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| EBSB > SEC Filings for EBSB > Form 10-Q on 11-May-2009 | All Recent SEC Filings |
11-May-2009
Quarterly Report
Management's discussion and analysis of the financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Meridian Interstate. The following discussion should be read in conjunction with the consolidated financial statements, notes and tables included in the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 2008, filed with the Securities and Exchange Commission.
Forward-Looking Statements
Forward-Looking Statements
This report contains forward-looking statements that are based on assumptions and may describe future plans, strategies and expectations of Meridian Interstate Bancorp. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. Meridian Interstate Bancorp's ability to predict results or the actual effect of future plans or strategies is inherently uncertain. Factors which could have a material adverse effect on the operations of Meridian Interstate Bancorp and its subsidiaries include, but are not limited to:
· significantly increased competition among depository and other financial institutions;
· inflation and changes in the interest rate environment or other changes that reduce our interest margins or reduce the fair value of financial instruments;
· general economic conditions, either nationally or in our market areas, that are worse than expected;
· adverse changes in the securities markets;
· legislative or regulatory changes that adversely affect our business;
· our ability to enter new markets successfully and take advantage of growth opportunities, and the possible dilutive effect of potential acquisitions or de novo branches, if any;
· changes in consumer spending, borrowing and savings habits;
· changes in accounting policies and practices, as may be adopted by bank regulatory agencies, the Financial Accounting Standards Board, the Public Company Accounting Oversight Board and other promulgating authorities;
· inability of third-party providers to perform their obligations to us;
· changes in our organization, compensation and benefit plans;
· changes in real estate values in our market areas;
· the effect of the current governmental effort to restructure the U.S. financial and regulatory system;
· the effect of developments in the secondary market affecting our loan pricing;
· the level of future deposit premiums; and
· the effect of the current financial crisis on our loan portfolio and our investment portfolio, and our deposit and other customers.
Management's ability to predict results or the effect of future plans or strategies is inherently uncertain. These factors include, but are not limited to, general economic conditions, changes in the interest rate environment, legislative or regulatory changes that may adversely affect our business, changes in accounting policies and practices, changes in competition and demand for financial services, adverse changes in the securities markets and changes in the quality or composition of Meridian Interstate Bancorp's loan or investment portfolios. Additional factors that may affect our results are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008 filed with the Securities and Exchange Commission on March 15, 2009, under "Risk Factors," as subsequently amended, which is available through the SEC's website at www.sec.gov. These risks and uncertainties should be considered in evaluating forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, Meridian Interstate Bancorp does not undertake, and specifically disclaims any obligation, to release publicly the result of any revisions that may be made to any forward-looking statements to reflect events or circumstances after the date of the statements or to reflect the occurrence of anticipated or unanticipated events.
Critical Accounting Policies
The Company's significant accounting policies are described in Note 1 to the consolidated financial statements included in the 2008 Annual Report on Form 10-K. The preparation of financial statements in accordance with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Management has identified accounting for the allowance for loan losses, other-than-temporary impairment of securities, foreclosed real estate and income taxes as the Company's most critical accounting policies. The Company's critical accounting policies have not changed since December 31, 2008.
Selected Financial Data
The following is a summary of operating and financial condition information as
of and for the periods indicated:
Financial Condition Highlights
At At
March 31, December 31,
(In thousands) 2009 2008
Total assets $ 1,128,767 $ 1,065,352
Secuities available for sale 278,707 252,529
Net loans 737,922 704,104
Deposits 859,260 796,852
Borrowed funds 65,221 65,486
Stockholders' equity 187,046 189,840
Three Months Ended
March 31,
(Dollars in thousands) 2009 2008
Net interest income $ 7,652 $ 5,838
Provision for loan losses 546 131
Non-interest income 1,093 3,176
Non-interest expenses 9,677 9,312
Benefit for income taxes (370 ) (108 )
Net loss (1,108 ) (321 )
Interest rate spread 2.55 % 1.82 %
Net interest margin 3.04 % 2.43 %
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Comparison of Financial Condition at March 31, 2009 and December 31, 2008
Total assets increased by $63.4 million, or 6.0%, to $1.1 billion at March 31, 2009. Securities available for sale increased $26.2 million, or 10.4%, from December 31, 2008, as the Company invested excess funds in money market mutual funds as an alternative to federal funds sold.
Loan growth continued in the first quarter of 2009, with total loans increasing by $34.4 million, or 4.8%. Multi-family loans increased by $15.3 million, or 49.2%, while the one- to four-family residential loan and
commercial real estate loan portfolios increased by $9.8 million and $8.4 million, respectively. Rate decreases have contributed to higher originations for these products, with increased interest in both purchase and refinance activity.
Deposits increased by $62.4 million, or 7.8%, from December 31, 2008, with increases in all deposit types, as local deposit competition has lessened. Money market deposits increased by $31.9 million, or 18.4%, to $204.7 million at March 31, 2009. Certificates of deposit also increased by $20.2 million, or 4.9%, to $434.2 million.
Stockholders' equity decreased by $2.8 million, to $187.0 million at March 31, 2009 from $189.8 million at December 31, 2008, mainly due to in the net operating loss of $1.1 million and a $1.5 million repurchase of the Company's common stock, for the Equity Incentive Plan.
Securities
All securities held by the Company as of March 31, 2009 and December 31, 2008 were classified as available-for-sale and are carried at fair value. Unrealized gains and losses, net of tax, are excluded from earnings and reported as a separate component of stockholders' equity. Gains or losses on the sale of available-for-sale securities are determined using the specific identification method. Premiums and discounts are recognized in interest income using the effective interest method over the period to maturity. Carrying amounts and fair values at March 31, 2009 and December 31, 2008 were as follows:
At March 31, At December 31,
2009 2008
(In thousands) Amortized Fair Amortized Fair
Cost Value Cost Value
Debt securities:
U.S. Government - sponsored enterprises $ - $ - $ 1,000 $ 1,003
Corporate bonds 209,970 205,079 210,079 203,687
Mortgage-backed securities 40 39 40 40
Total debt securities 210,010 205,118 211,119 204,730
Marketable equity securities :
Common stocks 27,276 21,554 26,142 22,854
Money market mutual funds 52,035 52,035 24,945 24,945
Total marketable equity securities 79,311 73,589 51,087 47,799
Total securities available for sale $ 289,321 $ 278,707 $ 262,206 $ 252,529
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Securities available for sale increased $26.2 million, or 10.4%, from $252.5 million at December 31, 2008, as the Company invested excess funds in money market mutual funds as an alternative to federal funds sold. Management continues to hold the money market mutual funds and monitor available investment opportunities in light of the current issues in the debt and equity markets.
Management evaluates securities for other-than-temporary impairment on a monthly basis, with more frequent evaluation for selected issues. Consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. The Company recorded an impairment loss of $124,000 on equity securities determined to be other-than-temporarily impaired during the first quarter of 2009.
As of March 31, 2009, the net unrealized loss on the total equity portfolio was $5.7 million. Twenty-seven equity securities had market value declines of 20% or more. The most significant market valuation decrease related to any one equity security at March 31, 2009 is $517,000. Although the issuers have shown declines in earnings as a result of the weakened economy, no credit issues have been identified that cause management to
believe the decline in market value is other than temporary, and the Company has the ability and intent to hold these investments until a recovery of fair value. In analyzing an equity issuer's financial condition, management considers industry analysts' reports, financial performance and projected target prices of investment analysts within a one-year time frame.
At March 31, 2009, the aggregate amortized cost of debt obligations owned by the Company was $210.0 million and the aggregate market value was $205.1 million. Eleven corporate bonds, from six issuers, had a market decline of greater than 20% of amortized cost, with declines ranging from 22% to 50%. The aggregate unrealized loss on these bonds at March 31, 2009 was $6.8 million and is presently considered to be temporary.
Three bonds, from two issuers, had been impaired greater than 20% for approximately seven months. The issuers are consumer finance and commercial finance subsidiaries of a major insurance company. The bonds had an amortized cost of $7.0 million and unrealized losses of $3.3 million at March 31, 2009. These bonds have maturity dates of May 2010 to May 2012.
Two bonds, from one issuer, had been impaired greater than 20% for approximately three months. The amortized cost and aggregate unrealized loss on these bonds at March 31, 2009 was $2.4 million and $813,000, respectively. These bonds were issued by a national media company with a significant revenue decline in 2008. These bonds mature in June of 2011.
Another bond, with a decline of $665,000, was issued by a national insurance company, and has been impaired for approximately four months. At March 31, 2009, the amortized cost of this bond, which matures in July of 2012, was $3.0 million.
Three bonds, from one issuer, had been impaired greater than 20% for approximately one month. The amortized cost and aggregate unrealized loss on these bonds at March 31, 2009 was $4.0 million and $1.1 million, respectively. These bonds were issued by a national insurance company. These bonds mature in September 2011 and June 2012.
Due to the relatively short length of time of the impairment of these securities, with no indication that the issuers will be unable to continue to service the obligations based on ongoing operations, and management's ability and intent to hold the obligations until the earlier of recovery or maturity, management considers the decline in market valuation to be temporary.
Loan Portfolio Analysis
Our loan portfolio consists primarily of residential, multi-family and commercial real estate, construction and land development, commercial, and consumer loans and home equity lines of credit originated primarily in our market area. There are no foreign loans outstanding. Interest rates charged on loans are affected principally by the demand for such loans, the supply of money available for lending purposes and the rates offered by our competitors.
Loan detail by category as of March 31, 2009 and December 31, 2008 was as follows:
At March 31, 2009 At December 31, 2008
(Dollars in thousands) Amount % Amount %
Real estate loans:
One-to four-family $ 284,565 38.1 % $ 274,716 38.6 %
Multi-family 46,560 6.2 31,212 4.4
Commercial real estate 277,825 37.2 269,454 37.7
Construction 91,794 12.3 91,652 12.9
Home equity lines
of credit 29,466 4.0 28,253 4.0
Total real estate loans 730,210 97.8 695,287 97.6
Commercial business loans 14,851 2.0 15,355 2.2
Consumer loans 1,303 0.2 1,379 0.2
Total loans 746,364 100.0 % 712,021 100.0 %
Net deferred loan origination fees (986 ) (1,005 )
Allowance for loan losses (7,456 ) (6,912 )
Loans, net $ 737,922 $ 704,104
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Analysis of Loan Loss Experience
The allowance for loan losses is maintained at levels considered adequate by management to provide for possible loan losses as of the consolidated balance sheet reporting dates. The allowance for loan losses is based on management's assessment of various factors affecting the loan portfolio, including portfolio composition, delinquent and non-accrual loans, national and local business conditions and loss experience, and an overall evaluation of the quality of the underlying collateral. Changes in the allowance for loan losses during the three months ended March 31, 2009 and 2008 were as follows:
Three Months Ended
March 31,
(Dollars in thousands) 2009 2008
Beginning balance $ 6,912 $ 3,637
Provision for loan losses 546 131
Charge offs:
Real estate loans - -
Commercial business loans - -
Consumer loans (2 ) -
Total charge-offs (2 ) -
Recoveries:
Real estate loans - -
Commercial business - -
Consumer loans - -
Total recoveries - -
Net recoveries (charge-offs) (2 ) -
Ending Balance $ 7,456 $ 3,768
Allowance to non-accrual loans 47.27 % 127.95 %
Allowance to total loans outstanding 1.00 % 0.64 %
Net recovery (charge-offs) to
average loans outstanding 0.00 % 0.00 %
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Provision for Loan Losses
Management made provisions of $546,000 and $131,000 for the quarters ended March 31, 2009 and 2008, respectively. We recorded net charge-offs of $2,000 in the first quarter of 2009. The allowance for loan losses was $7.5 million, or 1.0% of total loans outstanding as of March 31, 2009, as compared to $6.9 million, or 0.97% of total loans outstanding as of December 31, 2008. The increase in the balance of the allowance for loan losses is due to growth in the overall loan portfolio, increases in non-accrual loans, increased levels of specific reserves on impaired loans, and management's ongoing analysis of loan loss factors, including further deterioration of the national and local economic environment. The Company continues to assess the adequacy of its allowance for loan losses in accordance with established policies.
Management's Assessment of Asset Quality
Non-performing assets include loans that are 90 or more days past due or on non-accrual status and real estate and other loan collateral acquired through foreclosure and repossession. Loans 90 days or more past due may remain on an accrual basis if adequately collateralized and in the process of collection. For non-accrual loans, interest previously accrued but not collected is reversed and charged against income at the time a loan is placed on non-accrual status. Payments received at the time a loan is on non-accrual status are applied to principal. Interest income is not recognized until the loan is returned to accrual status. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.
The following table summarizes the non-performing assets at March 31, 2009 and December 31, 2008.
At March 31, At December 31, (In thousands) 2009 2008 Loans accounted for on a non-accrual basis:
Real estate loans:
One-to four-family $ 4,021 $ 3,962
Multi-family - -
Commercial real estate 798 883
Home equity lines of credit - -
Construction 10,906 9,387
Total real estate loans 15,725 14,232
Commercial business loans - -
Consumer loans 49 -
Total non-accrual loans 15,774 14,232
Foreclosed assets 2,449 2,604
Total nonperforming assets $ 18,223 $ 16,836
Non-accrual loans to total loans 2.11 % 2.00 %
Non-accrual loans to total assets 1.40 % 1.34 %
Non-performing assets to total assets 1.61 % 1.58 %
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Non-performing assets increased to $18.2 million, or 1.61% of total assets, at March 31, 2009 from $16.8 million at December 31, 2008. Non-performing assets include foreclosed real estate of $2.4 million, $10.9 million of construction loans, $4.0 million of residential mortgage loans, and $850,000 of other loans. Interest income that would have been recorded for the quarter ended March 31, 2009 had nonaccruing loans and accruing loans past due 90 days or more been current according to their original terms amounted to $345,000. At March 31, 2009, the Company did not have any accruing loans past due 90 days or more.
The Company had impaired loans totaling $15.6 million and $12.5 million as of March 31, 2009 and December 31, 2008, respectively. At March 31, 2009, impaired loans totaling $2.7 million had a valuation allowance of $527,000. Impaired loans totaling $2.0 million had a valuation allowance of $418,000 at December 31, 2008. The Company's average investment in impaired loans was $14.0 million and $3.1 million for the quarters ended March 31, 2009 and 2008, respectively. Included in the balance of impaired loans at March 31, 2009 are three troubled debt restructure loans totaling $3.9 million.
Deposits
Deposits are a major source of our funds for lending and other investment
purposes. Deposit inflows and outflows are significantly influenced by general
interest rates and money market conditions.
The following table summarizes the period end balance and the composition of
deposits:
At March 31, 2009 At December 31, 2008
(Dollars in thousands) Amount Percent Amount Percent
NOW and demand deposits $ 97,429 11.34 % $ 92,051 11.55 %
Money market deposits 204,746 28.83 172,876 21.69
Regular and other deposits 122,921 14.30 117,913 14.80
Certificates of deposit 434,164 50.53 414,012 51.96
Total $ 859,260 100.00 % $ 796,852 100.00 %
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Borrowings
At March 31, 2009 and December 31, 2008, long-term FHLB advances totaling $57.7 million mature through April 2013, with a weighted average yield of 3.45%. At March 31, 2009 and December 31, 2008, short-term borrowings consisted of federal funds purchased from the Company's affiliate bank amounting to $7,546,000 and $7,811,000, respectively, with a weighted average rate of 0.35% and 0.91%, respectively.
Results of Operations for the Three Months Ended March 31, 2009 and March 31, 2008
Average Balance Table
The following table sets forth average balance sheets, average yields and costs,
and certain other information at and for the periods indicated.
For The Three Months Ended March 31,
2009 2008
Average Interest Yield/ Average Interest Yield/
(Dollars in thousands) Balance Earned/Paid Cost (4) Balance Earned/Paid Cost (4)
Assets:
Interest-earning assets:
Loans (1) $ 726,851 $ 10,645 5.94 % $ 567,832 $ 9,183 6.50 %
Securities and certificates of deposit 262,955 2,790 4.30 259,907 2,877 4.45
Federal funds sold 30,361 12 0.16 138,471 1,063 3.09
Total interest-earning assets 1,020,167 13,447 5.35 966,210 13,123 5.46
Noninterest-earning assets 75,208 74,585
Total assets $ 1,095,375 $ 1,040,795
Liabilities and stockholders' equity:
Interest-bearing liabilities:
NOW deposits $ 36,610 46 0.51 % $ 37,511 68 0.72 %
Money market deposits 183,199 1,027 2.27 140,123 1,153 3.30
Savings and other deposits 122,990 302 1.00 145,970 395 1.09
Certificates of deposit 427,534 3,888 3.69 445,869 5,295 4.78
Total interest-bearing deposits 770,333 5,263 2.77 769,473 6,911 3.61
FHLB advances and other borrowings 67,752 532 3.19 35,913 374 4.19
. . .
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