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| EBSB > SEC Filings for EBSB > Form 10-Q on 7-Aug-2009 | All Recent SEC Filings |
7-Aug-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
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 elsewhere in this quarterly report, 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, and in other filings we make with the SEC. 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.
Comparison of Financial Condition at June 30, 2009 and December 31, 2008
Total assets increased by $119.8 million, or 11.2%, to $1.2 billion at June 30, 2009, from December 31, 2008. Securities available for sale increased by $49.1 million, or 19.5%, as the Company invested excess cash in money market mutual funds and debt securities as an alternative to lower-yielding federal funds sold.
Loan growth continued in the first half of 2009, with total loans increasing by $58.4 million, or 8.2%. Multi-family real estate loans increased by $17.2 million, or 55.0%, while the commercial real estate and construction loan portfolios increased by $20.1 million, or 7.4%, and $11.0 million, or 12.0%, respectively. The increase in construction loans included loans totaling $17.6 million that are expected to be completed and transferred to the commercial real estate portfolio by the end of year.
Deposits increased by $116.9 million, or 14.7%, from December 31, 2008, with increases in all deposit types. In 2009, marketing efforts emphasized the safety provided by the Bank's full deposit insurance coverage and the range of our products, which provide customers an alternative to larger competitors. Money market deposits increased by $80.8 million, or 46.7%, to $253.6 million at June 30, 2009. The Company successfully established an online deposit account-opening website during the second quarter, which contributed to the increase in money market account balances. Certificates of deposit also increased by $20.1 million, or 4.9%, to $434.1 million.
Stockholders' equity increased from $189.8 million as of December 31, 2008 to $192.8 million as of June 30, 2009. A reduction in the level of accumulated other comprehensive loss from $6.2 million to $255,000, due to improved market pricing on the securities portfolio, contributed to the increase. The Company also repurchased $3.5 million of the Company's common stock to be held as treasury shares or for the Equity Incentive Plan.
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 June 30, 2009 and December 31, 2008 was as follows:
At June 30, 2009 At December 31, 2008
(Dollars in thousands) Amount % Amount %
Real estate loans:
One- to four-family $ 281,595 36.6 % $ 274,716 38.6 %
Multi-family 48,376 6.3 31,212 4.4
Commercial real estate 289,521 37.6 269,454 37.7
Construction 102,640 13.3 91,652 12.9
Home equity lines
of credit 30,414 4.0 28,253 4.0
Total real estate loans 752,546 97.7 695,287 97.6
Commercial business loans 16,544 2.1 15,355 2.2
Consumer loans 1,339 0.2 1,379 0.2
Total loans 770,429 100.0 % 712,021 100.0 %
Net deferred loan origination fees (984 ) (1,005 )
Allowance for loan losses (8,120 ) (6,912 )
Loans, net $ 761,325 $ 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 and six months ended June 30, 2009 and 2008 were as follows:
Three Months Ended Six Months Ended
June 30, June 30,
(Dollars in thousands) 2009 2008 2009 2008
Beginning balance $ 7,456 $ 3,768 $ 6,912 $ 3,637
Provision for loan losses 568 2,197 1,114 2,328
Charge offs:
Real estate loans 164 5 166 5
Commercial business loans - - - -
Consumer loans - - - -
Total charge-offs 164 5 166 5
Recoveries:
Real estate loans 260 1 260 1
Commercial business - - - -
Consumer loans - - - -
Total recoveries 260 1 260 1
Net recoveries (charge-offs) 96 (4 ) 94 (4 )
Ending balance $ 8,120 $ 5,961 $ 8,120 $ 5,961
Allowance to non-accrual loans 47.61 % 78.64 % 47.61 % 78.64 %
Allowance to total loans
outstanding 1.05 % 0.96 % 1.05 % 0.96 %
Net recovery (charge-offs) to
average loans outstanding 0.01 % (0.00 )% 0.01 % (0.00 )%
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Provision for Loan Losses
The Company's loan loss provision was $568,000 and $1.1 million for the three and six months ended June 30, 2009, compared to $2.2 million and $2.3 million for the same periods in 2008. The decrease was due primarily to lower specific reserves recorded on impaired loans. The provision expense for the second quarter of 2008 included $1.7 million of specific reserves for two impaired loans. A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent.
The allowance for loan losses was $8.1 million, or 1.05% of total loans outstanding as of June 30, 2009, as compared to $6.0 million, or 0.96% of total loans outstanding as of June 30, 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 June 30, 2009 and December 31, 2008.
At June 30, At December 31, (In thousands) 2009 2008 Loans accounted for on a non-accrual basis:
Real estate loans:
One- to four-family $ 4,224 $ 3,962
Multi-family 820 -
Commercial real estate 300 883
Home equity lines of credit - -
Construction 11,663 9,387
Total real estate loans 17,007 14,232
Commercial business loans 47 -
Consumer loans 2 -
Total non-accrual loans 17,056 14,232
Foreclosed assets 3,050 2,604
Total non-performing assets $ 20,106 $ 16,836
Non-accrual loans to total loans 2.21 % 2.00 %
Non-accrual loans to total assets 1.44 % 1.34 %
Non-performing assets to total assets 1.70 % 1.58 %
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Non-performing assets increased to $20.1 million, or 1.70% of total assets, at June 30, 2009 from $16.8 million at December 31, 2008. Non-performing assets include foreclosed real estate of $3.0 million, $11.7 million of construction loans, $4.2 million of residential mortgage loans, and $1.2 million of other loans. Interest income that would have been recorded for the quarter ended June 30, 2009 had nonaccruing loans and accruing loans past due 90 days or more been current according to their original terms amounted to $655,000. At June 30, 2009, the Company did not have any accruing loans past due 90 days or more.
The Company had impaired loans totaling $17.3 million and $12.5 million as of June 30, 2009 and December 31, 2008, respectively. At June 30, 2009, impaired loans totaling $3.2 million had a valuation allowance of $722,000. Impaired loans totaling $1.9 million had a valuation allowance of $418,000 at December 31, 2008. The Company's average investment in impaired loans was $16.4 million and $7.7 million for the six months ended June 30, 2009 and 2008, respectively. Included in the balance of impaired loans at June 30, 2009 are three loans totaling $3.6 million that are considered troubled debt restructurings.
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 June 30, 2009 At December 31, 2008
(Dollars in thousands) Amount Percent Amount Percent
NOW and demand deposits $ 101,545 11.11 % $ 92,051 11.55 %
Money market deposits 253,647 27.76 172,876 21.69
Regular and other deposits 124,473 13.62 117,913 14.80
Certificates of deposit 434,114 47.51 414,012 51.96
Total $ 913,779 100.00 % $ 796,852 100.00 %
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Borrowings
At June 30, 2009 and December 31, 2008, long-term FHLB advances totaling $57.2 million and $57.7 million, respectively mature through April 2013, with a weighted average yield of 3.44% and 3.45%. At June 30, 2009 and December 31, 2008, short-term borrowings consisted of federal funds purchased from the Company's affiliate bank amounting to $5,803,000 and $7,811,000, respectively, with a weighted average rate of 0.35% and 0.91%, respectively.
Results of Operations for the Three and Six Months Ended June 30, 2009 and June 30, 2008
Average Balance Table
The following tables set forth average balance sheets, average yields and costs,
and certain other information at and for the periods indicated.
For The Three Months Ended June 30,
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) $ 757,131 $ 11,046 5.85 % $ 604,227 $ 9,334 6.21 %
Securities and certificates of deposit 290,433 2,867 3.96 310,094 3,097 4.02
Federal funds sold 22,125 6 0.11 96,801 478 1.99
Total interest-earning assets 1,069,689 13,919 5.22 1,011,122 12,909 5.13
Noninterest-earning assets 82,769 76,288
Total assets $ 1,152,458 $ 1,087,410
Liabilities and stockholders' equity:
Interest-bearing liabilities:
NOW deposits $ 37,913 37 0.39 $ 39,530 79 0.80
Money market deposits 226,777 1,074 1.90 143,566 885 2.48
Savings and other deposits 128,148 293 0.92 123,801 351 1.14
Certificates of deposit 432,899 3,534 3.27 448,618 5,111 4.58
Total interest-bearing deposits 825,737 4,938 2.40 755,515 6,426 3.42
FHLB advances and other borrowings 64,212 509 3.18 64,070 570 3.58
Total interest-bearing liabilities 889,949 5,447 2.45 819,585 6,996 3.43
Noninterest-bearing demand deposits 61,772 55,299
Other noninterest-bearing liabilities 10,853 9,647
Total liabilities 962,574 884,531
Total stockholders' equity 189,884 202,879
Total liabilities and stockholders' equity $ 1,152,458 $ 1,087,410
Net interest income $ 8,472 $ 5,913
Interest rate spread (2) 2.77 % 1.70 %
Net interest margin (3) 3.18 % 2.35 %
Average interest-earning assets to average
interest-bearing liabilities 120.20 % 123.37 %
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(1) Loans on non-accrual status are included in average balances.
(2) Interest rate spread represents the difference between the yield on interest-earning assets and the cost of interest-bearing liabilities.
(3) Net interest margin represents net interest income divided by average interest-earning assets.
(4) Annualized.
For The Six Months Ended June 30,
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) $ 742,085 $ 21,691 5.89 % $ 585,481 $ 18,517 6.36 %
Securities and certificates of deposit 272,016 5,657 4.19 285,088 5,974 4.21
Federal funds sold 26,220 18 0.14 117,636 1,541 2.63
Total interest-earning assets 1,040,321 27,366 5.30 988,205 26,032 5.30
Noninterest-earning assets 83,764 75,438
Total assets $ 1,124,085 $ 1,063,643
Liabilities and stockholders' equity:
Interest-bearing liabilities:
NOW deposits $ 37,265 83 0.45 $ 37,225 147 0.79
Money market deposits 205,108 2,101 2.07 141,844 2,038 2.89
Savings and other deposits 125,584 595 0.96 132,122 746 1.14
Certificates of deposit 430,232 7,422 3.48 447,243 10,406 4.68
Total interest-bearing deposits 798,189 10,201 2.58 758,434 13,337 3.54
FHLB advances and other borrowings 65,973 1,041 3.18 49,992 944 3.80
Total interest-bearing liabilities 864,162 11,242 2.62 808,426 14,281 3.55
Noninterest-bearing demand deposits 60,247 53,550
Other noninterest-bearing liabilities 9,979 9,215
Total liabilities 934,388 871,191
Total stockholders' equity 189,697 192,452
Total liabilities and stockholders' equity $ 1,124,085 $ 1,063,643
Net interest income $ 16,124 $ 11,751
. . .
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