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EBSB > SEC Filings for EBSB > Form 10-Q on 10-May-2013All Recent SEC Filings

Show all filings for MERIDIAN INTERSTATE BANCORP INC | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for MERIDIAN INTERSTATE BANCORP INC


10-May-2013

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION ANDRESULTS OF OPERATIONS

Management's discussion and analysis of the financial condition and results of operations is intended to assist in understanding the financial condition and results of operations of Meridian Interstate Bancorp, Inc. 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, 2012, 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 the Company. These forward-looking statements are generally identified by use of the words "believe," "expect," "intend," "anticipate," "estimate," "project" or similar expressions. The Company'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 the Company and its subsidiaries include, but are not limited to:

general economic conditions, either nationally or in our market area, that are worse than expected;

inflation and changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;

increased competitive pressures among financial services companies;

changes in consumer spending, borrowing and savings habits;

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;

legislative or regulatory changes that adversely affect our business;

adverse changes in the securities markets;

changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the Securities and Exchange Commission;

inability of third-party providers to perform their obligations to us; and

changes in our organization, compensation and benefit plans.

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 the Company'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, 2012 filed with the Securities and Exchange Commission on March 15, 2013, under "Risk Factors," which is available through the SEC's website at www.sec.gov, as updated by subsequent filings 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, the Company 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.


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Critical Accounting Policies

The Company's summary of significant accounting policies are described in Note 1 to the Consolidated Financial Statements included in the 2012 Annual Report on Form 10-K for the year ended December 31, 2012. 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, the valuation of goodwill and analysis for impairment, other-than-temporary impairment of securities and the valuation of deferred tax assets as the Company's critical accounting policies.

Comparison of Financial Condition at March 31, 2013 and December 31, 2012

Assets

Total assets increased $121.5 million, or 5.3%, to $2.400 billion at March 31, 2013 from $2.279 billion at December 31, 2012. Net loans increased $62.8 million, or 3.5%, to $1.849 billion at March 31, 2013 from $1.786 billion at December 31, 2012. The net increase in loans for the quarter ended March 31, 2013 was primarily due to increases of $37.7 million in commercial real estate loans, $35.4 million in construction loans and $9.1 million in commercial business loans. Cash and cash equivalents increased $90.2 million, or 96.8%, to $183.4 million at March 31, 2013 from $93.2 million at December 31, 2012. Securities available for sale decreased $26.7 million, or 10.2%, to $236.0 million at March 31, 2013 from $262.8 million at December 31, 2012 primarily due to sales, maturities and calls of securities.

Asset Quality

Credit Risk Management

Our strategy for credit risk management focuses on having well-defined credit policies and uniform underwriting criteria and providing prompt attention to potential problem loans.

When a borrower fails to make a required loan payment, we take a number of steps to have the borrower cure the delinquency and restore the loan to current status, including contacting the borrower by letter and phone at regular intervals. When the borrower is in default, we may commence collection proceedings. If a foreclosure action is instituted and the loan is not brought current, paid in full, or refinanced before the foreclosure sale, the real property securing the loan generally is sold at foreclosure. Management informs the Executive Committee monthly of the amount of loans delinquent more than 30 days. Management provides detailed information to the Board of Directors on loans 60 or more days past due and all loans in foreclosure and repossessed property that we own.

Delinquencies

Total past due loans increased $88,000, or 0.3%, to $32.1 million at March 31, 2013 from $32.0 million at December 31, 2012, reflecting an increase of $2.4 million in loans 30 to 89 days past due partially offset by a decrease of $2.3 million in loans 90 days or more past due. Delinquent loans at March 31, 2013 included $16.0 million of loans acquired in the Mt. Washington merger, including $4.7 million that were 30 to 59 days past due, $2.9 million that were 60 to 89 days past due and $8.5 million that were 90 days or more past due. At March 31, 2013, non-accrual loans exceed loans 90 days or more past due primarily due to loans which were placed on non-accrual status based on a determination that the ultimate collection of all principal and interest due was not expected and certain loans that remain on non-accrual status until they attain a sustained payment history of six months.

Non-performing Assets

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. At March 31, 2013, the Company did not have any accruing loans past due 90 days or more. 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. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.


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Real estate that we acquire as a result of foreclosure or by deed-in-lieu of foreclosure is classified as foreclosed real estate until it is sold. When property is acquired, it is initially recorded at the fair value less costs to sell at the date of foreclosure, establishing a new cost basis. Holding costs and declines in fair value after acquisition of the property result in charges against income.

The following table provides information with respect to our non-performing assets at the dates indicated.

                                                   March 31,        December 31,
                                                     2013               2012
                                                      (Dollars in thousands)
    Loans accounted for on a non-accrual basis:
    Real estate loans:
    Residential real estate:
    One-to four-family                            $    18,298      $       18,870
    Multi-family                                          879                 976
    Home equity lines of credit                         2,754               2,674
    Commercial real estate                              8,082               8,844
    Construction                                       15,770               7,785

    Total real estate loans                            45,783              39,149
    Commercial business loans                             401                 424

    Total non-accrual loans (1)                        46,184              39,573
    Foreclosed assets                                   2,080               2,604

    Total non-performing assets                   $    48,264      $       42,177

    Non-accrual loans to total loans                     2.47 %              2.19 %
    Non-accrual loans to total assets                    1.92 %              1.74 %
    Non-performing assets to total assets                2.01 %              1.85 %

(1) TDRs on accrual status not included above totaled $3.5 million at March 31, 2013 and $6.8 million at December 31, 2012.

Non-accrual loans increased $6.6 million, or 16.7%, to $46.2 million, or 2.47% of total loans outstanding, at March 31, 2013, from $39.6 million, or 2.19% of total loans outstanding, at December 31, 2012, primarily due to a net increase of $8.0 million in non-accrual construction loans. The increase in non-accrual construction loans resulted from two construction loan relationships totaling $9.2 million that were placed on non-accrual loan status due to loan performance changes during the quarter ended March 31, 2013. We are pursuing the resolution of one such loan relationship totaling $5.7 million following a charge-off of $626,000 recorded against the allowance for loan losses during the quarter ended March 31, 2013. The second of these loan relationships totaling $3.5 million is a TDR that we expect to collect in full. Foreclosed real estate decreased $524,000, or 20.1%, to $2.1 million at March 31, 2013 from $2.6 million at December 31, 2012. Non-performing assets increased $6.1 million, or 14.4%, to $48.3 million, or 2.01% of total assets, at March 31, 2013, from $42.2 million, or 1.85% of total assets, at December 31, 2012. Non-performing assets at March 31, 2013 included $17.7 million of assets acquired in the January 2010 Mt. Washington Co-operative Bank merger, comprised of $17.2 million of non-performing loans and $520,000 of foreclosed real estate. Interest income that would have been recorded for the three months ended March 31, 2013 had non-accruing loans been current according to their original terms amounted to $311,000.

Troubled Debt Restructurings

In the course of resolving non-accrual loans, the Bank may choose to restructure the contractual terms of certain loans, with terms modified to fit the ability of the borrower to repay in line with its current financial status. A loan is considered a troubled debt restructuring if, for reasons related to the debtor's financial difficulties, a concession is granted to the debtor that would not otherwise be considered.


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Total TDRs increased $359,000, or 2.0%, to $18.0 million at March 31, 2013 from $17.6 million at December 31, 2012, consisting of increase of $3.7 million in TDRs on non-accrual status partially offset by a decrease of $3.3 million in TDRs on accrual status. The increase in TDRs on non-accrual status was the result of a construction loan relationship totaling $3.3 million that was transferred to non-accrual status from accrual status during the quarter ended March 31, 2013. In addition, one-to four-family TDRs on non-accrual status increased $259,000 due to a residential loan modification that was completed during the quarter ended March 31, 2013. Modifications of one-to four-family TDRs consist of rate reductions, loan term extensions or provisions for interest-only payments for specified periods up to 12 months. The Company has generally been successful with the concessions it has offered to borrowers to date. The Company generally returns TDRs to accrual status when they have sustained payments for six months based on the restructured terms and future payments are reasonably assured. The decrease in commercial real estate TDRs on non-accrual status were due to contractual payments received during the quarter ending March 31, 2013. Interest income that would have been recorded for the quarter ended March 31, 2013 had TDRs been current according to their original terms amounted to $61,000.

Potential Problem Loans

Certain loans are identified during the Company's loan review process that are currently performing in accordance with their contractual terms and we expect to receive payment in full of principal and interest, but it is deemed probable that we will be unable to collect all the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. This may result from deteriorating conditions, such as cash flows, collateral values or creditworthiness of the borrower. These loans are classified as impaired but are not accounted for on a non-accrual basis. There were no potential problem loans identified at March 31, 2013 other than those already classified as non-accrual, impaired or troubled debt restructurings.

Allowance for Loan Losses

The allowance for loan losses is maintained at levels considered adequate by management to provide for probable loan losses inherent in the loan portfolio 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.

The following table sets forth the breakdown of the allowance for loan losses by loan category at the periods indicated:

                                                  March 31, 2013                                December 31, 2012
                                                                       % of                                           % of
                                                      % of           Loans in                        % of           Loans in
                                                    Allowance        Category                      Allowance        Category
                                                    to Total         of Total                      to Total         of Total
                                      Amount        Allowance         Loans          Amount        Allowance         Loans
                                                                      (Dollars in thousands)
Real estate loans:
Residential real estate:
One-to four-family                   $  2,150             10.2 %          22.8 %    $  2,507             12.2 %          24.5 %
Multi-family                            1,315              6.3             9.4         1,431              7.0             9.9
Home equity lines of credit               177              0.8             3.2           226              1.1             3.4
Commercial real estate                 10,620             50.9            44.6        10,405             50.8            44.0
Construction                            4,459             21.4            11.2         3,656             17.8             9.6

Total real estate loans                18,721             89.6            91.2        18,225             88.9            91.4

Commercial business loans               2,078             10.0             8.4         2,174             10.6             8.2
Consumer                                   84              0.4             0.4           105              0.5             0.4

Total loans                          $ 20,883            100.0 %         100.0 %    $ 20,504            100.0 %         100.0 %

Allowance to non-accrual loans          45.22 %                                        51.81 %
Allowance to total loans
outstanding                              1.12 %                                         1.13 %
Net charge-offs to average loans
outstanding (annualized)                 0.19 %                                         0.07 %


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The Company's provision for loan losses was $1.3 million for each of the quarters ended March 31, 2013 and 2012. The provision for loan losses was based on management's assessment of loan portfolio growth and composition changes, an ongoing evaluation of credit quality and current economic conditions. The allowance for loan losses was $20.9 million or 1.12% of total loans outstanding at March 31, 2013, compared to $20.5 million or 1.13% of total loans outstanding at December 31, 2012. Net loan charge-offs against the allowance for loans losses totaled $881,000 for the three months ended March 31, 2013, or 0.19% of average loans outstanding, including $622,000 of net charge-offs on construction loans. The Company continues to assess the adequacy of its allowance for loan losses in accordance with established policies.

The allowance consists of general and allocated components. The general component relates to pools of non-impaired loans and is based on historical loss experience adjusted for qualitative factors. The allocated component relates to loans that are classified as impaired, whereby an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan.

The Company had impaired loans totaling $39.0 million and $41.2 million as of March 31, 2013 and December 31, 2012, respectively. At March 31, 2013, impaired loans totaling $7.2 million had an allocated allowance component of $760,000. Impaired loans totaling $6.7 million had an allocated allowance component of $649,000 at December 31, 2012. The Company's average investment in impaired loans was $40.1 million and $57.6 million for the three months ended March 31, 2013 and 2012, respectively.

A loan is considered impaired when, based on current information and events, it is probable that we will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan's effective interest rate, the loan's obtainable market price, or the fair value of the collateral if the loan is collateral dependent.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, we do not separately identify individual one-to four-family residential and consumer loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring. The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a TDR. All TDRs are initially classified as impaired.

We review residential and commercial loans for impairment based on the fair value of collateral, if collateral-dependent, or the present value of expected cash flows. Management has reviewed the collateral value for all impaired and non-accrual loans that were collateral-dependent as of March 31, 2013 and considered any probable loss in determining the allowance for loan losses.

For residential loans measured for impairment based on the collateral value, we will do the following:

When a loan becomes seriously delinquent, generally 60 days past due, internal valuations are completed by our in-house appraiser who is a Massachusetts certified residential appraiser. We obtain third party appraisals, which are generally the basis for charge-offs when a loss is indicated, prior to the foreclosure sale. We generally are able to complete the foreclosure process within nine to 12 months from receipt of the internal valuation.

We make adjustments to appraisals based on updated economic information, if necessary, prior to the foreclosure sale. We review current market factors to determine whether, in management's opinion, downward adjustments to the most recent appraised values may be warranted. If so, we use our best estimate to apply an estimated discount rate to the appraised values to reflect current market factors.

Appraisals we receive are based on comparable property sales.

For commercial loans measured for impairment based on the collateral value, we will do the following:

We obtain a third party appraisal at the time a loan is deemed to be in a workout situation and there is no indication that the loan will return to performing status, generally when the loan is 90 days or more past due. One or more updated third party appraisals are obtained prior to foreclosure depending on the foreclosure timeline. In general we order new appraisals every 180 days on loans in the process of foreclosure.


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We make downward adjustments to appraisals when conditions warrant. Adjustments are made by applying a discount to the appraised value based on occupancy, recent changes in condition to the property and certain other factors. Adjustments are also made to appraisals for construction projects involving residential properties based on recent sales of units. Losses are recognized if the appraised value less estimated costs to sell is less than our carrying value of the loan.

Appraisals we receive are generally based on a reconciliation of comparable property sales and income capitalization approaches. For loans on construction projects involving residential properties, appraisals are generally based on a discounted cash flow analysis assuming a bulk sale to a single buyer.

Loans that are partially charged off generally remain on non-accrual status until foreclosure or such time that they are performing in accordance with the terms of the loan and have a sustained payment history of at least six months. The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan is currently performing. Loan losses are charged against the allowance when we believe the uncollectibility of a loan balance is confirmed, generally when appraised values (as adjusted values, if applicable) less estimated costs to sell, are less than the Company's carrying values.

Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with generally accepted accounting principles in the United States of America, there can be no assurance that regulators, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operations.

Securities Portfolio

The securities portfolio decreased $26.7 million, or 10.2% to $236.0 million, or 9.8% of total assets at March 31, 2013 as compared to $262.8 million, or 11.5% of total assets at December 31, 2012. At March 31, 2013, 46.6% of the securities portfolio, or $110.1 million, was invested in corporate bonds. The amortized cost and fair value of corporate bonds in the financial services sector was $66.4 million, and $68.2 million, respectively. The remainder of the corporate bond portfolio includes companies from a variety of industries. Refer to Note 4 Securities Available for Sale in Notes to the Consolidated Financial Statements within this report for more detail regarding the investments held in the Company's securities portfolio along with the Company's assessment of other-than-temporary impairment.

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. Our deposit base is comprised of demand, NOW, money market, regular savings and other deposits, and certificates of deposit. We consider demand, NOW, money market, and regular and other deposits to be core deposits. Total deposits increased $92.1 million, or 4.9%, to $1.958 billion at March 31, 2013 from $1.865 billion at December 31, 2012. Our continuing focus on the acquisition and expansion of core deposit relationships resulted in net growth in those non-term balances of $41.3 million to $1.279 billion, or 65.3% of total deposits, at March 31, 2013.


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The following table summarizes the period end balance and the composition of deposits:

                                             March 31, 2013                          December 31, 2012
                                                        Percent of                                Percent of
                                     Balance          Total Deposits           Balance          Total Deposits
                                                              (Dollars in thousands)
Demand deposits                    $   215,271                   11.0 %      $   204,079                   10.9 %
NOW deposits                           182,280                    9.3            180,629                    9.7
Money market deposits                  628,190                   32.1            606,861                   32.5
Regular and other deposits             252,793                   12.9            245,634                   13.2
Certificates of deposit                678,973                   34.7            628,230                   33.7
. . .
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