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MTGB > SEC Filings for MTGB > Form 10-Q on 15-May-2013All Recent SEC Filings

Show all filings for MEETINGHOUSE BANCORP, INC. | Request a Trial to NEW EDGAR Online Pro

Form 10-Q for MEETINGHOUSE BANCORP, INC.


15-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation

This discussion is intended to assist in understanding the financial condition and results of operations of the Company. This should be read in conjunction with the consolidated financial statements and accompanying notes contained in this report.

Forward-Looking Statements

This report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts; rather they are statements based on the Company's current expectations regarding its business strategies and their intended results and its future performance. Forward-looking statements are preceded by terms such as "expects," "believes," "anticipates," "intends" and similar expressions.

Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to the Bank's actual results, performance and achievements being materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; the quality and composition of the loan and investment securities portfolio; loan demand; deposit flows; competition; and changes in accounting principles and guidelines. Additional factors that may affect our results are discussed in the Company's 2012 Annual Report on Form 10-K under the section titled "Item 1A.- Risk Factors." These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements.


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Except as required by applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements.

Critical Accounting Policies

We consider accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies.

Allowance for Loan Losses. The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management's periodic review of the collectibility of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: owner and non-owner occupied residential real estate, home equity, multi-family commercial real estate, construction, commercial and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors:
levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no changes in the Company's policies or methodology pertaining to the general component of the allowance for loan losses for the six months ended March 31, 2012.

The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate: Residential real estate includes owner and non-owner occupied real estate loans and home equity loans. The Company originates most of the loans in this segment according to FNMA/FHLMC underwriting guidelines. Most loans in this segment are collateralized by residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment. There are some non-owner occupied residential real estate loans with multiple investment properties that are evaluated as commercial real estate property.

Commercial real estate: Commercial real estate includes multi-family and certain non-owner occupied residential real estate. Loans in this segment are primarily income-producing properties throughout Massachusetts. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management periodically obtains rent rolls and continually monitors the cash flows of these loans.

Construction loans: Loans in this segment primarily include speculative real estate development loans for which payment is derived from sale of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.

Commercial loans: Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

Consumer loans: Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.

The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan by loan basis for commercial, commercial real estate and construction loans by either the present value of expected future cash flows discounted at the loan's effective interest rate or the fair value of the collateral if the loan is collateral dependent. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan. Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential real estate loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.


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A loan is considered impaired when, based on current information and events, it is probable that the Bank 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. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

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 troubled debt restructuring ("TDR"). All TDRs are classified as impaired.

An unallocated component is maintained to cover uncertainties that could affect management's estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

Deferred Tax Assets. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. Management reviews deferred tax assets on a quarterly basis to identify any uncertainties pertaining to realization of such assets. In determining whether a valuation allowance is required against deferred tax assets, management assesses historical and forecasted operating results, including a review of eligible carryforward periods, tax planning opportunities and other relevant considerations. We believe the accounting estimate related to the valuation allowance is a critical estimate because the underlying assumptions can change from period to period. For example, tax law changes or variances in future projected operating performance could result in a change in the valuation allowance. Should actual factors and conditions differ materially from those used by management, the actual realization of net deferred tax assets could differ materially from the amounts recorded in the financial statements. If we were not able to realize all or part of our deferred tax assets in the future, an adjustment to the related valuation allowance would be charged to income tax expense in the period such determination was made and could have a negative impact on earnings. In addition, if actual factors and conditions differ materially from those used by management, we could incur penalties and interest imposed by taxing authorities.

Comparison of Financial Condition at March 31, 2013 and September 30, 2012

Total Assets. Total assets increased by $2.4 million, from $74.1 million at September 30, 2012 to $76.5 million at March 31, 2013, primarily due to an increase in loans held-for-sale of $2.4 million, an increase in loans, net of allowance of $5.8 million, and an increase in interest-bearing time deposits in other banks of $700,000. This increase was primarily offset by a decrease in cash and cash equivalents of $6.4 million.

Cash and Cash Equivalents. Cash and cash equivalents decreased by $6.4 million, from $10.2 million at September 30, 2012 to $3.8 million at March 31, 2013, in order to fund new loan originations.

Interest-Bearing Time Deposits in Other Banks. These deposits increased by $700,000, from $4.0 million at September 30, 2012 to $4.7 million at March 31, 2013. We maintain funds in these accounts in order to improve the yield earned on excess liquidity.

Securities. Our securities portfolio consists primarily of residential mortgage-backed securities issued by U.S. government agencies and government sponsored enterprises. Investments in available-for-sale securities increased by $300,000 from $5.4 million at September 30, 2012 to $5.7 million at March 31, 2013. The increase is largely due to the purchase of new mortgage-backed securities and government agency securities in the amount of $1.3 million offset by repayments made on mortgage-backed securities in the amount of $1.0 million.

Loans, Net. Loans, net, increased by $5.8 million, from $43.4 million at September 30, 2012 to $49.2 million at March 31, 2013. This increase was primarily due to new loans originated, net of repayments.

Loans Held-for-Sale. Loans held-for-sale increased by $2.4 million, from $6.8 million at September 30, 2012 to $9.2 million at March 31, 2013, primarily due to demand created for fixed-rate residential mortgage loans due to a prevailing low interest rate environment.

Deposits. Our primary sources of funds are retail deposit accounts held primarily by individuals and businesses within our primary market area. Total deposits decreased by $3.4 million, from $68.3 million at September 30, 2012 to $64.9 million at March


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31, 2013, primarily due to a $5.0 million decrease in noninterest-bearing accounts and a $1.6 million increase in interest-bearing deposits.

The following table sets forth the balances of our deposit products at the dates indicated.

                                          March 31,         September 30,
                                            2013                2012
(Dollars in thousands)                   (unaudited)
Noninterest-bearing demand deposits   $  9,671    14.90 % $ 14,713    21.54 %
Interest bearing deposits:
Money market                             9,657    14.89      8,599    12.59
Regular and other savings                9,654    14.88      8,561    12.54
Certificates of deposit                 35,901    55.33     36,424    53.33
Total                                 $ 64,883   100.00 % $ 68,297   100.00 %

Borrowings. We generally use borrowings from the Federal Home Loan Bank of Boston to supplement our supply of funds for loans and securities. No Federal Home Loan Bank of Boston borrowings were outstanding at September 30, 2012. Outstanding Federal Home Loan Bank of Boston borrowings were $700,000 at March 31, 2013.

Comparison of Results of Operations for the Three and Six Months Ended March 31, 2013 and 2012

Net Income. Net income was $34,000 in both the three months ended March 31, 2013 and 2012.

Net income decreased by $77,000, from $145,000 in the six months ended March 31, 2012 to $68,000 in the six months ended March 31, 2013, primarily due to an increase in net interest and dividend income of $6,000, an increase in noninterest income of $240,000 and a decrease in income tax expense of $65,000, offset by an increase in provision for loan losses of $33,000 and an increase in total noninterest expense of $355,000.

Net Interest and Dividend Income. Net interest and dividend income increased by $57,000, from $474,000 in the three months ended March 31, 2012 to $531,000 in the three months ended March 31, 2013, primarily due to the increase in loans, net, offset by declining market interest rates. The average outstanding balance of loans, net increased by $10.8 million, from $44.4 million in the three months ended March 31, 2012 to $55.2 million in the three months ended March 31, 2013. The yield on interest-earning assets decreased from 3.88% in the three months ended March 31, 2012 to 3.81% in the three months ended March 31, 2013, which offsets an increase in the average balance of interest-earning assets from $64.3 million to $69.9 million. The average rate paid on interest-bearing liabilities decreased from 1.13% in the three months ended March 31, 2012 to 0.96% in the three months ended March 31, 2013. The interest rate spread increased from 2.76% in the three months ended March 31, 2012 to 2.85% in the three months ended March 31, 2013.

Net interest and dividend income increased by $6,000, from $1.0 million in the six months ended March 31, 2012 to $1.0 million in the six months ended March 31, 2013 primarily due to the increase in loans, net, offset by declining market interest rates. The average outstanding balance of loans, net increased by $7.5 million, from $45.7 million in the six months ended March 31, 2012 to $53.2 million in the six months ended March 31, 2013. The yield on interest-earning assets decreased from 4.44% in the six months ended March 31, 2012 to 3.72% in the six months ended March 31, 2013, which offsets an increase in the average balance of interest-earning assets from $63.1 million to $69.6 million. The average rate paid on interest-bearing liabilities decreased from 1.29% in the six months ended March 31, 2012 to 0.98% in the six months ended March 31, 2013. The interest rate spread decreased from 3.15% in the six months ended March 31, 2012 to 2.75% in the six months ended March 31, 2013.

Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using daily balances. Loan fees are included in interest income on loans and are insignificant.


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                                                 Three months ended March 31,
                                         2013                                    2012
                            Average       Interest    Average       Average       Interest    Average
                          Outstanding     Earned/      Yield/     Outstanding     Earned/      Yield/
(Dollars in thousands)      Balance         Paid        Rate        Balance         Paid        Rate

Interest-earning
assets:
Securities (1)           $       5,857   $       39       2.66 % $       6,844   $       56       3.27 %
Loans, net (2)                  55,156          612       4.44 %        44,443          563       5.07 %
Other interest earning
assets (3)                       8,837           12       0.54 %        13,018            6       0.18 %
Total interest-earning
assets                          69,850          663       3.80 %        64,305          625       3.89 %

Non-interest earning
assets                           9,565                                   5,085
Total Assets             $      79,415                           $      69,390

Interest-bearing
liabilities:
Regular savings
accounts                 $       9,417   $        6       0.25 % $       8,662   $        5       0.23 %
Money market accounts            9,160           12       0.52 %         9,226           12       0.52 %
Time deposits                   36,324          114       1.26 %        35,370          134       1.52 %
Total interest-bearing
deposits                        54,901          132       0.96 %        53,258          151       1.13 %

Federal Home Loan Bank
advances                           241            -          -               -            -          -
Total interest-bearing
liabilities                     55,142          132       0.96 %        53,258          151       1.13 %

Demand deposits                 10,672                                  10,804
Other liabilities                  129                                      98
Equity                          13,472                                   5,230
Total liabilites and
equity                   $      79,415                           $      69,390

Net interest income                      $      531                              $      474

Interest rate spread                                      2.84 %                                  2.76 %
Net yield on earning
assets                                                    3.04 %                                  2.95 %



(1) Includes Federal Home Loan Bank stock, deposits with Co-operative Central Bank, and available-for-sale securities.

(2) Includes non-accrual loans and interest received on such loans, and loans held-for-sale.

(3) Includes short-term investments.


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                                                  Six months ended March 31,
                                         2013                                    2012
                            Average       Interest    Average       Average       Interest    Average
                          Outstanding     Earned/      Yield/     Outstanding     Earned/      Yield/
(Dollars in thousands)      Balance         Paid        Rate        Balance         Paid        Rate

Interest-earning
assets:
Securities (1)           $       5,938   $       81       2.73 % $       6,836   $      143       4.18 %
Loans, net (2)                  53,217        1,174       4.41 %        45,650        1,169       5.12 %
Other interest earning
assets (3)                      10,464           27       0.52 %        10,573            8       0.15 %
Total interest-earning
assets                          69,619        1,282       3.68 %        63,059        1,320       4.19 %

Non-interest earning
assets                           8,780                                   4,930
Total Assets             $      78,399                           $      67,989

Interest-bearing
liabilities:
Regular savings
accounts                 $       9,214   $       12       0.26 % $       8,766   $       11       0.25 %
Money market accounts            8,970           23       0.51 %         8,828           25       0.57 %
Time deposits                   36,248          230       1.27 %        34,852          273       1.57 %
Total interest-bearing
deposits                        54,432          265       0.97 %        52,446          309       1.18 %

Federal Home Loan Bank
advances                           119            -          -               -            -          -
Total interest-bearing
liabilities                     54,551          265       0.97 %        52,446          309       1.18 %

Demand deposits                 14,245                                  10,247
Other liabilities                  122                                     112
Equity                           9,481                                   5,184
Total liabilites and
equity                   $      78,399                           $      67,989

Net interest income                      $    1,017                              $    1,011

Interest rate spread                                      2.71 %                                  3.01 %
Net yield on earning
assets                                                    2.92 %                                  3.21 %



(1) Includes Federal Home Loan Bank stock, deposits with Co-operative Central Bank, and available-for-sale securities.

(2) Includes non-accrual loans and interest received on such loans, and loans held-for-sale.

(3) Includes short-term investments.

Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest and dividend income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume
(changes in volume multiplied by prior rate). The total increase (decrease)
column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.


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                             Three Months Ended                         Six Months Ended
                               March 31, 2013                            March 31, 2013
                                 Compared to                              Compared to
                             Three Months Ended                         Six Months Ended
                               March 31, 2012                            March 31, 2012
                       Increase (Decrease)                      Increase (Decrease)
                             Due to                                    Due to
(in thousands)       Volume           Rate          Net         Volume          Rate         Net

Interest income:
Securities (1)     $        (7 )   $       (10 ) $     (17 ) $        (17 )  $      (45 ) $     (62 )
Loans, net (2)             101             (52 )        49             30           (25 )         5
Other
interest-earning
assets (3)                  (1 )             7           6              -            19          19
Total
interest-earning
assets                      93             (55 )        38             13           (51 )       (38 )

Interest
expense:
Deposits           $         6     $       (25 ) $     (19 ) $         13    $      (57 ) $     (44 )
Federal Home
Loan Bank
advances                                                 -                                        -
Total
interest-bearing
liabilities                  6             (25 )       (19 )           13           (57 )       (44 )
Increase
(decrease) in
net interest
income             $        87     $       (30 ) $      57              -    $        6   $       6



(1) Includes Federal Home Loan Bank of Boston stock, deposits with the Cooperative Central Bank, and available-for-sale securities.

(2) Includes non accruing loan balances and interest received on such loans, and loans held-for-sale.

(3) Includes short-term investments.

Provision for Loan Losses. The provision for loan losses increased by $44,000, from a $3,000 benefit for the three months ended March 31, 2012 to $41,000 for the three months ended March 31, 2013. The increase in the provision was largely due to the increase in loan balances in the three months ended March 31, 2013 compared to the prior period.

The provision for loan losses increased by $33,000, from $12,000 for the six months ended March 31, 2012 to $45,000 for the six months ended March 31, 2013. The increase in the provision was largely due to the increase in loan balances in the six months ended March 31, 2013 compared to the prior period.

Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated.

                                          For the                          For the
                                    Three Months Ended                Six Months Ended
                                         March 31,                        March 31,
(Dollars in thousands)             2013            2012             2013            2012

Allowance beginning of
period                         $        335    $         330    $        334    $         316
Provision for loan losses                41               (2 )            45               12
Charge-offs                               -                -              (3 )              -
Recoveries                                -                -               -                -
Allowance at end of period     $        376    $         328    $        376    $         328

Allowance for loan losses
as a percent of
non-performing loans                    N/A        16,400.00 %           N/A        16,400.00 %
Allowance for loan losses
. . .
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