Is Meridian Bancorp saving enough money to cover potential loan losses?
Meridian Bancorp, the parent company of East Boston Savings Bank, has grown like a gangbuster over the past five years, growing from around $ 3.5 billion in total assets in 2015 to over $ 6.3 billion at the end of 2019. Much of the growth came organically and through new branches, which enabled the bank to significantly increase its loan portfolio, notably through commercial loans.
So when the coronavirus pandemic hit the economy, I was surprised to see the bank set aside a smaller quarterly credit allowance (cash banks set aside to cover future expected loan losses) than it did. ‘in the first quarter of 2019, when the economy was healthy. After all, many of the bank’s main competitors have significantly increased their quarterly allowances, and Meridian has a large number of loans in its portfolio. This seems like a red flag to me and something to watch out for when valuing the stock. Here’s why.
Allowance for loan losses
Let’s start by looking at the allowance for loan losses that the bank has made against some of its peers in the first trimester. Meridian is a traditional community bank that offers a variety of consumer and business loan products in Boston, Greater Boston and the North Shore of Massachusetts. Thus, most of its competitors are other large, publicly traded community banks headquartered in Boston and Massachusetts. Below is a table comparing the different credit metrics at Meridian and some of its biggest competitors.
|Bank||Total assets (billions)||
Credit provision Q120 (in thousands)
|T419 credit provision (thousands)||T119 credit provision (thousands)||Provision for loan losses Q120 (thousands)||The coverage ratio%|
|Meridian Bancorp (NASDAQ: EBSB)||$ 6.35||$ 725||(504) $||$ 843||$ 50,900||0.89%|
|Berkshire Hills Bancorp (NYSE: BHLB)||$ 13.2||$ 34,800||$ 5,300||$ 4000||$ 114,000||1.22%|
|Independent bank (NASDAQ: INDB)||$ 12||$ 25,000||$ 4000||$ 1,000||$ 92,400||1.04%|
|Century Bancorp (NASDAQ: CNBKA)||$ 5.6||$ 1,070||$ 550||$ 375||$ 30,800||1.23%|
|Brookline Bancorp (NASDAQ: BRKL)||$ 8.5||$ 54,000||$ 3,600||$ 1,300||$ 113,000||1.66%|
|HarbourOne Bancorp (NASDAQ: HONE)||$ 4.1||$ 3,750||$ 1,300||$ 857||$ 26,300||0.83%|
As you can see above, in terms of assets, Meridian sits right in the middle of these other banks. In the first quarter of 2020, the bank took a credit provision of only $ 725,000 (column 3), down from the first quarter of 2019 and up by approximately $ 1.2 million from the fourth quarter of 2019. This increase is nothing compared to those of its biggest competitors like Berkshire Hills Bancorp, Independent bank, the holding company of Rockland Trust, and Brookline Bancorp, which increased their quarterly provisions from the related quarter by $ 29.5 million, $ 21 million and $ 50.4 million, respectively.
Meridian has increased its quarterly provision by more than Century Bancorp from the previous quarter, but less than HarbourOne Bancorp, the smallest bank on this list. Another metric to pay attention to is the coverage ratio, which tells us the total cash that banks have set aside for future expected loan losses as a percentage of total loans. As you can see, Meridian’s coverage rate is 0.89%. That’s lower than all other banks except HarborOne. Ultimately, while you can look at these metrics and find similarities between Meridian and the smaller banks in this group like Century and HarborOne, the comparison is really poor, as Meridian has a very different makeup.
As I mentioned earlier, Meridian has achieved much of its growth through commercial loans, which are generally riskier than your standard residential mortgage. Much of Meridian’s growth has come from commercial real estate loans (CREs), but the bank has also experienced significant growth through other business segments such as commercial and development loans (C&D) and commercial and industrial loans. (C&I) some of the riskier loan segments aside from credit cards, farm loans, and other types of specialty loans. From the banks’ quarterly reports, we can see the specific amount of the quarterly credit provision dedicated to the specific credit segment of a bank’s portfolio in the first quarter of 2020.
CRE credits (000)
|CRE provision||C&D loans||C&D layout||C&I loans||C&I provision|
|Meridian Bancorp||$ 2,620,000||($ 215)||$ 716,000||$ 544||$ 638,000||$ 398|
|Berkshire Hills Bancorp||$ 4,000,000||N / A*||N / A||N / A||$ 1,812,000||N / A|
|Independent bank||$ 4,100,000||$ 9,274||$ 527,000||$ 1,346||$ 1,448,000||$ 5,948|
|Century Bancorp||$ 761,000||($ 343)||$ 6,500||($ 85)||$ 868,000||$ 673|
|Brookline Bancorp||$ 3,800,000||N / A||N / A||N / A||$ 772,000||N / A|
|HarbourOne Bancorp||$ 1,200,000||$ 2,940||$ 160,000||($ 4)||$ 317,000||($ 159)|
Some figures that stand out can be found in the CRE and C&D provisions. Meridian has $ 2.6 billion in CRE loans outstanding, but experienced a reversal of provision in the first quarter, which means that one or more loans that it previously expected to cause losses is actually back in better shape. financial form, allowing the company to withdraw money from the reserve bucket. By comparison, Independent Bank set aside more than $ 9 million in the quarter for its $ 4.1 billion in outstanding CRE loans. Even HarborOne, with its only $ 1.2 billion in CRE loans outstanding, has set aside nearly $ 3 million for expected future losses. A similar story played out in C&D loans. Meridian has a higher outstanding C&D loan balance than Independent Bank, but has taken a smaller allowance for the C&D segment.
How does Meridian operate in similar geographic markets, while expecting much lower losses in the same loan segments? Is the bank somehow immune to the coronavirus? The company in its recent quarterly filing said that more than 19% of its commercial loan portfolio is concentrated in the retail, hotel and restaurant sectors, so it is exposed to sectors significantly damaged by the pandemic.
While I pointed out some obvious issues, there were also similarities between Meridian and some of its smaller competitors namely Century and HarborOne. Specifically, HarborOne has a lower coverage ratio than Meridian, and Meridian has increased its quarterly provision more than Century on a quarterly basis. But what needs to be understood is that Meridian is much more dependent on loans than these banks and is more exposed to the commercial sector.
|Bank||Loan / asset ratio||Commercial loans / total loans ratio|
|Berkshire Hills Bancorp||70%||62%|
You can see why it’s hard to make an apple-to-apple comparison between Meridian and Century and HarborOne. On the one hand, Meridian issues twice as many loan assets as Century and has much more trade exposure than HarborOne.
These metrics indicate that Independent and Brookline are more like Meridian in terms of loan-to-asset ratio and total trade exposure. These banks took first quarter credit provisions of $ 25 million and $ 54 million, respectively, against Meridian’s provision of $ 725,000.
Need more information
Could there be an explanation for Meridian’s small allowance, other than the bank being the top loan underwriter in Massachusetts? Sure. Maybe most of his loans have a low loan-to-value ratio, which means borrowers make larger down payments and therefore more equity on the loans, making them more secure. But that’s hard to know, as Meridian doesn’t hold a quarterly conference call with analysts and hasn’t released an additional presentation on how the bank has been affected by the coronavirus. Given the information available and the numbers, I would stay away from this stock until the bank’s credit has been better tested or more information is available.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.