Meridian Bancorp, the parent company of East Boston Savings Bank, has grown like gangbusters over the past five years, from roughly $3.5 billion in total assets in 2015 to more than $6.3 billion at the end of 2019. A lot of the growth has come organically and through new branches, which has enabled the bank to grow its loan book significantly, particularly through commercial loans.
So when the coronavirus pandemic struck the economy, I was surprised to see the bank set aside a smaller quarterly credit provision (the 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 significantly increased their quarterly provisions, and Meridian has a large amount of loans on its book. This strikes me as a red flag and something to watch carefully when evaluating the stock. Here's why.
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Loan loss provision
Let's begin by examining the loan loss provision the bank took relative to some of its peers in the first quarter. Meridian is a traditional community bank that provides various consumer and commercial loan products in Boston, greater Boston, and the North Shore of Massachusetts. So most of its competitors are other large publicly traded community banks headquartered in Boston and Massachusetts. Below is a comparison chart of various credit metrics at Meridian and some of its most prominent competitors.
| Bank | Total Assets (billions) |
Credit Provision Q120 (thousands) | Credit Provision Q419 (thousands) | Credit Provision Q119 (thousands) | Allowance For Loan Losses Q120 (thousands) | Coverage Ratio % |
|---|---|---|---|---|---|---|
| Meridian Bancorp (EBSB +0.00%) | $6.35 | $725 | ($504) | $843 | $50,900 | 0.89% |
| Berkshire Hills Bancorp (BHLB +0.00%) | $13.2 | $34,800 | $5,300 | $4,000 | $114,000 | 1.22% |
| Independent Bank (INDB 2.35%) | $12 | $25,000 | $4,000 | $1,000 | $92,400 | 1.04% |
| Century Bancorp (CNBKA +0.00%) | $5.6 | $1,070 | $550 | $375 | $30,800 | 1.23% |
| Brookline Bancorp (BRKL +0.00%) | $8.5 | $54,000 | $3,600 | $1,300 | $113,000 | 1.66% |
| HarborOne Bancorp (HONE +0.00%) | $4.1 | $3,750 | $1,300 | $857 | $26,300 | 0.83% |
Sources: SEC filings and company earnings releases
As you can see above, in terms of assets, Meridian falls right in the middle of these other banks. In the first quarter of 2020, the bank took a credit provision of just $725,000 (column 3), which is down from the first quarter of 2019 and up about $1.2 million from the fourth quarter of 2019. This increase is nothing compared to those of its larger competitors like Berkshire Hills Bancorp, Independent Bank, the holding company of Rockland Trust, and Brookline Bancorp, which increased their quarterly provisions from the linked quarter by $29.5 million, $21 million, and $50.4 million, respectively.
Meridian did increase its quarterly provision by more than Century Bancorp from the previous quarter, but less than HarborOne Bancorp, the smallest bank on this list. Another metric to pay attention to is the coverage ratio, which tells us the total cash banks have set aside for future expected loan losses as a percentage of total loans. As you can see, Meridian's coverage ratio is 0.89%. That's lower than every other bank except HarborOne. Ultimately, although you can look at these metrics and find some similarities between Meridian and the smaller banks in this group like Century and HarborOne, it is really a poor comparison, because Meridian has a much different composition.
Commercial concentration
As I touched on earlier, Meridian has achieved a lot of its growth through commercial loans, which in general are riskier than your standard residential mortgage. A lot of Meridian's growth is from commercial real estate (CRE) loans, but the bank has also grown significantly through other commercial segments like commercial and development (C&D) loans and commercial and industrial (C&I) loans, some of the riskiest loan segments aside from credit cards, farm loans, and some other niche types of lending. From bank quarterly reports, we can see the specific amount of the quarterly credit provision dedicated to the specific loan segment of a bank's portfolio in the first quarter of 2020.
| Bank |
CRE Loans (000) | CRE Provision | C&D Loans | C&D Provision | 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 |
| HarborOne Bancorp | $1,200,000 | $2,940 | $160,000 | ($4) | $317,000 | ($159) |
Source: Earnings Links Above, *N/A = Company has yet to file quarterly report
Some numbers that stand out are in the CRE and C&D provisions. Meridian has $2.6 billion in outstanding CRE loans, yet saw a provision reversal in the first quarter, meaning that a loan or loans it previously expected to result in losses are actually back in better financial shape, allowing the company to take some money out of the provision bucket. In 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 outstanding CRE loans set aside nearly $3 million for expected future losses. A similar tale played out in C&D loans. Meridian has a higher balance of outstanding C&D loans than Independent Bank, but took a smaller provision for the C&D segment.
How is Meridian operating in similar geographic markets, yet expecting much smaller losses in the same loan segments? Is the bank somehow immune to the coronavirus? The company in its recent quarterly filing said more than 19% of its commercial loan portfolio is concentrated in the retail, hospitality, and restaurant industries, so it has exposure to industries significantly damaged by the pandemic.
Riskier portfolio
While I have been pointing out some obvious problems, there were also some similarities between Meridian and some of its small competitors, namely Century and HarborOne. Specifically, HarborOne has a smaller coverage ratio than Meridian, and Meridian raised its quarterly provision more than Century on a quarter-over-quarter basis. But the thing to understand is that Meridian is much more reliant on loans than these banks, and has a greater exposure to the commercial sector.
| Bank | Loan/Asset Ratio | Commercial Loans/Total Loans Ratio |
|---|---|---|
| Meridian Bancorp | 90% | 70% |
| Berkshire Hills Bancorp | 70% | 62% |
| Independent Bank | 74% | 70% |
| Century Bancorp | 45% | 65% |
| Brookline Bancorp | 81% | 81% |
| HarborOne Bancorp | 78% | 53% |
You can see why it's difficult to make an apples-to-apples comparison between Meridian and Century and HarborOne. For one, Meridian issues twice the amount of assets to loans that Century does, and has a much larger commercial exposure than HarborOne.
These metrics indicate that Independent and Brookline more closely resemble Meridian in terms of loans-to-assets ratio and total commercial exposure. Those banks took first-quarter credit provisions of $25 million and $54 million, respectively, compared to Meridian's $725,000 provision.
Need more information
Could there be an explanation for Meridian's small provision, other than the bank being the best loan underwriter in Massachusetts? Sure. Perhaps most of its loans have low loan-to-value ratios, meaning borrowers put down larger down payments and therefore more equity on the loans, making them safer. But it's hard to know, because Meridian does not hold a quarterly conference call with analysts and has not put out a supplementary presentation related to how the bank has been affected by 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.
