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BLMT > SEC Filings for BLMT > Form 10-Q on 9-May-2014All Recent SEC Filings

Show all filings for BSB BANCORP, INC.

Form 10-Q for BSB BANCORP, INC.


9-May-2014

Quarterly Report


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

The following analysis discusses the changes in financial condition and results of operation of the Company, and should be read in conjunction with both the unaudited consolidated interim financial statements and notes thereto, appearing in Part 1, Item 1 of this report.

Forward-Looking Statements

This report contains forward-looking statements, which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect," "will," "may" and words of similar meaning. These forward-looking statements include, but are not limited to:

statements of our goals, intentions and expectations;

statements regarding our business plans, prospects, growth and operating strategies;

statements regarding the asset quality of our loan and investment portfolios; and

estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We do not undertake any obligation to update any forward-looking statements after the date of this document, except as required by law.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

our ability to successfully implement our business strategy, which includes significant asset and liability growth;

our ability to increase our market share in our market areas and capitalize on growth opportunities;

our ability to successfully implement our branch network expansion strategy;

general economic conditions, either nationally or in our market areas, and conditions in the real estate markets that could affect the demand for our loans and other products and the ability of borrowers to repay loans, lead to declines in credit quality and increased loan losses, and negatively affect the value and salability of the real estate that is the collateral for many of our loans;

competition among depository and other financial institutions;

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

adverse changes in the securities markets;

changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

government shutdowns;

our ability to successfully integrate acquired entities, if any;

changes in consumer spending, borrowing and savings habits;

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


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changes in our organization, compensation and benefit plans;

changes in our financial condition or results of operations that reduce capital available; and

changes in the financial condition or future prospects of issuers of securities that we own.

Additional factors that could cause results to differ materially from those described in the forward-looking statements can be found in the filings made by BSB Bancorp, Inc. with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended December 31, 2013 under the heading "Item 1A. Risk Factors." Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Critical Accounting Policies

There are no material changes to the critical accounting policies from those disclosed in BSB Bancorp, Inc.'s 2013 Annual Report on Form 10-K. In applying these accounting policies, management is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. As discussed in the Company's 2013 Annual Report on Form 10-K, the three most significant areas in which management applies critical assumptions and estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses, investment classification and impairment and deferred income taxes. Management's estimates and assumptions affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ from the amount derived from management's estimates and assumptions under different conditions.

Comparison of Financial Condition at March 31, 2014 and December 31, 2013

Total Assets. Total assets increased $114.4 million to $1.2 billion at March 31, 2014, from $1.1 billion at December 31, 2013. The increase was primarily the result of an $88.6 million, or 10.6%, increase in net loans, and an $18.8 million, or 49.5%, increase in cash and cash equivalents. Investment securities also increased by $4.3 million, or 3.1%.

Loans. Our plan to prudently increase our commercial and consumer loan portfolios is working as we experienced solid growth in our commercial real estate loans, residential real estate loans, indirect auto loans and home equity loans during the quarter. Net loans increased by $88.6 million to $927.6 million at March 31, 2014 from $839.0 million at December 31, 2013. The increase in net loans was primarily due to increases of $43.9 million, or 13.7%, in commercial real estate loans, $23.4 million, or 8.1%, in residential one-to-four family loans, $3.3 million, or 3.6%, in home equity lines of credit, $16.0 million, or 16.0%, in indirect auto loans, and $2.5 million, or 25.3%, in construction loans, partially offset by a decrease in commercial loans of $910,000, or 3.0%. While we have continued to originate one-to-four family residential loans and indirect auto loans in 2014, we have continued to sell a portion of these loan types as part of our strategy.

Investment Securities. Total investment securities increased $4.3 million, to $146.0 million at March 31, 2014, from $141.7 million at December 31, 2013. The increase in investment securities primarily resulted from an increase of $4.2 million, or 3.5%, in held-to-maturity securities. This increase was driven by an increase in U.S. government sponsored mortgage backed securities of $6.2 million, partially offset by a decrease in corporate debt securities of $2.0 million.

Cash and Cash Equivalents. Cash and cash equivalents increased by $18.8 million to $56.9 million at March 31, 2014, from $38.0 million at December 31, 2013.

Bank-Owned Life Insurance. We invest in bank-owned life insurance to provide a funding source for our benefit plan obligations. Bank-owned life insurance also generally provides noninterest income that is nontaxable. At March 31, 2014, our investment in bank-owned life insurance was $13.4 million, an increase of $104,000 from $13.3 million at December 31, 2013, reflecting premiums paid and an increase in cash surrender value.

Deposits. Deposits increased $63.0 million, or 8.2%, to $827.7 million at March 31, 2014 from $764.8 million at December 31, 2013. The increase in deposits was due to a $34.7 million, or 8.0%, increase in savings accounts, an increase of $9.8 million, or 30.3%, in interest bearing checking accounts, an increase of $980,000, or 0.7%, in demand deposits, and an increase of $17.6 million, or 12.0%, in certificates of deposit ("CDs"). Core deposits, which we consider to include all deposits other than CDs and brokered CDs, increased by $45.4 million, or 7.3%. Deposit growth was fueled by growth in our PowerBlue savings products as well as our IOLTA and municipal banking programs. Our branch network and business banking programs have also continued to contribute to our deposit growth.


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The following table sets forth the Company's deposit accounts at the dates indicated (in thousands):

                                             March 31, 2014            December 31, 2013
                                          Amount       Percent        Amount       Percent
                                              (unaudited)

  Deposit type:
  Demand deposits                        $ 140,712        17.00 %    $ 139,733        18.27 %
  Interest-bearing checking accounts        42,189         5.10         32,372         4.23
  Savings accounts                         470,693        56.87        435,963        57.01
  Money market deposits                     10,346         1.25         10,501         1.37


  Total transaction accounts               663,940        80.22        618,569        80.88


  Term certificates less than $100,000      59,296         7.16         63,279         8.27
  Term certificates $100,000 or more       104,490        12.62         82,905        10.85


  Total certificate accounts               163,786        19.78        146,184        19.12


  Total deposits                         $ 827,726       100.00 %    $ 764,753       100.00 %

Borrowings. At March 31, 2014, borrowings consisted of advances from the Federal Home Loan Bank of Boston, securities sold to customers under agreements to repurchase, or "repurchase agreements", and other borrowed funds consisting of the balance of loans that we sold with recourse to another financial institution in March of 2006 that are accounted for as a secured borrowing.

Total borrowings increased $49.3 million, or 33.9%, to $194.6 million at March 31, 2014, from $145.3 million at December 31, 2013. Advances from the Federal Home Loan Bank of Boston increased $49.0 million to $191.1 million at March 31, 2014, from $142.1 million at December 31, 2013, and repurchase agreements increased $280,000 to $2.4 million at March 31, 2014, from $2.1 million at December 31, 2013.

The following table sets forth the Company's short-term borrowings and long-term debt for the dates indicated (in thousands):

                                                  March 31, 2014           December 31, 2013
                                                   (unaudited)
Long-term borrowed funds:
Federal Home Loan Bank of Boston long-term
advances                                         $         61,100         $            62,100
Other borrowed funds                                        1,101                       1,113

                                                           62,201                      63,213


Short-term borrowed funds:
Federal Home Loan Bank of Boston
short-term advances                                       130,000                      80,000
Repurchase agreements                                       2,407                       2,127

                                                          132,407                      82,127


Total borrowed funds                             $        194,608         $           145,340

Stockholders' Equity. Total stockholders' equity increased $1.3 million from $130.4 million as of December 31, 2013 to $131.8 million as of March 31, 2014. This increase is primarily the result of earnings of $680,000 and a $477,000 increase in additional paid-in capital related to stock based compensation.


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Non-Performing Assets. The following table sets forth the amounts and categories of our non-performing assets at the dates indicated (dollars in thousands):

                                                   At March 31,             At December 31,
                                                       2014                      2013
                                                    (unaudited)
Non-accrual loans:
Mortgage loans:
One-to-four family                                 $       1,945           $           3,860
Commercial real estate                                        34                          38
Construction loans                                            -                           -
Equity lines of credit                                       200                         200
Commercial loans                                              -                           -
Consumer loans:
Indirect auto loans                                           -                           16
Other consumer loans                                          -                            1

Total non-accrual loans                            $       2,179           $           4,115


Loans delinquent 90 days or greater and
still accruing:
Mortgage loans:
Residential one-to-four family                     $          -            $              -
Commercial real estate                                        -                           -
Construction loans                                            -                           -
Equity lines of credit                                        -                           -
Commercial loans                                              -                           -
Consumer loans:
Indirect auto loans                                           -                           -
Other consumer loans                                          -                           -

Total loans 90 days delinquent and still
accruing                                                      -                           -


Total non-performing loans                                 2,179                       4,115


Other real estate owned                                       -                           -
Repossessed automobiles                                       26                          -


Total non-performing assets (NPAs)                 $       2,205           $           4,115


Troubled debt restructurings:
Troubled debt restructures included in NPAs        $       1,900           $           1,900
Troubled debt restructures not included in
NPAs                                                       7,314                       7,366

Total troubled debt restructures                   $       9,214           $           9,266


Ratios:
Non-performing loans to total loans                         0.23 %                      0.49 %
Non-performing assets to total assets                       0.19 %                      0.39 %

It is the general policy of the Bank to consider any loan on non-accrual as an impaired loan. Exceptions to this policy can be made when, in the opinion of senior management, a loan is adequately secured, properly documented and clearly in the process of collection. Any exceptions to policy are reviewed on a monthly basis and must be approved by senior management. At March 31, 2014, there were no loans on non-accrual that were determined to not be impaired.

Troubled Debt Restructurings. We occasionally modify loans to extend the term or make other concessions to help a borrower stay current on their loan and to avoid foreclosure or collection activity. We generally do not forgive principal or interest on loans. At March 31, 2014, we had $9.2 million of troubled debt restructurings related to ten loans as compared to $9.3 million of troubled debt restructurings related to ten loans at December 31, 2013.


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Comparison of Operating Results for the Three Months Ended March 31, 2014 and 2013

General. Net income for the three months ended March 31, 2014 was $680,000, compared to net income of $416,000 for the three months ended March 31, 2013. The improvement in operating results of $264,000, or 63.5%, for the three months ended March 31, 2014 compared to the same period in 2013 resulted from an increase in net interest and dividend income after the provision for loan losses of $1.5 million, partially offset by an increase in noninterest expense of $880,000 and a decrease in noninterest income of $284,000.

Net Interest and Dividend Income. Net interest and dividend income increased $1.6 million to $7.3 million for the three months ended March 31, 2014, compared to $5.8 million for the three months ended March 31, 2013. The increase in net interest and dividend income was primarily due to an increase in our total interest earning assets and the ability to attract lower cost core deposits. Total interest-earning assets increased $262.7 million, or 32.7%, to $1.1 billion for the three months ended March 31, 2014, from $803.8 million for the three months ended March 31, 2013. Net average interest-earning assets also increased $17.7 million, or 7.5%, to $252.7 million for the three months ended March 31, 2014, from $235.0 million for the three months ended March 31, 2013. Partially offsetting this increase was a decrease in our net interest margin of 14 basis points to 2.77% for the three months ended March 31, 2014, compared to 2.91% for the three months ended March 31, 2013, and a decrease in our net interest rate spread of 4 basis points to 2.61% for the three months ended March 31, 2014, compared to 2.65% for the three months ended March 31, 2013.

Interest and Dividend Income. Interest and dividend income increased $1.8 million to $8.8 million for the three months ended March 31, 2014, from $7.0 million for the three months ended March 31, 2013. The increase in interest and dividend income was primarily due to a $1.4 million increase in interest income on loans and a $324,000 increase in interest on securities. The increase in interest income on loans resulted from an increase in the average balance of loans of $190.0 million to $882.7 million for the three months ended March 31, 2014, from $692.7 million for the three months ended March 31, 2013, partially offset by a 17 basis point decrease in the average yield on loans to 3.63% from 3.80%, primarily due to lower interest rates on originated loans during the period. The increase in interest and dividend income on securities was primarily due to an increase in the average balance of securities of $65.6 million to $143.1 million for the three months ended March 31, 2014, from $77.4 million for the three months ended March 31, 2013, partially offset by a 23 basis point decrease in the average yield on securities to 2.29% from 2.52%.

Interest Expense. Interest expense increased $202,000 to $1.4 million for the three months ended March 31, 2014, from $1.2 million for the three months ended March 31, 2013. The increase resulted from a $245.1 million, or 43.1%, increase in the average balance of interest-bearing liabilities partially offset by a 16 basis point decrease in the cost of interest-bearing liabilities to 0.71% from 0.87%.

Interest expense on interest-bearing deposits increased by $136,000 to $1.2 million for the three months ended March 31, 2014, from $1.0 million for the three months ended March 31, 2013. This increase was primarily due to an increase in the interest expense on savings accounts and CD's of $83,000 and $53,000, respectively. The increase in interest expense on savings accounts of $83,000 from $538,000 to $621,000, was driven by an increase in the average balance of $111.2 million, partially offset by a decrease in the average cost of 8 basis points to 0.57% from 0.65%. The increase in interest expense on CD's of $53,000 from $484,000 to $537,000, was driven by an increase in the average balance of $36.4 million, partially offset by a decrease in the average cost of 25 basis points to 1.42% from 1.67%. We experienced decreases in average cost within all deposit categories except for money market accounts, which remained flat.

Interest expense on total borrowings increased $66,000 to $260,000 for the three months ended March 31, 2014, from $194,000 for the three months ended March 31, 2013. This increase was primarily due to an increase in the average balance of FHLB advances to $171.9 million for the three months ended March 31, 2014, from $74.0 million for the three months ended March 31, 2013, partially offset by a decrease in the average cost of FHLB advances to 0.59% for the three months ended March 31, 2014, from 1.01% for the three months ended March 31, 2013.

Provision for Loan Losses. Based on our methodology for establishing the allowance for loan losses and provision for loan losses discussed in Note 4 to the Consolidated Financial Statements included in this Form 10-Q, we recorded a provision for loan losses of $388,000 for the three months ended March 31, 2014, compared to $327,000 for the three months ended March 31, 2013. The provision for loan losses was impacted by a reduction in a specific allowance on an impaired residential one-to-four family loan of $323,000, due to the full payoff of this loan. The allowance for loan losses was $8.3 million, or 0.90% of total loans, at March 31, 2014, compared to $8.0 million, or 0.95% of total loans, at December 31, 2013.

Noninterest Income. Noninterest income decreased by $284,000 to $722,000 for the three months ended March 31, 2014, from $1.0 million for the three months ended March 31, 2013. This decrease was driven by a decrease in gains on sales of loans of $289,000 as we benefited less during 2014 from the interest rate environment as compared to the first quarter of 2013.

Noninterest Expense. Noninterest expense increased $880,000 to $6.7 million for the three months ended March 31, 2014, from $5.8 million for the three months ended March 31, 2013. This increase was driven by an increase in salaries and employee benefits of


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$593,000 which included the impact of adding personnel for two additional branches and an amendment to an executive supplemental retirement plan agreement. Data processing expenses also increased by $92,000, quarter over quarter, driven by increases in core, online banking and loan servicing costs related to increased loan and deposit volume.

Income Tax Expense. We recorded income tax expense of $304,000 for the three months ended March 31, 2014, compared to income tax expense of $242,000 for the three months ended March 31, 2013. The effective tax rate for the three months ended March 31, 2014 was 30.9% compared to 36.8% for the same period in 2013. The decrease in effective tax rate was primarily the result of a change within an executive SERP agreement causing a one-time reduction to a deferred tax liability.

The following tables set forth average balances of assets and liabilities, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.

                                            Balance        Interest      Yield/Rate (1)        Balance       Interest      Yield/Rate (1)
Interest-earning assets:
Total loans                               $   882,743     $    7,895                3.63 %    $ 692,711     $    6,492                3.80 %
Securities                                    143,053            806                2.29 %       77,442            482                2.52 %
Other                                          40,659             21                0.21 %       33,581             17                0.22 %

Total interest-earning assets (5)           1,066,455     $    8,722                3.32 %      803,734     $    6,991                3.53 %
Non-interest-earning assets                    29,037                                            25,796

Total assets                              $ 1,095,492                                         $ 829,530


Interest-bearing liabilities:
Savings accounts                          $   445,326     $      621                0.57 %    $ 334,109     $      538                0.65 %
Checking accounts                              28,842              8                0.11 %       27,308              8                0.12 %
Money market accounts                          10,379              2                0.08 %       11,007              2                0.08 %
Certificates of deposit                       153,882            537                1.42 %      117,525            484                1.67 %

Total interest-bearing deposits               638,429          1,168                0.74 %      489,949          1,032                0.85 %
Federal Home Loan Bank advances               171,856            251                0.59 %       74,044            185                1.01 %
Securities sold under agreements to
repurchase                                      2,385              1                0.15 %        3,562              1                0.15 %
Other borrowed funds                            1,108              8                2.88 %        1,152              8                2.94 %

Total interest-bearing liabilities            813,778     $    1,428                0.71 %      568,707     $    1,226                0.87 %
Non-interest-bearing liabilities              151,092                                           128,257

Total liabilities                             964,870                                           696,965
Stockholders' Equity                          130,622                                           132,566

Total liabilities and stockholders'
equity                                    $ 1,095,492                                         $ 829,530


Net interest income                                       $    7,294                                        $    5,765

Net interest rate spread (2)                                                        2.61 %                                            2.65 %
Net interest-earning assets (3)               252,677                                           235,027

Net interest margin (4)                                                             2.77 %                                            2.91 %
Average interest-earning assets to
interest-bearing liabilities                                                      131.05 %                                          141.33 %

(1) Yields and rates for the three-month periods ended March 31, 2014 and 2013 are annualized.

(2) Net interest rate spread represents the difference between the yield on average interest-earning assets and the cost of average interest-bearing liabilities.

(3) Net interest-earning assets represents total interest-earning assets less total interest-bearing liabilities.

(4) Net interest margin represents net interest and dividend income divided by average total interest-earning assets.

(5) FHLB stock dividends of $29,000 and $7,000 for the three months ended March 31, 2014 and 2013, respectively, are not included.


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The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. 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). For purposes of this table, changes . . .

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