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BLMT > SEC Filings for BLMT > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for BSB BANCORP, INC.

Form 10-Q for BSB BANCORP, INC.


8-Aug-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 June 30, 2014 and December 31, 2013

Total Assets. Total assets increased $167.2 million to $1.2 billion at June 30, 2014, from $1.1 billion at December 31, 2013. The increase was primarily the result of a $148.3 million, or 17.7%, increase in net loans, a $10.8 million, or 28.5%, increase in cash and cash equivalents, and a $4.2 million, or 3.0% increase in investment securities. Federal Home Loan Bank stock also increased by $2.8 million, or 36.7% as a result of increases in borrowings from the Federal Home Loan Bank.

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 six months ending June 30, 2014. Net loans increased by $148.3 million to $987.3 million at June 30, 2014 from $839.0 million at December 31, 2013. The increase in net loans was primarily due to increases of $61.2 million, or 21.3%, in residential one-to-four family loans, $38.7 million, or 12.1%, in commercial real estate loans, $18.4 million, or 19.9%, in home equity lines of credit, $16.4 million, or 16.4%, in indirect auto loans, and $8.3 million, or 27.1%, in commercial loans. While we have continued to originate one-to-four family residential loans and indirect auto loans in 2014, we have also continued to sell a portion of these loan types as part of our strategy. We base the amount of one-to-four family residential loans that we sell into the secondary market on our liquidity needs, asset/liability mix, loan volume, portfolio size and other factors. We sell loans both servicing released and servicing retained. We base the amount of indirect auto loans that we sell on our risk management considerations, our liquidity needs, asset/liability mix, loan volume, portfolio size, market pricing and other factors.

Investment Securities. Total investment securities increased $4.2 million, to $145.9 million at June 30, 2014, from $141.7 million at December 31, 2013. The increase in investment securities primarily resulted from an increase of $3.9 million, or 3.3%, in held-to-maturity securities. This increase was driven by an increase in U.S. government sponsored mortgage-backed securities of $5.9 million, or 5.9%, partially offset by a decrease in corporate debt securities of $2.0 million, or 9.7%.

Cash and Cash Equivalents. Cash and cash equivalents increased by $10.8 million, or 28.5%, to $48.9 million at June 30, 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 June 30, 2014, our investment in bank-owned life insurance was $13.5 million, an increase of $204,000 from $13.3 million at December 31, 2013, reflecting premiums paid and an increase in cash surrender value.

Deposits. Deposits increased $127.1 million, or 16.6%, to $891.9 million at June 30, 2014 from $764.8 million at December 31, 2013. The increase in deposits was due to an increase of $40.6 million, or 125.3%, increase in interest bearing checking accounts, an increase of $35.0 million, or 24.0%, in certificates of deposit ("CDs"), an increase of $30.5 million, or 7.0% in savings accounts and an increase of $21.4 million, or 15.3%, in demand deposits. Core deposits, which we consider to include all deposits other than CDs and brokered CDs, increased by $92.1 million, or 14.9%. The maturing of our three InStore branches and the ongoing growth of our municipal banking program drove both checking and savings deposits. In addition, new and expanding small business banking and commercial real estate customer relationships continue to be important contributors to this strong performance.


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

                                             June 30, 2014             December 31, 2013
                                          Amount       Percent        Amount       Percent
                                              (unaudited)
  Deposit type:
  Demand deposits                        $ 161,171        18.07 %    $ 139,733        18.27 %
  Interest-bearing checking accounts        72,925         8.18         32,372         4.23
  Savings accounts                         466,509        52.30        435,963        57.01
  Money market deposits                     10,089         1.13         10,501         1.37

  Total transaction accounts               710,694        79.68        618,569        80.88

  Term certificates less than $100,000      56,603         6.35         63,279         8.27
  Term certificates $100,000 or more       124,594        13.97         82,905        10.85

  Total certificate accounts               181,197        20.32        146,184        19.12

  Total deposits                         $ 891,891       100.00 %    $ 764,753       100.00 %

Borrowings. At June 30, 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. As of June 30, 2014, the principal balance of these loans sold with recourse amounted to $1.1 million. We have not incurred any losses related to the loans sold with recourse.

Total borrowings increased $37.7 million, or 26.0%, to $183.1 million at June 30, 2014, from $145.3 million at December 31, 2013. Advances from the Federal Home Loan Bank of Boston drove this increase as they increased $38.0 million to $180.1 million at June 30, 2014, from $142.1 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):

                                                     June 30, 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                                          1,090                      1,113

                                                             62,190                     63,213

Short-term borrowed funds:
Federal Home Loan Bank of Boston short-term
advances                                                    119,000                     80,000
Repurchase agreements                                         1,872                      2,127

                                                            120,872                     82,127

Total borrowed funds                                $       183,062        $           145,340

Stockholders' Equity. Total stockholders' equity increased $3.0 million, or 2.3%, to $133.4 million at June 30, 2014 from $130.4 million as of December 31, 2013. This increase is primarily the result of earnings of $1.7 million and a $980,000 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 June 30,             At December 31,
                                                        2014                      2013
                                                     (unaudited)
Non-accrual loans:
Mortgage loans:
One-to-four family                                  $       1,943           $           3,860
Commercial real estate                                         -                           38
Construction loans                                             -                           -
Home equity                                                   298                         200
Commercial loans                                               -                           -
Consumer loans:
Indirect auto loans                                            -                           16
Other consumer loans                                           -                            1

Total non-accrual loans                             $       2,241           $           4,115

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

Total loans 90 days delinquent and still
accruing                                                       -                           -

Total non-performing loans                                  2,241                       4,115

Other real estate owned                                        -                           -
Repossessed automobiles                                        15                          -

Total non-performing assets (NPAs)                  $       2,256           $           4,115

Troubled debt restructurings:
Troubled debt restructures included in NPAs         $       1,900           $           1,900
Troubled debt restructures not included in
NPAs                                                        7,249                       7,366

Total troubled debt restructures                    $       9,149           $           9,266

Ratios:
Non-performing loans to total loans                          0.23 %                      0.49 %
Non-performing assets to total assets                        0.18 %                      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 June 30, 2014, there were no loans on non-accrual that were determined to not be impaired.

Non-accrual Loans. Non-accrual one-to-four family residential loans decreased by $1.9 million from December 31, 2013 to June 30, 2014. This decrease was due to the full payoff of one impaired loan.

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 June 30, 2014, we had $9.1 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 June 30, 2014 and 2013

General. Net income for the three months ended June 30, 2014 was $1.0 million, compared to net income of $361,000 for the three months ended June 30, 2013. The improvement in operating results of $680,000, or 188.4%, for the three months ended June 30, 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 $361,000 and a decrease in noninterest income of $51,000.

Net Interest and Dividend Income. Net interest and dividend income increased $1.7 million, or 29.0% to $7.6 million for the three months ended June 30, 2014, compared to $5.9 million for the three months ended June 30, 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 average interest-earning assets increased $306.3 million, or 36.2%, to $1.2 billion for the three months ended June 30, 2014, from $846.9 million for the three months ended June 30, 2013. Average net interest-earning assets also increased $24.3 million, or 10.1%, to $264.9 million for the three months ended June 30, 2014, from $240.7 million for the three months ended June 30, 2013. There was a decrease in our net interest margin of 15 basis points to 2.64% for the three months ended June 30, 2014, compared to 2.79% for the three months ended June 30, 2013, and a decrease in our net interest rate spread of 10 basis points to 2.46% for the three months ended June 30, 2014, compared to 2.56% for the three months ended June 30, 2013.

Interest and Dividend Income. Interest and dividend income increased $2.1 million, or 30.2%, to $9.3 million for the three months ended June 30, 2014, from $7.1 million for the three months ended June 30, 2013. The increase in interest and dividend income was primarily due to a $1.7 million increase in interest income on loans and a $380,000 increase in interest on securities. The increase in interest income on loans resulted from an increase in the average balance of loans of $230.0 million to $958.9 million for the three months ended June 30, 2014, from $728.9 million for the three months ended June 30, 2013, partially offset by a 16 basis point decrease in the average yield on loans to 3.51% from 3.67%, 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 $73.7 million to $146.3 million for the three months ended June 30, 2014, from $72.6 million for the three months ended June 30, 2013, partially offset by a 14 basis point decrease in the average yield on securities to 2.20% from 2.34%.

Interest Expense. Interest expense increased $437,000 to $1.7 million for the three months ended June 30, 2014, from $1.2 million for the three months ended June 30, 2013. The increase resulted from a $282.0 million, or 46.5%, increase in the average balance of interest-bearing liabilities partially offset by a 6 basis point decrease in the cost of interest-bearing liabilities to 0.75% from 0.81%.

Interest expense on interest-bearing deposits increased by $348,000 to $1.4 million for the three months ended June 30, 2014, from $1.0 million for the three months ended June 30, 2013. This increase was primarily due to an increase in the interest expense on CD's and savings accounts of $199,000 and $141,000, respectively. The increase in interest expense on CD's of $199,000 from $462,000 to $661,000, was driven by an increase in the average balance of $55.0 million, partially offset by a decrease in the average cost of 5 basis points to 1.56% from 1.61%. The increase in interest expense on savings accounts of $141,000 from $567,000 to $708,000, was driven by an increase in the average balance of $104.9 million, partially offset by a decrease in the average cost of 2 basis points to 0.60% from 0.62%. We experienced decreases in the average cost within savings and CD's, while the cost of money market accounts remained flat, and we experienced a slight increase on checking accounts of 4 basis points, from 0.11% to 0.15%.

Interest expense on total borrowings increased $89,000 to $271,000 for the three months ended June 30, 2014, from $182,000 for the three months ended June 30, 2013. This increase was primarily due to an increase in the average balance of FHLB advances of $111.0 million, or 146.8%, to $186.6 million for the three months ended June 30, 2014, from $75.6 million for the three months ended June 30, 2013, partially offset by a decrease in the average cost of FHLB advances of 36 basis points to 0.56% for the three months ended June 30, 2014, from 0.92% for the three months ended June 30, 2013.

Provision for Loan Losses. Based on our methodology for establishing the allowance for loan losses and provision for loan losses as discussed in Note 4 to the Consolidated Financial Statements and included in this Form 10-Q, we recorded a provision for loan losses of $307,000 for the three months ended June 30, 2014, compared to $100,000 for the three months ended June 30, 2013. The increase in the provision for loan losses was driven by an increase in loan growth during the three months ended June 30, 2014 as compared to the three months ended June 30, 2013. The allowance for loan losses was $8.6 million, or 0.87% of total loans, at June 30, 2014, compared to $8.0 million, or 0.95% of total loans, at December 31, 2013. The decrease in the allowance for loan losses as a percentage of total loans was driven by lower observed loss rates and improvements in economic conditions, such as unemployment, within our lending footprint. We also experienced a shift in our loan portfolio mix to loan types of lesser risk, such as residential real estate loans, which contributed to the decrease to the allowance for loan losses as a percentage of total loans.

Noninterest Income. Noninterest income decreased by $51,000 to $857,000 for the three months ended June 30, 2014, from $908,000 for the three months ended June 30, 2013. This decrease was driven by a decrease in gains on sales of loans of $286,000 as we benefited less during 2014 from the interest rate environment as compared to the second quarter of 2013. This was partially offset by an increase in other income of $164,000 which was driven by an increase in vendor loss experience refunds related to our indirect auto loan portfolio.


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Noninterest Expense. Noninterest expense increased $361,000 to $6.5 million for the three months ended June 30, 2014, from $6.1 million for the three months ended June 30, 2013. This increase was driven by an increase in salaries and employee benefits of $306,000 which included the impact of adding personnel for two additional branches.

Income Tax Expense. We recorded income tax expense of $614,000 for the three months ended June 30, 2014, compared to income tax expense of $200,000 for the three months ended June 30, 2013. The effective tax rate for the three months ended June 30, 2014 was 37.1% compared to 35.7% for the same period in 2013. The increase in the effective tax rate was primarily the result of the increase in taxable income which reduced the impact of tax-exempt income from bank owned life insurance.


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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.

                                                                             For the Three Months Ended June 30,
                                                                                         (unaudited)
                                                                 2014                                                  2013
                                                                                   (Dollars in thousands)
                                              Average                                               Average
                                            Outstanding                                           Outstanding
                                              Balance         Interest       Yield/Rate(1)          Balance         Interest       Yield/Rate(1)
Interest-earning assets:
Total loans                                 $    958,895     $    8,402                3.51 %    $     728,878     $    6,664                3.67 %
Securities                                       146,313            804                2.20 %           72,609            424                2.34 %
Other                                             47,928             29                0.24 %           45,396             23                0.20 %

Total interest-earning assets (5)              1,153,136     $    9,235                3.21 %          846,883     $    7,111                3.37 %
Non-interest-earning assets                       30,582                                                25,325

Total assets                                $  1,183,718                                         $     872,208

Interest-bearing liabilities:
Savings accounts                            $    474,205     $      708                0.60 %    $     369,336     $      567                0.62 %
Checking accounts                                 43,836             17                0.15 %           31,351              9                0.11 %
Money market accounts                             10,208              2                0.08 %           10,267              2                0.08 %
Certificates of deposit                          170,248            661                1.56 %          115,286            462                1.61 %

Total interest-bearing deposits                  698,497          1,388                0.80 %          526,240          1,040                0.79 %
Federal Home Loan Bank advances                  186,584            263                0.56 %           75,616            173                0.92 %
Securities sold under agreements to
repurchase                                         2,032              1                0.15 %            3,210              1                0.15 %
Other borrowed funds                               1,097              7                2.73 %            1,142              8                2.93 %

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