Description

BSB Bancorp, BLMT, is the holding company for Belmont Savings, which came public on October 4, 2011 in a mutual to stock conversion, selling 8,993,000 shares at $10, raising about $90 million in gross proceeds.  At $11.20 the market cap is $103 million, trading at .78x tangible book value.  BLMT has good credit quality and is overcapitalized, providing ample resources to grow, while returning capital to shareholders.  And management has continued to buy in the open market.

BLMT conducts operations from four full service branch offices located in Belmont and Watertown in southeast Middlesex County, MA.   BLMT also contracted with Shaw’s supermarkets in January 2012 to open in store full service branch in Waltham, MA.   Its primary lending market is Suffolk, Norfolk, Essex, and Middlesex counties, near Boston.   BLMT is #1 of 10 banks in Belmont with 27.3% market share and #5 of 8 in Watertown with 3.5% share.

In 2009 BLMT reorganized into a mutual holding company structure to allow it more flexibility with respect to acquisitions. Historically, BLMT operated as traditional thrift, ie it mainly originated long term fixed rate and adjustable rate 1-4 family residential mortgage loans, which were funded primarily with retail deposit accounts and FHLB Boston advances.  Recently, however, to improve earnings and decrease exposure to interest rate risk, BLMT has sold fixed rate conforming 1-4 family mortgages and shifted its focus to originating loans that have adjustable rates and or higher yields, including commercial real estate, home equity, commercial and industrial, and indirect automobile loans, which usually are shorter maturities, but entail more risk.  The board of directors conducted a strategic review to improve profitability and growth, which led to this shift in lending focus. 

Total assets grew dramatically in 2011 by $169 million to $669 million, driven by an increase in net loans of 173m, an increase of 51%.  The rise in loans to $510 million was mostly the result of growth in areas outside of its traditional lines of business.  Indirect automobile loans grew $63 million, commercial real estate grew $75 million, and home equity was up $19 million.  Auto loans will not continue to grow at this pace though, as management expects to sell more of its originations.  As a result, investment securities fell $19 million to $89 million to fund the growth of higher yielding loans.

Deposit growth was also strong in 2011, up $84 million, or 24%.  Management has emphasized a greater focus on customer centric relationship based product lines, as well as, an increased sales and marketing effort.  For example, in December, 2010, BLMT introduced Platinum Blue retail and small business products that have competitive rates, if the customer maintains an active checking account.

Stockholders equity grew $85 million, mainly from inflow of proceeds from stock conversion.

During 2011, net interest margin rose 22bps to 3.08% and net interest and dividend income grew $2.9 million to $16.6 million.  The increase in income was the result of higher interest earning assets, the shift to higher yielding loans, and the ability to attract lower cost deposits.  Furthermore, the cost of interest bearing liabilities fell faster than the yields on interest earning assets in the prevailing declining interest rate environment.   However, net income fell $1.5 million, as noninterest expense rose, partially due to the IPO, and a larger provision for loan losses.

The provision was $2.3 million in 2011, up from $438 thousand in 2010, because of higher loan volumes and the composition of the loan portfolio, resulting in a higher allowance for loan losses to total loans of .93% versus .85% the prior year.  NPA is only $4.4 million at .61% of total assets because of underwriting conservatism during the credit bubble heyday, as BLMT did not and does not offer Option ARMs, subprime, or Alt-A loans.   However, despite the strong credit metrics, ALL/NPL is 108%, so an elevated level of provisions could be necessary, given the strong loan growth and the entrance into types of loans that BLMT has not traditionally done.

Management and the board of directors have made reducing exposure to interest rate risk an area of focus, hence the change in composition of the loan portfolio.  According to management’s sensitivity analysis, a shock 300bps increase in interest rates would have a -2.2% impact on net interest income, while a more gradual 200bps increase would have a -1.1% impact.  And a 100bps decrease in rates would hit net interest income by only -.3%.

Part of the impetus for the restructuring over the past few years was to increase growth.  Beyond the new product lines and attention to marketing, management expects to expand its branch network by at least two de novo or acquired branches within the next four years.   And successful implementation of the strategy would also require increasing market share in existing markets.  However, this still leaves plenty of room to return capital to shareholders, as well.

BLMT is overcapitalized.  It has a Tier 1 capital to risk weighted assets ratio of 28.31%, well in excess of the required 6%.  And tangible equity to assets of 19.7% with assets of $669 million, so if it operated closer to a range of 11-12%, it could support assets of approximately $1.2-1.4 billion and/or do an enormous buyback.  Clearly, assets cannot grow that much in the near term, but it does illustrate the levers that can be pulled, in terms of growth, or buybacks, and the attractiveness to a potential acquirer.  Furthermore, ROA and ROE will remain depressed in the short term, but eventually its returns should improve to stable industry levels, making earnings power more evident and relevant.

The primary risk with BLMT is that its business strategy entails significant asset and liability growth, particularly loan growth in areas that the bank has not traditionally been active in.   The growth of the loan portfolio has exposed BLMT to greater risk than many savings bank peers due to more commercial, construction, and auto loans, in particular, which management is less experienced in.

Detail on loan portfolio

• One to four family residential 192m or 38% of total loan portfolio.
  • Loan up to 80% LTV.
    • Will go to 95% with private mortgage insurance and where borrower’s debt service does not exceed 45% of monthly cash flow.
  • Only 1.7% was non owner occupied.
  • Generally sell into secondary market majority of fixed rate mortgages that originate.
• CRE is 166m or 33% of portfolio.   Commercial and multifamily, ie more than 4 units.
  • Mostly in eastern MA.
  • Includes office buildings, owner occupied commercial, industrial, small strip mall centers.
  • Avg loan 1.2m.
  • Up to 80% LTV.
  • Typically higher yield and shorter duration than residential.  Can entail more risk though.
  • Generally require a minimum of 125% projected net cash flow to loan’s debt service.
• Home equity lines of credit are secured by borrower’s primary residence.  Use same criteria for residential mortgages.
  • Revolving lines often for 25 years with draws available for first ten years.
  • Interest only first 10 years than amortize over the remaining 15.
• Indirect automobile loan and other consumer loans were started in 4Q10.  And have grown to 13% of the loan portfolio.
  • These loans are originated by franchised dealerships and assigned to BLMT, upon BLMT approval, for a premium based on pre established rates and terms. 
  • Receive loans from 137 franchised dealerships, located in MA, RI, and CT.
  • 52% of auto loans are for new vehicles.
  • The weighted average original term to maturity was 61 months at yearend 2011 with an estimated average life of 30 months.
  • The average amount financed was $20,600 with a credit score of 764.
  • Dealers contractually make representations and warranties, but not as to the credit worthiness of the buyer.
  • Have relationships with 4 institutions that buy automobile loans.
• Commercial loans are generally used for working capital purposes or for acquiring equipment or real estate.  They are generally secured by equipment, real estate and working capital.
  • At the end of 2011 there were 21m of commercial loans outstanding, or 4% of loans.
• Construction loans include commercial development projects and residential property development.  There were 15m of construction loans outstanding at yearend 2011 with 8.1m for multifamily residential projects, 3.9m for one to four family residential real estate projects on speculation, and 3.2m secured by commercial real estate.
  • These loans generally provide for interest only during the construction phase, which is usually 12-24 months.  At the end of the construction phase the loan either converts to a permanent mortgage or the project is sold.
  • Usually maximum LTV of 75%.

Catalyst