BSB Bancorp 10-Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

Commission file number: 001-35309

BSB BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)

Maryland	80-0752082
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S Employer Identification No.)

2 Leonard Street Belmont, Massachusetts	02478
(Address of Principal Executive Officers)	(Zip Code)

(617) 484-6700

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. (Check one):

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The Registrant had 9,055,808 shares of common stock, par value $0.01 per share, outstanding as of November 2, 2013.

BSB BANCORP, INC.

TABLE OF CONTENTS

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Consolidated Financial Statements
	-Consolidated Balance Sheets as of September 30, 2013 (unaudited) and December 31, 2012		3
	-Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2013 and 2012 (unaudited)		4
	-Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012 (unaudited)		5
	-Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2013 and 2012 (unaudited)		6
	-Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012 (unaudited)		7
	-Notes to Unaudited Consolidated Financial Statements		9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		31
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		43
Item 4.	Controls and Procedures		43
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		44
Item 1A.	Risk Factors		44
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		44
Item 3.	Defaults Upon Senior Securities		45
Item 4.	Mine Safety Disclosures		45
Item 5.	Other Information		45
Item 6.	Exhibits		45

2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

BSB BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)

	September 30, 2013			December 31, 2012
	(unaudited)
ASSETS
Cash and due from banks	$	1,946		$	1,433
Interest-bearing deposits in other banks		46,870			51,279
Cash and cash equivalents		48,816			52,712
Interest-bearing time deposits with other banks		119			119
Investments in available-for-sale securities		21,804			22,621
Investments in held-to-maturity securities, at cost		121,426			63,984
Federal Home Loan Bank stock, at cost		7,650			7,627
Loans held-for-sale		—			11,205
Loans, net of allowance for loan losses of $7,325 as of September 30, 2013 (unaudited) and $6,440 as of December 31, 2012		795,467			654,295
Premises and equipment, net		3,301			2,902
Accrued interest receivable		2,176			2,217
Deferred tax asset, net		4,951			4,025
Income taxes receivable		—			806
Bank-owned life insurance		13,203			12,884
Other real estate owned		—			661
Other assets		4,118			2,024
Total assets	$	1,023,031		$	838,082
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	134,145		$	126,760
Interest-bearing		592,857			481,105
Total deposits		727,002			607,865
Federal Home Loan Bank advances		150,600			83,100
Securities sold under agreements to repurchase		2,552			3,404
Other borrowed funds		1,124			1,156
Accrued interest payable		625			455
Deferred compensation liability		5,096			4,685
Income taxes payable		261			—
Other liabilities		6,622			4,109
Total liabilities		893,882			704,774
Stockholders’ Equity:
Common stock		91			95
Additional paid-in capital		84,987			90,188
Retained earnings		48,667			47,352
Accumulated other comprehensive (loss) income		(314	)		68
Unearned compensation—ESOP		(4,282	)		(4,395	)
Total stockholders’ equity		129,149			133,308
Total liabilities and stockholders’ equity	$	1,023,031		$	838,082

The accompanying notes are an integral part of these consolidated financial statements.

3

BSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)

	Three months ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
	(unaudited)				(unaudited)
Interest and dividend income:
Interest and fees on loans	$	7,283	$	6,364	$	20,465	$	18,032
Interest on taxable debt securities		684		559		1,589		1,540
Dividends		7		10		21		38
Other interest income		21		18		61		72
Total interest and dividend income		7,995		6,951		22,136		19,682
Interest expense:
Interest on deposits		1,041		1,080		3,112		3,049
Interest on Federal Home Loan Bank advances		173		211		531		753
Interest on securities sold under agreements to repurchase		1		1		4		7
Interest on other borrowed funds		8		11		25		32
Total interest expense		1,223		1,303		3,672		3,841
Net interest and dividend income		6,772		5,648		18,464		15,841
Provision for loan losses		438		734		865		2,040
Net interest and dividend income after provision for loan losses		6,334		4,914		17,599		13,801
Noninterest income:
Customer service fees		252		216		710		613
Income from bank-owned life insurance		114		105		313		316
Net gain on sales of loans		168		191		968		1,506
Net gain on sales and calls of securities		—		—		34		—
Loan servicing fee income		192		137		489		330
Other income		164		30		290		366
Total noninterest income		890		679		2,804		3,131
Noninterest expense:
Salaries and employee benefits		3,871		3,279		11,122		9,595
Director compensation		257		113		693		356
Occupancy expense		238		207		685		586
Equipment expense		156		110		454		319
Deposit insurance		156		114		430		367
Data processing		717		531		2,039		1,489
Professional fees		216		200		622		731
Marketing		214		265		662		743
Other expense		548		528		1,626		1,421
Total noninterest expense		6,373		5,347		18,333		15,607
Income before income tax expense		851		246		2,070		1,325
Income tax expense		313		63		755		409
Net income	$	538	$	183	$	1,315	$	916
Earnings per share
Basic	$	0.06	$	0.02	$	0.15	$	0.11
Diluted	$	0.06	$	0.02	$	0.15	$	0.11

The accompanying notes are an integral part of these consolidated financial statements.

4

BSB BANCORP, INC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)

	Three months ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
	(unaudited)						(unaudited)
Net income	$	538		$	183		$	1,315		$	916
Other comprehensive income, before tax:
Change in fair value of securities available for sale		37			211			(589	)		211
Reclassification adjustment for realized gains in net income		—			—			(34	)		—
Other comprehensive income (loss), before tax		37			211			(623	)		211
Income tax (expense) benefit related to items of other comprehensive income (loss)		(15	)		(72	)		241			(72	)
Other comprehensive income (loss), net of tax		22			139			(382	)		139
Comprehensive income	$	560		$	322		$	933		$	1,055

The accompanying notes are an integral part of these consolidated financial statements.

5

BSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2013 AND 2012

(Dollars in thousands)

(Unaudited)

	Common Stock						Additional Paid-In			Retained		Accumulated Other Comprehensive			Unearned			Total Stockholders’
	Shares			Amount			Capital			Earnings		(Loss) Income			Compensation			Equity
Balance at December 31, 2011		9,172,860		$	92		$	90,016		$	45,951	$	(5	)	$	(4,548	)	$	131,506
Net income		—			—			—			916		—			—			916
Other comprehensive income		—			—			—			—		139			—			139
Release of ESOP stock		—			—			23			—		—			114			137
Balance at September 30, 2012		9,172,860		$	92		$	90,039		$	46,867	$	134		$	(4,434	)	$	132,698
Balance at December 31, 2012		9,532,430		$	95		$	90,188		$	47,352	$	68		$	(4,395	)	$	133,308
Net income		—			—			—			1,315		—			—			1,315
Other comprehensive loss		—			—			—			—		(382	)		—			(382	)
Release of ESOP stock		—			—			40			—		—			113			153
Stock based compensation-restricted stock awards		—			—			648			—		—			—			648
Stock based compensation-stock options		—			—			585			—		—			—			585
Share repurchases		(476,622	)		(4	)		(6,474	)		—		—			—			(6,478	)
Balance at September 30, 2013		9,055,808		$	91		$	84,987		$	48,667	$	(314	)	$	(4,282	)	$	129,149

The accompanying notes are an integral part of these consolidated financial statements.

6

BSB BANCORP, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Nine months ended September 30,
	2013			2012
Cash flows from operating activities:
Net income	$	1,315		$	916
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities, net		528			723
Net gain on sales of securities		(34	)		—
Gain on sales of loans, net		(968	)		(1,506	)
Loans originated for sale		(93,640	)		(96,761	)
Proceeds from sales of loans		104,466			138,458
Provision for loan losses		865			2,040
Change in unamortized mortgage premium		(834	)		(333	)
Change in net deferred loan costs		(461	)		(320	)
ESOP expense		153			137
Stock based compensation expense		1,233			—
Depreciation and amortization expense		521			363
Deferred income tax benefit		(685	)		—
Increase in bank-owned life insurance		(313	)		(316	)
Gain of sale of other real estate owned		(5	)		—
Net change in:
Accrued interest receivable		41			(261	)
Other assets		(1,844	)		(107	)
Income taxes receivable		806			(357	)
Income taxes payable		261			(121	)
Accrued interest payable		170			193
Deferred compensation liability		411			350
Other liabilities		2,371			1,188
Net cash provided by operating activities		14,357			44,286
Cash flows from investing activities:
Purchases of available-for-sale securities		(17,833	)		(22,587	)
Proceeds from sales of available-for-sale securities		17,985			—
Proceeds from maturities, payments, and calls of held-to-maturity securities		20,078			28,377
Purchases of held-to-maturity securities		(77,972	)		(11,668	)
Purchases of community loan fund investments		(250	)		—
Redemption of Federal Home Loan Bank stock		496			411
Purchases of Federal Home Loan Bank stock		(519	)
Recoveries of loans previously charged off		139			153
Loan originations and principal collections, net		(30,720	)		(93,589	)
Purchases of loans		(108,814	)		(84,357	)
Capital expenditures		(920	)		(1,229	)
Capital expenditures on other real estate owned		(79	)		—
Premiums paid on bank-owned life insurance		(6	)		(25	)
Proceeds from sales of other real estate		745			—
Net cash used in investing activities		(197,670	)		(184,514	)

The accompanying notes are an integral part of these consolidated financial statements.

7

BSB BANCORP, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

(Continued)

	Nine months ended September 30,
	2013			2012
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts		113,341			53,527
Net increase in time deposits		5,796			94,444
Principal payments on Federal Home Loan Bank advances		(12,500	)		(22,000	)
Net change in short-term advances		80,000			24,000
Net (decrease) increase in securities sold under agreement to repurchase		(852	)		208
Repayment of principal on other borrowed funds		(32	)		(39	)
Net increase in mortgagors’ escrow accounts		142			366
Payments to repurchase stock		(6,478	)		—
Net cash provided by financing activities		179,417			150,506
Net (decrease) increase in cash and cash equivalents		(3,896	)		10,278
Cash and cash equivalents at beginning of period		52,712			22,795
Cash and cash equivalents at end of period	$	48,816		$	33,073
Supplemental disclosures:
Interest paid	$	3,502		$	3,648
Income taxes paid		764			887
Transfer of loans receivable to loans held for sale		—			28,356
Transfer of loans to other real estate owned		—			661
Transfer of loans held for sale to loans receivable		1,347			—

The accompanying notes are an integral part of these consolidated financial statements.

8

BSB BANCORP, INC.

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

NOTE 1 – BASIS OF PRESENTATION

The accompanying unaudited consolidated financial statements of BSB Bancorp, Inc. have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Rule 10-01 of Regulations S-X. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. The consolidated financial statements of BSB Bancorp, Inc. include the balances and results of operations of BSB Bancorp, Inc., a Maryland corporation, and its wholly-owned subsidiary Belmont Savings Bank (referred to herein as “the Company,” “we,” “us,” or “our”). Intercompany transactions and balances are eliminated in the consolidation.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to present fairly the Company’s financial position as of September 30, 2013 and December 31, 2012 and the results of operations and cash flows for the interim periods ended September 30, 2013 and 2012. All interim amounts have not been audited, and the results of operations for the interim periods herein are not necessarily indicative of the results of operations to be expected for the fiscal year. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Certain previously reported amounts have been reclassified to conform to the current period’s presentation.

NOTE 2 – RECENT PRONOUNCEMENTS

In February 2013, the FASB issued ASU 2013-02, Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. The amendments require an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The amendments are effective prospectively for reporting periods beginning after December 15, 2012. The adoption of this guidance did not have a material impact on the Company’s consolidated financial statements.

In July 2013, the FASB issued ASU 2013-10, “Derivatives and Hedging (Topic 815) – Inclusion of the Fed Funds Effective Swap Rate (or Overnight Index Swap Rate) as a Benchmark Interest Rate for Hedge Accounting Purposes.” The amendments in this ASU permit the Fed Funds Effective Swap Rate (OIS) to be used as a U.S. benchmark interest rate for hedge accounting purposes under Topic 815, in addition to Treasury Obligations of the U.S. government (UST) and the London Interbank Offered Rate (LIBOR). The amendments also remove the restriction on using different benchmark rates for similar hedges. The amendments apply to all entities that elect to apply hedge accounting of the benchmark interest rate under Topic 815. The amendments are effective prospectively for qualifying new or redesignated hedging relationships entered into on or after July 17, 2013. The adoption of this ASU is not expected to have an impact on the Company’s results of operations or financial position.

In July 2013, the FASB issued ASU 2013-11, “Income Taxes – Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” The amendments in this ASU provide guidance for the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The amendments in this ASU are expected to reduce diversity in practice by providing guidance on the presentation of unrecognized tax benefits and will better reflect the manner in which an entity would settle at the reporting date any additional income taxes that would result from the disallowance of a tax position when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The amendments apply to all entities that have unrecognized tax benefits when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists at the reporting date and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance is not expected to have an impact on the Company’s results of operations or financial position.

9

NOTE 3 – INVESTMENTS IN SECURITIES

The amortized cost of available for sale (AFS) and held to maturity (HTM) securities and their approximate fair values were as follows at the dates indicated (in thousands):

	September 30, 2013									December 31, 2012
	Amortized Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(unaudited)
Available-for-sale securities:
Corporate debt securities	$	22,289	$	11	$	(496	)	$	21,804	$	22,483	$	188	$	(50	)	$	22,621
	$	22,289	$	11	$	(496	)	$	21,804	$	22,483	$	188	$	(50	)	$	22,621
Held-to-maturity securities:
U.S. government sponsored mortgage-backed securities	$	99,081	$	1,043	$	(484	)	$	99,640	$	49,039	$	1,731	$	—		$	50,770
Corporate debt securities		22,345		72		(446	)		21,971		14,945		216		—			15,161
	$	121,426	$	1,115	$	(930	)	$	121,611	$	63,984	$	1,947	$	—		$	65,931

The amortized cost and estimated fair value of debt securities by contractual maturity at September 30, 2013 is as follows (in thousands). Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	September 30, 2013
	Available-for-Sale				Held-to-Maturity
	Amortized Cost Basis		Fair Value		Amortized Cost Basis		Fair Value
	(unaudited)				(unaudited)
Due within one year	$	—	$	—	$	4,892	$	4,947
Due after one year through five years		12,829		12,802		7,665		7,719
Due after five years through ten years		9,460		9,002		55,500		55,334
Due after ten years		—		—		53,369		53,611
	$	22,289	$	21,804	$	121,426	$	121,611

When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale. The following table shows the gross gains and losses realized on sales of available for sale securities for the periods indicated (in thousands):

	Three months ended September 30,				Nine months ended September 30,
	2013		2012		2013			2012
	(unaudited)				(unaudited)
Gross gains	$	—	$	—	$	64		$	—
Gross losses		—		—		(30	)		—
Net gains on sales of available for sale securities	$	—	$	—	$	34		$	—
Income tax expense attributable to realized net gains on sales of AFS debt securities	$	—	$	—	$	14		$	—

During the three and nine months ended September 30, 2013 (unaudited), proceeds from sales of available-for-sale securities amounted to $0 and $18.0 million, respectively. During the nine months ended September 30, 2012 (unaudited), there were no security sales.

10

Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows (in thousands):

	Less than 12 Months					Over 12 Months
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses
September 30, 2013 (unaudited):
Available-for-sale
Corporate debt securities	$	18,793	$	(496	)	$	—	$	—
Held-to-maturity
Corporate debt securities		10,041		(446	)		—		—
U.S. government sponsored mortgage backed securities		33,117		(484	)		—		—
Total temporarily impaired securities	$	61,951	$	(1,426	)	$	—	$	—
December 31, 2012:
Available-for-sale
Corporate debt securities	$	5,580	$	(50	)	$	—	$	—
Total temporarily impaired securities	$	5,580	$	(50	)	$	—	$	—

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. At September 30, 2013 (unaudited), twenty four securities were in an unrealized loss position. When there are securities in an unrealized loss position, consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) the intent and ability of the Company to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value. Based on the Company’s September 30, 2013 (unaudited) quarterly review of securities in the investment portfolio, management has determined that unrealized losses related to twenty-three debt securities with aggregate depreciation of 1.7% from the Company’s amortized cost basis were caused primarily by changes in market interest rates. Unrealized loss related to one debt security with aggregate depreciation of 9.2% from the Company’s amortized cost basis relates to an investment in the telecom sector. The unrealized loss is primarily caused by changes in market rates and downgrades by several industry analysts. Based on the Company’s September 30, 2013 review of securities in the investment portfolio, management deemed securities with unrealized losses as of September 30, 2013 to be temporarily impaired. At December 31, 2012, two debt securities had unrealized losses with aggregate depreciation of 0.9% from the Company’s amortized cost basis. The Company’s unrealized loss on investments in corporate bonds primarily relates to an investment within the telecom sector. The unrealized loss is primarily caused by changes in market rates and recent downgrades by several industry analysts. The contractual terms of these investments do not permit the companies to settle the security at a price less than the par value of the investment.

The investment securities portfolio is generally evaluated for other-than-temporary impairment under ASC 320-10, “Investments – Debt and Equity Securities.”

In addition to the securities listed above, the Company holds securities in Rabbi Trust investments that are used to fund the executive and director non-qualified deferred compensation plan. These Rabbi Trust investments were included in other assets and consisted primarily of cash and cash equivalents, mutual funds and both U.S. government agency and corporate obligations, and were recorded at fair value. The fair value of these Rabbi Trust investments at September 30, 2013 and December 31, 2012 were $2.2 million and $0, respectively. For the three and nine month periods ending September 30, 2013, the net gain on Rabbi Trust investments still held at the reporting date was $51,000 and $33,000, respectively. The Company did not hold these assets during 2012. Refer to Note 7 – Postretirement Benefits, for more information.

11

NOTE 4 – LOANS, ALLOWANCE FOR LOAN LOSSES AND CREDIT QUALITY

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or pay-off generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred fees or costs on originated loans.

Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

The accrual of interest on all loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is based on contractual terms of the loan. In all cases, loans are placed on nonaccrual if collection of principal or interest is considered doubtful. All interest accrued but not collected for loans that are placed on nonaccrual is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured.

Cash receipts of interest income on impaired loans are credited to principal to the extent necessary to eliminate doubt as to the collectability of the net carrying amount of the loan. Some or all of the cash receipts of interest income on impaired loans is recognized as interest income if the remaining net carrying amount of the loan is deemed to be fully collectible. When recognition of interest income on an impaired loan on a cash basis is appropriate, the amount of income that is recognized is limited to that which would have been accrued on the net carrying amount of the loan at the contractual interest rate. Any cash interest payments received in excess of the limit and not applied to reduce the net carrying amount of the loan are recorded as recoveries of charge-offs until the charge-offs are fully recovered.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, allocated and unallocated components, as further described below.

General Component:

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, equity lines of credit, commercial real estate, construction, commercial, indirect auto and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the nine months ended September 30, 2013 or during fiscal year 2012.

The qualitative factors are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate and home equity loans – The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent and does not grant subprime loans. Loans in this segment are generally collateralized by owner-occupied residential real estate and repayment is dependent on the cash flow and credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

Commercial real estate – Loans in this segment are primarily secured by income-producing properties in eastern Massachusetts. The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy and increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management generally obtains rent rolls annually and continually monitors the cash flows of these borrowers.

Construction loans – Loans in this segment primarily include speculative real estate development loans for which payment is derived from sale and/or lease up of the property. Credit risk is affected by cost overruns, time to sell, or lease at adequate prices, and market conditions.

Commercial loans – Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer and business spending, will have an effect on the credit quality in this segment.

12

Indirect auto loans – Loans in this segment are secured installment loans that are originated through a network of select regional automobile dealerships. The Company’s interest in the vehicle is secured with a recorded lien on the state title of each automobile. Repayment is dependent on the credit quality and the cash flow of the individual borrower.

Consumer loans – Loans in this segment include secured and unsecured consumer loans. Repayment is dependent on the credit quality and the cash flow of the individual borrower.

Allocated Component:

The allocated component relates to loans that are classified as impaired. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring (“TDR”). All TDRs are classified as impaired.

Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral if the loan is collateral-dependent. Generally, TDRs are measured for impairment using the discounted cash flow method except in instances where foreclosure is probable in which case the fair value of the collateral is used. Generally, all other impaired loans are collateral dependent and are measured through the collateral method. When the fair value of the impaired loan is determined to be less than the recorded investment in the loan, the impairment is recorded through the valuation allowance. However, for collateral dependent loans, the amount of the recorded investment in a loan that exceeds the fair value of the collateral is charged-off against the allowance for loan losses in lieu of an allocation of a specific allowance amount when such an amount has been identified definitively as uncollectable.

Unallocated Component:

An unallocated component may be maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. At September 30, 2013 (unaudited) and December 31, 2012, the Company had unallocated reserves of $136,000 and $64,000, respectively.

13

Loans consisted of the following (in thousands):

	September 30, 2013						December 31, 2012
	Amount			Percent			Amount			Percent
	(unaudited)
Mortgage loans:
Residential one-to-four family	$	272,343			34.12	%	$	201,845			30.70	%
Commercial real estate loans (1)		305,220			38.25			261,022			39.71
Home equity		80,231			10.05			66,939			10.18
Construction loans		19,096			2.39			16,139			2.46
Total mortgage loans		676,890			84.81			545,945			83.05
Commercial loans		28,305			3.55			30,426			4.63
Consumer loans:
Indirect auto loans		92,325			11.57			80,312			12.22
Other consumer loans (2)		579			0.07			654			0.10
		121,209			15.19			111,392			16.95
Total loans		798,099			100.00	%		657,337			100.00	%
Net deferred loan costs		3,238						2,777
Net unamortized mortgage premiums		1,455						621
Allowance for loan losses		(7,325	)					(6,440	)
Total loans, net	$	795,467					$	654,295

(1) Includes multi-family real estate loans.

(2) Other consumer loans consist primarily of passbook loans, consumer lines of credit and overdraft protection, and consumer unsecured loans.

The following tables (in thousands) present the activity in the allowance for loan losses by portfolio class for the three and nine months ended September 30, 2013 and 2012 (unaudited); and the balances of the allowance for loan losses and recorded investment in loans by portfolio class based on impairment method at September 30, 2013 (unaudited) and December 31, 2012. The recorded investment in loans in any of the following tables does not include accrued and unpaid interest or any deferred loan fees or costs, as amounts are not significant.

	Three Months Ended September 30, 2013
	Beginning balance		Provision (benefit)			Charge-offs			Recoveries		Ending Balance
Residential one-to-four family	$	1,378	$	195		$	—		$	56	$	1,629
Commercial real estate		3,344		188			—			—		3,532
Construction		226		7			—			—		233
Commercial		440		(9	)		—			—		431
Home equity		538		41			(19	)		—		560
Indirect auto		785		—			(16	)		17		786
Consumer		17		8			(14	)		7		18
Unallocated		128		8			—			—		136
Total	$	6,856	$	438		$	(49	)	$	80	$	7,325

	Three Months Ended September 30, 2012
	Beginning balance		Provision (benefit)		Charge-offs			Recoveries		Ending Balance
Residential one-to-four family	$	1,086	$	117	$	(5	)	$	—	$	1,198
Commercial real estate		2,620		212		—			—		2,832
Construction		168		24		—			—		192
Commercial		390		35		—			—		425
Home equity		375		150		(165	)		97		457
Indirect auto		702		130		(38	)		10		804
Consumer		19		17		(16	)		2		22
Unallocated		—		49		—			—		49
Total	$	5,360	$	734	$	(224	)	$	109	$	5,979

14

	Nine Months Ended September 30, 2013
	Beginning balance		Provision (benefit)			Charge-offs			Recoveries		Ending Balance
Residential one-to-four family	$	1,412	$	161		$	—		$	56	$	1,629
Commercial real estate		3,039		493			—			—		3,532
Construction		198		35			—			—		233
Commercial		470		(39	)		—			—		431
Home equity		466		112			(18	)		—		560
Indirect auto		772		6			(58	)		66		786
Consumer		19		25			(43	)		17		18
Unallocated		64		72			—			—		136
Total	$	6,440	$	865		$	(119	)	$	139	$	7,325

	Nine Months Ended September 30, 2012
	Beginning balance		Provision (benefit)		Charge-offs			Recoveries		Ending Balance
Residential one-to-four family	$	986	$	316	$	(132	)	$	28	$	1,198
Commercial real estate		1,969		863		—			—		2,832
Construction		188		4		—			—		192
Commercial		321		104		—			—		425
Home equity		632		348		(620	)		97		457
Indirect auto		664		327		(208	)		21		804
Consumer		16		29		(30	)		7		22
Unallocated		—		49		—			—		49
Total	$	4,776	$	2,040	$	(990	)	$	153	$	5,979

	September 30, 2013 (unaudited)
	Individually evaluated for impairment				Collectively evaluated for impairment				Total
	Loan balance		Allowance		Loan balance		Allowance		Loan Balance		Allowance
Residential one-to-four family	$	7,372	$	410	$	264,971	$	1,219	$	272,343	$	1,629
Commercial real estate		4,139		10		301,081		3,522		305,220		3,532
Construction		—		—		19,096		233		19,096		233
Commercial		—		—		28,305		431		28,305		431
Home equity		424		—		79,807		560		80,231		560
Indirect auto		—		—		92,325		786		92,325		786
Consumer		—		—		579		18		579		18
Unallocated		—		—		—		136		—		136
Total	$	11,935	$	420	$	786,164	$	6,905	$	798,099	$	7,325

	December 31, 2012
	Individually evaluated for impairment				Collectively evaluated for impairment				Total
	Loan balance		Allowance		Loan balance		Allowance		Loan Balance		Allowance
Residential one-to-four family	$	7,157	$	439	$	194,688	$	973	$	201,845	$	1,412
Commercial real estate		2,359		—		258,663		3,039		261,022		3,039
Construction		—		—		16,139		198		16,139		198
Commercial		—		—		30,426		470		30,426		470
Home equity		519		—		66,420		466		66,939		466
Indirect auto		—		—		80,312		772		80,312		772
Consumer		—		—		654		19		654		19
Unallocated		—		—		—		64		—		64
Total	$	10,035	$	439	$	647,302	$	6,001	$	657,337	$	6,440

15

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of September 30, 2013 (unaudited and in thousands):

	Impaired loans with a related allowance for credit losses
	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Residential one-to-four family	$	2,376	$	2,376	$	410
Commercial real estate		3,129		3,129		10
Construction		—		—		—
Commercial		—		—		—
Home equity		—		—		—
Indirect auto		—		—		—
Consumer		—		—		—
Totals	$	5,505	$	5,505	$	420

	Impaired loans with no related allowance for credit losses
	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Residential one-to-four family	$	4,996	$	5,008	$	—
Commercial real estate		1,010		1,010		—
Construction		—		—		—
Commercial		—		—		—
Home equity		424		623		—
Indirect auto		—		—		—
Consumer		—		—		—
Totals	$	6,430	$	6,641	$	—

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of December 31, 2012 (in thousands):

	Impaired loans with a related allowance for credit losses
	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Residential one-to-four family	$	2,383	$	2,383	$	439
Commercial real estate		—		—		—
Construction		—		—		—
Commercial		—		—		—
Home equity		—		—		—
Indirect auto		—		—		—
Consumer		—		—		—
Totals	$	2,383	$	2,383	$	439

	Impaired loans with no related allowance for credit losses
	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Residential one-to-four family	$	4,774	$	4,858	$	—
Commercial real estate		2,359		2,359		—
Construction		—		—		—
Commercial		—		—		—
Home equity		519		699		—
Indirect auto		—		—		—
Consumer		—		—		—
Totals	$	7,652	$	7,916	$	—

16

The following tables set forth information regarding interest income recognized on impaired loans, by portfolio, for the periods indicated (unaudited and in thousands):

	Three months ended September 30, 2013				Nine months ended September 30, 2013
With an allowance recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Residential one-to-four family	$	2,209	$	3	$	2,374	$	9
Commercial real estate		3,133		23		1,393		50
Construction		—		—		—		—
Commercial		—		—		—		—
Home equity		—		—		—		—
Indirect auto		—		—		—		—
Consumer		—		—		—		—
Totals	$	5,342	$	26	$	3,767	$	59

	Three months ended September 30, 2013				Nine months ended September 30, 2013
Without an allowance recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Residential one-to-four family	$	5,214	$	36	$	5,077	$	107
Commercial real estate		1,025		9		2,682		95
Construction		—		—		—		—
Commercial		—		—		—		—
Home equity		436		3		483		13
Indirect auto		—		—		2		—
Consumer		—		—		—		—
Totals	$	6,675	$	48	$	8,244	$	215

	Three months ended September 30, 2012				Nine months ended September 30, 2012
With an allowance recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Residential one-to-four family	$	579	$	—	$	919	$	8
Commercial real estate		—		—		—		—
Construction		—		—		—		—
Commercial		—		—		—		—
Home equity		192		—		566		1
Indirect auto		—		—		—		—
Consumer		—		—		—		—
Totals	$	771	$	—	$	1,485	$	9

	Three months ended September 30, 2012				Nine months ended September 30, 2012
Without an allowance recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Residential one-to-four family	$	2,993	$	9	$	2,332	$	10
Commercial real estate		1,193		13		358		13
Construction		—		—		—		—
Commercial		43		1		46		3
Home equity		475		2		387		8
Indirect auto		—		—		—		—
Consumer		—		—		1		—
Totals	$	4,704	$	25	$	3,124	$	34

17

The following is a summary of past due and non-accrual loans (in thousands):

	September 30, 2013 (unaudited)
	30–59 Days		60–89 Days		90 Days or More		Total Past Due		90 days or more and accruing		Loans on Non-accrual
Real estate loans:
Residential one-to-four family	$	163	$	251	$	2,277	$	2,691	$	—	$	2,528
Commercial real estate		—		—		38		38		—		38
Home equity		126		—		24		150		—		24
Construction		—		—		—		—		—		—
Other loans:		—		—		—		—		—		—
Commercial		—		—		—		—		—		—
Indirect auto		118		11		—		129		—		—
Consumer		—		—		—		—		—		—
Total	$	407	$	262	$	2,339	$	3,008	$	—	$	2,590

	December 31, 2012
	30–59 Days		60–89 Days		90 Days or More		Total Past Due		90 days or more and accruing		Loans on Non-accrual
Real estate loans:
Residential one-to-four family	$	255	$	—	$	2,412	$	2,667	$	—	$	3,278
Commercial real estate		—		—		—		—		—		—
Home equity		—		—		43		43		—		319
Construction		—		—		—		—		—		—
Other loans:
Commercial		—		—		—		—		—		—
Indirect auto		361		27		24		412		—		24
Consumer		—		—		—		—		—		—
Total	$	616	$	27	$	2,479	$	3,122	$	—	$	3,621

Credit Quality Information

The Company utilizes a seven grade internal loan rating system for commercial, commercial real estate and construction loans, and a five grade internal loan rating system for certain residential real estate, home equity and consumer loans that are rated if the loans become delinquent.

Loans rated 1 – 3: Loans in these categories are considered “pass” rated loans with low to average risk.

Loans rated 4: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 5: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Loans rated 6: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 7: Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial, commercial real estate loans, and construction loans. On an annual basis, the Company engages an independent third party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process.

18

On a quarterly basis, the Company formally reviews the ratings on all residential real estate and home equity loans if they have become delinquent. Criteria used to determine rating consists of loan-to-value and days delinquent.

The following table presents the Company’s loans by risk rating at September 30, 2013 (unaudited) and December 31, 2012 (in thousands). There were no loans rated as 6 (“doubtful”) or 7 (“loss”) at the dates indicated.

	September 30, 2013
	Loans rated 1-3		Loans rated 4		Loans rated 5		Loans not rated (A)		Total
Residential one-to-four family	$	127	$	4,845	$	5,284	$	262,087	$	272,343
Commercial real estate		296,009		5,619		3,592		—		305,220
Construction		10,478		—		8,618		—		19,096
Commercial		28,305		—		—		—		28,305
Home equity		799		400		36		78,996		80,231
Indirect auto		—		—		—		92,325		92,325
Consumer		—		—		—		579		579
Total	$	335,718	$	10,864	$	17,530	$	433,987	$	798,099

	December 31, 2012
	Loans rated 1-3		Loans rated 4		Loans rated 5		Loans not rated (A)		Total
Residential one-to-four family	$	—	$	3,880	$	5,205	$	192,760	$	201,845
Commercial real estate		247,374		8,080		5,568		—		261,022
Construction		16,139		—		—		—		16,139
Commercial		30,384		17		25		—		30,426
Home equity		—		200		319		66,420		66,939
Indirect auto		—		—		—		80,312		80,312
Consumer		—		—		—		654		654
Total	$	293,897	$	12,177	$	11,117	$	340,146	$	657,337

(A) Residential real estate, home equity, indirect auto loans and consumer loans are not formally risk rated by the Company unless the loans become delinquent.

The Company periodically modifies loans to extend the term or make other concessions to help a borrower stay current on their loan and to avoid foreclosure. The Company generally does not forgive principal or interest on loans or modify the interest rates on loans to rates not otherwise available in the market for loans with similar risk characteristics as the restructured debt. During the three and nine months ended September 30, 2013, zero and five loans were modified and determined to be troubled debt restructurings (two of which had previously been restructured and determined to be troubled debt restructurings). During the year ended December 31, 2012, eight loans were modified and determined to be troubled debt restructurings. At September 30, 2013, the Company had $9.3 million of troubled debt restructurings related to ten loans.

The following table shows the Company’s total TDRs and other pertinent information as of the dates indicated (in thousands):

	September 30, 2013		December 31, 2012
	(unaudited)
TDR’s on Accrual Status	$	9,345	$	6,437
TDR’s on Nonaccrual Status		—		946
Total TDR’s	$	9,345	$	7,383
Amount of Specific Reserves Included in the Allowance for Loan Losses associated with TDR’s	$	22	$	86
Additional Commitments to Lend to a borrower who has been a party to a TDR	$	—	$	—

19

The following table shows the troubled debt restructuring modifications which occurred during the periods indicated and the change in the recorded investment subsequent to the modifications occurring (dollars in thousands):

			Three months ended September 30, 2013		(unaudited)				Nine months ended September 30, 2013		(unaudited)
	# of Contracts		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		# of Contracts		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment
Real estate loans:
Residential one-to-four family		—	$	—	$	—		1	$	347	$	378
Commercial real estate		—		—		—		4		4,732		4,128
Total		—	$	—	$	—		5	$	5,079	$	4,506

			Three months ended September 30, 2012		(unaudited)				Nine months ended September 30, 2012		(unaudited)
	# of Contracts		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment		# of Contracts		Pre-modification outstanding recorded investment		Post-modification outstanding recorded investment
Real estate loans:
Residential one-to-four family		5	$	4,491	$	4,507		5	$	4,491	$	4,507
Commercial real estate		3		2,369		2,369		3		2,369		2,369
Total		8	$	6,860	$	6,876		8	$	6,860	$	6,876

The following table shows the Company’s post-modification balance of TDRs listed by type of modification as of the periods indicated (in thousands):

	Three months ended September 30, 2013		Nine months ended September 30, 2013
	(unaudited)		(unaudited)
Extended Maturity	$	—	$	1,370
Adjusted Interest Rate		—		3,136
Total	$	—	$	4,506

	Three months ended September 30, 2012		Nine months ended September 30, 2012
	(unaudited)		(unaudited)
Extended Maturity	$	2,369	$	2,369
Adjusted Interest Rate		221		221
Interest only period		4,286		4,286
Total	$	6,876	$	6,876

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There were no TDR’s that have been modified during the twelve months ending on September 30, 2013 which have subsequently defaulted during the three or nine month periods ending on September 30, 2013. The Company considers a loan to have defaulted when it reaches 90 days past due. There was one loan modified during the twelve months ended September 30, 2012 that subsequently defaulted. The principal balance at the time of default was $208,000.

NOTE 5 – TRANSFERS AND SERVICING

Certain residential mortgage loans are periodically sold by the Company to the secondary market. Most of these loans are sold without recourse and the Company releases the servicing rights. For loans sold with servicing rights retained, we provide the servicing for the loans on a per-loan fee basis. The Company also periodically sells auto loans to other financial institutions without recourse, and the Company generally provides servicing for these loans.

At September 30, 2013 (unaudited) and December 31, 2012, residential loans previously sold and serviced by the Company were $62,175,000 and $76,595,000, respectively. At September 30, 2013 (unaudited) and December 31, 2012, indirect auto loans previously sold and serviced by the Company were $134,380,000 and $104,293,000, respectively.

On March 16, 2006, seventeen loans with an aggregate principal balance of $10.5 million were sold to another financial institution. The agreement related to this sale contains provisions requiring the Company during the initial 120 months to repurchase any loan that becomes 90 days past due. The Company will repurchase the past due loan for 100 percent of the unpaid principal plus interest to repurchase date. As of September 30, 2013 (unaudited) and December 31, 2012, the principal balance of these loans sold with recourse amounted to $1,124,000 and $1,156,000, respectively. The Company has not incurred, nor expects to incur, any losses related to the loans sold with recourse.

Mortgage servicing rights (MSR) are initially recorded as an asset and measured at fair value when loans are sold to third parties with servicing rights retained. MSR assets are amortized in proportion to, and over the period of, estimated net servicing revenues. The carrying value of these assets is periodically reviewed for impairment using the lower of amortized cost or fair value methodology. The fair value of the servicing rights is determined by estimating the present value of future net cash flows, taking into consideration market loan prepayment speeds, discount rates, servicing costs and other economic factors. For purposes of measuring impairment, the underlying loans are stratified into relatively homogeneous pools based on predominant risk characteristics which include product type (i.e., fixed or adjustable) and interest rate bands. If the aggregate carrying value of the capitalized mortgage servicing rights for a stratum exceeds its fair value, MSR impairment is recognized in earnings for the difference. As the loans are repaid and net servicing revenue is earned, the MSR asset is amortized as an offset in loan servicing income. Servicing revenues are expected to exceed this amortization expense. However, if actual prepayment experience or defaults exceed what was originally anticipated, net servicing revenues may be less than expected and mortgage servicing rights may be impaired. No servicing assets or liabilities related to auto loans were recorded, as the contractual servicing fees are adequate to compensate the Company for its servicing responsibilities.

Changes in mortgage servicing rights, which are included in other assets, were as follows (in thousands and unaudited):

	Three months ended September 30,						Nine months ended September 30,
	2013			2012			2013			2012
	(unaudited)						(unaudited)
Balance at beginning of period	$	354		$	246		$	353		$	—
Capitalization		71			—			188			255
Amortization		(23	)		(11	)		(82	)		(20	)
Impairment		(23	)		(7	)		(80	)		(7	)
Balance at end of period	$	379		$	228		$	379		$	228

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NOTE 6 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED FUNDS

The securities sold under agreements to repurchase as of September 30, 2013 (unaudited) and December 31, 2012 are securities sold on a short-term basis by the Company that have been accounted for not as sales but as borrowings. The securities consisted of mortgage backed securities issued by U.S. government sponsored entities. The securities were held in the Company’s safekeeping account at the Federal Home Loan Bank of Boston under the control of the Company. The securities are pledged to the purchasers of the securities. The purchasers have agreed to sell to the Company substantially identical securities at the maturity of the agreements. The balance of securities sold under agreements to repurchase as of September 30, 2013 and December 31, 2012 were $2,552,000 and $3,404,000, respectively.

Other borrowed funds consist of the balance of loans sold with recourse. On March 16, 2006, seventeen loans with an aggregate principal balance of $10.5 million were sold to another financial institution (investor). As of September 30, 2013 (unaudited) and December 31, 2012, the principal balance of these loans totaled $1,124,000 and $1,156,000, respectively. The agreement related to this sale contains provisions requiring the Company during the initial 120 months to repurchase any loan that becomes 90 days past due. The Company will repurchase the past due loan for 100 percent of the unpaid principal plus interest to repurchase date.

NOTE 7 – POST RETIREMENT BENEFITS

Supplemental Retirement Plans

The Company has supplemental retirement plans for eligible executive officers that provide for a lump sum benefit upon termination of employment at or after age 55 and completing 10 or more years of service (certain reduced benefits are available prior to attaining age 55 or fewer than 10 years of service), subject to certain limitations as set forth in the agreements. The present value of these future payments is being accrued over the service period. The estimated liability at September 30, 2013 (unaudited) and December 31, 2012 relating to these plans was $1,480,000 and $1,356,000, respectively.

The Company has a supplemental retirement plan for eligible directors that provides for monthly benefits based upon years of service to the Company, subject to certain limitations as set forth in the agreements. The present value of these future payments is being accrued over the estimated period of service. The estimated liability at September 30, 2013 (unaudited) and December 31, 2012 relating to this plan was $611,000 and $596,000, respectively.

Effective October 1, 2010, the Company established the Belmont Savings Bank Supplemental Executive Retirement Plan (“Plan”). The purpose of the Plan is to permit certain executive officers of the Company to receive supplemental retirement income from the Company. At September 30, 2013 (unaudited) and December 31, 2012, there were three participants in the Plan. Participants are fully vested after the completion of between five and ten years of service. The plan is unfunded. The estimated liability at September 30, 2013 (unaudited) and December 31, 2012 relating to this plan was $741,000 and $538,000, respectively.

Incentive Compensation Plan

The Incentive Compensation Plan is a discretionary annual cash-based incentive plan that is an integral part of the participant’s total compensation package and supports the continued growth, profitability and risk management of Belmont Savings Bank. Each year participants are awarded for the achievement of certain performance objectives on a company-wide and individual basis. Compensation expense recognized was $379,000 and $249,000 for the three months ended September 30, 2013 and 2012 (unaudited), respectively, and $884,000 and $756,000 for the nine months ended September 30, 2013 and 2012 (unaudited), respectively.

Defined Contribution Plan

The Company sponsors a 401(k) plan covering substantially all employees meeting certain eligibility requirements. Under the provisions of the plan, employees are able to contribute up to an annual limit of the lesser of 75% of eligible compensation or the maximum allowed by the Internal Revenue Service. The Company’s contributions for the three months ended September 30, 2013 and 2012 (unaudited) totaled $170,000 and $151,000, respectively and for the nine months ended September 30, 2013 and 2012 (unaudited) totaled $530,000 and $439,000, respectively.

Deferred Compensation Plans

The Company has a compensation deferral plan by which selected employees and Directors of the Company are entitled to elect, prior to the beginning of each year, to defer the receipt of an amount of their compensation for the forthcoming year. On April 1, 2013, the Company entered into deferred compensation agreements with certain Directors and employees of the Company. Each agreement allows for the individual to elect to defer a portion of his or her compensation to an individual deferred compensation account established by Belmont Savings Bank. Prior to April 1, 2013, each individual’s deferred compensation account balance was credited

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with earnings on a monthly basis based on the five year certificate of deposit yield as published by the Wall Street Journal. In April 2013, Belmont Savings Bank created a Rabbi Trust, or grantor trust. The Rabbi Trust is maintained by the Company primarily for purposes of providing deferred compensation for certain Directors and employees of the Company and replaced the existing agreements for non-retired participants with a Belmont Savings Bank Deferred Compensation Plan. The new plan is administered by a third party and permits participants to select from a number of investment options for the investment of their account balances. Each participant is always 100% vested in his or her deferred compensation account balance. Individuals that were retired as of April 1, 2013 continue to participate in the existing Salary Deferral Plan. As of September 30, 2013 (unaudited) and December 31, 2012, the recorded liability relating to the Rabbi Trust was $2.2 million and $0, respectively. As of September 30, 2013 (unaudited) and December 31, 2012, the recorded liability relating to the Salary Deferral Plan was $117,000 and $2.2 million, respectively.

Capital Appreciation Plan

Effective September 30, 2010, the Company established the Capital Appreciation Plan. The purpose of this plan is to attract, retain, and motivate certain key employees and directors of the Company. Eligible participants may receive an award based on capital appreciation of the Bank and the Bank’s return on average assets, entitling the employee or director to a specific percentage of the Employee or Trustee Capital Appreciation Pool as outlined in the plan. The value of any award payable to a participant shall be paid in the form of a single lump sum. The vesting period associated with the Plan begins the date a participant is awarded a Capital Appreciation Award and ends on June 30, 2014. The Company recognized $31,000 and $31,000 in relation to the plan during the three months ended September 30, 2013 and 2012 (unaudited), respectively, and $82,000 and $61,000 in relation to the plan during the nine months ended September 30, 2013 and 2012 (unaudited), respectively.

Employee Stock Ownership Plan

The Company maintains an Employee Stock Ownership Plan (“ESOP”) to provide eligible employees the opportunity to own Company stock. This plan is a tax-qualified retirement plan for the benefit of all Company employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax law limits.

The Company contributed funds to a subsidiary to enable it to grant a loan to the ESOP for the purchase of 458,643 shares of the Company’s common stock at a price of $10.00 per share. The loan obtained by the ESOP from the Company to purchase Company common stock is payable annually over 30 years at a rate per annum equal to the Prime Rate (3.25% at September 30, 2013). Loan payments are principally funded by cash contributions from the Bank. The loan is secured by the shares purchased, which are held in a suspense account for allocation among participants as the loan is repaid. Cash dividends paid on allocated shares are distributed to participants and cash dividends paid on unallocated shares are used to repay the outstanding debt of the ESOP. Shares used as collateral to secure the loan are released and available for allocation to eligible employees as the principal and interest on the loan is paid.

NOTE 8 – PLEDGED ASSETS

The following securities and loans were pledged to secure securities sold under agreements to repurchase, FHLB advances and credit facilities available (in thousands).

September 30, 2013 (unaudited)	Securities held-to- maturity (at cost)		Loans receivable		Total pledged assets
Repurchase agreements	$	5,046	$	—	$	5,046
FHLB borrowings		50,037		419,923		469,960
Federal Reserve Bank LOC		4,027		—		4,027
Total pledged assets	$	59,110	$	419,923	$	479,033

December 31, 2012	Securities held-to- maturity (at cost)		Loans receivable		Total pledged assets
Repurchase agreements	$	4,565	$	—	$	4,565
FHLB borrowings		17,151		103,844		120,995
Federal Reserve Bank LOC		10,146		—		10,146
Total pledged assets	$	31,862	$	103,844	$	135,706

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NOTE 9 – EARNINGS PER SHARE

Basic earnings per share (“EPS”) excludes dilution and is calculated by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted EPS is computed in a manner similar to that of basic EPS except that the weighted-average number of common shares outstanding is increased to include the number of incremental common shares (computed using the treasury stock method) that would have been outstanding if all potentially dilutive common stock equivalents (such as stock options and unvested restricted stock not meeting the definition of a participating security) were issued during the period.

Earnings per share consisted of the following components for the periods indicated (unaudited and dollars in thousands except per share data):

	Three months ended					Nine months ended
	September 30			September 30		September 30			September 30
	2013			2012		2013			2012
Net income	$	538		$	183	$	1,315		$	916
Undistributed earnings attributable to participating securities		(23	)		—		(54	)		—
Net income allocated to common stockholders	$	515		$	183	$	1,261		$	916
Weighted average shares outstanding, basic		8,264,349			8,727,594		8,461,719			8,723,772
Effect of dilutive shares		105,843			—		90,541			—
Weighted average shares outstanding, assuming dilution		8,370,192			8,727,594		8,552,260			8,723,772
Basic EPS	$	0.06		$	0.02	$	0.15		$	0.11
Effect of dilutive shares		—			—		—			—
Diluted EPS	$	0.06		$	0.02	$	0.15		$	0.11

The following table illustrates average options to purchase shares of common stock that were outstanding but not included in the computation of EPS because they were antidilutive under the treasury stock method (unaudited):

	Three months ended				Nine months ended
	September 30		September 30		September 30		September 30
	2013		2012		2013		2012
Stock options		123,761		—		156,259		—

Unallocated common shares held by the ESOP are shown as a reduction in stockholders’ equity and are not included in the weighted-average number of common shares outstanding for either basic or diluted earnings per share calculations.

On December 21, 2012, the Company’s Board of Directors authorized a program to repurchase, from time-to-time and as market and business conditions warrant, up to 476,622 shares of the Company’s common stock. During the nine months ended September 30, 2013, the Company repurchased 476,622 shares at an aggregate cost of $6.5 million to complete the program. On June 22, 2013, the Company’s Board of Directors authorized a second program to repurchase, from time-to-time and as market and business conditions warrant, up to 500,000 shares of the Company’s common stock. During the nine months ended September 30, 2013, the Company has not repurchased any shares under the second repurchase program.

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NOTE 10 – STOCK BASED COMPENSATION

On November 14, 2012, the stockholders of BSB Bancorp, Inc. approved the BSB Bancorp, Inc. 2012 Equity Incentive Plan.

The following table presents the pre-tax expense associated with stock option and restricted stock awards and the related tax benefits recognized (in thousands and unaudited):

	Three months ended September 30, 2013		Nine months ended September 30, 2013
Stock options	$	209	$	585
Restricted stock awards		223		648
Total stock based compensation expense		432		1,233
Related tax benefits recognized in earnings	$	173	$	493

There was no expense recognized during the three and nine months ended September 30, 2012.

Total compensation cost related to non-vested awards not yet recognized and the weighted average period (in years) over which it is expected to be recognized is as follows (in thousands):

	As of September 30, 2013				As of December 31, 2012
	(unaudited)
	Amount		Weighted average period		Amount		Weighted average period
Stock options	$	3,008		4.19	$	3,411		4.92
Restricted stock		3,172		4.16		3,676		4.92
Total	$	6,180			$	7,087

NOTE 11 – FAIR VALUE MEASUREMENTS

Determination of Fair Value

The fair value of an asset or liability is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company uses prices and inputs that are current as of the measurement date, including during periods of market dislocation. In periods of market dislocation, the observability of prices and inputs may be reduced for many instruments. This condition could cause an instrument to be reclassified from one level to another. Fair value is best determined based upon quoted market prices. However, in many instances, there are no quoted market prices for the Company’s various assets and liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value of cash flows or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the observability and reliability of the assumptions used to determine fair value.

Level 1 – Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 – Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly.

Level 3 – Level 3 inputs are unobservable inputs for the asset or liability.

For assets and liabilities fair value is based upon the lowest level of observable input that is significant to the fair value measurement.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon models that primarily use, as inputs, observable market based parameters. The Company’s valuation methodologies may

25

produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. Furthermore, the reported fair value amounts have not been comprehensively revalued since the presentation dates, and therefore, estimates of fair value after the balance sheet date may differ significantly from the amounts presented herein. A more detailed description of the valuation methodologies used for assets and liabilities measured at fair value is set forth below. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value for September 30, 2013 and December 31, 2012. There were no significant transfers between level 1 and level 2 of the fair value hierarchy during the nine months ended September 30, 2013 (unaudited) and the year ended December 31, 2012.

Financial Assets and Financial Liabilities: Financial assets and financial liabilities measured at fair value on a recurring basis include the following:

Securities Available for Sale: The Company’s investment in mortgage-backed securities and other debt securities is generally classified within level 2 of the fair value hierarchy. For these securities, the Company obtains fair value measurements from independent pricing services. The fair value measurements consider observable data that may include reported trades, dealer quotes, market spreads, cash flows, the U.S. treasury yield curve, trading levels, market consensus prepayment speeds, credit information and the instrument’s terms and conditions.

Rabbi Trust Investments: Rabbi Trust investments consisted primarily of cash and cash equivalents, mutual funds and both U.S. government agency and corporate obligations, and were recorded at fair value and included in other assets. The purpose of these Rabbi Trust investments is to fund certain director and executive non-qualified retirement benefits and deferred compensation. For cash and cash equivalents, which have maturities of 90 days or less, their carrying amounts reported in the consolidated balance sheets approximate fair value and were categorized as Level 1. The fair value of other U.S. government agency obligations was estimated using either a matrix or benchmarks. The inputs used include benchmark yields, reported trades, broker/dealer quotes, and issuer spreads. These securities were categorized as Level 2. The equity securities and other exchange-traded funds were valued based on quoted prices from the market. The equities and exchange-traded funds traded in an active market were categorized as Level 1.

The following table summarizes financial assets measured at fair value on a recurring basis as of September 30, 2013 and December 31, 2012, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands):

	Level 1		Level 2		Level 3		Total Fair Value
	(unaudited)
At September 30, 2013
Securities available-for-sale
Corporate debt securities	$	—	$	21,804	$	—	$	21,804
Rabbi trust investments		2,104		48		—		2,152
Totals	$	2,104	$	21,852	$	—	$	23,956

	Level 1		Level 2		Level 3		Total Fair Value
At December 31, 2012
Securities available-for-sale
Corporate debt securities	$	—	$	22,621	$	—	$	22,621
Totals	$	—	$	22,621	$	—	$	22,621

Certain financial assets and financial liabilities are measured at fair value on a nonrecurring basis; that is, the instruments are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, when there is evidence of impairment). Financial assets measured at fair value on a non-recurring basis during the reported periods include certain impaired loans reported at the fair value of the underlying collateral. Fair value was measured using appraised values of collateral and adjusted as necessary by management based on unobservable inputs for specific properties. However, the choice of observable data is subject to significant judgment, and there are often adjustments based on judgment in order to make observable data comparable and to consider the impact of time, the condition of properties, interest rates, and other market factors on current values. Additionally, commercial real estate appraisals frequently involve discounting of projected cash flows, which relies inherently on unobservable data. Therefore, real estate collateral related nonrecurring fair value measurement adjustments have generally been classified as Level 3. Estimates of fair value used for other collateral supporting commercial loans generally are based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3.

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The following table (in thousands) presents certain impaired loans that were re-measured and reported at fair value through a specific valuation allowance allocation of the allowance for loan losses based upon the fair value of the underlying collateral at September 30, 2013 (unaudited) and December 31, 2012.

	September 30, 2013
	Level 1		Level 2		Level 3
Impaired loans	$	—	$	—	$	2,117
Totals	$	—	$	—	$	2,117

	December 31, 2012
	Level 1		Level 2		Level 3
Impaired loans	$	—	$	—	$	2,452
Totals	$	—	$	—	$	2,452

Non-Financial Assets and Non-Financial Liabilities: The Company has no non-financial assets or non-financial liabilities measured at fair value on a recurring basis. Certain non-financial assets measured at fair value on a non-recurring basis include foreclosed assets (upon initial recognition or subsequent impairment), Non-financial assets measured at fair value on a non-recurring basis during the reported periods include certain foreclosed assets which, upon initial recognition, were re-measured and reported at fair value through a charge-off to the allowance for loan losses and certain foreclosed assets which, subsequent to their initial recognition, were re-measured at fair value through a write-down included in other non-interest expense.

The following tables (in thousands) present the non-financial assets that were re-measured and reported at the lower of cost or fair value at the periods indicated:

	September 30, 2013
	Level 1		Level 2		Level 3
	(unaudited)
Mortgage servicing rights	$	—	$	—	$	379
Totals	$	—	$	—	$	379

	December 31, 2012
	Level 1		Level 2		Level 3
Mortgage servicing rights	$	—	$	—	$	353
Other real estate owned		—		—		661
Totals	$	—	$	—	$	1,014

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ASC Topic 825, “Financial Instruments,” requires disclosure of the fair value of financial assets and financial liabilities, including those financial assets and financial liabilities that are not measured and reported at fair value on a recurring basis or non-recurring basis. The methodologies for estimating the fair value of financial assets and financial liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The estimated fair value approximates carrying value for cash and cash equivalents, interest bearing time deposits with other banks, FHLB stock, accrued interest, securities sold under agreements to repurchase, other borrowed funds and mortgagors escrow accounts. The methodologies for other financial assets and financial liabilities are discussed below:

Securities held to maturity – The fair values presented are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments and/or discounted cash flow analyses.

Loans – For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values. The fair values for other loans are estimated using discounted cash flow analyses, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.

Deposits – The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values for fixed-rate certificate accounts are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on certificate accounts.

FHLB advances – The fair values of the Company’s FHLB advances are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

Summary of Fair Values of Financial Instruments not Carried at Fair Value

The estimated fair values, and related carrying or notional amounts, of the Company’s financial instruments are as follows (in thousands):

	September 30, 2013
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(unaudited)
Financial assets:
Cash and cash equivalents	$	48,816	$	48,816	$	48,816	$	—	$	—
Interest-bearing time deposits with other banks		119		119		—		119		—
Held-to-maturity securities		121,426		121,610		—		121,610		—
Federal Home Loan Bank stock		7,650		7,650		—		7,650		—
Loans, net		795,467		795,745		—		—		795,745
Accrued interest receivable		2,176		2,176		2,176		—		—
Financial liabilities:
Deposits		727,002		716,967		—		716,967		—
Federal Home Loan Bank advances		150,600		150,458		—		150,458		—
Securities sold under agreements to repurchase		2,552		2,552		—		2,552		—
Other borrowed funds		1,124		1,124		—		1,124		—
Accrued interest payable		625		625		625		—		—
Mortgagor’s escrow accounts		1,000		1,000		—		1,000		—

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	December 31, 2012
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	52,712	$	52,712	$	52,712	$	—	$	—
Interest-bearing time deposits with other banks		119		119		—		119		—
Held-to-maturity securities		63,984		65,931		—		65,931		—
Federal Home Loan Bank stock		7,627		7,627		—		7,627		—
Loans, net		654,295		662,010		—		—		662,010
Loans held for sale		11,205		11,892						11,892
Accrued interest receivable		2,217		2,217		2,217		—		—
Financial liabilities:
Deposits		607,865		618,443		—		618,443		—
Federal Home Loan Bank advances		83,100		83,451		—		83,451		—
Securities sold under agreements to repurchase		3,404		3,404		—		3,404		—
Other borrowed funds		1,156		1,156		—		1,156		—
Accrued interest payable		455		455		455		—		—
Mortgagor’s escrow accounts		859		859				859		—

NOTE 12 – OTHER COMPREHENSIVE INCOME

	Three months ended September 30, 2013							Nine months ended September 30, 2013
	(unaudited and in thousands)
	Pre Tax Amount		Tax Benefit			After Tax Amount		Pre Tax Amount			Tax Expense		After Tax Amount
Securities available-for-sale:
Change in unrealized gain/loss during the period	$	37	$	(15	)	$	22	$	(589	)	$	227	$	(362	)
Reclassification adjustment for net realized gains included in net income(1)		—		—			—		(34	)		14		(20	)
Total securities available-for-sale		37		(15	)		22		(623	)		241		(382	)
Other Comprehensive Income (Loss)	$	37	$	(15	)	$	22	$	(623	)	$	241	$	(382	)

(1) Reclassification adjustments are comprised of realized security gains and losses. The gains and losses have been reclassified out of accumulated other comprehensive income and have affected certain lines in the consolidated statements of operations as follows; the pre-tax amount is included in net gain on sales and calls of securities, the tax expense amount is included in income tax expense and the after tax amount is included in net income.

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	Three months ended September 30, 2012							Nine months ended September 30, 2012
	(unaudited and in thousands)
	Pre Tax Amount		Tax Benefit			After Tax Amount		Pre Tax Amount		Tax Benefit			After Tax Amount
Securities available-for-sale:
Change in unrealized gain/loss during the period	$	211	$	(72	)	$	139	$	211	$	(72	)	$	139
Reclassification adjustment for net realized gains included in net income		—		—			—		—		—			—
Total securities available-for-sale		211		(72	)		139		211		(72	)		139
Other Comprehensive Income	$	211	$	(72	)	$	139	$	211	$	(72	)	$	139

Information on the Company’s accumulated other comprehensive (loss) income, net of tax is comprised of the following components as of the periods indicated (unaudited and in thousands):

	Unrealized gain on securities			Defined benefit pension plans			Accumulated other comprehensive (loss) income
Beginning Balance: January 1, 2013	$	91		$	(23	)	$	68
Other comprehensive loss		(382	)		—			(382	)
Ending balance: September 30, 2013	$	(291	)	$	(23	)	$	(314	)
Beginning Balance: January 1, 2012	$	—		$	(5	)	$	(5	)
Other comprehensive income (loss)		139			—			139
Ending balance: September 30, 2012	$	139		$	(5	)	$	134

NOTE 13 – SUBSEQUENT EVENTS

On October 23, 2013, the Company announced its plan to close its Cushing Square branch at 78 Trapelo Road, effective January 18, 2014.

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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, 2012 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 2012 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 2012 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 September 30, 2013 and December 31, 2012

Total Assets.Total assets increased $185.0 million to $1.0 billion at September 30, 2013, from $838.1 million at December 31, 2012. The increase was primarily the result of a $141.2 million, or 21.6%, increase in net loans, and a $57.4 million, or 89.8% increase in held-to- maturity investments, partially offset by an $11.2 million, or 100%, decrease in loans held for sale and a $4.4 million, or 8.6% decrease in interest-bearing deposits in other banks.

Loans. Net loans increased by $141.2 million to $795.5 million at September 30, 2013 from $654.3 million at December 31, 2012. The increase in net loans was primarily due to increases of $44.2 million, or 16.9%, in commercial real estate loans, $70.5 million, or 34.9%, in residential one-to-four family loans, $13.3 million, or 19.9%, in home equity lines of credit, $12.0 million, or 15.0%, in indirect auto loans, and $3.0 million, or 18.3%, in construction loans, partially offset by a decrease in commercial loans of $2.1 million, or 7.0%. While we have continued to originate one-to-four family residential loans and indirect auto loans in 2013, we have continued to sell a portion of these loan types as part of our strategy. Further, our plan to prudently build our commercial real estate and home equity loan businesses is working as solid growth was experienced in these business lines during the period.

Investment Securities. Total investment securities increased $56.6 million to $143.2 million at September 30, 2013, from $86.6 million at December 31, 2012. The increase in investment securities primarily resulted from an increase of $57.4 million, or 89.8%, in held-to-maturity securities, partially offset by a decrease of $0.8 million, or 3.6%, in available-for-sale securities.

Cash and Cash Equivalents.Cash and cash equivalents decreased by $3.9 million to $48.8 million at September 30, 2013, from $52.7 million at December 31, 2012.

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 September 30, 2013, our investment in bank-owned life insurance was $13.2 million, an increase of $319,000 from $12.9 million at December 31, 2012, reflecting premiums paid and an increase in cash surrender value.

Deposits.Deposits increased $119.1 million, or 19.6%, to $727.0 million at September 30, 2013 from $607.9 million at December 31, 2012. The increase in deposits was due to a $102.8 million, or 32.5%, increase in savings accounts, an increase of $4.2 million, or 13.0%, in interest bearing checking accounts, an increase of $7.4 million, or 5.8%, in demand deposits, and an increase of $5.8 million, or 4.8%, in CD’s. Core deposits, which we consider to include all deposits other than CD’s and brokered CD’s, increased by $113.3 million. Deposit growth continued this quarter as two new InStore branches in Cambridge and Newton were opened in June and August. In addition, the growing deposit relationships of new and existing commercial and small business customers, along with the momentum of our municipal banking program, contributed to this consistent, strong performance.

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

	September 30, 2013					December 31, 2012
	Amount		Percent			Amount		Percent
	(unaudited)
Deposit type:
Demand deposits	$	134,145		18.45	%	$	126,760		20.85	%
Interest-bearing checking accounts		36,694		5.05			32,463		5.34
Savings accounts		419,378		57.69			316,563		52.08
Money market deposits		9,677		1.33			10,767		1.77
Total transaction accounts		599,894		82.52			486,553		80.04
Term certificates less than $100,000		60,769		8.36			55,298		9.10
Term certificates $100,000 or more		66,339		9.12			66,014		10.86
Total certificate accounts		127,108		17.48			121,312		19.96
Total deposits	$	727,002		100.00	%	$	607,865		100.00	%

Borrowings. At September 30, 2013, 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 $66.6 million, or 76.0%, to $154.3 million at September 30, 2013, from $87.7 million at December 31, 2012. Advances from the Federal Home Loan Bank of Boston increased $67.5 million to $150.6 million at September 30, 2013, from $83.1 million at December 31, 2012, and repurchase agreements decreased $852,000 to $2.6 million at September 30, 2013, from $3.4 million at December 31, 2012.

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

	September 30, 2013		December 31, 2012
	(unaudited)
Long-term borrowed funds:
Federal Home Loan Bank of Boston long-term advances	$	55,600	$	68,100
Other borrowed funds		1,124		1,156
	$	56,724	$	69,256
Short-term borrowed funds:
Federal Home Loan Bank of Boston short-term advances	$	95,000	$	15,000
Repurchase agreements		2,552		3,404
		97,552		18,404
Total borrowed funds	$	154,276	$	87,660

Stockholders’ Equity. Total stockholders’ equity decreased from $133.3 million as of December 31, 2012 to $129.1 million as of September 30, 2013. This decrease is largely the result of the Stock Repurchase Program that was announced on December 21, 2012. During the nine months ended September 30, 2013, the Company repurchased 476,622 shares of its common stock for $6.5 million and completed the first Stock Repurchase Program that was announced on December 21, 2012. The decrease due to the Stock Repurchase Program was partially offset by $1.3 million of net income and $1.4 million of stock based compensation and ESOP stock released during the nine months ended September 30, 2013.

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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 September 30, 2013			At December 31, 2012
	(unaudited)
Non-accrual loans:
Mortgage loans:
One-to-four family	$	2,528		$	3,278
Commercial real estate		38			—
Construction loans		—			—
Equity lines of credit		—			319
Commercial loans		24			—
Consumer loans:
Indirect auto loans		—			24
Other consumer loans		—			—
Total non-accrual loans		2,590			3,621
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	$	2,590		$	3,621
Other real estate owned	$	—		$	661
Repossessed automobiles		—			43
Total non-performing assets (NPAs)	$	2,590		$	4,325
Troubled debt restructurings:
Troubled debt restructures included in NPAs	$	—		$	946
Troubled debt restructures not included in NPAs		9,345			6,437
Total troubled debt restructures	$	9,345		$	7,383
Ratios:
Non-performing loans to total loans		0.32	%		0.55	%
Non-performing assets to total assets		0.25	%		0.52	%

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 September 30, 2013, 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 or modify the interest rates on loans to rates not otherwise available in the market for loans with similar risk characteristics as the restructured debt. At September 30, 2013, we had $9.3 million of troubled debt restructurings related to ten loans as compared to $7.4 million of troubled debt restructurings related to ten loans at December 31, 2012. However, the balance of TDR’s has decreased from $9.5 million at June 30, 2013 due to net paydowns of $173,000.

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Comparison of Operating Results for the Three Months Ended September 30, 2013 and 2012

General.Net income for the three months ended September 30, 2013 was $538,000, compared to net income of $183,000 for the three months ended September 30, 2012. The change in operating results of $355,000, or 194.0% for the three months ended September 30, 2013 compared to the 2012 period resulted from an increase in net interest and dividend income after the provision for loan losses of $1.4 million, partially offset by an increase in noninterest expense of $1.0 million.

Net Interest and Dividend Income. Net interest and dividend income increased $1.1 million to $6.8 million for the three months ended September 30, 2013, compared to $5.7 million for the three months ended September 30, 2012. The increase in net interest and dividend income was primarily due to an increase in our net interest earning assets and the ability to attract lower cost core deposits. Net average interest-earning assets increased $32.0 million, or 15.0% to $245.4 million for the three months ended September 30, 2013, from $213.4 million for the three months ended September 30, 2012. Partially offsetting this was a decrease in our net interest margin of 12 basis points to 2.88% for the three months ended September 30, 2013, compared to 3.00% for the three months ended September 30, 2012, and a decrease in our net interest rate spread of 2 basis points to 2.70% for the three months ended September 30, 2013, compared to 2.72% for the three months ended September 30, 2012.

Interest and Dividend Income. Interest and dividend income increased $1.0 million to $8.0 million for the three months ended September 30, 2013, from $7.0 million for the three months ended September 30, 2012. The increase in interest and dividend income was primarily due to a $919,000 increase in interest income on loans and a $125,000 increase in interest on securities. The increase in interest income on loans resulted from an increase in the average balance of loans of $140.2 million to $770.2 million for the three months ended September 30, 2013, from $630.0 million for the three months ended September 30, 2012, partially offset by a 27 basis point decrease in the average yield on loans to 3.75% from 4.02%, 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 $38.1 million to $121.3 million for the three months ended September 30, 2013, from $83.2 million for the three months ended September 30, 2012, partially offset by a 43 basis point decrease in the average yield on securities to 2.24% from 2.67%.

Interest Expense. Interest expense decreased $80,000 to $1.2 million for the three months ended September 30, 2013, from $1.3 million for the three months ended September 30, 2012. The decrease resulted from a 26 basis point decrease in the cost of interest-bearing liabilities, partially offset by a $150.3 million, or 28.1%, increase in the average balance of interest-bearing liabilities.

Interest expense on interest-bearing deposits decreased by $39,000 to $1.04 million for the three months ended September 30, 2013, from $1.08 million for the three months ended September 30, 2012. This decrease was primarily due to a decrease in the interest expense on CDs of $68,000 from $542,000 to $474,000, which was driven by both a decrease in the average balance of $5.2 million and a decrease in the average cost of CD’s of 15 basis points. This was partially offset by an increase in interest expense on savings accounts of $28,000 from $526,000 to $554,000. The increase in interest expense on savings accounts was driven by a $118.6 million increase in the average balance of savings accounts to $403.3 million for the three months ended September 30, 2013, from $284.7 million for the three months ended September 30, 2012. Partially offsetting the increase in average balance was a 19 basis point decrease in the average cost of savings accounts to 0.55% for the three months ended September 30, 2013, from 0.74% for the three months ended September 30, 2012. We experienced decreases in average cost within all deposit categories except for checking.

Interest expense on total borrowings decreased $41,000 to $182,000 for the three months ended September 30, 2013, from $223,000 for the three months ended September 30, 2012. This decrease was primarily due to a 49 basis point decrease in the average cost of FHLB advances to 0.63% for the three months ended September 30, 2013, from 1.12% for the three months ended September 30, 2012, partially offset by a $34.3 million increase in the average balance of FHLB advances to $109.3 million for the three months ended September 30, 2013, from $75.0 million for the three months ended September 30, 2012.

Provision for Loan Losses.Based on our methodology for establishing the allowance for loan losses and provisions 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 $438,000 for the three months ended September 30, 2013, compared to $734,000 for the three months ended September 30, 2012. The allowance for loan losses was $7.3 million, or 0.92% of total loans, at September 30, 2013, compared to $6.4 million, or 0.98% of total loans, at December 31, 2012.

Noninterest Income. Noninterest income increased by $211,000 to $890,000 for the three months ended September 30, 2013, from $679,000 for the three months ended September 30, 2012. The increase was primarily due to an increase of $55,000 in loan servicing fee income and an increase of $134,000 in other income.

Noninterest Expense. Noninterest expense increased $1.0 million to $6.4 million for the three months ended September 30, 2013, from $5.3 million for the three months ended September 30, 2012. The largest components of this increase were salaries and employee benefits, which increased $592,000, or 18.1%, and data processing, which increased $186,000, or 35.1%. The increase in salaries and employee benefits was primarily the result of the equity incentive plan established in the fourth quarter of 2012 and the increased data processing expenses were driven by increased loan and deposit volumes.

Income Tax Expense. We recorded income tax expense of $313,000 for the three months ended September 30, 2013, compared to income tax expense of $63,000 for the three months ended September 30, 2012. The effective tax rate for the three months ended

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September 30, 2013 was 36.78% compared to 25.49% for the same period in 2012. The increase in effective tax rate was primarily the result of non-deductible stock based compensation expense which was partially offset by a decrease in the valuation reserve on deferred tax assets.

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 September 30,
	(unaudited)
	2013							2012
	(Dollars in thousands)
	Average Outstanding Balance		Interest		Yield/ Rate(1)			Average Outstanding Balance		Interest		Yield/ Rate(1)
Interest-earning assets:
Total loans	$	770,208	$	7,283		3.75	%	$	629,979	$	6,364		4.02	%
Securities		121,334		684		2.24	%		83,206		559		2.67	%
Other		39,089		21		0.21	%		35,138		18		0.21	%
Total interest-earning assets(5)		930,631		7,988		3.41	%		748,323		6,941		3.69	%
Non-interest-earning assets		27,612							25,271
Total assets		958,243							773,594
Interest-bearing liabilities:
Savings accounts		403,356		554		0.55	%		284,732		526		0.74	%
Checking accounts		36,492		11		0.12	%		32,008		9		0.11	%
Money market accounts		9,820		2		0.08	%		10,543		3		0.12	%
Certificates of deposit		122,494		474		1.54	%		127,707		542		1.69	%
Total interest-bearing deposits		572,162		1,041		0.72	%		454,990		1,080		0.94	%
Federal Home Loan Bank advances		109,296		173		0.63	%		74,980		211		1.12	%
Securities sold under agreements to repurchase		2,612		1		0.15	%		3,483		1		0.15	%
Other borrowed funds		1,130		8		2.89	%		1,471		11		2.86	%
Total interest-bearing liabilities		685,200		1,223		0.71	%		534,924		1,303		0.97	%
Non-interest-bearing liabilities		145,540							107,059
Total liabilities		830,740							641,983
Stockholders’ Equity		127,503							131,611
Total liabilities and equity	$	958,243						$	773,594
Net interest income			$	6,765						$	5,638
Net interest rate spread(2)						2.70	%						2.72	%
Net interest-earning assets(3)	$	245,431						$	213,399
Net interest margin(4)						2.88	%						3.00	%
Average interest-earning assets to interest-bearing liabilities						135.82	%						139.89	%

(1) Yields and rates for the three-month periods ended September 30, 2013 and 2012 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 $7,000 and $10,000 for the three months ended September 30, 2013 and 2012, 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 attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

	Three Months Ended September 30,
	2013 vs. 2012 (unaudited)
	Increase (Decrease)						Total
	Due to						Increase
	Volume			Rate			(Decrease)
	(In thousands)
Interest-earning assets:
Loans	$	1,360		$	(441	)	$	919
Securities		227			(102	)		125
Other		3			—			3
Total interest-earning assets (1)		1,590			(543	)		1,047
Interest-bearing liabilities:
Savings accounts		186			(158	)		28
Checking accounts		2			—			2
Money market accounts		—			(1	)		(1	)
Certificates of deposit		(21	)		(47	)		(68	)
Total interest-bearing deposits		167			(206	)		(39	)
Federal Home Loan Bank advances		75			(113	)		(38	)
Securities sold under agreements to repurchase		—			—			—
Other borrowed funds		(3	)		—			(3	)
Total interest-bearing liabilities		239			(319	)		(80	)
Change in net interest and dividend income	$	1,351		$	(224	)	$	1,127

(1) Does not include dividends on FHLB stock of $7,000 and $10,000 for the three months ended September 30, 2013 and 2012, respectively.

Comparison of Operating Results for the Nine Months Ended September 30, 2013 and 2012

General.Net income for the nine months ended September 30, 2013 was $1.3 million, compared to net income of $916,000 for the nine months ended September 30, 2012. The change in operating results of $399,000, or 43.6% for the nine months ended September 30, 2013 compared to the 2012 period resulted from an increase in net interest and dividend income after the provision for loan losses of $3.8 million, partially offset by a decrease in noninterest income of $327,000 and an increase in noninterest expense of $2.7 million.

Net Interest and Dividend Income. Net interest and dividend income increased $2.6 million to $18.4 million for the nine months ended September 30, 2013, compared to $15.8 million for the nine months ended September 30, 2012. The increase in net interest and dividend income was primarily due to an increase in our net interest earning assets and the ability to attract lower cost core deposits. Net average interest-earning assets increased $42.2 million, or 21.3% to $240.4 million for the nine months ended September 30, 2013, from $198.2 million for the nine months ended September 30, 2012. Partially offsetting this was a decrease in our net interest margin of 12 basis points to 2.86% for the nine months ended September 30, 2013, compared to 2.98% for the nine months ended September 30, 2012, and a decrease in our net interest rate spread of 6 basis points to 2.64% for the nine months ended September 30, 2013, compared to 2.70% for the nine months ended September 30, 2012.

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Interest and Dividend Income. Interest and dividend income increased $2.4 million to $22.1 million for the nine months ended September 30, 2013, from $19.7 million for the nine months ended September 30, 2012. The increase in interest and dividend income was primarily due to a $2.4 million increase in interest income on loans and a $49,000 increase in interest on investment securities. The increase in interest income on loans resulted from an increase in the average balance of loans of $148.4 million to $730.9 million for the nine months ended September 30, 2013, from $582.4 million for the nine months ended September 30, 2012 which was partially than offset by a 40 basis point decrease in the average yield on loans to 3.74% from 4.14%, primarily due to lower interest rates on originated loans during the period.

Interest Expense. Interest expense decreased $169,000 to $3.67 million for the nine months ended September 30, 2013, from $3.84 million for the nine months ended September 30, 2012. The decrease resulted from a 21 basis point decrease in the cost of interest-bearing liabilities, partially offset by a $109.4 million, or 21.4%, increase in the average balance of interest-bearing liabilities.

Interest expense on interest-bearing deposits increased by $63,000 to $3.1 million for the nine months ended September 30, 2013, from $3.0 million for the nine months ended September 30, 2012. This increase was primarily due to an increase in interest expense on savings accounts of $254,000 from $1.4 million to $1.7 million. The increase in interest expense on savings accounts was driven by a $107.7 million increase in the average balance of savings accounts to $369.2 million for the nine months ended September 30, 2013, from $261.5 million for the nine months ended September 30, 2012. Partially offsetting the increase in average balance was a 12 basis point decrease in the average cost of savings accounts to 0.60% for the nine months ended September 30, 2013, from 0.72% for the nine months ended September 30, 2012. The increase in interest expense on interest-bearing deposits was partially offset by a decrease in the interest expense on CDs of $185,000 from $1.6 million to $1.4 million. The decrease in interest expense on CD’s was driven by both a decrease in the average balance of $6.4 million and a decrease in the average cost of CD’s of 12 basis points. We experienced decreases in average cost within all deposit categories.

Interest expense on total borrowings decreased $232,000 to $560,000 for the nine months ended September 30, 2013, from $792,000 for the nine months ended September 30, 2012. This decrease was primarily due to a 43 basis point decrease in the average cost of FHLB advances to 0.82% for the nine months ended September 30, 2013, from 1.25% for the nine months ended September 30, 2012, partially offset by a $5.6 million increase in the average balance of FHLB advances to $86.4 million for the nine months ended September 30, 2013, from $80.8 million for the nine months ended September 30, 2012.

Provision for Loan Losses.Based on our methodology for establishing the allowance for loan losses and provisions 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 $865,000 for the nine months ended September 30, 2013, compared to $2.0 million for the nine months ended September 30, 2012. The allowance for loan losses was $7.3 million, or 0.92% of total loans, at September 30, 2013, compared to $6.4 million, or 0.98% of total loans, at December 31, 2012.

Noninterest Income. Noninterest income decreased by $327,000 to $2.8 million for the nine months ended September 30, 2013, from $3.1 million for the nine months ended September 30, 2012. The decrease was primarily due to a decrease of $538,000 in net gains on sales of loans partially offset by an increase of $159,000 in loan servicing fee income.

Noninterest Expense. Noninterest expense increased $2.7 million to $18.3 million for the nine months ended September 30, 2013, from $15.6 million for the nine months ended September 30, 2012. The largest components of this increase were: (i) salaries and employee benefits and director compensation, which increased $1.5 million, or 15.9%, and $337,000, or 94.7%, respectively, and (ii) data processing, which increased $550,000, or 36.9%. The increase in salaries and employee benefits and director compensation was primarily the result of the equity incentive plan and the increased data processing expenses were primarily driven by loan and deposit volumes during this period.

Income Tax Expense. We recorded income tax expense of $755,000 for the nine months ended September 30, 2013, compared to income tax expense of $409,000 for the nine months ended September 30, 2012. The effective tax rate for the nine months ended September 30, 2013 was 36.5% compared to 30.8% for the same period in 2012. The increase in effective tax rate was primarily the result of non-deductible stock based compensation expense which was partially offset by a decrease in the valuation reserve on deferred tax assets.

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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 Nine Months Ended September 30,
	(unaudited)
	2013							2012
	(Dollars in thousands)
	Average Outstanding Balance		Interest		Yield/ Rate(1)			Average Outstanding Balance		Interest		Yield/ Rate(1)
Interest-earning assets:
Total loans	$	730,883	$	20,465		3.74	%	$	582,445	$	18,032		4.14	%
Securities		90,623		1,589		2.34	%		78,622		1,540		2.62	%
Other		39,375		61		0.21	%		48,230		72		0.20	%
Total interest-earning assets(5)		860,881		22,115		3.43	%		709,297		19,644		3.70	%
Non-interest-earning assets		26,251							23,532
Total assets	$	887,132						$	732,829
Interest-bearing liabilities:
Savings accounts		369,187		1,658		0.60	%		261,472		1,405		0.72	%
Checking accounts		31,772		28		0.12	%		27,975		26		0.13	%
Money market accounts		10,360		6		0.08	%		11,150		13		0.15	%
Certificates of deposit		118,453		1,420		1.60	%		124,819		1,605		1.72	%
Total interest-bearing deposits		529,772		3,112		0.79	%		425,416		3,049		0.96	%
Federal Home Loan Bank advances		86,448		531		0.82	%		80,799		753		1.25	%
Securities sold under agreements to repurchase		3,125		4		0.15	%		3,370		7		0.28	%
Other borrowed funds		1,141		25		2.92	%		1,485		32		2.88	%
Total interest-bearing liabilities		620,486		3,672		0.79	%		511,070		3,841		1.00	%
Non-interest-bearing liabilities		136,746							90,227
Total liabilities		757,232							601,297
Stockholders’ Equity		129,900							131,532
Total liabilities and equity	$	887,132						$	732,829
Net interest income			$	18,443						$	15,803
Net interest rate spread(2)						2.64	%						2.70	%
Net interest-earning assets(3)	$	240,395						$	198,227
Net interest margin(4)						2.86	%						2.98	%
Average interest-earning assets to interest-bearing liabilities						138.74	%						138.79	%

(1) Yields and rates for the nine-month periods ended September 30, 2013 and 2012 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 $21,000 and $38,000 for the nine months ended September 30, 2013 and 2012, respectively, are not included.

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The following table presents the effects of changing rates and volumes on our net interest and dividend 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 attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.

	Nine Months Ended September 30,
	2013 vs. 2012 (unaudited)
	Increase (Decrease) Due to						Total Increase (Decrease)
	Volume			Rate
	(In thousands)
Interest-earning assets:
Loans	$	4,263		$	(1,830	)	$	2,433
Securities		219			(170	)	$	49
Other		(14	)		3		$	(11	)
Total interest-earning assets (1)		4,468			(1,997	)	$	2,471
Interest-bearing liabilities:
Savings accounts		509			(256	)	$	253
Checking accounts		4			(2	)	$	2
Money market accounts		(1	)		(6	)	$	(7	)
Certificates of deposit		(80	)		(105	)	$	(185	)
Total interest-bearing deposits		432			(369	)	$	63
Federal Home Loan Bank advances		49			(271	)	$	(222	)
Securities sold under agreements to repurchase		—			(3	)	$	(3	)
Other borrowed funds		(7	)		—		$	(7	)
Total interest-bearing liabilities		474			(643	)	$	(169	)
Change in net interest and dividend income	$	3,994		$	(1,354	)	$	2,640

(1) Does not include dividends on FHLB stock of $21,000 and $38,000 for the nine months ended September 30, 2013 and 2012, respectively.

Management of Market Risk

General. The Bank’s most significant form of market risk is interest rate risk because, as a financial institution, the majority of assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of the Bank’s operations is to manage interest rate risk and limit the exposure of the Bank’s financial condition and results of operations to changes in market interest rates. The Bank’s Asset/Liability Management Committee is responsible for evaluating the interest rate risk inherent in the Bank’s assets and liabilities, for determining the level of risk that is appropriate, given the Bank’s business strategy, operating environment, capital, liquidity and performance objectives, and for managing this risk consistent with the policy and guidelines approved by our Board of Directors.

Exposure to interest rate risk is managed by Belmont Savings Bank through periodic evaluations of the current interest rate risk inherent in its rate-sensitive assets and liabilities, primarily deposits, borrowings, loans and investment securities, coupled with determinations of the level of risk considered appropriate given Belmont Savings Bank’s capital and liquidity requirements, business strategy and performance objectives. Through such management, Belmont Savings Bank seeks to manage the vulnerability of its net interest income to changes in interest rates.

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Strategies used by Belmont Savings Bank to manage the potential volatility of its earnings may include:

• The origination and retention of adjustable rate residential one-to-four family loans, adjustable rate home equity lines of credit, adjustable rate commercial loans, commercial real estate loans and indirect automobile loans;

• The sale of fixed rate loans;

• Investing in securities with relatively short maturities and/or expected average lives;

• Emphasizing growth in low-cost core deposits; and

• Lengthening liabilities such as term certificates of deposit and Federal Home Loan Bank of Boston borrowings as appropriate.

Net Interest Income Analysis. The Bank analyzes its sensitivity to changes in interest rates through a net interest income model. Net interest income is the difference between the interest income the Bank earns on its interest-earning assets, such as loans and securities, and the interest the Bank pays on its interest-bearing liabilities, such as deposits and borrowings. The Bank estimates what its net interest income would be for a one-year period based on current interest rates. The Bank then calculates what the net interest income would be for the same period under different interest rate assumptions. The Bank also estimates the impact over a five year time horizon. The following table shows the estimated impact on net interest income (“NII”) for the one-year period beginning September 30, 2013 resulting from potential changes in interest rates. These estimates require the Bank to make certain assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain and, as a result, the Bank cannot precisely predict the impact of changes in interest rates on its net interest income. Although the net interest income table below provides an indication of the Banks interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on its net interest income and will differ from actual results.

Change in Interest Rates (basis points) (1)	NII Change Year One (% Change From Year One Base)
Shock +300		-18.0	%
+200		-11.6	%
- 100		-0.7	%

(1) The calculated change for -100 BPS and +200 BPS, assume a gradual parallel shift across the yield curve over a one-year period. The calculated change for “Shock +300” assumes that market rates experience an instantaneous and sustained increase of 300 BPS.

The table above indicates that at September 30, 2013, in the event of a 200 basis point increase in interest rates over a one year period, assuming a gradual parallel shift across the yield curve over such period, the Bank would experience an 11.6% decrease in net interest income. At the same date, in the event of a 100 basis point decrease in interest rates over a one year period, assuming a gradual parallel shift across the yield curve over such period, the Bank would experience a 0.7% decrease in net interest income.

Economic Value of Equity Analysis. The Bank also analyzes the sensitivity of its financial condition to changes in interest rates through an economic value of equity model. This analysis measures the difference between predicted changes in the present value of its assets and predicted changes in the present value of its liabilities assuming various changes in current interest rates. The economic value of equity analysis as of September 30, 2013 estimated that, in the event of an instantaneous 200 basis point increase in interest rates, the Bank would experience a 22.1% decrease in the economic value of its equity. At the same date, the analysis estimated that, in the event of an instantaneous 100 basis point decrease in interest rates, the Bank would experience a 1.4% decrease in the economic value of its equity. The estimates of changes in the economic value of the Bank’s equity require management to make certain assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain and, as a result, management cannot precisely predict the impact of changes in interest rates on the economic value of the Bank’s equity. Although the economic value of equity analysis provides an indication of the Bank’s interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on the economic value of the Bank’s equity and will differ from actual results.

Liquidity and Capital Resources. Liquidity is the ability to meet current and future financial obligations. Our primary sources of funds consist of deposit inflows, loan repayments, advances from the Federal Home Loan Bank of Boston, security repayments and

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loan sales. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition. Our Asset/Liability Management Committee is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers as well as unanticipated contingencies. We believe that we had enough sources of liquidity at September 30, 2013 to satisfy our short- and long-term liquidity needs as of that date.

We regularly monitor and adjust our investments in liquid assets based on our assessment of:

• expected loan demand;

• expected deposit flows and borrowing maturities;

• yields available on interest-earning deposits and securities; and

• the objectives of our asset/liability management program.

Excess liquid assets are invested generally in interest-earning deposits and short-term securities and may also be used to pay off short-term borrowings.

Our most liquid assets are cash and cash equivalents. The level of these assets is dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2013, cash and cash equivalents totaled $48.8 million.

Our cash flows are derived from operating activities, investing activities and financing activities as reported in our Consolidated Statements of Cash Flows included in our Consolidated Financial Statements.

At September 30, 2013, we had $50.2 million in loan commitments outstanding. In addition to commitments to originate loans, we had $127.6 million in unused lines of credit to borrowers and $14.4 million in unadvanced funds on construction loans.

Certificates of deposit due within one year of September 30, 2013 totaled $67.3 million, or 9.3%, of total deposits. If these deposits do not remain with us, we may be required to seek other sources of funds, including loan sales, brokered deposits, repurchase agreements and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the certificates of deposit due on or before September 30, 2014, or on our money market accounts. We believe, however, based on historical experience and current market interest rates that we will retain upon maturity a large portion of our certificates of deposit with maturities of one year or less as of September 30, 2013.

Our primary investing activity is originating loans. During the nine months ended September 30, 2013 and the year ended December 31, 2012, we originated $417.8 million and $415.6 million of loans, respectively.

Financing activities consist primarily of activity in deposit accounts, Federal Home Loan Bank advances and, to a lesser extent, brokered deposits. We experienced net increases in deposits of $119.1 million and $177.2 million for the nine months ended September 30, 2013 and for the year ended December 31, 2012, respectively. At September 30, 2013 and December 31, 2012, the levels of brokered deposits were $33.8 million and $22.6 million, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Boston, which provide an additional source of funds. At September 30, 2013, we had $150.6 million of Federal Home Loan Bank advances. Based on available collateral at that date, we had the ability to borrow up to an additional $141.0 million from the Federal Home Loan Bank of Boston.

Belmont Savings Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2013, Belmont Savings Bank exceeded all regulatory capital requirements. Belmont Savings Bank is considered “well capitalized” under regulatory guidelines.

The net proceeds from our stock offering completed in October 2011 have significantly increased our liquidity and capital resources. Over time, the level of liquidity will continue to be reduced as net proceeds from the stock offering are used for general corporate purposes, including the funding of loans. Our financial condition and results of operations will be enhanced by the net proceeds from the stock offering, resulting in increased net interest-earning assets and net interest and dividend income. However, due to the increase in equity resulting from the net proceeds raised in the stock offering, our return on equity has been adversely affected following the stock offering.

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The Company’s total stockholders’ equity declined to $129.1 million at September 30, 2013 from $133.3 million at December 31, 2012. The decline was primarily due to the previously mentioned stock repurchase plan and the repurchase of 476,622 shares of common stock at an average price of $13.59 per share. Stock repurchase plans allow the Company to proactively manage its capital position and return excess capital to shareholders. Management believes the repurchase, which was financed at favorable terms, will enhance future earnings per share. See Part II, Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds, included elsewhere in this report, for details of stock repurchases during the quarter.

Basel III Capital Rules. In July 2013, the Federal Deposit Insurance Corporation and the other federal bank regulatory agencies issued a final rule that will revise their leverage and risk-based capital requirements and the method for calculating risk-weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act. Among other things, the rule establishes a new common equity Tier 1 minimum capital requirement (4.5% of risk-weighted assets), increases the minimum Tier 1 capital to risk-based assets requirement (from 4% to 6% of risk-weighted assets) and assigns a higher risk weight (150%) to exposures that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The final rule also requires unrealized gains and losses on certain “available-for-sale” securities holdings to be included for purposes of calculating regulatory capital unless a one-time opt-out is exercised. The rule limits a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The final rule becomes effective for the Company and the Bank on January 1, 2015. The capital conservation buffer requirement will be phased in beginning January 1, 2016 and ending January 1, 2019, when the full capital conservation buffer requirement will be effective.

We are obligated to make future payments according to various contracts. As of September 30, 2013, our contractual obligations have not changed materially from those disclosed in our 2012 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 14, 2013.

Off-Balance Sheet Arrangements

As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. In addition, from time to time we enter into commitments to sell mortgage loans that we originate. For the three months ended September 30, 2013, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The information required by this item is included in Item 2 of this report under “Management of Market Risk.”

Item 4. Controls and Procedures

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Principal Executive Officer and Principal Financial Officer, of the effectiveness of our disclosure controls and procedures. Based on this evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures are effective in ensuring that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934, as amended, (1) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and (2) is accumulated and communicated to our management, including our Principal Executive and Principal Financial officers as appropriate to allow timely discussions regarding required disclosures.

The effectiveness of a system of disclosure controls and procedures is subject to various inherent limitations, including cost limitations, judgments used in decision making, assumptions about the likelihood of future events, the soundness of our systems, the possibility of human error, and the risk of fraud. Moreover, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in condition and the risk that the degree of compliance with policies or procedures may deteriorate over time. Due to such inherent limitations, there can be no assurance that any system of disclosure controls and procedures will be successful in preventing all errors or fraud, or in making all material information known in a timely manner to the appropriate levels of management.

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There were no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

Item 1A. Risk Factors.

For information regarding the Company’s risk factors, see “Risk Factors” in the Company’s 2012 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 14, 2013. As of September 30, 2013, the risk factors of the Company have not changed materially from those disclosed in the 2012 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(a) Unregistered Sales of Equity Securities. None

(b) Use of Proceeds. None

(c) Repurchase of Equity Securities.

The following table provides certain information with regard to shares repurchased by the Company in the third quarter of 2013.

Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)		(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1)
July 1 - July 31		—		—		—		—
August 1 - August 31		—		—		—		500,000
September 1 - September 30		—		—		—		500,000
Total		—		—		—

(1) The Company completed its first stock repurchase program during the second quarter of 2013. On August 5, 2013, the Company announced the commencement of a second stock repurchase program to acquire up to 500,000 shares, or 5.5% of the Company’s then outstanding common stock. Repurchases will be made from time to time depending on market conditions and other factors, and will be conducted through open market or private transactions, through block trades, and pursuant to any trading plan that may be adopted in accordance with Rule 10b5-1 of the Securities and Exchange Commission. There is no guarantee as to the exact number of shares to be repurchased by the Company.

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Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

None

Item 6. Exhibits

31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.
32.0	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer.*
101.0	The following data from the BSB Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter ended September 30, 2013 formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders Equity, (v) Consolidated Statements of Cash Flows, and (vi) the related notes.

* This information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	BSB BANCORP, INC.
Date: November 8, 2013	By:	/s/ Robert M. Mahoney
		Robert M. Mahoney
		President, Chief Executive Officer and Director (Principal Executive Officer)
Date: November 8, 2013	By:	/s/ John A. Citrano
		John A. Citrano
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)

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