BSB Bancorp, Inc. - FORM 10-Q

BSB Bancorp, Inc. - FORM 10-Q - November 7, 2014

Attached files

Attached files

BSB Bancorp, Inc. Reports

file	filename
EXCEL - IDEA: XBRL DOCUMENT - BSB Bancorp, Inc.	Financial_Report.xls
EX-32.0 - EX-32.0 - BSB Bancorp, Inc.	d802277dex320.htm
EX-31.1 - EX-31.1 - BSB Bancorp, Inc.	d802277dex311.htm
EX-31.2 - EX-31.2 - BSB Bancorp, Inc.	d802277dex312.htm

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, 2014

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):

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 9,063,326 shares of common stock, par value $0.01 per share, outstanding as of October 31, 2014.

BSB BANCORP, INC.

TABLE OF CONTENTS


		Page

PART I. FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements

	- Consolidated Balance Sheets as of September 30, 2014 (unaudited) and December 31, 2013		3

	- Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)		4

	- Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2014 and 2013 (unaudited)		5

	- Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2014 and 2013 (unaudited)		6

	- Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2014 and 2013 (unaudited)		7

	- Notes to Unaudited Consolidated Financial Statements		9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		33

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		46

Item 4.	Controls and Procedures		46

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		47

Item 1A.	Risk Factors		47

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		47

Item 3.	Defaults Upon Senior Securities		48

Item 4.	Mine Safety Disclosures		48

Item 5.	Other Information		48

Item 6.	Exhibits		48

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

BSB BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)


	September 30, 2014			December 31, 2013
	(unaudited)
ASSETS
Cash and due from banks	$	1,676		$	2,196
Interest-bearing deposits in other banks		43,809			35,839

Cash and cash equivalents		45,485			38,035
Interest-bearing time deposits with other banks		131			119
Investments in available-for-sale securities		22,246			21,921
Investments in held-to-maturity securities (fair value of $121,958 as of September 30, 2014 and $118,981 as of December 31, 2013)		121,682			119,776
Federal Home Loan Bank stock, at cost		13,112			7,712
Loans held-for-sale		101			—
Loans, net of allowance for loan losses of $8,319 as of September 30, 2014 (unaudited) and $7,958 as of December 31, 2013		1,093,571			839,013
Premises and equipment, net		3,159			3,327
Accrued interest receivable		2,815			2,241
Deferred tax asset, net		5,463			5,146
Income taxes receivable		151			—
Bank-owned life insurance		23,682			13,325
Other assets		4,119			4,004

Total assets	$	1,335,717		$	1,054,619


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	162,457		$	139,733
Interest-bearing		770,126			625,020

Total deposits		932,583			764,753
Federal Home Loan Bank advances		251,100			142,100
Securities sold under agreements to repurchase		1,458			2,127
Other borrowed funds		1,078			1,113
Accrued interest payable		922			683
Deferred compensation liability		5,497			5,137
Income taxes payable		—			178
Other liabilities		7,947			8,107

Total liabilities		1,200,585			924,198


Stockholders’ Equity:
Common stock; $0.01 par value, 100,000,000 shares authorized; 9,063,326 and 9,055,808 shares issued and outstanding at September 30, 2014 and December 31, 2013, respectively		91			91
Additional paid-in capital		86,892			85,449
Retained earnings		52,236			49,312
Accumulated other comprehensive income (loss)		42			(188	)
Unearned compensation - ESOP		(4,129	)		(4,243	)

Total stockholders’ equity		135,132			130,421

Total liabilities and stockholders’ equity	$	1,335,717		$	1,054,619

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

BSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)


	Three months ended September 30,				Nine months ended September 30,
	2014		2013		2014		2013
	(unaudited)				(unaudited)
Interest and dividend income:
Interest and fees on loans	$	9,235	$	7,268	$	25,532	$	20,426
Interest on taxable debt securities		749		684		2,359		1,589
Dividends		38		7		100		21
Other interest income		14		21		64		61

Total interest and dividend income		10,036		7,980		28,055		22,097

Interest expense:
Interest on deposits		1,575		1,041		4,131		3,112
Interest on Federal Home Loan Bank advances		313		173		827		531
Interest on securities sold under agreements to repurchase		1		1		2		4
Interest on other borrowed funds		7		8		23		25

Total interest expense		1,896		1,223		4,983		3,672

Net interest and dividend income		8,140		6,757		23,072		18,425
Provision for loan losses		292		438		988		865

Net interest and dividend income after provision for loan losses		7,848		6,319		22,084		17,560

Noninterest income:
Customer service fees		221		252		664		710
Income from bank-owned life insurance		152		114		352		313
Net gain on sales of loans		104		168		328		968
Net gain on sales of securities		—		—		—		34
Loan servicing fee income		217		192		636		489
Other income		98		164		391		290

Total noninterest income		792		890		2,371		2,804

Noninterest expense:
Salaries and employee benefits		4,313		3,871		12,462		11,122
Director compensation		173		257		706		693
Occupancy expense		259		238		804		685
Equipment expense		144		156		455		454
Deposit insurance		191		156		554		430
Data processing		751		717		2,228		2,039
Professional fees		184		216		583		622
Marketing		228		214		742		662
Other expense		413		533		1,297		1,587

Total noninterest expense		6,656		6,358		19,831		18,294

Income before income tax expense		1,984		851		4,624		2,070
Income tax expense		782		313		1,700		755

Net income	$	1,202	$	538	$	2,924	$	1,315

Earnings per share
Basic	$	0.14	$	0.06	$	0.34	$	0.15
Diluted	$	0.14	$	0.06	$	0.34	$	0.15

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

BSB BANCORP, INC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)


	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
	(unaudited)						(unaudited)

Net income	$	1,202		$	538		$	2,924		$	1,315
Other comprehensive income (loss), before tax:
Change in fair value of securities available for sale		56			37			379			(589	)
Reclassification adjustment for realized gains in net income		—			—			—			(34	)

Other comprehensive income (loss), before tax		56			37			379			(623	)

Income tax (expense) benefit related to items of other comprehensive income (loss)		(20	)		(15	)		(149	)		241

Other comprehensive income (loss), net of tax		36			22			230			(382	)

Comprehensive income	$	1,238		$	560		$	3,154		$	933

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

BSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2014 AND 2013

(Dollars in thousands)

(Unaudited)


	Common Stock						Additional Paid-In			Retained		Accumulated Other Comprehensive			Unearned Compensation			Total Stockholders’
	Shares			Amount			Capital			Earnings		(Loss) Income			ESOP			Equity

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


Balance at December 31, 2013		9,055,808		$	91		$	85,449		$	49,312	$	(188	)	$	(4,243	)	$	130,421
Net income		—			—			—			2,924		—			—			2,924
Other comprehensive income		—			—			—			—		230			—			230
Release of ESOP stock		—			—			81			—		—			114			195
Stock based compensation-restricted stock awards		—			—			685			—		—			—			685
Stock based compensation-stock options		—			—			642			—		—			—			642
Tax benefit from stock based compensation		—			—			13			—		—			—			13
Restricted stock grants		4,000			—			—			—		—			—			—
Stock option exercises		3,518			—			22			—		—			—			22

Balance at September 30, 2014		9,063,326		$	91		$	86,892		$	52,236	$	42		$	(4,129	)	$	135,132

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

BSB BANCORP, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	Nine months ended September 30,
	2014			2013
Cash flows from operating activities:
Net income	$	2,924		$	1,315
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities, net		462			528
Net gain on sales of securities		—			(34	)
Gain on sales of loans, net		(328	)		(968	)
Loans originated for sale		(14,922	)		(93,640	)
Proceeds from sales of loans		24,713			104,466
Provision for loan losses		988			865
Change in net unamortized mortgage premiums		(855	)		(834	)
Change in net deferred loan costs		(1,083	)		(461	)
ESOP expense		195			153
Stock based compensation expense		1,327			1,233
Excess tax benefit from stock based compensation		(13	)		—
Depreciation and amortization expense		575			521
Write off of premises and equipment		3			—
Deferred income tax benefit		(453	)		(685	)
Increase in bank-owned life insurance		(352	)		(313	)
Gain on sale of other real estate owned		—			(5	)
Net change in:
Accrued interest receivable		(574	)		41
Other assets		(115	)		(1,844	)
Income taxes receivable		(151	)		806
Income taxes payable		(178	)		261
Accrued interest payable		239			170
Deferred compensation liability		360			411
Other liabilities		(720	)		2,371

Net cash provided by operating activities		12,042			14,357

Cash flows from investing activities:
Maturities of interest-bearing time deposits with other banks		119			—
Purchases of interest-bearing time deposits with other banks		(131	)		—
Purchases of available-for-sale securities		—			(17,833	)
Proceeds from sales of available-for-sale securities		—			17,985
Proceeds from maturities, payments, and calls of held-to-maturity securities		15,904			20,078
Purchases of held-to-maturity securities		(18,218	)		(77,972	)
Purchases of community loan fund investments		—			(250	)
Redemption of Federal Home Loan Bank stock		405			496
Purchases of Federal Home Loan Bank stock		(5,805	)		(519	)
Recoveries of loans previously charged off		20			139
Loan originations and principal collections, net		(139,389	)		(30,720	)
Purchases of loans		(123,803	)		(108,814	)
Capital expenditures		(410	)		(920	)
Capital expenditures on other real estate owned		—			(79	)
Premiums paid on bank-owned life insurance		(10,005	)		(6	)
Proceeds from sales of other real estate owned		—			745

Net cash used in investing activities		(281,313	)		(197,670	)

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

BSB BANCORP, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

(Continued)


	Nine months ended September 30,
	2014			2013
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts		113,724			113,341
Net increase in time deposits		54,106			5,796
Net proceeds from (repayments of) long-term Federal Home Loan Bank borrowings		9,000			(12,500	)
Net change in short-term advances		100,000			80,000
Net decrease in securities sold under agreement to repurchase		(669	)		(852	)
Repayment of principal on other borrowed funds		(35	)		(32	)
Net increase in mortgagors’ escrow accounts		560			142
Net proceeds from exercise of stock options		22			—
Excess tax benefit from stock based compensation		13			—
Payments to repurchase stock		—			(6,478	)

Net cash provided by financing activities		276,721			179,417


Net increase (decrease) in cash and cash equivalents		7,450			(3,896	)
Cash and cash equivalents at beginning of period		38,035			52,712

Cash and cash equivalents at end of period	$	45,485		$	48,816


Supplemental disclosures:
Interest paid	$	4,744		$	3,502
Income taxes paid		2,482			764
Transfer of loans held for sale to loans receivable		—			1,347
Transfer of loans receivable to loans held for sale		9,564			—

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

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 Regulation 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 subsidiaries, Belmont Savings Bank and BSB Funding Corporation (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, 2014 and December 31, 2013 and the results of operations and cash flows for the interim periods ended September 30, 2014 and 2013. 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, 2013.

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

NOTE 2 – RECENT ACCOUNTING STANDARDS UPDATES

In July 2013, the Financial Accounting Standards Board (“FASB”) issued amendments to ASC 815 “Derivatives and Hedging” through issuance of Accounting Standards Update (“ASU”) 2013-10 “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 did not have an impact on the Company’s results of operations or financial position.

In July 2013, the FASB issued amendments to ASC 740 “Income Taxes” through issuance of ASU 2013-11, “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 did not have an impact on the Company’s results of operations or financial position.

In January 2014, the FASB issued amendments to ASC 323 “Investments - Equity Method and Joint Ventures” through issuance of ASU 2014-1 “Accounting for Investments in Qualified Affordable Housing Projects.” The amendments in this ASU apply to all reporting entities that invest in qualified affordable housing projects through limited liability entities that are flow-through entities for tax purposes as follows:

1. For reporting entities that meet the conditions for and that elect to use the proportional amortization method to account for investments in qualified affordable housing projects, all amendments in this ASU apply.

2. For reporting entities that do not meet the conditions for or that do not elect the proportional amortization method, only the amendments in this ASU that are related to disclosures apply.

The amendments in this ASU permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the investment should be accounted for as an equity method investment or a cost method investment in accordance with Subtopic 970-323. The amendments in this ASU should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this ASU are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. Early adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In January 2014, the FASB issued amendments to ASC 310-40 “Receivables-Troubled Debt Restructurings by Creditors” through issuance of ASU 2014-4 “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The objective of the amendments in this ASU is to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The amendments in this ASU clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In April 2014, the FASB issued amendments to ASC 205 “Presentation of Financial Statements” and ASC 360 “Property, Plant, and Equipment” through issuance of ASU 2014-8 “Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity.” This ASU changes the criteria for reporting discontinued operations and modifies related disclosure requirements. The new guidance is effective on a prospective basis for fiscal years beginning on or after December 15, 2014, and interim periods within those years. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In May 2014, the FASB issued amendments to ASC 606 “Revenue from Contracts with Customers” through issuance of ASU No. 2014-09, “Revenue from Contracts with Customers.” The guidance in this update affects any entity that either enters into contracts with customers to transfer goods or services or enters into contracts for the transfer of nonfinancial assets unless those contracts are within the scope of other standards (for example, insurance contracts or lease contracts). The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The guidance provides steps to follow to achieve the core principle. An entity should disclose sufficient information to enable users of financial statements to understand the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Qualitative and quantitative information is required about contracts with customers, significant judgments and changes in judgments, and assets recognized from the costs to obtain or fulfill a contract. The amendments in this update are effective for interim and annual reporting periods beginning after December 15, 2016. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

In June 2014, the FASB issued amendments to ASC 860 “Transfers and Servicing” through issuance of ASU 2014-11 “Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures” (“ASU 2014-11”). These amendments change the accounting for repurchase-to-maturity transactions which are repurchase agreements where the maturity of the security transferred as collateral matches the maturity of the repurchase agreement. Under ASU 2014-11, all repurchase-to-maturity transactions will be accounted for as secured borrowing transactions in the same way as other repurchase agreements rather than as sales of a financial asset and forward commitment to repurchase. The amendments also change the accounting for repurchase financing arrangements which are transactions involving the transfer of a financial asset to a counterparty executed contemporaneously with a reverse repurchase agreement with the same counterparty. Under ASU 2014-11, all repurchase financings will now be accounted for separately, which will result in secured borrowing accounting for the reverse repurchase agreement. ASU 2014-11 also introduces new disclosure requirements regarding repurchase agreements and securities lending transactions as well as certain other transactions which involve the transfer of financial assets accounted for as sales and where the transferor retains substantially all of the exposure to the economic return on the transferred assets. ASU 2014-11 is effective for interim or annual periods beginning after December 15, 2014 with early adoption prohibited. As of adoption date, the accounting for all outstanding repurchase-to-maturity transactions and repurchase financing arrangements is adjusted by means of a cumulative-effect adjustment to the balance sheet and retained earnings. We are currently evaluating the impact of adopting the new guidance on the consolidated financial statements.

In June 2014, the FASB issued amendments to ASC 718 “Compensation—Stock Compensation” through the issuance of ASU 2014-12 “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the Requisite Service Period.” The amendments clarify the proper method of accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. The ASU requires that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The performance target should not be reflected in estimating the grant-date fair value of the award. Compensation cost should be recognized in the period in which it becomes probable that the performance target will be achieved and should represent the compensation cost attributable to the period(s) for which the requisite service has already been rendered. The amendments in this ASU are effective for annual periods and interim periods within those annual periods beginning after December 15, 2015. Earlier adoption is permitted. The adoption of this guidance is not expected to have a material impact on the Company’s consolidated financial statements.

In August 2014, the FASB issued amendments to ASC 810 “Consolidation” through the issuance of ASU 2014-13, “Consolidation: Measuring the Financial Assets and the Financial Liabilities of a Consolidated Collateralized Financing Entity.” This ASU applies to entities that meet the following criteria:

1. they are required to consolidate a collateralized entity under the Variable Interest Entities guidance;

2. they measure all of the financial assets and the financial liabilities of that consolidated collateralized financing entity at fair value in the consolidated financial statements based on other FASB rules; and

3. those changes in fair value are reflected in earnings.

Under ASU 2014-13, entities that meet these criteria are provided an alternative under which they can choose to eliminate the difference between the fair value of financial assets and financial liabilities of a consolidated collateralized financing entity. If that alternative is not elected, then ASU 2014-13 indicates that the fair value of the financial assets and the fair value of the financial liabilities of the consolidated collateralized financing entity should be measured in accordance with ASC 820. Fair value measurement and differences between the fair value of the financial assets and the financial liabilities of that consolidated collateralized financing entity should be reflected in earnings and attributed to the reporting entity in the consolidated statement of income or loss. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2015. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In August 2014, the FASB issued amendments to ASC 310-40, “Receivables - Troubled Debt Restructurings by Creditors” through issuance of ASU 2014-14: “Classification of Certain Government - Guaranteed Mortgage Loans upon Foreclosure.” The amendments in this ASU require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met:

1. the loan has a government guarantee that is not separable from the loan before foreclosure;

2. at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim; and

3. at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed.

Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this ASU are effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

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, 2014									December 31, 2013
	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	$	22,217	$	242	$	(213	)	$	22,246	$	22,271	$	75	$	(425	)	$	21,921

	$	22,217	$	242	$	(213	)	$	22,246	$	22,271	$	75	$	(425	)	$	21,921


Held-to-maturity securities:
U.S. government sponsored mortgage-backed securities	$	104,146	$	705	$	(501	)	$	104,350	$	99,257	$	572	$	(998	)	$	98,831
Corporate debt securities		17,536		192		(120	)		17,608		20,519		120		(489	)		20,150

	$	121,682	$	897	$	(621	)	$	121,958	$	119,776	$	692	$	(1,487	)	$	118,981

The amortized cost basis and estimated fair value of debt securities by contractual maturity at September 30, 2014 is as follows (in thousands). Expected maturities may differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


	September 30, 2014
	Available-for-Sale				Held-to-Maturity
	Amortized Cost Basis		Fair Value		Amortized Cost Basis		Fair Value
	(unaudited)				(unaudited)

Due within one year	$	—	$	—	$	—	$	—
Due after one year through five years		12,811		13,029		7,337		7,503
Due after five years through ten years		9,406		9,217		68,761		68,680
Due after ten years		—		—		45,584		45,775

	$	22,217	$	22,246	$	121,682	$	121,958

When securities are sold, the adjusted cost of the specific security sold is used to compute the gain or loss on the sale. During the three and nine months ended September 30, 2014 (unaudited), there were no sales of available-for-sale securities. During the three months ended September 30, 2013 (unaudited), there were no sales of available-for sales securities. During the nine months ended September 30, 2013 (unaudited), proceeds from sales of available-for-sale securities amounted $18.0 million. 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,
	2014		2013		2014		2013
	(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

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					12 Months or longer
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

September 30, 2014 (unaudited):
Available-for-sale
Corporate debt securities	$	—	$	—		$	4,193	$	(213	)
Held-to-maturity
Corporate debt securities		7,588		(120	)		—		—
U.S. government sponsored mortgage backed securities		35,921		(142	)		18,971		(359	)

Total temporarily impaired securities	$	43,509	$	(262	)	$	23,164	$	(572	)


December 31, 2013:
Available-for-sale
Corporate debt securities	$	4,970	$	(30	)	$	4,052	$	(395	)
Held-to-maturity
Corporate debt securities		10,010		(489	)		—		—
U.S. government sponsored mortgage backed securities		59,073		(998	)		6		—

Total temporarily impaired securities	$	74,053	$	(1,517	)	$	4,058	$	(395	)

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

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, 2014 (unaudited), 32 debt 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, 2014 (unaudited) quarterly review of securities in the investment portfolio, management has determined that unrealized losses related to 32 debt securities with aggregate depreciation of 1.24% from the Company’s amortized cost basis were caused primarily by changes in market interest rates. 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 Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investments. Therefore, it is expected that the securities would not be settled at a price less than the par value of the investment. Because the Company does not intend to sell the investments and it is more likely than not that the Company will not be required to sell the investments before recovery of their amortized cost basis, it does not consider these investments to be other-than-temporarily impaired at September 30, 2014.

At December 31, 2013, thirty two debt securities had unrealized losses with aggregate depreciation of 2.4% from the Company’s amortized cost basis. The Company’s unrealized losses on investments in corporate bonds and mortgage backed securities are primarily caused by changes in market interest rates.

In addition to the securities listed above, the Company holds securities in a Rabbi Trust that are used to fund the executive and director non-qualified deferred compensation plan. These Rabbi Trust investments are included in other assets and consist primarily of cash and cash equivalents and actively traded mutual funds, and are recorded at fair value. The fair value of these Rabbi Trust investments at September 30, 2014 (unaudited) and December 31, 2013 was $2.3 million and $2.2 million, respectively. For the three and nine month periods ending September 30, 2014, the net loss and net gain on Rabbi Trust investments still held at the reporting date was $(31,000) and $31,000, 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. Refer to Note 7 – Employee and Director Benefit Plans, for more information.

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, deferred fees or costs on originated loans, and any premiums or discounts on purchased 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, home equity loans, commercial real estate, construction, commercial, indirect auto and other 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 three and nine months ended September 30, 2014 or during fiscal year 2013.

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 – 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.

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.

Other consumer loans - Loans in this segment include secured and unsecured consumer loans including passbook loans, consumer lines of credit and overdraft protection, and consumer unsecured 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 collateral method is used. 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, 2014 (unaudited) and December 31, 2013, the Company had unallocated reserves of $163,000 and $139,000, respectively.

Loans consisted of the following (dollars in thousands):


	September 30, 2014						December 31, 2013
	Amount			Percent			Amount			Percent
	(unaudited)
Mortgage loans:
Residential one-to-four family	$	407,593			37.22	%	$	287,652			34.17	%
Commercial real estate loans (1)		383,727			35.05			320,807			38.10
Home equity		123,932			11.32			92,461			10.98
Construction loans		15,654			1.43			9,965			1.18

Total mortgage loans		930,906			85.02			710,885			84.43


Commercial loans		41,029			3.75			30,691			3.65
Consumer loans:
Indirect auto loans		122,467			11.18			99,798			11.85
Other consumer loans		511			0.05			558			0.07

		164,007			14.98			131,047			15.57


Total loans		1,094,913			100.00	%		841,932			100.00	%


Net deferred loan costs		4,618						3,535
Net unamortized mortgage premiums		2,359						1,504
Allowance for loan losses		(8,319	)					(7,958	)


Total loans, net	$	1,093,571					$	839,013

(1)	Includes multi-family real estate 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, 2014 and 2013 (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, 2014 (unaudited) and December 31, 2013. 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, 2014
	Beginning balance		Provision (benefit)			Charge-offs			Recoveries		Ending balance

Residential one-to-four family	$	2,249	$	(92	)	$	(375	)	$	—	$	1,782
Commercial real estate		3,958		193			—			—		4,151
Construction		187		7			—			—		194
Commercial		513		—			—			—		513
Home equity		706		197			(199	)		—		704
Indirect auto		824		(21	)		(12	)		5		796
Other consumer		19		3			(9	)		3		16
Unallocated		158		5			—			—		163

Total	$	8,614	$	292		$	(595	)	$	8	$	8,319


	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
Other consumer		17		8			(14	)		7		18
Unallocated		128		8			—			—		136

Total	$	6,856	$	438		$	(49	)	$	80	$	7,325


	Nine Months Ended September 30, 2014
	Beginning balance		Provision (benefit)			Charge-offs			Recoveries		Ending balance

Residential one-to-four family	$	2,189	$	(32	)	$	(375	)	$	—	$	1,782
Commercial real estate		3,621		530			—			—		4,151
Construction		134		60			—			—		194
Commercial		419		98			(4	)		—		513
Home equity		681		222			(199	)		—		704
Indirect auto		749		82			(44	)		9		796
Other consumer		26		4			(25	)		11		16
Unallocated		139		24			—			—		163

Total	$	7,958	$	988		$	(647	)	$	20	$	8,319


	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
Other consumer		19		25			(43	)		17		18
Unallocated		64		72			—			—		136

Total	$	6,440	$	865		$	(119	)	$	139	$	7,325


	September 30, 2014
	Individually evaluated for impairment				Collectively evaluated for impairment				Total
	Loan balance		Allowance		Loan balance		Allowance		Loan balance		Allowance
Residential one-to-four family	$	4,607	$	9	$	402,986	$	1,773	$	407,593	$	1,782
Commercial real estate		3,926		11		379,801		4,140		383,727		4,151
Construction		—		—		15,654		194		15,654		194
Commercial		—		—		41,029		513		41,029		513
Home equity		297		—		123,635		704		123,932		704
Indirect auto		—		—		122,467		796		122,467		796
Other consumer		—		—		511		16		511		16
Unallocated		—		—		—		163		—		163

Total	$	8,830	$	20	$	1,086,083	$	8,299	$	1,094,913	$	8,319


	December 31, 2013
	Individually evaluated for impairment				Collectively evaluated for impairment				Total
	Loan balance		Allowance		Loan balance		Allowance		Loan balance		Allowance
Residential one-to-four family	$	6,982	$	869	$	280,670	$	1,320	$	287,652	$	2,189
Commercial real estate		4,081		11		316,726		3,610		320,807		3,621
Construction		—		—		9,965		134		9,965		134
Commercial		—		—		30,691		419		30,691		419
Home equity		400		—		92,061		681		92,461		681
Indirect auto		16		—		99,782		749		99,798		749
Other consumer		1		—		557		26		558		26
Unallocated		—		—		—		139		—		139

Total	$	11,480	$	880	$	830,452	$	7,078	$	841,932	$	7,958

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of September 30, 2014 (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	$	210	$	210	$	9
Commercial real estate		3,074		3,074		11
Construction		—		—		—
Commercial		—		—		—
Home equity		—		—		—
Indirect auto		—		—		—
Other consumer		—		—		—

Totals	$	3,284	$	3,284	$	20


	Impaired loans with no related allowance for credit losses
	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Residential one-to-four family	$	4,397	$	4,789	$	—
Commercial real estate		852		852		—
Construction		—		—		—
Commercial		—		—		—
Home equity		297		298		—
Indirect auto		—		—		—
Other consumer		—		—		—

Totals	$	5,546	$	5,939	$	—

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of December 31, 2013 (in thousands):


	Impaired loans with a related allowance for credit losses
	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Residential one-to-four family	$	3,824	$	3,824	$	869
Commercial real estate		3,111		3,111		11
Construction		—		—		—
Commercial		—		—		—
Home equity		—		—		—
Indirect auto		—		—		—
Other consumer		—		—		—

Totals	$	6,935	$	6,935	$	880


	Impaired loans with no related allowance for credit losses
	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Residential one-to-four family	$	3,158	$	3,158	$	—
Commercial real estate		970		970		—
Construction		—		—		—
Commercial		—		—		—
Home equity		400		599		—
Indirect auto		16		16		—
Other consumer		1		1		—

Totals	$	4,545	$	4,744	$	—

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, 2014				Three 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	$	1,344	$	3	$	2,209	$	3
Commercial real estate		3,078		32		3,133		23
Construction		—		—		—		—
Commercial		—		—		—		—
Home equity		—		—		—		—
Indirect auto		—		—		—		—
Other consumer		—		—		—		—

Totals	$	4,422	$	35	$	5,342	$	26


	Three months ended September 30, 2014				Three 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	$	3,532	$	21	$	5,214	$	36
Commercial real estate		862		9		1,025		9
Construction		—		—		—		—
Commercial		—		—		—		—
Home equity		431		2		436		3
Indirect auto		—		—		—		—
Other consumer		—		—		—		—

Totals	$	4,825	$	32	$	6,675	$	48


	Nine months ended September 30, 2014				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	$	1,882	$	110	$	2,374	$	9
Commercial real estate		3,092		84		1,393		50
Construction		—		—		—		—
Commercial		—		—		—		—
Home equity		—		—		—		—
Indirect auto		—		—		—		—
Other consumer		—		—		—		—

Totals	$	4,974	$	194	$	3,767	$	59


	Nine months ended September 30, 2014				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	$	3,265	$	70	$	5,077	$	107
Commercial real estate		906		26		2,682		95
Construction		—		—		—		—
Commercial		—		—		—		—
Home equity		387		7		483		13
Indirect auto		—		—		2		—
Other consumer		—		—		—		—

Totals	$	4,558	$	103	$	8,244	$	215

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


	September 30, 2014 (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	$	793	$	463	$	1,317	$	2,573	$	—	$	1,550
Commercial real estate		159		—		—		159		—		—
Home equity		125		—		97		222		—		97
Construction		—		—		—		—		—		—
Other loans:
Commercial		—		—		—		—		—		—
Indirect auto		266		49		—		315		—		—
Other consumer		—		—		—		—		—		—

Total	$	1,343	$	512	$	1,414	$	3,269	$	—	$	1,647


	December 31, 2013
	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	$	410	$	—	$	1,911	$	2,321	$	—	$	3,860
Commercial real estate		—		—		38		38		—		38
Home equity		914		—		—		914		—		200
Construction		—		—		—		—		—		—
Other loans:
Commercial		—		—		—		—		—		—
Indirect auto		222		—		16		238		—		16
Other consumer		—		—		1		1		—		1

Total	$	1,546	$	—	$	1,966	$	3,512	$	—	$	4,115

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.

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 the rating consists of loan-to-value and days delinquent.

The following tables present the Company’s loans by risk rating at September 30, 2014 (unaudited) and December 31, 2013 (in thousands). There were no loans rated as 6 (“doubtful”) or 7 (“loss”) at the dates indicated.


	September 30, 2014
	Loans rated 1-3		Loans rated 4		Loans rated 5		Loans not rated (A)		Total

Residential one-to-four family	$	—	$	578	$	2,292	$	404,723	$	407,593
Commercial real estate		370,779		4,204		8,744		—		383,727
Construction		15,654		—		—		—		15,654
Commercial		41,025		4		—		—		41,029
Home equity		—		97		799		123,036		123,932
Indirect auto		—		—		—		122,467		122,467
Other consumer		—		—		—		511		511

Total	$	427,458	$	4,883	$	11,835	$	650,737	$	1,094,913


	December 31, 2013
	Loans rated 1-3		Loans rated 4		Loans rated 5		Loans not rated (A)		Total

Residential one-to-four family	$	—	$	3,123	$	4,613	$	279,916	$	287,652
Commercial real estate		307,093		4,277		9,437		—		320,807
Construction		9,965		—		—		—		9,965
Commercial		30,643		48		—		—		30,691
Home equity		—		200		999		91,262		92,461
Indirect auto		—		—		—		99,798		99,798
Other consumer		—		9		4		545		558

Total	$	347,701	$	7,657	$	15,053	$	471,521	$	841,932

(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. Any loans that are modified are reviewed by the Company to identify if a TDR has occurred, which is when, for economic or legal reasons related to a borrower’s financial difficulties, the Bank grants a concession to the borrower that it would not otherwise consider. During the three and nine months ended September 30, 2014, no new loans were modified and determined to be troubled debt restructurings, however, three loans that had already been determined to be TDRs were remodified during the nine months ended September 30, 2014. During the three months ended September 30, 2014, there were no remodifications. During the nine months ended September 30, 2013, five loans were remodified and remain as TDRs. At September 30, 2014, the Company had $8.5 million of troubled debt restructurings related to nine loans.

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


	September 30, 2014		December 31, 2013
	(unaudited)
TDRs on Accrual Status	$	7,182	$	7,366
TDRs on Nonaccrual Status		1,317		1,900

Total TDRs	$	8,499	$	9,266


Amount of specific allocation included in the allowance for loan losses associated with TDRs	$	20	$	543

Additional commitments to lend to a borrower who has been a party to a TDR	$	—	$	—

The following tables show 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 and unaudited):

Three months ended
September 30, 2014

Three months ended
September 30, 2013

# 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

—

Home equity

—

Commercial real estate

—

Total

—


	Nine months ended September 30, 2014						Nine months ended September 30, 2013
	# 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	$	1,700	$	1,700		1	$	347	$	378
Home equity		1		200		200		—		—		—
Commercial real estate		1		882		882		4		4,732		4,128

Total		3	$	2,782	$	2,782		5	$	5,079	$	4,506

The three loans remodified during the nine months ended September 30, 2014 were TDRs that have been modified more than once. There was no financial impact due to these modifications.

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


	Three months ended September 30, 2014		Three months ended September 30, 2013
	(unaudited)		(unaudited)
Extended Maturity	$	—	$	—
Interest only period		—		—
Adjusted Interest Rate		—		—

Total	$	—	$	—


	Nine months ended September 30, 2014		Nine months ended September 30, 2013
	(unaudited)		(unaudited)
Extended Maturity	$	882	$	1,370
Interest only period		1,900		—
Adjusted Interest Rate		—		3,136

Total	$	2,782	$	4,506

The Company considers a TDR loan to have defaulted when it reaches 90 days past due. There were two TDRs in the amount of $1.9 million that have been modified during the twelve months ending on September 30, 2014 which have subsequently defaulted during the nine month period ending on September 30, 2014. During the three months ended September 30, 2014, we recorded charge offs of $573,000 related to these two loans. The loans previously had specific allowances of $555,000. There were no TDRs that have been modified during the twelve months ending on September 30, 2013 which have subsequently defaulted during the three and nine month periods ending on September 30, 2013.

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, 2014 (unaudited) and December 31, 2013, residential loans previously sold and serviced by the Company were $66.0 million and $61.2 million, respectively. At September 30, 2014 (unaudited) and December 31, 2013, indirect auto loans previously sold and serviced by the Company were $103.1 million and $124.8 million, 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 to repurchase any loan that becomes 90 days past due during the initial 120 months. The Company will repurchase the past due loan for 100 percent of the unpaid principal plus interest to repurchase date. As of September 30, 2014 (unaudited) and December 31, 2013, the principal balance of these loans sold with recourse amounted to $1.1 million and $1.1 million, respectively. The Company has not incurred 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 to 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):


	Three months ended September 30,						Nine months ended September 30,
	2014			2013			2014			2013
	(unaudited)						(unaudited)
Balance at beginning of period	$	402		$	354		$	411		$	353
Capitalization		56			71			85			188
Amortization		(20	)		(23	)		(56	)		(82	)
Valuation allowance adjustment		15			(23	)		13			(80	)

Balance at end of period	$	453		$	379		$	453		$	379

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

The securities sold under agreements to repurchase as of September 30, 2014 (unaudited) and December 31, 2013 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, 2014 and December 31, 2013 was $1.5 million and $2.1 million, 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, 2014 (unaudited) and December 31, 2013, the principal balance of these loans totaled $1.1 million and $1.1 million, respectively. The agreement related to this sale contains provisions requiring the Company to repurchase any loan that becomes 90 days past due during the initial 120 months. The Company will repurchase the past due loan for 100 percent of the unpaid principal plus interest to repurchase date.

NOTE 7 – EMPLOYEE AND DIRECTOR BENEFIT PLANS

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, 2014 (unaudited) and December 31, 2013 relating to these plans was $1.7 million and $1.5 million, 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, 2014 (unaudited) and December 31, 2013 relating to this plan was $551,000 and $553,000, 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, 2014 (unaudited) and December 31, 2013, there were four and three participants, respectively, 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, 2014 (unaudited) and December 31, 2013 relating to this plan was $959,000 and $729,000, 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 $464,000 and $379,000 for the three months ended September 30, 2014 and 2013 (unaudited), respectively, and $1.3 million and $884,000 for the nine months ended September 30, 2014 and 2013 (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, 2014 and 2013 (unaudited) totaled $223,000 and $170,000, respectively, and for the nine months ended September 30, 2014 and 2013 (unaudited) totaled $579,000 and $530,000, 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 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, 2014 (unaudited) and December 31, 2013, the recorded liability relating to the Rabbi Trust was $2.3 million and $2.2 million, respectively. As of September 30, 2014 (unaudited) and December 31, 2013, the recorded liability relating to the Salary Deferral Plan was $29,000 and $91,000, respectively.

Capital Appreciation Plan

Effective September 30, 2010, the Company established the Capital Appreciation Plan. The purpose of this plan was attract, retain, and motivate certain key employees and directors of the Company. Awards were calculated 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 vesting period ended on June 30, 2014 and the plan was completed. Participants were paid lump sums totaling $266,000. The Company recognized $0 and $31,000 in relation to the plan during the three months ended September 30, 2014 and 2013 (unaudited), respectively, and $61,000 and $82,000 in relation to the plan during the nine months ended September 30, 2014 and 2013 (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’s subsidiary 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, 2014). 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. The Company incurred expenses for the three months ended September 30, 2014 and 2013 (unaudited) of $67,000 and $53,000, respectively, and for the nine months ended September 30, 2014 and 2013 (unaudited) of $195,000 and $153,000, respectively.

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, 2014 (unaudited)	Securities held-to- maturity (at cost)		Loans receivable		Total pledged assets
Repurchase agreements	$	4,109	$	—	$	4,109
FHLB borrowings		53,534		473,346		526,880
Federal Reserve Bank LOC		16,595		—		16,595

Total pledged assets	$	74,238	$	473,346	$	547,584


December 31, 2013	Securities held-to- maturity (at cost)		Loans receivable		Total pledged assets
Repurchase agreements	$	4,832	$	—	$	4,832
FHLB borrowings		48,133		415,924		464,057
Federal Reserve Bank LOC		3,016		—		3,016

Total pledged assets	$	55,981	$	415,924	$	471,905

NOTE 9 – EARNINGS PER SHARE

Basic earnings per share (“EPS”) excludes dilution and is calculated by dividing net income allocated 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 September 30,						Nine months ended September 30,
	2014			2013			2014			2013
Net income	$	1,202		$	538		$	2,924		$	1,315
Undistributed earnings attributable to participating securities		(40	)		(23	)		(97	)		(54	)

Net income allocated to common stockholders	$	1,162		$	515		$	2,827		$	1,261


Weighted average shares outstanding, basic		8,358,592			8,264,349			8,352,936			8,461,719
Effect of dilutive shares		98,592			—			71,079			—

Weighted average shares outstanding, assuming dilution		8,457,184			8,264,349			8,424,015			8,461,719


Basic EPS	$	0.14		$	0.06		$	0.34		$	0.15
Effect of dilutive shares		—			—			—			—

Diluted EPS	$	0.14		$	0.06		$	0.34		$	0.15

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 September 30,				Nine months ended September 30,
	2014		2013		2014		2013
Stock options		33,760		866,794		5,604		848,311

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 and completed 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, 2014 and 2013, the Company did not repurchase any shares under the second repurchase program.

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 options and restricted stock awards and the related tax benefits recognized (in thousands and unaudited):


	Three months ended September 30, 2014		Three months ended September 30, 2013		Nine months ended September 30, 2014		Nine months ended September 30, 2013
Stock options	$	208	$	209	$	642	$	585
Restricted stock awards		224		223		685		648

Total stock based compensation expense		432		432		1,327		1,233

Related tax benefits recognized in earnings	$	123	$	123	$	388	$	358

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, 2014				As of December 31, 2013
	(unaudited)
	Amount		Weighted average period		Amount		Weighted average period
Stock options	$	2,359		3.24	$	2,797		3.94
Restricted stock		2,498		3.20		2,997		3.91

Total	$	4,857			$	5,794

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 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, 2014 and December 31, 2013. There were no significant transfers between level 1 and level 2 of the fair value hierarchy during the three and nine months ended September 30, 2014 (unaudited) and the year ended December 31, 2013.

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 consist 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 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 fair value of other U.S. government agency and corporate obligations was estimated using either a matrix or benchmarks for similar securities. The inputs used include benchmark yields, reported trades, broker/dealer quotes, and issuer spreads. These securities were categorized as Level 2.

The following table summarizes financial assets measured at fair value on a recurring basis as of September 30, 2014 and December 31, 2013, 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, 2014
Securities available-for-sale
Corporate debt securities	$	—	$	22,246	$	—	$	22,246
Trading securities
Rabbi trust investments		2,292		—		—		2,292

Totals	$	2,292	$	22,246	$	—	$	24,538


	Level 1		Level 2		Level 3		Total Fair Value

At December 31, 2013
Securities available-for-sale
Corporate debt securities	$	—	$	21,921	$	—	$	21,921
Trading securities
Rabbi trust investments		2,181		53		—		2,234

Totals	$	2,181	$	21,974	$	—	$	24,155

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.

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, 2014 (unaudited) and December 31, 2013.


	September 30, 2014
	Level 1		Level 2		Level 3

Impaired loans	$	—	$	—	$	1,317

Totals	$	—	$	—	$	1,317


	December 31, 2013
	Level 1		Level 2		Level 3

Impaired loans	$	—	$	—	$	3,199

Totals	$	—	$	—	$	3,199

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. 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. Non financial assets also include mortgage servicing right assets that are remeasured and reported at the lower of cost or fair value.

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, 2014
	Level 1		Level 2		Level 3
	(unaudited)
Mortgage servicing rights	$	—	$	—	$	453

Totals	$	—	$	—	$	453


	December 31, 2013
	Level 1		Level 2		Level 3

Mortgage servicing rights	$	—	$	—	$	411

Totals	$	—	$	—	$	411

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 - 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. The fair value of deposits also includes the benefit that results from the low-cost funding provided by the Company’s core deposit relationships.

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, 2014
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
	(unaudited)
Financial assets:
Cash and cash equivalents	$	45,485	$	45,485	$	45,485	$	—	$	—
Interest-bearing time deposits with other banks		131		131		—		131		—
Held-to-maturity securities		121,682		121,958		—		121,958		—
Federal Home Loan Bank stock		13,112		13,112		—		13,112		—
Loans, net		1,093,571		1,082,391		—		—		1,082,391
Accrued interest receivable		2,815		2,815		2,815		—		—

Financial liabilities:
Deposits		932,583		911,479		—		911,479		—
Federal Home Loan Bank advances		251,100		251,106		—		251,106		—
Securities sold under agreements to repurchase		1,458		1,458		—		1,458		—
Other borrowed funds		1,078		1,078		—		1,078		—
Accrued interest payable		922		922		922		—		—
Mortgagors’ escrow accounts		1,614		1,614		—		1,614		—


	December 31, 2013
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	38,035	$	38,035	$	38,035	$	—	$	—
Interest-bearing time deposits with other banks		119		119		—		119		—
Held-to-maturity securities		119,776		118,981		—		118,981		—
Federal Home Loan Bank stock		7,712		7,712		—		7,712		—
Loans, net		839,013		833,423		—		—		833,423
Accrued interest receivable		2,241		2,241		2,241		—		—

Financial liabilities:
Deposits		764,753		742,785		—		742,785		—
Federal Home Loan Bank advances		142,100		141,960		—		141,960		—
Securities sold under agreements to repurchase		2,127		2,127		—		2,127		—
Other borrowed funds		1,113		1,113		—		1,113		—
Accrued interest payable		683		683		683		—		—
Mortgagors’ escrow accounts		1,054		1,054		—		1,054		—

NOTE 12 – OTHER COMPREHENSIVE INCOME (LOSS)


	Three months ended September 30, 2014 (unaudited and in thousands)							Three months ended September 30, 2013 (unaudited and in thousands)
	Pre Tax Amount		Tax Expense			After Tax Amount		Pre Tax Amount		Tax Expense			After Tax Amount
Securities available-for-sale:
Change in unrealized gain/loss during the period	$	56	$	(20	)	$	36	$	37	$	(15	)	$	22
Reclassification adjustment for net realized gains included in net income (1)		—		—			—		—		—			—

Total securities available-for-sale		56		(20	)		36		37		(15	)		22

Other comprehensive income (loss)	$	56	$	(20	)	$	36	$	37	$	(15	)	$	22


	Nine months ended September 30, 2014 (unaudited and in thousands)							Nine months ended September 30, 2013 (unaudited and in thousands)
	Pre Tax Amount		Tax Expense			After Tax Amount		Pre Tax Amount			Tax Expense		After Tax Amount
Securities available-for-sale:
Change in unrealized gain/loss during the period	$	379	$	(149	)	$	230	$	(589	)	$	227	$	(362	)
Reclassification adjustment for net realized gains included in net income (1)		—		—			—		(34	)		14		(20	)

Total securities available-for-sale		379		(149	)		230		(623	)		241		(382	)

Other comprehensive income (loss)	$	379	$	(149	)	$	230	$	(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 of securities, the tax expense amount is included in income tax expense and the after tax amount is included in net income.

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


	Net unrealized (loss) gain on securities available for sale			Unrecognized actuarial gain (loss) on Defined benefit pension plan			Accumulated other comprehensive income (loss)
Beginning Balance: January 1, 2014	$	(210	)	$	22		$	(188	)
Other comprehensive income		230			—			230

Ending balance: September 30, 2014	$	20		$	22		$	42


Beginning Balance: January 1, 2013	$	91		$	(23	)	$	68
Other comprehensive loss		(382	)		—			(382	)

Ending balance: September 30, 2013	$	(291	)	$	(23	)	$	(314	)

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;

•

system failures or breaches of our network security;

•

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;

•

changes in our organization, compensation and benefit plans;

•

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

•

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

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

Critical Accounting Policies

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

Comparison of Financial Condition at September 30, 2014 and December 31, 2013

Total Assets. Total assets increased $281.1 million to $1.3 billion at September 30, 2014, from $1.1 billion at December 31, 2013. The increase was primarily the result of a $254.6 million, or 30.3%, increase in net loans, a $10.4 million, or 77.7% increase in bank-owned life insurance, a $7.5 million, or 19.6%, increase in cash and cash equivalents, and a $2.2 million, or 1.6%, increase in investment securities. Federal Home Loan Bank stock also increased by $5.4 million, or 70.0%, as a result of increases in borrowings from the Federal Home Loan Bank.

Loans. Our plan to prudently increase our commercial and consumer loan portfolios is working as we experienced solid growth in our residential real estate loans, commercial real estate loans, home equity lines of credit, indirect auto loans and commercial loans during the nine months ending September 30, 2014. Net loans increased by $254.6 million to $1.1 billion at September 30, 2014 from $839.0 million at December 31, 2013. The increase in net loans was primarily due to increases of $119.9 million, or 41.7%, in residential one-to-four family loans, $62.9 million, or 19.6%, in commercial real estate loans, $31.5 million, or 34.0%, in home equity lines of credit, $22.7 million, or 22.7%, in indirect auto loans, and $10.3 million, or 33.7%, in commercial loans. While we have continued to increase one-to-four family residential loans and indirect auto loans in 2014, we have also continued to sell a portion of these loan types as part of our strategy. We base the amount of one-to-four family residential loans that we sell into the secondary market on our liquidity needs, asset/liability mix, loan volume, portfolio size and other factors. We sell loans both servicing released and servicing retained. We base the amount of indirect auto loans that we sell on our risk management considerations, our liquidity needs, asset/liability mix, loan volume, portfolio size, market pricing and other factors.

Investment Securities. Total investment securities increased $2.2 million, to $143.9 million at September 30, 2014, from $141.7 million at December 31, 2013. The increase in investment securities primarily resulted from an increase of $1.9 million, or 1.6%, in held-to-maturity securities. This increase was driven by an increase in U.S. government sponsored mortgage-backed securities of $4.9 million, or 4.9%, partially offset by a decrease in corporate debt securities of $3.0 million, or 14.5%.

Cash and Cash Equivalents. Cash and cash equivalents increased by $7.5 million, or 19.6%, to $45.5 million at September 30, 2014, from $38.0 million at December 31, 2013.

Bank-Owned Life Insurance. We invest in bank-owned life insurance to provide a funding source for our benefit plan obligations. Bank-owned life insurance also generally provides noninterest income that is nontaxable. At September 30, 2014, our investment in bank-owned life insurance was $23.7 million, an increase of $10.4 million from $13.3 million at December 31, 2013, primarily due to purchases of $10.0 million and increases in cash surrender value of $352,000.

Deposits. Deposits increased $167.8 million, or 22.0%, to $932.6 million at September 30, 2014 from $764.8 million at December 31, 2013. The increase in deposits was due to an increase of $50.9 million, or 11.67%, in savings accounts, an increase of $41.2 million, or 127.3%, in interest bearing checking accounts, an increase of $22.7 million, or 16.3%, in demand deposits and $54.1 million, or 37.0%, in certificates of deposit (“CDs”). Core deposits, which we consider to include all deposits other than CDs and brokered CDs, increased by $113.7 million, or 18.4%. Core deposit growth has remained strong. Customer accounts and relationship expansion continue to increase in our retail and small business franchises. Increased deposits in our Municipal Banking Group was also a strong contributor to the deposit growth during the quarter ended September 30, 2014, as our expanding team, competitive products and high service levels have established a position for us in this important segment.

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


	September 30, 2014					December 31, 2013
	Amount		Percent			Amount		Percent
	(unaudited)
Deposit type:
Demand deposits	$	162,457		17.42	%	$	139,733		18.27	%
Interest-bearing checking accounts		73,570		7.89			32,372		4.23
Savings accounts		486,827		52.20			435,963		57.01
Money market deposits		9,439		1.01			10,501		1.37

Total transaction accounts		732,293		78.52			618,569		80.88

Term certificates less than $100,000		118,211		12.68			63,279		8.27
Term certificates $100,000 or more		82,079		8.80			82,905		10.85

Total certificate accounts		200,290		21.48			146,184		19.12

Total deposits	$	932,583		100.00	%	$	764,753		100.00	%

Borrowings. At September 30, 2014, borrowings consisted of advances from the Federal Home Loan Bank of Boston, securities sold to customers under agreements to repurchase, or “repurchase agreements”, and other borrowed funds consisting of the balance of loans that were sold with recourse to another financial institution in March of 2006 that are accounted for as a secured borrowing. As of September 30, 2014, the principal balance of these loans sold with recourse amounted to $1.1 million. We have not incurred any losses related to the loans sold with recourse.

Total borrowings increased $108.3 million, or 74.5%, to $253.6 million at September 30, 2014, from $145.3 million at December 31, 2013. Advances from the Federal Home Loan Bank of Boston drove this increase as they increased $109.0 million to $251.1 million at September 30, 2014, from $142.1 million at December 31, 2013.

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


	September 30, 2014		December 31, 2013
	(unaudited)
Long-term borrowed funds:
Federal Home Loan Bank of Boston long-term advances	$	71,100	$	62,100
Other borrowed funds		1,078		1,113

		72,178		63,213


Short-term borrowed funds:
Federal Home Loan Bank of Boston short-term advances		180,000		80,000
Repurchase agreements		1,458		2,127

		181,458		82,127


Total borrowed funds	$	253,636	$	145,340

Stockholders’ Equity. Total stockholders’ equity increased $4.7 million, or 3.6%, to $135.1 million at September 30, 2014 from $130.4 million as of December 31, 2013. This increase is primarily the result of earnings of $2.9 million and a $1.4 million increase in additional paid-in capital related to stock-based compensation.

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, 2014			At December 31, 2013
	(unaudited)
Non-accrual loans:
Real estate loans:
Residential one-to-four family	$	1,550		$	3,860
Commercial real estate		—			38
Construction loans		—			—
Home equity		97			200
Commercial loans		—			—
Consumer loans:
Indirect auto loans		—			16
Other consumer loans		—			1

Total non-accrual loans	$	1,647		$	4,115


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

Total loans 90 days delinquent and still accruing		—			—


Total non-performing loans		1,647			4,115


Other real estate owned		—			—
Repossessed automobiles		5			—


Total non-performing assets (NPAs)	$	1,652		$	4,115


Troubled debt restructurings:
Troubled debt restructures included in NPAs	$	1,317		$	1,900
Troubled debt restructures not included in NPAs		7,182			7,366

Total troubled debt restructures	$	8,499		$	9,266


Ratios:
Non-performing loans to total loans		0.15	%		0.49	%
Non-performing assets to total assets		0.12	%		0.39	%

It is the general policy of the Bank to consider any loan on non-accrual as an impaired loan. Exceptions to this policy can be made when, in the opinion of senior management, a loan is adequately secured, properly documented and clearly in the process of collection. Any exceptions to policy are reviewed on a monthly basis and must be approved by senior management. At September 30, 2014, there were no loans on non-accrual that were determined to not be impaired.

Non-accrual Loans. Non-accrual one-to-four family residential loans decreased by $2.3 million from December 31, 2013 to September 30, 2014. This decrease was due to the full payoff of one impaired loan for $1.9 million and charge offs of $375,000.

Troubled Debt Restructurings. We occasionally modify loans to extend the term or make other concessions to help a borrower stay current on their loan and to avoid foreclosure or collection activity. We generally do not forgive principal or interest on loans. At September 30, 2014, we had $8.5 million of troubled debt restructurings related to nine loans as compared to $9.3 million of troubled debt restructurings related to ten loans at December 31, 2013.

Comparison of Operating Results for the Three Months Ended September 30, 2014 and 2013

General. Net income for the three months ended September 30, 2014 was $1.2 million, compared to net income of $538,000 for the three months ended September 30, 2013. The improvement in operating results of $664,000, or 123.4%, for the three months ended September 30, 2014 compared to the three months ended September 30, 2013, resulted from an increase in net interest and dividend income after the provision for loan losses of $1.5 million, partially offset by an increase in noninterest expense of $298,000 and a decrease in noninterest income of $98,000.

Net Interest and Dividend Income. Net interest and dividend income increased $1.4 million, or 20.5% to $8.1 million for the three months ended September 30, 2014, compared to $6.8 million for the three months ended September 30, 2013. The increase in net interest and dividend income was primarily due to an increase in our total average interest earning assets. Total average interest-earning assets increased $297.3 million, or 31.9%, to $1.2 billion for the three months ended September 30, 2014, from $930.6 million for the three months ended September 30, 2013. Average net interest-earning assets also increased $27.9 million, or 11.4%, to $273.4 million for the three months ended September 30, 2014, from $245.5 million for the three months ended September 30, 2013. Partially offsetting this was a decrease in our net interest margin of 26 basis points to 2.62% for the three months ended September 30, 2014, compared to 2.88% for the three months ended September 30, 2013, and a decrease in our net interest rate spread of 25 basis points to 2.44% for the three months ended September 30, 2014, compared to 2.69% for the three months ended September 30, 2013.

Interest and Dividend Income. Interest and dividend income increased $2.1 million, or 25.8%, to $10.0 million for the three months ended September 30, 2014, from $8.0 million for the three months ended September 30, 2013. The increase in interest and dividend income was primarily due to a $2.0 million increase in interest income on loans and a $65,000 increase in interest on taxable debt securities. The increase in interest income on loans resulted from an increase in the average balance of loans of $281.3 million to $1.1 billion for the three months ended September 30, 2014, from $770.2 million for the three months ended September 30, 2013, partially offset by a 26 basis point decrease in the average yield on loans to 3.48% from 3.74%, primarily due to lower interest rates on originated and purchased 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 $22.9 million to $144.2 million for the three months ended September 30, 2014, from $121.3 million for the three months ended September 30, 2013, partially offset by an 18 basis point decrease in the average yield on securities to 2.06% from 2.24%.

Interest Expense. Interest expense increased $673,000 to $1.9 million for the three months ended September 30, 2014, from $1.2 million for the three months ended September 30, 2013. The increase resulted from a $269.3 million, or 39.3%, increase in the average balance of interest-bearing liabilities as well as an 8 basis point increase in the cost of interest-bearing liabilities to 0.79% from 0.71%.

Interest expense on interest-bearing deposits increased by $534,000 to $1.6 million for the three months ended September 30, 2014, from $1.0 million for the three months ended September 30, 2013. This increase was primarily due to an increase in the interest expense on CD’s and savings accounts of $315,000 and $192,000, respectively. The increase in interest expense on CD’s of $315,000 from $474,000 to $789,000, was driven by an increase in the average balance of $65.6 million and an increase in the average cost of 12 basis points to 1.66% from 1.54%. The increase in interest expense on savings accounts of $192,000 from $554,000 to $746,000, was driven by an increase in the average balance of $69.1 million and an increase in the average cost of 8 basis points to 0.63% from 0.55%. We experienced increases in the average cost within savings, CD’s and interest bearing checking accounts, while the cost of money market accounts remained flat.

Interest expense on total borrowings increased $139,000 to $321,000 for the three months ended September 30, 2014, from $182,000 for the three months ended September 30, 2013. This increase was primarily due to an increase in the average balance of FHLB advances of $108.4 million, or 99.2%, to $217.7 million for the three months ended September 30, 2014, from $109.3 million for the three months ended September 30, 2013, partially offset by a decrease in the average cost of FHLB advances of 6 basis points to 0.57% for the three months ended September 30, 2014, from 0.63% for the three months ended September 30, 2013.

Provision for Loan Losses. Based on our methodology for establishing the allowance for loan losses and provision for loan losses as discussed in Note 4 to the Consolidated Financial Statements and included in this Form 10-Q, we recorded a provision for loan losses of $292,000 for the three months ended September 30, 2014, compared to $438,000 for the three months ended September 30, 2013. The decrease in the provision for loan losses was driven by lower estimated credit losses resulting from the changes in and seasoning of our portfolio and improved loan quality. The allowance for loan losses was $8.3 million, or 0.76% of total loans, at September 30, 2014, compared to $8.0 million, or 0.95% of total loans, at December 31, 2013. The decrease in the allowance for loan losses as a percentage of total loans was primarily driven by a reduction in specific allowances, a shift in our loan portfolio mix to loan types of lesser risk, such as residential real estate loans, and reduced qualitative loss factors.

Noninterest Income. Noninterest income decreased by $98,000 to $792,000 for the three months ended September 30, 2014, from $890,000 for the three months ended September 30, 2013. This decrease was driven by a decrease in gains on sales of loans of $64,000 as we benefited less during 2014 from the interest rate environment as compared to the third quarter of 2013. Other income also decreased by $66,000. These decreases were partially offset by an increase in income from bank-owned life insurance of $38,000 which was driven by $10 million of bank-owned life insurance that was purchased during the three months ended September 30, 2014.

Noninterest Expense. Noninterest expense increased $298,000 to $6.7 million for the three months ended September 30, 2014, from $6.4 million for the three months ended September 30, 2013. This increase was driven by an increase in salaries and employee benefits of $442,000.

Income Tax Expense. We recorded income tax expense of $782,000 for the three months ended September 30, 2014, compared to income tax expense of $313,000 for the three months ended September 30, 2013. The effective tax rate for the three months ended September 30, 2014 was 39.4% compared to 36.8% for the three months ended September 30, 2013. The increase in the effective tax rate was primarily the result of the reduced impact of the tax exempt income from bank-owned life insurance as a portion of total income. Additionally, the three months ended September 30, 2013 benefited from 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)
	2014							2013
	(Dollars in thousands)
	Average Outstanding Balance		Interest		Yield/ Rate⁽¹⁾			Average Outstanding Balance		Interest		Yield/ Rate⁽¹⁾
Interest-earning assets:
Total loans	$	1,051,492	$	9,235		3.48	%	$	770,208	$	7,268		3.74	%
Securities		144,189		749		2.06	%		121,334		684		2.24	%
Other		32,204		14		0.18	%		39,089		21		0.21	%

Total interest-earning assets ⁽⁵⁾		1,227,885	$	9,998		3.23	%		930,631	$	7,973		3.40	%
Non-interest-earning assets		36,402							27,612

Total assets	$	1,264,287						$	958,243


Interest-bearing liabilities:
Savings accounts	$	472,467	$	746		0.63	%	$	403,356	$	554		0.55	%
Checking accounts		63,385		38		0.24	%		36,418		11		0.12	%
Money market accounts		9,782		2		0.08	%		9,820		2		0.08	%
Certificates of deposit		188,129		789		1.66	%		122,494		474		1.54	%

Total interest-bearing deposits		733,763		1,575		0.85	%		572,088		1,041		0.72	%
Federal Home Loan Bank advances		217,701		313		0.57	%		109,296		173		0.63	%
Securities sold under agreements to repurchase		1,914		1		0.15	%		2,612		1		0.15	%
Other borrowed funds		1,085		7		2.71	%		1,130		8		2.89	%

Total interest-bearing liabilities		954,463	$	1,896		0.79	%		685,126	$	1,223		0.71	%
Non-interest-bearing liabilities		177,956							145,614

Total liabilities		1,132,419							830,740
Stockholders’ Equity		131,868							127,503

Total liabilities and stockholders’ equity	$	1,264,287						$	958,243


Net interest income			$	8,102						$	6,750

Net interest rate spread ⁽²⁾						2.44	%						2.69	%
Net interest-earning assets ⁽³⁾	$	273,422						$	245,505

Net interest margin ⁽⁴⁾						2.62	%						2.88	%
Average interest-earning assets to interest-bearing liabilities						128.65	%						135.83	%

(1)	Yields and rates for the three-month periods ended September 30, 2014 and 2013 are annualized.

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

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

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

(5)	FHLB stock dividends of $38,000 and $7,000 for the three months ended September 30, 2014 and 2013, respectively, are not included.

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, 2014 vs. 2013 (unaudited)
	Change Due to Volume			Change Due to Rate			Total Change
	(In thousands)
Income on interest-earning assets:
Loans	$	2,500		$	(533	)	$	1,967
Securities		122			(57	)		65
Other		(4	)		(3	)		(7	)


Total interest-earning assets (1)	$	2,618		$	(593	)	$	2,025


Expense on interest-bearing liabilities:
Savings accounts	$	102		$	90		$	192
Checking accounts		11			16			27
Money market accounts		—			—			—
Certificates of deposit		272			43			315


Total interest-bearing deposits		385			149			534

Federal Home Loan Bank advances		158			(18	)		140
Securities sold under agreements to repurchase		—			—			—
Other borrowed funds		—			(1	)		(1	)


Total interest-bearing liabilities		543			130			673


Change in net interest income	$	2,075		$	(723	)	$	1,352

(1)	Does not include dividends on FHLB stock of $38,000 and $7,000 for the three months ended September 30, 2014 and 2013, respectively.

Comparison of Operating Results for the Nine Months Ended September 30, 2014 and 2013

General. Net income for the nine months ended September 30, 2014 was $2.9 million, compared to net income of $1.3 million for the nine months ended September 30, 2013. The improvement in operating results of $1.6 million, or 122.3%, for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013, resulted from an increase in net interest and dividend income after the provision for loan losses of $4.5 million, partially offset by an increase in noninterest expense of $1.5 million and a decrease in noninterest income of $433,000.

Net Interest and Dividend Income. Net interest and dividend income increased $4.6 million, or 25.2% to $23.1 million for the nine months ended September 30, 2014, compared to $18.4 million for the nine months ended September 30, 2013. The increase in net interest and dividend income was primarily due to an increase in our total average interest-earning assets. Total average interest-earning assets increased $288.9 million, or 33.6%, to $1.1 billion for the nine months ended September 30, 2014, from $860.9 million for the nine months ended September 30, 2013. Average net interest-earning assets also increased $23.4 million, or 9.7%, to $263.8 million for the nine months ended September 30, 2014, from $240.4 million for the nine months ended September 30, 2013. Partially offsetting this was a decrease in our net interest margin of 19 basis points to 2.67% for the nine months ended September 30, 2014, compared to 2.86% for the nine months ended September 30, 2013, and a decrease in our net interest rate spread of 14 basis points to 2.50% for the nine months ended September 30, 2014, compared to 2.64% for the nine months ended September 30, 2013.

Interest and Dividend Income. Interest and dividend income increased $6.0 million, or 27.0%, to $28.1 million for the nine months ended September 30, 2014, from $22.1 million for the nine months ended September 30, 2013. The increase in interest and dividend income was primarily due to a $5.1 million increase in interest income on loans and a $770,000 increase in interest on securities. The increase in interest income on loans resulted from an increase in the average balance of loans of $234.1 million to $965.0 million for the nine months ended September 30, 2014, from $730.9 million for the nine months ended September 30, 2013, partially offset by a 20 basis point decrease in the average yield on loans to 3.54% from 3.74%, primarily due to lower interest rates on originated and purchased 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 $53.9 million to $144.5 million for the nine months ended September 30, 2014, from $90.6 million for the nine months ended September 30, 2013, partially offset by a 16 basis point decrease in the average yield on securities to 2.18% from 2.34%.

Interest Expense. Interest expense increased $1.3 million to $5.0 million for the nine months ended September 30, 2014, from $3.7 million for the nine months ended September 30, 2013. The increase resulted from a $265.5 million, or 42.8%, increase in the average balance of interest-bearing liabilities partially offset by a 4 basis point decrease in the cost of interest-bearing liabilities to 0.75% from 0.79%.

Interest expense on interest-bearing deposits increased by $1.0 million to $4.1 million for the nine months ended September 30, 2014, from $3.1 million for the nine months ended September 30, 2013. This increase was primarily due to an increase in the interest expense on CD’s and savings accounts of $567,000 and $418,000, respectively. The increase in interest expense on CD’s of $567,000 from $1.4 million to $2.0 million, was driven by an increase in the average balance of $52.4 million, partially offset by a decrease in the average cost of 5 basis points to 1.55% from 1.60%. The increase in interest expense on savings accounts of $418,000 from $1.7 million to $2.1 million, was driven by an increase in the average balance of $94.9 million. We experienced decreases in the average cost of CD’s, while the cost of savings and money market accounts remained flat and we experienced a slight increase in cost on interest bearing checking accounts.

Interest expense on total borrowings increased $292,000 to $852,000 for the nine months ended September 30, 2014, from $560,000 for the nine months ended September 30, 2013. This increase was primarily due to an increase in the average balance of FHLB advances of $105.8 million, or 122.4%, to $192.2 million for the nine months ended September 30, 2014, from $86.4 million for the nine months ended September 30, 2013, partially offset by a decrease in the average cost of FHLB advances of 24 basis points to 0.58% for the nine months ended September 30, 2014, from 0.82% for the nine months ended September 30, 2013.

Provision for Loan Losses. Based on our methodology for establishing the allowance for loan losses and provision for loan losses as discussed in Note 4 to the Consolidated Financial Statements and included in this Form 10-Q, we recorded a provision for loan losses of $988,000 for the nine months ended September 30, 2014, compared to $865,000 for the nine months ended September 30, 2013. The increase in the provision for loan losses was driven by an increase in loan growth during the nine months ended September 30, 2014 as compared to the nine months ended September 30, 2013, partially offset by reductions in specific allowances and lower estimated credit losses resulting from the seasoning of our portfolio and improved loan quality. The allowance for loan losses was $8.3 million, or 0.76% of total loans, at September 30, 2014, compared to $8.0 million, or 0.95% of total loans, at December 31, 2013. The decrease in the allowance for loan losses as a percentage of total loans was primarily driven by a reduction in specific allowances, a shift in our loan portfolio mix to loan types of lesser risk, such as residential real estate loans, and reduced qualitative loss factors.

Noninterest Income. Noninterest income decreased by $433,000 to $2.4 million for the nine months ended September 30, 2014, from $2.8 million for the nine months ended September 30, 2013. This decrease was driven by a decrease in net gains on sales of loans of $640,000 as we benefited less during 2014 from the interest rate environment as compared to the first three quarters of 2013. This was partially offset by an increase in loan servicing fee income of $147,000.

Noninterest Expense. Noninterest expense increased $1.5 million to $19.8 million for the nine months ended September 30, 2014, from $18.3 million for the nine months ended September 30, 2013. This increase was driven by an increase in salaries and employee benefits of $1.3 million.

Income Tax Expense. We recorded income tax expense of $1.7 million for the nine months ended September 30, 2014, compared to income tax expense of $755,000 for the nine months ended September 30, 2013. The effective tax rate for the nine months ended September 30, 2014 was 36.8% compared to 36.5% for the nine months ended September 30, 2013. The increase in the effective tax rate was primarily the result of the reduced impact of the tax exempt income from bank-owned life insurance as a portion of total income, partially offset by a change within an executive SERP agreement causing a one-time reduction to a deferred tax liability and the corresponding tax provision.


	For the Nine Months Ended September 30, (unaudited)
	2014							2013
	(Dollars in thousands)
	Average Outstanding Balance		Interest		Yield/ Rate⁽¹⁾			Average Outstanding Balance		Interest		Yield/ Rate⁽¹⁾
Interest-earning assets:
Total loans	$	964,993	$	25,532		3.54	%	$	730,883	$	20,426		3.74	%
Securities		144,523		2,359		2.18	%		90,623		1,589		2.34	%
Other		40,233		64		0.21	%		39,375		61		0.21	%

Total interest-earning assets ⁽⁵⁾		1,149,749	$	27,955		3.25	%		860,881	$	22,076		3.43	%
Non-interest-earning assets		31,955							26,251

Total assets	$	1,181,704						$	887,132


Interest-bearing liabilities:
Savings accounts	$	464,099	$	2,076		0.60	%	$	369,187	$	1,658		0.60	%
Checking accounts		45,457		62		0.18	%		31,711		28		0.12	%
Money market accounts		10,121		6		0.08	%		10,360		6		0.08	%
Certificates of deposit		170,878		1,987		1.55	%		118,453		1,420		1.60	%

Total interest-bearing deposits		690,555		4,131		0.80	%		529,711		3,112		0.79	%
Federal Home Loan Bank advances		192,215		827		0.58	%		86,448		531		0.82	%
Securities sold under agreements to repurchase		2,108		2		0.15	%		3,125		4		0.15	%
Other borrowed funds		1,097		23		2.77	%		1,141		25		2.92	%

Total interest-bearing liabilities		885,975	$	4,983		0.75	%		620,425	$	3,672		0.79	%
Non-interest-bearing liabilities		164,444							136,807

Total liabilities		1,050,419							757,232
Stockholders’ Equity		131,285							129,900

Total liabilities and stockholders’ equity	$	1,181,704						$	887,132


Net interest income			$	22,972						$	18,404

Net interest rate spread ⁽²⁾						2.50	%						2.64	%
Net interest-earning assets ⁽³⁾	$	263,774						$	240,456

Net interest margin ⁽⁴⁾						2.67	%						2.86	%
Average interest-earning assets to interest-bearing liabilities						129.77	%						138.74	%

(1)	Yields and rates for the nine-month periods ended September 30, 2014 and 2013 are annualized.

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

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

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

(5)	FHLB stock dividends of $100,000 and $21,000 for the nine months ended September 30, 2014 and 2013, respectively, are not included.


	Nine Months Ended September 30, 2014 vs. 2013 (unaudited)
	Change Due to Volume			Change Due to Rate			Total Change
	(In thousands)
Income on interest-earning assets:
Loans	$	6,243		$	(1,137	)	$	5,106
Securities		887			(117	)		770
Other		1			2			3


Total interest-earning assets (1)	$	7,131		$	(1,252	)	$	5,879


Expense on interest-bearing liabilities:
Savings accounts	$	426		$	(8	)	$	418
Checking accounts		15			19			34
Money market accounts		—			—			—
Certificates of deposit		611			(44	)		567


Total interest-bearing deposits		1,052			(33	)		1,019

Federal Home Loan Bank advances		493			(197	)		296
Securities sold under agreements to repurchase		(2	)		—			(2	)
Other borrowed funds		(1	)		(1	)		(2	)


Total interest-bearing liabilities		1,542			(231	)		1,311


Change in net interest income	$	5,589		$	(1,021	)	$	4,568

(1)	Does not include dividends on FHLB stock of $100,000 and $21,000 for the nine months ended September 30, 2014 and 2013, 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.

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, brokered 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, 2014 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 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 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		-18.5	%
	+200		-6.9	%
	- 100		-0.3	%

(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, 2014, 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 a 6.9% 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 0.3% 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, 2014 estimated that, in the event of an instantaneous 200 basis point increase in interest rates, the Bank would experience a 17.0% 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 6.2% 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 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, 2014 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, 2014, cash and cash equivalents totaled $45.5 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, 2014, we had $66.1 million in loan commitments outstanding. In addition to commitments to originate and purchase loans, we had $177.8 million in unused lines of credit to borrowers and $8.4 million in unadvanced funds on construction loans.

Certificates of deposit due within one year of September 30, 2014 totaled $61.1 million, or 6.6%, 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, 2015. 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, 2014.

Our primary investing activity is originating loans. During the nine months ended September 30, 2014 and the year ended December 31, 2013, we originated $488.5 million and $507.1 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 $167.8 million and $156.9 million for the nine months ended September 30, 2014 and for the year ended December 31, 2013, respectively. At September 30, 2014 and December 31, 2013, the levels of brokered deposits were $81.6 million and $34.6 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, 2014, we had $251.1 million of Federal Home Loan Bank advances. Based on available collateral at that date, we had the ability to borrow up to an additional $120.7 million from the Federal Home Loan Bank of Boston.

We are obligated to make future payments according to various contracts. As of September 30, 2014, our contractual obligations have not changed materially from those disclosed in our 2013 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 14, 2014.

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, 2014, 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 and additions to capital from income generated are used for general corporate purposes, including the funding of loans. Our financial condition and results of operations will be enhanced by the continued investment of 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.

At the time of conversion from a mutual holding company to a stock holding company, BSB Bancorp, Inc. substantially restricted retained earnings by establishing a liquidation account and the Bank established a parallel liquidation account. The liquidation account will be maintained for the benefit of eligible holders who continue to maintain their accounts at the Bank after conversion. The liquidation account is reduced annually to the extent that eligible account holders have reduced their qualifying deposits. Subsequent increases will not restore an eligible account holder’s interest in the liquidation account. In the event of a complete liquidation of the Bank, and only in such event, each account holder will be entitled to receive a distribution from the liquidation account in an amount proportionate to the adjusted qualifying account balances then held. The Bank may not pay dividends if those dividends would reduce equity capital below the required liquidation account amount.

The Company’s total stockholders’ equity increased to $135.1 million at September 30, 2014 from $130.4 million at December 31, 2013. This increase is primarily the result of earnings of $2.9 million and a $1.4 million increase in additional paid-in capital related to stock based compensation.

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.

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, 2014, 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 conditions 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.

There were no changes in the Company’s internal control over financial reporting during the three months ended September 30, 2014 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 2013 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 14, 2014. As of September 30, 2014, the risk factors of the Company have not changed materially from those disclosed in the 2013 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 2014.


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		—	$	—		—		500,000
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 June 22, 2013, the Company’s Board of Directors authorized 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.

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Mine Safety Disclosures

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, 2014 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.

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 7, 2014	By:	/s/ Robert M. Mahoney
		Robert M. Mahoney
		President, Chief Executive Officer and Director (Principal Executive Officer)

Date: November 7, 2014	By:	/s/ John A. Citrano
		John A. Citrano
		Executive Vice President and Chief Financial Officer (Principal Financial Officer)

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if smaller reporting company)

Smaller reporting company