BSB Bancorp, Inc. - FORM 10-Q

BSB Bancorp, Inc. - FORM 10-Q - November 6, 2015

Attached files

Attached files

BSB Bancorp, Inc. Reports

file	filename
EX-31.2 - EX-31.2 - BSB Bancorp, Inc.	d94838dex312.htm
EX-31.1 - EX-31.1 - BSB Bancorp, Inc.	d94838dex311.htm
EX-32.0 - EX-32.0 - BSB Bancorp, Inc.	d94838dex320.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, 2015

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 9,087,988 shares of common stock, par value $0.01 per share, outstanding as of October 30, 2015.

BSB BANCORP, INC. AND SUBSIDIARIES

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements
	- Consolidated Balance Sheets as of September 30, 2015 (unaudited) and December 31, 2014		3

	- Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)		4

	- Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2015 and 2014 (unaudited)		5

	- Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2015 and 2014 (unaudited)		6

	- Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2015 and 2014 (unaudited)		7

	- Notes to Unaudited Consolidated Financial Statements		9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		42

Item 4.	Controls and Procedures		42

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		43

Item 1A.	Risk Factors		43

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		43

Item 3.	Defaults Upon Senior Securities		43

Item 4.	Mine Safety Disclosures		43

Item 5.	Other Information		44

Item 6.	Exhibits		44

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)


	September 30, 2015			December 31, 2014
	(unaudited)
ASSETS
Cash and due from banks	$	2,196		$	2,275
Interest-bearing deposits in other banks		40,404			49,492

Cash and cash equivalents		42,600			51,767
Interest-bearing time deposits with other banks		131			131
Investments in available-for-sale securities		22,025			22,079
Investments in held-to-maturity securities (fair value of $136,408 as of September 30, 2015 (unaudited) and $119,447 as of December 31, 2014)		135,328			118,528
Federal Home Loan Bank stock, at cost		16,774			13,712
Loans, net of allowance for loan losses of $10,390 as of September 30, 2015 (unaudited) and $8,881 as of December 31, 2014		1,427,660			1,179,399
Premises and equipment, net		2,714			3,066
Accrued interest receivable		3,608			2,977
Deferred tax asset, net		6,390			5,642
Income taxes receivable		1			321
Bank-owned life insurance		29,529			23,888
Other real estate owned		1,513			—
Other assets		4,132			4,040

Total assets	$	1,692,405		$	1,425,550


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	176,311		$	179,205
Interest-bearing		1,032,260			805,357

Total deposits		1,208,571			984,562
Federal Home Loan Bank advances		319,600			285,100
Securities sold under agreements to repurchase		2,386			1,392
Other borrowed funds		1,032			1,067
Accrued interest payable		1,025			961
Deferred compensation liability		6,175			5,751
Other liabilities		10,045			9,707

Total liabilities		1,548,834			1,288,540


Stockholders’ Equity:
Common stock; $0.01 par value, 100,000,000 shares authorized; 9,086,488 and 9,067,792 shares issued and outstanding at September 30, 2015 and December 31, 2014, respectively		91			91
Additional paid-in capital		89,030			87,428
Retained earnings		58,448			53,603
Accumulated other comprehensive loss		(22	)		(22	)
Unearned compensation - ESOP		(3,976	)		(4,090	)

Total stockholders’ equity		143,571			137,010

Total liabilities and stockholders’ equity	$	1,692,405		$	1,425,550

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

BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)


	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015			2014
	(unaudited)						(unaudited)
Interest and dividend income:
Interest and fees on loans	$	11,459		$	9,235		$	32,368		$	25,529
Interest on taxable debt securities		764			749			2,242			2,359
Dividends		123			38			245			100
Other interest income		15			14			59			64

Total interest and dividend income		12,361			10,036			34,914			28,052

Interest expense:
Interest on deposits		1,989			1,575			5,686			4,131
Interest on Federal Home Loan Bank advances		567			313			1,624			827
Interest on securities sold under agreements to repurchase		1			1			2			2
Interest on other borrowed funds		7			7			21			23

Total interest expense		2,564			1,896			7,333			4,983

Net interest and dividend income		9,797			8,140			27,581			23,069
Provision for loan losses		727			292			1,430			988

Net interest and dividend income after provision for loan losses		9,070			7,848			26,151			22,081

Noninterest income:
Customer service fees		253			221			668			664
Income from bank-owned life insurance		247			152			636			352
Net gain on sales of loans		47			104			379			328
Loan servicing fee income		159			217			462			636
Net (loss) gain on investments held in rabbi trust		(74	)		(31	)		(44	)		31
Other income		61			129			295			363

Total noninterest income		693			792			2,396			2,374

Noninterest expense:
Salaries and employee benefits		4,357			4,313			13,078			12,462
Director compensation		151			173			643			706
Occupancy expense		262			259			819			804
Equipment expense		138			144			422			455
Deposit insurance		236			191			687			554
Data processing		789			751			2,316			2,228
Professional fees		155			184			544			583
Marketing		190			228			708			742
Other expense		451			413			1,433			1,297

Total noninterest expense		6,729			6,656			20,650			19,831

Income before income tax expense		3,034			1,984			7,897			4,624
Income tax expense		1,166			782			3,052			1,700

Net income	$	1,868		$	1,202		$	4,845		$	2,924

Earnings per share
Basic	$	0.22		$	0.14		$	0.56		$	0.34
Diluted	$	0.21		$	0.14		$	0.55		$	0.34

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

BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)


	Three months ended September 30,						Nine months ended September 30,
	2015			2014			2015		2014
	(unaudited)						(unaudited)

Net income	$	1,868		$	1,202		$	4,845	$	2,924
Other comprehensive income, before tax:
Change in fair value of securities available for sale		18			56			—		379

Other comprehensive income, before tax		18			56			—		379

Income tax expense related to items of other comprehensive income		(7	)		(20	)		—		(149	)

Other comprehensive income, net of tax		11			36			—		230

Comprehensive income	$	1,879		$	1,238		$	4,845	$	3,154

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

BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

NINE MONTHS ENDED SEPTEMBER 30, 2015 AND 2014

(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, 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


Balance at December 31, 2014		9,067,792	$	91	$	87,428	$	53,603	$	(22	)	$	(4,090	)	$	137,010
Net income		—		—		—		4,845		—			—			4,845
Other comprehensive income		—		—		—		—		—			—			—
Release of ESOP stock		—		—		121		—		—			114			235
Stock based compensation-restricted stock awards		—		—		648		—		—			—			648
Stock based compensation-stock options		—		—		589		—		—			—			589
Tax benefit from stock based compensation		—		—		54		—		—			—			54
Stock option exercises		18,696		—		190		—		—			—			190

Balance at September 30, 2015		9,086,488	$	91	$	89,030	$	58,448	$	(22	)	$	(3,976	)	$	143,571

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

BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	Nine months ended September 30,
	2015			2014
Cash flows from operating activities:
Net income	$	4,845		$	2,924
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities, net		539			462
Gain on sales of loans, net		(379	)		(328	)
Loans originated for sale		(11,733	)		(14,922	)
Proceeds from sales of loans		22,228			24,713
Provision for loan losses		1,430			988
Change in net unamortized mortgage premiums		(1,298	)		(855	)
Change in net deferred loan costs		213			(1,083	)
ESOP expense		235			195
Stock based compensation expense		1,237			1,327
Excess tax benefit from stock based compensation		(54	)		(13	)
Depreciation and amortization expense		564			575
Write off of premises and equipment		6			3
Deferred income tax benefit		(694	)		(453	)
Increase in bank-owned life insurance		(636	)		(352	)
Net change in:
Accrued interest receivable		(631	)		(574	)
Other assets		(92	)		(115	)
Income taxes receivable		320			(151	)
Income taxes payable		—			(178	)
Accrued interest payable		64			239
Deferred compensation liability		424			360
Other liabilities		(279	)		(720	)

Net cash provided by operating activities		16,309			12,042

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	)
Proceeds from maturities, payments, and calls of held-to-maturity securities		15,659			15,904
Purchases of held-to-maturity securities		(32,944	)		(18,218	)
Redemption of Federal Home Loan Bank stock		—			405
Purchases of Federal Home Loan Bank stock		(3,062	)		(5,805	)
Recoveries of loans previously charged off		252			20
Loan originations and principal collections, net		(48,339	)		(139,389	)
Purchases of loans		(212,148	)		(123,803	)
Capital expenditures		(218	)		(410	)
Premiums paid on bank-owned life insurance		(5,005	)		(10,005	)

Net cash used in investing activities		(285,805	)		(281,313	)

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

BSB BANCORP, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

(Continued)


	Nine months ended September 30,
	2015			2014
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts		192,488			113,724
Net increase in time deposits		31,521			54,106
Net proceeds from long-term Federal Home Loan Bank borrowings		27,500			9,000
Net change in short-term advances		7,000			100,000
Net increase (decrease) in securities sold under agreement to repurchase		994			(669	)
Repayment of principal on other borrowed funds		(35	)		(35	)
Net increase in mortgagors’ escrow accounts		617			560
Net proceeds from exercise of stock options		190			22
Excess tax benefit from stock based compensation		54			13

Net cash provided by financing activities		260,329			276,721


Net (decrease) increase in cash and cash equivalents		(9,167	)		7,450
Cash and cash equivalents at beginning of period		51,767			38,035

Cash and cash equivalents at end of period	$	42,600		$	45,485


Supplemental disclosures:
Interest paid	$	7,269		$	4,744
Income taxes paid		3,426			2,482
Transfer of loans held for investment to loans held for sale		10,116			9,564
Transfer of loans to other real estate owned		1,513			—

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

BSB BANCORP, INC. AND SUBSIDIARIES

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, 2015 and December 31, 2014 and the results of operations and cash flows for the interim periods ended September 30, 2015 and 2014. 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 unaudited 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, 2014.

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

NOTE 2 – RECENT ACCOUNTING STANDARDS UPDATES

In May 2014, the Financial Accounting Standards Board (“FASB”) issued amendments to Accounting Standards Codification (“ASC”) section 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. In August 2015, the FASB issued ASU 2015-14, “Revenue from Contracts with Customers (Topic 606).” The amendments in ASU defer the effective date of ASU 2014-09 for all entities by one year. The amendments in this update are effective for interim and annual reporting periods beginning after December 15, 2017. 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 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 ASU 2014-15, “Presentation of Financial Statements – Going Concern (Subtopic 205-40).” The amendments in this ASU provide guidance about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments require management to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that are currently in U.S. auditing standards. Specifically, the amendments (1) provide a definition of the term substantial doubt, (2) require an evaluation every reporting period including interim periods, (3) provide principles for considering the mitigating effect of management’s plans, (4) require certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans, (5) require an

express statement and other disclosures when substantial doubt is not alleviated, and (6) require an assessment for a period of one year after the date that the financial statements are issued (or available to be issued). The amendments in this ASU are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In January 2015, the FASB issued ASU 2015-01, “Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” The amendments in this ASU eliminate the concept of extraordinary items. Eliminating the concept of extraordinary items will save time and reduce costs for preparers because they will not have to assess whether a particular event or transaction event is extraordinary (even if they ultimately would conclude it is not). This also alleviates uncertainty for preparers, auditors, and regulators because auditors and regulators no longer will need to evaluate whether a preparer treated an unusual and/or infrequent item appropriately. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include items that are both unusual in nature and infrequently occurring. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The Company anticipates that the adoption of this ASU will not have a material impact on its consolidated financial statements.

In February 2015, the FASB issued ASU 2015-02, “Consolidation (Topic 810): Amendments to the Consolidation Analysis.” The amendments in this ASU affect reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (1) Modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities (“VIEs”) or voting interest entities; (2) Eliminate the presumption that a general partner should consolidate a limited partnership; (3) Affect the consolidation analysis of reporting entities that are involved with VIEs, particularly those that have fee arrangements and related party relationships; and (4) Provide a scope exception from consolidation guidance for reporting entities with interests in legal entities that are required to comply with or operate in accordance with requirements that are similar to those in Rule 2a-7 of the Investment Company Act of 1940 for registered money market funds. ASU 2015-02 is effective for interim and annual reporting 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 May 2015, the FASB issued ASU 2015-07, “Fair Value Measurement (Topic 820) – Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent).” The objective of this update is to address the diversity in practice related to how certain investments measured at net asset value with redemption dates in the future are categorized within the fair value hierarchy. The amendments in this update remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendments also remove the requirement to make certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical expedient. Rather, those disclosures are limited to investments for which the entity has elected to measure the fair value using that practical expedient. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted. 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, 2015									December 31, 2014
	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	$	22,145	$	77	$	(197	)	$	22,025	$	22,199	$	86	$	(206	)	$	22,079

	$	22,145	$	77	$	(197	)	$	22,025	$	22,199	$	86	$	(206	)	$	22,079


Held-to-maturity securities:
U.S. government sponsored mortgage-backed securities	$	117,739	$	1,101	$	(154	)	$	118,686	$	100,977	$	1,019	$	(227	)	$	101,769
Corporate debt securities		17,589		163		(30	)		17,722		17,551		164		(37	)		17,678

	$	135,328	$	1,264	$	(184	)	$	136,408	$	118,528	$	1,183	$	(264	)	$	119,447

The amortized cost basis and estimated fair value of debt securities by contractual maturity at September 30, 2015 is as follows (in thousands and unaudited). 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, 2015
	Available-for-Sale				Held-to-Maturity
	Amortized Cost Basis		Fair Value		Amortized Cost Basis		Fair Value
	(unaudited)				(unaudited)

Due within one year	$	—	$	—	$	15	$	16
Due after one year through five years		12,794		12,856		7,236		7,293
Due after five years through ten years		9,351		9,169		56,775		57,177
Due after ten years		—		—		71,302		71,922

	$	22,145	$	22,025	$	135,328	$	136,408

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, 2015 (unaudited) and September 30, 2014 (unaudited), there were no sales of available-for-sale securities.

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 is as follows (in thousands):


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

September 30, 2015 (unaudited):
Available-for-sale
Corporate debt securities	$	4,822	$	(1	)	$	4,154	$	(196	)
Held-to-maturity
Corporate debt securities		4,722		(30	)		—		—
U.S. government sponsored mortgage-backed securities		15,271		(71	)		5,824		(83	)

Total temporarily impaired securities	$	24,815	$	(102	)	$	9,978	$	(279	)


December 31, 2014:
Available-for-sale
Corporate debt securities	$	—	$	—		$	4,185	$	(206	)
Held-to-maturity
Corporate debt securities		4,691		(37	)		—		—
U.S. government sponsored mortgage-backed securities		10,974		(34	)		15,637		(193	)

Total temporarily impaired securities	$	15,665	$	(71	)	$	19,822	$	(399	)

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, 2015 (unaudited), 19 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, 2015 (unaudited) quarterly review of securities in the investment portfolio, management has determined that unrealized losses related to 19 debt securities with aggregate depreciation of 1.08% 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, 2015.

At December 31, 2014, twenty one debt securities had unrealized losses with aggregate depreciation of 1.31% 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, 2015 (unaudited) and December 31, 2014 was $2.35 million and $2.34 million, respectively. For the three and nine month periods ending September 30, 2015, the net loss on Rabbi Trust investments still held at the reporting date was $74,000 and $31,000, respectively. For the three and nine months periods ending September 30, 2014, the net loss and net gain on Rabbi Trust investments still held at the reporting date was $(44,000) and $31,000, 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.

Payments received on impaired loans are applied to reduce the recorded investment in the loan 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 payments received on impaired loans are 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 lines of credit, 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 nine months ended September 30, 2015 or during fiscal year 2014.

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 loans and home equity lines of credit – The Company generally does not originate or purchase loans with a loan-to-value ratio greater than 80 percent and generally 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 were 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. Collections are sensitive to changes in borrower financial circumstances, and the collateral can depreciate or be damaged in the event of repossession. Repayment is primarily dependent on the credit worthiness and the cash flow of the individual borrower and secondarily, liquidation of the collateral.

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, 2015 (unaudited) and December 31, 2014, the Company had unallocated reserves of $200,000 and $171,000, respectively.

Loans consisted of the following (dollars in thousands):


	September 30, 2015						December 31, 2014
	Amount			Percent			Amount			Percent
	(unaudited)
Mortgage loans:
Residential one-to-four family	$	635,393			44.45	%	$	450,572			38.16	%
Commercial real estate loans (1)		425,314			29.75			395,178			33.47
Home equity		151,168			10.58			131,628			11.15
Construction loans		63,133			4.42			31,389			2.66

Total mortgage loans		1,275,008			89.20			1,008,767			85.44


Commercial loans		37,440			2.62			39,161			3.32
Consumer loans:
Indirect auto loans		116,439			8.15			131,961			11.17
Other consumer loans		461			0.03			774			0.07

		154,340			10.80			171,896			14.56


Total loans		1,429,348			100.00	%		1,180,663			100.00	%


Net deferred loan costs		4,855						5,068
Net unamortized mortgage premiums		3,847						2,549
Allowance for loan losses		(10,390	)					(8,881	)


Total loans, net	$	1,427,660					$	1,179,399

(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, 2015 and 2014 (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, 2015 (unaudited) and December 31, 2014. 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, 2015
	Beginning balance		Provision (benefit)			Charge-offs			Recoveries		Ending balance

Residential one-to-four family	$	2,740	$	627		$	(64	)	$	—	$	3,303
Commercial real estate		4,122		14			—			—		4,136
Construction		585		248			—			—		833
Commercial		355		44			—			24		423
Home equity		827		(196	)		—			199		830
Indirect auto		713		(27	)		(39	)		5		652
Other consumer		12		—			(3	)		4		13
Unallocated		183		17			—			—		200

Total	$	9,537	$	727		$	(106	)	$	232	$	10,390


	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


	Nine Months Ended September 30, 2015
	Beginning balance		Provision (benefit)			Charge-offs			Recoveries		Ending balance

Residential one-to-four family	$	2,364	$	1,003		$	(64	)	$	—	$	3,303
Commercial real estate		4,043		93			—			—		4,136
Construction		228		605			—			—		833
Commercial		458		(59	)		—			24		423
Home equity		828		(197	)		—			199		830
Indirect auto		778		(52	)		(98	)		24		652
Other consumer		11		8			(11	)		5		13
Unallocated		171		29			—			—		200

Total	$	8,881	$	1,430		$	(173	)	$	252	$	10,390


	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


	September 30, 2015
	Individually evaluated for impairment				Collectively evaluated for impairment				Total
	Loan balance		Allowance		Loan balance		Allowance		Loan balance		Allowance
Residential one-to-four family	$	4,303	$	211	$	631,090	$	3,092	$	635,393	$	3,303
Commercial real estate		3,726		5		421,588		4,131		425,314		4,136
Construction		—		—		63,133		833		63,133		833
Commercial		—		—		37,440		423		37,440		423
Home equity		291		—		150,877		830		151,168		830
Indirect auto		15		—		116,424		652		116,439		652
Other consumer		—		—		461		13		461		13
Unallocated		—		—		—		200		—		200

Total	$	8,335	$	216	$	1,421,013	$	10,174	$	1,429,348	$	10,390


	December 31, 2014
	Individually evaluated for impairment				Collectively evaluated for impairment				Total
	Loan balance		Allowance		Loan balance		Allowance		Loan balance		Allowance
Residential one-to-four family	$	6,256	$	188	$	444,316	$	2,176	$	450,572	$	2,364
Commercial real estate		3,882		5		391,296		4,038		395,178		4,043
Construction		—		—		31,389		228		31,389		228
Commercial		—		—		39,161		458		39,161		458
Home equity		296		—		131,332		828		131,628		828
Indirect auto		12		—		131,949		778		131,961		778
Other consumer		—		—		774		11		774		11
Unallocated		—		—		—		171		—		171

Total	$	10,446	$	193	$	1,170,217	$	8,688	$	1,180,663	$	8,881

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of September 30, 2015 (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	$	1,399	$	1,412	$	211
Commercial real estate		3,017		3,017		5

Totals	$	4,416	$	4,429	$	216


	Impaired loans with no related allowance for credit losses
	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Residential one-to-four family	$	2,904	$	2,941	$	—
Commercial real estate		709		709		—
Home equity		291		297		—
Indirect auto		15		15		—

Totals	$	3,919	$	3,962	$	—

Information about loans that meet the definition of an impaired loan in ASC 310-10-35 is as follows as of December 31, 2014 (in thousands):


	Impaired loans with a related allowance for credit losses
	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Residential one-to-four family	$	1,186	$	1,186	$	188
Commercial real estate		3,060		3,060		5

Totals	$	4,246	$	4,246	$	193


	Impaired loans with no related allowance for credit losses
	Recorded Investment		Unpaid Principal Balance		Specific Allowance
Residential one-to-four family	$	5,070	$	5,229	$	—
Commercial real estate		822		822		—
Home equity		296		298		—
Indirect auto		12		12		—

Totals	$	6,200	$	6,361	$	—

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, 2015				Three months ended September 30, 2014
With an allowance recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Residential one-to-four family	$	1,248	$	8	$	1,344	$	3
Commercial real estate		3,021		31		3,078		32

Totals	$	4,269	$	39	$	4,422	$	35


	Three months ended September 30, 2015				Three months ended September 30, 2014
Without an allowance recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Residential one-to-four family	$	4,206	$	24	$	3,532	$	21
Commercial real estate		727		8		862		9
Home equity		291		2		431		2
Indirect auto		12		—		—		—

Totals	$	5,236	$	34	$	4,825	$	32


	Nine months ended September 30, 2015				Nine months ended September 30, 2014
With an allowance recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Residential one-to-four family	$	1,202	$	25	$	1,882	$	110
Commercial real estate		3,036		93		3,092		84

Totals	$	4,238	$	118	$	4,974	$	194


	Nine months ended September 30, 2015				Nine months ended September 30, 2014
Without an allowance recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
Residential one-to-four family	$	4,764	$	74	$	3,265	$	70
Commercial real estate		767		23		906		26
Home equity		293		6		387		7
Indirect auto		8		—		—		—

Totals	$	5,832	$	103	$	4,558	$	103

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


	September 30, 2015 (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	$	440	$	—	$	641	$	1,081	$	—	$	1,144
Home equity		—		—		—		—		—		91
Other loans:
Indirect auto		336		113		15		464		—		15

Total	$	776	$	113	$	656	$	1,545	$	—	$	1,250


	December 31, 2014
	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	$	—	$	230	$	2,432	$	2,662	$	—	$	2,662
Home equity		270		—		96		366		—		96
Other loans:
Indirect auto		463		45		12		520		—		12

Total	$	733	$	275	$	2,540	$	3,548	$	—	$	2,770

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, 2015 (unaudited and in thousands) and December 31, 2014 (in thousands). There were no loans rated as 6 (“doubtful”) or 7 (“loss”) at the dates indicated.


	September 30, 2015
	Loans rated 1-3		Loans rated 4		Loans rated 5		Loans not rated (A)		Total

Residential one-to-four family	$	—	$	361	$	1,870	$	633,162	$	635,393
Commercial real estate		419,831		758		4,725		—		425,314
Construction		63,133		—		—		—		63,133
Commercial		37,440		—		—		—		37,440
Home equity		—		—		890		150,278		151,168
Indirect auto		—		—		—		116,439		116,439
Other consumer		—		—		—		461		461

Total	$	520,404	$	1,119	$	7,485	$	900,340	$	1,429,348


	December 31, 2014
	Loans rated 1-3		Loans rated 4		Loans rated 5		Loans not rated (A)		Total

Residential one-to-four family	$	—	$	1,134	$	3,400	$	446,038	$	450,572
Commercial real estate		386,513		—		8,665		—		395,178
Construction		31,389		—		—		—		31,389
Commercial		39,159		2		—		—		39,161
Home equity		—		—		895		130,733		131,628
Indirect auto		—		—		—		131,961		131,961
Consumer		—		—		—		774		774

Total	$	457,061	$	1,136	$	12,960	$	709,506	$	1,180,663

(A)	Residential real estate and home equity 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, 2015, there was one loan modified and determined to be a TDR. 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. At September 30, 2015, the Company had $7.59 million of troubled debt restructurings related to ten loans.

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


	September 30, 2015		December 31, 2014
	(unaudited)
TDRs on Accrual Status	$	7,085	$	7,675
TDRs on Nonaccrual Status		503		1,551

Total TDRs	$	7,588	$	9,226


Amount of specific allocation included in the allowance for loan losses associated with TDRs	$	174	$	174

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, 2015						Three months ended September 30, 2014
	# 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	$	463	$	507		—	$	—	$	—

Total		1	$	463	$	507		—	$	—	$	—


	Nine months ended September 30, 2015						Nine months ended September 30, 2014
	# 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	$	463	$	507		1	$	1,700	$	1,700
Home equity		—		—		—		1		200		200
Commercial real estate		—		—		—		1		882		882

Total		1	$	463	$	507		3	$	2,782	$	2,782

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, 2015		Three months ended September 30, 2014
	(unaudited)		(unaudited)
Interest only period		507		—

Total	$	507	$	—


	Nine months ended September 30, 2015		Nine months ended September 30, 2014
	(unaudited)		(unaudited)
Extended Maturity	$	—	$	882
Interest only period		507		1,900

Total	$	507	$	2,782

The Company considers a TDR loan to have defaulted when it reaches 90 days past due. There were no TDRs that have been modified during the twelve months ending on September 30, 2015 which have subsequently defaulted during the three and nine month periods ending on September 30, 2015. 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.

Foreclosure Proceedings

Consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure totaled $641,000 as of September 30, 2015. The carrying amount of foreclosed residential real estate property totaled $1.51 million as of September 30, 2015 and is recorded in other real estate owned in the consolidated balance sheets. There was no other real estate owned as of December 31, 2014.

NOTE 5 – TRANSFERS AND SERVICING

Certain residential mortgage loans are periodically sold by the Company to the secondary market. Generally, these loans are sold without recourse or other credit enhancements. The Company sells loans and both releases and retains the servicing rights. For loans sold with the 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 or other credit enhancements, and the Company generally provides servicing for these loans.

At September 30, 2015 (unaudited) and December 31, 2014, residential loans previously sold and serviced by the Company were $66.57 million and $69.49 million, respectively. At September 30, 2015 (unaudited) and December 31, 2014, indirect auto loans previously sold and serviced by the Company were $66.65 million and $94.68 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, 2015 (unaudited) and December 31, 2014, the principal balance of these loans sold with recourse amounted to $1.03 million and $1.07 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 through a valuation allowance 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,
	2015			2014			2015			2014
	(unaudited)						(unaudited)
Balance at beginning of period	$	475		$	402		$	476		$	411
Capitalization		16			56			93			85
Amortization		(24	)		(20	)		(71	)		(56	)
Valuation allowance adjustment		13			15			(18	)		13

Balance at end of period	$	480		$	453		$	480		$	453

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

The securities sold under agreements to repurchase as of September 30, 2015 (unaudited) and December 31, 2014 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, 2015 and December 31, 2014 was $2.39 million and $1.39 million, respectively.

Other borrowed funds consist of the recourse obligation recorded in connection with the loans sold with recourse discussed in Note 5. The balance of the recourse obligation at September 30, 2015 (unaudited) and December 31, 2014 was $1.03 million and $1.07 million, respectively.

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, 2015 (unaudited) and December 31, 2014 relating to these plans was $1.95 million and $1.77 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, 2015 (unaudited) and December 31, 2014 relating to this plan was $647,000 and $648,000, 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, 2015 (unaudited) and December 31, 2014, there were four participants in the Plan. Participants are fully vested after the completion of between five and ten years of service. The plan is unfunded. The estimated liability at September 30, 2015 (unaudited) and December 31, 2014 relating to this plan was $1.21 million and $985,000, 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 $487,000 and $464,000 for the three months ended September 30, 2015 and 2014 (unaudited), respectively, and $1.41 million and $1.32 million for the nine months ended September 30, 2015 and 2014 (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, 2015 and 2014 (unaudited) totaled $217,000 and $223,000, respectively, and $646,000 and $579,000 for the nine months ended September 30, 2015 and 2014 (unaudited), respectively.

Deferred Compensation Plan

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. 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. 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 holding deferred compensation for certain directors and employees of the Company. The 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. As of September 30, 2015 (unaudited) and December 31, 2014, the recorded liability relating to the Rabbi Trust was $2.35 million and $2.34 million, respectively.

Capital Appreciation Plan

Effective September 30, 2010, the Company established the Capital Appreciation Plan. The purpose of this plan was to 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 did not recognize any expense in relation to the plan during the three and nine months ended September 30, 2015. The Company recognized $0 and $61,000 in relation to the plan during the three and nine months ended September 30, 2014 (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, 2015). 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 of $79,000 and $67,000 for the three months ended September 30, 2015 and 2014 (unaudited), respectively, and $235,000 and $195,000 for the nine months ended September 30, 2015 and 2014 (unaudited), respectively.

Severance Agreements

The Company has entered into employment agreements and change in control agreements with certain executive officers which would provide the executive officers with severance payments based on salary, and the continuation of other benefits, upon a change in control as defined in the agreements.

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, 2015 (unaudited)	Securities held-to- maturity (at cost)		Loans receivable		Total pledged assets
Repurchase agreements	$	6,040	$	—	$	6,040
FHLB borrowings		50,999		623,520		674,519
Federal Reserve Bank LOC		15,691		—		15,691

Total pledged assets	$	72,730	$	623,520	$	696,250


December 31, 2014	Securities held-to- maturity (at cost)		Loans receivable		Total pledged assets
Repurchase agreements	$	3,830	$	—	$	3,830
FHLB borrowings		51,062		518,375		569,437
Federal Reserve Bank LOC		15,662		—		15,662

Total pledged assets	$	70,554	$	518,375	$	588,929

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,
	2015			2014			2015			2014
Net income	$	1,868		$	1,202		$	4,845		$	2,924
Undistributed earnings attributable to participating securities		(47	)		(40	)		(121	)		(97	)

Net income allocated to common stockholders	$	1,821		$	1,162		$	4,724		$	2,827


Weighted average shares outstanding, basic		8,468,527			8,358,592			8,453,768			8,352,936
Effect of dilutive shares		221,465			98,592			205,419			71,079

Weighted average shares outstanding, assuming dilution		8,689,992			8,457,184			8,659,187			8,424,015


Basic EPS	$	0.22		$	0.14		$	0.56		$	0.34
Effect of dilutive shares		(0.01	)		—			(0.01	)		—

Diluted EPS	$	0.21		$	0.14		$	0.55		$	0.34

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,
	2015		2014		2015		2014
Stock options		23,242		33,760		17,500		5,604

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 June 22, 2013, the Company’s Board of Directors authorized a 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, 2015 and 2014, the Company did not repurchase any shares under the repurchase program.

NOTE 10 – STOCK BASED COMPENSATION

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, 2015		Three months ended September 30, 2014		Nine months ended September 30, 2015		Nine months ended September 30, 2014
Stock options	$	203	$	208	$	589	$	642
Restricted stock awards		224		224		648		685

Total stock based compensation expense	$	427	$	432	$	1,237	$	1,327

Related tax benefits recognized in earnings	$	123	$	123	$	359	$	388

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, 2015				As of December 31, 2014
	(unaudited)
	Amount		Weighted average period		Amount		Weighted average period
Stock options	$	1,651		2.32	$	2,195		3.01
Restricted stock		1,755		2.20		2,313		2.94

Total	$	3,406			$	4,508

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 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, 2015 and December 31, 2014. 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, 2015 (unaudited) and the year ended December 31, 2014.

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 corporate 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 and mutual funds 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 are categorized as Level 1. The exchange-traded funds were valued based on quoted prices from the market and are categorized as Level 1.

The following table summarizes financial assets measured at fair value on a recurring basis as of September 30, 2015 and December 31, 2014, 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, 2015
Securities available-for-sale
Corporate debt securities	$	—	$	22,025	$	—	$	22,025
Trading securities
Rabbi trust investments		2,348		—		—		2,348

Totals	$	2,348	$	22,025	$	—	$	24,373


	Level 1		Level 2		Level 3		Total Fair Value

At December 31, 2014
Securities available-for-sale
Corporate debt securities	$	—	$	22,079	$	—	$	22,079
Trading securities
Rabbi trust investments		2,336		—		—		2,336

Totals	$	2,336	$	22,079	$	—	$	24,415

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 or charge off based upon the fair value of the underlying collateral at September 30, 2015 (unaudited) and December 31, 2014.


	September 30, 2015
	Level 1		Level 2		Level 3

Impaired loans	$	—	$	—	$	599

Totals	$	—	$	—	$	599


	December 31, 2014
	Level 1		Level 2		Level 3

Impaired loans	$	—	$	—	$	1,951

Totals	$	—	$	—	$	1,951

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

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


	September 30, 2015
	Level 1		Level 2		Level 3
			(unaudited)
Mortgage servicing rights	$	—	$	—	$	480
Other real estate owned		—		—		1,513

Totals	$	—	$	—	$	1,993


	December 31, 2014
	Level 1		Level 2		Level 3
Mortgage servicing rights	$	—	$	—	$	476

Totals	$	—	$	—	$	476

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, FHLB stock, accrued interest, bank owned life insurance, securities sold under agreements to repurchase and mortgagors’ escrow accounts. The methodologies for other significant financial assets and financial liabilities are discussed below:

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

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

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

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

Other borrowed funds-This balance represents the balance of loans sold with recourse. Fair values are determined consistent with that of our loans.

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, 2015
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
					(unaudited)
Financial assets:
Cash and cash equivalents	$	42,600	$	42,600	$	42,600	$	—	$	—
Interest-bearing time deposits with other banks		131		132		—		132		—
Held-to-maturity securities		135,328		136,408		—		136,408		—
Federal Home Loan Bank stock		16,774		16,774		—		16,774		—
Loans, net		1,427,660		1,422,433		—		—		1,422,433
Accrued interest receivable		3,608		3,608		3,608		—		—
Bank owned life insurance		29,529		29,529		—		29,529		—

Financial liabilities:
Deposits		1,208,571		1,211,597		950,837		260,760		—
Federal Home Loan Bank advances		319,600		320,862		—		320,862		—
Securities sold under agreements to repurchase		2,386		2,386		—		2,386		—
Other borrowed funds		1,032		1,019		—		1,019		—
Accrued interest payable		1,025		1,025		1,025		—		—
Mortgagors’ escrow accounts		2,344		2,344		—		2,344		—


	December 31, 2014
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	51,767	$	51,767	$	51,767	$	—	$	—
Interest-bearing time deposits with other banks		131		132		—		132		—
Held-to-maturity securities		118,528		119,447		—		119,447		—
Federal Home Loan Bank stock		13,712		13,712		—		13,712		—
Loans, net		1,179,399		1,170,663		—		—		1,170,663
Accrued interest receivable		2,977		2,977		2,977		—		—
Bank owned life insurance		23,888		23,888		—		23,888		—

Financial liabilities:
Deposits		984,562		987,353		758,349		229,004		—
Federal Home Loan Bank advances		285,100		285,266		—		285,266		—
Securities sold under agreements to repurchase		1,392		1,392		—		1,392		—
Other borrowed funds		1,067		1,056		—		1,056		—
Accrued interest payable		961		961		961		—		—
Mortgagors’ escrow accounts		1,726		1,726		—		1,726		—

NOTE 12 – OTHER COMPREHENSIVE INCOME


	Three months ended September 30, 2015 (unaudited and in thousands)							Three months ended September 30, 2014 (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	$	18	$	(7	)	$	11	$	56	$	(20	)	$	36

Total securities available-for-sale		18		(7	)		11		56		(20	)		36

Other comprehensive income	$	18	$	(7	)	$	11	$	56	$	(20	)	$	36


	Nine months ended September 30, 2015 (unaudited and in thousands)						Nine months ended September 30, 2014 (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

Total securities available-for-sale		—		—		—		379		(149	)		230

Other comprehensive income	$	—	$	—	$	—	$	379	$	(149	)	$	230

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


	Net unrealized (loss) gain on securities available for sale			Unrecognized actuarial gain on defined benefit pension plan		Accumulated other comprehensive (loss) income
Beginning balance: January 1, 2015	$	(72	)	$	50	$	(22	)
Other comprehensive income		—			—		—

Ending balance: September 30, 2015	$	(72	)	$	50	$	(22	)


Beginning balance: January 1, 2014	$	(210	)	$	22	$	(188	)
Other comprehensive income		230			—		230

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

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, 2014 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 2014 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 2014 Annual Report on Form 10-K, the 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, 2015 and December 31, 2014

Total Assets. Total assets increased $266.86 million to $1.69 billion at September 30, 2015, from $1.43 billion at December 31, 2014. The increase was primarily the result of a $248.26 million, or 21.0%, increase in net loans, a $16.75 million, or 11.9% increase in investment securities, and a $5.64 million, or 23.6% increase in bank owned life insurance. These increases were partially offset by a $9.17 million, or 17.7%, decrease in cash and cash equivalents.

Loans. Our plan to prudently increase our loan portfolios is working as we experienced solid growth in our residential real estate loans, construction loans, commercial real estate loans and home equity lines of credit during the nine months ending September 30, 2015. Net loans increased by $248.26 million, or 21.0%, to $1.43 billion at September 30, 2015 from $1.18 billion at December 31, 2014. The increase in net loans was primarily due to increases of $184.82 million, or 41.0%, in residential one-to-four family loans, $31.74 million, or 101.1%, in construction loans, $30.14 million, or 7.6%, in commercial real estate loans and $19.54 million, or 14.8%, in home equity lines of credit. Partially offsetting these increases was a decrease in indirect auto loans of $15.52 million, or 11.8%, as we have suspended new originations due to current market conditions.

Investment Securities. Total investment securities increased $16.75 million, to $157.35 million at September 30, 2015, from $140.61 million at December 31, 2014. This increase was driven by purchases of mortgage-backed securities classified as held to maturity.

Cash and Cash Equivalents. Cash and cash equivalents decreased by $9.17 million, or 17.7%, to $42.60 million at September 30, 2015, from $51.77 million at December 31, 2014.

Bank-Owned Life Insurance. We invest in bank-owned life insurance to help defray the cost of our benefit plan obligations. Bank-owned life insurance also generally provides noninterest income that is nontaxable. At September 30, 2015, our investment in bank-owned life insurance was $29.53 million, an increase of $5.64 million from $23.89 million at December 31, 2014. This increase was driven by $5 million of additional policies purchased in May 2015.

Deposits. Deposits increased $224.01 million, or 22.8%, to $1.21 billion at September 30, 2015 from $984.56 million at December 31, 2014. The increase in deposits was due to an increase of $147.56 million, or 29.7%, in savings accounts, an increase of $48.52 million, or 66.2% in interest bearing checking accounts and an increase of $31.52 million, or 13.9%, in certificates of deposit, partially offset by a decrease of $2.89 million, or 1.6%, in demand deposits. Core deposits, which we consider to include all deposits other than CDs and brokered CDs, increased by $192.49 million, or 25.4%. Deposit growth has been steady and we are pleased with the ongoing success of our municipal and business banking strategies which were the primary drivers of this growth.

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


	September 30, 2015					December 31, 2014
	Amount		Percent			Amount		Percent
	(unaudited)
Deposit type:
Demand deposits	$	176,311		14.59	%	$	179,205		18.20	%
Interest-bearing checking accounts		121,801		10.08			73,285		7.44
Savings accounts		644,242		53.30			496,686		50.45
Money market deposits		8,483		0.70			9,173		0.93


Total transaction accounts		950,837		78.67			758,349		77.02


Term certificates less than $100,000		162,497		13.45			140,469		14.27
Term certificates $100,000 or more		95,237		7.88			85,744		8.71


Total certificate accounts		257,734		21.33			226,213		22.98


Total deposits	$	1,208,571		100.00	%	$	984,562		100.00	%

Borrowings. At September 30, 2015, 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 secured borrowings. As of September 30, 2015, the principal balance of these loans sold with recourse amounted to $1.03 million. We have not incurred any losses related to the loans sold with recourse.

Total borrowings increased $35.46 million, or 12.3%, to $323.02 million at September 30, 2015, from $287.56 million at December 31, 2014. Advances from the Federal Home Loan Bank of Boston drove this increase as such advances increased $34.50 million to $319.60 million at September 30, 2015, from $285.10 million at December 31, 2014.

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


	September 30, 2015		December 31, 2014
	(unaudited)
Long-term borrowed funds:
Federal Home Loan Bank of Boston long-term advances	$	130,600	$	103,100
Other borrowed funds		1,032		1,067

		131,632		104,167

Short-term borrowed funds:
Federal Home Loan Bank of Boston short-term advances		189,000		182,000
Repurchase agreements		2,386		1,392

		191,386		183,392


Total borrowed funds	$	323,018	$	287,559

Stockholders’ Equity. Total stockholders’ equity increased $6.56 million, or 4.8%, to $143.57 million at September 30, 2015 from $137.01 million as of December 31, 2014. This increase is primarily the result of earnings of $4.85 million and a $1.60 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, 2015			At December 31, 2014
	(unaudited)
Non-accrual loans:
Real estate loans:
Residential one-to-four family	$	1,144		$	2,662
Home equity		91			96
Consumer loans:
Indirect auto loans		15			12

Total non-accrual loans	$	1,250		$	2,770


Total non-performing loans		1,250			2,770


Other real estate owned		1,513			—
Repossessed automobiles		—			48


Total non-performing assets (NPAs)	$	2,763		$	2,818


Troubled debt restructurings:
Troubled debt restructures included in NPAs	$	503		$	1,551
Troubled debt restructures not included in NPAs		7,085			7,675

Total troubled debt restructures	$	7,588		$	9,226


Ratios:
Non-performing loans to total loans		0.09	%		0.23	%
Non-performing assets to total assets		0.16	%		0.20	%

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, 2015 and December 31, 2014, there were no loans on non-accrual that were determined to not be impaired. At September 30, 2015 and December 31, 2014 there were no loans delinquent 90 days or more and still accruing.

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, 2015, we had $7.59 million of troubled debt restructurings related to nine loans as compared to $9.23 million of troubled debt restructurings related to ten loans at December 31, 2014. The decrease in the balance was driven by a transfer to other real estate owned of $1.51 million of residential real estate and a $360,000 payoff of a residential real estate loan. Partially offsetting these decreases was an increase of $463,000 due to a newly modified residential real estate loan.

Comparison of Operating Results for the Three Months Ended September 30, 2015 and 2014

General. Net income for the three months ended September 30, 2015 was $1.87 million, compared to net income of $1.20 million for the three months ended September 30, 2014. The improvement in operating results of $666,000, or 55.4%, for the three months ended September 30, 2015 compared to the three months ended September 30, 2014, resulted from an increase in net interest and dividend income after the provision for loan losses of $1.22 million, partially offset by an increase in noninterest expense of $73,000, an increase in income tax expense of $384,000 and a decrease in noninterest income of $99,000.

Net Interest and Dividend Income. Net interest and dividend income increased $1.66 million, or 20.4% to $9.80 million for the three months ended September 30, 2015, compared to $8.14 million for the three months ended September 30, 2014. The increase in net interest and dividend income was primarily due to an increase in average net interest-earning assets of $8.46 million, or 3.1%, to $280.70 million for the three months ended September 30, 2015, from $272.24 million for the three months ended September 30, 2014. Partially offsetting this was a decrease in the net interest margin of 15 basis points, from 2.62% during the three months ended September 30, 2014 to 2.47% during the three months ended September 30, 2015.

Interest and Dividend Income. Interest and dividend income increased $2.33 million, or 23.2%, to $12.36 million for the three months ended September 30, 2015, from $10.04 million for the three months ended September 30, 2014. The increase in interest and dividend income was primarily due to a $2.22 million increase in interest and fees on loans. The increase in interest and fees on loans resulted from an increase in the average balance of loans of $312.54 million to $1.36 billion for the three months ended September 30, 2015, from $1.05 billion for the three months ended September 30, 2014, partially offset by a 15 basis point decrease in the average yield on loans to 3.33% from 3.48%. The decrease in average yield on loans was primarily due to lower interest rates on originated and purchased loans during the period and prepayments of higher yielding loans.

Interest Expense. Interest expense increased $668,000, or 35.2%, to $2.56 million for the three months ended September 30, 2015, from $1.90 million for the three months ended September 30, 2014. The increase resulted from a $316.76 million, or 33.15%, increase in the average balance of interest-bearing liabilities to $1.27 billion for the three months ended September 30, 2015, from $955.65 million of the three months ended September 30, 2014 as well as a 1 basis point increase in the cost of interest-bearing liabilities to 0.80% during the three months ended September 30, 2015 from 0.79% during the three months ended September 30, 2014.

Interest expense on interest-bearing deposits increased by $414,000 to $1.99 million for the three months ended September 30, 2015, from $1.58 million for the three months ended September 30, 2014. This increase was primarily due to an increase in the interest expense on CDs and savings accounts of $212,000 and $155,000, respectively. The increase in interest expense on CDs of $212,000 from $789,000 to $1.00 million, was driven by an increase in the average balance of $70.53 million, partially offset by a 12 basis point decrease in the cost of CDs to 1.54% from 1.66%. The increase in interest expense on savings accounts of $155,000 from $746,000 to $901,000, was driven by an increase in the average balance of $147.62 million, partially offset by a 4 basis point decrease in the cost of savings accounts to 0.58% from 0.62%.

Interest expense on total borrowings increased $254,000 to $575,000 for the three months ended September 30, 2015, from $321,000 for the three months ended September 30, 2014. This increase was primarily due to an increase in the average balance of FHLB advances of $59.65 million, or 27.4%, to $277.35 million for the three months ended September 30, 2015, from $217.70 million for the three months ended September 30, 2014, and an increase in the average cost of FHLB advances of 24 basis points to 0.81% for the three months ended September 30, 2015, from 0.57% for the three months ended September 30, 2014, as we have increased the balance of our long term advances.

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 included in this Form 10-Q, we recorded a provision for loan losses of $727,000 for the three months ended September 30, 2015, compared to $292,000 for the three months ended September 30, 2014. The increase in the provision for loan losses was primarily due to loan growth. The allowance for loan losses was $10.39 million, or 0.73% of total loans, at September 30, 2015, compared to $8.88 million, or 0.75% of total loans, at December 31, 2014.

Noninterest Income. Noninterest income decreased by $99,000 to $693,000 for the three months ended September 30, 2015, from $792,000 for the three months ended September 30, 2014. This decrease was primarily driven by a decrease in loan servicing fee income and in net gains on sales of loans, partially offset by an increase in income from bank owned life insurance. The decrease in loan servicing fee income was driven by decreases in the balance of auto loans that we service for others. The decrease in net gains on sales of loans was driven by lower sales volumes of both auto loans and 1-4 family residential real estate loans. The increase in income from bank owned life insurance was driven by $10.00 million of additional policies purchased in the third quarter of 2014 and $5.00 million purchased in the second quarter of 2015.

Noninterest Expense. Noninterest expense increased $73,000, or 1.1%, to $6.73 million for the three months ended September 30, 2015, from $6.66 million for the three months ended September 30, 2014. Our efficiency ratio improved to 64.2% during the three months ended September 30, 2015 from 74.5% during the three months ended September 30, 2014 as we continue to grow the balance sheet and manage costs.

Income Tax Expense. We recorded income tax expense of $1.17 million for the three months ended September 30, 2015, compared to income tax expense of $782,000 for the three months ended September 30, 2014. The effective tax rate for the three months ended September 30, 2015 was 38.4% compared to 39.4% for the three months ended September 30, 2014. The decrease in effective tax rate was primarily the result of an increased amount of income from bank owned life insurance as a percentage of pretax income.

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)
	2015							2014
	(Dollars in thousands)
	Average Outstanding Balance		Interest		Yield/Rate⁽¹⁾			Average Outstanding Balance		Interest		Yield/ Rate⁽¹⁾
Interest-earning assets:
Total loans	$	1,364,030	$	11,459		3.33	%	$	1,051,492	$	9,235		3.48	%
Securities		153,478		764		1.97	%		144,189		749		2.06	%
Other		35,603		15		0.17	%		32,204		14		0.17	%

Total interest-earning assets ⁽⁵⁾		1,553,111	$	12,238		3.13	%		1,227,885	$	9,998		3.23	%
Non-interest-earning assets		53,340							37,090

Total assets	$	1,606,451						$	1,264,975


Interest-bearing liabilities:
Savings accounts	$	621,272	$	901		0.58	%	$	473,653	$	746		0.62	%
Checking accounts		103,216		86		0.33	%		63,385		38		0.24	%
Money market accounts		8,525		1		0.05	%		9,782		2		0.08	%
Certificates of deposit		258,655		1,001		1.54	%		188,129		789		1.66	%

Total interest-bearing deposits		991,668		1,989		0.80	%		734,949		1,575		0.85	%
Federal Home Loan Bank advances		277,350		567		0.81	%		217,701		313		0.57	%
Securities sold under agreements to repurchase		2,355		1		0.17	%		1,914		1		0.21	%
Other borrowed funds		1,039		7		2.67	%		1,085		7		2.56	%

Total interest-bearing liabilities		1,272,412	$	2,564		0.80	%		955,649	$	1,896		0.79	%
Non-interest-bearing liabilities		191,157							174,790

Total liabilities		1,463,569							1,130,439
Stockholders’ Equity		142,882							134,536

Total liabilities and stockholders’ equity	$	1,606,451						$	1,264,975


Net interest income			$	9,674						$	8,102

Net interest rate spread ⁽²⁾						2.33	%						2.44	%
Net interest-earning assets ⁽³⁾	$	280,699						$	272,236

Net interest margin ⁽⁴⁾						2.47	%						2.62	%
Average interest-earning assets to interest-bearing liabilities						122.06	%						128.49	%

(1)	Yields and rates for the three-month periods ended September 30, 2015 and 2014 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 income divided by average total interest-earning assets.

(5)	FHLB stock dividends of $123,000 and $38,000 for the three months ended September 30, 2015 and 2014, 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, 2015 vs. 2014 (unaudited)
	Change Due to Volume		Change Due to Rate			Total Change
	(In thousands)
Income on interest-earning assets:
Loans	$	2,641	$	(417	)	$	2,224
Securities		47		(32	)		15
Other		1		—			1


Total interest-earning assets (1)	$	2,689	$	(449	)	$	2,240


Expense on interest-bearing liabilities:
Savings accounts	$	218	$	(63	)	$	155
Checking accounts		30		18			48
Money market accounts		—		(1	)		(1	)
Certificates of deposit		277		(65	)		212


Total interest-bearing deposits		525		(111	)		414

Federal Home Loan Bank advances		100		154			254
Securities sold under agreements to repurchase		—		—			—
Other borrowed funds		—		—			—


Total interest-bearing liabilities		625		43			668


Change in net interest income	$	2,064	$	(492	)	$	1,572

(1)	Does not include dividends on FHLB stock of $123,000 and $38,000 for the three months ended September 30, 2015 and 2014, respectively.

Comparison of Operating Results for the Nine Months Ended September 30, 2015 and 2014

General. Net income for the nine months ended September 30, 2015 was $4.85 million, compared to net income of $2.92 million for the nine months ended September 30, 2014. The improvement in operating results of $1.92 million, or 65.7%, for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, resulted from an increase in net interest and dividend income after the provision for loan losses of $4.07 million, partially offset by an increase in noninterest expense of $819,000 and an increase in income tax expense of $1.35 million.

Net Interest and Dividend Income. Net interest and dividend income increased $4.51 million, or 19.6% to $27.58 million for the nine months ended September 30, 2015, compared to $23.07 million for the nine months ended September 30, 2014. The increase in net interest and dividend income was primarily due to an increase in average net interest-earning assets of $14.15 million, or 5.4%, to $276.93 million for the nine months ended September 30, 2015, from $262.79 million for the nine months ended September 30, 2014. Partially offsetting this was a decrease in the net interest margin of 18 basis points, from 2.67% during the nine months ended September 30, 2014 to 2.49% during the nine months ended September 30, 2015.

Interest and Dividend Income. Interest and dividend income increased $6.86 million, or 24.5%, to $34.91 million for the nine months ended September 30, 2015, from $28.05 million for the nine months ended September 30, 2014. The increase in interest and dividend income was primarily due to a $6.84 million increase in interest and fees on loans. The increase in interest and fees on loans resulted from an increase in the average balance of loans of $317.31 million to $1.28 billion for the nine months ended September 30, 2015, from $964.99 million for the nine months ended September 30, 2014, partially offset by a 17 basis point decrease in the average yield on loans to 3.37% from 3.54%. The decrease in average yield on loans was primarily due to lower interest rates on originated and purchased loans during the period and prepayments of higher yielding loans.

Interest Expense. Interest expense increased $2.35 million, or 47.2%, to $7.33 million for the nine months ended September 30, 2015, from $4.98 million for the nine months ended September 30, 2014. The increase resulted from a $304.08 million, or 34.3%, increase in the average balance of total interest-bearing liabilities to $1.19 billion for the nine months ended September 30, 2015 from $886.96 million for the nine months ended September 30, 2014 as well as a 7 basis point increase in the cost of interest-bearing liabilities to 0.82% during the three months ended September 30, 2015 from 0.75% during the three months ended September 30, 2014.

Interest expense on interest-bearing deposits increased by $1.55 million to $5.69 million for the nine months ended September 30, 2015, from $4.13 million for the nine months ended September 30, 2014. This increase was primarily due to an increase in the interest expense on CDs and savings accounts of $927,000 and $462,000, respectively. The increase in interest expense on CDs of $927,000 from $1.99 million to $2.91 million, was driven by an increase in the average balance of $79.07 million. The increase in interest expense on savings accounts of $462,000 from $2.08 million to $2.54 million, was driven by an increase in the average balance of $102.30 million.

Interest expense on total borrowings increased $795,000 to $1.65 million for the nine months ended September 30, 2015, from $852,000 for the nine months ended September 30, 2014. This increase was primarily due to an increase in the average balance of FHLB advances of $80.38 million, or 41.8%, to $272.59 million for the nine months ended September 30, 2015, from $192.22 million for the nine months ended September 30, 2014, and an increase in the average cost of FHLB advances of 22 basis points to 0.80% for the nine months ended September 30, 2015, from 0.58% for the nine months ended September 30, 2014, as we have lengthened the duration of these advances.

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 included in this Form 10-Q, we recorded a provision for loan losses of $1.43 million for the nine months ended September 30, 2015, compared to $988,000 for the nine months ended September 30, 2014. The increase was primarily due to increases in provision for loan losses for residential one to four family loans and construction loans during the nine months ended September 30, 2015 as compared to the nine months ended September 30, 2014. The allowance for loan losses was $10.39 million, or 0.73% of total loans, at September 30, 2015, compared to $8.88 million, or 0.75% of total loans, at December 31, 2014.

Noninterest Income. Noninterest income increased by $22,000 to $2.40 million for the nine months ended September 30, 2015, from $2.37 million for the nine months ended September 30, 2014. This increase was primarily driven by an increase in income from bank owned life insurance of $284,000, partially offset by a decrease in loan servicing fee income of $174,000.

Noninterest Expense. Noninterest expense increased $819,000, or 4.1%, to $20.65 million for the nine months ended September 30, 2015, from $19.83 million for the nine months ended September 30, 2014. This increase was primarily driven by an increase in salaries and employee benefits of $616,000. Our efficiency ratio improved to 68.9% during the nine months ended September 30, 2015, from 77.9% during the nine months ended September 30, 2014 as we continue to grow the balance sheet and manage costs.

Income Tax Expense. We recorded income tax expense of $3.05 million for the nine months ended September 30, 2015, compared to income tax expense of $1.70 million for the nine months ended September 30, 2014. The effective tax rate for the nine months ended September 30, 2015 was 38.7% compared to 36.8% for the nine months ended September 30, 2014. The increase in effective tax rate was primarily the result of a change within an executive SERP agreement causing a one-time reduction to a deferred tax liability combined with changes to the charitable contribution valuation allowance, both of which occurred during the nine months ended September 30, 2014.


	For the Nine Months Ended September 30,
	(unaudited)
	2015							2014
	(Dollars in thousands)
	Average Outstanding Balance		Interest		Yield/ Rate⁽¹⁾			Average Outstanding Balance		Interest		Yield/ Rate⁽¹⁾
Interest-earning assets:
Total loans	$	1,282,303	$	32,368		3.37	%	$	964,994	$	25,529		3.54	%
Securities		146,243		2,242		2.05	%		144,523		2,359		2.18	%
Other		39,429		59		0.20	%		40,232		64		0.21	%

Total interest-earning assets ⁽⁵⁾		1,467,975	$	34,669		3.16	%		1,149,749	$	27,952		3.25	%
Non-interest-earning assets		49,783							32,670

Total assets	$	1,517,758						$	1,182,419


Interest-bearing liabilities:
Savings accounts	$	567,382	$	2,538		0.60	%	$	465,083	$	2,076		0.60	%
Checking accounts		89,080		228		0.34	%		45,457		62		0.18	%
Money market accounts		8,959		5		0.07	%		10,121		6		0.08	%
Certificates of deposit		249,946		2,914		1.56	%		170,878		1,987		1.55	%

Total interest-bearing deposits		915,367		5,685		0.83	%		691,539		4,131		0.80	%
Federal Home Loan Bank advances		272,591		1,624		0.80	%		192,215		827		0.58	%
Securities sold under agreements to repurchase		2,032		2		0.13	%		2,109		2		0.13	%
Other borrowed funds		1,051		21		2.67	%		1,097		23		2.80	%

Total interest-bearing liabilities		1,191,041	$	7,332		0.82	%		886,960	$	4,983		0.75	%
Non-interest-bearing liabilities		186,022							162,412

Total liabilities		1,377,063							1,049,372
Stockholders’ Equity		140,695							133,047

Total liabilities and stockholders’ equity	$	1,517,758						$	1,182,419


Net interest income			$	27,337						$	22,969

Net interest rate spread ⁽²⁾						2.34	%						2.50	%
Net interest-earning assets ⁽³⁾	$	276,934						$	262,789

Net interest margin ⁽⁴⁾						2.49	%						2.67	%
Average interest-earning assets to interest-bearing liabilities						123.25	%						129.63	%

(1)	Yields and rates for the nine-month periods ended September 30, 2015 and 2014 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 income divided by average total interest-earning assets.

(5)	FHLB stock dividends of $245,000 and $100,000 for the nine months ended September 30, 2015 and 2014, respectively, are not included.


	Nine Months Ended September 30,
	2015 vs. 2014 (unaudited)
	Change Due to Volume			Change Due to Rate			Total Change
	(In thousands)

Income on interest-earning assets:
Loans	$	8,057		$	(1,218	)	$	6,839
Securities		28			(145	)		(117	)
Other		(1	)		(4	)		(5	)

Total interest-earning assets (1)	$	8,084		$	(1,367	)	$	6,717


Expense on interest-bearing liabilities:
Savings accounts	$	458		$	4		$	462
Checking accounts		87			79			166
Money market accounts		(1	)		—			(1	)
Certificates of deposit		922			5			927


Total interest-bearing deposits		1,466			88			1,554

Federal Home Loan Bank advances		415			382			797
Securities sold under agreements to repurchase		—			—			—
Other borrowed funds		(1	)		(1	)		(2	)


Total interest-bearing liabilities		1,880			469			2,349


Change in net interest income	$	6,204		$	(1,836	)	$	4,368

(1)	Does not include dividends on FHLB stock of $245,000 and $100,000 for the nine months ended September 30, 2015 and 2014, 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, 2015 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		-17.9	%
+200		-6.7	%
- 100		-0.5	%

(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, 2015, 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 6.7% 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 0.5% 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, 2015 estimated that, in the event of an instantaneous 200 basis point increase in interest rates, the Bank would experience a 16.5% 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 13.2% 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, 2015 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, 2015, cash and cash equivalents totaled $42.60 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, 2015, we had $72.85 million in loan commitments outstanding. In addition to commitments to originate and purchase loans, we had $259.96 million in unused lines of credit to borrowers and $12.17 million in unadvanced funds on construction loans.

Certificates of deposit due within one year of September 30, 2015 totaled $66.82 million, or 5.5%, 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, 2016. 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, 2015.

Our primary investing activity is originating and purchasing loans. During the nine months ended September 30, 2015 and the year ended December 31, 2014, we funded $582.62 million and $676.21 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 $224.01 million and $219.81 million for the nine months ended September 30, 2015 and for the year ended December 31, 2014, respectively. At September 30, 2015 and December 31, 2014, the levels of brokered deposits were $114.96 million and $88.60 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, 2015, we had $319.60 million of Federal Home Loan Bank advances. Based on available collateral at that date, we had the ability to borrow up to an additional $149.92 million from the Federal Home Loan Bank of Boston.

We are obligated to make future payments according to various contracts. As of September 30, 2015, our contractual obligations have not changed materially from those disclosed in our 2014 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 13, 2015.

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, 2015, 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 $143.57 million at September 30, 2015 from $137.01 million at December 31, 2014. This increase is primarily the result of earnings of $4.85 million and a $1.60 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 became 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, 2015, 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, 2015 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 2014 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 13, 2015. As of September 30, 2015, the risk factors of the Company have not changed materially from those disclosed in the 2014 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 2015.


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)

On June 22, 2013, the Company’s Board of Directors authorized a 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, 2015 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 5, 2015	By:	/s/ Robert M. Mahoney
		Robert M. Mahoney
		President, Chief Executive Officer and Director (Principal Executive Officer)

Date: November 5, 2015	By:	/s/ John A. Citrano
		John A. Citrano
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer)

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