Edgar Filing: BSB Bancorp, Inc.

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Form 10-Q

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 March 31, 2013

Commission file number: 001-35309

BSB BANCORP, INC.

(Exact Name of Registrant as Specified in Its Charter)


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

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

(617) 484-6700

(Registrant’s telephone number, including area code)

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

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

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

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 9,319,106 shares of common stock, par value $0.01 per share, outstanding as of May 3, 2013.

BSB BANCORP, INC

TABLE OF CONTENTS


		Page
PART I. FINANCIAL INFORMATION

Item 1.	Consolidated Financial Statements
	- Consolidated Balance Sheets as of March 31, 2013 (unaudited) and December 31, 2012		3

	- Consolidated Statements of Operations for the Three Months Ended March 31, 2013 and 2012 (unaudited)		4

	- Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2013 and 2012 (unaudited)		5

	- Consolidated Statements of Changes in Equity for the Three Months Ended March 31, 2013 and 2012 (unaudited)		6

	- Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2013 and 2012 (unaudited)		7

	- Notes to Unaudited Consolidated Financial Statements		9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25

Item 3.	Quantitative and Qualitative Disclosures About Market Risk		34

Item 4.	Controls and Procedures		34

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		34

Item 1A.	Risk Factors		34

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		34

Item 3.	Defaults Upon Senior Securities		35

Item 4.	Mine Safety Disclosures		35

Item 5.	Other Information		35

Item 6.	Exhibits		35

PART I.

FINANCIAL INFORMATION

Item 1.

Financial Statements

BSB BANCORP, INC

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)


	March 31, 2013			December 31, 2012
	(unaudited)
ASSETS
Cash and due from banks	$	1,228		$	1,433
Interest-bearing deposits in other banks		18,019			51,279

Cash and cash equivalents		19,247			52,712
Interest-bearing time deposits with other banks		119			119
Investments in available-for-sale securities		12,013			22,621
Investments in held-to-maturity securities, at cost		64,692			63,984
Federal Home Loan Bank stock, at cost		7,131			7,627
Loans held-for-sale		9,562			11,205
Loans, net of allowance for loan losses of $6,778 as of March 31, 2013 (unaudited) and $6,440 as of December 31, 2012		701,445			654,295
Premises and equipment, net		2,804			2,902
Accrued interest receivable		2,176			2,217
Deferred tax asset, net		4,169			4,025
Income taxes receivable		540			806
Bank-owned life insurance		12,988			12,884
Other real estate owned		661			661
Other assets		2,151			2,024

Total assets	$	839,698		$	838,082

LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing		116,229		$	126,760
Interest-bearing		500,424			481,105

Total deposits		616,653			607,865
Federal Home Loan Bank advances		76,600			83,100
Securities sold under agreements to repurchase		3,460			3,404
Other borrowed funds		1,145			1,156
Accrued interest payable		528			455
Deferred compensation liability		4,836			4,685
Other liabilities		4,447			4,109

Total liabilities		707,669			704,774

Stockholders’ Equity:
Common stock		94			95
Additional paid-in capital		88,655			90,188
Retained earnings		47,768			47,352
Accumulated other comprehensive (loss) income		(130	)		68
Unearned compensation - ESOP		(4,358	)		(4,395	)

Total stockholders’ equity		132,029			133,308

Total liabilities and stockholders’ equity	$	839,698		$	838,082

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

BSB BANCORP, INC

CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except per share data)


	Three months ended
	March 31,
	2013		2012
	(unaudited)
Interest and dividend income:
Interest and fees on loans	$	6,499	$	5,877
Interest on taxable debt securities		482		610
Dividends		7		10
Other interest income		17		13

Total interest and dividend income		7,005		6,510

Interest expense:
Interest on deposits		1,032		938
Interest on Federal Home Loan Bank advances		185		298
Interest on securities sold under agreements to repurchase		1		3
Interest on other borrowed funds		8		11

Total interest expense		1,226		1,250

Net interest and dividend income		5,779		5,260
Provision for loan losses		327		481

Net interest and dividend income after provision for loan losses		5,452		4,779

Noninterest income:
Customer service fees		230		198
Income from bank-owned life insurance		104		102
Net gain on sales of loans		351		578
Net gain on sales and calls of securities		31		—
Loan servicing fees		170		71
Vendor loss experience refund		100		—
Other income		20		15

Total noninterest income		1,006		964

Noninterest expense:
Salaries and employee benefits		3,682		3,155
Director fees		92		107
Occupancy expense		229		183
Equipment expense		148		104
Deposit insurance		127		125
Data processing		581		390
Professional fees		211		318
Marketing		209		239
Other expense		521		463

Total noninterest expense		5,800		5,084

Income before income tax expense		658		659
Income tax expense		242		212

Net income	$	416	$	447

Earnings per share
Basic	$	0.05	$	0.05
Diluted	$	0.05	$	0.05

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

BSB BANCORP, INC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Dollars in thousands)


	Three months ended
	March 31,
	2013			2012
	(unaudited)

Net income	$	416		$	447
Other comprehensive (loss), before tax:
Change in fair value of securities available for sale		(284	)		—
Reclassification adjustment for realized gains in net income		(31	)		—

Other comprehensive (loss) income, before tax		(315	)		—

Income tax benefit related to items of other comprehensive (loss)		117			—

Other comprehensive loss, net of tax		(198	)		—

Comprehensive income	$	218		$	447

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

BSB BANCORP, INC

CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY

THREE MONTHS ENDED MARCH 31, 2013 AND 2012

(Dollars in thousands)

(Unaudited)


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

Balance at December 31, 2011		9,172,860		$	92		$	90,016		$	45,951	$	(5	)	$	(4,548	)	$	131,506
Net income		—			—			—			447		—			—			447
Other comprehensive income		—			—			—			—		—			—			—
Release of ESOP stock		—			—			4			—		—			38			42

Balance at March 31, 2012		9,172,860		$	92		$	90,020		$	46,398	$	(5	)	$	(4,510	)	$	131,995


Balance at December 31, 2012		9,532,430		$	95		$	90,188		$	47,352	$	68		$	(4,395	)	$	133,308
Net income		—			—			—			416		—			—			416
Other comprehensive income		—			—			—			—		(198	)		—			(198	)
Release of ESOP stock		—			—			12			—		—			37			49
Stock based compensation-restricted stock awards		—			—			210			—		—			—			210
Stock based compensation-stock options		—			—			189			—		—			—			189
Share repurchases		(144,219	)		(1	)		(1,944	)		—		—			—			(1,945	)

Balance at March 31, 2013		9,388,211		$	94		$	88,655		$	47,768	$	(130	)	$	(4,358	)	$	132,029

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

BSB BANCORP, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)


	Three months ended March 31,
	2013			2012
Cash flows from operating activities:
Net income	$	416		$	447
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of securities, net		196			170
Net gain on sales and calls of securities		(31	)		—
Gain on sales of loans, net		(351	)		(578	)
Loans originated for sale		(27,848	)		(51,570	)
Proceeds from sales of loans		29,842			65,520
Provision for loan losses		327			481
Change in unamortized mortgage premium		(431	)		2
Change in net deferred loan costs		(281	)		(30	)
ESOP expense		49			42
Stock based compensation expense		399			—
Depreciation and amortization expense		169			116
Deferred income tax expense		(27	)		—
Increase in bank-owned life insurance		(99	)		(102	)
Net change in:
Accrued interest receivable		41			124
Other assets		(127	)		(332	)
Income taxes receivable		266			(66	)
Income taxes payable		—			(121	)
Accrued interest payable		73			40
Deferred compensation liability		151			155
Other liabilities		402			(162	)

Net cash provided by operating activities		3,136			14,136

Cash flows from investing activities:
Purchases of available-for-sale securities		—			—
Proceeds from sales of available-for-sale securities		10,280			—
Proceeds from maturities, payments, and calls of held-to-maturity securities		5,991			17,040
Purchases of held-to-maturity securities		(6,851	)		—
Redemption of Federal Home Loan Bank stock		496			411
Recoveries of loans previously charged off		46			6
Loan originations and principal collections, net		(30,012	)		(19,795	)
Purchases of loans		(16,799	)		(23,542	)
Capital expenditures		(71	)		(177	)
Premiums paid on bank-owned life insurance		(5	)		(5	)

Net cash used in investing activities	$	(36,925	)	$	(26,062	)

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

BSB BANCORP, INC

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

(Continued)


	Three months ended March 31,
	2013			2012
Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts		17,941			57,698
Net (decrease) increase in time deposits		(9,153	)		5,196
Principal payments on Federal Home Loan Bank advances		(6,500	)		(10,000	)
Net change in short-term advances		—			(4,000	)
Net increase in securities sold under agreement to repurchase		56			325
Repayment of principal on other borrowed funds		(11	)		(13	)
Net (decrease) increase in mortgagors’ escrow accounts		(64	)		70
Payments to repurchase stock		(1,945	)		—

Net cash provided by financing activities		324			49,276


Net (decrease) increase in cash and cash equivalents		(33,465	)		37,350
Cash and cash equivalents at beginning of period		52,712			22,795

Cash and cash equivalents at end of period	$	19,247		$	60,145


Supplemental disclosures:
Interest paid	$	1,153		$	1,210
Income taxes paid		3			399
Transfer of loans receivable to loans held for sale		—			28,355

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

BSB BANCORP, INC

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands)

NOTE 1 – BASIS OF PRESENTATION

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

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

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

NOTE 2 – RECENT PRONOUNCEMENTS

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

NOTE 3 – EARNINGS PER SHARE

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

Earnings per share consisted of the following components for the periods indicated:


	Three months ended
	March 31,		March 31,
	2013		2012
Net income	$	416	$	447
Undistributed earnings attributable to participating securities		17		—

Net income available to common stockholders	$	399	$	447


Weighted average shares outstanding, basic		8,696,894		8,719,950
Effect of dilutive shares		74,319		—

Weighted average shares outstanding, assuming dilution		8,771,213		8,719,950


Basic EPS	$	0.05	$	0.05
Effect of dilutive shares		—		—

Diluted EPS	$	0.05	$	0.05

As of March 31, 2013 and 2012, average options to purchase 850,610 and 0 shares of common stock, respectively, were outstanding but not included in the computation of EPS because they were antidilutive under the treasury stock method.

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

On December 21, 2012, the Company’s Board of Directors authorized a new program to repurchase, from time-to-time and as market and business conditions warrant, up to 476,622 shares of the Company’s common stock. Repurchases under the program may be made on the open market or in privately negotiated transactions, pursuant to Securities and Exchange Commission Rule 10b5-1 trading plans or other available means. The repurchase program may be suspended, terminated or modified at any time for any reason, including market conditions, the cost of repurchasing shares, the availability of alternative investment opportunities, liquidity, and other factors deemed appropriate. These factors may also affect the timing and amount of share repurchases. The repurchase program does not obligate the Company to purchase any particular number of shares. During the three months ended March 31, 2013, the Company repurchased 144,219 shares at an aggregate cost of $1.94 million. At March 31, 2013, the Company had remaining authority under the program to purchase 332,403 shares of its common stock.

NOTE 4 – INVESTMENTS IN SECURITIES

The amortized cost of available for sale and held-to-maturity securities and their approximate fair values are as follows (in thousands):


	March 31, 2013									December 31, 2012
	Amortized Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale securities:
Corporate debt securities	$	12,190	$	9	$	(186	)	$	12,013	$	22,483	$	188	$	(50	)	$	22,621

	$	12,190	$	9	$	(186	)	$	12,013	$	22,483	$	188	$	(50	)	$	22,621


Held to maturity securities:
U.S. government sponsored mortgage-backed securities		52,763		1,485		(25	)		54,223		49,039		1,731		—			50,770
Corporate debt securities		11,929		149		—			12,078		14,945		216		—			15,161

	$	64,692	$	1,634	$	(25	)	$	66,301	$	63,984	$	1,947		—		$	65,931

The amortized cost and estimated fair value of debt securities by contractual maturity at March 31, 2013 is as follows (in thousands). Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.


	March 31, 2013
	Available-for-Sale				Held-to-Maturity
	Amortized Cost Basis		Fair Value		Amortized Cost Basis		Fair Value
	(unaudited)				(unaudited)

Due within one year	$	—	$	—	$	10,953	$	11,065
Due after one year through five years		—		—		1,754		1,844
Due after five years through ten years		12,190		12,013		11,247		11,426
Due after ten years		—		—		40,738		41,966

	$	12,190	$	12,013	$	64,692	$	66,301

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 months ended March 31, 2013 (unaudited), proceeds from sales of available-for-sale securities amounted to $10.28 million. For the three months ended March 31, 2013 (unaudited) gross realized gains and gross realized losses on those sales amounted to $60,000 and $29,000, respectively. For the three months ended March 31, 2013 (unaudited) the income tax expense (benefit) related to the gross realized gains and losses were $24,000 and $11,000, respectively. During the three months ended March 31, 2012 (unaudited), there were no security sales.

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					Over 12 Months
	Fair Value		Unrealized Losses			Fair Value		Unrealized Losses

March 31, 2013:
Available-for-sale
Corporate debt securities	$	8,800	$	(186	)	$	—	$	—
Held-to-maturity
U.S. government sponsored mortgage backed securities	$	4,612	$	(25	)

Total temporarily impaired securities	$	13,412	$	(211	)	$	—	$	—


December 31, 2012:
Available-for-sale
Corporate debt securities	$	5,580	$	(50	)		—		—

Total temporarily impaired securities	$	5,580	$	(50	)		—		—

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns warrant such evaluation. At March 31, 2013 (unaudited), six 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 March 31, 2013 (unaudited) quarterly review of securities in the investment portfolio, management has determined that unrealized losses related to five debt securities with aggregate depreciation of 0.5% from the Company’s amortized cost basis were caused primarily by changes in market interest rates. Unrealized loss related to one debt security with aggregate depreciation of 3.6% from the Company’s amortized cost basis relates to an investment in the telecom sector. The unrealized loss is primarily caused by changes in market rates and downgrades by several industry analysts. Based on the Company’s

March 31, 2013 review of securities in the investment portfolio, management deemed securities with unrealized losses as of March 31, 2013 to be temporarily impaired. At December 31, 2012, two debt securities had unrealized losses with aggregate depreciation of 0.9% from the Company’s amortized cost basis. The Company’s unrealized losses on investments in corporate bonds primarily relate to an investment within the telecom sector. The unrealized loss is primarily caused by changes in market rates and recent downgrades by several industry analysts. The contractual terms of these investments do not permit the companies to settle the security at a price less than the par value of the investment.

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

NOTE 5 – LOANS AND ALLOWANCE FOR LOAN LOSSES

Loans

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

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

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

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

Allowance for Loan Losses

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

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

General Component:

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, equity lines of credit, commercial real estate, construction, commercial, indirect auto and consumer. Management uses a rolling average of historical losses based on a time frame appropriate to capture relevant loss data for each loan segment. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no changes in the Company’s policies or methodology pertaining to the general component of the allowance for loan losses during the three months ended March 31, 2013 or during fiscal year 2012.

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

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

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

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

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

Indirect auto loans - Loans in this segment are secured installment loans that are originated through a network of select regional automobile dealerships. The Company’s interest in the vehicle is secured with a recorded lien on the state title of each automobile. Repayments are sensitive to changes in borrower financial circumstances, and the collateral can depreciate or be damaged at the time of repossession. Repayment is dependent on the credit quality and the cash flow of the individual borrower.

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

Allocated Component:

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

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

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

Unallocated Component:

An unallocated component may be maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. At March 31, 2013 (unaudited) and December 31, 2012, the Company had unallocated reserves of $126,000 and $64,000, respectively.

Loans consisted of the following (in thousands):


	March 31, 2013						December 31, 2012
	Amount			Percent			Amount			Percent
	(unaudited)

Mortgage loans:
Residential one-to-four family	$	212,644			30.20	%	$	201,845			30.70	%
Commercial real estate loans (1)		288,163			40.93			261,022			39.71
Equity lines of credit		68,130			9.68			66,939			10.18
Construction loans		13,548			1.92			16,139			2.46

Total mortgage loans		582,485			82.73			545,945			83.05

Commercial loans		31,714			4.50			30,426			4.63
Consumer loans:
Indirect auto loans		89,299			12.68			80,312			12.22
Other consumer loans (2)		616			0.09			654			0.10

		121,629			17.27			111,392			16.95


Total loans		704,114			100.00	%		657,337			100.00	%


Net deferred loan costs		3,057						2,777
Net unamortized mortgage premiums		1,052						621
Allowance for loan losses		(6,778	)					(6,440	)


Total loans, net	$	701,445					$	654,295

(1)	Includes multi-family real estate loans.

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

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


	Three Months Ended March 31, 2013
	Beginning balance		Provision (benefit)			Charge-offs			Recoveries		Ending Balance

Residential one-to-four family	$	1,412	$	(45	)	$	—		$	—	$	1,367
Commercial real estate		3,039		284			—			—		3,323
Construction		198		(32	)		—			—		166
Commercial		470		21			—			—		491
Home equity		466		8			—			—		474
Indirect auto		772		19			(18	)		40		813
Consumer		19		10			(17	)		6		18
Unallocated		64		62			—			—		126

Total	$	6,440	$	327		$	(35	)	$	46	$	6,778


	Three Months Ended March 31, 2012
	Beginning balance		Provision (benefit)			Charge-offs			Recoveries		Ending Balance

Residential one-to-four family	$	986	$	27		$	—		$	—	$	1,013
Commercial real estate		1,969		333			—			—		2,302
Construction		188		(25	)		—			—		163
Commercial		321		35			—			—		356
Home equity		632		19			—			—		651
Indirect auto		664		78			(77	)		4		669
Consumer		16		14			(10	)		2		22
Unallocated		—		—			—			—		—

Total	$	4,776	$	481		$	(87	)	$	6	$	5,176


	March 31, 2013 (unaudited)
	Individually evaluated for impairment				Collectively evaluated for impairment				Total
	Loan balance		Allowance		Loan balance		Allowance		Loan Balance		Allowance
Residential one-to-four family	$	7,528	$	382	$	205,116	$	985	$	212,644	$	1,367
Commercial real estate		5,290		—		282,873		3,323		288,163		3,323
Construction		—		—		13,548		166		13,548		166
Commercial		—		—		31,714		491		31,714		491
Home equity		519		—		67,611		474		68,130		474
Indirect auto		—		—		89,299		813		89,299		813
Consumer		—		—		616		18		616		18
Unallocated		—		—		—		126		—		126

Total	$	13,337	$	382	$	690,777	$	6,396	$	704,114	$	6,778


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

Total	$	10,035	$	439	$	647,302	$	6,001	$	657,337	$	6,440

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


	Impaired loans with a related allowance for credit losses
	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Specific Allowance		Income Recognized
Residential one-to-four family	$	2,616	$	2,700	$	2,461	$	382	$	3
Commercial real estate		—		—		—		—		—
Construction		—		—		—		—		—
Commercial		—		—		—		—		—
Home equity		—		—		—		—		—
Indirect auto		—		—		—		—		—
Consumer		—		—		—		—		—

Totals	$	2,616	$	2,700	$	2,461	$	382	$	3


	Impaired loans with no related allowance for credit losses
	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Income Recognized
Residential one-to-four family	$	4,912	$	4,912	$	4,945	$	34
Commercial real estate		5,290		5,290		3,331		25
Construction		—		—		—		—
Commercial		—		—		—		—
Home equity		519		699		518		5
Indirect auto		—		—		6		—
Consumer		—		—		—		—

Totals	$	10,721	$	10,901	$	8,800	$	64

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


	Impaired loans with a related allowance for credit losses
	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Specific Allowance		Income Recognized
Residential one-to-four family	$	2,383	$	2,383	$	1,325	$	439	$	11
Commercial real estate		—		—		—		—		—
Construction		—		—		—		—		—
Commercial		—		—		—		—		—
Home equity		—		—		432		—		3
Indirect auto		—		—		—		—		—
Consumer		—		—		—		—		—

Totals	$	2,383	$	2,383	$	1,757	$	439	$	14


	Impaired loans with no related allowance for credit losses
	Recorded Investment		Unpaid Principal Balance		Average Recorded Investment		Income Recognized
Residential one-to-four family	$	4,774	$	4,858	$	3,006	$	76
Commercial real estate		2,359		2,359		889		32
Construction		—		—		—		—
Commercial		—		—		35		4
Home equity		519		699		410		13
Indirect auto		—		—		—		—
Consumer		—		—		—		—

Totals	$	7,652	$	7,916	$	4,340	$	125

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


	March 31, 2013 (unaudited)
	30–59 Days		60–89 Days		90 Days or More		Total Past Due		90 days or more and accruing		Loans on Non-accrual
Real estate loans:
Residential one-to-four family	$	535	$	—	$	2,412	$	2,947	$	—	$	3,057
Commercial real estate		—		—		77		77		—		77
Home equity		103		—		43		146		—		319
Construction		—		—		—		—		—		—
Other loans:
Commercial		—		—		—		—		—		—
Indirect auto		195		—		—		195		—		—
Consumer		—		—		—		—		—		—

	$	833	$	—	$	2,532	$	3,365	$	—	$	3,453


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

	$	616	$	27	$	2,479	$	3,122	$	—	$	3,621

Credit Quality Information

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

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

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

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

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

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

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

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

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


	March 31, 2013
	Loans rated 1-3		Loans rated 4		Loans rated 5		Loans not rated (A)		Total
Residential one-to-four family	$	—	$	4,094	$	4,968	$	203,582	$	212,644
Commercial real estate		274,680		5,709		7,774		—		288,163
Construction		13,548		—		—		—		13,548
Commercial		31,606		13		95		—		31,714
Home equity		—		200		319		67,611		68,130
Indirect auto		—		—		—		89,299		89,299
Consumer		—		—		—		616		616

Total	$	319,834	$	10,016	$	13,156	$	361,108	$	704,114


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

Total	$	293,897	$	12,177	$	11,117	$	340,146	$	657,337

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

The Company periodically modifies loans to extend the term or make other concessions to help a borrower stay current on their loan and to avoid foreclosure. The Company generally does not forgive principal or interest on loans or modify the interest rates on loans to those not otherwise available in the market for loans with similar risk characteristics as the restructured debt. During the three months ended March 31, 2013, three loans were modified and determined to be troubled debt restructurings. During the year ended December 31, 2012, eight loans were modified and determined to be troubled debt restructurings. At March 31, 2013, the Company had $10.6 million of troubled debt restructurings related to thirteen loans.

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


	March 31, 2013		December 31, 2012
	(unaudited)
TDRs on Accrual Status	$	9,884	$	6,437
TDRs on Nonaccrual Status		726		946

Total TDRs	$	10,610	$	7,383


Amount of Specific Reserves Included in the Allowance
for Loan Losses associated with TDRs	$	12	$	86
Additional Commitments to Lend to a borrower		—		—
who has been a party to a TDR	$	—	$	—

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


			Three months ended
			March 31, 2013		(unaudited)
			Pre-modification		Post-modification
	# of		outstanding		outstanding
	Contracts		recorded investment		recorded investment
Real estate loans:
Residential one-to-four family		1	$	347	$	378
Commercial real estate		4		4,732		4,732
Home equity		—		—		—
Construction		—		—		—
Other loans:
Commercial		—		—		—
Indirect auto		—		—		—
Consumer		—		—		—

		5	$	5,079	$	5,110

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


	Three months ended
	March 31, 2013
	(unaudited)
Extended Maturity	$	2,241
Adjusted Interest Rate		2,869

Total	$	5,110

There were no modifications determined to be TDR’s during the three months ended March 31, 2012.

Certain residential mortgage loans are periodically sold by the Company to the secondary market. Most of these loans are sold without recourse and the Company releases the servicing rights. For loans sold with servicing rights retained, we provide the servicing for the loans on a per-loan fee basis. The Company also periodically sells auto loans to other financial institutions without recourse, and the Company generally provides servicing for these loans. At March 31, 2013 (unaudited) and December 31, 2012, residential loans previously sold and serviced by the Company were $69,779,000 and $76,595,000, respectively. At March 31, 2013 (unaudited) and December 31, 2012, indirect auto loans previously sold and serviced by the Company were $107,987,000 and $104,293,000, respectively.

As of March 31, 2013 (unaudited) and December 31, 2012, loans sold with recourse amounted to $1,145,000 and $1,156,000, respectively. The Company has not incurred any losses related to the loans sold with recourse.

NOTE 6 – FAIR VALUE MEASUREMENTS

Fair Value Hierarchy

ASC 820-10, “Fair Value Measurements and Disclosures,” provides a framework for measuring fair value under generally accepted accounting principles. The guidance allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for certain financial assets and liabilities on a contract-by-contract basis.

In accordance with ASC 820-10, the Company groups its financial assets and financial 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.

A financial instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

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 to determine fair value as of March 31, 2013 (unaudited) and December 31, 2012.

Cash Instruments

The Company’s cash instruments are generally classified within level 1 or level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

Investment Securities

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

Level 3 is for positions that are not traded in active markets or are subject to transfer restrictions, valuations are adjusted to reflect illiquidity and/or non-transferability, and such adjustments are generally based on available market evidence. In the absence of such evidence, management’s best estimate is used. Subsequent to inception, management only changes level 3 inputs and assumptions when corroborated by evidence such as transactions in similar instruments, completed or pending third-party transactions in the underlying investment or comparable entities, subsequent rounds of financing, recapitalization and other transactions across the capital structure, offerings in the equity or debt markets, and changes in financial ratios or cash flows.

Loans Held for Sale

The Company elects to account for new originations of loans held for sale and transfers from held for investment to loans held for sale at the lower of cost or fair value. Fair value is measured using quoted market prices when available. If quoted market prices are not available, comparable market values or discounted cash flow analysis may be utilized. These assets are typically categorized as Level 3.

Impaired Loans

The Company’s impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using level 2 inputs based upon appraisals that utilize sales and estimated values of similar properties, obtained from a third party. The inputs used in the appraisals of the collateral are not always observable, and therefore the loans may be categorized as Level 3 within the fair value hierarchy.

Other Real Estate Owned

The fair values are estimated based upon recent valuations of the property less costs to sell the property. Certain inputs used in valuations are not always observable, and therefore Other Real Estate Owned may be categorized as Level 3 within the fair value hierarchy. When inputs in valuations are observable, they are classified as Level 2.

Fair Value Measurements

The following summarizes assets measured at fair value as of March 31, 2013 (unaudited) and December 31, 2012 (in thousands). Assets measured at fair value on a recurring basis at March 31, 2013 (unaudited) include investments in available-for-sale securities. Assets measured at fair value on a non-recurring basis include impaired loans and other real estate owned.


	March 31, 2013 (unaudited)
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3

Financial assets:
Cash and cash equivalents (a)	$	19,247	$	19,247	$	19,247	$	—	$	—
Interest-bearing time deposits with other banks (a)		119		119		—		119		—
Investments in available-for-sale securities		12,013		12,013		—		12,013		—
Held-to-maturity securities (b)		64,692		66,301		—		66,301		—
Federal Home Loan Bank stock (a)		7,131		7,131		—		7,131		—
Loans held-for-sale		9,562		10,065		—		—		10,065
Loans, net (c)		701,445		707,198		—		—		707,198
Accrued interest receivable (a)		2,176		2,176		2,176		—		—

Financial liabilities:
Deposits (d)		616,653		618,443		—		618,443		—
Federal Home Loan Bank advances (d)		76,600		76,868		—		76,868		—
Securities sold under agreements to repurchase (a)		3,460		3,460		—		3,460		—
Other borrowed funds (a)		1,145		1,145		—		1,145		—
Accrued interest payable (a)		528		528		528		—		—
Mortgagor’s escrow accounts (a)		794		794		—		794		—

Assets above for which fair value is only disclosed

a - Carrying value approximates fair value.

b - 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.

c - Fair value is estimated by discounting estimated future cash flows.

d - Fair value was determined by discounting anticipated future cash payments using rates currently available for instruments with similar remaining maturities.


	December 31, 2012
	Carrying		Fair
	Amount		Value		Level 1		Level 2		Level 3

Financial assets:
Cash and cash equivalents (a)	$	52,712	$	52,712	$	52,712		—		—
Interest-bearing time deposits with other banks (a)		119		119		—		119		—
Investments in available-for-sale securities		22,621		22,621		—		22,621		—
Held-to-maturity securities (b)		63,984		65,931		—		65,931		—
Federal Home Loan Bank stock (a)		7,627		7,627		—		7,627		—
Loans held-for-sale		11,205		11,892		—		—		11,892
Loans, net (c)		654,295		662,010		—		—		662,010
Accrued interest receivable (a)		2,217		2,217		2,217		—		—

Financial liabilities:
Deposits (d)		607,865		618,443		—		618,443		—
Federal Home Loan Bank advances (d)		83,100		83,451		—		83,451		—
Securities sold under agreements to repurchase (a)		3,404		3,404		—		3,404		—
Other borrowed funds (a)		1,156		1,156		—		1,156		—
Accrued interest payable (a)		455		455		455		—		—
Mortgagor’s escrow accounts (a)		859		859		—		859		—

a - Carrying value approximates fair value.

c - Fair value is estimated by discounting estimated future cash flows.

d - Fair value was determined by discounting anticipated future cash payments using rates currently available for instruments with similar remaining maturities.


	March 31, 2013
			(unaudited)
	Level 1		Level 2		Level 3

Impaired loans	$	—	$	—	$	2,048
Other real estate owned		—		—		661

Totals	$	—	$	—	$	2,709


	December 31, 2012
	Level 1		Level 2		Level 3

Impaired loans	$	—	$	—	$	2,452
Other real estate owned		—		—		661

Totals	$	—	$	—	$	3,113

Certain impaired loans were adjusted to the fair value, less the costs to sell, of the underlying collateral securing these loans resulting in losses. The loss is either recorded directly as an adjustment to current earnings through a partial charge off or is recorded as a component in determining the allowance for loan losses. 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.

There were no transfers between Level 1 and Level 2 assets and liabilities for the three months ended March 31, 2013 (unaudited) and the year ended December 31, 2012.

NOTE 7 – SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE AND OTHER BORROWED FUNDS

The securities sold under agreements to repurchase as of March 31, 2013 (unaudited) and December 31, 2012 are securities sold on a short-term basis by the Company that have been accounted for not as sales but as borrowings. The securities consisted of U.S. government and federal agency obligations. 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.

Other borrowed funds consist of the balance of loans sold with recourse. On March 16, 2006, seventeen loans with an aggregate principal balance of $10.5 million were sold to another financial institution (investor). As of March 31, 2013 (unaudited) and December 31, 2012, the principal balance of these loans totaled $1,145,000 and $1,156,000, respectively. The agreement related to this sale contains provisions requiring the Company during the initial 120 months to repurchase any loan that becomes 90 days past due. The Company will repurchase the past due loan for 100 percent of the unpaid principal plus interest to repurchase date.

NOTE 8 – POST RETIREMENT BENEFITS

Supplemental Retirement Plans

The Company has supplemental retirement plans for eligible executive officers that provide for a lump sum benefit upon termination of employment at or after age 55 and completing 10 or more years of service (certain reduced benefits are available prior to attaining age 55 or fewer than 10 years of service), subject to certain limitations as set forth in the agreements. The present value of these future payments is being accrued over the service period. The estimated liability at March 31, 2013 (unaudited) and December 31, 2012 relating to these plans was $1,398,000 and $1,356,000, respectively.

The Company has a supplemental retirement plan for eligible directors that provides for monthly benefits based upon years of service to the Company, subject to certain limitations as set forth in the agreements. The present value of these future payments is being accrued over the estimated period of service. The estimated liability at March 31, 2013 (unaudited) and December 31, 2012 relating to this plan was $597,000 and $596,000, respectively.

Effective October 1, 2010, the Company established the Belmont Savings Bank Supplemental Executive Retirement Plan (“Plan”). The purpose of the Plan is to permit certain executive officers of the Company to receive supplemental retirement income from the Company. At March 31, 2013 (unaudited) and December 31, 2012, there were three participants in the Plan. Participants are fully vested after the completion of between five and ten years of service. The plan is unfunded. The estimated liability at March 31, 2013 (unaudited) and December 31, 2012 relating to this plan was $606,000 and $538,000, respectively.

Incentive Compensation Plan

The Incentive Compensation Plan is a discretionary annual cash-based incentive plan that is an integral part of the participant’s total compensation package and supports the continued growth, profitability and risk management of Belmont Savings Bank. Each year participants are awarded for the achievement of certain performance objectives on a company-wide and individual basis. Compensation expense recognized was $231,000 and $249,000 for the three months ended March 31, 2013 and 2012 (unaudited), respectively.

Defined Contribution Plan

The Company sponsors a 401(k) plan covering substantially all employees meeting certain eligibility requirements. Under the provisions of the plan, employees are able to contribute up to an annual limit of the lesser of 75% of eligible compensation or the maximum allowed by the Internal Revenue Service. The Company’s contributions for the three months ended March 31, 2013 and 2012 (unaudited) totaled $169,000 and $142,000, respectively.

Salary Deferral Plan

The Company has a salary 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. The recorded liability at March 31, 2013 (unaudited) and December 31, 2012 relating to this plan was $2,235,000 and $2,194,000, respectively.

Capital Appreciation Plan

Effective September 30, 2010, the Company established the Capital Appreciation Plan. The purpose of this plan is to attract, retain, and motivate certain key employees and directors of the Company. Eligible participants may receive an award based on capital appreciation of the Bank and the Bank’s return on average assets, entitling the employee or director to a specific percentage of the Employee or Trustee Capital Appreciation Pool as outlined in the plan. The value of any award payable to a participant shall be paid in the form of a single lump sum. The vesting period associated with the Plan begins the date a participant is awarded a Capital Appreciation Award and ends on June 30, 2014. The Company recognized $20,000 and $0 in relation to the plan during the three and months ended March 31, 2013 and 2012 (unaudited), respectively.

Employee Stock Ownership Plan

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

The Company contributed funds to a subsidiary to enable it to grant a loan to the ESOP for the purchase of 458,643 shares of the Company’s common stock at a price of $10.00 per share. The loan obtained by the ESOP from the Company to purchase Company common stock is payable annually over 30 years at a rate per annum equal to the Prime Rate (3.25% at March 31, 2013). Loan payments are principally funded by cash contributions from the Bank. The loan is secured by the shares purchased, which are held in a suspense account for allocation among participants as the loan is repaid. Cash dividends paid on allocated shares are distributed to participants and cash dividends paid on unallocated shares are used to repay the outstanding debt of the ESOP. Shares used as collateral to secure the loan are released and available for allocation to eligible employees as the principal and interest on the loan is paid.

NOTE 9 – 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).


March 31, 2013 (unaudited)	Securities held-to-		Loans		Total pledged
	maturity (at cost)		receivable		assets
Repurchase agreements	$	4,290	$	—	$	4,290
FHLB borrowings		15,945		115,672		131,617
Federal Reserve Bank LOC		10,095		—		10,095

Total pledged assets	$	30,330	$	115,672	$	146,002


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

Total pledged assets	$	31,862	$	103,844	$	135,706

NOTE 10 – OTHER COMPREHENSIVE INCOME


	Three months ended March 31, 2013
	Pre Tax Amount			Tax (Expense) Benefit		After Tax Amount
Securities available for sale:
Change in unrealized gain/loss during the period	$	(284	)	$	104	$	(180	)
Reclassification adjustment for net (gains) losses included in net income¹		(31	)		13		(18	)

Total securities available for sale		(315	)		117		(198	)

Total Other Comprehensive Income		(315	)		117		(198	)

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

There was no other comprehensive income for the three months ended March 31, 2012.

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;

•

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, 2012 under the heading “Item 1A. Risk Factors.” Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Critical Accounting Policies

There are no material changes to the critical accounting policies from those disclosed in BSB Bancorp, Inc.’s 2012 Annual Report on Form 10-K. In applying these accounting policies, management is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. As discussed in the Company’s 2012 Annual Report on Form 10-K, the three most significant areas in which management applies critical assumptions and estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses, investment classification and impairment and deferred income taxes. Management’s estimates and assumptions affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ from the amount derived from management’s estimates and assumptions under different conditions.

Comparison of Financial Condition at March 31, 2013 and December 31, 2012

Total Assets. Total assets increased $1.6 million to $839.7 million at March 31, 2013, from $838.1 million at December 31, 2012. The increase was primarily the result of a $47.2 million, or 7.2%, increase in net loans, offset by a $33.5 million, or 63.5%, decrease in cash and cash equivalents and a $10.6 million, or 46.9%, decrease in investments in available-for-sale-securities.

Loans. Net loans increased by $47.2 million to $701.4 million at March 31, 2013 from $654.3 million at December 31, 2012. The increase in net loans was primarily due to increases of $27.1 million, or 10.4%, in commercial real estate loans, $10.8 million, or 5.4%, in residential one-to-four family loans, $1.2 million, or 1.8%, in home equity lines of credit, $1.3 million, or 4.2%, in commercial loans, and $9.0 million, or 11.2%, in indirect auto loans, offset by a decrease in construction loans of $2.6 million, or 16.1%. While we have continued to originate significant amounts of one-to-four family residential loans and indirect auto loans in 2013, we have continued to sell a portion of these loan types as part of our operations. Further, our plan to prudently build new commercial loan businesses is working as solid growth was experienced in this business line during the quarter.

Investment Securities. Total investment securities decreased $9.9 million to $76.7 million at March 31, 2013, from $86.6 million at December 31, 2012, reflecting our response to strong loan demand and conversion primarily into higher yielding assets. The decrease in investment securities primarily resulted from a decrease of $10.6 million, or 46.9%, in available-for-sale corporate debt securities.

Cash and Cash Equivalents. Cash and cash equivalents decreased by $33.5 million to $19.2 million at March 31, 2013, from $52.7 million at December 31, 2012. The outflow of cash was due to strong loan demand and deployment of cash into earning assets.

Bank-Owned Life Insurance. We invest in bank-owned life insurance to provide a funding source for our benefit plan obligations. Bank-owned life insurance also generally provides noninterest income that is nontaxable. At March 31, 2013, our investment in bank-owned life insurance was $13.0 million, an increase of $104,000 from $12.9 million at December 31, 2012, reflecting premiums paid and an increase in cash surrender value.

Deposits. Deposits increased $8.8 million, or 1.4%, to $616.7 million at March 31, 2013 from $607.9 million at December 31, 2012. The increase in deposits was due to a $30.0 million, or 9.5% increase in savings accounts, offset by a decrease in demand deposits of $10.5 million, or 8.3%, and a decrease in CDs of $9.2 million, or 7.5%. Core deposits, which we consider to include all deposits other than CDs and brokered CDs, increased by $17.9 million. Our core deposit growth continued in the first quarter with significant contributions from our new supermarket branch in Waltham. Through its tenth month of operation, the Waltham branch has exceeded $25 million in deposits, already twice the average for in-store branches nationwide.

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


	March 31, 2013					December 31, 2012
	Amount		Percent			Amount		Percent
	(unaudited)

Deposit type:
Demand deposits	$	116,229		18.85	%	$	126,760		20.85	%
Interest-bearing checking accounts		31,018		5.03			32,463		5.34
Savings accounts		346,540		56.20			316,563		52.08
Money market deposits		10,706		1.74			10,767		1.77

Total transaction accounts		504,493		81.81			486,553		80.04

Term certificates less than $100,000		53,847		8.73			55,298		9.10
Term certificates $100,000 or more		58,313		9.46			66,014		10.86

Total certificate accounts		112,160		18.19			121,312		19.96

Total deposits	$	616,653		100.00	%	$	607,865		100.00	%

Borrowings. At March 31, 2013, borrowings consisted of advances from the Federal Home Loan Bank of Boston, securities sold to customers under agreements to repurchase, or “repurchase agreements,” and other borrowed funds consisting of the balance of loans that we sold with recourse to another financial institution in March of 2006.

Total borrowings decreased $6.5 million, or 7.4%, to $81.2 million at March 31, 2013, from $87.7 million at December 31, 2012. Advances from the Federal Home Loan Bank of Boston decreased $6.5 million to $76.6 million at March 31, 2013, from $83.1 million at December 31, 2012, and repurchase agreements increased $56,000 to $3.5 million at March 31, 2013, from $3.4 million at December 31, 2012.

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


	March 31, 2013		December 31, 2012
	(unaudited)

Long-term borrowed funds:
Federal Home Loan Bank of Boston long-term advances	$	61,600	$	68,100
Other borrowed funds		1,145		1,156

	$	62,745	$	69,256


Short-term borrowed funds:
Federal Home Loan Bank of Boston short-term advances	$	15,000	$	15,000
Repurchase agreements		3,460		3,404

		18,460		18,404


Total borrowed funds	$	81,205	$	87,660

Stockholders’ Equity. Total stockholders’ equity decreased from $133.3 million as of December 31, 2012 to $132.0 million as of March 31, 2013. This decrease is largely the result of the Stock Repurchase Program that was adopted on December 12, 2012. During the first quarter of 2013, the Company repurchased 144,219 shares of its common stock for $1.94 million.

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 March 31,			At December 31,
	2013			2012
	(unaudited)

Non-accrual loans:
Mortgage loans:
One-to-four family	$	3,057		$	3,278
Commercial real estate		77			—
Construction loans		—			—
Equity lines of credit		319			319
Commercial loans		—			—
Consumer loans:
Indirect auto loans		—			24
Other consumer loans		—			—

Total non-accrual loans	$	3,453		$	3,621


Loans delinquent 90 days or greater and still accruing:
Mortgage loans:
Residential one-to-four family		—			—
Commercial real estate		—			—
Construction loans		—			—
Equity lines of credit		—			—
Commercial loans		—			—
Consumer loans:
Indirect auto loans		—			—
Other consumer loans		—			—

Total loans 90 days delinquent and still accruing		—			—

Total non-performing loans	$	3,453		$	3,621

Other real estate owned	$	661		$	661
Repossessed automobiles		20			43

Total non-performing assets (NPAs)	$	4,134		$	4,325


Troubled debt restructurings:
Troubled debt restructures included in NPAs	$	726		$	946
Troubled debt restructures not included in NPAs		9,884			6,437

Total troubled debt restructures	$	10,610		$	7,383


Ratios:
Non-performing loans to total loans		0.49	%		0.55	%
Non-performing assets to total assets		0.49	%		0.52	%

It is the general policy of the Bank to consider any loan on non-accrual as an impaired loan. Exceptions to this policy can be made when, in the opinion of senior management, a loan is adequately secured, properly documented and clearly in the process of collection. Any exceptions to policy are reviewed on a monthly basis and must be approved by senior management. At March 31, 2013, there were no loans on non-accrual that were determined to not be impaired.

Troubled Debt Restructurings. We occasionally modify loans to extend the term or make other concessions to help a borrower stay current on their loan and to avoid foreclosure or collection activity. We generally do not forgive principal or interest on loans or modify the interest rates on loans to those not otherwise available in the market for loans with similar risk characteristics as the restructured debt. At March 31, 2013, we had $10.6 million of troubled debt restructurings related to thirteen loans.

Comparison of Operating Results for the Three Months Ended March 31, 2013 and 2012

General. Net income for the three months ended March 31, 2013 was $416,000, compared to net income of $447,000 for the three months ended March 31, 2012. The change in operating results for the three months ended March 31, 2013 compared to the 2012 period resulted from an increase in net interest and dividend income after the provision for loan losses of $673,000 and an increase in noninterest income of $42,000. This was more than offset by an increase in noninterest expense of $716,000.

Net Interest and Dividend Income. Net interest and dividend income increased $519,000 to $5.8 million for the three months ended March 31, 2013, compared to $5.3 million for the three months ended March 31, 2012. The increase in net interest and dividend income was primarily due to an increase in our net interest earning assets and the ability to attract lower cost core deposits. Net average interest-earning assets increased $58.5 million, or 33.3% to $234.1 million for the three months ended March 31, 2013, from $175.6 million for the three months ended March 31, 2012. Our net interest margin decreased 26 basis points to 2.92% for the three months ended March 31, 2013, compared to 3.18% for the three months ended March 31, 2012, and our net interest rate spread decreased 24 basis points to 2.66% for the three months ended March 31, 2013, compared to 2.90% for the three months ended March 31, 2012.

Interest and Dividend Income. Interest and dividend income increased $495,000 to $7.0 million for the three months ended March 31, 2013, from $6.5 million for the three months ended March 31, 2012. The increase in interest and dividend income was primarily due to a $622,000 increase in interest income on loans partially offset by a $131,000 decrease in interest and dividend income on securities. The increase in interest income on loans resulted from a 51 basis point decrease in the average yield on loans to 3.80% from 4.31%, primarily due to lower market interest rates during the period which was more than offset by an increase in the average balance of loans of $144.9 million to $692.7 million for the three months ended March 31, 2013, from $547.8 million for the three months ended March 31, 2012. The decrease in interest and dividend income on securities was primarily due to a decrease in the average balance of $2.2 million to $77.4 million for the three months ended March 31, 2013, from $79.7 million for the three months ended March 31, 2012, as well as a 56 basis point decrease in the average yield on securities to 2.52% from 3.08%.

Interest Expense. Interest expense decreased $23,000 to $1.2 million for the three months ended March 31, 2013, from $1.3 million for the three months ended March 31, 2012. The decrease resulted from a 16 basis point decrease in the cost of interest-bearing liabilities, partially offset by a $79.4 million, or 16.3%, increase in the average balance of interest-bearing liabilities.

Interest expense on interest-bearing deposits increased by $95,000 to $1.0 million for the three months ended March 31, 2013, from $938,000 for the three months ended March 31, 2012. This increase was primarily due to a $94.9 million increase in the average balance of interest-bearing deposits to $489.9 million for the three months ended March 31, 2013, from $395.1 million for the three months ended March 31, 2012. Offsetting the increase in average balance was a 10 basis point decrease in the average cost of interest-bearing deposits to 0.85% for the three months ended March 31, 2013, from 0.95% for the three months ended March 31, 2012. We experienced decreases in the average cost within all deposit categories.

Interest expense on total borrowings decreased $118,000 to $194,000 for the three months ended March 31, 2013, from $312,000 for the three months ended March 31, 2012. This decrease was primarily due to a 33 basis point decrease in the average cost of FHLB advances to 1.01% for the three months ended March 31, 2013, from 1.34% for the three months ended March 31, 2012, and a $15.5 million decrease in the average balance of FHLB advances to $74.1 million for the three months ended March 31, 2013, from $89.5 million for the three months ended March 31, 2012.

Provision for Loan Losses. Based on our methodology for establishing our allowance for loan losses and provisions for loan losses discussed in Note 5 to the Consolidated Financial Statements included in this Form 10-Q, we recorded a provision for loan losses of $327,000 for the three months ended March 31, 2013, compared to $481,000 for the three months ended March 31, 2012. The allowance for loan losses was $6.8 million, or 0.96% of total loans, at March 31, 2013, compared to $6.4 million, or 0.98% of total loans, at December 31, 2012.

Noninterest Income. Noninterest income increased by $42,000 to $1.0 million for the three months ended March 31, 2013, from $964,000 for the three months ended March 31, 2012. The increase was primarily due to an increase of $32,000 in customer service fees, an increase of $31,000 on net gains on sales and calls of securities, an increase of $99,000 in loan servicing fee income and an increase of $100,000 in experience refunds for vendor single interest (“VSI”) coverage based on high credit quality and the resultant low level of VSI claims related to indirect auto loans, partially offset by a decrease in net gains on sales of loans of $227,000.

Noninterest Expense. Noninterest expense increased $716,000 to $5.8 million for the three months ended March 31, 2013, from $5.1 million for the three months ended March 31, 2012. The largest components of this increase were salaries and employee benefits, which increased 16.7%, or $527,000 and data processing, which increased 49.0% or $191,000. These increases in expenses were primarily the result of stock compensation expense and increased data processing expenses driven by loan and deposit volume increases. These increases were partially offset by a decrease of $107,000, or 33.6% in professional fees.

Income Tax Expense. We recorded income tax expense of $242,000 for the three months ended March 31, 2013, compared to income tax expense of $212,000 for the three months ended March 31, 2012. The effective tax rate for the three months ended March 31, 2013 was 36.8% compared to 32.2% for the same period in 2012. The increase in effective tax rate was primarily the result of non-deductible stock based compensation expense which was partially offset by a decrease in the valuation reserve on deferred tax assets.

The following tables set forth average balances of assets and liabilities, average yields and costs, and certain other information for the periods indicated. All average balances are daily average balances. Non-accrual loans were included in the computation of average balances, but have been reflected in the table as loans carrying a zero yield. The yields set forth below include the effect of deferred fees, discounts and premiums that are amortized or accreted to interest income or expense.


	For the Three Months Ended March 31,
	2013							2012
	(Dollars in thousands)
	Average Outstanding Balance		Interest		Yield/ Rate⁽¹⁾			Average Outstanding Balance		Interest		Yield/ Rate⁽¹⁾
Interest-earning assets:
Total loans	$	692,711	$	6,499		3.80	%	$	547,834	$	5,877		4.31	%
Securities		77,442		482		2.52	%		79,661		610		3.08	%
Other		32,635		17		0.22	%		37,384		13		0.14	%

Total interest-earning assets		802,788		6,998		3.54	%		664,879		6,500		3.93	%
Non-interest-earning assets		26,741							25,780

Total assets	$	829,529						$	690,659


Interest-bearing liabilities:
Savings accounts		334,109		538		0.65	%		238,139		411		0.69	%
Checking accounts		27,308		8		0.12	%		24,785		8		0.13	%
Money market accounts		11,007		2		0.08	%		12,226		5		0.18	%
Certificates of deposit		117,525		484		1.67	%		119,912		514		1.72	%

Total interest-bearing deposits		489,949		1,032		0.85	%		395,062		938		0.95	%
Federal Home Loan Bank advances		74,044		185		1.01	%		89,523		298		1.34	%
Securities sold under agreements to repurchase		3,562		1		0.15	%		3,228		3		0.40	%
Other borrowed funds		1,152		8		2.94	%		1,498		11		2.90	%

Total interest-bearing liabilities		568,707		1,226		0.87	%		489,311		1,250		1.03	%
Non-interest-bearing liabilities		128,256							69,624

Total liabilities		696,963							558,935
Stockholders’ Equity		132,566							131,724

Total liabilities and equity	$	829,529						$	690,659


Net interest and dividend income			$	5,772						$	5,250

Net interest rate spread ⁽²⁾						2.66	%						2.90	%
Net interest-earning assets ⁽³⁾		234,081							175,568

Net interest margin ⁽⁴⁾						2.92	%						3.18	%
Average interest-earning assets to interest-bearing liabilities						141.16	%						135.88	%

(1)	Yields and rates for the three-month periods ended March 31, 2013 and 2012 are annualized.

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

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

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

The following table presents the effects of changing rates and volumes on our net interest and dividend income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated proportionately, based on the changes due to rate and the changes due to volume.


	Three Months Ended March 31,
	2013 vs. 2012
	Increase (Decrease) Due to						Total Increase
	Volume			Rate			(Decrease)
	(In thousands)
Interest-earning assets:
Loans	$	1,124		$	(502	)	$	622
Securities		(17	)		(111	)		(128	)
Federal Home Loan Bank stock		—			—			—
Other		(1	)		6			5

Total interest-earning assets		1,106			(607	)		499

Interest-bearing liabilities:
Savings accounts		149			(22	)		127
Checking accounts		—			—			—
Money market accounts		—			(3	)		(3	)
Certificates of deposit		(12	)		(18	)		(30	)

Total interest-bearing deposits		137			(43	)		94

Federal Home Loan Bank advances		(47	)		(66	)		(113	)
Securities sold under agreements to repurchase		—			(2	)		(2	)
Other borrowed funds		(3	)		—			(3	)

Total interest-bearing liabilities		87			(111	)		(24	)

Change in net interest income	$	1,019		$	(496	)	$	523

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 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 March 31, 2013 resulting from potential changes in interest rates. These estimates require the Bank to make certain assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain and, as a result, the Bank cannot precisely predict the impact of changes in interest rates on its net interest income. Although the net interest income table below provides an indication of the Banks interest rate risk exposure at a particular point in time, such estimates are not intended to, and do not, provide a precise forecast of the effect of changes in market interest rates on its net interest income and will differ from actual results.


Change in Interest Rates (basis points) (1)	NII Change Year One (% Change From Year One Base)
Shock +300		–7.4	%
+200		–4.2	%
–100		–0.8	%

(1)	The calculated change for -100 basis points (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 March 31, 2013, in the event of a 200 basis point increase in interest rates over a one year period, assuming a gradual parallel shift across the yield curve over such period, the Bank would experience a 4.2% 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 0.8% 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 March 31, 2013 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 9.2% 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 March 31, 2013 to satisfy our short- and long-term liquidity needs as of that date.

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

•

expected loan demand;

•

expected deposit flows and borrowing maturities;

•

yields available on interest-earning deposits and securities; and

•

the objectives of our asset/liability management program.

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

Our most liquid assets are cash and cash equivalents. The level of these assets is dependent on our operating, financing, lending and investing activities during any given period. At March 31, 2013, cash and cash equivalents totaled $19.2 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 March 31, 2013, we had $29.3 million in loan commitments outstanding. In addition to commitments to originate loans, we had $89.3 million in unused lines of credit to borrowers and $12.8 million in unadvanced funds on construction loans.

Certificates of deposit due within one year of March 31, 2013 totaled $49.9 million, or 8.09%, 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 March 31, 2014, or on our money market accounts. We believe, however, based on historical experience and current market interest rates that we will retain upon maturity a large portion of our certificates of deposit with maturities of one year or less as of March 31, 2013.

Our primary investing activity is originating loans. During the three months ended March 31, 2013 and the year ended December 31, 2012, we originated $81.0 million and $415.6 million of loans, respectively.

Financing activities consist primarily of activity in deposit accounts, Federal Home Loan Bank advances and, to a lesser extent, brokered deposits. We experienced net increases in deposits of $8.8 million and $177.2 million for the three months ended March 31, 2013 and for the year ended December 31, 2012, respectively. At March 31, 2013 and December 31, 2012, the levels of brokered deposits were $18.8 million and $22.6 million, respectively. Deposit flows are affected by the overall level of interest rates, the interest rates and products offered by us and our local competitors, and by other factors.

Liquidity management is both a daily and long-term function of business management. If we require funds beyond our ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank of Boston, which provide an additional source of funds. At March 31, 2013, we had $76.6 million of Federal Home Loan Bank advances. Based on available collateral at that date, we had the ability to borrow up to an additional $74.6 million from the Federal Home Loan Bank of Boston.

Belmont Savings Bank is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At March 31, 2013, Belmont Savings Bank exceeded all regulatory capital requirements. Belmont Savings Bank is considered “well capitalized” under regulatory guidelines.

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

We are obligated to make future payments according to various contracts. As of March 31, 2013, our contractual obligations have not changed materially from those disclosed in our 2012 Annual Report on Form 10-K as filed with the Securities and Exchange Commission on March 14, 2013.

Off-Balance Sheet Arrangements

As a financial services provider, we routinely are a party to various financial instruments with off-balance-sheet risks, such as commitments to extend credit and unused lines of credit. While these contractual obligations represent our potential future cash requirements, a significant portion of commitments to extend credit may expire without being drawn upon. Such commitments are subject to the same credit policies and approval process accorded to loans we make. In addition, from time to time we enter into commitments to sell mortgage loans that we originate. For the three months ended March 31, 2013, we engaged in no off-balance sheet transactions reasonably likely to have a material effect on our financial condition, results of operations or cash flows.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

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

Item 4.

Controls and Procedures

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

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

There were no changes in the Company’s internal control over financial reporting during the three months ended March 31, 2013 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

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

Item 1A.

Risk Factors.

For information regarding the Company’s risk factors, see “Risk Factors” in the Company’s 2012 Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 14, 2013. As of March 31, 2013, the risk factors of the Company have not changed materially from those disclosed in the 2012 Annual Report on Form 10-K.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a) Unregistered Sales of Equity Securities. None

(b) Use of Proceeds. None

(c) Repurchase of Equity Securities.

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


Period	(a) Total Number of Shares Purchased		(b) Average Price Paid per Share		(c) Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(1)		(d) Maximum Number of Shares that May Yet Be Purchased Under the Plans or Programs(1)
January 1 - January 31		—	$	—		—		—
February 1 - February 28		53,789	$	13.21		53,789		422,833
March 1 - March 31		90,430	$	13.64		90,430		332,403

Total		144,219	$	13.48		144,219

(1)

On December 21, 2012, the Company announced the commencement of a stock repurchase program to acquire up to 476,622 shares, or 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 Disclosure

Not applicable.

Item 5.

Other Information

None

Item 6.

Exhibits


31.1		Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.

31.2		Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.

32.0		Section 1350 Certification of Chief Executive Officer and Chief Financial Officer.*

101.0		The following data from the BSB Bancorp, Inc. Quarterly Report on Form 10-Q for the quarter ended March 31, 2013 formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Equity, (v) Consolidated Statements of Cash Flows, and (vi) the related notes.**

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

**	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:	May 10, 2013	By:	/s/ Robert M. Mahoney
			Robert M. Mahoney
			President, Chief Executive Officer and Director (Principal Executive Officer)

Date:	May 10, 2013	By:	/s/ John A. Citrano
			John A. Citrano
			Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)

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