BSB Bancorp, Inc. (Form: 10-K, Received: 03/14/2014 16:14:07)

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x	ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2013

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

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 offices)		(Zip Code)

(617) 484-6700

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class		Name of each exchange on which registered
Common Stock, par value $0.01 per share		Nasdaq Capital Market

Securities registered pursuant to Section 12(g) of the Act: None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. x

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

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

The aggregate market value of the voting and non-voting common equity held by nonaffiliates as of June 30, 2013 was approximately $103,287,096.

The number of shares outstanding of the registrant’s common stock as of March 10, 2014 was 9,055,808.

DOCUMENTS INCORPORATED BY REFERENCE:

(1) Proxy Statement for the 2013 Annual Meeting of Stockholders of the Registrant (Part III).

INDEX


		Page

PART I			2

ITEM 1.	BUSINESS		2
ITEM 1A.	RISK FACTORS		38
ITEM 1B.	UNRESOLVED STAFF COMMENTS		45
ITEM 2.	PROPERTIES		45
ITEM 3.	LEGAL PROCEEDINGS		46
ITEM 4.	MINE SAFETY DISCLOSURE		46

PART II			47

ITEM 5.	MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES		47
ITEM 6.	SELECTED FINANCIAL DATA		50
ITEM 7.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION		52
ITEM 7A.	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK		64
ITEM 8.	FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA		64
ITEM 9.	CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE		115
ITEM 9A.	CONTROLS AND PROCEDURES		115
ITEM 9B.	OTHER INFORMATION		115

PART III			116

ITEM 10.	DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE		116
ITEM 11.	EXECUTIVE COMPENSATION		116
ITEM 12.	SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS		116
ITEM 13.	CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE		116
ITEM 14.	PRINCIPAL ACCOUNTING FEES AND SERVICES		116

PART IV			117

ITEM 15.	EXHIBITS AND FINANCIAL STATEMENT SCHEDULES		117

SIGNATURES			118

This report contains certain “forward-looking statements” within the meaning of the federal securities laws. These statements are not historical facts; rather, they are statements based on BSB Bancorp, Inc.’s current expectations regarding its business strategies, intended results and future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.

Management’s ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors which could affect actual results include interest rate trends, the general economic climate in the market area in which BSB Bancorp, Inc. operates, as well as nationwide, BSB Bancorp, Inc.’s ability to control costs and expenses, competitive products and pricing, loan delinquency rates and changes in federal and state legislation and regulation. For further discussion of factors that may affect our results, see “Item 1A. Risk Factors” in this Annual Report on Form 10-K (“Form 10-K”). These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Except as required by law, we disclaim any intention or obligation to update or revise any forward-looking statements after the date of this Form 10-K, whether as a result of new information, future events or otherwise.

PART I

ITEM 1.

BUSINESS

General

BSB Bancorp, Inc. (“BSB Bancorp” or the “Company”) is a Maryland corporation that owns 100% of the common stock of Belmont Savings Bank (“Belmont Savings” or the “Bank”) and BSB Funding Corporation. BSB Bancorp was incorporated in June, 2011 to become the holding company of Belmont Savings in connection with the Bank’s conversion from the mutual holding company to stock holding company form of organization (the “conversion”). On October 4, 2011 we completed our initial public offering of common stock in connection with the conversion, selling 8,993,000 shares of common stock at $10.00 per share for approximately $89.9 million in gross proceeds, including 458,643 shares sold to the Bank’s employee stock ownership plan. In addition, in connection with the conversion, we issued 179,860 shares of our common stock and contributed $200,000 in cash to the Belmont Savings Bank Foundation. At December 31, 2013, we had consolidated assets of $1.1 billion, consolidated deposits of $764.8 million and consolidated equity of $130.4 million. Other than holding the common stock of Belmont Savings, BSB Bancorp has not engaged in any significant business to date.

Belmont Savings is a Massachusetts-chartered savings bank headquartered in Belmont, Massachusetts. The Bank’s business consists primarily of accepting deposits from the general public and investing those deposits, together with funds generated from operations and borrowings, in one to four family residential mortgage loans, commercial real estate loans, multi-family real estate loans, home equity lines of credit, indirect automobile loans (automobile loans assigned to us by automobile dealerships), commercial business loans, construction loans and investment securities. To a much lesser extent, the Bank also makes other consumer loans and second mortgage loans. We offer a variety of deposit accounts, including relationship checking accounts for consumers and businesses, passbook and statement savings accounts, certificates of deposit, money market accounts, Interest on Lawyer Trust Accounts (“IOLTA”), commercial, municipal and regular checking accounts and Individual Retirement Accounts (“IRAs”).

Throughout its history, Belmont Savings has remained focused on providing a broad range of quality services within its market area as a community bank. However, in 2009, in order to provide the bank with flexibility to make potential acquisitions, Belmont Savings reorganized into the mutual holding company structure. Further, following a comprehensive strategic review of the Bank’s management and operations, the board of directors of the Bank approved a new strategic plan designed to increase the growth and profitability of the Bank. The strategic plan was intended to take advantage of the sound Eastern Massachusetts economy, which was not as negatively affected by the recession that began in 2008 as other regions of the United States. The Bank’s current strategic plan contemplates continued growth in assets and liabilities over the next several years with the intent of building upon Belmont Savings’ leading market share in Belmont and growing share in the communities we serve, the “Bank of Choice” for deposit driven small businesses and municipalities in its market area, an originator and distributor of high quality auto loans and the trusted lending partner for area commercial real estate investors, developers and managers.

Available Information

BSB Bancorp is a public company, and files interim, quarterly and annual reports with the Securities and Exchange Commission, or “SEC”. These respective reports are on file and a matter of public record with the SEC and may be read and copied at the SEC’s Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information regarding our filings with the SEC by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC ( http://www.sec.gov ).

BSB Bancorp’s executive offices are located at 2 Leonard Street, Belmont, Massachusetts 02478. Our telephone number at this address is (617) 484-6700, and our website address is www.belmontsavings.com . Information on our website should not be considered a part of this Form 10-K.

Market Area

We conduct our operations from our six ¹ full service branch offices located in Belmont, Watertown, Waltham, Newton and Cambridge in Southeast Middlesex County, Massachusetts. Our primary lending market includes Essex, Middlesex, Norfolk and Suffolk Counties, Massachusetts. Due to its proximity to Boston, our primary market area benefits from the presence of numerous institutions of higher learning, medical care and research centers and the corporate headquarters of several significant financial service companies. Eastern Massachusetts also has many high technology companies employing personnel with specialized skills. These factors affect the demand for residential homes, multi-family apartments, office buildings, shopping centers, industrial warehouses and other commercial properties.

Our lending area is primarily an urban market area with a substantial number of one to four unit properties, some of which are non-owner occupied, as well as apartment buildings, condominiums and office buildings. As a result, compared to many thrift institutions, our loan portfolio contains a significantly greater number of multi-family and commercial real estate loans.

Our market area is located largely in the Boston-Cambridge-Quincy, Massachusetts/New Hampshire Metropolitan Statistical Area. The United States Census Beureu estimates that as of July 1, 2012, the Boston metropolitan area is the 10 ^th largest metropolitan area in the United States. Located adjacent to major transportation corridors, the Boston metropolitan area provides a highly diversified economic base, with major employment sectors ranging from services, manufacturing and wholesale/retail trade, to finance, technology and medical care. According to the United States Department of Labor, in December 2013, the Boston-Cambridge-Quincy, Massachusetts/New Hampshire MSA had an unemployment rate of 5.9% compared to the national unemployment rate of 6.7%.

New In-Store Branches

On February 27, 2013, we entered into two lease agreements with Shaw’s Supermarkets, Inc., a Massachusetts corporation, to open two in-store full service branches located in Cambridge and Newton, Massachusetts. The branches commenced operations in June of 2013 and August of 2013 for Cambridge and Newton, respectively. Both branches are full service with state of the art technology, five to six staff, and two offices to meet and work with customers.

The Cambridge and Newton branches continue the planned geographic expansion of our network. We believe that entering the neighboring Cambridge and Newton markets is a natural extension of our franchise.

Competition

We face intense competition in our market area both for making loans and attracting deposits. We compete with commercial banks, credit unions, savings institutions, online banks, mortgage brokerage firms, finance companies, mutual funds, insurance companies and investment banking firms. Some of our competitors have greater name recognition and market presence that benefit them in attracting customers, and offer certain services that we do not or cannot provide.

Our deposit sources are primarily concentrated in the communities surrounding our full-service branch offices located in Belmont, Watertown, Waltham, Newton and Cambridge Massachusetts. As of June 30, 2013 (the latest date for which information is publicly available from the Federal Deposit Insurance Corporation), we ranked first of ten bank and thrift institutions with offices in the town of Belmont, Massachusetts, with a 33.3% market share. As

¹	On January 18, 2014, our branch located at 78 Trapelo Road, Belmont, MA, was closed and all accounts were transferred to the 277 Trapelo Road branch.

of that same date, we ranked fourth of eight bank and thrift institutions with offices in the city of Watertown, Massachusetts, with a 5.5% market share, seventh of nine bank and thrift institutions with offices in the city of Waltham, Massachusetts, with a 4.4% market share and sixteenth of sixteen bank and thrift institutions with offices in the city of Cambridge, with a 0.11% market share.

Lending Activities

Our primary lending activity is the origination of one to four family residential mortgage loans, multi-family real estate loans, commercial real estate loans, home equity lines of credit, indirect auto loans, commercial business loans and construction loans.

Loan Portfolio Composition. The following table sets forth the composition of our loan portfolio at the dates indicated, excluding loans held for sale of $0, $11.2 million, $15.9 million, $3.8 million, and $250,000 at December 31, 2013, 2012, 2011, 2010 and 2009, respectively.


	At December 31,
	2013						2012						2011
	Amount			Percent			Amount			Percent			Amount			Percent
	(Dollars in thousands)
Mortgage loans:
Residential one-to-four family	$	287,652			34.17	%	$	201,845			30.70	%	$	192,295			37.58	%
Commercial real estate (1)		320,807			38.10			266,669			40.57			170,080			33.23
Home equity lines of credit		92,461			10.98			66,939			10.18			50,015			9.77
Construction		9,965			1.18			16,139			2.46			15,198			2.97

Total mortgage loans		710,885			84.43			551,592			83.91			427,588			83.55

Commercial loans		30,691			3.65			24,779			3.77			16,807			3.28
Consumer loans:
Indirect auto		99,798			11.85			80,312			12.22			66,401			12.97
Other consumer (2)		558			0.07			654			0.10			998			0.20

		131,047			15.57			105,745			16.09			84,206			16.45


Total loans		841,932			100.00	%		657,337			100.00	%		511,794			100.00	%


Net deferred loan costs		3,535						2,777						2,523
Net unamortized mortgage premiums		1,504						621						423
Allowance for loan losses		(7,958	)					(6,440	)					(4,776	)


Total loans, net	$	839,013					$	654,295					$	509,964

(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.


	At December 31,
	2010						2009
	Amount			Percent			Amount			Percent
	(Dollars in thousands)
Mortgage loans:
Residential one to four family	$	184,087			54.27	%	$	213,100			60.25	%
Commercial real estate (1)		91,221			26.89			81,016			22.90
Home equity lines of credit		30,921			9.11			30,676			8.67
Construction		13,835			4.08			19,057			5.39

Total mortgage loans		320,064			94.35			343,849			97.21

Commercial		14,012			4.13			8,877			2.51
Consumer loans:
Indirect auto		3,697			1.09			—			—
Other consumer (2)		1,467			0.43			1,005			0.28

		19,176			5.65			9,882			2.79


Total loans		339,240			100.00	%		353,731			100.00	%


Net deferred loan costs		562						461
Net unamortized mortgage premiums		3						34
Allowance for loan losses		(2,889	)					(2,473	)


Total loans, net	$	336,916					$	351,753

(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.

Loan Portfolio Maturities and Yields. The following table summarizes the dollar amount of loans maturing in our portfolio based on their contractual terms to maturity at December 31, 2013. The table does not include any estimate of prepayments, which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans, loans having no stated repayment schedule or maturity, and overdraft loans are reported as being due in one year or less.


	One to Four Family					Commercial Real Estate (1)					Equity Lines of Credit					Construction
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
	(Dollars in thousands)
Maturing During the Twelve Months Ending December 31,
2014	$	9		6.45	%	$	14,167		4.21	%	$	—		0.00	%	$	1,171		4.53	%
2015		25		4.38	%		5,485		3.78	%		2		7.00	%		1,986		3.87	%
2016 to 2017		460		5.34	%		14,744		4.69	%		6		4.75	%		3,514		3.50	%
2018 to 2022		6,455		4.66	%		162,452		4.28	%		900		4.60	%		1,294		2.67	%
2023 to 2027		5,131		3.46	%		111,235		4.16	%		5,512		4.05	%		2,000		4.00	%
2028 and beyond		275,572		3.93	%		12,724		4.90	%		86,041		2.53	%		—		0.00	%


Total	$	287,652		3.94	%	$	320,807		4.27	%	$	92,461		2.64	%	$	9,965		3.69	%


	Commercial					Indirect Auto					Other Consumer					Total
	Amount		Yield			Amount		Yield			Amount		Yield			Amount		Yield
	(Dollars in thousands)
Maturing During the Twelve Months Ending December 31,
2014	$	13,871		3.39	%	$	117		2.79	%	$	468		2.89	%	$	29,803		4.02	%
2015		2,231		3.54	%		1,651		3.00	%		7		14.03	%		11,387		3.65	%
2016 to 2017		7,117		3.42	%		46,628		3.04	%		36		9.47	%		72,505		3.45	%
2018 to 2022		4,572		5.00	%		51,402		2.87	%		47		7.92	%		227,122		3.98	%
2023 to 2027		2,900		4.00	%		—		0.00	%		—		0.00	%		126,778		4.12	%
2028 and beyond		—		0.00	%		—		0.00	%		—		0.00	%		374,337		3.63	%


Total	$	30,691		3.71	%	$	99,798		2.95	%	$	558		3.88	%	$	841,932		3.80	%

(1)	Includes multi-family real estate loans.

The following table sets forth the scheduled repayments of fixed- and adjustable-rate loans at December 31, 2013 that are contractually due after December 31, 2014.


	Due After December 31, 2014
	Fixed		Adjustable		Total
	(Dollars in thousands)
Mortgage loans:
Residential one to four family	$	200,162	$	87,481	$	287,643
Commercial real estate loans (1)		80,291		226,349		306,640
Equity lines of credit		—		92,461		92,461
Construction loans		5,514		3,280		8,794

Total mortgage loans		285,967		409,571		695,538
Commercial loans		5,214		11,606		16,820
Consumer loans:
Indirect auto loans		99,681		—		99,681
Other consumer loans		90		—		90


Total loans	$	390,952	$	421,177	$	812,129

(1)	Includes multi-family real estate loans.

One to Four Family Residential Mortgage Loans.

At December 31, 2013, $287.7 million, or 34.2%, of our total loan portfolio, consisted of one to four family residential mortgage loans. We offer fixed and adjustable rate residential mortgage loans with maturities up to 30 years.

Much of the housing stock in our primary lending market area is comprised of one, two, three and four unit properties, all of which are classified as one to four family residential mortgage loans. At December 31, 2013, of the $287.7 million of one to four family residential mortgage loans in our portfolio, $2.0 million, or 0.7%, were comprised of non-owner occupied properties.

Our one to four family residential mortgage loans are generally underwritten according to Fannie Mae and Freddie Mac guidelines, and we refer to loans that conform to such guidelines as “conforming loans.” We generally originate both fixed and adjustable rate mortgage loans in amounts up to the maximum conforming loan limits as established by the Federal Housing Finance Agency, which is generally $417,000. We also originate loans above this amount, which are referred to as “jumbo loans.” We generally underwrite jumbo loans in a manner similar to conforming loans. Jumbo loans are common in our market area. During the year ended December 31, 2013, we originated $43.3 million and purchased $108.8 million of jumbo loans.

We originate our adjustable rate one to four family residential mortgage loans with initial interest rate adjustment periods of one, three and five years, based on adding a margin to a designated market index. These loans are limited to a 5% initial rate increase, a 2% annual rate increase after the initial adjustment, and a maximum adjustment of 5% over the life of the loan. We determine whether a borrower qualifies for an adjustable rate mortgage loan annually based on secondary market guidelines.

We will originate one to four family residential mortgage loans with loan-to-value ratios up to 80% without private mortgage insurance. We will originate loans with loan-to-value ratios of up to 95% with private mortgage insurance and where the borrower’s debt service does not exceed 43% of the borrower’s monthly cash-flow.

Generally, we sell into the secondary market the majority of the fixed rate one to four family residential mortgage loans that we originate. We base the amount of fixed rate loans that we sell into the secondary market on our liquidity needs, asset/liability mix, loan volume, portfolio size and other factors. We sell loans both servicing released and servicing retained. For the year ended December 31, 2013, we received servicing fees of $163,000 on loans that were previously sold. At December 31, 2013, the principal balance of loans serviced for others totaled $61.2 million.

We generally do not offer “interest only” mortgage loans on one to four family residential properties nor do we offer loans that provide for negative amortization of principal, such as “Option ARM” loans, where the borrower can pay less than the interest owed on his loan, resulting in an increased principal balance during the life of the loan. We do not offer “subprime loans” (loans that are made with low down-payments to borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies, or borrowers with questionable repayment capacity as evidenced by low credit scores or high debt-burden ratios) or Alt-A loans (defined as loans having less than full documentation).

Commercial Real Estate and Multi-family Real Estate Loans.

At December 31, 2013, $320.8 million, or 38.1%, of our loan portfolio consisted of commercial real estate loans and multi-family (which we consider to be five or more units) residential real estate loans. At December 31, 2013, substantially all of our commercial real estate and multi-family real estate loans were secured by properties located in Eastern Massachusetts.

Our commercial real estate mortgage loans are primarily secured by office buildings, owner-occupied commercial buildings, industrial buildings and strip mall centers. Our multi-family loans are primarily secured by five or more unit residential properties. At December 31, 2013, loans secured by commercial real estate and multi-family real estate had an average loan balance of $1.7 million.

We offer commercial and multi-family real estate loans at fixed and adjustable rates. Our commercial and multi-family real estate loans with adjustable rates generally have terms of ten years with fixed rates for the first five years and adjustable rates thereafter based on changes in a designated market index. These loans generally amortize on a twenty-five to thirty year basis, with a balloon payment due at maturity.

In underwriting commercial and multi-family real estate loans, we consider a number of factors, which include the net cash flow to the loan’s debt service requirement (generally requiring a minimum of 125%), the age and condition of the collateral, the financial resources and income level of the borrower or guarantor and the borrower’s and guarantor’s experience in owning or managing similar properties. Commercial and multi-family real estate loans are generally originated in amounts up to 80% of the appraised value or the purchase price of the property securing the loan, whichever is lower. Personal guarantees are typically obtained from commercial real estate and multi-family real estate borrowers. In addition, the borrower’s and guarantor’s financial information on such loans is monitored on an ongoing basis though required periodic financial statement updates.

Commercial and multi-family real estate loans generally carry higher interest rates and have shorter terms than one to four family residential mortgage loans. Commercial real estate and multi-family real estate loans, however, entail greater credit risks compared to the one to four family residential mortgage loans we originate as they typically involve larger loan balances concentrated with single borrowers or groups of related borrowers. In addition, the payment of loans secured by income producing properties typically depends on the successful operation of the property as repayment of the loan generally is dependent, in large part, on sufficient income from the property to cover operating expenses and debt service. Changes in economic conditions that are not in the control of the borrower or lender could affect the value of the collateral or the future cash flow of the property. Additionally, any decline in real estate values may be more pronounced for commercial real estate and multi-family real estate than for one to four family residential properties. All commercial real estate loans, regardless of size, are approved by Vice President-Credit Manager of Commercial Real Estate Lending, the Executive Vice President and Division Executive of Commercial Real Estate Lending and the President and Chief Executive Officer of the Bank.

At December 31, 2013, our largest commercial real estate loan had an outstanding balance of $19.3 million, was secured by two office buildings and one commercial building totaling 337,852 square feet, and was performing in accordance with its original terms. At that date, our largest multi-family real estate loan had a balance of $15 million, was secured by a 37 unit residential complex, and was performing in accordance with its original terms.

Home Equity Loans and Lines of Credit. In addition to traditional one to four family residential mortgage loans, we offer home equity lines of credit and, to a lesser extent, home equity loans, that are secured by the borrower’s primary residence, secondary residence or one to four family investment properties. Home equity loans and lines of credit are generally underwritten with the same criteria that we use to underwrite one to four family residential mortgage loans.

Our home equity lines of credit are revolving lines of credit which generally have a term of twenty five years, with draws available for the first ten years. Our twenty five year lines of credit are interest only during the first ten years, and amortize on a fifteen year basis thereafter. We generally originate home equity lines of credit with loan-to-value ratios of up to 80% when combined with the principal balance of the existing first mortgage loan, although loan-to-value ratios may occasionally exceed 80% on a case by case basis. Maximum loan-to-values are determined based on an applicant’s credit score, property value and debt-to-income ratio. Lines of credit above $1 million with loan-to-values greater than 60% require two full appraisals with the valuation being the average of the two. Lines of credit greater than $500,000 generally may not exceed a loan-to-value ratio of 75% and require a credit score (FICO) of greater than 720. Rates are adjusted monthly based on changes in a designated market index. At December 31, 2013, our largest home equity line of credit was a $2 million line of credit with an outstanding balance of $1.6 million. At December 31, 2013 this line of credit was performing in accordance with its original terms.

We have historically originated both fixed-rate and adjustable-rate home equity loans with terms up to 15 years, although in the current interest rate environment, fixed-rate loans with terms greater than five years are not a focus. Our adjustable-rate home equity loans have initial interest rate adjustment periods of one, three and five years, based on changes in a designated market index. These loans are limited to a 500 basis point initial increase in their interest rate, a 200 basis point annual increase after the initial adjustment, and a maximum upward adjustment of 500 basis points over the life of the loan.

Indirect Automobile Loans and Other Consumer Loans. In the fourth quarter of 2010, we began originating indirect automobile loans. These are automobile loans that franchised dealerships originate and assign to us, upon our approval, for a premium based on pre-established rates and terms. We underwrite each of these loans, as further described below. We currently receive auto loans from approximately 215 franchised dealerships located in Massachusetts, Rhode Island, Connecticut, Maine, New Hampshire and Vermont. During the year ended December 31, 2013, our portfolio of indirect auto loans increased from $80.3 million to $99.8 million, or 11.9%, of our total loan portfolio. Approximately 65.0% of the aggregate principal balance of our indirect automobile loan portfolio as of December 31, 2013 was for financing new vehicles, and the remainder was for financing used vehicles. We only originate used car loans through franchised dealers of new automobiles that also provide us with loans on new vehicles.

At December 31, 2013, the weighted average original term to maturity of our automobile loan portfolio was 62 months, with an estimated average expected life of 30 months. The average amount financed for each of our automobile loans for the year ended December 31, 2013 was $19,542 and the weighted average credit score was 786. Approximately 52%, 21% and 19% of the aggregate principal balance of our automobile loan portfolio at December 31, 2013 consisted of loans to borrowers with mailing addresses in Massachusetts, Rhode Island and Connecticut, respectively.

Each dealer that originates automobile loans contractually makes representations and warranties to us with respect to our security interest, dealer or consumer fraud and the dealership’s compliance with all state and federal laws for the related financed vehicles. These representations and warranties do not relate to the creditworthiness of the borrowers or the collectability of the loan. Each automobile contract requires the borrower to maintain insurance against loss or damage by fire, theft and collision.

Each participating dealership submits credit applications to us through industry web portals, (Dealertrack and Route One) into an online loan originations system provided by Fiserv Solutions, Inc. The borrower’s creditworthiness and the value of the underlying collateral are the most important criteria used in determining whether to originate an automobile loan. Each credit application requires that the borrower provide current, personal information regarding the borrower’s employment history, debts, and other factors that impact creditworthiness. Our loan origination system provides for automatic declines of lower quality applications. However, all other applications are reviewed by our experienced automobile lending staff prior to being approved.

We generally finance up to 100% of the wholesale value of the vehicle plus sales tax, dealer preparation fees, license fees and title fees, which may in some cases result in a loan-to-value ratio of 100% or higher. The vehicle’s value is determined by using NADA Dealer Invoice or wholesale value as updated by NADA on a monthly basis. We regularly review the quality of our indirect auto loans and periodically conduct quality control audits to ensure compliance with our established policies and procedures.

During the year ended December 31, 2013, we sold to other financial institutions $63.6 million, or 53.9%, of the indirect automobile loans that we originated. We expect that future sales of indirect auto loans will be driven by our risk management considerations, our liquidity needs, asset/liability mix, loan volume, portfolio size, market pricing and other factors. As of December 31, 2013, we maintained relationships with eighteen financial institutions to which we may sell indirect automobile loans. We sell our indirect automobile loans as non-recourse whole loans with servicing retained, and make standard representations and warranties in connection with the sale and servicing of the loans. We receive a fee from the loan purchaser at the time of sale, as well as servicing fees. Loans sold are generally representative of our indirect automobile portfolio.

To a lesser extent we also offer a variety of other consumer loans, primarily loans secured by savings deposits. At December 31, 2013, our portfolio of consumer loans other than indirect automobile loans totaled $558,000, or 0.07% of our total loan portfolio.

Indirect automobile loans and other consumer loans generally have shorter terms to maturity, which reduces our exposure to changes in interest rates. In addition, management believes that offering consumer loan products helps to expand and create stronger ties to our existing customer base by increasing the number of customer relationships and providing cross-marketing opportunities.

Consumer loans generally have greater risk compared to longer-term loans secured by improved, owner-occupied real estate, particularly consumer loans that are secured by rapidly depreciable assets, such as automobiles. In these cases, any repossessed collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. As a result, consumer loan repayments are dependent on the borrower’s continuing financial stability and thus are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, our consumer loan portfolio contains a substantial number of indirect automobile loans where we assume the risk that the automobile dealership administering the lending process complies with federal, state and local consumer protection laws.

Commercial Loans . We originate commercial term loans and variable lines of credit to small- and medium-sized businesses in our primary market area. Our commercial loans are generally used for working capital purposes or for acquiring equipment or real estate. These loans are generally secured by business assets, such as business equipment and inventory or accounts receivable, and real estate, and are generally originated with maximum loan-to-value ratios of up to 80%. The commercial business loans that we offer are generally adjustable-rate loans with terms ranging from three to five years. At December 31, 2013, we had $30.7 million of commercial business loans and lines of credit outstanding, representing 3.7% of our total loan portfolio. At December 31, 2013, the average loan balance of our commercial loans and lines of credit was $487,000.

When making commercial business loans, we consider the financial condition of the borrower, the payment history of the borrower, the debt service capabilities of the borrower, the projected cash flows of the business and the value of the collateral, if any. Virtually all of our loans are guaranteed by the principals of the borrower.

Commercial business loans generally have a greater credit risk than residential mortgage loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. We seek to minimize these risks through our underwriting standards and the experience of our credit department. The credit department is responsible for the underwriting and documentation of new commercial loans as well as the annual review of credit ratings of existing loans and special credit projects. The credit department has no loan production goals and has annual performance objectives based on credit quality and credit risk management. All commercial loans, regardless of size, are approved by Vice President-Credit Manager of Commercial Real Estate Lending, the Executive Vice President and Division Executive of Commercial Real Estate Lending and the President and Chief Executive Officer of the Bank.

At December 31, 2013, our largest commercial business loan outstanding was a $4.6 million loan secured by business assets and commercial real estate. At December 31, 2013, this loan was performing in accordance with its original terms.

Construction Loans. We originate loans to professional developers and investors to finance the construction of one to four family residential properties, multi-family properties and commercial properties. A majority of our construction loans are for commercial development projects, including residential properties. Most of our loans for the construction of one to four family residential properties are “on speculation.” At December 31, 2013, $10.0 million, or 1.18%, of our total loan portfolio, consisted of construction loans, $6.1 million of which were secured by one to four family residential real estate projects on speculation, $1.3 million of which were secured by multi-family residential real estate projects, and $2.5 million of which were secured by commercial real estate.

Our construction loans generally provide for the payment of interest only during the construction phase, which is usually 12 to 24 months. At the end of the construction phase, depending upon the initial purpose, the loan either converts to a permanent mortgage loan or the project is sold. Loans generally are made with a maximum loan to cost ratio of 75%, or a maximum loan-to-as completed value ratio of 75%, whichever is lower. Before making a

commitment to fund a construction loan, we require an appraisal of the property by an independent licensed appraiser. We also require inspections of the property and a satisfactory title update before disbursements of funds during the term of the construction loan.

At December 31, 2013, our largest speculative construction loan had a principal balance of $3.5 million and was secured by a 32 house residential subdivision development project. This loan was performing in accordance with its original terms at December 31, 2013.

Construction financing generally involves greater credit risk than the financing of improved cash flowing real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost is inaccurate, we may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project is inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment of the construction loan upon the sale of the property. Construction loans also expose us to the risk that improvements will not be completed on time in accordance with specifications and projected costs. In addition, the ultimate sale or rental of the property may not occur as anticipated.

Loan Originations, Purchases, Sales, Participations and Servicing. Residential one to four family loans that we originate are generally underwritten pursuant to our policies and procedures, which incorporate standard underwriting guidelines, including those of Freddie Mac and Fannie Mae, to the extent applicable. We originate both adjustable-rate and fixed-rate loans. Our loan origination and sales activity may be adversely affected by a rising interest rate environment that typically results in decreased loan demand. Most of our one to four family residential mortgage loan originations are generated by our loan officers or referred by branch managers and employees located in our banking offices.

In recent years, in an effort to manage interest rate risk in what has been a relatively low interest rate environment, we have sold the majority of fixed-rate one to four family residential mortgage loans that we have originated. Some of these loans are sold with the servicing rights released. For loans sold with servicing rights retained, we provide the servicing for the loans on a per-loan fee basis.

For the year ended December 31, 2013, we received $163,000 in net servicing income on residential mortgage loans that we sold. At December 31, 2013, the principal balance of residential mortgage loans serviced for others totaled $61.2 million. For the year ended December 31, 2013, we received $730,000 in net servicing income on indirect auto loans that we sold. At December 31, 2013, the principal balance of indirect auto loans serviced for others totaled $124.8 million.

We generally sell our loans without recourse, except for customary representations and warranties provided in sales transactions. Loan servicing includes collecting and remitting loan payments, accounting for principal and interest, contacting delinquent borrowers, supervising foreclosures and property dispositions in the event of unremedied defaults, making certain insurance and tax payments on behalf of the borrowers and generally administering the loans. We retain a portion of the interest paid by the borrower on the loans we service as consideration for our servicing activities.

From time to time, we will participate in loans with other banks. Whether we are the lead lender or not, we follow our customary loan underwriting and approval policies. At December 31, 2013, we held $508,000 of commercial real estate loans in our portfolio that were participation loans from other lenders and $37.7 million of commercial real estate and commercial construction loans were participated out to other lenders.

From time to time, we have also purchased whole loans from other banks and mortgage companies. In these cases, we follow our customary loan underwriting and approval policies. During the years ended December 31, 2013 and 2012, we purchased one to four family residential mortgage loans of $129.3 million and $100.0 million, respectively, of whole loans, largely at fixed rates, from other banks and mortgage companies.

Loan Approval Procedures and Authority . Our lending activities follow written, non-discriminatory underwriting standards and loan origination procedures established by our Board of Directors. The loan approval process is intended to assess the borrower’s ability to repay the loan and the value of the property that will secure the loan. To assess the borrower’s ability to repay, we review the borrower’s employment and credit history and information on the historical and projected income and expenses of the borrower. We require “full documentation” on all of our loan applications.

Our policies and loan approval limits are established by our Board of Directors. Aggregate lending relationships in amounts up to $1.0 million can be approved by designated individual officers or officers acting together with specific lending approval authority. Relationships of $1.0 million or greater require the approval of the Executive Committee. All commercial real estate and commercial loans, regardless of size, are approved by VP- Credit Manager of Commercial Real Estate Lending, the EVP and Division Executive of Commercial Real Estate Lending and the President and Chief Executive Officer of the Bank.

We seek to minimize credit risks through our underwriting standards and the experience of our credit department. The credit department is responsible for the underwriting and documentation of new commercial loans as well as the annual review of credit ratings of existing loans and special credit projects. We consider our credit department to be independent because it has no loan production goals and has annual performance objectives based on credit quality and credit risk management.

We require appraisals based on a comparison with current market sales for all real property securing one to four family residential mortgage loans, multi-family loans and commercial real estate loans, unless the Executive Committee approves an alternative means of valuation. All appraisers are independent, state-licensed or state-certified appraisers and are approved by the Board of Directors annually.

Non-Performing and Problem Assets

When a residential mortgage loan or home equity line of credit is 15 days past due, a late payment notice is generated and mailed to the borrower. We will attempt personal, direct contact with the borrower to determine when payment will be made. We will send a letter when a loan is 30 days or more past due and will attempt to contact the borrower by telephone. Thereafter, we will send an additional letter when a loan is 60 days or more past due, and we will attempt to contact the borrower by telephone. By the 90 ^th day of delinquency, unless the borrower has made arrangements to bring the loan current on its payments, the loan will be placed on non-accrual. We refer loans to legal counsel to commence foreclosure proceedings according to Massachusetts law. In addition, a property appraisal is made to determine the current condition and market value. The account will be monitored on a regular basis thereafter. In attempting to resolve a default on a residential mortgage loan, Belmont Savings Bank complies with all applicable Massachusetts laws regarding a borrower’s right to cure.

When auto finance loans become 10 to 15 days past due, a late fee is charged according to applicable guidelines. When the loan is 11 days past due, the customer will receive a phone call from our servicer requesting a payment. Letters are generated at 15, 25 and 34 days past due. A letter stating our intent to repossess the automobile goes to the customer 21 days prior to repossession, which is triggered at 45 days past due. Vehicles are assigned for repossession at 65 to 70 days past due; the customer has 21 days for right of redemption until the vehicle is sold. Auto loans are placed on non-accrual status at 90 days past due and charged off at 120 days past due.

Commercial business loans, commercial real estate loans and consumer loans are generally handled in the same manner as residential mortgage loans or home equity lines of credit. All commercial business loans that are 60 days past due are immediately referred to a senior lending officer. Because of the nature of the collateral securing consumer loans, we may commence collection procedures faster for consumer loans than for residential mortgage loans or home equity lines of credit.

Loans are placed on non-accrual status when payment of principal or interest is more than 90 days delinquent. Loans are also placed on non-accrual status if collection of principal or interest in full is in doubt. When loans are placed on a non-accrual status, unpaid accrued interest is fully reversed, and further income is recognized only to the extent received. The loan may be returned to accrual status if both principal and interest

payments are brought current and remain current for six consecutive months and full payment of principal and interest is expected. All non-performing loans and problem assets are reviewed by the Executive Committee on a regular basis.

Non-Performing Assets. The table below sets forth the amounts and categories of our non-performing assets at the dates indicated.


	At December 31,
	2013			2012			2011			2010			2009
	(Dollars in thousands)
Non-accrual loans (1):
Mortgage loans:
One-to-four family	$	3,860		$	3,278		$	3,149		$	1,053		$	1,636
Commercial real estate		38			—			—			—			—
Construction loans		—			—			—			—			—
Equity lines of credit		200			319			1,123			617			—
Second mortgage loans		—			—			—			—			—
Commercial loans		—			—			155			37			—
Consumer loans:
Indirect auto loans		16			24			—			—			—
Other consumer loans		1			—			—			—			—

Total non-accrual loans	$	4,115		$	3,621		$	4,427		$	1,707		$	1,636


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		—			—			—			—			277
Second mortgage loans		—			—			—			—			—
Commercial loans		—			—			—			—			—
Consumer loans:
Indirect auto loans		—			—			—			—			—
Other consumer loans		—			—			—			—			1

Total loans 90 days delinquent and still accruing		—			—			—			—			278


Total non-performing loans	$	4,115		$	3,621		$	4,427		$	1,707		$	1,914



Other real estate owned	$	—		$	661		$	—		$	—		$	—



Total Reposessed Vehicles	$	—		$	43		$	30		$	—		$	—


Total non-performing assets (NPAs)	$	4,115		$	4,325		$	4,457		$	1,707		$	1,914


Troubled debt restructures included in NPAs	$	1,900		$	946		$	609		$	629
Troubled debt restructures not included in NPAs		7,366			6,437			—			—			—

Total troubled debt restructures	$	9,266		$	7,383		$	609		$	629		$	—


Ratios:
Non-performing loans to total loans		0.49	%		0.55	%		0.80	%		0.50	%		0.54	%
Non-performing assets to total assets		0.39	%		0.52	%		0.67	%		0.34	%		0.38	%

(1)	At December 31, 2013, 2012, 2011 and 2010, non-accrual loans included $1,900,000, $946,000, $609,000 and $629,000 of troubled debt restructurings, respectively. We had no troubled debt restructurings at December 31, 2009. See “Troubled Debt Restructurings,” below.

For the years ended December 31, 2013 and 2012, gross interest income that would have been recorded had our non-accruing loans been current in accordance with their original terms was $101,000 and $116,000, respectively. Interest income recognized on such loans for the years ended December 31, 2013 and 2012, was $42,000 and $82,000, respectively. Loans remain on non-accrual until both principal and interest payments are brought current and remain current for six consecutive months and full payment of principal and interest is expected. As of December 31, 2013, $1.7 million of the $4.1 million in non-performing loans were paid current, with an additional $448,000 in non-performing loans that were less than 90 days past due.

Troubled Debt Restructurings. We periodically modify loans to extend the term or make other concessions to help a borrower stay current on their loan and to avoid foreclosure. We generally do not forgive principal or interest on loans or modify the interest rates on loans to rates that are below market rates. At December 31, 2013 and 2012, we had $9.3 million and $7.4 million, respectively, of troubled debt restructurings. At December 31, 2013, $4.9 million was related to five residential one to four family loans, $400,000 was related to two equity lines of credit and $4.0 million was related to three commercial real estate loans. At December 31, 2012, $4.6 million was related to five residential one to four family loans, $400,000 was related to two equity lines of credit and $2.4 million was related to commercial real estate loans.

For the years ended December 31, 2013 and 2012, gross interest income that would have been recorded had our troubled debt restructurings been performing in accordance with their original terms was $169,000 and $202,000, respectively. Interest income recognized on such modified loans for the years ended December 31, 2013 and 2012 was $391,000 and $257,000, respectively.

Delinquent Loans. The following table sets forth certain information with respect to our loan portfolio delinquencies at the dates indicated.


	Loans Delinquent For
	60 to 89 Days				90 Days or Greater				Total
	Number		Amount		Number		Amount		Number		Amount
	Dollars in thousands
At December 31, 2013
Mortgage loans:
Residential one to four family		—	$	—		1	$	1,911		1	$	1,911
Commercial real estate loans		—		—		1		38		1		38
Construction loans		—		—		—		—		—		—
Equity lines of credit		—		—		—		—		—		—

		—		—		2		1,949		2		1,949
Commercial loans		—		—		—		—		—		—
Consumer loans:
Indirect auto loans		—		—		1		16		1		16
Other consumer loans		—		—		1		1		1		1


Total loans		—	$	—		4	$	1,966		4	$	1,966


At December 31, 2012
Mortgage loans:
Residential one to four family		—	$	—		4	$	2,412		4	$	2,412
Commercial real estate loans		—		—		—		—		—		—
Construction loans		—		—		—		—		—		—
Equity lines of credit		—		—		2		43		2		43

						6		2,455		6		2,455
Commercial loans		—		—		—		—		—		—
Consumer loans:
Indirect auto loans		1		27		1		24		2		51
Other consumer loans		—		—		—		—		—		—


Total loans		1	$	27		7	$	2,479		8	$	2,506


At December 31, 2011
Mortgage loans:
Residential one to four family		3	$	1,188		5	$	1,880		8	$	3,068
Commercial real estate loans		—		—		—		—		—		—
Construction loans		—		—		—		—		—		—
Equity lines of credit		—		—		3		847		3		847

		3		1,188		8		2,727		11		3,915
Commercial loans		—		—		1		7		1		7
Consumer loans:
Indirect auto loans		1		23		—		—		1		23
Other consumer loans		1		1		—		—		1		1


Total loans		5	$	1,212		9	$	2,734		14	$	3,946


	Loans Delinquent For
	60 to 89 Days				90 Days or Greater				Total
	Number		Amount		Number		Amount		Number		Amount
	Dollars in thousands
At December 31, 2010
Mortgage loans:
Residential one to four family		1	$	507		3	$	1,053		4	$	1,560
Commercial real estate loans		1		497		—		—		1		497
Construction loans		—		—		—		—		—		—
Equity lines of credit		1		314		2		617		3		931

		3		1,318		5		1,670		8		2,988
Commercial loans		—		—		1		37		1		37
Consumer loans:
Indirect auto loans		—		—		—		—		—		—
Other consumer loans		—		—		—		—		—		—


Total loans		3	$	1,318		6	$	1,707		9	$	3,025


At December 31, 2009
Mortgage loans:
Residential one to four family		1	$	134		5	$	1,636		6	$	1,770
Commercial real estate loans		—		—		—		—		—		—
Construction loans		—		—		—		—		—		—
Equity lines of credit		—		—		2		276		2		276

		1		134		7		1,912		8		2,046
Commercial loans		—		—		—		—		—		—
Consumer loans:
Indirect auto loans		—		—		—		—		—		—
Other consumer loans		1		4		1		2		2		6


Total loans		2	$	138		8	$	1,914		10	$	2,052


At September 30, 2009
Mortgage loans:
Residential one to four family		2	$	1,642		4	$	1,255		6	$	2,897
Commercial real estate loans		—		—		1		1,161		1		1,161
Construction loans		—		—		—		—		—		—
Equity lines of credit		—		—		1		77		1		77

		2		1,642		6		2,493		8		4,135
Commercial loans		—		—		—		—		—		—
Consumer loans:
Indirect auto loans		—		—		—		—		—		—
Other consumer loans		1		4		1		2		2		6


Total loans		3	$	1,646		7	$	2,495		10	$	4,141

Other Real Estate Owned . Real estate acquired by us as a result of foreclosure or by deed in lieu of foreclosure is classified as other real estate owned. When property is acquired it is recorded at estimated fair market value at the date of foreclosure less the cost to sell, establishing a new cost basis. Estimated fair value generally represents the sales price a buyer would be willing to pay on the basis of current market conditions, including normal terms from other financial institutions. Holding costs and declines in estimated fair market value result in charges to expense after acquisition. At December 31, 2013 we did not have any property classified as other real estate owned. At December 31, 2012 we had one property in other real estate owned of $661,000.

Classification of Assets. Our policies, consistent with regulatory guidelines, provide for the classification of loans and other assets that are considered to be of lesser quality as substandard, doubtful, or loss assets. An asset is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard assets include those assets characterized by the distinct possibility that we will sustain some loss if the deficiencies are not corrected. Assets classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Assets (or portions of assets) classified as loss are those considered uncollectible and of such little value that their continuance as assets is not warranted. Assets that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve our close attention, are required to be designated as special mention.

We maintain an allowance for loan losses at an amount estimated to equal all credit losses incurred in our loan portfolio that are both probable and reasonable to estimate at a balance sheet measurement date. Our determination as to the classification of our assets and the amount of our loss allowances is subject to review by regulatory agencies, which may require that we establish additional loss allowances. We regularly review our asset portfolio to determine whether any assets require classification in accordance with applicable regulations.

The following table sets forth our amounts of classified assets, assets designated as special mention and criticized assets (classified assets and loans designated as special mention) as of the dates indicated.


	At December 31,
	2013		2012		2011		2010		2009
	(Dollars in thousands)
Classified loans:
Substandard	$	15,053	$	11,117	$	6,432	$	1,190	$	1,394
Doubtful		—		—		—		—		—
Loss		—		—		—		—		—

Total classified loans		15,053		11,117		6,432		1,190		1,394
Special mention		7,657		12,177		2,724		4,762		3,457


Total criticized loans	$	22,710	$	23,294	$	9,156	$	5,952	$	4,851

At December 31, 2013, we had $15.1 million of substandard assets, of which $4.6 million were one to four family residential mortgage loans; $9.4 million were commercial real estate loans; $1.0 million were home equity lines of credit, and $4,000 were unsecured consumer loans. At December 31, 2013, special mention assets consisted of $3.1 million of one to four family residential mortgage loans, $4.3 million of commercial real estate loans, $200,000 of home equity lines of credit, $48,000 in commercial loans and $9,000 in unsecured consumer loans. Other than disclosed in the above tables, there are no other loans at December 31, 2013 that management has serious doubts about the ability of the borrowers to comply with the present loan repayment terms.

Allowance for Loan Losses

We provide for loan losses based upon the consistent application of our documented allowance for loan loss methodology. All loan losses are charged to the allowance for loan losses and all recoveries are credited to it. Additions to the allowance for loan losses are provided by charges to income based on various factors which, in our judgment, deserve current recognition in estimating probable losses. We regularly review the loan portfolio, including a review of our classified assets, and make provisions for loan losses in order to maintain the allowance for loan losses in accordance with GAAP. The allowance for loan losses consists primarily of two components:

(1)

specific allowances established for impaired loans (as defined by GAAP). The amount of impairment provided for as a specific allowance is represented by the deficiency, if any, between the estimated fair value of the loan, or the loan’s observable market price, if any, or the fair value of the underlying collateral, if the loan is collateral dependent, and the carrying value of the loan. Impaired loans for which the estimated fair value of the loan, or the loan’s observable market price or the fair value of the underlying collateral, if the loan is collateral dependent, exceeds the carrying value of the loan do not result in establishing specific allowances for loan losses; and

(2)

general allowances established for loan losses on a portfolio basis for loans that do not meet the definition of impaired loans. The portfolio is grouped by similar risk characteristics, primarily by loan type and regulatory classification. We apply an estimated loss rate to each loan group. The loss rates applied are based upon our loss experience adjusted, as appropriate, for the environmental factors discussed below. This evaluation is inherently subjective, as it requires material estimates that may be susceptible to significant revisions based upon changes in economic and real estate market conditions.

Actual loan losses may be significantly more than the allowance for loan losses we have established, which could have a material negative effect on our financial results.

The adjustments to historical loss experience are based on our evaluation of several qualitative and environmental factors, including:

•

changes in any concentration of credit (including, but not limited to, concentrations by geography, industry or collateral type);

•

changes in the number and amount of non-accrual loans, watch list loans and past due loans;

•

changes in national, state and local economic trends;

•

changes in the types of loans in the loan portfolio;

•

changes in the experience and ability of personnel and management in the loan origination and loan servicing departments;

•

changes in the value of underlying collateral for collateral dependent loans;

•

changes in lending strategies; and

•

changes in lending policies and procedures.

In addition, we may establish an unallocated allowance to provide for probable losses that have been incurred as of the reporting date but are not reflected in the allocated allowance.

We evaluate the allowance for loan losses based upon the combined total of the specific and general components. Generally when the loan portfolio increases, absent other factors, the allowance for loan loss methodology results in a higher dollar amount of estimated probable losses than would be the case without the increase. Generally when the loan portfolio decreases, absent other factors, the allowance for loan losses methodology results in a lower dollar amount of estimated probable losses than would be the case without the decrease.

We evaluate the loan portfolio on a quarterly basis and the allowance is adjusted accordingly. While we use the best information available to make evaluations, future adjustments to the allowance may be necessary if conditions differ substantially from the information used in making the evaluations. In addition, various regulatory agencies as an integral part of their examination process, will periodically review the allowance for loan losses. Such agencies may require us to recognize additions to the allowance based on their analysis of information available to them at the time of their examination.

The following table sets forth activity in our allowance for loan losses at and for the periods indicated.


	At or For the Years Ended December 31,												At or For the Three Months Ended December 31,			At or For the Year Ended September 30,
	2013			2012			2011			2010			2009			2009
	(Dollars in thousands)

Balance at the beginning of the period	$	6,440		$	4,776		$	2,889		$	2,473		$	2,321		$	1,747

Charge-offs:
Residential one-to-four family		—			(225	)		(210	)		—			—			—
Commercial real estate		—			—			—			—			—			—
Construction		—			—			—			—			—			—
Commercial		—			—			(61	)		(6	)		—			—
Home equity		(20	)		(715	)		(83	)		—			—			—
Indirect auto		(62	)		(281	)		(23	)		—			—			—
Consumer		(53	)		(48	)		(33	)		(24	)		(1	)		(38	)

Total charge-offs		(135	)		(1,269	)		(410	)		(30	)		(1	)		(38	)

Recoveries:
Residential one-to-four family		68			43			—			—			—			—
Commercial real estate		—			—			—			—			—			—
Construction		—			—			—			—			—			—
Commercial		—			—			—			—			—			—
Home equity		—			96			—			—			—			—
Indirect auto		69			46			4			—			—			—
Consumer		18			12			8			8			1			15

Total recoveries		155			197			12			8			1			15
Net recoveries (charge-offs)		20			(1,072	)		(398	)		(22	)		—			(23	)

Provision for loan losses		1,498			2,736			2,285			438			152			597


Balance at the end of the period	$	7,958		$	6,440		$	4,776		$	2,889		$	2,473		$	2,321


Ratios:
Net recoveries (charge-offs) to average loans outstanding (annualized)		0.00	%		(0.18	)%		(0.09	)%		(0.01	)%		(0.00	)%		(0.01	)%
Allowance for loan losses to non-performing loans at end of period		193.39	%		177.86	%		107.88	%		169.24	%		129.21	%		93.03	%
Allowance for loan losses to total loans at end of period		0.95	%		0.98	%		0.93	%		0.85	%		0.70	%		0.64	%

Allocation of Allowance for Loan Losses. The following table sets forth the allowance for loan losses allocated by loan category and the percent of loans in each category to total loans at the dates indicated. The allowance for loan losses allocated to each category is not necessarily indicative of future losses in any particular category and does not restrict the use of the allowance to absorb losses in other categories.


	At December 31,
	2013					2012					2011
	(Dollars in thousands)
	Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans			Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans			Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans
Mortgage loans:
Residential one-to-four family	$	2,189		34.17	%	$	1,412		30.70	%	$	986		37.58	%
Commercial real estate		3,621		38.10			3,039		40.57			1,969		33.23
Construction		134		1.18			198		2.46			188		2.97
Home equity		681		10.98			466		10.18			632		9.77
Commercial		419		3.65			470		3.77			321		3.28
Consumer loans:
Indirect auto		749		11.85			772		12.22			664		12.97
Consumer		26		0.07			19		0.10			16		0.20

Total allocated allowance		7,819		100.00			6,376		100.00			4,776		100.00
Unallocated allowance		139		—			64		—			—		—

Total allowance	$	7,958		100.00	%	$	6,440		100.00	%	$	4,776		100.00	%


	At December 31,
	2010					2009
	(Dollars in thousands)
	Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans			Allowance for Loan Losses		Percent of Loans in Each Category to Total Loans
Mortgage loans:
Residential one-to-four family	$	1,057		54.27	%	$	1,027		60.25	%
Commercial real estate		1,136		26.89			911		22.90
Construction		140		4.08			193		5.39
Home equity		236		9.11			184		8.67
Commercial		261		4.13			142		2.51
Consumer loans:
Indirect auto		38		1.09			—		—
Consumer		21		0.43			16		0.28

Total allocated allowance		2,889		100.00			2,473		100.00
Unallocated allowance		—		—			—		—

Total allowance	$	2,889		100.00	%	$	2,473		100.00	%

Investments

The Board of Directors has the responsibility for approving our investment policy, and it is the responsibility of management to implement specific investment strategies. The Executive Committee has authorized our President and Chief Executive Officer, our Executive Vice President and Chief Financial Officer, and our Vice President, Director of Financial Reporting to execute specific investment actions. The investment policy requires that single day transactions in excess of $15.0 million must contain the signature of two authorized officers and a member of the Executive Committee.

The investment policy is reviewed annually by the Executive Committee, and any changes to the policy are subject to approval by the full Board of Directors. The overall objectives of the investment policy are to: fully and efficiently employ funds not presently required for Belmont Savings Bank’s loan portfolio, cash requirements, or other assets essential to our operations; to provide for the safety of the funds invested while generating maximum income and capital appreciation in accordance with the objectives of liquidity and quality; to meet liquidity requirements projected by management; to meet regulatory and industry standards; to generate earnings which, after the impact of taxes, will provide added growth to surplus; and to employ a percentage of assets in a manner that will balance the market and credit risks of other assets, as well as our liquidity, capital, and reserve structure. All gains and losses on securities transactions are reported to the Executive Committee of the Board of Directors on a monthly basis.

Our current investment policy permits investments in securities issued by the U.S. government and U.S. government agencies, municipal bonds, corporate bonds, mortgage-backed securities issued by Fannie Mae, Freddie Mac and Ginnie Mae, asset-backed securities (collateralized by assets other than conforming residential first mortgages), repurchase agreements, federal funds sold, certificates of deposit, money market funds, money market preferred securities, mutual funds, equity securities, daily overnight deposit funds, banker’s acceptances, commercial paper, equity securities, structured notes, callable securities and any other investments that are deemed prudent and are approved by the Executive Committee and permitted by statute.

ASC 320, “Investments—Debt and Equity Securities” requires that, at the time of purchase, we designate a security as either held to maturity, available for sale, or trading, based upon our intent and ability to hold such security until maturity. Securities available for sale and trading securities are reported at market value and securities held to maturity are reported at amortized cost. We currently do not maintain a trading portfolio. A periodic review and evaluation of the available-for-sale and held-to-maturity securities portfolios is conducted to determine if the fair value of any security has declined below its carrying value and whether such decline is other-than-temporary. For securities classified as available for sale, unrealized gains and losses are excluded from earnings and are reported as an increase or decrease to stockholders’ equity through other comprehensive income/(loss). If such decline is deemed to be other-than-temporary, the security is written down to a new cost basis and the resulting loss is charged against earnings or other comprehensive income/(loss).

Generally, mortgage-backed securities are more liquid than individual mortgage loans since there is an active trading market for such securities. In addition, mortgage-backed securities may be used to collateralize our borrowings. Investments in mortgage-backed securities involve a risk that actual payments will be greater or less than the prepayment rate estimated at the time of purchase, which may require adjustments to the amortization of any premium or accretion of any discount relating to such interests, thereby affecting the net yield on our securities. Current prepayment speeds determine whether prepayment estimates require modification that could cause amortization or accretion adjustments.

Securities. At December 31, 2013, our securities portfolio consisted entirely of corporate debt securities and mortgage-backed securities issued by Fannie Mae, Freddie Mac or Ginnie Mae. At that date our securities portfolio had a fair market value of $140.9 million and an amortized cost of $142.0 million. Total securities had a carrying value of $141.7 million, or 13.4% of total assets. At December 31, 2013, none of the underlying collateral consisted of subprime or Alt-A (traditionally defined as loans having less than full documentation) loans. We do not own any trust preferred securities or collateralized debt obligations. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Average Balances and Yields” for a discussion of the recent performance of our securities portfolio.

At December 31, 2013, we had no investments in a single company or entity, other than U.S. government-sponsored enterprises, that had an aggregate book value in excess of 10% of our stockholders’ equity.

Investment Securities Portfolio. The following tables set forth the composition of our investment securities portfolio at the dates indicated.


	At December 31,
	2013				2012				2011
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Held-to-maturity securities:

U.S. government and federal agency obligations	$	—	$	—	$	—	$	—	$	5,600	$	5,659
U.S. government sponsored mortgage-backed securities		99,257		98,831		49,039		50,770		46,432		47,503
Corporate debt securities		20,519		20,150		14,945		15,161		37,359		37,934


Total securities held-to-maturity	$	119,776	$	118,981	$	63,984	$	65,931	$	89,391	$	91,096


	At December 31,
	2013				2012				2011
	Amortized Cost		Fair Value		Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(Dollars in thousands)
Available-for-sale securities:

Corporate debt securities	$	22,271	$	21,921	$	22,483	$	22,621	$	—	$	—


Total available-for-sale securities	$	22,271	$	21,921	$	22,483	$	22,621	$	—	$	—

Portfolio Maturities and Yields. The composition and maturities of the investment securities portfolio at December 31, 2013 are summarized in the following table. Maturities are based on the final contractual payment dates, and do not reflect the impact of scheduled payments, prepayments or early redemptions that may occur.


	One Year or Less					More than One Year through Five Years					More than Five Years through Ten Years					More than Ten Years					Total Securities
	Amortized Cost		Weighted Average Rate			Amortized Cost		Weighted Average Rate			Amortized Cost		Weighted Average Rate			Amortized Cost		Weighted Average Rate			Amortized Cost		Weighted Average Rate
	(Dollars in thousands)

U.S. government sponsored mortgage-backed securities	$	19		9.46	%	$	564		4.55	%	$	49,865		2.13	%	$	48,809		2.59	%	$	99,257		2.59	%
Corporate debt securities		3,016		3.26	%		19,829		1.28	%		19,945		2.48	%		—		—			42,790		1.98	%


Total	$	3,035		3.30	%	$	20,393		1.37	%	$	69,810		2.23	%	$	48,809		2.59	%	$	142,047		2.25	%

Bank-Owned Life Insurance. We invest in bank-owned life insurance to provide us with a funding source for our benefit plan obligations. Bank-owned life insurance also generally provides us noninterest income that is generally non-taxable. Applicable regulations generally limit our investment in bank-owned life insurance to 25% of our Tier 1 capital plus our allowance for loan losses. At December 31, 2013, we had invested $13.3 million in bank-owned life insurance.

Sources of Funds

General. Deposits traditionally have been our primary source of funds for our investment and lending activities. We also borrow from the Federal Home Loan Bank of Boston (the “FHLB of Boston”) to supplement cash flow needs, to lengthen the maturities of liabilities for interest rate risk management purposes and to manage our cost of funds. Our additional sources of funds are scheduled payments and prepayments of principal and interest on loans and investment securities and fee income and proceeds from the sales of loans and securities.

Deposits. We accept deposits primarily from customers in the communities in which our offices are located, as well as from small businesses, municipalities and other customers throughout our lending area. We rely on our competitive pricing and products, convenient locations and quality customer service to attract and retain deposits. We offer a variety of deposit accounts with a range of interest rates and terms. Our deposit accounts consist of relationship checking for consumers and businesses, passbook and statement savings accounts, certificates of deposit, money market accounts, IOLTA, commercial, municipal and regular checking accounts, and IRAs. Deposit rates and terms are based primarily on current business strategies and market interest rates, liquidity requirements and our deposit growth goals. As of December 31, 2013 and 2012, we had a total of $34.6 million and $22.6 million, respectively, of brokered deposits.

At December 31, 2013, we had a total of $127.5 million in certificates of deposit, excluding brokered deposits, of which $70.1 million had remaining maturities of one year or less. Based on historical experience and our current pricing strategy, we believe we will retain a large portion of these accounts upon maturity.

The following tables set forth the distribution of our average total deposit accounts, by account type, for the periods indicated.


	For the Fiscal Year Ended								For the Fiscal Year Ended
	December 31, 2013								December 31, 2012
	Average Balance		Percent			Weighted Average Rate			Average Balance		Percent			Weighted Average Rate
	(Dollars in thousands)
Deposit type:
Demand deposits	$	128,756		19.03	%		—	%	$	91,716		17.33	%		—	%
Interest-bearing checking accounts		31,121		4.60			0.11			28,718		5.43			0.13
Regular savings accounts		383,316		56.65			0.58			273,148		51.62			0.71
Money market deposits		10,198		1.51			0.08			11,055		2.09			0.14
Certificates of deposit		123,193		18.21			1.57			124,521		23.53			1.71

Total deposits	$	676,584		100.00	%		0.62	%	$	529,158		100.00	%		0.78	%


	For the Fiscal Year Ended
	December 31, 2011
	Average Balance		Percent			Weighted Average Rate
	(Dollars in thousands)
Deposit type:
Demand deposits	$	40,365		10.24	%		—	%
Interest-bearing checking accounts		25,225		6.40			0.12
Regular savings accounts		190,339		48.28			0.69
Money market deposits		12,371		3.14			0.23
Certificates of deposit		125,926		31.94			1.81


Total deposits	$	394,226		100.00	%		0.93	%

The following table sets forth certificates of deposit classified by interest rate as of the dates indicated.


	At December 31,
	2013		2012		2011
	(Dollars in thousands)
Interest Rate:
Less than 2.00%	$	115,146	$	93,408	$	76,466
2.00% to 2.99%		25,493		17,897		27,965
3.00% to 3.99%		5,544		9,964		14,047
4.00% to 4.99%		—		43		367
5.00% to 5.99%		—		—		—


Total	$	146,183	$	121,312	$	118,845

The following table sets forth, by interest rate ranges, information concerning our certificates of deposit.


	At December 31, 2013
	Less Than or		More Than		More Than
	Equal to		One to		Two to		More Than				Percent of
	One Year		Two Years		Three Years		Three Years		Total		Total
	(Dollars in thousands)
Interest Rate:
Less than 2.00%	$	62,643	$	9,249	$	6,286	$	36,968	$	115,146		78.77	%
2.00% to 2.99%		2,979		6,891		15,573		50		25,493		17.44	%
3.00% to 3.99%		4,517		1,027		—		—		5,544		3.79	%
4.00% to 4.99%		—		—		—		—		—		0.00	%
5.00% to 5.99%		—		—		—		—		—		0.00	%

Total	$	70,139	$	17,167	$	21,859	$	37,018	$	146,183		100.00	%

As of December 31, 2013, the aggregate amount of outstanding certificates of deposit in amounts greater than or equal to $100,000 was approximately $82.9 million. The following table sets forth the maturity of those certificates as of December 31, 2013.


	At
	December 31, 2013
	(Dollars in thousands)

Three months or less	$	10,610
Over three months through six months		12,984
Over six months through one year		7,826
Over one year to three years		35,639
Over three years		15,846

Total	$	82,905

Borrowings. Our borrowings consist of advances from the Federal Home Loan Bank of Boston, repurchase agreements and the balance of certain loans sold to another financial institution with recourse.

At December 31, 2013, we had access to additional Federal Home Loan Bank advances of up to $178.1 million. The following table sets forth information concerning balances and interest rates on our Federal Home Loan Bank advances at the dates and for the periods indicated.


	At or For the Years Ended December 31,
	2013			2012			2011
	(Dollars in thousands)

Balance at end of period	$	142,100		$	83,100		$	95,600
Average balance during period	$	101,385		$	82,352		$	87,459
Maximum outstanding at any month end	$	150,600		$	97,600		$	97,500
Weighted average interest rate at end of period		0.69	%		0.93	%		1.42	%
Average interest rate during period		0.77	%		1.14	%		2.05	%

The following table sets forth information concerning balances and interest rates on our repurchase agreements at the dates and for the periods indicated.


	At or For the Years Ended December 31,
	2013			2012			2011
	(Dollars in thousands)

Balance at end of period	$	2,127		$	3,404		$	2,985
Average balance during period	$	2,995		$	3,444		$	3,282
Maximum outstanding at any month end	$	3,557		$	3,828		$	3,990
Weighted average interest rate at end of period		0.15	%		0.15	%		0.25	%
Average interest rate during period		0.15	%		0.25	%		0.42	%

On March 16, 2006, seventeen loans with an aggregate principal balance of $10.5 million were sold to another financial institution. As of December 31, 2013 and 2012, the principal balance of these loans sold with recourse amounted to $1,113,000 and $1,156,000, respectively. The agreement related to this sale contains provisions requiring that during the initial 120 months we repurchase any loan that becomes 90 days past due. We are required to repurchase any such past due loan for 100 percent of the unpaid principal plus interest to repurchase date. We have not incurred, and do not expect to incur, any losses related to the loans sold with recourse.

Personnel

At December 31, 2013, the Bank had 117 full-time employees and 10 part-time employees. Our employees are not represented by any collective bargaining group. Management believes that we have a good working relationship with our employees.

Subsidiaries

BSB Bancorp conducts its principal business activities through its wholly-owned subsidiary, Belmont Savings Bank. BSB Bancorp has one other wholly-owned subsidiary, BSB Funding Corporation, the sole purpose of which is to hold the loan to Belmont Savings Bank’s employee stock ownership plan. Belmont Savings has one subsidiary, BSB Investment Corporation, a Massachusetts corporation, which is engaged in the buying, selling and holding of investment securities.

REGULATION AND SUPERVISION

General

Belmont Savings Bank is a Massachusetts-chartered savings bank and the wholly-owned subsidiary of BSB Bancorp, Inc. (“BSB Bancorp”), a Maryland corporation. Belmont Savings Bank’s deposits are insured up to applicable limits by the Federal Deposit Insurance Corporation, or “FDIC”, and by the Depositors Insurance Fund of Massachusetts for amounts in excess of the FDIC insurance limits. Belmont Savings Bank is subject to extensive regulation by the Massachusetts Commissioner of Banks, as its chartering agency, and by the FDIC, its primary federal regulator and deposit insurer. Belmont Savings Bank is required to file reports with, and is periodically examined by, the FDIC and the Massachusetts Commissioner of Banks concerning its activities and financial condition and must obtain regulatory approvals prior to entering into certain transactions, including, but not limited to, mergers with or acquisitions of other financial institutions. As a registered bank holding company, BSB Bancorp is regulated by the Board of Governors of the Federal Reserve System, or the “Federal Reserve Board.”

The regulatory and supervisory structure establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of depositors and the deposit insurance funds, rather than for the protection of stockholders and creditors. The regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies concerning the establishment of deposit insurance assessment fees, classification of assets and establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the Massachusetts legislature, the Massachusetts Commissioner of Banks, the FDIC, the Federal Reserve Board or Congress, could have a material adverse impact on the financial condition and results of operations of BSB Bancorp and Belmont Savings Bank. As is further described below, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), has significantly changed the bank regulatory structure and may affect the lending, investment and general operating activities of depository institutions and their holding companies.

Set forth below is a summary of certain material statutory and regulatory requirements that are applicable to Belmont Savings Bank and BSB Bancorp. This description of statutes and regulations is not intended to be a complete description of such statutes and regulations and their effects on Belmont Savings Bank and BSB Bancorp.

The Dodd-Frank Act

The Dodd-Frank Act has significantly changed the bank regulatory structure and is affecting the lending and investment activities and general operations of depository institutions and their holding companies.

The Dodd-Frank Act required the Federal Reserve Board to establish minimum consolidated capital requirements for bank holding companies that are as stringent as those required for insured depository institutions; the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. In addition, the proceeds of trust preferred securities are excluded from Tier 1 capital unless such securities were issued prior to May 19, 2010 by bank or savings and loan holding companies with less than $15 billion of assets. The legislation also established a floor for capital of insured depository institutions that cannot be lower than the standards in effect on July 21, 2010, and directed the federal banking regulators to implement new leverage and capital requirements within 18 months of that date. The revised capital regulations are effective January 1, 2015.

The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with extensive powers to implement and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rulemaking authority for a wide range of consumer protection laws that apply to all banks and savings associations, among other things, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings associations with more than $10 billion in assets. Banks and savings associations with $10 billion or less in assets will continue to be examined for compliance with federal consumer protection and fair lending laws by their applicable primary federal bank regulators. The new legislation also weakens the federal preemption available for national banks and federal savings associations and gives state attorneys general certain authority to enforce applicable federal consumer protection laws.

The Dodd Frank Act also broadened the base for FDIC insurance assessments. The FDIC was required to promulgate rules revising its assessment system so that it is based on the average consolidated total assets less tangible equity capital of an insured institution instead of deposits. That rule took effect April 1, 2011. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008, and provided non-interest bearing transaction accounts with unlimited deposit insurance through December 31, 2012.

The Dodd-Frank Act requires companies to give stockholders a non-binding vote on executive compensation and so-called “golden parachute” payments. The legislation also directed the Federal Reserve Board to promulgate rules prohibiting excessive compensation paid to bank holding company executives, regardless of whether the company is publicly traded.

The Dodd-Frank Act made many other changes in banking regulation. These include authorizing depository institutions, for the first time, to pay interest on business checking accounts, mandating that regulation be issued requiring originators of securitized loans to retain a percentage of the risk for transferred loans and establishing regulatory rate-setting for certain debit card interchange fees and establishing a number of reforms for mortgage originations.

The Dodd-Frank Act contained the so-called “Volcker Rule,” which generally prohibits banking organizations from engaging in proprietary trading and from investing in, sponsoring or having certain relationships with hedge or private equity funds (“covered funds”). On December 13, 2013, federal agencies issued a final rule implementing the Volcker Rule which, among other things, requires banking organizations to restructure and limit certain of their investments in and relationships with covered funds. The final rule unexpectedly included within the interests subject to its restrictions collateralized debt obligations backed by trust-preferred securities (“TRUPs CDOs”). Many banking organizations had purchased such instruments because of their favorable tax, accounting and regulatory treatment and would have been subject to unexpected write-downs. In response to concerns expressed by community banking organizations, the federal agencies subsequently issued an interim final rule which grandfathers TRUPS CDOs issued before May 19, 2010 if (i) acquired by a banking organization on or before December 10, 2013 and (ii) the organization reasonably believed the proceeds from the TRUPS CDOs were invested primarily in any trust preferred security or subordinated debt instrument issued by a depository institution holding company with less than $15 billion in assets or by a mutual holding company. In addition, the Consumer Financial Protection Bureau has finalized the rule implementing the “Ability to Pay” requirements of the Dodd-Frank Act. The regulations generally require lenders to make a reasonable, good faith determination as to a potential borrower’s ability to repay a residential mortgage loan. The final rule establishes a safe harbor for certain “Qualified Mortgages,” which contain certain features and terms deemed to make the loan less risky. The Ability to Repay final rules were effective January 10, 2014.

Many of the provisions of the Dodd-Frank Act were subject to delayed effective dates and the legislation required various federal agencies to promulgate numerous and extensive implementing regulations over a period of years. It is therefore difficult to predict at this time what the full impact the new legislation and implementing regulations will have on community banks such as Belmont Savings Bank. Although the substance and scope of many of these regulations cannot be determined at this time, it is expected that the legislation and implementing regulations, particularly those provisions relating to the new Consumer Financial Protection Bureau, may increase operating and compliance costs.

Massachusetts Banking Laws and Supervision

General. As a Massachusetts-chartered stock savings bank, Belmont Savings Bank is subject to supervision, regulation and examination by the Massachusetts Commissioner of Banks and to various Massachusetts statutes and regulations which govern, among other things, investment powers, lending and deposit-taking activities, borrowings, maintenance of surplus and reserve accounts, distribution of earnings and payment of dividends. In addition, Belmont Savings Bank is subject to Massachusetts consumer protection and civil rights laws and regulations. The approval of the Massachusetts Commissioner of Banks or the Massachusetts Board of Bank Incorporation is required for a Massachusetts-chartered bank to establish or close branches, merge with other financial institutions, issue stock and undertake certain other activities.

Massachusetts regulations generally allow Massachusetts banks to, with appropriate regulatory approvals, engage in activities permissible for federally chartered banks or banks chartered by another state. The Commissioner also has adopted procedures reducing regulatory burdens and expense and expediting branching by well-capitalized and well-managed banks.

Dividends. A Massachusetts stock bank may declare cash dividends from net profits not more frequently than quarterly. Non-cash dividends may be declared at any time. No dividends may be declared, credited or paid if the bank’s capital stock is impaired. The approval of the Massachusetts Commissioner of Banks is required if the total of all dividends declared in any calendar year exceeds the total of its net profits for that year combined with its retained net profits of the preceding two years. Dividends from BSB Bancorp may depend, in part, upon receipt of dividends from Belmont Savings Bank. The payment of dividends from Belmont Savings Bank would be restricted by federal law if the payment of such dividends resulted in Belmont Savings Bank failing to meet regulatory capital requirements.

Loans to One Borrower Limitations. Massachusetts banking law grants broad lending authority. However, with certain limited exceptions, total obligations to one borrower may not exceed 20 percent of the total of the bank’s capital, surplus and undivided profits.

Loans to a Bank’s Insiders. Massachusetts banking laws prohibit any executive officer or director of a savings bank from borrowing or guaranteeing extensions of credit by such savings bank except for any of the following loans or extensions of credit with the approval of a majority of the Board of Directors: (i) loans or extensions of credit, secured or unsecured, to an officer of the savings bank in an amount not exceeding $100,000; (ii) loans or extensions of credit intended or secured for educational purposes to an officer of the bank in an amount not exceeding $200,000; (iii) loans or extensions of credit secured by a mortgage on residential real estate to be occupied in whole or in part by the officer to whom the loan or extension of credit is made, in an amount not exceeding $750,000; and (iv) loans or extensions of credit to a director of the savings bank who is not also an officer of the savings bank in an amount permissible under the savings bank’s loan to one borrower limit. No such loan or extension of credit may be granted with an interest rate or other terms that are preferential in comparison to loans granted to persons not affiliated with the savings bank.

Investment Activities. In general, Massachusetts-chartered savings banks may invest in preferred and common stock of any corporation organized under the laws of the United States or any state provided such investments do not involve control of any corporation and do not, in the aggregate, exceed 4% of the bank’s deposits. Federal law imposes additional restrictions on Belmont Savings Bank’s investment activities. See “—Federal Regulations—Business and Investment Activities”.

Regulatory Enforcement Authority. Any Massachusetts savings bank that does not operate in accordance with the regulations, policies and directives of the Massachusetts Commissioner of Banks may be subject to sanctions for non-compliance, including revocation of its charter. The Massachusetts Commissioner of Banks may, under certain circumstances, suspend or remove officers or directors who have violated the law, conducted the bank’s business in an unsafe or unsound manner or contrary to the depositors interests or been negligent in the performance of their duties. Upon finding that a bank has engaged in an unfair or deceptive act or practice, the Massachusetts Commissioner of Banks may issue an order to cease and desist and impose a fine on the bank concerned. The Commissioner also has authority to take possession of a bank and appoint a liquidating agent under certain conditions such as an unsafe and unsound condition to transact business, the conduct of business in an unsafe or unauthorized manner of impaired capital. In addition, Massachusetts consumer protection and civil rights statutes applicable to Belmont Savings Bank permit private individual and class action law suits and provide for the rescission of consumer transactions, including loans, and the recovery of statutory and punitive damage and attorney’s fees in the case of certain violations of those statutes.

Depositors Insurance Fund. All Massachusetts-chartered savings banks are required to be members of the Depositors Insurance Fund, a corporation that insures savings bank deposits in excess of federal deposit insurance coverage. The Depositors Insurance Fund is authorized to charge savings banks an annual assessment fee on deposit

balances in excess of amounts insured by the FDIC. Assessment rates are based on the institution’s risk category, similar to the method currently used to determine assessments by the FDIC discussed below under “—Federal Regulations—Insurance of Deposit Accounts.”

Protection of Personal Information. Massachusetts has adopted regulatory requirements intended to protect personal information. These requirements, which became effective March 1, 2010, are similar to existing federal laws such as the Gramm-Leach-Bliley Act, discussed below under “ — Federal Regulations—Privacy Regulations”, that require organizations to establish written information security programs to prevent identity theft. The Massachusetts regulation also contains technology system requirements, especially for the encryption of personal information sent over wireless or public networks or stored on portable devices.

Massachusetts has other statutes or regulations that are similar to certain of the federal provisions discussed below.

Federal Regulations

Capital Requirements. Under the FDIC’s regulations, federally insured state-chartered banks that are not members of the Federal Reserve System (“state non-member banks”), such as Belmont Savings Bank, are required to comply with minimum leverage capital requirements. For an institution not anticipating or experiencing significant growth and deemed by the FDIC to be, in general, a strong banking organization rated composite 1 under Uniform Financial Institutions Ranking System, the minimum capital leverage requirement is a ratio of Tier 1 capital to total assets of 3.0%. For all other institutions, the minimum leverage capital ratio is not less than 4.0%. Tier 1 capital is the sum of common stockholder’s equity, noncumulative perpetual preferred stock (including any related surplus) and minority investments in certain subsidiaries, less intangible assets (except for certain servicing rights and credit card relationships) and certain other specified items.

FDIC regulations also require state non-member banks to maintain certain ratios of regulatory capital to regulatory risk-weighted assets, or “risk-based capital ratios.” Risk-based capital ratios are determined by allocating assets and specified off-balance sheet items to four risk-weighted categories ranging from 0.0% to 100.0%. State non-member banks must maintain a minimum ratio of total capital to risk-weighted assets of at least 8.0%, of which at least one-half must be Tier 1 capital. Total capital consists of Tier 1 capital plus Tier 2 or supplementary capital items, which include allowances for loan losses in an amount of up to 1.25% of risk-weighted assets, cumulative preferred stock, subordinated debentures and certain other capital instruments, and a portion of the net unrealized gain on equity securities. The includable amount of Tier 2 capital cannot exceed the amount of the institution’s Tier 1 capital.

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

Standards for Safety and Soundness. As required by statute, the federal banking agencies adopted final regulations and Interagency Guidelines Establishing Standards for Safety and Soundness to implement safety and soundness standards. The guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The guidelines address internal controls and information systems, internal audit systems, credit underwriting, loan documentation, interest rate exposure, asset growth, asset quality, earnings, compensation, fees and benefits and, more recently, safeguarding customer information. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard.

Business and Investment Activities. Under federal law, all state-chartered FDIC-insured banks, including savings banks, have been limited in their activities as principal and in their equity investments to the type and the amount authorized for national banks, notwithstanding state law. Federal law permits exceptions to these limitations. For example, certain state-chartered savings banks may, with FDIC approval, continue to exercise state authority to invest in common or preferred stocks listed on a national securities exchange and in the shares of an investment company registered under the Investment Company Act of 1940, as amended. The maximum permissible investment is the lesser of 100.0% of Tier 1 capital or the maximum amount permitted by Massachusetts law. Belmont Savings Bank received approval from the FDIC to retain and acquire such equity instruments up to the specified limits. However, at December 31, 2013, Belmont Savings Bank held no such investments. Any such grandfathered authority may be terminated upon the FDIC’s determination that such investments pose a safety and soundness risk or upon the occurrence of certain events such as the savings bank’s conversion to a different charter.

The FDIC is also authorized to permit state banks to engage in state authorized activities or investments not permissible for national banks (other than non-subsidiary equity investments) if they meet all applicable capital requirements and it is determined that such activities or investments do not pose a significant risk to the FDIC insurance fund. The FDIC has adopted regulations governing the procedures for institutions seeking approval to engage in such activities or investments. The Gramm-Leach-Bliley Act of 1999 specified that a state bank may control a subsidiary that engages in activities as principal that would only be permitted for a national bank to conduct in a “financial subsidiary,” if a bank meets specified conditions and deducts its investment in the subsidiary for regulatory capital purposes.

Prompt Corrective Regulatory Action. Federal law requires, among other things, that federal bank regulatory authorities take “prompt corrective action” with respect to banks that do not meet minimum capital requirements. For these purposes, the law establishes five capital categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized.

The FDIC has adopted regulations to implement the prompt corrective action legislation. An institution is deemed to be “well capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater and a leverage ratio of 5.0% or greater. An institution is “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater. An institution is “undercapitalized” if it has a total risk-based capital ratio of less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0%, or a leverage ratio of less than 4.0%. An institution is deemed to be “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0%, or a leverage ratio of less than 3.0%. An institution is considered to be “critically undercapitalized” if it has a ratio of tangible equity (as defined in the regulations) to total assets that is equal to or less than 2.0%.

“Undercapitalized” banks must adhere to growth, capital distribution (including dividend) and other limitations and are required to submit a capital restoration plan. A bank’s compliance with such a plan must be guaranteed by any company that controls the undercapitalized institution in an amount equal to the lesser of 5% of the institution’s total assets when deemed undercapitalized or the amount necessary to achieve the status of adequately capitalized. If an “undercapitalized” bank fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.” “Significantly undercapitalized” banks must comply with one or more of a number of additional measures, including, but not limited to, a required sale of sufficient voting stock to become adequately capitalized, a requirement to reduce total assets, cessation of taking deposits from correspondent banks, the dismissal of directors or officers and restrictions on interest rates paid on deposits, compensation of executive

officers and capital distributions by the parent holding company. “Critically undercapitalized” institutions are subject to additional measures including, subject to a narrow exception, the appointment of a receiver or conservator within 270 days after it obtains such status.

In connection with the final capital rule described earlier, the federal banking agencies have adopted revisions to the prompt corrective action framework, effective January 1, 2015. Under the revised prompt corrective action requirements, insured depository institutions would be required to meet the following in order to qualify as “well capitalized:” (1) a common equity Tier 1 risk-based capital ratio of at least 6.5%; (2) a Tier 1 risk-based capital ratio of at least 8% (increased from 6%); (3) a total risk-based capital ratio of at least 10% (unchanged from current rules) and (4) a Tier 1 leverage ratio of 5% or greater (unchanged from the current rules).

Transactions with Affiliates. Transactions between a bank (and, generally, its subsidiaries) and its related parties or affiliates are limited by Sections 23A and 23B of the Federal Reserve Act. An affiliate of a bank is any company or entity that controls, is controlled by or is under common control with the bank. In a holding company context, the parent bank holding company and any companies which are controlled by such parent holding company are affiliates of the bank. Generally, Sections 23A and 23B of the Federal Reserve Act limit the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to 10% of such institution’s capital stock and surplus and contain an aggregate limit on all such transactions with all affiliates to an amount equal to 20% of such institution’s capital stock and surplus. The term “covered transaction” includes the making of loans, purchase of assets, issuance of a guarantee and similar transactions. In addition, loans or other extensions of credit by the institution to the affiliate are required to be collateralized in accordance with specified requirements. The law also requires that affiliate transactions be on terms and conditions that are substantially the same, or at least as favorable to the institution, as those provided to non-affiliates.

The Sarbanes-Oxley Act of 2002 generally prohibits loans by a company to its executive officers and directors. The law contains a specific exception for loans by a depository institution to its executive officers and directors in compliance with federal banking laws, assuming such loans are also permitted under the law of the institution’s chartering state. Under such laws, a bank’s authority to extend credit to executive officers, directors and 10% shareholders (“insiders”), as well as entities such persons control, is restricted. The law limits both the individual and aggregate amount of loans that may be made to insiders based, in part, on the bank’s capital position and requires certain board approval procedures to be followed. Such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and not involve more than the normal risk of repayment. There is an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. Loans to executive officers are further limited to loans of specific types and amounts.

Enforcement. The FDIC has extensive enforcement authority over insured state savings banks, including Belmont Savings Bank. That enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices. The FDIC also has authority under federal law to appoint a conservator or receiver for an insured bank under certain circumstances. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured state non-member bank if that bank was “critically undercapitalized” on average during the calendar quarter beginning 270 days after the date on which the institution became “critically undercapitalized.”

Federal Insurance of Deposit Accounts. Deposit accounts in Belmont Savings Bank are insured by the FDIC’s Deposit Insurance Fund, generally up to a maximum of $250,000 per separately insured depositor, pursuant to changes made permanent by the Dodd-Frank Act. The FDIC assesses insured depository institutions to maintain the Deposit Insurance Fund. No institution may pay a dividend if in default of its deposit insurance assessment.

Under the FDIC’s risk-based assessment system, insured institutions are assigned to a risk category based on supervisory evaluations, regulatory capital levels and other risk-based factors. An institution’s assessment rate depends upon the category to which it is assigned and certain adjustments specified by the FDIC, with less risky institutions paying lower assessments. On February 7, 2011, as required by the Dodd-Frank Act, the FDIC published a final rule to revise the deposit insurance assessment system. The rule, which took effect April 1, 2011, changes the assessment base used for calculating deposit insurance assessments from deposits to total assets less

tangible (Tier 1) capital. Since the new base is larger than the previous base, the FDIC also lowered assessment rates so that the rule would not significantly alter the total amount of revenue collected from the industry. The range of adjusted assessment rates is now 2.5 to 45 basis points of the new assessment base.

In addition to FDIC assessments, the Financing Corporation (“FICO”) is authorized to impose and collect, through the FDIC, assessments for costs related to bonds issued by the FICO in the 1980s to recapitalize the former Federal Savings and Loan Insurance Corporation. The bonds issued by the FICO are due to mature in 2017 through 2019. During the calendar year ended December 31, 2013, Belmont Savings Bank paid $49,000 in fees related to the FICO.

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. Insured institutions with assets of $10 billion or more are supposed to fund the increase. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC. The FDIC has exercised that discretion by establishing a long range fund ratio of 2%.

A material increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of Belmont Savings Bank. Management cannot predict what insurance assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that an institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not know of any practice, condition or violation that might lead to termination of Belmont Savings Bank’s deposit insurance.

As a Massachusetts-chartered savings bank, Belmont Savings Bank is also required to be a member of the Depositors Insurance Fund, a corporation that insures savings bank deposits in excess of federal deposit insurance coverage. See “—Massachusetts Banking Laws and Supervision—Depositors Insurance Fund,” above.

Community Reinvestment Act. Under the Community Reinvestment Act (“CRA”), a bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA does require the FDIC, in connection with its examination of a bank, to assess the institution’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution, including applications to establish or acquire branches and merge with other depository institutions. The CRA requires the FDIC to provide a written evaluation of an institution’s CRA performance utilizing a four-tiered descriptive rating system. Belmont Savings Bank’s latest FDIC CRA rating, dated August 10, 2011, was “satisfactory.”

Massachusetts has its own statutory counterpart to the CRA which is also applicable to Belmont Savings Bank. The Massachusetts version is generally similar to the CRA but utilizes a five-tiered descriptive rating system. The Massachusetts Commissioner of Banks is required to consider a bank’s record of performance under the Massachusetts law in considering any application by the bank to establish a branch or other deposit-taking facility, relocate an office or to merge or consolidate with or acquire the assets and assume the liabilities of any other banking institution. Belmont Savings Bank’s most recent rating under Massachusetts law, dated August 10, 2011, was “satisfactory.”

Federal Reserve System. The Federal Reserve Board regulations require savings institutions to maintain non-interest earning reserves against their transaction accounts (primarily Negotiable Order of Withdrawal (NOW) and regular checking accounts). The regulations currently provide that reserves be maintained against aggregate transaction accounts as follows: a 3% reserve ratio is assessed on net transaction accounts up to and including $89.0 million; a 10% reserve ratio is applied above $89.0 million. The first $13.3 million of otherwise reservable balances are exempted from the reserve requirements. The amounts are adjusted annually. Belmont Savings Bank complies with the foregoing requirements.

Federal Home Loan Bank System. Belmont Savings Bank is a member of the Federal Home Loan Bank System, which consists of twelve regional Federal Home Loan Banks. The Federal Home Loan Bank System provides a central credit facility primarily for member institutions as well as other entities involved in home mortgage lending. As a member of the Federal Home Loan Bank of Boston, Belmont Savings Bank is required to acquire and hold a specified amount of shares of capital stock in the Federal Home Loan Bank of Boston. As of December 31, 2012, Belmont Savings Bank was in compliance with this requirement.

The Federal Home Loan Bank of Boston suspended its dividend payment for the first quarter of 2009 and did not pay a dividend through 2010. The Federal Home Loan Bank of Boston has paid dividends since then that are considerably less than those paid by the Federal Home Loan Bank of Boston prior to 2009.

Other Regulations

Some interest and other charges collected or contracted for by Belmont Savings Bank are subject to state usury laws and federal laws concerning interest rates. Belmont Savings Bank’s operations are also subject to state and federal laws applicable to credit transactions and other operations, including but not limited to, the:

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Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers;

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Real Estate Settlement Procedures Act, requiring that borrowers for mortgage loans for one to four family residential real estate receive various disclosures, including good faith estimates of settlement costs, lender servicing and escrow account practices, and prohibiting certain practices that increase the cost of settlement services;

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Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves;

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Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed, or other prohibited factors in extending credit;

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Fair Credit Reporting Act, governing the use and provision of information to credit reporting agencies; and

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Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies.

The operations of Belmont Savings Bank also are subject to the:

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Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records;

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Electronic Funds Transfer Act and Regulation E promulgated thereunder, that govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

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Gramm-Leach-Bliley Act privacy statute which requires each depository institution to disclose its privacy policy, identify parties with whom certain nonpublic customer information is shared and provide customers with certain rights to “opt out” of disclosure to certain third parties; and

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Title III of The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (referred to as the “USA PATRIOT Act”), which significantly expanded the responsibilities of financial institutions, in preventing the use of the United States financial system to fund terrorist activities. Among other things, the USA PATRIOT

Act and the related regulations required banks operating in the United States to develop anti-money laundering compliance programs, due diligence policies and controls to facilitate the detection and reporting of money laundering.

Holding Company Regulation

BSB Bancorp, as a bank holding company, is subject to examination, regulation, and periodic reporting under the Bank Holding Company Act of 1956, as amended, as administered by the Federal Reserve Board. BSB Bancorp is required to obtain the prior approval of the Federal Reserve Board to acquire all, or substantially all, of the assets of any bank or bank holding company. Prior Federal Reserve Board approval would be required for BSB Bancorp to acquire direct or indirect ownership or control of any voting securities of any bank or bank holding company if it would, directly or indirectly, own or control more than 5% of any class of voting shares of the bank or bank holding company.

A bank holding company is generally prohibited from engaging in, or acquiring, direct or indirect control of more than 5% of the voting securities of any company engaged in non-banking activities. One of the principal exceptions to this prohibition is for activities found by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. Some of the principal activities that the Federal Reserve Board has determined by regulation to be closely related to banking are: (i) making or servicing loans; (ii) performing certain data processing services; (iii) providing securities brokerage services; (iv) acting as fiduciary, investment or financial advisor; (v) leasing personal or real property under certain conditions; (vi) making investments in corporations or projects designed primarily to promote community welfare; and (vii) acquiring a savings association.

The Gramm-Leach-Bliley Act of 1999 authorizes a bank holding company that meets specified conditions, including depository institutions subsidiaries that are “well capitalized” and “well managed,” to opt to become a “financial holding company.” A “financial holding company” may engage in a broader array of financial activities than permitted a typical bank holding company. Such activities can include insurance underwriting and investment banking. BSB Bancorp does not anticipate opting for “financial holding company” status at this time.

BSB Bancorp is subject to the Federal Reserve Board’s consolidated capital adequacy guidelines for bank holding companies. Traditionally, those guidelines have been structured similarly to the regulatory capital requirements for the subsidiary depository institutions, but were somewhat more lenient. For example, the holding company capital requirements allowed inclusion of certain instruments in Tier 1 capital that are not includable at the institution level. As previously noted, the Dodd-Frank Act directs the Federal Reserve Board to issue consolidated capital requirements for depository institution holding companies that are not less stringent, both quantitatively and in terms of components of capital, than those applicable to institutions themselves. The previously discussed final rule regarding regulatory capital requirements implements the Dodd-Frank Act as to bank holding company capital standards. Consolidated regulatory capital requirements identical to those applicable to the subsidiary banks will apply to bank holding companies (with greater than $500 million of assets) as of January 1, 2015. As is the case with institutions themselves, the capital conservation buffer will be phased in between 2016 and 2019.

A bank holding company is generally required to give the Federal Reserve Board prior written notice of any purchase or redemption of then outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve Board order or directive, or any condition imposed by, or written agreement with, the Federal Reserve Board. The Federal Reserve Board has adopted an exception to that approval requirement for well-capitalized bank holding companies that meet certain other conditions.

The Federal Reserve Board has issued a policy statement regarding the payment of dividends and the repurchase of shares of common stock by bank holding companies. In general, the policy provides that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the holding company appears consistent with the organization’s capital needs, asset quality and overall financial condition.

Regulatory guidance provides for prior regulatory consultation with respect to dividends in certain circumstances such as where the company’s net income for the past four quarters, net of dividends’ previously paid over that period, is insufficient to fully fund the dividend or the company’s overall rate of earnings retention is inconsistent with the company’s capital needs and overall financial condition. The ability of a holding company to pay dividends may be restricted if a subsidiary bank becomes undercapitalized. The policy statement also provides for regulatory consultation prior to a holding company redeeming or repurchasing regulatory capital instruments when the holding company is experiencing financial weaknesses or redeeming or repurchasing common stock or perpetual preferred stock that would result in a net reduction as of the end of a quarter in the amount of such equity instruments outstanding compared with the beginning of the quarter in which the redemption or repurchase occurred. These regulatory policies could affect the ability of the BSB Bancorp, Inc. to pay dividends, repurchase shares of its stock or otherwise engage in capital distributions.

The Federal Deposit Insurance Act, makes depository institutions liable to the FDIC for losses suffered or anticipated by the insurance fund in connection with the default of a commonly controlled depository institution or any assistance provided by the FDIC to such an institution in danger of default. That law would have potential applicability if BSB Bancorp ever held as a separate subsidiary a depository institution in addition to Belmont Savings Bank.

BSB Bancorp and Belmont Savings Bank will be affected by the monetary and fiscal policies of various agencies of the United States Government, including the Federal Reserve System. In view of changing conditions in the national economy and in the money markets, it is impossible for management to accurately predict future changes in monetary policy or the effect of such changes on the business or financial condition of BSB Bancorp or Belmont Savings Bank.

The status of BSB Bancorp as a registered bank holding company under the Bank Holding Company Act will not exempt it from certain federal and state laws and regulations applicable to corporations generally, including, without limitation, certain provisions of the federal securities laws.

Change in Control Regulations. Under the Change in Bank Control Act, no person may acquire control of a bank holding company such as BSB Bancorp, Inc. unless the Federal Reserve Board has been given 60 days’ prior written notice and has not issued a notice disapproving the proposed acquisition, taking into consideration certain factors, including the financial and managerial resources of the acquirer and the competitive effects of the acquisition. Control, as defined under federal law, means ownership, control of or holding irrevocable proxies representing more than 25% of any class of voting stock, control in any manner of the election of a majority of the institution’s directors, or a determination by the regulator that the acquiror has the power to direct, or directly or indirectly to exercise a controlling influence over, the management or policies of the institution. Acquisition of more than 10% of any class of a savings and loan holding company’s voting stock constitutes a rebuttable determination of control under the regulations under certain circumstances including where, as will be the case with BSB Bancorp, Inc., the issuer has registered securities under Section 12 of the Securities Exchange Act of 1934.

Massachusetts Holding Company Regulation. Under Massachusetts banking laws, a company owning or controlling two or more banking institutions, including a savings bank, is regulated as a bank holding company. Each Massachusetts bank holding company: (i) must obtain the approval of the Massachusetts Board of Bank Incorporation before engaging in certain transactions, such as the acquisition of more than 5% of the voting stock of another banking institution; (ii) must register, and file reports, with the Massachusetts Division of Banks; and (iii) is subject to examination by the Division of Banks. BSB Bancorp would become a Massachusetts bank holding company if it acquires a second banking institution and holds and operates it separately from Belmont Savings Bank.

Federal Securities Laws

BSB Bancorp’s common stock is registered with the Securities and Exchange Commission. BSB Bancorp is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Securities Exchange Act of 1934.

ITEM 1A.

RISK FACTORS

Our business strategy, which includes significant asset and liability growth, was adopted and implemented beginning in 2010 and has not yet had the time to be proven successful. If we fail to grow or fail to manage our growth effectively, our financial condition and results of operations could be negatively affected.

In 2010, the Board of Directors of the Bank approved a strategic plan that has resulted in significant growth in assets and liabilities and contemplates further growth over the next several years. Specifically, we intend to continue to increase our commercial real estate loans, home equity lines of credit, commercial business loans and indirect automobile loans , while attracting favorably priced deposits. During 2012 we added our Shaw’s Supermarket in-store branch in Waltham. In 2013 we opened two new in-store branches in Newton and Cambridge, and in 2014 we closed one of our existing branches due to its proximity to another branch. We have incurred substantial additional expenses due to the execution of our strategic plan, including salaries and occupancy expense related to new lending officers and related support staff, as well as marketing and infrastructure expenses. Many of these increased expenses are considered fixed expenses. Unless we can continue to successfully execute our strategic plan, results of operations will be negatively affected by these increased costs.

The successful continuation of our strategic plan will require, among other things, that we increase our market share by attracting new customers that currently bank at other financial institutions in our market area. In addition, our ability to continue to successfully grow will depend on several factors, including continued favorable market conditions, the competitive responses from other financial institutions in our market area, and our ability to maintain high asset quality as we increase our commercial real estate loans, home equity lines of credit, commercial business loans and indirect automobile loans. While we believe we have the management resources in place to successfully manage our future growth, growth opportunities may not be available and we may not be successful in achieving our business strategy goals.

Our branch network expansion strategy may negatively affect our financial performance.

During 2012 we added our Shaw’s Supermarket in-store branch in Waltham. In 2013 we opened two new in-store branches in Newton and Cambridge, and in 2014 we closed one of our existing branches due to its proximity to another branch. We have three of our branches located within supermarkets and changes in the supermarkets’ business could impact our branch operations within those supermarkets. This strategy of opening new branches may not generate earnings, or may not generate earnings within a reasonable period of time. Numerous factors contribute to the performance of a new branch, such as a suitable location, qualified personnel, and an effective marketing strategy. Additionally, it takes time for a new branch to originate sufficient loans and generate sufficient deposits to produce enough income to offset expenses, some of which, like salaries and occupancy expense, are considered fixed costs.

Because we intend to continue to emphasize our commercial real estate and multi-family loan originations, our credit risk will increase, and downturns in the local real estate market or economy could adversely affect our earnings.

We intend to continue originating commercial real estate and multi-family loans. At December 31, 2013, $320.8 million, or 38.1% of our total loan portfolio, consisted of multi-family loans and commercial real estate loans. Commercial real estate and multi-family loans generally have more risk than the one to four family residential real estate loans that we originate. Because the repayment of commercial real estate and multi-family loans depends on the successful management and operation of the borrower’s properties or related businesses, repayment of such loans can be affected by adverse conditions in the local real estate market or economy. Commercial real estate and multi-family loans may also involve relatively large loan balances to individual borrowers or groups of related borrowers. A downturn in the real estate market or the local economy could adversely affect the value of properties securing the loan or the revenues from the borrower’s business, thereby increasing the risk of nonperforming loans. As our commercial real estate and multi-family loan portfolios increase, the corresponding risks and potential for losses from these loans may also increase.

Our loan portfolio has greater risk than those of many savings banks due to the substantial number of indirect automobile loans in our portfolio.

We have a diversified loan portfolio with a substantial number of loans secured by collateral other than owner-occupied one to four family residential real estate. Our loan portfolio includes a substantial number of indirect automobile loans, which are automobile loans assigned to us by participating automobile dealerships upon our review and approval of such loans. At December 31, 2013, our indirect automobile loans totaled $99.8 million, or 11.9% of our total loan portfolio, an increase from $80.3 million, or 12.2% of our total loan portfolio, at December 31, 2012. Automobile loans generally have greater risk of loss in the event of default than one to four family residential mortgage loans due to the rapid depreciation of automobiles securing the loans. We face the risk that the collateral for a defaulted loan may not provide an adequate source of repayment of the outstanding loan balance. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit our ability to recover on such loans.

Because of our extensive expertise and focus on prime borrowers, we may continue to increase the amount of indirect automobile loans we originate, while selling more of the originations. However, it is difficult to assess the future performance of this part of our loan portfolio due to the recent origination of these loans. These loans may have delinquency or charge-off levels above our estimates, which would adversely affect our future performance. In addition, if our losses on these loans increase, it may become necessary to increase our provision for loan losses, which would also adversely impact our future earnings.

A portion of our one to four family residential mortgage loans is comprised of non-owner occupied properties, which increases the credit risk on this portion of our loan portfolio.

A significant portion of the housing stock in our primary lending market area is comprised of two-, three- and four-unit properties. At December 31, 2013, of the $287.7 million of one to four family residential mortgage loans in our portfolio, $2.0 million, or 0.7% of this amount, were comprised of non-owner occupied properties. There is a greater credit risk inherent in two-, three- and four-unit properties and especially in investor-owner and non-owner occupied properties, than in owner-occupied one-unit properties since, similar to commercial real estate and multi-family loans, the repayment of these loans may depend, in part, on the successful management of the property and/or the borrower’s ability to lease the units of the property. A downturn in the real estate market or the local economy could adversely affect the value of properties securing these loans or the revenues derived from these properties, which could affect the borrower’s ability to repay the loan.

Our home equity line of credit initiative exposes us to a risk of loss due to a decline in property values.

At December 31, 2013, $92.5 million, or 11.0%, of our total loan portfolio consisted of home equity lines of credit. As part of our strategic business plan, we intend to increase our home equity lines of credit over the next several years. We generally originate home equity lines of credit with loan-to-value ratios of up to 80% when combined with the principal balance of the existing first mortgage loan, although loan-to-value ratios may exceed 80% on a case-by-case basis. Declines in real estate values in our market area could cause some of our home equity loans to be inadequately collateralized, which would expose us to a greater risk of loss in the event that we seek to recover on defaulted loans by selling the real estate collateral.

Future changes in interest rates could reduce our profits.

Our ability to make a profit largely depends on our net interest and dividend income, which could be negatively affected by changes in interest rates. Net interest and dividend income is the difference between:

•

the interest and dividend income we earn on our interest-earning assets, such as loans and securities; and

•

the interest expense we pay on our interest-bearing liabilities, such as deposits and borrowings.

A significant portion of our loans are fixed-rate one to four family residential mortgage loans and 5/5 adjustable rate—10 year maturity commercial real estate loans, and like many savings institutions, our focus on deposit accounts as a source of funds, which have no stated maturity date or shorter contractual maturities, results in our liabilities having a shorter duration than our assets. This imbalance can create significant earnings volatility, because market interest rates change over time. In a period of rising interest rates, the interest income earned on our assets, such as loans and investments, may not increase as rapidly as the interest paid on our liabilities, such as deposits. In a period of declining interest rates, the interest income earned on our assets may decrease more rapidly than the interest paid on our liabilities, as borrowers prepay mortgage loans, and mortgage-backed securities and callable investment securities are called or prepaid, thereby requiring us to reinvest these funds at lower interest rates. At December 31, 2013 our interest rate risk analysis indicated that our net interest income would decrease by 5.4% over the next twelve months if there was an instantaneous 200 basis point increase in market interest rates. For additional discussion of how changes in current interest rates could impact our financial condition and results of operations, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Management of Market Risk.”

Changes in interest rates also create reinvestment risk, which is the risk that we may not be able to reinvest prepayments at rates that are comparable to the rates we earned on the prepaid loans or securities in a declining interest rate environment.

Additionally, increases in interest rates may decrease loan demand and/or make it more difficult for borrowers to repay adjustable-rate loans. At December 31, 2013, $87.5 million, or 30.4% of our $287.7 million total one to four family residential mortgage loans due after December 31, 2014 had adjustable rates of interest. If interest rates increase, the rates on these loans will, in turn, increase, thereby increasing the risk that borrowers will not be able to repay these loans.

Changes in interest rates also affect the current fair value of our interest-earning securities portfolio. Generally, the value of securities moves inversely with changes in interest rates.

Historically low interest rates may adversely affect our net interest income and profitability.

During the past four years it has been the policy of the Federal Reserve Board to maintain interest rates at historically low levels through its targeted federal funds rate and the purchase of mortgage-backed securities. As a result, market rates on the loans we have originated and the yields on securities we have purchased have been at lower levels than available prior to 2008. As a general matter, our interest-bearing liabilities reprice or mature more quickly than our interest-earning assets, which was one factor contributing to the increase in our interest rate spread between 2008 and 2012 as interest rates decreased. However, at current interest rate levels our ability to continue to lower our interest expense is relatively limited compared to the average yield on our interest-earning assets which may continue to decrease. Our interest rate spread has decreased to 2.69% for the year ended December 31, 2013, compared to 2.91% for the year ended December 31, 2011. The Federal Reserve Board has indicated its intention to maintain low interest rates until the unemployment rate is 6.5% or lower. Accordingly, our interest rate spread may continue to decrease in the near future, which would adversely affect our net interest income and our profitability.

Financial reform legislation has, among other things, tightened capital standards and created a new Consumer Financial Protection Bureau, and will result in new laws and regulations that are expected to increase our costs of operations.

The Dodd-Frank Act requires various federal agencies to adopt a broad range of new implementing rules and regulations, and to prepare numerous studies and reports for Congress. The federal agencies are given significant discretion in drafting the implementing rules and regulations, and consequently many of the details and much of the impact of the Dodd-Frank Act may not be known for many months or years.

Among other things, as a result of the Dodd-Frank Act:

•

effective July 21, 2011, the federal prohibition on paying interest on demand deposits has been eliminated, thus allowing businesses to have interest bearing checking accounts. This change may increase our interest expense;

•

the Federal Reserve Board is required to set minimum capital levels for bank holding companies that are as stringent as those required for their insured depository subsidiaries, and the components of Tier 1 capital are required to be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. See “Regulation and Supervision—Federal Banking Regulation—Capital Requirements;

•

the federal banking regulators are required to implement new leverage and capital requirements that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives;

•

a new Consumer Financial Protection Bureau has been established, which has broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10 billion in assets. Banks and savings institutions with $10 billion or less in assets, like Belmont Savings Bank, will be examined by their applicable bank regulators; and

•

federal preemption rules that have been applicable for national banks and federal savings banks have been weakened, and state attorneys general have the ability to enforce federal consumer protection laws.

In addition to the risks noted above, we expect that our operating and compliance costs, and possibly our interest expense, could increase as a result of the Dodd-Frank Act and the implementing rules and regulations. The need to comply with additional rules and regulations will also divert management’s time from managing our operations. Higher capital levels would require us to maintain higher levels of assets that earn less interest and dividend income and returns on stockholders’ equity would suffer.

Government responses to economic conditions may adversely affect our operations, financial condition and earnings.

In addition to new rules promulgated under the Dodd Frank Act, bank regulatory agencies have been responding aggressively to concerns and adverse trends identified in examinations. Ongoing uncertainty and adverse developments in the financial services industry and the domestic and international credit markets, and the effect of new legislation and regulatory actions in response to these conditions, may adversely affect our operations by restricting our business activities, including our ability to originate or sell loans, modify loan terms, or foreclose on property securing loans. These measures are likely to increase our costs of doing business and may have a significant adverse effect on our lending activities, financial performance and operating flexibility. In addition, these risks could affect the performance and value of our loan and investment securities portfolios, which also would negatively affect our financial performance.

Furthermore, the Federal Reserve Board, in an attempt to help stabilize the economy, has, among other things, kept interest rates low through its targeted federal funds rate and the purchase of mortgage-backed securities. If the Federal Reserve Board increases the federal funds rate, overall interest rates will likely rise, which may negatively impact the housing markets and the U.S. economic recovery.

A continuation or worsening of economic conditions could adversely affect our financial condition and results of operations.

Although the U.S. economy has emerged from the severe recession that occurred in 2008 and 2009, economic growth has been slow and unemployment levels remain high despite the Federal Reserve Board’s unprecedented efforts to maintain low market interest rates and encourage economic growth. Recovery by many businesses has been impaired by lower consumer spending. A discontinuation of the Federal Reserve Board’s bond purchasing program could result in higher interest rates and reduced economic activity. Moreover, a return to

prolonged deteriorating economic conditions could significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. Further declines in real estate values and sales volumes and continued elevated unemployment levels may result in greater loan delinquencies, increases in our nonperforming, criticized and classified assets and a decline in demand for our products and services. These events may cause us to incur losses and may adversely affect our financial condition and results of operations.

We will become subject to more stringent capital requirements, which may adversely impact our return on equity, require us to raise additional capital, or constrain us from paying dividends or repurchasing shares.

In July 2013, the federal banking agencies approved a new rule that will substantially amend the regulatory risk-based capital rules applicable to Belmont Savings Bank and BSB Bancorp. The final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Act.

The final rule includes new minimum risk-based capital and leverage ratios, which will be effective for us on January 1, 2015, and refines the definition of what constitutes “capital” for purposes of calculating these ratios. The new minimum capital requirements will be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4%. The final rule also establishes a “capital conservation buffer” of 2.5%, and will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. An institution will be subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations will establish a maximum percentage of eligible retained income that can be utilized for such actions.

The application of more stringent capital requirements could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions constraining us from paying dividends or repurchasing shares if we were to be unable to comply with such requirements.

We operate in a highly regulated environment and may be adversely affected by changes in laws and regulations.

We are subject to extensive regulation, supervision, and examination by the Federal Reserve Board, the Federal Deposit Insurance Corporation and the Commonwealth of Massachusetts Division of Banks. Federal regulations govern the activities in which we may engage, and are primarily for the protection of depositors and the Deposit Insurance Fund. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operations of a savings association, the classification of assets by a savings association, and the adequacy of a savings association’s allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations or legislation, could have a material impact on our results of operations. Because our business is highly regulated, the laws, rules and applicable regulations are subject to regular modification and change. Any legislative, regulatory or policy changes adopted in the future could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects. Further, we expect any such new laws, rules or regulations will add to our compliance costs and place additional demands on our management team.

If our allowance for loan losses is not sufficient to cover actual loan losses, our earnings will decrease.

We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans. In determining the amount of the allowance for loan losses, we review our loans and our loss and delinquency experience, and we evaluate economic conditions. If our assumptions are incorrect, our allowance for loan losses may not be sufficient to cover probable incurred losses in our loan portfolio, resulting in additions to our allowance. Material additions to our allowance could materially decrease our net income.

In addition, bank regulators periodically review our allowance for loan losses and may require us to increase our allowance for loan losses or recognize further loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities might have a material adverse effect on our financial condition and results of operations.

Because most of our borrowers are located in Eastern Massachusetts, a downturn in the local economy, or a decline in local real estate values, could cause an increase in nonperforming loans or a decrease in loan demand, which would reduce our profits.

Our success depends primarily on general economic conditions in our market area in Eastern Massachusetts. Nearly all of our loans are to customers in this market. Continued weakness in our local economy and our local real estate markets could adversely affect the ability of our borrowers to repay their loans and the value of the collateral securing our loans, which could adversely affect our results of operations. Real estate values are affected by various factors, including supply and demand, changes in general or regional economic conditions, interest rates, governmental rules or policies and natural disasters. Continued weakness in economic conditions also could result in reduced loan demand and a decline in loan originations, which could negatively affect our financial results.

Loss of key personnel could adversely impact results.

Our success has been and will continue to be greatly influenced by our ability to retain the services of our existing senior management. The unexpected loss of the services of any of the key management personnel, or the inability to recruit and retain qualified personnel in the future, could have an adverse impact on our business and financial results.

Strong competition for deposits and lending opportunities within our market areas, as well as competition from non-depository investment alternatives, may limit our growth and profitability.

Competition in the banking and financial services industry is intense. In our market areas, we compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Some of our competitors have greater name recognition and market presence that benefit them in attracting business, and offer certain services that we do not or cannot provide. In addition, larger competitors may be able to price loans and deposits more aggressively than we do, which could affect our ability to grow and to be profitable on a long-term basis. Our profitability depends upon our ability to successfully compete in our market areas. If we must raise interest rates paid on deposits or lower interest rates charged on our loans, our net interest margin and profitability could be adversely affected.

In addition, checking and savings account balances and other forms of deposits can decrease when our deposit customers perceive alternative investments, such as the stock market or other non-depository investments, as providing superior expected returns, or if our customers seek to spread their deposits over several banks to maximize FDIC insurance coverage. Furthermore, technology and other changes have made it more convenient for bank customers to transfer funds into alternative investments, including products offered by other financial institutions or non-bank service providers. Additional increases in short-term interest rates could increase transfers of deposits to higher yielding deposits. Efforts and initiatives we undertake to retain and increase deposits, including deposit pricing, can increase our costs. When bank customers move money out of bank deposits in favor of alternative investments or into higher yielding deposits, or spread their accounts over several banks, we can lose a relatively inexpensive source of funds, thus increasing our funding costs and reducing our profitability.

Changes in the structure of Fannie Mae and Freddie Mac (“GSEs”) and the relationship among the GSEs, the federal government and the private markets, or the conversion of the current conservatorship of the GSEs into receivership, could result in significant changes to our securities portfolio.

The GSEs are currently in conservatorship, with its primary regulator, the Federal Housing Finance Agency, acting as conservator. We cannot predict if, when or how the conservatorships will end, or any associated

changes to the GSEs’ business structure that could result. We also cannot predict whether the conservatorships will end in receivership. There are several proposed approaches to reform the GSEs which, if enacted, could change the structure of the GSEs and the relationship among the GSEs, the government and the private markets, including the trading markets for agency conforming mortgage loans and markets for mortgage-related securities in which we participate. We cannot predict the prospects for the enactment, timing or content of legislative or rulemaking proposals regarding the future status of the GSEs. Accordingly, there continues to be uncertainty regarding the future of the GSEs, including whether they will continue to exist in their current form. GSE reform, if enacted, could result in a significant change and adversely impact our business operations.

Our earnings have been negatively affected by the reduction in dividends paid by the Federal Home Loan Bank of Boston. In addition, any restrictions placed on the operations of the Federal Home Loan Bank of Boston could hinder our ability to use it as a liquidity source.

The Federal Home Loan Bank (“FHLB”) of Boston did not pay any dividends during the years 2009 and 2010. Although the FHLB of Boston began paying a dividend again in 2011, the dividends paid since 2010 have been far lower than the dividend paid by the FHLB of Boston prior to 2009. The failure of the FHLB of Boston to pay full dividends for any quarter will reduce our earnings during that quarter. In addition, the FHLB of Boston is an important source of liquidity for us, and any restrictions on their operations may hinder our ability to use it as a liquidity source. At December 31, 2013, the carrying value of our FHLB of Boston stock, was $7.7 million.

Technological advances impact our business.

The banking industry is undergoing technological changes with frequent introductions of new technology-driven products and services. In addition to improving customer services, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend, in part, on our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in operations. Many competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or successfully market such products and services to our customers.

Our information systems may experience an interruption or breach in security.

We rely heavily on communications and information systems to conduct our business. Any failure, interruption, or breach in security or operational integrity of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan, and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption, or security breach of our information systems, we cannot assure you that any such failures, interruptions, or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions, or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations.

ITEM 1B.

UNRESOLVED STAFF COMMENTS

None.

ITEM 2.

PROPERTIES

We operated from our seven full-service banking offices at December 31, 2013, including our main office and six branch offices located in Belmont, Watertown, Waltham, Cambridge and Newton, Massachusetts. On January 18, 2014, the branch located at 78 Trapelo Road, Belmont, MA, was closed and all accounts were transferred to the 277 Trapelo Road branch. The net book value of our premises, land and equipment was $3.3 million at December 31, 2013. The following table sets forth information with respect to our offices, including the expiration date of leases with respect to leased facilities.


Location	Year Opened	Owned/ Leased

Full Service Banking Offices:

Main Office 2 Leonard Street Belmont, Massachusetts 02478	1969	Owned

Cushing Square 78 Trapelo Road Belmont, Massachusetts 02478	1994	Leased ⁽¹⁾

Trapelo Road 277 Trapelo Road Belmont, Massachusetts 02478	1992	Owned

Watertown Square 53 Mount Auburn Street Watertown, Massachusetts 02472	2001	Leased ⁽²⁾

Shaws Supermarket In-Store Branch 1070 Lexington Street Waltham, Massachusetts 02452	2012	Leased ⁽⁵⁾

Shaws Supermarket In-Store Branch 33 Austin Street Newtonville, Massachusetts 02160	2013	Leased ⁽⁷⁾

Shaws Supermarket In-Store Branch 699 Mt. Auburn Street Cambridge, Massachusetts 02138	2013	Leased ⁽⁶⁾



Administrative Offices

Leonard Street 2 Leonard Street Belmont, Massachusetts 02478	1969	Owned

Concord Avenue – Suite 3 385 Concord Avenue Belmont, Massachusetts 02478	2010	Leased ⁽³⁾

Concord Avenue – Suite 203A 385 Concord Avenue Belmont, Massachusetts 02478	2012	Leased ⁽³⁾

Concord Avenue – Suite 205 385 Concord Avenue Belmont, Massachusetts 02478	2012	Leased ⁽³⁾

Fall River 10 N. Main Street Fall River, Massachusetts 02722	2010	Leased ⁽⁴⁾

(1)	Lease expires in March 2014.

(2)	Lease expires in March 2017.

(3)	Lease expires in September 2015.

(4)	Lease expires in October 2015.

(5)	Lease expires in April 2022.

(6)	Lease expires in February 2023.

(7)	Lease expires in February 2023.

ITEM 3.

LEGAL PROCEEDINGS

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

ITEM 4.

MINE SAFETY DISCLOSURE

Not applicable.

PART II

ITEM 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information.

The Company’s common stock is listed on the Nasdaq Capital Market (“NASDAQ”) under the trading symbol “BLMT.” The Company completed its initial public offering on October 4, 2011 and commenced trading on October 5, 2011.

Stock Performance Graph.

The following graph compares the cumulative total shareholder return on BSB Bancorp common stock with the cumulative total return on the Russell 2000 Index and with the SNL Thrift Industry Index. The graph assumes $100 was invested at the close of business on October 5, 2011 and utilizes closing market price.

LOGO


	Period Ending
	10/5/2011		12/31/2011		6/30/2012		12/31/2012		6/30/2013		12/31/2013

BSB Bancorp, Inc.	$	100.00	$	102.23	$	123.67	$	118.62	$	127.55	$	146.36
Russell 2000		100.00		113.01		122.65		131.48		152.34		182.53
SNL Thrift NASDQQ		100.00		108.17		115.99		129.10		146.59		163.69

Holders.

As of March 10, 2014, there were 369 holders of record of the Company’s common stock.

Dividends.

The Company has not paid any dividends to its stockholders to date. The payment of dividends in the future will depend upon a number of factors, including capital requirements, the Company’s financial condition and results of operations, tax considerations, statutory and regulatory limitations and general economic conditions. In addition, the Company’s ability to pay dividends is dependent on dividends received from Belmont Savings. For more information regarding restrictions on the payment of cash dividends by the Company and by Belmont Savings, see “Business—Regulation and Supervision—Holding Company Regulation—Dividends” and “—Regulation and Supervision—Massachusetts Banking Laws and Supervision—Dividends.” No assurances can be given that any dividends will be paid or that, if paid, will not be reduced or eliminated in the future.

Securities Authorized for Issuance under Equity Compensation Plans.

Stock-Based Compensation Plan

Information regarding stock-based compensation awards outstanding and available for future grants as of December 31, 2013, segregated between stock-based compensation plans approved by shareholders and stock-based compensation plans not approved by shareholders, is presented in the table below. Additional information regarding stock-based compensation plans is presented in Note 16 – Stock Based Compensation in the notes to consolidated financial statements included in Item 8. Financial Statements and Supplementary Data located elsewhere in this report.

Number of securities

Weighted-average

remaining available for

to be issued upon

exercise price of

future issuance under equity

exercise of

outstanding

compensation plans

outstanding options,

options, warrants

(excluding securities

Plan category

warrants and rights

and rights

reflected in column (a))

(a)

(b)

(c)

Equity compensation plans approved by security holders

853,034

12.10

71,596

Equity compensation plans not approved by security holders

—

Total

853,034

12.10

71,596

Purchases of Equity Securities by the Issuer and Affiliated Purchasers.

The following table provides certain information with regard to shares repurchased by the Company in the fourth 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)
October 1 - October 31		—	$	—		—		500,000
November 1 - November 30		—		—		—		500,000
December 1 - December 31		—		—		—		500,000

Total		—	$	—		—

(1)

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

ITEM 6.

SELECTED FINANCIAL DATA


	At December 31,
	2013		2012		2011		2010		2009
	(Dollars in thousands)
Selected Financial Condition Data:

Total assets	$	1,054,619	$	838,082	$	669,005	$	500,246	$	504,941
Cash and cash equivalents		38,035		52,712		22,795		20,967		16,395
Investment securities - trading		—		—		—		—		11,455
Investment securities - available-for-sale		21,921		22,621		—		14,274		—
Investment securities - held-to-maturity		119,776		63,984		89,391		93,899		91,704
Loans receivable, net		839,013		654,295		509,964		336,916		351,753
Federal Home Loan Bank stock		7,712		7,627		8,038		8,038		8,038
Bank-owned life insurance		13,325		12,884		12,420		11,954		13,621
Deposits		764,753		607,865		430,654		346,841		312,690
Federal Home Loan Bank advances		142,100		83,100		95,600		92,800		129,700
Securities sold under agreements to repurchase		2,127		3,404		2,985		2,654		3,673
Other borrowed funds		1,113		1,156		1,502		5,199		5,750
Total stockholders’ equity		130,421		133,308		131,506		46,927		43,825


	For the Fiscal Year Ended December 31,								For the Three Months Ended December 31,		For the Fiscal Year Ended September 30,
	2013		2012		2011		2010		2009		2009
	(Dollars in thousands)
Selected Operating Data:

Interest and dividend income	$	30,972	$	26,824	$	22,222	$	21,188	$	5,637	$	23,525
Interest expense		4,987		5,133		5,645		7,543		2,312		11,121

Net interest and dividend income		25,985		21,691		16,577		13,645		3,325		12,404
Provision for loan losses		1,498		2,736		2,285		438		152		597

Net interest and dividend income after provision for loan losses		24,487		18,955		14,292		13,207		3,173		11,807
Noninterest income		3,606		4,705		4,507		1,694		1,070		1,187
Noninterest expense		25,091		21,546		18,205		12,854		2,738		10,153

Income before income tax expense		3,002		2,114		594		2,047		1,505		2,841
Income tax expense		1,042		713		295		220		589		1,424


Net income	$	1,960	$	1,401	$	299	$	1,827	$	916	$	1,417


	At or For the Fiscal Years Ended December 31,												At or For the Three Months Ended December 31,			At or For the Fiscal Year Ended September 30,
	2013			2012			2011			2010			2009			2009
Selected Financial Ratios and Other Data:
*Performance Ratios:*
Return on average assets		0.21	%		0.19	%		0.05	%		0.36	%		0.72	%		0.29	%
Return on average equity		1.51	%		1.06	%		0.44	%		4.06	%		8.28	%		3.39	%
Interest rate spread (1)		2.69	%		2.68	%		2.91	%		2.73	%		2.53	%		2.38	%
Net interest margin (2)		2.89	%		2.97	%		3.11	%		2.91	%		2.76	%		2.62	%
Efficiency ratio (3)		84.79	%		81.62	%		86.34	%		83.80	%		62.34	%		74.70	%
Noninterest expense to average total assets		2.72	%		2.85	%		3.24	%		2.56	%		2.17	%		2.06	%
Average interest-earning assets to average interest-bearing liabilities		137.32	%		139.29	%		119.10	%		110.93	%		111.78	%		110.28	%
Average equity to average total assets		14.01	%		17.47	%		12.04	%		8.96	%		8.75	%		8.47	%
*Asset Quality Ratios:*
Non-performing assets to total assets		0.39	%		0.52	%		0.67	%		0.34	%		0.38	%		0.50	%
Non-performing loans to total loans		0.49	%		0.55	%		0.86	%		0.50	%		0.54	%		0.69	%
Allowance for loan losses to non-performing loans		193.39	%		177.86	%		107.88	%		169.24	%		129.21	%		93.03	%
Allowance for loan losses to total loans		0.95	%		0.98	%		0.93	%		0.85	%		0.70	%		0.64	%
*Capital Ratios (4):*
Total capital to risk-weighted assets		16.30	%		24.32	%		29.37	%		14.76	%		13.76	%		13.79	%
Tier 1 capital to risk-weighted assets		15.35	%		23.18	%		28.31	%		13.61	%		13.02	%		13.08	%
Tier 1 capital to average assets		12.59	%		16.02	%		20.14	%		9.25	%		8.73	%		8.58	%
*Other Data:*
Number of full service offices		7			5			4			4			4			4
Full time equivalent employees		123			114			96			86			73			75

(1)	The interest rate spread represents the difference between the weighted-average yield on interest-earning assets and the weighted-average cost of interest-bearing liabilities for the period.

(2)	The net interest margin represents net interest income as a percent of average interest-earning assets for the period.

(3)	The efficiency ratio represents noninterest expense as a percentage of the sum of net interest income and noninterest income.

(4)	Capital ratios are for BSB Bancorp, Inc.

ITEM 7.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

Overview

Our results of operations depend primarily on our net interest and dividend income. Net interest and dividend income is the difference between the income we earn on our interest and dividend earning assets and the amount we pay on our interest bearing liabilities. Interest and dividend earning assets consist primarily of loans, investment securities (including corporate bonds, U.S. government and U.S. government agency debt securities, and mortgage-backed securities guaranteed or issued by U.S. government-sponsored enterprises) and interest-earning deposits at other financial institutions. Interest bearing liabilities consist primarily of our depositor’s money market, savings, checking, and certificates of deposit accounts and to a lesser extent Federal Home Loan Bank of Boston advances. Our results of operations also are affected by our provision for loan losses, non-interest income and non-interest expense. Non-interest income consists primarily of service charges on deposit accounts, income derived from bank owned life insurance, loan servicing fees, gains or losses on the sale of loans, gains or losses on the sale of available-for-sale securities, and other income. Non-interest expense consists primarily of salaries and employee benefits, occupancy and equipment expenses, data processing expenses, legal expenses, accounting and exam fees, FDIC insurance premiums, director compensation and other operating expenses. Our results of operations may also be significantly affected by competitive conditions, changes in market interest rates, governmental policies, general and local economic conditions, and actions of regulatory authorities.

We historically have operated as a traditional thrift institution. In the past, a significant majority of our assets have consisted of long term, fixed and adjustable rate one to four family residential mortgage loans, which have been primarily funded by retail deposit accounts and Federal Home Loan Bank of Boston advances. In an effort to improve our earnings and to decrease our exposure to interest rate risk we have recently begun selling fixed rate, conforming one to four family residential mortgage loans and we have shifted our focus to originating loans that have adjustable rates or higher yields, including commercial real estate loans, home equity lines of credit, commercial business loans and indirect automobile loans. Such loans generally have shorter maturities than one to four family residential mortgage loans. See “Management of Market Risk” for a discussion of actions we take to manage interest rate risk.

In 2009, Belmont Savings Bank reorganized into the mutual holding company structure. Further, following a comprehensive strategic review of the Bank’s management and operations, the Board of Directors of the bank approved a new strategic plan designed to increase the growth and profitability of the bank. The strategic plan contemplates significant growth in assets and liabilities over the next several years with the intent of making Belmont Savings Bank a leader in market share in Belmont and the surrounding communities, the “Bank of Choice” for small businesses in its market area, and the trusted lending partner for area commercial real estate investors, developers and managers. The strategic plan includes increased small business lending, increased home equity lending, increased auto finance lending, and increased commercial real estate lending. Our portfolios of commercial real estate loans, home equity lines of credit, commercial business loans and indirect automobile loans have increased in accordance with the strategic plan, and we intend to continue this strategy of origination of such loans, while selling a portion of the loans that we originate.

On October 4, 2011, we completed our initial public offering of common stock in connection with BSB Bancorp, MHC’s mutual-to-stock conversion, selling 8,993,000 shares of common stock at $10.00 per share, including 458,643 shares sold to Belmont Savings Bank’s employee stock ownership plan, and raising approximately $89.9 million of gross proceeds. In addition, we issued 179,860 shares of our common stock and contributed $200,000 in cash to the Belmont Savings Bank Foundation.

In January of 2012, the Bank contracted with Shaw’s (subsequently acquired by Albertsons) Supermarkets, Inc., a Massachusetts corporation, to create an in-store full service branch located in Waltham, Massachusetts, which opened for business in May of 2012.

On February 27, 2013, the Bank entered into two lease agreements with Shaw’s Supermarkets, Inc., a Massachusetts corporation, to open two in-store full service branches located in Cambridge and Newtonville, Massachusetts. The leases commenced during 2013 and the branches were fully operational at December 31, 2013.

Our emphasis on conservative loan underwriting has resulted in relatively low levels of non-performing assets. Our non-performing assets totaled $4.1 million, or 0.39% of total assets, at December 31, 2013, compared to $4.3 million, or 0.52% of total assets, at December 31, 2012, and $4.5 million, or 0.67% of total assets, at December 31, 2011. Total loan delinquencies of 60 days or more as of December 31, 2013 were $2.0 million. Our provision for loan losses was $1.5 million, $2.7 million and $2.3 million for the years ended December 31, 2013, 2012 and 2011, respectively. For the year ended December 31, 2013, we experienced net recoveries of $20,000. For the years ending December 31, 2012 and 2011, we experienced net charge offs of $1.1 million and $398,000, respectively.

Critical Accounting Policies

Critical accounting policies are defined as those that involve significant judgments and uncertainties, and could potentially result in materially different results under different assumptions and conditions. We believe that the most critical accounting policies upon which our financial condition and results of operation depend, and which involve the most complex subjective decisions or assessments, are the following:

Allowance for Loan Losses. The allowance for loan losses is the estimated amount considered necessary to cover probable and reasonably estimable credit losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses that is charged against income. The determination of the allowance for loan losses is considered a critical accounting policy by management because of the high degree of judgment involved, the subjectivity of the assumptions used, and the potential for changes in the economic environment that could result in changes to the amount of the recorded allowance for loan losses.

The allowance for loan losses has been determined in accordance with GAAP. We are responsible for the timely and periodic determination of the amount of the allowance required. We believe that allowance for loan losses is an appropriate estimate of the inherent probable losses within our loan portfolio.

The estimate of our credit losses is applied to two general categories of loans:

•

loans that we evaluate individually for impairment under ASC 310-10, “Receivables;” and

•

groups of loans with similar risk characteristics that we evaluate collectively for impairment under ASC 450-20, “Loss Contingencies.”

The allowance for loan losses is evaluated on a regular basis by management and reflects consideration of all significant factors that affect the collectability of the loan portfolio. The factors used to evaluate the collectability of the loan portfolio include, but are not limited to, current economic conditions, our historical loss experience, the nature and volume of the loan portfolio, the financial strength of the borrower, and estimated value of any underlying collateral. This evaluation is inherently subjective as it requires estimates that are subject to significant revision as more information becomes available. Actual loan losses may be significantly more than the allowance for loan losses we have established which could have a material negative effect on our financial results.

Securities Valuation and Impairment . Our available-for-sale securities portfolio historically has consisted of corporate bonds, U.S. government and U.S. government agency debt securities, and mortgage-backed securities guaranteed or issued by the U.S. government or a U.S. government-sponsored enterprise. Our available-for-sale securities portfolio is carried at estimated fair value, with any unrealized gains or losses, net of taxes, reported as accumulated other comprehensive income or loss in stockholders’ equity. Our held-to-maturity securities portfolio, consisting of U.S. government and U.S. government agency debt securities, mortgage-backed securities and debt securities for which we have the positive intent and ability to hold to maturity, is carried at amortized cost. We conduct a quarterly review and evaluation of the available-for-sale and held-to-maturity securities portfolios to determine if the fair value of any security has declined below its amortized cost, and whether such decline is other-than-temporary. If the amortized cost basis of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, the duration and extent to which the fair value is less than cost, the probability of a near-term recovery in value and our intent to sell the security and whether it is more likely than not that we will be

required to sell the security before full recovery of our investment or maturity. If such a decline is deemed other-than-temporary for equity securities, an impairment charge is recorded through current earnings based upon the estimated fair value of the security at the time of impairment and a new cost basis in the investment is established. For any debt security with a fair value less than its amortized cost basis, we will determine whether we have the intent to sell the debt security or whether it is more likely than not we will be required to sell the debt security before the recovery of its amortized cost basis. If either condition is met, we will recognize the full impairment charge to earnings. For all other debt securities that are considered other-than-temporarily impaired and do not meet either condition, the credit loss portion of impairment will be recognized in earnings as realized losses. The other-than-temporary impairment related to all other factors will be recorded in other comprehensive income.

Determining if a security’s decline in estimated fair value is other-than-temporary is inherently subjective. In performing our evaluation of securities in an unrealized loss position, we consider among other things, the severity, and duration of time that the security has been in an unrealized loss position and the credit quality of the issuer. This evaluation is inherently subjective as it requires estimates of future events, many of which are difficult to predict. Actual results could be significantly different than our estimates and could have a material effect on our financial results.

Categorization of Investment Securities . We periodically review the level of trading activity within our investment portfolio categorized as trading and categorized as available-for-sale to determine if the investment securities held within those categories are properly classified. We consider a security to meet the definition of a trading security if the intent is to sell the security within hours or days after being acquired. During the year ended December 31, 2010, we reviewed the level of trading activity within our trading portfolio. Our external money manager, with our approval, adopted a more long-term buy and hold strategy related to most of the securities within the trading portfolio during the year ended December 31, 2010. As a result of this change in strategy, the level of trading activity was greatly reduced. Based on the reduced level of trades within the trading portfolio, we determined that the securities within this category no longer met the definition of a trading security and, effective July 31, 2010, we transferred our trading portfolio to the available-for-sale category. The fair value of the securities on the transfer date was $12.4 million.

Deferred Income Taxes. We use the asset and liability method of accounting for income taxes. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. If it is determined that it is more likely than not that the deferred tax assets will not be realized, a valuation allowance is established. We consider the determination of this valuation allowance to be a critical accounting policy because of the need to exercise significant judgment in evaluating the amount and timing of recognition of deferred tax liabilities and assets, including projections of future taxable income. These judgments and estimates are reviewed quarterly as regulatory and business factors change. A valuation allowance for deferred tax assets may be required if the amounts of taxes recoverable through loss carrybacks decline, or if we project lower levels of future taxable income. Such a valuation allowance would be established and any subsequent changes to such allowance would require an adjustment to income tax expense that could adversely affect our operating results.

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

Total Assets. Total assets increased $216.5 million to $1.1 billion at December 31, 2013, from $838.1 million at December 31, 2012. The increase was primarily the result of a $184.7 million, or 28.2% increase in net loans and a $55.8 million increase in investments in held-to-maturity securities, partially offset by a $14.7 million decrease in cash and cash equivalents and an $11.2 million decrease in loans held-for-sale.

Loans. Net loans increased by $184.7 million to $839.0 million at December 31, 2013 from $654.3 million at December 31, 2012. The increase in net loans was primarily due to increases of $19.5 million or 24.3% in indirect automobile loans, $54.1 million, or 20.3%, in commercial real estate loans, $25.5 million, or 38.1%, in home equity lines of credit, $85.8 million, or 42.5%, in one to four family residential loans, $5.9 million, or 23.9% in commercial business loans, partially offset by a decrease of $6.2 million, or 38.3%, in construction loans. Our plan to prudently build new commercial and consumer loan businesses is working as solid growth was experienced in each of our strategic business lines.

Investment Securities. Total investment securities increased $55.1 million to $141.7 million at December 31, 2013, from $86.6 million at December 31, 2012. The increase in investment securities resulted from an increase of $55.8 million, or 87.2%, in held-to-maturity securities (U.S. government and agency-sponsored mortgage-backed securities and corporate debt securities) which was partially offset by a decrease of $700,000 in available-for-sale corporate debt securities.

Cash and Cash Equivalents. Cash and cash equivalents decreased by $14.7 million to $38.0 million at December 31, 2013, from $52.7 million at December 31, 2012.

Bank-Owned Life Insurance. We invest in bank-owned life insurance to provide a funding source for our benefit plan obligations. Bank-owned life insurance also generally provides noninterest income that is nontaxable. At December 31, 2013, our investment in bank-owned life insurance was $13.3 million, an increase of $441,000 from $12.9 million at December 31, 2012, reflecting an increase in cash surrender value.

Deposits. Deposits increased $156.9 million, or 25.8%, to $764.8 million at December 31, 2013 from $607.9 million at December 31, 2012. The increase in deposits was primarily due to a $119.4 million, or 37.7% increase in regular savings accounts, a $24.9 million or 20.5%, increase in certificates of deposit accounts, and a $13.0 million or 10.2%, increase in demand deposit accounts. This strong growth was due to the impact of our business banking programs focused on deposit driven businesses as well as the effective cross selling of deposit relationships of new and existing borrowers by our commercial real estate lenders. In addition, this performance reflects the expanding customer base of our two new branches in Newton and Combridge. There was significant growth of 27.1% in our core deposit accounts, which we consider to include all deposits other than CD’s and brokered CD’s, which indicates that core banking relationships continue to grow.

Borrowings. At December 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 increased $57.7 million, or 65.8%, to $145.3 million at December 31, 2013, from $87.7 million at December 31, 2012. Advances from the Federal Home Loan Bank of Boston increased $59.0 million to $142.1 million at December 31, 2013, from $83.1 million at December 31, 2012. Securities sold under agreements to repurchase decreased $1.3 million to $2.1 million at December 31, 2013, from $3.4 million at December 31, 2012. Other borrowed funds decreased $43,000 to $1.1 million at December 31, 2013, from $1.2 million at December 31, 2012.

Stockholders’ Equity. Total equity capital decreased $2.9 million to $130.4 million at December 31, 2013, from $133.3 million at December 31, 2012. This decrease is primarily the result of the Stock Repurchase Program that was adopted on December 12, 2012. During the twelve months ended December 31, 2013, the Company purchased 476,622 shares of its common stock for $6.5 million and completed the Stock Repurchase Program. This was partially offset by earnings of $2.0 million and a $1.6 million positive effect on additional paid-in capital related to stock based compensation.

Comparison of Operating Results for the Years Ended December 31, 2013 and 2012

General . Net income increased $559,000, or 39.9%, to $2.0 million for the year ended December 31, 2013, from $1.4 million for the year ended December 31, 2012. The increase was primarily due to a $4.3 million increase in net interest and dividend income and a decrease of $1.2 million in the provision for loan losses, partially offset by a $3.5 million increase in noninterest expense and a $1.1 million decrease in noninterest income.

Net Interest and Dividend Income. Net interest and dividend income increased by $4.3 million to $26.0 million for the year ended December 31, 2013, from $21.7 million for the year ended December 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 $35.7 million, or 17.1%, to $243.8 million for the year ended December 31, 2013 from $208.2 million for the year ended December 31, 2012.

Our net interest margin decreased 8 basis points to 2.89% for the year ended December 31, 2013, compared to 2.97% for the year ended December 31, 2012, and our net interest rate spread increased 1 basis points to 2.69% for the year ended December 31, 2013, compared to 2.68% for the year ended December 31, 2012.

Interest and Dividend Income. Interest and dividend income increased $4.1 million, or 15.5%, to $31.0 million for the year ended December 31, 2013, from $26.8 million for the year ended December 31, 2012. The increase in interest and dividend income was primarily due to a $3.8 million increase in interest income on loans and a $331,000 increase in interest income on debt securities. The increase in interest income on loans resulted from a $146.2 million increase in the average balance of loans, partially offset by a 27 basis point decrease in the average yield on loans to 3.77% from 4.04%, primarily due to lower market interest rates during 2013. The increase in interest and dividend income on securities was primarily due to a $22.1 million increase in the average balance of securities to $103.9, partially offset by a 24 basis point decrease in the average yield on investment securities to 2.36% from 2.60%.

Interest Expense. Interest expense decreased $146,000 million, or 2.8%, to $5.0 million for the year ended December 31, 2013, from $5.1 million for the year ended December 31, 2012. The decrease resulted from a 22 basis point decrease in the cost of interest-bearing liabilities, partially offset by a $128.5 million increase in the average balance of interest-bearing liabilities.

Interest expense on interest-bearing deposits increased by $90,000 to $4.2 million for the year ended December 31, 2013, from $4.1 million for the year ended December 31, 2012. This increase was primarily due to an increase of $110.2 million in the average balance of interest bearing deposits to $547.8 million from $437.6 million at December 31, 2013 and 2012, respectively. The increase in average balance was partially offset by a 17 basis point decrease in the average cost of interest-bearing deposits, from 0.94% for the year ended December 31, 2012 to 0.77% for the year ended December 31, 2013. We experienced decreases in the average cost across all categories of interest-bearing deposits for the year ended December 31, 2013, reflecting our ability to attract low cost deposits and an improved product mix compared to the prior period.

Interest expense on Federal Home Loan Bank advances decreased $223,000 to $735,000 for the year ended December 31, 2013, from $958,000 for the year ended December 31, 2012. This decrease was primarily due to a 44 basis point decrease in the average cost of such advances to 0.72% for the year ended December 31, 2013, from 1.16% for the year ended December 31, 2012, partially offset by an increase of $19.0 million in the average balance of Federal Home Loan Bank advances to $101.4 million for the year ended December 31, 2013, from $82.4 million for the year ended December 31, 2012.

Provision for Loan Losses. We recorded a provision for loan losses of $1.5 million for the year ended December 31, 2013, compared to a provision for loan losses of $2.7 million for the year ended December 31, 2012. The decrease in the provision was driven by a reduction in net charge offs of $1.1 million from $1.1 million during the year ended December 31, 2012 to net recoveries of $20,000 during the year ended December 31, 2013. The allowance for loan losses was $8.0 million, or 0.95% of total loans, at December 31, 2013, compared to $6.4 million, or 0.98% of total loans, at December 31, 2012.

Noninterest Income. Noninterest income decreased $1.1 million to $3.6 million for the year ended December 31, 2013, from $4.7 million for the year ended December 31, 2012. This decrease was primarily the result of a decrease in net gains on sales of loans of $1.5 million, partially offset by a $283,000 increase in loan servicing fee income and a $108,000 increase in customer service fees.

Noninterest Expense. Noninterest expense increased $3.5 million to $25.1 million for the year ended December 31, 2013, from $21.5 million for the year ended December 31, 2012. This increase was largely the result of increases in salaries and employee benefits of $1.9 million. This increase in salaries and employee benefits was driven by an increase in stock compensation expense of $1.1 million related to the 2012 Equity Incentive Plan as well as new staff added to execute the Company’s commercial and consumer business strategies. There were also increases in infrastructure costs related to increased business volume, expansion of our branch network and director equity based incentive compensation.

Income Tax Expense . We recorded a provision for income taxes of $1.0 million for the year ended December 31, 2013, compared to a provision for income taxes of $713,000 for the year ended December 31, 2012, reflecting effective tax rates of 34.7% and 33.7%, respectively. The increase in the effective tax rate for 2013 was primarily due to the effect of the share based compensation, state tax as a portion of total earnings, and reduced impact of bank owned life insurance. These items were partially offset by the change in the valuation allowance established in 2011 for our charitable contribution carryover, which was 39.3% of pre-tax income in 2011.

Comparison of Operating Results for the Years Ended December 31, 2012 and 2011

General . Net income increased $1.1 million, or 368.6%, to $1.4 million for the year ended December 31, 2012, from $0.3 million for the year ended December 31, 2011. The increase was primarily due to a $5.1 million increase in net interest and dividend income and a $0.2 million increase in noninterest income partially offset by a $0.5 million increase in provision for loan losses and an increase of $3.3 million in noninterest expense.

Net Interest and Dividend Income. Net interest and dividend income increased by $5.1 million to $21.7 million for the year ended December 31, 2012, from $16.6 million for the year ended December 31, 2011. The increase in net interest and dividend income was primarily due to an increase in our net interest earning assets, a shift in asset focus to higher-yielding loans and the ability to attract lower cost core deposits. Net average interest-earning assets increased $120.8 million, or 141.5%, to $206.1 million for the year ended December 31, 2012 from $85.3 million for the year ended December 31, 2011. Our net interest margin decreased 14 basis points to 2.97% for the year ended December 31, 2012, compared to 3.11% for the year ended December 31, 2011, and our net interest rate spread decreased 23 basis points to 2.68% for the year ended December 31, 2012, compared to 2.91% for the year ended December 31, 2011.

Interest and Dividend Income. Interest and dividend income increased $4.6 million, or 20.7%, to $26.8 million for the year ended December 31, 2012, from $22.2 million for the year ended December 31, 2011. The increase in interest and dividend income was primarily due to a $5.0 million increase in interest income on loans partially offset by a $480,000 decrease in interest and dividend income on securities. The increase in interest income on loans resulted from a $188.1 million increase in the average balance of loans, partially offset by a 62 basis point decrease in the average yield on loans to 4.04% from 4.66%, primarily due to lower market interest rates during the period. The decrease in interest and dividend income on securities was primarily due to a $7.7 million decrease in the average balance of securities to $81.7 million.

Interest Expense. Interest expense decreased $0.5 million, or 9.1%, to $5.1 million for the year ended December 31, 2012, from $5.7 million for the year ended December 31, 2011. The decrease resulted from a 28 basis point decrease in the cost of interest-bearing liabilities, partially offset by a $77.8 million increase in the average balance of interest-bearing liabilities.

Interest expense on interest-bearing deposits increased by $469,000 to $4.1 million for the year ended December 31, 2012, from $3.7 million for the year ended December 31, 2011. This increase was primarily due to an increase of $83.6 million in the average balance of interest bearing deposits to $437.4 million from $353.8 million at December 31, 2012 and 2011, respectively. The increase was partially offset by a 9 basis point decrease in the average cost of interest-bearing deposits, from 1.03% for the year ended December 31, 2011 to 0.94% for the year ended December 31, 2012. We experienced decreases in the average cost across most categories of interest-bearing deposits for the year ended December 31, 2012, reflecting lower market interest rates compared to the prior period.

Interest expense on Federal Home Loan Bank borrowings decreased $0.9 million to $1.0 million for the year ended December 31, 2012, from $1.9 million for the year ended December 31, 2011. This decrease was primarily due to a $5.1 million decrease in the average balance of Federal Home Loan Bank advances to $82.4 million for the year ended December 31, 2012, from $87.5 million for the year ended December 31, 2011, and a 100 basis point decrease in the average cost of such advances to 1.16% for the year ended December 31, 2012, from 2.16% for the year ended December 31, 2011.

Provision for Loan Losses. We recorded a provision for loan losses of $2.7 million for the year ended December 31, 2012, compared to a provision for loan losses of $2.3 million for the year ended December 31, 2011. The allowance for loan losses was $6.4 million, or 0.98% of total loans, at December 31, 2012, compared to $4.8 million, or 0.93% of total loans, at December 31, 2011. This increase reflected changes in loan volume and composition in each period as well as higher specific allocations established against certain loans in 2012. Additionally, as part of a continuous review and analysis of current market and economic conditions by management, the Company adjusted the reserve ratio applied to certain loan categories in 2012.

Noninterest Income. Noninterest income improved to $4.7 million for the year ended December 31, 2012, from $4.5 million for the year ended December 31, 2011. This increase was primarily the result of an increase in net gains on sales of loans of $2.1 million, an increase of $207,000 in customer service fees, and an increase in other income of $660,000, primarily attributable to an increase in loan servicing fee income of $404,000 and $208,000 in noninterest income related to the sale of easement rights. This was partially offset by a $2.7 million decrease in net realized gains on investment securities as a result of the sale of the entire portfolio of marketable equity securities in the first quarter of 2011.

Noninterest Expense. Noninterest expense increased $3.3 million to $21.5 million for the year ended December 31, 2012, from $18.2 million for the year ended December 31, 2011. This increase in expenses was primarily the result of new staff added to execute the Company’s commercial and consumer business strategies, increased infrastructure costs related to increased business volume, public company costs and equity based incentive compensation. These were partially offset by a decrease in charitable contributions.

Income Tax Expense. We recorded a provision for income taxes of $713,000 for the year ended December 31, 2012, compared to a provision for income taxes of $295,000 for the year ended December 31, 2011, reflecting effective tax rates of 33.7% and 49.7%, respectively. The decrease in the effective tax rate for 2012 was primarily due to the valuation allowance added in 2011 for our charitable contribution carryover, which was 39.3% of pre-tax income in 2011. This was offset by other items, mostly a reduced impact of bank owned life insurance and state tax as a portion of total earnings.

Average Balances and Yields

The following tables set forth average balance sheets, average yields and costs, and certain other information for the periods indicated. 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 Year Ended December 31,
	2013								2012								2011
	Average Outstanding Balance			Interest		Yield/ Rate			Average Outstanding Balance			Interest		Yield/ Rate			Average Outstanding Balance			Interest		Yield/ Rate
	(Dollars in thousands)
Interest-earning assets:
Total loans	$	753,581		$	28,407		3.77	%	$	607,424		$	24,568		4.04	%	$	419,289		$	19,525		4.66	%
Securities		103,854			2,455		2.36	%		81,727			2,124		2.60	%		89,452			2,618		2.93	%
Other		39,748			82		0.21	%		43,861			85		0.19	%		23,550			55		0.23	%

Total interest-earning assets (4)		897,183			30,944		3.45	%		733,012			26,777		3.65	%		532,291			22,198		4.17	%
Non-interest-earning assets		26,790								24,105								29,454

Total assets	$	923,973							$	757,117							$	561,745

Interest-bearing liabilities:
Regular savings accounts		383,316			2,233		0.58	%		273,284			1,949		0.71	%		190,339			1,314		0.69	%
Checking accounts		31,121			36		0.11	%		28,718			36		0.13	%		25,225			31		0.12	%
Money market accounts		10,198			8		0.08	%		11,055			16		0.14	%		12,371			29		0.23	%
Certificates of deposit		123,193			1,938		1.57	%		124,521			2,124		1.71	%		125,926			2,282		1.81	%

Total interest-bearing deposits		547,828			4,215		0.77	%		437,578			4,125		0.94	%		353,861			3,656		1.03	%
Federal Home Loan Bank advances		101,385			735		0.72	%		82,352			958		1.16	%		87,459			1,892		2.16	%
Securities sold under agreements to repurchase		2,995			4		0.15	%		3,444			8		0.23	%		3,282			16		0.49	%
Other borrowed funds		1,136			33		2.92	%		1,450			42		2.90	%		2,338			81		3.46	%

Total interest-bearing liabilities		653,344			4,987		0.76	%		524,824			5,133		0.98	%		446,940			5,645		1.26	%

Non-interest-bearing liabilities		141,182								100,729								47,159

Total liabilities		794,526								625,553								494,099
Equity		129,447								131,564								67,646

Total liabilities and equity	$	923,973							$	757,117							$	561,745

Net interest income				$	25,957							$	21,644							$	16,553

Net interest rate spread ⁽¹⁾							2.69	%							2.68	%							2.91	%
Net interest-earning assets ⁽²⁾	$	243,839							$	208,188							$	85,351

Net interest margin ⁽³⁾							2.89	%							2.97	%							3.11	%
Average interest-earning assets to interest-bearing liabilities		137.32	%							139.67	%							119.10	%

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

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

(3)	Net interest margin represents net interest and dividend income divided by average total interest-earning asset

(4)	Totals do not include FHLB stock dividends of approximately $28,000, $47,000 and $24,000 for the years ended December 31, 2013, 2012 and 2011, respectively.

Rate/Volume Analysis

The following table presents the effects of changing rates and volumes on our net interest income for the periods indicated. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The net column represents the sum of the prior columns. For purposes of this table, changes attributable to both rate and volume, which cannot be segregated, have been allocated to the changes due to rate and the changes due to volume in proportion to the relationship of the absolute dollar amounts of change in each.


	Fiscal Years Ended December 31, 2013 vs. 2012									Fiscal Years Ended December 31, 2012 vs. 2011
	Increase (Decrease) Due to						Total Increase			Increase (Decrease) Due to						Total Increase
	Volume			Rate			(Decrease)			Volume			Rate			(Decrease)
	(Dollars in thousands)									(Dollars in thousands)
Interest-earning assets:
Loans	$	5,599		$	(1,760	)	$	3,839		$	7,132		$	(2,089	)	$	5,043
Securities		537			(206	)		331			(215	)		(279	)		(494	)
Other		(9	)		6			(3	)		36			(6	)		30


Total interest-earning assets	$	6,127		$	(1,960	)	$	4,167		$	6,953		$	(2,374	)	$	4,579


Interest-bearing liabilities:
Regular savings accounts	$	686		$	(402	)	$	284		$	590		$	45		$	635
Checking accounts		3			(3	)		—			4			1			5
Money market accounts		(1	)		(7	)		(8	)		(3	)		(11	)		(14	)
Certificates of deposit		(23	)		(163	)		(186	)		(25	)		(132	)		(157	)


Total interest-bearing deposits		665			(575	)		90			566			(97	)		469
Federal Home Loan Bank advances		190			(413	)		(223	)		(105	)		(829	)		(934	)
Securities sold under agreements to repurchase		(1	)		(3	)		(4	)		1			(9	)		(8	)
Other borrowed funds		(9	)		—			(9	)		(27	)		(12	)		(39	)


Total interest-bearing liabilities		845			(991	)		(146	)		435			(947	)		(512	)


Change in net interest and dividend income	$	5,282		$	(969	)	$	4,313		$	6,518		$	(1,427	)	$	5,091

Management of Market Risk

General . Our most significant form of market risk is interest rate risk because, as a financial institution, the majority of our assets and liabilities are sensitive to changes in interest rates. Therefore, a principal part of our operations is to manage interest rate risk and limit the exposure of our financial condition and results of operations to changes in market interest rates. Our Asset/Liability Management Committee is responsible for evaluating the interest rate risk inherent in our assets and liabilities, for determining the level of risk that is appropriate, given our 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.

Historically, we have operated as a traditional thrift institution. A significant portion of our assets consist of longer-term, fixed- and adjustable-rate residential mortgage loans and securities, which we have funded primarily with checking and savings accounts and short-term borrowings. In recent years, in an effort to improve our earnings and to decrease our exposure to interest rate risk, we generally have sold fixed-rate, conforming one to four family residential mortgage loans and we have shifted our focus to originating loans that have adjustable rates or higher yields, including commercial real estate loans, home equity lines of credit, commercial business loans and indirect automobile loans. Such loans generally have shorter maturities than one to four family residential mortgage loans. To manage our interest rate risk, we also invest in shorter maturity investment securities and mortgage-related securities, and seek to obtain general financing through lower cost deposits, wholesale funding and repurchase agreements. We have not conducted hedging activities, such as engaging in futures, options or swap transactions.

Net Interest Income Analysis

We analyze our sensitivity to changes in interest rates through our net interest income model. Net interest income is the difference between the interest income we earn on our interest-earning assets, such as loans and securities, and the interest we pay on our interest-bearing liabilities, such as deposits and borrowings. We estimate what our net interest income would be for a one-year period based on current interest rates. We then calculate what the net interest income would be for the same period under different interest rate assumptions. We also estimate 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 December 31, 2013 resulting from potential changes in interest rates. These estimates require us 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, we cannot precisely predict the impact of changes in interest rates on our net interest income. Although the net interest income table below provides an indication of our 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 our 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		–16.2	%

+200		–5.4	%

–100		0.1	%

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

The table above indicates that at December 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, we would experience a 5.4% 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, we would experience a 0.1% increase in net interest income.

Economic Value of Equity Analysis. We also analyze the sensitivity of the Bank’s financial condition to changes in interest rates through our economic value of equity model. This analysis measures the difference between predicted changes in the present value of the Bank’s assets and predicted changes in the present value of the Bank’s liabilities assuming various changes in current interest rates. The Bank’s economic value of equity analysis as of December 31, 2013 estimated that, in the event of an instantaneous 200 basis point increase in interest rates, the Bank would experience a 17.4% decrease in the economic value of equity. At the same date, our analysis estimated that, in the event of an instantaneous 100 basis point decrease in interest rates, the Bank would experience a 2.8% decrease in the economic value of equity. The estimates of changes in the economic value of our equity require us 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, we cannot precisely predict the impact of changes in interest rates on the economic value of our equity. Although our economic value of equity analysis provides an indication of our 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 our 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, principal repayments and loan sales and the sale of securities. 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 December 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:

(i)

expected loan demand;

(ii)

expected deposit flows and borrowing maturities;

(iii)

yields available on interest-earning deposits and securities; and

(iv)

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 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 December 31, 2013, cash and cash equivalents totaled $38.0 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 December 31, 2013, we had $48.9 million in loan commitments outstanding. In addition to commitments to originate and purchase loans, we had $132.8 million in unused lines of credit to borrowers and $14.1 million in unadvanced construction loans. Certificates of deposit due within one year of December 31, 2013 totaled $70.1 million, or 9.2%, 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 December 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 December 31, 2013.

Our primary investing activity is originating loans. During the years ended December 31, 2013 and 2012, we originated $507.1 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 $156.9 million and $177.2 million for the years ended December 31, 2013 and 2012, respectively. At December 31, 2013 and 2012, the level of brokered time deposits were $18.7 million and $13.3 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 December 31, 2013, we had $142.1 million of Federal Home Loan Bank advances. At that date we had the ability to borrow up to an additional $178.1 million from the Federal Home Loan Bank of Boston.

Belmont Savings 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 December 31, 2013, Belmont Savings exceeded all regulatory capital requirements. Belmont Savings is considered “well capitalized” under regulatory guidelines. See “Supervision and Regulation—Federal Regulation—Capital Requirements” and Note 14 of the Notes to our Consolidated Financial Statements.

The net proceeds from the stock offering have significantly increased our liquidity and capital resources. Over time, the initial level of liquidity will 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 will be adversely affected until we can effectively employ the proceeds of the offering.

Off-Balance Sheet Arrangements and Contractual Obligations

Commitments . 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 additional information, see Note 11 of the Notes to our Consolidated Financial Statements.

Contractual Obligations . We are obligated to make future payments according to various contracts. The following table presents the expected future payments of the contractual obligations aggregated by obligation type at December 31, 2013.


	December 31, 2013
	One year or less		More than one year to three years		More than three years to five years		More than five years		Total
	(Dollars in thousands)
Federal Home Loan Bank of Boston advances	$	89,000	$	21,100	$	32,000	$	—	$	142,100
Other borrowed funds		—		—		1,113		—		1,113
Securities sold under agreements to repurchase		2,127		—		—		—		2,127
Certificates of deposit		70,139		39,026		37,018		—		146,183
Operating leases		436		589		259		504		1,788


Total contractual obligations	$	161,702	$	60,715	$	70,390	$	504	$	293,311

Recent Accounting Pronouncements

For a discussion of the impact of recent accounting pronouncements, see Note 1 of the Notes to our Consolidated Financial Statements.

Impact of Inflation and Changing Prices

Our Consolidated Financial Statements and related notes have been prepared in accordance with U.S. GAAP. U.S. GAAP generally requires the measurement of financial position and operating results in terms of historical dollars without consideration of changes in the relative purchasing power of money over time due to inflation. The impact of inflation is reflected in the increased cost of our operations. Unlike industrial companies, our assets and liabilities are primarily monetary in nature. As a result, changes in market interest rates have a greater impact on performance than the effects of inflation.

ITEM 7A.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The information required by this item is incorporated herein by reference to Part II, Item 7, “ Management’s Discussion and Analysis of Financial Condition and Results of Operation .”

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	Page

Management’s Report on Internal Control Over Financial Reporting		65

Report of Independent Registered Public Accounting Firm		66

Consolidated Balance Sheets as of December 31, 2013 and 2012		68

Consolidated Statements of Operations for the Years Ended December 31, 2013, 2012 and 2011		69

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013, 2012 and 2011		70

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2013, 2012 and 2011		71

Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011		72

Notes to Consolidated Financial Statements		75

Management’s Report on Internal Control Over Financial Reporting

The management of BSB Bancorp, Inc. (the “Company”) is responsible for establishing and maintaining adequate internal control over financial reporting. The internal control process has been designed under our supervision to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America.

Management conducted an assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013, utilizing the framework established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission-1992 (COSO). Based on this assessment, management has determined that the Company’s internal control over financial reporting as of December 31, 2013 is effective.

Our internal control over financial reporting includes policies and procedures that pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, transactions and dispositions of assets; and provide reasonable assurances that: (1) transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America; (2) receipts and expenditures are being made only in accordance with authorizations of management and the directors of the Company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the Company’s financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

The effectiveness of the Company’s internal control over financial reporting as of December 31, 2013 has been audited by Shatswell, MacLeod & Company, P.C, the Company’s independent registered public accounting firm, as stated in their report below, which expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2013.

The Board of Directors

BSB Bancorp, Inc.

Belmont, Massachusetts

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have audited the accompanying consolidated balance sheets of BSB Bancorp, Inc. and Subsidiaries as of December 31, 2013 and 2012 and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the three year period ended December 31, 2013. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of BSB Bancorp, Inc. and Subsidiaries as of December 31, 2013 and 2012, and the consolidated results of their operations and their cash flows for each of the years in the three year period ended December 31, 2013, in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), BSB Bancorp, Inc. and Subsidiaries’ internal controls over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework (1992 version) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 14, 2014 expressed an unqualified opinion thereon.

/s/ SHATSWELL, MacLEOD & COMPANY, P.C.

West Peabody, Massachusetts

March 14, 2014

The Board of Directors

BSB Bancorp, Inc.

Belmont, Massachusetts

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

We have audited BSB Bancorp, Inc. and Subsidiaries’ internal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control – Integrated Framework (1992 version) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). BSB Bancorp, Inc. and Subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on BSB Bancorp, Inc.’s Internal Control over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, BSB Bancorp, Inc. and Subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of BSB Bancorp, Inc. and Subsidiaries as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income, changes in stockholders’ equity and cash flows for each of the years in the three year period ended December 31, 2013 and our report dated March 14, 2014, expressed on unqualified opinion thereon.

/s/ SHATSWELL, MacLEOD & COMPANY, P.C.

West Peabody, Massachusetts

March 14, 2013

BSB BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(Dollars in thousands)


	December 31, 2013			December 31, 2012

ASSETS
Cash and due from banks	$	2,196		$	1,433
Interest-bearing deposits in other banks		35,839			51,279

Cash and cash equivalents		38,035			52,712
Interest-bearing time deposits with other banks		119			119
Investments in available-for-sale securities		21,921			22,621
Investments in held-to-maturity securities (fair value of $118,981 as of December 31, 2013 and $65,931 as of December 31, 2012)		119,776			63,984
Federal Home Loan Bank stock, at cost		7,712			7,627
Loans held-for-sale		—			11,205
Loans, net of allowance for loan losses of $7,958 as of December 31, 2013 and $6,440 as of December 31, 2012		839,013			654,295
Premises and equipment, net		3,327			2,902
Accrued interest receivable		2,241			2,217
Deferred tax asset, net		5,146			4,025
Income taxes receivable		—			806
Bank-owned life insurance		13,325			12,884
Other real estate owned		—			661
Other assets		4,004			2,024

Total assets	$	1,054,619		$	838,082


LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits:
Noninterest-bearing	$	139,733		$	126,760
Interest-bearing		625,020			481,105

Total deposits		764,753			607,865
Federal Home Loan Bank advances		142,100			83,100
Securities sold under agreements to repurchase		2,127			3,404
Other borrowed funds		1,113			1,156
Accrued interest payable		683			455
Deferred compensation liability		5,137			4,685
Income taxes payable		178			—
Other liabilities		8,107			4,109

Total liabilities		924,198			704,774

Stockholders’ Equity:
Common stock; $0.01 par value, 100,000,000 shares authorized; 9,055,808 and 9,532,430 shares issued and outstanding at December 31, 2013 and 2012, respectively		91			95
Additional paid-in capital		85,449			90,188
Retained earnings		49,312			47,352
Accumulated other comprehensive (loss) income		(188	)		68
Unearned compensation - ESOP		(4,243	)		(4,395	)

Total stockholders’ equity		130,421			133,308

Total liabilities and stockholders’ equity	$	1,054,619		$	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 for per share data )


	Years Ended December 31,
	2013		2012		2011
Interest and dividend income:
Interest and fees on loans	$	28,407	$	24,568	$	19,525
Interest on debt securities:
Taxable		2,455		2,124		2,536
Dividends		28		47		115
Other interest income		82		85		46

Total interest and dividend income		30,972		26,824		22,222

Interest expense:
Interest on deposits		4,215		4,125		3,656
Interest on Federal Home Loan Bank advances		735		958		1,892
Interest on securities sold under agreements to repurchase		4		8		16
Interest on other borrowed funds		33		42		81

Total interest expense		4,987		5,133		5,645

Net interest and dividend income		25,985		21,691		16,577
Provision for loan losses		1,498		2,736		2,285

Net interest and dividend income after provision for loan losses		24,487		18,955		14,292

Noninterest income:
Customer service fees		938		830		637
Income from bank-owned life insurance		435		439		435
Net gain on sales of loans		1,024		2,520		462
Net gain on sales and calls of securities		34		59		2,790
Loan servicing fee income		750		467		142
Other income		425		390		41

Total noninterest income		3,606		4,705		4,507

Noninterest expense:
Salaries and employee benefits		15,207		13,305		10,137
Director compensation		889		529		354
Occupancy expense		951		801		752
Equipment expense		650		450		350
Deposit insurance		575		500		456
Data processing		2,777		2,113		1,225
Professional fees		929		1,036		818
Marketing		999		928		930
Contribution to Belmont Savings Bank Foundation		—		—		1,999
Other expense		2,114		1,884		1,184

Total noninterest expense		25,091		21,546		18,205

Income before income tax expense		3,002		2,114		594
Income tax expense		1,042		713		295

Net income	$	1,960	$	1,401	$	299

Net income available to common stockholders	$	1,881	$	1,396	$	299


Earnings per share
Basic	$	0.22	$	0.16		N/A
Diluted	$	0.22	$	0.16		N/A

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

BSB BANCORP, INC

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

( Dollars in thousands )


	Years Ended December 31,
	2013			2012			2011

Net income	$	1,960		$	1,401		$	299
Other comprehensive income (loss), before tax:
Securities available for sale:
Change in net unrealized gain/loss during the period		(454	)		138			667
Reclassification adjustment for net (gains) included in net income		(34	)		—			(2,787	)

Total securities available for sale		(488	)		138			(2,120	)

Defined benefit post-retirement benefit plan:
Change in net actuarial gain/loss		72			(28	)		(11	)

Total defined benefit post-retirement benefit plan		72			(28	)		(11	)

Other comprehensive (loss) income , before tax		(416	)		110			(2,131	)
Income tax benefit (expense)		160			(37	)		851

Other comprehensive (loss) income, net of tax		(256	)		73			(1,280	)

Comprehensive income (loss)	$	1,704		$	1,474		$	(981	)

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

BSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

YEARS ENDED DECEMBER 31, 2013 AND 2012 AND 2011

(Dollars in thousands)


												Accumulated
							Additional					Other			Unearned			Total
	Common Stock						Paid-In			Retained		Comprehensive			Compensation -			Stockholders’
	Shares			Amount			Capital			Earnings		Income (Loss)			ESOP			Equity
Balance at December 31, 2010		—		$	—		$	—		$	45,652	$	1,275		$	—		$	46,927
Net income		—			—			—			299		—			—			299
Other comprehensive loss		—			—			—			—		(1,280	)		—			(1,280	)
Issuance of common stock for initial public offering, net of expenses of $1,622		8,993,000			90			88,218			—		—			—			88,308
Issuance of common stock to the Belmont Savings Bank Foundation		179,860			2			1,797			—		—			—			1,799
Stock purchased by the ESOP		—			—			—			—		—			(4,586	)		(4,586	)
Release of ESOP stock		—			—			1			—		—			38			39

Balance at December 31, 2011		9,172,860		$	92		$	90,016		$	45,951	$	(5	)	$	(4,548	)	$	131,506
Net income		—			—			—			1,401		—			—			1,401
Other comprehensive income		—			—			—			—		73			—			73
Release of ESOP stock		—			—			32			—		—			153			185
Stock based compensation-restricted stock awards		—			—			74			—		—			—			74
Stock based compensation-stock options		—			—			69			—		—			—			69
Restricted stock awards granted		359,570			3			(3	)		—		—			—			—

Balance at December 31, 2012		9,532,430		$	95		$	90,188		$	47,352	$	68		$	(4,395	)	$	133,308

Net income		—			—			—			1,960		—			—			1,960
Other comprehensive loss		—			—			—			—		(256	)		—			(256	)
Release of ESOP stock		—			—			57			—		—			152			209
Stock based compensation-restricted stock awards		—			—			869			—		—			—			869
Stock based compensation-stock options		—			—			778			—		—			—			778
Tax benefit from stock compensation		—			—			31											31
Share repurchases		(476,622	)		(4	)		(6,474	)		—		—			—			(6,478	)

Balance at December 31, 2013		9,055,808		$	91		$	85,449		$	49,312	$	(188	)	$	(4,243	)	$	130,421

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

BSB BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)


	Years Ended December 31,
	2013			2012			2011
Cash flows from operating activities:
Net income	$	1,960		$	1,401		$	299
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Amortization of securities, net		608			965			1,101
Net gain on sales and calls of securities		(34	)		(59	)		(2,790	)
Gain on sales of loans, net		(1,024	)		(2,520	)		(462	)
Loans originated for sale		(87,892	)		(161,794	)		(50,377	)
Proceeds from sales of loans		98,773			197,341			38,737
Provision for loan losses		1,498			2,736			2,285
Change in unamortized mortgage premium		(883	)		(198	)		(420	)
Change in net deferred loan costs		(758	)		(236	)		(1,961	)
ESOP expense		209			185			39
Depreciation and amortization expense		716			517			447
Impairment of fixed assets		41			—			—
Deferred income tax (benefit) expense		(961	)		253			(551	)
Increase in bank-owned life insurance		(435	)		(439	)		(435	)
Gain on sale of other real estate owned		(5	)		—			—
Stock based compensation expense		1,647			143			—
Excess tax benefit from stock-based compensation		(31	)
Issuance of common stock to Belmont Savings Bank Foundation		—			—			1,799
Net change in:
Accrued interest receivable		(24	)		(32	)		(64	)
Other assets		(1,730	)		(123	)		523
Income taxes receivable		806			(806	)		908
Income taxes payable		209			(121	)		121
Accrued interest payable		228			278			(46	)
Deferred compensation liability		452			512			233
Other liabilities		3,875			1,378			451


Net cash provided by (used in) operating activities		17,245			39,381			(10,163	)


	Years Ended December 31,
	2013			2012			2011
Cash flows from investing activities:
Purchases of available-for-sale securities		(17,833	)		(22,587	)		(709	)
Proceeds from sales of available-for-sale securities		17,985			—			15,650
Proceeds from maturities, payments, and calls of held-to-maturity securities		25,585			38,350			43,059
Purchases of held-to-maturity securities		(81,891	)		(13,745	)		(39,650	)
Purchases of community loan fund investments		(250	)
Redemption of Federal Home Loan Bank stock		496			411			—
Purchases of Federal Home Loan Bank stock		(581	)
Recoveries of loans previously charged off		155			197			12
Loan originations and principal collections, net		(54,098	)		(75,311	)		(125,874	)
Purchases of loans		(129,284	)		(99,972	)		(47,090	)
Payoff of first mortgage on OREO		—			(563	)
Capital expenditures		(1,182	)		(1,419	)		(508	)
Capital expenditures on other real estate owned		(79	)
Premiums paid on bank-owned life insurance		(6	)		(25	)		(31	)
Proceeds from sales of other real estate		745


Net cash (used in) investing activities		(240,238	)		(174,664	)		(155,141	)


Cash flows from financing activities:
Net increase in demand deposits, NOW and savings accounts		132,017			174,744			88,482
Net increase (decrease) in time deposits		24,871			2,467			(4,669	)
Proceeds from Federal Home Loan Bank advances		17,000			15,000			46,100
Principal payments on Federal Home Loan Bank advances		(23,000	)		(29,500	)		(53,300	)
Net change in short-term advances		65,000			2,000			10,000
Net (decrease) increase in securities sold under agreement to repurchase		(1,277	)		419			331
Repayment of principal on other borrowed funds		(43	)		(346	)		(3,697	)
Net proceeds from issuance of common stock		—			—			88,308
Acquisition of common stock by ESOP		—			—			(4,586	)
Net increase in mortgagors’ escrow accounts		195			416			163
Payments to repurchase stock		(6,478	)		—			—
Excess tax benefit from stock-based compensation		31			—			—


Net cash provided by financing activities		208,316			165,200			167,132


Net (decrease) increase in cash and cash equivalents		(14,677	)		29,917			1,828
Cash and cash equivalents at beginning of period		52,712			22,795			20,967

Cash and cash equivalents at end of period	$	38,035		$	52,712		$	22,795


	Years Ended December 31,
	2013		2012		2011

Supplemental disclosures:
Interest paid	$	4,759	$	4,855	$	5,691
Income taxes paid (received)		988		1,387		(183	)
Transfer of available-for-sale securities to other assets		—		—		1
Transfer of loans receivable to loans held for sale		—		28,355
Transfer of loans to other real estate owned		—		98		—
Transfer of loans held for sale to loans receivable		1,347		—		—

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

BSB BANCORP, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Tables in thousands, except share amounts)

NOTE 1 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

BSB Bancorp, Inc. (the “Company”) was incorporated in Maryland in June, 2011 to become the holding company of Belmont Savings Bank (the “Bank”), a state-chartered Massachusetts savings bank. The Company is supervised by the Board of Governors of the Federal Reserve System (“FRB”), while the Bank is subject to the regulations of, and periodic examination by, the Federal Deposit Insurance Corporation (“FDIC”) and the Massachusetts Division of Banks (the “Division”). The Bank’s deposits are insured by the Bank Insurance Fund of the FDIC up to $250,000 per account. For balances in excess of the FDIC deposit insurance limits, coverage is provided by the Massachusetts Depositors Insurance Fund, Inc. (“Mass DIF”). In connection with the Company’s conversion from a mutual holding company to stock holding company form of organization (the “conversion”), on October 4, 2011 we completed our initial public offering of common stock, selling 8,993,000 shares of common stock at $10.00 per share for approximately $89.9 million in gross proceeds, including 458,643 shares sold to the Bank’s employee stock ownership plan. In addition, in connection with the conversion, we issued 179,860 shares of our common stock and contributed $200,000 in cash to the Belmont Savings Bank Foundation.

Belmont Savings Bank is a state chartered savings bank which was incorporated in 1885 and is headquartered in Belmont, Massachusetts. The Bank is engaged principally in the business of attracting deposits from the general public and investing those deposits in residential and commercial real estate loans, consumer loans, including indirect auto loans, commercial loans and construction loans, as well as investment securities.

Basis of Presentation

The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries, Belmont Savings Bank and BSB Funding Corporation. All significant intercompany balances and transactions have been eliminated in consolidation.

The Company’s consolidated financial statements have been prepared in conformity with U.S. generally accepted accounting principles and general practices within the financial services industry.

Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the balance sheet and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant changes in the near-term relate to the determination of the allowance for loan losses, valuation and potential other-than-temporary impairment (“OTTI”) of investment securities, the valuation of deferred tax assets and the fair value of stock-based compensation awards.

Reclassification

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

Significant Group Concentrations of Credit Risk

Most of the Company’s business activity is with customers located within the Commonwealth of Massachusetts. There are no concentrations of credit to borrowers that have similar economic characteristics. The majority of the Company’s loan portfolio is comprised of loans collateralized by real estate located in the Commonwealth of Massachusetts.

Cash and Cash Equivalents

For purposes of the consolidated statements of cash flows, cash and cash equivalents include cash, balances due from banks and interest-bearing deposits in other banks.

Securities

Debt securities that management has the positive intent and ability to hold to maturity are classified as “held-to-maturity” and recorded at amortized cost. Securities not classified as held-to-maturity or trading, including equity securities with readily determinable fair values, are classified as “available-for-sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income.

Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

Each reporting period, the Company evaluates all securities classified as available-for-sale or held-to-maturity, with a decline in fair value below the amortized cost of the investment to determine whether or not the impairment is deemed to be other-than-temporary (“OTTI”). Consideration is given to the obligor of the security, whether the security is guaranteed, whether there is a projected adverse change in cash flows, the liquidity of the security, the type of security, the capital position of security issuers, and payment history of the security, amongst other factors when evaluating these individual securities.

OTTI is required to be recognized if (1) the Company intends to sell the security; (2) it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. Marketable equity securities are evaluated for OTTI based on the severity and duration of the impairment and, if deemed to be other than temporary, the declines in fair value are reflected in earnings as realized losses. For impaired debt securities that the Company intends to sell, or more likely than not will be required to sell, the full amount of the depreciation is recognized as OTTI through earnings. For all other impaired debt securities, credit-related OTTI is recognized through earnings and non-credit related OTTI is recognized in other comprehensive income, net of applicable taxes.

Federal Home Loan Bank Stock

As a member of the Federal Home Loan Bank of Boston (FHLB), the Company is required to invest in stock of the FHLB. Management evaluates the Company’s investment in the FHLB of Boston stock for other-than-temporary impairment at least on a quarterly basis and more frequently when economic or market conditions warrant such evaluation. Based on its most recent analysis of the FHLB of Boston as of December 31, 2013, management deems its investment in FHLB of Boston stock to be not other-than-temporarily impaired.

Loans Held For Sale

Loans purchased or transferred from held for investment, (if intent or ability to hold existing loans changes), and loans originated and intended for sale in the secondary market are carried at the lower of cost or estimated fair value, in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to income. Direct loan origination costs and fees are deferred upon origination and are recognized on the date of sale.

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, any deferred fees or costs on originated loans and unamortized premiums on purchased loans.

Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized over the expected term 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 uncollectibility of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

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

General Component:

The general component of the allowance for loan losses is based on historical loss experience adjusted for qualitative factors stratified by the following loan segments: residential real estate, home equity lines of credit, commercial real estate, construction, commercial, indirect auto and 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 2013 or 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 income-producing properties throughout New England. The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management generally obtains rent rolls annually and continually monitors the cash flows of these borrowers.

Construction loans – Loans in this segment primarily include speculative real estate development loans for which payment is derived from sale and/or lease up of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, 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. Collections are sensitive to changes in borrower financial circumstances, and the collateral can depreciate or be damaged in the event 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 and therefore are subject to a specific review for impairment.

Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate at the time of impairment 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, impairment on TDRs is measured using the discounted cash flow method by discounting expected cash flows by the loan’s contractual rate of interest in effect prior to the loan’s modification. Loans that have been classified as TDR’s and which subsequently default are reviewed to determine if the loan should be deemed collateral dependent. In such an instance, any shortfall between the value of the collateral and the book value of the loan is determined by measuring the recorded investment in the loan against the fair value of the collateral less costs to sell. Generally, all other impaired loans are collateral dependent and impairment is measured through the collateral method. Beginning in 2011, all loans on non-accrual status, with the exception of indirect auto and consumer loans, are considered to be impaired. Prior to 2011, all loans on non-accrual status, with the exception of homogeneous residential loans, indirect auto and consumer loans, were considered to be impaired. When the measurement of the impaired loan is less than the recorded investment in the loan, the impairment is recorded through the allowance for loan losses. The Bank charges off the amount of any confirmed loan loss in the period when the loans, or portion of loans, are deemed uncollectible.

Unallocated Component:

An unallocated component is 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.

In the ordinary course of business, the Bank enters into commitments to extend credit, commercial letters of credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they are funded or become payable. The credit risk associated with these commitments is evaluated in a manner similar to the allowance for loan losses. The reserve for off balance sheet commitments is included in other liabilities in the balance sheet. At December 31, 2013 and 2012, the reserve for unfunded loan commitments was $114,000 and $72,000, respectively. The related provision for off balance sheet credit losses is included in non-interest expense in the statement of operations.

Premises and Equipment

Land is carried at cost. Building and equipment are stated at cost, less accumulated depreciation, computed on the straight-line method over the estimated useful lives of the assets. It is general practice to charge the cost of maintenance and repairs to earnings when incurred; major expenditures for betterments are capitalized and depreciated over the shorter of the lease term for leasehold improvements or their estimated useful lives.

Bank-owned Life Insurance

Bank-owned life insurance policies are reflected on the consolidated balance sheets at cash surrender value. Changes in the net cash surrender value of the policies, as well as insurance proceeds received, are reflected in non-interest income on the consolidated statements of operations and are generally not subject to income taxes. The Company reviews the financial strength of the insurance carriers prior to the purchase of life insurance policies and no less than annually thereafter. A life insurance policy with any individual carrier is limited to 15% of tier one capital and the total cash surrender value of life insurance policies is limited to 25% of tier one capital.

Transfers and Servicing of Financial Assets

Transfers of an entire financial asset, a group of entire financial assets, or a participating interest in an entire financial asset are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets.

During the normal course of business, the Company may transfer whole loans or a portion of a financial asset, for example, a participation loan or the government guaranteed portion of a loan. In order to be eligible for sales treatment, the transfer of the portion of the loan must meet the criteria of a participating interest. If it does not meet the criteria of a participating interest, the transfer will be accounted for as a secured borrowing. In order to meet the criteria for a participating interest, all cash flows from the loan must be divided proportionately, the rights of each loan holder must have the same priority, the loan holders must have no recourse to the transferor other than standard representations and warranties and no loan holder has the right to pledge or exchange the entire loan.

The Company services mortgage loans for others. Mortgage servicing assets are recognized as separate assets when rights are acquired through purchase or through sale of financial assets with servicing rights retained. Fair value is determined using prices for similar assets with similar characteristics, when available, or based upon discounted cash flows using market-based assumptions. Capitalized servicing rights are reported in other assets and are amortized into loan servicing fee income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing assets are evaluated for impairment based upon the fair value of the rights as compared to amortized cost. Impairment is determined by stratifying rights by predominant risk characteristics, such as interest rates and terms. Impairment is recognized through a valuation allowance for an individual stratum, to the extent that fair value is less than the capitalized amount for the stratum.

Other Real Estate Owned and Other Foreclosed Assets

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value, less estimated costs to sell, at the date of foreclosure or when control is established, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Revenue and expenses from operations, changes in the valuation allowance and any direct writedowns are included in other noninterest expense.

The Company classifies loans as in-substance repossessed or foreclosed if the Company receives physical possession of the debtor’s assets regardless of whether formal foreclosure proceedings take place.

Advertising Costs

Advertising costs are expensed as incurred.

Supplemental Executive Retirement Plan

The compensation cost of an employee’s retirement benefit is recognized on the projected unit credit method over the employee’s approximate service period. The aggregate cost method is utilized for funding purposes.

The Company accounts for its supplemental executive retirement plan using an actuarial model that allocates benefit costs over the service period of employees in the plan. The Company accounts for the over-funded or under-funded status of the plan as an asset or liability in its consolidated balance sheets and recognizes changes in the funded status in the year in which the changes occur through other comprehensive income or loss.

Employee Stock Ownership Plan

Compensation expense for the Employee Stock Ownership Plan (“ESOP”) is recorded at an amount equal to the shares allocated by the ESOP multiplied by the average fair value of the shares during the period. The Company recognizes compensation expense ratably over the year based upon the Company’s estimate of the number of shares expected to be allocated by the ESOP. Unearned

compensation applicable to the ESOP is reflected as a reduction of stockholders’ equity in the consolidated balance sheet. The difference between the average fair value and the cost of the shares allocated by the ESOP is recorded as an adjustment to additional paid-in capital.

Stock Based Compensation

The Company recognizes stock-based compensation based on the grant-date fair value of the award adjusted for forfeitures. The Company values share-based stock option awards granted using the Black-Scholes option-pricing model. The Company recognizes compensation expense for its awards on a straight-line basis over the requisite service period for the entire award (straight-line attribution method), ensuring that the amount of compensation cost recognized at any date at least equals the portion of the grant-date fair value of the award that is vested at that time.

Income Taxes

Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is determined based on the tax effects of the temporary differences between the book and tax bases of the various balance sheet assets and liabilities and gives current recognition to changes in tax rates and laws. A valuation allowance is established against deferred tax assets when, based upon all available evidence, both positive and negative, it is determined that it is more likely than not that some or all of the deferred tax assets will not be realized.

Fair Value Hierarchy

The Company measures the fair values of its financial instruments in accordance with accounting guidance that requires an entity to base fair value on exit price, and maximize the use of observable inputs and minimize the use of unobservable inputs to determine the exit price. Under applicable accounting guidance, the Company categorizes its financial instruments, based on the priority of inputs to the valuation technique, into a three-level hierarchy, as described below.

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.

Transfers between levels are recognized at the end of a reporting period, if applicable.

Earnings per Share (EPS)

Basic earnings per share is calculated using the two-class method. The two-class method is an earnings allocation formula under which earnings per share is calculated from common stock and participating securities considering both dividends declared (or accumulated) and participation rights in undistributed earnings as if all such earnings had been distributed during the period. Under this method, all earnings distributed and undistributed, are allocated to participating securities and common shares based on their respective rights to receive dividends. Unvested share-based payment awards that contain nonforfeitable rights to dividends are considered participating securities (i.e. stock options and unvested restricted stock), not subject to performance based measures. Basic earnings per share is calculated by dividing net income available to common shareholders by the weighted average number of common shares outstanding (inclusive of participating securities). Diluted earnings per share have been calculated in a manner similar to that of basic earnings per share except that the weighted average number of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if all potentially dilutive common shares (such as those resulting from the exercise of stock options or the attainment of performance measures) were issued during the period, computed using the treasury stock method. Because the stock offering of the Company was completed on October 4, 2011, earnings per share data is not meaningful for prior comparative periods and is therefore not presented.

Comprehensive Income

Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities are reported as a separate component of the equity section of the balance sheet, such items, along with net income, are components of comprehensive income. Other comprehensive income includes unrealized gains and losses on securities available for sale and changes in the funded status of the Company’s postretirement and supplemental retirement plans.

Recent accounting pronouncements

In December 2011, the FASB issued ASU 2011-11, Disclosures about Offsetting Assets and Liabilities. This ASU enhances current disclosures. Entities are required to disclose both gross information and net information about both instruments and transactions eligible for offset in the statement of financial position and instruments and transactions subject to an agreement similar to a master netting arrangement. The amendments in this ASU are effective for annual periods beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures required by those amendments retrospectively for all comparative periods presented. The adoption of this guidance did not have a material impact on the Companys consolidated financial statements.

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

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

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

In January 2014, the FASB issued ASU 2014-01, “Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Qualified Affordable Housing Projects.” The amendments in this ASU apply to all reporting entities that invest in qualified affordable housing projects through limited liability entities that are flow-through entities for tax purposes as follows:

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

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

The amendments in this ASU permit reporting entities to make an accounting policy election to account for their investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. Under the proportional amortization method, an entity amortizes the initial cost of the investment in proportion to the tax credits and other tax benefits received and recognizes the net investment performance in the income statement as a component of income tax expense (benefit). For those investments in qualified affordable housing projects not accounted for using the proportional amortization method, the investment should be accounted for as an equity method investment or a cost method investment in accordance with Subtopic 970-323. The amendments in this ASU should be applied retrospectively to all periods presented. A reporting entity that uses the effective yield method to account for its investments in qualified affordable housing projects before the date of adoption may continue to apply the effective yield method for those preexisting investments. The amendments in this ASU are effective for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014. For all entities other than public business entities, the amendments are effective for annual periods beginning after December 15, 2014, and interim periods within annual reporting periods beginning after December 15, 2015. Early adoption is permitted. The Company does not expect that the adoption of this ASU will have an impact on the Company’s consolidated financial statements.

In January 2014, the FASB issued ASU 2014-02, “Intangibles-Goodwill and Other (Topic 350): Accounting for Goodwill.” The amendments in this ASU apply to all entities except for public business entities and not-for-profit entities as defined in the Master Glossary of the Accounting Standards Codification and employee benefit plans within the scope of Topics 960 through 965 on plan accounting. An entity within the scope of the amendments that elects to apply the accounting alternative in this ASU is subject to all of the related subsequent measurement, derecognition, other presentation matters, and disclosure requirements within the accounting alternative. The amendments in this ASU allow an accounting alternative for the subsequent measurement of goodwill. An entity within the scope of the amendments that elects the accounting alternative in this ASU should amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates that another useful life is more appropriate. An entity that elects the accounting alternative is further required to make an accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level. The accounting alternative, if elected, should be applied prospectively to goodwill existing as of the beginning of the period of adoption and new goodwill recognized in annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. Early application is permitted, including application to any period for which the entity’s annual or interim financial statements have not yet been made available for issuance. The Company does not expect that the adoption of this ASU will have an impact on the Company’s consolidated financial statements.

In January 2014, the FASB issued ASU 2014-04, “Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure.” The objective of the amendments in this ASU is to reduce diversity by clarifying when an in substance repossession or foreclosure occurs, that is, when a creditor should be considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan such that the loan receivable should be derecognized and the real estate property recognized. The amendments in this ASU clarify that an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to local requirements of the applicable jurisdiction. The amendments in this ASU are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. For entities other than public business entities, the amendments in this ASU are effective for annual periods beginning after December 15, 2014, and interim periods within annual periods beginning after December 15, 2015. An entity can elect to adopt the amendments in this ASU using either a modified retrospective transition method or a prospective transition method. The Company is reviewing this ASU to determine if there will be a material impact on the Company’s consolidated financial statements.

NOTE 2 – RESTRICTIONS ON CASH AND AMOUNTS DUE FROM BANKS

Cash and cash equivalents as of December 31, 2013 and 2012 includes $8,816,000 and $8,029,000, respectively, which is subject to withdrawals and usage restrictions to satisfy the reserve requirements of the Federal Reserve Bank of Boston.

NOTE 3 – SECURITIES

Debt and equity securities have been classified in the consolidated balance sheets according to management’s intent.

The following table presents a summary of the amortized cost, gross unrealized holding gains and losses and fair value of securities available for sale and securities held to maturity for the periods indicated. Gross unrealized holding gains and losses on available for sale securities are included in other comprehensive income.


	December 31, 2013									December 31, 2012
	Amortized		Gross		Gross					Amortized		Gross		Gross
	Cost		Unrealized		Unrealized			Fair		Cost		Unrealized		Unrealized			Fair
	Basis		Gains		Losses			Value		Basis		Gains		Losses			Value

Available for sale securities:
Corporate debt securities	$	22,271	$	75	$	(425	)	$	21,921	$	22,483	$	188	$	(50	)	$	22,621

	$	22,271	$	75	$	(425	)	$	21,921	$	22,483	$	188	$	(50	)	$	22,621


Held to maturity securities:
U.S. government sponsored mortgage-backed securities	$	99,257	$	572	$	(998	)	$	98,831	$	49,039	$	1,731	$	—		$	50,770
Corporate debt securities		20,519		120		(489	)		20,150		14,945		216		—			15,161

	$	119,776	$	692	$	(1,487	)	$	118,981	$	63,984	$	1,947	$	—		$	65,931

The amortized cost and estimated fair value of debt securities by contractual maturity at December 31, 2013 is as follows. 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.


	Available for Sale				Held-to-Maturity
	Amortized		Fair		Amortized		Fair
	Cost Basis		Value		Cost Basis		Value

Due in one year or less	$	—	$	—	$	3,035	$	3,065
Due from one year to five years		12,825		12,899		7,568		7,692
Due from five years to ten years		9,446		9,022		60,364		59,805
Due after ten years		—		—		48,809		48,419

At December 31, 2013 and 2012, securities with a carrying value of $4,832,000 and $4,565,000, respectively, were pledged to secure securities sold under agreements to repurchase. Securities with a carrying value of $48,133,000 and $17,151,000 were pledged to secure borrowings with the Federal Home Loan Bank of Boston at December 31, 2013 and 2012, respectively, and securities with a carrying value of $3,016,000 and $10,146,000 were pledged to an available line of credit with the Federal Reserve Bank of Boston at December 31, 2013 and 2012, respectively.

Information relating to sales of securities available-for-sale during the years ending December 31, 2013, 2012 and 2011 were as follows:


	2013			2012		2011

Proceeds from sales	$	17,985		$	—	$	15,650
Gross realized gains		64			—		2,843
Gross realized losses		(30	)		—		(56	)
Tax expense of securities gains/losses		14			—		1,122

In addition to the securities listed above, the Company holds securities in Rabbi Trust investments that are used to fund the executive and director non-qualified deferred compensation plan. These Rabbi Trust investments were included in other assets and consisted primarily of cash and cash equivalents, mutual funds and both U.S. government agency and corporate obligations, and are classified as trading securities and recorded at fair value. The fair value of these Rabbi Trust investments at December 31, 2013 and December 31, 2012 were $2.2 million and $0, respectively. For the year ended December 31, 2013, the net gain on Rabbi Trust investments still held at the reporting date was $81,000. The Company did not hold these assets during 2012. Refer to Note 15 – Employee Benefit Plans, for more information.

Information pertaining to securities with gross unrealized losses at December 31, 2013 and 2012 aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:


	Less than 12 Months					Over 12 Months
	Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses

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

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


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 December 31, 2013, thirty two debt securities had unrealized losses with aggregate depreciation of 2.4% from the Company’s amortized cost basis.

The Company’s unrealized losses on investments in corporate bonds and mortgage backed securities are primarily caused by changes in market interest rates. The contractual terms of these investments do not permit the companies to settle the security at a price less than the par value of the investment. The Company currently does not believe it is probable that it will be unable to collect all amounts due according to the contractual terms of the investments. Therefore, it is expected that the securities would not be settled at a price less than the par value of the investment. Because the Company does not intend to sell the investments and it is more likely than not that the Company will not be required to sell the investments before recovery of their amortized cost basis, it does not consider these investments to be other-than-temporarily impaired at December 31, 2013.

NOTE 4 – LOANS

A summary of the balances of loans follows:


	December 31,
	2013			2012

Mortgage loans on real estate:
Residential one-to-four family	$	287,652		$	201,845
Commercial real estate loans		320,807			266,669
Home equity loans		92,461			66,939
Construction loans		9,965			16,139

Total real estate loans		710,885			551,592

Other loans:
Commercial loans		30,691			24,779
Indirect auto loans		99,798			80,312
Consumer loans		558			654

		131,047			105,745


Total loans		841,932			657,337

Net deferred loan costs		3,535			2,777
Net unamortized mortgage premiums		1,504			621
Allowance for loan losses		(7,958	)		(6,440	)


Total loans, net	$	839,013		$	654,295

The following tables present the activity in the allowance for loan losses for the years ended December 31, 2013, 2012 and 2011 and the balances of the allowance for loan losses and recorded investment in loans by portfolio class based on impairment method at December 31, 2013 and 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.


	Year Ended December 31, 2013
	Beginning balance		Provision (benefit)			Charge-offs			Recoveries		Ending Balance

Residential one-to-four family	$	1,412	$	709		$	—		$	68	$	2,189
Commercial real estate		3,039		582			—			—		3,621
Construction		198		(64	)		—			—		134
Commercial		470		(51	)		—			—		419
Home equity		466		235			(20	)		—		681
Indirect auto		772		(30	)		(62	)		69		749
Consumer		19		42			(53	)		18		26
Unallocated		64		75			—			—		139

Total	$	6,440	$	1,498		$	(135	)	$	155	$	7,958


	Year Ended December 31, 2012
	Beginning balance		Provision		Charge-offs			Recoveries		Ending Balance

Residential one-to-four family	$	986	$	608	$	(225	)	$	43	$	1,412
Commercial real estate		1,969		1,070		—			—		3,039
Construction		188		10		—			—		198
Commercial		321		149		—			—		470
Home equity		632		453		(715	)		96		466
Indirect auto		664		343		(281	)		46		772
Consumer		16		39		(48	)		12		19
Unallocated		—		64		—			—		64

Total	$	4,776	$	2,736	$	(1,269	)	$	197	$	6,440


	Year Ended December 31, 2011
	Beginning balance		Provision		Charge-offs			Recoveries		Ending Balance

Residential one-to-four family	$	1,057	$	139	$	(210	)	$	—	$	986
Commercial real estate		1,136		833		—			—		1,969
Construction		140		48		—			—		188
Commercial		261		121		(61	)		—		321
Home equity		236		479		(83	)		—		632
Indirect auto		38		645		(23	)		4		664
Consumer		21		20		(33	)		8		16
Unallocated		—		—		—			—		—

Total	$	2,889	$	2,285	$	(410	)	$	12	$	4,776


	Year Ended December 31, 2013
	Individually evaluated for impairment				Collectively evaluated for impairment				Total
	Loan balance		Allowance		Loan balance		Allowance		Loan Balance		Allowance

Residential one-to-four family	$	6,982	$	869	$	280,670	$	1,320	$	287,652	$	2,189
Commercial real estate		4,081		11		316,726		3,610		320,807		3,621
Construction		—		—		9,965		134		9,965		134
Commercial		—		—		30,691		419		30,691		419
Home equity		400		—		92,061		681		92,461		681
Indirect auto		16		—		99,782		749		99,798		749
Consumer		1		—		557		26		558		26
Unallocated		—		—		—		139		—		139


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


	Year Ended 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		—		264,310		3,039		266,669		3,039
Construction		—		—		16,139		198		16,139		198
Commercial		—		—		24,779		470		24,779		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 December 31, 2013 and 2012:


	Impaired loans with a related allowance for credit losses at December 31, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance For Credit Losses
Residential one-to-four family	$	3,824	$	3,824	$	869
Commercial real estate		3,111		3,111		11
Construction		—		—		—
Commercial		—		—		—
Home equity		—		—		—
Indirect auto		—		—		—
Consumer		—		—		—

Totals	$	6,935	$	6,935	$	880


	Impaired loans with no related allowance for credit losses at December 31, 2013
	Recorded Investment		Unpaid Principal Balance		Related Allowance For Credit Losses
Residential one-to-four family	$	3,158	$	3,158	$	—
Commercial real estate		970		970		—
Construction		—		—		—
Commercial		—		—		—
Home equity		400		599		—
Indirect auto		16		16		—
Consumer		1		1		—

Totals	$	4,545	$	4,744	$	—


	Impaired loans with a related allowance for credit losses at December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance For Credit Losses
Residential one-to-four family	$	2,383	$	2,383	$	439
Commercial real estate		—		—		—
Construction		—		—		—
Commercial		—		—		—
Home equity		—		—		—
Indirect auto		—		—		—
Consumer		—		—		—

Totals	$	2,383	$	2,383	$	439


	Impaired loans with no related allowance for credit losses at December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance For Credit Losses
Residential one-to-four family	$	4,774	$	4,858	$	—
Commercial real estate		2,359		2,359		—
Construction		—		—		—
Commercial		—		—		—
Home equity		519		699		—
Indirect auto		—		—		—
Consumer		—		—		—

Totals	$	7,652	$	7,916	$	—

The following tables set forth information regarding interest income recognized on impaired loans, by portfolio, for the periods indicated.


	Year Ended December 31, 2013				Year Ended December 31, 2012				Year Ended December 31, 2011
	Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income
With an allowance recorded	Investment		Recognized		Investment		Recognized		Investment		Recognized
Residential one-to-four family	$	2,566	$	10	$	1,325	$	11	$	403	$	21
Commercial real estate		1,824		59		—		—		—		—
Construction		—		—		—		—		—		—
Commercial		—		—		—		—		3		—
Home equity		—		—		432		3		514		8
Indirect auto		—		—		—		—		—		—
Consumer		—		—		—		—		—		—

Totals	$	4,390	$	69	$	1,757	$	14	$	920	$	29


	Year Ended December 31, 2013				Year Ended December 31, 2012				Year Ended December 31, 2011
	Average		Interest		Average		Interest		Average		Interest
	Recorded		Income		Recorded		Income		Recorded		Income
Without an allowance recorded	Investment		Recognized		Investment		Recognized		Investment		Recognized
Residential one-to-four family	$	5,460	$	130	$	3,006	$	76	$	1,685	$	53
Commercial real estate		2,258		118		889		32		—		—
Construction		—		—		—		—		—		—
Commercial		—		—		35		4		56		7
Home equity		462		17		410		13		374		12
Indirect auto		3		—		—		—		—		—
Consumer		—		—		—		—		—		—

Totals	$	8,183	$	265	$	4,340	$	125	$	2,115	$	72

At December 31, 2013, there were no additional funds committed to be advanced in connection with loans to borrowers with impaired loans.

The following is a summary of past due and non-accrual loans at December 31, 2013 and 2012:


	December 31, 2013
									90 days
					90 Days		Total		or more		Loans on
	30–59 Days		60–89 Days		or More		Past Due		and accruing		Non-accrual
Real estate loans:
Residential one-to-four family	$	410	$	—	$	1,911	$	2,321	$	—	$	3,860
Commercial real estate		—		—		38		38		—		38
Home equity		914		—		—		914		—		200
Construction		—		—		—		—		—		—
Other loans:
Commercial		—		—		—		—		—		—
Indirect auto		222		—		16		238		—		16
Consumer		—		—		1		1		—		1

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


	December 31, 2012
									90 days
					90 Days		Total		or more		Loans on
	30–59 Days		60–89 Days		or More		Past Due		and accruing		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 ratings consist of loan-to-value ratios and days delinquent.

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


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

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

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


	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		253,021		8,080		5,568		—		266,669
Construction		16,139		—		—		—		16,139
Commercial		24,737		17		25		—		24,779
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 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. During the year ended December 31, 2013, five loans were modified and determined to be troubled debt restructurings (two of which had previously been restructured and determined to be troubled debt restructurings). During the year ended December 31, 2012, eight loans were modified and determined to be troubled debt restructurings. At December 31, 2013, the Company had $9.3 million of troubled debt restructurings related to ten loans, which were modified in 2010, 2012 and 2013.

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


	December 31, 2013		December 31, 2012
TDRs on Accrual Status	$	7,366	$	6,437
TDRs on Nonaccrual Status		1,900		946

Total TDRs	$	9,266	$	7,383


Amount of specific allocation included in the allowance for loan losses associated with TDRs	$	543	$	86

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

The following table shows the TDR modifications which occurred during the periods indicated and the outstanding recorded investment subsequent to the modifications occurring:


			Year ended December 31, 2013
			Pre-modification		Post-modification
	# of		outstanding		outstanding
	Contracts		recorded investment		recorded investment (a)
Real estate loans:
Residential one-to-four family		1	$	347	$	378
Commercial real estate		4		4,732		4,128

		5	$	5,079	$	4,506


			Year ended December 31, 2012
			Pre-modification		Post-modification
	# of		outstanding		outstanding
	Contracts		recorded investment		recorded investment (a)
Real estate loans:
Residential one-to-four family		4	$	4,291	$	4,307
Commercial real estate		3		2,369		2,369
Home equity		1		200		200

		8	$	6,860	$	6,876

(a)	The post-modification balances represent the balance of the loan on the date of modifications. These amounts may show an increase when modifications include a capitalization of interest.

The following table shows the Company’s post-modification balance of TDRs listed by type of modification during the years indicated:


	For the years ended
	December 31, 2013		December 31, 2012

Extended maturity	$	1,370	$	2,369
Adjusted interest rate		3,136		221
Interest only period		—		4,286

Total	$	4,506	$	6,876

There were no TDRs entered into during 2013 which have subsequently defaulted during 2013. There was one residential one to four family loan with a carrying amount of $1.7 million and one home equity line of credit with a carrying amount of $200,000 that were both modified and determined to be TDR’s in 2012 that subsequently defaulted in 2013.

At December 31, 2013 and 2012, $415.9 million and $103.8 million in loans were pledged to secure FHLB advances.

NOTE 5 – TRANSFERS AND SERVICING

Certain residential mortgage loans are periodically sold by the Company to the secondary market. Most of these loans are sold without recourse and the Company releases the servicing rights. For loans sold with servicing rights retained, we provide the servicing for the loans on a per-loan fee basis. The Company also periodically sells auto loans to other financial institutions without recourse, and the Company generally provides servicing for these loans. Mortgage loans sold for cash during the years ended December 31, 2013, 2012 and 2011 were $34.2 million, $97.7 million and $18.5 million, respectively with gains recognized in non-interest income of $798,000, $1,731,000 and $205,000, respectively. Auto loans sold for cash during the years ended December 31, 2013, 2012 and 2011 were $63.6 million, $99.7 million and $31.9 million, respectively with gains recognized in non-interest income of $226,000, $789,000 and $257,000, respectively. At

December 31, 2013 and 2012, residential mortgage loans previously sold and serviced by the Company were $61.2 million and $76.6, respectively. At December 31, 2013 and 2012, auto loans previously sold and serviced by the Company were $124.8 million and $104.3 million, respectively. There were no liabilities incurred during the years ended December 31, 2013 and 2012 in connection with these loan sales.

On March 16, 2006, seventeen loans with an aggregate principal balance of $10.5 million were sold to another financial institution. The agreement related to this sale contains provisions requiring the Company during the initial 120 months to repurchase any loan that becomes 90 days past due. The Company will repurchase the past due loan for 100 percent of the unpaid principal plus interest to repurchase date. As of December 31, 2013 and 2012, the principal balance of these loans sold with recourse amounted to $1.1 million and $1.2 million, respectively. The Company has not incurred, nor expects to incur, any losses related to the loans sold with recourse.

Changes in mortgage servicing rights, which are included in other assets, were as follows:


	Years Ended December 31,
	2013			2012			2011

Balance at beginning of period	$	353		$	—		$	6
Capitalization		202			421			—
Amortization		(101	)		(32	)		(6	)
Impairment		(43	)		(36	)		—

Balance at end of period	$	411		$	353		$	—

During the years ended December 31, 2013 and 2012, the Company recorded a provision for impairment of $43,000 and $36,000, respectively, for the mortgage servicing rights. There was no valuation allowance at December 31, 2011 and no additions or writedowns in the valuation allowance during the years ended December 31, 2011. As of December 31, 2013, the fair value of mortgage servicing rights approximated carrying value.

NOTE 6 – PREMISES AND EQUIPMENT

A summary of the cost and accumulated depreciation and amortization of premises and equipment follows:


	December 31,
	2013			2012

Land	$	161		$	161
Buildings		3,331			3,286
Leasehold improvements		2,152			1,426
Furniture and equipment		5,925			5,555

		11,569			10,428
Accumulated depreciation		(8,242	)		(7,526	)


	$	3,327		$	2,902

Depreciation and amortization expense for the years ended December 31, 2013, 2012 and 2011 amounted to $716,000, $517,000 and $447,000, respectively. During the year ended December 31, 2013, we purchased a new telephone system and determined that certain assets related to our previous system had no future economic benefit to the Company and recorded an impairment charge of $41,000 within equipment expense on the consolidated statement of operations.

NOTE 7 – DEPOSITS

The aggregate amount of time deposits in denominations of $100,000 or more at December 31, 2013 and 2012 was $82.9 million and $66.0 million, respectively.

At December 31, 2013, the scheduled maturities of time deposits are as follows:


2014	$	70,139
2015		17,167
2016		21,859
2017		16,418
2018		20,600

	$	146,183

Included in time deposits greater than $100,000 or more are brokered deposits of $18.7 million at December 31, 2013 and $13.3 million at December 31, 2012. Brokered deposits of $18.7 million are also included in the maturities of time deposits at December 31, 2013.

NOTE 8 – SHORT-TERM BORROWINGS

Federal Home Loan Bank Advances

FHLB advances with an original maturity of less than one year, amounted to $80.0 million and $15.0 million at December 31, 2013 and 2012, respectively, at a weighted average rate of 0.17% and 0.20% respectively. The Bank also has an available line of credit with the FHLB at an interest rate that adjusts daily. All borrowings from the FHLB are secured by a blanket security agreement on qualified collateral, principally mortgage loans, commercial loans and U.S. government sponsored mortgage backed securities in an aggregate amount equal to outstanding advances.

Securities Sold Under Agreements to Repurchase

Securities sold under agreements to repurchase amounted to $2.1 million and $3.4 million at December 31, 2013 and 2012, respectively, mature on a daily basis and are secured by U.S. government agency mortgage backed securities. The weighted average interest rate on these agreements was 0.15% and 0.15% at December 31, 2013 and 2012, respectively. The obligations to repurchase the securities sold are reflected as a liability in the consolidated balance sheets. The dollar amounts of the securities underlying the agreements remain in the asset accounts. The securities pledged are registered in the Company’s name; however, the securities are held by the designated trustee of the broker. Upon maturity of the agreements, the identical securities pledged as collateral are returned to the Company.

NOTE 9 – LONG-TERM BORROWINGS

Long-term debt at December 31, 2013 and 2012 consists of the following FHLB advances:


	Amount				Weighted Average Rate
	2013		2012		2013			2012

Fixed rate advances maturing:
2013	$	—	$	23,000		—	%		1.02	%
2014		9,000		9,000		1.26			1.26
2015		14,100		14,100		1.17			1.17
2016		7,000		7,000		1.39			1.39
2017		15,000		15,000		0.9			0.90
2018		17,000		—		1.93			—


	$	62,100	$	68,100		1.35			1.09

Other borrowed funds consist of the balance of loans sold with recourse (see Note 5).

NOTE 10 – INCOME TAXES

Allocation of federal and state income taxes between current and deferred portions is as follows:


	Years Ended December 31,
	2013			2012		2011

Current tax provision:
Federal	$	1,615		$	401	$	545
State		388			59		301


		2,003			460		846


Deferred tax provision (benefit):
Federal		(606	)		195		(445	)
State		(175	)		58		(339	)


		(781	)		253		(784	)


Change in valuation allowance		(180	)		—		233

Total provision for income taxes	$	1,042		$	713	$	295

The reasons for the differences between the statutory federal income tax rate and the effective tax rates are summarized as follows:


	Years Ended December 31,
	2013			2012			2011

Statutory federal tax rate		34.0	%		34.0	%		34.0	%
Increase (decrease) resulting from:
State taxes, net of federal tax benefit		4.8			3.7			(4.2	)
Bank-owned life insurance		(4.1	)		(5.8	)		(20.5	)
Dividends received deduction		—			—			(3.6	)
Change in valuation allowance		(6.0	)		—			39.3
Share based compensation		5.6			1.3			—
Other, net		0.4			0.5			4.7


Effective tax rates		34.7	%%		33.7	%		49.7	%

The components of the net deferred tax asset are as follows:


	Years Ended December 31,
	2013			2012

Deferred tax assets:
Employee benefit and deferred compensation plans	$	2,766		$	2,415
Allowance for loan losses		3,224			2,601
Depreciation		—			—
Accrued rent		11			10
Interest on non-performing loans		8			21
Stock options		144			9
Charitable contribution carryover		502			746
Unrealized loss on securities available for sale		140			—
Unrecognized retirement benefit		—			13
ESOP		53			30

Gross deferred tax assets		6,848			5,845

Valuation allowance		(53	)		(233	)


		6,795			5,612


Deferred tax liabilities:
Mortgage servicing rights		(164	)		(141	)
Deferred loan origination costs		(624	)		(446	)
Net unrealized gain on securities available for sale		—			(47	)
Restricted stock awards		(651	)		(822	)
Depreciation		(110	)		(70	)
Unrecognized retirement benefit		(14	)
Other		(86	)		(61	)


		(1,649	)		(1,587	)


Net deferred tax asset	$	5,146		$	4,025

A valuation reserve has been established for the income tax effects attributable to the deferred tax assets to limit the federal and state tax benefit related to the charitable contribution carryover.


	Years Ended December 31,
	2013			2012			2011

Balance at beginning of year	$	(233	)	$	(233	)	$	—
Reserve for charitable contribution carryforward		—			—			(233	)
Reduction in valuation allowance		180			—			—


	$	(53	)	$	(233	)	$	(233	)

The Company does not have any uncertain tax positions at December 31, 2013 or 2012 which require accrual or disclosure. The Company records interest and penalties as part of income tax expense. No interest or penalties were recorded for the years ended December 31, 2013, 2012 and 2011.

The Company’s income tax returns are subject to review and examination by federal and state taxing authorities. The Company is currently open to audit under the applicable statutes of limitations by the Internal Revenue Service for the years ended December 31, 2010 through 2013. The years open to examination by state taxing authorities vary by jurisdiction; no years prior to 2010 are open.

In prior years, the Company was allowed a special tax-basis bad debt deduction under certain provisions of the Internal Revenue Code. As a result, retained earnings of the Company as of December 31, 2013 and 2012 includes approximately $3.6 million for which federal and

state income taxes have not been provided. If the Company no longer qualifies as a bank as defined in certain provisions of the Internal Revenue Code, this amount will be subject to recapture in taxable income ratably over four (4) years, subject to a combined federal and state tax rate of approximately 40%.

NOTE 11 – OFF-BALANCE SHEET ACTIVITIES

Credit-Related Financial Instruments

The Company is a party to credit related financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments include commitments to extend credit, standby letters of credit and commercial letters of credit. Such commitments involve, to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the consolidated balance sheets.

The Company’s exposure to credit loss is represented by the contractual amount of these commitments. The Company follows the same credit policies in making commitments as it does for on-balance-sheet instruments.

At December 31, 2013 and 2012, the following financial instruments were outstanding whose contract amounts represent credit risk:


	Contract Amount
	2013		2012
Commitments to grant loans	$	27,588	$	21,517
Unfunded commitments under lines of credit		132,825		88,160
Unadvanced portion of construction loans		14,066		17,102
Standby letters of credit		80		100
Commitments to purchase loans		15,383		—

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The commitments for equity lines of credit may expire without being drawn upon. Therefore, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if it is deemed necessary by the Company, is based on management’s credit evaluation of the customer.

Unfunded commitments under commercial lines-of-credit, revolving credit lines and overdraft protection agreements are commitments for possible future extensions of credit to existing customers. These lines-of-credit are uncollateralized and usually do not contain a specified maturity date and ultimately may not be drawn upon to the total extent to which the Company is committed.

Standby letters-of-credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Those letters-of-credit are primarily issued to support public and private borrowing arrangements. Essentially all letters of credit issued have expiration dates within one year. The credit risk involved in issuing letters-of-credit is essentially the same as that involved in extending loan facilities to customers. The Company generally holds collateral supporting those commitments.

Commitments to purchase loans are conditional commitments issued by the Company to purchase loans through select correspondent mortgage companies who originate and sell loans as part of their operations. Typically the commitment to purchase is valid as long as there is no violation of any condition established in the correspondent contract. Commitments generally have fixed expiration dates or other termination clauses and generally do not require payment of a fee.

NOTE 12 – COMMITMENTS AND CONTINGENT LIABILITIES

Pursuant to the terms of noncancelable lease agreements in effect at December 31, 2013, pertaining to banking premises and equipment, future minimum rent commitments under various operating leases are as follows:


2014	$	436
2015		368
2016		221
2017		141
2018		118
Thereafter		504


	$	1,788

Certain leases contain provisions for escalation of minimum lease payments contingent upon increases in real estate taxes and percentage increases in the consumer price index. Also, certain leases contain options to extend for periods from one to ten years. The cost of such rentals is not included above. Total rent expense for the years ended December 31, 2013, 2012 and 2011 amounted to $353,000, $291,000 and $232,000, respectively.

NOTE 13 – LEGAL CONTINGENCIES

Various legal claims also arise from time to time in the normal course of business which, in the opinion of management, will have no material effect on the Company’s consolidated financial statements.

NOTE 14 – MINIMUM REGULATORY CAPITAL REQUIREMENTS

The Company (on a consolidated basis) and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s and Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Prompt corrective action provisions are not applicable to bank holding companies.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to maintain minimum amounts and ratios (set forth in the following table) of total and Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined) and of Tier 1 capital to average assets (as defined). Management believes, as of December 31, 2013 and 2012, that the Company and the Bank meet all capital adequacy requirements to which they are subject.

As of December 31, 2013, the most recent notification from the Federal Deposit Insurance Corporation categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, an institution must maintain minimum total risk-based, Tier 1 risk-based and Tier 1 leverage ratios as set forth in the following tables. There are no conditions or events since the notification that management believes have changed the Bank’s category. The Company’s and the Bank’s actual capital amounts and ratios as of December 31, 2013 and 2012 are also presented in the following table.


											Minimum To Be Well
											Capitalized Under
						Minimum For Capital					Prompt Corrective
	Actual					Adequacy Purposes					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio

As of December 31, 2013:
Total Capital (to Risk Weighted Assets)
Consolidated	$	138,146		16.30	%	$	67,806		8.0	%		N/A		N/A
Belmont Savings Bank		117,849		13.91	%		67,782		8.0	%	$	84,728		10.0	%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated	$	130,074		15.35	%	$	33,903		4.0	%		N/A		N/A
Belmont Savings Bank		109,777		12.96	%		33,891		4.0	%	$	50,837		6.0	%
Tier 1 Capital (to Average Assets)
Consolidated	$	130,074		12.59	%	$	41,323		4.0	%		N/A		N/A
Belmont Savings Bank		109,777		10.62	%		41,334		4.0	%	$	51,668		5.0	%

As of December 31, 2012:
Total Capital (to Risk Weighted Assets)
Consolidated	$	139,287		24.32	%	$	45,826		8.0	%		N/A		N/A
Belmont Savings Bank		92,493		15.99	%		46,268		8.0	%	$	57,835		10.0	%
Tier 1 Capital (to Risk Weighted Assets)
Consolidated	$	132,775		23.18	%	$	22,913		4.0	%		N/A		N/A
Belmont Savings Bank		85,981		14.87	%		23,134		4.0	%	$	34,701		6.0	%
Tier 1 Capital (to Average Assets)
Consolidated	$	132,775		16.02	%	$	33,157		4.0	%		N/A		N/A
Belmont Savings Bank		85,981		10.37	%		33,167		4.0	%	$	41,459		5.0	%

NOTE 15 – EMPLOYEE BENEFIT PLANS

Supplemental Retirement Plans

The Company has supplemental retirement plans for eligible executive officers that provide for a lump sum benefit upon termination of employment at or after age 55 and completing 10 or more years of service (certain reduced benefits are available prior to attaining age 55 or fewer than 10 years of service), subject to certain limitations as set forth in the agreements. The present value of these future payments is being accrued over the service period. The estimated liability at December 31, 2013 and 2012 relating to these plans was $1.5 million and $1.4 million, respectively. The discount rate used to determine the Company’s obligation was 5.0% in 2013 and 4.0% in 2012. The projected rate of salary increase was 3.0% in 2013 and 3.0% in 2012.

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 December 31, 2013 and 2012 relating to this plan was $553,000 and $596,000, respectively. The discount rate used to determine the Company’s obligation was 5.0% in 2013 and 4.0% in 2012.

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 employees of the Company to receive supplemental retirement income from the Company. At December 31, 2013 and 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. Information pertaining to the activity in the plan is as follows:


	Years Ended December 31,
	2013			2012
Change in benefit obligation:
Benefit obligation at beginning of year	$	538		$	273
Service cost		242			224
Interest cost		21			13
Actuarial (gain) loss		(72	)		28
Benefits paid		—			—

Benefit obligation at end of year		729			538


Funded status at end of year	$	(729	)	$	(538	)


Accrued pension benefit		(765	)		(502	)


Accumulated benefit obligation	$	670		$	480

The assumptions used to determine the benefit obligation are as follows:


	December 31,
	2013			2012

Discount rate		5.00	%		4.00	%
Rate of compensation increase		3.00	%		3.00	%

The components of net periodic pension cost are as follows:


	December 31,
	2013		2012

Service cost	$	242	$	224
Interest cost		21		13


Net periodic cost	$	263	$	237

Other changes in benefit obligations recognized in other comprehensive income are as follows:


	December 31,
	2013			2012
Net actuarial (gain) loss	$	(72	)	$	28


Total recognized in other comprehensive income	$	(72	)	$	28

The assumptions used to determine net periodic pension cost are as follows:


	December 31,
	2013			2012

Discount rate		4.00	%		4.75	%
Rate of compensation increase		3.00	%		3.00	%

100

Amounts recognized in accumulated other comprehensive income, before tax effect, consist of an unrecognized net gain of $36,000 as of December 31, 2013 and an unrecognized net loss of $36,000 as of December 31, 2012.

The Company does not expect to contribute to the Plan in 2014.

Estimated future benefit payments, which reflect expected future service, as appropriate, are as follows:


Year Ending December 31,	Amount
2014	$	—
2015		46
2016		93
2017		93
2018		93
Years 2019-2023	$	980

Total supplemental retirement plan expense amounted to $405,000, $507,000 and $393,000 for the years ended December 31, 2013, 2012 and 2011, respectively.

Incentive Compensation Plan

In 2005, the Board of Directors approved an incentive compensation plan whereby all members of the management team with at least one full year of service are eligible to participate. This Plan was amended in 2008 and 2011. 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 and profitability 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 $1.4 million, $1.3 million and $795,000 for the years ended December 31, 2013, 2012 and 2011, 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 years ended December 31, 2013, 2012 and 2011 totaled $729,000, $635,000 and $574,000, respectively.

Deferred Compensation Plan

The Company has a deferred compensation plan by which selected employees and directors of the Company are entitled to elect, prior to the beginning of each year, to defer the receipt of an amount of their compensation for the forthcoming year. On April 1, 2013, the Company entered into deferred compensation agreements with certain Directors and employees of the Company. Each agreement allows for the individual to elect to defer a portion of his or her compensation to an individual deferred compensation account established by Belmont Savings Bank. Prior to April 1, 2013, each individual’s deferred compensation account balance was credited with earnings on a monthly basis based on the five year certificate of deposit yield as published by the Wall Street Journal. In April 2013, Belmont Savings Bank created a Rabbi Trust, or grantor trust. The Rabbi Trust is maintained by the Company primarily for purposes of providing deferred compensation for certain Directors and employees of the Company and replaced the existing agreements for non-retired participants with a Belmont Savings Bank Deferred Compensation Plan. The new plan is administered by a third party and permits participants to select from a number of investment options for the investment of their account balances. Each participant is always 100% vested in his or her deferred compensation account balance. Individuals that were retired as of April 1, 2013 continue to participate in the existing Salary Deferral Plan. As of December 30, 2013 and December 31, 2012, the recorded liability relating to the Rabbi Trust was $2.2 million and $0, respectively. The recorded liability at December 31, 2013 and 2012 relating to the Salary Deferral Plan was $91,000 and $2.2 million, respectively.

101

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 $113,000, $92,000 and $0 of expense in relation to the plan during the years ended December 31, 2013, 2012 and 2011, respectively.

Employee Stock Ownership Plan

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

The Company contributed funds to a subsidiary to enable it to grant a loan to the ESOP for the purchase of 458,643 shares of the Company’s common stock at a price of $10.00 per share. The loan obtained by the ESOP from the Company’s Subsidiary to purchase Company common stock is payable annually over 30 years at a rate per annum equal to the Prime Rate (3.25% at December 31, 2013). Loan payments are principally funded by cash contributions from the Company. 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.

At December 31, 2013, the remaining principal balance on the ESOP debt is payable as follows:


Years Ending December 31,	Amount

2014	$	99
2015		102
2016		105
2017		109
2018		113
Thereafter		3,845


	$	4,373

Shares held by the ESOP include the following:


	December 31,
	2013		2012

Unallocated		424,271		439,531
Allocated		34,372		19,112


		458,643		458,643

The fair value of unallocated shares was approximately $6.4 million at December 31, 2013 and $5.4 million at December 31, 2012. Total compensation expense recognized in connection with the ESOP for the years ended December 31, 2013, 2012 and 2011 was $209,000, $185,000 and $39,000, respectively.

102

NOTE 16 – STOCK BASED COMPENSATION

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

The following table presents the amount of cumulatively granted stock options and restricted stock awards, net of forfeitures, through December 31, 2013 under the BSB Bancorp, Inc. 2012 Equity Incentive Plan:

Authorized
Stock
Option Awards

Authorized
Restricted
Stock Awards

Authorized
Total

Cumulative Granted

Net of Forfeitures

Outstanding
Total

Stock
Option Awards

Restricted
Stock Awards

917,286

366,914

1,284,200

853,033

359,570

1,212,603

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


	For the year ended December 31,
	2013		2012
Stock based compensation expense
Stock options	$	778	$	69
Restricted stock awards		869		74

Total stock based award expense	$	1,647	$	143

Related tax benefits recognized in earnings	$	658	$	57

No cash was paid by the Company to settle equity instruments granted under stock-based compensation arrangements during the year ended December 31, 2013.

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


	As of December 31, 2013
	Amount		Weighted average period
Stock options	$	2,797		3.94
Restricted stock		2,997		3.91

Total	$	5,794

The Company granted 41,258 stock option awards on July 1, 2013. The fair value of the stock options granted was estimated on the date of the grant using the Black-Scholes option pricing model with the following assumptions used:

•

Expected volatility is based on the standard deviation of the historical volatility of the daily adjusted closing price of a group of the Company’s peers’ shares for a period equivalent to the expected life of the option.

•

Expected term represents the period of time that the option is expected to be outstanding. The Company determined the expected life using the “Simplified Method.”

•

Expected dividend yield is determined based on management’s expectations regarding issuing dividends in the foreseeable future.

103

•

The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for a period equivalent to the expected life of the option.

•

The stock-based compensation expense recognized in earnings is based on the amount of awards ultimately expected to vest, therefore a forfeiture assumption is estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Stock-based compensation expense recognized in 2013 has been reduced for annualized estimated forfeitures of 7% for grants to employees, based on historical experience.


	Year ended December 31, 2013
Date of grant		7/1/2013
Exercise price	$	13.38
Vesting period (1)		5 years
Expiration date		7/1/2023
Expected volatility		36.82	%
Expected term		6.5 years
Expected dividend yield		0	%
Risk free interest rate		1.80	%
Fair value	$	5.34

1-Vesting period begins on the date of grant

The option exercise price is derived from trading value on the date of grant.

A summary of the status of the Company’s Stock Option and Restricted Stock Grants for the year ended December 31, 2013 is presented in the tables below:


	Outstanding and exercisable						Non-vested
	Stock option awards		Weighted average exercise price		Weighted average remaining contractual term		Stock option awards			Weighted average grant date fair value		Weighted average remaining contractual term
Balance at January 1, 2013		—	$	—				853,055		$	4.67		8.91
Granted		—		—				41,258			5.34		9.50
Vested		162,370		12.04		8.91		(162,370	)		4.67		8.91
Forfeited		—		—				(41,280	)		4.67		8.91

Balance at December 31, 2013		162,370	$	12.04		8.91		690,663		$	4.71		8.95


	Non-vested restricted stock awards
Balance at January 1, 2013		359,570
Vested		(71,922	)

Balance at December 31, 2013		287,648

104

NOTE 17 – EARNINGS PER SHARE

Earnings per share consisted of the following components for the years ended December 31, 2013 and 2012:


	December 31,			December 31,
	2013			2012
Net income	$	1,960		$	1,401
Undistributed earnings attributable to participating securities		(79	)		(5	)

Net income available to common stockholders	$	1,881		$	1,396


Weighted average shares outstanding, basic		8,419,437			8,727,615
Effect of dilutive shares		92,671			541

Weighted average shares outstanding, assuming dilution		8,512,108			8,728,156


Basic EPS	$	0.22		$	0.16
Effect of dilutive shares		—			—

Diluted EPS	$	0.22		$	0.16

For 2013 and 2012, average options to purchase 136,741 and 79,446 shares of common stock were outstanding but not included in the computation of EPS because they were antidilutive under the treasury stock method.

NOTE 18 – RELATED PARTY TRANSACTIONS

In the ordinary course of business, the Bank has granted loans to principal officers and directors and their affiliates. As of December 31, 2013 and 2012, related party loans were not significant.

NOTE 19 – RESTRICTIONS ON DIVIDENDS, LOANS AND ADVANCES

Federal and state banking regulations place certain restrictions on dividends paid and loans or advances made by the Bank to the Company. The total amount for dividends which may be paid in any calendar year cannot exceed the Bank’s net income for the current year, plus the Bank’s net income retained for the two previous years, without regulatory approval. Loans or advances are limited to 10 percent of the Bank’s capital stock and surplus on a secured basis.

In addition, dividends paid by the Bank to the Company would be prohibited if the effect thereof would cause the Bank’s capital to be reduced below applicable minimum capital requirements.

NOTE 20 – FAIR VALUES OF ASSETS AND LIABILITIES

Determination of Fair Value

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

105

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

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

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

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

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

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

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

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

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

106

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


	Level 1		Level 2		Level 3		Total Fair Value

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


Totals	$	2,181	$	21,974	$	—	$	24,155


	Level 1		Level 2		Level 3		Total Fair Value

At December 31, 2012
Securities available-for-sale
Corporate debt securities	$	—	$	22,621	$	—	$	22,621


Totals	$	—	$	22,621	$	—	$	22,621

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

The following table presents certain impaired loans that were remeasured and reported at fair value through a specific valuation allowance allocation of the allowance for loan losses based upon the fair value of the underlying collateral at December 31 2013 and 2012:


	December 31, 2013
	Level 1		Level 2		Level 3

Impaired loans	$	—	$	—	$	3,199

Totals	$	—	$	—	$	3,199


	December 31, 2012
	Level 1		Level 2		Level 3

Impaired loans	$	—	$	—	$	2,452

Totals	$	—	$	—	$	2,452

107

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

There were no foreclosed assets at December 31, 2013. The following table presents the foreclosed assets that were remeasured and reported at the lower of cost or fair value at December 31, 2012:


	December 31, 2012
	Level 1		Level 2		Level 3

Other real estate owned	$	—	$	—	$	661

Totals	$	—	$	—	$	661

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

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

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

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

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

108

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

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


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

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


	December 31, 2012
	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	52,712	$	52,712	$	52,712	$	—	$	—
Interest-bearing time deposits with other banks		119		119		—		119		—
Held-to-maturity securities		63,984		65,931		—		65,931		—
Federal Home Loan Bank stock		7,627		7,627		—		7,627		—
Loans, net		654,295		662,010		—		—		662,010
Loans held for sale		11,205		11,892						11,892
Accrued interest receivable		2,217		2,217		2,217		—		—

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

109

NOTE 21 – COMPREHENSIVE INCOME


	Year Ended December 31, 2013
	Pre Tax Amount			Tax (Expense) Benefit			After Tax Amount
Securities available-for-sale:
Change in unrealized gain/loss during the period	$	(454	)	$	173		$	(281	)
Reclassification adjustment for net gains included in net income ¹		(34	)		14			(20	)

Total securities available for sale		(488	)		187			(301	)

Defined benefit post-retirement benefit plans:
Change in the actuarial gain/loss		72			(27	)		45

Total defined-benefit post-retirement benefit plans		72			(27	)		45

Total other comprehensive loss	$	(416	)	$	160		$	(256	)


	Year Ended December 31, 2012
	Pre Tax Amount			Tax (Expense) Benefit			After Tax Amount
Securities available-for-sale:
Change in unrealized gain/loss during the period	$	138		$	(47	)		91
Reclassification adjustment for net gains included in net income ¹		—			—			—

Total securities available for sale		138			(47	)		91

Defined benefit post-retirement benefit plans:
Change in the actuarial gain/loss		(28	)		10			(18	)

Total defined-benefit post-retirement benefit plans		(28	)		10			(18	)

Total other comprehensive income	$	110		$	(37	)	$	73


	Year Ended December 31, 2011
	Pre Tax Amount			Tax (Expense) Benefit			After Tax Amount
Securities available for sale:
Change in unrealized gain/loss during the period	$	667		$	(275	)		392
Reclassification adjustment for net gains included in net income ¹		(2,787	)		1,122			(1,665	)

Total securities available for sale		(2,120	)		847			(1,273	)

Defined benefit post-retirement benefit plans:
Change in net actuarial gain/loss		(11	)		4			(7	)

Total defined-benefit post-retirement benefit plan		(11	)		4			(7	)

Total other comprehensive loss	$	(2,131	)	$	851		$	(1,280	)

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.

110

The components of accumulated other comprehensive (loss) income, included in stockholders’ equity, are as follows:


	December 31, 2013			December 31, 2012

Net unrealized holding (loss) gain on available-for-sale securities, net of tax	$	(210	)	$	91
Unrecognized net actuarial income (loss) pertaining to defined benefit plan, net of tax		22			(23	)

Accumulated other comprehensive (loss) income	$	(188	)	$	68

NOTE 22 – CONDENSED FINANCIAL STATEMENTS OF PARENT COMPANY

The following condensed financial statements are for the Parent Company only and should be read in conjunction with the consolidated financial statements of the Company.

Condensed Balance Sheets


	December 31,
	2013		2012
Assets

Cash and cash equivalents held at Belmont Savings Bank	$	14,967	$	41,624
Investment in Belmont Savings Bank		110,093		86,432
Investment in BSB Funding Corp.		4,580		4,696
Deferred tax asset		500		513
Other assets		336		99


Total assets	$	130,476	$	133,364


Liabilities and Stockholders’ Equity

Accrued expenses		55		56
Other liabilities		—		—

Total liabilities		55		56

Stockholders’ equity		130,421		133,308


Total liabilities and stockholders’ equity	$	130,476	$	133,364

111

Condensed Statements of Operations


	Years Ended December 31,
	2013			2012			2011

Interest and dividend income:
Interest on cash equivalents	$	27		$	42		$	21
Dividends from subsidiaries		—			—			—

Total interest and dividend income		27			42			21
Interest expense:		—			—			7

Net interest and dividend income		27			42			14
Non-interest income		—			—			—
Non-interest expense		248			303			2,040

Loss before income taxes and equity in undistributed earnings of subsidiaries		(221	)		(261	)		(2,026	)
Income tax (benefit) provision		(268	)		(105	)		(586	)

Income (loss) before equity in income of subsidiaries		47			(156	)		(1,440	)
Equity in undistributed earnings of Belmont Savings Bank		1,826			1,469			1,717
Equity in undistributed earnings of BSB Funding Corp		87			88			22

Net income	$	1,960		$	1,401		$	299

112

Condensed Statement of Cash Flows


	Years Ended December 31,
	2013			2012			2011
Cash flows from operating activities:
Net income	$	1,960		$	1,401		$	299
Adjustments to reconcile net income to net cash used in operating activities:
Equity in undistributed earnings of Belmont Savings Bank		(1,826	)		(1,469	)		(1,717	)
Equity in undistributed earnings of BSB Funding Corp.		(87	)		(88	)		(22	)
Issuance of common stock to Belmont Savings Bank Foundation		—			—			1,799
Deferred income tax expense (benefit)		13			52			(565	)
Other, net		(239	)		(122	)		80


Net cash used in operating activities		(179	)		(226	)		(126	)


Cash flows from investing activities:
Investment in Belmont Savings Bank		(20,000	)		—			—
Investment in BSB Funding Corp.		—			—			(4,586	)


Net cash used in investing activities		(20,000	)		—			(4,586	)


Cash flows from financing activities:
Capital contribution to Belmont Savings Bank		—			—			(41,761	)
Repurchase of common stock		(6,478	)		—			—
Issuance of common stock		—			—			88,308


Net cash (used in) provided by financing activities		(6,478	)		—			46,547


Net (decrease) increase in cash and cash equivalents		(26,657	)		(226	)		41,835
Cash and cash equivalents at beginning of period		41,624			41,850			15

Cash and cash equivalents at end of period	$	14,967		$	41,624		$	41,850

113

NOTE 23 – QUARTERLY DATA (UNAUDITED)

Quarterly results of operations are as follows:


	Years Ended December 31,
	2013								2012
	Fourth Quarter		Third Quarter		Second Quarter		First Quarter		Fourth Quarter		Third Quarter		Second Quarter		First Quarter

Interest and dividend income	$	8,875	$	7,995	$	7,136	$	7,005	$	7,143	$	6,951	$	6,220	$	6,510
Interest expense		1,316		1,223		1,222		1,226		1,291		1,303		1,289		1,250


Net interest income		7,559		6,772		5,914		5,779		5,852		5,648		4,931		5,260
Provision for loan losses		632		438		100		327		696		734		825		481

Net interest income, after provision for loan losses		6,927		6,334		5,814		5,452		5,156		4,914		4,106		4,779
Non-interest income		802		890		908		1,006		1,574		680		1,487		964
Non-interest expense		6,797		6,373		6,161		5,800		5,940		5,348		5,174		5,084


Income before taxes		932		851		561		658		790		246		419		659
Income tax expense		287		313		200		242		305		63		133		212


Net income	$	645	$	538	$	361	$	416	$	485	$	183	$	286	$	447

Earnings per common share
Basic	$	0.07	$	0.06	$	0.04	$	0.05	$	0.05	$	0.02	$	0.03	$	0.05
Diluted	$	0.07	$	0.06	$	0.04	$	0.05	$	0.05	$	0.02	$	0.03	$	0.05

NOTE 24 – SUBSEQUENT EVENTS

The Company has evaluated subsequent events for potential recognition and/or disclosure through the date these consolidated financial statements were issued. There were no subsequent events that required adjustment to or disclosure in the consolidated financial statements.

114

ITEM 9.

CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A.

CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures.

The Company’s President and Chief Executive Officer, its Chief Financial Officer, and other members of its senior management team have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) or 15d-15(e)), as of December 31, 2013. Based on such evaluation, the President and Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures, as of the end of the period covered by this report, were effective.

Changes in Internal Controls Over Financial Reporting .

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

Management’s Report on Internal Control over Financial Reporting and the Report of Independent Registered Public Accounting Firm are set forth in Part II, Item 8 of this Form 10-K.

ITEM 9B.

OTHER INFORMATION

Not applicable.

115

PART III

ITEM 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

The information relating to the directors and officers of BSB Bancorp, Inc. is incorporated herein by reference to our definitive Proxy Statement for the 2014 Annual Meeting of Stockholders (the “Proxy Statement”) under the headings “Corporate Governance and Board Matters” and “Proposal I—Election of Directors”. Information regarding compliance with Section 16(a) of the Exchange Act, our procedures for stockholders to submit recommendations for director candidates, and the audit committee and audit committee financial expert, is incorporated herein by reference from our definitive Proxy Statement, specifically the sections captioned “Section 16(a) Beneficial Ownership Reporting Compliance” and “Corporate Governance and Board Matters.”

We have adopted a Joint Code of Ethics and Conflicts of Interest Policy (the “Code”) that is designed to promote the highest standards of ethical conduct by our directors, officers (including our senior officers, which are our principal executive officer, principal financial officer, principal accounting officer and all officers performing similar functions). The Code is available on our website, www.belmontsavings.com , under “Investor Relations—Corporate Information—Governance Documents—Code of Ethics and Conflicts of Interest Policy.”

ITEM 11.

EXECUTIVE COMPENSATION

Information concerning executive compensation is incorporated herein by reference from our Proxy Statement, specifically the sections captioned “Executive Compensation”, “Director Compensation”, “Compensation Discussion and Analysis”, “Compensation Committee Interlocks and Insider Participation”, and Compensation Committee Report”.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERS MATTERS

Information concerning security ownership of certain owners and management is incorporated herein by reference from our Proxy Statement, specifically the sections captioned “Stock Ownership” and Item 5 of the Report on Form 10-K.

ITEM 13.

CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information concerning relationships and transactions is incorporated herein by reference from our Proxy Statement, specifically the section captioned “Transactions with Certain Related Persons” and “Corporate Governance and Board Matters.”

ITEM 14.

PRINCIPAL ACCOUNTING FEES AND SERVICES

Information concerning principal accountant fees and services is incorporated herein by reference from our Proxy Statement, specifically the section captioned “Proposal II-Ratification of Independent Registered Public Accounting Firm.”

116

PART IV

ITEM 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(1)

The financial statements required in response to this item are incorporated by reference from Item 8 of this report.

(2)

All financial statement schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto.

(3)

Exhibits


3.1		Articles of Incorporation of BSB Bancorp, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s Registration Statement on Form S-1 (333-174808) initially filed with the SEC on June 9, 2011).

3.2		Bylaws of BSB Bancorp, Inc. (incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (333-174808) initially filed with the SEC on June 9, 2011).

4.1		Specimen Stock Certificate of BSB Bancorp, Inc. (incorporated by reference to Exhibit 4 to the Company’s Registration Statement on Form S-1 (333-174808) initially filed with the SEC on June 9, 2011).

10.1		Severance Agreement between Belmont Savings Bank and Robert M. Mahoney (incorporated by reference to Exhibit 10.1 to the Company’s Annual Report on Form 10-K filed with the SEC on March 27, 2012). †

10.2		Severance Agreement between Belmont Savings Bank and John A. Citrano (incorporated by reference to Exhibit 10.2 to the Company’s Annual Report on Form 10-K filed with the SEC on March 27, 2012). †

10.3		Severance Agreement between Belmont Savings Bank and Hal R. Tovin (incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K filed with the SEC on March 27, 2012). †

10.4		Severance Agreement between Belmont Savings Bank and Christopher Y. Downs (incorporated by reference to Exhibit 10.4 to the Company’s Annual Report on Form 10-K filed with the SEC on March 27, 2012). †

10.5		Severance Agreement between Belmont Savings Bank and Carroll M. Lowenstein, Jr. (incorporated by reference to Exhibit 10.5 to the Company’s Annual Report on Form 10-K filed with the SEC on March 27, 2012). †

10.6		2014 Belmont Savings Bank Incentive Compensation Plan †

10.7		Belmont Savings Bank Capital Appreciation Plan (incorporated by reference to Exhibit 10.7 to the Company’s Registration Statement on Form S-1 (333-174808) initially filed with the SEC on June 9, 2011). †

10.8		Belmont Savings Bank Supplemental Executive Retirement Plan †

10.9		Amended and Restated Supplemental Retirement Agreement between Belmont Savings Bank and John A. Citrano, dated February 12, 2014 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K, filed with the SEC on February 19, 2014). †

10.10		Belmont Savings Bank Deferred Compensation Plan for Members of the Board of Investment (incorporated by reference to Exhibit 10.15 to the Company’s Registration Statement on Form S-1 (333-174808) initially filed with the SEC on June 9, 2011). †

10.11		Belmont Savings Bank Deferred Compensation Plan, effective April 1, 2013. †

10.12		BSB Bancorp, Inc. 2012 Equity Incentive Plan (incorporated by reference to Appendix A to the Company’s Definitive Proxy Statement filed with the SEC on October 5, 2012). †

21.0		List of Subsidiaries (incorporated by reference to Exhibit 21 to the Company’s Annual Report on Form 10-K filed with the SEC on March 27, 2012).

23.0		Consent of Shatswell, MacLeod & Company, P.C.

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. Annual Report on Form 10-K for the fiscal year ended December 31, 2012 formatted in Extensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Comprehensive Income, (iv) Consolidated Statements of Changes in Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) the related notes.

†	This exhibit is a management contract or a compensatory plan or arrangement.

*	This information is furnished and not filed.

117

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.


Signatures	Title	Date

/s/ Robert M. Mahoney Robert M. Mahoney	President, Chief Executive Officer and Director (Principal Executive Officer)	March 12, 2014

/s/ John A. Citrano John A. Citrano	Executive Vice President and Chief Financial Officer (Principal Financial and Accounting Officer)	March 12, 2014

/s/ Hal R. Tovin Hal R. Tovin	Executive Vice President, Chief Operating Officer and Director	March 12, 2014

/s/ Robert J. Morrissey Robert J. Morrissey	Chairman of the Board	March 12, 2014

/s/ John A. Borelli John A. Borelli	Director	March 12, 2014

/s/ S. Warren Farrell S. Warren Farrell	Director	March 12, 2014

/s/ Richard J. Fougere Richard J. Fougere	Director	March 12, 2014

/s/ John W. Gahan, III John W. Gahan, III	Director	March 12, 2014

118


Signatures	Title	Date

/s/ John A. Greene John A. Greene	Director	March 12, 2014

/s/ John A. Whittemore John A. Whittemore	Director	March 12, 2014

119

BELMONT SAVINGS BANK

INCENTIVE COMPENSATION PLAN

2014

Purpose of the Plan

Belmont Savings Bank (the Bank) has adopted this Incentive Compensation Plan (the Plan) for the purpose of supporting the organizational and financial objectives of the Bank as define in the Bank’s Business Plan. This Plan provides incentive compensation (Incentive Awards) to certain named Executive Officers and other key contributing officers (the Participants). The Plan is designed to insure that participants do not take on undue risk to achieve payouts. All participants with responsibility for managing risk have goals for risk control and clawback provisions in the Plan.

The Plan is further intended to attract, motivate, and retain high quality executives and to support continued growth and profitability of the Bank. Participation in the Incentive Plan is dependent upon one’s responsibility within the Bank and ability to influence the Bank’s strategic outcomes. Individual incentive payout targets will be shared with each participant. It is important to note that this Plan is established to reward and recognize participants for meeting set objectives. This Plan is not meant to be a substitute for salary increases.

Key Terms

•

Incentive Awards

•

Plan year

•

Business Plan

•

Company-Wide Goals

•

Individual Goals

•

Performance Categories

•

Maximum Target

•

Clawback Policy

Performance Objectives

•

The Business Plan outlines key strategic initiatives approved by the Board of Directors. Each Division Head will review the Business Plan with Participants within his or her group. Together, they should identify up to six specific and measurable Individual Goals to support the Business Plan. Company-Wide Goals and their weightings must be approved by the Compensation Committee.

Approved by the Compensation Committee and Board of Directors – March 12, 2014

Company-Wide Goals include the Performance Categories:

•

Deposit growth

•

Loan growth

•

Net interest income

•

Fee income

•

Non-interest expense

•

Expense control

•

Credit quality and portfolio management

Individual Goals should include up to six of the following:

•

Deposit Growth

•

Loan Growth

•

Expense Control

•

Credit Quality / Portfolio Management

•

Fee Income

•

Net Interest Margin

•

Teamwork

•

Compliance

•

Customer Service – externally and to other colleagues

•

Community Involvement

•

Referrals to other business units

•

Personal goals include major projects or initiatives

After the year end close, Participants in the Plan will report on the achievement of their Individual Goals. Division Heads will summarize individual achievements and recommend to the Bank President the percentage payout based on the Individual Goals achieved. The Director of Human Resources will calculate the payouts and report to the President for approval of the Compensation Committee. Incentive awards will be calculated on year to date regular earnings (exclusive of commissions or incentive payments).

The Compensation Committee will be responsible for any interpretation of the Plan relating to the Executive Officers named in the Company’s annual proxy statement (“Named Executive Officers”), including the Bank President, and the Compensation Committee’s decision shall be final and binding on all parties. The Bank President will be responsible for any interpretation of the Plan relating to all Participants, other than the Named Executive Officers, and his decision shall be final and binding on all parties.

Before the beginning of each Plan year, the Compensation Committee will consider changes for the upcoming year.

The Compensation Committee may consider extraordinary occurrences impacting Bank earnings which may be excluded when determining the performance against goals to ensure that the best interests of the Bank are protected.

Incentive Plan Participants

The Compensation Committee shall designate the Participants in the Plan who are Named Executive Officers. The Bank President is authorized to name Participants in the Plan other than the Named Executive Officers. Officers hired prior to the third Quarter (October 1), will be included in the plan. A master list of Participants will be shared with the Bank President, Compensation Committee, and Senior Management.

At the Beginning of Plan Year

•

Participants will identify up to six specific and measurable individual goals in support of the Business Plan.

•

The Division Head will review those goals and approve.

•

A copy will be provided to the Participant, the Division Head, and Human Resources for their recordkeeping.

•

The Incentive Plan will be reviewed and approved by the Compensation Committee and recommended to the Board.

•

Plan Participants will be notified of approved Performance Categories and weightings.

After Close of the Plan Year

•

The Chief Financial Officer will calculate and report the Bank financials for the prior year.

•

The Division Head will receive each Participant’s self evaluation of their performance to Individual Goals.

•

The Human Resource Director will calculate the Percent Awards for each participant based on the weighting of Company-Wide and Individual Goal achievement.

•

The results will be recommended to the Compensation Committee for approval by the Board.

•

Payouts will be made in March of the year following the Plan Year. Participants must be employed at the time of payout.

Definitions

Each group of Officers has a Maximum Target bonus as a percentage of their salaries. The Maximum Target is met when an individual achieves all objectives and exceeds the important objectives.

The incentive payout for each officer classification will be weighted to include a percentage based on Company-Wide Goals and a percentage based on Individual Goals. Company-Wide Goals will be weighted higher than Individual Goals when considering incentive recommendations for Executive Officers.

For the President and Executive Vice Presidents, Company-Wide Goals are weighted at 75%, for Senior Vice Presidents 50%, and for Vice Presidents and other Officers 25%. The Compensation Committee will determine the performance against the Company-Wide Goals.

Approved by the Compensation Committee and Board of Directors – March 12, 2014

The following table represents the weighting structure.


Title	Weight attributed to Company-Wide Goals			Weight attributed to Individual Goals
President / CEO and Executive Officers		75	%		25	%
Senior Vice Presidents		50	%		50	%
Vice Presidents		25	%		75	%
Other Officers		25	%		75	%
Other Colleagues		0			100	%

Other Considerations

It is not possible to consider all issues that will invariably materialize as plans are developed and implemented. Therefore, the Bank President will act on individual cases as issues are identified. The plan is “discretionary” based on individual performance consistent with the business plan.

The Compensation Committee will also weigh progress on Regulatory matters in determining the performance of management with respect to Company-Wide Goals.

Withholding for Taxes

The Bank shall deduct from all payments under this Plan any federal or state taxes required by law to be withheld with respect to such payments. This payment is subject to 401k deductions and bank match. No other voluntary deductions will be taken from this payment.

Clawback Policy

The Bank reserves the right to recover any bonus or incentive compensation payment to any officer if the payments were based on materially inaccurate financial statements, other materially inaccurate reporting or fraud by that Officer. The Clawback Policy will also apply to material losses in future years. The look back period is one year from the incentive payment.

BELMONT SAVINGS BANK

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

ARTICLE I

Name and Purpose

1.1 This instrument and the supplemental retirement plan embodied herein, as from time to time amended, shall be known as the “Belmont Savings Bank Supplemental Executive Retirement Plan.”

1.2 The Plan is established and maintained for the purpose of providing retirement benefits described in Article III to eligible executive employees of the Bank, MHC and/or Bancorp.

1.3 For purposes of ERISA, the Plan is intended to be unfunded, and maintained by the Company primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of ERISA.

ARTICLE II

Definitions

2.1 “Annual Benefit Amount” means a gross amount equal to the product of the Participant’s Final Average Compensation multiplied by the Participant’s Benefit Percentage.

2.2 “Applicable Appendix” means, with respect to each Participant, the appendix to this Plan in which such Participant is identified by name and date of hire. Each such appendix, as amended from time to time, is incorporated in its entirety into this Plan by reference and made a part hereof.

2.3 “Bancorp” means BSB Bancorp., Inc., with its principal administrative office also located at Two Leonard Street, Belmont, MA 02478.

2.4 “Benefit Percentage” means, with respect to each Participant, the percentage determined in accordance with such Participant’s Applicable Appendix.

2.5 “Board” means the Bank’s Board of Directors, provided, however that for purposes of any action required or permitted by the Board of Directors for purposes of this Plan, the Board shall act without participation by the Participant if the Participant is then a member of the Board.

2.6 “Cause” means any one or more of the following: (i) the commission by the Participant of any crime involving deceit, dishonesty or fraud with regard to the Bank or its business, or moral turpitude of such a nature as would adversely affect the reputation of the Bank; (ii) the commission by the Participant of a material act or acts of dishonesty in connection with the performance of the Participant’s duties to the Bank including, without limitation, misappropriation of funds or property; (iii) an act or acts of misconduct (including sexual

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harassment) by the Participant; (iv) failure by the Participant to perform to the reasonable satisfaction of the Board a substantial portion of the duties and responsibilities assigned to the Participant, which failure continues for more than fifteen (15) days after notice is given to the Participant by the Board; or (v) the suspension or termination of the employment of the Participant pursuant to an order by any federal or state regulatory agency having jurisdiction over the Bank.

2.7 “Code” means the Internal Revenue Code of 1986, as amended.

2.8 “Date of Hire” means, with respect to the Participant, the date specified on such Participant’s Applicable Appendix.

2.9 “ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

2.10 “Final Average Compensation” means the average of the Participant’s annual gross base salary (prior to any elective salary reduction contributions to any pre-tax benefit arrangement, e.g. , a Code Section 401(k), Code Section 125 or Code Section 132 plan) during the three consecutive calendar year period during which the Participant’s compensation from the Bank was highest during the final sixty (60) month period of the Participant’s employment with the Bank.

2.11 “Good Reason” shall mean: (i) a material diminution in the Participant’s base salary other than in connection with a reduction in compensation of comparable magnitude, as a percentage matter, affecting all or substantially all executive employees of the Bank; (ii) a material diminution in the Participant’s authority, duties, or responsibilities; (iii) a material diminution in the authority, duties or responsibilities of position to which the Participant is to report; (iv) a material diminution in the budget over which the Participant retains authority; (v) a material change in the geographic location at which the Participant must perform the Participant’s duties; or (iv) any other action or inaction that constitutes a material breach by the Bank of any agreement under which the Participant provides services, including this Plan; provided that for a termination to be deemed for Good Reason the Participant must give, within the 90-day period commencing on the initial existence of the condition(s) constituting (or allegedly constituting) Good Reason, written notice of the intention to terminate for Good Reason, and, upon receipt of such notice, the Bank shall have a thirty (30) day period within which to cure such condition(s); and provided further that the Bank may waive such right to notice and opportunity to cure. In no event may facts or circumstances constituting “Good Reason” arise after the occurrence of facts or circumstances that the Bank relies upon, in whole or in material part, in terminating the Participant for Cause. In no event shall the separation from service, replacement or promotion of any employee other than the Participant, per se , constitute “Good Reason.”

2.12 “MHC” means BSB Bancorp, MHC, a mutual holding company, with its principal administrative office at Two Leonard Street, Belmont, MA 02478.

2.13 “Normal Distribution Form” means a distribution in ten (10) annual installments, each such installment equal to the Annual Benefit Amount, the initial installment of which is to

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be distributed within sixty (60) days after the later to occur of (i) the date the Participant Separates from Service with the Bank and (ii) the Participant’s Normal Retirement Date, and the subsequent installments shall be distributed on the first through ninth anniversary of such initial installment. For purposes of Code Section 409A, all such installments shall be treated as a single payment.

2.14 “Normal Retirement Date” means the date the Participant attains age sixty-two (62).

2.15 “Participant” means each employee of the Bank, Bancorp or MHC who (i) is designated by the Board as a participant in the Plan in accordance with Article III of the Plan, (ii) is named in an appendix to the Plan, and (iii) executes a participation instrument in accordance with Section 3.2.

2.16 “Plan” means the deferred compensation arrangement set forth in this instrument, as amended from time to time.

2.17 “Plan Year” means the twelve (12) month period ending December 31.

2.18 “Separation from Service” means a change in the Participant’s service relationship with the Bank, whether or not initiated by the Bank, such that the Bank reasonably determines, based on the facts and circumstances available as at such determination date, that no further services will be performed by the Participant for the Bank after a certain date (the “Separation Date”) or that the level of bona fide services the Participant will perform after such Separation Date (whether as an employee, independent contractor or other service provider) will decrease permanently to no more than twenty percent (20%) of the average level of bona fide services performed (whether as an employee, independent contractor or other service provider) over the preceding thirty-six (36) month period immediately preceding such Separation Date. The Participant will be presumed to have separated from service where the level of bona fide services performed continues at a level that is more than twenty percent (20%) but less than fifty percent (50%) of the average level of service performed by the Participant during the thirty-six (36) month period immediately preceding the Separation Date.

2.19 “Year of Service” means each period of twelve (12) consecutive months that (i) commences either on the Participant’s Date of Hire or any anniversary thereof and (ii) ends on or prior to the Participant’s Separation from Service.

ARTICLE III

Participation

3.1 Designation by Board . Participation in the Plan shall be limited to such management or highly compensated employees of the Bank, Bancorp or MHC, as the Board may designate from time to time, in its discretion.

3.2 Term of Participation . An individual designated by the Board to participate in the Plan in accordance with Section 3.1 shall become a Participant upon executing a written instrument of participation in such form as the Bank approves (which may be in the form set forth as Appendix B to the Plan), and the effective date of such participation shall be the date of

- 3 -

Board action designating such individual as a participant in the Plan unless otherwise provided by the Board. A Participant’s participation in the Plan shall end upon the first to occur of (i) the distribution of 100% of the Participant’s benefit, (ii) the Participant’s Separation from Service with a Benefit Percentage of less than ten percent (10%), (iii) the Participant’s Separation from Service for Cause, (iv) the termination of the Plan and (v) the amendment of the Plan to render the Participant ineligible to participate, subject to Article VIII.

ARTICLE IV

Eligibility for Benefit

4.1 Separation from Service . In no event shall any benefit be payable under the Plan to a Participant prior to such Participant’s Separation from Service, provided, however, that nothing herein shall prevent a distribution required in connection with the Plan’s termination, in whole or in part, or as otherwise required by applicable law.

4.2 Minimum Required Benefit Percentage; Forfeiture . In no event shall any benefit be payable under this Plan if either (i) the Participant’s Benefit Percentage is less than ten percent (10%) at Separation from Service, or (ii) the Participant Separates from Service due to termination for Cause or resignation under circumstances that the Board determines to constitute Cause.

ARTICLE V

Payment of Benefit

5.1 Time and Form of Benefit . A Participant who Separates from Service for reasons other than Cause and whose Benefit Percentage is greater than zero percent (0%) shall be entitled to a benefit to be distributed in the Normal Distribution Form, such distribution to commence within sixty (60) days after the later to occur of (i) the date the Participant separates from service with the Bank and (ii) the Participant’s Normal Retirement Date.

5.2 Death . In the event that the Participant whose Benefit Percentage is greater than zero percent (0%) dies prior to Separation from Service, the Participant’s benefit shall be distributed in the Normal Distribution Form commencing on the date the Participant would have attained age sixty-two (62) if the Participant had survived (or, if later, within thirty (30) days after the Participant’s date of death), such benefit to be distributed to the Participant’s surviving designated beneficiary or, in the absence thereof, to the Participant’s estate. In the event that the Participant dies after Separation from Service but prior to distribution in full of the Participant’s benefit, the undistributed payment(s) shall be paid to the Participant’s designated beneficiary or, in the absence of a surviving designated beneficiary (including due to the death of a designated beneficiary prior to payment of the final payment), to the Participant’s estate.

ARTICLE VI

Claims Procedure.

6.1 In the event the Participant or the Participant’s beneficiary in the case of the Participant’s death or their authorized representative (hereinafter, the “Claimant”) asserts a right to a benefit under this Plan which has not been received, in whole or in part, the Claimant must file with the Bank a claim for such benefit on forms provided by the Bank. The Bank shall

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render its decision on the claim within ninety (90) days after receipt of the claim. If special circumstances apply, the ninety (90) day period may be extended by an additional ninety (90) days, provided written notice of the extension is given to the Claimant during the initial ninety (90) day period and such notice indicates the special circumstances requiring an extension of time and the date by which the Bank expects to render its decision on the claim. If the Bank wholly or partially denies the claim, the Bank shall provide written notice to the Claimant.

6.2 For purposes of ERISA, including ERISA Section 501 et seq. , the Bank, acting through the Board, shall be the Plan administrator with respect to this Plan. As Plan administrator, the Bank shall have complete authority, in its sole and absolute discretion, to interpret the provisions of this Plan and make determinations regarding eligibility. Without limiting the foregoing, it is the Bank’s intent that the Plan be administered in a manner compliant with the provisions of Section 409A of the Code, and regulations and rulings issued thereunder so as not to subject the benefits accruing hereunder to taxation pursuant to said Section 409A(a)(1).

ARTICLE VII

Funding

7.1 General Obligation of the Bank . The benefits provided under the Plan constitute a mere promise by the Bank to make payments in the future, and the rights of the Participant hereunder shall be those of a general unsecured creditor of the Bank. Nothing contained herein shall be construed to create a trust of any kind or to render the Bank a fiduciary with respect to the Participant. The Bank shall not be required to maintain any fund or segregate any amount or in any other way currently fund the future payment of any benefit provided under the Plan, and nothing contained herein shall be construed to give the Participant or any other person any right to any specific assets of the Bank or of any other person. This Plan is intended to be, and shall in all events be construed and treated as, a deferred compensation arrangement for a “select group of management and highly compensated employees,” within the meaning of Title I of ERISA.

7.2 Use of Trust, Insurance Policies, Etc . Notwithstanding the foregoing, the Bank may, in its sole and absolute discretion, establish a trust to which funds earmarked for payment under this Plan may be transferred and from which benefits arising hereunder, and subject to the provisions and limitations hereof, may be paid. Any such trust would contain provisions making it irrevocable by the Bank unless and until all benefits hereunder which are funded through such trust have been paid or provided for, except in the case of bankruptcy or insolvency of the Bank, in which event benefit payments from the trust would cease and assets thereof would revert to the Bank or be paid to its creditors. The Bank may, for its corporate purposes, choose to obtain a policy or policies of life insurance on the Participant. The Participant agrees to fully cooperate in connection with the securing of any such policy or policies or the election of any options thereunder which the Bank may wish and that the Participant will be available for medical examinations if necessary.

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ARTICLE VIII

Amendment and Termination

8.1 Amendment . The Board shall have the right to amend, alter or modify the Plan at any time and from time to time, in whole or in part; provided, however, that to the extent that any amendment, alteration or modification reduces the amount of any benefit to which a Participant would have a vested entitlement if the Participant resigned without Good Reason immediately prior to the effective date of such amendment, or changes the form in which such benefit is to be distributed, such amendment shall become effective without the consent of such affected Participant(s).

8.2 Termination . The Board shall have the right, in its sole discretion, to terminate the Plan, in whole or in part, at any time; provide, however that no such action shall reduce the amount to which a Participant would have a vested entitlement if the Participant resigned without Good Reason immediately prior to the effective date of such amendment.

ARTICLE IX

Miscellaneous

9.1 Provision for Incapacity . If the Board reasonably deems any individual incapable of receiving benefits by reason of illness, infirmity or incapacity of any kind, the Bank may make payment of such benefits to any one or more persons or representatives as provided in a written direction received from the affected individual while competent and, in the absence of any such written direction, to such individual(s) as the Board designates and shall fully discharge the Bank from all obligations liability under this Plan.

9.2 Non-assignable Rights . Except as otherwise provided by the Plan, neither the Participant nor the Participant’s surviving spouse shall have any right to commute, sell, assign, transfer or otherwise convey the right to receive any payments hereunder, which payments and the right thereto are expressly declared to be non-assignable and non-transferable.

9.3 Independence of Plan . The benefits payable under the Plan shall be independent of, and in addition to, any employment agreement that may exist from time to time between the parties hereto, or any compensation payable by the Bank to the Participant other than supplemental retirement benefits, whether as salary, bonus or otherwise.

9.4 At-Will Status . Notwithstanding any provision of this Plan, the Participant is employed at-will, so that the Participant or the Bank may terminate the Participant’s employment at any time, with or without notice, for any or no reason.

9.5 Conditions of Benefits; Effect on the Participant’s Post-Employment Obligations . In the event that the Participant becomes entitled to a benefit distribution in connection with a involuntary termination prior to attainment of the Participant’s maximum Benefit Percentage, then the Participant shall be eligible to receive the benefits provided under this Plan, only if the Participant executes a general release, in a form acceptable to the Bank, within fifty (50) days (or such longer period as may be required by applicable law including, without limitation, the Age Discrimination in Employment Act) of the date of the termination of the Participant’s employment.

- 6 -

9.6 Taxes . All payments and benefits described in this Plan shall be subject to any and all applicable federal, state and local income, employment and other taxes, and the Bank will deduct from each payment to be made to the Participant under this Plan such amounts, if any, required to be deducted or withheld under applicable law. The Participant hereby acknowledges and agrees that the Bank makes no representations or warranties regarding the tax treatment or tax consequences of any compensation, benefits or other payments under the Plan, or under any statute, or regulation or guidance thereunder, or under any successor statute, regulation and guidance thereunder.

9.7 Code Section 409A . It is the intent of the parties that this Plan, and all payments of deferred compensation subject to Code Section 409A made hereunder, shall be in compliance with such requirements and the regulations and other guidance thereunder. Notwithstanding any other provision with respect to the timing of payments under this Plan, if, at the time of the Participant’s separation from service, the Participant is a “specified employee” (meaning a key employee as defined in Section 416(i) of the Code without regard to paragraph 5 thereof) of the Bank (or a Bank affiliate), then to the extent necessary to comply with the requirements of Code Section 409A, any payments to which the Participant is entitled under this Plan during the six month period commencing on the Participant’s separation from service which are subject to Code Section 409A (and not otherwise exempt from its application including, without limitation, by operation of Treasury Regulation section 1.409A-1(n)) will be withheld until the first business day of the seventh month following the Participant’s separation from service, at which time such withheld amount shall be paid in a lump-sum distribution.

9.8 Limitation on Benefits . In no event shall the Bank be obligated to make any payment pursuant to this Plan that is prohibited by Section 18(k) of the Federal Deposit Insurance Act (codified at 12 U.S.C. sec. 1828(k)), 12 C.F.R. Part 359, or any other applicable law. It is the intention of the Participant and of the Bank that no payments by the Bank to or for the benefit of the Participant under this Plan or any other agreement or plan pursuant to which Participant is entitled to receive payments or benefits shall be non-deductible to the Bank by reason of the operation of Code Section 280G relating to parachute payments. If all, or any portion, of the payments provided under this Plan, either alone or together with other payments and benefits which the Participant receives or is entitled to receive from the Bank, would constitute a “parachute payment” within the meaning of Code Section 280G, the payments and benefits provided under this Plan shall be reduced to the extent necessary so that no portion thereof shall fail to be tax-deductible by operation of Code Section 280G (such reduced amount being referred to hereinafter as the “280G Maximum Amount”). To the extent that payments exceeding the 280G Maximum Amount have been made to or for the benefit of the Participant, such excess payments shall be refunded to the Bank with interest thereon at the applicable federal rate determined under Code Section 1274(d), compounded annually.

9.9 Assumption of Obligation . No sale, merger, consolidation or conversion of the Bank shall take place unless the new or surviving entity expressly acknowledges the obligations under this Plan and agrees to abide by its terms.

9.10 Governing Law . The Plan shall be construed under and governed by the laws of the Commonwealth of Massachusetts except to the extent pre-empted by ERISA.

- 7 -

EXECUTED under seal as of the day and year first above written, by the Bank’s duly authorized representative.


BELMONT SAVINGS BANK

By:		/s/ Robert Morrissey

(duly authorized)

- 8 -

BELMONT SAVINGS BANK

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

APPENDIX A-1

Except as otherwise defined in this Appendix, the terms used herein shall have the meaning(s) ascribed to them in the Belmont Savings Bank Supplemental Executive Retirement Plan, to which this Appendix, as amended from time to time, is appended and into which this Appendix is incorporated by reference.

Notwithstanding the foregoing, if prior to the completion of five (5) Years of Service, the Participant either is terminated by the Bank without Cause or resigns for Good Reason, the term “Benefit Percentage” shall mean, with respect to the Participant, the following:


Years of Service	Benefit Percentage
Less than 1		4	%
1		8	%
2		12	%
3		16	%
4		20	%

A-1

BELMONT SAVINGS BANK

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

APPENDIX A-2

Notwithstanding the foregoing, if prior to the completion of ten (10) Years of Service, the Participant either is terminated by the Bank without Cause or resigns for Good Reason, the term “Benefit Percentage” shall mean, with respect to the Participant, the following:


Years of Service	Benefit Percentage
Less than 1		2	%
1		4	%
2		6	%
3		8	%
4		10	%
5		12	%
6		14	%
7		16	%
8		18	%
9		20	%

A-2

BELMONT SAVINGS BANK

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

APPENDIX A-3


Years of Service	Benefit Percentage
Less than 1		2	%
1		4	%
2		6	%
3		8	%
4		10	%
5		12	%
6		14	%
7		16	%
8		18	%
9		20	%

A-3

BELMONT SAVINGS BANK

SUPPLEMENTAL EXECUTIVE RETIREMENT PLAN

APPENDIX A-4


Participant Name	Date of Hire	Years of Service	Benefit Percentage
Carroll M. Lowenstein, Jr.	September 15, 2010	0-4		0	%
		5-9		10	%
		10 or more		20	%


Years of Service	Benefit Percentage
Less than 1		2	%
1		4	%
2		6	%
3		8	%
4		10	%
5		12	%
6		14	%
7		16	%
8		18	%
9		20	%

A-4

ADOPTION AGREEMENT


1.01	PREAMBLE

	By the execution of this Adoption Agreement the Plan Sponsor hereby [complete (a) or (b)]

	(a)	¨	adopts a new plan as of [month, day, year]

	(b)	x	amends and restates its existing plan as of April 1, 2013 which is the Amendment Restatement Date. Except as otherwise provided in Appendix A, all amounts deferred under the Plan prior to the Amendment Restatement Date shall be governed by the terms of the Plan as in effect on the day before the Amendment Restatement Date.

			Original Effective Date: November 30, 1998 Pre-409A Grandfathering: ¨ Yes x No



1.02		PLAN

		Plan Name: Belmont Savings Bank Deferred Compensation Plan

		Plan Year: 1/1 - 12/31

1.03		PLAN SPONSOR



		Name:		Belmont Savings Bank

		Address:		2 Leonard Street, Belmont, MA 02478

		Phone #:		(617) 484-6700

		EIN:		27-0988452

		Fiscal Yr:		1/1 - 12/31

		Is stock of the Plan Sponsor, any Employer or any Related Employer publicly traded on an established securities market?

		x Yes ¨ No

- 1 -


Entity	Publicly Traded on Est. Securities Market
	Yes	No
BSB Bancorp, Inc.	x	¨
BSB Investment Corporation	¨	x
	¨	¨
	¨	¨
	¨	¨
	¨	¨


1.05	ADMINISTRATOR

	The Plan Sponsor has designated the following party or parties to be responsible for the administration of the Plan:

	Name:	Executive Committee of the Board of Directors
	Address:	2 Leonard Street, Belmont, MA 02478

	Note :	The Administrator is the person or persons designated by the Plan Sponsor to be responsible for the administration of the Plan. Neither Fidelity Employer Services Company nor any other Fidelity affiliate can be the Administrator.

1.06	KEY EMPLOYEE DETERMINATION DATES

	The Employer has designated as the Identification Date for purposes of determining Key Employees. In the absence of a designation, the Identification Date is December 31. The Employer has designated as the effective date for purposes of applying the six month delay in distributions to Key Employees. In the absence of a designation, the effective date is the first day of the fourth month following the Identification Date.

- 2 -


2.01	PARTICIPATION

	(a)	x	Employees [complete (i), (ii) or (iii)]

		(i)	x	Eligible Employees are selected by the Employer.

		(ii)	¨	Eligible Employees are those employees of the Employer who satisfy the following criteria:











		(iii)	¨	Employees are not eligible to participate.

	(b)	x	Directors [complete (i), (ii) or (iii)]

		(i)	x	All Directors are eligible to participate.

		(ii)	¨	Only Directors selected by the Employer are eligible to participate.

		(iii)	¨	Directors are not eligible to participate.

- 3 -


3.01	COMPENSATION

	For purposes of determining Participant contributions under Article 4 and Employer contributions under Article 5, Compensation shall be defined in the following manner [complete (a) or (b) and select (c)and/or (d), if applicable]:

	(a)	x	Compensation is defined as: The base salary and Bonus payable to the Participant by the Employer for a Plan year including any amounts deferred under a qualified cash or deferred arrangement under Section 401(k) of the Code and under a cafeteria plan under Section 125 of the Code.

	(b)	¨	Compensation as defined in [insert name of qualified plan] without regard to the limitation in Section 401(a)(17) of the Code for such Plan Year.

	(c)	x	Director Compensation is defined as: The retainer, meeting fees and other special compensation paid in cash to or for the benefit of the Participant by the Employer for a Plan Year for services rendered as a Director.

	(d)	¨	Compensation shall, for all Plan purposes, be limited to $ .

	(e)	¨	Not Applicable.

3.02	BONUSES

	Compensation, as defined in Section 3.01 of the Adoption Agreement, includes the following type of bonuses that will be the subject of a separate deferral election:


Type	Will be treated as Performance Based Compensation
	Yes	No
Incentive Compensation Plan	x	¨
	¨	¨
	¨	¨
	¨	¨
	¨	¨



				¨		Not Applicable.

- 4 -

4.01

PARTICIPANT CONTRIBUTIONS

If Participant contributions are permitted, complete (a), (b), and (c). Otherwise complete (d).

(a)

Amount of Deferrals

A Participant may elect within the period specified in Section 4.01(b) of the Adoption Agreement to defer the following amounts of remuneration. For each type of remuneration listed, complete “dollar amount” and / or “percentage amount”.

(i) Compensation Other than Bonuses [do not complete if you complete (iii)]


Type of Remuneration	Dollar Amount		% Amount		Increment
Type of Remuneration	Min	Max	Min	Max	Increment
(a) Base Salary			5	100	1%
(b)
(c)

Note: The increment is required to determine the permissible deferral amounts. For example, a minimum of 0% and maximum of 20% with a 5% increment would allow an individual to defer 0%, 5%, 10%, 15% or 20%.

(ii) Bonuses [do not complete if you complete (iii)]


Type of Bonus	Dollar Amount		% Amount		Increment
Type of Bonus	Min	Max	Min	Max	Increment
(a) Incentive Compensation Plan			5	100	1%
(b)
(c)

(iii) Compensation [do not complete if you completed (i) and (ii)]


Dollar Amount		% Amount		Increment
Min	Max	Min	Max	Increment

(iv) Director Compensation


Type of Compensation	Dollar Amount		% Amount		Increment
Type of Compensation	Min	Max	Min	Max	Increment
Director Compensation			5	100	1%

- 5 -

(b)

Election Period

(i)

Performance Based Compensation

A special election period

x Does ¨ Does Not

apply to each eligible type of performance based compensation referenced in Section 3.02 of the Adoption Agreement.

The special election period, if applicable, will be determined by the Employer.

(ii)

Newly Eligible Participants

An employee who is classified or designated as an Eligible Employee during a Plan Year

x May ¨ May Not

elect to defer Compensation earned during the remainder of the Plan Year by completing a deferral agreement within the 30 day period beginning on the date he is eligible to participate in the Plan.

(c)

Revocation of Deferral Agreement

A Participant’s deferral agreement

x Will

¨ Will Not

be cancelled for the remainder of any Plan Year during which he receives a hardship distribution of elective deferrals from a qualified cash or deferred arrangement maintained by the Employer to the extent necessary to satisfy the requirements of Reg. Sec. 1.401(k)-1(d)(3). If cancellation occurs, the Participant may resume participation in accordance with Article 4 of the Plan.

(d)

No Participant Contributions

¨ Participant contributions are not permitted under the Plan.

- 6 -

5.01

EMPLOYER CONTRIBUTIONS

If Employer contributions are permitted, complete (a) and/or (b). Otherwise complete (c).

(a)

Matching Contributions

(i)

Amount

For each Plan Year, the Employer shall make a Matching Contribution on behalf of each Participant who defers Compensation for the Plan Year and satisfies the requirements of Section 5.01(a)(ii) of the Adoption Agreement equal to [complete the ones that are applicable]:

(A)

¨ [insert percentage] of the Compensation the Participant has elected to defer for the Plan Year

(B)

¨ An amount determined by the Employer in its sole discretion

(C)

¨ Matching Contributions for each Participant shall be limited to $ and/or % of Compensation.

(D)

¨ Other:

________________________

(E)

x Not Applicable [Proceed to Section 5.01(b)]

(ii)

Eligibility for Matching Contribution

A Participant who defers Compensation for the Plan Year shall receive an allocation of Matching Contributions determined in accordance with Section 5.01(a)(i) provided he satisfies the following requirements [complete the ones that are applicable]:

(A)

¨ Describe requirements:

_______________________

(B)

¨ Is selected by the Employer in its sole discretion to receive an allocation of Matching Contributions

(C)

¨ No requirements

- 7 -


	(iii)	Time of Allocation

		Matching Contributions, if made, shall be treated as allocated [select one]:

		(A) ¨	As of the last day of the Plan Year

		(B) ¨	At such times as the Employer shall determine in it sole discretion

		(C) ¨	At the time the Compensation on account of which the Matching Contribution is being made would otherwise have been paid to the Participant

		(D) ¨	Other:
			_________________________________
			_________________________________

(b)	Other Contributions

	(i)	Amount

		The Employer shall make a contribution on behalf of each Participant who satisfies the requirements of Section 5.01(b)(ii) equal to [complete the ones that are applicable]:

		(A) ¨	An amount equal to [insert number] % of the Participant’s Compensation

		(B) ¨	An amount determined by the Employer in its sole discretion

		(C) ¨	Contributions for each Participant shall be limited to $

		(D) ¨	Other:

			_________________________________
			_________________________________
			_________________________________

		(E) x	Not Applicable [Proceed to Section 6.01]

- 8 -


	(ii)	Eligibility for Other Contributions

		A Participant shall receive an allocation of other Employer contributions determined in accordance with Section 5.01(b)(i) for the Plan Year if he satisfies the following requirements [complete the one that is applicable]:

		(A) ¨	Describe requirements:
			_________________________________
			_________________________________

		(B) ¨	Is selected by the Employer in its sole discretion to receive an allocation of other Employer contributions

		(C) ¨	No requirements

	(iii)	Time of Allocation

		Employer contributions, if made, shall be treated as allocated [select one]:

		(A) ¨	As of the last day of the Plan Year

		(B) ¨	At such time or times as the Employer shall determine in its sole discretion

		(C) ¨	Other:
			_________________________________
			_________________________________
			_________________________________

(c)	No Employer Contributions

	x	Employer contributions are not permitted under the Plan.

- 9 -

6.01

DISTRIBUTIONS

The timing and form of payment of distributions made from the Participant’s vested Account shall be made in accordance with the elections made in this Section 6.01 of the Adoption Agreement except when Section 9.6 of the Plan requires a six month delay for certain distributions to Key Employees of publicly traded companies.

(a) Timing of Distributions

(i)

All distributions shall commence in accordance with the following [choose one]:

(A)

As soon as administratively feasible following the distribution event but in no event later than the time prescribed by Treas. Reg. Sec. 1.409A-3(d).

(B)

Monthly on specified day 15th [insert day]

(C)

Annually on specified month and day [insert month and day]

(D)

Calendar quarter on specified month and day [ month of quarter (insert 1,2 or 3); day (insert day)]

(ii)

The timing of distributions as determined in Section 6.01(a)(i) shall be modified by the adoption of:

(A)

Event Delay – Distribution events other than those based on Specified Date or Specified Age will be treated as not having occurred for months [insert number of months].

(B)

Hold Until Next Year – Distribution events other than those based on Specified Date or Specified Age will be treated as not having occurred for twelve months from the date of the event if payment pursuant to Section 6.01(a)(i) will thereby occur in the next calendar year or on the first payment date in the next calendar year in all other cases.

(C)

Immediate Processing – The timing method selected by the Plan Sponsor under Section 6.01(a)(i) shall be overridden for the following distribution events [insert events]:

(D)

Not applicable.

- 10 -

(b)

Distribution Events

Participants may elect the following payment events and the associated form or forms of payment. If multiple events are selected, the earliest to occur will trigger payment. For installments, insert the range of available periods (e.g., 5-15) or insert the periods available (e.g., 5,7,9).

For each Plan Year that the Participant elects to defer Compensation, he must elect both Disability and Death as payment events and must elect an associated form of payment for each payment event.

In the event a Participant fails to elect a form of payment for a payment event, the default form of payment is a lump sum.


			Lump Sum	Installments
(i)	x	Specified Date	X	2-10 years

(ii)	¨	Specified Age		years

(iii)	x	Separation from Service	X	2-10 years

(iv)	¨	Separation from Service plus 6 months		years

(v)	¨	Separation from Service plus months [not to exceed months]		years

(vi)	¨	Retirement		years

(vii)	¨	Retirement plus 6 months		years

(viii)	¨	Retirement plus months [not to exceed months]		years

(ix)	x	Disability	X	2-10 years

(x)	x	Death	X	2-10 years

(xi)	¨	Change in Control		years

The minimum deferral period for Specified Date or Specified Age event shall be two years. Installments may be paid [select each that applies]

x	Monthly

¨	Quarterly

¨	Annually

(c)

Specified Date and Specified Age elections may not extend beyond age Not Applicable [insert age or “Not Applicable” if no maximum age applies].

- 11 -

(d)

Payment Election Override

Payment of the remaining vested balance of the Participant’s Account will automatically occur at the time specified in Section 6.01(a) of the Adoption Agreement in the form indicated upon the earliest to occur of the following events [check each event that applies and for each event include only a single form of payment]:

EVENTS

Separation from Service

Separation from

Service before Retirement

Death

Disability

Not Applicable

FORM OF PAYMENT

Lump sum Installments


(e)	Involuntary Cashouts

	¨	If the Participant’s vested Account at the time of his Separation from Service does not exceed $ distribution of the vested Account shall automatically be made in the form of a single lump sum in accordance with Section 9.5 of the Plan.

	x	There are no involuntary cashouts.

(f)	Retirement

	¨	Retirement shall be defined as a Separation from Service that occurs on or after the Participant [insert description of requirements]:





	x	No special definition of Retirement applies.

- 12 -

(g)

Distribution Election Change

A Participant

Shall

Shall Not

be permitted to modify a scheduled distribution date and/or payment option in accordance with Section 9.2 of the Plan.

A Participant shall generally be permitted to elect such modification one time.

Administratively, allowable distribution events will be modified to reflect all options necessary to fulfill the distribution change election provision.

(h)

Frequency of Elections

The Plan Sponsor

Has

Has Not

Elected to permit annual elections of a time and form of payment for amounts deferred under the Plan. If a single election of a time and/or form of payment is required, the Participant will make such election at the time he first completes a deferral agreement which, in all cases, will be no later than the time required by Reg. Sec. 1.409A-2.

- 13 -

7.01

VESTING

(a)

Matching Contributions

The Participant’s vested interest in the amount credited to his Account attributable to Matching Contributions shall be based on the following schedule:


¨	Years of Service	Vesting %
	0		(insert ‘100’ if there is immediate vesting)
	1
	2
	3
	4
	5
	6
	7
	8
	9

¨	Other:





¨	Class year vesting applies.



x	Not applicable.

(b)

Other Employer Contributions

The Participant’s vested interest in the amount credited to his Account attributable to Employer contributions other than Matching Contributions shall be based on the following schedule:


¨	Years of Service	Vesting %
	0		(insert ‘100’ if there is immediate vesting)
	1
	2
	3
	4
	5
	6
	7
	8
	9

¨	Other:





¨	Class year vesting applies.



x	Not applicable.

- 14 -

(c)

Acceleration of Vesting

A Participant’s vested interest in his Account will automatically be 100% upon the occurrence of the following events: [select the ones that are applicable]:

(i)

¨ Death

(ii)

¨ Disability

(iii)

¨ Change in Control

(iv)

¨ Eligibility for Retirement


		(v) ¨ Other:

(vi)

x Not applicable.

(d)

Years of Service

(i)

A Participant’s Years of Service shall include all service performed for the Employer and

Shall

Shall Not

include service performed for the Related Employer.


(ii)	Years of Service shall also include service performed for the following entities:







(iii)	Years of Service shall be determined in accordance with (select one)

	(A) ¨	The elapsed time method in Treas. Reg. Sec. 1.410(a)-7

	(B) ¨	The general method in DOL Reg. Sec. 2530.200b-1 through b-4

	(C) ¨	The Participant’s Years of Service credited under [insert name of plan]


	(D) ¨	Other:


(iv)	x Not applicable.

- 15 -

8.01

UNFORESEEABLE EMERGENCY

(a)

A withdrawal due to an Unforeseeable Emergency as defined in Section 2.24:

Will

Will Not [if Unforeseeable Emergency withdrawals are not permitted, proceed to Section 9.01]

be allowed.

(b)

Upon a withdrawal due to an Unforeseeable Emergency, a Participant’s deferral election for the remainder of the Plan Year:

Will

Will Not

be cancelled. If cancellation occurs, the Participant may resume participation in accordance with Article 4 of the Plan.

- 16 -

9.01

INVESTMENT DECISIONS

Investment decisions regarding the hypothetical amounts credited to a Participant’s Account shall be made by [select one]:

(a) x

The Participant or his Beneficiary

(b) ¨

The Employer

- 17 -

10.01

TRUST

The Employer [select one]:

Does

Does Not

intend to establish a rabbi rabbi trust as provided in Article 11 of the Plan.

- 18 -

11.01

TERMINATION UPON CHANGE IN CONTROL

The Plan Sponsor

Reserves

Does Not Reserve

the right to terminate the Plan and distribute all vested amounts credited to Participant Accounts upon a Change in Control as described in Section 9.7.

11.02

AUTOMATIC DISTRIBUTION UPON CHANGE IN CONTROL

Distribution of the remaining vested balance of each Participant’s Account

Shall

Shall Not

automatically be paid as a lump sum payment upon the occurrence of a Change in Control as provided in Section 9.7.

11.03

CHANGE IN CONTROL

A Change in Control for Plan purposes includes the following [select each definition that applies]:

(a) x

A change in the ownership of the Employer as described in Section 9.7(c) of the Plan.

(b) x

A change in the effective control of the Employer as described in Section 9.7(d) of the Plan.

A change in the ownership of a substantial portion of the assets of the Employer as described in Section 9.7(e) of the Plan.

(d) ¨

Not Applicable.

- 19 -

12.01

GOVERNING STATE LAW

The laws of Massachusetts shall apply in the administration of the Plan to the extent not preempted by ERISA.

- 20 -

EXECUTION PAGE

The Plan Sponsor has caused this Adoption Agreement to be executed this 28 ^th day of March, 2013.


PLAN SPONSOR: BELMONT SAVINGS BANK

By:
Title:		EVP/CFO

- 21 -

APPENDIX A

SPECIAL EFFECTIVE DATES

Individual deferred compensation agreements between the Plan Sponsor and the following named individuals were merged into the Plan on the Effective Date:

•

John A. Borelli (agreement originally executed on December 21, 2006 and amended twice thereafter)

•

S. Warren Farrell (agreement originally executed on December 1, 1998 and amended four times thereafter)

•

John W. Gahan III (agreement originally executed on December 19, 2006 and amended twice thereafter)

•

Patricia W. Hawkins (agreement originally executed on December 1, 1998 and amended four times thereafter)

•

Robert Mahoney (agreement originally executed on December 29, 2012)

•

Robert J. Morrissey (agreement originally executed on November 30, 1998 and amended four times thereafter).

All amounts deferred under the individual agreements prior to the Effective Date shall be separately accounted for under the Plan and shall be paid in accordance with the provisions of the individual agreements as in effect on the Effective Date. Payments to the Participant under the individual agreements shall be made in the form of monthly installments over a 60 month period commencing as of the first day of the month following the date of the Participant’s Separation from Service unless the Participant elects to modify the election in accordance with Section 6.01(g) of the Adoption Agreement. In the event of the death of the Participant either before installment payouts have commenced or before 60 months of installments have been paid, the remaining payments will be made to the party indicated as provided in the individual agreements.

All amounts deferred under the individual agreements are subject to the provisions of Section 409A of the Code. No deferred amounts have been separately accounted for under the law as in effect prior to the effective date of Section 409A of the Code.

- 22 -

Belmont Savings Bank Deferred

Compensation Plan

[Generally Effective For Deferrals Made With Respect To

Calendar Years Beginning On And After April 1, 2013]

IMPORTANT NOTE

This document has not been approved by the Department of Labor, Internal Revenue Service or any other governmental entity. An adopting Employer must determine whether the Plan is subject to the Federal securities laws and the securities laws of the various states. An adopting Employer may not rely on this document to ensure any particular tax consequences or to ensure that the Plan is “unfunded and maintained primarily for the purpose of providing deferred compensation to a select group of management or highly compensated employees” under Title I of the Employee Retirement Income Security Act of 1974, as amended, with respect to the Employer’s particular situation. Fidelity Employer Services Company, its affiliates and employees cannot provide you with legal advice in connection with the execution of this document. This document should be reviewed by the Employer’s attorney prior to execution.

March 2012

TABLE OF CONTENTS

PREAMBLE


ARTICLE 1 – GENERAL		1-1
1.1	Plan	1-1
1.2	Effective Dates	1-1
1.3	Amounts Not Subject to Code Section 409A	1-1

ARTICLE 2 – DEFINITIONS		2-1
2.1	Account	2-1
2.2	Administrator	2-1
2.3	Adoption Agreement	2-1
2.4	Beneficiary	2-1
2.5	Board or Board of Directors	2-1
2.6	Bonus	2-1
2.7	Change in Control	2-1
2.8	Code	2-1
2.9	Compensation	2-1
2.10	Director	2-1
2.11	Disability	2-2
2.12	Eligible Employee	2-2
2.13	Employer	2-2
2.14	ERISA	2-2
2.15	Identification Date	2-2
2.16	Key Employee	2-2
2.17	Participant	2-2
2.18	Plan	2-2
2.19	Plan Sponsor	2-2
2.20	Plan Year	2-2
2.21	Related Employer	2-2
2.22	Retirement	2-3
2.23	Separation from Service	2-3
2.24	Unforeseeable Emergency	2-4
2.25	Valuation Date	2-4
2.26	Years of Service	2-4

ARTICLE 3 – PARTICIPATION		3-1
3.1	Participation	3-1
3.2	Termination of Participation	3-1


ARTICLE 4 – PARTICIPANT ELECTIONS		4-1
4.1	Deferral Agreement	4-1
4.2	Amount of Deferral	4-1
4.3	Timing of Election to Defer	4-1
4.4	Election of Payment Schedule and Form of Payment	4-2

ARTICLE 5 – EMPLOYER CONTRIBUTIONS		5-1
5.1	Matching Contributions	5-1
5.2	Other Contributions	5-1

ARTICLE 6 – ACCOUNTS AND CREDITS		6-1
6.1	Establishment of Account	6-1
6.2	Credits to Account	6-1

ARTICLE 7 – INVESTMENT OF CONTRIBUTIONS		7-1
7.1	Investment Options	7-1
7.2	Adjustment of Accounts	7-1

ARTICLE 8 – RIGHT TO BENEFITS		8-1
8.1	Vesting	8-1
8.2	Death	8-1
8.3	Disability	8-1

ARTICLE 9 – DISTRIBUTION OF BENEFITS		9-1
9.1	Amount of Benefits	9-1
9.2	Method and Timing of Distributions	9-1
9.3	Unforeseeable Emergency	9-1
9.4	Payment Election Overrides	9-2
9.5	Cashouts of Amounts Not Exceeding Stated Limit	9-2
9.6	Required Delay in Payment to Key Employees	9-2
9.7	Change in Control	9-4
9.8	Permissible Delays in Payment	9-7
9.9	Permitted Acceleration of Payment	9-8


ARTICLE 10 – AMENDMENT AND TERMINATION		10-1
10.1	Amendment by Plan Sponsor	10-1
10.2	Plan Termination Following Change in Control or Corporate Dissolution	10-1
10.3	Other Plan Terminations	10-1

ARTICLE 11 – THE TRUST		11-1
11.1	Establishment of Trust	11-1
11.2	Rabbi Trust	11-1
11.3	Investment of Trust Funds	11-1

ARTICLE 12 – PLAN ADMINISTRATION		12-1
12.1	Powers and Responsibilities of the Administrator	12-1
12.2	Claims and Review Procedures	12-2
12.3	Plan Administrative Costs	12-3

ARTICLE 13 – MISCELLANEOUS		13-1
13.1	Unsecured General Creditor of the Employer	13-1
13.2	Employer’s Liability	13-1
13.3	Limitation of Rights	13-1
13.4	Anti-Assignment	13-1
13.5	Facility of Payment	13-1
13.6	Notices	13-2
13.7	Tax Withholding	13-2
13.8	Indemnification	13-2
13.9	Successors	13-3
13.10	Disclaimer	13-3
13.11	Governing Law	13-3

iii

PREAMBLE

The Plan is intended to be a “plan which is unfunded and is maintained by an employer primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees” within the meaning of Sections 201(2), 301(a)(3) and 401(a)(1) of the Employee Retirement Income Security Act of 1974, as amended, or an “excess benefit plan” within the meaning of Section 3(36) of the Employee Retirement Income Security Act of 1974, as amended, or a combination of both. The Plan is further intended to conform with the requirements of Internal Revenue Code Section 409A and the final regulations issued thereunder and shall be interpreted, implemented and administered in a manner consistent therewith.

ARTICLE 1 – GENERAL

1.1

Plan. The Plan will be referred to by the name specified in the Adoption Agreement.

1.2

Effective Dates.

(a)

Original Effective Date. The Original Effective Date is the date as of which the Plan was initially adopted.

(b)

Amendment Effective Date. The Amendment Effective Date is the date specified in the Adoption Agreement as of which the Plan is amended and restated. Except to the extent otherwise provided herein or in the Adoption Agreement, the Plan shall apply to amounts deferred and benefit payments made on or after the Amendment Effective Date.

(c)

Special Effective Date. A Special Effective Date may apply to any given provision if so specified in Appendix A of the Adoption Agreement. A Special Effective Date will control over the Original Effective Date or Amendment Effective Date, whichever is applicable, with respect to such provision of the Plan.

1.3

Amounts Not Subject to Code Section 409A

Except as otherwise indicated by the Plan Sponsor in Section 1.01 of the Adoption Agreement, amounts deferred before January 1, 2005 that are earned and vested on December 31, 2004 will be separately accounted for and administered in accordance with the terms of the Plan as in effect on December 31, 2004.

1-1

ARTICLE 2 – DEFINITIONS

Pronouns used in the Plan are in the masculine gender but include the feminine gender unless the context clearly indicates otherwise. Wherever used herein, the following terms have the meanings set forth below, unless a different meaning is clearly required by the context:

2.1

“Account” means an account established for the purpose of recording amounts credited on behalf of a Participant and any income, expenses, gains, losses or distributions included thereon. The Account shall be a bookkeeping entry only and shall be utilized solely as a device for the measurement and determination of the amounts to be paid to a Participant or to the Participant’s Beneficiary pursuant to the Plan.

2.2

“Administrator” means the person or persons designated by the Plan Sponsor in Section 1.05 of the Adoption Agreement to be responsible for the administration of the Plan. If no Administrator is designated in the Adoption Agreement, the Administrator is the Plan Sponsor.

2.3

“Adoption Agreement” means the agreement adopted by the Plan Sponsor that establishes the Plan.

2.4

“Beneficiary” means the persons, trusts, estates or other entities entitled under Section 8.2 to receive benefits under the Plan upon the death of a Participant.

2.5

“Board” or “Board of Directors” means the Board of Directors of the Plan Sponsor.

2.6

“Bonus” means an amount of incentive remuneration payable by the Employer to a Participant.

2.7

“Change in Control” means the occurrence of an event involving the Plan Sponsor that is described in Section 9.7.

2.8

“Code” means the Internal Revenue Code of 1986, as amended.

2.9

“Compensation” has the meaning specified in Section 3.01 of the Adoption Agreement.

2.10

“Director” means a non-employee member of the Board who has been designated by the Employer as eligible to participate in the Plan.

2-1

2.11

“Disability” means a determination by the Administrator that the Participant is either (a) unable to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment which can be expected to result in death or can be expected to last for a continuous period of not less than 12 months, or (b) is, by reason of any medically determinable physical or mental impairment which can be expected to result in death or last for a continuous period of not less than twelve months, receiving income replacement benefits for a period of not less than three months under an accident and health plan covering employees of the Employer. A Participant will be considered to have incurred a Disability if he is determined to be totally disabled by the Social Security Administration or the Railroad Retirement Board.

2.12

“Eligible Employee” means an employee of the Employer who satisfies the requirements in Section 2.01 of the Adoption Agreement.

2.13

“Employer” means the Plan Sponsor and any other entity which is authorized by the Plan Sponsor to participate in and, in fact, does adopt the Plan.

2.14

“ERISA” means the Employee Retirement Income Security Act of 1974, as amended.

2.15

“Identification Date” means the date as of which Key Employees are determined which is specified in Section 1.06 of the Adoption Agreement.

2.16

“Key Employee” means an employee who satisfies the conditions set forth in Section 9.6.

2.17

“Participant” means an Eligible Employee or Director who commences participation in the Plan in accordance with Article 3.

2.18

“Plan” means the unfunded plan of deferred compensation set forth herein, including the Adoption Agreement and any trust agreement, as adopted by the Plan Sponsor and as amended from time to time.

2.19

“Plan Sponsor” means the entity identified in Section 1.03 of the Adoption Agreement or any successor by merger, consolidation or otherwise.

2.20

“Plan Year” means the period identified in Section 1.02 of the Adoption Agreement.

2.21

“Related Employer” means the Employer and (a) any corporation that is a member of a controlled group of corporations as defined in Code Section 414(b) that includes the Employer and (b) any trade or business that is under common control as defined in Code Section 414(c) that includes the Employer.

2-2

2.22

“Retirement” has the meaning specified in 6.01(f) of the Adoption Agreement.

2.23

“Separation from Service” means the date that the Participant dies, retires or otherwise has a termination of employment with respect to all entities comprising the Related Employer. A Separation from Service does not occur if the Participant is on military leave, sick leave or other bona fide leave of absence if the period of leave does not exceed six months or such longer period during which the Participant’s right to re-employment is provided by statute or contract. If the period of leave exceeds six months and the Participant’s right to re-employment is not provided either by statute or contract, a Separation from Service will be deemed to have occurred on the first day following the six-month period. If the period of leave is due to any medically determinable physical or mental impairment that can be expected to result in death or can be expected to last for a continuous period of not less than six months, where the impairment causes the Participant to be unable to perform the duties of his or her position of employment or any substantially similar position of employment, a 29 month period of absence may be substituted for the six month period.

Whether a termination of employment has occurred is based on whether the facts and circumstances indicate that the Related Employer and the Participant reasonably anticipated that no further services would be performed after a certain date or that the level of bona fide services the Participant would perform after such date (whether as an employee or as an independent contractor) would permanently decrease to no more than 20 percent of the average level of bona fide services performed (whether as an employee or an independent contractor) over the immediately preceding 36 month period (or the full period of services to the Related Employer if the employee has been providing services to the Related Employer for less than 36 months).

An independent contractor is considered to have experienced a Separation from Service with the Related Employer upon the expiration of the contract (or, in the case of more than one contract, all contracts) under which services are performed for the Related Employer if the expiration constitutes a good-faith and complete termination of the contractual relationship.

If a Participant provides services as both an employee and an independent contractor of the Related Employer, the Participant must separate from service both as an employee and as an independent contractor to be treated as having incurred a Separation from Service. If a Participant ceases providing services as an independent contractor and begins providing services as an employee, or ceases providing services as an employee and begins providing services as an independent contractor, the Participant will not be considered to have experienced a Separation from Service until the Participant has ceased providing services in both capacities.

2-3

If a Participant provides services both as an employee and as a member of the board of directors of a corporate Related Employer (or an analogous position with respect to a noncorporate Related Employer), the services provided as a director are not taken into account in determining whether the Participant has incurred a Separation from Service as an employee for purposes of a nonqualified deferred compensation plan in which the Participant participates as an employee that is not aggregated under Code Section 409A with any plan in which the Participant participates as a director.

If a Participant provides services both as an employee and as a member of the board of directors of a corporate related Employer (or an analogous position with respect to a noncorporate Related Employer), the services provided as an employee are not taken into account in determining whether the Participant has experienced a Separation from Service as a director for purposes of a nonqualified deferred compensation plan in which the Participant participates as a director that is not aggregated under Code Section 409A with any plan in which the Participant participates as an employee.

All determinations of whether a Separation from Service has occurred will be made in a manner consistent with Code Section 409A and the final regulations thereunder.

2.24

“Unforeseeable Emergency” means a severe financial hardship of the Participant resulting from an illness or accident of the Participant, the Participant’s spouse, the Participant’s Beneficiary, or the Participant’s dependent (as defined in Code Section 152, without regard to Code section 152(b)(1), (b)(2) and (d)(1)(B); loss of the Participant’s property due to casualty; or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Participant.

2.25

“Valuation Date” means each business day of the Plan Year that the New York Stock Exchange is open.

2.26

“Years of Service” means each one year period for which the Participant receives service credit in accordance with the provisions of Section 7.01(d) of the Adoption Agreement.

2-4

ARTICLE 3 – PARTICIPATION

3.1

Participation. The Participants in the Plan shall be those Directors and employees of the Employer who satisfy the requirements of Section 2.01 of the Adoption Agreement.

3.2

Termination of Participation. The Administrator may terminate a Participant’s participation in the Plan in a manner consistent with Code Section 409A. If the Employer terminates a Participant’s participation before the Participant experiences a Separation from Service the Participant’s vested Accounts shall be paid in accordance with the provisions of Article 9.

3-1

ARTICLE 4 – PARTICIPANT ELECTIONS

4.1

Deferral Agreement. If permitted by the Plan Sponsor in accordance with Section 4.01 of the Adoption Agreement, each Eligible Employee and Director may elect to defer his Compensation within the meaning of Section 3.01 of the Adoption Agreement by executing in writing or electronically, a deferral agreement in accordance with rules and procedures established by the Administrator and the provisions of this Article 4.

A new deferral agreement must be timely executed for each Plan Year during which the Eligible Employee or Director desires to defer Compensation. An Eligible Employee or Director who does not timely execute a deferral agreement shall be deemed to have elected zero deferrals of Compensation for such Plan Year.

A deferral agreement may be changed or revoked during the period specified by the Administrator. Except as provided in Section 9.3 or in Section 4.01(c) of the Adoption Agreement, a deferral agreement becomes irrevocable at the close of the specified period.

4.2

Amount of Deferral. An Eligible Employee or Director may elect to defer Compensation in any amount permitted by Section 4.01(a) of the Adoption Agreement.

4.3

Timing of Election to Defer. Each Eligible Employee or Director who desires to defer Compensation otherwise payable during a Plan Year must execute a deferral agreement within the period preceding the Plan Year specified by the Administrator. Each Eligible Employee who desires to defer Compensation that is a Bonus must execute a deferral agreement within the period preceding the Plan Year during which the Bonus is earned that is specified by the Administrator, except that if the Bonus can be treated as performance based compensation as described in Code Section 409A(a)(4)(B)(iii), the deferral agreement may be executed within the period specified by the Administrator, which period, in no event, shall end after the date which is six months prior to the end of the period during which the Bonus is earned, provided the Participant has performed services continuously from the later of the beginning of the performance period or the date the performance criteria are established through the date the Participant executed the deferral agreement and provided further that the compensation has not yet become ‘readily ascertainable’ within the meaning of Reg. Sec 1.409A-2(a)(8). In addition, if the Compensation qualifies as ‘fiscal year compensation’ within the meaning of Reg. Sec. 1.409A-2(a)(6), the deferral agreement may be made not later than the end of the Employer’s taxable year immediately preceding the first taxable year of the Employer in which any services are performed for which such Compensation is payable.

4-1

Except as otherwise provided below, an employee who is classified or designated as an Eligible Employee during a Plan Year or a Director who is designated as eligible to participate during a Plan Year may elect to defer Compensation otherwise payable during the remainder of such Plan Year in accordance with the rules of this Section 4.3 by executing a deferral agreement within the thirty (30) day period beginning on the date the employee is classified or designated as an Eligible Employee or the date the Director is designated as eligible, whichever is applicable, if permitted by Section 4.01(b)(ii) of the Adoption Agreement. If Compensation is based on a specified performance period that begins before the Eligible Employee or Director executes his deferral agreement, the election will be deemed to apply to the portion of such Compensation equal to the total amount of Compensation for the performance period multiplied by the ratio of the number of days remaining in the performance period after the election becomes irrevocable and effective over the total number of days in the performance period. The rules of this paragraph shall not apply unless the Eligible Employee or Director can be treated as initially eligible in accordance with Reg. Sec. 1.409A-2(a)(7).

4.4

Election of Payment Schedule and Form of Payment.

All elections of a payment schedule and a form of payment will be made in accordance with rules and procedures established by the Administrator and the provisions of this Section 4.4.

(a) If the Plan Sponsor has elected to permit annual distribution elections in accordance with Section 6.01(h) of the Adoption Agreement the following rules apply. At the time an Eligible Employee or Director completes a deferral agreement, the Eligible Employee or Director must elect a distribution event (which includes a specified time) and a form of payment for the Compensation subject to the deferral agreement from among the options the Plan Sponsor has made available for this purpose and which are specified in 6.01(b) of the Adoption Agreement. Prior to the time required by Reg. Sec. 1.409A-2, the Eligible Employee or Director shall elect a distribution event (which includes a specified time) and a form of payment for any Employer contributions that may be credited to the Participant’s Account during the Plan Year. If an Eligible Employee or Director fails to elect a distribution event, he shall be deemed to have elected Separation from Service as the distribution event. If he fails to elect a form of payment, he shall be deemed to have elected a lump sum form of payment.

4-2

(b) If the Plan Sponsor has elected not to permit annual distribution elections in accordance with Section 6.01(h) of the Adoption Agreement the following rules apply. At the time an Eligible Employee or Director first completes a deferral agreement but in no event later than the time required by Reg. Sec. 1.409A-2, the Eligible Employee or Director must elect a distribution event (which includes a specified time) and a form of payment for amounts credited to his Account from among the options the Plan Sponsor has made available for this purpose and which are specified in Section 6.01(b) of the Adoption Agreement. If an Eligible Employee or Director fails to elect a distribution event, he shall be deemed to have elected Separation from Service in the distribution event. If the fails to elect a form of payment, he shall be deemed to have elected a lump sum form of payment.

4-3

ARTICLE 5 – EMPLOYER CONTRIBUTIONS

5.1

Matching Contributions. If elected by the Plan Sponsor in Section 5.01(a) of the Adoption Agreement, the Employer will credit the Participant’s Account with a matching contribution determined in accordance with the formula specified in Section 5.01(a) of the Adoption Agreement. The matching contribution will be treated as allocated to the Participant’s Account at the time specified in Section 5.01(a)(iii) of the Adoption Agreement.

5.2

Other Contributions. If elected by the Plan Sponsor in Section 5.01(b) of the Adoption Agreement, the Employer will credit the Participant’s Account with a contribution determined in accordance with the formula or method specified in Section 5.01(b) of the Adoption Agreement. The contribution will be treated as allocated to the Participant’s Account at the time specified in Section 5.01(b)(iii) of the Adoption Agreement.

5-1

ARTICLE 6 – ACCOUNTS AND CREDITS

6.1

Establishment of Account. For accounting and computational purposes only, the Administrator will establish and maintain an Account on behalf of each Participant which will reflect the credits made pursuant to Section 6.2, distributions or withdrawals, along with the earnings, expenses, gains and losses allocated thereto, attributable to the hypothetical investments made with the amounts in the Account as provided in Article 7. The Administrator will establish and maintain such other records and accounts, as it decides in its discretion to be reasonably required or appropriate to discharge its duties under the Plan.

6.2

Credits to Account. A Participant’s Account will be credited for each Plan Year with the amount of his elective deferrals under Section 4.1 at the time the amount subject to the deferral election would otherwise have been payable to the Participant and the amount of Employer contributions treated as allocated on his behalf under Article 5.

6-1

ARTICLE 7 – INVESTMENT OF CONTRIBUTIONS

7.1

Investment Options. The amount credited to each Account shall be treated as invested in the investment options designated for this purpose by the Administrator.

7.2

Adjustment of Accounts. The amount credited to each Account shall be adjusted for hypothetical investment earnings, expenses, gains or losses in an amount equal to the earnings, expenses, gains or losses attributable to the investment options selected by the party designated in Section 9.01 of the Adoption Agreement from among the investment options provided in Section 7.1. If permitted by Section 9.01 of the Adoption Agreement, a Participant (or the Participant’s Beneficiary after the death of the Participant) may, in accordance with rules and procedures established by the Administrator, select the investments from among the options provided in Section 7.1 to be used for the purpose of calculating future hypothetical investment adjustments to the Account or to future credits to the Account under Section 6.2 effective as of the Valuation Date coincident with or next following notice to the Administrator. Each Account shall be adjusted as of each Valuation Date to reflect: (a) the hypothetical earnings, expenses, gains and losses described above; (b) amounts credited pursuant to Section 6.2; and (c) distributions or withdrawals. In addition, each Account may be adjusted for its allocable share of the hypothetical costs and expenses associated with the maintenance of the hypothetical investments provided in Section 7.1.

7-1

ARTICLE 8 – RIGHT TO BENEFITS

8.1

Vesting. A Participant, at all times, has a 100% nonforfeitable interest in the amounts credited to his Account attributable to his elective deferrals made in accordance with Section 4.1.

A Participant’s right to the amounts credited to his Account attributable to Employer contributions made in accordance with Article 5 shall be determined in accordance with the relevant schedule and provisions in Section 7.01 of the Adoption Agreement. Upon a Separation from Service and after application of the provisions of Section 7.01 of the Adoption Agreement, the Participant shall forfeit the nonvested portion of his Account.

8.2

Death. The Plan Sponsor may elect to accelerate vesting upon the death of the Participant in accordance with Section 7.01(c) of the Adoption Agreement and/or to accelerate distributions upon Death in accordance with Section 6.01(b) or Section 6.01(d) of the Adoption Agreement. If the Plan Sponsor does not elect to accelerate distributions upon death in accordance with Section 6.01(b) or Section 6.01(d) of the Adoption Agreement, the vested amount credited to the Participant’s Account will be paid in accordance with the provisions of Article 9.

A Participant may designate a Beneficiary or Beneficiaries, or change any prior designation of Beneficiary or Beneficiaries in accordance with rules and procedures established by the Administrator.

A copy of the death notice or other sufficient documentation must be filed with and approved by the Administrator. If upon the death of the Participant there is, in the opinion of the Administrator, no designated Beneficiary for part or all of the Participant’s vested Account, such amount will be paid to his estate (such estate shall be deemed to be the Beneficiary for purposes of the Plan) in accordance with the provisions of Article 9.

8.3

Disability. If the Plan Sponsor has elected to accelerate vesting upon the occurrence of a Disability in accordance with Section 7.01(c) of the Adoption Agreement and/or to permit distributions upon Disability in accordance with Section 6.01(b) or Section 6.01(d) of the Adoption Agreement, the determination of whether a Participant has incurred a Disability shall be made by the Administrator in its sole discretion in a manner consistent with the requirements of Code Section 409A.

8-1

ARTICLE 9 – DISTRIBUTION OF BENEFITS

9.1

Amount of Benefits. The vested amount credited to a Participant’s Account as determined under Articles 6, 7 and 8 shall determine and constitute the basis for the value of benefits payable to the Participant under the Plan.

9.2

Method and Timing of Distributions. Except as otherwise provided in this Article 9, distributions under the Plan shall be made in accordance with the elections made or deemed made by the Participant under Article 4. Subject to the provisions of Section 9.6 requiring a six month delay for certain distributions to Key Employees, distributions following a payment event shall commence at the time specified in Section 6.01(a) of the Adoption Agreement. If permitted by Section 6.01(g) of the Adoption Agreement, a Participant may elect, at least twelve months before a scheduled distribution event, to delay the payment date for a minimum period of sixty months from the originally scheduled date of payment, provided the election does not take effect for at least twelve months from the date on which the election is made. The distribution election change must be made in accordance with procedures and rules established by the Administrator. The Participant may, at the same time the date of payment is deferred, change the form of payment but such change in the form of payment may not effect an acceleration of payment in violation of Code Section 409A or the provisions of Reg. Sec. 1.409A-2(b). For purposes of this Section 9.2, a series of installment payments is always treated as a single payment and not as a series of separate payments.

9.3

Unforeseeable Emergency. A Participant may request a distribution due to an Unforeseeable Emergency if the Plan Sponsor has elected to permit Unforeseeable Emergency withdrawals under Section 8.01(a) of the Adoption Agreement. The request must be in writing and must be submitted to the Administrator along with evidence that the circumstances constitute an Unforeseeable Emergency. The Administrator has the discretion to require whatever evidence it deems necessary to determine whether a distribution is warranted, and may require the Participant to certify that the need cannot be met from other sources reasonably available to the Participant. Whether a Participant has incurred an Unforeseeable Emergency will be determined by the Administrator on the basis of the relevant facts and circumstances in its sole discretion, but, in no event, will an Unforeseeable Emergency be deemed to exist if the hardship can be relieved: (a) through reimbursement or compensation by insurance or otherwise, (b) by liquidation of the Participant’s assets to the

9-1

extent such liquidation would not itself cause severe financial hardship, or (c) by cessation of deferrals under the Plan. A distribution due to an Unforeseeable Emergency must be limited to the amount reasonably necessary to satisfy the emergency need and may include any amounts necessary to pay any federal, state, foreign or local income taxes and penalties reasonably anticipated to result from the distribution. The distribution will be made in the form of a single lump sum cash payment. If permitted by Section 8.01(b) of the Adoption Agreement, a Participant’s deferral elections for the remainder of the Plan Year will be cancelled upon a withdrawal due to an Unforeseeable Emergency. If the payment of all or any portion of the Participant’s vested Account is being delayed in accordance with Section 9.6 at the time he experiences an Unforeseeable Emergency, the amount being delayed shall not be subject to the provisions of this Section 9.3 until the expiration of the six month period of delay required by section 9.6.

9.4

Payment Election Overrides. If the Plan Sponsor has elected one or more payment election overrides in accordance with Section 6.01(d) of the Adoption Agreement, the following provisions apply. Upon the occurrence of the first event selected by the Plan Sponsor, the remaining vested amount credited to the Participant’s Account shall be paid in the form designated to the Participant or his Beneficiary regardless of whether the Participant had made different elections of time and /or form of payment or whether the Participant was receiving installment payments at the time of the event.

9.5

Cashouts Of Amounts Not Exceeding Stated Limit. If the vested amount credited to the Participant’s Account does not exceed the limit established for this purpose by the Plan Sponsor in Section 6.01(e) of the Adoption Agreement at the time he incurs a Separation from Service for any reason, the Employer shall distribute such amount to the Participant at the time specified in Section 6.01(a) of the Adoption Agreement in a single lump sum cash payment following such Separation from Service regardless of whether the Participant had made different elections of time or form of payment as to the vested amount credited to his Account or whether the Participant was receiving installments at the time of such termination. A Participant’s Account, for purposes of this Section 9.5, shall include any amounts described in Section 1.3.

9.6

Required Delay in Payment to Key Employees . Except as otherwise provided in this Section 9.6, a distribution made on account of Separation from Service (or Retirement, if applicable) to a Participant who is a Key Employee as of the date of his Separation from Service (or Retirement, if applicable) shall not be made before the date which is six months after the Separation from Service (or Retirement, if applicable). If payments to a

9-2

Key Employee are delayed in accordance with this Section 9.6, the payments to which the Key Employee would otherwise have been entitled during the six month period shall be accumulated and paid in a single lump sum at the time specified in Section 6.01(a) of the Adoption Agreement after the six month period elapses.

(a) A Participant is treated as a Key Employee if (i) he is employed by a Related Employer any of whose stock is publicly traded on an established securities market, and (ii) he satisfies the requirements of Code Section 416(i)(1)(A)(i), (ii) or (iii), determined without regard to Code Section 416(i)(5), at any time during the twelve month period ending on the Identification Date.

(b) A Participant who is a Key Employee on an Identification Date shall be treated as a Key Employee for purposes of the six month delay in distributions for the twelve month period beginning on the first day of a month no later than the fourth month following the Identification Date. The Identification Date and the effective date of the delay in distributions shall be determined in accordance with Section 1.06 of the Adoption Agreement.

(c) The Plan Sponsor may elect to apply an alternative method to identify Participants who will be treated as Key Employees for purposes of the six month delay in distributions if the method satisfies each of the following requirements. The alternative method is reasonably designed to include all Key Employees, is an objectively determinable standard providing no direct or indirect election to any Participant regarding its application, and results in either all Key Employees or no more than 200 Key Employees being identified in the class as of any date. Use of an alternative method that satisfies the requirements of this Section 9.6(c ) will not be treated as a change in the time and form of payment for purposes of Reg. Sec. 1.409A-2(b).

(d) The six month delay does not apply to payments described in Section 9.9(a),(b) or (d) or to payments that occur after the death of the Participant. If the payment of all or any portion of the Participant’s vested Account is being delayed in accordance with this Section 9.6 at the time he incurs a Disability which would otherwise require a distribution under the terms of the Plan, no amount shall be paid until the expiration of the six month period of delay required by this Section 9.6.

9-3

9.7

Change in Control. If the Plan Sponsor has elected to permit distributions upon a Change in Control, the following provisions shall apply. A distribution made upon a Change in Control will be made at the time specified in Section 6.01(a) of the Adoption Agreement in the form elected by the Participant in accordance with the procedures described in Article 4. Alternatively, if the Plan Sponsor has elected in accordance with Section 11.02 of the Adoption Agreement to require distributions upon a Change in Control, the Participant’s remaining vested Account shall be paid to the Participant or the Participant’s Beneficiary at the time specified in Section 6.01(a) of the Adoption Agreement as a single lump sum payment. A Change in Control, for purposes of the Plan, will occur upon a change in the ownership of the Plan Sponsor, a change in the effective control of the Plan Sponsor or a change in the ownership of a substantial portion of the assets of the Plan Sponsor, but only if elected by the Plan Sponsor in Section 11.03 of the Adoption Agreement. The Plan Sponsor, for this purpose, includes any corporation identified in this Section 9.7. All distributions made in accordance with this Section 9.7 are subject to the provisions of Section 9.6.

If a Participant continues to make deferrals in accordance with Article 4 after he has received a distribution due to a Change in Control, the residual amount payable to the Participant shall be paid at the time and in the form specified in the elections he makes in accordance with Article 4 or upon his death or Disability as provided in Article 8.

Whether a Change in Control has occurred will be determined by the Administrator in accordance with the rules and definitions set forth in this Section 9.7. A distribution to the Participant will be treated as occurring upon a Change in Control if the Plan Sponsor terminates the Plan in accordance with Section 10.2 and distributes the Participant’s benefits within twelve months of a Change in Control as provided in Section 10.3.

(a)

Relevant Corporations. To constitute a Change in Control for purposes of the Plan, the event must relate to (i) the corporation for whom the Participant is performing services at the time of the Change in Control, (ii) the corporation that is liable for the payment of the Participant’s benefits under the Plan (or all corporations liable if more than one corporation is liable) but only if either the deferred compensation is attributable to the performance of services by the Participant for such corporation (or corporations) or there is a bona fide business purpose for such corporation (or corporations) to be liable for such payment and, in either case, no significant purpose of making such corporation (or corporations) liable for such payment is the avoidance of federal income tax, or (iii) a corporation that is a majority shareholder of a corporation identified in (i) or (ii), or any corporation in a chain of corporations in which each corporation is a majority shareholder of another corporation in the chain, ending in a corporation identified in (i) or (ii). A majority shareholder is defined as a shareholder owning more than fifty percent (50%) of the total fair market value and voting power of such corporation.

9-4

(b)

Stock Ownership. Code Section 318(a) applies for purposes of determining stock ownership. Stock underlying a vested option is considered owned by the individual who owns the vested option (and the stock underlying an unvested option is not considered owned by the individual who holds the unvested option). If, however, a vested option is exercisable for stock that is not substantially vested (as defined by Treasury Regulation Section 1.83-3(b) and (j)) the stock underlying the option is not treated as owned by the individual who holds the option.

(c)

Change in the Ownership of a Corporation. A change in the ownership of a corporation occurs on the date that any one person or more than one person acting as a group, acquires ownership of stock of the corporation that, together with stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of such corporation. If any one person or more than one person acting as a group is considered to own more than fifty percent (50%) of the total fair market value or total voting power of the stock of a corporation, the acquisition of additional stock by the same person or persons is not considered to cause a change in the ownership of the corporation (or to cause a change in the effective control of the corporation as discussed below in Section 9.7(d)). An increase in the percentage of stock owned by any one person, or persons acting as a group, as a result of a transaction in which the corporation acquires its stock in exchange for property will be treated as an acquisition of stock. Section 9.7(c) applies only when there is a transfer of stock of a corporation (or issuance of stock of a corporation) and stock in such corporation remains outstanding after the transaction. For purposes of this Section 9.7(c), persons will not be considered to be acting as a group solely because they purchase or own stock of the same corporation at the same time or as a result of a public offering. Persons will, however, be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar business transaction with the corporation. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation only with respect to ownership in that corporation prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.

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(d)

Change in the effective control of a corporation. A change in the effective control of a corporation occurs on the date that either (i) any one person, or more than one person acting as a group, acquires (or has acquired during the twelve month period ending on the date of the most recent acquisition by such person or persons) ownership of stock of the corporation possessing thirty percent (30%) or more of the total voting power of the stock of such corporation, or (ii) a majority of members of the corporation’s board of directors is replaced during any twelve month period by directors whose appointment or election is not endorsed by a majority of the members of the corporation’s board of directors prior to the date of the appointment or election, provided that for purposes of this paragraph (ii), the term corporation refers solely to the relevant corporation identified in Section 9.7(a) for which no other corporation is a majority shareholder for purposes of Section 9.7(a). In the absence of an event described in Section 9.7(d)(i) or (ii), a change in the effective control of a corporation will not have occurred. A change in effective control may also occur in any transaction in which either of the two corporations involved in the transaction has a change in the ownership of such corporation as described in Section 9.7(c) or a change in the ownership of a substantial portion of the assets of such corporation as described in Section 9.7(e). If any one person, or more than one person acting as a group, is considered to effectively control a corporation within the meaning of this Section 9.7(d), the acquisition of additional control of the corporation by the same person or persons is not considered to cause a change in the effective control of the corporation or to cause a change in the ownership of the corporation within the meaning of Section 9.7(c). For purposes of this Section 9.7(d), persons will or will not be considered to be acting as a group in accordance with rules similar to those set forth in Section 9.7(c) with the following exception. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in a corporation only with respect to the ownership in that corporation prior to the transaction giving rise to the change and not with respect to the ownership interest in the other corporation.

(e)

Change in the ownership of a substantial portion of a corporation’s assets. A change in the ownership of a substantial portion of a corporation’s assets occurs on the date that any one person, or more than one person acting as a group (as determined in accordance with rules similar to those set forth in Section 9.7(d)), acquires (or has acquired during the twelve month period ending on the date of the most recent acquisition by such person or persons) assets from the corporation that have a total gross fair market value

9-6

equal to or more than forty percent (40%) of the total gross fair market value of all of the assets of the corporation immediately prior to such acquisition or acquisitions. For this purpose, gross fair market value means the value of the assets of the corporation or the value of the assets being disposed of determined without regard to any liabilities associated with such assets. There is no Change in Control event under this Section 9.7(e) when there is a transfer to an entity that is controlled by the shareholders of the transferring corporation immediately after the transfer. A transfer of assets by a corporation is not treated as a change in ownership of such assets if the assets are transferred to (i) a shareholder of the corporation (immediately before the asset transfer) in exchange for or with respect to its stock, (ii) an entity, fifty percent (50%) or more of the total value or voting power of which is owned, directly or indirectly, by the corporation, (iii) a person, or more than one person acting as a group, that owns, directly or indirectly, fifty percent (50%) or more of the total value or voting power of all the outstanding stock of the corporation, or (iv) an entity, at least fifty (50%) of the total value or voting power of which is owned, directly or indirectly, by a person described in Section 9.7(e)(iii). For purposes of the foregoing, and except as otherwise provided, a person’s status is determined immediately after the transfer of assets.

9.8

Permissible Delays in Payment. Distributions may be delayed beyond the date payment would otherwise occur in accordance with the provisions of Articles 8 and 9 in any of the following circumstances as long as the Employer treats all payments to similarly situated Participants on a reasonably consistent basis.

(a)

The Employer may delay payment if it reasonably anticipates that its deduction with respect to such payment would be limited or eliminated by the application of Code Section 162(m). Payment must be made during the Participant’s first taxable year in which the Employer reasonably anticipates, or should reasonably anticipate, that if the payment is made during such year the deduction of such payment will not be barred by the application of Code Section 162(m) or during the period beginning with the Participant’s Separation from Service and ending on the later of the last day of the Employer’s taxable year in which the Participant separates from service or the 15th day of the third month following the Participant’s Separation from Service. If a scheduled payment to a Participant is delayed in accordance with this Section 9.8(a), all scheduled payments to the Participant that could be delayed in accordance with this Section 9.8(a) will also be delayed.

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(b)

The Employer may also delay payment if it reasonably anticipates that the making of the payment will violate federal securities laws or other applicable laws provided payment is made at the earliest date on which the Employer reasonably anticipates that the making of the payment will not cause such violation.

(c)

The Employer reserves the right to amend the Plan to provide for a delay in payment upon such other events and conditions as the Secretary of the Treasury may prescribe in generally applicable guidance published in the Internal Revenue Bulletin.

9.9

Permitted Acceleration of Payment . The Employer may permit acceleration of the time or schedule of any payment or amount scheduled to be paid pursuant to a payment under the Plan provided such acceleration would be permitted by the provisions of Reg. Sec. 1.409A-3(j)(4), including the following events:

(a)

Domestic Relations Order. A payment may be accelerated if such payment is made to an alternate payee pursuant to and following the receipt and qualification of a domestic relations order as defined in Code Section 414(p).

(b)

Compliance with Ethics Agreements and Legal Requirements. A payment may be accelerated as may be necessary to comply with ethics agreements with the Federal government or as may be reasonably necessary to avoid the violation of Federal, state, local or foreign ethics law or conflicts of laws, in accordance with the requirements of Code Section 409A.

(c)

De Minimis Amounts. A payment will be accelerated if (i) the amount of the payment is not greater than the applicable dollar amount under Code Section 402(g)(1)(B), (ii) at the time the payment is made the amount constitutes the Participant’s entire interest under the Plan and all other plans that are aggregated with the Plan under Reg. Sec. 1.409A-1(c)(2).

(d)

FICA Tax. A payment may be accelerated to the extent required to pay the Federal Insurance Contributions Act tax imposed under Code Sections 3101, 3121(a) and 3121(v)(2) of the Code with respect to compensation deferred under the Plan (the “FICA Amount”). Additionally, a payment may be accelerated to pay the income tax on wages imposed under Code Section 3401 of the Code on the FICA Amount and to pay the additional income tax at source on wages attributable to the pyramiding Code Section 3401 wages and taxes. The total payment under this subsection (d) may not exceed the aggregate of the FICA Amount and the income tax withholding related to the FICA Amount.

9-8

(e)

Section 409A Additional Tax. A payment may be accelerated if the Plan fails to meet the requirements of Code Section 409A; provided that such payment may not exceed the amount required to be included in income as a result of the failure to comply with the requirements of Code Section 409A.

(f)

Offset. A payment may be accelerated in the Employer’s discretion as satisfaction of a debt of the Participant to the Employer, where such debt is incurred in the ordinary course of the service relationship between the Participant and the Employer, the entire amount of the reduction in any of the Employer’s taxable years does not exceed $5,000, and the reduction is made at the same time and in the same amount as the debt otherwise would have been due and collected from the Participant.

(g)

Other Events. A payment may be accelerated in the Administrator’s discretion in connection with such other events and conditions as permitted by Code Section 409A.

9-9

ARTICLE 10 – AMENDMENT AND TERMINATION

10.1

Amendment by Plan Sponsor. The Plan Sponsor reserves the right to amend the Plan (for itself and each Employer) through action of its Board of Directors. No amendment can directly or indirectly deprive any current or former Participant or Beneficiary of all or any portion of his Account which had accrued and vested prior to the amendment.

10.2

Plan Termination Following Change in Control or Corporate Dissolution. If so elected by the Plan Sponsor in 11.01 of the Adoption Agreement, the Plan Sponsor reserves the right to terminate the Plan and distribute all amounts credited to all Participant Accounts within the 30 days preceding or the twelve months following a Change in Control as determined in accordance with the rules set forth in Section 9.7. For this purpose, the Plan will be treated as terminated only if all agreements, methods, programs and other arrangements sponsored by the Related Employer immediately after the Change in Control which are treated as a single plan under Reg. Sec. 1.409A-1(c)(2) are also terminated so that all participants under the Plan and all similar arrangements are required to receive all amounts deferred under the terminated arrangements within twelve months of the date the Plan Sponsor irrevocably takes all necessary action to terminate the arrangements. In addition, the Plan Sponsor reserves the right to terminate the Plan within twelve months of a corporate dissolution taxed under Code Section 331 or with the approval of a bankruptcy court pursuant to 11 U. S. C. Section 503(b)(1)(A) provided that amounts deferred under the Plan are included in the gross incomes of Participants in the latest of (a) the calendar year in which the termination and liquidation occurs, (b) the first calendar year in which the amount is no longer subject to a substantial risk of forfeiture, or (c) the first calendar year in which payment is administratively practicable.

10.3

Other Plan Terminations. The Plan Sponsor retains the discretion to terminate the Plan if (a) all arrangements sponsored by the Plan Sponsor that would be aggregated with any terminated arrangement under Code Section 409A and Reg. Sec. 1.409A-1(c)(2) are terminated, (b) no payments other than payments that would be payable under the terms of the arrangements if the termination had not occurred are made within twelve months of the termination of the arrangements, (c) all payments are made within twenty-four months of the date the Plan Sponsor takes all necessary action to irrevocably terminate and liquidate the arrangements, (d) the Plan Sponsor does not adopt a new arrangement that would be aggregated with any terminated arrangement under Code Section 409A and the regulations thereunder at any time within the three year period following the date of termination of the arrangement, and (e) the termination does not occur proximate to a downturn in the financial health

10-1

of the Plan sponsor. The Plan Sponsor also reserves the right to amend the Plan to provide that termination of the Plan will occur under such conditions and events as may be prescribed by the Secretary of the Treasury in generally applicable guidance published in the Internal Revenue Bulletin.

10-2

ARTICLE 11 – THE TRUST

11.1

Establishment of Trust. The Plan Sponsor may but is not required to establish a trust to hold amounts which the Plan Sponsor may contribute from time to time to correspond to some or all amounts credited to Participants under Section 6.2. In the event that the Plan Sponsor wishes to establish a trust to provide a source of funds for the payment of Plan benefits, any such trust shall be constructed to constitute an unfunded arrangement that does not affect the status of the Plan as an unfunded plan for purposes of Title I of ERISA and the Code. If the Plan Sponsor elects to establish a trust in accordance with Section 10.01 of the Adoption Agreement, the provisions of Sections 11.2 and 11.3 shall become operative.

11.2

Rabbi Trust. Any trust established by the Plan Sponsor shall be between the Plan Sponsor and a trustee pursuant to a separate written agreement under which assets are held, administered and managed, subject to the claims of the Plan Sponsor’s creditors in the event of the Plan Sponsor’s insolvency. The trust is intended to be treated as a rabbi trust in accordance with existing guidance of the Internal Revenue Service, and the establishment of the trust shall not cause the Participant to realize current income on amounts contributed thereto. The Plan Sponsor must notify the trustee in the event of a bankruptcy or insolvency.

11.3

Investment of Trust Funds. Any amounts contributed to the trust by the Plan Sponsor shall be invested by the trustee in accordance with the provisions of the trust and the instructions of the Administrator. Trust investments need not reflect the hypothetical investments selected by Participants under Section 7.1 for the purpose of adjusting Accounts and the earnings or investment results of the trust need not affect the hypothetical investment adjustments to Participant Accounts under the Plan.

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ARTICLE 12 – PLAN ADMINISTRATION

12.1

Powers and Responsibilities of the Administrator. The Administrator has the full power and the full responsibility to administer the Plan in all of its details, subject, however, to the applicable requirements of ERISA. The Administrator’s powers and responsibilities include, but are not limited to, the following:

(a)

To make and enforce such rules and procedures as it deems necessary or proper for the efficient administration of the Plan;

(b)

To interpret the Plan, its interpretation thereof to be final, except as provided in Section 12.2, on all persons claiming benefits under the Plan;

(c)

To decide all questions concerning the Plan and the eligibility of any person to participate in the Plan;

(d)

To administer the claims and review procedures specified in Section 12.2;

(e)

To compute the amount of benefits which will be payable to any Participant, former Participant or Beneficiary in accordance with the provisions of the Plan;

(f)

To determine the person or persons to whom such benefits will be paid;

(g)

To authorize the payment of benefits;

(h)

To comply with the reporting and disclosure requirements of Part 1 of Subtitle B of Title I of ERISA;

(i)

To appoint such agents, counsel, accountants, and consultants as may be required to assist in administering the Plan;

(j)

By written instrument, to allocate and delegate its responsibilities, including the formation of an Administrative Committee to administer the Plan.

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12.2

Claims and Review Procedures.

(a)

Claims Procedure.

If any person believes he is being denied any rights or benefits under the Plan, such person may file a claim in writing with the Administrator. If any such claim is wholly or partially denied, the Administrator will notify such person of its decision in writing. Such notification will contain (i) specific reasons for the denial, (ii) specific reference to pertinent Plan provisions, (iii) a description of any additional material or information necessary for such person to perfect such claim and an explanation of why such material or information is necessary, and (iv) a description of the Plan’s review procedures and the time limits applicable to such procedures, including a statement of the person’s right to bring a civil action following an adverse decision on review. Such notification will be given within 90 days (45 days in the case of a claim regarding Disability) after the claim is received by the Administrator. The Administrator may extend the period for providing the notification by 90 days (30 days in the case of a claim regarding Disability) if special circumstances require an extension of time for processing the claim and if written notice of such extension and circumstance is given to such person within the initial 90 day period (45 day period in the case of a claim regarding Disability). If such notification is not given within such period, the claim will be considered denied as of the last day of such period and such person may request a review of his claim.

(b)

Review Procedure.

Within 60 days (180 days in the case of a claim regarding Disability) after the date on which a person receives a written notification of denial of claim (or, if written notification is not provided, within 60 days (180 days in the case of a claim regarding Disability) of the date denial is considered to have occurred), such person (or his duly authorized representative) may (i) file a written request with the Administrator for a review of his denied claim and of pertinent documents and (ii) submit written issues and comments to the Administrator. The Administrator will notify such person of its decision in writing. Such notification will be written in a manner calculated to be understood by such person and will contain specific reasons for the decision as well as specific references to pertinent Plan provisions. The notification will explain that the person is entitled to receive, upon request and free of charge,

12-2

reasonable access to and copies of all pertinent documents and has the right to bring a civil action following an adverse decision on review. The decision on review will be made within 60 days (45 days in the case of a claim regarding Disability). The Administrator may extend the period for making the decision on review by 60 days (45 days in the case of a claim regarding Disability) if special circumstances require an extension of time for processing the request such as an election by the Administrator to hold a hearing, and if written notice of such extension and circumstances is given to such person within the initial 60-day period (45 days in the case of a claim regarding Disability). If the decision on review is not made within such period, the claim will be considered denied.

(c)

Exhaustion of Claims Procedures and Right to Bring Legal Claim

No action at law or equity shall be brought more than one (1) year after the Administrator’s affirmation of a denial of a claim, or, if earlier, more than four (4) years after the facts or events giving rising to the claimant’s allegation(s) or claim(s) first occurred.

12.3

Plan Administrative Costs. All reasonable costs and expenses (including legal, accounting, and employee communication fees) incurred by the Administrator in administering the Plan shall be paid by the Plan to the extent not paid by the Employer.

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ARTICLE 13 – MISCELLANEOUS

13.1

Unsecured General Creditor of the Employer. Participants and their Beneficiaries, heirs, successors and assigns shall have no legal or equitable rights, interests or claims in any property or assets of the Employer. For purposes of the payment of benefits under the Plan, any and all of the Employer’s assets shall be, and shall remain, the general, unpledged, unrestricted assets of the Employer. Each Employer’s obligation under the Plan shall be merely that of an unfunded and unsecured promise to pay money in the future.

13.2

Employer’s Liability . Each Employer’s liability for the payment of benefits under the Plan shall be defined only by the Plan and by the deferral agreements entered into between a Participant and the Employer. An Employer shall have no obligation or liability to a Participant under the Plan except as provided by the Plan and a deferral agreement or agreements. An Employer shall have no liability to Participants employed by other Employers.

13.3

Limitation of Rights . Neither the establishment of the Plan, nor any amendment thereof, nor the creation of any fund or account, nor the payment of any benefits, will be construed as giving to the Participant or any other person any legal or equitable right against the Employer, the Plan or the Administrator, except as provided herein; and in no event will the terms of employment or service of the Participant be modified or in any way affected hereby.

13.4

Anti-Assignment . Except as may be necessary to fulfill a domestic relations order within the meaning of Code Section 414(p), none of the benefits or rights of a Participant or any Beneficiary of a Participant shall be subject to the claim of any creditor. In particular, to the fullest extent permitted by law, all such benefits and rights shall be free from attachment, garnishment, or any other legal or equitable process available to any creditor of the Participant and his or her Beneficiary. Neither the Participant nor his or her Beneficiary shall have the right to alienate, anticipate, commute, pledge, encumber, or assign any of the payments which he or she may expect to receive, contingently or otherwise, under the Plan, except the right to designate a Beneficiary to receive death benefits provided hereunder. Notwithstanding the preceding, the benefit payable from a Participant’s Account may be reduced, at the discretion of the administrator, to satisfy any debt or liability to the Employer.

13.5

Facility of Payment . If the Administrator determines, on the basis of medical reports or other evidence satisfactory to the Administrator, that the recipient of any benefit payments under the Plan is incapable of handling his affairs by reason of minority, illness, infirmity or other incapacity, the Administrator may

13-1

direct the Employer to disburse such payments to a person or institution designated by a court which has jurisdiction over such recipient or a person or institution otherwise having the legal authority under State law for the care and control of such recipient. The receipt by such person or institution of any such payments therefore, and any such payment to the extent thereof, shall discharge the liability of the Employer, the Plan and the Administrator for the payment of benefits hereunder to such recipient.

13.6

Notices. Any notice or other communication to the Employer or Administrator in connection with the Plan shall be deemed delivered in writing if addressed to the Plan Sponsor at the address specified in Section 1.03 of the Adoption Agreement and if either actually delivered at said address or, in the case or a letter, 5 business days shall have elapsed after the same shall have been deposited in the United States mails, first-class postage prepaid and registered or certified.

13.7

Tax Withholding . If the Employer concludes that tax is owing with respect to any deferral or payment hereunder, the Employer shall withhold such amounts from any payments due the Participant or from amounts deferred, as permitted by law, or otherwise make appropriate arrangements with the Participant or his Beneficiary for satisfaction of such obligation. Tax, for purposes of this Section 13.7 means any federal, state, local or any other governmental income tax, employment or payroll tax, excise tax, or any other tax or assessment owing with respect to amounts deferred, any earnings thereon, and any payments made to Participants under the Plan.

13.8

Indemnification. (a) Each Indemnitee (as defined in Section 13.8(e)) shall be indemnified and held harmless by the Employer for all actions taken by him and for all failures to take action (regardless of the date of any such action or failure to take action), to the fullest extent permitted by the law of the jurisdiction in which the Employer is incorporated, against all expense, liability, and loss (including, without limitation, attorneys’ fees, judgments, fines, taxes, penalties, and amounts paid or to be paid in settlement) reasonably incurred or suffered by the Indemnitee in connection with any Proceeding (as defined in Subsection (e)). No indemnification pursuant to this Section shall be made, however, in any case where (1) the act or failure to act giving rise to the claim for indemnification is determined by a court to have constituted willful misconduct or recklessness or (2) there is a settlement to which the Employer does not consent.

(b) The right to indemnification provided in this Section shall include the right to have the expenses incurred by the Indemnitee in defending any Proceeding paid by the Employer in advance of the final disposition of the Proceeding, to the fullest extent permitted by the law of the jurisdiction in which the Employer is incorporated; provided that, if such law requires, the payment of such expenses incurred by the Indemnitee in advance of the final disposition of a Proceeding shall be made only on delivery to the Employer of an undertaking, by or on behalf of the Indemnitee, to repay all amounts so advanced without interest if it shall ultimately be determined that the Indemnitee is not entitled to be indemnified under this Section or otherwise.

13-2

(c) Indemnification pursuant to this Section shall continue as to an Indemnitee who has ceased to be such and shall inure to the benefit of his heirs, executors, and administrators. The Employer agrees that the undertakings made in this Section shall be binding on its successors or assigns and shall survive the termination, amendment or restatement of the Plan.

(d) The foregoing right to indemnification shall be in addition to such other rights as the Indemnitee may enjoy as a matter of law or by reason of insurance coverage of any kind and is in addition to and not in lieu of any rights to indemnification to which the Indemnitee may be entitled pursuant to the by-laws of the Employer.

(e) For the purposes of this Section, the following definitions shall apply:

(1) “Indemnitee” shall mean each person serving as an Administrator (or any other person who is an employee, director, or officer of the Employer) who was or is a party to, or is threatened to be made a party to, or is otherwise involved in, any Proceeding, by reason of the fact that he is or was performing administrative functions under the Plan.

(2) “Proceeding” shall mean any threatened, pending, or completed action, suit, or proceeding (including, without limitation, an action, suit, or proceeding by or in the right of the Employer), whether civil, criminal, administrative, investigative, or through arbitration.

13.9

Successors . The provisions of the Plan shall bind and inure to the benefit of the Plan Sponsor, the Employer and their successors and assigns and the Participant and the Participant’s designated Beneficiaries.

13.10

Disclaimer. It is the Plan Sponsor’s intention that the Plan comply with the requirements of Code Section 409A. Neither the Plan Sponsor nor the Employer shall have any liability to any Participant should any provision of the Plan fail to satisfy the requirements of Code Section 409A.

13.11

Governing Law . The Plan will be construed, administered and enforced according to the laws of the State specified by the Plan Sponsor in Section 12.01 of the Adoption Agreement.

13-3

Exhibit 23.0

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

LOGO

Consent of Independent Registered Public Accounting Firm

We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (File No. 333-185073) of BSB Bancorp, Inc. of our reports dated March 14, 2014 relating to the financial statements and the effectiveness of internal control over financial reporting, which appear in Part II, Item 8 of this Form 10-K.


		/s/ SHATSWELL, MacLEOD & COMPANY, P.C.
		SHATSWELL, MacLEOD & COMPANY, P.C.

West Peabody, Massachusetts

March 14, 2014

LOGO

Exhibit 31.1

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

CERTIFICATION

I, Robert M. Mahoney certify that:

1. I have reviewed this annual report on Form 10-K of BSB Bancorp, Inc.;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: March 14, 2014		/s/ Robert M. Mahoney
		Robert M. Mahoney
		President and Chief Executive Officer

Exhibit 31.2

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

CERTIFICATION

I, John A. Citrano, certify that:

1. I have reviewed this annual report on Form 10-K of BSB Bancorp, Inc.;

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.


Date: March 14, 2014		/s/ John A. Citrano
		John A. Citrano
		Executive Vice President and Chief Financial Officer

Exhibit 32.0

Section 1350 Certification of Chief Executive Officer and Chief Financial Officer

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADDED BY

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Annual Report of BSB Bancorp, Inc. (the “Company”) on Form 10-K for the period ended December 31, 2013 as filed with the Securities and Exchange Commission (the “Report”), the undersigned hereby certify, pursuant to 18 U.S.C. §1350, as added by § 906 of the Sarbanes-Oxley Act of 2002, that:

(1)

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2)

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of and for the period covered by the Report.

/s/ Robert M. Mahoney

Robert M. Mahoney

President and Chief Executive Officer

/s/ John A. Citrano

John A. Citrano

Executive Vice President and Chief Financial Officer

March 14, 2014