BSB Bancorp, Inc. - FORM 10-K/A

BSB Bancorp, Inc. - FORM 10-K/A - April 10, 2014

Attached files

Attached files

BSB Bancorp, Inc. Reports

file	filename
EX-31.1 - EX-31.1 - BSB Bancorp, Inc.	d706507dex311.htm
EX-23.0 - EX-23.0 - BSB Bancorp, Inc.	d706507dex230.htm
EX-32.0 - EX-32.0 - BSB Bancorp, Inc.	d706507dex320.htm
EX-31.2 - EX-31.2 - BSB Bancorp, Inc.	d706507dex312.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K/A

AMENDMENT NO. 1

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).

EXPLANATORY NOTE

This Amendment No. 1 to the Form 10-K of BSB Bancorp, Inc. is being filed solely to correct the date of Shatswell, MacLeod & Company, P.C.’s signature on the Report of Independent Registered Public Accounting Firm.

ITEM 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


	Page
Management’s Report on Internal Control Over Financial Reporting		1

Report of Independent Registered Public Accounting Firm		2

Consolidated Balance Sheets as of December 31, 2013 and 2012		3

Consolidated Statements of Operations for the Years Ended December 31, 2013, 2012 and 2011		4

Consolidated Statements of Comprehensive Income for the Years Ended December 31, 2013, 2012 and 2011		5

Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2013, 2012 and 2011		6

Consolidated Statements of Cash Flows for the Years Ended December 31, 2013, 2012 and 2011		7

Notes to Consolidated Financial Statements		9

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, 2014

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)


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

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	)


	Years Ended December 31,
	2013			2012			2011
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

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 Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost Basis		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
Available for sale securities:
Corporate debt securities	$	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 Cost Basis		Fair Value		Amortized Cost Basis		Fair 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 Value		Unrealized Losses			Fair Value		Unrealized 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
With an allowance recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income 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
Without an allowance recorded	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income 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
	30–59 Days		60–89 Days		90 Days or More		Total Past Due		90 days or more and accruing		Loans on Non-accrual
Real estate loans:
Residential one-to-four family	$	410	$	—	$	1,911	$	2,321	$	—	$	3,860
Commercial real estate		—		—		38		38		—		38
Home equity		914		—		—		914		—		200
Construction		—		—		—		—		—		—
Other loans:
Commercial		—		—		—		—		—		—
Indirect auto		222		—		16		238		—		16
Consumer		—		—		1		1		—		1

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


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

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

Credit Quality Information

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

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

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

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

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

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

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

On a quarterly basis, the Company formally reviews the ratings on all residential real estate and home equity loans if they have become delinquent. Criteria used to determine 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
	# of Contracts		Pre-modification outstanding recorded investment		Post-modification outstanding 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
	# of Contracts		Pre-modification outstanding recorded investment		Post-modification outstanding 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	%

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.

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.

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.

•

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

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.

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.

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

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.

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		—

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 income¹		(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 income¹		—			—			—

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 income¹		(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.

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

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

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

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.

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 (incorporated by reference to Exhibit 10.6 to the Company’s Annual Report on Form10-K filed with the SEC on March 14, 2014) †

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 (incorporated by reference to Exhibit 10.8 to the Company’s Annual Report on Form10-K filed with the SEC on March 14, 2014) †

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 (incorporated by reference to Exhibit 10.11 to the Company’s Annual Report on Form10-K filed with the SEC on March 14, 2014). †

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.

**	Previously filed with the Company’s Form 10-K filed with the SEC on March 14, 2014.

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.

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company