The following analysis discusses the changes in financial condition and results of operation of the Company, and should be read in conjunction with both the unaudited consolidated interim financial statements and notes thereto, appearing in Part 1, Item 1 of this report.

Forward-Looking Statements

This report contains forward-looking statements, which can be identified by the use of words such as "estimate," "project," "believe," "intend," "anticipate," "plan," "seek," "expect," "will," "may" and words of similar meaning. These forward-looking statements include, but are not limited to:

• statements of our goals, intentions and expectations;

• statements regarding our business plans, prospects, growth and operating strategies;

• statements regarding the asset quality of our loan and investment portfolios; and

• estimates of our risks and future costs and benefits.

These forward-looking statements are based on our current beliefs and expectations and are inherently subject to significant business, economic and competitive uncertainties and contingencies, many of which are beyond our control. In addition, these forward-looking statements are subject to assumptions with respect to future business strategies and decisions that are subject to change. We do not undertake any obligation to update any forward-looking statements after the date of this document, except as required by law.

The following factors, among others, could cause actual results to differ materially from the anticipated results or other expectations expressed in the forward-looking statements:

• our ability to successfully implement our business strategy, which includes significant asset and liability growth;

• our ability to increase our market share in our market areas and capitalize on growth opportunities;

• our ability to successfully implement our branch network expansion strategy;

• general economic conditions, either nationally or in our market areas, and conditions in the real estate markets that could affect the demand for our loans and other products and the ability of borrowers to repay loans, lead to declines in credit quality and increased loan losses, and negatively affect the value and salability of the real estate that is the collateral for many of our loans;

• competition among depository and other financial institutions;

• inflation and changes in the interest rate environment that reduce our margins or reduce the fair value of financial instruments;

• adverse changes in the securities markets;

• changes in laws or government regulations or policies affecting financial institutions, including changes in regulatory fees and capital requirements;

• our ability to successfully integrate acquired entities, if any;

• changes in consumer spending, borrowing and savings habits;

• changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board, the Securities and Exchange Commission and the Public Company Accounting Oversight Board;

• changes in our organization, compensation and benefit plans;

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

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

Additional factors that could cause results to differ materially from those described in the forward-looking statements can be found in the filings made by BSB Bancorp, Inc. with the Securities and Exchange Commission, including the Annual Report on Form 10-K for the fiscal year ended December 31, 2011 under the heading "Item 1A. Risk Factors". Because of these and a wide variety of other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

Critical Accounting Policies

There are no material changes to the critical accounting policies from those disclosed in BSB Bancorp, Inc.'s 2011 Annual Report on Form 10-K. In applying these accounting policies, management is required to exercise judgment in determining many of the methodologies, assumptions and estimates to be utilized. As discussed in the Company's 2011 Annual Report on Form 10-K, the three most significant areas in which management applies critical assumptions and estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses, investment classification and impairment, and deferred income taxes. Management's estimates and assumptions affect the reported amounts of assets and liabilities as of the balance sheet date and revenues and expenses for the period. Actual results could differ from the amount derived from management's estimates and assumptions under different conditions.

Comparison of Financial Condition at June 30, 2012 and December 31, 2011

Total Assets. Total assets increased $86.4 million to $755.4 million at June 30, 2012, from $669.0 million at December 31, 2011. The increase was primarily the result of an $82.9 million, or 16.2%, increase in net loans and a $31.9 million, or 139.9%, increase in cash and cash equivalents, partially offset by a $14.3 million, or 16.0%, decrease in securities held to maturity and a $15.3 million, or 96.1%, decrease in loans held-for-sale.

Loans. Net loans increased by $82.9 million to $592.8 million at June 30, 2012 from $509.9 million at December 31, 2011. The increase in net loans was primarily due to increases of $56.7 million, or 34.1%, in commercial real estate loans, $11.3 million, or 5.9%, in one-to-four family residential loans, $9.2 million, or 18.3%, in home equity lines of credit, $4.1 million, or 19.9%, in commercial loans, and $3.8 million, or 5.8%, in indirect auto loans, partially offset by a $1.5 million, or 9.8%, decrease in commercial construction loans. Our plan to prudently build new commercial and consumer loan businesses is working as solid growth was experienced in each of our new strategic business lines.

Investment Securities. Total investment securities decreased $14.3 million to $75.1 million at June 30, 2012, from $89.4 million at December 31, 2011, reflecting our funding of higher-yielding loans during the six-month period ended June 30, 2012. The decrease in investment securities resulted from decreases of $5.6 million, or 100.0%, in U.S. government and federal agency obligations and $13.2 million, or 35.4%, in corporate debt securities partially offset by an increase of $4.5 million, or 9.7%, in U.S. government sponsored enterprise mortgage-backed securities.

Cash and Cash Equivalents. Cash and cash equivalents increased by $31.9 million to $54.7 million at June 30, 2012, from $22.8 million at December 31, 2011. The significant influx of cash was due to the success in deposit growth.

Bank-Owned Life Insurance. We invest in bank-owned life insurance to provide a funding source for our benefit plan obligations. Bank-owned life insurance also generally provides noninterest income that is nontaxable. At June 30, 2012, our investment in bank-owned life insurance was $12.7 million, an increase of $236,000 from $12.4 million at December 31, 2011, reflecting premiums paid and an increase in cash value.

Deposits. Deposits increased $107.0 million, or 24.8%, to $537.7 million at June 30, 2012 from $430.7 million at December 31, 2011. The increase in deposits was due to a $42.7 million, or 76.3%, increase in non-interest bearing deposits, a $41.8 million, or 18.8%, increase in savings accounts, a $13.2 million, or 58.4%, increase in interest-bearing checking accounts, and a $9.4 million, or 7.9%, increase in certificate accounts. This deposit growth is due to continued investment in local marketing and advertising, ongoing momentum in our Small Business Banking and Commercial Real Estate businesses, the opening of our new supermarket branch, and an $8.5 million short-term deposit transaction crossing over quarter end.

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

                                             June 30, 2012             December 31, 2011
                                          Amount       Percent        Amount       Percent
                                              (unaudited)
  Deposit type:
  Demand deposits                        $  98,561        18.33 %    $  55,900        12.98 %
  Interest-bearing checking accounts        35,882         6.67         22,646         5.26
  Savings accounts                         264,429        49.19        222,630        51.69
  Money market deposits                     10,547         1.96         10,633         2.47

  Total transaction accounts               409,419        76.15        311,809        72.40

  Term certificates less than $100,000      70,215        13.06         53,877        12.51
  Term certificates $100,000 or more        58,023        10.79         64,968        15.09

  Total certificate accounts               128,238        23.85        118,845        27.60

  Total deposits                         $ 537,657       100.00 %    $ 430,654       100.00 %

Borrowings. At June 30, 2012, borrowings consisted of advances from the Federal Home Loan Bank of Boston, securities sold to customers under agreements to repurchase, or "repurchase agreements", and other borrowed funds consisting of the balance of loans that we sold with recourse to another financial institution in March of 2006.

Total borrowings decreased $24.3 million, or 24.3%, to $75.8 million at June 30, 2012, from $100.1 million at December 31, 2011. Advances from the Federal Home Loan Bank of Boston decreased $24.5 million to $71.1 million at June 30, 2012, from $95.6 million at December 31, 2011, and repurchase agreements increased $249,000 to $3.2 million at June 30, 2012, from $3.0 million at December 31, 2011.

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

                                                   June 30, 2012           December 31, 2011
                                                    (unaudited)
Long-term borrowed funds:
Federal Home Loan Bank of Boston long-term
advances                                          $        43,100         $            82,600
Other borrowed funds                                        1,476                       1,502

                                                           44,576                      84,102

Short-term borrowed funds:
Federal Home Loan Bank of Boston short-term
advances                                                   28,000                      13,000
Repurchase agreements                                       3,234                       2,985

                                                           31,234                      15,985

Total borrowed funds                              $        75,810         $           100,087

Stockholders' Equity. Total equity capital increased $821,000 to $132.3 million at June 30, 2012, from $131.5 million at December 31, 2011. This increase in stockholders' equity was primarily due to year-to-date earnings of $733,000. Stockholder's equity was further increased by $88,000 as a result of the release of shares under the Employee Stock Ownership Plan.

Non-Performing Assets. The following table sets forth the amounts and categories of our non-performing assets at the dates indicated (dollars in thousands):

                                                             At June 30,           At December 31,
                                                                 2012                   2011
                                                             (unaudited)
Non-accrual loans:
Mortgage loans:
One-to-four family                                          $        2,569        $           3,149
Commercial real estate                                                  -                        -
Construction loans                                                      -                        -
Equity lines of credit                                                 693                    1,123
Commercial loans                                                         4                      155
Consumer loans:
Indirect auto loans                                                     -                        -
Other consumer loans                                                     1                       -

Total non-accrual loans                                     $        3,267        $           4,427

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

Total loans 90 days delinquent and still accruing                       -                        -

Total non-performing loans                                  $        3,267        $           4,427

Other real estate owned                                     $           -         $              -
Repossessed automobiles                                                 39                       -

Total non-performing assets (NPAs)                          $        3,306        $           4,427

Troubled debt restructures included in NPAs                 $          607        $             609
Troubled debt restructures not included in NPAs                         -                        -

Total troubled debt restructures                            $          607        $             609

Ratios:
Non-performing loans to total loans                                   0.55 %                   0.86 %
Non-performing assets to total assets                                 0.44 %                   0.66 %

It is the general policy of the Bank to consider any loan on non-accrual as an impaired loan. Exceptions to this policy can be made when, in the opinion of management, a loan is adequately secured, properly documented and clearly in the process of collection. Any exceptions to policy are reviewed on a monthly basis and must be approved by management.

Troubled Debt Restructurings. We periodically modify loans to extend the term or make other concessions to help a borrower stay current on their loan and to avoid foreclosure. We generally do not forgive principal or interest on loans or modify the interest rates on loans to rates not otherwise available in the market for loans with similar risk characteristics as the restructured debt. At June 30, 2012, we had $607,000 of troubled debt restructurings related to two loans. One of these loans was a one-to four-family residential mortgage loan and the other was a home equity line of credit. One of the two loans is performing under its terms as modified while the second loan has exceeded 90 days past due as of June 30, 2012.

Comparison of Operating Results for the Three Months Ended June 30, 2012 and 2011

General. Net income for the three months ended June 30, 2012 was $286,000, compared to net loss of $188,000 for the three months ended June 30, 2011. The increase in operating results for the three months ended June 30, 2012 compared to the 2011 period resulted primarily from an increase of $1.1 million in net interest and dividend income before provision for loan losses and a $1.0 million increase in non-interest income, partially offset by an increase of $1.3 million in noninterest expense.

Net Interest and Dividend Income. Net interest and dividend income increased $1.1 million to $4.9 million for the three months ended June 30, 2012, compared to $3.8 million for the three months ended June 30, 2011. The increase in net interest and dividend income was primarily due to an increase in our net interest earning assets, partially offset by a 32 basis point decrease in our net interest rate spread. Net average interest-earning assets increased $132.4 million, or 192.4% to $201.1 million for the three months ended June 30, 2012 from $68.8 million for the three months ended June 30, 2011. Our net interest margin decreased 21 basis points to 2.79% for the three months ended June 30, 2012, compared to 3.00% for the three months ended June 30, 2011.

Interest and Dividend Income. Interest and dividend income increased $859,000 to $6.2 million for the three months ended June 30, 2012, from $5.4 million for the three months ended June 30, 2011. The increase in interest and dividend income was primarily due to a $1.0 million increase in interest income on loans partially offset by a $158,000 decrease in interest and dividend income on securities and other interest-earning assets. The increase in interest income on loans resulted from a 60 basis point decrease in the average yield on loans to 4.13% from 4.73%, primarily due to lower market interest rates during the period which was more than offset by an increase in the average balance of loans of $158.6 million to $563.6 million for the three months ended June 30, 2012, from $405.0 million for the three months ended June 30, 2011. The decrease in interest and dividend income on securities was primarily due to a decrease in the average balance of $3.3 million to $72.8 million for the three months ended June 30, 2012, from $76.2 million for the three months ended June 30, 2011 and a 92 basis point decrease in the average yield to 2.09% from 3.01%, which was primarily the result of a true up of unamortized premiums related to the mortgage backed security portfolio that took place during the second quarter of 2012. Dividends on Federal Home Loan Bank stock increased to $10,000 for the three months ended June 30, 2012, from $6,000 for the three months ended June 30, 2011. Interest income on other interest-earning assets increased to $41,000 for the three months ended June 30, 2012 from $9,000, primarily due to the increase of $40.0 million in the average balance to $65.6 million for the three months ended June 30, 2012, from $25.6 million for the three months ended June 30, 2011.

Interest Expense. Interest expense decreased $225,000 to $1.3 million for the three months ended June 30, 2012, from $1.5 million for the three months ended June 30, 2011. The decrease resulted from a 34 basis point decrease in the cost of interest-bearing liabilities, partially offset by a $62.5 million, or 14.0%, increase in the average balance of interest-bearing liabilities.

Interest expense on interest-bearing deposits increased by $69,000 to $1.0 million for the three months ended June 30, 2012, from $962,000 for the three months ended June 30, 2011. This increase was primarily due to a $72.0 million increase in the average balance of interest-bearing deposits to $425.8 million for the three months ended June 30, 2012, from $353.8 million for the three months ended June 30, 2011. Offsetting the increase in average balance was a 12 basis point decrease in the average cost of interest-bearing deposits to 0.97% for the three months ended June 30, 2012, from 1.09% for the three months ended June 30, 2011. We experienced decreases in the average cost within money market accounts and certificates of deposit for the three months ended June 30, 2012, reflecting lower market interest rates compared to the prior period, while the average cost of savings and checking accounts increased slightly for the three months ended June 30, 2012 as compared to the three months ended June 30, 2011.

Interest expense on total borrowings decreased $294,000 to $257,000 for the three months ended June 30, 2012, from $551,000 for the three months ended June 30, 2011. This decrease was primarily due to a 115 basis point decrease in the average cost of such borrowings to 1.25% for the three months ended June 30, 2012, from 2.40% for the three months ended June 30, 2011, further aided by a $9.4 million decrease in the average balance of total borrowings to $82.8 million for the three months ended June 30, 2012, from $92.3 million for the three months ended June 30, 2011.

Provision for Loan Losses. Based on our methodology for establishing our allowance for loan losses and provisions for loan losses discussed in Note 5 to the Consolidated Financial Statements included in this Form 10-Q, we recorded a provision for loan losses of $825,000 for the three months ended June 30, 2012, compared to $742,000 for the three months ended June 30, 2011. The allowance for loan losses was $5.4 million, or 0.90% of total loans, at June 30, 2012, compared to $4.8 million, or 0.93% of total loans, at December 31, 2011.

Noninterest Income. Noninterest income increased by $1.1 million to $1.5 for the three months ended June 30, 2012, from $412,000 for the three months ended June 30, 2011. The increase was primarily due to a $590,000 increase on the gain on sale of loans to $737,000 for the three months ended June 30, 2012, from $147,000 for the three months ended June 30, 2011. The loan sales for both periods were made up of residential mortgages and indirect auto loans. In addition, customer service fees increased by $59,000, or 41.8%, due primarily to a $33,000, or 43.1%, increase in insufficient funds fees. Other non-interest income increased by $405,000 to $441,000 for the three months ended June 30, 2012, from $36,000 for the three months ended June 30, 2011. This increase is due primarily to a $101,000 increase in loan servicing fees collected on residential mortgage and auto loans previously sold, and a $208,000 gain recognized on the sale of easement rights owned by the Bank.

Noninterest Expense. Noninterest expense increased $1.3 million to $5.2 million for the three months ended June 30, 2012, from $3.9 million for the three months ended June 30, 2011. The largest components of this increase were salaries and employee benefits, which increased $792,000, or 32.5%, data processing, which increased $172,000, or 61.0%, and other noninterest expense, which increased $201,000, or 61.7%. These increases were primarily the result of an investment in human resources and our infrastructure to help execute our commercial and consumer business strategies, and increased public company costs.

Income Tax Expense. We recorded income tax expense of $134,000 for the three months ended June 30, 2012, compared to an income tax benefit of $210,000 for the three months ended June 30, 2011. The change was primarily the result of higher pre-tax earnings for the quarter ended June 30, 2012 from the same period in 2011. The effective tax rate for the three months ended June 30, 2012 was 31.9% compared to (52.8%) for the same period in 2011.

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

                                                                                  For the Three Months Ended June 30,
                                                                       2012                                                  2011
                                                                                         (Dollars in thousands)
                                                    Average                                               Average
                                                  Outstanding                                           Outstanding
                                                    Balance         Interest       Yield/Rate(1)          Balance         Interest       Yield/Rate(1)
Interest-earning assets:
Total loans                                      $     563,596     $    5,791                4.13 %    $     404,998     $    4,774                4.73 %
Securities                                              72,848            378                2.09 %           76,153            572                3.01 %
FHLB stock                                               7,627             10                0.53 %            8,038              6                0.30 %
Other                                                   65,648             41                0.25 %           25,631              9                0.14 %

Total interest-earning assets                          709,719          6,220                3.52 %          514,820          5,361                4.18 %
Non-interest-earning assets                             24,047                                                20,992

Total assets                                     $     733,766                                         $     535,812

Interest-bearing liabilities:
Savings accounts                                       261,170            468                0.72 %          185,919            330                0.71 %
Checking accounts                                       27,088              9                0.13 %           24,118              6                0.10 %
Money market accounts                                   10,688              4                0.15 %           12,305              7                0.23 %
Certificates of deposit                                126,807            550                1.74 %          131,429            619                1.89 %

Total interest-bearing deposits                        425,753          1,031                0.97 %          353,771            962                1.09 %
Federal Home Loan Bank advances                         77,957            244                1.26 %           87,291            535                2.46 %
Securities sold under agreements to repurchase           3,397              3                0.36 %            3,399              4                0.47 %
Other borrowed funds                                     1,486             10                2.71 %            1,585             12                3.04 %

Total interest-bearing liabilities                     508,593          1,288                1.02 %          446,046          1,513                1.36 %
Non-interest-bearing liabilities                        92,995                                                42,504

Total liabilities                                      601,588                                               488,550
Stockholders' Equity                                   132,178                                                47,262

Total liabilities and equity                     $     733,766                                         $     535,812

Net interest and dividend income                                   $    4,932                                            $    3,848
. . .