UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark one)

 

x

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

 

For the quarterly period ended June 30, 2017

 

OR

 

¨

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: 001-35352

 

	WELLESLEY BANCORP, INC.
	(Exact name of registrant as specified in its charter)

 

Maryland		45-3219901
(State or other jurisdiction of incorporation or		(I.R.S. Employer Identification No.)
organization)

 

40 Central Street, Wellesley, Massachusetts		02482
(Address of principal executive offices)		(Zip Code)

 

	(781) 235-2550
	(Registrant’s telephone number, including area code)

 

	Not Applicable
	(Former name, former address and former fiscal year, if changed since last report)

 

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

	Large accelerated filer  ¨		Accelerated filer  ¨
	Non-accelerated filer    ¨		Smaller reporting company x
	(Do not check if a smaller reporting company)		Emerging growth company ¨

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 7(a)(2)(B) of the Securities Act

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

 

As of August 1, 2017, there were 2,489,852 shares of the registrant’s common stock outstanding.

 

 

 

WELLESLEY BANCORP, INC.

 

Table of Contents

 

				Page No.
Part I.   Financial Information
Item 1.		Financial Statements (Unaudited)
		Consolidated Balance Sheets as of June 30, 2017 and December 31, 2016		1
		Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2017 and 2016		2
		Consolidated Statements of Changes in Stockholders’ Equity for the Six Months Ended June 30, 2017 and 2016		3
		Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2017 and 2016		4
		Notes to Consolidated Financial Statements		5
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		23
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		34
Item 4.		Controls and Procedures		35
Part II.   Other Information
Item 1.		Legal Proceedings		36
Item 1A.		Risk Factors		36
Item 2.		Defaults Upon Senior Securities		36
Item 3.		Mine Safety Disclosures		36
Item 4.		Other Information		36
Item 5.		Exhibits		36
Signatures				37

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

CONSOLIDATED BALANCE SHEETS

 

		June 30, 2017				December 31, 2016
		(Dollars in thousands)
Assets
Cash and due from banks		$	3,455			$	3,607
Short-term investments			18,818				24,818
Total cash and cash equivalents			22,273				28,425
Certificates of deposit			100				100
Securities available for sale, at fair value			66,471				64,648
Federal Home Loan Bank of Boston stock, at cost			6,436				5,758
Loans held for sale			1,057				1,454
Loans			623,133				581,563
Less allowance for loan losses			(5,543	)			(5,432	)
Loans, net			617,590				576,131
Bank-owned life insurance			7,417				7,303
Premises and equipment, net			3,665				3,876
Accrued interest receivable			1,626				1,647
Net deferred tax asset			2,674				2,742
Other assets			3,032				3,199
Total assets		$	732,341			$	695,283
Liabilities and Stockholders’ Equity
Deposits:
Non-interest-bearing		$	96,017			$	94,946
Interest-bearing			439,217				427,864
			535,234				522,810
Short-term borrowings			24,250				21,250
Long-term debt			100,848				83,020
Subordinated debt			9,786				9,769
Accrued expenses and other liabilities			4,557				3,220
Total liabilities			674,675				640,069
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized, none issued			—				—
Common stock, $0.01 par value; 14,000,000 shares authorized, 2,489,852 and 2,484,852 shares issued and outstanding at June 30, 2017 and December 31, 2016, respectively			25				25
Additional paid-in capital			25,134				24,703
Retained earnings			33,593				31,999
Accumulated other comprehensive income (loss)			134				(229	)
Unearned compensation – ESOP			(1,220	)			(1,284	)
Total stockholders' equity			57,666				55,214
Total liabilities and stockholders' equity		$	732,341			$	695,283

 

See accompanying notes to consolidated financial statements.

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2017				2016				2017				2016
		(Dollars in thousands, except per share data)
Interest and dividend income:
Interest and fees on loans and loans held for sale		$	6,355			$	5,614			$	12,332			$	11,171
Debt securities:
Taxable			333				340				672				670
Tax-exempt			78				54				147				107
Short-term investments and certificates of deposit			42				17				85				40
FHLB stock			59				49				116				95
Total interest and dividend income			6,867				6,074				13,352				12,083
Interest expense:
Deposits			828				758				1,621				1,539
Short-term borrowings			48				24				80				40
Long-term debt			299				261				585				506
Subordinated debt			158				159				316				318
Total interest expense			1,333				1,202				2,602				2,403
Net interest income			5,534				4,872				10,750				9,680
Provision for loan losses			122				125				122				187
Net interest income, after provision for loan losses			5,412				4,747				10,628				9,493
Non-interest income:
Customer service fees			36				32				70				58
Mortgage banking activities			21				108				64				140
Gain on sale of securities, net			—				16				—				16
Income on bank-owned life insurance			57				57				114				115
Wealth management fees			308				238				603				449
Miscellaneous			27				59				119				77
Total non-interest income			449				510				970				855
Non-interest expense:
Salaries and employee benefits			2,501				2,378				5,110				4,680
Occupancy and equipment			707				687				1,403				1,350
Data processing			220				177				421				373
FDIC insurance			150				82				297				159
Professional fees			182				278				355				469
Other general and administrative			565				465				1,032				942
Total non-interest expense			4,325				4,067				8,618				7,973
Income before income taxes			1,536				1,190				2,980				2,375
Provision for income taxes			599				463				1,162				916
Net income			937				727				1,818				1,459
Other comprehensive income :
Net unrealized holding gains on available-for-sale securities			340				526				577				1,316
Reclassification adjustment for net gain on sale of securities recognized in non-interest income			—				(16	)			—				(16	)
Income tax expense			(127	)			(65	)			(214	)			(488	)
Total other comprehensive income			213				445				363				812
Comprehensive income		$	1,150			$	1,172			$	2,181			$	2,271
Earnings per common share:
Basic		$	0.40			$	0.31			$	0.77			$	0.63
Diluted		$	0.38			$	0.31			$	0.74			$	0.62
Weighted average shares outstanding:
Basic			2,364,581				2,322,147				2,361,336				2,320,542
Diluted			2,449,413				2,352,092				2,445,712				2,345,946

 

See accompanying notes to consolidated financial statements.

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Six Months Ended June 30, 2017 and 2016

 

		Common Stock								Additional Paid-in				Retained				Accumulated Other Comprehensive				Unearned Compensation-				Total Stockholders’
		Shares				Amount				Capital				Earnings				Income (Loss)				ESOP				Equity
		(Dollars in thousands)
Balance at December 31, 2015			2,458,553			$	25			$	23,992			$	29,411			$	162			$	(1,412	)		$	52,178
Comprehensive income			—				—				—				1,459				812				—				2,271
Dividends paid to common stockholders ($0.07 per share)			—				—				—				(172	)			—				—				(172	)
Share-based compensation-equity incentive plan			—				—				254				—				—				—				254
Tax benefit from stock based compensation			—				—				1				—				—				—				1
ESOP shares committed to be allocated  (6,419)			—				—				60				—				—				64				124
Balance at June 30, 2016			2,458,553			$	25			$	24,307			$	30,698			$	974			$	(1,348	)		$	54,656
Balance at December 31, 2016			2,484,852			$	25			$	24,703			$	31,999			$	(229	)		$	(1,284	)		$	55,214
Comprehensive income			—				—				—				1,818				363				—				2,181
Dividends paid to common stockholders ($0.09 per share)			—				—				—				(224	)			—				—				(224	)
Issuance of restricted stock			5,000				—				—				—				—				—				—
Share-based compensation-equity incentive plan			—				—				321				—				—				—				321
ESOP shares committed to be allocated (6,419)			—				—				110				—				—				64				174
Balance at June 30, 2017			2,489,852			$	25			$	25,134			$	33,593			$	134			$	(1,220	)		$	57,666

 

See accompanying notes to consolidated financial statements.

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Six Months Ended June 30,
		2017				2016
		(In thousands)
Cash flows from operating activities:
Net income		$	1,818			$	1,459
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			122				187
Depreciation and amortization			380				354
Net amortization of securities			115				179
Gain on sale of securities, net			—				(16	)
Principal amount of loans sold			5,063				11,697
Loans originated for sale			(4,666	)			(13,380	)
Accretion of net deferred loan fees			(286	)			(300	)
Amortization  of subordinated debt issuance costs			17				18
Income on bank-owned life insurance			(114	)			(115	)
Deferred income tax provision (benefit)			(146	)			7
ESOP expense			174				124
Share-based compensation			321				254
Net change in other assets and liabilities			1,525				784
Net cash provided by operating activities			4,323				1,252
Cash flows from investing activities:
Activity in securities available for sale:
Maturities, prepayments and calls			1,652				11,381
Purchases			(3,013	)			(14,726	)
Proceeds from sales of securities, net			—				93
Redemption (purchase) of Federal Home Loan Bank stock			(678	)			64
Loan originations, net of principal payments			(41,295	)			(22,907	)
Additions to premises and equipment			(169	)			(839	)
Net cash used by investing activities			(43,503	)			(26,934	)
Cash flows from financing activities:
Net increase in deposits			12,424				20,799
Proceeds from long-term debt			36,000				9,500
Repayments of long-term debt			(18,172	)			(8,169	)
Increase (decrease) in short-term borrowings			3,000				(750	)
Excess tax benefits from share-based compensation			—				1
Cash dividends paid on common stock			(224	)			(172	)
Net cash provided by financing activities			33,028				21,209
Net change in cash and cash equivalents			(6,152	)			(4,473	)
Cash and cash equivalents at beginning period			28,425				28,178
Cash and cash equivalents at end of period		$	22,273			$	23,705
Supplementary information:
Interest paid		$	2,550			$	2,398
Income taxes paid			1,483				825

 

See accompanying notes to consolidated financial statements.

 

 

WELLESLEY BANCORP, INC. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

NOTE 1 – BASIS OF PRESENTATION AND CONSOLIDATION

 

The accompanying unaudited interim consolidated financial statements include the accounts of Wellesley Bancorp, Inc. (the “Company”) and its wholly-owned subsidiary, Wellesley Bank (the “Bank”), the principal operating entity, and its wholly-owned subsidiaries: Wellesley Securities Corporation, which engages in the business of buying, selling and dealing in securities exclusively on its own behalf; Wellesley Investment Partners, LLC, formed to provide investment management services for individuals, not-for-profit entities and businesses; and Central Linden, LLC, to hold, manage and sell foreclosed real estate. All significant intercompany balances and transactions have been eliminated in consolidation. Assets under management at Wellesley Investment Partners, LLC are not included in these consolidated financial statements because they are not assets of the Company. These financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information, and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements.

 

In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2016 Annual Report on Form 10-K. The results for the three and six months ended June 30, 2017 are not necessarily indicative of the results that may be expected for the year ending December 31, 2017 or for any other period.

 

NOTE 2 – LOAN POLICIES

 

The loan portfolio consists of real estate, commercial and other loans to the Company’s customers in our primary market areas in eastern Massachusetts. The ability of the Company’s debtors to honor their contracts is dependent upon the economy in general and the real estate and construction sectors within our markets.

 

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred loan origination fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

 

Interest is generally not accrued on loans which are identified as impaired or loans which are ninety days or more past due. Past due status is based on the contractual terms of the loan. Interest income previously accrued on such loans is reversed against current period interest income. Interest income on non-accrual loans is recognized only to the extent of interest payments received and is first applied to the outstanding principal balance when collectibility of principal is in doubt. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured through sustained payment performance for at least six months.

 

Allowance for loan losses

 

The allowance for loan losses is established through a provision for loan losses charged to earnings as losses are estimated to have occurred. Loan losses are charged against the allowance when management believes the uncollectibility of the 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.

 

 

General component

The general component is based on the following loan segments: residential real estate, commercial real estate, construction, commercial, home equity lines of credit and other consumer. Management considers a rolling average of historical losses for each segment based on a time frame appropriate to capture relevant loss data for each loan segment, generally three and 10 years. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume, concentrations and terms of loans; level of collateral protection; effects of changes in risk selection and underwriting standards; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no significant changes to the Company’s policies or methodology pertaining to the general component of the allowance during 2017 or 2016.

 

The qualitative factor adjustments 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 – The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent and does not originate subprime loans. Most loans in this segment are collateralized by one-to-four family 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 in the Company’s primary market areas in eastern Massachusetts. The underlying cash flows generated by the properties may be 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 typically obtains rent rolls annually and continually monitors the cash flows of these loans.

 

Construction – Loans in this segment include speculative construction loans primarily on residential properties for which payment is derived from the sale of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.    Residential construction loans in this segment also include loans to build one-to-four family owner-occupied properties which are subject to the same credit quality factors as residential real estate.

 

Commercial – 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 spending, will have an effect on the credit quality in this segment.

 

Home equity lines of credit – Loans in this segment are collateralized by one-to-four family 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.

 

Other consumer – Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.

 

Allocated component

The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the fair value of the loan or, if the loan is collateral dependent, by the fair value of the collateral, less estimated costs to sell. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan are lower than the carrying value of that loan. Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify performing individual residential and consumer loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

 

 

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 initially classified as impaired.

 

Unallocated component

An unallocated component is maintained to cover additional uncertainties in management’s estimation 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.

 

NOTE 3 – COMPREHENSIVE INCOME

 

Accounting principles generally require that recognized revenue, expenses, and gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the stockholders’ equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income/loss.

 

The components of accumulated other comprehensive income (loss) and related tax effects are as follows:

 

		June 30,				December 31,
		2017				2016
		(In thousands)
Unrealized holding gains (losses) on securities available for sale		$	203			$	(374	)
Tax effect			(69	)			145
Net-of tax amount		$	134			$	(229	)

 

NOTE 4 – RECENT ACCOUNTING AND REGULATORY PRONOUNCEMENTS

 

Effective January 1, 2017, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-09, Compensation-Stock Compensation (Topic 718). This update is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The adoption of this update did not have a significant impact on the consolidated financial statements.

 

During the quarter ended March 31, 2017, the FASB issued ASU 2017-08, Receivables - Non-refundable Fees and Other Costs (Subtopic 310-20), which shortens the period of amortization of the premium on certain callable debt securities to the earliest call date. For the Company, these amendments are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. Management elected to early adopt this ASU effective January 1, 2017 and the adoption did not have a material impact on the Company’s financial statements.

 

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this update supersede the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. For public companies, this ASU is effective for annual reporting periods, including interim periods, beginning after December 15, 2017. The Company's primary source of revenue is interest income on financial assets, which is explicitly excluded from the scope of the new guidance. In addition, management has determined that the timing of the Company’s recognition of wealth management fees will not change materially. Certain implementation issues relevant to the financial institutions industry are still pending resolution. Management will continue to evaluate any impact as additional guidance is issued.

 

In January 2016, the FASB issued ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10), to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The key provision included in the ASU is that equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) will be measured at fair value with changes in fair value recognized in net income and the elimination of the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost.  For public entities such as the Company, this ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this update will not have a significant impact on the consolidated financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires a lessee to record a right-to-use asset and liability representing the obligation to make lease payments for long-term leases. This ASU will be effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. It is expected that assets and liabilities will increase based on the present value of remaining lease payments for leases in place at the adoption date; however, based on the current level of long-term leases in place, this is not expected to be material to the Company's results of operations or financial position. Management continues to evaluate the extent of potential impact the new guidance will have on the Company’s consolidated financial statements.

 

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure expected credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. Credit losses on available-for-sale debt securities should be measured in a manner similar to current GAAP; however, recognized credit losses will be presented as an allowance rather than as a write-down. This ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods. Management is evaluating the provisions of the Update, and will closely monitor developments and additional guidance to determine the potential impact on the Company's consolidated financial statements. Management is currently working with a third party software service provider to ensure proper mapping and alignment of critical instrument-specific data.

 

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU provide cash flow statement classification guidance for certain areas where diversification existed in practice. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early application is permitted, including adoption in an interim period. The adoption of this update will not have a significant impact on the consolidated financial statements.

 

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this update require that in the statement of cash flows, amounts generally described as restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted. The adoption of this update will not have a significant impact on the consolidated financial statements.

 

In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718) to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change in terms or conditions of a share-based payment award. For public business entities, the amendments are effective for fiscal periods beginning December 15, 2017, and interim periods within those annual periods. Early adoption is permitted. The adoption of this update will not have a significant impact on the consolidated financial statements.

 

 

NOTE 5 – SECURITIES AVAILABLE FOR SALE

 

The amortized cost and fair value of securities available for sale, with gross unrealized gains and losses, follows:

 

		June 30, 2017
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In thousands)
Residential mortgage-backed securities:
Government National Mortgage Association		$	3,619			$	47			$	(35	)		$	3,631
Government-sponsored enterprises			12,507				110				(77	)			12,540
SBA and other asset-backed securities			11,882				122				(75	)			11,929
State and municipal bonds			12,380				226				(46	)			12,560
Government-sponsored enterprise obligations			8,000				—				(131	)			7,869
Corporate bonds			17,880				102				(40	)			17,942
		$	66,268			$	607			$	(404	)		$	66,471

 

		December 31, 2016
		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In thousands)
Residential mortgage-backed securities:
Government National Mortgage Association		$	3,876			$	55			$	(33	)		$	3,898
Government-sponsored enterprises			13,134				73				(97	)			13,110
SBA and other asset-backed securities			12,571				70				(140	)			12,501
State and municipal bonds			9,533				93				(156	)			9,470
Government-sponsored enterprise obligations			8,000				—				(197	)			7,803
Corporate bonds			17,908				55				(97	)			17,866
		$	65,022			$	346			$	(720	)		$	64,648

 

There were no proceeds from sales of available-for-sale securities for the three and six months ended June 30, 2017.

 

For the three and six months ended June 30, 2016, proceeds from sales of available-for-sale securities amounted to $93 thousand with gross realized gains of $16 thousand and no gross realized losses.

 

The amortized cost and fair value of debt securities by contractual maturity at June 30, 2017 are as follows. Expected maturities may differ from contractual maturities because the issuer, in certain instances, has the right to call or prepay obligations with or without call or prepayment penalties.

 

 

		Amortized Cost				Fair Value
		(In thousands)
Within 1 year		$	3,019			$	3,020
After 1 year to 5 years			12,627				12,642
After 5 years to 10 years			15,044				15,066
After 10 years			7,570				7,643
			38,260				38,371
Mortgage- and asset-backed securities			28,008				28,100
		$	66,268			$	66,471

 

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

 

		Less Than Twelve Months								Over Twelve Months
		Gross Unrealized Losses				Fair Value				Gross Unrealized Losses				Fair Value
		(In thousands)
June 30, 2017
Residential mortgage-backed securities:
Government National Mortgage Association		$	(15	)		$	941			$	(20	)		$	851
Government-sponsored enterprises			(56	)			3,756				(21	)			488
SBA and other asset-backed securities			(75	)			3,379				—				—
State and municipal bonds			(45	)			3,644				(1	)			100
Government-sponsored enterprise obligations			(131	)			7,869				—				—
Corporate bonds			(37	)			2,718				(3	)			994
		$	(359	)		$	22,307			$	(45	)		$	2,433
December 31, 2016
Residential mortgage-backed securities:
Government National Mortgage Association		$	(11	)		$	1,214			$	(22	)		$	849
Government-sponsored enterprises			(85	)			6,771				(12	)			540
SBA and other asset-backed securities			(115	)			6,109				(25	)			1,608
State and municipal bonds			(154	)			5,257				(2	)			396
Government-sponsored enterprise obligations			(197	)			7,803				—				—
Corporate bonds			(93	)			7,360				(4	)			992
		$	(655	)		$	34,514			$	(65	)		$	4,385

 

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluations. At June 30, 2017, various debt securities have unrealized losses with aggregate depreciation of 1.6% from their aggregate amortized cost basis. These unrealized losses relate principally to the effect of interest rate changes on the fair value of debt securities and not an increase in credit risk of the issuers. As the Company does not intend to sell the securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost, which may be maturity, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2017.

 

 

NOTE 6 – LOANS AND ALLOWANCE FOR LOAN LOSSES

 

A summary of the ending balances of loans is as follows:

 

		June 30,				December 31,
		2017				2016
		(In thousands)
Real estate loans:
Residential – fixed		$	26,086			$	18,573
Residential – variable			271,018				249,486
Commercial			123,882				121,134
Construction			118,320				110,390
			539,306				499,583
Commercial loans:
Secured			50,274				49,126
Unsecured			222				221
			50,496				49,347
Consumer loans:
Home equity lines of credit			33,015				32,437
Other			223				216
			33,238				32,653
Total loans			623,040				581,583
Less:
Allowance for loan losses			(5,543	)			(5,432	)
Net deferred origination costs (fees)			93				(20	)
Loans, net		$	617,590			$	576,131

 

 

The following table summarizes the changes in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2017 and 2016:

 

		Residential Real Estate				Commercial Real Estate				Construction				Commercial				Home Equity				Other Consumer				Unallocated				Total
		(In thousands)
Three Months Ended June 30, 2017
Allowance at March 31, 2017		$	1,487			$	1,134			$	1,695			$	710			$	211			$	3			$	181			$	5,421
Provision (credit) for loan losses			76				37				65				4				4				(1	)			(63	)			122
Allowance at June 30, 2017		$	1,563			$	1,171			$	1,760			$	714			$	215			$	2			$	118			$	5,543
Three Months Ended June 30, 2016
Allowance at March 31, 2016		$	1,520			$	1,043			$	1,587			$	589			$	221			$	2			$	212			$	5,174
Provision (credit) for loan losses			(45	)			(7	)			117				54				39				1				(34	)			125
Loans charged off			(102	)			—				—				—				(11	)			—				—				(113	)
Allowance at June 30, 2016		$	1,373			$	1,036			$	1,704			$	643			$	249			$	3			$	178			$	5,186
Six Months Ended June 30, 2017
Allowance at December 31, 2016		$	1,422			$	1,145			$	1,827			$	703			$	211			$	3			$	121			$	5,432
Provision (credit) for loan losses			141				26				(67	)			11				4				10				(3	)			122
Loans charged off			—				—				—				—				—				(11	)			—				(11	)
Allowance at June 30, 2017		$	1,563			$	1,171			$	1,760			$	714			$	215			$	2			$	118			$	5,543
Six Months Ended June 30, 2016
Allowance at December 31, 2014		$	1,490			$	1,025			$	1,684			$	509			$	238			$	2			$	164			$	5,112
Provision (credit) for loan losses			(15	)			11				20				134				22				1				14				187
Loans charged off			(102	)			—				—				—				(11	)			—				—				(113	)
Allowance at June 30, 2016		$	1,373			$	1,036			$	1,704			$	643			$	249			$	3			$	178			$	5,186

  

 

Additional information pertaining to the allowance for loan losses is as follows:

  

		Residential Real Estate				Commercial Real Estate				Construction				Commercial				Home Equity				Other Consumer				Unallocated				Total
		(In thousands)
June 30, 2017
Allowance related to impaired loans		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Allowance related to non-impaired loans			1,563				1,171				1,760				714				215				2				118				5,543
Total allowance		$	1,563			$	1,171			$	1,760			$	714			$	215			$	2			$	118			$	5,543
Impaired loan balances		$	175			$	582			$	—			$	—			$	—			$	—			$	—			$	757
Non-impaired loan balances			296,929				123,300				118,320				50,496				33,015				223				—				622,283
Total loans		$	297,104			$	123,882			$	118,320			$	50,496			$	33,015			$	223			$	—			$	623,040
December 31, 2016
Allowance related to impaired loans		$	—			$	—			$	—			$	—			$	—			$	—			$	—			$	—
Allowance related to non-impaired loans			1,422				1,145				1,827				703				211				3				121				5,432
Total allowance		$	1,422			$	1,145			$	1,827			$	703			$	211			$	3			$	121			$	5,432
Impaired loan balances		$	179				591			$	—			$	—			$	—			$	—			$	—			$	770
Non-impaired loan balances			267,880				120,543				110,390				49,347				32,437				216				—				580,813
Total loans		$	268,059			$	121,134			$	110,390			$	49,347			$	32,437			$	216			$	—			$	581,583

 

The following is a summary of past due and non-accrual loans:

 

		30-59 Days Past Due				60-89 Days Past Due				Past Due 90 Days or More				Total Past Due				Past Due 90 Days or More and Still Accruing				Non-accrual Loans
		(In thousands)
June 30, 2017
Commercial real estate		$	964			$	—			$	—			$	964			$	—			$	582
December 31, 2016
Commercial real estate		$	—			$	979			$	591			$	1,570			$	—			$	591
Home equity lines of credit			—				208				—				208				—				—
Total		$	—			$	1,187			$	591			$	1,778			$	—			$	591

 

 

The following is a summary of impaired loans:

 

		June 30, 2017								December 31, 2016
		Recorded Investment				Unpaid Principal Balance				Recorded Investment				Unpaid Principal Balance
		(In thousands)
Impaired loans without a valuation allowance:
Residential real estate		$	175			$	193			$	179			$	196
Commercial real estate			582				714				591				646
Total impaired loans		$	757			$	907			$	770			$	842

 

Additional information pertaining to impaired loans follows:

 

		Three Months Ended June 30, 2017												Six Months Ended June 30, 2017
		Average Recorded Investment				Interest Income Recognized				Interest Income Recognized on Cash Basis				Average Recorded Investment				Interest Income Recognized				Interest Income Recognized on Cash Basis
		(In thousands)
Residential real estate		$	176			$	2			$	—			$	177			$	3			$	—
Commercial real estate			581				43				43				583				43				43
Total		$	757			$	45			$	43			$	760			$	46			$	43

 

		Three Months Ended June 30, 2016												Six Months Ended June 30, 2016
		Average Recorded Investment				Interest Income Recognized				Interest Income Recognized on Cash Basis				Average Recorded Investment				Interest Income Recognized				Interest Income Recognized on Cash Basis
		(In thousands)
Residential real estate		$	468			$	5			$	3			$	516			$	11			$	8
Commercial real estate			626				—				—				633				—				—
Commercial			8				—				—				9				—				—
Home equity lines of credit			32				—				—				33				1				1
Total		$	1,134			$	5			$	3			$	1,191			$	12			$	9

 

No additional funds are committed to be advanced in connection with impaired loans.

 

The following is a summary of troubled debt restructurings recorded for the three and six months ended June 30, 2017.

 

		Number of Contracts				Pre- Modification Outstanding Recorded Investment				Post- Modification Outstanding Recorded Investment
		(In thousands)
Commercial real estate		$	1			$	572			$	582

 

The Company recorded a TDR for one commercial borrower which capitalized past-due interest over the remaining term of the loan in accordance with their bankruptcy filing during the three and six months ended June 30, 2017.

 

 

There were no TDRs recorded during the three and six months ended June 30, 2016.

 

There were no TDRs that defaulted during the three and six months ended June 30, 2017 and 2016, and for which default was within one year of the restructure date.

 

Credit Quality Information

 

The Company utilizes an eleven-grade internal loan rating system for commercial real estate, construction and commercial loans.

 

Loans rated 1-4: Loans in these categories are considered “pass” rated loans with low to average risk.

 

Loans rated 5: 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 6: 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 7: 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 8: Loans in this category are considered “loss” or uncollectible and of such little value that their continuance as loans is not warranted.

 

Loans rated 9: Loans in this category only include commercial loans under $25 thousand with no other outstandings or relationships with the Company that are not rated for credit quality on an annual basis.

 

Loans rated 10: Loans in this category include loans which otherwise require rating but which have not been rated, or loans for which the Company’s loan policy does not require rating.

 

Loans rated 11: Loans in this category include credit commitments/relationships that cannot be rated due to a lack of financial information or inaccurate financial information. If, within 60 days of the assignment of an 11 rating, information is still not available to allow a standard rating, the credit will be rated 6.

 

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial loans. During each calendar year, 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 monthly basis, the Company reviews the residential real estate and consumer loan portfolio for credit quality primarily through the use of delinquency reports.

 

The following table presents the Company’s loans by risk rating:

 

		June 30, 2017																December 31, 2016
		Commercial Real Estate				Construction				Commercial				Total				Commercial Real Estate				Construction				Commercial				Total
		(In thousands)
Loans rated 1 -4		$	119,111			$	118,320			$	49,473			$	286,904			$	115,110			$	110,390			$	46,820			$	272,320
Loans rated 5			4,189				—				325				4,514				5,433				—				1,569				7,002
Loans rated 6			—				—				698				698				—				—				958				958
Loans rated 7			582				—				—				582				591				—				—				591
Total		$	123,882			$	118,320			$	50,496			$	292,698			$	121,134			$	110,390			$	49,347			$	280,871

 

 

NOTE 7 – FAIR VALUES OF FINANCIAL INSTRUMENTS

 

Fair value hierarchy

 

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

 

Level 1 – Valuation is based on quoted market prices in active exchange markets for identical assets and liabilities. Valuations are obtained from readily available pricing sources.

 

Level 2 – Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities. Valuations are obtained from readily available pricing sources.

 

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. Level 3 assets include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as those for which the determination of fair value requires significant management judgment or estimation.

 

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

 

Determination of fair value

 

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Fair value 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. 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 financial instruments. In cases where quoted market prices are not available, fair values are based on estimates using present value 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 following methods and assumptions were used by the Company in estimating fair value disclosures:

 

Cash, cash equivalents and certificates of deposit: The carrying amounts approximate fair values based on the short-term nature of the assets.

 

Securities available for sale: Fair value measurements are obtained from a third-party pricing service and are not adjusted by management. All securities are measured at fair value in Level 2 based on valuation models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.

 

Federal Home Loan Bank (“FHLB”) stock: The carrying value of FHLB stock is deemed to approximate fair value based on the redemption provisions of the FHLB of Boston.

 

Loans held for sale: Fair values are based on commitments in effect from investors or prevailing market prices.

 

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

 

Deposits: The fair values disclosed for non-certificate deposit 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 certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

 

 

Short-term borrowings: The carrying amount of short-term borrowings approximates fair value, based on the short-term nature of the liabilities.

 

Long-term debt: The fair values of long-term debt are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

 

Subordinated debt: The fair values reported for subordinated debentures are based on the discounted value of contractual cash flows. The discount rates used are representative of approximate rates currently offered on instruments with similar terms and maturities.

 

Accrued interest: The carrying amounts of accrued interest approximate fair value.

 

Forward loan sale commitments and derivative loan commitments: The fair value of forward loan sale commitments and derivative loan commitments are based on fair values of the underlying mortgage loans, including servicing values as applicable. The fair value of derivative loan commitments also considers the probability of such commitments being exercised.

 

Off-balance sheet instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing. The fair values of these instruments are considered immaterial.

 

Assets and liabilities measured at fair value on a recurring basis

 

Assets and liabilities measured at fair value on a recurring basis at June 30, 2017 and December 31, 2016 are summarized below.

 

		Level 1				Level 2				Level 3				Total Fair Value
		(In thousands)
June 30, 2017
Assets
Securities available for sale		$	—			$	66,471			$	—			$	66,471
Forward loan sale commitments			—				24				—				24
Total assets		$	—			$	66,495			$	—			$	66,495
Liabilities
Derivative loan commitments		$	—			$	9			$	—			$	9
December 31, 2016
Assets
Securities available for sale		$	—			$	64,648			$	—			$	64,648
Forward loan sale commitments			—				72				—				72
Total assets		$	—			$	64,720			$	—			$	64,720
Liabilities
Derivative loan commitments		$	—			$	17			$	—			$	17

 

 

Assets measured at fair value on a non-recurring basis

 

The Company may also be required, from time to time, to measure certain other financial assets at fair value on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market (“LOCOM”) accounting or write-downs of individual assets. The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets.

 

There are no liabilities measured at fair value on a non-recurring basis at June 30, 2017 and December 31, 2016.

 

		June 30, 2017												December 31, 2016
		Level 1				Level 2				Level 3				Level 1				Level 2				Level 3
		(In thousands)
Loans held for sale		$	—			$	—			$	1,057			$	—			$	—			$	1,454

 

The following table presents the total losses on loans held for sale and impaired loans for the three and six month periods ended June 30, 2017 and 2016.

 

		Three Months Ended June 30,								Six Months Ended  June 30,
		2017				2016				2017				2016
		(In thousands)
Loans held for sale		$	(5	)		$	(8	)		$	(5	)		$	(8	)
Impaired loans			—				(113	)			—				(113	)
		$	(5	)		$	(121	)		$	(5	)		$	(121	)

 

Loans held for sale (“LHFS”) are evaluated for losses associated with the application of LOCOM accounting. At June 30, 2017, a rise in market interest rates above contractual loan rates from the time LHFS were recorded is reflected as a reduction in the carrying value of the asset and a loss is recognized in current period earnings. Losses applicable to certain impaired loans are estimated using the appraised value of the underlying collateral considering discounting factors and adjusted for selling costs. The loss is not recorded directly as an adjustment to current earnings, but rather as a component in determining the overall adequacy of the allowance for loan losses. Adjustments to the estimated fair value of impaired loans may result in increases or decreases to the provision for loan losses.

 

 

 

Summary of fair values of financial instruments

 

The estimated fair values and related carrying amounts of the Company’s financial instruments are outlined in the table below. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.

 

		Fair Value
		Carrying Amount				Level 1				Level 2				Level 3				Total
		(In thousands)
June 30, 2017
Financial assets:
Cash and cash equivalents		$	22,273			$	22,273			$	—			$	—			$	22,273
Certificates of deposit			100				100				—				—				100
Securities available for sale			66,471				—				66,471				—				66,471
FHLB stock			6,436				—				—				6,436				6,436
Loans held for sale			1,057				—				—				1,057				1,057
Loans, net			617,590				—				—				630,440				630,440
Accrued interest receivable			1,626				—				—				1,626				1,626
Forward loan sale commitments			24				—				—				24				24
Financial liabilities:
Deposits		$	535,234			$	—			$	—			$	536,311			$	536,311
Short-term borrowings			24,250				—				24,250				—				24,250
Long-term debt			100,848				—				101,109				—				101,109
Subordinated debt			9,786				—				—				9,552				9,552
Accrued interest payable			193				—				—				193				193
Derivative loan commitments			9				—				9				—				9
December 31, 2016
Financial assets:
Cash and cash equivalents		$	28,425			$	28,425			$	—			$	—			$	28,425
Certificate of deposit			100				100				—				—				100
Securities available for sale			64,648				—				64,648				—				64,648
FHLB stock			5,758				—				—				5,758				5,758
Loans held for sale			1,454				—				—				1,454—				1,454
Loans, net			576,131				—				—				591,450				591,450
Accrued interest receivable			1,647				—				—				1,647				1,647
Forward loan sale commitments			72				—				72				—				72
Financial liabilities:
Deposits		$	522,810			$	—			$	—			$	523,479			$	523,479
Short-term borrowings			21,250				—				21,250				—				21,250
Long-term debt			83,020				—				83,254				—				83,254
Subordinated debt			9,769				—				—				9,506				9,506
Accrued interest payable			140				—				—				140				140
Derivative loan commitments			17				—				17				—				17

 

 

NOTE 8 – EMPLOYEE STOCK OWNERSHIP PLAN

 

The Bank maintains an Employee Stock Ownership Plan (the “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 limits.

 

The Company granted a loan to the ESOP for the purchase shares of the Company’s common stock on the closing date of the Company’s mutual to stock conversion in 2012. As of June 30, 2017, the ESOP held 182,526 shares or 7.30% of the common stock outstanding on that date. The loan obtained by the ESOP from the Company to purchase common stock is payable annually over 15 years at the rate of 3.25% per annum. The loan can be prepaid without penalty. Loan payments are expected to be funded by cash contributions from the Bank. The loan is secured by the shares purchased, which are held in a suspense account for allocation among participants as the loan is repaid. Cash dividends paid on allocated shares will be distributed to participants and cash dividends paid on unallocated shares will be 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.

 

Shares held by the ESOP at June 30, 2017 include the following:

 

Allocated			54,144
Committed to be allocated			6,419
Unallocated			121,963
			182,526

 

The fair value of unallocated shares was $3.4 million at June 30, 2017.

 

Total compensation expense recognized in connection with the ESOP for the three and six month periods ended June 30, 2017 was $87 thousand and $174 thousand, respectively.

 

NOTE 9 – EQUITY INCENTIVE PLANS

 

Under the Company’s 2016 Equity Incentive Plan (the “2016 Equity Incentive Plan”), effective July 27, 2016, the Company may grant restricted stock awards to its employees and directors for up to 75,000 shares of its common stock. A restricted stock award (the “award”) is a grant of shares of Company common stock for no consideration, subject to a vesting schedule or the satisfaction of market conditions or performance criteria. Awarded shares are held in reserve for each grantee by the Company’s transfer agent, and will be issued from previously authorized but unissued shares upon vesting. The fair value of the stock awards, based on the market price at the grant date, will be recognized over the five-year vesting period.

 

Under the Company’s 2012 Equity Incentive Plan (the “2012 Equity Incentive Plan”), the Company granted stock options to its employees and directors in the form of incentive stock options and non-qualified stock options totaling 231,894 shares of its common stock. The exercise price of each stock option was not less than the fair market value of the Company’s common stock on the date of grant, and the maximum term of each option is 10 years from the date of each award. The vesting period is five years from the date of grant, with vesting at 20% per year.

 

Under the 2012 Equity Incentive Plan, the Company also granted stock awards to management, employees and directors. Awarded shares are held in reserve for each grantee by the Company’s transfer agent, and will be issued from previously authorized but unissued shares upon vesting. The fair value of the stock awards, based on the market price at the grant date, is recognized over the five-year vesting period.

 

The Company’s 2012 Equity Incentive Plan was terminated upon approval of the 2016 Equity Incentive Plan.

 

 

Stock Options

A summary of option activity under the 2012 Equity Incentive Plan for the six months ended June 30, 2017 is presented below:

 

Options		Number of Shares				Weighted Average Exercise Price				Weighted Average Remaining Contractual Term				Aggregate Intrinsic Value
		(In thousands)								(In years)				(In thousands)
Outstanding at beginning of period			222			$	16.02				5.92
Granted			—				—				—
Exercised			—				—				—
Forfeited			—				—				—
Outstanding at end of period			222			$	16.02				5.67			$	2,597
Options exercisable at end of period			158			$	15.40				5.32			$	1,879

 

For the three months ended June 30, 2017 and 2016, compensation expense applicable to the stock options was $53 thousand, and the recognized tax benefit related to this expense was $9 thousand, in both periods.

 

For the six months ended June 30, 2017 and 2016, compensation expense applicable to the stock options was $106 thousand, and the recognized tax benefit related to this expense was $19 thousand in both years.

 

Unrecognized compensation expense for non-vested stock options totaled $133 thousand as of June 30, 2017, which will be recognized over the remaining weighted average vesting period of 0.67 years.

 

Stock Awards

The following table presents the activity in non-vested stock awards under the Equity Incentive Plans for the six months ended June 30, 2017:

 

		Number of Shares				Grant-date Fair Value
		(In thousands)
Non-vested stock awards at beginning of year			51			$	19.38
Restricted shares granted			5				27.65
Non-vested stock awards at end of period			56			$	20.11

 

For the three months ended June 30, 2017 and 2016, compensation expense applicable to the stock awards was $113 thousand and $74 thousand, respectively, and the recognized tax benefit related to this expense was $45 thousand and $28 thousand, respectively.

 

For the six months ended June 30, 2017 and 2016, compensation expense applicable to the stock awards was $214 thousand and $148 thousand, respectively, and the recognized tax benefit related to this expense was $86 thousand and $59 thousand, respectively.

 

Unrecognized compensation expense for non-vested restricted stock totaled $813 thousand as of June 30, 2017, which will be recognized over the remaining weighted average vesting period of 2.88 years.

 

 

NOTE 10 – EARNINGS PER COMMON SHARE

 

Basic earnings per share represents net income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Unallocated ESOP shares are not deemed outstanding for earnings per share calculations. Under the Company’s 2012 and 2016 Equity Incentive Plans, stock awards contain non-forfeitable dividend rights. Accordingly, these shares are considered outstanding for computation of basic earnings per share. Potential common shares that may be issued by the Company relate to outstanding stock options and are determined using the treasury stock method.

 

Earnings per common share have been computed as follows:

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2017				2016				2017				2016
		(In thousands, except per share data)
Net income applicable to common stock		$	937			$	727			$	1,818			$	1,459
Average number of common shares issued			2,488				2,458				2,486				2,458
Less: Average unallocated ESOP shares			(123	)			(136	)			(125	)			(138	)
Average number of common shares outstanding used to calculate basic earnings per common share			2,365				2,322				2,361				2,320
Effect of dilutive stock options			85				30				85				26
Average number of common shares outstanding used to calculate diluted earnings per share			2,450				2,352				2,446				2,346
Earnings per common share:
Basic		$	0.40			$	0.31			$	0.77			$	0.63
Diluted		$	0.38			$	0.31			$	0.74			$	0.62

 

All options were included in the computations of diluted earnings per share for the three and six months ended at June 30, 2017.

 

For the three and six months ended June 30, 2016, options for 43,400 shares were not included in the computations of diluted earnings per share because to do so would have been anti-dilutive. Anti-dilutive shares are common stock equivalents with exercise prices in excess of the average market value of the Company’s stock for the periods presented.

 

 

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

 

Safe Harbor Statement for Forward-Looking Statements

 

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

 

Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to the Company’s actual results, performance and achievements being materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; the changing quality and composition of the loan and investment securities portfolio; loan demand; deposit flows; competition; and, changes in accounting principles and guidelines. Additional factors that may affect our results are discussed in the Company’s 2016 Annual Report on Form 10-K under the section titled “Item 1A.–Risk Factors.” These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements.

 

Critical Accounting Policies

 

We consider critical accounting policies to be accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income.

 

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are the following: the likelihood of loan default; the loss exposure at default; the amount and timing of future cash flows on impaired loans; the value of collateral; and, the determination of loss factors to be applied to the various qualitative elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance at least quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectibility of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, the Federal Deposit Insurance Corporation and Massachusetts Commissioner of Banks, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.

 

Deferred Tax Assets. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. Management reviews deferred tax assets on a quarterly basis to identify any uncertainties pertaining to realization of such assets. In determining whether a valuation allowance is required against deferred tax assets, management assesses historical and forecasted operating results, including a review of eligible carry-forward periods, tax planning opportunities and other relevant considerations. We believe the accounting estimate related to the valuation allowance is a critical estimate because the underlying assumptions can change from period to period. For example, tax law changes or variances in future projected operating performance could result in a change in the valuation allowance. Should actual factors and conditions differ materially from those used by management, the actual realization of net deferred tax assets could differ materially from the amounts recorded in the financial statements. If we were not able to realize all or part of our deferred tax assets in the future, an adjustment to the related valuation allowance would be charged to income tax expense in the period such determination was made and could have a negative impact on earnings. In addition, if actual factors and conditions differ materially from those used by management, we could incur penalties and interest imposed by taxing authorities.

 

 

Comparison of Financial Condition at June 30, 2017 and December 31, 2016

 

General. Total assets increased $37.1 million, or 5.3%, from $695.3 million at December 31, 2016 to $732.3 million at June 30, 2017. Total asset growth was due to an increase in gross loans of $41.6 million or 7.1%, and an increase of $1.8 million, or 2.8%, in securities available for sale, partially offset by a reduction of $6.2 million, or 21.6%, in cash and cash equivalents.

 

Loans. Growth in the loan portfolio of $41.6 million, or 7.1%, reflects our expansion efforts as well as a strategic focus to diversify our loan portfolio. Residential real estate loans increased $29.1 million to $297.1 million, compared to $268.1 million at December 31, 2016. The majority of growth in residential real estate was in adjustable-rate mortgages, but also included some fixed-rate loans, reflecting customer preferences. Commercial loans increased $1.1 million, or 2.3%, due largely to our presence in the Boston market. Commercial real estate loans increased $2.7 million, or 2.3%, as we have had recent success in expanding our business development efforts. Construction loans increased $7.9 million, or 7.2%, primarily due to strong housing demands within our lending area.

 

At June 30, 2017, total past due loans decreased $814 thousand as compared to December 31, 2016, as fewer customers are experiencing payment difficulties. Substantially all delinquent loans are secured by real estate collateral with values exceeding outstanding loan principal. Any losses expected on delinquent loans have been charged-off and amounted to $11 thousand and $113 thousand for the six months ended June 30, 2017 and June 30, 2016, respectively.

 

Securities. Total securities increased from $64.6 million at December 31, 2016 to $66.5 million at June 30, 2017, as excess liquidity was invested in tax-exempt municipal bonds.

 

Deposits. Total deposits increased $12.4 million, or 2.4%, from $522.8 million at December 31, 2016 to $535.2 million at June 30, 2017. Money market accounts increased $13.6 million. Certificates of deposit increased $2.1 million, which included $10.0 million of new brokered deposits used to diversify our funding for liquidity and cash needs. Demand deposits and NOW accounts increased $1.3 million, or 1.0%, to $131.9 million as growth was realized in both retail and commercial accounts. Savings accounts decreased $4.6 million.

 

Borrowings. We use borrowings, primarily from the FHLB, to supplement our supply of funds for loans and securities, and to support short-term liquidity needs of the institution. Long-term debt, consisting entirely of FHLB advances, increased $17.8 million, or 21.5%, for the six months ended June 30, 2017. Short-term borrowings consist entirely of advances from the FHLB with initial maturities less than one year. Balances of short-term borrowings increased $3.0 million, or 14.1%, since December 31, 2016. The balance of the subordinated debt was $9.8 million at June 30, 2017.

 

Stockholders’ Equity. Stockholders’ equity increased $2.5 million, or 4.4%, from $55.2 million at December 31, 2016 to $57.7 million at June 30, 2017, primarily as a result of net income for the six month period of $1.8 million, an increase in the value of share-based compensation related to the equity incentive plans of $320 thousand, an increase in the after-tax effect of increases in the fair value of available for sale securities of $363 thousand, offset by dividends paid.

 

Results of Operations for the Three Months Ended June 30, 2017 and 2016

 

Overview. Net income for the three months ended June 30, 2017 was $937 thousand, compared to net income of $727 thousand for the three months ended June 30, 2016. The $210 thousand increase was primarily due to an increase in net interest income, partially offset by a decrease in non-interest income and an increase in non-interest expenses. Net interest income increased $662 thousand to $5.5 million; non-interest income decreased $61 thousand to $449 thousand in the 2017 quarter, while non-interest expense increased $258 thousand to $4.3 million in the same period.

 

Net Interest Income. Net interest income for the three months ended June 30, 2017 increased $662 thousand, or 13.6%, as compared to the three months ended June 30, 2016. The increase in net interest income was primarily due to increases in the average balances of loans. Interest expense increased, driven by overall deposit growth, higher rates offered on money market accounts, and increases in long-term borrowings.

 

 

Interest and dividend income increased $793 thousand, or 13.1%, from $6.1 million for the three months ended June 30, 2016 to $6.9 million for the three months ended June 30, 2017. The average balance of interest-earning assets increased 12.7%, while the average rate earned on these assets increased by one basis point (“bp”). Interest and fees on loans increased $741 thousand, or 13.2%, due to a 14.2% increase in the average balance of loans partially offset by a five bp decrease in the average rate earned on loans. Contributing to the increase in loan income was the increase in residential real estate, construction loans, commercial real estate and commercial loan balances during the period. Interest income from investments increased $42 thousand, or 10.5%, due to an increase in the average balances for the three months ended June 30, 2017 as compared to the prior year period, as well as an increase in the average rate earned on these securities due, in part, to recent Federal Reserve interest rate increases.

 

The increase in interest expense was primarily due to an increase in average balances of interest-bearing deposits and long-term debt. The average balance of interest-bearing deposits increased $39.0 million, or 9.8%, in the three months ended June 30, 2017, compared to the same period in 2016 and the average rate paid on interest bearing deposits decreased one bp. The rate paid on savings accounts increased two bps primarily due to a higher rate structure for these accounts than in the prior year while the average balance of savings accounts decreased $714 thousand to $97.9 million, as compared to the prior year period. The cost of term certificates of deposit increased $32 thousand to $568 thousand as balances in our retail products, deposits generated through a national certificate of deposit clearinghouse and brokered CDs have increased, and rates paid to acquire these balances have decreased four bps, compared to the same period last year. The average balance of long-term FHLB advances increased from $75.2 million to $94.9 million, while rates paid on long-term FHLB advances decreased from 1.37% to 1.26%. Interest expense on short-term borrowings totaled $48 thousand in the three month period ended June 30, 2017, compared to $24 thousand in the three months ended June 30, 2016 due to rates increasing by 52 bps.

 

Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using daily balances. Loan fees are included in interest income on loans and are insignificant. Yields are not presented on a tax-equivalent basis. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant.

 

 

		For the Three Months Ended June,
		2017												2016
(Dollars in thousands)		Average Outstanding Balance				Interest Earned/ Paid				Average Yield/ Rate (1)				Average Outstanding Balance				Interest Earned/ Paid				Average Yield/ Rate (1)
Interest-earning assets:
Short-term investments		$	19,194			$	42				0.88	%		$	17,295			$	17				0.41	%
Debt securities:
Taxable			54,323				333				2.46				57,948				340				2.36
Tax-exempt			12,613				78				2.47				8,784				54				2.48
Total loans and loans held for sale			599,983				6,355				4.25				525,326				5,614				4.30
FHLB stock			6,336				59				3.71				5,325				49				3.68
Total interest-earning assets			692,449				6,867				3.98				614,678				6,074				3.97
Allowance for loan losses			(5,452	)											(5,195	)
Total interest-earning assets less allowance for loan losses			686,997												600,483
Non-interest-earning assets			22,275												21,250
Total assets		$	709,272											$	630,733
Interest-bearing liabilities:
Regular savings accounts		$	97,904				110				0.45			$	98,618				106				0.43
NOW checking accounts			34,186				23				0.27				30,726				19				0.25
Money market accounts			104,914				127				0.48				85,398				97				0.46
Certificates of deposit			199,887				568				1.14				183,197				536				1.18
Total interest-bearing deposits			436,891				828				0.76				397,939				758				0.77
Short-term borrowings			17,964				48				1.06				17,285				24				0.54
Long-term debt			94,910				299				1.26				75,192				261				1.37
Subordinated debt			9,781				158				6.56				9,746				159				6.52
Total interest-bearing liabilities			559,546				1,333				0.96				500,162				1,202				0.97
Non-interest-bearing demand deposits			89,025												73,861
Other non-interest-bearing liabilities			3,147												2,381
Total liabilities			651,718												576,404
Stockholders’ equity			57,554												54,329
Total liabilities and stockholders’ equity		$	709,272											$	630,733
Net interest income						$	5,534											$	4,872
Net interest rate spread (2)											3.02	%											3.00	%
Net interest-earning assets (3)		$	132,903											$	114,516
Net interest margin (4)											3.21	%											3.19	%
Average total interest-earning assets to average total interest-bearing liabilities			123.75	%											122.90	%

 

(1)

Ratios for the three month periods have been annualized.

(2)

Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities.

(3)

Represents total average interest-earning assets less total average interest-bearing liabilities.

(4)

Represents net interest income as a percent of average interest-earning assets.

 

 

Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total increase (decrease) column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.

 

		Three Months Ended June 30, 2017 Compared to Three Months Ended June 30, 2016
		Increase (Decrease) Due to								Total Increase
(In thousands)		Volume				Rate				(Decrease)
Interest-earning assets:
Short-term investments		$	2			$	23			$	25
Debt securities:
Taxable			(16	)			9				(7	)
Tax-exempt			24				—				24
Total loans and loans held for sale			841				(100	)			741
FHLB stock			10				—				10
Total interest-earning assets			861				(68	)			793
Interest-bearing liabilities:
Regular savings			(1	)			5				4
NOW checking			2				2				4
Money market			24				6				30
Certificates of deposit			54				(22	)			32
Total interest-bearing deposits			79				(9	)			70
Short-term borrowings			1				23				24
Long-term debt			61				(23	)			38
Subordinated debt			—				(1	)			(1	)
Total interest-bearing liabilities			141				(10	)			131
Increase (decrease) in net interest income		$	720			$	(58	)		$	662

 

 

Provision for Loan Losses. The provision for loan losses was $122 thousand for the three months ended June 30, 2017, compared to $125 thousand for the three month period ended June 30, 2016. In the 2017 period, the provision reflects management’s estimate of loan losses based upon historical loan portfolio performance as well as environmental considerations such as the strength of the regional economy and organizational knowledge and expertise.

 

Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated.

 

		Three Months Ended
		June 30,
(Dollars in thousands)		2017				2016
Allowance at beginning of period		$	5,421			$	5,174
Provision for loan losses			122				125
Charge-offs			—				(113	)
Recoveries			—				—
Net charge-offs			—				(113	)
Allowance at end of period		$	5,543			$	5,186
Allowance for loan losses to nonperforming loans at end of period			953.17	%			605.04	%
Allowance for loan losses to total loans at end of period			0.89	%			0.97	%
Net charge-offs to average loans outstanding during the period			N/A				0.02	%

 

Non-interest Income. Non-interest income totaled $449 thousand, a decrease of $61 thousand or 12.0%. Wealth management fees increased $70 thousand, or 29.4%, as compared to the prior year as assets under management increased to $339.5 million as of June 30, 2017. Income from mortgage banking activities in 2017 decreased $87 thousand as sales of longer-term, fixed rate mortgage loans were lower as compared to the prior year. Miscellaneous income decreased $32 thousand due to a decrease in fees on customer swaps.

 

Non-interest Expense. Non-interest expense increased $258 thousand to $4.3 million for the three months ended June 30, 2017, from $4.1 million for the three months ended June 30, 2016. Factors that contributed to the increase in non-interest expense during the 2017 period were increased salaries and employee benefits of $123 thousand, or 5.2%, primarily attributable to several strategic hires in late 2016. FDIC insurance costs increased $68 thousand, or 82.9%, due to growth and new quarterly assessment rates. Data processing increased $43 thousand and other general administrative costs, such as advertising and insurance, increased $100 thousand due to expanding business volumes and operations. Professional fees decreased $96 thousand, as one-time charges were incurred during 2016 for certain staffing searches.

 

Income Taxes. An income tax provision of $599 thousand was recorded during the quarter ended June 30, 2017, compared to a provision of $463 thousand in the comparable 2016 quarter. The effective tax rate for the 2017 three month period was 39.0%, compared with 38.9% for the 2016 three month period.

 

Results of Operations for the Six Months Ended June 30, 2017 and 2016

 

Overview. Net income for the six months ended June 30, 2017 was $1.8 million, compared to net income of $1.5 million for the six months ended June 30, 2016, an increase of 24.6%. The $359 thousand increase was primarily due to increased net interest income of $1.1 million and increased non-interest income of $115 thousand, partially offset by increased non-interest expense of $645 thousand and provision of income taxes of $246 thousand.

 

Net Interest Income. Net interest income for the six months ended June 30, 2017 increased $1.1 million, or 11.1%, as compared to the six months ended June 30, 2016. The increase in net interest income was primarily due to an increase in interest income of $1.3 million, or 10.5% partially offset by interest expenses that increased $199 thousand, or 8.3%, during the period.

 

 

Interest and dividend income increased $1.3 million, or 10.5%, from $12.1 million for the six months ended June 30, 2016 to $13.4 million for the six months ended June 30, 2017. The average balance of interest-earning assets increased 12.1%, while the average rate earned on these assets decreased by four bps. Interest and fees on loans increased $1.2 million, or 10.4%, due to a 13.4% increase in the average balance of loans partially offset by a 10 bps decrease in the average rate earned on loans. Contributing to the increase in loan income was the increase in residential real estate, construction loan, commercial real estate and commercial loan balances during the period. Interest income from investments increased $87 thousand, or 10.6%, due to an increase in the average balances for the six months ended June 30, 2017 as compared to the prior year period, as well as an increase in the average rate earned on these securities, due, in part, to recent Federal Reserve interest rate increases.

 

The increase in interest expense was primarily due to an increase in average balances of interest-bearing deposits and long-term debt. The average balance of interest-bearing deposits increased $34.6 million, or 8.7%, in the six months ended June 30, 2017, as compared to the same period in 2016, while the average rate paid on interest-bearing deposits decreased two bps. The rate paid on money market accounts remained at 48 bps while the average balance of these accounts increased $19.3 million to $105.5 million, as compared to the prior year period. The cost of term certificates of deposit increased $36 thousand to $1.1 million as balances in both our retail products, deposits generated through a national certificate of deposit clearinghouse, and brokered CDs have increased, partially offset by a four bp decrease in the rates paid to acquire these balances, as compared to the same period last year. The average balance of long-term FHLB advances increased from $74.0 million to $90.2 million, while rates paid on long-term FHLB advances decreased from 1.35% to 1.31%. Interest expense on short-term borrowings totaled $80 thousand in the six months ended June 30, 2017, compared to $40 thousand in the six months ended June 30, 2016 while rates paid increased 42 bps.

 

 

Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using daily balances. Loan fees are included in interest income on loans and are insignificant. Yields are not presented on a tax-equivalent basis. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant.

 

		For the Six Months Ended June 30,
		2017												2016
(Dollars in thousands)		Average Outstanding Balance				Interest Earned/ Paid				Average Yield/ Rate (1)				Average Outstanding Balance				Interest Earned/ Paid				Average Yield/ Rate (1)
Interest-earning assets:
Short-term investments		$	20,172			$	85				0.85	%		$	17,756			$	40				0.47	%
Debt securities:
Taxable			54,556				672				2.49				57,233				670				2.35
Tax-exempt			11,676				147				2.53				8,323				107				2.58
Total loans and loans held for sale			589,598				12,332				4.22				519,786				11,171				4.32
FHLB stock			6,085				116				3.82				5,362				95				3.56
Total interest-earning assets			682,087				13,352				3.95				608,460				12,083				3.99
Allowance for loan losses			(5,442	)											(5,164	)
Total interest-earning assets less allowance for loan losses			676,645												603,296
Non-interest-earning assets			22,607												21,063
Total assets		$	699,252											$	624,359
Interest-bearing liabilities:
Regular savings accounts		$	97,586				219				0.45			$	99,121				225				0.46
NOW checking accounts			34,497				46				0.27				30,747				38				0.25
Money market accounts			105,503				251				0.48				86,179				207				0.48
Certificates of deposit			196,619				1,105				1.13				183,509				1,069				1.17
Total interest-bearing deposits			434,205				1,621				0.75				399,556				1,539				0.77
Short-term borrowings			16,825				80				0.95				14,862				40				0.53
Long-term debt			90,208				585				1.31				74,010				506				1.35
Subordinated debt			9,776				316				6.57				9,746				318				6.52
Total interest-bearing liabilities			551,014				2,602				0.95				498,174				2,403				0.97
Non-interest-bearing demand deposits			88,318												69,846
Other non-interest-bearing liabilities			3,023												2,615
Total liabilities			642,355												570,635
Stockholders’ equity			56,897												53,724
Total liabilities and stockholders’ equity		$	699,252											$	624,359
Net interest income						$	10,750											$	9,680
Net interest rate spread (2)											3.00	%											3.02	%
Net interest-earning assets (3)		$	131,073											$	110,287
Net interest margin (4)											3.18	%											3.20	%
Average total interest-earning assets to average total interest-bearing liabilities			123.79	%											122.14	%

 

(1)

Ratios for the six month periods have been annualized.

(2)

Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities.

(3)

Represents total average interest-earning assets less total average interest-bearing liabilities.

(4)

Represents net interest income as a percent of average interest-earning assets.

 

 

Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total increase (decrease) column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.

 

		Six Months Ended June 30, 2017 Compared to Six Months Ended June 30, 2016
		Increase (Decrease) Due to								Total Increase
(In thousands)		Volume				Rate				(Decrease)
Interest-earning assets:
Short-term investments		$	7			$	38			$	45
Debt securities:
Taxable			(34	)			36				2
Tax-exempt			(1	)			41				40
Total loans and loans held for sale			1,487				(326	)			1,161
FHLB stock			10				11				21
Total interest-earning assets			1,469				(200	)			1,269
Interest-bearing liabilities:
Regular savings			(3	)			(3	)			(6	)
NOW checking			5				2				7
Money market			(1	)			46				45
Certificates of deposit			77				(41	)			36
Total interest-bearing deposits			78				4				82
Short-term borrowings			6				34				40
Long-term debt			105				(26	)			79
Subordinated debt			—				(2	)			(2	)
Total interest-bearing liabilities			189				10				199
Increase (decrease) in net interest income		$	1,280			$	(210	)		$	1,070

 

 

Provision for Loan Losses. The provision for loan losses was $122 thousand for the six months ended June 30, 2017, compared to $187 thousand for the six month period ended June 30, 2016. In the 2017 period, the provision reflects management’s estimate of loan losses based upon historical loan portfolio performance as well as environmental considerations such as the strength of the regional economy and organizational knowledge and expertise.

 

Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated.

 

		Six Months Ended
		June 30,
(Dollars in thousands)		2017				2016
Allowance at beginning of period		$	5,432			$	5,112
Provision for loan losses			122				187
Charge-offs:			(11	)			(113	)
Recoveries			—				—
Net charge- offs			(11	)			(113	)
Allowance at end of period		$	5,543			$	5,186
Allowance for loan losses to nonperforming loans at end of period			953.17	%			605.04	%
Allowance for loan losses to total loans at end of period			0.89	%			0.97	%
Net charge-offs to average loans outstanding during the period			N/A				0.02	%

 

Non-interest Income. Non-interest income totaled $970 thousand, an increase of $115 thousand, or 13.5%, as income from wealth management fees in 2017 increased $154 thousand as assets under management increased to $339.5 million as of June 30, 2017. Mortgage banking activities in 2017 decreased $76 thousand compared to 2016 due to lower mortgage sales volumes. Miscellaneous income increased $42 thousand due to a $38 thousand increase in fees on customer swaps.

 

Non-interest Expense. Non-interest expense increased $645 thousand to $8.6 million during the six months ended June 30, 2017, from $8.0 million for the six months ended June 30, 2016. Factors that contributed to the increase in non-interest expense during the 2017 period were increased salaries and employee benefits of $430 thousand, or 9.2%, primarily attributable to the recognition of a full six months of expenses related to our Newton Centre office which opened in April 2016, along with several strategic hires in late 2016. FDIC insurance costs increased $138 thousand, or 86.8%, as new quarterly assessment rates were implemented. Occupancy and equipment expense increased $53 thousand resulting from normal rent increases and additional rent and other expense associated with our Newton Centre office space. Professional fees decreased $114 thousand, as one-time charges were incurred during 2016 for certain staffing searches.

 

Income Taxes. An income tax provision of $1.2 million was recorded during the six months ended June 30, 2017 compared to a provision of $916 thousand in the comparable 2016 period. The effective tax rate for the 2017 six month period was 39.0%, compared with 38.6% for the 2016 six month period.

 

Liquidity and Capital Resources

 

Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term and long-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities, and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, calls of securities and prepayments on loans are greatly influenced by general interest rates, economic conditions and competition.

 

Management regularly adjusts our investments in liquid assets based upon an assessment of the following: expected loan demand; expected deposit flows; yields available on interest-earning deposits and securities; and, the objectives of our interest-rate risk and investment policies.

 

 

Our most liquid assets are cash and cash equivalents, interest-bearing deposits in other banks, and securities available for sale. The level of these assets depends on our operating, financing, lending and investing activities during any given period. At June 30, 2017, cash and cash equivalents, which include short-term investments, totaled $22.3 million. Securities classified as available-for-sale, whose aggregate fair value of $66.5 million exceeds cost, and $1.1 million of loans held for sale provide additional sources of liquidity.

 

At June 30, 2017, we had $24.2 million in short-term borrowings outstanding, represented entirely by FHLB advances, and $100.8 million in long-term debt, also consisting entirely of FHLB advances. At June 30, 2017, we had a total of $13.2 million in unused borrowing capacity from the FHLB. Short-term borrowings are generally used to fund temporary cash needs due to the timing of loan originations and deposit gathering activities. Long-term debt is generally used to provide for longer-term funding needs of the Company, including the match funding of loans originated for portfolio. At June 30, 2017, we also had the ability to borrow $5.0 million from the Co-operative Central Bank on an unsecured basis, a credit line of $5.0 million with a correspondent bank, and $9.8 million from the Federal Reserve Bank under a collateralized borrowing program, none of which was outstanding at that date.

 

At June 30, 2017, we had $125.7 million in loan commitments outstanding, which included $46.5 million in unadvanced funds on construction loans, $28.3 million in unadvanced home equity lines of credit, $33.8 million in unadvanced commercial lines of credit, and $16.0 million in new loan originations.

 

Term certificates of deposit due within one year of June 30, 2017 amounted to $132.5 million, or 67.2%, of total term certificates, an increase of $9.5 million from $123.0 million at December 31, 2016. Balances of term certificates maturing in more than one year decreased to $64.6 million as compared to $72.0 million at December 31, 2016. Balances of term certificates that mature within one year reflect customer preferences for greater liquidity of personal funds, while longer-dated certificates reflect a willingness among customers to accept current interest rates for extended time periods. If maturing deposits are not renewed, we will be required to seek other sources of funds, including new term certificates and other borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the existing funds. Management believes, however, based on past experience that a significant portion of our term certificates will be renewed. We have the ability to attract and retain deposits by adjusting the interest rates offered.

 

The Company is a separate legal entity from the Bank and will have to provide for its own liquidity to pay its operating expenses and other financial obligations. The Company’s primary source of income will be dividends received from the Bank and earnings from investment of net proceeds from the offering retained by the Company. Massachusetts banking law and FDIC regulations limit distributions of capital. In addition, the Company is subject to the policy of the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the Company appears consistent with its capital needs, asset quality and overall financial condition. At June 30, 2017, the Company had $345 thousand of liquid assets as represented by cash and cash equivalents on an unconsolidated basis.

 

Capital Management. The Bank is subject to various regulatory capital requirements administered by the Federal Deposit Insurance Corporation and the Massachusetts Commissioner of Banks, including a risk-based capital measure. The Company is also subject to similar capital requirements set by the Federal Reserve Board. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. In July 2013, the Federal Reserve Board released its final rules, which implemented the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the Dodd-Frank Act. These rules became effective January 1, 2016 for community banks and increased both the quality and quantity of capital held by banks. The final rule implements strict eligibility criteria for regulatory capital instruments and improves the methodology for calculating risk-weighted assets to enhance risk sensitivity. Consistent with the international Basel framework, the final rule included a new minimum capital requirement of common equity Tier I capital to risk-weighted assets of 4.5% and a common equity Tier I capital conservation buffer of 2.5% of risk-weighted assets. The capital conservation buffer is being phased in beginning January 1, 2016 at 0.625% of risk-weighted assets, increasing each year until fully implemented to 2.5% on January 1, 2019. At June 30, 2017, the capital conservation buffer was 1.250%. In addition, the final rule raises the minimum ratio of Tier I capital to risk-weighted assets requirement from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations.

 

At June 30, 2017, the Bank was well-capitalized under the January 1, 2016 rules. Management believes the Bank’s capital levels will be characterized as “well-capitalized” upon full implementation of the new rules.

 

.

We strive to manage our capital for maximum shareholder benefit. The capital from our stock offering significantly increased our liquidity and capital resources. Over time, the initial level of liquidity has been reduced as net proceeds from the stock offering were used for general corporate purposes, including the funding of lending activities. Our financial condition and results of operations were enhanced by the capital from the offering, resulting over time in increased net interest-earning assets and net income. However, the large increase in equity resulting from the capital raised in the offering has had an adverse impact on our return on equity. To help us better manage our capital, we may use such tools as common share repurchases and cash dividends as regulations permit.

 

Off-Balance Sheet Arrangements

 

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For information about our loan commitments and unused lines of credit see Liquidity Management herein.

 

For the six months ended June 30, 2017, the Company did not engage in any off-balance sheet transactions reasonably likely to have a material effect on the Company’s financial condition, results of operations or cash flows.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

 

Qualitative Aspects of Market Risk

 

One significant risk affecting the financial condition and operating results of the Company and the Bank is interest rate risk. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Our strategy for managing interest rate risk emphasizes: originating adjustable-rate loans for retention in our loan portfolio; selling in the secondary market newly originated, conforming longer-term fixed rate residential mortgage loans; promoting core deposit products; adjusting the maturities of borrowings; and, adjusting the investment portfolio mix; and duration.

 

We have an Asset/Liability Committee, which includes members of management, to communicate, coordinate and control all aspects involving asset-liability management. The committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.

 

Quantitative Aspects of Market Risk

 

We analyze our interest rate sensitivity position to manage the risk associated with interest rate movements through the use of interest income and equity simulations. The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest sensitive.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or reprice within that time period.

 

Our goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income and the present value of our equity. Interest income and equity simulations are completed quarterly and presented to the Asset/Liability Committee and the Board of Directors. The simulations provide an estimate of the impact of changes in interest rates on net interest income and the present value of our equity under a range of assumptions. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates. The simulation analysis incorporates management’s current assessment of the risk that pricing margins will change adversely over time due to competition or other factors.

 

 

Simulation analysis is only an estimate of our interest rate risk exposure at a particular point in time. We continually review the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities. We engaged a new outside vendor in the third quarter of 2016 to increase functionality and sophistication of these simulations.

 

The table below sets forth an approximation of our exposure as a percentage of estimated net interest income for the next 12 month period using interest income and equity simulations. The simulations use projected repricing of assets and liabilities at June 30, 2017 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rates can have a significant impact on the simulations. Because of the large percentage of loans we hold, rising or falling interest rates have a significant impact on the prepayment speeds of our earning assets that, in turn, affect the rate sensitivity position. When interest rates rise, prepayments tend to slow. When interest rates fall, prepayments tend to rise. Our asset sensitivity would be reduced if prepayments slowed and would increase if prepayments accelerated. While we believe such assumptions to be reasonable, there can be no assurance that assumed prepayment rates will occur.

 

The following table reflects the estimated effects of changes in interest rates on the present value of our equity at June 30, 2017 and on our projected net interest income from June 30, 2017 through June 30, 2018.

 

				As of June 30, 2017												Over the Next 12 Months Ending June 30, 2018
Basis Point (“bp”)				Present Value of Equity												Projected Net Interest Income
Change in Rates				$ Amount				$ Change				% Change				$ Amount				$ Change				% Change
				(Dollars in thousands)
	300 bp			$	90,069			$	(7,496	)			(7.68	)%		$	21,576			$	(1,281	)			(5.60	)%
	200				94,157				(3,408	)			(3.49	)			22,070				(787	)			(3.44	)
	0				97,565				—				—				22,857				—				—
	(100)				90,347				(7,218	)			(7.40	)			22,406				(451	)			(1.97	)

 

Item 4. Controls and Procedures

 

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended June 30, 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 

PART II. OTHER INFORMATION

 

Item 1. Legal Proceedings

 

The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business. The Company’s management believes that such routine legal proceedings, in the aggregate, are immaterial to the Company’s financial condition and results of operations.

 

Item 1A. Risk Factors

 

For information regarding the Company’s risk factors, see Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, filed with the Securities and Exchange Commission on March 24, 2017. As of June 30, 2017, the risk factors of the Company have not changed materially from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2016.

 

Item 2. Defaults Upon Senior Securities

 

Not applicable.

 

Item 3. Mine Safety Disclosures

 

Not applicable.

 

Item 4. Other Information

 

Not applicable.

 

Item 5. Exhibits

 

3.1

Amended and Restated Articles of Incorporation of Wellesley Bancorp, Inc. (1)

 

3.2

Bylaws of Wellesley Bancorp, Inc. (2)

 

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

 

101.1

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2017, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements.

 

 

(1)

Incorporated herein by reference to the exhibits to Wellesley Bancorp, Inc.’s Pre-Effective Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-176764), filed with the Securities and Exchange Commission on November 7, 2011.

(2)

Incorporated herein by reference to the exhibits to Wellesley Bancorp, Inc.’s Registration Statement on Form S-1 (File No. 333-176764), filed with the Securities and Exchange Commission on September 9, 2011.

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

		WELLESLEY BANCORP, INC.
Dated:   August 10, 2017	By:	/s/ Thomas J. Fontaine
		Thomas J. Fontaine
		President and Chief Executive Officer
		(principal executive officer)
Dated:   August 10, 2017	By:	/s/ Michael W. Dvorak
		Michael W. Dvorak
		Chief Financial Officer and Treasurer
		(principal accounting and financial officer)