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EX-32.0 - EXHIBIT 32.0 - Wellesley Bancorp, Inc.tv477796_ex32-0.htm
EX-31.2 - EXHIBIT 31.2 - Wellesley Bancorp, Inc.tv477796_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Wellesley Bancorp, Inc.tv477796_ex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

FORM 10-Q

 

(Mark one)

 

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

 

For the quarterly period ended September 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, a smaller reporting company and an emerging growth company. See definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and emerging growth 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 November 1, 2017, there were 2,499,063 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 September 30, 2017 and December 31, 2016 1
     
  Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016 2
     
  Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2017 and 2016 3
     
  Consolidated Statements of Cash Flows for the Nine Months Ended September 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

 

   September 30, 2017   December 31, 2016 
   (Dollars in thousands) 
Assets          
           
Cash and due from banks  $3,994   $3,607 
Short-term investments   27,025    24,818 
Total cash and cash equivalents   31,019    28,425 
           
Certificates of deposit   100    100 
Securities available for sale, at fair value   65,731    64,648 
Federal Home Loan Bank of Boston stock, at cost   6,073    5,758 
Loans held for sale       1,454 
           
Loans   654,386    581,563 
Less allowance for loan losses   (5,793)   (5,432)
Loans, net   648,593    576,131 
           
Bank-owned life insurance   7,476    7,303 
Premises and equipment, net   3,495    3,876 
Accrued interest receivable   1,868    1,647 
Net deferred tax asset   2,990    2,742 
Other assets   2,504    3,199 
           
Total assets  $769,849   $695,283 
           
Liabilities and Stockholders’ Equity          
           
Deposits:          
Non-interest-bearing  $109,737   $94,946 
Interest-bearing   471,812    427,864 
    581,549    522,810 
Short-term borrowings   27,000    21,250 
Long-term debt   87,261    83,020 
Subordinated debt   9,794    9,769 
Accrued expenses and other liabilities   5,202    3,220 
Total liabilities   710,806    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, 2,492,352 and 2,484,852 shares issued and  outstanding at September  30, 2017 and  December 31, 2016, respectively   25    25 
Additional paid-in capital   25,400    24,703 
Retained earnings   34,634    31,999 
Accumulated other comprehensive income (loss)   172    (229)
Unearned compensation – ESOP   (1,188)   (1,284)
Total stockholders' equity   59,043    55,214 
Total liabilities and stockholders' equity  $769,849   $695,283 

 

See accompanying notes to consolidated financial statements.

 

 1 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

  

Three Months

Ended September 30,

  

Nine Months

Ended September 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  $6,747   $5,838   $19,079   $17,009 
Debt securities:                    
Taxable   337    355    1,009    1,025 
Tax-exempt   77    54    224    161 
Short-term investments and certificates of deposit   78    17    163    57 
FHLB stock   66    48    182    143 
Total interest and dividend income   7,305    6,312    20,657    18,395 
Interest expense:                    
Deposits   919    781    2,540    2,320 
Short-term borrowings   95    29    175    69 
Long-term debt   316    254    901    760 
Subordinated debt   158    159    474    477 
Total interest expense   1,488    1,223    4,090    3,626 
                     
Net interest income   5,817    5,089    16,567    14,769 
Provision for loan losses   250    125    372    312 
Net interest income, after provision for loan losses   5,567    4,964    16,195    14,457 
                     
Non-interest income:                    
Customer service fees   39    16    109    74 
Mortgage banking activities   34    71    98    218 
Gain on sale of securities, net               16 
Income on bank-owned life insurance   59    58    173    173 
Wealth management fees   314    260    917    709 
Miscellaneous   58    10    177    80 
Total non-interest income   504    415    1,474    1,270 
                     
Non-interest expenses:                    
Salaries and employee benefits   2,408    2,439    7,518    7,119 
Occupancy and equipment   684    708    2,087    2,058 
Data processing   230    201    651    574 
FDIC insurance   150    122    447    281 
Professional fees   192    244    547    713 
Other general and administrative   500    447    1,532    1,389 
Total non-interest expenses   4,164    4,161    12,782    12,134 
                     
Income before income taxes   1,907    1,218    4,887    3,593 
Provision for income taxes   741    463    1,903    1,379 
                     
Net income   1,166    755    2,984    2,214 
                     
Other comprehensive income (loss) :                    
Net unrealized holding gains (losses) on available-for-sale securities   63    (214)   640    1,101 
Reclassification adjustment for net gain on sale of securities recognized in non-interest income               (16)
Income tax expense (benefit)   25    (77)   239    410 
                     
Total other comprehensive income (loss)   38    (137)   401    675 
                     
Comprehensive income  $1,204   $618   $3,385   $2,889 
Earnings per common share:                    
Basic  $0.49   $0.32   $1.26   $0.95 
Diluted  $0.48   $0.32   $1.22   $0.94 
Weighted average shares outstanding:                    
Basic   2,370,623    2,325,356    2,364,449    2,322,147 
Diluted   2,454,198    2,364,437    2,448,558    2,352,110 

 

See accompanying notes to consolidated financial statements.

 

 2 

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months Ended September 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               2,214    675        2,889 
Dividends paid to common stockholders ($0.11 per share)               (270)           (270)
Share-based compensation- equity incentive plan           381                381 
Tax benefit from stock based compensation           2                2 
ESOP shares committed to be allocated  (9,629)           95            96    191 
                                    
Balance at September 30, 2016   2,458,553   $25   $24,470   $31,355   $837   $(1,316)  $55,371 
                                    
Balance at December 31, 2016   2,484,852   $25   $ 24,703  $31,999  $(229)  $(1,284)  $ 55,214
                                    
Comprehensive income               2,984    401        3,385 
Dividends paid to common stockholders ($0.14 per share)               ((349)           (349)
Issuance of restricted stock   5,000                         
Proceeds from exercises of stock options, net of cash   2,500        40                40 
Share-based compensation- equity incentive plan           493                2               493 
ESOP shares committed to be allocated  (9,629)           164            96    260 
                                    
Balance at September 30, 2017   2,492,352   $25   $25,400   $34,634   $172   $(1,188)  $59,043 

 

See accompanying notes to consolidated financial statements.

 

 3 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Nine Months Ended September 30, 
   2017   2016 
   (In thousands) 
Cash flows from operating activities:          
Net  income  $2,984   $2,214 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   372    312 
Depreciation and amortization   556    555 
Net amortization of securities   177    226 
Gain on sale of securities, net       (16)
Principal balance of loans sold   10,449    21,453 
Loans originated for sale   (8,995)   (22,539)
Accretion of net deferred loan fees   (438)   (418)
Amortization  of subordinated debt issuance costs   25    27 
Income on bank-owned life insurance   (173)   (173)
Deferred income tax benefit   (487)   (147)
ESOP expense   260    191 
Share-based compensation   493    381 
Net change in other assets and liabilities   2,456    (496)
Net cash provided by operating activities   7,679    1,570 
           
Cash flows from investing activities:          
Activity in securities available for sale:          
Maturities, prepayments and calls   3,393    12,559 
Purchases   (4,013)   (17,756)
Proceeds from sales of securities, net       1,088 
Purchase of Federal Home Loan Bank stock   (315)   (115)
Loan originations, net of principal payments   (72,396)   (41,124)
Additions to premises and equipment   (175)   (1,063)
Net cash used by investing activities   (73,506)   (46,411)
           
Cash flows from financing activities:          
Net increase in deposits   58,739    32,094 
Proceeds from long-term debt   39,000    17,585 
Repayments of long-term debt   (34,759)   (12,339)
Increase in short-term borrowings   5,750    4,250 
Excess tax benefits from share-based compensation       2 
Stock options exercised   40     
Cash dividends paid on common stock   (349)   (270)
Net cash provided by financing activities   68,421    41,322 
           
Net change in cash and cash equivalents   2,594    (3,519)
Cash and cash equivalents at beginning period   28,425    28,178 
Cash and cash equivalents at end of period  $31,019   $24,659 
           
Supplementary information:          
Interest paid  $3,986   $3,609 
Income taxes paid   2,134    1,210 

 

See accompanying notes to consolidated financial statements.

 

 4 

 

 

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 nine months ended September 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.

 

 5 

 

 

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.

 

 6 

 

 

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:

 

   September 30,   December 31, 
   2017   2016 
   (In thousands) 
     
Unrealized holding gains (losses) on securities available for sale  $266   $(374)
Tax effect   (94)   145 
           
Net-of tax amount  $172   $(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 consolidated financial statements.

 

 7 

 

 

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. The total outstanding leases, as of 12/31/2016 was $6.4 million.

 

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.

 

 8 

 

 

NOTE 5 – SECURITIES AVAILABLE FOR SALE

 

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

 

   September 30, 2017 
  

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Fair

Value

 
   (In thousands) 
                 
Residential mortgage-backed securities:                    
Government National Mortgage Association  $3,480   $49   $(41)  $3,488 
Government-sponsored enterprises   12,079    108    (55)   12,132 
SBA and other asset-backed securities   11,394    116    (71)   11,439 
State and municipal bonds   13,350    235    (41)   13,544 
Government-sponsored enterprise obligations   8,000        (130)   7,870 
Corporate bonds   17,162    125    (29)   17,258 
                     
   $65,465   $633   $(367)  $65,731 

 

   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 nine months ended September 30, 2017.

 

For the three months ended September 30, 2016, proceeds from sales of available-for-sale securities amounted to $995 thousand with no gross realized gains or losses. For the nine months ended September 30, 2016, proceeds from sales of available-for-sale securities amounted to $1.1 million with gross realized gains of $16 thousand and no gross realized losses.

 

 9 

 

 

The amortized cost and fair value of debt securities by contractual maturity at September 30, 2017 are as follows:

 

   Amortized
Cost
  

Fair
Value

 
   (In thousands) 
Within 1 year  $3,303   $3,295 
After 1 year to 5 years   19,072    19,177 
After 5 years to 10 years   15,208    15,278 
After 10 years   929    922 
    38,512    38,672 
Mortgage- and asset-backed securities   26,953    27,059 
           
   $65,465   $65,731 

 

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.

 

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) 
September 30, 2017                    
Residential mortgage-backed securities:                    
Government National Mortgage Association  $(16)  $912   $(25)  $846 
Government-sponsored enterprises   (36)   3,707    (19)   475 
SBA and other asset-backed securities   (33)   1,904    (38)   1,596 
State and municipal bonds   (23)   2,681    (18)   1,424 
Government-sponsored enterprise obligations   (38)   2,962    (92)   4,908 
Corporate bonds           (29)   1,992 
                     
   $(146)  $12,166   $(221)  $11,241 
                     
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 

  

 10 

 

 

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 September 30, 2017, various debt securities have unrealized losses with aggregate depreciation of 1.5% 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 September 30, 2017.

 

NOTE 6 – LOANS AND ALLOWANCE FOR LOAN LOSSES

 

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

 

   September 30,   December 31, 
   2017   2016 
   (In thousands) 
Real estate loans:          
Residential – fixed  $30,570   $18,573 
Residential – variable   280,403    249,486 
Commercial   130,086    121,134 
Construction   123,576    110,390 
    564,635    499,583 
           
Commercial loans:          
Secured   56,137    49,126 
Unsecured   20    221 
    56,157    49,347 
           
Consumer loans:          
Home equity lines of credit   33,271    32,437 
Other   212    216 
    33,483    32,653 
           
Total loans   654,275    581,583 
           
Less:          
Allowance for loan losses   (5,793)   (5,432)
Net deferred origination costs (fees)   111    (20)
           
Loans, net  $648,593   $576,131 

 

 11 

 

 

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

 

  

Residential

Real Estate

  

Commercial

Real Estate

   Construction   Commercial  

Home

Equity

  

Other

Consumer

   Unallocated   Total 
   (In thousands)     
Three Months Ended September 30, 2017                                        
                                         
Allowance at June 30, 2017   $1,563   $1,171   $1,760   $714   $215   $2   $118   $5,543 
                                         
Provision (credit) for loan losses   73    59    86    115    1        (84)   250 
                                         
Allowance at September 30, 2017  $1,636   $1,230   $1,846   $829   $216   $2   $34   $5,793 
                                         
Three Months Ended September 30, 2016                                        
                                         
Allowance at June 30, 2016   $1,373   $1,036   $1,704   $643   $249   $3   $178   $5,186 
                                         
Provision (credit) for loan losses   46    30    (8)   92    3        (38)   125 
Loans charged off   (4)                           (4)
                                         
Allowance at September 30, 2016  $1,415   $1,066   $1,696   $735   $252   $3   $140   $5,307 
                                         
Nine Months Ended September 30, 2017                                        
                                         
Allowance at December 31, 2016  $1,422   $1,145   $1,827   $703   $211   $3   $121   $5,432 
                                         
Provision (credit) for loan losses   214    85    19    126    5    10    (87)   372 
Loans charged off                       (11)       (11)
                                         
Allowance at September 30, 2017  $1,636   $1,230   $1,846   $829   $216   $2   $34   $5,793 
                                         
Nine Months Ended September 30, 2016                                        
                                         
Allowance at December 31, 2015  $1,490   $1,025   $1,684   $509   $238   $2   $164   $5,112 
                                         
Provision (credit) for loan losses   31    41    12    226    25    1    (24)   312 
Loans charged off   (106                (11)           (117)
                                         
Allowance at September 30, 2016  $1,415   $1,066   $1,696   $735   $252   $3   $140   $5,307 

 

 12 

 

 

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) 
September 30, 2017                                        
                                         
Allowance related to impaired loans  $   $   $   $   $   $   $   $ 
Allowance related to non-impaired loans   1,636    1,230    1,846    829    216    2    34    5,793 
                                         
Total allowance  $1,636   $1,230   $1,846   $829   $216   $2   $34   $5,793 
                                         
Impaired loan balances  $174   $580   $   $   $   $   $   $754 
Non-impaired loan balances   310,799    129,506    123,576    56,157    33,271    212        653,521 
                                         
Total loans  $310,973   $130,086   $123,576   $56,157   $33,271   $212   $   $654,275 
                                         
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) 
September 30, 2017                              
                               
Commercial real estate  $956   $580   $   $1,536   $   $580 
Home equity lines of credit   142            142         
                               
Total  $1,098   $580   $   $1,678   $   $580 
                               
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 

 

 13 

 

 

The following is a summary of impaired loans:

 

   September 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  $174   $192   $179   $196 
Commercial real estate   580    712    591    646 
                     
Total impaired loans  $754   $904   $770   $842 

 

Additional information pertaining to impaired loans follows:

 

   Three Months Ended September 30, 2017   Nine Months Ended September 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  $175   $2   $   $176   $5   $ 
Commercial real estate   582    5    5    583    48    48 
                               
Total  $757   $7   $5   $759   $53   $48 

 

   Three Months Ended September 30, 2016   Nine Months Ended September 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  $285   $2   $   $394   $13   $8 
Commercial real estate   610            625         
Commercial   5            8         
Home equity lines of credit   12            19    1    1 
                               
Total  $912   $2   $   $1,046   $14   $9 

 

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

 

There were no troubled debt restructurings during the three months ended September 30, 2017.

 

The following is a summary of troubled debt restructurings recorded for the nine months ended September 30, 2017.

 

   Number of
Contracts
  

Pre-
Modification
Outstanding

Recorded
Investment

  

Post-
Modification
Outstanding

Recorded
Investment

 
   (In thousands) 
                
Commercial real estate  $1   $572   $582 

 

 14 

 

 

During the nine months ended September 30, 2017, the Company recorded a TDR for one commercial real estate loan which capitalized past-due interest over the remaining term of the loan in accordance with their bankruptcy filing.

 

There were no TDRs recorded during the three and nine months ended September 30, 2016.

 

There were no TDRs that defaulted, generally considered 90 days past due or longer, during the three and nine months ended September 30, 2017 and 2016, and for which default was within one year of the restructure date. TDRs did not have a material impact on the allowance for loan losses for the three and nine months ended September 30, 2017 and 2016.

 

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:

 

   September 30, 2017   December 31, 2016 
  

Commercial

Real Estate

   Construction   Commercial   Total  

Commercial

Real Estate

   Construction   Commercial   Total 
   (In thousands) 
                                 
Loans rated 1 -4  $125,417   $123,576   $55,203   $304,196   $115,110   $110,390   $46,820   $272,320 
Loans rated 5   1,493        314    1,807    5,433        1,569    7,002 
Loans rated 6   2,596        640    3,236            958    958 
Loans rated 7   580            580    591            591 
                                         
Total  $130,086   $123,576   $56,157   $309,819   $121,134   $110,390   $49,347   $280,871 

 

 15 

 

 

NOTE 7 – FAIR VALUES OF FINANCIAL INSTRUMENTS

 

Fair value hierarchy

 

The Company groups its assets 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 assets and liabilities. 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 assets and liabilities.

 

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.

 

 16 

 

 

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 September 30, 2017 and December 31, 2016 are summarized below.

 

   Level 1   Level 2   Level 3   Total
Fair Value
 
   (In thousands) 
September 30, 2017                    
                     
Assets                    
Securities available for sale  $   $65,731   $   $65,731 
Forward loan sale commitments       5        5 
                     
Total assets  $   $65,736   $   $65,736 
Liabilities                    
Derivative loan commitments  $   $3   $   $3 
                    
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 

 

 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.

 

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

 

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

 

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

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2017   2016   2017   2016 
   (In thousands) 
Loans held for sale  $   $(18)  $   $(18)
Impaired loans       (4)       (118)
   $   $(22)  $   $(136)

 

Loans held for sale (“LHFS”) are evaluated for losses associated with the application of LOCOM accounting. 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.

 

 18 

 

 

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) 
September 30, 2017                         
                          
Financial assets:                         
Cash and cash equivalents  $31,019   $31,019   $   $   $31,019 
Certificates of deposit   100    100            100 
Securities available for sale   65,731        65,731        65,731 
FHLB stock   6,073            6,073    6,073 
Loans held for sale                    
Loans, net   648,593            658,627    658,627 
Accrued interest receivable   1,868            1,868    1,868 
Forward loan sale commitments   5            5    5 
                          
Financial liabilities:                         
Deposits  $581,549   $   $   $581,269   $581,269 
Short-term borrowings   27,000        27,000        27,000 
Long-term debt   87,261        87,524        87,524 
Subordinated debt   9,794            9,575    9,575 
Accrued interest payable   244            244    244 
Derivative loan commitments   3        3        3 
                          
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 

 

 19 

 

 

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 September 30, 2017, the ESOP held 181,508 shares or 7.28% 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 September 30, 2017 include the following:

 

Allocated   53,126 
Committed to be allocated   9,629 
Unallocated   118,753 
      
    181,508 

 

The fair value of unallocated shares was $3.2 million at September 30, 2017.

 

Total compensation expense recognized in connection with the ESOP for the three and nine month periods ended September 30, 2017 was $86 thousand and $260 thousand, respectively.

 

Total compensation expense recognized in connection with the ESOP for the three and nine month periods ended September 30, 2016 was $68 thousand and $191 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.

 

 20 

 

 

Stock Options

 

A summary of option activity under the 2012 Equity Incentive Plan for the nine months ended September 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   (3)  $15.77          
Forfeited                 
                     
Outstanding at end of period   219   $16.02    5.42   $2,410 
                     
 Options exercisable at end of period   155   $15.39    5.07   $1,737 

 

For the three months ended September 30, 2017 and 2016, compensation expense applicable to the stock options was $54 thousand and $53 thousand, respectively, and the recognized tax benefit related to this expense was $10 thousand, in both periods.

 

For the nine months ended September 30, 2017 and 2016, compensation expense applicable to the stock options was $159 thousand and the recognized tax benefit related to this expense was $28 thousand in both years.

 

Unrecognized compensation expense for non-vested stock options totaled $79 thousand as of September 30, 2017, which will be recognized over the remaining weighted average vesting period of 0.42 years.

 

Stock Awards

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

 

   Number of
Shares
  

Grant-date

Fair Value

 
   (In thousands)     
Non-vested stock awards at beginning of period   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 September 30, 2017 and 2016, compensation expense applicable to the stock awards was $121 thousand and $74 thousand, respectively, and the recognized tax benefit related to this expense was $134 thousand and $30 thousand, respectively.

 

For the nine months ended September 30, 2017 and 2016, compensation expense applicable to the stock awards was $334 thousand and $222 thousand, respectively, and the recognized tax benefit related to this expense was $134 thousand and $89 thousand, respectively.

 

Unrecognized compensation expense for non-vested restricted stock totaled $692 thousand as of September 30, 2017, which will be recognized over the remaining weighted average vesting period of 2.65 years.

 

 21 

 

 

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.

 

  

Three Months Ended

September 30,

  

Nine Months Ended

September 30,

 
   2017   2016   2017   2016 
   (In thousands, except per share data) 
Net income applicable to common stock  $            1,166   $         755   $2,984  $2,214
                     
Average number of common shares issued   2,490    2,458    2,488    2,458 
                     
Less: Average unallocated ESOP shares   (120)   (133)   (124)   (136)
                     
Average number of common shares outstanding used to calculate basic earnings per common share   2,370    2,325    2,364    2,322 
Effect of  dilutive stock options   84    39    85    30 
                     
Average number of common shares outstanding used  to calculate diluted earnings per share   2,454    2,364    2,449    2,352 
                     
 Earnings per common share:                    
Basic  $0.49   $0.32   $1.26   $0.95 
Diluted  $0.48   $0.32   $1.22   $0.94 

 

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

 

For the three and nine months ended September 30, 2016, options for 37,000 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.

 

 22 

 

 

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.

 

 23 

 

 

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

 

General. Total assets increased $74.6 million, or 10.7%, from $695.3 million at December 31, 2016 to $769.8 million at September 30, 2017. Total asset growth was due to an increase in total loans of $72.8 million or 12.5%, an increase in securities available for sale of $1.1 million, or 1.7%, and an increase in cash and cash equivalents of $2.6 million, or 9.1%.

 

Loans. Growth in the loan portfolio of $72.8 million, or 12.5%, reflects market demands and our expansion efforts as well as a strategic focus to diversify our loan portfolio. Residential real estate loans increased $42.9 million to $311.0 million, compared to $268.6 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. Construction loans increased $13.2 million, or 11.9%, primarily due to strong housing demands within our lending area. Commercial real estate loans increased $9.0 million, or 7.4%, as we have had recent success in expanding our business development efforts. Commercial loans increased $6.8 million, or 13.8%, due largely to our growing presence in the Boston market.

 

At September 30, 2017, past due loans totaled $1.7 million as compared to $1.8 million at 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 $117 thousand for the nine months ended September 30, 2017 and September 30, 2016, respectively.

 

Securities. Total securities increased from $64.6 million at December 31, 2016 to $65.7 million at September 30, 2017, as excess liquidity was invested in tax-exempt municipal bonds.

 

Deposits. Total deposits increased $58.7 million, or 11.2%, from $522.8 million at December 31, 2016 to $581.5 million at September 30, 2017. Money market accounts increased $33.9 million, or 33.9%, due to our success in attracting new deposit relationships. Certificates of deposit increased $11.3 million, which included $13.0 million of new brokered deposits used to diversify our funding for liquidity and cash needs. Demand deposits and NOW accounts increased $15.2 million, or 11.7%, to $145.8 million as growth was realized in both retail and commercial accounts. Savings accounts decreased $1.7 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 $4.2 million, or 5.1%, for the nine months ended September 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 $5.8 million, or 27.1%, since December 31, 2016. The balance of the subordinated debt was $9.8 million at September 30, 2017 and December 31, 2016.

 

Stockholders’ Equity. Stockholders’ equity increased $3.8 million, or 6.9%, from $55.2 million at December 31, 2016 to $59.0 million at September 30, 2017, primarily as a result of net income for the nine month period of $3.0 million, the Company’s equity incentive plans’ share-based compensation and ESOP expense of $753 thousand, an after-tax increase in the fair value of available for sale securities of $401 thousand, partially offset by dividends paid of $349 thousand.

 

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

 

Overview. Net income for the three months ended September 30, 2017 was $1.2 million, compared to net income of $755 thousand for the three months ended September 30, 2016, an increase of 54.4%. The $411 thousand increase was primarily due to an increase in net interest income and an increase in non-interest income, as non-interest expenses remained relatively flat. Net interest income increased $728 thousand to $5.8 million; non-interest income increased $89 thousand to $504 thousand in the 2017 quarter. Non-interest expense totaled $4.2 million for both quarters ended September 30, 2017 and 2016. The loan loss provision increased $125 thousand and income tax expense increased $278 thousand as compared to the 2016 prior period.

 

 24 

 

 

Net Interest Income. Net interest income for the three months ended September 30, 2017 increased $728 thousand, or 14.3%, as compared to the three months ended September 30, 2016. The increase in 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 borrowings.

 

Interest and dividend income increased $993 thousand, or 15.7%, from $6.3 million for the three months ended September 30, 2016 to $7.3 million for the three months ended September 30, 2017. The average balance of interest-earning assets increased 16.4%, while the average rate earned on these assets decreased by four basis points (“bp”). Interest and fees on loans increased $909 thousand, or 15.6%, due to a 17.5% increase in the average balance of loans partially offset by an eight bp decrease in the average rate earned on loans. Contributing to the increase in loan interest 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 $65 thousand, or 15.3%, due to an increase in the average balances for the three months ended September 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.

 

Interest expense increased $265 thousand, or 21.7% primarily due to an increase in average balances of interest-bearing deposits, and short and long-term debt. Deposit expense increased $138 thousand, or 17.7%. The average balance of interest-bearing deposits increased $52.3 million, or 12.8%, in the three months ended September 30, 2017, compared to the same period in 2016 and the average rate paid on interest bearing deposits increased three bps. Interest expense on money market accounts increased by $62 thousand to $169 thousand. The rate paid on money market accounts increased eight bps primarily due to a higher rate structure for these accounts than in the prior year along with the increase of the average balance of money market accounts of $32.3 million to $123.8 million, as compared to the prior year period. The cost of term certificates of deposit increased $83 thousand to $623 thousand as balances in our retail products, deposits generated through a national certificate of deposit clearinghouse and brokered CDs have increased. Rates paid on certificates of deposit balances have remained flat as compared to the same period last year. Long-term debt expense increased $62 thousand from year to year. The average balance of long-term FHLB advances increased from $74.1 million to $95.1 million, while rates paid on long-term FHLB advances decreased from 1.34% to 1.32%. Interest expense on short-term borrowings totaled $95 thousand in the three month period ended September 30, 2017, compared to $29 thousand in the three months ended September 30, 2016 due to increases in the average balance combined with rates increasing by 81 bps.

 

 25 

 

 

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 September, 
   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  $24,706   $78    1.24%  $14,792   $17    0.46%
Debt securities:                              
Taxable   53,318    337    2.51    59,053    355    2.39 
Tax-exempt   12,616    77    2.41    8,760    54    2.43 
Total loans and loans held for sale   641,681    6,747    4.17    546,311    5,838    4.25 
FHLB stock   6,395    66    4.14    5,481    48    3.51 
Total interest-earning assets   738,716    7,305    3.92    634,397    6,312    3.96 
Allowance for loan losses   (5,608)             (5,263)          
Total interest-earning assets less allowance for loan losses   733,108              629,134           
Non-interest-earning assets   22,814              21,122           
Total assets  $755,922             $650,256           
Interest-bearing liabilities:                              
Regular savings accounts  $95,012    106    0.44   $101,280    111    0.44%
NOW checking accounts   33,494    21    0.25    34,774    23    0.26 
Money market accounts   123,830    169    0.54    91,512    107    0.46 
Certificates of deposit   208,295    623    1.19    180,811    540    1.19 
Total interest-bearing deposits   460,631    919    0.79    408,377    781    0.76 
Short-term borrowings   27,033    95    1.39    19,728    29    0.58 
Long-term debt   95,123    316    1.32    74,124    254    1.34 
Subordinated debt   9,789    158    6.41    9,755    159    6.50 
Total interest-bearing liabilities   592,576    1,488    1.00    511,984    1,223    0.95 
Non-interest-bearing demand deposits   100,823              79,926           
Other non-interest-bearing liabilities   3,511              2,865           
Total liabilities   696,910              594,775           
Stockholders’ equity   59,012              55,481           
Total liabilities and stockholders’ equity  $755,922             $650,256           
Net interest income       $5,817             $5,089      
Net interest rate spread (2)             2.93%             3.01%
Net interest-earning assets (3)  $146,140             $122,413           
Net interest margin (4)             3.12%             3.19%
Average total interest-earning assets to average total interest-bearing liabilities   124.66%             123.91%          

 

(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.

 

 26 

 

 

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 September 30, 2017

Compared to

Three Months Ended September 30, 2016

 
  

Increase (Decrease)

Due to

  

Total Increase

 
(In thousands)  Volume   Rate   (Decrease) 
Interest-earning assets:               
Short-term investments  $17   $44   $61 
Debt securities:               
Taxable   (41)   23    (18)
Tax-exempt   23        23 
Total loans and loans held for sale   984    (75)   909 
FHLB stock   9    9    18 
Total interest-earning assets   992    1    993 
                
Interest-bearing liabilities:               
Regular savings   (7)   2    (5)
NOW checking   (1)   (1)   (2)
Money market   42    20    62 
Certificates of deposit   81    2    83 
Total interest-bearing deposits   115    23    138 
Short-term borrowings   14    52    66 
Long-term debt   69    (7)   62 
Subordinated debt   3    (4)   (1)
Total interest-bearing liabilities   201    64    265 
                
Increase (decrease) in net interest income  $791   $(63)  $728 

 

 27 

 

 

Provision for Loan Losses. The provision for loan losses was $250 thousand for the three months ended September 30, 2017, compared to $125 thousand for the three month period ended September 30, 2016. In the 2017 period, the provision reflects the overall growth in the portfolio, 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 
   September 30, 
(Dollars in thousands)  2017   2016 
Allowance at beginning of period  $5,543   $5,186 
Provision for loan losses   250    125 
Charge-offs       (4)
Recoveries        
Net charge-offs       (4)
           
Allowance at end of period  $5,793   $5,307 
Allowance for loan losses to nonperforming loans at end of period   998.45%   878.62%
Allowance for loan losses to total loans at end of period   0.89%   0.96%
Net charge-offs to average loans outstanding during the period   N/A    0.00%

 

Non-interest Income. Non-interest income totaled $504 thousand, an increase of $89 thousand or 21.4%. Wealth management fees increased $54 thousand, or 20.8%, as compared to the prior year as assets under management increased to $346.8 million as of September 30, 2017 up from $297.5 million at September 30, 2016. Income from mortgage banking activities in 2017 decreased $37 thousand as sales of longer-term, fixed rate mortgage loans were lower as compared to the prior year. Miscellaneous income increased $48 thousand due to an increase in fees on customer interest rate swaps. Customer service fees increased $23 thousand mainly due to an increase in ATM network interchange fees.

 

Non-interest Expense. Non-interest expense totaled $4.2 million for the three months ended September 30, 2017, relatively unchanged from the three months ended September 30, 2016. Salaries and employee benefits were lower by $31 thousand due to several open positions and reductions in the 401k employer match. Occupancy and equipment was lower by $24 thousand due to lower depreciation expense. Professional fees are also lower by $52 thousand due primarily to recruiting costs related to the hiring of several senior executives in 2016. These reductions were offset by increased data processing cost of $29 thousand and other general administrative costs, such as advertising and insurance which increased $53 thousand attributable to expanding business volumes and operations. FDIC insurance costs increased $28 thousand, or 23.0%, due to growth, new quarterly assessment rates and higher assessment balances.

 

Income Taxes. An income tax provision of $741 thousand was recorded during the quarter ended September 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 38.9%, compared with 38.0% for the 2016 three month period.

 

Results of Operations for the Nine Months Ended September 30, 2017 and 2016

 

Overview. Net income for the nine months ended September 30, 2017 was $3.0 million, compared to net income of $2.2 million for the nine months ended September 30, 2016, an increase of 34.8%. The $770 thousand increase was primarily due to increased net interest income of $1.8 million and increased non-interest income of $204 thousand, partially offset by increases in non-interest expense of $648 thousand, provision of income taxes of $524 thousand, and provision for loan losses of $60 thousand.

 

 28 

 

 

Net Interest Income. Net interest income for the nine months ended September 30, 2017 increased $1.8 million, or 12.2%, as compared to the nine months ended September 30, 2016. The increase in net interest income was primarily due to an increase in interest income of $2.3 million, or 12.3%, partially offset by interest expenses that increased $464 thousand, or 12.8%, during the period.

 

Interest and dividend income increased $2.3 million, or 12.3%, from $18.4 million for the nine months ended September 30, 2016 to $20.7 million for the nine months ended September 30, 2017. The average balance of interest-earning assets increased 12.3%, while the average rate earned on these assets decreased by four bps. Interest and fees on loans increased $2.1 million, or 12.2%, due to a 14.8% increase in the average balance of loans partially offset by a nine 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 $152 thousand, or 12.2%, due to an increase in the average balances for the nine months ended September 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.

 

Interest expense increased $464 thousand, or 12.8%, primarily due to an increase in average balances of interest-bearing deposits and long-term debt. Interest-bearing deposit expense increased $220 thousand, or 9.5%. The average balance of interest-bearing deposits increased $40.6 million, or 10.1%, in the nine months ended September 30, 2017, as compared to the same period in 2016, while the average rate paid on interest-bearing deposits remained flat at 77 bps. Interest expense on money market accounts increased $106 thousand. The rate paid on money market accounts increased two bps to 50 bps while the average balance of these accounts increased $23.7 million to $111.7 million, as compared to the prior year period. The cost of term certificates of deposit increased $120 thousand to $1.7 million as balances in our retail products, deposits generated through a national certificate of deposit clearinghouse, and brokered CDs have increased, partially offset by a three bp decrease in the rates paid to acquire these balances, as compared to the same period last year. Long-term debt expense increased $141 thousand from year to year. The average balance of long-term FHLB advances increased from $74.0 million to $91.9 million, while rates paid on long-term FHLB advances decreased from 1.35% to 1.31%. Interest expense on short-term borrowings totaled $175 thousand in the nine months ended September 30, 2017, compared to $69 thousand in the nine months ended September 30, 2016 as average balances increased $3.8 million and rates paid increased 60 bps.

 

 29 

 

 

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 Nine Months Ended September 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  $21,725   $163    1.00%  $16,733   $57    0.47%
Debt securities:                              
Taxable   54,138    1,009    2.49    57,844    1,025    2.37 
Tax-exempt   11,993    224    2.49    8,470    161    2.52 
Total loans and loans held for sale   607,356    19,079    4.20    529,182    17,009    4.29 
FHLB stock   6,189    182    3.93    5,402    143    3.54 
Total interest-earning assets   701,401    20,657    3.94    617,631    18,395    3.98 
Allowance for loan losses   (5,498)             (5,198)          
Total interest-earning assets less allowance for loan losses   695,903              612,433           
Non-interest-earning assets   22,446              20,599           
Total assets  $718,349             $633,032           
Interest-bearing liabilities:                              
Regular savings accounts  $96,719    325    0.45   $99,846    336    0.45%
NOW checking accounts   34,159    67    0.26    32,099    62    0.26 
Money market accounts   111,679    419    0.50    87,970    313    0.48 
Certificates of deposit   200,554    1,729    1.15    182,603    1,609    1.18 
Total interest-bearing deposits   443,111    2,540    0.77    402,518    2,320    0.77 
Short-term borrowings   20,262    175    1.15    16,496    69    0.55 
Long-term debt   91,864    901    1.31    74,048    760    1.35 
Subordinated debt   9,780    474    6.49    9,749    477    6.51 
Total interest-bearing liabilities   565,017    4,090    0.97    502,811    3,626    0.96 
Non-interest-bearing demand deposits   92,532              73,230           
Other non-interest-bearing liabilities   3,191              2,677           
Total liabilities   660,740              578,718           
Stockholders’ equity   57,609              54,314           
Total liabilities and stockholders’ equity  $718,349             $633,032           
Net interest income       $16,567             $14,769      
Net interest rate spread (2)             2.97%             3.02%
Net interest-earning assets (3)  $136,384             $114,820           
Net interest margin (4)             3.16%             3.19%
Average total interest-earning assets to average total interest-bearing liabilities   124.14%             122.84%          

 

(1)Ratios for the nine 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.

 

 30 

 

 

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.

 

  

Nine Months Ended September 30, 2017

Compared to

Nine Months Ended September 30, 2016

 
  

Increase (Decrease)

Due to

   Total Increase 
(In thousands)  Volume   Rate   (Decrease) 
Interest-earning assets:               
Short-term investments  $22   $84   $106 
Debt securities:               
Taxable   (80)   64    (16)
Tax-exempt   66    (3)   63 
Total loans and loans held for sale   2,463    (393)   2,070 
FHLB stock   22    17    39 
Total interest-earning assets   2,493    (231)   2,262 
                
Interest-bearing liabilities:               
Regular savings   (10)   (1)   (11)
NOW checking   4    2    5 
Money market   88    18    106 
Certificates of deposit   155    (36)   120 
Total interest-bearing deposits   237    (17)   220 
Short-term borrowings   19    87    106 
Long-term debt   174    (33)   141 
Subordinated debt       (3)   (3)
Total interest-bearing liabilities   430    34    464 
                
Increase (decrease) in net interest income  $2,063   $(265)  $1,798 

 

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Provision for Loan Losses. The provision for loan losses was $372 thousand for the nine months ended September 30, 2017, compared to $312 thousand for the nine month period ended September 30, 2016. In the 2017 period, the provision reflects the overall growth of the loan portfolio, 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.

 

   Nine Months Ended 
   September 30, 
(Dollars in thousands)  2017   2016 
Allowance at beginning of period  $5,432   $5,112 
Provision for loan losses   372    312 
Charge-offs:   (11)   (117)
Recoveries        
Net charge- offs   (11)   (117)
           
Allowance at end of period  $5,793   $5,307 
Allowance for loan losses to nonperforming loans at end of period   998.45%   878.62%
Allowance for loan losses to total loans at end of period   0.89%   0.96%
Net charge-offs to average loans outstanding during the period   0.00%   0.02%

 

Non-interest Income. Non-interest income totaled $1.5 million, an increase of $204 thousand, or 16.1%, as income from wealth management fees in 2017 increased $208 thousand as assets under management increased to $346.8 million as of September 30, 2017 up from $297.5 million at September 30, 2016. Mortgage banking activities in 2017 decreased $120 thousand compared to 2016 due to lower mortgage sales volumes. Other non-interest income increased $97 thousand due to increases in fees on customer interest rate swaps and ATM network interchange fees.

 

Non-interest Expense. Non-interest expense increased $648 thousand to $12.8 million during the nine months ended September 30, 2017, from $12.1 million for the nine months ended September 30, 2016. Factors that contributed to the increase in non-interest expense during the 2017 period were increased salaries and employee benefits of $399 thousand, or 5.6%, primarily attributable to the recognition of a full nine 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 $166 thousand, or 59.1%, as new quarterly assessment rates were implemented and assessment balances increased. Data processing expense was higher by $77 thousand from the prior year period due to increasing business volumes. Advertising grew $44 thousand, largely associated with our efforts to generate deposits. Occupancy and equipment expense increased $29 thousand resulting from normal rent increases and additional rent and other expense associated with our Newton Centre office space. Professional fees decreased $166 thousand, as one-time charges were incurred during 2016 for certain staffing searches.

 

Income Taxes. An income tax provision of $1.9 million was recorded during the nine months ended September 30, 2017 compared to a provision of $1.4 million in the comparable 2016 period. The effective tax rate for the 2017 nine month period was 38.9%, compared with 38.4% for the 2016 nine 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.

 

 32 

 

 

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 September 30, 2017, cash and cash equivalents, which include short-term investments, totaled $31.0 million. Securities classified as available-for-sale, whose aggregate fair value of $65.7 million exceeds cost, provide additional sources of liquidity.

 

At September 30, 2017, we had $27.0 million in short-term borrowings outstanding, represented entirely by FHLB advances, and $87.3 million in long-term debt, also consisting entirely of FHLB advances. At September 30, 2017, we had a total of $36.1 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 September 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 $9.1 million from the Federal Reserve Bank under a collateralized borrowing program, none of which was outstanding at that date.

 

At September 30, 2017, we had $129.0 million in loan commitments outstanding, which included $50.0 million in unadvanced funds on construction loans, $33.1 million in unadvanced home equity lines of credit, $24.6 million in unadvanced commercial lines of credit, and $20.1 million in new loan originations.

 

Term certificates of deposit due within one year of September 30, 2017 amounted to $142.9 million, or 69.3%, of total term certificates, an increase of $19.9 million from $123.0 million at December 31, 2016. Balances of term certificates maturing in more than one year decreased to $63.4 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 September 30, 2017, the Company had $301 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 September 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.

 

 33 

 

 

At September 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 nine months ended September 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 the following: 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.

 

 34 

 

 

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 September 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 September 30, 2017 and on our projected net interest income from September 30, 2017 through September 30, 2018.

 

   As of September 30, 2017  

Over the Next 12 Months

Ending September 30, 2018

 
   Present Value of Equity   Projected Net Interest Income 

Basis Point (“bp”)

Change in Rates

  $ Amount   $ Change   % Change   $ Amount   $ Change   % Change 
   (Dollars in thousands) 
300 bp  $91,773   $(7,320)   (7.39)%  $22,624   $(1,140)   (4.80)%
200   95,972    (3,121)   (3.15)   23,094    (670)   (2.82)
0   99,093            23,764         
(100)   90,672    (8,421)   (8.50)   23,410    (354)   (1.49)

 

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 September 30, 2017 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

 35 

 

 

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 September 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 September 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.

 

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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: November 9, 2017   By: /s/ Thomas J. Fontaine
      Thomas J. Fontaine
      President and Chief Executive Officer
      (principal executive officer)
       
Dated: November 9, 2017   By: /s/ Michael W. Dvorak
      Michael W. Dvorak
      Chief Financial Officer and Treasurer
      (principal accounting and financial officer)

 

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