Company Quick10K Filing
Quick10K
Wellesley Bancorp
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$34.72 3 $88
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-05-22 Officers, Shareholder Vote, Other Events, Exhibits
8-K 2019-04-25 Earnings, Exhibits
8-K 2019-03-11 Other Events, Exhibits
8-K 2019-01-29 Regulation FD, Exhibits
8-K 2019-01-24 Earnings, Exhibits
8-K 2019-01-24 Earnings, Exhibits
8-K 2018-11-28 Other Events, Exhibits
8-K 2018-10-25 Earnings, Exhibits
8-K 2018-08-22 Other Events, Exhibits
8-K 2018-08-13 Regulation FD, Exhibits
8-K 2018-07-26 Earnings, Exhibits
8-K 2018-05-23 Officers, Shareholder Vote, Other Events, Exhibits
8-K 2018-05-09 Regulation FD, Exhibits
8-K 2018-04-26 Earnings, Exhibits
8-K 2018-03-27 Officers, Exhibits
8-K 2018-03-05 Regulation FD, Exhibits
8-K 2018-02-28 Other Events, Exhibits
8-K 2018-01-25 Earnings, Exhibits
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BAH Booz Allen Hamilton Holding 8,440
XEC Cimarex Energy 6,840
SYNA Synaptics 1,090
XENT Intersect Ent 866
EQ Equillium 105
HZN Horizon Global 69
FUSB First US Bancshares 63
FOSI Frontier Oilfield Services 0
ASNB Advansource Biomaterials 0
WEBK 2019-03-31
Part I. Financial Information
Item 1.Financial Statements (Unaudited)
Note 1 - Basis of Presentation and Consolidation
Note 2 - Loan Policies
Note 3 - Lease Policy
Note 4 - Comprehensive Income
Note 5 - Recent Accounting and Regulatory Pronouncements
Note 6 - Securities Available for Sale
Note 7 - Loans and Allowance for Loan Losses
Note 8 - Derivative Instruments
Note 9 - Fair Values of Financial Instruments
Note 10 - Employee Stock Ownership Plan
Note 11 - Equity Incentive Plans
Note 12 - Earnings per Common Share
Note 13 - Leases
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation
Item 3. Quantitative and Qualitative Disclosure About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
EX-31.1 tv519707_ex31-1.htm
EX-31.2 tv519707_ex31-2.htm
EX-32.0 tv519707_ex32-0.htm

Wellesley Bancorp Earnings 2019-03-31

WEBK 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 tv519707_10q.htm 10-Q

 

 

 

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 March 31, 2019

 

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
organization)
  (I.R.S. Employer Identification No.)

 

100 Worcester Street, Suite 300, Wellesley, Massachusetts   02481
(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 every Interactive Data File required to be submitted 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 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.

 

Large accelerated filer ¨ Accelerated filer ¨
Non-accelerated filer x Smaller reporting company x
  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

 

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

 

Title of each class   Trading symbol(s)   Name of each exchange on which Registered
Common Stock, par value $0.01 per share   WEBK   The NASDAQ Stock Market LLC

 

As of April 30, 2019, there were 2,550,538 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 March 31, 2019 and December 31, 2018 1
     
  Consolidated Statements of Comprehensive Income for the Three Months ended March 31, 2019 and 2018 2
     
  Consolidated Statements of Changes in Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018 3
     
  Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 4
     
  Notes to Consolidated Financial Statements 5
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 22
     
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
     
Item 4. Controls and Procedures 30
     
Part II. Other Information
     
Item 1. Legal Proceedings 31
     
Item 1A. Risk Factors 31
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 31
     
Item 3. Defaults Upon Senior Securities 31
     
Item 4. Mine Safety Disclosures 31
     
Item 5. Other Information 31
     
Item 6. Exhibits 31
   
Signatures 32

 

 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1.Financial Statements (Unaudited)

 

CONSOLIDATED BALANCE SHEETS

 

   March 31, 2019   December 31, 2018 
   (Dollars in thousands) 
Assets          
           
Cash and due from banks  $7,767   $7,678 
Short-term investments   28,554    34,972 
Total cash and cash equivalents   36,321    42,650 
           
Certificates of deposit   100    100 
Securities available for sale, at fair value   64,023    66,770 
Federal Home Loan Bank of Boston stock, at cost   3,842    4,747 
           
Loans   785,511    743,770 
Less allowance for loan losses   (6,978)   (6,738)
Loans, net   778,533    737,032 
           
Bank-owned life insurance   7,827    7,769 
Operating lease, right-of-use asset   7,606     
Premises and equipment, net   3,853    3,924 
Accrued interest receivable   2,745    2,288 
Net deferred tax asset   2,493    2,804 
Other assets   4,753    3,336 
           
Total assets  $912,096   $871,420 
           
Liabilities and Stockholders’ Equity          
           
Deposits:          
Non-interest-bearing  $126,974   $116,926 
Interest-bearing   623,949    601,005 
Total deposits   750,923    717,931 
           
Short-term borrowings   18,000    15,000 
Long-term borrowings   53,197    58,528 
Subordinated debt   9,840    9,832 
Lease liability   7,626     
Accrued expenses and other liabilities   5,329    4,999 
Total liabilities   844,915    806,290 
           
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, 2,537,644 and 2,525,611 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively   25    25 
Additional paid-in capital   26,676    26,462 
Retained earnings   41,365    40,203 
Accumulated other comprehensive income (loss)   110    (533)
Unearned compensation – ESOP   (995)   (1,027)
Total stockholders' equity   67,181    65,130 
Total liabilities and stockholders' equity  $912,096   $871,420 

 

See accompanying notes to consolidated financial statements.

 

 1 

 

 

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

   Three Months Ended March 31, 
   2019   2018 
  

(Dollars in thousands,

except per share data)

 
Interest and dividend income:          
Interest and fees on loans and loans held for sale  $8,727   $7,227 
Interest on debt securities:          
Taxable   378    341 
Tax-exempt   82    82 
Interest on short-term investments and certificates of deposit   164    113 
Dividends on FHLB stock   79    76 
Total interest and dividend income   9,430    7,839 
Interest expense:          
Deposits   2,489    1,193 
Short-term borrowings   110    123 
Long-term debt   243    343 
Subordinated debentures   157    158 
Total interest expense   2,999    1,817 
           
Net interest income   6,431    6,022 
Provision for loan losses   240    65 
Net interest income, after provision for loan losses   6,191    5,957 
           
Non-interest income:          
Customer service fees   39    43 
Mortgage banking activities   28    9 
Income on bank-owned life insurance   58    57 
Wealth management fees   434    384 
Miscellaneous   123    85 
Total non-interest income   682    578 
Non-interest expenses:          
Salaries and employee benefits   3,040    2,721 
Occupancy and equipment   804    718 
Data processing   297    234 
FDIC insurance   135    168 
Professional fees   190    198 
Advertising and marketing   79    74 
Other general and administrative   550    445 
Total non-interest expenses   5,095    4,558 
           
Income before income taxes   1,778    1,977 
Provision for income taxes   476    540 
           
Net income   1,302    1,437 
           
Other comprehensive income (loss):          
Net unrealized gains (losses) on available-for-sale securities   858    (872)
Income tax (provision) benefit   (215)   219 
           
Total other comprehensive income (loss), net of tax   643    (653)
           
Comprehensive income  $1,945   $784 
           
Earnings per common share:          
Basic  $0.54   $0.60 
Diluted  $0.52   $0.58 
Weighted average shares outstanding:          
Basic   2,431,324    2,392,592 
Diluted   2,523,907    2,485,222 

 

See accompanying notes to consolidated financial statements.

  

 2 

 

 

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Three Months Ended March 31, 2019 and 2018

 

   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, 2017   2,506,532   $25   $25,601   $34,736   $39   $(1,156)  $59,245 
                                    
Comprehensive income               1,437    (653)       784 
Reclassification related to Tax Cuts and Jobs Act               (7   7         
Dividends paid to common  stockholders ($0.05 per share)               (127)           (127)
Share-based compensation-  equity incentive plan           107                2 107 
ESOP shares committed to be allocated (3,209)           61            33    94 
Balance at March 31, 2018   2,506,532   $25   $25,769   $36,039   $(607)  $(1,123)  $60,103 
Balance at December 31, 2018   2,525,611   $25   $26,462   $40,203   $(533)  $(1,027)  $65,130 
                                    
Comprehensive income               1,302    643        1,945 
Restricted stock awards grant   11,500                         
Stock options exercised   2,553        48                48 
Restricted stock forfeitures   (2,000)                        
Dividends paid to common  stockholders ($0.055 per share)               (140)           (140)
Share-based compensation-  equity incentive plan           102                102 
ESOP shares committed to be allocated (3,209)           64            32    96 
                                    
Balance at March 31, 2019   2,537,664   $25   $26,676   $41,365   $110   $(995)  $67,181 

 

See accompanying notes to consolidated financial statements.

 

 3 

 

 

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

   Three Months Ended March 31, 
   2019   2018 
   (In thousands) 
Cash flows from operating activities:          
Net income  $1,302   $1,437 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   240    65 
Depreciation and amortization   187    196 
Net amortization of securities   42    41 
Principal balance of loans sold   1,228    1,085 
Loans originated for sale   (1,228)   (1,085)
Accretion of net deferred loan fees   (142)   (137)
Amortization of subordinated debt issuance costs   8    8 
Income on bank-owned life insurance   (58)   (57)
Deferred income tax provision   96    127 
ESOP expense   96    94 
Share-based compensation   102    107 
Net change in other assets and liabilities   (1,524)   (616)
Net cash provided by operating activities   349    1,265 
           
Cash flows from investing activities:          
           
Activity in securities available for sale:          
Maturities, prepayments and calls   3,563    826 
Purchases       (2,462)
Redemption of Federal Home Loan Bank stock   905    73 
Net loan (originations) principal payments   (41,599)   6,865 
Additions to premises and equipment   (116)   (55)
Proceeds from sale of premises and equipment       14 
Net cash (used) provided by investing activities   (37,247)   5,261 
           
Cash flows from financing activities:          
Net increase in deposits   32,992    26,167 
Proceeds from issuance of long-term debt   3,000    21,000 
Repayments of long-term debt   (8,331)   (10,167)
Increase (decrease) in short-term borrowings   3,000    (20,500)
Stock options exercised   48     
Cash dividends paid on common stock   (140)   (127)
Net cash provided by financing activities   30,569    16,373 
           
Net change in cash and cash equivalents   (6,329)   22,899 
Cash and cash equivalents at beginning period   42,650    28,462 
Cash and cash equivalents at end of period  $36,321   $51,361 
           
Supplementary information:          
Interest paid  $2,718   $1,682 
Income taxes paid   330    330 

 

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 2018 Annual Report on Form 10-K. The results for the three months ended March 31, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 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 state of 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 occur. Loan losses are charged against the allowance when management believes the uncollectibility of the loan balance is confirmed. Subsequent recoveries 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 2019 or 2018.

 

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 of 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 – LEASE POLICY

 

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets and operating lease liabilities in our consolidated balance sheet. These operating leases provide the housing for our sales, branch locations, administration, operations, and ATMs.

 

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities were recognized as of adoption date based on the present value of lease payments over the remaining lease term. As our leases do not provide an implicit rate, we use the Federal Home Loan Bank borrowing rates that best align with the lease term in determining the present value of lease payments. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. For operating leases, the lease expense is recognized on a straight-line basis over the lease term.

 

The Bank has elected to adopt the lease guidance retrospectively at the beginning of 2019. The adoption did not result in any cumulative-effect adjustment to beginning retained earnings.

 

NOTE 4 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:

 

   March 31,   December 31, 
   2019   2018 
   (In thousands) 
     
Unrealized holding gains (losses) on securities available for sale  $126   $(732)
Tax effect   (16)   199 
Net-of tax amount  $110   $(533)

 

 7 

 

 

NOTE 5 RECENT ACCOUNTING AND REGULATORY PRONOUNCEMENTS

 

Effective January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The purpose of this ASU is to eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Reform Act of 2018. Upon adoption of this update, the Company recorded a reclassification of $7 thousand to increase accumulated other comprehensive income and decrease retained earnings.

 

Effective January 1, 2019, the Company adopted FASB 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. Upon adoption of the ASU, the Company recorded an increase in assets of $7.8 million and an increase in liabilities of $7.8 million on the Consolidated Balance Sheets as a result of recognizing the right-of-use assets and lease liabilities.

 

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. Entities will now use forward-looking information to better form their credit loss estimates. 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 within those fiscal years. The Company has implemented a committee led by the Company’s Chief Financial Officer, which includes the Chief Lending Officer, to assist in identifying, implementing and evaluating the impact of the required changes to the loan loss estimation model and processes. The Company has evaluated the portfolio segments and various methodologies and is currently evaluating potential loss modeling processes as well as related controls and procedures. Management will continue to closely monitor developments and additional guidance to determine the potential impact on the Company's consolidated financial statements.

 

NOTE 6 – SECURITIES AVAILABLE FOR SALE

 

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

 

  

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Fair

Value

 
   (In thousands) 
March 31, 2019                    
Residential mortgage-backed securities:                    
Government National Mortgage Association  $3,740   $56   $(31)  $3,765 
Government-sponsored enterprises   11,113    60    (100)   11,073 
SBA and other asset-backed securities   11,018    93    (79)   11,032 
State and municipal bonds   12,878    310    (5)   13,183 
Government-sponsored enterprise obligations   8,000        (93)   7,907 
Corporate bonds   17,148    29    (114)   17,063 
                     
   $63,897   $548   $(422)  $64,023 

 

 8 

 

 

  

Amortized

Cost

  

Gross

Unrealized

Gains

  

Gross

Unrealized

Losses

  

Fair

Value

 
   (In thousands) 
December 31, 2018                    
Residential mortgage-backed securities:                    
Government National Mortgage Association  $3,846   $44   $(43)  $3,847 
Government-sponsored enterprises   11,382    29    (188)   11,223 
SBA and other asset-backed securities   11,720    64    (157)   11,627 
State and municipal bonds   12,908    111    (111)   12,908 
Government-sponsored enterprise obligations   8,000        (187)   7,813 
Corporate bonds   18,151    28    (322)   17,857 
U.S. Treasury bills   1,495            1,495 
                     
   $67,502   $276   $(1,008)  $66,770 

 

There were no sales of available-for-sale securities for the three ended March 31, 2019 and 2018.

 

The amortized cost and fair value of debt securities by contractual maturity at March 31, 2019 are as follows:

 

   Amortized
Cost
  

Fair

Value

 
   (In thousands) 
Within 1 year  $2,348   $2,336 
After 1 year to 5 years   20,563    20,448 
After 5 years to 10 years   7,160    7,212 
After 10 years   7,955    8,157 
    38,026    38,153 
Mortgage- and asset-backed securities   25,871    25,870 
           
   $63,897   $64,023 

 

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) 
March 31, 2019                    
Residential mortgage-backed securities:                    
Government National Mortgage Association  $   $   $(31)  $1,738 
Government-sponsored enterprises           (100)   6,738 
SBA and other asset-backed securities   (1)   341    (78)   3,477 
State and municipal bonds           (5)   1,116 
Government-sponsored enterprise obligations           (93)   7,907 
Corporate bonds   (14)   3,984    (100)   11,314 
                     
   $(15)  $4,325   $(407)  $32,290 

 

 9 

 

 

   Less Than Twelve Months   Over Twelve Months 
  

Gross

Unrealized

Losses

  

Fair

Value

  

Gross

Unrealized

Losses

  

Fair

Value

 
   (In thousands) 
December 31, 2018                    
Residential mortgage-backed securities:                    
Government National Mortgage Association  $   $   $(43)  $1,755 
Government-sponsored enterprises   (1)   103    (187)   7,880 
SBA and other asset-backed securities           (157)   5,455 
State and municipal bonds   (2)   386    (109)   6,257 
Government-sponsored enterprise obligations           (187)   7,813 
Corporate bonds   (29)   5,705    (293)   11,124 
                     
   $(32)  $6,194   $(976)  $40,284 

 

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 March 31, 2019, various debt securities have unrealized losses with aggregate depreciation of 1.1% 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 March 31, 2019.

 

 10 

 

 

NOTE 7 – LOANS AND ALLOWANCE FOR LOAN LOSSES

 

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

 

   March 31,   December 31, 
   2019   2018 
   (In thousands) 
Real estate loans:          
Residential – fixed  $68,273   $64,218 
Residential – variable   312,691    318,292 
Commercial   153,049    148,006 
Construction   130,381    106,723 
    664,394    637,239 
           
Commercial loans:          
Secured   75,590    61,563 
Unsecured   5,219    5,327 
    80,809    66,890 
           
Consumer loans:          
Home equity lines of credit   40,259    39,486 
Other   150    163 
    40,409    39,649 
           
Total loans   785,612    743,778 
           
Less:          
Allowance for loan losses   (6,978)   (6,738)
Net deferred origination costs   (101)   (8)
           
Loans, net  $778,533   $737,032 

 

 11 

 

 

The following table summarizes the changes in the allowance for loan losses by portfolio segment for the three months ended March 31, 2019 and 2018:

 

  

Residential

Real Estate

  

Commercial

Real Estate

   Construction   Commercial  

Home

Equity

  

Other

Consumer

   Unallocated   Total 
   (In thousands) 
Three Months Ended March 31, 2019                                        
                                         
Allowance at December 31, 2018   $2,216    1,602   $1,462   $1,124   $257   $3   $74   $6,738 
                                         
Provision (credit) for loan losses   (14)   (241)   347    157    5        (14)   240 
                                         
Allowance at March 31, 2019  $2,202   $1,361   $1,809   $1,281   $262   $3   $60   $6,978 
                                         
Three Months Ended March 31, 2018                                        
                                         
Allowance at December 31, 2017   $1,722   $1,520   $1,661   $917   $237   $2   $94   $6,153 
                                         
Provision (credit) for loan losses   203    25    (228)   78    11    1    (25)   65 
                                         
Allowance at March 31, 2018  $1,925   $1,545   $1,433   $995   $248   $3   $69   $6,218 

 

Further 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) 
March 31, 2019                                        
                                         
Allowance related to impaired loans  $   $   $   $   $   $   $   $ 
Allowance related to non-impaired loans   2,202    1,361    1,809    1,281    262    3    60    6,978 
                                         
Total allowance  $2,202   $1,361   $1,809   $1,281   $262   $3   $60   $6,978 
                                         
Impaired loan balances  $742   $2,773   $   $   $   $   $   $3,515 
Non-impaired loan balances   380,222    150,276    130,381    80,809    40,259    150        782,097 
                                         
Total loans  $380,964   $153,049   $130,381   $80,809   $40,259   $150   $   $785,612 
                                         
December 31, 2018                                        
                                         
Allowance related to impaired loans  $   $   $   $   $   $   $   $ 
Allowance related to non-impaired loans   2,216    1,602    1,462    1,124    257    3    74    6,738 
                                         
Total allowance  $2,216   $1,602   $1,462   $1,124   $257   $3   $74   $6,738 
                                         
Impaired loan balances  $746    2,846   $   $   $   $   $   $3,592 
Non-impaired loan balances   381,764    145,160    106,723    66,890    39,486    163        740,186 
                                         
Total loans  $382,510   $148,006   $106,723   $66,890   $39,486   $163   $   $743,778 

 

 12 

 

 

The following is a summary of past due and non-accrual loans at March 31, 2019 and December 31, 2018:

 

  

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) 
                         
March 31, 2019                              
                               
Residential real estate  $1,214   $578   $   $1,792   $   $578 
Commercial real estate           550    550        550 
Consumer loans   34            34         
                               
Total  $1,248   $578   $550   $2,376   $   $1,128 
                               
December 31, 2018                              
                               
Residential real estate  $1,551   $   $   $1,551   $   $581 
Commercial real estate           556    556        556 
                               
Total  $1,551   $   $556   $2,107   $   $1,137 

 

The following is a summary of impaired loans:

 

   March 31, 2019   December 31, 2018 
  

Recorded

Investment

  

Unpaid

Principal

Balance

  

Recorded

Investment

  

Unpaid

Principal

Balance

 
   (In thousands) 
Impaired loans without a valuation allowance:                    
Residential real estate  $742   $759   $746   $764 
Commercial real estate   2,773    2,899    2,846    2,974 
                     
Total impaired loans  $3,515   $3,658   $3,592   $3,738 

 

Further information pertaining to impaired loans follows:

 

   Three Months Ended March 31, 2019   Three Months Ended March 31, 2018 
  

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  $744   $6   $4   $171   $2   $ 
Commercial real estate   2,809    33    8    570    20    20 
                               
Total  $3,553   $39   $12   $741   $22   $20 

 

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

 

There were no new troubled debt restructurings recorded during the three months ended March 31, 2019 and 2018.

 

 13 

 

 

There were no TDRs that defaulted, generally considered 90 days past due or longer, during the three months ended March 31, 2019 and 2018, 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 months ended March 31, 2019 and 2018.

 

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 uncollectible “loss” 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.

 

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:

 

   March 31, 2019   December 31, 2018 
  

Commercial

Real Estate

   Construction   Commercial   Total  

Commercial

Real Estate

   Construction   Commercial   Total 
   (In thousands) 
                                 
Loans rated 1-4  $149,368   $130,381   $78,939   $358,688   $144,243   $106,723   $65,245   $316,211 
Loans rated 5   908        1,870    2,778    917        1,645    2,562 
Loans rated 6   2,223            2,223    2,290            2,290 
Loans rated 7   550            550    556            556 
                                         
Total  $153,049   $130,381   $80,809   $364,239   $148,006   $106,723   $66,890   $321,619 

 

 14 

 

 

NOTE 8 - DERIVATIVE INSTRUMENTS

 

Certain derivative instruments do not meet the requirements to be accounted for as hedging instruments. These undesignated derivative instruments are recognized on the consolidated balance sheet at fair value, with changes in the fair value recorded in miscellaneous income.

 

Derivative Loan Commitments

 

Mortgage loan commitments are referred to as derivative loan commitments if the loan that will result from exercise of the commitment will be held for sale upon funding. The Company enters into commitments to fund residential mortgage loans at specified rates and times in the future, with the intention that these loans will subsequently be sold in the secondary market.

 

Outstanding derivative loan commitments expose the Company to the potential for changes in the fair value of the underlying loans as interest rates change, along with the value of the loan commitment. If interest rates increase, the value of these loan commitments will decrease. Conversely, if interest rates decrease, the value of these loan commitments will increase. The notional amount of undesignated derivative loan commitments was $1.3 million at March 31, 2019. The fair value of these commitments was an asset of $6 thousand.

 

There were no outstanding derivative loan commitments at December 31, 2018.

 

Forward Loan Sale Commitments

 

To protect against the price risk inherent in derivative loan commitments, the Company utilizes “best efforts” forward loan sale commitments to mitigate the risk of potential decreases in the values of loans that would result from the exercise of the derivative loan commitments. With a “best efforts” contract, the Company commits to deliver an individual mortgage loan of a specified principal amount and quality to an investor if the loan to the underlying borrower closes. Generally, the price the investor will pay the seller for an individual loan is specified prior to the loan being funded.

 

The Company expects that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments. The notional amount of undesignated forward loan sale commitments was $1.3 million at March 31, 2019. The fair value of these commitments was an asset of $3 thousand.

 

There were no undesignated forward loan sale commitments at December 31, 2018.

 

Interest Rate Swap Agreements

 

The Company has entered into derivative financial instruments in the normal course of business to manage exposure to fluctuations in interest rates for its commercial customers. Typically these agreements have generally been limited to loan level interest rate swap agreements, which are entered into with borrowers and a third party. Typically, the Company enters into a floating-rate loan and a fixed-rate swap directly with a loan customer. The Company offsets the fixed-rate interest rate risk with an identical offsetting swap with a swap dealer. This is referred to as a “back-to-back” swap structure. As this structure has equal and offsetting interest rate contacts, fair value gains and losses recorded each month are offsetting.

 

The notional amounts are amounts on which calculations, payments, and the value of the derivatives are based. Notional amounts do not represent direct credit exposures. The fair value of the derivative instruments is reflected on the Company’s consolidated balance sheet as other assets and other liabilities as appropriate. Changes in fair values are recorded in miscellaneous income in the consolidated statements of income.

 

 15 

 

 

A summary of the interest rate swaps is as follows:

 

   With commercial   With third-party 
   loan borrowers   financial institutions 
   March 31,   December 31,   March 31,   December 31, 
   2019   2018   2019   2018 
   (dollars in thousands) 
                 
Notional amount  $36,476   $28,320   $36,476   $28,320 
Receive (pay) fixed rate weighted average   4.49%   5.09%   (4.49)%   (5.09)%
Receive (pay) variable rate weighted average   (4.33)%   (5.06)%   4.33%   5.06%
Weighted average remaining years   10.8 years    12.8 years    10.8 years    12.8 years 
Unrealized fair value gain (loss)  $1,105   $264   $(1,105)  $(264)

 

NOTE 9 – 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.

 

 16 

 

 

Assets and liabilities measured at fair value on a recurring basis

 

Assets and liabilities measured at fair value on a recurring basis at March 31, 2019 and December 31, 2018 are summarized below.

 

   Level 1   Level 2   Level 3  

Total

Fair Value

 
   (In thousands) 
March 31, 2019                    
                     
Assets                    
Securities available for sale  $   $64,023   $   $64,023 
Interest rate swap agreements       1,105        1,105 
Derivative loan commitments       6        6 
Forward loan sale commitments       3        3 
   $   $65,137   $   $65,137 
                     
Liabilities                    
Interest rate swap agreements  $   $1,105   $   $1,105 
                     
December 31, 2018                    
                     
Assets                    
Securities available for sale  $   $66,770   $   $66,770 
Interest rate swap agreements       264        264 
   $   $67,034   $   $67,034 
                     
Liabilities                    
Interest rate swap agreements  $   $264   $   $264 

 

Fair value measurements for securities available for sale 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.

 

The fair values of interest rate swap agreements are based on a valuation model that uses primarily observable inputs, such as benchmark yield curves and interest rates and also the value associated with the counterparty risk. Credit risk adjustments consider factors such as the likelihood of default by the Company and its counterparties, its net exposure and remaining contractual life.

 

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.

 

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. Fair values for loans held for sale are based on commitments in effect from investors or prevailing market rates.

 

There are no assets or liabilities measured at fair value on a non-recurring basis at March 31, 2019 and December 31, 2018.

 

 17 

 

 

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) 
March 31, 2019                         
Financial assets:                         
Cash and cash equivalents  $36,321   $36,321   $   $   $36,321 
Certificates of deposit   100    100            100 
Securities available for sale   64,023        64,023        64,023 
FHLB stock   3,842            3,842    3,842 
Loans, net   778,533            780,721    780,721 
Accrued interest receivable   2,745            2,745    2,745 
Interest rate swap agreements   1,105        1,105        1,105 
Forward loan sale commitments   6        6        6 
Derivative loan commitments   3        3        3 
                          
Financial liabilities:                         
Deposits  $750,923   $   $    750,185    750,185 
Short-term borrowings   18,000        18,000        18,000 
Long-term debt   53,197        53,021        53,021 
Subordinated debt   9,840            9,717    9,717 
Accrued interest payable   767            767    767 
Interest rate swap agreements   1,105        1,105        1,105 
                          
December 31, 2018                         
Financial assets:                         
Cash and cash equivalents  $42,650   $42,650   $   $   $42,650 
Certificates of deposit   100    100            100 
Securities available for sale   66,770        66,770        66,770 
FHLB stock   4,747            4,747    4,747 
Loans, net   737,032            732,427    732,427 
Accrued interest receivable   2,288            2,288    2,288 
Interest rate swap agreements   264        264        264 
                          
Financial liabilities:                         
Deposits  $717,931   $   $   $716,685   $716,685 
Short-term borrowings   15,000        15,000        15,000 
Long-term debt   58,528        58,192        58,192 
Subordinated debt   9,832            9,691    9,691 
Accrued interest payable   487            487    487 
Interest rate swap agreements   264        264        264 

 

 18 

 

 

NOTE 10 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 to purchase shares of the Company’s common stock on the closing date of the Company’s mutual to stock conversion in 2012. As of March 31, 2019, the ESOP held 177,872 shares or 7.0% of the common stock outstanding on that date. The loan 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 are reinvested into shares 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 March 31, 2019 include the following:

 

Allocated   75,166 
Committed to be allocated   3,210 
Unallocated   99,496 
    177,872 

 

The fair value of unallocated shares was $3.0 million at March 31, 2019.

 

Total compensation expense recognized in connection with the ESOP for the three months ended March 31, 2019 and March 31, 2018 was $96 thousand and $94 thousand, respectively.

 

NOTE 11 EQUITY INCENTIVE PLANS

 

Under the Company’s 2016 Equity Incentive Plan, 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. At March 31, 2019, there remain 19,500 shares available to award under the Plan.

 

Under the Company’s 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 was 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 were 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.

 

 19 

 

 

Stock Options

 

A summary of option activity under the 2012 Equity Incentive Plan for the three months ended March 31, 2019 is presented below:

   Outstanding   Non-vested 
   Shares   Weighted
Average
Exercise
Price
   Weighted
Average
Remaining
Contractual
Term
   Aggregate
Intrinsic
Value
   Shares   Weighted
Average
Grant
Date Fair
Value
 
   (In thousands)       (In years)   (In thousands)   (In thousands)     
Balance at January 1, 2019   193   $16.11              10   $4.13 
Forfeited   (3)   19.07              (3)   4.01 
Exercised   (2)   18.95                   
                               
Balance at March 31, 2019   188   $16.03    3.88   $2,721    7   $4.18 
Exercisable at  March 31, 2019   180   $15.15    3.54   $2,555           

 

For the three months ended March 31, 2019 and 2018, compensation expense applicable to the stock options was $7 thousand and $9 thousand, respectively. There was no recognized tax benefit related to this expense for the period ended March 31, 2019 and March 31, 2018, respectively.

 

Unrecognized compensation expense for non-vested stock options totaled $18 thousand as of March 31, 2019, which will be recognized over the remaining weighted average vesting period of 1.0 years.

 

Stock Awards

 

For the three months ended March 31, 2019, there were 11,500 restricted stock awards granted with a weighted average grant date fair value of $28.25.

 

The following table presents the activity in non-vested stock awards under the equity incentive plans for the three months ended March 31, 2019:

 

   Number of
Shares
  

Grant-date

Fair Value

 
   (In thousands)     
Non-vested stock awards at beginning of year   27   $23.97 
Restricted shares granted    12    28.25 
Restricted shares forfeited   (2)   20.78 
           
Non-vested stock awards at end of quarter    37   $25.47 

 

There was no activity in non-vested restricted stock awards under the 2016 or the 2012 Equity Incentive Plan for the three months ended March 31, 2018.

 

For the three months ended March 31, 2019 and 2018, compensation expense applicable to the stock awards was $95 thousand and $98 thousand, respectively, and the recognized tax benefit related to this expense was $27 thousand, respectively.

 

Unrecognized compensation expense for non-vested restricted stock totaled $795 thousand as of March 31, 2019, which will be recognized over the remaining weighted average vesting period of 3.35 years.

 

 20 

 

 

NOTE 12 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

March 31,

 
   2019   2018 
   (In thousands) 
Net income applicable to common stock  $1,302   $1,437 
           
Average number of common shares issued   2,532    2,506 
Less: Average unallocated ESOP shares   (101)   (114)
           
Average number of common shares outstanding used to calculate basic earnings per common share   2,431    2,392 
Effect of  dilutive stock options   93    93 
           
Average number of common shares outstanding used to calculate diluted earnings per share   2,524    2,485 
           
 Earnings per common share:          
Basic  $0.54   $0.60 
Diluted  $0.52   $0.58 

 

There were no anti-dilutive options that would have been excluded from the computations of diluted earnings per share for the three months ended March 31, 2019 and 2018. 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.

 

NOTE 13 LEASES

 

Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). As of March 31, 2019, the Company leases real estate for several branch locations, operational office space, and ATM locations.

 

The operating lease expense for the three-months ended March 31, 2019 was $416 thousand.

 

The table below summarized other information related to our operating leases as of March 31, 2019:

 

Cash paid for amounts included in the measurement of lease liabilities     
Operating cash flows from operating leases, in thousands  $396 
Weighted average remaining lease term –operating leases, in years   5.8 
Weighted average discount rate-operating leases   3.12%

 

 21 

 

 

The table below summarizes the maturity of the operating lease liabilities as of March 31, 2019:

 

   (In thousands) 
2019  $1,199 
2020   1,633 
2021   1,483 
2022   1,182 
2023   1,101 
Thereafter   1,768 
Total lease payments   8,366 
Less imputed interest   (740)
Present value of lease liabilities  $7,626 

 

The Bank is under agreement to take possession of an additional 4,431 square feet of office space in 2020 for a term of 74 months that is expected to increase the Bank’s ROU assets by $1.3 million.

 

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 2018 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 to be critical accounting policies.

 

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 processes, 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.

 

 22 

 

 

Comparison of Financial Condition at March 31, 2019 and December 31, 2018

 

General. Total assets increased $40.7 million, or 4.7%, from $871.4 million at December 31, 2018 to $912.1 million at March 31, 2019. Total asset growth was primarily related to an increase in the loan portfolio of $41.8 million or 5.6%, and the addition of an operating lease right-of-use asset of $7.6 million, partially offset by a decrease in cash and cash equivalents of $6.3 million, or 14.8%, and a decrease of $2.7 million in securities available for sale.

 

Loans. The loan portfolio increased $41.8 million. Construction loans increased $23.7 million, or 22.2%, primarily due to the addition of several projects during the period. Commercial loans increased $13.9 million, or 20.8%. Commercial real estate loans increased $5.0 million, or 3.4%, as we have had success in expanding our business development efforts. Residential real estate loans decreased $1.6 million, or 0.4%, to $380.9 million, compared to $382.5 million at December 31, 2018.

 

At March 31, 2019, past due loans totaled $2.4 million as compared to $2.1 million at December 31, 2018. Substantially all delinquent loans are secured by real estate collateral with values exceeding outstanding loan principal. There were no charge-offs on delinquent loans during the three months ended March 31, 2019 and March 31, 2018.

 

Securities. Total securities decreased from $66.8 million at December 31, 2018 to $64.0 million at March 31, 2019.

 

Deposits. Total deposits increased $33.0 million, or 4.6%, from $717.9 million at December 31, 2018 to $750.9 million at March 31, 2019. Money market accounts increased $31.0 million, or 15.2%. Demand deposits and NOW accounts increased $10.2 million, or 6.6%, to $164.0 million as growth was realized in both retail and commercial accounts. Deposit growth was driven through our continued emphasis on primary relationships as well as targeted offers on interest-bearing accounts. Certificates of deposit decreased $6.4 million, or 2.3%, to $271.9 million. Savings account balances decreased $1.8 million to $80.4 million at March 31, 2019.

 

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, decreased $5.3 million, or 9.1%, for the three months ended March 31, 2019. Short-term borrowings consist entirely of advances from the FHLB with initial maturities less than one year. Balances of short-term borrowings increased $3.0 million, or 20.0%, from December 31, 2018. Subordinated debt was $9.8 million at March 31, 2019 and December 31, 2018.

 

Stockholders’ Equity. Stockholders’ equity increased $2.1 million, or 3.2%, from $65.1 million at December 31, 2018 to $67.2 million at March 31, 2019. The increase was primarily a result of net income for the three month period of $1.3 million and an after-tax increase in the fair value of available for sale securities of $643 thousand, partially offset by dividends paid of $140 thousand.

 

Results of Operations for the Three Months Ended March 31, 2019 and 2018

 

Overview. Net income for the three months ended March 31, 2019 was $1.3 million, compared to net income of $1.4 million for the three months ended March 31, 2018, a decrease of $135 thousand or 9.4%. The $135 thousand decrease was primarily due to an increase in non-interest expense and an increase in the provision for loan losses offset by an increase in net interest income and non-interest income. Net interest income increased $409 thousand to $6.4 million, non-interest income increased $104 thousand to $682 thousand and the provision for loan loss increased $175 thousand to $240 thousand in the 2019 quarter. Non-interest expense increased $537 thousand and totaled $5.1 million for the three months ended March 31, 2019. Income tax expense decreased $64 thousand to $476 thousand, as compared to the 2018 period.

 

 23 

 

 

Net Interest Income. Net interest income for the three months ended March 31, 2019 increased $409 thousand, or 6.8%, as compared to the three months ended March 31, 2018. The increase in interest income was due to increases in the average balances of loans and an increasing yield. Interest expense increased, driven by overall deposit growth, and higher rates offered on certificates of deposit and money market accounts.

 

Interest and dividend income increased $1.6 million, or 20.3%, from $7.8 million for the three months ended March 31, 2018 to $9.4 million for the three months ended March 31, 2019. The average balance of interest-earning assets increased 9.7%, while the average rate earned on these assets increased by 39 basis points (“bps”). Interest and fees on loans increased $1.5 million, or 20.8%, due, in part, to a 12.6% increase in the average balance of loans. The average rate earned on loans increased 30 bps to 4.59%. Interest income from investments increased $37 thousand, or 10.9%, due primarily to an increase in the average yields for the three months ended March 31, 2019 as compared to the prior year period.

 

Interest expense increased $1.2 million, or 65.1% primarily due to an increase in average balances of interest-bearing deposits and an increase in rates. Our funding costs have responded more quickly than loan income to the change in interest rates. Deposit expense increased $1.3 million, or 108.6%. The average balance of interest-bearing deposits increased $102.5 million, or 20.0%, in the three months ended March 31, 2019, compared to the same period in 2018 and the average rate paid on interest bearing deposits increased 69 bps. The cost of term certificates of deposit increased $642 thousand to $1.5 million as balances in our retail products increased. Rates paid on certificates of deposit balances increased to 2.12%, up from 1.43% in the same period last year. In the 2019 period, interest expense on money market accounts increased by $642 thousand to $875 thousand. The rate paid on money market accounts increased 95 bps primarily due to a higher tiered-rate structure for these accounts than in the prior year, along with the increase of the average balance of money market accounts of $77.8 million to $220.8 million, as compared to the prior year period.

 

Interest expense on short-term borrowings totaled $110 thousand in the three month period ended March 31, 2019, compared to $123 thousand in the three months ended March 31, 2018. Decreases in average balances were offset by increases in the rates by 121 bps.

 

Long-term debt expense decreased $100 thousand to $243 thousand in the three month period ended March 31, 2019 compared to $343 thousand the three months ended March 31, 2018. The average balance of long-term FHLB advances decreased from $87.0 million to $56.2 million, while rates paid on long-term FHLB advances increased from 1.60% to 1.75%.

 

 24 

 

 

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 March 31, 
   2019   2018 
(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  $24,151   $164    2.76%  $29,411   $113    1.55%
Debt securities:                              
Taxable   52,043    378    2.94    53,945    341    2.57 
Tax-exempt   12,993    82    2.55    13,082    82    2.54 
Total loans and loans held for sale   770,975    8,727    4.59    684,876    7,227    4.29 
FHLB stock   3,882    79    8.27    6,064    76    5.07 
Total interest-earning assets   864,044    9,430    4.43    787,378    7,839    4.04 
Allowance for loan losses   (6,831)             (6,196)          
Total interest-earning assets less allowance for loan losses   857,213              781,182           
Non-interest-earning assets   30,626              23,308           
Total assets  $887,839             $804,490           
Interest-bearing liabilities:                              
Regular savings accounts  $79,201    119    0.61   $98,833    113    0.46 
NOW checking accounts   33,574    28    0.34    35,854    22    0.25 
Money market accounts   220,764    875    1.61    142,979    233    0.66 
Certificates of deposit   280,242    1,467    2.12    233,631    825    1.43 
Total interest-bearing deposits   613,781    2,489    1.64    511,297    1,193    0.95 
Short-term borrowings   15,592    110    2.87    30,011    123    1.66 
Long-term debt   56,232    243    1.75    87,033    343    1.60 
Subordinated debt   9,835    157    6.49    9,805    158    6.53 
Total interest-bearing liabilities   695,440    2,999    1.75    638,146    1,817    1.15 
Non-interest-bearing demand deposits   115,629              102,362           
Other non-interest-bearing liabilities   10,269              3,948           
Total liabilities   821,338              744,456           
Stockholders’ equity   66,501              60,034           
Total liabilities and stockholders’ equity  $887,839             $804,490           
Net interest income       $6,431             $6,022      
Net interest rate spread (2)             2.68%             2.88%
Net interest-earning assets (3)  $168,604             $149,232           
Net interest margin (4)             3.02%             3.10%
Average total interest-earning assets to average total interest-bearing liabilities   124.24%             123.39%          

 

(1)Ratios for the three month period 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.

 

 25 

 

 

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 March 31, 2019

Compared to

Three Months Ended March 31, 2018

 
  

Increase (Decrease)

Due to

   Total Increase 
(In thousands)  Volume   Rate   (Decrease) 
Interest-earning assets:               
Short-term investments  $(16)  $67   $51 
Debt securities:               
Taxable   (11)   48    37 
Tax-exempt            
Total loans and loans held for sale   951    549    1,500 
FHLB stock   (4)   7    3 
Total interest-earning assets   920    671    1,591 
                
Interest-bearing liabilities:               
Regular savings   (10)   16    6 
NOW checking   (1)   7    6 
Money market   177    465    642 
Certificates of deposit   188    454    642 
Total interest-bearing deposits   354    942    1,296 
Short-term borrowings   25    (38)   (13)
Long-term debt   (137)   37    (100)
Subordinated debt       (1)   (1)
Total interest-bearing liabilities   242    940    1,182 
                
Increase (decrease) in net interest income  $678   $(269)  $409 

 

 26 

 

 

Provision for Loan Losses. The provision for loan losses was $240 thousand for the three months ended March 31, 2019, compared to $65 thousand for the three months ended March 31, 2018. In the 2019 period, the provision reflects the increased net loan originations, the shift in the portfolio’s loan mix and 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 
   March 31, 
(Dollars in thousands)  2019   2018 
Allowance at beginning of period  $6,738   $6,153 
Provision for loan losses   240    65 
Charge-offs        
Recoveries        
Net charge-offs        
           
Allowance at end of period  $6,978   $6,218 
Allowance for loan losses to nonperforming loans at end of period   619.10%   504.52%
Allowance for loan losses to total loans at end of period   0.88%   0.91%
Net charge-offs to average loans outstanding during the period   0.00%   0.00%

 

Non-interest Income. Non-interest income totaled $682 thousand, an increase of $104 thousand or 18.0%. Wealth management fees increased $50 thousand, or 13.0%, as compared to the prior year as total assets under management totaled $419.3 million as of March 31, 2019, up from $406.6 million at March 31, 2018. Income from mortgage banking activities in 2019 increased $19 thousand as sales of residential mortgage loans were higher as compared to the prior year. Other miscellaneous income increased $38 thousand primarily due to increases in fees on customer loan interest rate swaps.

 

Non-interest Expense. Non-interest expense totaled $5.1 million for the three months ended March 31, 2019, compared to $4.6 million for the three months ended March 31, 2018, an increase of $537 thousand. Salaries and employee benefits increased $319 thousand due to annual merit and benefit cost increases along with increases to staff. Occupancy and equipment costs increased $86 thousand as a result of the consolidation and relocation of business operations to new office space and annual rent adjustments. FDIC insurance expense decreased $33 thousand due to lower assessment rates. Data processing costs increased $63 thousand and all other non-interest expense increased $102 thousand attributable to expanding business volumes and operations.

 

Income Taxes. An income tax provision of $476 thousand was recorded during the quarter ended March 31, 2019, compared to a provision of $540 thousand in the comparable 2018 quarter. The effective tax rate for the 2019 three month period was 26.8%, compared to 27.3% for the 2018 three 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. The Bank’s 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 seasonal events, general interest rates, economic conditions and competition.

 

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

 

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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 March 31, 2019, cash and cash equivalents, which include short-term investments, totaled $36.3 million. Securities classified as available-for-sale, whose aggregate fair value is $64.0 million, provide additional sources of liquidity.

 

At March 31, 2019, we had $18.0 million in short-term borrowings outstanding, represented entirely by FHLB advances, and $53.2 million in long-term debt, also consisting entirely of FHLB advances. At March 31, 2019, we had a total of $124.2 million in unused borrowing capacity from the FHLB. Short-term borrowings are generally used to fund temporary cash needs due to the timing of loan originations and deposit gathering activities. Long-term debt is generally used to provide for longer-term funding needs of the Company, including the match funding of loans originated for portfolio. At March 31, 2019, 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 $5.1 million from the Federal Reserve Bank under a collateralized borrowing program, none of which was outstanding at that date.

 

At March 31, 2019, we had $180.9 million in loan commitments outstanding, which included $72.2 million in unadvanced funds on construction loans, $40.5 million in unadvanced home equity lines of credit, $32.1 million in unadvanced commercial lines of credit, and $34.2 million in new loan originations.

 

Term certificates of deposit due within one year of March 31, 2019 amounted to $222.1 million, or 81.7%, of total term certificates, a decrease of $6.4 million from $228.5 million at December 31, 2018. Balances of term certificates maturing in more than one year totaled $49.8 million at March 31, 2019, relatively unchanged as compared to balances at December 31, 2018. 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. 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. 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 March 31, 2019, the Company had $126 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 banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

 

Federal banking regulations require a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%; a minimum ratio of Tier 1 capital to risk-weighted assets of 6%; a minimum ratio of total capital to risk-weighted assets of 8%; and, a minimum leverage ratio of 4% for all banking organizations. Additionally, community banking institutions must maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonuses. The capital conservation buffer and certain deductions from and adjustments to regulatory capital and risk-weighted assets were phased in over several years. The conservation buffer of 2.5% was fully phased in on January 1, 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions. Management believes that the Company’s capital levels will remain characterized as “well-capitalized” throughout the phase-in periods.

 

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At March 31, 2019, the Bank was well-capitalized under the current rules.

 

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 three months ended March 31, 2019, 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 changes spreads between different market rates. The simulation analysis incorporates management’s current assessment of the risk that pricing margins will change adversely over time due to competition or other factors.

 

Simulation analysis is only an estimate of our interest rate risk exposure at a particular point in time. We continually review the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.

 

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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 March 31, 2019 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, loan prepayments tend to slow. When interest rates fall, loan 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 approximate actual future mortgage-backed security and loan repayment activity.

 

the following table reflects the estimated effects of changes in interest rates on the present value of our equity at March 31, 2019 and on our projected net interest income from March 31, 2019 through March 31, 2020. These estimates are in compliance with our internal policy limits.

 

   As of March 31, 2019  

Over the Next 12 Months

Ending March 31, 2020

 
   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  $87,890   $(11,258)   (11.35)%  $26,105   $(800)   (2.97)%
200   94,075    (5,073)   (5.12)   26,560    (345)   (1.28)
0   99,148            26,905         
(100)   96,774    (2,374)   (2.39)   27,058    153    0.57 

 

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 March 31, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

 

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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, 2018, filed with the Securities and Exchange Commission on March 29, 2019. As of March 31, 2019, 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, 2018.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

Not applicable.

 

Item 3. Defaults Upon Senior Securities

 

Not applicable.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

Not applicable.

 

Item 6. Exhibits

 

  3.1 Amended and Restated Articles of Incorporation of Wellesley Bancorp, Inc. (1)
     
  3.2 Amended and Restated Bylaws of Wellesley Bancorp, Inc. (2)
     
  4.1 Form of 6.00% Fixed to Floating Subordinated Note Due 2025 (3)
     
  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 March 31, 2019, 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 Annual Report on Form 10-K (File No. 001-35352), filed with the Securities and Exchange Commission on March 29, 2018.

 

(3)Incorporated herein by reference to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission on December 17, 2015 (included as Exhibit A to the Purchase Agreement filed as Exhibit 10.1 thereto).

 

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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: May 9, 2019 By: /s/ Thomas J. Fontaine
      Thomas J. Fontaine
      President and Chief Executive Officer
      (principal executive officer)

 

Dated: May 9, 2019 By: /s/ Michael W. Dvorak
      Michael W. Dvorak
      Chief Financial Officer and Treasurer
      (principal accounting and financial officer)

 

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