UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark one)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 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) |
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 |
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
As of November 1, 2019, there were 2,569,992 shares of the registrant’s common stock outstanding.
WELLESLEY BANCORP, INC.
Table of Contents
Item 1. Financial Statements (Unaudited)
| September 30, 2019 | December 31, 2018 | |||||||
| (Dollars in thousands) | ||||||||
| Assets | ||||||||
| Cash and due from banks | $ | 7,305 | $ | 7,678 | ||||
| Short-term investments | 74,048 | 34,972 | ||||||
| Total cash and cash equivalents | 81,353 | 42,650 | ||||||
| Certificates of deposit | 100 | 100 | ||||||
| Securities available for sale, at fair value | 33,793 | 66,770 | ||||||
| Federal Home Loan Bank of Boston stock, at cost | 6,162 | 4,747 | ||||||
| Loans held for sale | 6,351 | -- | ||||||
| Loans | 832,803 | 743,770 | ||||||
| Less allowance for loan losses | (7,218 | ) | (6,738 | ) | ||||
| Loans, net | 825,585 | 737,032 | ||||||
| Bank-owned life insurance | 7,946 | 7,769 | ||||||
| Operating lease, right-of-use asset | 6,852 | -- | ||||||
| Premises and equipment, net | 3,785 | 3,924 | ||||||
| Accrued interest receivable | 2,769 | 2,288 | ||||||
| Net deferred tax asset | 2,717 | 2,804 | ||||||
| Other assets | 8,454 | 3,336 | ||||||
| Total assets | $ | 985,867 | $ | 871,420 | ||||
| Liabilities and Stockholders’ Equity | ||||||||
| Deposits: | ||||||||
| Non-interest-bearing | $ | 133,187 | $ | 116,926 | ||||
| Interest-bearing | 625,558 | 601,005 | ||||||
| Total deposits | 758,745 | 717,931 | ||||||
| Short-term borrowings | 51,000 | 15,000 | ||||||
| Long-term borrowings | 77,533 | 58,528 | ||||||
| Subordinated debt | 9,854 | 9,832 | ||||||
| Lease liability | 6,907 | -- | ||||||
| Accrued expenses and other liabilities | 10,043 | 4,999 | ||||||
| Total liabilities | 914,082 | 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, 2,569,542 and 2,525,611 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively | 26 | 25 | ||||||
| Additional paid-in capital | 27,500 | 26,462 | ||||||
| Retained earnings | 44,598 | 40,203 | ||||||
| Accumulated other comprehensive income (loss) | 592 | (533 | ) | |||||
| Unearned compensation – ESOP | (931 | ) | (1,027 | ) | ||||
| Total stockholders' equity | 71,785 | 65,130 | ||||||
| Total liabilities and stockholders' equity | $ | 985,867 | $ | 871,420 | ||||
See accompanying notes to consolidated financial statements.
1
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| (Dollars in thousands, except per share data) | ||||||||||||||||
| Interest and dividend income: | ||||||||||||||||
| Interest and fees on loans and loans held for sale | $ | 9,769 | $ | 7,941 | $ | 27,940 | $ | 22,702 | ||||||||
| Debt securities: | ||||||||||||||||
| Taxable | 335 | 364 | 1,076 | 1,050 | ||||||||||||
| Tax-exempt | 76 | 82 | 238 | 246 | ||||||||||||
| Short-term investments and certificates of deposit | 270 | 143 | 577 | 376 | ||||||||||||
| FHLB stock | 75 | 86 | 213 | 244 | ||||||||||||
| Total interest and dividend income | 10,525 | 8,616 | 30,044 | 24,618 | ||||||||||||
| Interest expense: | ||||||||||||||||
| Deposits | 2,606 | 1,668 | 7,665 | 4,318 | ||||||||||||
| Short-term borrowings | 338 | 244 | 703 | 442 | ||||||||||||
| Long-term debt | 521 | 273 | 1,154 | 1,004 | ||||||||||||
| Subordinated debt | 157 | 158 | 471 | 474 | ||||||||||||
| Total interest expense | 3,622 | 2,343 | 9,993 | 6,238 | ||||||||||||
| Net interest income | 6,903 | 6,273 | 20,051 | 18,380 | ||||||||||||
| Provision for loan losses | 70 | 130 | 480 | 390 | ||||||||||||
| Net interest income, after provision for loan losses | 6,833 | 6,143 | 19,571 | 17,990 | ||||||||||||
| Non-interest income: | ||||||||||||||||
| Customer service fees | 43 | 42 | 131 | 130 | ||||||||||||
| Mortgage banking activities | 102 | 35 | 181 | 72 | ||||||||||||
| Income on bank-owned life insurance | 60 | 60 | 177 | 175 | ||||||||||||
| Wealth management fees | 402 | 407 | 1,228 | 1,208 | ||||||||||||
| Miscellaneous | 355 | 17 | 809 | 200 | ||||||||||||
| Total non-interest income | 962 | 561 | 2,526 | 1,785 | ||||||||||||
| Non-interest expense: | ||||||||||||||||
| Salaries and employee benefits | 3,052 | 2,660 | 9,214 | 8,074 | ||||||||||||
| Occupancy and equipment | 842 | 782 | 2,466 | 2,201 | ||||||||||||
| Data processing | 325 | 265 | 930 | 734 | ||||||||||||
| FDIC insurance | 11 | 150 | 336 | 486 | ||||||||||||
| Professional fees | 191 | 159 | 637 | 572 | ||||||||||||
| Other general and administrative | 579 | 566 | 1,871 | 1,666 | ||||||||||||
| Total non-interest expense | 5,000 | 4,582 | 15,454 | 13,733 | ||||||||||||
| Income before income taxes | 2,795 | 2,122 | 6,643 | 6,042 | ||||||||||||
| Provision for income taxes | 759 | 565 | 1,800 | 1,628 | ||||||||||||
| Net income | 2,036 | 1,557 | 4,843 | 4,414 | ||||||||||||
| Other comprehensive income: | ||||||||||||||||
| Net unrealized holding (loss) gains on available-for-sale securities | (92 | ) | (267 | ) | 1,509 | (1,343 | ) | |||||||||
| Income tax benefit (expense) | 17 | 54 | (384 | ) | 335 | |||||||||||
| Total other comprehensive (loss) gain income | (75 | ) | (213 | ) | 1,125 | (1,008 | ) | |||||||||
| Comprehensive income | $ | 1,961 | $ | 1,344 | $ | 5,968 | $ | 3,406 | ||||||||
| Earnings per common share: | ||||||||||||||||
| Basic | $ | 0.82 | $ | 0.65 | $ | 1.97 | $ | 1.84 | ||||||||
| Diluted | $ | 0.80 | $ | 0.62 | $ | 1.91 | $ | 1.77 | ||||||||
| Weighted average shares outstanding: | ||||||||||||||||
| Basic | 2,472,267 | 2,408,091 | 2,454,103 | 2,398,671 | ||||||||||||
| Diluted | 2,554,454 | 2,511,241 | 2,545,786 | 2,499,093 | ||||||||||||
See accompanying notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Nine Months Ended September 30, 2019 and 2018
| Common Stock | Additional | Retained | Accumulated | Unearned | 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 | -- | -- | -- | 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 | |||||||||||||
| Comprehensive income | -- | -- | -- | 1,420 | (149 | ) | -- | 1,271 | ||||||||||||||||||||
| Dividends paid to common stockholders ($0.055 per share) | -- | -- | -- | (137 | ) | -- | -- | (137 | ) | |||||||||||||||||||
| Restricted stock forfeitures | (400 | ) | ||||||||||||||||||||||||||
| Share-based compensation-equity incentive plan | -- | -- | 100 | -- | -- | -- | 100 | |||||||||||||||||||||
| ESOP shares committed to be allocated (3,210) | -- | -- | 72 | -- | -- | 31 | 103 | |||||||||||||||||||||
| Balance at June 30, 2018 | 2,506,132 | $ | 25 | $ | 25,941 | $ | 37,322 | $ | (756 | ) | $ | (1,092 | ) | $ | 61,440 | |||||||||||||
| Comprehensive income | -- | -- | -- | 1,557 | (213 | ) | -- | 1,344 | ||||||||||||||||||||
| Dividends paid to common stockholders ($0.055 per share) | -- | -- | -- | (139 | ) | -- | -- | (139 | ) | |||||||||||||||||||
| Stock options exercised | 19,054 | -- | 154 | -- | -- | -- | 154 | |||||||||||||||||||||
| Share-based compensation-equity incentive plan | -- | -- | 106 | -- | -- | -- | 106 | |||||||||||||||||||||
| ESOP shares committed to be allocated (3,210) | -- | -- | 77 | -- | -- | 33 | 110 | |||||||||||||||||||||
| Balance at September 30, 2018 | 2,525,186 | $ | 25 | $ | 26,278 | $ | 38,740 | $ | (962 | ) | $ | (1,059 | ) | $ | 63,022 | |||||||||||||
3
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Nine Months Ended September 30, 2019 and 2018
| Common Stock | Additional Paid-in | Retained | Accumulated | Unearned Compensation- | Total Stockholders’ | |||||||||||||||||||||||
| Shares | Amount | Capital | Earnings | Income (Loss) | ESOP | Equity | ||||||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||||||
| 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 | ||||||||||||||
| Comprehensive income | -- | -- | -- | 1,505 | 557 | -- | 2,062 | |||||||||||||||||||||
| Stock options exercised | 21,901 | 1 | 351 | -- | -- | -- | 352 | |||||||||||||||||||||
| Dividends paid to common stockholders ($0.06 per share) | -- | -- | -- | (153 | ) | -- | -- | (153 | ) | |||||||||||||||||||
| Share-based compensation-equity incentive plan | -- | -- | 99 | -- | -- | -- | 99 | |||||||||||||||||||||
| ESOP shares committed to be allocated (3,210) | -- | -- | 75 | -- | -- | 32 | 107 | |||||||||||||||||||||
| Balance at June 30, 2019 | 2,559,565 | $ | 26 | $ | 27,201 | $ | 42,717 | $ | 667 | $ | (963 | ) | $ | 69,648 | ||||||||||||||
| Comprehensive income | -- | -- | -- | 2,036 | (75 | ) | -- | 1,961 | ||||||||||||||||||||
| Restricted stock awards grant | 3,000 | -- | -- | -- | -- | -- | -- | |||||||||||||||||||||
| Stock options exercised | 11,027 | -- | 169 | -- | -- | -- | 169 | |||||||||||||||||||||
| Restricted stock forfeitures | (4,050 | ) | -- | (36 | ) | -- | -- | -- | (36 | ) | ||||||||||||||||||
| Dividends paid to common stockholders ($0.06 per share) | -- | -- | -- | (155 | ) | -- | -- | (155 | ) | |||||||||||||||||||
| Share-based compensation-equity incentive plan | -- | -- | 97 | -- | -- | -- | 97 | |||||||||||||||||||||
| ESOP shares committed to be allocated (3,210) | -- | -- | 69 | -- | -- | 32 | 101 | |||||||||||||||||||||
| Balance at September 30, 2019 | 2,569,542 | $ | 26 | $ | 27,500 | $ | 44,598 | $ | 592 | $ | (931 | ) | $ | 71,785 | ||||||||||||||
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
| Nine Months Ended September 30, | ||||||||
| 2019 | 2018 | |||||||
| (In thousands) | ||||||||
| Cash flows from operating activities: | ||||||||
| Net income | $ | 4,843 | $ | 4,414 | ||||
| Adjustments to reconcile net income to net cash provided (used) by operating activities: | ||||||||
| Provision for loan losses | 480 | 390 | ||||||
| Depreciation and amortization | 611 | 574 | ||||||
| Net amortization of securities | 129 | 117 | ||||||
| Gains on sales of securities, net | 8 | -- | ||||||
| Principal balance of loans sold | 13,782 | 5,857 | ||||||
| Loans originated for sale | (20,133 | ) | (6,555 | ) | ||||
| Accretion of net deferred loan fees | (493 | ) | (435 | ) | ||||
| Amortization of subordinated debt issuance costs | 22 | 23 | ||||||
| Income on bank-owned life insurance | (177 | ) | (175 | ) | ||||
| Deferred income tax provision | (297 | ) | (262 | ) | ||||
| ESOP expense | 304 | 307 | ||||||
| Share-based compensation | 262 | 313 | ||||||
| Net change in other assets and liabilities | (467 | ) | (500 | ) | ||||
| Net cash provided (used) by operating activities | (1,126 | ) | 4,068 | |||||
| Cash flows from investing activities: | ||||||||
| Activity in securities available for sale: | ||||||||
| Maturities, prepayments and calls | 5,944 | 8,289 | ||||||
| Purchases | -- | (10,914 | ) | |||||
| Proceeds from sales | 28,406 | -- | ||||||
| Purchase (redemption) of Federal Home Loan Bank stock | (1,415 | ) | 471 | |||||
| Net loan originations | (88,540 | ) | (33,703 | ) | ||||
| Additions to premises and equipment | (534 | ) | (728 | ) | ||||
| Proceeds on sale of premises and equipment | 28 | 63 | ||||||
| Net cash used by investing activities | (56,111 | ) | (36,522 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net increase in deposits | 40,814 | 53,761 | ||||||
| Proceeds from issuance of long-term debt | 33,000 | 36,000 | ||||||
| Repayments of long-term debt | (13,995 | ) | (50,817 | ) | ||||
| Increase (decrease) in short-term borrowings | 36,000 | (10,500 | ) | |||||
| Stock options exercised | 568 | 154 | ||||||
| Common stock repurchased | 1 | -- | ||||||
| Cash dividends paid on common stock | (448 | ) | (403 | ) | ||||
| Net cash provided by financing activities | 95,940 | 28,195 | ||||||
| Net change in cash and cash equivalents | 38,703 | (4,259 | ) | |||||
| Cash and cash equivalents at beginning period | 42,650 | 28,462 | ||||||
| Cash and cash equivalents at end of period | $ | 81,353 | $ | 24,203 | ||||
| Supplementary information: | ||||||||
| Interest paid | $ | 9,762 | $ | 6,083 | ||||
| Income taxes paid | 1,838 | 2,086 | ||||||
See accompanying notes to consolidated financial statements.
5
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 accounting principles generally accepted 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 and nine months ended September 30, 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 that 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.
6
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.
7
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring ("TDR"). All TDRs are initially classified as impaired.
Unallocated component
An unallocated component is maintained to cover additional uncertainties in management’s estimation of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.
NOTE 3 – COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue, expenses, and gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the stockholders’ equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income/loss.
The components of accumulated other comprehensive income (loss) and related tax effects are as follows:
| September 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| (In thousands) | ||||||||
| Unrealized holding gains (losses) on securities available for sale | $ | 777 | $ | (732 | ) | |||
| Tax effect | (185 | ) | 199 | |||||
| Net-of tax amount | $ | 592 | $ | (533 | ) | |||
NOTE 4 – RECENT ACCOUNTING AND REGULATORY PRONOUNCEMENTS
Effective January 1, 2019, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842), which requires a lessee to record a right-of-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 September 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 was scheduled to be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. However, the FASB recently voted to propose delaying the standard by three years for small reporting companies, which includes Wellesley Bank. To date, 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 legislative developments.
8
NOTE 5 – SECURITIES AVAILABLE FOR SALE
The amortized cost and fair value of securities available for sale, with gross unrealized gains and losses, follows:
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| September 30, 2019 | ||||||||||||||||
| Residential mortgage-backed securities: | ||||||||||||||||
| Government National Mortgage Association | $ | 2,869 | $ | 79 | $ | (24 | ) | $ | 2,924 | |||||||
| Government-sponsored enterprises | 2,381 | 63 | (9 | ) | 2,435 | |||||||||||
| SBA and other asset-backed securities | 4,211 | 176 | (2 | ) | 4,385 | |||||||||||
| State and municipal bonds | 7,459 | 387 | -- | 7,846 | ||||||||||||
| Government-sponsored enterprise obligations | 7,000 | -- | (6 | ) | 6,994 | |||||||||||
| Corporate bonds | 9,096 | 139 | (26 | ) | 9,209 | |||||||||||
| $ | 33,016 | $ | 844 | $ | (67 | ) | $ | 33,793 | ||||||||
| Gross | Gross | |||||||||||||||
| Amortized | Unrealized | Unrealized | Fair | |||||||||||||
| Cost | Gains | Losses | 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 | ||||||||
For the three and nine months ended September 30, 2019, proceeds from sales of available-for-sale securities amounted to $28.4 million with gross realized gains of $145 thousand and gross realized losses of $137 thousand, which are included in miscellaneous income.
There were no sales of available-for-sale securities for the three and nine months ended September 30, 2018.
9
The amortized cost and fair value of debt securities by contractual maturity at September 30, 2019 are as follows:
| Amortized Cost | Fair
Value | |||||||
| (In thousands) | ||||||||
| Within 1 year | $ | 2,349 | $ | 2,349 | ||||
| After 1 year to 5 years | 9,809 | 9,853 | ||||||
| After 5 years to 10 years | 7,799 | 8,108 | ||||||
| After 10 years | 3,598 | 3,739 | ||||||
| 23,555 | 24,049 | |||||||
| Mortgage- and asset-backed securities | 9,461 | 9,744 | ||||||
| $ | 33,016 | $ | 33,793 | |||||
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 | Gross | |||||||||||||||
| Unrealized | Fair | Unrealized | Fair | |||||||||||||
| Losses | Value | Losses | Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| September 30, 2019 | ||||||||||||||||
| Residential mortgage-backed securities: | ||||||||||||||||
| Government National Mortgage Association | $ | -- | $ | -- | $ | (24 | ) | $ | 904 | |||||||
| Government-sponsored enterprises | -- | -- | (9 | ) | 367 | |||||||||||
| SBA and other asset-backed securities | (2 | ) | 305 | -- | -- | |||||||||||
| State and municipal bonds | -- | -- | -- | -- | ||||||||||||
| Government-sponsored enterprise obligations | (6 | ) | 2,994 | -- | -- | |||||||||||
| Corporate bonds | -- | -- | (26 | ) | 1,835 | |||||||||||
| $ | (8 | ) | $ | 3,299 | $ | (59 | ) | $ | 3,106 | |||||||
| Less Than Twelve Months | Over Twelve Months | |||||||||||||||
| Gross | Gross | |||||||||||||||
| Unrealized | Fair | Unrealized | Fair | |||||||||||||
| Losses | Value | Losses | 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 | |||||||
10
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluations. At September 30, 2019, various debt securities have unrealized losses with aggregate depreciation of 1.03% from their aggregate amortized cost basis. These unrealized losses relate principally to the effect of interest rate changes on the fair value of debt securities and not an increase in credit risk of the issuers. As the Company does not intend to sell the securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost, which may be maturity, the Company does not consider these securities to be other-than-temporarily impaired at September 30, 2019.
NOTE 6 – LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of the ending balances of loans is as follows:
| September 30, | December 31, | |||||||
| 2019 | 2018 | |||||||
| (In thousands) | ||||||||
| Real estate loans: | ||||||||
| Residential – fixed | $ | 71,834 | $ | 64,218 | ||||
| Residential – variable | 319,236 | 318,292 | ||||||
| Commercial | 166,193 | 148,006 | ||||||
| Construction | 150,732 | 106,723 | ||||||
| 707,995 | 637,239 | |||||||
| Commercial loans: | ||||||||
| Secured | 82,784 | 61,563 | ||||||
| Unsecured | 5,144 | 5,327 | ||||||
| 87,928 | 66,890 | |||||||
| Consumer loans: | ||||||||
| Home equity lines of credit | 36,955 | 39,486 | ||||||
| Other | 165 | 163 | ||||||
| 37,120 | 39,649 | |||||||
| Total loans | 833,043 | 743,778 | ||||||
| Net deferred originations costs | (240 | ) | (8 | ) | ||||
| Total loans, net of deferred fees | 832,803 | 743,770 | ||||||
| Less: | ||||||||
| Allowance for loan losses | (7,218 | ) | (6,738 | ) | ||||
| Loans, net | $ | 825,585 | $ | 737,032 | ||||
11
The following table summarizes the changes in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2019 and 2018:
Residential Real Estate | Commercial Real Estate | Construction | Commercial | Home Equity | Other Consumer | Unallocated | Total | ||||||||||||||||||
| (In thousands) | |||||||||||||||||||||||||
| Three Months Ended September 30, 2019 | |||||||||||||||||||||||||
| Allowance at June 30, 2019 | $ | 2,151 | $ | 1,522 | $ | 1,626 | $ | 1,352 | $ | 262 | $ | 3 | $ | 232 | $ | 7,148 | |||||||||
| Provision (credit) for loan losses | (35 | ) | (34 | ) | 211 | 30 | (25 | ) | -- | (77 | ) | 70 | |||||||||||||
| Allowance at September 30, 2019 | $ | 2,116 | $ | 1,488 | $ | 1,837 | $ | 1,382 | $ | 237 | $ | 3 | $ | 155 | $ | 7,218 | |||||||||
| Three Months Ended September 30, 2018 | |||||||||||||||||||||||||
| Allowance at June 30, 2018 | $ | 1,999 | $ | 1,615 | $ | 1,459 | $ | 962 | $ | 257 | $ | 4 | $ | 117 | $ | 6,413 | |||||||||
| Provision (credit) for loan losses | 108 | 4 | 5 | (10 | ) | (6 | ) | (1 | ) | 30 | 130 | ||||||||||||||
| Allowance at September 30, 2018 | $ | 2,107 | $ | 1,619 | $ | 1,464 | $ | 952 | $ | 251 | $ | 3 | $ | 147 | $ | 6,543 | |||||||||
| Nine Months Ended September 30, 2019 | |||||||||||||||||||||||||
| Allowance at December 31, 2018 | $ | 2,216 | $ | 1,602 | $ | 1,462 | $ | 1,124 | $ | 257 | $ | 3 | $ | 74 | $ | 6,738 | |||||||||
| Provision (credit) for loan losses | (100 | ) | (114 | ) | 375 | 258 | (20 | ) | -- | 81 | 480 | ||||||||||||||
| Allowance at September 30, 2019 | $ | 2,116 | $ | 1,488 | $ | 1,837 | $ | 1,382 | $ | 237 | $ | 3 | $ | 155 | $ | 7,218 | |||||||||
| Nine Months Ended September 30, 2018 | |||||||||||||||||||||||||
| Allowance at December 31, 2017 | $ | 1,722 | $ | 1,520 | $ | 1,661 | $ | 917 | $ | 237 | $ | 2 | $ | 94 | $ | 6,153 | |||||||||
| Provision (credit) for loan losses | 385 | 99 | (197 | ) | 35 | 14 | 1 | 53 | 390 | ||||||||||||||||
| Allowance at September 30, 2018 | $ | 2,107 | $ | 1,619 | $ | 1,464 | $ | 952 | $ | 251 | $ | 3 | $ | 147 | $ | 6,543 | |||||||||
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) | |||||||||||||||||||||||||
| September 30, 2019 | |||||||||||||||||||||||||
| Allowance related to impaired loans | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | $ | -- | |||||||||
| Allowance related to non-impaired loans | 2,116 | 1, 488 | 1,837 | 1,382 | 237 | 3 | 155 | 7,218 | |||||||||||||||||
| Total allowance | $ | 2,116 | $ | 1,488 | $ | 1,837 | $ | 1,382 | $ | 237 | $ | 3 | $ | 155 | $ | 7,218 | |||||||||
| Impaired loan balances | $ | 728 | $ | 2,635 | $ | -- | $ | 796 | $ | 500 | $ | -- | $ | -- | $ | 4,659 | |||||||||
| Non-impaired loan balances | 390,342 | 163,558 | 150,732 | 87,132 | 36,455 | 165 | -- | 828,384 | |||||||||||||||||
| Total loans | $ | 391,070 | $ | 166,193 | $ | 150,732 | $ | 87,928 | $ | 36,955 | $ | 165 | $ | -- | $ | 833,043 | |||||||||
| 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 September 30, 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) | ||||||||||||||||||||||||
| September 30, 2019 | ||||||||||||||||||||||||
| Residential real estate | $ | 568 | $ | -- | $ | -- | $ | 568 | $ | -- | $ | 568 | ||||||||||||
| Commercial real estate | -- | -- | 548 | 548 | -- | 548 | ||||||||||||||||||
| Consumer loans | -- | 500 | -- | 500 | -- | 500 | ||||||||||||||||||
| Total | $ | 568 | $ | 500 | $ | 548 | $ | 1,616 | $ | -- | $ | 1,616 | ||||||||||||
| 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:
| September 30, 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 | $ | 728 | $ | 745 | $ | 746 | $ | 764 | ||||||||
| Commercial real estate | 2,635 | 2,760 | 2,846 | 2,974 | ||||||||||||
| Commercial loans | 796 | 796 | -- | -- | ||||||||||||
| Consumer loans | 500 | 500 | -- | -- | ||||||||||||
| Total impaired loans | $ | 4,659 | $ | 4,801 | $ | 3,592 | $ | 3,738 | ||||||||
Further information pertaining to impaired loans follows:
| Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2019 | |||||||||||||||||||||||
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 | $ | 731 | $ | 8 | $ | 6 | $ | 738 | $ | 23 | $ | 18 | ||||||||||||
| Commercial real estate | 2,669 | 24 | -- | 2,739 | 84 | 11 | ||||||||||||||||||
| Commercial loans | 790 | 14 | 519 | 31 | ||||||||||||||||||||
| Consumer loans | 125 | -- | 42 | -- | ||||||||||||||||||||
| Total | $ | 4,315 | $ | 46 | $ | 6 | $ | 4,038 | $ | 138 | $ | 29 | ||||||||||||
13
| Three Months Ended September 30, 2018 | Nine Months Ended September 30, 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 | $ | 821 | $ | 13 | $ | 2 | $ | 421 | $ | 25 | $ | 5 | ||||||||||||
| Commercial real estate | 2,949 | 32 | 6 | 1,627 | 61 | 34 | ||||||||||||||||||
| Total | $ | 3,770 | $ | 45 | $ | 8 | $ | 2,048 | $ | 86 | $ | 39 | ||||||||||||
New TDRs were recorded totaling $2.6 million, which included a new commitment of $500 thousand, in the three and nine months ended September 30, 2019 as a working capital, line of credit was granted to an existing impaired commercial loan relationship, consisting of two commercial real estate loans.
There were no new troubled debt restructurings recorded during the three and nine months ended September 30, 2018.
There were no TDRs that defaulted, generally considered 90 days past due or longer, during the three and nine months ended September 30, 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 and nine months ended September 30, 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.
14
Loans rated 11: Loans in this category include credit commitments/relationships that cannot be rated due to a lack of financial information or inaccurate financial information. If within 60 days of the assignment of an 11 rating, information is still not available to allow a standard rating, the credit will be rated 6.
On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial loans. During each calendar year, the Company engages an independent third party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process. On a monthly basis, the Company reviews the residential real estate and consumer loan portfolio for credit quality primarily through the use of delinquency reports.
The following table presents the Company’s loans by risk rating:
| September 30, 2019 | December 31, 2018 | |||||||||||||||||||||||||||||||
Commercial Real Estate | Construction | Commercial | Total | Commercial Real Estate | Construction | Commercial | Total | |||||||||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||||||||||
| Loans rated 1-4 | $ | 162,523 | $ | 150,732 | $ | 86,211 | $ | 399,466 | $ | 144,243 | $ | 106,723 | $ | 65,245 | $ | 316,211 | ||||||||||||||||
| Loans rated 5 | 885 | -- | 1,049 | 1,934 | 917 | -- | 1,645 | 2,562 | ||||||||||||||||||||||||
| Loans rated 6 | 2,237 | -- | 668 | 2,905 | 2,290 | -- | -- | 2,290 | ||||||||||||||||||||||||
| Loans rated 7 | 548 | -- | -- | 548 | 556 | -- | -- | 556 | ||||||||||||||||||||||||
| Total | $ | 166,193 | $ | 150,732 | $ | 87,928 | $ | 404,853 | $ | 148,006 | $ | 106,723 | $ | 66,890 | $ | 321,619 | ||||||||||||||||
NOTE 7 – 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 $1.8 million at September 30, 2019. The fair value of these commitments was an asset of $5 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 $8.9 million at September 30, 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.
15
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 contracts, 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 comprehensive income. A deposit account totaling $3.0 million is currently pledged to secure the Company’s liability for the offsetting interest rate swaps.
A summary of the interest rate swaps is as follows:
| With commercial | With third-party | |||||||||||
| loan borrowers | financial institutions | |||||||||||
| September 30, | December 31, | September 30, | December 31, | |||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||
| (dollars in thousands) | ||||||||||||
| Notional amount | $ 66,098 | $28,320 | $66,098 | $28,320 | ||||||||
| Receive (pay) fixed rate weighted average | 4.68% | 5.09% | (4.68%) | (5.09%) | ||||||||
| Receive (pay) variable rate weighted average | (4.23%) | (5.06%) | 4.23% | 5.06% | ||||||||
| Weighted average remaining years | 10.7 years | 12.8 years | 10.7 years | 12.8 years | ||||||||
| Unrealized fair value gain (loss) | $4,832 | $264 | $(4,832) | $(264) | ||||||||
NOTE 8 – 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.
16
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.
Assets and liabilities measured at fair value on a recurring basis
Assets and liabilities measured at fair value on a recurring basis at September 30, 2019 and December 31, 2018 are summarized below.
| Level 1 | Level 2 | Level 3 | Total Fair Value | |||||||||||||
| (In thousands) | ||||||||||||||||
| September 30, 2019 | ||||||||||||||||
| Assets | ||||||||||||||||
| Securities available for sale | $ | -- | $ | 33,793 | $ | -- | $ | 33,793 | ||||||||
| Interest rate swap agreements | -- | 4,832 | -- | 4,832 | ||||||||||||
| Derivative loan commitments | -- | -- | 5 | 5 | ||||||||||||
| Forward loan sale commitments | -- | -- | 3 | 3 | ||||||||||||
| $ | -- | $ | 38,625 | $ | 8 | $ | 38,633 | |||||||||
| Liabilities | ||||||||||||||||
| Interest rate swap agreements | $ | -- | $ | 4,832 | $ | -- | $ | 4,832 | ||||||||
| 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.
17
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.
| September 30, 2019 | December 31, 2018 | |||||||||||||||||||||||
| Level 1 | Level 2 | Level 3 | Level 1 | Level 2 | Level 3 | |||||||||||||||||||
| (In thousands) | ||||||||||||||||||||||||
| Loans held for sale | $ | -- | $ | -- | $ | 6,351 | $ | -- | $ | -- | $ | -- | ||||||||||||
There were no liabilities measured at fair value on a non-recurring basis at September 30, 2019 and December 31, 2018.
18
Summary of fair values of financial instruments
The estimated fair values and related carrying amounts of the Company’s financial instruments are outlined in the table below. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.
| Carrying | Fair Value | |||||||||||||||||||
| Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
| (In thousands) | ||||||||||||||||||||
| September 30, 2019 | ||||||||||||||||||||
| Financial assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 81,353 | $ | 81,353 | $ | -- | $ | -- | $ | 81,353 | ||||||||||
| Certificates of deposit | 100 | 100 | -- | -- | 100 | |||||||||||||||
| Securities available for sale | 33,793 | -- | 33,793 | -- | 33,793 | |||||||||||||||
| FHLB stock | 6,162 | -- | -- | 6,162 | 6,162 | |||||||||||||||
| Loans held for sale | 6,351 | -- | -- | 6,351 | 6,351 | |||||||||||||||
| Loans, net | 825,585 | -- | -- | 833,926 | 833,926 | |||||||||||||||
| Accrued interest receivable | 2,769 | -- | -- | 2,769 | 2,769 | |||||||||||||||
| Interest rate swap agreements | 4,832 | -- | 4,832 | -- | 4,832 | |||||||||||||||
| Derivative loan commitments | 5 | -- | -- | 5 | 5 | |||||||||||||||
| Forward loan sale commitments | 3 | -- | -- | 3 | 3 | |||||||||||||||
| Financial liabilities: | ||||||||||||||||||||
| Deposits | $ | 758,745 | $ | -- | $ | -- | $ | 758,924 | $ | 758,924 | ||||||||||
| Short-term borrowings | 51,000 | -- | 51,000 | -- | 51,000 18,,000 | |||||||||||||||
| Long-term debt | 77,533 | -- | 77,702 | -- | 77,702 | |||||||||||||||
| Subordinated debt | 9,854 | -- | -- | 9,765 | 9,765 | |||||||||||||||
| Accrued interest payable | 716 | -- | -- | 716 | 716 | |||||||||||||||
| Interest rate swap agreements | 4,832 | -- | 4,832 | -- | 4,832 | |||||||||||||||
| 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 | |||||||||||||||
19
NOTE 9 – 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 September 30, 2019, the ESOP held 176,177 shares or 6.9% 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 September 30, 2019 include the following:
| Allocated | 73,471 | |||
| Committed to be allocated | 9,629 | |||
| Unallocated | 93,077 | |||
| 176,177 |
The fair value of unallocated shares was $2.9 million at September 30, 2019.
Total compensation expense recognized in connection with the ESOP for the three months ended September 30, 2019 and 2018 was $101 thousand and $109 thousand, respectively. ESOP-related compensation expense was $304 thousand and $307 thousand for the nine months ended September 30, 2019 and 2018, respectively.
NOTE 10 – 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 September 30, 2019, there remain 20,550 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.
20
Stock Options
A summary of option activity under the 2012 Equity Incentive Plan for the nine months ended September 30, 2019 is presented below:
| Outstanding | ||||||||||||||||
| Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | |||||||||||||
| (In thousands) | (In years) | (In thousands) | ||||||||||||||
| Balance at January 1, 2019 | 193 | $ | 16.11 | |||||||||||||
| Forfeited | (3 | ) | 19.07 | |||||||||||||
| Exercised | (35 | ) | 16.01 | |||||||||||||
| Balance at September 30, 2019 | 155 | $ | 16.09 | 3.45 | $ | 2,339 | ||||||||||
| Exercisable at September 30, 2019 | 148 | $ | 15.33 | 3.16 | $ | 2,193 | ||||||||||
| Non-vested | |||||||||
| Shares | Weighted Average Grant Date Fair Value | ||||||||
| (In thousands) | |||||||||
| Balance at January 1, 2019 | 10 | $ | 4.13 | ||||||
| Forfeited | (3 | ) | 4.01 | ||||||
| Balance at September 30, 2019 | 7 | $ | 4.18 | ||||||
For the three months ended September 30, 2019 and 2018, compensation expense applicable to the stock options was $4 thousand and $9 thousand, respectively. There was no recognized tax benefit related to this expense for the period ended September 30, 2019 and September 30, 2018, respectively.
For the nine months ended September 30, 2019 and 2018, compensation expense applicable to the stock options was $17 thousand and $28 thousand, respectively. There was no recognized tax benefit related to this expense for the period ended September 30, 2019 and September 30, 2018, respectively.
Unrecognized compensation expense for non-vested stock options totaled $6 thousand as of September 30, 2019, which will be recognized over the remaining weighted average vesting period of 0.4 years.
Stock Awards
For the nine months ended September 30, 2019, there were 14,500 restricted stock awards granted with a weighted average grant date fair value of $28.88.
The following table presents the activity in non-vested stock awards under the equity incentive plans for the nine months ended September 30, 2019:
Number of | Grant-date Fair Value | ||||||||
| (In thousands) | |||||||||
| Balance at January 1, 2019 | 27 | $ | 23.97 | ||||||
| Restricted shares granted | 15 | 28.88 | |||||||
| Restricted shares forfeited | (6 | ) | 24.39 | ||||||
| Balance at September 30, 2019 | 36 | $ | 25.83 | ||||||
There was no activity in non-vested restricted stock awards under the 2016 or the 2012 Equity Incentive Plan for the three and nine months ended September 30, 2018.
21
For the three months ended September 30, 2019 and 2018, compensation expense applicable to the stock awards was $56 thousand and $97 thousand, respectively, and the recognized tax benefit related to this expense was $16 thousand and $27 thousand, respectively.
For the nine months ended September 30, 2019 and 2018, compensation expense applicable to the stock awards was $245 thousand and $285 thousand, respectively, and the recognized tax benefit related to this expense was $69 thousand and $80 thousand, respectively.
Unrecognized compensation expense for non-vested restricted stock totaled $626 thousand as of September 30, 2019, which will be recognized over the remaining weighted average vesting period of 2.27 years.
NOTE 11 – EARNINGS PER COMMON SHARE
Basic earnings per share represents net income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Unallocated ESOP shares are not deemed outstanding for earnings per share calculations. Under the Company’s 2012 and 2016 Equity Incentive Plans, stock awards contain non-forfeitable dividend rights. Accordingly, these shares are considered outstanding for computation of basic earnings per share. Potential common shares that may be issued by the Company relate to outstanding stock options and are determined using the treasury stock method.
Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2019 | 2018 | 2019 | 2018 | |||||||||||||
| (In thousands, except earnings per share amounts) | ||||||||||||||||
| Net income applicable to common stock | $ | 2,036 | $ | 1,557 | $ | 4,843 | $ | 4,414 | ||||||||
| Average number of common shares issued | 2,567 | 2,516 | 2,552 | 2,509 | ||||||||||||
| Less: Average unallocated ESOP shares | (95 | ) | (108 | ) | (98 | ) | (111 | ) | ||||||||
| Average number of common shares outstanding used to calculate basic earnings per common share | 2,472 | 2,408 | 2,454 | 2,398 | ||||||||||||
| Effect of dilutive stock options | 82 | 103 | 92 | 101 | ||||||||||||
| Average number of common shares outstanding used to calculate diluted earnings per share | 2,554 | 2,511 | 2,546 | 2,499 | ||||||||||||
| Earnings per common share: | ||||||||||||||||
| Basic | $ | 0.82 | $ | 0.65 | $ | 1.97 | $ | 1.84 | ||||||||
| Diluted | $ | 0.80 | $ | 0.62 | $ | 1.91 | $ | 1.77 | ||||||||
There were no anti-dilutive options that would have been excluded from the computations of diluted earnings per share for the three and nine months ended September 30, 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 12 – LEASES
Effective January 1, 2019, operating leases are included in operating lease right-of-use (“ROU”) asset and liabilities in our consolidated balance sheet. These operating leases provide the physical facilities for our sales and service locations, administration and operations offices, and ATMs.
22
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 at the accounting 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, which we include 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 operating lease expense for the three and nine months ended September 30, 2019 was $403 thousand and $1.2 million, respectively.
The table below summarizes other information related to our operating leases as of September 30, 2019:
| Cash flows from operating leases, in thousands, year to date 2019 | $ | 1,194 | ||
| Weighted average remaining lease term, in years | 5.4 | |||
| Weighted average discount rate | 3.13 | % |
The table below summarizes the maturity of the operating lease liabilities as of September 30, 2019:
| (In thousands) | |||||
| 2019 | $ | 402 | |||
| 2020 | 1,632 | ||||
| 2021 | 1,483 | ||||
| 2022 | 1,182 | ||||
| 2023 | 1,101 | ||||
| Thereafter | 1,912 | ||||
| Total lease payments | 7,712 | ||||
| Less imputed interest | (805 | ) | |||
| Present value of lease liabilities | $ | 6,907 | |||
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.
23
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.
Comparison of Financial Condition at September 30, 2019 and December 31, 2018
General. Total assets increased $114.4 million, or 13.1%, from $871.4 million at December 31, 2018 to $985.9 million at September 30, 2019. Total asset growth was primarily related to an increase in the net loan portfolio of $88.6 million or 12.0%, the addition of an operating lease right-of-use asset of $6.9 million and an increase in cash and short-term investments of $38.7 million, partially offset by a decrease of $33.0 million in securities available for sale.
Loans. The net loan portfolio increased $88.6 million. Construction loans increased $44.0 million, or 41.2%, primarily due to the addition of several projects during the period. Commercial real estate loans increased $18.2 million, or 12.3%, as we have had continued success in expanding our business development efforts. Commercial and industrial loans increased $21.0 million, or 31.5%, associated with continued strong business conditions in our markets. Residential real estate loans increased $8.6 million, or 2.2%, to $391.1 million, compared to $382.5 million at December 31, 2018.
At September 30, 2019, past due loans totaled $1.6 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 nine months ended September 30, 2019 and September 30, 2018.
Securities. Total securities decreased from $66.8 million at December 31, 2018 to $33.8 million at September 30, 2019 associated with the initiative to increase liquidity to pay down borrowings coming due in the fourth quarter.
Deposits. Total deposits increased $40.8 million, or 5.7%, from $717.9 million at December 31, 2018 to $758.7 million at September 30, 2019. Money market accounts increased $76.9 million, or 37.7%. Demand deposits and NOW accounts increased $21.5 million, or 14.0%, to $175.3 million as growth was realized in both retail and commercial accounts. Deposit growth was driven by our continued emphasis on primary relationships as well as targeted offers on interest-bearing accounts. Consequently, non-relationship based certificates of deposit decreased $48.1 million, or 17.3%, to $230.2 million, which included a decrease of $32.5 million brokered accounts. Savings account balances also decreased $9.4 million to $72.8 million at September 30, 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, increased $19.0 million, or 32.5%, for the nine months ended September 30, 2019 to support loan funding. Short-term borrowings consist entirely of advances from the FHLB with initial maturities less than one year. Balances of short-term borrowings increased $36.0 million, or 240.0%, from December 31, 2018 to meet liquidity needs. Subordinated debt was $9.8 million at September 30, 2019 and December 31, 2018.
24
Stockholders’ Equity. Stockholders’ equity increased $6.7 million, or 10.2%, from $65.1 million at December 31, 2018 to $71.8 million at September 30, 2019. The increase was primarily a result of net income for the nine month period of $4.8 million, an after-tax increase in the fair value of available-for-sale securities of $1.1 million and $1.0 million primarily related to equity plan transactions, partially offset by dividends paid of $448 thousand.
Results of Operations for the Three Months Ended September 30, 2019 and 2018
Overview. Net income for the three months ended September 30, 2019 was $2.0 million, compared to net income of $1.6 million for the three months ended September 30, 2018, an increase of $479 thousand or 30.8%. The increase in net income was due to increases in net interest income and non-interest income along with a lower provision for loan losses, partially offset by an increase in non-interest expense. Net interest income increased $630 thousand to $6.9 million; non-interest income increased $401 thousand to $962 thousand; and, the provision for loan loss decreased $60 thousand to $70 thousand in the 2019 quarter. Non-interest expense increased $418 thousand and totaled $5.0 million for the three months ended September 30, 2019. Income tax expense increased $194 thousand to $759 thousand, as compared to the 2018 period.
Net Interest Income. Net interest income for the three months ended September 30, 2019 increased $630 thousand, or 10.0%, as compared to the three months ended September 30, 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, higher rates offered on certificates of deposit and money market accounts, and higher rates on borrowings.
Interest and dividend income increased $1.9 million, or 22.2%, from $8.6 million for the three months ended September 30, 2018 to $10.5 million for the three months ended September 30, 2019. The average balance of interest-earning assets increased 15.9%, while the average rate earned on these assets increased by 23 basis points (“bps”). Interest and fees on loans increased $1.8 million, or 23.0%, due, in part, to a 15.6% increase in the average balance of loans. The average rate earned on loans increased 28 bps to 4.64%. Interest income from investments increased $92 thousand, or 15.6%, due primarily to an increase in the average balances and the average yields for the three months ended September 30, 2019 as compared to the prior year period.
Interest expense increased $1.3 million, or 54.6% 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 $938 thousand, or 56.2%. The average balance of interest-bearing deposits increased $89.6 million, or 16.9%, in the three months ended September 30, 2019, compared to the same period in 2018 and the average rate paid on interest bearing deposits increased 42 bps. In the 2019 period, interest expense on money market accounts increased by $768 thousand to $1.1 million. The rate paid on money market accounts increased 65 bps primarily due to higher interest rates offered on these accounts than in the prior year, along with the increase of the average balance of money market accounts of $124.3 million to $274.2 million, as compared to the prior year period. The cost of term certificates of deposit increased $192 thousand to $1.3 million as balances in our retail products increased. Rates paid on certificates of deposit balances increased to 2.23%, up from 1.74% in the same period last year.
Interest expense on short-term borrowings totaled $338 thousand in the three month period ended September 30, 2019, compared to $244 thousand in the three months ended September 30, 2018, primarily due to increases in average balances as well as increases in the rates paid by 35 bps.
Long-term debt expense totaled $521 thousand in the three month period ended September 30, 2019 compared to $273 thousand in the three months ended September 30, 2018. The average balance of long-term FHLB advances increased from $66.7 million to $77.6 million, while rates paid on long-term FHLB advances increased from 1.62% to 2.66%.
25
Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using daily balances. Loan fees are included in interest income on loans and are insignificant. Yields are not presented on a tax-equivalent basis. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant.
| For the Three Months Ended September 30, | ||||||||||||||||||||||||
| 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 | $ | 52,941 | $ | 270 | 2.02 | % | $ | 27,703 | $ | 143 | 2.04 | % | ||||||||||||
| Debt securities: | ||||||||||||||||||||||||
| Taxable | 47,194 | 335 | 2.82 | 53,789 | 364 | 2.69 | ||||||||||||||||||
| Tax-exempt | 12,233 | 76 | 2.45 | 12,905 | 82 | 2.52 | ||||||||||||||||||
| Total loans and loans held for sale | 835,663 | 9,769 | 4.64 | 722,979 | 7,941 | 4.36 | ||||||||||||||||||
| FHLB stock | 6,162 | 75 | 4.80 | 6,042 | 86 | 5.64 | ||||||||||||||||||
| Total interest-earning assets | 954,193 | 10,525 | 4.38 | 823,418 | 8,616 | 4.15 | ||||||||||||||||||
| Allowance for loan losses | (7,195 | ) | (6,479 | ) | ||||||||||||||||||||
| Total interest-earning assets less allowance for loan losses | 946,998 | 816,939 | ||||||||||||||||||||||
| Non-interest-earning assets | 36,499 | 23,564 | ||||||||||||||||||||||
| Total assets | $ | 983,497 | $ | 840,503 | ||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Regular savings accounts | $ | 71,152 | 103 | 0.57 | $ | 88,950 | 136 | 0.61 | ||||||||||||||||
| NOW checking accounts | 42,217 | 41 | 0.39 | 37,182 | 30 | 0.32 | ||||||||||||||||||
| Money market accounts | 274,179 | 1,150 | 1.66 | 149,898 | 382 | 1.01 | ||||||||||||||||||
| Certificates of deposit | 233,686 | 1,312 | 2.23 | 255,587 | 1,120 | 1.74 | ||||||||||||||||||
| Total interest-bearing deposits | 621,234 | 2,606 | 1.66 | 531,617 | 1,668 | 1.24 | ||||||||||||||||||
| Short-term borrowings | 51,587 | 338 | 2.60 | 43,060 | 244 | 2.25 | ||||||||||||||||||
| Long-term debt | 77,647 | 521 | 2.66 | 66,743 | 273 | 1.62 | ||||||||||||||||||
| Subordinated debt | 9,850 | 157 | 6.33 | 9,820 | 158 | 6.37 | ||||||||||||||||||
| Total interest-bearing liabilities | 760,318 | 3,622 | 1.89 | 651,240 | 2,343 | 1.43 | ||||||||||||||||||
| Non-interest-bearing demand deposits | 136,077 | 123,134 | ||||||||||||||||||||||
| Other non-interest-bearing liabilities | 15,650 | 3,292 | ||||||||||||||||||||||
| Total liabilities | 912,045 | 777,666 | ||||||||||||||||||||||
| Stockholders’ equity | 71,452 | 62,837 | ||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 983,497 | $ | 840,503 | ||||||||||||||||||||
| Net interest income | $ | 6,903 | $ | 6,273 | ||||||||||||||||||||
| Net interest rate spread (2) | 2.49 | % | 2.72 | % | ||||||||||||||||||||
| Net interest-earning assets (3) | $ | 193,876 | $ | 172,177 | ||||||||||||||||||||
| Net interest margin (4) | 2.87 | % | 3.02 | % | ||||||||||||||||||||
| Average total interest-earning assets to average total interest-bearing liabilities | 125.50 | % | 126.44 | % | ||||||||||||||||||||
| (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. |
26
Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total increase (decrease) column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.
| Three Months Ended September 30, 2019 Compared to Three Months Ended September 30, 2018 | ||||||||||||
| Increase (Decrease) | ||||||||||||
| Due to | Total Increase | |||||||||||
| (In thousands) | Volume | Rate | (Decrease) | |||||||||
| Interest-earning assets: | ||||||||||||
| Short-term investments | $ | 128 | $ | (1 | ) | $ | 127 | |||||
| Debt securities: | ||||||||||||
| Taxable | (48 | ) | 19 | (29 | ) | |||||||
| Tax-exempt | (4 | ) | (2 | ) | (6 | ) | ||||||
| Total loans and loans held for sale | 1,294 | 534 | 1,828 | |||||||||
| FHLB stock | 2 | (13 | ) | (11 | ) | |||||||
| Total interest-earning assets | 1,372 | 537 | 1,909 | |||||||||
| Interest-bearing liabilities: | ||||||||||||
| Regular savings | (26 | ) | (7 | ) | (33 | ) | ||||||
| NOW checking | 4 | 7 | 11 | |||||||||
| Money market | 431 | 337 | 768 | |||||||||
| Certificates of deposit | (84 | ) | 276 | 192 | ||||||||
| Total interest-bearing deposits | 325 | 613 | 938 | |||||||||
| Short-term borrowings | 53 | 41 | 94 | |||||||||
| Long-term debt | 50 | 198 | 248 | |||||||||
| Subordinated debt | -- | (1 | ) | (1 | ) | |||||||
| Total interest-bearing liabilities | 428 | 851 | 1,279 | |||||||||
| Increase (decrease) in net interest income | $ | 944 | $ | (314 | ) | $ | 630 | |||||
Provision for Loan Losses. The provision for loan losses was $70 thousand for the three months ended September 30, 2019, compared to $130 thousand for the three month period ended September 30, 2018. In both periods the provision reflects management’s estimate of loan losses based upon historical loan portfolio performance, growth of the portfolio, loan mix, as well as qualitative factors such as the strength of the regional economy and organizational knowledge and expertise.
27
Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated.
| Three Months Ended | ||||||||
| September 30, | ||||||||
| (Dollars in thousands) | 2019 | 2018 | ||||||
| Allowance at beginning of period | $ | 7,148 | $ | 6,413 | ||||
| Provision for loan losses | 70 | 130 | ||||||
| Charge-offs | -- | -- | ||||||
| Recoveries | -- | -- | ||||||
| Net charge-offs | -- | -- | ||||||
| Allowance at end of period | $ | 7,218 | $ | 6,543 | ||||
| Allowance for loan losses to nonperforming loans at end of period | 646.5 | % | 542.89 | % | ||||
| Allowance for loan losses to total loans at end of period | 0.87 | % | 0.90 | % | ||||
| Net charge-offs to average loans outstanding during the period | 0.00 | % | 0.00 | % | ||||
Non-interest Income. Non-interest income totaled $962 thousand, an increase of $401 thousand or 71.5%. Wealth management fees decreased $5 thousand, or 1.2%, as compared to the prior year as total assets under management (”AUM”) totaled $406.6 million as of September 30, 2019, compared to $435.7 million at September 30, 2018. The reduction in AUM is due to a recent sale of $28.4 million of the Bank’s investment portfolio. Income from mortgage banking activities in 2019 increased $67 thousand as sales of residential mortgage loans were higher as compared to the prior year. Other miscellaneous income increased $338 thousand primarily due to increases in fees on customer loan interest rate swaps.
Non-interest Expense. Non-interest expense totaled $5.0 million for the three months ended September 30, 2019, compared to $4.6 million for the three months ended September 30, 2018, an increase of $418 thousand. Salaries and employee benefits increased $392 thousand due to annual merit and benefit cost increases, promotions, along with increases to staff. Occupancy and equipment costs increased $60 thousand as a result of the consolidation and relocation of business operations to new office space and annual rent adjustments. Data processing costs increased $60 thousand associated with increased business volumes. Professional fees increased $32 thousand due mainly to higher legal expense. FDIC insurance expense decreased $139 thousand primarily due to a one-time small bank assessment credit.
Income Taxes. An income tax provision of $759 thousand was recorded during the quarter ended September 30, 2019, compared to a provision of $565 thousand in the comparable 2018 quarter. The effective tax rate for the 2019 three month period was 27.2%, compared to 26.6% for the 2018 three month period, primarily related to the sale of a portion of the municipal securities portfolio.
Results of Operations for the Nine Months Ended September 30, 2019 and 2018
Overview. Net income for the nine months ended September 30, 2019 was $4.8 million, compared to net income of $4.4 million for the nine months ended September 30, 2018, an increase of $429 thousand from the prior period. The increase was primarily due to increased net interest income of $1.7 million and increased non-interest income of $741 thousand, partially offset by increased non-interest expense of $1.7 million, increased provision for loan losses of $90 thousand, and an increase in the tax provision of $172 thousand.
Net Interest Income. Net interest income for the nine months ended September 30, 2019 increased $1.7 million, or 9.1%, as compared to the nine months ended September 30, 2018. The increase in net interest income was primarily due to an increase in interest income of $5.4 million, or 22.0%, partially offset by interest expenses that increased $3.8 million, or 60.2%, during the period.
28
Interest and dividend income increased $5.4 million, or 22.0%, from $24.6 million for the nine months ended September 30, 2018 to $30.0 million for the nine months ended September 30, 2019. The average balance of interest-earning assets increased 13.1%, while the average rate earned on these assets increased by 33 bps. Interest and fees on loans increased $5.2 million, or 23.1%, due to a 14.8% increase in the average balance of loans and an increase of 31 bps in the average rate earned on loans. Interest income from investments increased $219 thousand, or 13.1%, due to an increase in the average rate earned on these securities, in part, from Federal Reserve interest rate increases.
The increase in interest expense of $3.7 million, or 60.2%, was primarily due to an increase in average balances of interest-bearing deposits and an increase in the cost of funds. The average balance of interest-bearing deposits increased $93.2 million, or 17.8%, in the nine months ended September 30, 2019, as compared to the same period in 2018, while the average rate paid on interest-bearing deposits increased 56 bps. Interest expense on money market accounts increased by $2.2 million from 2018 to 2019. The rate paid on money market accounts increased to 1.65% up from 0.81% in 2018, while the average balance of these accounts increased $107.3 million to $249.5 million, as compared to the prior year period. The cost of term certificates of deposit increased $1.2 million to $4.1 million as balances in our retail products have increased, as well as an increase of 58 bps in the rates paid to acquire these balances, as compared to the same period last year. The cost for all FHLB advances increased by $411 thousand, or 28.4%, due mainly to increases in interest rates as short-term advance rates increased by 70 bps while long-term debt rates climbed by 69 bps.
29
Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using daily balances. Loan fees are included in interest income on loans and are insignificant. Yields are not presented on a tax-equivalent basis. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant.
| For the Nine Months Ended September 30, | ||||||||||||||||||||||||
| 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 | $ | 34,916 | $ | 577 | 2.21 | % | $ | 28,908 | $ | 376 | 1.74 | % | ||||||||||||
| Debt securities: | ||||||||||||||||||||||||
| Taxable | 49,919 | 1,076 | 2.88 | 53,796 | 1,050 | 2.61 | ||||||||||||||||||
| Tax-exempt | 12,756 | 238 | 2.49 | 12,971 | 246 | 2.53 | ||||||||||||||||||
| Total loans and loans held for sale | 806,618 | 27,940 | 4.63 | 702,490 | 22,702 | 4.32 | ||||||||||||||||||
| FHLB stock | 5,004 | 213 | 5.70 | 5,993 | 244 | 5.43 | ||||||||||||||||||
| Total interest-earning assets | 909,213 | 30,044 | 4.42 | 804,158 | 24,618 | 4.09 | ||||||||||||||||||
| Allowance for loan losses | (7,033 | ) | (6,321 | ) | ||||||||||||||||||||
| Total interest-earning assets less allowance for loan losses | 902,180 | 797,837 | ||||||||||||||||||||||
| Non-interest-earning assets | 33,638 | 23,163 | ||||||||||||||||||||||
| Total assets | $ | 935,818 | $ | 821,000 | ||||||||||||||||||||
| Interest-bearing liabilities: | ||||||||||||||||||||||||
| Regular savings accounts | $ | 74,899 | 335 | 0.60 | $ | 95,695 | 401 | 0.56 | ||||||||||||||||
| NOW checking accounts | 37,672 | 104 | 0.37 | 37,384 | 84 | 0.30 | ||||||||||||||||||
| Money market accounts | 249,545 | 3,074 | 1.65 | 142,235 | 859 | 0.81 | ||||||||||||||||||
| Certificates of deposit | 254,235 | 4,152 | 2.18 | 247,795 | 2,974 | 1.60 | ||||||||||||||||||
| Total interest-bearing deposits | 616,351 | 7,665 | 1.66 | 523,109 | 4,318 | 1.10 | ||||||||||||||||||
| Short-term borrowings | 34,983 | 703 | 2.69 | 29,778 | 442 | 1.99 | ||||||||||||||||||
| Long-term debt | 65,826 | 1,154 | 2.34 | 81,132 | 1,004 | 1.65 | ||||||||||||||||||
| Subordinated debt | 9,842 | 471 | 6.41 | 9,812 | 474 | 6.45 | ||||||||||||||||||
| Total interest-bearing liabilities | 727,002 | 9,993 | 1.84 | 643,831 | 6,238 | 1.29 | ||||||||||||||||||
| Non-interest-bearing demand deposits | 126,672 | 112,474 | ||||||||||||||||||||||
| Other non-interest-bearing liabilities | 13,188 | 3,327 | ||||||||||||||||||||||
| Total liabilities | 866,862 | 759,632 | ||||||||||||||||||||||
| Stockholders’ equity | 68,956 | 61,368 | ||||||||||||||||||||||
| Total liabilities and stockholders’ equity | $ | 935,818 | $ | 821,000 | ||||||||||||||||||||
| Net interest income | $ | 20,051 | $ | 18,380 | ||||||||||||||||||||
| Net interest rate spread (2) | 2.58 | % | 2.80 | % | ||||||||||||||||||||
| Net interest-earning assets (3) | $ | 182,211 | $ | 160,326 | ||||||||||||||||||||
| Net interest margin (4) | 2.95 | % | 3.06 | % | ||||||||||||||||||||
| Average total interest-earning assets to average total interest-bearing liabilities | 125.06 | % | 124.90 | % | ||||||||||||||||||||
| (1) | Ratios for the nine month periods have been annualized. |
| (2) | Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities. |
| (3) | Represents total average interest-earning assets less total average interest-bearing liabilities. |
| (4) | Represents net interest income as a percent of average interest-earning assets. |
30
Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total increase (decrease) column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.
Nine Months Ended September 30, 2019 Compared to Nine Months Ended September 30, 2018 | ||||||||||||
Increase (Decrease) Due to | Total Increase | |||||||||||
| (In thousands) | Volume | Rate | (Decrease) | |||||||||
| Interest-earning assets: | ||||||||||||
| Short-term investments | $ | 87 | $ | 114 | $ | 201 | ||||||
| Debt securities: | ||||||||||||
| Taxable | (57 | ) | 83 | 26 | ||||||||
| Tax-exempt | (4 | ) | (4 | ) | (8 | ) | ||||||
| Total loans and loans held for sale | 3,528 | 1,710 | 5,238 | |||||||||
| FHLB stock | (43 | ) | 12 | (31 | ) | |||||||
| Total interest-earning assets | 3,511 | 1,915 | 5,426 | |||||||||
| Interest-bearing liabilities: | ||||||||||||
| Regular savings | (95 | ) | 28 | (67 | ) | |||||||
| NOW checking | 1 | 20 | 21 | |||||||||
| Money market | 932 | 1,283 | 2,215 | |||||||||
| Certificates of deposit | 79 | 1,099 | 1,178 | |||||||||
| Total interest-bearing deposits | 917 | 2,430 | 3,347 | |||||||||
| Short-term borrowings | 87 | 174 | 261 | |||||||||
| Long-term debt | (124 | ) | 274 | 150 | ||||||||
| Subordinated debt | -- | (3 | ) | (3 | ) | |||||||
| Total interest-bearing liabilities | 880 | 2,875 | 3,755 | |||||||||
| Increase (decrease) in net interest income | $ | 2,631 | $ | (960 | ) | $ | 1,671 | |||||
Provision for Loan Losses. The provision for loan losses was $480 thousand for the nine months ended September 30, 2019, compared to $390 thousand for the nine month period ended September 30, 2018. In both periods, the provision reflects management’s estimate of loan losses based upon historical loan portfolio performance, growth of the portfolio, loan mix, as well as other considerations such as the strength of the regional economy and organizational knowledge and expertise.
31
Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated.
| Nine Months Ended | ||||||||
| September 30, | ||||||||
| (Dollars in thousands) | 2019 | 2018 | ||||||
| Allowance at beginning of period | $ | 6,738 | $ | 6,153 | ||||
| Provision for loan losses | 480 | 390 | ||||||
| Charge-offs: Other consumer loans | -- | -- | ||||||
| Recoveries | -- | -- | ||||||
| Net charge-offs | -- | -- | ||||||
| Allowance at end of period | $ | 7,218 | $ | 6,543 | ||||
| Allowance for loan losses to nonperforming loans at end of period | 646.5 | % | 542.89 | % | ||||
| Allowance for loan losses to total loans at end of period | 0.87 | % | 0.90 | % | ||||
| Net charge-offs to average loans outstanding during the period | 0.00 | % | 0.00 | % | ||||
Non-interest Income. Non-interest income totaled $2.5 million, an increase of $741 thousand, or 41.5%. Income from mortgage banking activities increased $109 thousand, primarily due to higher volume of sales of residential mortgage loans as compared to the prior year period. Income from wealth management fees in 2019 increased $20 thousand. All other non-interest income increased $612 thousand primarily due to an increase in fees on customer interest rate swaps due to increased commercial loan volume.
Non-interest Expense. Non-interest expense increased $1.7 million to $15.5 million during the nine months ended September 30, 2019, up from $13.7 million for the nine months ended September 30, 2018. Factors that contributed to the increase in non-interest expense during the 2019 period were increased salaries and employee benefits of $1.1 million, or 14.1%, primarily attributable to annual salary and employee benefits increases, promotions and increases to staff. Occupancy and equipment expenses increased $265 thousand due to the relocation of business operations to a new home office location and increases in rent expense. Data processing expense increased $196 thousand and other general administrative costs increased $205 thousand due to expanding business volumes and operations. Professional fees increased $65 thousand mainly due to higher legal expense. FDIC insurance costs decreased $150 thousand primarily due to the one-time small bank assessment credit.
Income Taxes. An income tax provision of $1.8 million was recorded during the nine months ended September 30, 2019 compared to a provision of $1.6 million in the comparable 2018 period. The effective tax rate for the 2019 nine month period was 27.1%, compared to 26.9% in the 2018 period, primarily related to a sale of a portion of the municipal securities portfolio.
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.
Our most liquid assets are cash and cash equivalents, interest-bearing deposits in other banks, and securities available for sale. The level of these assets depends on our operating, financing, lending and investing activities during any given period. At September 30, 2019, cash and cash equivalents, which include short-term investments, totaled $81.4 million. Securities classified as available-for-sale, whose aggregate fair value is $33.8 million, provide additional sources of liquidity.
32
At September 30, 2019, we had $51.0 million in short-term borrowings outstanding, represented entirely by FHLB advances, and $77.5 million in long-term debt, also consisting entirely of FHLB advances. At September 30, 2019, we had a total of $81.2 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 September 30, 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 $6.7 million from the Federal Reserve Bank under a collateralized borrowing program, none of which was outstanding at that date.
At September 30, 2019, we had $181.3 million in loan commitments outstanding, which included $76.4 million in unadvanced funds on construction loans, $43.2 million in unadvanced home equity lines of credit, $30.5 million in unadvanced commercial lines of credit, and $28.8 million in new loan originations.
Term certificates of deposit due within one year of September 30, 2019 amounted to $175.4 million, or 76.2%, of total term certificates, a decrease of $53.1 million from $228.5 million at December 31, 2018. Balances of term certificates maturing in more than one year totaled $54.7 million at September 30, 2019, up from $49.8 million 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 to stockholders should be paid only out of current earnings and only if the prospective rate of earnings retention by the Company appears consistent with its capital needs, asset quality and overall financial condition. At September 30, 2019, the Company had $362 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.
In order to be considered “adequately capitalized,” 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 be considered “well capitalized” and avoid being subject to limitations on capital distributions and discretionary bonuses. 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. At September 30, 2019, the Bank was well-capitalized under the current rules and we expect to remain well capitalized.
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.
33
For the nine months ended September 30, 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.
The table below sets forth an approximation of our exposure as a percentage of estimated net interest income for the next 12 month period using interest income and equity simulations. The simulations use projected repricing of assets and liabilities at September 30, 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.
34
The following table reflects the estimated effects of changes in interest rates on the present value of our equity at September 30, 2019 and on our projected net interest income from September 30, 2019 through September 30, 2020. These estimates are in compliance with our internal policy limits.
| As of September 30, 2019 | Over the Next 12 Months Ending September 30, 2020 | |||||||||||||||||||||||
| Basis Point (“bp”) | Present Value of Equity | Projected Net Interest Income | ||||||||||||||||||||||
| Change in Rates | $ Amount | $ Change | % Change | $ Amount | $ Change | % Change | ||||||||||||||||||
| (Dollars in thousands) | ||||||||||||||||||||||||
| 300 bp | $ | 93,769 | $ | 2,422 | 2.65 | % | $ | 30,820 | $ | 1,563 | 5.34 | % | ||||||||||||
| 200 | 96,048 | 4,701 | 5.15 | 30,492 | 1,235 | 4.22 | ||||||||||||||||||
| 0 | 91,347 | -- | -- | 29,257 | -- | -- | ||||||||||||||||||
| (100) | 84,479 | (6,868 | ) | (7.52 | ) | 28,673 | (584 | ) | (2.00 | ) | ||||||||||||||
Item 4. Controls and Procedures
The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended September 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
35
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.
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 September 30, 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.
Not applicable.
| 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) |
| 10.1 | First Amendment to the Wellesley Bank Employee Severance Compensation Plan |
| 10.2 | First Amendment to Severance Letter By and Between Wellesley Bank and Michael W. Dvorak |
| 10.3 | First Amendment to Severance Letter By and Between Wellesley Bank and Ralph L. Letner |
| 31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
| 31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
| 32.0 | Section 1350 Certification |
| 101.1 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 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). |
36
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| WELLESLEY BANCORP, INC. | |||
| Dated: | November 7, 2019 | By: | /s/ Thomas J. Fontaine |
| Thomas J. Fontaine | |||
| President and Chief Executive Officer | |||
| (Principal Executive Officer) | |||
| Dated: | November 7, 2019 | By: | /s/ Michael W. Dvorak |
| Michael W. Dvorak | |||
| Chief Financial Officer and Treasurer | |||
| (Principal Accounting and Financial Officer) | |||
37
Exhibit 10.1
FIRST AMENDMENT
TO WELLESLEY BANK
EMPLOYEE SEVERANCE COMPENSATION PLAN
FIRST AMENDMENT to the Wellesley Bank Employee Severance Compensation Plan (the "Plan") dated as of September 25, 2019.
WHEREAS, Wellesley Bank (the "Bank") maintains the Plan for the benefit of Covered Employees (as defined in the Section C of the Plan);
WHEREAS, Section M of the Plan provides that the Plan may be amended at any time by the Board of Directors of the Bank prior to the occurrence of a Change in Control (as defined in the Plan); and
WHEREAS, a Change in Control has not occurred as of the date hereof and the Bank has determined that certain modifications to the Plan are necessary and appropriate to its effective operation;
NOW, THEREFORE, in consideration of the premises and mutual promises and obligations set forth herein, the Plan is hereby amended as the first date noted herein as follows:
First Change
Section C, paragraph (b) shall be deleted in its entirety and replaced with the following new paragraph (b):
"(b) Notwithstanding the foregoing, no employee shall be eligible for a Change in Control Severance Benefit if, at the time of his termination of employment, the employee is a party to an individual employment agreement, change in control agreement or any other severance arrangement that provides a cash payment upon a change in control."
Second Change
Section D, paragraph (b) shall be deleted in its entirety and replaced with the following new paragraph (b):
"(b) As a condition to receiving a Change in Control Severance Benefit under this Plan, a Participant shall deliver to the Bank (or its successor) a general release no later than the 46th calendar day following the date of his or her termination of employment, and shall not revoke said general release. The general release shall be in the form attached hereto as Exhibit A. The Change in Control Severance Benefit will be paid in a lump sum no later than the pay period following the pay period in which the general release becomes effective."
Third Change
The following new Section O shall be added:
" O. Section 409A of the Internal Revenue Code
This Plan is intended to comply with the separation pay exemption or the short-term deferral exemption under Section 409A of the Internal Revenue Code, as amended (the "Code"). If any payment is subject to (rather than exempt from) Section 409A, this Plan will be interpreted and administered to comply with Section 409A, and any such payment subject to Section 409A that is to be made upon a termination of employment (i) will only be made upon a "separation from service" under Section 409A, and (ii) if a Participant is a "specified employee" (as determined under Section 409A) at the time of separation from service, will not be made until six (6) months and one day after the Participant's separation from service to the extent required under Section 409A."
In all other respects, the terms and conditions of the Plan are hereby ratified and affirmed.
IN WITNESS WHEREOF, the Bank, by a duly authorized representative, has executed this amendment, effective as of the date first written above.
| By: | /s/ Thomas J. Fontaine | |
| Duly authorized officer of Wellesley Bank |
Exhibit 10.2
FIRST AMENDMENT TO SEVERANCE LETTER BY AND BETWEEN WELLESLEY
BANK AND Michael W. Dvorak
WHEREAS, Wellesley Bank (the "Bank") issued a severance letter dated May 23, 2016 to Michael W. Dvorak ("Executive") which sets forth the severance benefits the Executive is entitled to in the event Executive: (i) is terminated without Cause absent a Change in Control, (ii) is terminated without cause within 12 months following a Change in Control or (iii) voluntarily terminates employment within 12 months following a Change in Control as a result of not being offered a comparable position with a successor (the "Severance Letter");
WHEREAS, the Bank wishes to amend the Severance Letter to make certain clarifications to ensure compliance with Section 409A of the Internal Revenue Code of 1986, as amended.
NOW, THEREFORE, the Severance Letter is hereby amended by adding the following paragraph immediately after the General Release bullet:
''This arrangement is intended to comply with the separation pay exemption under Section 409A of the Internal Revenue Code, as amended (the "Code"). For purposes of Section 409A of the Code ("Section 409A"), each installment payment provided under this arrangement will be treated as a separate payment. If any payment is subject to (rather than exempt from) Section 409A, this Severance Letter will be interpreted and administered to comply with Section 409A, and any such payment subject to Section 409A that is to be made upon a termination of employment (i) will only be made upon a "separation from service" under Section 409A, and (ii) if Executive is a "specified employee" (as determined under Section 409A) at the time of separation from service, will not be made until six months and one day after Executive's separation from service to the extent required under Section 409A."
In all other respects, the terms and conditions of the Severance Letter are hereby affirmed.
IN WITNESS WHEREOF, the parties hereto have executed this amendment as of the date noted below.
| WELLESLEY BANK | ||
| By: | /s/ Thomas J. Fontaine | |
| Date: | 10/1/2019 | |
| By: | /s/ Michael W. Dvorak | |
| Date: | 10/1/2019 | |
Exhibit 10.3
FIRST AMENDMENT TO SEVERANCE LETTER BY AND BETWEEN WELLESLEY
BANK AND Ralph L. Letner
WHEREAS, Wellesley Bank (the "Bank") issued a severance letter dated May 23, 2016 to Ralph L. Letner ("Executive") which sets forth the severance benefits the Executive is entitled to in the event Executive: (i) is terminated without Cause absent a Change in Control, (ii) is terminated without cause within 12 months following a Change in Control or (iii) voluntarily terminates employment within 12 months following a Change in Control as a result of not being offered a comparable position with a successor (the "Severance Letter");
WHEREAS, the Bank wishes to amend the Severance Letter to make certain clarifications to ensure compliance with Section 409A of the Internal Revenue Code of 1986, as amended.
NOW, THEREFORE, the Severance Letter is hereby amended by adding the following paragraph immediately after the General Release bullet:
"This arrangement is intended to comply with the separation pay exemption under Section 409A of the Internal Revenue Code, as amended (the "Code"). For purposes of Section 409A of the Code ("Section 409A"), each installment payment provided under this arrangement will be treated as a separate payment. If any payment is subject to (rather than exempt from) Section 409A, this Severance Letter will be interpreted and administered to comply with Section 409A, and any such payment subject to Section 409A that is to be made upon a termination of employment (i) will only be made upon a "separation from service" under Section 409A, and (ii) if Executive is a "specified employee" (as determined under Section 409A) at the time of separation from service, will not be made until six months and one day after Executive's separation from service to the extent required under Section 409A."
In all other respects, the terms and conditions of the Severance Letter are hereby affirmed.
IN WITNESS WHEREOF, the parties hereto have executed this amendment as of the date noted below.
| WELLESLEY BANK | ||
| By: | /s/ Thomas J. Fontaine | |
| Date: | 9/25/2019 | |
| By: | /s/ Ralph L. Letner | |
| Date: | 9/25/2019 | |
Exhibit 31.1
Certification
I, Thomas J. Fontaine, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Wellesley Bancorp, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and in preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Dated: | November 7, 2019 | /s/ Thomas J. Fontaine |
| Thomas J. Fontaine | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) |
Exhibit 31.2
Certification
I, Michael W. Dvorak, certify that:
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Wellesley Bancorp, Inc.; |
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and in preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
| (c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and |
| (d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting. |
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. |
| Dated: November 7, 2019 | /s/ Michael W. Dvorak |
| Michael W. Dvorak | |
| Chief Financial Officer and Treasurer | |
| (Principal Accounting and Financial Officer) |
Exhibit 32.0
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report on Form 10-Q of Wellesley Bancorp, Inc. (the “Company”) for the quarter ended September 30, 2019, as filed with the Securities and Exchange Commission (the “Report”), I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and |
| 2. | The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and results of operations of the Company as of and for the period covered by the Report. |
| By: | /s/ Thomas J. Fontaine | |
| Thomas J. Fontaine | ||
| President and Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| November 7, 2019 |
| By: | /s/ Michael W. Dvorak | |
| Michael W. Dvorak | ||
| Chief Financial Officer and Treasurer | ||
| (Principal Financial and Accounting Officer) | ||
| November 7, 2019 |
SECURITIES AVAILABLE FOR SALE (Tables) |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| SECURITIES AVAILABLE FOR SALE | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Available-for-sale securities | The amortized cost and fair value of securities available for sale, with gross unrealized gains and losses, follows:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Schedule of investments classified by contractual maturity date | The amortized cost and fair value of debt securities by contractual maturity at September 30, 2019 are as follows:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Available-for-sale securities, continuous unrealized loss position, fair value | 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:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
EMPLOYEE STOCK OWNERSHIP PLAN (Tables) |
9 Months Ended | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2019 | |||||||||||||||||||
| EMPLOYEE STOCK OWNERSHIP PLAN | |||||||||||||||||||
| Schedule of shares held by ESOP | Shares held by the ESOP at September 30, 2019 include the following:
|
LEASES - Other information related to our operating leases (Details) $ in Thousands |
9 Months Ended |
|---|---|
|
Sep. 30, 2019
USD ($)
| |
| LEASES | |
| Operating cash flows from operating leases, in thousands | $ 1,194 |
| Weighted average remaining lease term -operating leases, in years | 5 years 4 months 24 days |
| Weighted average discount rate-operating leases | 3.13% |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY (Parenthetical) - $ / shares |
3 Months Ended | |||||
|---|---|---|---|---|---|---|
Sep. 30, 2019 |
Jun. 30, 2019 |
Mar. 31, 2019 |
Sep. 30, 2018 |
Jun. 30, 2018 |
Mar. 31, 2018 |
|
| CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY | ||||||
| Dividends paid to common stockholders, per share | $ 0.06 | $ 0.06 | $ 0.055 | $ 0.055 | $ 0.055 | $ 0.05 |
| ESOP shares committed to be allocated, Shares | 3,210 | 3,210 | 3,209 | 3,210 | 3,210 | 3,209 |
EARNINGS PER COMMON SHARE |
9 Months Ended | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| EARNINGS PER COMMON SHARE | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| EARNINGS PER COMMON SHARE | NOTE 11 – 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.
There were no anti-dilutive options that would have been excluded from the computations of diluted earnings per share for the three and nine months ended September 30, 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. |
|||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
COMPREHENSIVE INCOME |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| COMPREHENSIVE INCOME | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| COMPREHENSIVE INCOME | NOTE 3 – COMPREHENSIVE INCOME Accounting principles generally require that recognized revenue, expenses, and gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the stockholders’ equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income/loss. The components of accumulated other comprehensive income (loss) and related tax effects are as follows:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||
DERIVATIVE INSTRUMENTS |
9 Months Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 30, 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| DERIVATIVE INSTRUMENTS | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| DERIVATIVE INSTRUMENTS | NOTE 7 - 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 $1.8 million at September 30, 2019. The fair value of these commitments was an asset of $5 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 $8.9 million at September 30, 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 contracts, 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 comprehensive income. A deposit account totaling $3.0 million is currently pledged to secure the Company’s liability for the offsetting interest rate swaps. A summary of the interest rate swaps is as follows:
|
||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
EQUITY INCENTIVE PLANS - Non-vested awards (Details) - Restricted Stock [Member] shares in Thousands |
9 Months Ended |
|---|---|
|
Sep. 30, 2019
$ / shares
shares
| |
| Number of Shares | |
| Outstanding at beginning of period | shares | 27 |
| Restricted shares granted | shares | 15 |
| Restricted shares forfeited | shares | (6) |
| Outstanding at end of period | shares | 36 |
| Grant-date Fair Value | |
| Outstanding at beginning of period | $ / shares | $ 23.97 |
| Restricted shares granted | $ / shares | 28.88 |
| Restricted shares forfeited | $ / shares | 24.39 |
| Outstanding at end of period | $ / shares | $ 25.83 |
@<_-_#B#JNC
M[=-D5DW?W-WLN[?%_N@/+\WH=G3MA^6Z'R].JS/];YC/PW#U\UW&-ZO/8S\S
M4AP1/D?L)5)IA$[$:KC_:1",!E&P:B[&4&HB