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 March 31, 2018
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 IdentificationNo.) | |
40 Central Street, Wellesley, Massachusetts | 02482 | |
(Address of principal executive offices) | (Zip Code) |
(781) 235-2550 |
(Registrant’s telephone number, including area code) |
Not Applicable |
(Former name, former address and former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company and an emerging growth company. See definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and emerging growth company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ¨ | Accelerated filer ¨ | |
Non-accelerated filer ¨ | Smaller reporting company x | |
(Do not check if a smaller reporting company) | Emerging growth company ¨ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 7(a)(2)(B) of the Securities Act
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ¨ No x
As of April 30, 2018, there were 2,506,532 shares of the registrant’s common stock outstanding.
WELLESLEY BANCORP, INC.
Table of Contents
Item 1. | Financial Statements (Unaudited) |
March 31, 2018 | December 31, 2017 | |||||||
(Dollars in thousands) | ||||||||
Assets | ||||||||
Cash and due from banks | $ | 5,828 | $ | 4,604 | ||||
Short-term investments | 45,533 | 23,858 | ||||||
Total cash and cash equivalents | 51,361 | 28,462 | ||||||
Certificates of deposit | 100 | 100 | ||||||
Securities available for sale, at fair value | 67,209 | 66,486 | ||||||
Federal Home Loan Bank of Boston stock, at cost | 5,864 | 5,937 | ||||||
Loans | 685,727 | 692,455 | ||||||
Less allowance for loan losses | (6,218 | ) | (6,153 | ) | ||||
Loans, net | 679,509 | 686,302 | ||||||
Bank-owned life insurance | 7,592 | 7,535 | ||||||
Premises and equipment, net | 3,329 | 3,470 | ||||||
Accrued interest receivable | 1,954 | 2,140 | ||||||
Net deferred tax asset | 2,444 | 2,352 | ||||||
Other assets | 2,530 | 2,611 | ||||||
Total assets | $ | 821,892 | $ | 805,395 | ||||
Liabilities and Stockholders’ Equity | ||||||||
Deposits: | ||||||||
Non-interest-bearing | $ | 110,631 | $ | 104,346 | ||||
Interest-bearing | 532,278 | 512,396 | ||||||
Total deposits | 642,909 | 616,742 | ||||||
Short-term borrowings | 17,500 | 38,000 | ||||||
Long-term debt | 88,007 | 77,174 | ||||||
Subordinated debt | 9,810 | 9,802 | ||||||
Accrued expenses and other liabilities | 3,563 | 4,432 | ||||||
Total liabilities | 761,789 | 746,150 | ||||||
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,2,506,532 shares issued | 25 | 25 | ||||||
Additional paid-in capital | 25,769 | 25,601 | ||||||
Retained earnings | 36,039 | 34,736 | ||||||
Accumulated other comprehensive income (loss) | (607 | ) | 39 | |||||
Unearned compensation – ESOP | (1,123 | ) | (1,156 | ) | ||||
Total stockholders' equity | 60,103 | 59,245 | ||||||
Total liabilities and stockholders' equity | $ | 821,892 | $ | 805,395 |
See accompanying notes to consolidated financial statements.
1 |
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
(Dollars in thousands, except per share data) | ||||||||
Interest and dividend income: | ||||||||
Interest and fees on loans and loans held for sale | $ | 7,227 | $ | 5,977 | ||||
Interest on debt securities: | ||||||||
Taxable | 341 | 339 | ||||||
Tax-exempt | 82 | 69 | ||||||
Interest on short-term investments and certificates of deposit | 113 | 43 | ||||||
Dividends on FHLB stock | 76 | 57 | ||||||
Total interest and dividend income | 7,839 | 6,485 | ||||||
Interest expense: | ||||||||
Deposits | 1,193 | 793 | ||||||
Short-term borrowings | 123 | 32 | ||||||
Long-term debt | 343 | 286 | ||||||
Subordinated debentures | 158 | 158 | ||||||
Total interest expense | 1,817 | 1,269 | ||||||
Net interest income | 6,022 | 5,216 | ||||||
Provision for loan losses | 65 | — | ||||||
Net interest income, after provision for loan losses | 5,957 | 5,216 | ||||||
Noninterest income: | ||||||||
Customer service fees | 43 | 34 | ||||||
Mortgage banking activities | 9 | 43 | ||||||
Income on bank-owned life insurance | 57 | 57 | ||||||
Wealth management fees | 384 | 295 | ||||||
Miscellaneous | 85 | ) | 92 | |||||
Total noninterest income | 578 | 521 | ||||||
Noninterest expenses: | ||||||||
Salaries and employee benefits | 2,721 | 2,609 | ||||||
Occupancy and equipment | 718 | 696 | ||||||
Data processing | 234 | 201 | ||||||
FDIC insurance | 168 | 147 | ||||||
Professional fees | 198 | 173 | ||||||
Advertising and marketing | 74 | 74 | ||||||
Other general and administrative | 445 | 393 | ||||||
Total noninterest expenses | 4,558 | 4,293 | ||||||
Income before income taxes | 1,977 | 1,444 | ||||||
Provision for income taxes | 540 | 563 | ||||||
Net income | 1,437 | 881 | ||||||
Other comprehensive income (loss): | ||||||||
Net unrealized gains (losses) on available-for-sale securities | (872 | ) | 237 | |||||
Income tax (expense) benefit | 219 | (88 | ) | |||||
Total other comprehensive income (loss), net of tax | (653 | ) | 149 | |||||
Comprehensive income | $ | 784 | $ | 1,030 | ||||
Earnings per common share: | ||||||||
Basic | $ | 0.60 | $ | 0.37 | ||||
Diluted | $ | 0.58 | $ | 0.36 | ||||
Weighted average shares outstanding: | ||||||||
Basic | 2,392,592 | 2,358,074 | ||||||
Diluted | 2,485,222 | 2,441,993 |
See accompanying notes to consolidated financial statements.
2 |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Three Months Ended March 31, 2018 and 2017
Additional | Accumulated Other | Unearned | Total | |||||||||||||||||||||||||
Common Stock | Paid-in | Retained | Comprehensive | Compensation- | Stockholders’ | |||||||||||||||||||||||
Shares | Amount | Capital | Earnings | Income (Loss) | ESOP | Equity | ||||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||||
Balance at December 31, 2016 | 2,484,852 | $ | 25 | $ | 24,703 | $ | 31,999 | $ | (229 | ) | $ | (1,284 | ) | $ | 55,214 | |||||||||||||
Comprehensive income | — | — | — | 881 | 149 | — | 1,030 | |||||||||||||||||||||
Dividends paid to common stockholders ($0.04 per share) | — | — | — | (100 | ) | — | — | (100 | ) | |||||||||||||||||||
Share-based compensation-equity incentive plan | — | — | 154 | — | — | — | 154 | |||||||||||||||||||||
ESOP shares committed to be allocated (3,209) | — | — | 56 | — | — | 32 | 88 | |||||||||||||||||||||
Balance at March 31, 2017 | 2,484,852 | $ | 25 | $ | 24,913 | $ | 32,780 | $ | (80 | ) | $ | (1,252 | ) | $ | 56,386 | |||||||||||||
Balance at December 31, 2017 | 2,506,532 | $ | 25 | $ | 25,601 | $ | 34,736 | $ | 39 | $ | (1,156 | ) | $ | 59,245 | ||||||||||||||
Comprehensive income | — | — | — | 1,437 | (653 | ) | — | 784 | ||||||||||||||||||||
Reclassification related to Tax Cuts and Jobs Act | — | — | — | (7) | 7 | — | — | |||||||||||||||||||||
Dividends paid to common stockholders ($0.05 per share) | — | — | — | (127 | ) | — | — | (127 | ) | |||||||||||||||||||
Share-based compensation-equity incentive plan | — | — | 107 | — | — | — | 2 107 | |||||||||||||||||||||
ESOP shares committed to be allocated (3,209) | — | — | 61 | — | — | 33 | 94 | |||||||||||||||||||||
Balance at March 31, 2018 | 2,506,532 | $ | 25 | $ | 25,769 | $ | 36,039 | $ | (607 | ) | $ | (1,123 | ) | $ | 60,103 |
See accompanying notes to consolidated financial statements.
3 |
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
(In thousands) | ||||||||
Cash flows from operating activities: | ||||||||
Net income | $ | 1,437 | $ | 881 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for loan losses | 65 | — | ||||||
Depreciation and amortization | 196 | 192 | ||||||
Net amortization of securities | 41 | 53 | ||||||
Principal balance of loans sold | 1,085 | 1,454 | ||||||
Loans originated for sale | (1,085 | ) | — | |||||
Accretion of net deferred loan fees | (137 | ) | (134 | ) | ||||
Amortization of subordinated debt issuance costs | 8 | 9 | ||||||
Income on bank-owned life insurance | (57 | ) | (57 | ) | ||||
Deferred income tax provision | 127 | 77 | ||||||
ESOP expense | 94 | 88 | ||||||
Share-based compensation | 107 | 154 | ||||||
Net change in other assets and liabilities | (616 | ) | 319 | |||||
Net cash provided by operating activities | 1,265 | 3,036 | ||||||
Cash flows from investing activities: | ||||||||
Activity in securities available for sale: | ||||||||
Maturities, prepayments and calls | 826 | 902 | ||||||
Purchases | (2,462 | ) | (3,013 | ) | ||||
Redemption (purchase) of Federal Home Loan Bank stock | 73 | (179 | ) | |||||
Net loan (originations) principal payments | 6,865 | (10,900 | ) | |||||
Additions to premises and equipment | (55 | ) | (104 | ) | ||||
Proceeds from sale of premises and equipment | 14 | — | ||||||
Net cash provided (used) by investing activities | 5,261 | (13,294 | ) | |||||
Cash flows from financing activities: | ||||||||
Net increase in deposits | 26,167 | 3,256 | ||||||
Proceeds from issuance of long-term debt | 21,000 | 22,000 | ||||||
Repayments of long-term debt | (10,167 | ) | (8,086 | ) | ||||
Decrease in short-term borrowings | (20,500 | ) | (9,000 | ) | ||||
Cash dividends paid on common stock | (127 | ) | (100 | ) | ||||
Net cash provided by financing activities | 16,373 | 8,070 | ||||||
Net change in cash and cash equivalents | 22,899 | (2,188 | ) | |||||
Cash and cash equivalents at beginning period | 28,462 | 28,425 | ||||||
Cash and cash equivalents at end of period | $ | 51,361 | $ | 26,237 | ||||
Supplementary information: | ||||||||
Interest paid | $ | 1,682 | $ | 1,293 | ||||
Income taxes paid | 330 | 116 |
See accompanying notes to consolidated financial statements.
4 |
WELLESLEY BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 – BASIS OF PRESENTATION AND CONSOLIDATION
The accompanying unaudited interim consolidated financial statements include the accounts of Wellesley Bancorp, Inc. (the “Company”) and its wholly-owned subsidiary, Wellesley Bank (the “Bank”), the principal operating entity, and its wholly-owned subsidiaries: Wellesley Securities Corporation, which engages in the business of buying, selling and dealing in securities exclusively on its own behalf; Wellesley Investment Partners, LLC, formed to provide investment management services for individuals, not-for-profit entities and businesses; and Central Linden, LLC, to hold, manage and sell foreclosed real estate. All significant intercompany balances and transactions have been eliminated in consolidation. Assets under management at Wellesley Investment Partners, LLC are not included in these consolidated financial statements because they are not assets of the Company. These financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information, and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements.
In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2017 Annual Report on Form 10-K. The results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 or for any other period.
NOTE 2 – LOAN POLICIES
The loan portfolio consists of real estate, commercial and other loans to the Company’s customers in our primary market areas in eastern Massachusetts. The ability of the Company’s debtors to honor their contracts is dependent upon the economy in general and the state of real estate and construction sectors within our markets.
Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred loan origination fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.
Interest is generally not accrued on loans which are identified as impaired or loans which are ninety days or more past due. Past due status is based on the contractual terms of the loan. Interest income previously accrued on such loans is reversed against current period interest income. Interest income on non-accrual loans is recognized only to the extent of interest payments received and is first applied to the outstanding principal balance when collectibility of principal is in doubt. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured through sustained payment performance for at least six months.
Allowance for loan losses
The allowance for loan losses is established through a provision for loan losses charged to earnings as losses are estimated to occur. Loan losses are charged against the allowance when management believes the uncollectibility of the loan balance is confirmed. Subsequent recoveries are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, allocated and unallocated components.
5 |
General component
The general component is based on the following loan segments: residential real estate, commercial real estate, construction, commercial, home equity lines of credit and other consumer. Management considers a rolling average of historical losses for each segment based on a time frame appropriate to capture relevant loss data for each loan segment, generally three and 10 years. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume, concentrations and terms of loans; level of collateral protection; effects of changes in risk selection and underwriting standards; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no significant changes to the Company’s policies or methodology pertaining to the general component of the allowance during 2018 or 2017.
The qualitative factor adjustments are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:
Residential real estate – The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent and does not originate subprime loans. Most loans in this segment are collateralized by one-to-four family residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.
Commercial real estate – Loans in this segment are primarily income-producing properties in the Company’s primary market areas in eastern Massachusetts. The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management typically obtains rent rolls annually and continually monitors the cash flows of these loans.
Construction – Loans in this segment include speculative construction loans primarily on residential properties for which payment is derived from the sale of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions. Residential construction loans in this segment also include loans to build one-to-four family owner-occupied properties which are subject to the same credit quality factors as residential real estate.
Commercial – Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.
Home equity lines of credit – Loans in this segment are collateralized by one-to-four family residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.
Other consumer – Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.
Allocated component
The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the fair value of the loan or, if the loan is collateral dependent, by the fair value of the collateral, less estimated costs to sell. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan are lower than the carrying value of that loan. Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify performing individual residential and consumer loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.
6 |
A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.
The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring ("TDR"). All TDRs are initially classified as impaired.
Unallocated component
An unallocated component is maintained to cover additional uncertainties in management’s estimation of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.
NOTE 3 – COMPREHENSIVE INCOME
Accounting principles generally require that recognized revenue, expenses, and gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the stockholders’ equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income/loss.
The components of accumulated other comprehensive income (loss) and related tax effects are as follows:
March 31, | December 31, | |||||||
2018 | 2017 | |||||||
(In thousands) | ||||||||
Unrealized holding gains (losses) on securities available for sale | $ | (828 | ) | $ | 44 | |||
Tax effect | 221 | (5 | ) | |||||
Net-of tax amount | $ | (607 | ) | $ | 39 |
NOTE 4 – RECENT ACCOUNTING AND REGULATORY PRONOUNCEMENTS
Effective January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this update supersede the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company's primary source of revenue is interest income on financial assets, which is explicitly excluded from the scope of the new guidance. In addition, management determined that the timing of the Company’s recognition of wealth management fees did not change materially. As a result, adopting this update did not have a material impact on the Company’s consolidated financial statements.
Effective January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities, to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The key provision included in the ASU is that equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) will be measured at fair value with changes in fair value recognized in net income and the elimination of the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost. This ASU also requires companies to use an “exit price” fair value when measuring the fair values of financial instruments. The adoption of this update did not have a significant impact on the consolidated financial statements, as the Company does not currently invest in equity securities.
7 |
Effective January 1, 2018, the Company adopted ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU provide cash flow statement classification guidance for certain areas where diversification existed in practice. The adoption of this update did not have a significant impact on the consolidated financial statements.
Effective January 1, 2018, the Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this update require that in the statement of cash flows, amounts generally described as restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. The adoption of this update did not have a significant impact on the consolidated financial statements.
Effective January 1, 2018, the Company adopted ASU 2017-09, Compensation-Stock Compensation (Topic 718) to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change in terms or conditions of a share-based payment award. The adoption of this update did not have a significant impact on the consolidated financial statements.
Effective January 1, 2018, the Company adopted ASU 2018-02, Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The purpose of this ASU is to eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Reform Act of 2017. Upon adoption of this update, the Company recorded a reclassification of $7 thousand to increase accumulated other comprehensive income and decrease retained earnings.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires a lessee to record a right-to-use asset and liability representing the obligation to make lease payments for long-term leases. This ASU will be effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. It is expected that assets and liabilities will increase based on the present value of remaining lease payments for leases in place at the adoption date; however, this is not expected to be material to the Company's results of operations or financial position. Management continues to evaluate the extent of potential impact the new guidance will have on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure expected credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. Credit losses on available-for-sale debt securities should be measured in a manner similar to current GAAP; however, recognized credit losses will be presented as an allowance rather than as a write-down. This ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods. Management is evaluating the provisions of the Update, and will closely monitor developments and additional guidance to determine the potential impact on the Company's consolidated financial statements. Management is currently working with a third party software service provider to ensure proper mapping and alignment of critical instrument-specific data.
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:
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
March 31, 2018 | ||||||||||||||||
Residential mortgage-backed securities: | ||||||||||||||||
Government National Mortgage Association | $ | 3,251 | $ | 38 | $ | (57 | ) | $ | 3,232 | |||||||
Government-sponsored enterprises | 11,445 | 18 | (243 | ) | 11,220 | |||||||||||
SBA and other asset-backed securities | 11,469 | 48 | (155 | ) | 11,362 | |||||||||||
State and municipal bonds | 12,996 | 103 | (144 | ) | 12,955 | |||||||||||
Government-sponsored enterprise obligations | 8,000 | — | (247 | ) | 7,753 | |||||||||||
Corporate bonds | 17,162 | 34 | (222 | ) | 16,974 | |||||||||||
U.S. Treasury bonds | 3,714 | — | (1 | ) | 3,713 | |||||||||||
$ | 68,037 | $ | 241 | $ | (1,069 | ) | $ | 67,209 |
Amortized Cost | Gross Unrealized Gains | Gross Unrealized Losses | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
December 31, 2017 | ||||||||||||||||
Residential mortgage-backed securities: | ||||||||||||||||
Government National Mortgage Association | $ | 3,358 | $ | 46 | $ | (53 | ) | $ | 3,351 | |||||||
Government-sponsored enterprises | 11,690 | 43 | (84 | ) | 11,649 | |||||||||||
SBA and other asset-backed securities | 11,961 | 89 | (87 | ) | 11,963 | |||||||||||
State and municipal bonds | 13,026 | 276 | (15 | ) | 13,287 | |||||||||||
Government-sponsored enterprise obligations | 8,000 | — | (166 | ) | 7,834 | |||||||||||
Corporate bonds | 17,166 | 52 | (57 | ) | 17,161 | |||||||||||
U.S. Treasury bonds | 1,241 | — | — | 1,241 | ||||||||||||
$ | 66,442 | $ | 506 | $ | (462 | ) | $ | 66,486 |
There were no sales of available-for-sale securities for the three months ended March 31, 2018 and 2017.
The amortized cost and fair value of debt securities by contractual maturity at March 31, 2018 are as follows:
Amortized Cost | Fair Value | |||||||
(In thousands) | ||||||||
Within 1 year | $ | 5,716 | $ | 5,710 | ||||
After 1 year to 5 years | 18,812 | 18,471 | ||||||
After 5 years to 10 years | 9,839 | 9,748 | ||||||
After 10 years | 7,505 | 7,466 | ||||||
41,872 | 41,395 | |||||||
Mortgage- and asset-backed securities | 26,165 | 25,814 | ||||||
$ | 68,037 | $ | 67,209 |
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.
9 |
Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
Less Than Twelve Months | Over Twelve Months | |||||||||||||||
Gross Unrealized Losses | Fair Value | Gross Unrealized Losses | Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
March 31, 2018 | ||||||||||||||||
Residential mortgage-backed securities: | ||||||||||||||||
Government National Mortgage Association | $ | (3 | ) | $ | 145 | $ | (54 | ) | $ | 1,690 | ||||||
Government-sponsored enterprises | (116 | ) | 4,786 | (127 | ) | 5,001 | ||||||||||
SBA and other asset-backed securities | (55 | ) | 3,647 | (100 | ) | 2,308 | ||||||||||
State and municipal bonds | (121 | ) | 6,057 | (23 | ) | 857 | ||||||||||
Government-sponsored enterprise obligations | (54 | ) | 1,946 | (193 | ) | 5,808 | ||||||||||
Corporate bonds | (168 | ) | 12,974 | (54 | ) | 1,966 | ||||||||||
U.S. Treasury Bonds | (1 | ) | 3,713 | — | — | |||||||||||
$ | (518 | ) | $ | 33,268 | $ | (551 | ) | $ | 17,630 | |||||||
December 31, 2017 | ||||||||||||||||
Residential mortgage-backed securities: | ||||||||||||||||
Government National Mortgage Association | $ | (3 | ) | $ | 266 | $ | (50 | ) | $ | 1,611 | ||||||
Government-sponsored enterprises | (13 | ) | 3,578 | (71 | ) | 3,110 | ||||||||||
SBA and other asset-backed securities | (8 | ) | 2,267 | (79 | ) | 2,434 | ||||||||||
State and municipal bonds | (3 | ) | 571 | (12 | ) | 871 | ||||||||||
Government-sponsored enterprise obligations | (27 | ) | 1,973 | (139 | ) | 5,860 | ||||||||||
Corporate bonds | (21 | ) | 7,399 | (36 | ) | 1,985 | ||||||||||
$ | (75 | ) | $ | 16,054 | $ | (387 | ) | $ | 15,871 |
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluations. At March 31, 2018, various debt securities have unrealized losses with aggregate depreciation of 2.1% from their aggregate amortized cost basis. These unrealized losses relate principally to the effect of interest rate changes on the fair value of debt securities and not an increase in credit risk of the issuers. As the Company does not intend to sell the securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost, which may be maturity, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2018.
10 |
NOTE 6 – LOANS AND ALLOWANCE FOR LOAN LOSSES
A summary of the ending balances of loans is as follows:
March 31, | December 31, | |||||||
2018 | 2017 | |||||||
(In thousands) | ||||||||
Real estate loans: | ||||||||
Residential – fixed | $ | 35,724 | $ | 31,433 | ||||
Residential – variable | 303,692 | 297,593 | ||||||
Commercial | 141,001 | 138,784 | ||||||
Construction | 107,784 | 120,004 | ||||||
588,201 | 587,814 | |||||||
Commercial loans: | ||||||||
Secured | 53,495 | 62,333 | ||||||
Unsecured | 5,523 | 5,638 | ||||||
59,018 | 67,971 | |||||||
Consumer loans: | ||||||||
Home equity lines of credit | 38,179 | 36,378 | ||||||
Other | 223 | 214 | ||||||
38,402 | 36,592 | |||||||
Total loans | 685,621 | 692,377 | ||||||
Less: | ||||||||
Allowance for loan losses | (6,218 | ) | (6,153 | ) | ||||
Net deferred origination costs | 106 | 78 | ||||||
Loans, net | $ | 679,509 | $ | 686,302 |
11 |
The following table summarizes the changes in the allowance for loan losses by portfolio segment for the three months ended March 31, 2018 and 2017:
Residential Real Estate | Commercial Real Estate | Construction | Commercial | Home Equity | Other Consumer | Unallocated | Total | |||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
Three Months Ended March 31, 2018 | ||||||||||||||||||||||||||||||||
Allowance at December 31, 2017 | $ | 1,722 | $ | 1,520 | $ | 1,661 | $ | 917 | $ | 237 | $ | 2 | $ | 94 | $ | 6,153 | ||||||||||||||||
Provision (credit) for loan losses | 203 | 25 | (228 | ) | 78 | 11 | 1 | (25 | ) | 65 | ||||||||||||||||||||||
Allowance at March 31, 2018 | $ | 1,925 | $ | 1,545 | $ | 1,433 | $ | 995 | $ | 248 | $ | 3 | $ | 69 | $ | 6,218 | ||||||||||||||||
Three Months Ended March 31, 2017 | ||||||||||||||||||||||||||||||||
Allowance at December 31, 2016 | $ | 1,422 | $ | 1,145 | $ | 1,827 | $ | 703 | $ | 211 | $ | 3 | $ | 121 | $ | 5,432 | ||||||||||||||||
Provision (credit) for loan losses | 65 | (11 | ) | (132 | ) | 7 | — | 11 | 60 | — | ||||||||||||||||||||||
Loans charged off | — | — | — | — | — | (11 | ) | — | (11 | ) | ||||||||||||||||||||||
Allowance at March 31, 2017 | $ | 1,487 | $ | 1,134 | $ | 1,695 | $ | 710 | $ | 211 | $ | 3 | $ | 181 | $ | 5,421 |
Further information pertaining to the allowance for loan losses is as follows:
Residential Real Estate | Commercial Real Estate | Construction | Commercial | Home Equity | Other Consumer | Unallocated | Total | |||||||||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||||||||||
March 31, 2018 | ||||||||||||||||||||||||||||||||
Allowance related to impaired loans | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Allowance related to non-impaired loans | 1,925 | 1,545 | 1,433 | 995 | 248 | 3 | 69 | 6,218 | ||||||||||||||||||||||||
Total allowance | $ | 1,925 | $ | 1,545 | $ | 1,433 | $ | 995 | $ | 248 | $ | 3 | $ | 69 | $ | 6,218 | ||||||||||||||||
Impaired loan balances | $ | 170 | $ | 566 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 736 | ||||||||||||||||
Non-impaired loan balances | 339,246 | 140,435 | 107,784 | 59,018 | 38,179 | 223 | — | 684,885 | ||||||||||||||||||||||||
Total loans | $ | 339,416 | $ | 141,001 | $ | 107,784 | $ | 59,018 | $ | 38,179 | $ | 223 | $ | — | $ | 685,621 | ||||||||||||||||
December 31, 2017 | ||||||||||||||||||||||||||||||||
Allowance related to impaired loans | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | — | ||||||||||||||||
Allowance related to non-impaired loans | 1,722 | 1,520 | 1,661 | 917 | 237 | 2 | 94 | 6,153 | ||||||||||||||||||||||||
Total allowance | $ | 1,722 | $ | 1,520 | $ | 1,661 | $ | 917 | $ | 237 | $ | 2 | $ | 94 | $ | 6,153 | ||||||||||||||||
Impaired loan balances | $ | 172 | 576 | $ | — | $ | — | $ | — | $ | — | $ | — | $ | 748 | |||||||||||||||||
Non-impaired loan balances | 328,854 | 138,208 | 120,004 | 67,971 | 36,378 | 214 | — | 691,629 | ||||||||||||||||||||||||
Total loans | $ | 329,026 | $ | 138,784 | $ | 120,004 | $ | 67,971 | $ | 36,378 | $ | 214 | $ | — | $ | 692,377 |
12 |
The following is a summary of past due and non-accrual loans at March 31, 2018 and December 31, 2017:
30-59 Days Past Due | 60-89 Days Past Due | Past Due 90 Days or More | Total Past Due | Past Due 90 Days or More and Still Accruing | Non- accrual Loans | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
March 31, 2018 | ||||||||||||||||||||||||
Residential real estate | $ | — | $ | — | $ | 663 | $ | 663 | $ | — | $ | 663 | ||||||||||||
Commercial real estate | 100 | — | — | 100 | — | 566 | ||||||||||||||||||
Home equity | 245 | — | — | 245 | — | — | ||||||||||||||||||
Total | $ | 345 | $ | — | $ | 663 | $ | 1,008 | $ | — | $ | 1,229 | ||||||||||||
December 31, 2017 | ||||||||||||||||||||||||
Residential real estate | $ | 598 | $ | 65 | $ | — | $ | 663 | $ | — | $ | — | ||||||||||||
Commercial real estate | — | — | 576 | 576 | — | 576 | ||||||||||||||||||
Total | $ | 598 | $ | 65 | $ | 576 | $ | 1,239 | $ | — | $ | 576 |
The following is a summary of impaired loans:
March 31, 2018 | December 31, 2017 | |||||||||||||||
Recorded Investment | Unpaid Principal Balance | Recorded Investment | Unpaid Principal Balance | |||||||||||||
(In thousands) | ||||||||||||||||
Impaired loans without a valuation allowance: | ||||||||||||||||
Residential real estate | $ | 170 | $ | 188 | $ | 172 | $ | 189 | ||||||||
Commercial real estate | 566 | 695 | 576 | 710 | ||||||||||||
Total impaired loans | $ | 736 | $ | 883 | $ | 748 | $ | 899 |
Further information pertaining to impaired loans follows:
Three Months Ended March 31, 2018 | Three Months Ended March 31, 2017 | |||||||||||||||||||||||
Average Recorded Investment | Interest Income Recognized | Interest Income Recognized on Cash Basis | Average Recorded Investment | Interest Income Recognized | Interest Income Recognized on Cash Basis | |||||||||||||||||||
(In thousands) | ||||||||||||||||||||||||
Residential real estate | $ | 171 | $ | 2 | $ | — | $ | 178 | $ | 2 | $ | — | ||||||||||||
Commercial real estate | 570 | 20 | 20 | 583 | — | — | ||||||||||||||||||
Total | $ | 741 | $ | 22 | $ | 20 | $ | 761 | $ | 2 | $ | — |
No additional funds are committed to be advanced in connection with impaired loans.
There were no new troubled debt restructurings recorded during the three months ended March 31, 2018 and 2017.
There were no TDRs that defaulted, generally considered 90 days past due or longer, during the three months ended March 31, 2018 and 2017, and for which default was within one year of the restructure date. TDRs did not have a material impact on the allowance for loan losses for the three months ended March 31, 2018 and 2017.
13 |
Credit Quality Information
The Company utilizes an eleven-grade internal loan rating system for commercial real estate, construction and commercial loans.
Loans rated 1-4: Loans in these categories are considered “pass” rated loans with low to average risk.
Loans rated 5: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.
Loans rated 6: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.
Loans rated 7: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.
Loans rated 8: Loans in this category are considered “loss” or uncollectible and of such little value that their continuance as loans is not warranted.
Loans rated 9: Loans in this category only include commercial loans under $25 thousand with no other outstandings or relationships with the Company that are not rated for credit quality on an annual basis.
Loans rated 10: Loans in this category include loans which otherwise require rating, but which have not been rated, or loans for which the Company’s loan policy does not require rating.
Loans rated 11: Loans in this category include credit commitments/relationships that cannot be rated due to a lack of financial information or inaccurate financial information. If, within 60 days of the assignment of an 11 rating, information is still not available to allow a standard rating, the credit will be rated 6.
On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial loans. During each calendar year, the Company engages an independent third party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process. On a monthly basis, the Company reviews the residential real estate and consumer loan portfolio for credit quality primarily through the use of delinquency reports.
The following table presents the Company’s loans by risk rating:
March 31, 2018 | December 31, 2017 | ||||||||||||||||||||||||||||||||||
Commercial Real Estate | Construction | Commercial | Total | Commercial Real Estate | Construction | Commercial | Total | ||||||||||||||||||||||||||||
(In thousands) | |||||||||||||||||||||||||||||||||||
Loans rated 1 -4 | $ | 137,010 | $ | 107,784 | $ | 57,933 | $ | 302,727 | $ | 134,201 | $ | 120,004 | $ | 67,087 | $ | 321,292 | |||||||||||||||||||
Loans rated 5 | 937 | — | 1,085 | 2.022 | 1,476 | — | 301 | 1,777 | |||||||||||||||||||||||||||
Loans rated 6 | 2,488 | — | — | 2.488 | 2,531 | — | 583 | 3,114 | |||||||||||||||||||||||||||
Loans rated 7 | 566 | — | — | 566 | 576 | — | — | 576 | |||||||||||||||||||||||||||
Total | $ | 141,001 | $ | 107,784 | $ | 59,018 | $ | 307,803 | $ | 138,784 | $ | 120,004 | $ | 67,971 | $ | 326,759 |
14 |
NOTE 7 – FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value hierarchy
The Company groups its assets measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
Level 1 – Valuation is based on quoted market prices in active exchange markets for identical assets and liabilities. Valuations are obtained from readily available pricing sources.
Level 2 – Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities. Valuations are obtained from readily available pricing sources.
Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. Level 3 assets include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as those for which the determination of fair value requires significant management judgment or estimation.
Transfers between levels are recognized at the end of a reporting period, if applicable.
Determination of fair value
The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances there are no quoted market prices for the Company’s various assets and liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the assets and liabilities.
Assets and liabilities measured at fair value on a recurring basis
Assets and liabilities measured at fair value on a recurring basis at March 31, 2018 and December 31, 2017 are summarized below.
Level 1 | Level 2 | Level 3 | Total Fair Value | |||||||||||||
(In thousands) | ||||||||||||||||
March 31, 2018 | ||||||||||||||||
Assets | ||||||||||||||||
Securities available for sale | $ | — | $ | 67,209 | $ | — | $ | 67,209 | ||||||||
Derivative loan commitments | — | 1 | — | 1 | ||||||||||||
Total assets | $ | — | $ | 67,210 | $ | — | $ | 67,210 | ||||||||
Liabilities | ||||||||||||||||
Forward loan sale commitments | $ | — | $ | 3 | $ | — | $ | 3 | ||||||||
December 31, 2017 | ||||||||||||||||
Assets | ||||||||||||||||
Securities available for sale | $ | — | $ | 66,486 | $ | — | $ | 66,486 |
15 |
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 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.
There were no liabilities measured at fair value on a recurring basis at December 31, 2017
Assets measured at fair value on a non-recurring basis
The Company may also be required, from time to time, to measure certain other financial assets at fair value on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market (“LOCOM”) accounting or write-downs of individual assets. Fair values for loans held for sale are based on commitments in effect from investors or prevailing market rates.
There are no assets or liabilities measured at fair value on a non-recurring basis at March 31, 2018 and December 31, 2017.
16 |
Summary of fair values of financial instruments
The estimated fair values and related carrying amounts of the Company’s financial instruments are outlined in the table below. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.
Fair Value | ||||||||||||||||||||
Carrying Amount | Level 1 | Level 2 | Level 3 | Total | ||||||||||||||||
(In thousands) | ||||||||||||||||||||
March 31, 2018 | ||||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 51,361 | $ | 51,361 | $ | — | $ | — | $ | 51,361 | ||||||||||
Certificates of deposit | 100 | 100 | — | — | 100 | |||||||||||||||
Securities available for sale | 67,209 | — | 67,209 | — | 67,209 | |||||||||||||||
FHLB stock | 5,864 | — | — | 5,864 | 5,864 | |||||||||||||||
Loans held for sale | — | — | — | — | — | |||||||||||||||
Loans, net | 679,509 | — | — | 682,473 | 682,473 | |||||||||||||||
Accrued interest receivable | 1,954 | — | — | 1,954 | 1,954 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | $ | 642,909 | $ | — | $ | — | $ | 641,363 | $ | 641,363 | ||||||||||
Short-term borrowings | 17,500 | — | 17,500 | — | 17,500 | |||||||||||||||
Long-term debt | 88,007 | — | 87,355 | — | 87,355 | |||||||||||||||
Subordinated debt | 9,810 | — | — | 9,621 | 9,621 | |||||||||||||||
Accrued interest payable | 421 | — | — | 421 | 421 | |||||||||||||||
December 31, 2017 | ||||||||||||||||||||
Financial assets: | ||||||||||||||||||||
Cash and cash equivalents | $ | 28,462 | $ | 28,462 | $ | — | $ | — | $ | 28,462 | ||||||||||
Certificates of deposit | 100 | 100 | — | — | 100 | |||||||||||||||
Securities available for sale | 66,486 | — | 66,486 | — | 66,486 | |||||||||||||||
FHLB stock | 5,937 | — | — | 5,937 | 5,937 | |||||||||||||||
Loans, net | 686,302 | — | — | 694,614 | 694,614 | |||||||||||||||
Accrued interest receivable | 2,140 | — | — | 2,140 | 2,140 | |||||||||||||||
Financial liabilities: | ||||||||||||||||||||
Deposits | $ | 616,742 | $ | — | $ | — | $ | 615,653 | $ | 615,653 | ||||||||||
Short-term borrowings | 38,000 | — | 38,000 | — | 38,000 | |||||||||||||||
Long-term debt | 77,174 | — | 76,906 | — | 76,906 | |||||||||||||||
Subordinated debt | 9,802 | — | — | 9,598 | 9,598 | |||||||||||||||
Accrued interest payable | 286 | — | — | 286 | 286 |
NOTE 8 – EMPLOYEE STOCK OWNERSHIP PLAN
The Bank maintains an Employee Stock Ownership Plan (the “ESOP”) to provide eligible employees the opportunity to own Company stock. This plan is a tax-qualified retirement plan for the benefit of all Company employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax limits.
17 |
The Company granted a loan to the ESOP to purchase shares of the Company’s common stock on the closing date of the Company’s mutual to stock conversion in 2012. As of March 31, 2018, the ESOP held 180,512 shares or 7.2% of the common stock outstanding on that date. The loan is payable annually over 15 years at the rate of 3.25% per annum. The loan can be prepaid without penalty. Loan payments are expected to be funded by cash contributions from the Bank. The loan is secured by the shares purchased, which are held in a suspense account for allocation among participants as the loan is repaid. Cash dividends paid on allocated shares are reinvested into shares to participants and cash dividends paid on unallocated shares will be used to repay the outstanding debt of the ESOP. Shares used as collateral to secure the loan are released and available for allocation to eligible employees as the principal and interest on the loan is paid.
Shares held by the ESOP at March 31, 2018 include the following:
Allocated | 64,969 | |||
Committed to be allocated | 3,209 | |||
Unallocated | 112,334 | |||
Total | 180,512 |
The fair value of unallocated shares was $3.3 million at March 31, 2018.
Total compensation expense recognized in connection with the ESOP for the three months ended March 31, 2018 and March 31, 2017 was $94 thousand and $88 thousand, respectively.
NOTE 9 – 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.
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.
18 |
Stock Options
A summary of option activity under the 2012 Equity Incentive Plan for the Three months ended March 31, 2018 is presented below:
Options | Number of Shares | Weighted Average Exercise Price | Weighted Average Remaining Contractual Term | Aggregate Intrinsic Value | ||||||||||||
(In thousands) | (In years) | (In thousands) | ||||||||||||||
Outstanding at beginning of period | 212 | $ | 16.05 | |||||||||||||
Exercised | — | — | ||||||||||||||
Forfeited | — | — | ||||||||||||||
Outstanding at end of period | 212 | $ | 16.05 | 4.93 | $ | 2,915 | ||||||||||
Options exercisable at end of period | 194 | $ | 15.30 | 4.57 | $ | 2,664 |
For the three months ended March 31, 2018 and 2017, compensation expense applicable to the stock options was $9 thousand and $53 thousand, respectively. There was no recognized tax benefit related to this expense for the period ended March 31, 2018. The recognized tax benefit related to this expense was $10 thousand for the period ended March 31, 2017.
Unrecognized compensation expense for non-vested stock options totaled $60 thousand as of March 31, 2018, which will be recognized over the remaining weighted average vesting period of 1.5 years.
Stock Awards
There was no activity in non-vested restricted stock awards under the 2016 or the 2012 Equity Incentive Plan for the three months ended March 31, 2018.
For the three months ended March 31, 2018 and 2017, compensation expense applicable to the stock awards was $98 thousand and $101 thousand, respectively, and the recognized tax benefit related to this expense was $27 thousand and $40 thousand, respectively.
Unrecognized compensation expense for non-vested restricted stock totaled $754 thousand as of March 31, 2018, which will be recognized over the remaining weighted average vesting period of 3.51 years.
19 |
NOTE 10 – EARNINGS PER COMMON SHARE
Basic earnings per share represents net income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Unallocated ESOP shares are not deemed outstanding for earnings per share calculations. Under the Company’s 2012 and 2016 Equity Incentive Plans, stock awards contain non-forfeitable dividend rights. Accordingly, these shares are considered outstanding for computation of basic earnings per share. Potential common shares that may be issued by the Company relate to outstanding stock options and are determined using the treasury stock method.
Three Months Ended March 31, | ||||||||
2018 | 2017 | |||||||
(In thousands, except per share data) | ||||||||
Net income applicable to common stock | $ | 1,437 | $ | 881 | ||||
Average number of common shares issued | 2,506 | 2,485 | ||||||
Less: Average unallocated ESOP shares | (114 | ) | (127 | ) | ||||
Average number of common shares outstanding used to calculate basic earnings per common share | 2,392 | 2,358 | ||||||
Effect of dilutive stock options | 93 | 84 | ||||||
Average number of common shares outstanding used to calculate diluted earnings per share | 2,485 | 2,442 | ||||||
Earnings per common share: | ||||||||
Basic | $ | 0.60 | $ | 0.37 | ||||
Diluted | $ | 0.58 | $ | 0.36 |
There were no anti-dilutive options for the three months ended March 31, 2018 and 2017. 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.
20 |
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 2017 Annual Report on Form 10-K under the section titled “Item 1A.–Risk Factors.” These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements.
Critical Accounting Policies
We consider critical accounting policies to be accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income.
Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are the following: the likelihood of loan default; the loss exposure at default; the amount and timing of future cash flows on impaired loans; the value of collateral; and, the determination of loss factors to be applied to the various qualitative elements of the portfolio. All of these estimates are susceptible to significant change. Management reviews the level of the allowance at least quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectibility of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, the Federal Deposit Insurance Corporation and Massachusetts Commissioner of Banks, as an integral part of their examination process, periodically review our allowance for loan losses and may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.
Deferred Tax Assets. Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled. Management reviews deferred tax assets on a quarterly basis to identify any uncertainties pertaining to realization of such assets. In determining whether a valuation allowance is required against deferred tax assets, management assesses historical and forecasted operating results, including a review of eligible carry-forward periods, tax planning opportunities and other relevant considerations. We believe the accounting estimate related to the valuation allowance is a critical estimate because the underlying assumptions can change from period to period. For example, tax law changes or variances in future projected operating performance could result in a change in the valuation allowance. Should actual factors and conditions differ materially from those used by management, the actual realization of net deferred tax assets could differ materially from the amounts recorded in the financial statements. If we were not able to realize all or part of our deferred tax assets in the future, an adjustment to the related valuation allowance would be charged to income tax expense in the period such determination was made.
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Comparison of Financial Condition at March 31, 2018 and December 31, 2017
General. Total assets increased $16.5 million, or 2.0%, from $805.4 million at December 31, 2017 to $821.9 million at March 31, 2018. Total asset growth was due to an increase in in cash and cash equivalents of $22.9 million, or 80.5%, an increase in securities available for sale of $723 thousand, or 1.1%, partially offset by a decrease in total loans of $6.8 million or 1.0%. The increase in cash provides additional liquidity during tax season for some of our commercial clients.
Loans. The decrease in the loan portfolio of $6.8 million, or 1.0%, reflects the successful completion and sale of several construction loan projects as well as the payoff of a large loan relationship to one commercial borrower. Residential real estate loans increased $10.4 million to $339.4 million, compared to $329.0 million at December 31, 2017. The majority of growth in residential real estate was in adjustable-rate mortgages, but also included some fixed-rate loans, reflecting customer preferences. Commercial real estate loans increased $2.2 million, or 1.6%, as we have had recent success in expanding our business development efforts. Construction loans decreased $12.2 million, or 10.2%, primarily due to the completion of several projects during the period. Commercial loans decreased $8.9 million, or 13.2%, due largely to the payoff of a large, credit-only relationship.
At March 31, 2018, past due loans totaled $1.0 million as compared to $1.2 million at December 31, 2017. Substantially all delinquent loans are secured by real estate collateral with values exceeding outstanding loan principal. There were no charge-offs on delinquent loans during the three months ended March 31, 2018. Charge-offs on delinquent loans amounted to $11 thousand for the three months ended March 31, 2017.
Securities. Total securities increased from $66.5 million at December 31, 2017 to $67.2 million at March 31, 2018, as excess liquidity was invested in U.S Treasury bonds.
Deposits. Total deposits increased $26.2 million, or 4.2%, from $616.7 million at December 31, 2017 to $642.9 million at March 31, 2018. Certificates of deposit increased $18.0 million, or 7.37%, to $251.3 million. Demand deposits and NOW accounts increased $7.9 million, or 5.6%, to $149.7 million as growth was realized in both retail and commercial accounts. Money market and savings accounts balances remained relatively unchanged at $143.1 million and $98.6 million at March 31, 2018.
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 $10.8 million, or 14.0%, for the three months ended March 31, 2018. Short-term borrowings consist entirely of advances from the FHLB with initial maturities less than one year. Balances of short-term borrowings decreased $20.5 million, or 53.9%, since December 31, 2017. The balance of the subordinated debt was $9.8 million at March 31, 2018 and December 31, 2017.
Stockholders’ Equity. Stockholders’ equity increased $858 thousand, or 1.4%, from $59.2 million at December 31, 2017 to $60.1 million at March 31, 2018. The increase was primarily a result of net income for the three month period of $1.4 million, an increase in the Company’s equity incentive plans’ share-based compensation and ESOP unearned compensation of $201 thousand, offset by an after-tax decrease in the fair value of available for sale securities of $646 thousand and dividends paid of $127 thousand.
Results of Operations for the Three Months Ended March 31, 2018 and 2017
Overview. Net income for the three months ended March 31, 2018 was $1.4 million, compared to net income of $881 thousand for the three months ended March 31, 2017, an increase of 63.1%. The $556 thousand increase was primarily due to an increase in net interest income and non-interest income, offset by an increase in non-interest expense. Net interest income increased $806 thousand to $6.0 million; non-interest income increased $57 thousand to $578 thousand in the 2018 quarter. Non-interest expense increased $265 thousand and totaled $4.6 million for the three months ended March 31, 2018. The loan loss provision increased $65 thousand and income tax expense decreased $23 thousand as compared to the 2017 period.
Net Interest Income. Net interest income for the three months ended March 31, 2018 increased $806 thousand, or 15.5%, as compared to the three months ended March 31, 2017. 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 certificate of deposit and money market accounts, and increases in borrowings.
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Interest and dividend income increased $1.4 million, or 20.9%, from $6.5 million for the three months ended March 31, 2017 to $7.8 million for the three months ended March 31, 2018. The average balance of interest-earning assets increased 17.0%, while the average rate earned on these assets increased by four basis points (“bps”). Interest and fees on loans increased $1.3 million, or 20.9%, due to an 18.3% increase in the average balance of loans. The average rate earned on loans was unchanged at 4.19%. Contributing to the increase in loan interest income was the increase in residential real estate, construction loans, commercial real estate and commercial loan average balances during the period. Interest income from investments increased $15 thousand, or 3.7%, due to an increase in the average balances for the three months ended March 31, 2018 as compared to the prior year period.
Interest expense increased $548 thousand, or 43.2% primarily due to an increase in average balances of interest-bearing deposits, and short and long-term debt. Our funding costs have responded more quickly than loan income to the change in interest rates. Deposit expense increased $400 thousand, or 50.4%. The average balance of interest-bearing deposits increased $78.8 million, or 18.2%, in the three months ended March 31, 2018, compared to the same period in 2017 and the average rate paid on interest bearing deposits increased 19 bps. Interest expense on money market accounts increased by $108 thousand to $233 thousand. The rate paid on money market accounts increased 17 bps primarily due to a higher tiered- rate structure for these accounts than in the prior year along with the increase of the average balance of money market accounts of $36.9 million to $143.0 million, as compared to the prior year period. The cost of term certificates of deposit increased $288 thousand to $825 thousand as balances in our retail products increased. Rates paid on certificates of deposit balances increased to 1.40%, up 27 bps as compared to the same period last year. Short and long-term debt expense increased $148.0 thousand from year to year. The average balance of long-term FHLB advances increased from $85.5 million to $87.0 million, while rates paid on long-term FHLB advances increased from 1.36% to 1.56%. Interest expense on short-term borrowings totaled $123 thousand in the three month period ended March 31, 2018, compared to $32 thousand in the three months ended March 31, 2017 due to increases in the average balance combined with rates increasing by 81 bps.
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Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using daily balances. Loan fees are included in interest income on loans and are insignificant. Yields are not presented on a tax-equivalent basis. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant.
For the Three Months Ended March 31, | ||||||||||||||||||||||||
2018 | 2017 | |||||||||||||||||||||||
(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 | $ | 29,411 | $ | 113 | 1.52 | % | $ | 20,944 | $ | 43 | 0.83 | % | ||||||||||||
Debt securities: | ||||||||||||||||||||||||
Taxable | 53,945 | 341 | 2.51 | 54,791 | 339 | 2.51 | ||||||||||||||||||
Tax-exempt | 13,082 | 82 | 2.48 | 10,728 | 69 | 2.60 | ||||||||||||||||||
Total loans and loans held for sale | 684,876 | 7,227 | 4.19 | 579,098 | 5,977 | 4.19 | ||||||||||||||||||
FHLB stock | 6,064 | 76 | 4.96 | 7,333 | 57 | 3.13 | ||||||||||||||||||
Total interest-earning assets | 787,378 | 7,839 | 3.95 | 672,894 | 6,485 | 3.91 | ||||||||||||||||||
Allowance for loan losses | (6,196 | ) | (5,432 | ) | ||||||||||||||||||||
Total interest-earning assets less allowance for loan losses | 781,182 | 667,462 | ||||||||||||||||||||||
Non-interest-earning assets | 23,308 | 21,658 | ||||||||||||||||||||||
Total assets | $ | 804,490 | $ | 689,120 | ||||||||||||||||||||
Interest-bearing liabilities: | ||||||||||||||||||||||||
Regular savings accounts | $ | 98,833 | 113 | 0.45 | $ | 98,265 | 108 | 0.45 | % | |||||||||||||||
NOW checking accounts | 35,854 | 22 | 0.24 | 34,811 | 23 | 0.26 | ||||||||||||||||||
Money market accounts | 142,979 | 233 | 0.65 | 106,098 | 125 | 0.48 | ||||||||||||||||||
Certificates of deposit | 233,631 | 825 | 1.40 | 193,315 | 537 | 1.13 | ||||||||||||||||||
Total interest-bearing deposits | 511,297 | 1,193 | 0.93 | 432,489 | 793 | 0.74 | ||||||||||||||||||
Short-term borrowings | 30,011 | 123 | 1.63 | 15,674 | 32 | 0.82 | ||||||||||||||||||
Long-term debt | 87,033 | 343 | 1.56 | 85,453 | 286 | 1.36 | ||||||||||||||||||
Subordinated debt | 9,805 | 158 | 6.39 | 9,772 | 158 | 6.57 | ||||||||||||||||||
Total interest-bearing liabilities | 638,146 | 1,817 | 1.13 | 543,388 | 1,269 | 0.95 | ||||||||||||||||||
Non-interest-bearing demand deposits | 102,362 | 87,603 | ||||||||||||||||||||||
Other non-interest-bearing liabilities | 3,948 | 1,897 | ||||||||||||||||||||||
Total liabilities | 744,456 | 632,888 | ||||||||||||||||||||||
Stockholders’ equity | 60,034 | 56,232 | ||||||||||||||||||||||
Total liabilities and stockholders’ equity | $ | 804,490 | $ | 689,120 | ||||||||||||||||||||
Net interest income | $ | 6,022 | $ | 5,216 | ||||||||||||||||||||
Net interest rate spread (2) | 2.82 | % | 2.96 | % | ||||||||||||||||||||
Net interest-earning assets (3) | $ | 149,232 | $ | 129,506 | ||||||||||||||||||||
Net interest margin (4) | 3.03 | % | 3.14 | % | ||||||||||||||||||||
Average total interest-earning assets to average total interest-bearing liabilities | 123.39 | % | 123.83 | % |
(1) | Ratios for the three month periods have been annualized. |
(2) | Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities. |
(3) | Represents total average interest-earning assets less total average interest-bearing liabilities. |
(4) | Represents net interest income as a percent of average interest-earning assets. |
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Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate (changes in rate multiplied by prior volume). The volume column shows the effects attributable to changes in volume (changes in volume multiplied by prior rate). The total increase (decrease) column represents the sum of the prior columns. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.
Three Months Ended March 31, 2018 Compared to Three Months Ended March 31, 2017 | ||||||||||||
Increase (Decrease) Due to | Total Increase | |||||||||||
(In thousands) | Volume | Rate | (Decrease) | |||||||||
Interest-earning assets: | ||||||||||||
Short-term investments | $ | 22 | $ | 48 | $ | 70 | ||||||
Debt securities: | ||||||||||||
Taxable | (5 | ) | 7 | 2 | ||||||||
Tax-exempt | 15 | (2 | ) | 13 | ||||||||
Total loans and loans held for sale | 1,114 | 136 | 1,250 | |||||||||
FHLB stock | (8 | ) | 27 | 19 | ||||||||
Total interest-earning assets | 1,138 | 216 | 1,354 | |||||||||
Interest-bearing liabilities: | ||||||||||||
Regular savings | 2 | 3 | 5 | |||||||||
NOW checking | 1 | (1 | ) | — | ||||||||
Money market | 51 | 57 | 108 | |||||||||
Certificates of deposit | 125 | 162 | 287 | |||||||||
Total interest-bearing deposits | 179 | 221 | 400 | |||||||||
Short-term borrowings | 43 | 48 | 91 | |||||||||
Long-term debt | 5 | 52 | 57 | |||||||||
Subordinated debt | — | — | — | |||||||||
Total interest-bearing liabilities | 227 | 321 | 548 | |||||||||
Increase (decrease) in net interest income | $ | 911 | $ | (105 | ) | $ | 806 |
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Provision for Loan Losses. The provision for loan losses was $65 thousand for the three months ended March 31, 2018, compared to no provision for the three months ended March 31, 2017. In the 2018 period, the provision reflects the loan balances in the portfolio and management’s estimate of loan losses based upon historical loan portfolio performance as well as environmental considerations such as the strength of the regional economy and organizational knowledge and expertise.
Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated.
Three Months Ended | ||||||||
March 31, | ||||||||
(Dollars in thousands) | 2018 | 2017 | ||||||
Allowance at beginning of period | $ | 6,153 | $ | 5,432 | ||||
Provision for loan losses | 65 | — | ||||||
Charge-offs | — | (11 | ) | |||||
Recoveries | — | — | ||||||
Net charge-offs | — | (11 | ) | |||||
Allowance at end of period | $ | 6,218 | $ | 5,421 | ||||
Allowance for loan losses to nonperforming loans at end of period | 504.52 | % | 947.89 | % | ||||
Allowance for loan losses to total loans at end of period | 0.91 | % | 0.91 | % | ||||
Net charge-offs to average loans outstanding during the period | — | % | 0.0 | % |
Two residential mortgage loans totaling $65 thousand and $598 thousand, respectively were newly classified as non-accrual loans as of March 31, 2018 as borrower payments slowed and both went over 90 days past due.
Non-interest Income. Non-interest income totaled $578 thousand, an increase of $57 thousand or 10.9%. Wealth management fees increased $89 thousand, or 30.2%, as compared to the prior year as total assets under management increased to $406.6 million as of March 31, 2018 up from $328.1 million at March 31, 2017. Income from mortgage banking activities in 2018 decreased $34 thousand as sales of longer-term, fixed rate mortgage loans were lower as compared to the prior year. Customer service fees increased $9 thousand mainly due to an increase in ATM network interchange fees.
Non-interest Expense. Non-interest expense totaled $4.6 million for the three months ended March 31, 2018, compared to $4.3 million for the three months ended March 31, 2017, an increase of $265 thousand. Salaries and employee benefits increased $112 thousand due to annual merit and benefit cost increases. Occupancy and equipment was higher by $22 thousand primarily due to rent and building maintenance increases. Professional fees were also higher by $25 thousand due primarily to an increase in legal and audit-related fees. Data processing cost increased $33 thousand and other general and administrative costs, such as advertising and insurance, increased $52 thousand and are attributable to expanding business volumes and operations. FDIC insurance costs increased $21 thousand, or 14.3%, due to higher assessment balances related to growth.
Income Taxes. An income tax provision of $540 thousand was recorded during the quarter ended March 31, 2018, compared to a provision of $563 thousand in the comparable 2017 quarter. Due to the reduced corporate federal income tax rate enacted at the end of 2017, the effective tax rate for the 2018 three month period was 27.3%, compared with 39.0% for the 2017 three month period.
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Liquidity and Capital Resources
Liquidity Management. Liquidity is the ability to meet current and future financial obligations of a short-term and long-term nature. Our primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities, and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, calls of securities and prepayments on loans are greatly influenced by 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 March 31, 2018, cash and cash equivalents, which include short-term investments, totaled $51.4 million. Securities classified as available-for-sale, whose aggregate fair value is $67.2 million provide additional sources of liquidity.
At March 31, 2018, we had $17.5 million in short-term borrowings outstanding, represented entirely by FHLB advances, and $88.0 million in long-term debt, also consisting entirely of FHLB advances. At March 31, 2018, we had a total of $79.1 million in unused borrowing capacity from the FHLB. Short-term borrowings are generally used to fund temporary cash needs due to the timing of loan originations and deposit gathering activities. Long-term debt is generally used to provide for longer-term funding needs of the Company, including the match funding of loans originated for portfolio. At March 31, 2018, 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 $8.8 million from the Federal Reserve Bank under a collateralized borrowing program, none of which was outstanding at that date.
At March 31, 2018, we had $127.8 million in loan commitments outstanding, which included $56.8 million in unadvanced funds on construction loans, $38.3 million in unadvanced home equity lines of credit, $23.7 million in unadvanced commercial lines of credit, and $7.5 million in new loan originations.
Term certificates of deposit due within one year of March 31, 2018 amounted to $151.0 million, or 60.1%, of total term certificates, a decrease of $24.2 million from $175.2 million at December 31, 2017. Balances of term certificates maturing in more than one year increased to $100.3 million as compared to $58.1 million at December 31, 2017. 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 and earnings from investment of net proceeds from the offering retained by the Company. Massachusetts banking law and FDIC regulations limit distributions of capital. In addition, the Company is subject to the policy of the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the Company appears consistent with its capital needs, asset quality and overall financial condition. At March 31, 2018, the Company had $172 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.
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Federal banking regulations require a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%, a minimum ratio of Tier 1 capital to risk-weighted assets of 6%, a minimum ratio of total capital to risk-weighted assets of 8% and a minimum leverage ratio of 4% for all banking organizations. Additionally, community banking institutions must maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to avoid being subject to limitations on capital distributions and discretionary bonuses. The capital conservation buffer and certain deductions from and adjustments to regulatory capital and risk-weighted assets are being phased in over several years. The required minimum conservation buffer was 1.25% as of December 31, 2017 and increased to 1.875% on January 1, 2018 and will increase to 2.5% on January 1, 2019. An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. These limitations establish a maximum percentage of eligible retained income that could be utilized for such actions. Management believes that the Company’s capital levels will remain characterized as “well-capitalized” throughout the phase-in periods.
At March 31, 2018, the Bank was well-capitalized under the current rules. Management believes the Bank’s capital levels will be characterized as “well-capitalized” upon full implementation of the new rules.
Off-Balance Sheet Arrangements
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit. For information about our loan commitments and unused lines of credit see Liquidity Management herein.
For the three months ended March 31, 2018, 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.
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Our goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income and the present value of our equity. Interest income and equity simulations are completed quarterly and presented to the Asset/Liability Committee and the Board of Directors. The simulations provide an estimate of the impact of changes in interest rates on net interest income and the present value of our equity under a range of assumptions. The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates. The simulation analysis incorporates management’s current assessment of the risk that pricing margins will change adversely over time due to competition or other factors.
Simulation analysis is only an estimate of our interest rate risk exposure at a particular point in time. We continually review the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.
The table below sets forth an approximation of our exposure as a percentage of estimated net interest income for the next 12 month period using interest income and equity simulations. The simulations use projected repricing of assets and liabilities at March 31, 2018 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rates can have a significant impact on the simulations. Because of the large percentage of loans we hold, rising or falling interest rates have a significant impact on the prepayment speeds of our earning assets that, in turn, affect the rate sensitivity position. When interest rates rise, prepayments tend to slow. When interest rates fall, prepayments tend to rise. Our asset sensitivity would be reduced if prepayments slowed and would increase if prepayments accelerated. While we believe such assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment activity.
The following table reflects the estimated effects of changes in interest rates on the present value of our equity at March 31, 2018 and on our projected net interest income from March 31, 2018 through March 31, 2019. These estimates are in compliance with our internal policy limits.
As of March 31, 2018 | Over the Next 12 Months Ending March 31, 2019 | |||||||||||||||||||||||||
Present Value of Equity | Projected Net Interest Income | |||||||||||||||||||||||||
Basis Point (“bp”) Change in Rates | $ Amount | $ Change | % Change | $ Amount | $ Change | % Change | ||||||||||||||||||||
(Dollars in thousands) | ||||||||||||||||||||||||||
300 bp | $ | 96,441 | $ | (11,803 | ) | (10.90 | )% | $ | 23,217 | $ | (946 | ) | (3.92 | )% | ||||||||||||
200 | 101,815 | (6,429 | ) | (5.94 | ) | 23,616 | (547 | ) | (2.26 | ) | ||||||||||||||||
0 | 108,244 | — | — | 24,163 | — | — | ||||||||||||||||||||
(100) | 101,587 | (6,657 | ) | (6.15 | ) | 23,425 | (738 | ) | (3.05 | ) |
Item 4. Controls and Procedures
The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended March 31, 2018 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
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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, 2017, filed with the Securities and Exchange Commission on March 29, 2018. As of March 31, 2018, 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, 2017.
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 | Employment Agreement for Thomas J. Fontaine (4) |
10.2 | Salary Continuation Agreement for Thomas J. Fontaine |
31.1 | Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer |
31.2 | Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer |
32.0 | Section 1350 Certification |
101.1 | The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, 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) | Incorporate herein by reference to the Company’s Current Report on Form 8-K filed with the Securities sand Exchange Commission on December 17, 2015 (included as Exhibit A to the Purchase Agreement filed as Exhibit 10.1 thereto). |
(4) | Incorporated herein by reference to the exhibits to Wellesley Bancorp, Inc.’s Current Report on Form 8-K (File No. 001-35352), filed with the Securities and Exchange Commission on April 2, 2018. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
WELLESLEY BANCORP, INC. | ||
Dated: May 10, 2018 | By: | /s/ Thomas J. Fontaine |
Thomas J. Fontaine | ||
President and Chief Executive Officer | ||
(principal executive officer) | ||
Dated: May 10, 2018 | By: | /s/ Michael W. Dvorak |
Michael W. Dvorak | ||
Chief Financial Officer and Treasurer | ||
(principal accounting and financial officer) |
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Exhibit 10.2
AMENDED AND RESTATED
EXECUTIVE SALARY CONTINUATION AGREEMENT
THIS AGREEMENT, made and entered into this day of March 27, 2018 by and between Wellesley Bank, a bank organized and existing under the laws of the Commonwealth of Massachusetts (hereinafter referred to as the “Bank”), and Thomas J. Fontaine, an Executive of the Bank (hereinafter referred to as the “Executive”), a member of a select group of management and highly compensated employees of the Bank, shall amend and restate in its entirety the Executive Salary Continuation Agreement effective June 1, 2007, amended and restated on October 17, 2007 and thereafter subsequently amended.
WHEREAS, the Executive has been and continues to be a valued Executive of the Bank; and
WHEREAS, the purpose of this Agreement is to further the growth and development of the Bank by providing the Executive with supplemental retirement income, and thereby encourage the Executive’s productive efforts on behalf of the Bank and Wellesley Bancorp, Inc. (the “Company”), and to align the interests of the Executive and Company shareholders; and
WHEREAS, it is the desire of the Bank and the Executive to enter into this Agreement under which the Bank will agree to make certain payments to the Executive at retirement or the Executive’s Beneficiary in the event of the Executive’s death pursuant to this Agreement; and
ACCORDINGLY, it is intended that the Agreement be “unfunded” for purposes of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”) and not be construed to provide income to the participant or beneficiary under the Internal Revenue Code of 1986, as amended (the “Code”), particularly Section 409A of the Code and guidance or regulations issued thereunder, prior to actual receipt of benefits; and
NOW THEREFORE, it is agreed as follows:
I. | EFFECTIVE DATE |
The effective date of this Agreement in June 1, 2007.
II. | FRINGE BENEFITS |
The salary continuation benefits provided by this Agreement are granted by the Bank as a fringe benefit to the Executive and are not part of any salary reduction plan or an arrangement deferring a bonus or a salary increase. The Executive has no option to take any current payment or bonus in lieu of these salary continuation benefits except as set forth hereinafter.
III. | DEFINITIONS |
A. Beneficiary:
The Executive shall have the right to name a Beneficiary of the Death Benefit. The Executive shall have the right to name such Beneficiary at any time prior to the Executive’s death and submit it to the Plan Administrator (or Plan Administrator’s representative) on the form provided. Once received and acknowledged by the Plan Administrator, the form shall be effective. The Executive may change a Beneficiary designation at any time by submitting a new form to the Plan Administrator. Any such change shall follow the same rules as for the original Beneficiary designation and shall automatically supersede the existing Beneficiary form on file with the Plan Administrator.
If the Executive dies without a valid Beneficiary designation on file with the Plan Administrator, death benefits shall be paid to the Executive’s estate.
If the Plan Administrator determines in its discretion that a benefit is to be paid to a minor, to a person declared incompetent, or to a person incapable of handling the disposition of that person’s property, the Plan Administrator may direct distribution of such benefit to the guardian, legal representative or person having the care or custody of such minor, incompetent person or incapable person. The Plan Administrator may require proof of incompetence, minority or guardianship as it may deem appropriate prior to distribution of the benefit. Any distribution of a benefit shall be a distribution for the account of the Executive and the Beneficiary, as the case may be, and shall be a complete discharge of any liability under the Agreement for such distribution amount.
B. Change in Control:
“Change in Control” shall mean a change in ownership or control of the Bank as defined in Treasury Regulation Section 1.409A-3(i)(5) or any subsequently applicable Treasury Regulation.
C. Discharge For Cause:
The term “For Cause” shall mean any of the following that result in an adverse effect on the Bank: (i) the commission of a felony or gross misdemeanor involving fraud or dishonesty; (ii) the willful violation of any banking law, rule, or banking regulation (other than a traffic violation or similar offense); (iii) an intentional failure to perform stated duties; or (iv) a breach of fiduciary duty involving personal profit. If a dispute arises as to discharge “For Cause,” such dispute shall be resolved by arbitration as set forth in this Agreement.
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D. Plan Year:
Any reference to “Plan Year” shall mean a calendar year from January 1st to December 31st. In the year of implementation, the term “Plan Year” shall mean the period from the Effective Date to December 31st of the year of the Effective Date.
E. Restriction on Timing of Distribution:
Notwithstanding any provision of this Agreement to the contrary, distributions hereunder may not commence earlier than six (6) months after the date of a Separation from Service, as that term is used under Section 409A if, pursuant to Internal Revenue Code Section 409A, the Executive is considered a “specified employee” of the Bank under Internal Revenue Code Section 416(i), if any stock of the Bank is publicly traded on an established securities market or otherwise. In the event a distribution is delayed pursuant to this paragraph, the originally scheduled payment shall be delayed for six (6) months, and shall commence instead on the first day of the seventh month following Separation from Service. If payments are scheduled to be made in installments, the first six (6) months of installment payments shall be delayed, aggregated, and paid instead on the first day of the seventh month, after which all installment payments shall be made on their regular schedule. If payment is delayed for six (6) months and instead be made on the first day of the seventh month.
F. Retirement Date:
“Retirement Date” shall mean the later of the Executive’s sixty-fifth (65th) birthday or Separation from Service.
G. Normal Retirement Age:
“Normal Retirement Age” shall mean the date on which the Executive attains age sixty-five (65).
H. Separation from Service:
“Separation from Service” shall mean the Executive has experienced a termination of employment with the Bank. For purposes of this Agreement, whether a termination of employment or service has occurred is determined based on whether the facts and circumstances indicate that the Bank and Executive reasonably anticipated that no further services would be performed after a certain date or that the level of bona fide services the Executive would perform after such date (whether as an Executive or as an independent contractor) would permanently decrease to no more than twenty percent (20%) of the average level of bona fide services performed (whether as an Executive or an independent contractor) over the immediately preceding thirty-six (36) month period (or the full period of services to the Bank if the Executive has been providing services to the Bank less than 36 months). Facts and circumstances to be considered in making this determination include, but are not limited to, whether the Executive continues to be treated as an Executive for other purposes (such as continuation of salary and participation in Executive benefit programs), whether similarly situated service providers have been treated consistently, and whether the Executive is permitted, and realistically available, to perform services for other service recipients in the same line of business. The Executive will be presumed not to have separated from service where the level of bona fide services performed continues at a level that is twenty percent (20%) or more of the average level of service performed by the Executive during the immediately preceding thirty-six (36) month period.
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IV. | RETIREMENT BENEFIT |
Upon attainment of the Retirement Date, the Executive shall become entitled to a lump sum benefit, which is equivalent to a fifteen (15) year benefit, equal to seventy-five percent (75%) of the Executive’s highest W-2 compensation earned in any calendar year of employment with the Bank, plus any reductions from the Executive’s personal contributions to a qualified retirement plan (i.e., a 401(k) plan), less the following: (i) the Bank’s portion of social security benefits; (ii) the Bank’s qualified defined benefit plan; and (iii) the Bank’s match in the Bank provided 401(k) plan. W-2 wages shall include all compensation including salary, bonuses and other compensation, plus any reductions for salary deferred as a contribution by the Executive to the Bank provided 401(k) plan and any salary reductions attributed to the Executive’s contributions to the Bank’s medical savings plan. Said payment shall be paid thirty (30) days following the Executive’s Separation from Service.
V. | DEATH BENEFIT |
In the event the Executive should die at any time after the Effective Date of this Agreement, the Bank will pay an amount equal to the Executive’s Accrued Liability Retirement Account, as of the date of death, in one (1) lump sum to the Executive’s Beneficiary(ies). Said payment due hereunder shall be made within sixty (60) days of the Executive’s death.
VI. | BENEFIT ACCOUNTING/ACCRUED LIABILITY RETIREMENT ACCOUNT |
The Bank shall account for this benefit using the regulatory accounting principles of the Bank’s primary federal regulator. The Bank shall establish an Accrued Liability Retirement Account for the Executive on the books of the Bank into which appropriate reserves shall be accrued. The Bank and the Executive agree that the calculations impacting the reserve account and payment under this Agreement shall be made, when applicable, using a discount rate of six and one quarter percent (6.25%).
VII. | VESTING |
The Executive shall be one hundred percent (100%) vested in his Accrued Liability Account from the Effective Date of this Agreement.
.
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VIII. | TERMINATION PRIOR TO NORMAL RETIREMENT AGE |
Subject to Paragraph IX, in the event that the employment of the Executive shall terminate prior to the Normal Retirement Age, by the Executive’s voluntary action, or by the Executive’s discharge by the Bank without cause, the Bank shall pay to the Executive an amount of money equal to the balance of the Executive’s Accrued Liability Retirement Account on the date of Separation from Service. Such balance shall be paid in one (1) lump sum within sixty (60) days following Separation from Service.
IX. | CHANGE IN CONTROL |
Upon a Change in Control, the Executive shall become entitled to his full Retirement Benefit (as calculated pursuant to Paragraph IV). For purposes of this Paragraph IX, the Retirement Benefit shall be calculated based on compensation through the Change in Control without any adjustment for estimated future salary increases. Such benefit shall be paid in accordance with Paragraph IV.
Notwithstanding any other provision of this Agreement to the contrary, if payments made under this Paragraph IX or otherwise from the Bank or any affiliate of the Bank are considered “parachute payments” under Section 280G of the Internal Revenue Code of 1986, as amended (the “Code”) then such payments or benefits shall be limited to the greatest amount that may be paid to Executive under Section 280G of the Code without causing any loss of deduction to the Corporation or its affiliates under such section, but only if, by reason of such reduction, the net after tax benefit to Executive shall exceed the net after tax benefit if such reduction were not made. “Net after tax benefit” for purposes of this Agreement shall mean the sum of (i) the total amounts payable to Executive under this Paragraph IX, plus (ii) all other payments and benefits which the Executive receives or then is entitled to receive from the Bank or any affiliate of the Bank that would constitute a “parachute payment” within the meaning of Section 280G of the Code, less (iii) the amount of federal, state and local income and payroll taxes payable with respect to the foregoing calculated at the maximum marginal tax rates for each year in which the foregoing shall be paid to Executive (based upon the rate in effect for such year as set forth in the Code at the time of termination of Executive’s employment), less (iv) the amount of excise taxes imposed with respect to the payments and benefits described in (i) and (ii) above by Section 4999 of the Code. The determination as to whether and to what extent payments are required to be reduced in accordance with this Paragraph IX shall be made at the Bank’s expense by an accounting firm or law firm experienced in such matters. Any reduction in payments required by this Paragraph IX shall occur in the following order: (i) any cash severance, (ii) any other cash amount payable to Executive, (iii) any benefit valued as a “parachute payment,” (iv) the acceleration of vesting of any equity awards that are options, and (v) the acceleration of vesting of any other equity awards. Within any such category of payments and benefits, a reduction shall occur first with respect to amounts that are not “deferred compensation” within the meaning of Section 409A of the Code and then with respect to amounts that are. In the event that acceleration of compensation from equity awards is to be reduced, such acceleration of vesting shall be canceled, subject to the immediately preceding sentence, in the reverse order of the date of grant.
X. | RESTRICTIONS ON FUNDING |
The Bank shall have no obligation to set aside, earmark or entrust any fund or money with which to pay its obligations under this Agreement. The Executive, their Beneficiary, or any successor in interest shall be and remain simply a general creditor of the Bank in the same manner as any other creditor having a general claim for matured and unpaid compensation.
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The Bank reserves the absolute right, at its sole discretion, to either fund the obligations undertaken by this Agreement or to refrain from funding the same and to determine the extent, nature and method of such funding. Should the Bank elect to fund this Agreement, in whole or in part, through the purchase of life insurance, mutual funds, Disability policies or annuities, the Bank reserves the absolute right, in its sole discretion, to terminate such funding at any time, in whole or in part. At no time shall any Executive be deemed to have any lien, right, title or interest in any specific funding investment or assets of the Bank.
If the Bank elects to invest in a life insurance, Disability or annuity policy on the life of the Executive, then the Executive shall assist the Bank by freely submitting to a physical exam and supplying such additional information necessary to obtain such insurance or annuities.
XI. | MISCELLANEOUS |
A. Alienability and Assignment Prohibition:
Neither the Executive nor any Beneficiary under this Agreement shall have any power or right to transfer, assign, anticipate, hypothecate, mortgage, commute, modify or otherwise encumber in advance any of the benefits payable hereunder nor shall any of said benefits be subject to seizure for the payment of any debts, judgments, alimony or separate maintenance owed by the Executive or the Executive’s Beneficiary, nor be transferable by operation of law in the event of bankruptcy, insolvency or otherwise.
B. Amendment or Revocation:
During the lifetime of the Executive, this Agreement may be amended or revoked at any time or times, in whole or in part only, by the mutual written consent of the Executive and the Bank. Any such amendment shall not be effective to decrease or restrict the Executive’s accrued benefit under this Agreement, determined as of the date of amendment, unless agreed to in writing by the Executive, and provided further, no amendment shall be made, or if made, shall be effective, if such amendment would cause the Agreement to violate Internal Revenue Code Section 409A.
C. Applicable Law:
The validity and interpretation of this Agreement shall be governed by the laws of the Commonwealth of Massachusetts.
D. Binding Obligation of the Bank and any Successor in Interest:
The Bank shall not merge or consolidate into or with another bank or sell substantially all of its assets to another bank, firm or person until such bank, firm or person expressly agrees, in writing, to assume and discharge the duties and obligations of the Bank under this Agreement. This Agreement shall be binding upon the parties hereto, their successors, assignees, beneficiaries, heirs and personal representatives.
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E. Gender:
Whenever in this Agreement words are used in the masculine or neutral gender, they shall be read and construed as in the masculine, feminine or neutral gender, whenever they should so apply.
F. Headings:
Headings and subheadings in this Agreement are inserted for reference and convenience only and shall not be deemed a part of this Agreement.
G. Not a Contract of Employment:
This Agreement shall not be deemed to constitute a contract of employment between the parties hereto, nor shall any provision hereof restrict the right of the Bank to discharge the Executive, or restrict the right of the Executive to terminate employment.
H. Opportunity to Consult with Independent Advisors:
The Executive acknowledges that he has been afforded the opportunity to consult with independent advisors of his choosing including, without limitation, accountants or tax advisors and legal counsel regarding both the benefits granted to him under the terms of this Agreement and the: (i) terms and conditions which may affect the Executive’s right to these benefits; and (ii) personal tax effects of such benefits including, without limitation, the effects of any federal or state taxes, Section 280G of the Code, Section 409A of the Code and guidance or regulations thereunder, and any other taxes, costs, expenses or liabilities whatsoever related to such benefits, which in any of the foregoing instances the Executive acknowledges and agrees shall be the sole responsibility of the Executive notwithstanding any other term or provision of this Agreement. The Executive further acknowledges and agrees that the Bank shall have no liability whatsoever related to any such personal tax effects or other personal costs, expenses, or liabilities applicable to the Executive and further specifically waives any right for himself or herself, and his or her heirs, beneficiaries, legal representative, agents, successor and assign to claim or assert liability on the part of the Bank related to the matters described above in this paragraph. The Executive further acknowledges that he has read, understands and consents to all of the terms and conditions of this Agreement, and that he enters into this Agreement with a full understanding of its terms and conditions.
I. Partial Invalidity:
If any term, provision, covenant, or condition of this Agreement is determined by an arbitrator or a court, as the case may be, to be invalid, void, or unenforceable, such determination shall not render any other term, provision, covenant, or condition invalid, void, or unenforceable, and the Agreement shall remain in full force and effect notwithstanding such partial invalidity.
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J. Permissible Acceleration Provision:
Under Treasury Regulation Section 1.409A-3(j)(4), a payment of deferred compensation may not be accelerated except as provided in regulations by the Internal Revenue Code. This Agreement allows all permissible payment accelerations under 1.409A-3(j)(4) that include but are not limited to payments necessary to comply with a domestic relations order, payments necessary to comply with certain conflict of interest rules, payments intended to pay employment taxes, and other permissible payments are allowed as permitted by statute or regulation.
K. Subsequent Changes to Time and Form of Payment:
The Bank may permit subsequent changes to the time and form of payment. Any such change shall be considered made only when it becomes irrevocable under the terms of the Agreement. Any subsequent time and form of payment changes will be considered irrevocable not later than thirty (30) days following acceptance of the change by the Plan Administrator, subject to the following rules:
a. | the subsequent change may not take effect until at least twelve (12) months after the date on which the change is made; |
b. | the payment (except in the case of death, disability, or unforeseeable emergency) upon which the change is made is deferred for a period of not less than five (5) years from the date such payment would otherwise have been paid; and |
c. | in the case of a payment made at a specified time, the change must be made not less than twelve (12) months before the date the payment is scheduled to be paid. |
L. Tax Withholding:
The Bank shall withhold any taxes that are required to be withheld from the benefits provided under this Agreement. The Executive acknowledges that the Bank’s sole liability regarding taxes is to forward any amounts withheld to the appropriate taxing authority(ies).
XIV. | ADMINISTRATIVE AND CLAIMS PROVISIONS |
A. Plan Administrator:
The “Plan Administrator” of this Agreement shall be Wellesley Bank. As Plan Administrator, the Bank shall be responsible for the management, control and administration of the Agreement. The Plan Administrator may delegate to others certain aspects of the management and operation responsibilities of the Agreement including the employment of advisors and the delegation of ministerial duties to qualified individuals.
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B. Claims Procedure:
a. Filing a Claim for Benefits:
Any insured, Beneficiary, or other individual, (“Claimant”) entitled to benefits under this Agreement will file a claim request with the Plan Administrator. The Plan Administrator will, upon written request of a Claimant, make available copies of all forms and instructions necessary to file a claim for benefits or advise the Claimant where such forms and instructions may be obtained. If the claim relates to disability benefits, then the Plan Administrator shall designate a sub-committee to conduct the initial review of the claim (and applicable references below to the Plan Administrator shall mean such sub-committee).
b. Denial of Claim:
A claim for benefits under this Agreement will be denied if the Bank determines that the Claimant is not entitled to receive benefits under the Agreement. Notice of a denial shall be furnished the Claimant within a reasonable period of time after receipt of the claim for benefits by the Plan Administrator. This time period shall not exceed more than ninety (90) days after the receipt of the properly submitted claim. In the event that the claim for benefits pertains to disability, the Plan Administrator shall provide written notice within forty-five (45) days. However, if the Plan Administrator determines, in its discretion, that an extension of time for processing the claim is required, such extension shall not exceed an additional ninety (90) days. In the case of a claim for disability benefits, the forty-five (45) day review period may be extended for up to thirty (30) days if necessary due to circumstances beyond the Plan Administrator’s control, and for an additional thirty (30) days, if necessary. Any extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan Administrator expects to render the determination on review.
c. Content of Notice:
The Plan Administrator shall provide written notice to every Claimant who is denied a claim for benefits which notice shall set forth the following:
(i.) | The specific reason or reasons for the denial; |
(ii.) | Specific reference to pertinent Agreement provisions on which the denial is based; |
(iii.) | A description of any additional material or information necessary for the Claimant to perfect the claim, and any explanation of why such material or information is necessary; and |
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(iv.) | Any other information required by applicable regulations, including with respect to disability benefits. |
d. Review Procedure:
The purpose of the Review Procedure is to provide a method by which a Claimant may have a reasonable opportunity to appeal a denial of a claim to the Plan Administrator for a full and fair review. The Claimant, or his duly authorized representative, may:
(i.) | Request a review upon written application to the Plan Administrator. Application for review must be made within sixty (60) days of receipt of written notice of denial of claim. If the denial of claim pertains to disability, application for review must be made within one hundred eighty (180) days of receipt of written notice of the denial of claim; |
(ii.) | Review and copy (free of charge) pertinent Agreement documents, records and other information relevant to the Claimant’s claim for benefits; |
(iii.) | Submit issues and concerns in writing, as well as documents, records, and other information relating to the claim. |
e. Decision on Review:
A decision on review of a denied claim shall be made in the following manner:
(i.) | The Plan Administrator may, in its sole discretion, hold a hearing on the denied claim. If the Claimant’s initial claim is for disability benefits, any review of a denied claim shall be made by members of the Plan Administrator other than the original decision maker(s) and such person(s) shall not be a subordinate of the original decision maker(s). The decision on review shall be made promptly, but generally not later than sixty (60) days after receipt of the application for review. In the event that the denied claim pertains to disability, such decision shall not be made later than forty- five (45) days after receipt of the application for review. If the Plan Administrator determines that an extension of time for processing is required, written notice of the extension shall be furnished to the Claimant prior to the termination of the initial sixty (60) day period. In no event shall the extension exceed a period of sixty (60) days from the end of the initial period. In the event the denied claim pertains to disability, written notice of such extension shall be furnished to the Claimant prior to the termination of the initial forty-five (45) day period. In no event shall the extension exceed a period of thirty (30) days from the end of the initial period. The extension notice shall indicate the special circumstances requiring an extension of time and the date by which the Plan Administrator expects to render the determination on review. |
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(ii.) | The decision on review shall be in writing and shall include specific reasons for the decision written in an understandable manner with specific references to the pertinent Agreement provisions upon which the decision is based. |
(iii.) | The review will take into account all comments, documents, records and other information submitted by the Claimant relating to the claim without regard to whether such information was submitted or considered in the initial benefit determination. Additional considerations shall be required in the case of a claim for disability benefits. For example, the claim will be reviewed without deference to the initial adverse benefits determination and, if the initial adverse benefit determination was based in whole or in part on a medical judgment, the Plan Administrator will consult with a health care professional with appropriate training and experience in the field of medicine involving the medical judgment. The health care professional who is consulted on appeal will not be the same individual who was consulted during the initial determination or the subordinate of such individual. If the Plan Administrator obtained the advice of medical or vocational experts in making the initial adverse benefits determination (regardless of whether the advice was relied upon), the Plan Administrator will identify such experts. |
(iv.) | The decision on review will include a statement that the Claimant is entitled to receive, upon request and free of charge, reasonable access to, and copies of, all documents, records or other information relevant to the Claimant’s claim for benefits. |
f. Exhaustion of Remedies:
A Claimant must follow the claims review procedures under this Agreement and exhaust his or her administrative remedies before taking any further action with respect to a claim for benefits.
C. Arbitration:
If claimants continue to dispute the benefit denial based upon completed performance of this Agreement or the meaning and effect of the terms and conditions thereof, then claimants may submit the dispute to an Arbitrator for final arbitration. The Arbitrator shall be selected by mutual agreement of the Bank and the claimants. The Arbitrator shall operate under any generally recognized set of arbitration rules. The parties hereto agree that they and their heirs, personal representatives, successors and assigns shall be bound by the decision of such Arbitrator with respect to any controversy properly submitted to it for determination.
Where a dispute arises as to the Bank’s discharge of the Executive “For Cause,” such dispute shall likewise be submitted to arbitration as above described and the parties hereto agree to be bound by the decision thereunder.
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IN WITNESS WHEREOF, the parties hereto acknowledge that each has carefully read this amended and restated Agreement and executed the Agreement effective as of the first day set forth hereinabove, and that, upon execution, each has received a conforming copy.
WELLESLEY BANK | |||
Wellesley, MA | |||
/s/ Leslie B. Shea | By: | /s/ Thomas J. Fontaine | |
Witness | Thomas J. Fontaine | ||
/s/ Leslie B. Shea | /s/ Theodore Parker | ||
Witness | Theodore Parker, Chair Compensation Committee |
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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(s) 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 which 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: May 10, 2018 | /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(s) 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 which 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: May 10, 2018 | /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 March 31, 2018, 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) | ||
May 10, 2018 | ||
By: | /s/ Michael W. Dvorak | |
Michael W. Dvorak | ||
Chief Financial Officer and Treasurer | ||
(principal financial and accounting officer) | ||
May 10, 2018 |
Document And Entity Information - shares |
3 Months Ended | |
---|---|---|
Mar. 31, 2018 |
Apr. 30, 2018 |
|
Document Information [Line Items] | ||
Document Type | 10-Q | |
Amendment Flag | false | |
Document Period End Date | Mar. 31, 2018 | |
Document Fiscal Year Focus | 2018 | |
Document Fiscal Period Focus | Q1 | |
Entity Registrant Name | Wellesley Bancorp, Inc. | |
Entity Central Index Key | 0001526952 | |
Current Fiscal Year End Date | --12-31 | |
Entity Filer Category | Smaller Reporting Company | |
Trading Symbol | WEBK | |
Entity Common Stock, Shares Outstanding | 2,506,532 |
CONSOLIDATED BALANCE SHEETS [Parenthetical] - $ / shares |
Mar. 31, 2018 |
Dec. 31, 2017 |
---|---|---|
Preferred Stock, Par or Stated Value Per Share | $ 0.01 | $ 0.01 |
Preferred Stock, Shares Authorized | 1,000,000 | 1,000,000 |
Preferred Stock, Shares Issued | 0 | 0 |
Common Stock, Par or Stated Value Per Share | $ 0.01 | $ 0.01 |
Common Stock, Shares Authorized | 14,000,000 | 14,000,000 |
Common Stock, Shares, Issued | 2,506,532 | 2,506,532 |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY - USD ($) $ in Thousands |
Total |
Common Stock [Member] |
Additional Paid-in Capital [Member] |
Retained Earnings [Member] |
Accumulated Other Comprehensive Income (loss) [Member] |
Unearned Compensation - ESOP [Member] |
---|---|---|---|---|---|---|
Balance at Dec. 31, 2016 | $ 55,214 | $ 25 | $ 24,703 | $ 31,999 | $ (229) | $ (1,284) |
Balance (in shares) at Dec. 31, 2016 | 2,484,852 | |||||
Comprehensive income | 1,030 | $ 0 | 0 | 881 | 149 | 0 |
Dividends paid to common stockholders | (100) | 0 | 0 | (100) | 0 | 0 |
Share-based compensation - equity incentive plan | 154 | 0 | 154 | 0 | 0 | 0 |
ESOP shares committed to be allocated | 88 | 0 | 56 | 0 | 0 | 32 |
Balance at Mar. 31, 2017 | 56,386 | $ 25 | 24,913 | 32,780 | (80) | (1,252) |
Balance (in shares) at Mar. 31, 2017 | 2,484,852 | |||||
Balance at Dec. 31, 2017 | 59,245 | $ 25 | 25,601 | 34,736 | 39 | (1,156) |
Balance (in shares) at Dec. 31, 2017 | 2,506,532 | |||||
Comprehensive income | 784 | $ 0 | 0 | 1,437 | (653) | 0 |
Reclassification related to Tax Cuts and Jobs Act | 0 | 0 | 0 | (7) | 7 | 0 |
Dividends paid to common stockholders | (127) | 0 | 0 | (127) | 0 | 0 |
Share-based compensation - equity incentive plan | 107 | 0 | 107 | 0 | 0 | 0 |
ESOP shares committed to be allocated | 94 | 0 | 61 | 0 | 0 | 33 |
Balance at Mar. 31, 2018 | $ 60,103 | $ 25 | $ 25,769 | $ 36,039 | $ (607) | $ (1,123) |
Balance (in shares) at Mar. 31, 2018 | 2,506,532 |
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY [Parenthetical] - $ / shares |
3 Months Ended | |
---|---|---|
Mar. 31, 2018 |
Mar. 31, 2017 |
|
Dividends paid to common stockholders, per share | $ 0.05 | $ 0.04 |
ESOP shares committed to be allocated, Shares | 3,209 | 3,209 |
BASIS OF PRESENTATION AND CONSOLIDATION |
3 Months Ended | |
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Mar. 31, 2018 | ||
Organization, Consolidation and Presentation of Financial Statements [Abstract] | ||
Basis of Accounting [Text Block] | NOTE 1 BASIS OF PRESENTATION AND CONSOLIDATION The accompanying unaudited interim consolidated financial statements include the accounts of Wellesley Bancorp, Inc. (the “Company”) and its wholly-owned subsidiary, Wellesley Bank (the “Bank”), the principal operating entity, and its wholly-owned subsidiaries: Wellesley Securities Corporation, which engages in the business of buying, selling and dealing in securities exclusively on its own behalf; Wellesley Investment Partners, LLC, formed to provide investment management services for individuals, not-for-profit entities and businesses; and Central Linden, LLC, to hold, manage and sell foreclosed real estate. All significant intercompany balances and transactions have been eliminated in consolidation. Assets under management at Wellesley Investment Partners, LLC are not included in these consolidated financial statements because they are not assets of the Company. These financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information, and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2017 Annual Report on Form 10-K. The results for the three months ended March 31, 2018 are not necessarily indicative of the results that may be expected for the year ending December 31, 2018 or for any other period. |
LOAN POLICIES |
3 Months Ended | |
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Mar. 31, 2018 | ||
Accounting Policies [Abstract] | ||
Loan Portfolio [Text Block] | NOTE 2 LOAN POLICIES The loan portfolio consists of real estate, commercial and other loans to the Company’s customers in our primary market areas in eastern Massachusetts. The ability of the Company’s debtors to honor their contracts is dependent upon the economy in general and the state of real estate and construction sectors within our markets. Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred loan origination fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. Interest is generally not accrued on loans which are identified as impaired or loans which are ninety days or more past due. Past due status is based on the contractual terms of the loan. Interest income previously accrued on such loans is reversed against current period interest income. Interest income on non-accrual loans is recognized only to the extent of interest payments received and is first applied to the outstanding principal balance when collectibility of principal is in doubt. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured through sustained payment performance for at least six months. Allowance for loan losses The allowance for loan losses is established through a provision for loan losses charged to earnings as losses are estimated to occur. Loan losses are charged against the allowance when management believes the uncollectibility of the loan balance is confirmed. Subsequent recoveries are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, allocated and unallocated components. 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 2018 or 2017. The qualitative factor adjustments are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows: Residential real estate The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent and does not originate subprime loans. Most loans in this segment are collateralized by one-to-four family residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment. Commercial real estate Loans in this segment are primarily income-producing properties in the Company’s primary market areas in eastern Massachusetts. The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management typically obtains rent rolls annually and continually monitors the cash flows of these loans. Construction Loans in this segment include speculative construction loans primarily on residential properties for which payment is derived from the sale of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions. Residential construction loans in this segment also include loans to build one-to-four family owner-occupied properties which are subject to the same credit quality factors as residential real estate. Commercial Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment. Home equity lines of credit Loans in this segment are collateralized by one-to-four family residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment. Other consumer Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower. Allocated component The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the fair value of the loan or, if the loan is collateral dependent, by the fair value of the collateral, less estimated costs to sell. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan are lower than the carrying value of that loan. Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify performing individual residential and consumer loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring ("TDR"). All TDRs are initially classified as impaired. Unallocated component An unallocated component is maintained to cover additional uncertainties in management’s estimation of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. |
COMPREHENSIVE INCOME |
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Stockholders' Equity Note [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comprehensive Income (Loss) Note [Text Block] | 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:
|
RECENT ACCOUNTING AND REGULATORY PRONOUNCEMENTS |
3 Months Ended | |
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Mar. 31, 2018 | ||
Accounting Changes and Error Corrections [Abstract] | ||
New Accounting Pronouncements and Changes in Accounting Principles [Text Block] | NOTE 4 RECENT ACCOUNTING AND REGULATORY PRONOUNCEMENTS Effective January 1, 2018, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). The amendments in this update supersede the revenue recognition requirements in Topic 605, Revenue Recognition, including most industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. The core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company's primary source of revenue is interest income on financial assets, which is explicitly excluded from the scope of the new guidance. In addition, management determined that the timing of the Company’s recognition of wealth management fees did not change materially. As a result, adopting this update did not have a material impact on the Company’s consolidated financial statements. Effective January 1, 2018, the Company adopted ASU 2016-01, Financial Instruments-Overall (Subtopic 825-10) Recognition and Measurement of Financial Assets and Financial Liabilities, to address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. The key provision included in the ASU is that equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) will be measured at fair value with changes in fair value recognized in net income and the elimination of the requirement for public business entities to disclose the methods and significant assumptions used to estimate the fair value for financial instruments measured at amortized cost. This ASU also requires companies to use an “exit price” fair value when measuring the fair values of financial instruments. The adoption of this update did not have a significant impact on the consolidated financial statements, as the Company does not currently invest in equity securities. Effective January 1, 2018, the Company adopted ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. The amendments in this ASU provide cash flow statement classification guidance for certain areas where diversification existed in practice. The adoption of this update did not have a significant impact on the consolidated financial statements. Effective January 1, 2018, the Company adopted ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. The amendments in this update require that in the statement of cash flows, amounts generally described as restricted cash and restricted cash equivalents are included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts. The adoption of this update did not have a significant impact on the consolidated financial statements. Effective January 1, 2018, the Company adopted ASU 2017-09, Compensation-Stock Compensation (Topic 718) to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, Compensation-Stock Compensation, to a change in terms or conditions of a share-based payment award. The adoption of this update did not have a significant impact on the consolidated financial statements. Effective January 1, 2018, the Company adopted ASU 2018-02, Income Statement Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. The purpose of this ASU is to eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Reform Act of 2017. Upon adoption of this update, the Company recorded a reclassification of $7 thousand to increase accumulated other comprehensive income and decrease retained earnings. In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which requires a lessee to record a right-to-use asset and liability representing the obligation to make lease payments for long-term leases. This ASU will be effective for public business entities for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. It is expected that assets and liabilities will increase based on the present value of remaining lease payments for leases in place at the adoption date; however, this is not expected to be material to the Company's results of operations or financial position. Management continues to evaluate the extent of potential impact the new guidance will have on the Company’s consolidated financial statements. In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure expected credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. Credit losses on available-for-sale debt securities should be measured in a manner similar to current GAAP; however, recognized credit losses will be presented as an allowance rather than as a write-down. This ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods. Management is evaluating the provisions of the Update, and will closely monitor developments and additional guidance to determine the potential impact on the Company's consolidated financial statements. Management is currently working with a third party software service provider to ensure proper mapping and alignment of critical instrument-specific data. |
SECURITIES AVAILABLE FOR SALE |
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Investments, Debt and Equity Securities [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Investments in Debt and Marketable Equity Securities (and Certain Trading Assets) Disclosure [Text Block] | NOTE 5 SECURITIES AVAILABLE FOR SALE The amortized cost and fair value of securities available for sale, with gross unrealized gains and losses, follows:
There were no sales of available-for-sale securities for the three months ended March 31, 2018 and 2017. The amortized cost and fair value of debt securities by contractual maturity at March 31, 2018 are as follows:
Expected maturities may differ from contractual maturities because the issuer, in certain instances, has the right to call or prepay obligations with or without call or prepayment penalties. 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:
Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluations. At March 31, 2018, various debt securities have unrealized losses with aggregate depreciation of 2.1% from their aggregate amortized cost basis. These unrealized losses relate principally to the effect of interest rate changes on the fair value of debt securities and not an increase in credit risk of the issuers. As the Company does not intend to sell the securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost, which may be maturity, the Company does not consider these securities to be other-than-temporarily impaired at March 31, 2018. |
LOANS AND ALLOWANCE FOR LOAN LOSSES |
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Notes and Loans Payable, Current [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Loans, Notes, Trade and Other Receivables Disclosure [Text Block] | NOTE 6 LOANS AND ALLOWANCE FOR LOAN LOSSES A summary of the ending balances of loans is as follows:
The following table summarizes the changes in the allowance for loan losses by portfolio segment for the three months ended March 31, 2018 and 2017:
Further information pertaining to the allowance for loan losses is as follows:
The following is a summary of past due and non-accrual loans at March 31, 2018 and December 31, 2017:
The following is a summary of impaired loans:
Further information pertaining to impaired loans follows:
No additional funds are committed to be advanced in connection with impaired loans. There were no new troubled debt restructurings recorded during the three months ended March 31, 2018 and 2017. There were no TDRs that defaulted, generally considered 90 days past due or longer, during the three months ended March 31, 2018 and 2017, and for which default was within one year of the restructure date. TDRs did not have a material impact on the allowance for loan losses for the three months ended March 31, 2018 and 2017. Credit Quality Information The Company utilizes an eleven-grade internal loan rating system for commercial real estate, construction and commercial loans. Loans rated 1-4: Loans in these categories are considered “pass” rated loans with low to average risk. Loans rated 5: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management. Loans rated 6: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected. Loans rated 7: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable. Loans rated 8: Loans in this category are considered “loss” or uncollectible and of such little value that their continuance as loans is not warranted. Loans rated 9: Loans in this category only include commercial loans under $25 thousand with no other outstandings or relationships with the Company that are not rated for credit quality on an annual basis. Loans rated 10: Loans in this category include loans which otherwise require rating, but which have not been rated, or loans for which the Company’s loan policy does not require rating. Loans rated 11: Loans in this category include credit commitments/relationships that cannot be rated due to a lack of financial information or inaccurate financial information. If, within 60 days of the assignment of an 11 rating, information is still not available to allow a standard rating, the credit will be rated 6. On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial loans. During each calendar year, the Company engages an independent third party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process. On a monthly basis, the Company reviews the residential real estate and consumer loan portfolio for credit quality primarily through the use of delinquency reports. The following table presents the Company’s loans by risk rating:
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FAIR VALUES OF FINANCIAL INSTRUMENTS |
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Financial Liabilities Fair Value Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Financial Instruments Disclosure [Text Block] | NOTE 7 FAIR VALUES OF FINANCIAL INSTRUMENTS Fair value hierarchy The Company groups its assets measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Level 1 Valuation is based on quoted market prices in active exchange markets for identical assets and liabilities. Valuations are obtained from readily available pricing sources. Level 2 Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities. Valuations are obtained from readily available pricing sources. Level 3 Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. Level 3 assets include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as those for which the determination of fair value requires significant management judgment or estimation. Transfers between levels are recognized at the end of a reporting period, if applicable. Determination of fair value The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances there are no quoted market prices for the Company’s various assets and liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the assets and liabilities. Assets and liabilities measured at fair value on a recurring basis Assets and liabilities measured at fair value on a recurring basis at March 31, 2018 and December 31, 2017 are summarized below.
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 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. There were no liabilities measured at fair value on a recurring basis at December 31, 2017 Assets measured at fair value on a non-recurring basis The Company may also be required, from time to time, to measure certain other financial assets at fair value on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market (“LOCOM”) accounting or write-downs of individual assets. Fair values for loans held for sale are based on commitments in effect from investors or prevailing market rates. There are no assets or liabilities measured at fair value on a non-recurring basis at March 31, 2018 and December 31, 2017. 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.
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EMPLOYEE STOCK OWNERSHIP PLAN |
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Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | ||||||||||||||||||||||
Compensation and Employee Benefit Plans [Text Block] | NOTE 8 EMPLOYEE STOCK OWNERSHIP PLAN The Bank maintains an Employee Stock Ownership Plan (the “ESOP”) to provide eligible employees the opportunity to own Company stock. This plan is a tax-qualified retirement plan for the benefit of all Company employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax limits. The Company granted a loan to the ESOP to purchase shares of the Company’s common stock on the closing date of the Company’s mutual to stock conversion in 2012. As of March 31, 2018, the ESOP held 180,512 shares or 7.2% of the common stock outstanding on that date. The loan is payable annually over 15 years at the rate of 3.25% per annum. The loan can be prepaid without penalty. Loan payments are expected to be funded by cash contributions from the Bank. The loan is secured by the shares purchased, which are held in a suspense account for allocation among participants as the loan is repaid. Cash dividends paid on allocated shares are reinvested into shares to participants and cash dividends paid on unallocated shares will be used to repay the outstanding debt of the ESOP. Shares used as collateral to secure the loan are released and available for allocation to eligible employees as the principal and interest on the loan is paid. Shares held by the ESOP at March 31, 2018 include the following:
The fair value of unallocated shares was $3.3 million at March 31, 2018. Total compensation expense recognized in connection with the ESOP for the three months ended March 31, 2018 and March 31, 2017 was $94 thousand and $88 thousand, respectively. |
EQUITY INCENTIVE PLANS |
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Disclosure of Compensation Related Costs, Share-based Payments [Text Block] | NOTE 9 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. 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. Stock Options A summary of option activity under the 2012 Equity Incentive Plan for the Three months ended March 31, 2018 is presented below:
For the three months ended March 31, 2018 and 2017, compensation expense applicable to the stock options was $9 thousand and $53 thousand, respectively. There was no recognized tax benefit related to this expense for the period ended March 31, 2018. The recognized tax benefit related to this expense was $10 thousand for the period ended March 31, 2017. Unrecognized compensation expense for non-vested stock options totaled $60 thousand as of March 31, 2018, which will be recognized over the remaining weighted average vesting period of 1.5 years. Stock Awards There was no activity in non-vested restricted stock awards under the 2016 or the 2012 Equity Incentive Plan for the three months ended March 31, 2018. For the three months ended March 31, 2018 and 2017, compensation expense applicable to the stock awards was $98 thousand and $101 thousand, respectively, and the recognized tax benefit related to this expense was $27 thousand and $40 thousand, respectively. Unrecognized compensation expense for non-vested restricted stock totaled $754 thousand as of March 31, 2018, which will be recognized over the remaining weighted average vesting period of 3.51 years. |
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Earnings Per Share [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share [Text Block] | NOTE 10 EARNINGS PER COMMON SHARE Basic earnings per share represents net income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Unallocated ESOP shares are not deemed outstanding for earnings per share calculations. Under the Company’s 2012 and 2016 Equity Incentive Plans, stock awards contain non-forfeitable dividend rights. Accordingly, these shares are considered outstanding for computation of basic earnings per share. Potential common shares that may be issued by the Company relate to outstanding stock options and are determined using the treasury stock method.
There were no anti-dilutive options for the three months ended March 31, 2018 and 2017. 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. |
LOAN POLICIES (Policies) |
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Mar. 31, 2018 | ||
Accounting Policies [Abstract] | ||
Loans and Leases Receivable, Allowance for Loan Losses Policy [Policy Text Block] | LOAN POLICIES The loan portfolio consists of real estate, commercial and other loans to the Company’s customers in our primary market areas in eastern Massachusetts. The ability of the Company’s debtors to honor their contracts is dependent upon the economy in general and the state of real estate and construction sectors within our markets. Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred loan origination fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method. Interest is generally not accrued on loans which are identified as impaired or loans which are ninety days or more past due. Past due status is based on the contractual terms of the loan. Interest income previously accrued on such loans is reversed against current period interest income. Interest income on non-accrual loans is recognized only to the extent of interest payments received and is first applied to the outstanding principal balance when collectibility of principal is in doubt. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured through sustained payment performance for at least six months. Allowance for loan losses The allowance for loan losses is established through a provision for loan losses charged to earnings as losses are estimated to occur. Loan losses are charged against the allowance when management believes the uncollectibility of the loan balance is confirmed. Subsequent recoveries are credited to the allowance. The allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, allocated and unallocated components. 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 2018 or 2017. The qualitative factor adjustments are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows: Residential real estate The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent and does not originate subprime loans. Most loans in this segment are collateralized by one-to-four family residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment. Commercial real estate Loans in this segment are primarily income-producing properties in the Company’s primary market areas in eastern Massachusetts. The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment. Management typically obtains rent rolls annually and continually monitors the cash flows of these loans. Construction Loans in this segment include speculative construction loans primarily on residential properties for which payment is derived from the sale of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions. Residential construction loans in this segment also include loans to build one-to-four family owner-occupied properties which are subject to the same credit quality factors as residential real estate. Commercial Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment. Home equity lines of credit Loans in this segment are collateralized by one-to-four family residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment. Other consumer Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower. Allocated component The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the fair value of the loan or, if the loan is collateral dependent, by the fair value of the collateral, less estimated costs to sell. An allowance is established when the discounted cash flows (or collateral value) of the impaired loan are lower than the carrying value of that loan. Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify performing individual residential and consumer loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed. The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring ("TDR"). All TDRs are initially classified as impaired. Unallocated component An unallocated component is maintained to cover additional uncertainties in management’s estimation of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. |
COMPREHENSIVE INCOME (Tables) |
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Schedule of Accumulated Other Comprehensive Income (Loss) [Table Text Block] | The components of accumulated other comprehensive income (loss) and related tax effects are as follows:
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SECURITIES AVAILABLE FOR SALE (Tables) |
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Investments, Debt and Equity Securities [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Available-for-sale Securities [Table Text Block] | The amortized cost and fair value of securities available for sale, with gross unrealized gains and losses, follows:
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Investments Classified by Contractual Maturity Date [Table Text Block] | The amortized cost and fair value of debt securities by contractual maturity at March 31, 2018 are as follows:
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Available-for-sale Securities, Continuous Unrealized Loss Position, Fair Value [Table Text Block] | 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:
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LOANS AND ALLOWANCE FOR LOAN LOSSES (Tables) |
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Notes and Loans Payable, Current [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Accounts, Notes, Loans and Financing Receivable [Table Text Block] | A summary of the ending balances of loans is as follows:
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Schedule of Credit Losses Related to Financing Receivables, Current and Noncurrent [Table Text Block] | The following table summarizes the changes in the allowance for loan losses by portfolio segment for the three months ended March 31, 2018 and 2017:
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Allowance for Credit Losses on Financing Receivables [Table Text Block] | Further information pertaining to the allowance for loan losses is as follows:
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Past Due Financing Receivables [Table Text Block] | The following is a summary of past due and non-accrual loans at March 31, 2018 and December 31, 2017:
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Impaired Financing Receivables [Table Text Block] | The following is a summary of impaired loans:
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Impaired Financing Receivables By Class Of Loans [Table Text Block] | Further information pertaining to impaired loans follows:
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Financing Receivable Credit Quality Indicators [Table Text Block] | The following table presents the Company’s loans by risk rating:
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FAIR VALUES OF FINANCIAL INSTRUMENTS (Tables) |
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Financial Liabilities Fair Value Disclosure [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Fair Value, Assets and Liabilities Measured on Recurring Basis [Table Text Block] | Assets and liabilities measured at fair value on a recurring basis at March 31, 2018 and December 31, 2017 are summarized below.
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Fair Value, by Balance Sheet Grouping [Table Text Block] | Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.
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EMPLOYEE STOCK OWNERSHIP PLAN (Tables) |
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Mar. 31, 2018 | ||||||||||||||||||||||
Disclosure of Compensation Related Costs, Share-based Payments [Abstract] | ||||||||||||||||||||||
Employee Stock Ownership Plan ESOP Status Of Entity Shares Held [Table Text Block] | Shares held by the ESOP at March 31, 2018 include the following:
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EQUITY INCENTIVE PLANS (Tables) |
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Equity [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Share-based Compensation, Stock Options, Activity [Table Text Block] | A summary of option activity under the 2012 Equity Incentive Plan for the Three months ended March 31, 2018 is presented below:
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EARNINGS PER COMMON SHARE (Tables) |
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Earnings Per Share [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Earnings Per Share, Basic and Diluted [Table Text Block] | Potential common shares that may be issued by the Company relate to outstanding stock options and are determined using the treasury stock method.
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LOAN POLICIES (Details Textual) |
3 Months Ended |
---|---|
Mar. 31, 2018 | |
Residential Portfolio Segment [Member] | |
Accounts, Notes, Loans and Financing Receivable [Line Items] | |
Loan To Value Ratio | 80.00% |
Maximum [Member] | |
Accounts, Notes, Loans and Financing Receivable [Line Items] | |
Time Period To Capture Relevant Loan Loss Data | 10 years |
COMPREHENSIVE INCOME (Details) - USD ($) $ in Thousands |
3 Months Ended | 12 Months Ended |
---|---|---|
Mar. 31, 2018 |
Dec. 31, 2017 |
|
Accumulated Other Comprehensive Income (Loss) [Line Items] | ||
Unrealized holding gains (losses) on securities available for sale | $ (828) | $ 44 |
Tax effect | 221 | (5) |
Net-of tax amount | $ (607) | $ 39 |
RECENT ACCOUNTING AND REGULATORY PRONOUNCEMENTS (Details Textual) $ in Thousands |
3 Months Ended |
---|---|
Mar. 31, 2018
USD ($)
| |
Reclassification from AOCI, Current Period, Tax | $ 0 |
Accounting Standards Update 2018-02 [Member] | |
Reclassification from AOCI, Current Period, Tax | $ 7 |
SECURITIES AVAILABLE FOR SALE (Details 1) $ in Thousands |
Mar. 31, 2018
USD ($)
|
---|---|
Available-for-sale Securities, Debt Maturities, Amortized Cost | |
Within 1 year | $ 5,716 |
After 1 year to 5 years | 18,812 |
After 5 years to 10 years | 9,839 |
After 10 years | 7,505 |
Available-for-sale Securities, Debt Maturities, Single Maturity Date, Amortized Cost Basis, Total | 41,872 |
Mortgage- and asset-backed securities | 26,165 |
Available-for-sale Debt Securities, Amortized Cost Basis, Total | 68,037 |
Available-for-sale Securities, Debt Maturities, Fair Value | |
Within 1 year | 5,710 |
After 1 year to 5 years | 18,471 |
After 5 years to 10 years | 9,748 |
After 10 years | 7,466 |
Available-for-sale Securities, Debt Maturities, Single Maturity Date, Fair Value Total | 41,395 |
Mortgage- and asset-backed securities | 25,814 |
Available-for-sale Securities, Debt Securities, Fair Value Total | $ 67,209 |
SECURITIES AVAILABLE FOR SALE (Details Textual) |
Mar. 31, 2018 |
---|---|
Schedule of Available-for-sale Securities [Line Items] | |
Unrealized Losses Debt Securities Aggregate Depreciation Percentage | 2.10% |
LOANS AND ALLOWANCE FOR LOAN LOSSES (Details) - USD ($) $ in Thousands |
Mar. 31, 2018 |
Dec. 31, 2017 |
---|---|---|
Total loans | $ 685,621 | $ 692,377 |
Less: Allowance for loan losses | (6,218) | (6,153) |
Net deferred origination costs | 106 | 78 |
Loans, net | 679,509 | 686,302 |
Commercial loan [Member] | ||
Total loans | 59,018 | 67,971 |
Consumer loan [Member] | ||
Total loans | 38,402 | 36,592 |
Residential - fixed [Member] | ||
Total loans | 35,724 | 31,433 |
Residential - variable [Member] | ||
Total loans | 303,692 | 297,593 |
Commercial Real Estate [Member] | ||
Total loans | 141,001 | 138,784 |
Construction [Member] | ||
Total loans | 107,784 | 120,004 |
Secured [Member] | ||
Total loans | 53,495 | 62,333 |
Unsecured [Member] | ||
Total loans | 5,523 | 5,638 |
Home equity lines of credit [Member] | ||
Total loans | 38,179 | 36,378 |
Other Consumer [Member] | ||
Total loans | 223 | 214 |
Real estate loans [Member] | ||
Total loans | $ 588,201 | $ 587,814 |
LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 4) - USD ($) $ in Thousands |
Mar. 31, 2018 |
Dec. 31, 2017 |
---|---|---|
Total impaired loans Recorded Investment | $ 736 | $ 748 |
Total impaired loans Unpaid Principal Balance | 883 | 899 |
Residential Real Estate [Member] | ||
Impaired loans Recorded Investment, Without a Valuation Allowance | 170 | 172 |
Impaired loans Unpaid Principal Balance, Without a Valuation Allowance | 188 | 189 |
Commercial Real Estate [Member] | ||
Impaired loans Recorded Investment, Without a Valuation Allowance | 566 | 576 |
Impaired loans Unpaid Principal Balance, Without a Valuation Allowance | $ 695 | $ 710 |
LOANS AND ALLOWANCE FOR LOAN LOSSES (Details 5) - USD ($) $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2018 |
Mar. 31, 2017 |
|
Average Recorded Investment | $ 741 | $ 761 |
Interest Income Recognized | 22 | 2 |
Interest Income Recognized on Cash Basis | 20 | 0 |
Residential real estate [Member] | ||
Average Recorded Investment | 171 | 178 |
Interest Income Recognized | 2 | 2 |
Interest Income Recognized on Cash Basis | 0 | 0 |
Commercial real estate [Member] | ||
Average Recorded Investment | 570 | 583 |
Interest Income Recognized | 20 | 0 |
Interest Income Recognized on Cash Basis | $ 20 | $ 0 |
LOANS AND ALLOWANCE FOR LOAN LOSSES (Details Textual) - USD ($) $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2018 |
Dec. 31, 2017 |
|
Loans and Leases Receivable, Gross | $ 685,621 | $ 692,377 |
Loan rated 9 [Member] | Maximum [Member] | Commercial Loan [Member] | ||
Loans and Leases Receivable, Gross | $ 25 | |
Credit Rating Eleven [Member] | Maximum [Member] | ||
Period After Credit Rating Assignment | 60 days |
EMPLOYEE STOCK OWNERSHIP PLAN (Details) - shares |
Mar. 31, 2018 |
Mar. 31, 2017 |
---|---|---|
Employee Stock Ownership Plan (ESOP) Disclosures [Line Items] | ||
Allocated | 64,969 | |
Committed to be allocated | 3,209 | 3,209 |
Unallocated | 112,334 | |
Total | 180,512 |
EMPLOYEE STOCK OWNERSHIP PLAN (Details Textual) - USD ($) $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2018 |
Mar. 31, 2017 |
|
Employee Stock Ownership Plan (ESOP) Disclosures [Line Items] | ||
Employee Stock Ownership Plan ESOP Percent Of Shares Authorized To Be Purchased | 7.20% | |
Employee Stock Ownership Plan ESOP Debt Structure Direct Loan Term | 15 years | |
Employee Stock Ownership Plan ESOP Debt Structure Direct Loan Interest Rate | 3.25% | |
Employee Stock Ownership Plan ESOP Cost Of Committed To Be Released Shares | $ 3,300 | |
Employee Stock Ownership Plan (ESOP), Shares in ESOP | 180,512 | |
Employee Stock Ownership Plan (ESOP), Compensation Expense | $ 94 | $ 88 |
EQUITY INCENTIVE PLANS (Details) - 2012 Equity Incentive Plan [Member] $ / shares in Units, shares in Thousands, $ in Thousands |
3 Months Ended |
---|---|
Mar. 31, 2018
USD ($)
$ / shares
shares
| |
Options | |
Outstanding at beginning of period | shares | 212 |
Exercised | shares | 0 |
Forfeited | shares | 0 |
Outstanding at end of period | shares | 212 |
Options exercisable at end of period | shares | 194 |
Weighted Average Exercise Price | |
Outstanding at beginning of period | $ / shares | $ 16.05 |
Exercised | $ / shares | 0 |
Forfeited | $ / shares | 0 |
Outstanding at end of period | $ / shares | 16.05 |
Options exercisable at end of period | $ / shares | $ 15.3 |
Weighted Average Remaining Contractual Term | |
Outstanding at end of period | 4 years 11 months 5 days |
Options exercisable at end of period | 4 years 6 months 25 days |
Aggregate intrinsic value | |
Outstanding | $ | $ 2,915 |
Options exercisable at end of period | $ | $ 2,664 |
EARNINGS PER COMMON SHARE (Details) - USD ($) $ / shares in Units, $ in Thousands |
3 Months Ended | |
---|---|---|
Mar. 31, 2018 |
Mar. 31, 2017 |
|
Schedule Of Computation Of Basic And Diluted Earnings Per Common Share [Line Items] | ||
Net income applicable to common stock | $ 1,437 | $ 881 |
Average number of common shares issued | 2,506,000 | 2,485,000 |
Less: Average unallocated ESOP shares | (114,000) | (127,000) |
Average number of common shares outstanding used to calculate basic earnings per common share | 2,392,592 | 2,358,074 |
Effect of dilutive stock options | 93,000 | 84,000 |
Average number of common shares outstanding used to calculate diluted earnings per share | 2,485,222 | 2,441,993 |
Earnings per common share: | ||
Basic | $ 0.6 | $ 0.37 |
Diluted | $ 0.58 | $ 0.36 |
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