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EX-31.1 - EXHIBIT 31.1 - Wellesley Bancorp, Inc.a50918102_ex311.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549

FORM 10-Q

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

For the quarterly period ended June 30, 2014

OR

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

For the transition period from ______________ to _____________
 

Commission file number:  001-35352
 

                  WELLESLEY BANCORP, INC.                    
(Exact name of registrant as specified in its charter)
 
                       Maryland                                                 45-3219901                   
(State or other jurisdiction of incorporation or
organization)
(I.R.S. Employer Identification No.)
   
40 Central Street, Wellesley, Massachusetts       02482     
(Address of principal executive offices) (Zip Code)
 
                          (781) 235-2550                                
(Registrant’s telephone number, including area code)
 
                                                                  Not Applicable                                                                      
(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes    X     No____

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of  “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):
 
  Large accelerated filer  ____ Accelerated filer  ____
  Non-accelerated filer    ____  Smaller reporting company    X   
 
(Do not check if a smaller reporting company)
 
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ___  No   X   

As of August 1, 2014, there were 2,452,465 shares of the registrant’s common stock outstanding.
 
 
 

 
 
WELLESLEY BANCORP, INC.

Table of Contents

   
Page
No.
     
 
     
 
1
     
 
2
     
 
3
     
 
4
     
 
5
     
22
     
33
     
34
     
     
35
     
35
     
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36 
 
 
 

 
 
PART I.  FINANCIAL INFORMATION

Item 1.   Financial Statements (Unaudited)

CONSOLIDATED BALANCE SHEETS
             
   
June 30, 2014
   
December 31, 2013
 
   
(Dollars in thousands)
 
Assets
           
             
Cash and due from banks
  $ 2,775     $ 2,685  
Short-term investments
    14,804       16,382  
Total cash and cash equivalents
    17,579       19,067  
                 
Certificates of deposit
    100       100  
Securities available for sale, at fair value
    39,852       36,672  
Federal Home Loan Bank of Boston stock, at cost
    3,300       3,176  
Loans held for sale
    1,598       825  
                 
Loans
    421,338       387,931  
Less allowance for loan losses
    (4,613 )     (4,213 )
Loans, net
    416,725       383,718  
                 
Bank-owned life insurance
    6,724       6,607  
Premises and equipment, net
    3,762       3,805  
Accrued interest receivable
    1,133       1,044  
Net deferred tax asset
    2,043       1,997  
Other assets
    1,488       1,509  
                 
Total assets
  $ 494,304     $ 458,520  
                 
Liabilities and Stockholders’ Equity
               
                 
Deposits:
               
Noninterest-bearing
  $ 48,518     $ 44,864  
Interest-bearing
    338,468       312,654  
      386,986       357,518  
 
               
Short-term borrowings
    4,000       9,000  
Long-term debt
    53,500       43,500  
Accrued expenses and other liabilities
    1,708       1,713  
Total liabilities
    446,194       411,731  
                 
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,  2,452,465 shares issued and outstanding at
June 30, 2014; 2,454,465 shares issued and outstanding at
December 31,  2013
    24       24  
Additional paid-in capital
    23,146       22,845  
Retained earnings
    26,187       25,423  
Accumulated other comprehensive income
    358       166  
Unearned compensation – ESOP
    (1,605 )     (1,669 )
Total stockholders' equity
    48,110       46,789  
                 
Total liabilities and stockholders' equity
  $ 494,304     $ 458,520  

See accompanying notes to consolidated financial statements.
 
 
1

 
 
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

   
Three Months
Ended June 30,
   
Six Months
Ended June 30,
 
   
2014
   
2013
   
2014
   
2013
 
   
(Dollars in thousands, except per share data)
 
Interest and dividend income:
                       
Interest and fees on loans and loans held for sale
  $ 4,617     $ 3,770     $ 8,972     $ 7,516  
Debt securities:
                               
Taxable
    183       133       331       277  
Tax-exempt
    46       47       90       99  
Interest on short-term investments and certificates of deposit
    8       8       16       18  
Dividends on FHLB stock
    11       2       23       4  
Total interest and dividend income
    4,865       3,960       9,432       7,914  
Interest expense:
                               
Deposits
    695       538       1,363       1,077  
Short-term borrowings
    1       1       6       1  
Long-term debt
    150       134       278       256  
Total interest expense
    846       673       1,647       1,334  
                                 
Net interest income
    4,019       3,287       7,785       6,580  
Provision for loan losses
    220       100       400       200  
Net interest income, after provision for loan losses
    3,799       3,187       7,385       6,380  
                                 
Noninterest income:
                               
Customer service fees
    37       40       71       80  
Mortgage banking activities
    17       52       39       76  
Gain on sale of securities, net
    --       103       16       103  
Income on bank-owned life insurance
    59       57       117       102  
Wealth management fees
    124       93       236       181  
Loss on extinguishment of debt
    --       (93 )     --       (93 )
Miscellaneous
    (4 )     11       7       23  
Total noninterest income
    233       263       486       472  
Noninterest expense:
                               
Salaries and employee benefits
    1,991       1,521       3,864       2,951  
Occupancy and equipment
    483       356       983       696  
Data processing
    145       116       301       242  
FDIC insurance
    68       67       135       133  
Professional fees
    251       132       428       264  
Other general and administrative
    387       303       798       626  
Total noninterest expense
    3,325       2,495       6,509       4,912  
                                 
Income before income taxes
    707       955       1,362       1,940  
Provision for income taxes
    276       372       537       762  
                                 
Net income
    431       583       825       1,178  
                                 
Other comprehensive income (loss):
                               
Unrealized holding (losses) gains on available-for-sale securities
    219       (604 )     332       (715 )
Reclassification adjustment for net securities gains realized in income
    --       (103 )     (16 )     (103 )
Tax effect
    (87 )     279       (124 )     323  
                                 
Total other comprehensive income (loss)
    132       (428 )     192       (495 )
                                 
Comprehensive income
  $ 563     $ 155     $ 1,017     $ 683  
Earnings per common share:
                               
Basic
  $ 0.19     $ 0.26     $ 0.36     $ 0.52  
Diluted
  $ 0.19     $ 0.26     $ 0.36     $ 0.52  
Weighted average shares outstanding:
                               
Basic
    2,290,488       2,285,860       2,290,167       2,289,699  
Diluted
    2,294,515       2,285,860       2,292,764       2,289,699  

See accompanying notes to consolidated financial statements.
 
 
2

 
 
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
Six Months Ended June 30, 2014 and 2013
 
   
Common Stock
   
Additional
Paid-in
   
Retained 
   
Accumulated
Other
Comprehensive
   
Unearned
Compensation-
   
Total
Stockholders’ 
 
   
Shares
   
Amount
    Capital     Earnings    
Income
   
ESOP
    Equity  
   
(Dollars in thousands)
 
       
Balance at December 31, 2012
    2,480,610     $ 24     $ 22,751     $ 23,203     $ 790     $ (1,797 )   $ 44,971  
                                                         
Net income
    --       --       --       1,178       --       --       1,178  
Other comprehensive loss
    --       --       --       --       (495 )     --       (495 )
Purchase and retirement of
treasury shares
    (20,120 )     --       (314 )     --       --       --       (314 )
Share- based compensation-
equity incentive plan
    --       --       228       --       --       --       228  
ESOP shares committed to be
allocated  (6,419)
    --       --       39       --       --       64       103  
                                                         
Balance at June 30, 2013
    2,460,490     $ 24     $ 22,704     $ 24,381     $ 295     $ (1,733 )   $ 45,671  
                                                         
                                                         
Balance at December 31, 2013
    2,454,465     $ 24     $ 22,845     $ 25,423     $ 166     $ (1,669 )   $ 46,789  
                                                         
Net income
    --       --       --       825       --       --       825  
Other comprehensive income
    --       --       --       --       192       --       192  
Dividends paid to common
stockholders ($0.025 per share)
    --       --       --       (61 )     --       --       (61 )
Share- based compensation-
equity incentive plan
    --       --       239       --       --       --       239  
Issuance of stock under stock
option plan
    400       --       6       --       --       --       6  
Restricted stock forfeitures
    (2,400 )     --       --       --       --       --       --  
ESOP shares committed to be
allocated  (6,419)
    ---       --       56       --       --       64       120  
                                                         
Balance at June 30, 2014
    2,452,465     $ 24     $ 23,146     $ 26,187     $ 358     $ (1,605 )   $ 48,110  
 
See accompanying notes to consolidated financial statements.

 
3

 
 
CONSOLIDATED STATEMENTS OF CASH FLOWS

   
Six Months Ended June 30,
 
   
2014
   
2013
 
   
(In thousands)
 
Cash flows from operating activities:
           
Net  income
  $ 825     $ 1,178  
Adjustments to reconcile net income  to net cash provided
by operating activities:
               
Provision for loan losses
    400       200  
Depreciation and amortization
    286       179  
Net amortization of securities
    78       125  
Gain on sale of securities, net
    (16 )     (103 )
Principal amount of loans sold
    8,799       21,125  
Loans originated for sale
    (9,611 )     (14,558 )
Accretion of net deferred loan fees
    (194 )     (224 )
Income on bank-owned life insurance
    (117 )     (102 )
Deferred income tax (benefit) provision
    (170 )     175  
ESOP expense
    120       103  
Share-based compensation
    239       228  
Net change in other assets and liabilities
    (58 )     (370 )
Net cash provided by operating activities
    581       7,956  
                 
Cash flows from investing activities:
               
Maturities of certificates of deposit
    --       250  
Activity in securities available for sale:
               
Maturities, prepayments and calls
    4,968       4,967  
Purchases
    (8,797 )     (3,256 )
Sales
    903       1,429  
Purchase of Federal Home Loan Bank stock
    (124 )     (794 )
Loan originations, net of principal payments
    (33,174 )     (35,904 )
Additions to premises and equipment
    (258 )     (582 )
Net cash used by investing activities
    (36,482 )     (33,890 )
                 
Cash flows from financing activities:
               
Net increase in deposits
    29,468       3,219  
Proceeds from long-term debt
    14,000       17,500  
Repayments of long-term debt
    (4,000 )     (6,500 )
(Decrease) increase in short-term borrowings
    (5,000 )     6,000  
Issuance of stock under stock option plan
    6       --  
Purchase and retirement of treasury stock
    --       (314 )
Cash dividends paid on common stock
    (61 )     --  
Net cash provided by financing activities
    34,413       19,905  
                 
Net change in cash and cash equivalents
    (1,488 )     (6,029 )
                 
Cash and cash equivalents at beginning period
    19,067       18,218  
Cash and cash equivalents at end of period
  $ 17,579     $ 12,189  
                 
Supplementary information:
               
Interest paid
  $ 1,643     $ 1,319  
Income taxes paid
    703       873  
 
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 the Bank’s 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, formed to hold manage and sell foreclosed real estate.  All significant intercompany balances and transactions have been eliminated in consolidation.  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 2013 Annual Report on Form 10-K.  The results for the three or six months ended June 30, 2014 are not necessarily indicative of the results that may be expected for the year ending December 31, 2014 or for any other period.
 
NOTE 2 – LOAN POLICIES
 
The loan portfolio consists of real estate, commercial and other loans to the Company’s customers in our primary market areas in eastern Massachusetts.  The ability of the Company’s debtors to honor their contracts is dependent upon the economy in general and the real estate and construction sectors within our markets.
 
Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, generally 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 not accrued on loans when identified as impaired or loans which are ninety days or more past due.  Past due status is based on the contractual terms of the loan.  Interest income previously accrued on such loans is reversed against current period interest income.  Interest income on non-accrual loans is recognized only to the extent of interest payments received and is first applied to the outstanding principal balance when collectibility of principal is in doubt.  Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured through sustained payment performance for at least six months.

Allowance for loan losses
 
The allowance for loan losses is established through a provision for loan losses charged to earnings as losses are estimated to have occurred.  Loan losses are charged against the allowance when management believes the uncollectibility of the loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance.
 
The allowance for loan losses is evaluated on a regular basis by management.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.  The allowance consists of general, allocated and unallocated components, as further described below.
 
 
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, which generally ranges from 3-10 years.  This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume, concentrations and terms of loans; effects of changes in risk selection and underwriting standards and other changes in lending policies, procedures and practices; 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 2014 or 2013.
 
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.
 
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 obtains rent rolls annually and continually monitors the cash flows of these loans.
 
Construction – Loans in this segment include speculative construction loans for which payment is derived from sale of the property and construction loans on primary residences for which repayment is dependent on the credit quality of the residential borrower.  Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.   
 
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 Company generally does not hold a first mortgage position on homes that secure home equity lines of credit. 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 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 is 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 consumer loans (residential, home equity lines of credit, personal and other consumer secured 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, 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 and related tax effects are as follows:
 
   
June 30,
   
December 31,
 
   
2014
   
2013
 
   
(In thousands)
 
       
Unrealized holding gains on securities available for sale
  $ 587     $ 271  
Tax effect
    (229 )     (105 )
                 
Net-of tax amount
  $ 358     $ 166  
 
NOTE 4 RECENT ACCOUNTING AND REGULATORY PRONOUNCEMENTS
 
In July 2013, federal banking regulators approved minimum requirements for both the quantity and quality of capital held by community banking institutions. The rule includes a new minimum ratio of common equity Tier 1 capital to risk weighted assets of 4.5%, raises the minimum ratio of Tier 1 capital to risk-weighted assets from 4.0% to 6.0% and includes a minimum leverage ratio of 4.0% 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 bonus payments to executive officers. The Company must begin complying with the rule on January 1, 2015. The Company is currently evaluating the rule but believes that it will continue to exceed all the minimum capital ratio requirements.
 
 
7

 
 
NOTE 5 – SECURITIES AVAILABLE FOR SALE
 
The amortized cost and fair value of securities available for sale, with gross unrealized gains and losses, follows:

   
June 30, 2014
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
 
 
   
(In thousands)
 
                         
Residential mortgage-backed securities:
                       
Government National Mortgage Association
  $ 6,460     $ 165     $ (4 )   $ 6,621  
Government-sponsored enterprises
    9,173       220       (50 )     9,343  
SBA and other asset-backed securities
    7,956       97       (53 )     8,000  
State and municipal bonds
    5,259       166       (5 )     5,420  
Government-sponsored enterprise obligations
    4,000       12       (9 )     4,003  
Corporate bonds
    6,417       74       (26 )     6,465  
                                 
    $ 39,265     $ 734     $ (147 )   $ 39,852  


   
December 31, 2013
 
   
Amortized
Cost
   
Gross
Unrealized
Gains
   
Gross
Unrealized
Losses
   
Fair
Value
 
 
 
   
(In thousands)
 
                         
Residential mortgage-backed securities:
                       
Government National Mortgage Association
  $ 7,673     $ 191     $ (33 )   $ 7,831  
Government-sponsored enterprises
    9,622       153       (93 )     9,682  
SBA and other asset-backed securities
    5,089       15       (90 )     5,014  
State and municipal bonds
    4,025       101       (6 )     4,120  
Government-sponsored enterprise obligations
    2,060       4       (50 )     2,014  
Corporate bonds
    7,932       79       --       8,011  
                                 
    $ 36,401     $ 543     $ (272 )   $ 36,672  

The amortized cost and fair value of debt securities by contractual maturity at June 30, 2014 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.
 
   
June 30, 2014
 
   
Amortized
Cost
   
Fair
Value
 
 
   
(In thousands)
 
Within 1 year
  $ 1,249     $ 1,253  
After 1 year to 5 years
    5,506       5,575  
After 5 years to 10 years
    4,367       4,436  
After 10 years
    4,554       4,624  
      15,676       15,888  
Mortgage- and asset-backed securities
    23,589       23,964  
                 
    $ 39,265     $ 39,852  

 
8

 
 
Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:
 
   
Less Than Twelve Months
   
Over Twelve Months
 
   
Gross
Unrealized
Losses
   
Fair
Value
   
Gross
Unrealized
Losses
   
Fair
Value
 
 
 
   
(In thousands)
 
June 30, 2014
                       
Residential mortgage-backed securities:
                       
Government National Mortgage Association
  $ --     $ --     $ (4 )   $ 576  
Government-sponsored enterprises
    (6 )     1,049       (44 )     850  
SBA and other asset-backed securities
    (3 )     241       (50 )     1,153  
State and municipal bonds
    --       --       (5 )     547  
Government-sponsored enterprise obligations
    --       --       (9 )     991  
Corporate bonds
    (26 )     1,699       --       --  
                                 
    $ (35 )   $ 2,989     $ (112 )   $ 4,117  
                                 
December 31, 2013
                               
Residential mortgage-backed securities:
                               
Government National Mortgage Association
  $ (33 )   $ 1,496     $ --     $ --  
Government-sponsored enterprises
    (93 )     4,864       --       --  
SBA and other asset-backed securities
    (90 )     2,164       --       --  
State and municipal bonds
    (2 )     251       (4 )     296  
Government-sponsored enterprise obligations
    (50 )     949       --       --  
                                 
    $ (268 )   $ 9,724     $ (4 )   $ 296  
 
 
9

 
 
 NOTE 6 – LOANS AND ALLOWANCE FOR LOAN LOSSES

A summary of the balances of loans is as follows:

   
June 30,
   
December 31,
 
   
2014
   
2013
 
   
(In thousands)
 
Real estate loans:
           
Residential – fixed
  $ 21,509     $ 21,101  
Residential – variable
    183,011       160,618  
Commercial
    85,825       82,367  
Construction
    88,796       80,103  
      379,141       344,189  
                 
Commercial loans:
               
Secured
    14,268       14,977  
Unsecured
    1,369       1,453  
      15,637       16,430  
                 
Consumer loans:
               
Home equity lines of credit
    26,381       27,092  
Other
    323       415  
      26,704       27,507  
                 
Total loans
    421,482       388,126  
                 
Less:
               
Allowance for loan losses
    (4,613 )     (4,213 )
Net deferred origination fees
    (144 )     (195 )
                 
Loans, net
  $ 416,725     $ 383,718  
 
 
10

 
 
The following table summarizes the changes in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2014 and 2013:

   
Residential
Real Estate
   
Commercial
Real Estate
   
Construction
   
Commercial
   
Home
Equity
   
Other
Consumer
   
Unallocated
   
Total
 
   
(In thousands)
 
Three Months Ended June 30, 2014
                                               
                                                 
Allowance at March 31, 2014
  $ 1,425     $ 1,021     $ 1,307     $ 390     $ 208     $ 6     $ 36     $ 4,393  
                                                                 
Provision (credit) for loan losses
    70       (20 )     136       (39 )     98       (2 )     (23 )     220  
                                                                 
Allowance at June 30, 2014
  $ 1,495     $ 1,001     $ 1,443     $ 351     $ 306     $ 4     $ 13     $ 4,613  
                                                                 
Three Months Ended June 30, 2013
                                                               
                                                                 
Allowance at March 31, 2013
  $ 1,259     $ 919     $ 976     $ 404     $ 192     $ 11     $ 147     $ 3,908  
                                                                 
Provision (credit) for loan losses
    134       11       11       43       (25 )     (4 )     (70 )     100  
                                                                 
Allowance at June 30, 2013
  $ 1,393     $ 930     $ 987     $ 447     $ 167     $ 7     $ 77     $ 4,008  
                                                                 
       
Six Months Ended June 30, 2014
                                                               
                                                                 
Allowance at December 31, 2013
  $ 1,351     $ 887     $ 1,305     $ 426     $ 213     $ 7     $ 24     $ 4,213  
                                                                 
Provision (credit) for loan losses
    144       114       138       (75 )     93       (3 )     (11 )     400  
                                                                 
Allowance at June 30, 2014
  $ 1,495     $ 1,001     $ 1,443     $ 351     $ 306     $ 4     $ 13     $ 4,613  
                                                                 
Six Months Ended June 30, 2013
                                                               
                                                                 
Allowance at December 31, 2012
  $ 1,157     $ 1,041     $ 918     $ 456     $ 171     $ 11     $ 90     $ 3,908  
                                                                 
Provision (credit) for loan losses
    236       (111 )     69       27       (4 )     (4 )     (13 )     200  
Loans charged off
    --       --       --       (36 )     --       --       --       (36 )
                                                                 
Allowance at June 30, 2013
  $ 1,393     $ 930     $ 987     $ 447     $ 167     $ 7     $ 77     $ 4,008  

 
11

 
 
Additional information pertaining to the allowance for loan losses at June 30, 2014 and December 31, 2013 is as follows:

   
Residential
Real Estate
   
Commercial
Real Estate
   
Construction
   
Commercial
   
Home
Equity
   
Other
Consumer
   
Unallocated
   
Total
 
   
(In thousands)
 
June 30, 2014
                                               
                                                 
Allowance related to loans
individually evaluated and
deemed to be impaired
  $ --     $ 86     $ --     $ --     $ 95     $ --     $ --     $ 181  
                                                                 
Allowance related to loans
individually evaluated and
not deemed impaired, and
those collectively evaluated
for impairment
    1,495       915       1,443       351       211       4       13       4,432  
                                                                 
Total allowance
  $ 1,495     $ 1,001     $ 1,443     $ 351     $ 306     $ 4     $ 13     $ 4,613  
                                                                 
Impaired loan balances
individually evaluated and
deemed to be impaired
  $ 413     $ 2,601     $ --     $ 27     $ 426     $ --     $ --     $ 3,467  
                                                                 
Loan balances individually
evaluated and not deemed
impaired, and those collectively
evaluated for impairment
    204,107       83,224       88,796       15,610       25,955       323       --       418,015  
                                                                 
Total loans
  $ 204,520     $ 85,825     $ 88,796     $ 15,637     $ 26,381     $ 323     $ --     $ 421,482  
                                                                 
                                                                 
December 31, 2013
                                                               
                                                                 
Allowance related to loans
individually evaluated and
deemed to be impaired
  $ --     $ --     $ --     $ --     $ --     $ --     $ --     $ --  
                                                                 
Allowance related to loans
individually evaluated and
not deemed impaired, and
those collectively evaluated
for impairment
    1,351       887       1,305       426       213       7       24       4,213  
                                                                 
Total allowance
  $ 1,351     $ 887     $ 1,305     $ 426     $ 213     $ 7     $ 24     $ 4,213  
                                                                 
Impaired loan balances
individually evaluated and
deemed to be impaired
  $ 425     $ 5,269     $ --     $ 34     $ 427     $ --     $ --     $ 6,155  
                                                                 
Loan balances individually
evaluated and not deemed
impaired, and those collectively
evaluated for impairment
    181,294       77,098       80,103       16,396       26,665       415       --       381,971  
                                                                 
Total loans
  $ 181,719     $ 82,367     $ 80,103     $ 16,430     $ 27,092     $ 415     $ --     $ 388,126  

 
12

 
 
The following is a summary of past due and non-accrual loans at June 30, 2014 and December 31, 2013:

   
30-59
Days
Past Due
   
60-89 Days
Past Due
   
Past Due 90
Days or
More
   
Total
Past Due
   
Past Due 90
Days or More
and Still
Accruing
   
Non-
accrual
Loans
 
   
(In thousands)
 
June 30, 2014
                                   
                                     
Residential real estate
  $ 1,001     $ --     $ --     $ 1,001     $ --     $ 413  
Commercial real estate
    2       --       791       793       --       2,601  
Commercial
    --       --       2       2       --       27  
Home equity lines of credit
    81       --       392       473       --       426  
                                                 
Total
  $ 1,084     $ --     $ 1,185     $ 2,269     $ --     $ 3,467  
                                                 
                                                 
       
December 31, 2013
                                               
                                                 
Residential real estate
  $ --     $ 335     $ 90     $ 425     $ --     $ 639  
Commercial real estate
    867       791       --       1,658       --       2,645  
Commercial
    --       --       34       34       --       34  
Home equity lines of credit
    136       308       583       1,027       191       427  
                                                 
Total
  $ $1,003     $ $1,434     $ $707     $ $3,144     $ $191     $ $3,745  
 
The following is a summary of impaired loans at June 30, 2014 and December 31, 2013:
 
   
June 30, 2014
   
December 31, 2013
 
   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
   
Recorded
Investment
   
Unpaid
Principal
Balance
   
Related
Allowance
 
   
(In thousands)
 
Impaired loans without a valuation allowance:
                                   
Residential real estate
  $ 413     $ 413     $ --     $ 425     $ 425     $ --  
Commercial real estate
    1,810       1,810       --       5,269       5,269       --  
Commercial
    27       27       --       34       34       --  
Home equity lines of credit
    34       34       --       427       427       --  
                                                 
Total
    2,284       2,284       --       6,155       6,155       --  
                                                 
Impaired loans with a valuation allowance:
                                               
Commercial real estate
    791       791       86       --       --       --  
Home equity lines of credit
    392       392       95       --       --       --  
                                                 
Total impaired loans
  $ 3,467     $ 3,467     $ 181     $ 6,155     $ 6,155     $ --  

 
13

 
 
Additional information pertaining to impaired loans follows:

   
Three Months Ended June 30, 2014
   
Six Months Ended June 30, 2014
 
   
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
  $ 419     $ 4     $ 10     $ 421     $ 8     $ 13  
Commercial real estate
    3,924       38       26       4,498       77       54  
Commercial
    28       --       --       29       1       1  
Home equity lines of credit
    427       4       --       427       8       --  
                                                 
Total
  $ 4,798     $ 46     $ 36     $ 5,375     $ 94     $ 68  

   
Three Months Ended June 30, 2013
   
Six Months Ended June 30, 2013
 
   
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
  $ 623     $ 4     $ 4     $ 612     $ 11     $ 11  
Commercial real estate
    6,228       85       58       6,156       202       148  
Commercial
    385       4       4       363       6       6  
Home equity lines of credit
    34       --       --       74       --       --  
Other consumer loans
    --       --       --       --       1       1  
                                                 
Total
  $ 7,270     $ 93     $ 66     $ 7,205     $ 220     $ 166  

No additional funds are committed to be advanced in connection with impaired loans.
 
There were no troubled debt restructurings recorded during the three and six months ended June 30, 2014 and 2013.
 
There were no troubled debt restructurings that defaulted during the three and six months ended June 30, 2014 and 2013, and for which default was within one year of the restructure date.

Credit Quality Information
 
The Company utilizes an eleven-grade internal loan rating system for commercial real estate, construction and commercial loans as follows:
 
Loans rated 1-3 and 31:  Loans in these categories are considered “pass” rated loans with low to average risk.
 
Loans rated 4:  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 5:  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 6:  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 7:  Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.
 
 
14

 
 
Category 8:  Loans in this category only include commercial loans under $25 thousand with no other outstandings or relationships with the Company.
 
Category 9:  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.
 
Category 10:  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 a 10 rating, information is still not available to allow a standard rating, the credit will be rated 5.
 
On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial loans.  During each calendar year, the Company engages an independent third party to review a significant portion of loans within these segments.  Management uses the results of these reviews as part of its annual review process.  On a monthly basis, the Company reviews the residential real estate and consumer loan portfolio for credit quality primarily through the use of delinquency reports.
 
The following table presents the Company’s loans by risk rating:
 
   
June 30, 2014
   
December 31, 2013
 
   
Commercial
Real Estate
   
Construction
   
Commercial
   
Total
   
Commercial
Real Estate
   
Construction
   
Commercial
   
Total
 
   
(In thousands)
 
                                                 
Loans rated 1 -3 and 31
  $ 76,864     $ 88,796     $ 15,142     $ 180,802     $ 71,547     $ 80,103     $ 15,019     $ 166,669  
Loans rated 4
    6,586       --       270       6,856       8,418       --       1,168       9,586  
Loans rated 5
    1,584       --       225       1,809       2,402       --       243       2,645  
Loans rated 6
    791       --       --       791       --       --       --       --  
                                                                 
Total
  $ 85,825     $ 88,796     $ 15,637     $ 190,258     $ 82,367     $ 80,103     $ 16,430     $ 178,900  

NOTE 7 – FAIR VALUES OF FINANCIAL INSTRUMENTS
 
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.  The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Fair value is best determined based upon quoted market prices.  However, in many instances, there are no quoted market prices for the Company’s various financial instruments.  In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.  Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.  Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.
 
Fair value hierarchy
 
The Company groups its assets generally measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.
 
Level 1 – Valuation is based on quoted market prices in active exchange markets for identical assets and liabilities.  Valuations are obtained from readily available pricing sources.
 
Level 2 – Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities.  Valuations are obtained from readily available pricing sources.
 
 
15

 
 
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 instruments 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.
 
The following methods and assumptions were used by the Company in estimating fair value disclosures:
 
Cash, cash equivalents and certificates of deposit:  The carrying amounts approximate fair values based on the short-term nature of the assets.
 
Securities available for sale:  Fair value measurements are obtained from a third-party pricing service and are not adjusted by management.  Securities measured at fair value in Level 2 are based on pricing 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.
 
FHLB stock:  The carrying value of FHLB stock is deemed to approximate fair value, based on the redemption provisions of the FHLB of Boston.
 
Loans held for sale:  Fair values are based on commitments in effect from investors or prevailing market prices.
 
Loans, net:  For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.  Fair values for other loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.  Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.
 
Deposits:  The fair values disclosed for non-certificate deposit accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts).  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.
 
Short-term borrowings:  The carrying amount of short-term borrowings approximates fair value, based on the short-term nature of the liabilities.
 
Long-term debt: The fair values of long-term debt are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.
 
Accrued interest: The carrying amounts of accrued interest approximate fair value.
 
Forward loan sale commitments and derivative loan commitments: Forward loan sale commitments and derivative loan commitments are based on fair values of the underlying mortgage loans and the probability of such commitments being exercised.
 
Off-balance sheet instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.  The fair values of these instruments are considered immaterial.
 
 
16

 
 
Assets and liabilities measured at fair value on a recurring basis
 
Assets and liabilities measured at fair value on a recurring basis at June 30, 2014 and December 31, 2013 are summarized below.   There were no liabilities measured at fair value on a recurring basis at June 30, 2014.
 
   
June 30, 2014
 
   
Level 1
   
Level 2
   
Level 3
   
Fair Value
 
   
(In thousands)
 
Assets
                       
Securities available for sale
  $ --     $ 39,852     $ --     $ 39,852  
Forward loan sale commitments
    --       4       --       4  
                                 
Total assets
  $ --     $ 39,856     $ --     $ 39,856  
                                 
   
December 31, 2013
 
   
Level 1
   
Level 2
   
Level 3
   
Fair Value
 
   
(In thousands)
 
Assets
                               
Securities available for sale
  $ --     $ 36,672     $ --     $ 36,672  
Forward loan sale commitments
    --       36       --       36  
                                 
Total assets
  $ --     $ 36,708     $ --     $ 36,708  
                                 
Liabilities
                               
Derivative loan commitments
  $ --     $ 12     $ --     $ 12  
 
Assets measured at fair value on a non-recurring basis

The Company may also be required, from time to time, to measure certain other financial assets at fair value on a non-recurring basis in accordance with generally accepted accounting principles.  These adjustments to fair value usually result from application of lower-of-cost-or-market (LOCOM) accounting or write-downs of individual assets.  The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets as of June 30, 2014 and December 31, 2013.

   
June 30, 2014
   
December 31, 2013
 
   
Level 1
   
Level 2
   
Level 3
   
Level 1
   
Level 2
   
Level 3
 
   
(In thousands)
 
Loans held for sale
  $ --     $ --     $ 1,598     $ --     $ --     $ 825  
Impaired loans
    --       --       1,183       --       --       --  
    $ --     $ --     $ 2,781     $ --     $ --     $ 825  

The following table presents the total (losses) gains on loans held for sale and impaired loans for the three and six month periods ended June 30, 2014 and 2013.
 
   
Three Months Ended
June 30,
 
Six Months Ended
 June 30,
 
   
2014
   
2013
   
2014
   
2013
 
   
(In thousands)
 
Loans held for sale
  $ (4 )   $ (125 )   $ 1     $ (160 )
Impaired loans
    (104 )     --       (181 )     --  
    $ (108 )   $ (125 )   $ (180 )   $ (160 )

 
17

 

Loans held for sale (LHFS) are evaluated for losses associated with the application of LOCOM accounting.  At June 30, 2014, a rise in market interest rates above contractual loan rates from the time LHFS were recorded is reflected as a reduction in the carrying value of the asset and a loss in recognized in current period earnings. Losses applicable to certain impaired loans are estimated using the appraised value of the underlying collateral considering discounting factors and adjusted for selling costs.  The loss is not recorded directly as an adjustment to current earnings, but rather as a component in determining the overall adequacy of the allowance for loan losses.  Adjustments to the estimated fair value of impaired loans may result in increases or decreases to the provision for loan losses.

There are no liabilities measured at fair value on a non-recurring basis at June 30, 2014 and December 31, 2013.

Summary of fair values of financial instruments
 
The estimated fair values and related carrying amounts of the Company’s financial instruments are outlined in the table below.  Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements.  Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.
 
   
Fair Value
 
   
Carrying
Amount
   
Level 1
   
Level 2
   
Level 3
   
Total
 
 
 
(In thousands)
 
June 30, 2014
     
                               
Financial assets:
                             
Cash and cash equivalents
  $ 17,579     $ 17,579     $ --     $ --     $ 17,579  
Certificates of deposit
    100       100       --       --       100  
Securities available for sale
    39,852       --       39,852       --       39,852  
FHLB stock
    3,300       --       --       3,300       3,300  
Loans held for sale
    1,598       --       1,598       --       1,598  
Loans, net
    416,725       --       --       417,564       417,564  
Accrued interest receivable
    1,133       --       --       1,133       1,133  
Forward loan sale commitments
    4       --       4       --       4  
                                         
Financial liabilities:
                                       
Deposits
  $ 386,986     $ --     $ --     $ 387,586     $ 387,586  
Short-term borrowings
    4,000       --       4,000       --       4,000  
Long-term debt
    53,500               53,616       --       53,616  
Accrued interest payable
    5       --       --       5       5  
                                         
December 31, 2013
     
                                         
Financial assets:
                                       
Cash and cash equivalents
  $ 19,067     $ 19,067     $ --     $ --     $ 19,067  
Certificates of deposit
    100       100       --       --       100  
Securities available for sale
    36,672       --       36,672       --       36,672  
FHLB stock
    3,176       --       --       3,176       3,176  
Loans held for sale
    825       --       825       --       825  
Loans, net
    383,718       --       --       383,420       383,420  
Accrued interest receivable
    1,044       --       --       1,044       1,044  
Forward loan sale commitments
    36       --       36       --       36  
                                         
Financial liabilities:
                                       
Deposits
  $ 357,518     $ --     $ --     $ 356,850     $ 356,850  
Short-term borrowings
    9,000       --       9,000       --       9,000  
Long-term debt
    43,500       --       43,493       --       43,493  
Accrued interest payable
    7       --       --       7       7  
Derivative loan commitments
    12       --       12       --       12  
 
 
18

 

NOTE 8 EMPLOYEE STOCK OWNERSHIP PLAN

The Bank maintains an Employee Stock Ownership Plan (“ESOP”) to provide eligible employees the opportunity to own Company stock.  This plan is a tax-qualified retirement plan for the benefit of all Bank 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 at the conversion date.  As of June 30, 2014, the ESOP held 191,674 shares or 7.81% of the common stock outstanding on that date.  The loan obtained by the ESOP from the Company to purchase common stock is payable annually over 15 years at the rate of 3.25% per annum.  The loan can be prepaid without penalty.  Loan payments are expected to be funded by cash contributions from the Bank.  The loan is secured by the shares purchased, which are held in a trust account for allocation among participants as the loan is repaid.  Cash dividends paid on allocated shares will be distributed to participants and cash dividends paid on unallocated shares will be used to repay the outstanding debt of the ESOP.  Shares used as collateral to secure the loan are released and available for allocation to eligible employees as the principal and interest on the loan is paid.

Shares held by the ESOP include the following:

   
June 30, 2014
 
       
Allocated
    24,778  
Committed to be allocated
    6,419  
Unallocated
    160,477  
         
      191,674  

The fair value of unallocated shares was approximately $3.0 million at June 30, 2014.

Total compensation expense recognized in connection with the ESOP for the three and six month periods ended June 30, 2014 was $60 thousand and $120 thousand, respectively.

NOTE 9 EQUITY INCENTIVE PLAN

Under the Company’s Equity Incentive Plan (the “Plan”), the Company may grant stock options to its employees and directors in the form of incentive stock options and non-qualified stock options for up to 240,751 shares.  The exercise price of each stock option shall not be less than the fair market value of the Company’s common stock on the date of grant, and the maximum term of each option is 10 years from the date of each award.  The vesting period is five years from the date of grant, with vesting at 20% per year.

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. Under the Equity Incentive Plan, the Company may also grant stock awards to management, employees and directors for up to 96,286 shares. 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.

 
19

 

Stock Options
A summary of option activity under the Plan for the six months ended June 30, 2014, 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   $ 15.45     8.80      
          Granted
  --     --        --      
          Exercised
  (1)     15.35     --      
          Forfeited
  (2)     15.35     --      
                       
     Outstanding at end of period
  209   $ 15.45     8.30   $ 738  
                         
     Options exercisable at end of period
  37   $ 15.35     8.25   $ 134  

For the three and six months ended June 30, 2014, share based compensation expense applicable to the stock options was $51 thousand and $102 thousand, respectively, and the recognized tax benefit related to this expense was $9 thousand and $19 thousand, respectively.

Unrecognized compensation expense for non-vested stock options totaled $670 thousand as of June 30, 2014, which will be recognized over the remaining vesting period of 3.30 years.

Stock Awards
The following table presents the activity in non-vested restricted stock awards under the Plan for the six months ended June 30, 2014:

   
Number of 
Shares
   
Weighted Average
Grant-date
Fair Value
 
   
(In thousands)
       
Non-vested restricted stock awards at beginning of period
    72     $ 15.43  
Restricted shares granted
    --       --  
Shares vested
    --       --  
Forfeited
    (2 )     15.35  
Non-vested restricted stock awards at end of period
    70       15.43  

For the three and six months ended June 30, 2014 and 2013, compensation expense applicable to the stock awards was $68 thousand and $137 thousand, respectively, and the recognized tax benefit related to this expense was $27 thousand and $55 thousand, respectively. Unrecognized compensation expense for non-vested restricted stock totaled $973 thousand as of June 30, 2014, which will be recognized over the remaining weighted average vesting period of 3.28 years.

NOTE 10 EARNINGS PER COMMON SHARE

Basic earnings per share represents 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.  Under the Company’s Equity Incentive Plan, stock awards granted on October 1, 2013 and 2012 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 restricted stock awards and are determined using the treasury stock method.
 
 
20

 

Earnings per common share have been computed as follows:
 
   
Three Months Ended
June 30,
     
Six Months Ended
June 30,
 
   
2014
     2013    
2014
      2013  
   
(In thousands)
 
                                 
Net income applicable to common stock
  $ 431     $ 583     $ 825     $ 1,178  
                                 
Average number of common shares issued
    2,452,570       2,460,780       2,453,554       2,466,224  
Less: Average unallocated ESOP shares
    (162,082 )     (174,920 )     (163,387 )     (176,525 )
                                 
Average number of common shares outstanding
   used to calculate basic earnings per common share
    2,290,488       2,285,860       2,290,167       2,289,699  
                                 
Effect of dilutive stock options
    4,027       --       2,597       --  
                                 
Average number of common shares outstanding used
   to calculate diluted earnings per share
    2,294,515       2,285,860       2,292,764       2,289,699  
Earnings per common share:
                               
   Basic
  $ 0.19     $ 0.26     $ 0.36     $ 0.52  
   Diluted
  $ 0.19     $ 0.26     $ 0.36     $ 0.52  

NOTE 11 – STOCK REPURCHASE PLAN
 
On October 1, 2012, the Board of Directors approved the repurchase of up to 96,286 shares, or approximately 4.0% of the Company’s outstanding common stock. At June 30, 2014, the Company had repurchased and retired 40,535 shares.
 
NOTE 12 – DIVIDENDS DECLARED
 
On June 4, 2014, the Company announced that its Board of Directors declared a quarterly cash dividend of $0.025 per share on the Company’s common stock.  The dividend was payable to stockholders of record on June 18, 2014.
 
 
21

 
 
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, changes in real estate values in our market area and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; the 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 2013 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 accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies.

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

Deferred Tax Assets.  Deferred tax assets and liabilities are reflected at currently enacted income tax rates applicable to the period in which the deferred tax assets or liabilities are expected to be realized or settled.  Management reviews deferred tax assets on a quarterly basis to identify any uncertainties pertaining to realization of such assets.  In determining whether a valuation allowance is required against deferred tax assets, management assesses historical and forecasted operating results, including a review of eligible carry-forward periods, tax planning opportunities and other relevant considerations.  We believe the accounting estimate related to the valuation allowance is a critical estimate because the underlying assumptions can change from period to period.  For example, tax law changes or variances in future projected operating performance could result in a change in the valuation allowance.  Should actual factors and conditions differ materially from those used by management, the actual realization of net deferred tax assets could differ materially from the amounts recorded in the financial statements.  If we were not able to realize all or part of our deferred tax assets in the future, an adjustment to the related valuation allowance would be charged to income tax expense in the period such determination was made and could have a negative impact on earnings.  In addition, if actual factors and conditions differ materially from those used by management, we could incur penalties and interest imposed by taxing authorities.  A valuation allowance was not required for the five-year charitable carry-forward created primarily by the contribution of 157,477 shares of the Company’s common stock to the Wellesley Charitable Foundation as part of the mutual to stock conversion.  Based on historical income it is expected that there will be sufficient income to be able to deduct the entire amount of the contribution over future years.
 
 
22

 

Comparison of Financial Condition at June 30, 2014 and December 31, 2013

General.  Total assets increased $35.8 million, or 7.8%, from $458.5 million at December 31, 2013 to $494.3 million at June 30, 2014.  Total asset growth was due to an increase in net loans of $33.0 million, or 8.6%, and an increase of $3.2 million, or 8.7%, in securities available for sale, partially offset by a reduction of $1.5 million, or 7.8%, in cash and cash equivalents.

Loans.  The $33.0 million increase in loans was due primarily to an increase of $22.8 million, or 12.5%, in residential real estate loans. We have continued to grow our residential lending activity through our internal loan origination efforts throughout our expanded CRA assessment area revised in conjunction with the opening of offices in Wellesley Lower Falls and Boston. Adjustable-rate residential mortgage loans increased $22.4 million, or 13.9%, to $183.0 million while fixed-rate residential loans increased $408 thousand, or 1.9%.  Construction loans increased $8.7 million, or 10.9%, primarily due to seasonal lending requirements of our borrowers.  At June 30, 2014, total past due loans decreased $875 thousand as compared to December 31, 2013, as fewer customers are experiencing payment difficulties.  Substantially all delinquent loans are secured by real estate collateral with values exceeding outstanding loan principal. Any losses expected on delinquent loans have been charged-off or reflected as specific reserves in the allowance for loan losses as of June 30, 2014.

Securities.  Total securities increased from $36.7 million at December 31, 2013 to $39.9 million at June 30, 2014, as excess liquid funds were invested in municipal securities,  SBA and other asset-backed securities.

Deposits.  Total deposits increased $29.5 million, or 8.2%, from $357.5 million at December 31, 2013 to $387.0 million at June 30, 2014.  Savings accounts increased $15.6 million primarily due to new account openings and the movement of funds into our premier relationship savings account offering.  Certificates of deposit increased $10.8 million as depositor funds were attracted to our premier relationship term certificate offerings. Demand deposits increased $3.7 million, or 8.2%, to $48.5 million as growth was realized in both retail and commercial accounts.

Borrowings.  We use borrowings from a variety of sources to supplement our supply of funds for loans and securities.  Long-term debt, consisting entirely of FHLB advances, increased $10.0 million, or 23.0%, for the six months ended June 30, 2014.  Long-term FHLB advances increased as we funded loan growth during the period with extended maturity advances at low rates.  Short-term borrowings consist entirely of advances from the FHLB with initial maturities less than one year.  Balances of short-term borrowings decreased $5.0 million, or 55.6%, since December 31, 2013 as funds available from growth in deposits replaced short-term borrowing requirements.

Stockholders’ Equity.  Stockholders’ equity increased $1.3 million, or 2.8%, from $46.8 million at December 31, 2013 to $48.1 million at June 30, 2014, primarily as a result of net income for the six month period of $825 thousand, share-based compensation related to the equity plans of $365 thousand, and the after-tax effect of increases in the fair value of available for sale securities, which contributed $192 thousand.

Results of Operations for the Three Months Ended June 30, 2014 and 2013

Overview.  Net income for the three months ended June 30, 2014 was $431 thousand, compared to net income of $583 thousand for the three months ended June 30, 2013.  The $152 thousand decrease was primarily due to an increase in noninterest expense and an increase in the provision for loan losses, offset by an increase in net interest income. Net interest income increased $732 thousand to $4.0 million in the 2014 quarter, while noninterest expense increased $830 thousand to $3.3 million in the same period.

Net Interest Income.  Net interest income for the three months ended June 30, 2014 increased $732 thousand, or 22.3%, as compared to the three months ended June 30, 2013.  The increase in net interest income was primarily due to increases in the average balances of loans, partially offset by a decline in loan yields and interest costs associated with an increase in the average balance of deposits.
 
 
23

 

Interest and dividend income increased $906 thousand, or 22.9%, from $4.0 million for the three-month period ended June 30, 2013 to $4.9 million for the three months ended June 30, 2014.  The average balance of interest-earning assets increased 24.4%, while the average rate earned on these assets decreased 5 basis points.  The decline in loan yields was due to new, lower yielding adjustable-rate real estate loans added to the portfolio and the downward re-pricing of loans in a continued low rate environment. The decline in earning asset yield was more than offset by the improvement in interest income attributable to asset growth.  Interest and fees on loans increased $847 thousand, or 22.5%, due to a 26.1% increase in the average balance of loans, partially offset by a 14 basis point decrease in the average rate received on loans.  Interest income from taxable securities increased $50 thousand, or 37.6%, due to a 21.8% increase in the average balance of taxable securities as compared to the prior year period.  The average rate earned on taxable securities of 1.99% increased 22 basis points compared to the same period in the prior year. Increases in yields on investment securities are due to the reinvestment of funds from maturing securities and excess liquid funds into higher yielding securities as longer-term investment yields have risen compared to prior year levels.

The increase in interest expense of $173 thousand was due to a $157 thousand increase in interest expense on deposit accounts related primarily to growth in deposit balances during the period, and an increase in rates paid on savings and money market accounts, while rates paid on certificates of deposit have declined. Interest paid on long-term FHLB advances increased $16 thousand to $150 thousand as average balances increased and rates paid on long-term FHLB advances declined.  The average rates paid on interest-bearing liabilities of 0.88% remained stable as compared to the prior year.  The increase in the cost of savings and money market accounts reflects the payment of premium rates on targeted products associated with our recent branch office openings. The continued long-term low interest rate environment has resulted in lower costs on certificates of deposit and long-term FHLB advances.  We experienced an increase in the average balance of interest-bearing deposits of 28.8% in the three-month period ended June 30, 2014, compared to the same period in 2013.

 
24

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

   
For the Three Months Ended June 30,
 
   
2014
   
2013
 
    Average     Interest     Average     Average     Interest     Average  
    Outstanding     Earned/     Yield/     Outstanding     Earned/     Yield/  
(Dollars in thousands)
 
Balance
   
Paid
   
Rate (1)
   
Balance
   
Paid
   
Rate (1)
 
Interest-earning assets:
                                   
Short-term investments
  $ 11,286     $ 7       0.27 %   $ 11,976     $ 7       0.25 %
Certificates of deposit
    100       1       0.22       350       1       0.42  
Debt securities:
                                               
Taxable
    36,833       183       1.99       30,242       133       1.77  
Tax-exempt
    5,414       46       3.40       5,034       47       3.71  
Total loans and loans held for sale
    412,040       4,617       4.49       326,802       3,770       4.63  
FHLB stock
    3,194       11       1.47       2,571       2       0.31  
Total interest-earning assets
    468,867       4,865       4.16       376,975       3,960       4.21  
Allowance for loan losses
    (4,469 )                     (3,959 )                
Total interest-earning assets less
allowance for loan losses
    464,398                       373,016                  
Noninterest-earning assets
    17,852                       13,627                  
Total assets
  $ 482,250                     $ 386,643                  
Interest-bearing liabilities:
                                               
Regular savings accounts
  $ 82,783       155       0.75 %   $ 47,657       58       0.49 %
NOW checking accounts
    23,975       22       0.36       24,623       22       0.36  
Money market accounts
    59,149       75       0.51       54,244       56       0.41  
Certificates of deposit
    170,588       443       1.04       134,677       402       1.20  
Total interest-bearing deposits
    336,495       695       0.83       261,201       538       0.83  
Short-term borrowings
    1,692       1       0.29       2,198       1       0.22  
Long-term debt
    48,423       150       1.22       41,456       134       1.28  
Total interest-bearing liabilities
    386,610       846       0.88       304,855       673       0.88  
Noninterest-bearing demand deposits
    46,619                       38,129                  
Other noninterest-bearing liabilities
    969                       1,903                  
Total liabilities
    434,198                       344,887                  
Stockholders’ equity
    48,052                       41,756                  
Total liabilities and stockholders’
equity
  $ 482,250                     $ 386,643                  
Net interest income
          $ 4,019                     $ 3,287          
Net interest rate spread (2)
                    3.28 %                     3.33 %
Net interest-earning assets (3)
  $ 82,257                     $ 72,120                  
Net interest margin (4)
                    3.44 %                     3.50 %
Average total interest-earning assets to
average total interest-bearing liabilities
    121.28 %                     123.66 %                

(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)
Represent total average interest-earning assets less total average interest-bearing liabilities.
(4)
Represents net interest income as a percent of average interest-earning assets.

 
25

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

   
Three Months Ended June 30, 2014
Compared to
Three Months Ended June 30, 2013
 
    Increase (Decrease)        
   
Due to
    Total Increase  
(In thousands)
 
Volume
   
Rate
   
(Decrease)
 
Interest-earning assets:
                 
Short-term investments                                                        
  $ --     $ --     $ --  
Certificates of deposit                                                        
    --       --       --  
Debt securities:
                       
Taxable                                                        
    32       18       50  
Tax-exempt                                                        
    6       (7 )     (1 )
Total loans and loans held for sale                                                        
    952       (105 )     847  
FHLB stock                                                        
    --       9       9  
Total interest-earning assets                                                     
    990       (85 )     905  
                         
Interest-bearing liabilities:
                       
Regular savings                                                        
    56       41       97  
NOW checking                                                        
    1       (1 )     --  
Money market                                                        
    5       14       19  
Certificates of deposit                                                        
    98       (57 )     41  
Total interest-bearing deposits                                                     
    160       (3 )     157  
Short-term borrowings                                                        
    --       --       --  
Long-term debt                                                        
    21       (5 )     16  
Total interest-bearing liabilities                                                     
    181       (8 )     173  
                         
Increase (decrease) in net interest income
  $ 809     $ (77 )   $ 732  

Provision for Loan Losses.  The provision for loan losses was $220 thousand for the three month period ended June 30, 2014, compared to $100 thousand for the three month period ended June 30, 2013.  In the 2014 period, the provision reflects growth in the loan portfolio, specifically real estate construction and residential loans, and the addition of separate specific reserves related to a commercial real estate loan and a home equity loan, partially offset by a reduction in certain loss factors due to management’s assessment of improving collateral values on certain real estate and commercial loan portfolios.
 
 
26

 

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

   
Three Months Ended
 
   
June 30,
 
(Dollars in thousands)
 
2014
   
2013
 
Balance at beginning of period                                                           
  $ 4,393     $ 3,908  
Provision for loan losses                                                           
    220       100  
Charge-offs                                                           
    --       --  
Recoveries                                                           
    --       --  
Net charge-offs                                                           
    --       --  
Allowance at end of period                                                           
  $ 4,613     $ 4,008  
Allowance for loan losses to nonperforming loans at end of period                                                           
    136.07 %     87.09 %
Allowance for loan losses to total loans at end of period                                                           
    1.09 %     1.20 %
Net charge-offs to average loans outstanding during the period                                                           
    -- %     -- %

Noninterest Income.  Noninterest income totaled $233 thousand, a decrease of $30 thousand or 11.4%. Wealth management fees increased $31 thousand, or 33.3%, from the comparable 2013 period. Income from mortgage banking activities in 2014 decreased $35 thousand as sales of longer-term mortgage loans have declined compared to the prior year.  In the three-month period ended June 30, 2013, we recorded $103 thousand gain on the sales of securities, and a loss of $93 thousand on the early extinguishment of $2.0 million of long-term FHLB advances.   We did not record similar transactions in the three month period ended June 30, 2014.

Noninterest Expense.  Noninterest expense increased $830 thousand to $3.3 million during the three months ended June 30, 2014, from $2.5 million for the three months ended June 30, 2013.  Factors that contributed to the increase in noninterest expense during the 2014 period were increased salaries and employee benefits of $470 thousand, or 31.0%, primarily attributable to additional personnel supporting our branch network and our residential and commercial lending operations. Occupancy and equipment expense increased $127 thousand resulting from normal rent increases and additional rent and other expense associated with expanded office space. Professional fees increased $119 thousand, or 90.2%, as we have incurred one-time charges of $95 thousand for professional service firms to facilitate certain staffing and contract negotiation matters on our behalf.

Income Taxes.  An income tax provision of $276 thousand was recorded during the quarter ended June 30, 2014, compared to a provision of $372 thousand in the comparable 2013 quarter.  The effective tax rate for the 2014 three-month period was 39.1%, compared with 39.0% for the 2013 three-month period.

Results of Operations for the Six Months Ended June 30, 2014 and 2013

Overview.  Net income for the six months ended June 30, 2014 was $825 thousand, compared to net income of $1.2 million for the six months ended June 30, 2013.  The $353 million decrease was primarily due to increased noninterest expense of $1.6 million, partially offset by increased net interest income of $1.2 million.

Net Interest Income.  Net interest income for the six months ended June 30, 2014 increased $1.2 million, or 18.3%, as compared to the six months ended June 30, 2013.  The increase in net interest income was primarily due to an increase in interest income of $1.5 million, or 19.2%, partially offset by an increase in interest expense of $313 thousand, or 23.5%, during the period.

Interest and dividend income increased to $9.4 million for the six months ended June 30, 2014 from $7.9 million for the six-month period ended June 30, 2013. The average balance of interest-earning assets increased 23.7%, while the average rate earned on these assets decreased 16 basis points.    Interest and fees on loans increased $1.5 million, or 19.4%, due to a 27.2% increase in the average balance of loans partially offset by a 30 basis point decrease in the average rate received on loans.  Interest income from taxable securities increased $54 thousand, or 19.5%, due to a 20 basis point increase in the average rate earned on taxable securities and a 7.0% increase in the average balance of taxable securities compared to the prior year period.
 
 
27

 

The increase in interest expense was primarily due to growth in the average balance of interest-bearing deposits, increasing interest costs by $286 thousand, or 26.6%, as compared to the prior year. Long-term debt expense increased $22 thousand as the average balance of long-term FHLB advances increased $7.7 million from $38.2 million to $45.9 million, partially offset by a decrease in rates paid on the advances of 12 basis points. The average rates paid on all interest-bearing liabilities decreased by 3 basis points from the comparative six-month period.  The decrease in the cost of deposits and borrowings was primarily due to the extended period of declining interest rates and a more cost-effective mix of funds. We experienced an increase in the average balance of interest-bearing deposits of 27.0% in the six-month period ended June 30, 2014 compared to the same period in 2013.

 
28

 

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

   
For the Six Months Ended June 30,
 
   
2014
   
2013
 
    Average     Interest     Average     Average     Interest     Average  
    Outstanding     Earned/    
Yield/
    Outstanding     Earned/     Yield/  
(Dollars in thousands)
 
Balance
   
Paid
   
Rate (1)
   
Balance
   
Paid
   
Rate (1)
 
Interest-earning assets:
                                   
Short-term investments
  $ 14,345     $ 15       0.23 %   $ 14,851     $ 17       0.23 %
Certificates of deposit
    100       1       0.22       473       1       0.43  
Debt securities:
                                               
Taxable
    34,394       331       1.94       32,137       277       1.74  
Tax-exempt
    5,154       90       3.51       5,488       99       3.65  
Total loans and loans held for sale
    404,436       8,972       4.47       317,891       7,516       4.77  
FHLB stock
    3,185       23       1.48       2,298       4       0.33  
Total interest-earning assets
    461,614       9,432       4.12       373,138       7,914       4.28  
Allowance for loan losses
    (4,371 )                     (3,911 )                
Total interest-earning assets less
allowance for loan losses
    457,243                       369,227                  
Noninterest-earning assets
    17,650                       13,919                  
Total assets
  $ 474,893                     $ 383,146                  
Interest-bearing liabilities:
                                               
Regular savings accounts
  $ 80,399       295       0.74 %   $ 45,255       107       0.48 %
NOW checking accounts
    24,267       43       0.36       24,891       42       0.34  
Money market accounts
    57,977       146       0.51       55,074       113       0.41  
Certificates of deposit
    168,070       879       1.05       135,254       815       1.21  
Total interest-bearing deposits
    330,713       1,363       0.83       260,474       1,077       0.83  
Short-term borrowings
    3,757       6       0.30       1,094       1       0.22  
Long-term debt
    45,887       278       1.21       38,174       256       1.33  
Total interest-bearing liabilities
    380,357       1,647       0.87       299,742       1,334       0.90  
Noninterest-bearing demand deposits
    45,746                       37,736                  
Other noninterest-bearing liabilities
    1,154                       2,251                  
Total liabilities
    427,257                       339,729                  
Stockholders’ equity
    47,636                       43,417                  
Total liabilities and stockholders’
equity
  $ 474,893                     $ 383,146                  
Net interest income
          $ 7,785                     $ 6,580          
Net interest rate spread (2)
                    3.25 %                     3.38 %
Net interest-earning assets (3)
  $ 81,257                     $ 73,396                  
Net interest margin (4)
                    3.40 %                     3.56 %
Average total interest-earning assets to
average total interest-bearing liabilities
    121.36 %                     124.49 %                

(1)
Ratios for the six month periods have been annualized.
(2)
Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities.
(3)
Represent total average interest-earning assets less total average interest-bearing liabilities.
(4)
Represents net interest income as a percent of average interest-earning assets.
 
 
29

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

   
Six Months Ended June 30, 2014
Compared to
Six Ended June 30, 2013
 
   
Increase (Decrease)
Due to
   
Total Increase
(Decrease)
 
(In thousands)
 
Volume
   
Rate
 
Interest-earning assets:
                 
Short-term investments                                                        
  $ (2 )   $ --     $ (2 )
Certificates of deposit                                                        
    --       --       --  
Debt securities:
                       
Taxable                                                        
    20       34       54  
Tax-exempt                                                        
    (6 )     (3 )     (9 )
Total loans and loans held for sale                                                        
    1,886       (430 )     1,456  
FHLB stock                                                        
    2       17       19  
Total interest-earning assets                                                     
    1,900       (382 )     1,518  
                         
Interest-bearing liabilities:
                       
Regular savings                                                        
    110       78       188  
NOW checking                                                        
    (1 )     3       2  
Money market                                                        
    6       26       32  
Certificates of deposit                                                        
    181       (117 )     64  
Total interest-bearing deposits                                                     
    296       (10 )     286  
Short-term borrowings                                                        
    4       1       5  
Long-term debt                                                        
    42       (20 )     23  
Total interest-bearing liabilities                                                     
    342       (29 )     313  
                         
Increase (decrease) in net interest income
  $ 1,558     $ (353 )   $ 1,205  

Provision for Loan Losses.  The provision for loan losses was $400 thousand for the six months ended June 30, 2014, compared to $200 thousand for the six months ended June 30, 2013.  In the 2014 period, the provision reflects growth in the loan portfolio, specifically real estate construction and residential loans, and the addition of separate specific reserves related to a commercial real estate loan and a home equity loan, partially offset by a reduction in certain loss factors due to management’s assessment of improving collateral values on certain real estate and commercial loan portfolios.   Changes in the loss factors and changes in the mix of loans held in portfolio to less risky residential real estate loans has resulted in a reduction in the ratio of the allowance for loan losses to total loans at June 30, 2014, as compared to the prior year.

 
30

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

   
Six Months Ended
 
   
June 30,
 
(Dollars in thousands)
 
2014
   
2013
 
Balance at beginning of period                                                           
  $ 4,213     $ 3,844  
Provision for loan losses                                                           
    400       200  
Charge-offs:
               
Commercial loans                                                           
    --       (36 )
Total charge-offs                                                     
    --       (36 )
Recoveries                                                           
    --       --  
Net charge- offs                                                           
    --       (36 )
Allowance at end of period                                                           
  $ 4,613     $ 4,008  
Allowance for loan losses to nonperforming
loans at end of period                                                           
    136.07 %     87.09 %
Allowance for loan losses to total loans at end of period                                                           
    1.09 %     1.20 %
Net charge-offs to average loans outstanding
during the period                                                           
    -- %     0.01 %

Noninterest Income.  Noninterest income totaled $486 thousand, an increase of $14 thousand, or 3.0%, as wealth management fees increased $55 thousand, as compared to the 2013 period. Income from mortgage banking activities in 2014 decreased $37 thousand compared to 2013 as mortgage sales volumes have decreased.  Gains on sales of securities declined $87 thousand in 2014 as fewer transactions have been recorded in 2014.  In June 2013, we recorded a loss of $93 thousand on the early extinguishment of $2.0 million of long-term FHLB advances. We did not record a similar transaction in the 2014 period.

Noninterest Expense.  Noninterest expense increased $1.6 million to $6.5 million during the six months ended June 30, 2014 from $4.9 million for the six months ended June 30, 2013.  Factors that contributed to the increase in noninterest expense during the 2014 period were increased salaries and employee benefits of $913 thousand, or 30.9%, primarily attributable to additional personnel supporting our branch operations and our residential and commercial lending operations. Occupancy and equipment expense increased $287 thousand resulting from normal rent increases and additional rent and other expense associated with expanded office space.  Professional fees increased $164 thousand as we incurred one-time charges of $162 thousand for professional service firms to facilitate certain staffing and contract negotiation matters on our behalf.

Income Taxes.  An income tax provision of $537 thousand was recorded during the six months ended June 30, 2014 compared to a provision of $762 thousand in the comparable 2013 period. The effective tax rate for the 2014 six-month period was 39.4%, compared with 39.3% for the 2013 six-month period.

Liquidity and Capital Resources

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

Management regularly adjusts our investments in liquid assets based upon an assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities, and (4) the objectives of our interest-rate risk and investment policies.

Our most liquid assets are cash and cash equivalents, loans held for sale and securities available for sale.  The level of these assets depends on our operating, financing, lending and investing activities during any given period.  At June 30, 2014, cash and cash equivalents, which include short-term investments, totaled $17.6 million.  Securities classified as available-for-sale, whose aggregate market value of $39.9 million exceeds cost, and $1.6 million of loans held for sale provide additional sources of liquidity.
 
 
31

 

At June 30, 2014, we had $53.5 million in long-term borrowings outstanding, represented entirely by FHLB advances. Long-term FHLB advances are generally used to fund loan growth. We also had $4.0 million of short-term borrowings represented by advances from the FHLB with original maturities less than one year. These borrowings are primarily used to fund temporary liquidity needs due to the timing of loan closings and deposit gathering activities. In addition, at June 30, 2014, we had a total of $44.1 million in unused borrowing capacity from the FHLB.  At June 30, 2014, we also had the ability to borrow $5.0 million from the Co-operative Central Bank on an unsecured basis, $2.0 million under an unsecured line of credit with a correspondent bank, and $13.3 million from the Federal Reserve Bank under a collateralized borrowing program, none of which was outstanding at that date.

At June 30, 2014, we had $73.9 million in loan commitments outstanding, which included $37.3 million in unadvanced funds on construction loans, $20.5 million in unadvanced home equity lines of credit, $11.7 million in unadvanced commercial lines of credit, and $3.4 million in new loan originations.

Certificates of deposit due within one year of June 30, 2014 amounted to $125.3 million, or 73.6% of total certificates and 32.4% of total deposits.  This total has increased $24.6 million from December 31, 2013. Balances of certificates maturing in more than one year have decreased $13.8 million.  Balances of 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 certificates and other borrowings.  Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the existing funds.  Management believes, however, based on past experience that a significant portion of our certificates will be renewed.  We have the ability to attract and retain deposits by adjusting the interest rates offered.

The Company is a separate legal entity from the Bank and has to provide for its own liquidity to pay its operating expenses and other financial obligations.  The Company’s primary sources of income are dividends received from the Bank and earnings from the investment of net proceeds from the initial stock offering retained by the Company.  Massachusetts banking law and FDIC regulations limit distributions of capital.  In addition, the Company is subject to 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.  Finally, in connection with its nonobjection to the conversion, the FDIC has required the Bank to commit that for the three-year period following the closing of the conversion it will not make any distribution of capital to the Company, including cash dividends, except in accordance with the FDIC on laws and regulations and as provided for in the business plan submitted with the conversion application without the prior approval of the Boston Area Office of the FDIC or, if such action would cause the Bank’s tier 1 leverage and total risk-based capital ratios to fall below 8.0% and 12.0%, respectively.  At June 30, 2014, the Company had $1.8 million of liquid assets as represented by cash and cash equivalents on an unconsolidated basis. The Company declared an initial cash dividend of $0.025 per share, or $61 thousand, payable on June 18, 2014 to stockholders of record on June 4, 2014.

Capital Management.  The Bank is subject to various regulatory capital requirements administered by the Federal Deposit Insurance Corporation and the Massachusetts Commissioner of Banks, including a risk-based capital measure.  The Company is also subject to similar capital requirements set by the Federal Reserve Board.  The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories.  At June 30, 2014, we exceeded all of our regulatory capital requirements.  We are considered “well capitalized” under regulatory guidelines.

We strive to manage our capital for maximum shareholder benefit.  The capital from our stock offering significantly increased our liquidity and capital resources.  Over time, the initial level of liquidity has been reduced as net proceeds from the stock offering were used for general corporate purposes, including the funding of lending activities.  Our financial condition and results of operations were enhanced by the additional capital from the offering, resulting over time in increased net interest-earning assets and net income.  However, the large increase in equity resulting from the capital raised in the offering has had an adverse impact on our return on equity.  To help us better manage our capital, we may consider the use of such tools as common share repurchases and cash dividends as regulations permit.
 
 
32

 
 
Off-Balance Sheet Arrangements

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

For the six months ended June 30, 2014, the Company did not engage in any off-balance sheet transactions reasonably likely to have a material effect on the Company’s financial condition, results of operations or cash flows.
 
Item 3.  Quantitative and Qualitative Disclosure About Market Risk

Qualitative Aspects of Market Risk

One significant risk affecting the financial condition and operating results of the Company and the Bank is interest rate risk.  We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment.  Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits.   As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings.  To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread.  Our strategy for managing interest rate risk emphasizes: originating adjustable-rate loans for retention in our loan portfolio; selling in the secondary market substantially all newly originated conforming longer-term fixed-rate residential mortgage loans; promoting core deposit products; and adjusting the maturities of borrowings and adjusting the investment portfolio mix and duration.  We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of derivative financial instruments.

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 with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.

Quantitative Aspects of Market Risk

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

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

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

The table below sets forth an approximation of our exposure as a percentage of estimated net interest income for the next 12 month period using interest income and equity simulations.  The simulations use projected repricing of assets and liabilities at June 30, 2014 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 slow 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.
 
 
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The following table reflects the estimated effects of changes in interest rates on the present value of our equity at June 30, 2014 and on our projected net interest income from June 30, 2014 through June 30, 2015.

     
As of June 30, 2014
   
Over the Next 12 Months
Ending June 30, 2015
 
     
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   $ 61,350     $ (7,503 )     (10.90 )%   $ 15,363     $ (626 )     (3.92 )%
  200       63,737       (5,116 )     (7.43 )     15,537       (452 )     (2.83 )
  100       65,820       (3,033 )     (4.41 )     15,704       (285 )     (1.78 )
  0       68,853       --       --       15,989       --       --  
  (100 )     72,892       4,039       5.87       15,877       112       (0.70

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”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
 
 
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PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

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

Item 1A.  Risk Factors

For information regarding the Company’s risk factors, see Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed with the Securities and Exchange Commission on March 24, 2014.  As of June 30, 2014, 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, 2013.

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

On October 1, 2012, the Company’s Board of Directors approved the repurchase of up to 96,286 shares of the Company’s common stock. As of June 30, 2014, 55,751 shares of common stock remain available for repurchase under the plan.  No shares of common stock were repurchased by the Company in the three months ended June 30, 2014. The repurchase plan will continue until it is completed or terminated by the Company’s Board of Directors

Item 3.  Defaults Upon Senior Securities

Not applicable.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

Not applicable.

Item 6.  Exhibits

3.1
Amended and Restated Articles of Incorporation of Wellesley Bancorp, Inc. (1)

3.2
Bylaws of Wellesley Bancorp, Inc. (2)

31.1
Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer

31.2
Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer

32.0
Section 1350 Certification
 
101.1
The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income and Comprehensive Income, (iii) the Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements.
_________________________________________________________________________
 
(1)
Incorporated herein by reference to the exhibits to Wellesley Bancorp, Inc.’s Pre-Effective Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-176764), filed with the Securities and Exchange Commission on November 7, 2011.
 
(2)
Incorporated herein by reference to the exhibits to Wellesley Bancorp, Inc.’s Registration Statement on Form S-1 (File No. 333-176764), filed with the Securities and Exchange Commission on September 9, 2011.
 
 
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
     
WELLESLEY BANCORP, INC.
       
       
       
Dated:
August 8, 2014
By:
/s/ Thomas J. Fontaine
     
Thomas J. Fontaine
     
President and Chief Executive Officer
     
(principal executive officer)
 
 
 
 
Dated:
August 8, 2014
By:
/s/ Gary P. Culyer
     
Gary P. Culyer
     
Chief Financial Officer and Treasurer
     
(principal accounting and financial officer)
 
 
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