Wellesley Bancorp, Inc. (Form: 10-Q, Received: 08/06/2019 16:43:07)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended June 30, 2019

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

For the transition period from ______________ to _____________

Commission file number: 001-35352

	WELLESLEY BANCORP, INC.
(Exact name of registrant as specified in its charter)

Maryland		45-3219901
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

100 Worcester Street, Suite 300, Wellesley, Massachusetts		02481
(Address of principal executive offices)		(Zip Code)

	(781) 235-2550
	(Registrant’s telephone number, including area code)

	Not Applicable
	(Former name, former address and former fiscal year, if changed since last report)

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

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

As of August 1, 2019, there were 2,560,065 shares of the registrant’s common stock outstanding.

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company and an emerging growth company. See definition of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth” company in Rule 12b-2 of the Exchange Act.

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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 7(a)(2)(B) of the Securities Act

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

WELLESLEY BANCORP, INC.

Table of Contents

		Page No.
Part I. Financial Information

Item 1.	Financial Statements (Unaudited)

	Consolidated Balance Sheets as of June 30, 2019 and December 31, 2018	1

	Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2019 and 2018	2

	Consolidated Statements of Changes in Stockholders’ Equity for the Three and Six Months Ended June 30, 2019 and 2018	3

	Consolidated Statements of Cash Flows for the Three and Six Months Ended June 30, 2019 and 2018	4

	Notes to Consolidated Financial Statements	5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	33

Item 4.	Controls and Procedures	34

Part II. Other Information

Item 1.	Legal Proceedings	35

Item 1A.	Risk Factors	35

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	35

Item 3.	Defaults Upon Senior Securities	35

Item 4.	Mine Safety Disclosures	35

Item 5.	Other Information	35

Item 6.	Exhibits	35

Signatures		37

PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements (Unaudited)

CONSOLIDATED BALANCE SHEETS

	June 30, 2019			December 31, 2018
	(Dollars in thousands)
Assets

Cash and due from banks	$	5,747		$	7,678
Short-term investments		26,581			34,972
Total cash and cash equivalents		32,328			42,650

Certificates of deposit		100			100
Securities available for sale, at fair value		63,348			66,770
Federal Home Loan Bank of Boston stock, at cost		6,162			4,747
Loans held for sale		2,170			—

Loans		828,285			743,770
Less allowance for loan losses		(7,148	)		(6,738	)
Loans, net		821,137			737,032

Bank-owned life insurance		7,886			7,769
Operating lease, right-of-use asset		7,229			—
Premises and equipment, net		3,778			3,924
Accrued interest receivable		2,815			2,288
Net deferred tax asset		2,498			2,804
Other assets		7,097			3,336

Total assets	$	956,548		$	871,420

Liabilities and Stockholders’ Equity

Deposits:
Non-interest-bearing	$	130,560		$	116,926
Interest-bearing		599,680			601,005
Total deposits		730,240			717,931
Short-term borrowings		54,000			15,000
Long-term borrowings		77,866			58,528
Subordinated debt		9,847			9,832
Lease liability		7,267			—
Accrued expenses and other liabilities		7,680			4,999
Total liabilities		886,900			806,290

Commitments and contingencies

Stockholders' equity:
Preferred stock, $0.01 par value; 1,000,000 shares authorized, none issued		—			—
Common stock, $0.01 par value; 14,000,000 shares authorized, 2,559,565 and 2,525,611 shares issued and outstanding at June 30, 2019 and December 31, 2018, respectively		26			25
Additional paid-in capital		27,201			26,462
Retained earnings		42,717			40,203
Accumulated other comprehensive income (loss)		667			(533	)
Unearned compensation – ESOP		(963	)		(1,027	)
Total stockholders' equity		69,648			65,130

Total liabilities and stockholders' equity	$	956,548		$	871,420

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(Dollars in thousands, except per share data)
Interest and dividend income:
Interest and fees on loans and loans held for sale	$	9,444		$	7,534		$	18,171		$	14,761
Debt securities:
Taxable		363			345			741			686
Tax-exempt		80			82			162			164
Short-term investments and certificates of deposit		143			120			307			233
FHLB stock		59			82			138			158
Total interest and dividend income		10,089			8,163			19,519			16,002
Interest expense:
Deposits		2,570			1,457			5,059			2,650
Short-term borrowings		255			75			365			198
Long-term debt		390			388			633			731
Subordinated debt		157			158			314			316
Total interest expense		3,372			2,078			6,371			3,895

Net interest income		6,717			6,085			13,148			12,107
Provision for loan losses		170			195			410			260
Net interest income, after provision for loan losses		6,547			5,890			12,738			11,847

Non-interest income:
Customer service fees		49			45			88			88
Mortgage banking activities		51			28			79			37
Income on bank-owned life insurance		59			58			117			115
Wealth management fees		392			417			826			801
Miscellaneous		331			98			454			183
Total non-interest income		882			646			1,564			1,224

Non-interest expense:
Salaries and employee benefits		3,122			2,693			6,162			5,414
Occupancy and equipment		820			701			1,624			1,419
Data processing		308			235			605			469
FDIC insurance		190			168			325			336
Professional fees		256			215			446			413
Other general and administrative		663			581			1,292			1,100
Total non-interest expense		5,359			4,593			10,454			9,151

Income before income taxes		2,070			1,943			3,848			3,920
Provision for income taxes		565			523			1,041			1,063

Net income		1,505			1,420			2,807			2,857

Other comprehensive income:
Net unrealized holding (loss) gains on available-for-sale securities		743			(204	)		1,601			(1,076	)
Income tax benefit (expense)		(186	)		55			(401	)		274

Total other comprehensive (loss) gain income		557			(149	)		1,200			(802	)

Comprehensive income	$	2,062		$	1,271		$	4,007		$	2,055
Earnings per common share:
Basic	$	0.61		$	0.59		$	1.15		$	1.19
Diluted	$	0.59		$	0.57		$	1.11		$	1.15
Weighted average shares outstanding:
Basic		2,454,617			2,395,635			2,444,897			2,394,113
Diluted		2,554,895			2,501,122			2,541,328			2,493,172

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Six Months Ended June 30, 2019 and 2018

	Common Stock					Additional Paid-in		Retained			Accumulated Other Comprehensive			Unearned Compensation-			Total Stockholders’
	Shares			Amount		Capital		Earnings			Income (Loss)			ESOP			Equity
	(Dollars in thousands)
Balance at December 31, 2017		2,506,532		$	25	$	25,601	$	34,736		$	39		$	(1,156	)	$	59,245

Comprehensive income		—			—		—		1,437			(653	)		—			784
Reclassification related to Tax Cuts and Jobs Act		—			—		—		(7)			7			—			—
Dividends paid to common stockholders ($0.05 per share)		—			—		—		(127	)		—			—			(127	)
Share-based compensation-equity incentive plan		—			—		107		—			—			—			107
ESOP shares committed to be allocated (3,209)		—			—		61		—			—			33			94

Balance at March 31, 2018		2,506,532		$	25	$	25,769	$	36,039		$	(607	)	$	(1,123	)	$	60,103

Comprehensive income		—			—		—		1,420			(149	)		—			1,271
Dividends paid to common stockholders ($0.055 per share)		—			—		—		(137	)		—			—			(137	)
Restricted stock forfeitures		(400	)
Share-based compensation-equity incentive plan		—			—		100		—			—			—			100
ESOP shares committed to be allocated (3,210)		—			—		72		—			—			31			103

Balance at June 30, 2018		2,506,132		$	25	$	25,941	$	37,322		$	(756	)	$	(1,092	)	$	61,440

	Common Stock					Additional Paid-in		Retained			Accumulated Other Comprehensive			Unearned Compensation-			Total Stockholders’
	Shares			Amount		Capital		Earnings			Income (Loss)			ESOP			Equity
	(Dollars in thousands)
Balance at December 31, 2018		2,525,611		$	25	$	26,462		40,203		$	(533	)	$	(1,027	)	$	65,130

Comprehensive income		—			—		—		1,302			643			—			1,945
Restricted stock awards grant		11,500			—		—		—			—			—			—
Stock options exercised		2,553			—		48		—			—			—			48
Restricted stock forfeitures		(2,000	)		—		—		—			—			—			—
Dividends paid to common stockholders ($0.055 per share)		—			—		—		(140	)		—			—			(140	)
Share-based compensation-equity incentive plan		—			—		102		—			—			—			102
ESOP shares committed to be allocated (3,209)		—			—		64		—			—			32			96

Balance at March 31, 2019		2,537,664		$	25	$	26,676	$	41,365		$	110		$	(995	)	$	67,181

Comprehensive income		—			—		—		1,505			557			—			2,062
Stock options exercised		21,901			1		351		—			—			—			352
Dividends paid to common stockholders ($0.06 per share)		—			—		—		(153	)		—			—			(153	)
Share-based compensation-equity incentive plan		—			—		99		—			—			—			99
ESOP shares committed to be allocated (3,210)		—			—		75		—			—			32			107

Balance at June 30, 2019		2,559,565		$	26	$	27,201	$	42,717		$	667		$	(963	)	$	69,648

See accompanying notes to consolidated financial statements.

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended June 30,
	2019			2018
	(In thousands)
Cash flows from operating activities:
Net income	$	2,807		$	2,857
Adjustments to reconcile net income to net cash provided (used) by operating activities:
Provision for loan losses		410			260
Depreciation and amortization		391			392
Net amortization of securities		91			82
Principal balance of loans sold		6,259			2,532
Loans originated for sale		(8,429	)		(3,128	)
Accretion of net deferred loan fees		(335	)		(308	)
Amortization of subordinated debt issuance costs		15			15
Income on bank-owned life insurance		(117	)		(115	)
Deferred income tax provision		(96	)		(55	)
ESOP expense		203			197
Share-based compensation		201			207
Net change in other assets and liabilities		(1,560	)		(1,346	)
Net cash provided (used) by operating activities		(160	)		1,590

Cash flows from investing activities:

Activity in securities available for sale:
Maturities, prepayments and calls		4,933			5,557
Purchases		—			(7,480	)
Purchase of Federal Home Loan Bank stock		(1,415	)		(5	)
Net loan originations		(84,180	)		(18,141	)
Additions to premises and equipment		(260	)		(329	)
Proceeds on sale of premises and equipment		6			63
Net cash used by investing activities		(80,916	)		(20,335	)

Cash flows from financing activities:
Net increase in deposits		12,309			26,444
Proceeds from issuance of long-term debt		33,000			36,000
Repayments of long-term debt		(13,662	)		(30,492	)
Increase (decrease) in short-term borrowings		39,000			(8,000	)
Stock options exercised		399			—
Common stock repurchased		1			—
Cash dividends paid on common stock		(293	)		(264	)
Net cash provided by financing activities		70,754			23,688

Net change in cash and cash equivalents		(10,322	)		4,943
Cash and cash equivalents at beginning period		42,650			28,462
Cash and cash equivalents at end of period	$	32,328		$	33,405

Supplementary information:
Interest paid	$	5,853		$	3,756
Income taxes paid		1,677			1,954

See accompanying notes to consolidated financial statements.

WELLESLEY BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – BASIS OF PRESENTATION AND CONSOLIDATION

The accompanying unaudited interim consolidated financial statements include the accounts of Wellesley Bancorp, Inc. (the “Company”) and its wholly-owned subsidiary, Wellesley Bank (the “Bank”), the principal operating entity, and its wholly-owned subsidiaries: Wellesley Securities Corporation, which engages in the business of buying, selling and dealing in securities exclusively on its own behalf; Wellesley Investment Partners, LLC, formed to provide investment management services for individuals, not-for-profit entities and businesses; and Central Linden, LLC, to hold, manage and sell foreclosed real estate. All significant intercompany balances and transactions have been eliminated in consolidation. Assets under management at Wellesley Investment Partners, LLC are not included in these consolidated financial statements because they are not assets of the Company. These financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information, and with the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements.

In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included. The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2018 Annual Report on Form 10-K. The results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the year ending December 31, 2019 or for any other period.

NOTE 2 – LOAN POLICIES

The loan portfolio consists of real estate, commercial and other loans to the Company’s customers in our primary market areas in eastern Massachusetts. The ability of the Company’s debtors to honor their contracts is dependent upon the economy in general and the state of real estate and construction sectors within our markets.

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred loan origination fees or costs. Interest income is accrued on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

Interest is generally not accrued on loans that are identified as impaired or loans which are ninety days or more past due. Past due status is based on the contractual terms of the loan. Interest income previously accrued on such loans is reversed against current period interest income. Interest income on non-accrual loans is recognized only to the extent of interest payments received and is first applied to the outstanding principal balance when collectibility of principal is in doubt. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured through sustained payment performance for at least six months.

Allowance for loan losses

The allowance for loan losses is established through a provision for loan losses charged to earnings as losses are estimated to occur. Loan losses are charged against the allowance when management believes the uncollectibility of the loan balance is confirmed. Subsequent recoveries are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance consists of general, allocated and unallocated components.

General component

The general component is based on the following loan segments: residential real estate, commercial real estate, construction, commercial, home equity lines of credit and other consumer. Management considers a rolling average of historical losses for each segment based on a time frame appropriate to capture relevant loss data for each loan segment, generally three and 10 years. This historical loss factor is adjusted for the following qualitative factors: levels/trends in delinquencies; trends in volume, concentrations and terms of loans; level of collateral protection; effects of changes in risk selection and underwriting standards; experience/ability/depth of lending management and staff; and national and local economic trends and conditions. There were no significant changes to the Company’s policies or methodology pertaining to the general component of the allowance during 2019 or 2018.

The qualitative factor adjustments are determined based on the various risk characteristics of each loan segment. Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate – The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent and does not originate subprime loans. Most loans in this segment are collateralized by one-to-four family residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality of this segment.

Commercial real estate – Loans in this segment are primarily income-producing properties in the Company’s primary market areas in eastern Massachusetts. The underlying cash flows generated by the properties may be adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which, in turn, will have an effect on the credit quality in this segment. Management typically obtains rent rolls annually and continually monitors the cash flows of these loans.

Construction – Loans in this segment include speculative construction loans primarily on residential properties for which payment is derived from the sale of the property. Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions. Residential construction loans in this segment also include loans to build one-to-four family owner-occupied properties which are subject to the same credit quality factors as residential real estate.

Commercial – Loans in this segment are made to businesses and are generally secured by assets of the business. Repayment is expected from the cash flows of the business. A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

Home equity lines of credit – Loans in this segment are collateralized by one-to-four family residential real estate and repayment is dependent on the credit quality of the individual borrower. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

Other consumer – Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.

Allocated component

The allocated component relates to loans that are classified as impaired. Impairment is measured on a loan-by-loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the fair value of the loan or, if the loan is collateral dependent, by the fair value of the collateral less estimated costs to sell. An allowance is established when the discounted cash flows or collateral value of the impaired loan are lower than the carrying value of that loan. Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify performing individual residential and consumer loans for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due, according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value, and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

The Company periodically may agree to modify the contractual terms of loans. When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring ("TDR"). All TDRs are initially classified as impaired.

Unallocated component

An unallocated component is maintained to cover additional uncertainties in management’s estimation of probable losses. The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

NOTE 3 – COMPREHENSIVE INCOME

Accounting principles generally require that recognized revenue, expenses, and gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the stockholders’ equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income/loss.

The components of accumulated other comprehensive income (loss) and related tax effects are as follows:

	June 30,			December 31,
	2019			2018
	(In thousands)

Unrealized holding gains (losses) on securities available for sale	$	869		$	(732	)
Tax effect		(202	)		199
Net-of tax amount	$	667		$	(533	)

NOTE 4 – RECENT ACCOUNTING AND REGULATORY PRONOUNCEMENTS

Effective January 1, 2019, the Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2016-02, Leases (Topic 842 ), which requires a lessee to record a right-of-use asset and liability representing the obligation to make lease payments for long-term leases. Upon adoption of the ASU, the Company recorded an increase in assets of $7.8 million and an increase in liabilities of $7.8 million on the Consolidated Balance Sheets as a result of recognizing the right-of-use assets and lease liabilities.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), which requires entities to measure expected credit losses based on relevant information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectibility of the reported amount. Entities will now use forward-looking information to better form their credit loss estimates. Credit losses on available-for-sale debt securities should be measured in a manner similar to current GAAP; however, recognized credit losses will be presented as an allowance rather than as a write-down. This ASU will be effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. The Company has implemented a committee led by the Company’s Chief Financial Officer, which includes the Chief Lending Officer, to assist in identifying, implementing and evaluating the impact of the required changes to the loan loss estimation model and processes. The Company has evaluated the portfolio segments and various methodologies and is currently evaluating potential loss modeling processes as well as related controls and procedures. Management will continue to closely monitor developments and additional guidance to determine the potential impact on the Company's consolidated financial statements.

NOTE 5 – SECURITIES AVAILABLE FOR SALE

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
June 30, 2019
Residential mortgage-backed securities:
Government National Mortgage Association	$	3,647	$	79	$	(18	)	$	3,708
Government-sponsored enterprises		10,656		132		(34	)		10,754
SBA and other asset-backed securities		10,684		242		(14	)		10,912
State and municipal bonds		12,348		465		(1	)		12,812
Government-sponsored enterprise obligations		8,000		—		(11	)		7,989
Corporate bonds		17,144		82		(53	)		17,173

	$	62,479	$	1,000	$	(131	)	$	63,348

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

	$	67,502	$	276	$	(1,008	)	$	66,770

There were no sales of available-for-sale securities for the three and six months ended June 30, 2019 and 2018, respectively.

The amortized cost and fair value of debt securities by contractual maturity at June 30, 2019 are as follows:

	Amortized Cost		Fair Value
	(In thousands)
Within 1 year	$	5,248	$	5,255
After 1 year to 5 years		16,096		16,169
After 5 years to 10 years		6,565		6,616
After 10 years		9,583		9,934
		37,492		37,974
Mortgage- and asset-backed securities		24,987		25,374

	$	62,479	$	63,348

Expected maturities may differ from contractual maturities because the issuer, in certain instances, has the right to call or prepay obligations with or without call or prepayment penalties.

Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	Less Than Twelve Months					Over Twelve Months
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
	(In thousands)
June 30, 2019
Residential mortgage-backed securities:
Government National Mortgage Association	$	—		$	—	$	(18	)	$	1,596
Government-sponsored enterprises		—			—		(34	)		2,838
SBA and other asset-backed securities		(1	)		320		(13	)		2,062
State and municipal bonds		—			—		(1	)		330
Government-sponsored enterprise obligations		(3	)		997		(8	)		4,992
Corporate bonds		(11	)		3,988		(42	)		5,332

	$	(15	)	$	5,305	$	(116	)	$	17,150

	Less Than Twelve Months					Over Twelve Months
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
	(In thousands)
December 31, 2018
Residential mortgage-backed securities:
Government National Mortgage Association	$	—		$	—	$	(43	)	$	1,755
Government-sponsored enterprises		(1	)		103		(187	)		7,880
SBA and other asset-backed securities		—			—		(157	)		5,455
State and municipal bonds		(2	)		386		(109	)		6,257
Government-sponsored enterprise obligations		—			—		(187	)		7,813
Corporate bonds		(29	)		5,705		(293	)		11,124

	$	(32	)	$	6,194	$	(976	)	$	40,284

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market conditions warrant such evaluations. At June 30, 2019, various debt securities have unrealized losses with aggregate depreciation of 0.6% from their aggregate amortized cost basis. These unrealized losses relate principally to the effect of interest rate changes on the fair value of debt securities and not an increase in credit risk of the issuers. As the Company does not intend to sell the securities and it is more likely than not that the Company will not be required to sell the securities before recovery of their amortized cost, which may be maturity, the Company does not consider these securities to be other-than-temporarily impaired at June 30, 2019.

NOTE 6 – LOANS AND ALLOWANCE FOR LOAN LOSSES

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

	June 30,			December 31,
	2019			2018
	(In thousands)
Real estate loans:
Residential – fixed	$	74,748		$	64,218
Residential – variable		324,486			318,292
Commercial		170,554			148,006
Construction		132,945			106,723
		702,733			637,239

Commercial loans:
Secured		80,380			61,563
Unsecured		4,910			5,327
		85,290			66,890

Consumer loans:
Home equity lines of credit		40,304			39,486
Other		165			163
		40,469			39,649

Total loans		828,492			743,778

Less:
Allowance for loan losses		(7,148	)		(6,738	)
Net deferred origination costs		(207	)		(8	)

Loans, net	$	821,137		$	737,032

The following table summarizes the changes in the allowance for loan losses by portfolio segment for the three and six months ended June 30, 2019 and 2018:

	Residential Real Estate			Commercial Real Estate			Construction			Commercial			Home Equity		Other Consumer		Unallocated		Total
	(In thousands)
Three Months Ended June 30, 2019

Allowance at March 31, 2019	$	2,202			1,361		$	1,809		$	1,281		$	262	$	3	$	60	$	6,978

Provision (credit) for loan losses		(51	)		161			(183	)		71			—		—		172		170

Allowance at June 30, 2019	$	2,151		$	1,522		$	1,626		$	1,352		$	262	$	3	$	232	$	7,148

Three Months Ended June 30, 2018

Allowance at March 31, 2018	$	1,925		$	1,545		$	1,433		$	995		$	248	$	3	$	69	$	6,218

Provision (credit) for loan losses		74			70			26			(33	)		9		1		48		195

Allowance at June 30, 2018	$	1,999		$	1,615		$	1,459		$	962		$	257	$	4	$	117	$	6,413

Six Months Ended June 30, 2019

Allowance at December 31, 2018	$	2,216			1,602		$	1,462		$	1,124		$	257	$	3	$	74	$	6,738

Provision (credit) for loan losses		(65	)		(80	)		164			228			5		—		158		410

Allowance at June 30, 2019	$	2,151		$	1,522		$	1,626		$	1,352		$	262	$	3	$	232	$	7,148

Six Months Ended June 30, 2018

Allowance at December 31, 2017	$	1,722		$	1,520		$	1,661		$	917		$	237	$	2	$	94	$	6,153

Provision (credit) for loan losses		277			95			(202	)		45			20		2		23		260

Allowance at June 30, 2018	$	1,999		$	1,615		$	1,459		$	962		$	257	$	4	$	117	$	6,413

Further information pertaining to the allowance for loan losses is as follows:

	Residential Real Estate		Commercial Real Estate		Construction		Commercial		Home Equity		Other Consumer		Unallocated		Total
	(In thousands)
June 30, 2019

Allowance related to impaired loans	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Allowance related to non-impaired loans		2,151		1, 522		1,626		1,352		262		3		232		7,148

Total allowance	$	2,151	$	1,522	$	1,626	$	1,352	$	262	$	3	$	232	$	7,148

Impaired loan balances	$	734	$	2,703	$	—	$	—	$	—	$	—	$	—	$	3,437
Non-impaired loan balances		398,500		167,851		132,945		85,290		40,304		165		—		825,055

Total loans	$	399,234	$	170,554	$	132,945	$	85,290	$	40,304	$	165	$	—	$	828,492

December 31, 2018

Allowance related to impaired loans	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—
Allowance related to non-impaired loans		2,216		1,602		1,462		1,124		257		3		74		6,738

Total allowance	$	2,216	$	1,602	$	1,462	$	1,124	$	257	$	3	$	74	$	6,738

Impaired loan balances	$	746		2,846	$	—	$	—	$	—	$	—	$	—	$	3,592
Non-impaired loan balances		381,764		145,160		106,723		66,890		39,486		163		—		740,186

Total loans	$	382,510	$	148,006	$	106,723	$	66,890	$	39,486	$	163	$	—	$	743,778

The following is a summary of past due and non-accrual loans at June 30, 2019 and December 31, 2018:

	30-59 Days Past Due		60-89 Days Past Due		Past Due 90 Days or More		Total Past Due		Past Due 90 Days or More and Still Accruing		Non- accrual Loans
	(In thousands)
June 30, 2019

Residential real estate	$	572	$	—	$	—	$	572	$	—	$	572
Commercial real estate		—		—		548		548		—		548
Consumer loans		100		—		—		100		—		—

Total	$	672	$	—	$	548	$	1,220	$	—	$	1,120

December 31, 2018

Residential real estate	$	1,551	$	—	$	—	$	1,551	$	—	$	581
Commercial real estate		—		—		556		556		—		556

Total	$	1,551	$	—	$	556	$	2,107	$	—	$	1,137

The following is a summary of impaired loans:

	June 30, 2019				December 31, 2018
	Recorded Investment		Unpaid Principal Balance		Recorded Investment		Unpaid Principal Balance
	(In thousands)
Impaired loans without a valuation allowance:
Residential real estate	$	734	$	751	$	746	$	764
Commercial real estate		2,703		2,829		2,846		2,974

Total impaired loans	$	3,437	$	3,580	$	3,592	$	3,738

Further information pertaining to impaired loans follows:

	Three Months Ended June 30, 2019						Six Months Ended June 30, 2019
	Average Recorded Investment		Interest Income Recognized		Interest Income Recognized on Cash Basis		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized on Cash Basis
	(In thousands)

Residential real estate	$	738	$	10	$	8	$	741	$	15	$	12
Commercial real estate		2,738		27		3		2,774		60		11

Total	$	3,476	$	37	$	11	$	3,515	$	75	$	23

	Three Months Ended June 30, 2018						Six Months Ended June 30, 2018
	Average Recorded Investment		Interest Income Recognized		Interest Income Recognized on Cash Basis		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized on Cash Basis
	(In thousands)

Residential real estate	$	333	$	10	$	—	$	209	$	11	$	8
Commercial real estate		564		8		8		567		28		28

Total	$	897	$	18	$	8	$	776	$	39	$	36

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

There were no new troubled debt restructurings recorded during the three months ended June 30, 2019 and 2018.

There were no TDRs that defaulted, generally considered 90 days past due or longer, during the three and six months ended June 30, 2019 and 2018, and for which default was within one year of the restructure date. TDRs did not have a material impact on the allowance for loan losses for the three and six months ended June 30, 2019 and 2018.

Credit Quality Information

The Company utilizes an eleven-grade internal loan rating system for commercial real estate, construction and commercial loans.

Loans rated 1-4: Loans in these categories are considered “pass” rated loans with low to average risk.

Loans rated 5: Loans in this category are considered “special mention.” These loans are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 6: Loans in this category are considered “substandard.” Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged. There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Loans rated 7: Loans in this category are considered “doubtful.” Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 8: Loans in this category are considered uncollectible “loss” and of such little value that their continuance as loans is not warranted.

Loans rated 9: Loans in this category only include commercial loans under $25 thousand with no other outstandings or relationships with the Company.

Loans rated 10: Loans in this category include loans which otherwise require rating but which have not been rated, or loans for which the Company’s loan policy does not require rating.

Loans rated 11: Loans in this category include credit commitments/relationships that cannot be rated due to a lack of financial information or inaccurate financial information. If within 60 days of the assignment of an 11 rating, information is still not available to allow a standard rating, the credit will be rated 6.

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial loans. During each calendar year, the Company engages an independent third party to review a significant portion of loans within these segments. Management uses the results of these reviews as part of its annual review process. On a monthly basis, the Company reviews the residential real estate and consumer loan portfolio for credit quality primarily through the use of delinquency reports.

The following table presents the Company’s loans by risk rating:

	June 30, 2019								December 31, 2018
	Commercial Real Estate		Construction		Commercial		Total		Commercial Real Estate		Construction		Commercial		Total
	(In thousands)

Loans rated 1-4	$	166,954	$	132,945	$	83,511	$	383,410	$	144,243	$	106,723	$	65,245	$	316,211
Loans rated 5		897		—		1,053		1,950		917		—		1,645		2,562
Loans rated 6		2,155		—		726		2,881		2,290		—		—		2,290
Loans rated 7		548		—		—		548		556		—		—		556

Total	$	170,554	$	132,945	$	85,290	$	388,789	$	148,006	$	106,723	$	66,890	$	321,619

NOTE 7 - DERIVATIVE INSTRUMENTS

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

Derivative Loan Commitments

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

Outstanding derivative loan commitments expose the Company to the potential for changes in the fair value of the underlying loans as interest rates change, along with the value of the loan commitment. If interest rates increase, the value of these loan commitments will decrease. Conversely, if interest rates decrease, the value of these loan commitments will increase. The notional amount of undesignated derivative loan commitments was $650 thousand at June 30, 2019. The fair value of these commitments was a liability of $3 thousand.

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

Forward Loan Sale Commitments

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

The Company expects that these forward loan sale commitments will experience changes in fair value opposite to the change in fair value of derivative loan commitments. The notional amount of undesignated forward loan sale commitments was $2.2 million at June 30, 2019. The fair value of these commitments was an asset of $1 thousand.

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

Interest Rate Swap Agreements

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

The notional amounts are amounts on which calculations, payments, and the value of the derivatives are based. Notional amounts do not represent direct credit exposures. The fair value of the derivative instruments is reflected on the Company’s consolidated balance sheet as other assets and other liabilities as appropriate. Changes in fair values are recorded in miscellaneous income in the consolidated statements of comprehensive income. A deposit account totaling $3.0 million is currently pledged to secure the Company’s liability for the offsetting interest rate swaps.

A summary of the interest rate swaps is as follows:

	With commercial						With third-party
	loan borrowers						financial institutions
	June 30,			December 31,			June 30,			December 31,
	2019			2018			2019			2018
	(dollars in thousands)
Notional amount	$	50,401		$	28,320		$	50,401		$	28,320
Receive (pay) fixed rate weighted average		4.83	%		5.09	%		(4.83	)%		(5.09	)%
Receive (pay) variable rate weighted average		(4.58	)%		(5.06	)%		4.58	%		5.06	%
Weighted average remaining years		11.2 years			12.8 years			11.2 years			12.8 years
Unrealized fair value gain (loss)	$	3,064		$	264		$	(3,064	)	$	(264	)

NOTE 8 – FAIR VALUES OF FINANCIAL INSTRUMENTS

Fair value hierarchy

The Company groups its assets measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 – Valuation is based on quoted market prices in active exchange markets for identical assets and liabilities. Valuations are obtained from readily available pricing sources.

Level 2 – Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities. Valuations are obtained from readily available pricing sources.

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. Level 3 assets include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as those for which the determination of fair value requires significant management judgment or estimation.

Transfers between levels are recognized at the end of a reporting period, if applicable.

Determination of fair value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in many instances there are no quoted market prices for the Company’s various assets and liabilities. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the assets and liabilities.

Assets and liabilities measured at fair value on a recurring basis

Assets and liabilities measured at fair value on a recurring basis at June 30, 2019 and December 31, 2018 are summarized below.

	Level 1		Level 2		Level 3		Total Fair Value
	(In thousands)
June 30, 2019

Assets
Securities available for sale	$	—	$	63,348	$	—	$	63,348
Interest rate swap agreements		—		3,064		—		3,064
Forward loan sale commitments		—		1		—		1
	$	—	$	66,434	$	—	$	66,434

Liabilities
Interest rate swap agreements	$	—	$	3,064	$	—	$	3,064
Derivative loan commitments		—		3		—		3
	$	—	$	3,067	$	—	$	3,067

December 31, 2018

Assets
Securities available for sale	$	—	$	66,770	$	—	$	66,770
Interest rate swap agreements		—		264		—		264
	$	—	$	67,034	$	—	$	67,034

Liabilities
Interest rate swap agreements	$	—	$	264	$	—	$	264

Fair value measurements for securities available for sale are obtained from a third-party pricing service and are not adjusted by management. All securities are measured at fair value in Level 2 based on valuation models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.

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

The fair value of forward loan sale commitments and derivative loan commitments are based on fair values of the underlying mortgage loans, including servicing values as applicable. The fair value of derivative loan commitments also considers the probability of such commitments being exercised.

Assets measured at fair value on a non-recurring basis

The Company may also be required, from time to time, to measure certain other financial assets at fair value on a non-recurring basis in accordance with generally accepted accounting principles. These adjustments to fair value usually result from application of lower-of-cost-or-market (“LOCOM”) accounting or write-downs of individual assets. Fair values for loans held for sale are based on commitments in effect from investors or prevailing market rates.

	June 30, 2019						December 31, 2018
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
	(In thousands)
Loans held for sale	$	—	$	—	$	2,170	$	—	$	—	$	—

There were no liabilities measured at fair value on a non-recurring basis at June 30, 2019 and December 31, 2018.

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, 2019

Financial assets:
Cash and cash equivalents	$	32,328	$	32,328	$	—	$	—	$	32,328
Certificates of deposit		100		100		—		—		100
Securities available for sale		63,348		—		63,348		—		63,348
FHLB stock		6,162		—		—		6,162		6,162
Loans held for sale		2,170		—		—		2,170		2,170
Loans, net		821,137		—		—		830,413		830,413
Accrued interest receivable		2,815		—		—		2,815		2,815
Interest rate swap agreements		3,064		—		3,064		—		3,064
Forward loan sale commitments		1		—		1		—		1

Financial liabilities:
Deposits	$	730,240	$	—	$	—	$	730,275	$	730,275
Short-term borrowings		54,000		—		54,000		—		54,000
Long-term debt		77,866		—		78,008		—		78,008
Subordinated debt		9,847		—		—		9,741		9,741
Accrued interest payable		1,004		—		—		1,004		1,004
Interest rate swap agreements		3,064		—		3,064		—		3,064
Derivative loan commitments		3		—		3		—		3

December 31, 2018

Financial assets:
Cash and cash equivalents	$	42,650	$	42,650	$	—	$	—	$	42,650
Certificates of deposit		100		100		—		—		100
Securities available for sale		66,770		—		66,770		—		66,770
FHLB stock		4,747		—		—		4,747		4,747
Loans, net		737,032		—		—		732,427		732,427
Accrued interest receivable		2,288		—		—		2,288		2,288
Interest rate swap agreements		264		—		264		—		264

Financial liabilities:
Deposits	$	717,931	$	—	$	—	$	716,685	$	716,685
Short-term borrowings		15,000		—		15,000		—		15,000
Long-term debt		58,528		—		58,192		—		58,192
Subordinated debt		9,832		—		—		9,691		9,691
Accrued interest payable		487		—		—		487		487
Interest rate swap agreements		264		—		264		—		264

NOTE 9 – EMPLOYEE STOCK OWNERSHIP PLAN

The Bank maintains an Employee Stock Ownership Plan (the “ESOP”) to provide eligible employees the opportunity to own Company stock. This plan is a tax-qualified retirement plan for the benefit of all Company employees. Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax limits.

The Company granted a loan to the ESOP to purchase shares of the Company’s common stock on the closing date of the Company’s mutual-to-stock conversion in 2012. As of June 30, 2019, the ESOP held 177,380 shares or 6.9% of the common stock outstanding on that date. The loan is payable annually over 15 years at the rate of 3.25% per annum. The loan can be prepaid without penalty. Loan payments are expected to be funded by cash contributions from the Bank. The loan is secured by the shares purchased, which are held in a suspense account for allocation among participants as the loan is repaid. Cash dividends paid on allocated shares are reinvested into shares to participants and cash dividends paid on unallocated shares will be used to repay the outstanding debt of the ESOP. Shares used as collateral to secure the loan are released and available for allocation to eligible employees as the principal and interest on the loan is paid.

Shares held by the ESOP at June 30, 2019 include the following:

Allocated			74,674
Committed to be allocated			6,419
Unallocated			96,287

			177,380

The fair value of unallocated shares was $3.1 million at June 30, 2019.

Total compensation expense recognized in connection with the ESOP for the three months ended June 30, 2019 and 2018 was $107 thousand and $103 thousand, respectively. ESOP-related compensation expense was $203 thousand and $197 thousand for the six months ended June 30, 2019 and 2018, respectively.

NOTE 10 – EQUITY INCENTIVE PLANS

Under the Company’s 2016 Equity Incentive Plan, the Company may grant restricted stock awards to its employees and directors for up to 75,000 shares of its common stock. A restricted stock award (the “award”) is a grant of shares of Company common stock for no consideration, subject to a vesting schedule or the satisfaction of market conditions or performance criteria. Awarded shares are held in reserve for each grantee by the Company’s transfer agent, and will be issued from previously authorized but unissued shares upon vesting. The fair value of the stock awards, based on the market price at the grant date, will be recognized over the five-year vesting period . At June 30, 2019, there remain 19,500 shares available to award under the Plan.

Under the Company’s 2012 Equity Incentive Plan the Company granted stock options to its employees and directors in the form of incentive stock options and non-qualified stock options totaling 231,894 shares of its common stock. The exercise price of each stock option was not less than the fair market value of the Company’s common stock on the date of grant, and the maximum term of each option is 10 years from the date of each award. The vesting period was five years from the date of grant, with vesting at 20% per year.

Under the 2012 Equity Incentive Plan, the Company also granted stock awards to management, employees and directors. Awarded shares are held in reserve for each grantee by the Company’s transfer agent, and were issued from previously authorized but unissued shares upon vesting. The fair value of the stock awards, based on the market price at the grant date, is recognized over the five-year vesting period.

The Company’s 2012 Equity Incentive Plan was terminated upon approval of the 2016 Equity Incentive Plan.

Stock Options

A summary of option activity under the 2012 Equity Incentive Plan for the six months ended June 30, 2019 is presented below:

	Outstanding									Non-vested
	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Aggregate Intrinsic Value		Shares			Weighted Average Grant Date Fair Value
	(In thousands)					(In years)		(In thousands)		(In thousands)
Balance at January 1, 2019		193		$	16.11						10		$	4.13
Forfeited		(3	)		19.07						(3	)		4.01
Exercised		(24	)		15.31						—			—

Balance at June 30, 2019		166		$	16.03		3.67	$	2,747		7		$	4.18
Exercisable at June 30, 2019		159		$	15.33		3.63	$	2,584

For the three months ended June 30, 2019 and 2018, compensation expense applicable to the stock options was $6 thousand and $9 thousand, respectively. There was no recognized tax benefit related to this expense for the period ended June 30, 2019 and June 30, 2018, respectively.

For the six months ended June 30, 2019 and 2018, compensation expense applicable to the stock options was $13 thousand and $19 thousand, respectively. There was no recognized tax benefit related to this expense for the period ended June 30, 2019 and June 30, 2018, respectively.

Unrecognized compensation expense for non-vested stock options totaled $12 thousand as of June 30, 2019, which will be recognized over the remaining weighted average vesting period of 0.70 years.

Stock Awards

For the six months ended June 30, 2019, there were 11,500 restricted stock awards granted with a weighted average grant date fair value of $28.25.

The following table presents the activity in non-vested stock awards under the equity incentive plans for the six months ended June 30, 2019:

	Number of Shares			Grant-date Fair Value
	(In thousands)
Non-vested stock awards at beginning of year		27		$	23.97
Restricted shares granted		12			28.25
Restricted shares forfeited		(2	)		20.78

Non-vested stock awards at end of quarter		37		$	25.47

There was no activity in non-vested restricted stock awards under the 2016 or the 2012 Equity Incentive Plan for the three and six months ended June 30, 2018.

For the three months ended June 30, 2019 and 2018, compensation expense applicable to the stock awards was $93 thousand and $90 thousand, respectively, and the recognized tax benefit related to this expense was $26 thousand and $25 thousand, respectively.

For the six months ended June 30, 2019 and 2018, compensation expense applicable to the stock awards was $188 thousand and $188 thousand, respectively, and the recognized tax benefit related to this expense was $53 thousand, in each six month period 2019 and 2018.

Unrecognized compensation expense for non-vested restricted stock totaled $700 thousand as of June 30, 2019, which will be recognized over the remaining weighted average vesting period of 3.10 years.

NOTE 11 – EARNINGS PER COMMON SHARE

Basic earnings per share represents net income available to common stockholders divided by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Unallocated ESOP shares are not deemed outstanding for earnings per share calculations. Under the Company’s 2012 and 2016 Equity Incentive Plans, stock awards contain non-forfeitable dividend rights. Accordingly, these shares are considered outstanding for computation of basic earnings per share. Potential common shares that may be issued by the Company relate to outstanding stock options and are determined using the treasury stock method.

	Three Months Ended June 30,						Six Months Ended June 30,
	2019			2018			2019			2018
	(In thousands, except earnings per share amounts)
Net income applicable to common stock	$	1,505		$	1,420		$	2,807		$	2,857

Average number of common shares issued		2,553			2,506			2,544			2,506
Less: Average unallocated ESOP shares		(98	)		(111	)		(99	)		(112	)

Average number of common shares outstanding used to calculate basic earnings per common share		2,455			2,396			2,445			2,394
Effect of dilutive stock options		100			105			96			99

Average number of common shares outstanding used to calculate diluted earnings per share		2,555			2,501			2,541			2,493

Earnings per common share:
Basic	$	0.61		$	0.59		$	1.15		$	1.19
Diluted	$	0.59		$	0.57		$	1.11		$	1.15

There were no anti-dilutive options that would have been excluded from the computations of diluted earnings per share for the three and six months ended June 30, 2019 and 2018. Anti-dilutive shares are common stock equivalents with exercise prices in excess of the average market value of the Company’s stock for the periods presented.

NOTE 12 – LEASES

Effective January 1, 2019, operating leases are included in operating lease right-of-use (“ROU”) asset and liabilities in our consolidated balance sheet. These operating leases provide the physical facilities for our sales and service locations, administration and operations offices, and ATMs.

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities were recognized at the adoption date based on the present value of lease payments over the remaining lease term. As our leases do not provide an implicit rate, we use the Federal Home Loan Bank borrowing rates that best align with the lease term in determining the present value of lease payments. Our lease terms may include options to extend or terminate the lease, which we include when it is reasonably certain that we will exercise that option. For operating leases, the lease expense is recognized on a straight-line basis over the lease term. The operating lease expense for the three and six months ended June 30, 2019 was $416 thousand and $832 thousand, respectively.

The table below summarizes other information related to our operating leases as of June 30, 2019:

Cash flows from operating leases, in thousands, year to date 2019	$	795
Weighted average remaining lease term, in years		5.6
Weighted average discount rate		3.12	%

The table below summarizes the maturity of the operating lease liabilities as of June 30, 2019:

	(In thousands)
2019	$	801
2020		1,632
2021		1,483
2022		1,182
2023		1,101
Thereafter		1,912
Total lease payments		8,111
Less imputed interest		(844	)
Present value of lease liabilities	$	7,267

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

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operation

Safe Harbor Statement for Forward-Looking Statements

This report may contain forward-looking statements within the meaning of the federal securities laws. These statements are not historical facts; rather they are statements based on the Company’s current expectations regarding its business strategies and their intended results and its future performance. Forward-looking statements are preceded by terms such as “expects,” “believes,” “anticipates,” “intends” and similar expressions.

Forward-looking statements are not guarantees of future performance. Numerous risks and uncertainties could cause or contribute to the Company’s actual results, performance and achievements being materially different from those expressed or implied by the forward-looking statements. Factors that may cause or contribute to these differences include, without limitation, general economic conditions, including changes in market interest rates and changes in monetary and fiscal policies of the federal government; legislative and regulatory changes; the changing quality and composition of the loan and investment securities portfolio; loan demand; deposit flows; competition; and, changes in accounting principles and guidelines. Additional factors that may affect our results are discussed in the Company’s 2018 Annual Report on Form 10-K under the section titled “Item 1A.–Risk Factors.” These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements.

Critical Accounting Policies

We consider critical accounting policies to be accounting policies involving significant judgments and assumptions by management that have, or could have, a material impact on the carrying value of certain assets or on income to be critical accounting policies.

Allowance for Loan Losses. The allowance for loan losses is the amount estimated by management as necessary to cover losses inherent in the loan portfolio at the balance sheet date. The allowance is established through the provision for loan losses, which is charged to income. Determining the amount of the allowance for loan losses necessarily involves a high degree of judgment. Among the material estimates required to establish the allowance are the following: the likelihood of loan default; the loss exposure at default; the amount and timing of future cash flows on impaired loans; the value of collateral; and, the determination of loss factors to be applied to the various qualitative elements of the portfolio. All of these estimates are susceptible to significant change.

Management reviews the level of the allowance at least quarterly and establishes the provision for loan losses based upon an evaluation of the portfolio, past loss experience, current economic conditions and other factors related to the collectibility of the loan portfolio. Although we believe that we use the best information available to establish the allowance for loan losses, future adjustments to the allowance may be necessary if economic or other conditions differ substantially from the assumptions used in making the evaluation. In addition, the Federal Deposit Insurance Corporation and Massachusetts Commissioner of Banks, as an integral part of their examination processes, periodically review our allowance for loan losses and may require us to recognize adjustments to the allowance based on their judgments about information available to them at the time of their examination. A large loss could deplete the allowance and require increased provisions to replenish the allowance, which would adversely affect earnings.

Comparison of Financial Condition at June 30, 2019 and December 31, 2018

General. Total assets increased $85.1 million, or 9.8%, from $871.4 million at December 31, 2018 to $956.5 million at June 30, 2019. Total asset growth was primarily related to an increase in the loan portfolio of $84.5 million or 11.4%, and the addition of an operating lease right-of-use asset of $7.2 million, partially offset by a decrease in cash and cash equivalents of $10.3 million , or 24.2%, and a decrease of $3.4 million in securities available for sale.

Loans . The loan portfolio increased $84.5 million. Construction loans increased $26.2 million, or 24.6%, primarily due to the addition of several projects during the period. Commercial real estate loans increased $22.5 million, or 15.2%, as we have had continued success in expanding our business development efforts. Commercial loans increased $18.4 million, or 27.5%. Residential real estate loans increased $16.7 million, or 4.4%, to $399.2 million, compared to $382.5 million at December 31, 2018.

At June 30, 2019, past due loans totaled $1.2 million as compared to $2.1 million at December 31, 2018. Substantially all delinquent loans are secured by real estate collateral with values exceeding outstanding loan principal. There were no charge-offs on delinquent loans during the six months ended June 30, 2019 and June 30, 2018.

Securities. Total securities decreased from $66.8 million at December 31, 2018 to $63.3 million at June 30, 2019.

Deposits. Total deposits increased $12.3 million, or 1.7%, from $717.9 million at December 31, 2018 to $730.2 million at June 30, 2019. Money market accounts increased $59.0 million, or 29.0%. Demand deposits and NOW accounts increased $17.6 million, or 11.4%, to $171.5 million as growth was realized in both retail and commercial accounts. Deposit growth was driven by our continued emphasis on primary relationships as well as targeted offers on interest-bearing accounts. Consequently, non-relationship based certificates of deposit decreased $52.1 million, or 18.7%, to $226.2 million. Savings account balances also decreased $12.2 million to $70.0 million at June 30, 2019.

Borrowings. We use borrowings, primarily from the FHLB, to supplement our supply of funds for loans and securities, and to support short-term liquidity needs of the institution. Long-term debt, consisting entirely of FHLB advances, increased $19.3 million, or 33.0%, for the six months ended June 30, 2019 to support loan funding. Short-term borrowings consist entirely of advances from the FHLB with initial maturities less than one year. Balances of short-term borrowings increased $39.0 million, or 260.0%, from December 31, 2018 to meet liquidity needs. Subordinated debt was $9.8 million at June 30, 2019 and December 31, 2018.

Stockholders’ Equity. Stockholders’ equity increased $4.5 million, or 6.9%, from $65.1 million at December 31, 2018 to $69.6 million at June 30, 2019. The increase was primarily a result of net income for the six month period of $2.8 million and an after-tax increase in the fair value of available for sale securities of $1.2 million, partially offset by dividends paid of $293 thousand.

Results of Operations for the Three Months Ended June 30, 2019 and 2018

Overview. Net income for the three months ended June 30, 2019 was $1.5 million, compared to net income of $1.4 million for the three months ended June 30, 2018, an increase of $85 thousand or 6.0%. The increase in net income was due to increases in net interest income and non-interest income along with a lower provision for loan losses, partially offset by an increase in non-interest expense. Net interest income increased $632 thousand to $6.7 million, non-interest income increased $236 thousand to $882 thousand and the provision for loan loss decreased $25 thousand to $170 thousand in the 2019 quarter. Non-interest expense increased $766 thousand and totaled $5.4 million for the three months ended June 30, 2019. Income tax expense increased $42 thousand to $565 thousand, as compared to the 2018 period.

Net Interest Income. Net interest income for the three months ended June 30, 2019 increased $632 thousand, or 10.4%, as compared to the three months ended June 30, 2018. The increase in interest income was due to increases in the average balances of loans and an increasing yield. Interest expense increased, driven by overall deposit growth, higher rates offered on certificates of deposit and money market accounts, and higher rates on borrowings .

Interest and dividend income increased $1.9 million, or 23.6%, from $8.2 million for the three months ended June 30, 2018 to $10.1 million for the three months ended June 30, 2019. The average balance of interest-earning assets increased 13.3%, while the average rate earned on these assets increased by 37 basis points (“bps”). Interest and fees on loans increased $1.9 million, or 25.4%, due, in part, to a 16.2% increase in the average balance of loans. The average rate earned on loans increased 34 bps to 4.66%. Interest income from investments increased $39 thousand, or 7.1%, due primarily to an increase in the average yields for the three months ended June 30, 2019 as compared to the prior year period.

Interest expense increased $1.3 million, or 62.3% primarily due to an increase in average balances of interest-bearing deposits and an increase in rates. Our funding costs have responded more quickly than loan income to the change in interest rates. Deposit expense increased $1.1 million, or 76.4%. The average balance of interest-bearing deposits increased $87.8 million, or 16.7%, in the three months ended June 30, 2019, compared to the same period in 2018 and the average rate paid on interest bearing deposits increased 57 bps. In the 2019 period, interest expense on money market accounts increased by $805 thousand to $1.1 million. The rate paid on money market accounts increased 93 bps primarily due to a higher tiered-rate structure for these accounts than in the prior year, along with the increase of the average balance of money market accounts of $119.4 million to $253.1 million, as compared to the prior year period. The cost of term certificates of deposit increased $345 thousand to $1.4 million as balances in our retail products increased. Rates paid on certificates of deposit balances increased to 2.21%, up from 1.63% in the same period last year.

Interest expense on short-term borrowings totaled $255 thousand in the three month period ended June 30, 2019, compared to $75 thousand in the three months ended June 30, 2018, primarily due to increases in average balances as well as increases in the rates paid by 87 bps.

Long-term debt expense totaled $390 thousand in the three month period ended June 30, 2019 compared to $388 thousand in the three months ended June 30, 2018. The average balance of long-term FHLB advances decreased from $89.7 million to $63.4 million, while rates paid on long-term FHLB advances increased from 1.73% to 2.47%.

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,
	2019								2018
(Dollars in thousands)	Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate (1)			Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate (1)
Interest-earning assets:
Short-term investments	$	27,106		$	143		2.11	%	$	29,858		$	120		1.61	%
Debt securities:
Taxable		50,574			363		2.87			53,656			345		2.58
Tax-exempt		13,050			80		2.47			12,927			82		2.54
Total loans and loans held for sale		812,506			9,444		4.66			698,988			7,534		4.32
FHLB stock		4,944			59		4.83			5,874			82		5.57
Total interest-earning assets		908,180			10,089		4.46			801,303			8,163		4.09
Allowance for loan losses		(7,070	)							(6,285	)
Total interest-earning assets less allowance for loan losses		901,110								795,018
Non-interest-earning assets		33,956								23,098
Total assets	$	935,066							$	818,116
Interest-bearing liabilities:
Regular savings accounts	$	74,433			112		0.60		$	99,411			152		0.61
NOW checking accounts		37,130			34		0.37			39,102			31		0.32
Money market accounts		253,105			1,050		1.66			133,753			245		0.73
Certificates of deposit		249,288			1,374		2.21			253,926			1,029		1.63
Total interest-bearing deposits		613,956			2,570		1.68			526,192			1,457		1.11
Short-term borrowings		37,374			255		2.74			16,120			75		1.87
Long-term debt		63,364			390		2.47			89,841			388		1.73
Subordinated debt		9,842			157		6.41			9,812			158		6.45
Total interest-bearing liabilities		724,536			3,372		1.87			641,965			2,078		1.29
Non-interest-bearing demand deposits		128,083								111,698
Other non-interest-bearing liabilities		13,584								3,253
Total liabilities		866,203								756,916
Stockholders’ equity		68,863								61,200
Total liabilities and stockholders’ equity	$	935,066							$	818,116
Net interest income				$	6,717							$	6,085
Net interest rate spread (2)							2.59	%							2.79	%
Net interest-earning assets (3)	$	183,644							$	159,338
Net interest margin (4)							2.97	%							3.05	%
Average total interest-earning assets to average total interest-bearing liabilities		125.35	%							124.82	%

(1)

Ratios for the three month period have been annualized.

(2)

Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of interest-bearing liabilities.

(3)

Represents total average interest-earning assets less total average interest-bearing liabilities.

(4)

Represents net interest income as a percent of average interest-earning assets.

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, 2019 Compared to Three Months Ended June 30, 2018
	Increase (Decrease) Due to						Total Increase
(In thousands)	Volume			Rate			(Decrease)
Interest-earning assets:
Short-term investments	$	(9	)	$	32		$	23
Debt securities:
Taxable		(17	)		35			18
Tax-exempt		1			(3	)		(2	)
Total loans and loans held for sale		1,288			622			1,910
FHLB stock		(12	)		(11	)		(23	)
Total interest-earning assets		1,251			675			1,926

Interest-bearing liabilities:
Regular savings		(38	)		(2	)		(40	)
NOW checking		(1	)		5			4
Money market		333			472			805
Certificates of deposit		(19	)		363			344
Total interest-bearing deposits		275			838			1,113
Short-term borrowings		133			47			180
Long-term debt		(3	)		5			2
Subordinated debt		—			(1	)		(1	)
Total interest-bearing liabilities		405			889			1,294

Increase (decrease) in net interest income	$	846		$	(214	)	$	632

Provision for Loan Losses. The provision for loan losses was $170 thousand for the three months ended June 30, 2019, compared to $195 thousand for the three month period ended June 30, 2018. In the 2019 period, the provision reflects management’s estimate of loan losses based upon historical loan portfolio performance, growth of the portfolio, loan mix, as well as qualitative factors such as the strength of the regional economy and organizational knowledge and expertise.

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)	2019			2018
Allowance at beginning of period	$	6,978		$	6,218
Provision for loan losses		170			195
Charge-offs		—			—
Recoveries		—			—
Net charge-offs		—			—
Allowance at end of period	$	7,148		$	6,413
Allowance for loan losses to nonperforming loans at end of period		637.87	%		526.49	%
Allowance for loan losses to total loans at end of period		0.86	%		0.90	%
Net charge-offs to average loans outstanding during the period		0.00	%		0.00	%

Non-interest Income. Non-interest income totaled $882 thousand, an increase of $236 thousand or 36.5%. Wealth management fees decreased $25 thousand, or 6.0%, as compared to the prior year as total assets under management totaled $405.3 million as of June 30, 2019, compared to $413.9 million at June 30, 2018. Income from mortgage banking activities in 2019 increased $23 thousand as sales of residential mortgage loans were higher as compared to the prior year. Other miscellaneous income increased $233 thousand primarily due to increases in fees on customer loan interest rate swaps.

Non-interest Expense. Non-interest expense totaled $5.4 million for the three months ended June 30, 2019, compared to $4.6 million for the three months ended June 30, 2018, an increase of $766 thousand. Salaries and employee benefits increased $429 thousand due to annual merit and benefit cost increases along with increases to staff. Occupancy and equipment costs increased $119 thousand as a result of the consolidation and relocation of business operations to new office space and annual rent adjustments. Data processing costs increased $73 thousand as several data and information security projects contributed to an additional $36 thousand in 2019. Professional fees increased $41 thousand due mainly to higher legal expense. Advertising and other general administrative costs increased $82 thousand associated with increased business volumes. FDIC insurance expense increased $22 thousand due to higher assessment balances and quarterly assessment rates.

Income Taxes. An income tax provision of $565 thousand was recorded during the quarter ended June 30, 2019, compared to a provision of $523 thousand in the comparable 2018 quarter. The effective tax rate for the 2019 three month period was 27.3%, compared to 26.9% for the 2018 three month period.

Results of Operations for the Six Months Ended June 30, 2019 and 2018

Overview. Net income for the six months ended June 30, 2019 was $2.8 million, compared to net income of $2.9 million for the six months ended June 30, 2018. The slight decrease was primarily due to increased net interest income of $1.0 million and increased non-interest income of $340 thousand, more than offset by increased non-interest expense of $1.3 million and increased provision for loan losses of $150 thousand.

Net Interest Income. Net interest income for the six months ended June 30, 2019 increased $1.0 million, or 8.6%, as compared to the six months ended June 30, 2018. The increase in net interest income was primarily due to an increase in interest income of $3.5 million, or 22.0% partially offset by interest expenses that increased $2.5 million, or 63.6%, during the period.

Interest and dividend income increased $3.5 million, or 22.0%, from $16.0 million for the six months ended June 30, 2018 to $19.5 million for the six months ended June 30, 2019 . The average balance of interest-earning assets increased 11.6%, while the average rate earned on these assets increased by 38 bps. Interest and fees on loans increased $3.4 million, or 23.1%, due to a 14.4% increase in the average balance of loans and an increase of 33 bps in the average rate earned on loans. Interest income from investments increased $127 thousand, or 11.7%, due to an increase in the average rate earned on these securities, due, in part, to Federal Reserve interest rate increases.

The increase in interest expense of $2.5 million was primarily due to an increase in average balances of interest-bearing deposits and an increase in the cost of funds. The average balance of interest-bearing deposits increased $98.1 million, or 18.3%, in the six months ended June 30, 2019, as compared to the same period in 2018, while the average rate paid on interest-bearing deposits increased 63 bps. Interest expense on money market accounts increased by $1.4 million from 2018 to 2019. The rate paid on money market accounts increased to 1.64% up from 0.70% in 2018, while the average balance of these accounts increased $98.7 million to $237.0 million, as compared to the prior year period. The cost of term certificates of deposit increased $986 thousand to $2.8 million as balances in our retail products have increased, as well as an increase of 63 bps in the rates paid to acquire these balances, as compared to the same period last year. The average balance of short-term FHLB advances increased from $23.0 million to $26.5 million, while rates paid on short-term FHLB advances increased from 1.74% to 2.78%. Rates on long-term FHLB advances increased 46 bps to 2.13% for the six months ending June 30, 2019. Interest expense on short-term and long-term borrowings totaled $998 thousand in the six months ended June 30, 2019, compared to $929 thousand in the six months ended June 30, 2018, an increase of $69 thousand.

	For the Six Months Ended June 30,
	2019								2018
(Dollars in thousands)	Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate (1)			Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate (1)
Interest-earning assets:
Short-term investments	$	25,627		$	307		2.42	%	$	29,505		$	233		1.57	%
Debt securities:
Taxable		51,305			741		2.91			53,800			686		2.58
Tax-exempt		13,021			162		2.51			13,004			164		2.54
Total loans and loans held for sale		791,855			18,171		4.63			692,076			14,761		4.30
FHLB stock		4,416			138		6.33			5,968			158		5.32
Total interest-earning assets		886,224			19,519		4.44			794,353			16,002		4.06
Allowance for loan losses		(6,951	)							(6,241	)
Total interest-earning assets less allowance for loan losses		879,273								788,112
Non-interest-earning assets		32,310								22,975
Total assets	$	911,583							$	811,087
Interest-bearing liabilities:
Regular savings accounts	$	76,804			231		0.61		$	99,123			265		0.54
NOW checking accounts		35,361			63		0.36			37,486			53		0.29
Money market accounts		237,024			1,925		1.64			138,340			478		0.70
Certificates of deposit		264,680			2,840		2.16			243,835			1,854		1.53
Total interest-bearing deposits		613,869			5,059		1.66			518,784			2,650		1.03
Short-term borrowings		26,543			365		2.78			23,027			198		1.74
Long-term debt		59,817			633		2.13			88,445			731		1.67
Subordinated debt		9,839			314		6.45			9,808			316		6.49
Total interest-bearing liabilities		710,068			6,371		1.81			640,064			3,895		1.23
Non-interest-bearing demand deposits		121,891								107,055
Other non-interest-bearing liabilities		11,936								3,347
Total liabilities		843,895								750,466
Stockholders’ equity		67,688								60,621
Total liabilities and stockholders’ equity	$	911,583							$	811,087
Net interest income				$	13,148							$	12,107
Net interest rate spread (2)							2.63	%							2.84	%
Net interest-earning assets (3)	$	176,156							$	154,289
Net interest margin (4)							2.99	%							3.07	%
Average total interest-earning assets to average total interest-bearing liabilities		124.81	%							124.11	%

(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)

Represents total average interest-earning assets less total average interest-bearing liabilities.

(4)

Represents net interest income as a percent of average interest-earning assets.

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, 2019 Compared to Six Months Ended June 30, 2018
	Increase (Decrease) Due to						Total Increase
(In thousands)	Volume			Rate			(Decrease)
Interest-earning assets:
Short-term investments	$	(25	)	$	99		$	74
Debt securities:
Taxable		(29	)		84			55
Tax-exempt		—			(2	)		(2	)
Total loans and loans held for sale		2,234			1,176			3,410
FHLB stock		(71	)		51			(20	)
Total interest-earning assets		2,109			1,408			3,517

Interest-bearing liabilities:
Regular savings		(77	)		44			(33	)
NOW checking		(3	)		12			9
Money market		500			947			1,447
Certificates of deposit		170			816			986
Total interest-bearing deposits		590			1,819			2,409
Short-term borrowings		34			133			167
Long-term debt		(716	)		618			(98	)
Subordinated debt		—			(2	)		(2	)
Total interest-bearing liabilities		(92	)		2,568			2,476

Increase (decrease) in net interest income	$	2,201		$	(1,160	)	$	1,041

Provision for Loan Losses. The provision for loan losses was $410 thousand for the six months ended June 30, 2019, compared to $260 thousand for the six month period ended June 30, 2018. In the 2019 period, the provision reflects management’s estimate of loan losses based upon historical loan portfolio performance, growth of the portfolio, loan mix, as well as other considerations such as the strength of the regional economy and organizational knowledge and expertise.

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)	2019			2018
Allowance at beginning of period	$	6,738		$	6,153
Provision for loan losses		410			260
Charge-offs: Other consumer loans		—			—
Recoveries		—			—
Net charge- offs		—			—

Allowance at end of period	$	7,148		$	6,413
Allowance for loan losses to nonperforming loans at end of period		637.87	%		526.49	%
Allowance for loan losses to total loans at end of period		0.86	%		0.90	%
Net charge-offs to average loans outstanding during the period		0.00	%		0.00	%

Non-interest Income. Non-interest income totaled $1.6 million, an increase of $340 thousand, or 27.8%. Income from mortgage banking activities increased $42 thousand, primarily due to higher volume of sales of residential mortgage loans as compared to the prior year period. Income from wealth management fees in 2019 increased $25 thousand. All other non-interest income increased $273 thousand primarily due to an increase in fees on customer interest rate swaps due to increased volume.

Non-interest Expense. Non-interest expense increased $1.3 million to $10.5 million during the six months ended June 30, 2019, up from $9.2 million for the six months ended June 30, 2018. Factors that contributed to the increase in non-interest expense during the 2019 period were increased salaries and employee benefits of $748 thousand, or 13.8%, primarily attributable to annual salary and employee benefits increases and increases to staff. Occupancy and equipment expenses increased $205 thousand due to the relocation of business operations to a new home office location and increases in rent expense. Data processing expense increased $136 thousand and other general administrative costs increased $191 thousand due to expanding business volumes and operations. Professional fees increased $33 thousand mainly due to higher legal expense.

Income Taxes. An income tax provision of $1.0 million was recorded during the six months ended June 30, 2019 compared to a provision of $1.1 million in the comparable 2018 period. The effective tax rate for the 2019 six month period was 27.1%, identical to the rate for the 2018 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. The Bank’s primary sources of funds consist of deposit inflows, loan repayments, maturities and sales of securities, and borrowings from the FHLB. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, calls of securities and prepayments on loans are greatly influenced by seasonal events, general interest rates, economic conditions and competition.

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

Our most liquid assets are cash and cash equivalents, interest-bearing deposits in other banks, and securities available for sale. The level of these assets depends on our operating, financing, lending and investing activities during any given period. At June 30, 2019, cash and cash equivalents, which include short-term investments, totaled $32.4 million. Securities classified as available-for-sale, whose aggregate fair value is $63.3 million, provide additional sources of liquidity.

At June 30, 2019, we had $54.0 million in short-term borrowings outstanding, represented entirely by FHLB advances, and $77.9 million in long-term debt, also consisting entirely of FHLB advances. At June 30, 2019, we had a total of $65.1 million in unused borrowing capacity from the FHLB. Short-term borrowings are generally used to fund temporary cash needs due to the timing of loan originations and deposit gathering activities. Long-term debt is generally used to provide for longer-term funding needs of the Company, including the match funding of loans originated for portfolio. At June 30, 2019, we also had the ability to borrow $5.0 million from the Co-operative Central Bank on an unsecured basis, a credit line of $5.0 million with a correspondent bank, and $7.1 million from the Federal Reserve Bank under a collateralized borrowing program, none of which was outstanding at that date.

At June 30, 2019, we had $195.4 million in loan commitments outstanding, which included $82.3 million in unadvanced funds on construction loans, $39.8 million in unadvanced home equity lines of credit, $28.2 million in unadvanced commercial lines of credit, and $42.6 million in new loan originations.

Term certificates of deposit due within one year of June 30, 2019 amounted to $174.5 million, or 77.2%, of total term certificates, a decrease of $54.0 million from $228.5 million at December 31, 2018. Balances of term certificates maturing in more than one year totaled $51.7 million at June 30, 2019, relatively unchanged as compared to balances at December 31, 2018. Balances of term certificates that mature within one year reflect customer preferences for greater liquidity of personal funds, while longer-dated certificates reflect a willingness among customers to accept current interest rates for extended time periods. If maturing deposits are not renewed, we will be required to seek other sources of funds, including new term certificates and other borrowings. Depending on market conditions, we may be required to pay higher rates on such deposits or other borrowings than we currently pay on the existing funds. We have the ability to attract and retain deposits by adjusting the interest rates offered.

The Company is a separate legal entity from the Bank and will have to provide for its own liquidity to pay its operating expenses and other financial obligations. The Company’s primary source of income will be dividends received from the Bank. Massachusetts banking law and FDIC regulations limit distributions of capital. In addition, the Company is subject to the policy of the Board of Governors of the Federal Reserve System (“Federal Reserve Board”) that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the Company appears consistent with its capital needs, asset quality and overall financial condition. At June 30, 2019, the Company had $435 thousand of liquid assets as represented by cash and cash equivalents on an unconsolidated basis.

Capital Management. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Bank’s consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

In order to be considered “adequately capitalized,” federal banking regulations require a minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5%; a minimum ratio of Tier 1 capital to risk-weighted assets of 6%; a minimum ratio of total capital to risk-weighted assets of 8%; and, a minimum leverage ratio of 4% for all banking organizations. Additionally, community banking institutions must maintain a capital conservation buffer of common equity Tier 1 capital in an amount greater than 2.5% of total risk-weighted assets to be considered “well capitalized” and avoid being subject to limitations on capital distributions and discretionary bonuses. An institution is subject to limitations on paying dividends, engaging in share repurchases, and paying discretionary bonuses if its capital level falls below the buffer amount. At June 30, 2019, the Bank was well-capitalized under the current rules and we expect to remain well capitalized.

Off-Balance Sheet Arrangements

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

For the six months ended June 30, 2019, the Company did not engage in any off-balance sheet transactions reasonably likely to have a material effect on the Company’s financial condition, results of operations or cash flows.

Item 3. Quantitative and Qualitative Disclosure About Market Risk

Qualitative Aspects of Market Risk

One significant risk affecting the financial condition and operating results of the Company and the Bank is interest rate risk. We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment. Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits. As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings. To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread. Our strategy for managing interest rate risk emphasizes the following: originating adjustable-rate loans for retention in our loan portfolio; selling in the secondary market newly originated, conforming longer-term fixed rate residential mortgage loans; promoting core deposit products; adjusting the maturities of borrowings; and, adjusting the investment portfolio mix and duration.

We have an Asset/Liability Committee, which includes members of management, to communicate, coordinate and control all aspects involving asset-liability management. The committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.

Quantitative Aspects of Market Risk

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

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

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

The table below sets forth an approximation of our exposure as a percentage of estimated net interest income for the next 12 month period using interest income and equity simulations. The simulations use projected repricing of assets and liabilities at June 30, 2019 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments. Prepayment rates can have a significant impact on the simulations. Because of the large percentage of loans we hold, rising or falling interest rates have a significant impact on the prepayment speeds of our earning assets that, in turn, affect the rate sensitivity position. When interest rates rise, loan prepayments tend to slow. When interest rates fall, loan prepayments tend to rise. Our asset sensitivity would be reduced if prepayments slowed and would increase if prepayments accelerated. While we believe such assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment activity.

The following table reflects the estimated effects of changes in interest rates on the present value of our equity at June 30, 2019 and on our projected net interest income from June 30, 2019 through June 30, 2020. These estimates are in compliance with our internal policy limits.

	As of June 30, 2019								Over the Next 12 Months Ending June 30, 2020
	Present Value of Equity								Projected Net Interest Income
Basis Point (“bp”) Change in Rates	$ Amount		$ Change			% Change			$ Amount		$ Change			% Change
						(Dollars in thousands)
300 bp	$	91,570	$	(5,462	)		(5.63	)%	$	29,075	$	590			2.07	%
200		96,888		(144	)		(0.15	)		29,102		617			2.17
0		97,032		—			—			28,485		—			—
(100)		89,936		(7,096	)		(7.31	)		27,903		(582	)		(2.04	)

Item 4. Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

For information regarding the Company’s risk factors, see Part I, Item 1A “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission on March 29, 2019. As of June 30, 2019, the risk factors of the Company have not changed materially from those disclosed in the Annual Report on Form 10-K for the year ended December 31, 2018.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

Not applicable.

Item 6. Exhibits

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

	3.2	Amended and Restated Bylaws of Wellesley Bancorp, Inc. (2)

	4.1	Form of 6.00% Fixed to Floating Subordinated Note Due 2025 (3)

	10.1	Amended Severance Compensation Agreement between Wellesley Bank and Ralph L. Letner *

	10.2	Amended Severance Compensation Agreement between Wellesley Bank and Michael W. Dvorak*

	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, 2019, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements.

* Management contract or compensatory agreement or arrangement.

(1)

Incorporated herein by reference to the exhibits to Wellesley Bancorp, Inc.’s Pre-Effective Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-176764), filed with the Securities and Exchange Commission on November 7, 2011.

(2)

Incorporated herein by reference to the exhibits to Wellesley Bancorp, Inc.’s Annual Report on Form 10-K (File No. 001-35352), filed with the Securities and Exchange Commission on March 29, 2018.

(3)

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		WELLESLEY BANCORP, INC.

Dated:	August 6, 2019	By:	/s/ Thomas J. Fontaine
			Thomas J. Fontaine
			President and Chief Executive Officer
			(Principal Executive Officer)

Dated:	August 6, 2019	By:	/s/ Michael W. Dvorak
			Michael W. Dvorak
			Chief Financial Officer and Treasurer
			(Principal Accounting and Financial Officer)

Exhibit 10.1

Severance Compensation Agreement between Wellesley Bank and Ralph Letner

The purpose of this letter is to document the terms of the promotion at Wellesley Bank (The “Bank”) that have been discussed with you. These terms supersede any prior agreement with the Bank.

Effective May 1, 2016, your title will be Executive Vice President, Chief Lending Officer. In this position, you will be paid biweekly at an annual salary rate of $226,000.00. In addition, you are now eligible for the severance compensation agreement following these terms:

Termination without cause absent a change in control. The Bank will continue your base salary (at the rate then in effect) for twenty four (24) months and continue to pay the Bank’s share of your health insurance premiums if you elect COBRA health care continuation coverage.

Termination without cause or voluntary termination if you are not offered a comparable position within 12 months of a change in control. The Bank will continue your base salary (at the rate then in effect) for twenty four (24) months and continue to pay the Bank’s share of your health insurance premiums if you elect COBRA health care continuation coverage.

General Release. As a condition to your receipt of any severance benefit, you will be required to execute a release in a form satisfactory to the Bank.

For purposes of this letter agreement, the terms “cause”, “change in control” and “comparable position” shall have the same meaning as under the Wellesley Bank Employee Severance Compensation Plan dated January 25, 2012 (the “Plan). A copy of the Plan is attached for your reference. If you terminate employment in circumstances not expressly covered by this letter agreement, you will not be eligible for severance.

To confirm our agreement with the foregoing, please sign a copy of this letter and return it to my attention.

Should you have any questions, please call me at your convenience.

Date: May 23, 2016		/s/ Maureen Sullivan
		EVP, Chief Marketing and
		Human Resources Officer

		Accepted:
		/s/ Ralph Letner

Exhibit 10.2

Severance Compensation Agreement between Wellesley Bank and Michael W. Dvorak

The purpose of this letter is to document the terms of the severance compensation agreement at Wellesley Bank (The “Bank”) that have been discussed with you. These terms supersede any prior agreement, whether oral or written, with the Bank.

Effective June 20, 2016, your title will be Executive Vice President, Chief Financial Officer. In this position, you are eligible for the severance compensation on the following terms:

General Release. As a condition to your receipt of any severance benefit, you will be required to execute a release in a form satisfactory to the Bank.

To confirm our agreement with the foregoing, please sign a copy of this letter and return it to my attention.

Should you have any questions, please call me at your convenience.

Dated: May 23, 2016		/s/ Maureen Sullivan
		EVP, Chief Marketing and
		Human Resources Officer

		Accepted:
		/s/ Michael W. Dvorak

Exhibit 31.1

Certification

I, Thomas J. Fontaine, certify that:

I have reviewed this Quarterly Report on Form 10-Q of Wellesley Bancorp, Inc.;

Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and in preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c)

Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report, based on such evaluation; and

(d)

Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.

The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting that are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated:	August 6, 2019	/s/ Thomas J. Fontaine
		Thomas J. Fontaine
		President and Chief Executive Officer
		(Principal Executive Officer)

Exhibit 31.2

Certification

I, Michael W. Dvorak, certify that:

I have reviewed this Quarterly Report on Form 10-Q of Wellesley Bancorp, Inc.;

(a)

(b)

(c)

(d)

(a)

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Dated:	August 6, 2019	/s/ Michael W. Dvorak
		Michael W. Dvorak
		Chief Financial Officer and Treasurer
		(Principal Accounting and Financial Officer)

Exhibit 32.0

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report on Form 10-Q of Wellesley Bancorp, Inc. (the “Company”) for the quarter ended June 30, 2019, as filed with the Securities and Exchange Commission (the “Report”), I hereby certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:

The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

The information contained in the Report fairly presents, in all material respects, the consolidated financial condition and results of operations of the Company as of and for the period covered by the Report.

	By:	/s/ Thomas J. Fontaine
		Thomas J. Fontaine
		President and Chief Executive Officer
		(Principal Executive Officer)
		August 6, 2019

	By:	/s/ Michael W. Dvorak
		Michael W. Dvorak
		Chief Financial Officer and Treasurer
		(Principal Financial and Accounting Officer)
		August 6, 2019