WELLESLEY BANCORP, INC. Safe Harbor Statement for Forward-Looking Statements
This report contains certain forward-looking statements about the Company and the Bank. The words or phrases "will likely result," "are expected to," "will continue," "intends," "believes," "is anticipated," "estimate," "project" or similar expressions are intended to identify "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain risks and uncertainties including changes in economic conditions in the Company's market area, changes in policies by regulatory agencies, changes in legislation or accounting policies, fluctuations in interest rates, demand for loans in the Company's market area, competition and information provided by third-party vendors. Management's ability to predict results or the effect of future plans or strategies is inherently uncertain. Factors that could affect actual results include, but are not limited to, our ability to complete our previously announced business combination with Cambridge Bancorp, interest rate trends, the general economic climate in our market area, as well as nationwide, the COVID-19 (coronavirus) pandemic or the outbreak of other highly infectious or contagious diseases, our ability to control costs and expenses, competitive products and pricing, loan delinquency rates and changes in federal and state legislation and regulation and tax laws. Further, statements about the potential effects of the COVID-19 pandemic on our business and financial results and condition may constitute forward-looking statements and are subject to the risk that the actual effects may differ, possibly materially, from what is reflected in those forward-looking statements due to factors and future developments that are uncertain, unpredictable and in many cases beyond our control, including the scope and duration of the pandemic, actions taken by governmental authorities in response to the pandemic, and the direct and indirect impact of the pandemic on our customers, third parties and us. Additional factors that may affect our results that could cause actual results to differ materially from historical results and those presently anticipated or projected are discussed in the Company's 2019 Annual Report on Form 10-K under the section titled "Item 1A.-Risk Factors." Except as required by applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. The Company wishes to advise readers that the factors listed above could affect the Company's financial performance and could cause the Company's actual results for future periods to differ materially from any opinions or statements expressed with respect to future periods in any current statements. 22 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 at a level that represents management's best estimate of losses in the loan portfolio at the balance sheet date, future adjustments to the allowance for loan losses may be necessary and our results of operations could be adversely affected if circumstances differ substantially from the assumptions used in making the determinations. Furthermore, while we believe we have established our allowance for loan losses in conformity with accounting principles generally accepted inthe United States of America , there can be no assurance that theFDIC or theMassachusetts Commissioner of Banks, in reviewing our loan portfolio, will not require us to increase our allowance for loan losses based on judgments different from ours. In addition, because future events affecting borrowers and collateral cannot be predicted with certainty, there can be no assurance that the existing allowance for loan losses is adequate or that increases will not be necessary should the quality of any loans deteriorate as a result of the factors discussed above. The spread of a highly infectious or contagious disease, such as COVID-19, could cause severe disruptions in theU.S. economy, which could in turn disrupt the business, activities, and operations of our customers, as well our business and operations. Moreover, since the beginning ofJanuary 2020 , the coronavirus outbreak has caused significant disruption in the financial markets both globally and inthe United States . The spread of COVID-19, or an outbreak of another highly infectious or contagious disease, may result in a significant decrease in business and/or cause our customers to be unable to meet existing payment or other obligations to us, particularly in the event of a spread of COVID-19 or an outbreak of an infectious disease in our market area. Any material increase in the allowance for loan losses may adversely affect our financial condition and results of operation. COVID-19. In response to the rapidly evolving COVID-19 pandemic, the Company focused first on the well-being of its people, customers and communities. Preventative health measures were put in place including work from home for all employees able to do so, social distancing precautions for all employees in the office and customers visiting branches, and preventative cleaning at offices and branches. The Company also focused on business continuity measures, including monitoring potential business interruptions, making improvements to our remote working technology, and conducting regular discussions with our technology vendors. The Company has also taken measures to both support customers affected by the pandemic and to maintain strong asset quality, including the following: helping business customers through theSmall Business Administration's Paycheck Protection Program (the "PPP"); offering flexible repayment options for consumer and business clients through a streamlined loan modification process, when appropriate; maintaining prudent underwriting standards; and, monitoring portfolio risk and related mitigation strategies. The Company is participating in the PPP, which provides forgivable loans to small businesses to enable them to maintain payroll, rehire employees who have been laid-off, and cover applicable overhead. After the PPP was announced, the Company mobilized resources to maximize the ability of clients to access this program. As ofApril 30, 2020 , the Company had processed and approved 164 loans under the PPP for a total of$35.0 million . As a further relief to qualified commercial and residential mortgage and consumer loan clients, the Company has developed guidelines to provide for forbearance of certain loan payments for up to 90 days. As ofApril 30, 2020 , the Company had granted approvals for payment deferrals on seven commercial loans with an aggregate balance of$3.0 million , and five residential mortgage loans with an aggregate balance of$3.5 million . 23
Comparison of Financial Condition at
General. Total assets increased$15.7 million , or 1.7%, from$945.2 million atDecember 31, 2019 to$960.9 million atMarch 31, 2020 . Total asset growth was primarily related to an increase in the net loan portfolio of$21.1 million or 2.5%, along with the quarterly mark-to-market increase of$6.7 million on client swaps, partially offset by a reduction in short-term investments and cash of$7.2 million and investments of$5.4 million . Loans.The net loan portfolio increased$21.1 million . We have had continued success growing our commercial loan portfolio. Commercial and industrial loans increased$7.8 million , or 12.2%, to$105.1 million . Construction loans increased$1.3 million to$139.3 million . Commercial real estate loans decreased$1.5 million to$180.4 million . Residential real estate loans increased$13.5 million , or 3.5%, to$401.8 million , compared to$388.3 million at December
31, 2019.
AtMarch 31, 2020 , past due loans totaled$5.1 million as compared to$1.0 million atDecember 31, 2019 . The increase is exclusively due to borrowers who have recently become 30-59 days past due. All delinquent loans are secured by real estate collateral with values exceeding outstanding loan principal. As ofApril 15, 2020 ,$2.7 million of the past due loans atMarch 31, 2020 had been brought current. There were no charge-offs on delinquent loans during the three months endedMarch 31, 2020 andMarch 31, 2019 .
Securities. Total securities decreased from
Deposits. Total deposits decreased$17.4 million , or 2.3%, from$752.5 million atDecember 31, 2019 to$735.0 million atMarch 31, 2020 . Demand deposits and NOW accounts increased$17.4 million , or 9.7%, to$196.2 million as growth was realized in both retail and commercial accounts. Money market accounts decreased$24.3 million , or 8.8% as depositors moved funds to more liquid alternatives in these uncertain markets. Certificates of deposit decreased$6.1 million , to$230.2 million , which included a decrease of$3.0 million in brokered accounts. Savings account balances also decreased$4.5 million to$73.5 million atMarch 31, 2020 . Borrowings. We use borrowings, primarily from the FHLB, to supplement our supply of funds for loans and securities, and to support short-term liquidity needs of the institution. Long-term debt, consisting entirely of FHLB advances, decreased$1.3 million , or 1.8%, for the three months endedMarch 31, 2020 . Short-term borrowings also consist entirely of advances from the FHLB with initial maturities less than one year. Balances of short-term borrowings increased$25.0 million , or 125.0%, fromDecember 31, 2019 to meet liquidity needs. Subordinated debt was$9.8 million atMarch 31, 2020 andDecember 31, 2019 . Stockholders' Equity. Stockholders' equity increased$1.7 million , or 2.3%, from$73.5 million atDecember 31, 2019 to$75.1 million atMarch 31, 2020 . The increase was primarily due to retained earnings and the exercise of stock options, partially offset by a decrease in the fair values of available-for-sale securities and by dividends paid. AtMarch 31, 2020 , the Company's ratio of stockholders' equity-to-total assets was 7.82%, compared to 7.77% atDecember 31, 2019 .
Results of Operations for the Three Months Ended
Overview. Net income for the three months endedMarch 31, 2020 was$1.5 million , compared to net income of$1.3 million for the three months endedMarch 31, 2019 , an increase of$239 thousand or 18.4%. The increase in net income was due to increases in net interest income and non-interest income, partially offset by an increase in the provision for loan losses and an increase in non-interest expense. Net interest income increased$809 thousand to$7.2 million and non-interest income increased$374 thousand to$1.1 million . The provision for loan loss increased$315 thousand to$555 thousand in the 2020 quarter. Non-interest expense increased$468 thousand and totaled$5.6 million for the three months endedMarch 31, 2020 . Income tax expense increased$161 thousand to$637 thousand , as compared to the 2019 period. Net Interest Income. Net interest income for the three months endedMarch 31, 2020 increased$809 thousand , or 12.6%, as compared to the three months endedMarch 31, 2019 . The increase in interest income was due to increases in the average balances of loans offset by a decreasing yield. Interest expense decreased, driven by overall deposit decreases, lower rates offered on certificates of deposit and money market accounts, and lower rates on borrowings. The net interest margin improved from 3.02% in the first quarter of 2019 to 3.15% in the first quarter of 2020. 24 Interest and dividend income increased$671 thousand , or 7.1%, from$9.4 million for the three months endedMarch 31, 2019 to$10.1 million for the three months endedMarch 31, 2020 . The average balance of interest-earning assets increased 6.9%, while the average rate earned on these assets decreased by three basis points ("bps"). Interest and fees on loans increased$976 thousand , or 11.2%, due, in part, to an 11.3% increase in the average balance of loans. The average rate earned on loans decreased four bps to 4.55%. Interest income from debt securities decreased$243 thousand , or 52.8%, due primarily to a decrease in the average balances associated with a sale of almost half of the portfolio in
late 2019. Interest expense decreased$138 thousand , or 4.6% primarily due to a decrease in average balances of interest-bearing deposits and a decrease in rates. Our funding costs have responded more quickly than loan income to the change in interest rates. Deposit expense decreased$436 thousand or 17.5%. The average balance of interest-bearing deposits decreased$17.5 million , or 2.9%, in the three months endedMarch 31, 2020 , compared to the same period in 2019 and the average rate paid on interest bearing deposits decreased 26 bps. The cost of term certificates of deposit decreased$387 thousand to$1.1 million as average balances decreased$73.1 million . Rates paid on certificates of deposit balances decreased to 2.10%, down from 2.12% in the same period last year. In the 2020 period, interest expense on money market accounts decreased by$26 thousand to$849 thousand . The rate paid on money market accounts decreased 37 bps primarily due to lower interest rates offered on these accounts. The average balance of money market accounts of$274.3 million is compared to$220.8 million in the prior year period. Interest expense increased for borrowings. Interest expense on short-term borrowings totaled$171 thousand in the three month period endedMarch 31, 2020 , compared to$110 thousand in the three months endedMarch 31, 2019 , primarily due to increases in average balances. Rates paid on short-term borrowings decreased by 103 bps during the 2020 period. Long-term debt expense totaled$480 thousand in the three month period endedMarch 31, 2020 compared to$243 thousand in the three months endedMarch 31, 2019 . The average balance of long-term FHLB advances increased from$56.2 million to$73.3 million , while rates paid on long-term FHLB advances increased from 1.75% to 2.63%. 25 Average Balances and Yields. The following table presents information regarding average balances of assets and liabilities, the total dollar amounts of interest income and dividends from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting annualized average yields and costs. The yields and costs for the periods indicated are derived by dividing income or expense by the average balances of assets or liabilities, respectively, for the periods presented. Average balances have been calculated using daily balances. Loan fees are included in interest income on loans and are insignificant. Yields are not presented on a tax-equivalent basis. Any adjustments necessary to present yields on a tax-equivalent basis are insignificant. For the Three Months Ended March 31, 2020 2019 Average Interest Average Average Interest Average Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
(Dollars in thousands) Balance Paid Rate (1) Balance Paid Rate (1) Interest-earning assets: Short-term investments$ 32,810 $ 107 1.32 %$ 24,151 $ 164 2.76 % Debt securities: Taxable 19,589 162 3.31 52,043 378 2.94 Tax-exempt 7,900 55 2.78 12,993 82 2.55 Total loans and loans held for sale 858,249 9,703 4.55 770,975 8,727 4.59 FHLB stock 5,445 74 5.45 3,882 79 8.27 Total interest-earning assets 923,993 10,101 4.40 864,044 9,430 4.43 Allowance for loan losses (7,724 ) (6,831 ) Total interest-earning assets less allowance for loan losses 916,269 857,213 Non-interest-earning assets 35,987 30,626 Total assets$ 952,256 $ 887,839 Interest-bearing liabilities: Regular savings accounts$ 75,604 90 0.48$ 79,201 119 0.61 NOW checking accounts 39,199 34 0.35 33,574 28 0.34 Money market accounts 274,268 849 1.24 220,764 875 1.61 Certificates of deposit 207,168 1,080 2.10 280,242 1,467 2.12 Total interest-bearing deposits 596,239 2,053 1.38 613,781 2,489 1.64 Short-term borrowings 37,255 171 1.84 15,592 110 2.87 Long-term debt 73,262 480 2.63 56,232 243 1.75 Subordinated debt 9,864 157 6.40 9,835 157 6.49 Total interest-bearing liabilities 716,620 2,861 1.61 695,440 2,999 1.75
Non-interest-bearing demand deposits 142,607 115,629 Other non-interest-bearing liabilities 17,837 10,269 Total liabilities 877,064 821,338 Stockholders' equity 75,192 66,501 Total liabilities and stockholders' equity$ 952,256 $ 887,839 Net interest income$ 7,240 $ 6,431 Net interest rate spread (2) 2.79 % 2.68 % Net interest-earning assets (3)$ 207,374 $ 168,604 Net interest margin (4) 3.15 % 3.02 % Average total interest-earning assets to average total interest-bearing liabilities 128.94 % 124.24 %
(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.
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Rate/Volume Analysis. The following table sets forth the effects of changing
rates and volumes on our net interest income. The rate column shows the effects
attributable to changes in rate (changes in rate multiplied by prior volume).
The volume column shows the effects attributable to changes in volume (changes
in volume multiplied by prior rate). The total increase (decrease) column
represents the sum of the prior columns. For purposes of this table, changes
attributable to changes in both rate and volume that cannot be segregated have
been allocated proportionally based on the changes due to rate and the changes
due to volume.
Three Months Ended March 31, 2020
Compared to
Three Months Ended March 31, 2019
Increase (Decrease)
Due to Total Increase
(In thousands) Volume Rate (Decrease)
Interest-earning assets:
Short-term investments $ 130 $ (187 ) $ (57 ) Debt securities: Taxable (281 ) 65 (216 ) Tax-exempt (37 ) 10 (27 )
Total loans and loans held for sale 918 58 976 FHLB stock (30 ) 25 (5 ) Total interest-earning assets 700 (29 ) 671 Interest-bearing liabilities: Regular savings (5 ) (23 ) (28 ) NOW checking 5 1 6 Money market (218 ) 191 (27 )
Certificates of deposit (393 ) 7 (386 ) Total interest-bearing deposits (611 )
176 (435 ) Short-term borrowings 80 (20 ) 60 Long-term debt 86 151 237 Subordinated debt -- -- --
Total interest-bearing liabilities (445 ) 307 (138 )
Increase (decrease) in net interest income
809
Provision for Loan Losses.The provision for loan losses was $555 thousand for
the three months ended March 31, 2020 , compared to $240 thousand for the three
month period ended March 31, 2019 . The additional provision is in anticipation
of the economy slowing in coming quarters associated with the COVID-19 outbreak.
No charge-offs were recorded in the first quarter 2020. A specific reserve of
$350 thousand that was established at the end of 2019 was reversed when the
related loan paid off in the first quarter. The 2020 first quarter's reserve is
based upon the assumption that U. S. and local gross domestic product willfall and unemployment will rise. 27
Analysis of Loan Loss Experience. The following table sets forth an analysis of the allowance for loan losses for the periods indicated.
Three Months Ended
March 31,
(Dollars in thousands) 2020 2019Allowance at beginning of period$ 7,653
$ 6,738 Provision for loan losses 555 240 Charge-offs -- -- Recoveries -- -- Net charge-offs -- -- Allowance at end of period$ 8,208
511.09 % 619.10 %
Allowance for loan losses to total loans at end of period 0.95 % 0.88 %
Net charge-offs to average loans outstanding during the
period 0.00 % 0.00 %
Non-interest Income. Non-interest income totaled$1.1 million , an increase of$374 thousand or 54.8%. Other miscellaneous income increased$449 thousand due to increases in fees on customer loan interest rate swaps associated with commercial loan originations of$283 thousand , and income of$160 thousand realized due to the merger ofThe Co-operative Central Bank and itsShare Insurance Fund with theDepositors Insurance Fund . Wealth management fees decreased by$69 thousand to$365 thousand as assets under management ("AUM") were$332.9 million as ofMarch 31, 2020 , compared to$419.3 million atMarch 31, 2019 . The reduction in AUM is mainly due to market value fluctuations and partly due to the sale of$28.4 million during 2019 of the Bank's investment portfolio. Income from mortgage banking activities in 2020 decreased$21 thousand as sales of residential mortgage loans were lower as compared to the prior year. Non-interest Expense. Non-interest expense totaled$5.6 million for the three months endedMarch 31, 2020 , compared to$5.1 million for the three months endedMarch 31, 2019 , an increase of$468 thousand , or 9.2%. Salaries and employee benefits increased$156 thousand to$3.2 million due to various employee benefit cost increases. Professional fees increased$308 thousand due mainly to higher corporate legal expense and professional fees associated with the proposed merger with Cambridge Bancorp. Occupancy and equipment costs increased$111 thousand due to annual rent adjustments and additional space taken at our home office facility.FDIC insurance expense increased$45 thousand primarily due to higher assessment balances and rates. Other general and administrative expenses decreased$157 thousand due to a decline in advertising along with various efforts to contain discretionary expenses. Income Taxes. An income tax provision of$637 thousand was recorded during the quarter endedMarch 31, 2020 , compared to a provision of$476 thousand in the comparable 2019 quarter. The effective tax rate for the 2020 three month period was 29.3%, compared to 26.8% for the 2019 three month period. The tax rate increase is due to a reduction in some tax-advantaged investments.
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.
28
Our most liquid assets are cash and cash equivalents, interest-bearing deposits
in other banks, and securities available for sale. The level of these assets
depends on our operating, financing, lending and investing activities during any
given period. At March 31, 2020 , cash and cash equivalents, which include
short-term investments, totaled $35.0 million . Securities classified as
available-for-sale, whose aggregate fair value is $24.4 million , provide
additional sources of liquidity.
At March 31, 2020 , we had $45.0 million in short-term borrowings outstanding,
represented entirely by FHLB advances, and $72.9 million in long-term debt, also
consisting entirely of FHLB advances. At March 31, 2020 , we had a total of $71.8
million in unused borrowing capacity from the FHLB. Short-term borrowings are
generally used to fund temporary cash needs due to the timing of loan
originations and deposit gathering activities. Long-term debt is generally used
to provide for longer-term funding needs of the Company, including the match
funding of loans originated for portfolio. At March 31, 2020 , we also had the
ability to borrow on a credit line of $5.0 million with a correspondent bank,
and $8.7 million from the Federal Reserve Bank under a collateralized borrowing
program, none of which was outstanding at that date.
At March 31, 2020 , we had $185.4 million in loan commitments outstanding, which
included $59.9 million in unadvanced funds on construction loans, $42.9 million
in unadvanced home equity lines of credit, $58.3 million in unadvanced
commercial lines of credit, and $22.7 million in new loan originations.
Term certificates of deposit due within one year of March 31, 2020 amounted to
$174.2 million , or 82.7%, of total term certificates, an increase of $4.6
million from $169.6 million at December 31, 2019 . Balances of term certificates
maturing in more than one year totaled $36.5 million at March 31, 2020 , down
from $47.1 million balances at December 31, 2019 . Balances of term certificates
that mature within one year reflect customer preferences for greater liquidity
of personal funds, while longer-dated certificates reflect a willingness among
customers to accept current interest rates for extended time periods. If
maturing deposits are not renewed, we will be required to seek other sources of
funds, including new term certificates and other borrowings. Depending on market
conditions, we may be required to pay higher rates on such deposits or other
borrowings than we currently pay on the existing funds. We have the ability to
attract and retain deposits by adjusting the interest rates offered.
The Company is a separate legal entity from the Bank and will have to provide
for its own liquidity to pay its operating expenses and other financial
obligations. The Company's primary source of income will be dividends received
from the Bank. Massachusetts banking law and FDIC regulations limit
distributions of capital. In addition, the Company is subject to the policy of
the Board of Governors of the Federal Reserve System ("Federal Reserve Board")
that dividends to stockholders should be paid only out of current earnings and
only if the prospective rate of earnings retention by the Company appears
consistent with its capital needs, asset quality and overall financial
condition. At March 31, 2020 , the Company had $758 thousand of liquid assets as
represented by cash and cash equivalents on an unconsolidated basis.
Capital Management. The Bank is subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Bank's consolidated financial statements. Under
capital adequacy guidelines and the regulatory framework for prompt corrective
action, the Bank must meet specific capital guidelines that involve quantitative
measures of their assets, liabilities and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
Federal banking regulations require a minimum ratio of common equity Tier 1
capital to risk-weighted assets of 4.5%, a minimum ratio of Tier 1 capital to
risk-weighted assets of 6%, a minimum ratio of total capital to risk-weighted
assets of 8% and a minimum leverage ratio of 4% for all banking organizations.
Additionally, community banking institutions must maintain a capital
conservation buffer of common equity Tier 1 capital in an amount greater than
2.5% of total risk-weighted assets above adequately capitalized levels to avoid
being subject to limitations on capital distributions and discretionary bonuses.
Management believes that the Company's capital levels will remain as
"well-capitalized," and above the buffer-enhanced levels.
29
Off-Balance Sheet Arrangements
In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles are not recorded in our financial statements. These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk. Such transactions are used primarily to manage customers' requests for funding and take the form of loan commitments and lines of credit. For information about our loan commitments and unused lines of credit see Liquidity Management herein. For the three months endedMarch 31, 2020 , 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.
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