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WEBK > SEC Filings for WEBK > Form 10-Q on 14-Nov-2012All Recent SEC Filings

Show all filings for WELLESLEY BANCORP, INC.

Form 10-Q for WELLESLEY BANCORP, INC.


14-Nov-2012

Quarterly Report


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 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 2011 Annual Report on Form 10-K under the section titled "Item 1A.-Risk Factors." These factors should be considered in evaluating the forward-looking statements and undue reliance should not be placed on such statements. Except as required by applicable law or regulation, the Company assumes no obligation and disclaims any obligation to update any forward-looking statements.

Critical Accounting Policies

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

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

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


Comparison of Financial Condition at September 30, 2012 and December 31, 2011

General. Total assets increased $54.2 million, or 17.9%, from $303.1 million at December 31, 2011 to $357.3 million at September 30, 2012. This increase was reflected in increases in securities available for sale of $6.4 million, or 17.7%, and in net loans of $46.2 million, or 20.8%, while cash and cash equivalents decreased $9.9 million, or 29.4%. Asset growth was funded primarily by an increase in deposits of $34.8 million, or 14.2%, and an increase in long-term Federal Home Loan Bank ("FHLB") advances of $24.0 million, or 320.0%.

Loans. Loans, net increased from $221.9 million at December 31, 2011 to $268.1 million at September 30, 2012. The increase in loans was due primarily to an increase of $36.6 million, or 45.5%, in residential real estate loans due, in part, to increased loan volume produced by new origination staff added this year. The increase in residential real estate loans reflected growth of $34.5 million in adjustable-rate mortgage loans and an increase of $2.1 million in fixed-rate loans. At September 30, 2012, loans past due 30-59 days have increased $5.1 million compared to December 31, 2011, primarily due to two customers whose payment patterns have slowed. No losses are expected on either relationship as collateral positions and the customers' ability to pay remain strong.

Securities. Total securities increased from $36.1 million at December 31, 2011 to $42.5 million at September 30, 2012, primarily due to an increase in floating rate corporate bonds held in our portfolio.

Deposits. Total deposits increased $34.8 million, or 14.2%, from $245.2 million at December 31, 2011 to $280.0 million at September 30, 2012. Non-interest-bearing accounts increased $5.4 million, while savings accounts increased $7.4 million and money market deposit accounts increased $2.6 million. Term certificates of deposit increased $12.0 million during the nine-month period ended September 30, 2012. NOW accounts increased $7.4 million during the nine-month period ended September 30, 2012 due primarily to the introduction of a corporate sweep account (see discussion under "Borrowings" that follows). The increase in non-interest-bearing accounts was reflective of increases in personal checking accounts. Savings account balances increased primarily due to the movement of funds into our premium relationship savings account.

Borrowings. We use borrowings from a variety of sources to supplement our supply of funds for loans and securities. Long-term debt, consisting entirely of FHLB advances, increased $24.0 million, or 320.0%, for the nine months ended September 30, 2012. The increase in FHLB advances was in response to increased lending activity during the period and a desire to extend our liability maturities while longer-term interest rates remain low. During the third quarter of 2012, we terminated a program of selling securities under agreements to repurchase (REPO) which had been offered to commercial customers. The funds provided under this program had been represented as short-term borrowings on the Company's balance sheets. We replaced this program with a corporate sweep account which offers a competitive interest rate. Substantially all customers previously participating in the REPO program now participate in the sweep accounts. These balances are presented as a component of NOW balances as of September 30, 2012.


Stockholders' Equity. Stockholders' equity increased $21.7 million, or 95.4%, from $22.7 million at December 31, 2011 to $44.4 million at September 30, 2012, primarily as a result of the Company's stock offering in January 2012.

Results of Operations for the Three Months Ended September 30, 2012 and 2011

Overview. Net income for the three months ended September 30, 2012 was $537,000 compared to net income of $528,000 for the three months ended September 30, 2011. The $9,000 increase was primarily due to increases in net interest income and noninterest income, partially offset by an increase in noninterest expenses. Net interest income increased $292,000, or 11.3%, while noninterest expense increased $413,000, or 24.0%.

Net Interest Income. Net interest income for the three months ended September 30, 2012 was $2.9 million, as compared to $2.6 million for the three months ended September 30, 2011. The increase in net interest income was primarily due to increases in the average balances of loans and debt securities, partially offset by declines in yields for these asset categories.

Interest and dividend income increased $313,000 or 9.7%, from $3.2 million for the three-month period ended September 30, 2011 to $3.5 million for the three months ended September 30, 2012. The average balance of interest-earning assets increased 25.5%, while the average rate earned on these assets decreased 62 basis points. The decline in yield was partially offset by the improvement in interest income attributable to asset growth. Interest and fees on loans increased $295,000, or 9.9%, due to a 23.5% increase in the average balance of loans partially offset by a 60 basis point decrease in the average rate received on loans. Interest income from taxable securities increased $26,000, or 17.2%, due to an 84.0% increase in the average balance of taxable securities compared to the prior year period. The average rate earned on taxable securities of 1.90% fell 108 basis points compared to the same period in the prior year.

The decrease in interest expense was primarily due to a decrease in the average rates paid on interest-bearing deposits, in particular certificates of deposit. The average balance of FHLB advances increased from $7.5 million to $26.9 million, while rates paid on FHLB advances decreased from 3.70% to 1.58%. The average rates paid on interest-bearing liabilities decreased by 14 basis points from the comparative three-month period. The decrease in the cost of deposits and borrowings was primarily due to a declining long-term interest rate environment and the decline in higher cost long-term FHLB advances. We experienced an increase in the average balance of interest-bearing deposits of 10.1% in the three-month period ended September 30, 2012 compared to the same period in 2011.


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

                                                      For the Three Months Ended September 30,
                                               2012                                              2011

                              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     $      15,482     $         8            0.22 %   $      15,110     $         7            0.19 %
Certificates of
deposit                              600               1            0.56             1,002               5            1.96
Debt securities:
  Taxable                         37,060             177            1.90            20,127             151            2.98
  Tax-exempt                       7,539              63            3.33             8,095              69            3.40
Total loans and loans
held for sale                    259,168           3,281            5.04           209,882           2,986            5.64
FHLB stock                         1,745               2            0.51             1,930               1            0.27
Total interest-earning
assets                           321,594           3,532            4.37 %         256,146           3,219            4.99 %
Allowance for loan
losses                            (3,596 )                                          (3,253 )
Total interest-earning
assets less allowance
      for loan
losses                           317,998                                           252,893
Noninterest-earning
assets                            14,516                                            12,724
Total assets               $     332,514                                     $     265,617
Interest-bearing
liabilities:
Regular savings accounts   $      32,112              41            0.51 %   $      24,692              32            0.51 %
NOW checking accounts             17,106              14            0.32            13,607               7            0.21
Money market accounts             50,719              76            0.60            46,861              69            0.58
Certificates of deposit          119,681             402            1.34           114,274             432            1.50
Total interest-bearing
deposits                         219,618             533            0.97           199,434             540            1.07
Short-term borrowings              5,181              13            1.04             7,517              22            1.15
Long-term debt                    26,870             107            1.58             7,500              70            3.70
Total interest-bearing
liabilities                      251,669             653            1.03 %         214,451             632            1.17 %
Noninterest-bearing
demand deposits                   35,428                                            28,005
Other
noninterest-bearing
liabilities                        1,426                                             1,529
Total
liabilities                      288,523                                           243,985
Stockholders' equity              43,991                                            21,632
Total liabilities and
stockholders' equity       $     332,514                                     $     265,617
Net interest
income                                       $     2,879                                       $     2,587
Net interest rate spread
(2)                                                                 3.34 %                                            3.82 %
Net interest-earning
assets (3)                 $      69,925                                     $      41,695
Net interest margin (4)                                             3.56 %                                            4.01 %
Average total
interest-earning assets
to
average total
interest-bearing
liabilities                       127.78 %                                          119.44 %

(1) Yields for the three month periods have been annualized.

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

(3) Represents total average interest-earning assets less total average interest-bearing liabilities.

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


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

                                                          Three Months Ended September 30, 2012
                                                                       Compared to
                                                          Three Months Ended September 30, 2011
                                                       Increase (Decrease)
                                                             Due to                         Total Increase
(In thousands)                                    Volume                 Rate                 (Decrease)
Interest-earning assets:
Short-term
investments                                    $           -         $           1         $              1
Certificates of
deposit                                                   (1 )                  (3 )                     (4 )
Debt securities:
  Taxable                                                 45                   (19 )                     26
  Tax-exempt                                              (5 )                  (1 )                     (6 )
Total loans and loans held for
sale                                                     542                  (247 )                    295
FHLB stock                                                 -                     1                        1
Total interest-earning
assets                                                   581                  (268 )                    313

Interest-bearing liabilities:
Regular savings                                            9                     -                        9
NOW checking                                               3                     4                        7
Money market                                               5                     2                        7
Certificates of
deposit                                                   23                   (53 )                    (30 )
Total interest-bearing
deposits                                                  40                   (47 )                     (7 )
Short-term
borrowings                                                (7 )                  (2 )                     (9 )
Long-term debt                                            95                   (58 )                     37
Total interest-bearing
liabilities                                              128                  (107 )                     21

Increase (decrease) in net interest income     $         453         $        (161 )       $            292

Provision for Loan Losses. The provision for loan losses was $150,000 for the three months ended September 30, 2012 compared to $150,000 for the three months ended September 30, 2011. In the 2012 period, the additional provision reflects an increase in balances of residential and commercial real estate loans. In 2011, the provision was primarily related to residential loan charge-offs recorded during the quarter.


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

                                                                    Three Months Ended
                                                                       September 30,
(Dollars in thousands)                                             2012             2011
Balance at beginning of period                                 $      3,550      $     3,229
Provision for loan losses                                               150              150
Charge-offs:
Real estate loans:
Residential                                                               -             (134 )
Commercial                                                                -                -
Construction                                                              -                -
Commercial loans                                                          -                -
Consumer loans                                                           (7 )              -
Total charge-offs                                                        (7 )           (134 )
Recoveries                                                                1                0
Net charge- offs                                                         (6 )           (134 )

Balance at end of period                                       $      3,694      $     3,245
Allowance for loan losses to
  nonperforming loans at end of period                                80.49 %          118.4 %
Allowance for loan losses to total loans
  at end of period                                                     1.36 %           1.55 %
Net charge-offs to average loans outstanding
  during the period                                                    0.00 %           0.06 %

Noninterest Income. Noninterest income totaled $263,000, an increase of $153,000, or 139.1%, as wealth management fees increased $35,000 from the comparable 2011 period. During 2012, we expanded our residential lending activities with the hiring of a mortgage originator, and have actively begun selling long-term mortgage loans in the secondary market. During the three months ended September 30, 2012, we recognized $62,000 in gains on the sale of mortgage loans. We also recognized $52,000 in gains on the sale of securities during this period.

Noninterest Expenses. Noninterest expense increased $413,000 to $2.1 million during the three months ended September 30, 2012 from $1.7 million for the three months ended September 30, 2011. Factors that contributed to the increase in noninterest expense during the 2012 period were increased occupancy and equipment expense of $137,000 resulting from normal rent increases and additional rent and other expense associated with a new branch opened in April 2012 and related expanded office space. Professional service fees increased $87,000 in support of legal, regulatory and other matters related to our operating as a public company. Additionally, Federal Deposit Insurance Corporation assessments increased $119,000 as compared to the quarter ended September 30, 2011, reflecting changes to the Federal Deposit Insurance Corporation assessment base and changes to the assessment formula which was recorded as a benefit of $51,000 in the 2011 period.

Income Taxes. An income tax provision of $318,000 was recorded during the quarter ended September 30, 2012 compared to a provision of $295,000 in the comparable 2011 quarter. The effective tax rate for the 2012 three-month period was 37.2%, compared with 35.9% for the 2011 three-month period.

Results of Operations for the Nine Months Ended September 30, 2012 and 2011

Overview. Net income for the nine months ended September 30, 2012 was $418,000 compared to net income of $1.5 million for the nine months ended September 30, 2011. The $1.1 million decrease was primarily due to the $1.1 million after-tax expense associated with the funding of the Wellesley Bank Charitable Foundation. Net interest income increased $840,000, or 11.0%, while noninterest expense, exclusive of the Foundation contribution, increased $1.3 million, or 27.4%.


Net Interest Income. Net interest income for the nine months ended September 30, 2012 totaled $8.4 million, as compared to $7.6 million for the nine months ended September 30, 2011. The increase in net interest income was primarily due to an increase in interest income of $688,000, or 7.1%, and a decrease in interest expense of $152,000, or 7.4%, during the period.

Interest and dividend income increased $688,000, or 7.1%, from $9.7 million for the nine month period ended September 30, 2011 to $10.4 million for the nine months ended September 30, 2012. The average balance of interest-earning assets increased 19.2%, while the average rate earned on these assets decreased 52 basis points. The decline in yield was offset by the improvement in interest income attributable to asset growth. Interest and fees on loans increased $553,000 or 6.2%, due to a 15.5% increase in the average balance of loans partially offset by a 47 basis point decrease in the average rate received on loans. Interest income from taxable securities increased $124,000, or 28.5%, due to a 71.5% increase in the average balance of taxable securities compared to the prior year period. The average rate earned on taxable securities of 2.21% fell 74 basis points compared to the same period in the prior year.

The decrease in interest expense was primarily due to a decrease in the average rates paid on interest-bearing deposits, in particular certificates of deposit and regular savings accounts. The average balance of FHLB advances increased from $10.5 million to $16.7 million, while rates paid on the advances decreased 203 basis points, reducing the corresponding interest expense by $56,000 from the comparative nine-month period. The average rates paid on interest-bearing liabilities decreased by 22 basis points from the comparative nine-month period. The decrease in the cost of deposits and borrowings was primarily due to a declining long-term interest rate environment. We experienced an increase in the average balance of interest-bearing deposits of 9.9% in the nine-month period ended September 30, 2012 compared to the same period in 2011.


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 . . .

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