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WEBK > SEC Filings for WEBK > Form 10-Q on 10-May-2013All Recent SEC Filings

Show all filings for WELLESLEY BANCORP, INC. | Request a Trial to NEW EDGAR Online Pro



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 2012 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 March 31, 2013 and December 31, 2012

General. Total assets increased $9.7 million, or 2.6%, from $376.0 million at December 31, 2012 to $385.8 million at March 31, 2013. Total assets increased primarily due to an increase in net loans of $16.7 million, or 5.6%, offset by a decrease in loans held for sale of $6.8 million.

Loans. Net loans increased $16.7 million, or 5.7%, from $294.1 million at December 31, 2012 to $310.8 million at March 31, 2013. The increase in loans was due primarily to an increase of $11.5 million, or 8.8%, in residential real estate loans. We have expanded our residential lending activity through the addition of a commissioned loan originator, and the expansion of our CRA assessment area. Adjustable-rate residential mortgage loans increased $10.0 million, or 9.1%, to $121.1 million while fixed-rate residential loans increased $1.5 million, or 7.5%. At March 31, 2013, loans past due 30-59 days have decreased $2.8 million and loans past due 90 days or more have decreased $1.1 million as compared to December 31, 2012, primarily due to certain commercial loan relationships whose payment patterns have improved. No losses are expected on any relationship as collateral positions and the customers' ability to pay remain strong.

Securities. Total securities decreased from $39.3 million at December 31, 2012 to $38.5 million at March 31, 2013, primarily due to the principal repayments on mortgage-backed securities.

Deposits. Total deposits increased $4.5 million, or 1.5%, from $298.1 million at December 31, 2012 to $302.6 million at March 31, 2013. Savings accounts increased $4.7 million, money market deposit accounts increased $975 thousand, and non-interest-bearing accounts increased $679 thousand. NOW accounts decreased $1.2 million during the three-month period ended March 31, 2013 while term certificates of deposit decreased $786 thousand during the same period. 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 $5.0 million, or 15.9%, for the three months ended March 31, 2013. 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.

Stockholders' Equity. Stockholders' equity increased $407 thousand, or 0.9%, from $45.0 million at December 31, 2012 to $45.4 million at March 31, 2013, primarily as a result of net income for the quarter of $595 thousand offset by the acquisition and retirement of treasury stock amounting to $284 thousand and share based compensation related to the equity incentive plan of $113 thousand.

Results of Operations for the Three Months Ended March 31, 2013 and 2012

Overview. Net income for the three months ended March 31, 2013 was $595 thousand compared to a loss of $553 thousand for the three months ended March 31, 2012. The $1.1 million increase was primarily due to the one-time $1.8 million pre-tax ($1.1 million after tax) contribution to establish the Foundation in the first quarter of 2012. In addition, increases in net interest income and noninterest income, partially offset by an increase in noninterest expenses contributed to an increase in earnings. Net interest income increased $525 thousand, or 19.0%, while noninterest expense, exclusive of the aforementioned contribution, increased $505 thousand, or 26.4%.

Net Interest Income. Net interest income for the three months ended March 31, 2013 was $3.3 million, as compared to $2.8 million for the three months ended March 31, 2012. 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 $569 thousand or 16.8%, from $3.4 million for the three-month period ended March 31, 2012 to $4.0 million for the three months ended March 31, 2013. The average balance of interest-earning assets increased 26.2%, while the average rate earned on these assets decreased by 36 basis points. The decline in yield partially offset the improvement in interest income attributable to asset growth. Interest and fees on loans increased $629 thousand, or 20.2%, due to a 35.0% increase in the average balance of loans partially offset by a 62 basis point decrease in the average rate received on loans. Interest income from taxable securities decreased $39 thousand, or 21.3%, due to a decline in the average rate to 1.75% for the three months ended March 31, 2013 as compared to 2.56% in the prior year, which was partially offset by an increase in the average balance of taxable securities compared to the prior year period.

The increase in interest expense was primarily due to an increase in balances of FHLB advances. The average balance of FHLB advances increased from $7.6 million to $34.9 million, while rates paid on FHLB advances decreased from 3.78% to 1.40%. The average rates paid on interest-bearing liabilities decreased by 10 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. We experienced an increase in the average balance of interest-bearing deposits of 20.8% in the three-month period ended March 31, 2013 compared to the same period in 2012.

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,
                                                2013                                              2012
                               Average         Interest         Average          Average         Interest         Average
                             Outstanding        Earned/       Yield/Rate       Outstanding        Earned/         Yield/
(Dollars in thousands)         Balance           Paid             (1)            Balance           Paid          Rate (1)
Interest-earning assets:
Short-term investments      $      17,931     $         9            0.21 %   $      24,005     $        15            0.24 %
Certificates of deposit               597               1            0.42               105               -            1.23
Debt securities:
  Taxable                          33,042             144            1.75            28,904             183            2.56
  Tax-exempt                        5,947              53            3.56             8,285              69            3.35
Total loans and loans
held for sale                     308,882           3,745            4.86           228,763           3,116            5.48
FHLB stock                          2,022               2            0.35             1,927               2            0.50
Total interest-earning
assets                            368,421           3,954            4.30 %         291,989           3,385            4.66 %
Allowance for loan losses          (3,863 )                                          (3,446 )
Total interest-earning
assets less allowance
  for loan losses                 364,558                                           288,543
assets                             15,053                                            14,323
Total assets                $     379,611                                     $     302,866
Regular savings accounts    $      42,826              50            0.47 %   $      27,791              31            0.44 %
NOW checking accounts              25,162              20            0.32            15,697               8            0.21
Money market accounts              55,913              58            0.41            51,542              75            0.59
Certificates of deposit           135,837             412            1.22           119,985             411            1.38
Total interest-bearing
deposits                          259,738             540            0.83           215,015             525            0.98
Short-term borrowings                   -               -               -             7,451              21            1.13
Long-term debt                     34,855             121            1.40             7,566              71            3.78
Total interest-bearing
liabilities                       294,593             661            0.98 %         230,032             617            1.08 %
demand deposits                    37,911                                            35,443
Other noninterest-bearing
liabilities                         2,010                                             1,076
Total liabilities                 334,514                                           266,550
Stockholders' equity               45,097                                            36,315
Total liabilities and
stockholders' equity        $     379,611                                     $     302,866
Net interest income                           $     3,293                                       $     2,768
Net interest rate spread
(2)                                                                  3.40 %                                            3.58 %
Net interest-earning
assets (3)                  $      73,828                                     $      61,957
Net interest margin (4)                                              3.59 %                                            3.81 %
Average total
interest-earning assets
to average total
liabilities                        125.06 %                                          126.93 %

(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 March 31, 2013
                                                                          Compared to
                                                               Three Months Ended March 31, 2012
                                                       Increase (Decrease) Due to           Total Increase
                                                        Volume              Rate              (Decrease)
                                                                         (In thousands)
Interest-earning assets:
Short-term investments                               $         (3 )      $        (2 )     $             (5 )
Certificates of deposit                                         -                  -                      -
Debt securities:
  Taxable                                                      33                (72 )                  (39 )
  Tax-exempt                                                  (21 )                5                    (16 )
Total loans and loans held for sale                           917               (288 )                  629
FHLB stock                                                      -                  -                      -
Total interest-earning assets                                 926               (357 )                  569

Interest-bearing liabilities:
Regular savings                                                17                  2                     19
NOW checking                                                    6                  6                     12
Money market                                                    8                (25 )                  (17 )
Certificates of deposit                                         1                  -                      1
Total interest-bearing deposits                                32                (17 )                   15
Short-term borrowings                                         (21 )                -                    (21 )
Long-term debt                                                 61                (11 )                   50
Total interest-bearing liabilities                             72                (28 )                   44

Increase (decrease) in net interest income           $        854        $      (329 )     $            525

Provision for Loan Losses. The provision for loan losses was $100 thousand for the three months ended March 31, 2013 compared to $150 thousand for the three months ended March 31, 2012. In the 2013 period, the provision reflects a decrease in specific reserve requirements for impaired commercial real estate loans. In 2012, the provision was primarily related to specific reserve requirements related to the balances of impaired loans.

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,
                                                         2013             2012
                                                       (Dollars in thousands)

      Balance at beginning of period                 $       3,844       $ 3,396
      Provision for loan losses                                100           150
      Real estate loans:
      Residential                                                -             -
      Commercial                                                 -             -
      Construction                                               -             -
      Commercial loans                                         (36 )         (90 )
      Consumer loans                                             -             -
      Total charge-offs                                        (36 )         (90 )
      Recoveries                                                 -             -
      Net charge-offs                                          (36 )         (90 )

      Balance at end of period                       $       3,908       $ 3,456
      Allowance for loan losses to
        nonperforming loans at end of period                 82.15 %       74.66 %
      Allowance for loan losses to total loans
        at end of period                                      1.26 %        1.48 %
      Net charge-offs to average loans outstanding
        during the period                                     0.01 %        0.04 %

Noninterest Income. Noninterest income totaled $209 thousand, an increase of $92 thousand, or 78.6%, as wealth management fees increased $45 thousand from the comparable 2012 period. We also recognized $24 thousand in gains on the sale of loans during the 2013 period.

Noninterest Expenses. Noninterest expenses, exclusive of the $1.8 million pretax, ($1.1 million after-tax) contribution to establish the Foundation in the first quarter of 2012, increased $505 thousand to $2.4 million during the three months ended March 31, 2013, from $1.9 million for the three months ended March 31, 2012. Factors that contributed to the increase in noninterest expense during the 2013 period were increased salary and employee benefits expense of $331 thousand resulting from increased staffing levels and the costs associated with the adoption of the Company's equity incentive plan. Professional service fees increased $30 thousand in support of legal, regulatory and other matters related to our operating as a public company, and services related to the increase lending volume. Additionally, Federal Deposit Insurance Company (the "FDIC") assessments increased $12 thousand, as compared to the quarter ended March 31, 2012, reflecting the increase in the average consolidated total assets.

Income Taxes. An income tax provision of $390 thousand was recorded during the quarter ended March 31, 2013 compared to a tax benefit of $424 thousand in the comparable 2012 quarter. The effective tax rate for the 2013 three-month period was 39.6%, compared with (43.4) % for the 2012 three-month period. The change in rates is due to the level of tax exempt income as a percentage of gross income.

Liquidity and Capital Resources

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

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

Our most liquid assets are cash and cash equivalents and 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, 2013, cash and cash equivalents, which include short-term investments, totaled $18.7 million. Securities classified as available-for-sale, whose aggregate market value of $38.5 million exceeds cost, and $2.3 million of loans held for sale provide additional sources of liquidity.

At March 31, 2013, we had $36.5 million in borrowings outstanding, represented entirely by FHLB advances. In addition, at March 31, 2013, we had the ability to borrow a total of $28.0 million in unused borrowing capacity from the FHLB. At March 31, 2013, we also had the ability to borrow $14.7 million from the Co-operative Central Bank and $12.9 million from the Federal Reserve Bank under a collateralized borrowing program, none of which was outstanding at that date.

At March 31, 2013, we had $61.8 million in loan commitments outstanding, which included $26.5 million in unadvanced funds on construction loans, $18.2 million in unadvanced home equity lines of credit, $10.7 million in unadvanced commercial lines of credit, and $5.5 million in new loan originations.

Term certificates of deposit due within one year of March 31, 2013 amounted to $75.8 million, or 55.9% of total term certificates. This total has decreased $1.3 million from December 31, 2012. Balances of term certificates maturing in more than one year have increased $665 thousand. 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. Management believes, however, based on past experience that a significant portion of our term certificates will be renewed. We have the ability to attract and retain deposits by adjusting the interest rates offered.

The Company is a separate legal entity from the Bank and will have to provide for its own liquidity to pay its operating expenses and other financial obligations. The Company's primary source of income will be dividends received from the Bank and earnings from investment of net proceeds from the offering retained by the Company. Massachusetts banking law and FDIC regulations limit distributions of capital. In addition, the Company is subject to policy of the Board of Governors of the Federal Reserve System ("Federal Reserve Board") that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by the Company appears consistent with its capital needs, asset quality and overall financial condition. Finally, in connection with its nonobjection to the conversion, the FDIC has required the Bank to commit that for the three-year period immediately following the closing of the conversion it will not make any distribution of capital to the Company, . . .

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