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WEBK > SEC Filings for WEBK > Form 10-Q on 9-Aug-2013All Recent SEC Filings

Show all filings for WELLESLEY BANCORP, INC.

Form 10-Q for WELLESLEY BANCORP, INC.


9-Aug-2013

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 expense 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 June 30, 2013 and December 31, 2012

General. Total assets increased $20.7 million, or 5.5%, from $376.0 million at December 31, 2012 to $396.7 million at June 30, 2013. Total assets increased primarily due to an increase in net loans of $36.0 million, or 12.2%, offset by a decrease in loans held for sale of $6.6 million and a decrease in cash and cash equivalents of $6.0 million.

Loans. Net loans increased $36.0 million, or 12.2%, from $294.1 million at December 31, 2012 to $330.1 million at June 30, 2013. The increase in loans was due primarily to an increase of $25.3 million, or 19.4%, in residential real estate loans. The strength in our residential lending activity is due to the efforts of our loan origination staff, a vibrant marketplace, and the expansion of our market area. Adjustable-rate residential mortgage loans increased $22.5 million, or 20.3%, to $133.6 million while fixed-rate residential loans increased $2.8 million, or 14.5%. We continue to sell longer-term fixed rate mortgage loans in the secondary market. At June 30, 2013, loans past due 30-89 days have decreased $888 thousand and loans past due 90 days or more have decreased $2.0 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 $35.3 million at June 30, 2013, primarily due to the $3.4 million in principal repayments on mortgage-backed securities.

Deposits. Total deposits increased $3.2 million, or 1.1%, from $298.1 million at December 31, 2012 to $301.3 million at June 30, 2013. Savings accounts increased $5.6 million, NOW accounts increased $718 thousand, non-interest-bearing accounts increased $326 thousand, and term certificates of deposit increased $304 thousand during the six-month period ended June 30, 2013, while money market deposit accounts decreased $3.7 million. 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 $11 million, or 34.9%, for the six months ended June 30, 2013. The increase in longer-term 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. Short-term borrowings, consisting entirely of FHLB advances, increased $6.0 million for the six months ended June 30, 2013 in order to satisfy short-term funding needs.

Stockholders' Equity. Stockholders' equity increased $700 thousand, or 1.6%, from $45.0 million at December 31, 2012 to $45.7 million at June 30, 2013, primarily as a result of net income of $1.2 million, and the impact of share-based compensation related to the equity incentive plan of $228 thousand. Partially offsetting these results was the $495 thousand after-tax effect decrease in the fair market value of available-for-sale securities and the acquisition and retirement of treasury stock amounting to $314 thousand.

Results of Operations for the Three Months Ended June 30, 2013 and 2012

Overview. Net income for the three months ended June 30, 2013 was $583 thousand, compared to net income of $434 thousand for the three months ended June 30, 2012. The $149 thousand increase was primarily due to increases in net interest income, partially offset by an increase in noninterest expenses. Net interest income increased to $3.3 million from $2.8 million in the 2012 quarter while noninterest expense increased $323 thousand, to $2.5 million in the same period.


Net Interest Income. Net interest income for the three months ended June 30, 2013 increased $485 thousand or 17.3%, as compared to the three months ended June 30, 2012. The increase in net interest income was primarily due to increases in the average balances of loans, partially offset by declines in yields.

Interest and dividend income increased $521 thousand or 15.2%, from $3.4 million for the three-month period ended June 30, 2012 to $4.0 million for the three months ended June 30, 2013. The average balance of interest-earning assets increased 25.1%, while the average rate earned on these assets decreased 38 basis points. The decline in loan yields is due to new, lower yielding loans added to the portfolio and the downward re-pricing of floating rate loans in a continued low rate environment. The decline in yield was partially offset by the improvement in interest income attributable to asset growth. Interest and fees on loans increased $613 thousand, or 19.4%, due to a 37.9% increase in the average balance of loans partially offset by a 73 basis point decrease in the average rate received on loans. Interest income from taxable securities decreased $66 thousand, or 33.0%, due to a 14.6% decrease in the average balance of taxable securities compared to the prior year period. The average rate earned on taxable securities of 1.77% fell 49 basis points compared to the same period in the prior year. Declines in yields on investment securities are due to the downward re-pricing of certain floating rate securities and the reinvestment of funds from maturing securities into lower yielding securities.

The increase in interest expense was primarily due to a $35 thousand increase in interest expense related to FHLB long-term advances resulting from an increase in the average balances of FHLB long-term advances which increased from $15.6 million to $41.5 million. Rates paid on long-term FHLB advances decreased from 2.55% to 1.28%. The average rates paid on interest-bearing liabilities decreased by 20 basis points from the comparative three-month period. The decrease in the cost of deposits and borrowings was primarily due to the impact of a declining long-term interest rate environment on term certificates of deposit and the expansion of lower cost long-term FHLB advances. We experienced an increase in the average balance of interest-bearing deposits of 21.9% in the three-month period ended June 30, 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 June 30,
                                                         2013                                            2012
                                         Average         Interest       Average          Average         Interest       Average
                                       Outstanding       Earned/         Yield/        Outstanding       Earned/         Yield/
(Dollars in thousands)                   Balance           Paid         Rate (1)         Balance           Paid         Rate (1)
Interest-earning assets:
Short-term investments                $      11,976     $        7           0.25 %   $      18,673     $       13           0.23 %
Certificates of deposit                         350              1           0.42               600              1           0.56
Debt securities:
  Taxable                                    30,242            133           1.77            35,401            199           2.26
  Tax-exempt                                  5,034             47           3.71             8,062             67           3.34
Total loans and loans held for sale         326,802          3,770           4.63           236,914          3,157           5.36
FHLB stock                                    2,571              2           0.31             1,714              2           0.57
Total interest-earning assets               376,975          3,960           4.21           301,364          3,439           4.59
Allowance for loan losses                    (3,959 )                                        (3,501 )
Total interest-earning assets less
allowance for loan losses                   373,016                                         297,863
Noninterest-earning assets                   13,627                                          17,174
Total assets                          $     386,643                                   $     315,037
Interest-bearing liabilities:
Regular savings accounts              $      47,657             58           0.49 %   $      27,550             30           0.43 %
NOW checking accounts                        24,623             22           0.36            15,276              7           0.19
Money market accounts                        54,244             56           0.41            52,491             76           0.58
Certificates of deposit                     134,677            402           1.20           119,018            403           1.36
Total interest-bearing deposits             261,201            538           0.83           214,335            516           0.97
Short-term borrowings                         2,198              1           0.22             7,463             22           1.21
Long-term debt                               41,456            134           1.28            15,588             99           2.55
Total interest-bearing liabilities          304,855            673           0.88           237,386            637           1.08
Noninterest-bearing demand deposits          38,129                                          33,417
Other noninterest-bearing
liabilities                                   1,903                                             865
Total liabilities                           344,887                                         271,668
Stockholders' equity                         41,756                                          43,369
Total liabilities and stockholders'
equity                                $     386,643                                   $     315,037
Net interest income                                     $    3,287                                      $    2,802
Net interest rate spread (2)                                                 3.33 %                                          3.51 %
Net interest-earning assets (3)       $      69,306                                   $      63,978
Net interest margin (4)                                                      3.50 %                                          3.74 %
Average total interest-earning
assets to average total
interest-bearing liabilities                 122.73 %                                        126.95 %

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

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, 2013
                                                                  Compared to
                                                        Three Months Ended June 30, 2012
                                                   Increase (Decrease)
                                                         Due to                      Total Increase
(In thousands)                                 Volume               Rate               (Decrease)
Interest-earning assets:
Short-term
investments                                 $          (4 )     $           1       $             (3 )
Debt securities:
  Taxable                                             (27 )               (39 )                  (66 )
  Tax-exempt                                          (30 )                 9                    (21 )
Total loans and loans held for sale                   949                (336 )                  613
FHLB stock                                              2                  (2 )                    -
Total interest-earning assets                         890                (367 )                  523

Interest-bearing liabilities:
Regular
savings                                                24                   4                     28
NOW checking                                            6                   9                     15
Money market                                            3                 (23 )                  (20 )
Certificates of
deposit                                                 7                  (6 )                    1
Total interest-bearing deposits                        40                 (16 )                   24
Short-term
borrowings                                            (10 )               (12 )                  (22 )
Long-term
debt                                                   50                 (15 )                   35
Total interest-bearing liabilities                     80                 (43 )                   37

Increase (decrease) in net interest
income                                      $         810       $        (324 )     $            486


Provision for Loan Losses and Analysis of Loan Loss Experience. The provision for loan losses was $100 thousand for each of the three month periods ended June 30, 2013 and June 30, 2012. Growth in the portfolio during the period, in combination with lower provisions, and a reduction in specific reserves has resulted in a lower ratio of the allowance for loan losses to total loans as of June 30, 2013 compared with the prior year. 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)                            2013          2012
        Balance at beginning of period                 $    3,908      $ 3,456
        Provision for loan losses                             100          100
        Charge-offs:
        Real estate loans:
        Residential                                             -            -
        Commercial                                              -            -
        Construction                                            -            -
        Commercial loans                                        -          (10 )
        Consumer loans                                          -            -
        Total charge-offs                                       -          (10 )
        Recoveries                                              -            4
        Net charge-offs                                         -           (6 )

        Allowance at end of period                     $    4,008      $ 3,550
        Allowance for loan losses to nonperforming
        loans at end of period                              87.09 %      76.19 %
        Allowance for loan losses to total loans
        at end of period                                     1.20 %       1.42 %
        Net charge-offs to average loans outstanding
        during the period                                    0.00 %       0.17 %

Noninterest Income. Noninterest income totaled $263 thousand, an increase of $115 thousand, or 77.7%, as the gain on the sale of securities increased $104 thousand and wealth management fees increased $47 thousand from the comparable 2012 period. Income from mortgage banking activities in 2013 reflects the expansion of our residential mortgage origination and sales efforts during the past year. In June 2013, we recorded a loss of $93 thousand on the early extinguishment of $2.0 million of long-term FHLB advances, and deferred an additional $70 thousand of early retirement penalties over the life of a new $1.5 million long-term advance.

Noninterest Expenses. Noninterest expense increased $323 thousand to $2.5 million during the three months ended June 30, 2013 from $2.2 million for the three months ended June 30, 2012. Factors that contributed to the increase in noninterest expense during the 2013 period were increased salaries and employee benefits of $276 thousand, or 22.2%, primarily attributable to additional personnel supporting our residential and commercial lending operations and the cost of equity-based incentive compensation programs adopted in October 2012. Occupancy and equipment expense increased $38 thousand resulting from normal rent increases and additional rent and other expense associated with expanded office space. Partially offsetting these increases was a $28 thousand decrease in other general and administrative expenses.

Income Taxes. An income tax provision of $372 thousand was recorded during the quarter ended June 30, 2013 compared to a provision of $244 thousand in the comparable 2012 quarter. The effective tax rate for the 2013 three-month period was 38.9%, compared with 36.0% for the 2012 three-month period, as fewer tax-preference items were available to the Bank in 2013, compared to 2012.

Results of Operations for the Six Months Ended June 30, 2012 and 2011

Overview. Net income for the six months ended June 30, 2013 was $1.2 million, compared to a net loss of $119 thousand for the six months ended June 30, 2012. The $1.3 million increase was primarily due to recording a non-recurring $1.1 million after-tax expense associated with the funding of the Wellesley Bank Charitable Foundation in January 2012. Net interest income increased $1.0 million to $6.6 million, while noninterest expense, exclusive of the Foundation contribution, increased $827 thousand, or 20.3%.


Net Interest Income. Net interest income for the six months ended June 30, 2013 increased $1.0 million, or 18.13%, as compared to the six months ended June 30, 2012. The increase in net interest income was primarily due to an increase in interest income of $1.1 million, or 16.0%, offset by an increase in interest expense of $80 thousand, or 6.4%, during the period.

Interest and dividend income increased from $6.8 million for the six-month period ended June 30, 2012 to $7.9 million for the six months ended June 30, 2013. The average balance of interest-earning assets increased 25.9%, while the average rate earned on these assets decreased 35 basis points. The decline in yield was offset by the improvement in interest income attributable to asset growth. Interest and fees on loans increased $1.2 million or 19.8%, due to a 36.5% increase in the average balance of loans partially offset by a 65 basis point decrease in the average rate received on loans. Interest income from taxable securities decreased $106 thousand, or 27.6%, due to the 66 basis point decrease in the average rate earned on taxable securities to 1.74%, partially offset by a 0.05% decrease 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 the average balance of long-term FHLB advances which increased $26.6 million from $11.6 million to $38.2 million, partially offset by a decrease in rates paid on the advances of 162 basis points. The corresponding interest expense on the FHLB advances increased by $85 thousand, as compared to the same six-month period last year. The average rates paid on all interest-bearing liabilities decreased by 18 basis points from the comparative six-month period. The decrease in the cost of deposits and borrowings was primarily due to the extended period of declining interest rates. We experienced an increase in the average balance of interest-bearing deposits of 21.3% in the six-month period ended June 30, 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.

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