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WEBK > SEC Filings for WEBK > Form 10-Q on 12-May-2014All Recent SEC Filings

Show all filings for WELLESLEY BANCORP, INC.



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 2013 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, 2014 and December 31, 2013

General. Total assets increased $17.7 million, or 3.9%, from $458.5 million at December 31, 2013 to $476.2 million at March 31, 2014. Total asset growth was primarily the result of an increase in net loans of $13.9 million, or 3.6%, and an increase of $5.7 million, or 15.5%, in securities available for sale, partially offset by a reduction of $2.3 million, or 11.9%, in cash and cash equivalents.

Loans. The $13.9 million increase in loans was due primarily to an increase of $11.6 million, or 6.4%, in residential real estate loans. We have expanded our residential lending activity through the addition of commissioned loan originators, the expansion of our CRA assessment area and recent opening of offices in Wellesley Lower Falls and Boston. Adjustable-rate residential mortgage loans increased $10.7 million, or 6.7%, to $171.4 million while fixed-rate residential loans increased $848 thousand, or 4.0%. At March 31, 2014, loans past due 30-59 days have decreased $1.0 million and loans past due 60-89 days have decreased $1.2 million as fewer customers are experiencing payment difficulties, allowing balances to be brought current. Loans past due 90 days or more have increased $679 thousand as compared to December 31, 2013, primarily due to one commercial real estate loan becoming delinquent. Substantially all delinquent loans are secured by real estate collateral with values exceeding outstanding loan principal. Any losses expected on delinquent loans have been reflected as specific reserves in the allowance for loan losses as of March 31, 2014.

Securities. Total securities increased from $36.7 million at December 31, 2013 to $42.3 million at March 31, 2014, primarily due to the investment of excess liquid funds in Small Business Administration securities and government sponsored enterprise obligations.

Deposits. Total deposits increased $24.3 million, or 6.8%, from $357.5 million at December 31, 2013 to $381.8 million at March 31, 2014. Savings accounts increased $18.8 million primarily due to new account openings and the movement of funds into our premium priced relationship savings account. Term certificates of deposit increased $10.8 million as we have increased funding from a national deposit clearinghouse. Partially offsetting these increases was a decrease of $3.2 million in money market deposit accounts.

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, decreased $2.0 million, or 4.6%, for the three months ended March 31, 2014. The decrease in long-term FHLB advances was due to paying off certain advances at maturity. Short-term borrowings consist entirely of advances from the FHLB with initial maturities less than one year. Balances of short-term borrowings have decreased $5.0 million, or 55.6%, since December 31, 2013 as excess funds became available due to growth in retail deposits.

Stockholders'Equity. Stockholders' equity increased $640 thousand, or 1.4%, from $46.8 million at December 31, 2013 to $47.4 million at March 31, 2014, primarily as a result of net income for the quarter of $394 thousand, and share based compensation related to the equity incentive plan of $120 thousand.

Results of Operations for the Three Months Ended March 31, 2014 and 2013

Overview. Net income for the three months ended March 31, 2014 was $394 thousand compared to net income of $595 thousand for the three months ended March 31, 2013. The $201 thousand decrease was primarily due to personnel and occupancy costs associated with operating our new office locations, the addition of retail and operational support personnel throughout the organization, and the expansion of our marketing and promotional activities within the communities we serve. Bank growth during the past year has contributed to increases in net interest income and noninterest income, offset by an increase in noninterest expenses. Net interest income increased $473 thousand, or 14.4%, while noninterest expense increased $767 thousand, or 31.7%.

Net Interest Income. Net interest income for the three months ended March 31, 2014 was $3.8 million, as compared to $3.3 million for the three months ended March 31, 2013. The increase in net interest income was primarily due to increases in the average balances of loans, partially offset by declines in yields on loans.

Interest and dividend income increased $613 thousand, or 15.5%, from $4.0 million for the three-month period ended March 31, 2013 to $4.6 million for the three months ended March 31, 2014. The average balance of interest-earning assets increased 23.3%, while the average rate earned on these assets decreased by 27 basis points (bp). The decline in yield partially offset the improvement in interest income attributable to asset growth. Interest and fees on loans increased $610 thousand, or 16.3%, due to a 28.5% increase in the average balance of loans partially offset by a 47 bp decrease in the average rate earned on loans. Interest income from taxable securities decreased $9 thousand, or 17.8%, due to a decline in the average balances for the three months ended March 31, 2014 as compared to the prior year, which was partially offset by an increase in the average rate of 12 bp on taxable securities compared to the prior year period.

The increase in interest expense was primarily due to an increase in average balances of deposits. The average balance of interest-bearing deposits increased $65.1 million, or 25.1%, in the three-month period ended March 31, 2014 compared to the same period in 2013, while the average rate paid on interest bearing deposits decreased 1 bp. The rate paid on savings accounts increased 26 bp primarily due to the higher cost of our premium relationship savings account. The average balance of savings accounts increased $35.2 million to $78.0 million, as compared to the prior year. The cost of term certificates of deposit increased $22 thousand to $434 thousand as we have grown our retail deposit balances and added $15.5 million of term deposits through a national certificate of deposit clearinghouse. The average balance of long-term FHLB advances increased from $34.9 million to $43.3 million, while rates paid on long-term FHLB advances decreased from 1.41% to 1.20%. The average rates paid on interest-bearing liabilities decreased by 4 bp from the comparative three-month period. In addition, we use short-term FHLB borrowings to temporarily fund loan originations and support other short-term liquidity demands. Interest expense on short-term borrowings totaled $5 thousand in the three month period ended March 31, 2014. We did not utilize short-term borrowings in the period ending March 31, 2013.

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,
                                                    2014                                            2013
                                    Average         Interest       Average          Average         Interest       Average
                                  Outstanding       Earned/         Yield/        Outstanding       Earned/         Yield/
                                    Balance           Paid         Rate (1)         Balance           Paid         Rate (1)
                                                                   (Dollars in thousands)
Interest-earning assets:
Short-term investments           $      17,493     $        8           0.19 %   $      17,931     $        9           0.21 %
Certificates of deposit                    100             --           0.22               597              1           0.44
Debt securities:
  Taxable                               31,928            148           1.89            33,042            144           1.77
  Tax-exempt                             4,890             44           3.63             5,947             53           3.60
Total loans and loans held for
sale                                   396,748          4,355           4.45           308,882          3,745           4.92
FHLB stock                               3,176             12           1.48             2,022              2           0.35
Total interest-earning assets          454,335          4,567           4.08 %         368,421          3,954           4.35 %
Allowance for loan losses               (4,272 )                                        (3,863 )
Total interest-earning assets
less allowance
for loan losses                        450,063                                         364,558
Noninterest-earning assets              17,391                                          15,053
Total assets                     $     467,454                                   $     379,611
Interest-bearing liabilities:
Regular savings accounts         $      77,990            141           0.73 %   $      42,826             50           0.47 %
NOW checking accounts                   24,562             22           0.36            25,162             20           0.32
Money market accounts                   56,791             71           0.50            55,913             58           0.42
Certificates of deposit                165,525            434           1.17           135,837            412           1.23
Total interest-bearing
deposits                               324,868            668           0.83           259,738            540           0.84
Short-term borrowings                    5,844              5           0.31                --             --             --
Long-term debt                          43,322            128           1.20            34,855            121           1.41
Total interest-bearing
liabilities                            374,034            801           0.87 %         294,593            661           0.91 %
Noninterest-bearing demand
deposits                                44,863                                          37,911
Other noninterest-bearing
liabilities                              1,341                                           2,010
Total liabilities                      420,238                                         334,514
Stockholders' equity                    47,216                                          45,097
Total liabilities and
stockholders' equity             $     467,454                                   $     379,611
Net interest income                                $    3,766                                      $    3,293
Net interest rate spread (2)                                            3.21 %                                          3.44 %
Net interest-earning assets
(3)                              $      80,302                                   $      73,828
Net interest margin (4)                                                 3.36 %                                          3.62 %
Average total interest-earning
assets to average total
interest-bearing liabilities            121.47 %                                        125.06 %

(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, 2014
                                                                             Compared to
                                                                  Three Months Ended March 31, 2013
                                                          Increase (Decrease) Due to           Total Increase
                                                           Volume              Rate              (Decrease)
                                                                            (In thousands)
Interest-earning assets:
Short-term investments                                  $         --        $        (1 )     $             (1 )
Certificates of deposit                                           (1 )               --                     (1 )
Debt securities:
  Taxable                                                         (5 )                9                      4
  Tax-exempt                                                      (9 )               --                     (9 )
Total loans and loans held for sale                              914               (304 )                  610
FHLB stock                                                         2                  8                     10
Total interest-earning assets                                    901               (288 )                  613

Interest-bearing liabilities:
Regular savings accounts                                          54                 37                     91
NOW checking accounts                                             --                  2                      2
Money market accounts                                              1                 12                     13
Certificates of deposit                                           59                (37 )                   22
Total interest-bearing deposits                                  114                 14                    128
Short-term borrowings                                              5                 --                      5
Long-term debt                                                    18                (11 )                    7
Total interest-bearing liabilities                               137                  3                    140

Increase (decrease) in net interest income              $        764        $      (291 )     $            473

Provision for Loan Losses. The provision for loan losses was $180 thousand for the three months ended March 31, 2014 compared to $100 thousand for the three months ended March 31, 2013. In the 2014 period, the provision reflects growth in the loan portfolio, specifically commercial real estate and residential loans, and the addition of a specific reserve related to a commercial real estate loan, partially offset by a reduction in certain loss factors due to improving real estate values and regional economic conditions.

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,
                                                          2014            2013
                                                       (Dollars in thousands)
      Balance at beginning of period                 $        4,213      $ 3,844
      Provision for loan losses                                 180          100
      Commercial loans                                           --          (36 )
      Total charge-offs                                          --          (36 )
      Recoveries                                                 --           --
      Net charge-offs                                            --          (36 )
      Balance at end of period                       $        4,393      $ 3,908
      Allowance for loan losses to
        nonperforming loans at end of period                 125.41 %      82.15 %
      Allowance for loan losses to total loans
        at end of period                                       1.09 %       1.26 %
      Net charge-offs to average loans outstanding
        during the period                                      0.00 %       0.01 %

Noninterest Income. Noninterest income totaled $253 thousand, an increase of $44 thousand, or 21.1%, as wealth management fees increased $24 thousand from the comparable 2013 period. We also recognized $16 thousand in net gains on sales and calls of securities during the 2014 period, with no gains recognized during the comparable period in 2013.

Noninterest Expenses. Noninterest expenses increased $767 thousand to $3.2 million during the three months ended March 31, 2014, from $2.4 million for the three months ended March 31, 2013. Factors that contributed to the increase in noninterest expense during the 2014 period were increased salary and employee benefits expense of $442 thousand resulting from increased staffing levels related to the operation of our newest branch office in Boston, and additional retail and support staff supporting the Company's growth. Occupancy and equipment fees increased $160 thousand related to the operation of our newest branch office. Professional service fees increased $45 thousand in support of services related to the increased lending volume, additional compliance and operational support costs and key program initiatives. Marketing and promotion costs have increased $67 thousand due to increased promotional initiatives within the communities we serve. Additionally, data processing fees increased $30 thousand, as compared to the quarter ended March 31, 2013 due to overall growth in our operations.

Income Taxes. An income tax provision of $261 thousand was recorded during the quarter ended March 31, 2014 compared to a provision of $390 thousand in the comparable 2013 quarter. The effective tax rate for the 2014 three-month period was 39.8%, compared with 39.6% for the 2013 three-month period. The change in rates is due to the relative mix of tax exempt income and tax preference items recognized by the Company as a percentage of pre-tax 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 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, 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, 2014, cash and cash equivalents, which include short-term investments, totaled $16.8 million. Securities classified as available-for-sale, whose aggregate market value of $42.3 million exceeds cost, and $1.3 million in loans held for sale provide additional sources of liquidity.

At March 31, 2014, we had $4.0 million in short-term borrowings outstanding, represented entirely by FHLB advances, and $41.5 million in long-term debt, also consisting entirely of FHLB advances. At March 31, 2014, we had a total of $50.1 million in unused borrowing capacity from the FHLB. Short-term borrowings are generally used to fund temporary cash needs due to the timing of loan originations and deposit gathering activities. Long-term debt is generally used to provide for longer-term funding needs of the Company, including the match funding of loans originated for portfolio. At March 31, 2014, we also had the ability to borrow $5.0 million from the Co-operative Central Bank, $2.0 million under an unsecured line of credit with a correspondent bank, and $13.1 million from the Federal Reserve Bank under a collateralized borrowing program, none of which was outstanding at that date

At March 31, 2014, we had $75.8 million in loan commitments outstanding, which included $35.3 million in unadvanced funds on construction loans, $20.3 million in unadvanced home equity lines of credit, $11.5 million in unadvanced commercial lines of credit, and $7.7 million in new loan originations.

Term certificates of deposit due within one year of March 31, 2014 amounted to $120.5 million, or 70.8% of total term certificates. This total has increased $19.8 million from December 31, 2013. Balances of term certificates maturing in more than one year have decreased $9.1 million. 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 . . .

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