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WEBK > SEC Filings for WEBK > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for WELLESLEY BANCORP, INC.

Form 10-Q for WELLESLEY BANCORP, INC.


8-Aug-2014

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, changes in real estate values in our market area 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 June 30, 2014 and December 31, 2013

General. Total assets increased $35.8 million, or 7.8%, from $458.5 million at December 31, 2013 to $494.3 million at June 30, 2014. Total asset growth was due to an increase in net loans of $33.0 million, or 8.6%, and an increase of $3.2 million, or 8.7%, in securities available for sale, partially offset by a reduction of $1.5 million, or 7.8%, in cash and cash equivalents.

Loans. The $33.0 million increase in loans was due primarily to an increase of $22.8 million, or 12.5%, in residential real estate loans. We have continued to grow our residential lending activity through our internal loan origination efforts throughout our expanded CRA assessment area revised in conjunction with the opening of offices in Wellesley Lower Falls and Boston. Adjustable-rate residential mortgage loans increased $22.4 million, or 13.9%, to $183.0 million while fixed-rate residential loans increased $408 thousand, or 1.9%. Construction loans increased $8.7 million, or 10.9%, primarily due to seasonal lending requirements of our borrowers. At June 30, 2014, total past due loans decreased $875 thousand as compared to December 31, 2013, as fewer customers are experiencing payment difficulties. Substantially all delinquent loans are secured by real estate collateral with values exceeding outstanding loan principal. Any losses expected on delinquent loans have been charged-off or reflected as specific reserves in the allowance for loan losses as of June 30, 2014.

Securities. Total securities increased from $36.7 million at December 31, 2013 to $39.9 million at June 30, 2014, as excess liquid funds were invested in municipal securities, SBA and other asset-backed securities.

Deposits. Total deposits increased $29.5 million, or 8.2%, from $357.5 million at December 31, 2013 to $387.0 million at June 30, 2014. Savings accounts increased $15.6 million primarily due to new account openings and the movement of funds into our premier relationship savings account offering. Certificates of deposit increased $10.8 million as depositor funds were attracted to our premier relationship term certificate offerings. Demand deposits increased $3.7 million, or 8.2%, to $48.5 million as growth was realized in both retail and commercial 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, increased $10.0 million, or 23.0%, for the six months ended June 30, 2014. Long-term FHLB advances increased as we funded loan growth during the period with extended maturity advances at low rates. Short-term borrowings consist entirely of advances from the FHLB with initial maturities less than one year. Balances of short-term borrowings decreased $5.0 million, or 55.6%, since December 31, 2013 as funds available from growth in deposits replaced short-term borrowing requirements.

Stockholders' Equity. Stockholders' equity increased $1.3 million, or 2.8%, from $46.8 million at December 31, 2013 to $48.1 million at June 30, 2014, primarily as a result of net income for the six month period of $825 thousand, share-based compensation related to the equity plans of $365 thousand, and the after-tax effect of increases in the fair value of available for sale securities, which contributed $192 thousand.

Results of Operations for the Three Months Ended June 30, 2014 and 2013

Overview. Net income for the three months ended June 30, 2014 was $431 thousand, compared to net income of $583 thousand for the three months ended June 30, 2013. The $152 thousand decrease was primarily due to an increase in noninterest expense and an increase in the provision for loan losses, offset by an increase in net interest income. Net interest income increased $732 thousand to $4.0 million in the 2014 quarter, while noninterest expense increased $830 thousand to $3.3 million in the same period.

Net Interest Income. Net interest income for the three months ended June 30, 2014 increased $732 thousand, or 22.3%, as compared to the three months ended June 30, 2013. The increase in net interest income was primarily due to increases in the average balances of loans, partially offset by a decline in loan yields and interest costs associated with an increase in the average balance of deposits.


Interest and dividend income increased $906 thousand, or 22.9%, from $4.0 million for the three-month period ended June 30, 2013 to $4.9 million for the three months ended June 30, 2014. The average balance of interest-earning assets increased 24.4%, while the average rate earned on these assets decreased 5 basis points. The decline in loan yields was due to new, lower yielding adjustable-rate real estate loans added to the portfolio and the downward re-pricing of loans in a continued low rate environment. The decline in earning asset yield was more than offset by the improvement in interest income attributable to asset growth. Interest and fees on loans increased $847 thousand, or 22.5%, due to a 26.1% increase in the average balance of loans, partially offset by a 14 basis point decrease in the average rate received on loans. Interest income from taxable securities increased $50 thousand, or 37.6%, due to a 21.8% increase in the average balance of taxable securities as compared to the prior year period. The average rate earned on taxable securities of 1.99% increased 22 basis points compared to the same period in the prior year. Increases in yields on investment securities are due to the reinvestment of funds from maturing securities and excess liquid funds into higher yielding securities as longer-term investment yields have risen compared to prior year levels.

The increase in interest expense of $173 thousand was due to a $157 thousand increase in interest expense on deposit accounts related primarily to growth in deposit balances during the period, and an increase in rates paid on savings and money market accounts, while rates paid on certificates of deposit have declined. Interest paid on long-term FHLB advances increased $16 thousand to $150 thousand as average balances increased and rates paid on long-term FHLB advances declined. The average rates paid on interest-bearing liabilities of 0.88% remained stable as compared to the prior year. The increase in the cost of savings and money market accounts reflects the payment of premium rates on targeted products associated with our recent branch office openings. The continued long-term low interest rate environment has resulted in lower costs on certificates of deposit and long-term FHLB advances. We experienced an increase in the average balance of interest-bearing deposits of 28.8% in the three-month period ended June 30, 2014, compared to the same period in 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 June 30,
                                               2014                                              2013
                              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     $      11,286     $         7            0.27 %   $      11,976     $         7            0.25 %
Certificates of deposit              100               1            0.22               350               1            0.42
Debt securities:
Taxable                           36,833             183            1.99            30,242             133            1.77
Tax-exempt                         5,414              46            3.40             5,034              47            3.71
Total loans and loans
held for sale                    412,040           4,617            4.49           326,802           3,770            4.63
FHLB stock                         3,194              11            1.47             2,571               2            0.31
Total interest-earning
assets                           468,867           4,865            4.16           376,975           3,960            4.21
Allowance for loan
losses                            (4,469 )                                          (3,959 )
Total interest-earning
assets less
allowance for loan
losses                           464,398                                           373,016
Noninterest-earning
assets                            17,852                                            13,627
Total assets               $     482,250                                     $     386,643
Interest-bearing
liabilities:
Regular savings accounts   $      82,783             155            0.75 %   $      47,657              58            0.49 %
NOW checking accounts             23,975              22            0.36            24,623              22            0.36
Money market accounts             59,149              75            0.51            54,244              56            0.41
Certificates of deposit          170,588             443            1.04           134,677             402            1.20
Total interest-bearing
deposits                         336,495             695            0.83           261,201             538            0.83
Short-term borrowings              1,692               1            0.29             2,198               1            0.22
Long-term debt                    48,423             150            1.22            41,456             134            1.28
Total interest-bearing
liabilities                      386,610             846            0.88           304,855             673            0.88
Noninterest-bearing
demand deposits                   46,619                                            38,129
Other
noninterest-bearing
liabilities                          969                                             1,903
Total liabilities                434,198                                           344,887
Stockholders' equity              48,052                                            41,756
Total liabilities and
stockholders'
equity                     $     482,250                                     $     386,643
Net interest income                          $     4,019                                       $     3,287
Net interest rate spread
(2)                                                                 3.28 %                                            3.33 %
Net interest-earning
assets (3)                 $      82,257                                     $      72,120
Net interest margin (4)                                             3.44 %                                            3.50 %
Average total
interest-earning assets
to
average total
interest-bearing
liabilities                       121.28 %                                          123.66 %

(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, 2014
                                                                     Compared to
                                                           Three Months Ended June 30, 2013
                                                      Increase (Decrease)
                                                            Due to                    Total Increase
(In thousands)                                     Volume             Rate              (Decrease)
Interest-earning assets:
Short-term
investments                                      $        --       $        --       $             --
Certificates of
deposit                                                   --                --                     --
Debt securities:
Taxable                                                   32                18                     50
Tax-exempt                                                 6                (7 )                   (1 )
Total loans and loans held for
sale                                                     952              (105 )                  847
FHLB stock                                                --                 9                      9
Total interest-earning
assets                                                   990               (85 )                  905

Interest-bearing liabilities:
Regular savings                                           56                41                     97
NOW checking                                               1                (1 )                   --
Money market                                               5                14                     19
Certificates of
deposit                                                   98               (57 )                   41
Total interest-bearing
deposits                                                 160                (3 )                  157
Short-term
borrowings                                                --                --                     --
Long-term debt                                            21                (5 )                   16
Total interest-bearing
liabilities                                              181                (8 )                  173

Increase (decrease) in net interest income       $       809       $       (77 )     $            732

Provision for Loan Losses. The provision for loan losses was $220 thousand for the three month period ended June 30, 2014, compared to $100 thousand for the three month period ended June 30, 2013. In the 2014 period, the provision reflects growth in the loan portfolio, specifically real estate construction and residential loans, and the addition of separate specific reserves related to a commercial real estate loan and a home equity loan, partially offset by a reduction in certain loss factors due to management's assessment of improving collateral values on certain real estate and commercial loan portfolios.


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
                                                                     June 30,
(Dollars in thousands)                                         2014            2013
Balance at beginning of
period                                                      $     4,393     $    3,908
Provision for loan losses                                           220            100
Charge-offs                                                          --             --
Recoveries                                                           --             --
Net charge-offs                                                      --             --
Allowance at end of period                                  $     4,613     $    4,008
Allowance for loan losses to nonperforming loans at end
of period                                                        136.07 %        87.09 %
Allowance for loan losses to total loans at end of
period                                                             1.09 %         1.20 %
Net charge-offs to average loans outstanding during the
period                                                               -- %           -- %

Noninterest Income. Noninterest income totaled $233 thousand, a decrease of $30 thousand or 11.4%. Wealth management fees increased $31 thousand, or 33.3%, from the comparable 2013 period. Income from mortgage banking activities in 2014 decreased $35 thousand as sales of longer-term mortgage loans have declined compared to the prior year. In the three-month period ended June 30, 2013, we recorded $103 thousand gain on the sales of securities, and a loss of $93 thousand on the early extinguishment of $2.0 million of long-term FHLB advances. We did not record similar transactions in the three month period ended June 30, 2014.

Noninterest Expense. Noninterest expense increased $830 thousand to $3.3 million during the three months ended June 30, 2014, from $2.5 million for the three months ended June 30, 2013. Factors that contributed to the increase in noninterest expense during the 2014 period were increased salaries and employee benefits of $470 thousand, or 31.0%, primarily attributable to additional personnel supporting our branch network and our residential and commercial lending operations. Occupancy and equipment expense increased $127 thousand resulting from normal rent increases and additional rent and other expense associated with expanded office space. Professional fees increased $119 thousand, or 90.2%, as we have incurred one-time charges of $95 thousand for professional service firms to facilitate certain staffing and contract negotiation matters on our behalf.

Income Taxes. An income tax provision of $276 thousand was recorded during the quarter ended June 30, 2014, compared to a provision of $372 thousand in the comparable 2013 quarter. The effective tax rate for the 2014 three-month period was 39.1%, compared with 39.0% for the 2013 three-month period.

Results of Operations for the Six Months Ended June 30, 2014 and 2013

Overview. Net income for the six months ended June 30, 2014 was $825 thousand, compared to net income of $1.2 million for the six months ended June 30, 2013. The $353 million decrease was primarily due to increased noninterest expense of $1.6 million, partially offset by increased net interest income of $1.2 million.

Net Interest Income. Net interest income for the six months ended June 30, 2014 increased $1.2 million, or 18.3%, as compared to the six months ended June 30, 2013. The increase in net interest income was primarily due to an increase in interest income of $1.5 million, or 19.2%, partially offset by an increase in interest expense of $313 thousand, or 23.5%, during the period.

Interest and dividend income increased to $9.4 million for the six months ended June 30, 2014 from $7.9 million for the six-month period ended June 30, 2013. The average balance of interest-earning assets increased 23.7%, while the average rate earned on these assets decreased 16 basis points. Interest and fees on loans increased $1.5 million, or 19.4%, due to a 27.2% increase in the average balance of loans partially offset by a 30 basis point decrease in the average rate received on loans. Interest income from taxable securities increased $54 thousand, or 19.5%, due to a 20 basis point increase in the average rate earned on taxable securities and a 7.0% increase in the average balance of taxable securities compared to the prior year period.


The increase in interest expense was primarily due to growth in the average balance of interest-bearing deposits, increasing interest costs by $286 thousand, or 26.6%, as compared to the prior year. Long-term debt expense increased $22 thousand as the average balance of long-term FHLB advances increased $7.7 million from $38.2 million to $45.9 million, partially offset by a decrease in rates paid on the advances of 12 basis points. The average rates paid on all interest-bearing liabilities decreased by 3 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 and a more cost-effective mix of funds. We experienced an increase in the average balance of interest-bearing deposits of 27.0% in the six-month period ended June 30, 2014 compared to the same period in 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 . . .

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