Wellesley Bancorp 10-Q 2013 Q3 Quarterly report

 UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2013

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _____________

Commission file number:  001-35352

WELLESLEY BANCORP, INC.

(Exact name of registrant as specified in its charter)

Maryland	45-3219901
(State or other jurisdiction of incorporation or	(I.R.S. Employer Identification No.)
organization)

40 Central Street, Wellesley, Massachusetts	02482
(Address of principal executive offices)	(Zip Code)

(781) 235-2550

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes    X   No ___

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Sec. 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes    X   No ___

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definition of  “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer  ____	Accelerated filer  ____
Non-accelerated filer  ____	Smaller reporting company     X
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes ___ No    X   

As of October 31, 2013, there were 2,459,080 shares of the registrant’s common stock outstanding.

WELLESLEY BANCORP, INC.

Table of Contents

		Page No.
Part I.   Financial Information
Item 1.	Financial Statements (Unaudited)
	Consolidated Balance Sheets as of September 30, 2013 and December 31, 2012	1
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2013 and 2012	2
	Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2013 and 2012	3
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2013 and 2012	4
	Notes to Consolidated Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	37
Part II.   Other Information
Item 1.	Legal Proceedings	38
Item 1A.	Risk Factors	38
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	39
Item 3.	Defaults Upon Senior Securities	39
Item 4.	Mine Safety Disclosures	39
Item 5.	Other Information	39
Item 6.	Exhibits	39
Signatures

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited)

CONSOLIDATED BALANCE SHEETS

	September 30, 2013			December 31, 2012
	(Dollars in thousands)
Assets
Cash and due from banks	$	4,770		$	2,247
Short-term investments		8,049			15,971
Total cash and cash equivalents		12,819			18,218
Certificates of deposit		100			600
Securities available for sale, at fair value		35,232			39,256
Federal Home Loan Bank of Boston (FHLB) stock, at cost		2,799			2,005
Loans held for sale		—			9,130
Loans		360,387			297,935
Less allowance for loan losses		(4,158	)		(3,844	)
Loans, net		356,229			294,091
Bank-owned life insurance		6,546			6,385
Premises and equipment, net		2,941			2,044
Accrued interest receivable		973			1,019
Net deferred tax asset		2,381			1,933
Other assets		1,074			1,367
Total assets	$	421,094		$	376,048
Liabilities and Stockholders’ Equity
Deposits:
Noninterest-bearing	$	45,143		$	39,044
Interest-bearing		282,305			259,015
		327,448			298,059
Short-term borrowings		5,000			—
Long-term debt		40,500			31,500
Accrued expenses and other liabilities		1,764			1,518
Total liabilities		374,712			331,077
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.01 par value;
1,000,000 shares authorized, none issued		—			—
Common stock, $0.01 par value;
14,000,000 shares authorized, 2,460,080 shares  issued and
outstanding at September 30, 2013;  2,480,610 shares issued
and outstanding at December 31, 2012		24			24
Additional paid-in capital		22,835			22,751
Retained earnings		24,989			23,203
Accumulated other comprehensive income		235			790
Unearned compensation – ESOP		(1,701	)		(1,797	)
Total stockholders' equity		46,382			44,971
Total liabilities and stockholders' equity	$	421,094		$	376,048

See accompanying notes to consolidated financial statements.

1

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(Dollars in thousands, except per share data)
Interest and dividend income:
Interest and fees on loans and loans held for sale	$	4,085		$	3,281		$	11,600		$	9,554
Debt securities-taxable		126			177			403			559
Debt securities-tax-exempt		38			63			138			199
Interest on short-term investments and certificates of deposit		7			9			25			38
Dividends on FHLB stock		2			2			6			6
Total interest and dividend income		4,258			3,532			12,172			10,356
Interest expense:
Deposits		569			533			1,647			1,574
Short-term borrowings		4			13			4			56
Long-term debt		124			107			380			277
Total interest expense		697			653			2,031			1,907
Net interest income		3,561			2,879			10,141			8,449
Provision for loan losses		150			150			350			400
Net interest income, after provision for loan losses		3,411			2,729			9,791			8,049
Noninterest income:
Customer service fees		46			26			126			99
Mortgage banking activities		10			62			86			62
Wealth management fees		101			64			282			153
Gain on sale of securities, net		—			52			103			51
Income on bank-owned life insurance		59			47			161			130
Loss on extinguishment of debt		—			—			(93	)		—
Miscellaneous		9			12			32			33
Total noninterest income		225			263			697			528
Noninterest expense:
Salaries and employee benefits		1,553			1,227			4,505			3,572
Occupancy and equipment		354			346			1,050			950
Data processing		125			115			367			330
FDIC insurance		68			68			201			170
Contributions		—			—			2			1,801
Other general and administrative		536			381			1,422			1,198
Total noninterest expense		2,636			2,137			7,547			8,021
Income before income taxes		1,000			855			2,941			556
Provision for income taxes		393			318			1,155			138
Net income		607			537			1,786			418
Other comprehensive income (loss):
Unrealized holding gains (losses) on available-for-sale securities		(94	)		271			(809	)		495
Reclassification adjustment for net securities gains realized		—			(52	)		(103	)		(51	)
Tax effect		34			(86	)		357			(172	)
Total other comprehensive income (loss)		(60	)		133			(555	)		272
Comprehensive income	$	547		$	670		$	1,231		$	690
Net income per common share (basic and diluted)	$	0.27		$	0.24		$	0.78			N/A
Weighted average shares outstanding (basic and diluted)		2,288,752			2,221,534			2,290,402			N/A

See accompanying notes to consolidated financial statements.

2

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

Nine Months Ended September 30, 2013 and 2012

											Accumulated
						Additional					Other			Unearned			Total
	Common Stock					Paid-in			Retained		Comprehensive			Compensation-			Stockholders’
	Shares			Amount		Capital			Earnings		Income			ESOP			Equity
(Dollars in thousands)
Balance at December 31, 2011		—		$	—	$	—		$	22,104	$	627		$	—		$	22,731
Net income		—			—		—			418		—			—			418
Other comprehensive income		—			—		—			—		272			—			272
Issuance of common stock for    initial public offering, net of    expenses of $1,260		2,249,674			22		21,214			—		—			—			21,236
Issuance of common stock to    Wellesley Bank Charitable    Foundation		157,477			2		1,573			—		—			—			1,575
Stock purchased by the ESOP		—			—		—			—		—			(1,926	)		(1,926	)
ESOP shares committed to be     allocated (8,559)		—			—		32			—		—			86			118
Balance at September 30, 2012		2,407,151		$	24	$	22,819		$	22,522	$	899		$	(1,840	)	$	44,424
Balance at December 31, 2012		2,480,610		$	24	$	22,751		$	23,203	$	790		$	(1,797	)	$	44,971
Net income		—			—		—			1,786		—			—			1,786
Other comprehensive loss		—			—		—			—		(555	)		—			(555	)
Purchase and retirement of     treasury shares		(20,530	)		—		(321	)		—		—			—			(321	)
Shared- based compensation-     equity incentive plan		—			—		342			—		—			—			342
ESOP shares committed to be     allocated  (9,629)		—			—		63			—		—			96			159
Balance at September 30, 2013		2,460,080		$	24	$	22,835		$	24,989	$	235		$	(1,701	)	$	46,382

See accompanying notes to consolidated financial statements.

3

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Nine Months Ended September 30,
	2013			2012
	(In thousands)
Cash flows from operating activities:
Net income	$	1,786		$	418
Adjustments to reconcile net income to net cash provided (used) by operating activities
Provision for loan losses		350			400
Depreciation and amortization		234			210
Net amortization of securities		187			187
Loans originated for sale		(19,468	)		(20,219	)
Principal amount of loans sold		28,505			12,207
Gain on sale of securities, net		(103	)		(51	)
Accretion of net deferred loan fees		(391	)		(304	)
Income on bank-owned life insurance		(161	)		(130	)
Deferred income tax benefit		(91	)		(783	)
Issuance of common stock to Wellesley Bank Charitable Foundation		—			1,575
ESOP expense		159			118
Share-based compensation		342			—
Net change in:
Accrued interest receivable		46			(167	)
Other assets		293			750
Accrued expenses and other liabilities		246			400
Net cash provided (used) by operating activities		11,934			(5,389	)
Cash flows from investing activities:
Net decrease (increase) in certificates of deposit:		500			(500	)
Activity in securities available for sale:
Maturities, prepayments and calls		6,662			7,838
Purchases		(5,063	)		(15,523	)
Proceeds from sales		1,429			1,624
(Purchase) redemption of Federal Home Loan Bank stock		(794	)		125
Loan originations, net		(62,004	)		(46,312	)
Additions to premises and equipment		(1,131	)		(1,111	)
Purchases of bank-owned life insurance		—			(2,000	)
Net cash used by investing activities		(60,401	)		(55,859	)
Cash flows from financing activities:
Net increase in deposits		29,389			34,801
Proceeds from long-term debt		22,500			26,000
Repayments of long-term debt		(13,500	)		(2,000	)
Increase (decrease)  in short-term borrowings		5,000			(7,059	)
Conversion of stock subscriptions to common stock		—			(19,666	)
Net proceeds from the issuance of common stock		—			21,236
Payment to acquire treasury shares		(321	)		—
Acquisition of common stock by ESOP		—			(1,926	)
Net cash provided by financing activities		43,068			51,386
Net change in cash and cash equivalents		(5,399	)		(9,862	)
Cash and cash equivalents at beginning period		18,218			33,524
Cash and cash equivalents at end of period	$	12,819		$	23,662
Supplementary information:
Interest paid	$	2,025		$	1,927
Income taxes paid		1,852			840

See accompanying notes to consolidated financial statements.

4

WELLESLEY BANCORP, INC. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - STOCK CONVERSION

On July 20, 2011, the Board of Directors of Wellesley Bank (the “Bank”) adopted a Plan of Conversion (the “Plan”) whereby the Bank would convert from a Massachusetts mutual cooperative bank to a Massachusetts stock cooperative bank and become a wholly-owned subsidiary of a Maryland-chartered stock corporation, Wellesley Bancorp, Inc. (the “Company”).  The Company would offer stock on a priority basis to qualifying depositors, tax-qualified employee plans, and employees, officers and directors of the Bank (the “Conversion”).

On January 25, 2012, the Conversion was completed and the Company became the parent holding company for the Bank.  A total of 2,249,674 shares of the Company common stock were issued, including those issued to our employee stock ownership plan, at $10.00 per share through which the Company received net offering proceeds of $21.2 million, net of conversion costs of $1.3 million.  Additionally, the Company contributed $225 thousand in cash and 157,477 shares of common stock to the Wellesley Bank Charitable Foundation (the “Foundation”).  The total number of shares of common stock outstanding upon completion of the Conversion was 2,407,151 shares.  All eligible subscribers and community members who properly completed and timely submitted a stock order form were allocated the number of shares of common stock requested in their stock order form.

As part of the Conversion, the Bank established a liquidation account in an amount equal to the net worth of the Bank as of the date of the latest consolidated balance sheet appearing in the final prospectus distributed in connection with the Conversion, or $22.1 million.  The liquidation account will be maintained for the benefit of eligible account holders and supplemental eligible account holders who maintain their accounts at the Bankafter the Conversion.  The liquidation account will be reduced annually to the extent that such account holders have reduced their qualifying deposits as of each fiscal year end.  Subsequent increases will not restore an account holder’s interest in the liquidation account.  In the event of a complete liquidation, each eligible account holder will be entitled to receive balances for accounts then held.

NOTE 2 - BASIS OF PRESENTATION AND CONSOLIDATION

The accompanying unaudited interim consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary; the Bank, the principal operating entity, and its wholly-owned subsidiaries; Wellesley Securities Corporation, which engages in the business of buying, selling and dealing in securities exclusively on its own behalf; Wellesley Investment Partners, LLC, formed for the purpose of providing investment management services for individuals, not-for-profit entities and businesses; and Central Linden, LLC, formed for the purpose of holding, managing and selling foreclosed real estate.  All significant intercompany balances and transactions have been eliminated in consolidation.  These financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) for interim financial information, and with the instructions to Form 10-Q and Regulation S-X.  Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements.

In the opinion of management, all adjustments (consisting only of normal recurring accruals) considered necessary for a fair presentation have been included.  The accompanying consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s 2012 Annual Report on Form 10-K.  The results for the three and nine months ended September 30, 2013 are not necessarily indicative of the results that may be expected for the year ending December 31, 2013.

NOTE 3 - LOAN POLICIES

The loan portfolio consists of real estate, commercial and other loans to the Company’s  customers in our primary market areas in eastern Massachusetts.  The ability of the Company’s debtors to honor their contracts is dependent upon the economy in general and the real estate and construction  sectors within our markets.

5

Loans that management has the intent and ability to hold for the foreseeable future, or until maturity or pay-off, generally are reported at their outstanding unpaid principal balances adjusted for charge-offs, the allowance for loan losses, and any deferred loan origination fees or costs.  Interest income is accrued on the unpaid principal balance.  Loan origination fees, net of certain direct origination costs, are deferred and recognized as an adjustment of the related loan yield using the interest method.

Interest is not accrued on loans when  identified as impaired or loans which are ninety days or more past due.  Past due status is based on the contractual terms of the loan.  Interest income previously accrued on such loans is reversed against current period interest income.  Interest income on non-accrual loans is recognized only to the extent of interest payments received and is first applied to the outstanding principal balance when collectibility of principal is in doubt.  Loans are returned to accrual status when all principal and interest amounts contractually due are brought current and future payments are reasonably assured through sustained payment performance for at least six months.

Allowance for loan losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings.  Loan losses are charged against the allowance when management believes the uncollectibility of the loan balance is confirmed.  Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management.  This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.  The allowance consists of general, allocated and unallocated components, as further described below.

General component

The general component is based on the following loan segments: residential real estate, commercial real estate, construction, commercial, home equity lines of credit and other consumer.  Management considers a rolling average of historical losses for each segment based on a time frame appropriate to capture relevant loss data for each loan segment, which generally ranges from 3-10 years.  This historical loss factor is adjusted for qualitative factors including: levels/trends in delinquencies; trends in volume, concentrations and terms of loans; effects of changes in risk selection and underwriting standards, and other changes in lending policies, procedures and practices; experience/ability/depth of lending management and staff; and national and local economic trends and conditions.  There were no significant changes to the Company’s  policies or methodology pertaining to the general component of the allowance during 2013 or 2012.

The qualitative factor adjustments are determined based on the various risk characteristics of each loan segment.  Risk characteristics relevant to each portfolio segment are as follows:

Residential real estate – The Company generally does not originate loans with a loan-to-value ratio greater than 80 percent and does not originate subprime loans.  Most loans in this segment are collateralized by one- to four-family owner and non-owner occupied residential real estate, and repayment is dependent on the credit quality of the individual borrower.

Commercial real estate – Loans in this segment are primarily income-producing properties in the Company’s  primary market areas in eastern Massachusetts.  The underlying cash flows generated by the properties are adversely impacted by a downturn in the economy as evidenced by increased vacancy rates, which in turn, will have an effect on the credit quality in this segment.  Management obtains rent rolls and performs credit reviews on these loans.

Construction – Loans in this segment, primarily single family residential construction, include speculative  loans for which payment is derived from sale of the property.  Credit risk is affected by cost overruns, time to sell at an adequate price, and market conditions.   

6

Commercial  – Loans in this segment are made to businesses and are generally secured by assets of the business.  Repayment is expected from the cash flows of the business.  A weakened economy, and resultant decreased consumer spending, will have an effect on the credit quality in this segment.

Home equity lines of credit – Loans in this segment are collateralized by one-to-four family residential real estate and repayment is dependent on the credit quality of the individual borrower.  The Company typically does not hold a first mortgage position on homes that secure home equity lines of credit. The overall health of the economy, including unemployment rates and housing prices, will have an effect on the credit quality in this segment.

Other consumer  – Loans in this segment are generally unsecured and repayment is dependent on the credit quality of the individual borrower.

Allocated component

The allocated component relates to loans that are classified as impaired.  Impairment is measured on a loan by loan basis by either the present value of expected future cash flows discounted at the loan’s effective interest rate or, if the loan is collateral dependent, by the fair value of the collateral, less estimated costs to sell.  An allowance is established when the discounted cash flows (or collateral value) of the impaired loan is lower than the carrying value of that loan.  Large groups of smaller-balance homogeneous loans are collectively evaluated for impairment.  Accordingly, the Company does not separately identify performing individual consumer loans (residential, home equity lines of credit, personal and other consumer secured loans) for impairment disclosures, unless such loans are subject to a troubled debt restructuring agreement.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement.  Factors considered by management in determining impairment include payment status, collateral value, and the financial strength of the borrower.  Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired.  Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

The Company periodically may agree to modify the contractual terms of loans.  When a loan is modified and a concession is made to a borrower experiencing financial difficulty, the modification is considered a troubled debt restructuring ("TDR").  All TDRs are initially classified as impaired.

Unallocated component

An unallocated component is maintained to cover uncertainties that could affect management’s estimate of probable losses.  The unallocated component of the allowance reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio.

NOTE 4 - COMPREHENSIVE INCOME

Accounting principles generally require that recognized revenue, expenses, gains and losses be  included in net income.  Although certain changes in assets and liabilities, such as unrealized gains and losses on available-for-sale securities, are reported as a separate component of the stockholders’ equity section of the consolidated balance sheets, such items, along with net income, are components of comprehensive income/loss.

7

The components of accumulated other comprehensive income and related tax effects are as follows:

	September 30,			December 31,
	2013			2012
	(In thousands)
Unrealized holding gains on securities available for sale	$	385		$	1,297
Tax effect		(150	)		(507	)
Net-of tax amount	$	235		$	790

NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS

In February 2013, the Financial Accounting Standards Board  issued Accounting Standards Update No. 2013-02 related to disclosure of amounts reclassified out of accumulated other comprehensive income. The standard requires that companies present either in a single note or parenthetically on the face of the financial statements, the effect of significant amounts reclassified from each component of accumulated other comprehensive income based on its source and the income statement line items affected by the reclassification. The new requirements are effective for public companies in fiscal years, and interim periods within those years, beginning after December 15, 2012. The Company adopted this standard on January 1, 2013, with no significant impact on the Company’s consolidated financial statements for the three or nine months ended September 30, 2013.

NOTE 6 – SECURITIES AVAILABLE FOR SALE

The amortized cost and fair value of securities available for sale, with gross unrealized gains and losses, follows:

	September 30, 2013
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Residential mortgage-backed securities:
Government National Mortgage Association	$	8,387	$	191	$	(32	)	$	8,546
Government-sponsored enterprises		10,038		186		(57	)		10,167
SBA and other asset-backed securities		2,282		4		(78	)		2,208
State and municipal bonds		4,029		117		(7	)		4,139
Government-sponsored enterprise obligations		2,911		23		(33	)		2,901
Corporate bonds		7,200		90		(19	)		7,271
	$	34,847	$	611	$	(226	)	$	35,232

8

	December 31, 2012
	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(In thousands)
Residential mortgage-backed securities:
Government National Mortgage Association	$	9,235	$	311	$	—		$	9,546
Government-sponsored enterprises		10,841		372		—			11,213
SBA and other asset-backed securities		3,988		139		—			4,127
State and municipal bonds		5,604		362		(3	)		5,963
Government-sponsored enterprise obligations		2,105		13		(3	)		2,115
Corporate bonds		6,186		106		—			6,292
	$	37,959	$	1,303	$	(6	)	$	39,256

The amortized cost and fair value of debt securities by contractual maturity at September 30, 2013 and December 31, 2012 are as follows.  Expected maturities may differ from contractual maturities because the issuer, in certain instances, has the right to call or prepay obligations with or without call or prepayment penalties.

	September 30, 2013				December 31, 2012
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Within 1 year	$	2,752	$	2,764	$	154	$	155
After 1 year to 5 years		5,605		5,694		7,454		7,603
After 5 years to 10 years		2,616		2,670		2,912		2,990
After 10 years		3,167		3,183		3,375		3,622
		14,140		14,311		13,895		14,370
Mortgage- and asset-backed securities		20,707		20,921		24,064		24,886
	$	34,847	$	35,232	$	37,959	$	39,256

9

Unrealized losses generally reflect declines in the fair value of a security, as compared to the carrying value of the security.  Recent increases in longer-term interest rates are reflected in lower fair values of certain securities in our portfolio than current carrying values, resulting in unrealized losses which we consider to be temporary in duration. Management currently does not have the intent to sell these securities and it is more likely that it will not have to sell these securities before recovery of their cost basis. Information pertaining to securities with gross unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	Less Than Twelve Months					Over Twelve Months
	Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value
September 30, 2013	(In thousands)
Residential mortgage-backed securities:
Government National Mortgage Association	$	(32	)	$	1,744	$	—		$	—
Government-sponsored enterprises		(57	)		4,443		—			—
SBA and other asset-backed securities		(78	)		1,406		—			—
State and municipal bonds		(3	)		250		(4	)		296
Government-sponsored enterprise obligations		(33	)		967		—			—
Corporate bonds		(19	)		1,131		—			—
	$	(222	)	$	9,941	$	(4	)	$	296
December 31, 2012
State and municipal bonds	$	(3	)	$	299	$	—		$	—
Government-sponsored enterprise obligations		(3	)		998		—			—
	$	(6	)	$	1,297	$	—		$	—

10

NOTE 7 – LOANS AND ALLOWANCE FOR LOAN LOSSES

A summary of the balances of loans is as follows:

	September 30,			December 31,
	2013			2012
	(In thousands)
Real estate loans:
Residential – fixed	$	22,105		$	19,524
Residential – variable		144,999			111,041
Commercial		78,482			80,200
Construction		71,095			48,158
		316,681			258,923
Commercial loans:
Secured		13,085			14,854
Unsecured		1,530			871
		14,615			15,725
Consumer loans:
Home equity lines of credit		28,906			23,111
Other		443			455
		29,349			23,566
Total loans		360,645			298,214
Less:
Allowance for loan losses		(4,158	)		(3,844	)
Net deferred origination fees		(258	)		(279	)
Loans, net	$	356,229		$	294,091

11

The following table summarizes the changes in the allowance for loan losses by portfolio segment for the three and nine months ended September 30, 2013 and 2012:

	Residential Real Estate			Commercial Real Estate			Construction			Commercial			Home Equity			Other Consumer			Unallocated			Total
	(In thousands)
Three Months Ended September 30, 2013
Allowance at June 30, 2013	$	1,393		$	930		$	987		$	447		$	167		$	7		$	77		$	4,008
Provision (credit) for loan losses		(65	)		(52	)		186			(53	)		155			1			(22	)		150
Loans charged off		—			—			—			—			—			—			—			—
Recoveries of loans previously   charged off		—			—			—			—			—			—			—			—
Allowance at September 30, 2013	$	1,328		$	878		$	1,173		$	394		$	322		$	8		$	55		$	4,158
Three Months Ended September 30, 2012
Allowance at June 30, 2012	$	1,047		$	956		$	921		$	403		$	162		$	13		$	48		$	3,550
Provision (credit) for loan losses		115			107			(8	)		(22	)		(2	)		5			(45	)		150
Loans charged off		—			—			—			—			—			(7	)		—			(7	)
Recoveries of loans previously   charged off		—			—			—			—			—			1			—			1
Allowance at September 30, 2012	$	1,162		$	1,063		$	913		$	381		$	160		$	12		$	3		$	3,694

	Residential Real Estate		Commercial Real Estate			Construction			Commercial			Home Equity		Other Consumer			Unallocated			Total
	(In thousands)
Nine Months Ended September 30, 2013
Allowance at December 31, 2012	$	1,157	$	1,041		$	918		$	456		$	171	$	11		$	90		$	3,844
Provision (credit) for loan losses		171		(163	)		255			(26	)		151		(3	)		(35	)		350
Loans charged off		—		—			—			(36	)		—		—			—			(36	)
Recoveries of loans previously   charged off		—		—			—			—			—		—			—			—
Allowance at September 30, 2013	$	1,328	$	878		$	1,173		$	394		$	322	$	8		$	55		$	4,158
Nine Months Ended September 30, 2012
Allowance at December 31, 2011	$	626	$	988		$	1,119		$	382		$	153	$	16		$	112		$	3,396
Provision (credit) for loan losses		536		75			(206	)		95			7		2			(109	)		400
Loans charged off		—		—			—			(100	)		—		(8	)		—			(108	)
Recoveries of loans previously   charged off		—		—			—			4			—		2			—			6
Allowance at September 30, 2012	$	1,162	$	1,063		$	913		$	381		$	160	$	12		$	3		$	3,694

12

Further information pertaining to the allowance for loan losses at September 30, 2013 and December 31, 2012 is as follows:

	Residential Real Estate		Commercial Real Estate		Construction		Commercial		Home Equity		Other Consumer		Unallocated		Total
	(In thousands)
September 30, 2013
Allowance related to loans     individually evaluated and     deemed to be impaired	$	—	$	—	$	—	$	—	$	95	$	—	$	—	$	95
Allowance related to loans     individually evaluated and     not deemed impaired, and     those collectively evaluated     for impairment		1,328		878		1,173		394		227		8		55		4,063
Total allowance	$	1,328	$	878	$	1,173	$	394	$	322	$	8	$	55	$	4,158
Impaired loan balances     individually evaluated and     deemed to be impaired	$	427	$	5,294	$	—	$	—	$	522	$	—	$	—	$	6,243
Loan balances individually     evaluated and not deemed     impaired, and those collectively     evaluated for impairment		166,677		73,188		71,095		14,615		28,384		443		—		354,402
Total loans	$	167,104	$	78,482	$	71,095	$	14,615	$	28,906	$	443	$	—	$	360,645

	Residential Real Estate		Commercial Real Estate		Construction		Commercial		Home Equity		Other Consumer		Unallocated		Total
	(In thousands)
December 31, 2012
Allowance related to loans     individually evaluated and     deemed to be impaired	$	—	$	94	$	—	$	26	$	—	$	—	$	—	$	120
Allowance related to loans     individually evaluated and     not deemed impaired, and     those collectively evaluated     for impairment		1,157		947		918		430		171		11		90		3,724
Total allowance	$	1,157	$	1,041	$	918	$	456	$	171	$	11	$	90	$	3,844
Impaired loan balances     individually evaluated and     deemed to be impaired	$	541	$	5,657	$	—	$	76	$	308	$	—	$	—	$	6,582
Loan balances individually     evaluated and not deemed     impaired, and those collectively     evaluated for impairment		130,024		74,543		48,158		15,649		22,803		455		—		291,632
Total loans	$	130,565	$	80,200	$	48,158	$	15,725	$	23,111	$	455	$	—	$	298,214

13

The following is a summary of past due and non-accrual loans at September 30, 2013 and December 31, 2012:

	30-59 Days Past Due		60-89 Days Past Due		Past Due 90 Days or More		Total Past Due		Past Due 90 Days or More and Accruing		Non-accrual Loans
	(In thousands)
September 30, 2013
Residential real estate	$	804	$	—	$	350	$	1,154	$	—	$	901
Commercial real estate		599		—		—		599		—		1,874
Commercial		—		36		—		36		—		—
Home equity lines of credit		109		—		487		596		—		522
Other consumer loans		104		—		—		104		—		—
Total	$	1,616	$	36	$	837	$	2,489	$	—	$	3,297

	30-59 Days Past Due		60-89 Days Past Due		Past Due 90 Days or More		Total Past Due		Past Due 90 Days or More and Accruing		Non-accrual Loans
	(In thousands)
December 31, 2012
Residential real estate	$	1,483	$	217	$	306	$	2,006	$	—	$	540
Commercial real estate		—		—		2,756		2,756		—		2,932
Commercial		2,452		19		—		2,471		—		—
Home equity lines of credit		874		—		34		908		—		38
Total	$	4,809	$	236	$	3,096	$	8,141	$	—	$	3,510

14

The following is a summary of impaired loans at September 30, 2013 and December 31, 2012:

	September 30, 2013						December 31, 2012
	Recorded Investment		Unpaid Principal Balance		Related Allowance		Recorded Investment		Unpaid Principal Balance		Related Allowance
	(In thousands)
Impaired loans without a valuation allowance:
Residential real estate	$	427	$	427	$	—	$	541	$	541	$	—
Commercial real estate		5,294		5,294		—		5,481		5,481		—
Commercial		—		—		—		50		50		—
Home equity lines of credit		35		35		—		308		308		—
Total		5,756		5,756		—		6,380		6,380		—
Impaired loans with a valuation allowance:
Commercial real estate		—		—		—		176		176		94
Commercial		—		—		—		26		26		26
Home equity lines of credit		487		487		95		—		—		—
Total		487		487		95		202		202		120
Total impaired loans	$	6,243	$	6,243	$	95	$	6,582	$	6,582	$	120

Further information pertaining to impaired loans follows:

	Three Months Ended September 30, 2013						Nine Months Ended September 30, 2013
	Average Recorded Investment		Interest Income Recognized		Interest Income Recognized on Cash Basis		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized on Cash Basis
	(In thousands)
Residential real estate	$	524	$	4	$	11	$	576	$	16	$	22
Commercial real estate		5,532		73		80		5,909		248		282
Commercial		385		4		6		257		13		12
Home equity lines of credit		156		2		—		111		2		1
Total	$	6,597	$	83	$	97	$	6,853	$	279	$	317

	Three Months Ended September 30, 2012						Nine Months Ended September 30, 2012
	Average Recorded Investment		Interest Income Recognized		Interest Income Recognized on Cash Basis		Average Recorded Investment		Interest Income Recognized		Interest Income Recognized on Cash Basis
	(In thousands)
Residential real estate	$	762	$	3	$	3	$	1,509	$	62	$	62
Commercial real estate		350		—		—		513		38		38
Construction		2,907		30		30		2,758		111		111
Commercial		—		—		—		4		2		2
Home equity lines of credit		93		1		1		67		1		1
Other consumer loans		7		—		0		11		0		0
Total	$	4,119	$	34	$	34	$	4,862	$	214	$	214

No additional funds are committed to be advanced in connection with impaired loans.

15

There were no troubled debt restructurings recorded during the three and nine month periods ended September 30, 2013. There were no troubled debt restructurings that defaulted during the three and nine month periods ended September 30, 2013, and for which default was within one year of the restructure date.

There were no troubled debt restructurings recorded during the three month period ended September 30, 2012. There were no troubled debt restructurings that defaulted during the three and nine month periods ended September 30, 2012, and which default was within one year of the restructure date.

The following is a summary of troubled debt restructurings for the nine months ended September 30, 2012:

	Number of Contracts		Pre-Modification Outstanding Recorded Investment		Post-Modification Outstanding Recorded Investment
	(Dollars in thousands)
Nine Months Ended September 30, 2012
Residential  real estate		2	$	1,088	$	1,088
Commercial real estate		2		257		257
Total		4	$	1,345	$	1,345

In the nine month period ended September 30, 2012, monthly payment terms were modified on two residential real estate loans to a level comparable with rates offered to high quality borrowers. One loan totaling $881 thousand was paid in full during the quarter ended September 30, 2012. The remaining loan was on non-accrual status as of quarter-end September 30, 2012. There were no reserves for expected uncollectible principal on this loan at September 30, 2012 or 2013.

During the same period, monthly payment terms were modified on two commercial real estate loans to one borrower to reduce required payments.   These loans were on non-accrual status and in a principal-only collection status as of September 30, 2012. Reserves for expected uncollectible principal totaling $97 thousand were established and a component of the specific reserve allowance for loan losses as of September 30, 2012.  These loans were resolved during 2013 with no losses incurred.

Credit Quality Information

The Company utilizes an eleven-grade internal loan rating system for commercial real estate, construction and commercial loans as follows:

Loans rated 1 – 3 and 31:  Loans in these categories are considered “pass” rated loans with low to average risk.

Loans rated 4:  Loans in this category are considered “special mention.”  These loans are starting to show signs of potential weakness and are being closely monitored by management.

Loans rated 5:  Loans in this category are considered “substandard.”  Generally, a loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligors and/or the collateral pledged.  There is a distinct possibility that the Company will sustain some loss if the weakness is not corrected.

Loans rated 6:  Loans in this category are considered “doubtful.”  Loans classified as doubtful have all the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, highly questionable and improbable.

Loans rated 7:  Loans in this category are considered uncollectible (“loss”) and of such little value that their continuance as loans is not warranted.

16

Category 8:  Loans in this category only include commercial loans under $25 thousand with no other outstandings or relationships with the Company.  In accordance with regulatory guidelines, these loans are not rated.

Category 9:  Loans in this category includeloans which otherwise require rating but which have not been rated, or loans for which the Company’s loan policy does not require rating.

Category 10:  Loans in this category include credit commitments/relationships that cannot be rated due to a lack of financial information or inaccurate financial information.  If, within 60 days of the assignment of a 10 rating, information is still not available to allow a standard rating, the credit will be rated 5.

On an annual basis, or more often if needed, the Company formally reviews the ratings on all commercial real estate, construction and commercial loans.  During each calendar year, the Company engages an independent third party to review a significant portion of loans within these segments.  Management uses the results of these reviews as part of its annual review process.  On a monthly basis, the Company reviews the residential real estate and consumer loan portfolio for credit quality primarily through the use of delinquency reports. Currently, there are no loans rated in categories 7and10.

The following table presents the Company’s loans by risk rating:

	September 30, 2013								December 31, 2012
	Commercial Real Estate		Construction		Commercial		Total		Commercial Real Estate		Construction		Commercial		Total
	(In thousands)
Loans rated 1–3 and 31	$	71,703	$	71,095	$	13,957	$	156,755	$	73,312	$	48,158	$	14,002	$	135,472
Loans rated 4		4,108		—		628		4,736		4,235		—		1,390		5,625
Loans rated 5		2,671		—		—		2,671		2,477		—		333		2,810
Loans rated 6		—		—		—		—		176		—		—		176
Loans rated 8		—		—		25		25		—		—		—		—
Loans rated 9		—		—		5		5		—		—		—		—
Total	$	78,482	$	71,095	$	14,615	$	164,192	$	80,200	$	48,158	$	15,725	$	144,083

NOTE 8 – FAIR VALUES OF FINANCIAL INSTRUMENTS

Determination of fair value

The Company uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures.  The fair value of a financial instrument is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  Fair value is best determined based upon quoted market prices.  However, in many instances, there are no quoted market prices for the Company’s various financial instruments.  In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques.  Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows.  Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument.

Fair value hierarchy

The Company groups its assets and liabilities measured at fair value in three levels, based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value.

Level 1 – Valuation is based on quoted market prices in active exchange markets for identical assets and liabilities.  Valuations are obtained from readily available pricing sources.

17

Level 2 – Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets and liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets and liabilities.  Valuations are obtained from readily available pricing sources.

Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities.  Level 3 assets include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.

Transfers between levels are recognized at the end of a reporting period, if applicable.

The following methods and assumptions were used by the Company in estimating fair value disclosures:

Cash, cash equivalents and certificates of deposit:  The carrying amounts approximate fair values based on the short-term nature of the assets.

Securities available for sale:  Fair value measurements are obtained from a third-party pricing service and are not adjusted by management.  Securities measured at fair value in Level 2 are based on pricing models that consider standard input factors such as observable market data, benchmark yields, interest rate volatilities, broker/dealer quotes, credit spreads and new issue data.

FHLB stock:  The carrying value of FHLB stock is deemed to approximate fair value, based on the redemption provisions of the FHLB of Boston.

Loans held for sale:  Fair values are based on commitments in effect from investors or prevailing market prices.

Loans, net:  For variable-rate loans that reprice frequently and with no significant change in credit risk, fair values are based on carrying values.  Fair values for other loans are estimated using discounted cash flow analyses, using market interest rates currently being offered for loans with similar terms to borrowers of similar credit quality.  Fair values for impaired loans are estimated using discounted cash flow analyses or underlying collateral values, where applicable.

Deposits:  The fair values disclosed for non-certificate deposit accounts are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts).  Fair values for fixed-rate certificates of deposit are estimated using a discounted cash flow calculation that applies market interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturities on time deposits.

Short-term borrowings:  The carrying amount of short-term borrowings approximates fair value, based on the short-term nature of the liabilities.

Long-term debt: The fair values of long-term debt are estimated using discounted cash flow analyses based on the current incremental borrowing rates in the market for similar types of borrowing arrangements.

Accrued interest: The carrying amounts of accrued interest approximate fair value.

Forward loan sale commitments and derivative loan commitments: Fair value of derivative loan commitments are based on fair values of the underlying mortgage loans and related servicing rights, and the probability of such commitments being exercised. Fair value of forward loan sales commitments are based on changes in fair value of the underlying mortgage loans from the commitment date to the reporting date.

Off-balance sheet instruments: Fair values for off-balance-sheet lending commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the counterparties’ credit standing.  The fair values of these instruments are considered immaterial.

18

Assets and liabilities measured at fair value on a recurring basis

Assets and liabilities measured at fair value on a recurring basis at September 30, 2013 and December 31, 2012 are summarized below.

	September 30, 2013
	Level 1		Level 2		Level 3		Fair Value
	(In thousands)
Assets
Securities available for sale	$	—	$	35,232	$	—	$	35,232
Derivative loan commitments		—		—		8		8
Total assets	$	—	$	35,232	$	8	$	39,240
Liabilities
Forward  loan sale commitments	$	—	$	—	$	5	$	5
	December 31, 2012
	Level 1		Level 2		Level 3		Fair Value
	(In thousands)
Assets
Securities available for sale	$	—	$	39,256	$	—	$	39,256
Derivative loan commitments		—		—		10		10
Forward loan sale commitments		—		—		22		22
Total assets	$	—	$	39,256	$	32	$	39,288
Liabilities
Forward loan sale commitments	$	—	$	—	$	18	$	18

19

Assets measured at fair value on a non-recurring basis

The Company may also be required, from time to time, to measure certain other financial assets at fair value on a non-recurring basis in accordance with generally accepted accounting principles.  These adjustments to fair value usually result from application of lower-of-cost-or-market (LOCOM) accounting or write-downs of individual assets.  The following table summarizes the fair value hierarchy used to determine each adjustment and the carrying value of the related individual assets as of September 30, 2013 and December 31, 2012.

	September 30, 2013						December 31, 2012
	Level 1		Level 2		Level 3		Level 1		Level 2		Level 3
	(In thousands)
Impaired loans	$	—	$	—	$	392	$	—	$	—	$	82

The following table presents the total (losses) gains related to the fair value measurement on loans held for sale and impaired loans for the three and nine month periods ended September 30, 2013 and 2012.

	Three Months Ended September 30,					Nine Months Ended September 30,
	2013			2012		2013			2012
	(In thousands)					(In thousands)
Loans held for sale	$	160		$	—	$	—		$	—
Impaired loans		(95	)		27		(1	)		333
	$	65		$	27	$	(1	)	$	333

Loans held for sale (LHFS) are evaluated for losses associated with the application of LOCOM accounting. At September 30, 2013, and December 31, 2012, there were no LOCOM adjustments.

Losses applicable to certain impaired loans are estimated using the appraised value of the underlying collateral considering discounting factors and adjusted for selling costs.  The loss is not recorded directly as an adjustment to current earnings, but rather as a component in determining the overall adequacy of the allowance for loan losses.  Adjustments to the estimated fair value of impaired loans may result in increases or decreases to the provision for loan losses.

There are no liabilities measured at fair value on a non-recurring basis at September 30, 2013 and December 31, 2012.

20

Summary of fair values of financial instruments

The estimated fair values and related carrying amounts of the Company’s financial instruments are outlined in the table below.  Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements.  Accordingly, the aggregate fair value amounts presented herein may not necessarily represent the underlying fair value of the Company.

	September 30, 2013
			Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(In thousands)
Financial assets
Cash and cash equivalents	$	12,819	$	12,819	$	—	$	—	$	12,819
Certificates of deposit		100		100		—		—		100
Securities available for sale		35,232		—		35,232		—		35,232
FHLB stock		2,799		—		—		2,799		2,799
Loans, net		356,229		—		—		354,379		354,379
Accrued interest receivable		973		—		—		973		973
Derivative loan commitments		8		—		—		8		8
Financial liabilities
Deposits	$	327,448	$	—	$	—	$	328,181	$	328,181
Long-term debt		40,500		—		40,356		—		40,356
Short-term borrowings		5,000		5,000		—		—		5,000
Accrued interest payable		49		—		—		49		49
Forward  loan sale commitments		5		—		—		5		5

	December 31, 2012
			Fair Value
	Carrying Amount		Level 1		Level 2		Level 3		Total
	(In thousands)
Financial assets
Cash and cash equivalents	$	18,218	$	18,218	$	—	$	—	$	18,218
Certificates of deposit		600		600		—		—		600
Securities available for sale		39,256		—		39,256		—		39,256
FHLB stock		2,005		—		—		2,005		2,005
Loans held for sale		9,130		—		9,130		—		9,130
Loans, net		294,091		—		—		294,618		294,618
Accrued interest receivable		1,019		—		—		1,019		1,019
Derivative loan commitments		10		—		—		10		10
Forward loan sale commitments		22		—		—		22		22
Financial liabilities
Deposits	$	298,059	$	—	$	—	$	298,949	$	298,949
Long-term debt		31,500		—		31,961		—		31,961
Accrued interest payable		5		—		—		5		5
Forward  loan sale commitments		18		—		—		18		18

21

NOTE 9 - EMPLOYEE STOCK OWNERSHIP PLAN

The Company maintains an Employee Stock Ownership Plan (“ESOP”) to provide eligible employees the opportunity to own Company stock.  This plan is a tax-qualified retirement plan for the benefit of all Company employees.  Contributions are allocated to eligible participants on the basis of compensation, subject to federal tax limits.

The Company granted a loan to the ESOP for the purchase of shares of the Company’s common stock at the Conversion date.  As of September 30, 2013, the ESOP holds 192,572 shares or 7.83% of the common stock outstanding on that date.  The loan obtained by the ESOP from the Company to purchase common stock is payable annually over 15 years at the rate of 3.25% per annum.  The loan can be prepaid without penalty.  Loan payments are expected to be funded by cash contributions from the Company.  The loan is secured by the shares purchased, which are held in a suspense account for allocation among participants as the loan is repaid.  Cash dividends paid on allocated shares will be distributed to participants and cash dividends paid on unallocated shares will be used to repay the outstanding debt of the ESOP.  Shares used as collateral to secure the loan are released and available for allocation to eligible employees as the principal and interest on the loan is paid.

Shares held by the ESOP include the following:

	September 30, 2013
Allocated		12,838
Committed to be allocated		9,629
Unallocated		170,105
		192,572

The fair value of unallocated shares was approximately $3.0 million at September 30, 2013.

Total compensation expense recognized in connection with the ESOP for the three and nine month periods ended September 30, 2013 was $57 thousand and $159 thousand, respectively.

NOTE 10 - EQUITY INCENTIVE PLAN

Under the Company’s Equity Incentive Plan (the “Plan”), approved by the Company’s stockholders at the annual meeting on August 15, 2012, the Company may grant stock options to its management, employees and directors in the form of incentive stock options and non-qualified stock options for up to 240,751 shares.  On October 1, 2012, the Board of Directors granted options to purchase 203,395 shares of the Company’s common stock to its management, employees and directors at an exercise price of $15.35 per share.  The exercise price of each option equals the market price of the stock on the date of grant, and the maximum term of each option is 10 years.  The vesting period is five years from the date of grant, with vesting at 20% per year. The weighted average fair value of stock options granted on October 1, 2012 using a Black-Scholes pricing model was $4.69.

On October 1, 2013, the Board of Directors granted options to purchase 11,500 shares of the Company’s common stock to certain employees at an exercise price of $17.45 per share. The exercise price of each option equals the market price of the stock on the date of grant, and the maximum term of each option is 10 years.  The vesting period is five years from the date of grant, with vesting at 20% per year. The weighted average fair value of stock options granted on October 1, 2013 using a Black-Scholes pricing model was $5.62.

For the three and nine month periods ended September 30, 2013, share-based compensation expense applicable to the stock options was $48 thousand and $143 thousand, respectively, and the recognized tax benefit related to this expense was $9 thousand and $28 thousand, respectively.

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Unrecognized compensation expense for the non-vested options totaled $763 thousand as of September 30, 2013, which will be recognized over the remaining vesting period of 4.0 years.  The aggregate intrinsic value of unvested options at September 30, 2013 was approximately $427 thousand. No options are exercisable as of September 30, 2013.

Under the Plan, the Company may also grant stock awards to management, employees and directors for up to 96,286 shares.  Granted stock awards vest over five years at 20% per year.  On October 1, 2012, the Board of Directors granted stock awards of 86,539 shares to its management, employees and directors.  The fair market value of the stock awards, based on the market price of $15.35 at the grant date, will be amortized over the remaining vesting period of 4.0 years. Unrecognized compensation expense related to non-vested restricted stock totaled $1.1 million as of September 30, 2013.

On October 1, 2013, the Board of Directors granted stock awards of 2,750 shares to certain employees.  The fair market value of the stock awards, based on the market price of $17.45 at the grant date, will be amortized over the remaining vesting period of 5.0 years. These awards will have no impact on reported earnings per share.

For the three and nine month periods ended September 30, 2013, compensation expense applicable to stock awards was $66 thousand and $199 thousand, respectively.  The recognized tax benefit related to the expense was $27 thousand and $80 thousand, respectively.

There was no activity related to stock options or awards during the three or nine months ended September 30, 2013.

NOTE 11 - EARNINGS PER COMMON SHARE

Basic earnings per share represents income available to common stockholders divided by the weighted average number of common shares outstanding during the period.  Diluted earnings per share reflect additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance.  There were no potentially dilutive common stock equivalents as of September 30, 2013.  Under the Company’s Equity Incentive Plan, stock awards granted on October 1, 2012 contain non-forfeitable dividend rights. Accordingly, these shares are considered outstanding for computation of basic earnings per share.  Options to purchase 203,395 shares were not included in the computation of diluted earnings per share because to do so would have been anti-dilutive for the three and nine months ended September 30, 2013.

Earnings per common share have been computed as follows:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2013			2012			2013			2012
	(Dollars in thousands)
Net income applicable to common stock	$	607		$	537		$	1,786		$	418
Average number of common shares outstanding		2,460,463			2,407,152			2,465,322			N/A
Less: Average unallocated ESOP shares		(171,711	)		(185,618	)		(174,920	)		N/A
Average number of common shares outstanding used to calculate basic and fully diluted earnings per common share		2,288,752			2,221,534			2,290,402			N/A
Net income per common share (basic and diluted)	$	0.27		$	0.24		$	0.78			N/A

N/A = not applicable

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NOTE 12 – STOCK REPURCHASE PLAN

On October 1, 2012, the Board of Directors approved the repurchase of up to 96,286 shares, or approximately 4.0% of the Company’s outstanding common stock. At September 30, 2013, the Company had repurchased and retired 33,610 shares.

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.

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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 determinations were made which 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 September 30, 2013 and December 31, 2012

General.  Total assets increased $45.1 million, or 12.0%, from $376.0 million at December 31, 2012 to $421.1 million at September 30, 2013.  Total assets increased primarily due to an increase in net loans of $62.1 million, offset by a decrease in loans held for sale of $9.1million and a decrease in cash and cash equivalents of $5.4 million.

Loans.Net loans increased $62.1 million, or 21.1%, from $294.1 million at December 31, 2012 to $356.2million at September 30, 2013. The increase in loans was due primarily to an increase of $36.5million, or 28.0%, in residential real estate loans. The strength in our residential lending activity is due to the efforts of our loan origination staff, a healthy marketplace, and the expansion of our market area. Adjustable-rate residential mortgage loans increased $34.0million, or 30.6%, to $145.0million while fixed-rate residential loans increased $2.6million, or 13.2%. We continue to sell longer-term fixed rate mortgage loans in the secondary market. At September 30, 2013, loans past due 30-89 days have decreased $3.4 million and loans past due 90 days or more have decreased $2.3 million as compared to December 31, 2012, primarily due to certain commercial loan relationships whose payment patterns have improved.  All losses expected to be realized on impaired loans have been specifically reserved for in the allowance for loan losses as of September 30, 2013.

Securities.  Total securities decreased from $39.3million at December 31, 2012 to $35.2 million at September 30, 2013, primarily due to bond maturities and $4.8 million in principal repayments on mortgage-backed securities.

Deposits.  Total deposits increased $29.4 million, or 9.9%, from $298.1 million at December 31, 2012 to $327.4 million at September 30, 2013.  Term certificates of deposit increased $13.1 million, savings accounts increased $9.7 million, non-interest-bearing accounts increased $6.1 million, and money market deposit accounts increased $2.0 million during the nine month period ended September 30, 2013, while NOW deposit accounts decreased $1.5 million. Savings account balances increased primarily due to customers depositing funds into our premium rate Connection Premier Savings account. Term certificate of deposits increased due to expansion of deposit gathering activities, including the utilization of a national deposit funding source.

Borrowings.  We use borrowings, primarily advances from the Federal Home Loan Bank (FHLB) to supplement our supply of funds for loans and securities.  Long-term debt, consisting entirely of FHLB advances, increased $9.0 million, or 28.6%, for the nine months ended September 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 at September 30, 2013, increased $5.0 million as compared to December 31, 2012, in order to satisfy short-term funding needs.

Stockholders’ Equity.  Stockholders’ equity increased $1.4 million, or 3.1%, from $45.0 million at December 31, 2012 to $46.4 million at September 30, 2013, primarily as a result of net income of $1.8 million. Partially offsetting this item was the $555 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 $321 thousand.

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

Overview.  Net income for the three months ended September 30, 2013 was $607 thousand, compared to net income of $537 thousand for the three months ended September 30, 2012.  The $70 thousand increase was primarily due to increases in net interest income, partially offset by an increase in noninterest expenses.  Net interest income increased to $3.6 million from $2.9 million in the 2012 period, while noninterest expense increased $499 thousand to $2.6 million in the same period.

Net Interest Income.  Net interest income for the three months ended September 30, 2013 increased $682 thousand or 23.7%, as compared to the three months ended September 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 $726 thousand or 20.6%, from $3.5 million for the three-month period ended September 30, 2012, to $4.3 million for the three months ended September 30, 2013.  The average balance of interest-earning assets increased 22.7%, while the average rate earned on these assets decreased 4 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 $804 thousand, or 24.5%, due to a 33.5% 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 decreased $51 thousand, or 28.8%, due to a 19.3% decrease in the average balance of taxable securities compared to the prior year period.  The average rate earned on taxable securities of 1.69% fell 21 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.

Interest expense for the three months ended September 30, 2013 increased $44 thousand, primarily due to increases in expense on regular savings accounts and certificates of deposit. The average rates paid on interest-bearing deposits decreased by 13 basis points from the comparative three-month period.    We experienced an increase in the average balance of total interest-bearing deposits of 24.2% in the three-month period ended September 30, 2013 compared to the same period in 2012.  Also contributing to the increase in interest expense was the expense resulting from an increase in the average balances of FHLB long-term advances, which increased from $26.9 million to $41.3 million. Rates paid on long-term FHLB advances decreased from 1.58% to 1.19%.  The average balance of short-term borrowings, consisting entirely of FHLB advances at September 30, 2013, decreased $1.7 million from the comparative 2012 period, resulting in a reduction of $9 thousand in interest expense, and a drop in the rate paid on these funds of 70 basis points.  During the 2012 period, short-term borrowings consisted entirely of repurchase agreements with commercial customers.

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

	For the Three Months Ended September 30,
	2013								2012
(Dollars in thousands)	Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate (1)			Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate (1)
Interest-earning assets:
Short-term investments	$	11,435		$	6		0.24	%	$	15,482		$	8		0.22	%
Certificates of deposit		266			1		0.40			600			1		0.56
Debt securities:
Taxable		29,910			126		1.69			37,060			177		1.90
Tax-exempt		4,214			38		3.65			7,539			63		3.33
Total loans and loans held for sale		345,958			4,085		4.74			259,168			3,281		5.04
FHLB stock		2,799			2		0.35			1,745			2		0.51
Total interest-earning assets		394,581			4,258		4.33	%		321,594			3,532		4.37	%
Allowance for loan losses		(4,059	)							(3,596	)
Total interest-earning assets less allowance             for loan losses		390,522								317,998
Noninterest-earning assets		13,720								14,516
Total assets	$	404,242							$	332,514
Interest-bearing liabilities:
Regular savings accounts	$	49,077			65		0.53	%	$	32,112			41		0.51	%
NOW checking accounts		24,071			24		0.40			17,106			14		0.32
Money market accounts		53,720			58		0.43			50,719			76		0.60
Certificates of deposit		145,864			423		1.16			119,681			402		1.34
Total interest-bearing deposits		272,733			569		0.84			219,618			533		0.97
Short-term borrowings		3,478			4		0.34			5,181			13		1.04
Long-term debt		41,348			124		1.19			26,870			107		1.58
Total interest-bearing liabilities		317,559			697		0.88	%		251,669			653		1.03	%
Noninterest-bearing demand deposits		42,449								35,428
Other noninterest-bearing liabilities		1,910								1,426
Total liabilities		361,918								288,523
Stockholders’ equity		42,324								43,991
Total liabilities and stockholders’ equity	$	404,242							$	332,514
Net interest income				$	3,561							$	2,879
Net interest rate spread (2)							3.45	%							3.34	%
Net interest-earning assets (3)	$	77,022							$	69,925
Net interest margin (4)							3.62	%							3.56	%
Average total interest-earning assets to      average total interest-bearing liabilities		124.25	%							127.78	%

(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) 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.

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

	Three Months Ended September 30, 2013 Compared to Three Months Ended September 30, 2012
	Increase (Decrease) Due to						Total Increase (Decrease)
(In thousands)	Volume			Rate
Interest-earning assets:
Short-term investments	$	(3	)	$	1		$	(2	)
Debt securities:
Taxable		(32	)		(19	)		(51	)
Tax-exempt		(31	)		6			(25	)
Total loans and loans held for sale		1,007			(203	)		804
FHLB stock		—			—			—
Total interest-earning assets		941			(215	)		726
Interest-bearing liabilities:
Regular savings		22			1			23
NOW checking		6			4			10
Money market		5			(23	)		(18	)
Certificates of deposit		81			(60	)		21
Total interest-bearing deposits		114			(78	)		36
Short-term borrowings		(3	)		(6	)		(9	)
Long-term debt		32			(15	)		17
Total interest-bearing liabilities		143			(99	)		44
Increase (decrease) in net interest income	$	798		$	(116	)	$	682

Provision for Loan Losses and Analysis of Loan Loss Experience.  The provision for loan losses was $150 thousand for the three month period ended September 30, 2013 compared to $150 thousand for the three months ended September 30, 2012. Growth in the portfolio of lower-risk residential loans during the period, in combination with a reduction in specific reserves has resulted in a lower ratio of the allowance for loan losses to total loans as of September 30, 2013 compared with the prior year.  The following table sets forth an analysis of the allowance for loan losses for the periods indicated.

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	Three Months Ended
	September 30,
(Dollars in thousands)	2013			2012
Balance at beginning of period	$	4,008		$	3,550
Provision for loan losses		150			150
Charge-offs:
Real estate loans:
Residential		—			—
Commercial		—			—
Construction		—			—
Commercial loans		—			—
Consumer loans		—			(7	)
Total charge-offs		—			(7	)
Recoveries		—			1
Net charge-offs		—			(6	)
Balance at end of period	$	4,158		$	3,694
Allowance for loan losses to    nonperforming loans at end of period		79.29	%		80.49	%
Allowance for loan losses to total loans    at end of period		1.15	%		1.36	%
Net charge-offs to average loans outstanding    during the period		0.00	%		0.00	%

Noninterest Income.  Noninterest income totaled $225 thousand, a decrease of $38 thousand, or 14.4%, as gains on the sales of securities decreased $52 thousand and income from mortgage banking activities decreased $52 thousand, partially offset by the increase in wealth management fees of $37 thousand and other customer service fees of $20 thousand.

Noninterest Expense.  Noninterest expense increased $499 thousand to $2.6 million during the three months ended September 30, 2013 from $2.1 million for the three months ended September 30, 2012.  Factors that contributed to the increase in noninterest expense during the 2013 period were increased salaries and employee benefits of $326 thousand, or 26.6%, 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, which were not present in the period ending September 30, 2012. Advertising and marketing costs increased $124 thousand as compared to the 2012 quarter, primarily due to our recent re-branding campaign.

Income Taxes.  An income tax provision of $393 thousand was recorded during the quarter ended September 30, 2013 compared to a provision of $318 thousand in the comparable 2012 quarter.  The effective tax rate for the 2013 three-month period was 39.3%, compared with 37.2% 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 Nine Months Ended September 30, 2013 and 2012

Overview.  Net income for the nine months ended September 30, 2013 was $1.8 compared to net income of $418 thousand for the nine months ended September 30, 2012.  The $1.4 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 $1.7 million to $10.1 million, while noninterest expense, exclusive of the Foundation contribution, increased $1.3 million, or 21.3%.

Net Interest Income.  Net interest income for the nine months ended September 30, 2013 increased $1.7 million, or 20.0%, as compared to the nine months ended September 30, 2012.  The increase in net interest income was primarily due to an increase in interest income of $1.8 million, or 17.5%, partially offset by an increase in interest expense of $124 thousand, or 6.5%, compared to the 2012 period.

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Interest and dividend income increased from $10.4 million for the nine-month period ended September 30, 2012 to $12.2 million for the nine months ended September 30, 2013.  The average balance of interest-earning assets increased 23.6%, while the average rate earned on these assets decreased 22 basis points.  The decline in yield was offset by the improvement in interest income attributable to asset growth.  Interest and fees on loans increased $2.0 million or 21.4%, due to a 34.1% increase in the average balance of loans, partially offset by a 49 basis point decrease in the average rate received on loans.  Interest income from taxable securities decreased $156 thousand, or 27.9%, due to the 49 basis point decrease in the average rate earned on taxable securities to 1.72%, and a 7.1% 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 $22.5 million from $16.7 million to $39.2 million, partially offset by a decrease in rates paid on the advances of 92 basis points. The corresponding interest expense on long-term FHLB advances, as compared to the same nine-month period last year, increased by $103 thousand.  We experienced an increase in the average balance of interest-bearing deposits of 22.3% in the nine-month period ended September 30, 2013 compared to the same period in 2012, primarily among regular savings accounts and certificates of deposit.  The average rate paid on regular savings accounts increased 3 basis points while the average rate paid on certificates of deposit decreased by 17 basis points.  The average rates paid on all interest-bearing liabilities decreased by 17 basis points from the comparative nine-month period.  The decrease in the cost of deposits and borrowings was primarily due to the extended period of declining interest rates.

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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 Nine Months Ended September 30,
	2013								2012
(Dollars in thousands)	Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate (1)			Average Outstanding Balance			Interest Earned/ Paid		Average Yield/ Rate (1)
Interest-earning assets:
Short-term investments	$	13,390		$	24		0.24	%	$	19,157		$	36		0.24	%
Certificates of deposit		403			1		0.42			436			2		0.61
Debt securities:
Taxable		31,386			403		1.72			33,800			559		2.21
Tax-exempt		5,059			138		3.64			7,960			199		3.34
Total loans and loans held for sale		324,078			11,600		4.79			241,694			9,554		5.28
FHLB stock		2,467			6		0.33			1,795			6		0.52
Total interest-earning assets		376,783			12,172		4.32	%		304,842			10,356		4.54	%
Allowance for loan losses		(3,961	)							(3,515	)
Total interest-earning assets less allowance         for loan losses		372,822								301,327
Noninterest-earning assets		17,434								15,536
Total assets	$	390,256							$	316,863
Interest-bearing liabilities:
Regular savings accounts	$	46,542			172		0.49	%	$	29,162			101		0.46	%
NOW checking accounts		24,615			66		0.36			16,031			29		0.24
Money market accounts		54,664			171		0.42			51,561			228		0.59
Certificates of deposit		139,830			1,238		1.19			119,561			1,216		1.36
Total interest-bearing deposits		264,651			1,647		0.83			216,315			1,574		0.97
Short-term borrowings		1,897			4		0.29			6,693			56		1.13
Long-term debt		39,244			380		1.29			16,712			277		2.21
Total interest-bearing liabilities		305,792			2,031		0.89	%		239,720			1,907		1.06	%
Noninterest-bearing demand deposits		39,325								34,785
Other noninterest-bearing liabilities		2,090								1,123
Total liabilities		347,207								275,678
Stockholders’ equity		43,049								41,235
Total liabilities and stockholders’ equity	$	390,256							$	316,863
Net interest income				$	10,141							$	8,449
Net interest rate spread (2)							3.43	%							3.48	%
Net interest-earning assets (3)	$	70,991							$	65,122
Net interest margin (4)							3.60	%							3.70	%
Average total interest-earning assets to      average total interest-bearing liabilities		123.22	%							127.17	%

(1) Ratios for the nine 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.

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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.

	Nine Months Ended September 30, 2013 Compared to Nine Months Ended September 30, 2012
	Increase (Decrease) Due to						Total Increase (Decrease)
(In thousands)	Volume			Rate
Interest-earning assets:
Short-term investments	$	(12	)	$	—		$	(12	)
Certificates of deposit		—			(1	)		(1	)
Debt securities:
Taxable		(37	)		(119	)		(156	)
Tax-exempt		(81	)		20			(61	)
Total loans and loans held for sale		2,831			(785	)		2,046
FHLB stock		2			(2	)		—
Total interest-earning assets		2,703			(887	)		1,816
Interest-bearing liabilities:
Regular savings		64			7			71
NOW checking		20			17			37
Money market		15			(72	)		(57	)
Certificates of deposit		182			(160	)		22
Total interest-bearing deposits		281			(208	)		73
Short-term borrowings		(26	)		(26	)		(52	)
Long-term debt		254			(151	)		103
Total interest-bearing liabilities		509			(385	)		124
Increase (decrease) in net interest income	$	2,194		$	(502	)	$	1,692

Provision for Loan Losses and Analysis of Loan Loss Experience.  The provision for loan losses was $350 thousand for the nine months ended September 30, 2013 compared to $400 thousand for the nine months ended September 30, 2012.  The decrease in the provision reflects a reduction in the related specific reserves on certain nonaccrual loans along with improvements in qualitative factors evaluated in setting the provision.  Growth in the portfolio of lower-risk residential loans 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 September 30, 2013, compared with the prior year. The following table sets forth an analysis of the allowance for loan losses for the periods indicated.

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	Nine Months Ended
	September 30,
(Dollars in thousands)	2013			2012
Balance at beginning of period	$	3,844		$	3,396
Provision for loan losses		350			400
Charge-offs:
Real estate loans:
Residential		—			—
Commercial		—			—
Construction		—			—
Commercial loans		(36	)		(100	)
Consumer loans		—			(8	)
Total charge-offs		(36	)		(108	)
Recoveries		—			6
Net charge-offs		(36	)		(102	)
Balance at end of period	$	4,158		$	3,694
Allowance for loan losses to    nonperforming loans at end of period		79.29	%		80.49	%
Allowance for loan losses to total loans    at end of period		1.15	%		1.36	%
Net charge-offs to average loans outstanding    during the period		0.01	%		0.05	%

Noninterest Income.  Noninterest income totaled $697 thousand, an increase of $169 thousand, or 32.0%, as wealth management fees and the gains on the sales of securities increased $129 thousand and $52 thousand, respectively, 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 Expense.  Noninterest expense, exclusive of the $1.8 million pre-tax contribution to establish the Foundation, increased $1.3 million to $7.5 million during the nine months ended September 30, 2013 from $6.2 million for the nine months ended September 30, 2012.  Factors that contributed to the increase in noninterest expense during the 2013 period were increased salaries and employee benefits of $933 thousand, or 26.1%, primarily attributable to additional personnel supporting our branch operations, residential and commercial lending operations and costs associated with the equity-based incentive compensation program adopted in October, 2012.  Occupancy and equipment expense increased $100 thousand resulting from normal rent increases and additional rent and other expense associated with expanded office space.  Advertising expense totaled $208 thousand, an increase of $102 thousand compared to 2012, primarily as a result of our recent re-branding campaign and related advertising.

Income Taxes.  An income tax provision of $1.2 million was recorded during the nine months ended September 30, 2013 compared to a provision of $138 thousand in the comparable 2012 period. Pre-tax income in 2012 was substantially reduced by the $1.8 million contribution to the Foundation.  The effective tax rate for the 2013 nine-month period was 39.3%, compared with 24.8% for the 2012 nine-month period as tax preference items represented a higher percentage of pre-tax income in 2012.

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.

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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 September 30, 2013, cash and cash equivalents, which include short-term investments, totaled $12.8 million.  Securities classified as available-for-sale, whose aggregate market value of $35.2 million exceeds cost, provide additional sources of liquidity.

At September 30, 2013, we had $40.5 million in long-term debt outstanding, represented entirely by FHLB advances. We also had $5.0 million of short-term borrowings represented entirely by advances from the FHLB with original maturities less than one year. These borrowings are primarily used to fund temporary liquidity needs due to the timing of loan closings. In addition, at September 30, 2013, we had the ability to borrow a total of $33.2 million in unused borrowing capacity from the FHLB.  At September 30, 2013, we also had the ability to borrow $16.7 million from the Co-operative Central Bank and $13.7 million from the Federal Reserve Bank under a collateralized borrowing program, none of which was outstanding at that date.

At September 30, 2013, we had $76.9 million in loan commitments outstanding, which included $37.6 million in unadvanced funds on construction loans, $19.5 million in unadvanced home equity lines of credit, $12.4 million in unadvanced commercial lines of credit, and $6.5 million in new loan originations.

Term certificates of deposit due within one year of September 30, 2013 amounted to $79.9 million, or 53.5% of total term certificates.  This total has increased $2.7 million from December 31, 2012. Balances of term certificates maturing in more than one year have increased $23.7 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 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. Term certificates of deposit increased $13.1 million, partially attributable to deposit gathering activities through a national deposit funding source.

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, including cash dividends, except in accordance with FDIC on laws and regulations and as provided for in the business plan submitted with the conversion application without the prior approval of the Boston Area Office of the FDIC if such action would cause the Bank’s tier 1 leverage and total risk-based capital ratios to fall below 8.0% and 12.0%, respectively.  At September 30, 2013, the Company had $7.2 million of liquid assets as represented by cash and cash equivalents on an unconsolidated basis.

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Capital Management.  The Bank is subject to various regulatory capital requirements administered by the Federal Deposit Insurance Corporation and the Massachusetts Commissioner of Banks, including a risk-based capital measure.  The Company is also subject to similar capital requirements set by the Federal Reserve Board.  The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories.  At September 30, 2013, we exceeded all of our regulatory capital requirements.  We are considered “well capitalized” under regulatory guidelines.

We strive to manage our capital for maximum shareholder benefit.  The capital from our stock offering significantly increased our liquidity and capital resources.  Since the conversion, we have reduced, and will continue to reduce, this increased level of liquidity as net proceeds from the stock offering have been used for general corporate purposes, including the funding of lending activities.  Our financial condition and results of operations have also been enhanced by the additional capital from the offering, reflected in increased net interest-earning assets and net income.  However, the increase in equity resulting from the capital raised in the offering is expected to continue to have an adverse impact on our return on equity until the additional capital raised can be more effectively leveraged.  To help us better manage our capital, we may consider the use of such tools as common share repurchases and cash dividends as regulations permit.

Off-Balance Sheet Arrangements

In the normal course of operations, we engage in a variety of financial transactions that, in accordance with generally accepted accounting principles, are not recorded in our financial statements.  These transactions involve, to varying degrees, elements of credit, interest rate and liquidity risk.  Such transactions are used primarily to manage customers’ requests for funding and take the form of loan commitments and lines of credit.  For information about our loan commitments and unused lines of credit see Liquidity Management herein.

For the nine months ended September 30, 2013, the Company did not engage in any off-balance sheet transactions reasonably likely to have a material effect on the Company’s financial condition, results of operations or cash flows.

Item 3.  Quantitative and Qualitative Disclosure About Market Risk

At September 30, 2013, there have not been any material changes to the market risk disclosure from that contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012.

Qualitative Aspects of Market Risk

One significant risk affecting the financial condition and operating results of the Company and the Bank is interest rate risk.  We manage the interest rate sensitivity of our interest-bearing liabilities and interest-earning assets in an effort to minimize the adverse effects of changes in the interest rate environment.  Deposit accounts typically react more quickly to changes in market interest rates than mortgage loans because of the shorter maturities of deposits.   As a result, sharp increases in interest rates may adversely affect our earnings while decreases in interest rates may beneficially affect our earnings.  To reduce the potential volatility of our earnings, we have sought to improve the match between asset and liability maturities and rates, while maintaining an acceptable interest rate spread.  Our strategy for managing interest rate risk emphasizes: originating adjustable-rate loans for retention in our loan portfolio; selling in the secondary market substantially all newly originated conforming longer term fixed rate residential mortgage loans, promoting core deposit products; adjusting the maturities of borrowings and adjusting the investment portfolio mix and duration.  We currently do not participate in hedging programs, interest rate swaps or other activities involving the use of derivative financial instruments.

We have an Asset/Liability Committee, which includes members of management, to communicate, coordinate and control all aspects involving asset-liability management.  The committee establishes and monitors the volume, maturities, pricing and mix of assets and funding sources with the objective of managing assets and funding sources to provide results that are consistent with liquidity, growth, risk limits and profitability goals.

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Quantitative Aspects of Market Risk

We analyze our interest rate sensitivity position to manage the risk associated with interest rate movements through the use of interest income and equity simulations.  The matching of assets and liabilities may be analyzed by examining the extent to which such assets and liabilities are “interest sensitive.” An asset or liability is said to be interest rate sensitive within a specific time period if it will mature or re-price within that time period.

Our goal is to manage asset and liability positions to moderate the effects of interest rate fluctuations on net interest income and the present value of our equity.  Interest income and equity simulations are completed quarterly and presented to the Asset/Liability Committee and the Board of Directors.  The simulations provide an estimate of the impact of changes in interest rates on net interest income and the present value of our equity under a range of assumptions.  The simulation incorporates assumptions regarding the potential timing in the repricing of certain assets and liabilities when market rates change and the changes in spreads between different market rates.  The simulation analysis incorporates management’s current assessment of the risk that pricing margins will change adversely over time due to competition or other factors.

Simulation analysis is only an estimate of our interest rate risk exposure at a particular point in time.  We continually review the potential effect changes in interest rates could have on the repayment of rate sensitive assets and funding requirements of rate sensitive liabilities.

The table below sets forth an approximation of our exposure as a percentage of estimated net interest income for the next 12 month period using interest income and equity simulations.  The simulations use projected repricing of assets and liabilities at September 30, 2013 on the basis of contractual maturities, anticipated repayments and scheduled rate adjustments.  Prepayment rates can have a significant impact on the simulations.  Because of the large percentage of loans we hold, rising or falling interest rates have a significant impact on the prepayment speeds of our earning assets that in turn affect the rate sensitivity position.  When interest rates rise, prepayments tend to slow.  When interest rates fall, prepayments tend to rise.  Our asset sensitivity would be reduced if prepayments slow and would increase if prepayments accelerated.  While we believe such assumptions to be reasonable, there can be no assurance that assumed prepayment rates will approximate actual future mortgage-backed security and loan repayment activity.

The following table reflects the estimated effects of changes in interest rates on the present value of our equity at September 30, 2013 and on our projected net interest income from September 30, 2013 through September 30, 2014.

			As of September 30, 2013								Over the Next 12 Months Ending September 30, 2014
			Present Value of Equity								Projected Net Interest Income
Basis Point (“bp”) Change in Rates			$ Amount		$ Change			% Change			$ Amount		$ Change			% Change
			(Dollars in thousands)
300		bp	$	49,036	$	(7,382	)		(13.08	)%	$	14,077	$	41			0.29	%
200				51,142		(5,276	)		(9.35	)		14,022		(14	)		(0.10	)
100				53,231		(3,187	)		(5.65	)		13,965		(71	)		(0.51	)
0				56,418		—			—			14,036		—			—
(100	)			60,746		4,328			7.67			13,848		(188	)		(1.34	)

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Item 4.  Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”).  Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the quarter ended September 30, 2013 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business.  The Company’s management believes that such routine legal proceedings, in the aggregate, are immaterial to the Company’s financial condition and results of operations.

Item 1A.  Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the Securities and Exchange Commission on March 27, 2012. Except as set forth below, as of September 30, 2013, the risk factors of the Company have not changed materially from those disclosed in our Annual Report on Form 10-K.

The short-term and long-term impact of the changing regulatory capital requirements and new capital rules are uncertain.

In July 2013, the Office of the Comptroller of the Currency and the Federal Reserve Board approved a new rule that will substantially amend the regulatory risk-based capital rules applicable to the Bank and the Company. The final rule implements the “Basel III” regulatory capital reforms and changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The final rule includes new minimum risk-based capital and leverage ratios, which will be effective for the Bank and the Company on January 1, 2015, and refines the definition of what constitutes “capital” for purposes of calculating these ratios.  The new minimum capital requirements will be: (i) a new common equity Tier 1 capital ratio of 4.5%; (ii) a Tier 1 to risk-based assets capital ratio of 6% (increased from 4%); (iii) a total capital ratio of 8% (unchanged from current rules); and (iv) a Tier 1 leverage ratio of 4%. The final rule also revises the rules for calculating risk-weighted assets to enhance their risk sensitivity. The final rule also establishes a “capital conservation buffer” of 2.5% above the new regulatory minimum capital ratios, and will result in the following minimum ratios: (i) a common equity Tier 1 capital ratio of 7.0%, (ii) a Tier 1 to risk-based assets capital ratio of 8.5%, and (iii) a total capital ratio of 10.5%. The new capital conservation buffer requirement would be phased in beginning in January 2016 at 0.625% of risk-weighted assets and would increase each year until fully implemented in January 2019. As a result, under the new rules, if the Bank fails to maintain the buffer, the Company will be subject to limits, and possibly prohibitions, on its ability to obtain capital distributions from Bank. If the Company does not receive sufficient cash dividends from the Bank, then the Company may not have sufficient funds to pay dividends on its common stock, service its debt obligations, if any, or repurchase its common stock.  In addition, if the Bank fails to maintain the buffer, the Company may be limited in its ability to pay certain cash bonuses to its executive officers which may make it more difficult to retain key personnel.

The application of more stringent capital requirements for the Bank and the Company could, among other things, result in lower returns on equity, require the raising of additional capital, and result in regulatory actions such as limitations or prohibitions on the ability to pay dividends, repurchase shares or pay discretionary bonuses.  While we are continuing to review the impact of the new rules, there can be no assurance that they will not have a material impact on our business, financial condition and results of operations.

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Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

Period	(a) Total number of Shares (or Units) Purchased		(b) Average Price Paid per Share (or Unit)		(c) Total Number of Shares (or units) Purchased as Part of Publicly Announced Plans or Programs (1)		(d) Maximum Number (or Appropriate Dollar Value) of Shares (or units) that May Yet Be Purchased Under the Plans or Programs
July 1, 2013 through   July 31, 2013		—		—		—		63,086
August 1, 2013  through   August 31, 2013		—		—		—		63,086
September 1, 2013  through   September  30, 2013		410	$	17.27		410		62,676
Total		410	$	17.27		410

(1) On October 1, 2012, the Company’s Board of Directors approved the repurchase of up to 96,286 shares of the Company’s common stock. The repurchase plan will continue until it is completed or terminated by the Company’s Board of Directors.

Item 3.  Defaults Upon Senior Securities

Not applicable.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

Not applicable.

Item 6.  Exhibits

3.1	Amended and Restated Articles of Incorporation of Wellesley Bancorp, Inc. (1)
3.2	Bylaws of Wellesley Bancorp, Inc. (2)
31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32.0	Section 1350 Certification
101.1*	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2013, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balances Sheets, (ii) the Consolidated Statements of Comprehensive Income, (iii) the Consolidated Statements of Changes in Stockholders’ Equity, (iv) the Consolidated Statements of Cash Flows and (v) the Notes to the Consolidated Financial Statements.

*	Furnished, not filed.
(1)	Incorporated herein by reference to the exhibits to Wellesley Bancorp, Inc.’s Pre-Effective Amendment No. 2 to the Registration Statement on Form S-1 (File No. 333-176764), filed with the Securities and Exchange Commission on November 7, 2011.
(2)	Incorporated herein by reference to the exhibits to Wellesley Bancorp, Inc.’s Registration Statement on Form S-1 (File No. 333-176764), filed with the Securities and Exchange Commission on September 9, 2011.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		WELLESLEY BANCORP, INC.
Dated:   November 8, 2013	By:	/s/ Thomas J. Fontaine
		Thomas J. Fontaine
		President and Chief Executive Officer
		(principal executive officer)
Dated:   November 8, 2013	By:	/s/ Gary P. Culyer
		Gary P. Culyer
		Chief Financial Officer and Treasurer
		(principal accounting and financial officer)