Table of Contents

As filed with the Securities and Exchange Commission on September 9, 2011

Registration No. 333-                    

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

Wellesley Bancorp, Inc.

and

Wellesley Bank Employee 401(k) Plan

(Exact name of registrant as specified in its charter)

 

 

 

Maryland   6036   To be applied for

State or other jurisdiction of

incorporation or organization

 

(Primary Standard Industrial

Classification Code Number)

 

(IRS Employer

Identification No.)

40 Central Street

Wellesley, Massachusetts 02482

(781) 235-2550

(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)

 

 

Thomas J. Fontaine

President and Chief Executive Officer

Wellesley Bancorp, Inc.

40 Central Street

Wellesley, Massachusetts 02482

(781) 235-2550

(Name, address, including zip code, and telephone number, including area code, of agent for service)

 

 

Copies to:

 

Gary R. Bronstein, Esq.   Michelle L. Basil, Esq.
Sean P. Kehoe, Esq.   Nutter McClennen & Fish LLP
Kilpatrick Townsend & Stockton LLP   115 Seaport Boulevard
607 14th Street, NW, Suite 900   Boston, Massachusetts 02210
Washington, DC 20005   (617) 439-2000
(202) 508-5800  

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  x

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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 the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

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

 

 

Calculation of Registration Fee

 

Title of Each Class of

Securities to be Registered

  Amount to be
Registered
 

Proposed Maximum

Offering Price Per
Unit

 

Proposed Maximum

Aggregate Offering
Price (2)

  Amount of
Registration Fee

Common Stock $0.01 par value

  3,396,180 (1)   $10.00   $33,961,800   $3,943

Participation Interests (3)

  —     —     —     —  

 

 

 

(1) Includes shares of common stock to be issued to the Wellesley Bank Charitable Foundation, a private foundation.
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Regulation 457(o) under the Securities Act.
(3) In addition, pursuant to Rule 416(c) under the Securities Act, this registration statement also covers an indeterminate amount of interests to be offered or sold pursuant to the employee benefit plan described herein. The securities of Wellesley Bancorp, Inc. to be purchased by the Wellesley Bank Employee 401(k) Plan are included in the common stock being registered. Pursuant to Rule 457(h)(2) of the Securities Act of 1933, as amended, no separate fee is required for the participation interests.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to Section 8(a), may determine.

 

 

 


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SUBSCRIPTION AND

COMMUNITY OFFERING

PROSPECTUS

LOGO

(Proposed Holding Company for Wellesley Bank)

Up to 2,760,000 Shares of Common Stock

(Subject to increase to 3,174,000 shares)

 

 

 

Wellesley Bancorp, Inc., a newly formed Maryland corporation, is offering common stock for sale in connection with the conversion of Wellesley Bank from the mutual to stock form of organization. We expect that our common stock will be listed for trading on the Nasdaq Capital Market under the symbol “WEBK” upon conclusion of the stock offering. There is currently no public market for the shares of our common stock.

We are offering up to 2,760,000 shares of common stock for sale on a best efforts basis, subject to certain conditions. We must sell a minimum of 2,040,000 shares to complete the offering. All shares are offered at a price of $10.00 per share. Purchasers will not pay a commission to purchase shares of common stock in the offering. The amount of capital being raised is based on an independent appraisal of Wellesley Bank. Most of the terms of this offering are required by regulations of the Federal Deposit Insurance Corporation and the Massachusetts Commissioner of Banks. If, as a result of regulatory considerations, demand for the shares or changes in financial market conditions, the independent appraiser determines that our market value has increased, we may sell up to 3,174,000 shares without giving you further notice or the opportunity to change or cancel your order.

We are offering the shares of common stock in a “subscription offering” to eligible depositors of Wellesley Bank. Shares of common stock not purchased in the subscription offering may be offered for sale to the general public in a community offering, with a preference given to natural persons residing in the municipalities of Wellesley, Dover, Needham, Newton, Natick and Weston, Massachusetts. We also may offer for sale shares of common stock not subscribed for in the subscription offering or community offering through a “syndicated community offering” managed by Sandler O’Neill + Partners, L.P. Sandler O’Neill + Partners, L.P. is not required to purchase any shares of common stock that are being offered for sale.

The minimum order is 25 shares. The subscription offering will end at         :00 p.m., Eastern time, on [Expiration Date], 2011. We expect that the community offering, if held, will terminate at the same time, although the offering may continue without notice to you until [Extension Date], 2011 or longer if the Massachusetts Commissioner of Banks approves a later date. The offering must be completed by July 20, 2013. Once submitted, orders are irrevocable unless the offering is terminated or is extended beyond [Extension Date], 2011, or the number of shares of common stock to be sold is increased to more than 3,174,000 shares or decreased to less than 2,040,000 shares. If we extend the offering beyond [Extension Date], 2011, all subscribers will be notified and given the opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will promptly return your funds with interest calculated at Wellesley Bank’s passbook savings rate or cancel your deposit account withdrawal authorization. If we intend to sell fewer than 2,040,000 shares or more than 3,174,000 shares, we will promptly return all funds and set a new offering range. All subscribers will be notified and given the opportunity to place a new order. Funds received before the completion of the subscription and community offerings will be held in a segregated account at Wellesley Bank and will earn interest at Wellesley Bank’s passbook savings rate, which is currently 0.25%.

In addition to the shares that we will sell in the offering, we intend to establish a charitable foundation in connection with the conversion and contribute to it an amount equal to 8% of the gross offering proceeds, 87.5% of which will be funded with our common stock and 12.5% of which will be funded with cash (193,200 shares and $276,000 in cash at the maximum of the offering range).

We expect that our directors and executive officers, together with their associates, will subscribe for approximately 250,000 shares, which is 9.7% of the shares that would be sold in the offering and issued to the charitable foundation at the midpoint of the offering range.

This investment involves a degree of risk, including the possible loss of principal.

Please read “Risk Factors” beginning on page 10.

OFFERING SUMMARY

Price Per Share: $10.00

 

     Minimum      Maximum      Maximum,
as
Adjusted
 

Number of shares

     2,040,000         2,760,000         3,174,000   

Gross offering proceeds

   $ 20,400,000       $ 27,600,000       $ 31,740,000   

Estimated offering expenses, excluding selling agent fees

   $ 960,000       $ 960,000       $ 960,000   

Estimated selling agent fees(1)

   $ 270,000       $ 270,000       $ 270,000   

Estimated net proceeds

   $ 19,170,000       $ 26,370,000       $ 30,510,000   

Estimated net proceeds per share

   $ 9.40       $ 9.55       $ 9.61   

 

(1) Excludes fees payable if a syndicated offering is held. For a discussion of the compensation of Sandler O’Neill + Partners, L.P. and the other broker-dealers that may participate in the syndicated offering, see “The Conversion and Stock Offering—Marketing Arrangements.”

These securities are not deposits or savings accounts and are not insured or guaranteed by the Federal Deposit Insurance Corporation, any other government agency or the Share Insurance Fund. None of the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, the Board of Governors of the Federal Reserve System, the Massachusetts Commissioner of Banks or any state securities commission has approved or disapproved of these securities or determined if this prospectus is accurate or complete. Any representation to the contrary is a criminal offense.

For assistance, please contact the Conversion Center at (            )             -                    .

 

 

SANDLER O’NEILL + PARTNERS, L.P.

 

 

The date of this prospectus is                     , 2011


Table of Contents

LOGO


Table of Contents

Table of Contents

 

     PAGE  

SUMMARY

     1   

RISK FACTORS

     10   

A WARNING ABOUT FORWARD-LOOKING STATEMENTS

     17   

SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA

     18   

USE OF PROCEEDS

     20   

OUR DIVIDEND POLICY

     22   

MARKET FOR THE COMMON STOCK

     23   

CAPITALIZATION

     24   

REGULATORY CAPITAL COMPLIANCE

     26   

PRO FORMA DATA

     27   

COMPARISON OF INDEPENDENT VALUATION AND PRO FORMA FINANCIAL INFORMATION WITH AND WITHOUT THE FOUNDATION

     32   

OUR BUSINESS

     33   

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     40   

OUR MANAGEMENT

     62   

SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS

     70   

REGULATION AND SUPERVISION

     71   

FEDERAL AND STATE TAXATION

     79   

THE CONVERSION AND STOCK OFFERING

     80   

THE WELLESLEY BANK CHARITABLE FOUNDATION

     93   

RESTRICTIONS ON THE ACQUISITION OF WELLESLEY BANCORP

     96   

DESCRIPTION OF WELLESLEY BANCORP CAPITAL STOCK

     98   

TRANSFER AGENT AND REGISTRAR

     99   

REGISTRATION REQUIREMENTS

     99   

LEGAL AND TAX OPINIONS

     99   

EXPERTS

     100   

WHERE YOU CAN FIND MORE INFORMATION

     100   

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS OF WELLESLEY BANK AND SUBSIDIARIES

     101   

 

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Summary

This summary highlights selected information from this document and may not contain all the information that is important to you. To understand the stock offering fully, you should read this entire document carefully.

The Companies

Wellesley Bancorp, Inc.

Wellesley Bank

40 Central Street

Wellesley, Massachusetts 02482

(781) 235-2550

Wellesley Bancorp, Inc. This offering is made by Wellesley Bancorp, a Maryland corporation incorporated in September 2011 by Wellesley Bank to be its holding company upon completion of the conversion. Currently, Wellesley Bancorp has no assets. Following the conversion, Wellesley Bancorp will own all of Wellesley Bank’s capital stock and will direct, plan and coordinate Wellesley Bank’s business activities. In the future, Wellesley Bancorp might also acquire other financial institutions or financial services companies or organize other operating subsidiaries, although it currently has no specific plans or agreements to do so.

Wellesley Bank. Wellesley Bank operates as a community-oriented financial institution, with its executive office and two full service branches in the town of Wellesley, Massachusetts. Wellesley Bank offers deposit products and provides residential mortgage loans, commercial real estate loans, construction loans, commercial business loans and consumer loans. Wellesley Bank was not a participant in any of the U.S. Treasury’s capital raising programs for financial institutions and at June 30, 2011 exceeded all regulatory capital requirements. At June 30, 2011, Wellesley Bank had total assets of $264.8 million, total deposits of $228.4 million and total equity of $21.4 million on a consolidated basis.

Our Business

We operate as a community bank. Our primary business lines involve generating funds from deposits or borrowings and investing such funds in loans and investment securities. We currently operate our executive office and two retail banking locations in Wellesley, Massachusetts.

Our primary lines of business are:

 

   

Commercial and Construction Lending. We offer commercial real estate loans and commercial business loans for property owners and businesses in our primary market area. We also offer residential construction loans to individuals and builders/developers to finance the construction of residential dwellings for personal use and commercial construction loans for commercial development projects, including condominiums and single family subdivisions as well as office buildings, retail and other income producing properties. Commercial and construction loans constituted 56.3% of our total loan portfolio at June 30, 2011.

 

   

Residential Mortgage and Home Equity Lending. We offer a variety of residential mortgage loans and home equity lines of credit through our branch network. Residential mortgage loans and home equity lines of credit constituted 43.5% of our total loan portfolio at June 30, 2011.

 

   

Deposit Products and Services. We offer a full range of traditional deposit products for consumers and businesses, such as demand deposit accounts, NOW accounts, money market accounts, regular savings accounts and certificate accounts. These products can have additional features such as direct deposit, ATM and check card services, overdraft protection, Internet banking, and remote electronic deposits, thereby providing our customers multiple channels to access their accounts.

Our Business Strategy

Our mission is to operate and grow a profitable community-oriented financial institution. The following are the key elements of our business strategy:

 

   

increasing our deposit market share within Wellesley, Massachusetts and the surrounding communities;

 

   

continuing to emphasize our commercial real estate, construction and commercial business loans, as well as increasing our commercial business depository relationships in our market area;

 

 

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increasing our residential mortgage lending in our market area;

 

   

continuing conservative underwriting practices while maintaining a high quality loan portfolio;

 

   

seeking to enhance fee income by growing our investment advisory services; and

 

   

emphasizing lower cost core deposits to maintain low funding costs.

The Conversion and Offering

Description of the Conversion

Currently, we are a Massachusetts chartered mutual cooperative bank with no stockholders. Our depositors currently have the right to vote on certain matters such as the election of directors and this conversion. The conversion transaction that we are undertaking involves a change from our mutual form to a stock cooperative bank that will result in all of Wellesley Bank’s capital stock being owned by Wellesley Bancorp. Voting rights in Wellesley Bancorp will belong to its stockholders, including our employee stock ownership plan and our charitable foundation. We are conducting the conversion under the terms of our plan of conversion. The Massachusetts Commissioner of Banks has conditionally approved the plan of conversion and the Federal Deposit Insurance Corporation has conditionally provided its nonobjection to the conversion, both subject to a condition that the conversion be approved by our depositors. We have called a special meeting of depositors for                     , 2011 to vote on the plan of conversion and the establishment and funding of the charitable foundation.

The following diagram depicts our corporate structure after the conversion and offering:

LOGO

Reasons for the Conversion and Offering

Our primary reasons for the conversion and offering are to:

 

   

increase the capital of Wellesley Bank to support future lending and operational growth;

 

   

enhance profitability and earnings through reinvesting and leveraging the proceeds, primarily through traditional funding and lending activities;

 

   

support future branching activities;

 

   

retain and attract qualified personnel by establishing stock-based benefit plans;

 

   

increase our philanthropic endeavors to the community we serve through the formation and funding of the Wellesley Bank Charitable Foundation; and

 

   

support the future acquisition of other financial institutions or financial services companies.

For further information about our reasons for the conversion and offering, see “The Conversion and Stock Offering—Reasons for the Conversion and Offering.”

Purchase Price

The purchase price is $10.00 per share. You will not pay a commission to buy any shares in the offering.

 

 

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Number of Shares to be Sold

We are offering for sale between 2,040,000 and 2,760,000 shares of Wellesley Bancorp common stock in this offering. With regulatory approval, we may increase the number of shares to be sold to 3,174,000 shares without giving you further notice or the opportunity to change or cancel your order. In considering whether to increase the offering size, the Federal Deposit Insurance Corporation and the Massachusetts Commissioner of Banks will consider the level of subscriptions, the views of our independent appraiser, our financial condition and results of operations and changes in market conditions.

How We Determined the Offering Range

We decided to offer between 2,040,000 and 2,760,000 shares, which is our offering range, based on an independent appraisal of our pro forma market value prepared by Feldman Financial Advisors, Inc., an appraisal firm experienced in appraisals of financial institutions. Feldman Financial estimates that as of August 23, 2011, our pro forma market value was between $21.8 million and $29.5 million, with a midpoint of $25.7 million, inclusive of shares to be issued to the charitable foundation.

In preparing its appraisal, Feldman Financial considered the information in this prospectus, including our consolidated financial statements. Feldman Financial also considered the following factors, among others:

 

   

our historical and projected operating results and financial condition and the economic and demographic characteristics of our primary market area;

 

   

a comparative evaluation of the operating and financial statistics of Wellesley Bank with those of other similarly situated, publicly traded companies;

 

   

the effect of the capital raised in this offering on our net worth and earnings potential;

 

   

the trading market for securities of comparable institutions and general conditions in the market for such securities; and

 

   

our intention to contribute to the Wellesley Bank Charitable Foundation an amount equal to 8% of the gross offering proceeds, 87.5% of which will be funded with shares of Wellesley Bancorp’s common stock and 12.5% of which will be funded with cash.

Two measures that some investors use to analyze whether a stock might be a good investment are the ratio of the offering price to the issuer’s “book value” and the ratio of the offering price per share to the issuer’s earnings per share for the past 12 months. Feldman Financial considered these ratios, among other factors, in preparing its appraisal. Book value is the same as total equity and represents the difference between the issuer’s assets and liabilities. Feldman Financial’s appraisal also incorporates an analysis of a peer group of publicly traded companies that Feldman Financial considered to be comparable to us.

The following table presents a summary of selected pricing ratios for the peer group companies and for us utilized by Feldman Financial Advisors in its appraisal. These ratios are based on our book value, tangible book value and core earnings as of and for the 12 months ended June 30, 2011 and the latest date for which complete financial data is publicly available for the peer group.

 

     Price to  Core
Earnings
Multiple
    Price to
Book Value  Ratio
    Price to
Tangible Book
Value Ratio
 

Wellesley Bancorp (pro forma):

      

Minimum

     10.6     56.8     56.8

Midpoint

     12.7        61.7        61.7   

Maximum

     14.9        65.8        65.8   

Maximum, as adjusted

     17.2        69.9        69.9   

Peer group companies as of August 23, 2011:

      

BCSB Bancorp, Inc.

     43.3     76.9     77.0

Central Bancorp, Inc.

     N/M        80.5        85.6   

Chicopee Bancorp, Inc.

     N/M        90.8        90.8   

CMS Bancorp, Inc.

     N/M        68.4        68.4   

Elmira Savings Bank, FSB

     9.5        113.8        113.8   

Hampden Bancorp, Inc.

     N/M        86.5        86.5   

Mayflower Bancorp, Inc.

     14.4        76.9        76.9   

Newport Bancorp, Inc.

     22.6        87.3        87.3   

OBA Financial Services, Inc.

     N/M        78.9        78.9   

WVS Financial Corp.

     15.3        65.6        65.6   

Average

     21.0        78.9        83.1   

Median

     15.3        78.1        82.2   

 

 

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Compared to the average pricing ratios of the peer group at the maximum of the offering range, our stock would be priced at a discount of 29.0% to the peer group on a price-to-core earnings basis, a discount of 16.6% to the peer group on a price-to-book basis and a discount of 20.8% on a price-to-tangible book basis. This means that, at the maximum of the offering range, a share of our common stock would be less expensive than the peer group on an earnings, book value and tangible book value basis.

The independent appraisal does not indicate market value. You should not assume or expect that the valuation described above means that our common stock will trade at or above the $10.00 purchase price after the offering.

Possible Change in Offering Range

Feldman Financial will update its appraisal before we complete the stock offering. If, as a result of regulatory considerations, demand for the shares or changes in market conditions, Feldman Financial determines that our pro forma market value has increased, we may sell up to 3,174,000 shares without further notice to you. If our pro forma market value at the end of the stock offering period is either below $21.8 million or above $34.0 million, then, after consulting with the Federal Deposit Insurance Corporation and the Massachusetts Commissioner of Banks, we may: terminate the offering and promptly return all funds, with interest; promptly return all funds with interest, set a new offering range and give all subscribers the opportunity to place a new order; or take such other actions as may be permitted by the Federal Deposit Insurance Corporation, the Massachusetts Commissioner of Banks and the Securities and Exchange Commission.

Conditions to Completing the Conversion and Offering

We are conducting the conversion and offering under the terms of our plan of conversion. We cannot complete the conversion and offering unless:

 

   

we sell at least the minimum number of shares offered;

 

   

we receive the final regulatory approvals and nonobjections from the Massachusetts Commissioner of Banks, the Federal Deposit Insurance Corporation and the Board of Governors of the Federal Reserve System to complete the offering; and

 

   

our depositors approve the plan of conversion.

We Will Issue Shares to the Wellesley Bank Charitable Foundation

To continue our long-standing commitment to our local communities, we intend to establish a charitable foundation, the Wellesley Bank Charitable Foundation, as part of the conversion. Subject to separate approval by depositors of Wellesley Bank, we will make a contribution to the charitable foundation in an amount equal to 8% of the gross offering proceeds, 87.5% of which will be funded with newly issued shares of Wellesley Bancorp common stock and 12.5% of which will be funded with cash (193,200 shares and $276,000 at the maximum of the offering range). At the maximum of the offering range, this contribution to the charitable foundation would reduce net earnings by approximately $1.3 million, after tax, in the year in which the contribution is made to the charitable foundation, which is expected to be the fourth calendar quarter of 2011. The charitable foundation will make grants and donations to nonprofit and community groups and projects that serve the communities in which Wellesley Bank maintains a banking office. The amount of common stock that we are offering for sale would be greater if the conversion were to be completed without the contribution to the charitable foundation. For a further discussion of the financial impact of the contribution to the charitable foundation, see “Comparison of Independent Valuation and Pro Forma Financial Information With and Without the Foundation.”

Benefits of the Offering to Management

Employee Stock Ownership Plan. We have adopted an employee stock ownership plan that will purchase 8% of the shares sold in the offering and contributed to the charitable foundation. The employee stock ownership plan’s purchase will be funded by a 15-year loan from Wellesley Bancorp. As the loan is repaid and shares are released from collateral, the plan will allocate shares to the accounts of participating employees. Participants will receive allocations based on their individual compensation as a percentage of total plan compensation. Nonemployee directors are not eligible to participate in the employee stock ownership plan. We will incur additional compensation expense as a result of this plan. See “Pro Forma Data” for an illustration of the effects of this plan.

Future Equity Incentive Plan. We intend to implement an equity incentive plan no earlier than six months after completion of the conversion. If we implement the plan within one year after the conversion, the plan must be approved by a majority of the total votes eligible to be cast by our stockholders. If we implement the plan more than one year after the conversion, it must be approved by a majority of the total votes cast. If adopted within one year following the completion of the conversion, the equity

 

 

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incentive plan will reserve a number of shares of common stock equal to not more than 4% of the shares issued in the conversion (including shares contributed to our charitable foundation), for restricted stock awards to key employees and directors, at no cost to the recipients, and will also reserve a number of stock options equal to not more than 10% of the shares of common stock issued in the conversion (including shares contributed to our charitable foundation) for key employees and directors. If the equity incentive plan is adopted after one year from the date of the completion of the conversion, the 4% and 10% limitations described above will no longer apply, and we may adopt equity incentive plans encompassing more than 14% of the shares of common stock that were issued in the conversion. We have not yet determined when we will present these plans for stockholder approval and we have not yet determined the number of shares that would be reserved for issuance under this plan. We will incur additional compensation expense as a result of this plan. See “Pro Forma Data” for an illustration of the effects of this plan.

The following table summarizes at the maximum of the offering range the total number and value of the shares of common stock that the employee stock ownership plan expects to acquire in the offering and the total value of all restricted stock awards and stock options that are expected to be available under the equity incentive plan (assuming the equity incentive plan is implemented within one year following completion of the conversion). The equity incentive plan may award a greater number of options and restricted stock awards if the plan is adopted more than one year after completion of the conversion. At the maximum of the offering range and upon completion of the offering, we would sell 2,760,000 shares and have 2,953,200 shares outstanding inclusive of shares of common stock to be contributed to the charitable foundation

 

     Number of Shares to be
Granted or Purchased
             
     At Maximum
of
Offering
Range
     As a %  of
Common
Stock
Issued in
Conversion
    Dilution
Resulting from
Issuance of
Additional
Shares (1)
    Total
Estimated

Value
 

Employee stock ownership plan (2)

     236,256         8.0     —     $ 2,362,560   

Restricted stock awards (2)

     118,128         4.0        3.8        1,181,280   

Stock options (3)

     295,320         10.0        9.1        1,160,608   
  

 

 

    

 

 

     

 

 

 

Total

     649,704         22.0     12.3   $ 4,704,448   
  

 

 

    

 

 

   

 

 

   

 

 

 

 

(1) Assumes the issuance of authorized but unissued shares to satisfy awards and option exercises.
(2) Assumes the value of Wellesley Bancorp common stock is $10.00 per share for purposes of determining the total estimated value of the grants.
(3) Assumes the value of a stock option is $3.93, which was determined using the Black-Scholes option-pricing formula. See “Pro Forma Data.”

Employment Agreement. Wellesley Bank and Wellesley Bancorp intend to enter into an amended and restated three-year employment agreement with Thomas J. Fontaine, President and Chief Executive Officer. This employment agreement will provide for severance benefits if the executive is terminated following a change in control of Wellesley Bancorp or Wellesley Bank. See “Our Management—Employment Agreements and Severance Arrangements.”

Supplemental Executive Retirement Plan. We intend to implement a supplemental executive retirement plan that will provide benefits to eligible employees if their retirement benefits under the employee stock ownership plan and the 401(k) plan are reduced because of federal tax law limitations. This plan will also provide benefits to eligible employees following a change in control before the complete allocation of shares under the employee stock ownership plan. See “Our Management—Pension and Nonqualified Retirement Benefits.”

Employee Severance Compensation Plan. We expect to adopt an employee severance compensation plan that will provide severance benefits to eligible employees if there is a change in control of Wellesley Bancorp or Wellesley Bank. Under the severance plan, if, within twelve months after a change in control, an employee’s employment involuntarily terminates, or if an employee voluntarily terminates employment without being offered continued employment in a comparable position (as defined in the plan), the former employee would receive a severance payment equal to two week’s of base compensation for each year of service up to a maximum of 52 week’s of base compensation and with a minimum of four week’s base compensation. Any eligible employee who is designated as a Vice President or above would receive a severance benefit equal to 52 week’s base compensation, regardless of the employee’s years of service. See “Our Management—Employment Agreements and Severance Arrangements.”

 

 

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Persons Who Can Order Stock in the Subscription and Community Offerings

We have granted rights to subscribe for shares of Wellesley Bancorp common stock in a subscription offering to the following persons in the following order of priority:

 

  1 Persons with $50 or more on deposit at Wellesley Bank as of the close of business on April 30, 2010.

 

  2. Persons with $50 or more on deposit at Wellesley Bank as of the close of business on June 30, 2011.

 

  3. Our employee stock ownership plan.

 

  4. Wellesley Bank’s employees, officers and directors who do not have a higher priority right.

If we receive subscriptions for more shares than are to be sold in this offering, we may be unable to fill or may only partially fill your order. Shares will be allocated in order of the priorities described above under a formula outlined in the plan of conversion. If we increase the number of shares to be sold above 2,760,000, the employee stock ownership plan will have the first priority right to purchase any shares exceeding that amount to the extent that its subscription has not previously been filled. Any shares remaining will be allocated in the order of priorities described above. See “The Conversion and Stock Offering—Subscription Offering and Subscription Rights” for a description of the allocation procedures.

Unlike our employee stock ownership plan, our 401(k) plan has not been granted priority subscription rights. Accordingly, a 401(k) plan participant who elects to purchase shares in the offering through self-directed purchases within the 401(k) plan will receive the same subscription priority, and be subject to the same purchase limitations, as if the participant had elected to purchase shares using funds outside the 401(k) plan.

We intend to offer shares not sold in the subscription offering to the general public in a community offering. Natural persons who are residents of the Massachusetts municipalities of Wellesley, Dover, Needham, Newton, Natick and Weston will be given a preference to purchase shares in the community offering. We may, in our sole discretion, reject orders received in the community offering either in whole or in part. If your order is rejected in part, you cannot cancel the remainder of your order.

Shares not sold in the subscription offering or the community offering may be offered for sale in a syndicated offering, which would be an offering to the general public on a best efforts basis managed by Sandler O’Neill + Partners, L.P. As in the case of the community offering, we may, in our sole discretion, reject orders received in the syndicated offering either in whole or in part.

Subscription Rights

You are not allowed to transfer your subscription rights, and we will act to ensure that you do not do so. You will be required to certify that you are purchasing shares solely for your own account and that you have no agreement or understanding with another person involving the transfer of the shares that you purchase. We will not accept any stock orders that we believe involve the transfer of subscription rights. Depositors who enter into agreements to allow other investors to participate in the subscription offering may be violating federal and state law and may be subject to civil enforcement actions or criminal prosecution.

Deadline for Ordering Stock in the Subscription and Community Offerings

The subscription offering will end at             p.m., Eastern time, on [Expiration Date]. We expect that the community offering, if held, will terminate at the same time, although the offering may continue without notice to you until [Extension Date], or longer if the Federal Deposit Insurance Corporation and Massachusetts Commissioner of Banks approve a later date. If we extend the offering beyond [Extension Date], all subscribers will be notified and given the opportunity to confirm, change or cancel their orders. If you do not respond to this notice, we will return your funds promptly with interest at our passbook savings rate or cancel your deposit account withdrawal authorization.

Purchase Limitations

Our plan of conversion establishes limitations on the purchase of stock in the offering. These limitations include the following:

 

   

The minimum purchase is 25 shares.

 

   

No individual (or individuals on a single deposit account) may purchase more than $200,000 of common stock (which equals 20,000 shares) in all categories of the offering combined.

 

 

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No individual, together with any associates, and no group of persons acting in concert, may purchase more than $350,000 of common stock (which equals 35,000 shares) in all categories of the offering combined.

Subject to the approval of the Federal Deposit Insurance Corporation and Massachusetts Commissioner of Banks, we may increase or decrease the purchase limitations at any time. Our employee stock ownership plan may purchase up to 8% of the shares sold in the offering and contributed to the charitable foundation without regard to theses purchase limitations.

How to Purchase Common Stock

If you want to place an order for shares in the offering, you must complete an original stock order form and send it to us together with full payment, or deliver it in person to the Conversion Center located at             . We must receive your stock order form before the end of the subscription offering or the end of the community offering, as appropriate, regardless of the postmark date. Once we receive your order, you cannot cancel or change it without our consent.

To ensure that we properly identify your subscription rights, you must list all of your deposit accounts as of the applicable eligibility date on the stock order form. If you fail to do so, your subscription may be reduced or rejected if the offering is oversubscribed. To preserve your purchase priority, you must register the shares only in the name(s) of person(s) listed on your deposit account at the applicable date of eligibility. You may not add the names of others who were not eligible to purchase common stock in the offering on the applicable date of eligibility.

You may pay for shares in the subscription offering or the community offering in any of the following ways:

 

   

By check or money order made payable to Wellesley Bancorp; or

 

   

By authorizing withdrawal from an account at Wellesley Bank.

We will pay interest on your subscription funds at the rate we pay on our passbook savings accounts, which is currently 0.25% per annum, from the date we receive your funds until the offering is completed or terminated. All funds authorized for withdrawal from deposit accounts with us will earn interest at the applicable account rate until the offering is completed or terminated. If, as a result of a withdrawal from a certificate of deposit, the balance falls below the minimum balance requirement, the remaining funds will earn interest at our passbook savings rate. There will be no early withdrawal penalty for withdrawals from certificates of deposit held at Wellesley Bank and used to pay for stock.

Using IRA Funds to Purchase Shares in the Offering

You may be able to subscribe for shares of common stock using funds in your individual retirement account(s), or IRA. If you wish to use some or all of the funds in your Wellesley Bank IRA or other retirement account, the applicable funds must first be transferred to a self-directed retirement account maintained by an unaffiliated institutional trustee or custodian, such as a brokerage firm. An annual fee may be payable to the new trustee. If you do not have such an account, you will need to establish one and transfer your funds before placing your stock order. Our Conversion Center can give you guidance if you wish to place an order for stock using funds held in a retirement account at Wellesley Bank or elsewhere. Because processing retirement account transactions takes additional time, we recommend that you contact our Conversion Center for guidance promptly, preferably at least two weeks before the [Expiration Date] offering deadline. Whether you may use retirement funds for the purchase of shares in the offering will depend on timing constraints and, possibly, limitations imposed by the institution where the funds are held.

 

 

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How We Will Use the Proceeds of This Offering

The following table summarizes how we will use the proceeds of this offering, based on the sale of shares at the minimum and maximum of the offering range.

 

(In thousands)

   Minimum
2,040,000
Shares at
$10.00
per Share
    Maximum
2,760,000
Shares at
$10.00
per Share
 

Offering proceeds

   $ 20,400      $ 27,600   

Less estimated offering expenses

     (1,230     (1,230
  

 

 

   

 

 

 

Net offering proceeds

     19,170        26,370   

Less:

    

Proceeds contributed to Wellesley Bank

     (9,585     (13,185

Proceeds used for loan to employee stock ownership plan

     (1,746     (2,363

Proceeds contributed to charitable foundation

     (204     (276
  

 

 

   

 

 

 

Proceeds remaining for Wellesley Bancorp

   $ 7,635      $ 10,546   
  

 

 

   

 

 

 

Initially, we intend to invest the proceeds of the offering in short-term investments. In the future, Wellesley Bancorp may use the portion of the proceeds that it retains to, among other things, pay cash dividends, repurchase shares of common stock, subject to regulatory restrictions, invest in short-term liquid investments and securities or for general corporate purposes. Over time, Wellesley Bank intends to use the portion of the proceeds that it receives to fund new loans. The amount of time that it will take to deploy the proceeds of the offering into loans will depend primarily on the level of loan demand. We also may use the proceeds of the offering to diversify our business or acquire other companies or expand our branch network, although we have no specific plans to do so at this time other than the opening of our third branch in the first quarter of 2012. This new branch is expected to be funded by cash generated by our business. We do not expect to borrow funds for this expansion project. Based on current estimates, we expect the total cost of equipment and leasehold improvements required to open the new Wellesley branch location to be approximately $942,000, none of which had been incurred at June 30, 2011. Funding for this branch is not contingent on this offering.

Purchases by Directors and Executive Officers

We expect that our directors and executive officers, together with their associates, will subscribe for approximately 250,000 shares, which is 9.7% of the shares that would be sold in the offering and issued to the charitable foundation at the midpoint of the offering range. Our directors and executive officers will pay the same $10.00 per share price as everyone else who purchases shares in the offering. Like all of our depositors, our directors and executive officers have subscription rights based on their deposits and, if there is an oversubscription, their orders will be subject to the allocation provisions set forth in our plan of conversion. Purchases by our directors and executive officers will count towards the minimum number of shares we must sell to close the offering.

Market for Wellesley Bancorp Common Stock

We have applied for approval to list our common stock on the Nasdaq Capital Market under the symbol “WEBK.” Sandler O’Neill + Partners, L.P. currently intends to become a market maker in the common stock, but it is under no obligation to do so.

Wellesley Bancorp Dividend Policy

Following the offering, our board of directors will consider adopting a policy of paying cash dividends. We cannot guarantee that we will pay dividends or that, if paid, we will not reduce or eliminate dividends in the future. Our ability to pay dividends will depend on a number of factors, including capital requirements, regulatory limitations and our operating results and financial condition.

Tax Consequences

As a general matter, the conversion will not be a taxable transaction for purposes of federal income taxes to persons who receive or exercise subscription rights. We have received an opinion from our special counsel, Kilpatrick Townsend & Stockton LLP, to this effect. See “The Conversion and Offering—Material Income Tax Consequences.”

 

 

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Delivery of Prospectus

To ensure that each person in the subscription and community offerings receives a prospectus at least 48 hours before the offering deadline, we may not mail prospectuses any later than five days before such date or hand-deliver prospectuses later than two days before that date. Stock order forms may only be delivered if accompanied or preceded by a prospectus. We are not obligated to deliver a prospectus or order form by means other than U.S. mail.

We will make reasonable attempts to provide a prospectus and offering materials to holders of subscription rights. The subscription offering and all subscription rights will expire at             p.m., Eastern time, on [Expiration Date] whether or not we have been able to locate each person entitled to subscription rights.

Delivery of Stock Certificates in the Subscription and Community Offerings

Certificates representing shares of common stock issued in the subscription and community offerings will be mailed to purchasers at the address provided by them on the order form as soon as practicable following completion of the conversion and offering. Until certificates for common stock are available and delivered to purchasers, purchasers may not be able to sell their shares, even though trading of the common stock will have commenced.

Conversion Center

If you have any questions regarding the offering, please call the Conversion Center at             to speak to a registered representative of Sandler O’Neill + Partners, L.P. The Conversion Center is open Monday through Friday, [            a.m. to             p.m.], Eastern time, except for bank holidays.

 

 

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Risk Factors

You should consider carefully the following risk factors before purchasing Wellesley Bancorp common stock.

Risks Related to Our Business

We make and hold in our portfolio construction loans, including speculative construction loans, which are considered to have greater credit risk than other types of residential loans.

We originate construction loans for residential properties and commercial real estate properties, including properties built on speculative, undeveloped property by builders and developers who have not identified a buyer for the completed residential or commercial real estate property at the time of loan origination. At June 30, 2011, $36.7, or 17.6%, of our loan portfolio consisted of construction loans. At this date, our construction loan portfolio consisted of $23.8 million, or 11.4%, of our loan portfolio in loans that were secured by residential real estate speculative loan projects, $4.9 million, or 2.4%, of our loan portfolio in loans that were secured by owner-occupied residential real estate, and $8.0 million, or 3.8%, of our loan portfolio in loans that were secured by commercial real estate speculative loan projects. Construction lending is an important part of our business strategy and we expect this portion of our loan portfolio to continue to grow.

Construction lending involves additional risks when compared with permanent residential lending because funds are advanced upon the progress of the project, which is of uncertain value prior to its completion. Because of the uncertainties inherent in estimating construction costs, the market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. This type of lending also typically involves higher loan principal amounts and is often concentrated with a small number of builders. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a residential mortgage loan. These loans often involve the disbursement of substantial funds with repayment substantially dependent on the success of the ultimate project and the ability of the borrower to sell or lease the property or obtain permanent take-out financing, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of a completed project proves to be overstated, we may have inadequate security for the repayment of the loan upon completion of construction of the project and may incur a loss. While we believe we have established adequate allowances in our financial statements to cover the credit risk of our construction loan portfolio, there can be no assurance that losses will not exceed our allowances, which could adversely impact our future earnings.

Our ability to continue to originate a significant amount of construction loans is dependent on the continued strength of the housing market in our market area. Further, if we lost our relationship with several of our larger borrowers building in this area or there is a decline in the demand for new housing in this area, it is expected that the demand for construction loans would decline and our net income would be adversely affected.

Our commercial lending exposes us to lending risks.

At June 30, 2011, $80.9 million, or 38.7%, of our loan portfolio consisted of commercial real estate and commercial business loans. Commercial loans generally expose a lender to greater risk of nonpayment and loss than residential mortgage loans because repayment of the loans often depends on the successful operation of the business and the income stream of the borrowers. Such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential mortgage loans. Also, many of our commercial borrowers have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a residential mortgage loan. Further, unlike residential mortgage loans or commercial real estate loans, commercial business loans may be secured by collateral other than real estate, the value of which may be more difficult to appraise, and may be more susceptible to fluctuation in value. In addition, many of our commercial real estate and commercial business loans are unseasoned, meaning that they were originated recently, with a limited significant payment history pattern with which to judge future collectibility. As a result, it may be difficult to predict the future performance of this part of our loan portfolio.

Our level of nonperforming loans and classified assets expose us to increased risk of loss. Further, our allowance for loan losses may prove to be insufficient to absorb losses in our loan portfolio.

At June 30, 2011, loans that were classified as either special mention, substandard, doubtful or loss totaled $10.3 million, representing 4.9% of total loans, including nonperforming loans of $3.5 million, representing 1.7% of total loans. If these loans do not perform according to their terms and the value of the collateral is insufficient to pay the remaining loan balance or if the

 

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economy and/or the real estate market continues to weaken, we could experience loan losses or be required to record further provisions to our allowance for loan losses, either of which could have a material adverse effect on our operating results. Like all financial institutions, we maintain an allowance for loan losses at a level representing management’s best estimate of inherent losses in the portfolio based upon management’s evaluation of the portfolio’s collectibility as of the corresponding balance sheet date. However, our allowance for loan losses may be insufficient to cover actual loan losses, and future provisions for loan losses could materially adversely affect our operating results.

At June 30, 2011, our allowance for loan losses totaled $3.2 million, which represented 1.6% of total loans and 93.3% of nonperforming loans. Our regulators, as an integral part of their examination process, periodically review the allowance for loan losses and may require us to increase the allowance for loan losses by recognizing additional provisions for loan losses charged to income, or to charge off loans, which, net of any recoveries, would decrease the allowance for loan losses. Any such additional provisions for loan losses or charge-offs, as required by these regulatory agencies, could have a material adverse effect on our operating results.

A return of recessionary conditions in our national economy and, in particular, local economy could continue to increase our level of nonperforming loans and/or reduce demand for our products and services, which would lead to lower revenue, higher loan losses and lower earnings.

Our business activities and earnings are affected by general business conditions in the United States and, in particular, our local market area as a result of our geographic concentration of lending activities. These conditions include short-term and long-term interest rates, inflation, unemployment levels, monetary supply, consumer confidence and spending, fluctuations in both debt and equity capital markets, and the strength of the economy in the United States generally, and in our market area in particular. Following a national home price peak in mid-2006, falling home prices and sharply reduced sales volumes, along with the collapse of the United States’ subprime mortgage industry in early 2007, significantly contributed to a recession that officially lasted until June 2009, although the effects continued thereafter. Dramatic declines in real estate values and high levels of foreclosures resulted in significant asset write-downs by financial institutions, which have caused many financial institutions to seek additional capital, to merge with other institutions and, in some cases, to fail. While our primary market area was not affected by the recessionary conditions as much as the United States generally, our primary market area was negatively impacted by the downturn in the economy and experienced increased unemployment levels and a softening of the local real estate market, including reductions in local property values.

Concerns over the United States’ credit rating (which was downgraded by Standard & Poor’s), the European sovereign debt crisis, and continued high unemployment in the United States, among other economic indicators, have contributed to increased volatility in the capital markets and diminished expectations for the economy. A return of recessionary conditions and/or continued negative developments in the domestic and international credit markets may significantly affect the markets in which we do business, the value of our loans and investments, and our ongoing operations, costs and profitability. In particular, unlike larger financial institutions that are more geographically diversified, our profitability depends on the general economic conditions in our primary market area. Most of our loans are secured by real estate or made to businesses in the town of Wellesley and the surrounding communities. As a result of this concentration, a prolonged or more severe downturn in the local economy could result in significant increases in nonperforming loans, which would negatively impact our interest income and result in higher provisions for loan losses, which would reduce our earnings. The economic downturn could also result in reduced demand for credit or fee-based products and services, which would negatively impact our revenues.

Our residential mortgage loans and home equity lines of credit exposes us to lending risks.

At June 30, 2011, $68.3 million, or 32.7%, of our loan portfolio consisted of residential mortgage loans and $22.6 million, or 10.8%, of our loan portfolio consisted of home equity lines of credit. We intend to continue to emphasize and grow these types of lending, in particular residential mortgage lending, after the offering. Recent declines in the housing market have resulted in declines in real estate values in our market area. Declines in real estate values could cause some of our residential mortgage and home equity lines of credit to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral.

Changes in interest rates may hurt our profits and asset value.

Like other financial institutions, we are subject to interest rate risk. Our primary source of income is net interest income, which is the difference between interest earned on loans and investments and the interest paid on deposits and borrowings. Changes in the general level of interest rates can affect our net interest income by affecting the difference between the weighted-average yield earned on our interest-earning assets and the weighted-average rate paid on our interest-bearing liabilities, or interest rate

 

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spread, and the average life of our interest-earning assets and interest-bearing liabilities. Changes in interest rates also can affect: (1) the ability to originate loans; (2) the value of our interest-earning assets and our ability to realize gains from the sale of such assets; (3) the ability to obtain and retain deposits in competition with other available investment alternatives; and (4) the ability of our borrowers to repay adjustable or variable rate loans. Interest rates are highly sensitive to many factors, including government monetary policies, domestic and international economic and political conditions and other factors beyond our control. Although we believe that the estimated maturities of our interest-earning assets currently are well balanced in relation to the estimated maturities of our interest-bearing liabilities, our profitability could be adversely affected as a result of changes in interest rates.

Strong competition within our market area could reduce our profits and slow growth.

As the economy recovers, we will face more intense competition both in making loans and attracting deposits. This competition may make it more difficult for us to make new loans and may force us to offer lower loan rates and higher deposit rates. Pricing competition for loans and deposits might result in our earning less on our loans and paying more on our deposits, which would reduce net interest income. Competition also makes it more difficult to grow loans and deposits. At June 30, 2010, which is the most recent date for which data is available from the Federal Deposit Insurance Corporation, we held 1.19% of the deposits in Norfolk County, which was the 19th largest market share out of 45 financial institutions with offices in Norfolk County. At June 30, 2010, we also held 12.71% of the deposits in the town of Wellesley, which was the third largest market share out of 12 financial institutions with offices in Wellesley. Some of the institutions with which we compete have substantially greater resources and lending limits than we have and may offer services that we do not provide. We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Our profitability depends upon our continued ability to compete successfully in our market area.

Our business strategy includes moderate growth plans, and our financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively.

We have experienced moderate growth during the past five years and this offering will further add to this growth. Upon completion of the offering, at the maximum of the offering range, our assets will have increased on a pro forma basis $101.8 million, or 54.6%, from $186.4 million at December 31, 2006 to $288.2 million at June 30, 2011. In the future, we expect to experience further growth in our assets, our deposits and the scale of our operations, whether through organic growth or acquisitions. We anticipate opening our third full service branch in Wellesley in the first quarter of 2012. However, achieving our moderate growth targets requires us to successfully execute our business strategies. Our business strategies include continuing to expand our loan portfolio with more residential mortgage lending and larger commercial lending relationships and increased emphasis on competitive deposit products, in particular business deposit and checking products, to become a full-service community banking institution. Our ability to successfully grow will also depend on the continued availability of loan opportunities that meet our more stringent underwriting standards. If we do not manage our growth effectively, we may not be able to achieve our business plan, and our business and prospects could be adversely affected.

The loss of our President and Chief Executive Officer could hurt our operations.

We rely heavily on our President and Chief Executive Officer, Thomas J. Fontaine. The loss of Mr. Fontaine could have an adverse effect on us because, as a small community bank, Mr. Fontaine has more responsibility than would be typical at a larger financial institution with more employees. In addition, as a small community bank, we have fewer management-level personnel who are in position to succeed and assume the responsibilities of Mr. Fontaine. We intend to enter into an amended and restated three-year employment contract with Mr. Fontaine. In addition, we have bank-owned life insurance on Mr. Fontaine. For further discussion, see “Our Management—Executive Compensation.”

We own stock in the Federal Home Loan Bank of Boston, which recently had to suspend its dividend as a result of its financial difficulties.

As a member bank, Wellesley Bank is required to purchase capital stock in the Federal Home Loan Bank in an amount commensurate with the amount of Wellesley Bank’s advances and unused borrowing capacity. This stock is carried at cost and was $1.9 million at June 30, 2011. In response to unprecedented market conditions and potential future losses, the Federal Home Loan Bank announced in February 2009 an initiative to preserve capital by the adoption of a revised retained earnings target, declaration of a moratorium on excess stock repurchases and the suspension of cash dividend payments. If the Federal Home Loan Bank is unable to meet minimum regulatory capital requirements or is required to aid the remaining Federal Home Loan Banks, our holding of Federal Home Loan Bank stock may be determined to be other-than-temporarily impaired and may require a charge to earnings.

 

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Financial reform legislation recently enacted by Congress will, among other things, tighten capital standards, create a new Consumer Financial Protection Bureau and result in new laws and regulations that are expected to increase our costs of operations.

The recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) has and will continue to change the current bank regulatory structure and affect the lending, investment, trading and operating activities of financial institutions and their holding companies. The Dodd-Frank Act requires the Federal Reserve Board to set minimum capital levels for bank holding companies that are as stringent as those required for insured depository institutions, and the components of Tier 1 capital would be restricted to capital instruments that are currently considered to be Tier 1 capital for insured depository institutions. The legislation also establishes a floor for capital of insured depository institutions that cannot be lower than the standards in effect today, and directs the federal banking regulators to implement new leverage and capital requirements within 18 months of the date of enactment of the Dodd-Frank Act that take into account off-balance sheet activities and other risks, including risks relating to securitized products and derivatives.

The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with broad powers to supervise and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rule-making authority for a wide range of consumer protection laws that apply to all banks and savings institutions such as Wellesley Bank, including the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings institutions with more than $10.0 billion in assets. Banks and savings institutions with $10.0 billion or less in assets will be examined by their applicable bank regulators.

In addition, the Dodd-Frank Act increased stockholder influence over boards of directors by requiring certain public companies to give stockholders a nonbinding vote on executive compensation and so-called “golden parachute” payments, and by authorizing the Securities and Exchange Commission to promulgate rules that would allow stockholders to nominate and solicit votes for their own candidates using a company’s proxy materials.

Many aspects of the Dodd-Frank Act are subject to rulemaking and will take effect over several years. While it is difficult to anticipate the overall impact of the Dodd-Frank Act on us and the financial service industry, it is expected that at a minimum it will increase our operating costs.

We operate in a highly regulated environment and we may be adversely affected by changes in laws and regulations.

Wellesley Bank is subject to extensive government regulation, supervision and examination by the Federal Deposit Insurance Corporation and the Massachusetts Commissioner of Banks. Wellesley Bancorp will also be subject to regulation and supervision by the Federal Reserve Board upon the consummation of the conversion and offering. Such regulation, supervision and examination govern the activities in which we may engage and are intended primarily for the protection of the deposit insurance fund and our depositors. Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, the classification of our assets and determination of the level of our allowance for loan losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a material impact on our operations.

Increased and/or special Federal Deposit Insurance Corporation assessments will hurt our earnings.

The recent economic recession has caused a high level of bank failures, which has dramatically increased Federal Deposit Insurance Corporation resolution costs and led to a significant reduction in the balance of the Deposit Insurance Fund. As a result, the Federal Deposit Insurance Corporation has significantly increased the initial base assessment rates paid by financial institutions for deposit insurance. Increases in the base assessment rate have increased our deposit insurance costs and negatively impacted our earnings. In addition, in May 2009, the Federal Deposit Insurance Corporation imposed a special assessment on all insured institutions. Our special assessment, which was reflected in earnings for the quarter ended June 30, 2009, was $118,000. In lieu of imposing an additional special assessment, the Federal Deposit Insurance Corporation required all institutions to prepay their assessments for all of calendar years 2010, 2011 and 2012, which for us totaled $1.1 million. Additional increases in the assessment base, or the base assessment rate, or additional special assessments would negatively impact our earnings.

Risks Related to This Offering

We expect our return on equity will initially be low following the offering which may negatively impact the value of our common stock.

Return on equity, which equals net income divided by average equity, is a ratio used by many investors to compare the performance of a particular company with other companies. Our pro forma return on equity for the six months ended June 30, 2011, (annualized) and the year ended December 31, 2010 is expected to be 3.87% and 4.64%, respectively, and our pro forma

 

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stockholders’ equity to assets ratio at June 30, 2011 is 15.55%, assuming the sale of shares at the maximum of the offering range. Our publicly traded thrift peers used in the independent appraisal as of August 23, 2011 had an average return on equity of 3.27% for the twelve months ended June 30, 2011. Over time, we intend to use the net proceeds from this offering to increase earnings per share and book value per share, without assuming undue risk, with the goal of achieving a return on equity that is competitive with other publicly held companies. This goal could take a number of years to achieve, and it may not be attained. The expected increase in our noninterest expenses following the offering due to operating as a public company and from new equity benefit plans will likely further deter our ability to achieve a competitive return on equity. Consequently, you should not expect a competitive return on equity in the near future. Failure to achieve a competitive return on equity might make an investment in our common stock unattractive to some investors and might cause our common stock to trade at lower prices than comparable companies with higher returns on equity. See “Pro Forma Data” for an illustration of the financial impact of this offering.

We have broad discretion in allocating the proceeds of the offering. Our failure to effectively utilize such proceeds would reduce our profitability.

We intend to contribute approximately 50% of the net proceeds of the offering to Wellesley Bank. Wellesley Bancorp may use the portion of the proceeds that it retains to, among other things, invest in securities, pay cash dividends and repurchase shares of common stock, subject to regulatory restrictions. Wellesley Bank may use the portion of the proceeds that it receives to fund new loans, open new branches, invest in securities, introduce new deposit products and technologies and expand its other business activities. Wellesley Bancorp and Wellesley Bank also may use the proceeds of the offering to diversify their businesses and acquire other companies, although we have no specific plans to do so at this time. Except as discussed above, we have not allocated specific amounts of proceeds for any of these purposes, and we will have significant flexibility in determining how much of the net proceeds we apply to different uses and the timing of such applications. Our failure to utilize these funds effectively would reduce our profitability.

Our stock price may decline when trading commences.

If you purchase shares in the offering, you may not be able to sell them at or above the $10.00 purchase price. After the shares of our common stock begin trading, the trading price of the common stock will be determined by the marketplace and will be influenced by many factors outside of our control, including prevailing interest rates, investor perceptions, securities analyst research reports and general industry, geopolitical and economic conditions. Publicly traded stocks, including stocks of financial institutions, often experience substantial market price volatility. These market fluctuations might not be related to the operating performance of particular companies whose shares are traded. Additionally, the stock prices of many recently converted thrift institutions have declined below, and remain below, their initial offering prices.

There may be a limited market for our common stock, which may adversely affect our stock price.

Although we have applied for approval to list our shares of common stock for trading on the Nasdaq Capital Market, our shares of common stock may not be actively traded. If an active trading market for our common stock does not develop, you may not be able to sell all of your shares of common stock on short notice, and the sale of a large number of shares at one time could temporarily depress the market price. There also may be a wide spread between the bid and asked price for our common stock. When there is a wide spread between the bid and asked price, the price at which you may be able to sell our common stock may be significantly lower than the price at which you could buy it at that time.

Additional expenses following the offering from operating as a public company will adversely affect our profitability.

Following the offering, our noninterest expenses will increase as a result of the additional financial accounting, legal and various other additional expenses usually associated with operating as a public company and complying with public company disclosure obligations. Due to these public company obligations, we hired a new Chief Financial Officer in August 2011 and in the future may be required to expand our accounting staff further and to expand our internal audit and risk management functions, all of which will increase our operating expenses and adversely affect our profitability.

Additional expenses following the offering from the implementation of new equity benefit plans will adversely affect our profitability.

We will recognize additional annual employee compensation and benefit expenses stemming from options and shares of common stock granted to employees, directors and executives under new benefit plans if approved by stockholders. These additional expenses will adversely affect our profitability. We cannot determine the actual amount of these new stock-related compensation and benefit expenses at this time because applicable accounting practices generally require that they be based on the

 

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fair value of the options or shares of common stock at the date of the grant; however, we expect them to be material. We will recognize expenses for our employee stock ownership plan when shares are committed to be released to participants’ accounts and will recognize expenses for restricted stock awards and stock options generally over the vesting period of awards made to recipients. These benefit expenses in the first year following the offering have been estimated to be approximately $445,000 after taxes at the maximum of the offering range as set forth in the pro forma financial information under “Pro Forma Data” assuming the $10.00 per share purchase price as fair market value. Actual expenses, however, may be higher or lower, depending on the price of our common stock. For further discussion of these plans, see “Our Management—Benefit Plans.”

A significant percentage of our common stock will be held by our directors, executive officers and employee benefit plans.

We expect that our directors and executive officers, together with their associates, will subscribe for 250,000 shares in the offering. In addition, we intend to establish an employee stock ownership plan that will purchase an amount of shares equal to 8.0% of the sum of the shares sold in the offering and contributed to the Wellesley Bank Charitable Foundation. As a result, upon consummation of the offering and the issuance of shares to the charitable foundation, a total of up to 424,624, or 19.5%, and 486,256, or 16.5%, of our outstanding shares will be held by our directors and executive officers and our employee stock ownership plan at the minimum and maximum of the offering range, respectively. Additional shares will be held by management following the implementation of an equity incentive plan, which we intend to implement no earlier than six months following the completion of the offering. The articles of incorporation and bylaws of Wellesley Bancorp contain supermajority voting provisions that require that the holders of at least 75% of Wellesley Bancorp’s outstanding shares of voting stock approve certain actions including, but not limited to, the amendment of certain provisions of Wellesley Bancorp’s articles of incorporation and bylaws. If our directors and executive officers and benefit plans hold more than 25% of our outstanding common stock following the completion of the offering, the shares held by these individuals and benefit plans could be voted in a manner that would ensure that the 75% supermajority needed to approve such actions could not be attained. For more information on the restrictions included in the articles of incorporation and bylaws of Wellesley Bancorp, see Restrictions on the Acquisition of Wellesley Bancorp.”

Issuance of shares for benefit programs will dilute your ownership interest.

We intend to adopt an equity incentive plan following the offering. If stockholders approve the new equity incentive plan, we intend to issue shares to our officers, employees and directors through this plan. If the restricted stock awards under the equity incentive plan are funded from authorized but unissued stock, your ownership interest in the shares will be diluted by up to approximately 3.8%, assuming awards of common stock equal to 4% of the sum of the shares sold in the offering and contributed to the Wellesley Bank Charitable Foundation are awarded under the plan. If the shares issued upon the exercise of stock options under the equity incentive plan are issued from authorized but unissued stock, your ownership interest in the shares will be diluted by up to approximately 9.1%, assuming stock option grants equal to 10% of the sum of the shares sold in the offering and contributed to the Wellesley Bank Charitable Foundation are granted under the plan. See “Pro Forma Data” and “Our Management—Equity Incentive Plan.”

The articles of incorporation and bylaws of Wellesley Bancorp and certain regulations may prevent or make more difficult certain transactions, including a sale or merger of Wellesley Bancorp.

Provisions of the articles of incorporation and bylaws of Wellesley Bancorp, state corporate law and federal and state banking regulations may make it more difficult for companies or persons to acquire control of Wellesley Bancorp. Consequently, our stockholders may not have the opportunity to participate in such a transaction and the trading price of our common stock may not rise to the level of other institutions that are more vulnerable to hostile takeovers. The factors that may discourage takeover attempts or make them more difficult include:

 

   

Articles of incorporation and bylaws. Provisions of the articles of incorporation and bylaws of Wellesley Bancorp that may make it more difficult and expensive to pursue a takeover attempt that the board of directors opposes include:

 

   

supermajority voting requirements for certain business combinations and changes to some provisions of the articles of incorporation and bylaws;

 

   

a limitation on the right to vote shares;

 

   

the election of directors to staggered terms of three years;

 

   

the removal of directors only for cause;

 

   

the absence of cumulative voting by stockholders in the election of directors;

 

   

provisions restricting the calling of special meetings of stockholders; and

 

   

provisions regarding the timing and content of stockholder proposals and nominations.

 

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Massachusetts and federal banking regulations and Maryland corporate law. Massachusetts banking regulations prohibit, for three years following the completion of a mutual-to-stock conversion, the offer to acquire or the acquisition of more than 10% of any class of equity security of a converted institution without the prior approval of the Massachusetts Commissioner of Banks. Additional state corporate law and federal banking regulations place limitations on the acquisition of certain percentages of our common stock and impose restrictions on these significant stockholders.

For further information, see “Restrictions on the Acquisition of Wellesley Bancorp.

Risks Related to the Contribution to the Charitable Foundation

The contribution to the Wellesley Bank Charitable Foundation will decrease our profits for 2011.

Wellesley Bancorp intends to contribute to the Wellesley Bank Charitable Foundation an amount equal to 8% of the gross offering proceeds, 87.5% of which will be funded with shares of Wellesley Bancorp common stock and 12.5% of which will be funded with cash (193,200 shares and $276,000 in cash at the maximum of the offering range). This contribution will be an additional operating expense and will reduce net income during the fiscal year in which the foundation is funded, which is expected to be the fiscal year ending December 31, 2011. Assuming the offering is completed at the maximum of the offering range, the contribution to the Wellesley Bank Charitable Foundation would reduce net earnings by approximately $1.3 million, after tax, in 2011. See “Pro Forma Data.”

The contribution to the Wellesley Bank Charitable Foundation will decrease the ownership interest and voting interest in the shares sold to the public by 6.5% after the contribution.

Purchasers of shares will have their ownership and voting interests diluted at the close of the conversion when Wellesley Bancorp makes a contribution to the Wellesley Bank Charitable Foundation. This dilution will be 6.5% throughout the valuation range. For a further discussion regarding the effect of the contribution to the charitable foundation, see “Pro Forma Data” and “Comparison of Independent Valuation and Pro Forma Financial Information With and Without the Foundation.”

Our contribution to the Wellesley Bank Charitable Foundation may not be tax deductible, which could decrease our profits.

We believe that our contribution to the Wellesley Bank Charitable Foundation, valued at $2.2 million at the maximum of the offering range, pre-tax, will be deductible for federal income tax purposes. However, we may not have sufficient profits to be able to use the deduction fully. If it is more likely than not that we will be unable to use the entire deduction, we will be required to establish a valuation allowance related to that portion of the deferred tax asset that is not deemed to be realizable.

 

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A Warning About Forward-Looking Statements

This prospectus contains forward-looking statements, which can be identified by the use of words such as “believes,” “expects,” “anticipates,” “estimates” or similar expressions. Forward-looking statements include:

 

   

statements of our goals, intentions and expectations;

 

   

statements regarding our business plans, prospects, growth and operating strategies;

 

   

statements regarding the quality of our loan and investment portfolios; and

 

   

estimates of our risks and future costs and benefits.

These forward-looking statements are subject to significant risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the following factors:

 

   

increased lending risks associated with increased construction and commercial lending;

 

   

general economic conditions, either nationally or in our primary market area, that are worse than expected;

 

   

a continued decline in real estate values;

 

   

changes in the interest rate environment that reduce our interest margins or reduce the fair value of financial instruments;

 

   

increased competitive pressures among financial services companies;

 

   

changes in consumer spending, borrowing and savings habits;

 

   

legislative, regulatory or supervisory changes that adversely affect our business;

 

   

adverse changes in the securities markets; and

 

   

changes in accounting or auditing standards, as may be adopted by the bank regulatory agencies, the Financial Accounting Standards Board or the Public Company Accounting Oversight Board.

Any of the forward-looking statements that we make in this prospectus and in other public statements we make may later prove incorrect because of inaccurate assumptions, the factors illustrated above or other factors that we cannot foresee. Consequently, no forward-looking statement can be guaranteed. We are under no duty to and do not take any obligation to update any forward-looking statements after the date of this prospectus.

 

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Selected Consolidated Financial and Other Data

The summary financial information presented below is derived in part from our consolidated financial statements. The following is only a summary and you should read it in conjunction with the consolidated financial statements and notes beginning on page F-1. The information at December 31, 2010 and 2009 and for the years then ended is derived in part from the audited consolidated financial statements that appear in this prospectus. The information at December 31, 2008, 2007 and 2006 and for the years then ended are derived in part from our audited consolidated financial statements that do not appear in this prospectus. The information at June 30, 2011 and 2010 and for the six months then ended was not audited, but in the opinion of management, reflects all adjustments necessary for a fair presentation. All of these adjustments are normal and recurring. The results of operations for the six months ended June 30, 2011 are not necessarily indicative of the results of operations that may be expected for the entire year.

 

     At June  30,
2011
     At December 31,  

(In thousands)

      2010      2009      2008      2007      2006  

Selected Financial Condition Data:

                 

Total assets

   $ 264,774       $ 262,002       $ 245,829       $ 241,284       $ 214,919       $ 186,445   

Cash and cash equivalents

     18,637         18,397         9,370         5,072         5,624         4,901   

Securities available for sale

     28,506         25,565         28,188         29,621         25,669         20,971   

Loans receivable, net

     205,386         204,117         184,370         194,640         174,141         152,011   

Deposits

     228,375         222,140         195,625         187,804         158,361         143,816   

Short-term borrowings

     6,423         5,804         6,270         4,395         4,238         4,133   

Long-term debt

     7,500         12,500         24,500         30,000         34,600         22,350   

Total surplus

     21,445         20,408         18,303         16,958         16,199         15,034   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Six Months
Ended June 30,
     Years Ended December 31,  

(In thousands)

   2011      2010      2010      2009      2008     2007      2006  

Operating Data:

                   

Interest and dividend income

   $ 6,450       $ 6,526       $ 13,337       $ 13,382       $ 13,553      $ 13,214       $ 11,192   

Interest expense

     1,427         1,787         3,379         5,553         6,739        6,875         4,921   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income

     5,023         4,739         9,958         7,829         6,814        6,339         6,271   

Provision for loan losses

     600         500         1,100         300         445        260         70   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net interest income, after provision for loan losses

     4,423         4,239         8,858         7,529         6,369        6,079         6,201   

Noninterest income (loss) (1)

     229         211         552         258         (347     339         254   

Noninterest expenses

     3,153         2,849         5,999         5,945         5,030        4,782         4,338   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Income before income taxes

     1,499         1,601         3,411         1,842         992        1,636         2,117   

Provision for income taxes

     541         589         1,258         697         305        553         749   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Net income

   $ 958       $ 1,012       $ 2,153       $ 1,145       $ 687      $ 1,083       $ 1,368   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

 

     At or For the
Six Months Ended
June 30,
    At or For the Years Ended
December 31,
 
     2011     2010     2010     2009     2008     2007     2006  

Selected Financial Ratios and Other Data:

              

Performance Ratios:

              

Return on average assets (2)

     0.73     0.81     0.84     0.45     0.31     0.54     0.78

Return on average equity (2)

     9.27        10.89        11.17        6.50        4.12        6.84        9.35   

Interest rate spread (2)(3)

     3.75        3.71        3.82        2.84        2.81        2.71        3.24   

Net interest margin (2)(4)

     3.96        3.97        4.07        3.21        3.22        3.29        3.77   

Noninterest expense to average assets (2)

     2.40        2.29        2.35        2.36        2.24        2.37        2.48   

Efficiency ratio (5)

     60.03        57.56        57.08        73.51        77.75        71.61        66.48   

Average interest-earning assets to average interest-bearing liabilities

     119.11        117.10        117.70        116.14        112.98        115.81        117.17   

Average equity to average total assets

     7.86        7.47        7.57        6.99        7.41        7.85        8.37   

 

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     At or For the
Six Months Ended
June 30,
    At or For the Years Ended
December 31,
 
         2011             2010         2010     2009     2008     2007     2006  

Asset Quality Ratios:

              

Nonperforming loans to total assets (6)

     1.31     0.99     0.77     0.29     0.81     —       —  

Nonperforming loans to total loans (6)

     1.66        1.27        0.97        0.38        0.99        —          —     

Allowance for loan losses to nonperforming loans (6)

     93.27        95.02        133.96        292.20        104.55        —          —     

Allowance for loan losses to total loans

     1.55        1.23        1.30        1.10        1.04        0.91        0.92   

Net charge-offs to average loans outstanding during the period (7)

     0.03        0.05        0.24        0.15        0.00        0.04        —     

Capital Ratios:

              

Total capital to risk-weighted assets

     12.14     11.72     11.90     11.86     11.10     11.39     12.37

Tier I capital to risk-weighted assets

     10.88        10.47        10.64        10.63        9.90        10.36        11.32   

Tier I capital to total average assets (8)

     7.95        7.53        7.74        7.00        7.06        7.45        8.33   

Other Data:

              

Number of full service offices

     2        2        2        2        2        2        2   

 

(1) The noninterest loss in 2008 includes other-than-temporary impairment losses on securities of $701,000.
(2) Ratios for the six-month periods have been annualized.
(3) Represents the difference between the weighted average yield on average interest-earning assets and the weighted average cost of average interest-bearing liabilities.
(4) Represents net interest income as a percent of average interest-earning assets.
(5) Represents noninterest expense divided by the sum of net interest income and other income, excluding gains or losses on the sale of securities.
(6) There were no nonperforming loans at December 31, 2007 and 2006.
(7) There were no charge-offs during 2006 and $4,000 of charge-offs during 2008.
(8) Average assets represent average assets for the most recent quarter within the respective period.

 

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Use of Proceeds

The following table shows how we intend to use the net proceeds of the offering. The actual net proceeds will depend on the number of shares of common stock sold in the offering and the expenses incurred in connection with the offering. Payments for shares made through withdrawals from deposit accounts at Wellesley Bank will reduce deposits and will not result in the receipt of new funds for investment. See “Pro Forma Data” for the assumptions used to arrive at these amounts.

 

    Minimum of
Offering Range
    Midpoint of
Offering Range
    Maximum of
Offering Range
    15% Above Maximum
of Offering Range
 

(Dollars in thousands)

  2,040,000
Shares at
$10.00
Per Share
    Percent of
Net
Proceeds
    2,400,000
Shares at
$10.00
Per Share
    Percent
of
Net
Proceeds
    2,760,000
Shares at
$10.00
Per Share
    Percent
of
Net
Proceeds
    3,174,000
Shares at
$10.00
Per Share
    Percent
of
Net
Proceeds
 

Offering proceeds

  $ 20,400        $ 24,000        $ 27,600        $ 31,740     

Less: offering expenses

    (1,230       (1,230       (1,230       (1,230  
 

 

 

     

 

 

     

 

 

     

 

 

   

Net offering proceeds

    19,170        100.0     22,770        100.0     26,370        100.0     30,510        100.0

Less:

               

Proceeds contributed to Wellesley Bank

    (9,585     (50.0     (11,385     (50.0     (13,185     (50.0     (15,255     (50.0

Proceeds used for loan to employee stock ownership plan

    (1,746     (9.1     (2,054     (9.0     (2,363     (9.0     (2,717     (8.9

Proceeds contributed to foundation

    (204     (1.1     (240     (1.1     (276     (1.0     (317     (1.0
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Proceeds remaining for Wellesley Bancorp

  $ 7,635        39.8   $ 9,091        39.9   $ 10,546        40.0   $ 12,221        40.1
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Wellesley Bancorp initially intends to invest the proceeds it retains from the offering in short-term, liquid investments, such as U.S. treasury and government agency securities, mortgage-backed securities and cash and cash equivalents. The actual amounts to be invested in different instruments will depend on the interest rate environment and Wellesley Bancorp’s liquidity requirements. In the future, Wellesley Bancorp may liquidate its investments and use those funds:

 

   

to pay dividends to stockholders;

 

   

to repurchase shares of its common stock, subject to regulatory restrictions;

 

   

to finance the possible acquisition of other financial institutions or other businesses that are related to banking, although we currently have no plans, arrangements or understandings regarding potential acquisition opportunities; and

 

   

for general corporate purposes, including contributing additional capital to Wellesley Bank.

Under current Federal Deposit Insurance Corporation regulations, Wellesley Bancorp may not repurchase shares of its common stock during the first year following the offering, except that stock repurchases of no greater than 5% of outstanding capital stock may be made during this one-year period where compelling and valid business reasons are established to the satisfaction of the Federal Deposit Insurance Corporation. In addition, Wellesley Bancorp will be subject to the Federal Reserve Board’s notice provisions for stock repurchases. See “Regulation and Supervision—Holding Company Regulation.”

Wellesley Bank initially intends to invest the proceeds that it receives from the offering, which is shown in the table above as the amount contributed to Wellesley Bank, in short-term liquid investments. Over time, Wellesley Bank may use the proceeds it receives from the offering:

 

   

to fund new loans;

 

   

to invest in securities;

 

   

to finance the possible expansion of its business activities; and

 

   

for general corporate purposes.

We may need regulatory approval to engage in some of the activities listed above. We currently have no specific plans or agreements regarding any expansion activities or acquisitions other than the opening of our third branch in the first quarter of 2012. This new branch is expected to be funded by cash generated by our business. We do not expect to borrow funds for this expansion project. Based on current estimates, we expect the total cost of equipment and leasehold improvements required to open the new Wellesley branch location to be approximately $942,000, none of which had been incurred at June 30, 2011. Funding for this branch is not contingent on this offering.

 

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We currently anticipate that the proceeds of the offering contributed to Wellesley Bank will primarily be used to fund new loans. The amount of time that it will take to deploy the proceeds of the offering into loans will depend primarily on the level of loan demand. During the six months ended June 30, 2011 and year ended December 31, 2010, we originated $41.4 million and $74.1 million of loans, respectively.

Except as described above, neither Wellesley Bancorp nor Wellesley Bank has any specific plans, arrangements or understandings for the investment of the proceeds of this offering and has not allocated a specific portion of the proceeds to any particular use. For a discussion of our business reasons for undertaking the offering, see “The Conversion and Stock Offering—Reasons for the Conversion and Offering.”

 

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Our Dividend Policy

Following the offering, our board of directors will consider adopting a policy of paying cash dividends. We cannot guarantee that we will pay dividends or that, if paid, we will not reduce or eliminate dividends in the future.

The board of directors may declare and pay periodic special cash dividends in addition to, or in lieu of, regular cash dividends. In determining whether to declare or pay any dividends, whether regular or special, the board of directors will take into account our financial condition and results of operations, tax considerations, capital requirements, industry standards, and economic conditions. We will also consider the regulatory restrictions that affect the payment of dividends by Wellesley Bank to us, discussed below.

Wellesley Bancorp is subject to Maryland law, which generally permits a corporation to pay dividends on its common stock unless, after giving effect to the dividend, the corporation would be unable to pay its debts as they become due in the usual course of its business or the total assets of the corporation would be less than its total liabilities.

Dividends from Wellesley Bancorp may depend, in part, upon receipt of dividends from Wellesley Bank because Wellesley Bancorp will have no source of income other than dividends from Wellesley Bank and earnings from investment of net proceeds from the offering retained by Wellesley Bancorp. Massachusetts banking law and Federal Deposit Insurance Corporation regulations limit distributions from Wellesley Bank to Wellesley Bancorp. See “Regulation and Supervision—Massachusetts Banking Laws and Supervision—Dividends” and “—Federal Regulations—Prompt Corrective Regulatory Action.” In addition, Wellesley Bancorp is subject to the Federal Reserve Board’s policy that dividends should be paid only out of current earnings and only if the prospective rate of earnings retention by Wellesley Bancorp appears consistent with its capital needs, asset quality and overall financial condition. See “Regulation and Supervision—Holding Company Regulation.”

Any payment of dividends by Wellesley Bank to us that would be deemed to be drawn out of Wellesley Bank’s bad debt reserves would require Wellesley Bank to pay federal income taxes at the then current income tax rate on the amount deemed distributed. See “Federal and State Taxation—Federal Income Taxation.” Wellesley Bancorp does not contemplate any distribution by Wellesley Bank that would result in this type of tax liability.

 

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Market for the Common Stock

We have not previously issued common stock and there is currently no established market for our common stock. We have applied for approval to list our common stock for trading on the Nasdaq Capital Market under the symbol “WEBK” upon completion of the offering. In order to list our common stock on the Nasdaq Capital Market, we are required to have at least three broker-dealers who will make a market in our common stock. Sandler O’Neill + Partners, L.P. has advised us that it intends to become a market maker in our common stock following the offering, but it is under no obligation to do so. Sandler O’Neill + Partners, L.P. also may assist us, if needed, in obtaining other market makers after the offering. We cannot assure you that other market makers will be obtained or that an active and liquid trading market for the common stock will develop or, if developed, will be maintained.

The development of a public market having the desirable characteristics of depth, liquidity and orderliness depends on the existence of willing buyers and sellers, the presence of which is not within our control or that of any market maker. The number of active buyers and sellers of our common stock at any particular time may be limited, which may have an adverse effect on the price at which our common stock can be sold. There can be no assurance that persons purchasing the common stock will be able to sell their shares at or above the $10.00 price per share in the offering. Purchasers of our common stock should recognize that there may be a limited trading market in the common stock and, therefore, should have the financial ability to withstand a longer-term investment horizon.

 

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Capitalization

The following table presents the historical capitalization of Wellesley Bank on a consolidated basis at June 30, 2011 and the capitalization of Wellesley Bancorp reflecting the offering (referred to as “pro forma” information). The pro forma capitalization gives effect to the assumptions listed under “Pro Forma Data,” based on the sale of the number of shares of common stock indicated in the table. This table does not reflect the issuance of additional shares as a result of the exercise of options granted under the proposed equity incentive plan. A change in the number of shares to be issued in the offering may materially affect pro forma capitalization.

 

          Wellesley Bancorp
Pro Forma
Capitalization Based Upon the Sale of
 

(Dollars in thousands, except per share amounts)

  Wellesley  Bank
Capitalization
as of
June 30, 2011
    2,040,000
Shares at
$10.00
Per Share
    2,400,000
Shares at
$10.00
Per Share
    2,760,000
Shares at
$10.00
Per Share
    3,174,000
Shares at
$10.00
Per Share
 

Deposits (1)

  $ 228,375      $ 228,375      $ 228,375      $ 228,375      $ 228,375   

Borrowings

    13,923        13,923        13,923        13,923        13,923   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total deposits and borrowed funds

  $ 242,298      $ 242,298      $ 242,298      $ 242,298      $ 242,298   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity:

         

Preferred stock:

         

1,000,000 shares, $0.01 par value per share, authorized; none issued or outstanding

  $ —        $ —        $ —        $ —        $ —     

Common stock:

         

12,000,000 shares, $0.01 par value per share, authorized; specified number of shares assumed to be issued and outstanding (2)

    —          22        26        30        34   

Additional paid-in capital

    —          20,576        24,424        28,272        32,698   

Retained earnings (3)

    21,057        21,057        21,057        21,057        21,057   

Accumulated other comprehensive income

    388        388        388        388        388   

Plus:

         

Tax benefit of contribution to charitable foundation (4)

    —          653        768        883        1,016   

Less :

         

Charitable foundation contribution expense (5)

    —          (1,632     (1,920     (2,208     (2,539

Common stock acquired by employee stock ownership plan (6)

    —          (1,746     (2,054     (2,363     (2,717

Common stock to be acquired by equity incentive plan (7)

    —          (873     (1,027     (1,181     (1,358
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total stockholders’ equity

  $ 21,445      $ 38,445      $ 41,662      $ 44,878      $ 48,579   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Stockholders’ equity to assets (1)

    8.10     13.64     14.62     15.57     16.64
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1) Does not reflect withdrawals from deposit accounts for the purchase of common stock in the offering. Withdrawals to purchase common stock will reduce pro forma deposits and assets by the amounts of the withdrawals.
(2) Reflects total issued and outstanding shares of 2,182,800, 2,568,000, 2,953,200 and 3,396,180 at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively, which includes shares sold in the offering and contributed to the charitable foundation.
(3) Retained earnings are restricted by applicable regulatory capital requirements.
(4) Represents the tax benefit of the contribution to the Wellesley Bank Charitable Foundation based on an estimated tax rate of 40.0%. The actual rate experienced by Wellesley Bancorp may vary. The realization of the tax benefit is limited annually to 10.0% of our annual taxable income. However, for federal and state tax purposes, we can carry forward any unused portion of the deduction for five years following the year in which the contribution is made.
(5) Represents the pre-tax expense of the contribution to the Wellesley Bank Charitable Foundation.
(6)

Assumes that 8% of the sum of the shares of common stock sold in the offering and contributed to the charitable foundation will be acquired by the employee stock ownership plan in the offering with funds borrowed from Wellesley Bancorp. Under generally accepted accounting principles, the amount of common stock to be purchased by the employee stock ownership plan represents unearned compensation and is, accordingly, reflected as a reduction of capital and a liability to the employee stock ownership plan. As shares are released to plan participants’ accounts, a compensation expense will be charged, along with the related tax benefit, and a reduction in the charge against capital will occur in the amount of the compensation expense recognized. Since the funds are borrowed from Wellesley Bancorp, the borrowing will be eliminated in consolidation and no

 

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Table of Contents
  liability or interest expense will be reflected in the consolidated financial statements of Wellesley Bancorp. The loan will be repaid principally through Wellesley Bank’s contributions to the employee stock ownership plan and dividends payable on unallocated common stock held by the plan over the anticipated 15-year term of the loan. See “Our Management—Benefit Plans—Employee Stock Ownership Plan.”
(7) Assumes the purchase in the open market at $10.00 per share, for restricted stock awards under the proposed equity incentive plan, of a number of shares equal to 4% of the sum of the shares of common stock sold in the offering and contributed to the charitable foundation. The shares are reflected as a reduction of stockholders’ equity. The equity incentive plan will be submitted to stockholders for approval at a meeting following the offering. See Risk Factors—Risks Related to This Offering—Issuance of shares for benefit programs will dilute your ownership interest, Pro Forma Data and Our Management—Equity Incentive Plans.

 

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Table of Contents

Regulatory Capital Compliance

At June 30, 2011, Wellesley Bank exceeded all regulatory capital requirements. The following table presents Wellesley Bank’s capital position relative to its regulatory capital requirements at June 30, 2011, on a historical and a pro forma basis. The table reflects receipt by Wellesley Bank of 50% of the net proceeds of the offering. For purposes of the table, the amount expected to be borrowed by the employee stock ownership plan is deducted from pro forma regulatory capital. For a discussion of the assumptions underlying the pro forma capital calculations presented below, see “Use of Proceeds,” “Capitalization” and “Pro Forma Data.” For a discussion of the capital standards applicable to Wellesley Bank, see “Regulation and Supervision—Federal Regulations—Capital Requirements.”

 

                  Wellesley Bank
Pro Forma at June 30, 2011
 
                  Minimum of
Offering Range
    Midpoint of
Offering Range
    Maximum of
Offering Range
    15% Above
Maximum of
Offering Range
 
     Historical at
June 30, 2011
    2,040,000 Shares
at $10.00 per Share
    2,400,000 Shares
at $10.00 per Share
    2,760,000 Shares
at $10.00 per Share
    3,174,000 Shares
at $10.00 per Share
 

(Dollars in thousands)

   Amount      Percent
of
Assets (1)
    Amount     Percent
of
Assets
    Amount     Percent
of
Assets
    Amount     Percent
of
Assets
    Amount     Percent
of
Assets
 

Total capital under generally accepted accounting principles (GAAP)

   $ 21,445         8.10   $ 28,411        10.39   $ 29,749        10.81   $ 31,086        11.23   $ 32,625        11.71

Tier 1 capital to average assets:

                     

Capital level (2)

   $ 21,057         7.96   $ 28,023        10.25   $ 29,361        10.68   $ 30,698        11.10   $ 32,237        11.57

Requirement

     7,940         3.00        8,202        3.00        8,251        3.00        8,300        3.00        8,357        3.00   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess

   $ 13,117         4.96   $ 19,821        7.25   $ 21,110        7.68   $ 22,398        8.10   $ 23,880        8.57

Tier 1 capital to risk- weighted assets:

                     

Capital level (2)(3)

   $ 21,057         10.89   $ 28,023        14.36   $ 29,361        15.02   $ 30,698        15.67   $ 32,237        16.43

Requirement

     7,738         4.00        7,807        4.00        7,821        4.00        7,834        4.00        7,849        4.00   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess

   $ 13,319         6.69   $ 20,216        10.36   $ 21,540        11.02   $ 22,864        11.67   $ 24,388        12.43

Total capital to risk- weighted assets:

                     

Capital level (2)(3)

   $ 23,475         12.14   $ 30,441        15.60   $ 31,779        16.25   $ 33,116        16.91   $ 34,655        17.66

Requirement

     15,475         8.00        15,615        8.00        15,641        8.00        15,668        8.00        15,698        8.00   
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Excess

   $ 8,000         4.14   $ 14,826        7.60   $ 16,138        8.25   $ 17,448        8.91   $ 18,957        9.66

Reconciliation of capital infusion to Wellesley Bank:

                     

Net proceeds of offering

        $ 19,170        $ 22,770        $ 26,370        $ 30,510     

Proceeds to Wellesley Bank

          (9,585       (11,385       (13,185       (15,255  

Less stock acquired by ESOP

          (1,746       (2,054       (2,363       (2,717  

Less stock acquired by equity incentive plan

          (873       (1,027       (1,181       (1,358  
       

 

 

     

 

 

     

 

 

     

 

 

   

Pro forma increase in GAAP and regulatory capital

        $ 6,966        $ 8,304        $ 9,641        $ 11,180     
       

 

 

     

 

 

     

 

 

     

 

 

   

 

(1) Based on average assets of $264.7 million and risk-weighted assets of $193.4 million.
(2) A portion of the net unrealized gains on securities available for sale accounts for the difference between capital calculated under generally accepted accounting principles and Tier 1 capital. See note 12 of the notes to consolidated financial statements for further information.
(3) Pro forma amounts and percentages assume net proceeds are invested in assets that carry a 20% risk-weighting.

 

26


Table of Contents

Pro Forma Data

The following tables show information about our net income and stockholders’ equity reflecting the sale of common stock in the offering. The information provided illustrates our pro forma net income and stockholders’ equity based on the sale of common stock at the minimum, midpoint, maximum and 15% above the maximum of the offering range. The actual net proceeds from the sale of the common stock cannot be determined until the offering is completed and may vary from our estimates. Net proceeds indicated in the following tables are based upon the following assumptions:

 

   

All shares of stock will be sold in the subscription and community offerings;

 

   

Our employee stock ownership plan will purchase a number of shares equal to 8% of the sum of the shares sold in the offering and contributed to the charitable foundation with a loan from Wellesley Bancorp that will be repaid in equal installments over 15 years;

 

   

Sandler O’Neill + Partners, L.P. will receive a success fee equal to $270,000;

 

   

Total expenses of the offering, excluding fees paid to Sandler O’Neill + Partners, L.P., will be approximately $960,000; and

 

   

We will make a charitable contribution in an amount equal to 8% of the gross offering proceeds, 87.5% of which will be funded with common stock and 12.5% of which will be funded with cash.

Pro forma net income for the six months ended June 30, 2011 and the year ended December 31, 2010 has been calculated as if the offering were completed at the beginning of each period, and the net proceeds had been invested at 1.76% and 2.01%, respectively, which represents the five-year treasury rate at June 30, 2011 and December 31, 2010, respectively.

A pro forma after-tax return on net proceeds of 1.06% is used for the six months ended June 30, 2011 and 1.21% for the year ended December 31, 2010, respectively, after giving effect to a combined federal and state income tax rate of 40.0% for the period. Historical and pro forma per share amounts have been calculated by dividing historical and pro forma amounts by the number of shares of common stock indicated in the tables.

When reviewing the following tables you should consider the following:

 

   

Since funds on deposit at Wellesley Bank may be withdrawn to purchase shares of common stock, the amount of funds available for investment will be reduced by the amount of withdrawals for stock purchases. The pro forma tables do not reflect withdrawals from deposit accounts.

 

   

Historical per share amounts have been computed as if the shares of common stock expected to be issued in the offering had been outstanding at the beginning of the period covered by the table. However, neither historical nor pro forma stockholders’ equity has been adjusted to reflect the investment of the estimated net proceeds from the sale of the shares in the offering, the additional employee stock ownership plan expense or the proposed equity incentive plan.

 

   

Pro forma stockholders’ equity (“book value”) represents the difference between the stated amounts of our assets and liabilities. Pro forma tangible stockholders’ equity excludes intangible assets. Book value amounts do not represent fair market values or amounts available for distribution to stockholders in the unlikely event of liquidation. The amounts shown do not reflect the federal income tax consequences of the restoration to income of Wellesley Bank’s special bad debt reserves for income tax purposes or give effect to the liquidation account in the event of liquidation, which would be required in the unlikely event of liquidation. See “Federal and State Taxation” and “The Conversion and Stock Offering—Effects of Conversion to Stock Form.

 

   

The amounts shown as pro forma stockholders’ equity per share do not represent possible future price appreciation of our common stock.

 

   

The amounts shown do not include the impact of new expenses we expect to incur as a result of our operating as a public company.

 

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Table of Contents

The following pro forma data, which are based on Wellesley Bank’s capital at June 30, 2011 and December 31, 2010, and net income for the six months ended June 30, 2011 and for the year ended December 31, 2010, may not represent the actual financial effects of the offering or our operating results after the offering. The pro forma data rely exclusively on the assumptions outlined above and in the notes to the pro forma tables. The pro forma data does not represent the fair market value of our common stock, the current fair market value of our assets or liabilities, or the amount of money that would be available for distribution to stockholders if we were to be liquidated after the conversion.

 

     Six Months Ended June 30, 2011  
   Minimum
of
Offering
Range
    Midpoint
of
Offering
Range
    Maximum
of
Offering
Range
    15% Above
Maximum
of
Offering
Range
 

(Dollars in thousands, except per share amounts)

   2,040,000
Shares
at $10.00
per Share
    2,400,000
Shares
at $10.00
per Share
    2,760,000
Shares
at $10.00
per Share
    3,174,000
Shares
at $10.00
per Share
 

Gross proceeds

   $ 20,400      $ 24,000      $ 27,600      $ 31,740   

Less: estimated offering expenses

     (1,230     (1,230     (1,230     (1,230
  

 

 

   

 

 

   

 

 

   

 

 

 

Estimated net conversion proceeds

     19,170        22,770        26,370        30,510   

Less: cash contribution to charitable foundation

     (204     (240     (276     (317

Less: common stock acquired by employee stock ownership plan (1)

     (1,746     (2,054     (2,363     (2,717

Less: common stock to be acquired by equity incentive plan (2)

     (873     (1,027     (1,181     (1,358
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investable proceeds

   $ 16,347      $ 19,449      $ 22,550      $ 26,118   

Pro forma net income:

        

Pro forma net income (3):

        

Historical

   $ 958      $ 958      $ 958      $ 958   

Pro forma income on net investable proceeds

     87        103        120        138   

Less: pro forma employee stock ownership plan adjustments (1)

     (35     (41     (47     (54

Less: pro forma restricted stock award expense (2)

     (52     (62     (71     (82

Less: pro forma stock option expense (4)

     (77     (91     (104     (120
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income

   $ 881      $ 867      $ 856      $ 840   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share (3):

        

Historical

   $ 0.48      $ 0.41      $ 0.35      $ 0.31   

Pro forma income on net investable proceeds

     0.04        0.04        0.04        0.04   

Less: pro forma employee stock ownership plan adjustments (1)

     (0.02     (0.02     (0.02     (0.02

Less: pro forma restricted stock award expense (2)

     (0.02     (0.02     (0.02     (0.02

Less: pro forma stock option expense (4)

     (0.04     (0.04     (0.04     (0.04
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share

   $ 0.44      $ 0.37      $ 0.31      $ 0.27   
  

 

 

   

 

 

   

 

 

   

 

 

 

Offering price as a multiple of annualized pro forma net income per share

     11.4     13.5     16.1     18.5

Number of shares used to calculate pro forma net income per share (5)

     2,013,997        2,369,408        2,724,819        3,133,542   

Pro forma stockholders’ equity:

        

Pro forma stockholders’ equity (book value) (5):

        

Historical

   $ 21,445      $ 21,445      $ 21,445      $ 21,445   

Estimated net proceeds

     19,170        22,770        26,370        30,510   

Plus: common stock issued to charitable foundation

     1,428        1,680        1,932        2,222   

Less: expense net of tax of contribution to charitable foundation

     (979     (1,152     (1,325     (1,524

Less: common stock acquired by employee stock ownership plan (1)

     (1,746     (2,054     (2,363     (2,717

Less: common stock to be acquired by equity incentive plan (2)

     (873     (1,027     (1,181     (1,358
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity

   $ 38,445      $ 41,662      $ 44,878      $ 48,578   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity per share (5):

        

Historical

   $ 9.83      $ 8.35      $ 7.27      $ 6.32   

Estimated net proceeds

     8.78        8.87        8.93        8.98   

Plus: common stock issued to charitable foundation

     0.65        0.65        0.65        0.65   

Less: expense net of tax of contribution to charitable foundation

     (0.45     (0.45     (0.45     (0.45

Less: common stock acquired by employee stock ownership plan (1)

     (0.80     (0.80     (0.80     (0.80

Less: common stock to be acquired by equity incentive plan (2)

     (0.40     (0.40     (0.40     (0.40
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity per share

   $ 17.61      $ 16.22      $ 15.20      $ 14.30   
  

 

 

   

 

 

   

 

 

   

 

 

 

Offering price as a percentage of pro forma stockholders’ equity per share

     56.8     61.7     65.8     69.9

Number of shares used to calculate pro forma stockholders’ equity per share (5)

     2,182,800        2,568,000        2,953,200        3,396,180   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Year Ended December 31, 2010  
     Minimum
of
Offering
Range
    Midpoint
of
Offering
Range
    Maximum
of
Offering
Range
    15% Above
Maximum
of
Offering
Range
 

(Dollars in thousands, except per share amounts)

   2,040,000
Shares
at $10.00
per Share
    2,400,000
Shares
at $10.00
per Share
    2,760,000
Shares
at $10.00
per Share
    3,174,000
Shares
at $10.00
per Share
 

Gross proceeds

   $ 20,400      $ 24,000      $ 27,600      $ 31,740   

Less: estimated offering expenses

     (1,230     (1,230     (1,230     (1,230
  

 

 

   

 

 

   

 

 

   

 

 

 

Estimated net conversion proceeds

     19,170        22,770        26,370        30,510   

Less: cash contribution to charitable foundation

     (204     (240     (276     (317

Less: common stock acquired by employee stock ownership plan (1)

     (1,746     (2,054     (2,363     (2,717

Less: common stock to be acquired by equity incentive plan (2)

     (873     (1,027     (1,181     (1,358
  

 

 

   

 

 

   

 

 

   

 

 

 

Net investable proceeds

   $ 16,347      $ 19,449      $ 22,550      $ 26,118   

Pro forma net income:

        

Pro forma net income (3):

        

Historical

   $ 2,153      $ 2,153      $ 2,153      $ 2,153   

Pro forma income on net investable proceeds

     198        235        273        316   

Less: pro forma employee stock ownership plan adjustments (1)

     (70     (82     (95     (109

Less: pro forma restricted stock award expense (2)

     (105     (123     (142     (163

Less: pro forma stock option expense (4)

     (154     (182     (209     (240
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income

   $ 2,022      $ 2,001      $ 1,980      $ 1,957   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share (3):

        

Historical

   $ 1.06      $ 0.90      $ 0.78      $ 0.68   

Pro forma income on net investable proceeds

     0.10        0.10        0.10        0.10   

Less: pro forma employee stock ownership plan adjustments (1)

     (0.03     (0.03     (0.03     (0.03

Less: pro forma restricted stock award expense (2)

     (0.05     (0.05     (0.05     (0.05

Less: pro forma stock option expense (4)

     (0.08     (0.08     (0.08     (0.08
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma net income per share

   $ 1.00      $ 0.84      $ 0.72      $ 0.62   

Offering price as a multiple of pro forma net income per share

     10.0x        11.9x        13.9x        16.1x   

Number of shares used to calculate pro forma net income per share (5)

     2,019,818        2,376,256        2,732,694        3,142,599   

Pro forma stockholders’ equity:

        

Pro forma stockholders’ equity (book value) (5):

        

Historical

   $ 20,408      $ 20,408      $ 20,408      $ 20,408   

Estimated net proceeds

     19,170        22,770        26,370        30,510   

Plus: common stock issued to charitable foundation

     1,428        1,680        1,932        2,222   

Less: expense net of tax of contribution to charitable foundation

     (979     (1,152     (1,325     (1,524

Less: common stock acquired by employee stock ownership plan (1)

     (1,746     (2,054     (2,363     (2,717

Less: common stock to be acquired by equity incentive plan (2)

     (873     (1,027     (1,181     (1,358
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity

   $ 37,408      $ 40,625      $ 43,841      $ 47,541   
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity per share (5):

        

Historical

   $ 9.35      $ 7.95      $ 6.92      $ 6.01   

Estimated net proceeds

     8.79        8.87        8.93        8.99   

Plus: common stock issued to charitable foundation

     0.65        0.65        0.65        0.65   

Less: expense net of tax of contribution to charitable foundation

     (0.45     (0.45     (0.45     (0.45

Less: common stock acquired by employee stock ownership plan (1)

     (0.80     (0.80     (0.80     (0.80

Less: common stock to be acquired by equity incentive plan (2)

     (0.40     (0.40     (0.40     (0.40
  

 

 

   

 

 

   

 

 

   

 

 

 

Pro forma stockholders’ equity per share

   $ 17.14      $ 15.82      $ 14.85      $ 14.00   
  

 

 

   

 

 

   

 

 

   

 

 

 

Offering price as a percentage of pro forma stockholders’ equity per share

     58.3     63.2     67.3     71.4

Number of shares used to calculate pro forma stockholders’ equity per share (5)

     2,182,800        2,568,000        2,953,200        3,396,180   
  

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

Assumes that the employee stock ownership plan will acquire a number of shares of stock equal to 8% of the sum of the shares sold in the offering and contributed to the charitable foundation (174,624, 205,440, 236,256 and 271,694 shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively). The employee stock ownership plan will borrow the funds to acquire these shares from the net offering proceeds retained by Wellesley Bancorp. The amount of this borrowing has been reflected as a reduction from gross proceeds to determine estimated net investable proceeds. This borrowing will have an interest rate equal to the prime rate as published in the Wall Street Journal, which is currently 3.25%, which will be fixed at the consummation of the offering and be for a term of 15 years. Wellesley Bank intends to make contributions to the employee stock ownership plan in amounts at least equal to the principal and interest requirement of the debt. Interest income that Wellesley Bancorp will earn on the loan will offset a portion of the compensation expense recorded by Wellesley Bank as it contributes to the ESOP. As the debt is paid

 

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  down, shares will be released for allocation to participants’ accounts and stockholders’ equity will be increased. The adjustment to pro forma net income for the employee stock ownership plan reflects the after-tax compensation expense associated with the plan. The combined federal and state income tax rate is assumed to be 40.0%. Applicable accounting principles require that compensation expense for the employee stock ownership plan be based upon the market value of shares committed to be released and that unallocated shares be excluded from earnings per share computations. An equal number of shares (1/15 of the total, based on a 15-year loan) will be released each year over the term of the loan. The valuation of shares committed to be released would be based upon the average market value of the shares during the year, which, for purposes of this calculation, was assumed to be equal to the $10.00 per share purchase price. If the average market value per share is greater than $10.00 per share, total employee stock ownership plan expense would be greater.
(2) Assumes that Wellesley Bancorp will purchase in the open market a number of shares of stock equal to 4% of the sum of the shares sold in the offering and contributed to the charitable foundation (87,312, 102,720, 118,128 and 135,847 shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively), that will be reissued as restricted stock awards under an equity incentive plan to be adopted following the offering. Purchases will be funded with cash on hand at Wellesley Bancorp or with dividends paid to Wellesley Bancorp by Wellesley Bank. The cost of these shares has been reflected as a reduction from gross proceeds to determine estimated net investable proceeds. In calculating the pro forma effect of the restricted stock awards, it is assumed that the required stockholder approval has been received, that the shares used to fund the awards were acquired at the beginning of the respective period and that the shares were acquired at the $10.00 per share purchase price. The issuance of authorized but unissued shares of the common stock instead of shares repurchased in the open market would dilute the ownership interests of existing stockholders by approximately 3.8%. The adjustment to pro forma net income for the restricted stock awards reflects the after-tax compensation expense associated with the awards. It is assumed that the fair market value of a share of Wellesley Bancorp common stock was $10.00 at the time the awards were made, that shares of restricted stock issued under the equity incentive plan vest 20% per year, that compensation expense is recognized on a straight-line basis over each vesting period so that 20% of the value of the shares awarded was an amortized expense during each year, and that the combined federal and state income tax rate was 40.0%. If the fair market value per share is greater than $10.00 per share on the date shares are awarded under the equity incentive plan, total equity incentive plan expense would be greater.
(3) Does not give effect to the nonrecurring expense that is expected to be recognized in fiscal 2011 as a result of the contribution of common stock and cash to the charitable foundation.

The following table shows the estimated after-tax expense associated with the contribution to the foundation, as well as pro forma net income (loss) and pro forma net income (loss) per share assuming the contribution to the foundation was expensed during the periods presented.

 

(Dollars in thousands, except per share amounts)

   Minimum  of
Offering
Range
    Midpoint of
Offering
Range
    Maximum of
Offering
Range
    15% Above
Maximum of
Offering Range
 

Before-tax expense of contribution to foundation:

        

Six months ended June 30, 2011

   $ 1,632      $ 1,920      $ 2,208      $ 2,539   

Year ended December 31, 2010

     1,632        1,920        2,208        2,539   

After-tax expense of contributions to foundation:

        

Six months ended June 30, 2011

     979        1,152        1,325        1,523   

Year ended December 31, 2010

     979        1,152        1,325        1,523   

Pro forma net income (loss):

        

Six months ended June 30, 2011

     (98     (285     (469     (683

Year ended December 31, 2010

     1,043        849        655        434   

Pro forma net income (loss) per share:

        

Six months ended June 30, 2011

     (0.05     (0.12     (0.17     (0.22

Year ended December 31, 2010

     0.52        0.36        0.24        0.14   

Pro forma tax benefit:

        

Six months ended June 30, 2011

     653        768        883        1,016   

Year ended December 31, 2010

     653        768        883        1,016   

The pro forma data assume that we will realize 100.0% of the income tax benefit as a result of the contribution to the foundation based on a 40.0% income tax rate. The realization of the tax benefit is limited annually to 10.0% of our annual taxable income. However, for federal and state tax purposes, we can carry forward any unused portion of the deduction for five years following the year in which the contribution is made.

(4)

The adjustment to pro forma net income for stock options reflects the after-tax compensation expense associated with the stock options that may be granted under the equity incentive plan expected to be adopted following the offering. The table assumes that a number of shares equal to 10% of the sum of the shares sold in the offering and contributed to the charitable foundation (218,280, 256,800, 295,320 and 339,618 shares at the minimum, midpoint, maximum and adjusted maximum of the offering range, respectively) will be reserved for future issuance upon the exercise of stock options that may be granted under the plan. Using the Black-Scholes option-pricing formula, the options are assumed to have a value of $3.93 for each option, based on the following assumptions: exercise price, $10.00; trading price on date of grant, $10.00; dividend yield, 0.00%; expected life, 10 years; expected volatility, 21.89%; and risk-free interest rate, 3.18%. Because there currently is no market for Wellesley Bancorp common stock, the assumed expected volatility is based on the SNL Index for all publicly-traded thrifts. It is assumed that stock options granted under the equity incentive plan vest 20% per year, that compensation expense is recognized on a straight-line basis over each vesting period so that 20% of the value of the options awarded was an amortized expense during each year, that 25% of the options awarded are

 

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  nonqualified options and that the combined federal and state income tax rate was 40.0%. If the fair market value per share is different than $10.00 per share on the date options are awarded under the equity incentive plan, or if the assumptions used in the option-pricing formula are different from those used in preparing this pro forma data, the value of the stock options and the related expense would be different. Applicable accounting standards do not prescribe a specific valuation technique to be used to estimate the fair value of employee stock options. Wellesley Bancorp may use a valuation technique other than the Black-Scholes option-pricing formula and that technique may produce a different value. The issuance of authorized but unissued shares of common stock to satisfy option exercises instead of shares repurchased in the open market would dilute the ownership interests of existing stockholders by approximately 9.1%.
(5) The number of shares used to calculate pro forma net income per share is equal to the total number of shares to be outstanding upon completion of the offering, less the number of shares purchased by the employee stock ownership plan not committed to be released within one year following the offering. The number of shares used to calculate pro forma stockholders’ equity per share equals the total number of shares to be outstanding upon completion of the offering.

 

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Comparison of Independent Valuation and Pro Forma Financial Information

With and Without the Foundation

As set forth in the following table, if we do not fund the Wellesley Bank Charitable Foundation as part of the offering, Feldman Financial estimates that our pro forma valuation would be greater, which would have increased the amount of common stock offered for sale in the offering. If the contribution to the charitable foundation was not made, there is no assurance that the updated appraisal that Feldman Financial will prepare at the closing of the offering would conclude that our pro forma market value would be the same as the estimate set forth in the table below. The updated appraisal will be based on the facts and circumstances existing at that time, including, among other things, market and economic conditions.

The information presented in the following table is for comparative purposes only. It assumes that the offering was completed at June 30, 2011, based on the assumptions set forth under “Pro Forma Data.”

 

     At and for the Six Months Ended June 30, 2011  
     At the Minimum
of Estimated
Valuation Range
    At the Midpoint
of Estimated
Valuation Range
    At the Maximum
of Estimated
Valuation Range
    At the Maximum,
as Adjusted,
of Estimated
Valuation Range
 

(Dollars in thousands, except per

share amount)

   With
Foundation
    No
Foundation
    With
Foundation
    No
Foundation
    With
Foundation
    No
Foundation
    With
Foundation
    No
Foundation
 

Estimated offering amount (1)

   $ 20,400      $ 22,950      $ 24,000      $ 27,000      $ 27,600      $ 31,050      $ 31,740      $ 35,708   

Pro forma market capitalization

     21,828        22,950        25,680        27,000        29,532        31,050        33,962        35,708   

Estimated pro forma valuation

     21,828        22,950        25,680        27,000        29,532        31,050        33,962        35,708   

Pro forma total assets

     281,796        283,762        285,013        287,326        288,229        290,890        291,929        294,989   

Pro forma total liabilities

     243,351        243,351        243,351        243,351        243,351        243,351        243,351        243,351   

Pro forma stockholders’ equity

     38,445        40,411        41,662        43,975        44,878        47,539        48,578        51,638   

Pro forma net income (2)

     881        886        867        874        856        861        840        849   

Pro forma stockholders’ equity per share

     17.61        17.61        16.22        16.29        15.20        15.31        14.30        14.46   

Pro forma net income per share

     0.44        0.42        0.37        0.35        0.31        0.30        0.27        0.26   

Pro Forma Pricing Ratios:

                

Offering prices as a percentage of pro forma stockholders’ equity

     56.79     56.79     61.65     61.39     65.79     65.32     69.93     69.16

Offering price to annualized net income per share

     11.36        11.90        13.51        14.29        16.13        16.67        18.52        19.23   

Offering price to assets

     7.75        8.09        9.01        9.40        10.25        10.67        11.63        12.10   

Pro Forma Financial Ratios:

                

Return on assets (3)

     0.63     0.62     0.61     0.61     0.59     0.59     0.58     0.58

Return on stockholders’ equity (3)

     4.58        4.38        4.16        3.97        3.81        3.63        3.46        3.29   

Stockholders’ equity to total assets

     13.64        14.24        14.62        15.30        15.57        16.34        16.64        17.51   

 

(1) Based on independent valuation prepared by Feldman Financial as of August 23, 2011.
(2) Does not give effect to the nonrecurring expense that is expected to be recognized in fiscal 2011 as a result of the contribution of common stock and cash to the charitable foundation.
(3) Performances ratios have been annualized.

 

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Our Business

General

Founded in 1911, Wellesley Bank is a Massachusetts chartered cooperative bank headquartered in Wellesley, Massachusetts. We operate as a community-oriented financial institution offering traditional financial services to consumers and businesses in our primary market area. We attract deposits from the general public and use those funds to originate primarily residential mortgage loans, commercial real estate loans and construction loans, and, to a lesser extent, commercial business loans, home equity lines of credit and other consumer loans. We conduct our lending and deposit activities primarily with individuals and small businesses in our primary market area.

Wellesley Bancorp, a Maryland corporation, was incorporated in September 2011 to become the holding company for Wellesley Bank upon completion of the conversion. Before the completion of the conversion, Wellesley Bancorp will not engage in any significant activities other than organizational activities. Following completion of the conversion, Wellesley Bancorp’s business activity will be the ownership of the outstanding capital stock of Wellesley Bank and management of the investment of offering proceeds retained from the conversion. Initially, Wellesley Bancorp will not own or lease any property but instead use the premises, equipment and other property of Wellesley Bank with the payment of appropriate rental fees, as required by applicable law and regulations, under the terms of an expense allocation agreement that Wellesley Bancorp and Wellesley Bank will enter into upon completion of the conversion. In addition, Wellesley Bancorp and Wellesley Bank will also enter into a tax allocation agreement upon completion of the conversion as a result of their status as members of an affiliated group under the Internal Revenue Code. In the future, Wellesley Bancorp may acquire other financial institutions or organize other operating subsidiaries; however, there are no current plans, arrangements, agreements or understandings, written or oral, to do so.

Our website address is www.wellesleybank.com. Information on our website should not be considered a part of this prospectus.

Market Area

We conduct our operations from our executive offices and two full-service branch offices located in Wellesley, Massachusetts, a community within the greater Boston metropolitan area. Our primary lending market includes the communities of Wellesley, Dover and Needham in Norfolk County and the communities of Natick, Newton and Weston in Middlesex County. Due to its proximity to Boston, our primary market area benefits from the presence of numerous institutions of higher learning, medical care and research centers and the corporate headquarters of several investment and financial services companies. The greater Boston metropolitan area also has many life science and high technology companies employing personnel with specialized skills. These factors affect the demand for residential homes, residential construction, office buildings, shopping centers, and other commercial properties in our market area. Communities within our market area include many older residential commuter towns which function partially as business and service centers.

Our market area is located largely in the Boston-Cambridge-Quincy, Massachusetts/New Hampshire Metropolitan Statistical Area. Based on the 2010 United States census, the Boston metropolitan area is the 10th largest metropolitan area in the United States. Located adjacent to major transportation corridors, the Boston metropolitan area provides a highly diversified economic base, with major employment sectors ranging from services, manufacturing and wholesale/retail trade, to finance, technology and medical care. Based on U.S. Census Bureau data, 2009 median household income was $80,000 and $77,000 for Norfolk County and Middlesex County, respectively, compared to median household income for Massachusetts of $64,000 and $51,000 for the United States for 2009. In addition, 2009 per capital income was $42,000 and $39,000 for Norfolk County and Middlesex County, respectively, compared to per capita income for Massachusetts of $33,000 and $27,000 for the United States for 2009. The town of Wellesley had 2009 median household income and per capita income of $134,000 and $64,000, respectively.

Competition

We face significant competition for deposits and loans. Our most direct competition for deposits has historically come from the financial institutions operating in our primary market area and from other financial service companies such as securities brokerage firms, credit unions and insurance companies. We also face competition for investors’ funds from money market funds and mutual funds. At June 30, 2010, which is the most recent date for which data is available from the Federal Deposit Insurance Corporation, we held 1.19% of the deposits in Norfolk County, which was the 19th largest market share out of 45 financial institutions with offices in Norfolk County. At June 30, 2010, we also held 12.71% of the deposits in the town of Wellesley, which was the third largest market share out of 12 financial institutions with offices in Wellesley. Some of the banks owned by large national and regional holding companies and other community-based banks that also operate in our primary market area are larger than we are and, therefore, may have greater resources or offer a broader range of products and services.

 

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Our competition for loans comes from financial institutions, including credit unions, in our primary market area and from other financial service providers, such as mortgage companies and mortgage brokers. Competition for loans also comes from nondepository financial service companies entering the mortgage market, such as insurance companies, securities companies and specialty finance companies.

We expect competition to increase in the future as a result of legislative, regulatory and technological changes and the continuing trend of consolidation in the financial services industry. Technological advances, for example, have lowered barriers to entry, allowed banks to expand their geographic reach by providing services over the internet, and made it possible for nondepository institutions to offer products and services that traditionally have been provided by banks. Competition for deposits and the origination of loans could limit our growth in the future.

Lending Activities

Residential Mortgage Loans. The largest segment of our loan portfolio is mortgage loans to enable borrowers to purchase or refinance existing homes, most of which serve as the primary residence of the owner. At June 30, 2011, residential mortgage loans were $68.3 million, or 32.7%, of our total loan portfolio, consisting of $15.1 million and $53.2 million of fixed-rate and adjustable rate loans, respectively. We offer fixed-rate residential mortgage loans with terms up to 30 years and adjustable-rate residential mortgage loans with terms up to 30 years. Generally, our fixed-rate loans conform to Fannie Mae and Freddie Mac underwriting guidelines and are originated with the intention to sell. Our adjustable-rate mortgage loans generally adjust annually or every three years after an initial fixed period that ranges from three to seven years. Interest rates and payments on our adjustable-rate loans generally are adjusted to a rate equal to a specified percentage above the three year U.S. Treasury index. Depending on the loan type, the maximum amount by which the interest rate may be increased or decreased is generally 2% per adjustment period and the lifetime interest rate caps range from 5% to 6% over the initial interest rate of the loan. Our adjustable rate loans generally have prepayment penalties.

Borrower demand for adjustable-rate compared to fixed-rate loans is a function of the level of interest rates, the expectations of changes in the level of interest rates, and the difference between the interest rates and loan fees offered for fixed-rate mortgage loans as compared to the interest rates and loan fees for adjustable-rate loans. The relative amount of fixed-rate and adjustable-rate mortgage loans that can be originated at any time is largely determined by the demand for each in a competitive environment. The loan fees, interest rates and other provisions of mortgage loans are determined by us on the basis of our own pricing criteria and competitive market conditions.

While residential mortgage loans are normally originated with up to 30-year terms, such loans typically remain outstanding for substantially shorter periods because borrowers often prepay their loans in full either upon sale of the property pledged as security or upon refinancing the original loan. Therefore, average loan maturity is a function of, among other factors, the level of purchase and sale activity in the real estate market, prevailing interest rates and the interest rates payable on outstanding loans. Additionally, our current practice is generally to (1) sell to the secondary market newly originated 15-year or longer term conforming fixed-rate residential mortgage loans, and (2) to hold in our portfolio nonconforming loans, shorter-term fixed-rate loans and adjustable-rate loans. Generally, conforming fixed-rate loans are sold to third parties with servicing released. Wellesley Bank’s portfolio lending generally consists of conforming and non-conforming adjustable-rate loans for owner-occupied and investor properties with loan-to-value ratios of up to 80%. Mortgage amortizations range from 15 to 30 years. We do not portfolio “interest only” mortgage loans on one-to-four family residential properties nor do we offer loans that provide for negative amortization of principal such as “option ARM” loans where the borrower can pay less than the interest owed on their loan. Additionally, we generally do not offer “subprime loans” (loans that are made with low down payments to borrowers with weakened credit histories typically characterized by payment delinquencies, previous charge-offs, judgments, bankruptcies or borrower with questionable repayment capacity) or “Alt-A” loans (loans to borrowers having less than full documentation).

We will make loans with loan-to-value ratios up to 90% (95% for first time home buyers only); however, we generally require private mortgage insurance for loans with a loan-to-value ratio over 90%. We generally require all properties securing mortgage loans in excess of $250,000 to be appraised by a licensed real estate appraiser. We generally require title insurance on all first mortgage loans. Exceptions to these lending policies are based on an evaluation of credit risk related to the borrower and the size of the loan. Borrowers must obtain hazard insurance, and flood insurance is required for loans on properties located in a flood zone.

In an effort to provide financing for first-time buyers, we offer adjustable- and fixed-rate loan programs. We offer mortgage loans through this program to qualified individuals and originate the loans using modified underwriting guidelines, reduced interest rates and loan conditions and reduced closing costs.

 

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Commercial Real Estate Loans. We also offer fixed- and adjustable-rate mortgage loans secured by commercial real estate, including loans secured by multi-family real estate. At June 30, 2011, commercial real estate loans were $65.7 million, or 31.4%, of our total loan portfolio, inclusive of $3.7 million in multi-family real estate loans. The commercial real estate loan portfolio consisted of $10.8 million fixed-rate loans and $54.9 million adjustable rate loans at June 30, 2011. We currently target new individual commercial real estate loan and multi-family originations to small- and mid-size owner occupants and investors in our market area between $1.0 million and $4.0 million, which is our current internal limit on loans to one borrower. Due to loan amortizations and lower than targeted size originations, the average size for loans in this portfolio was $750,000 at June 30, 2011. Our commercial real estate and multi-family loans are generally secured by properties used for business purposes such as office buildings, warehouses, retail facilities and apartment buildings. In addition to originating these loans, we also participate in commercial real estate loans with other financial institutions located primarily in Massachusetts.

We originate fixed- and adjustable-rate commercial real estate and multi-family loans for terms up to 25 years. Interest rates and payments on our adjustable-rate loans adjust every three, five or seven years and generally are adjusted to a rate equal to a specified percentage above the corresponding Federal Home Loan Bank Classic Advance borrowing rate. Most of our adjustable-rate commercial real estate and multi-family loans adjust every five years and amortize over a 25 year term. Since 2010, all commercial real estate and multi-family loan originations are generally subject to an interest rate floor. Loan amounts do not exceed 80% of the property’s appraised value at the time the loan is originated.

At June 30, 2011, our largest commercial real estate loan was for $3.9 million and was secured by a commercial research and development building located in Massachusetts outside of our primary market area. At June 30, 2011, our largest multi-family real estate loan was for $2.9 million and was secured by several income producing properties in Massachusetts outside of our primary market. Both of these loans were performing according to their original repayment terms at June 30, 2011.

At June 30, 2011, loan participations purchased totaled $325,000. The properties securing these loans are located entirely in Massachusetts. Our underwriting practices with respect to loan participations generally do not differ from loans that we originate.

Construction Loans. At June 30, 2011, construction loans were $36.7 million, or 17.6%, of our total loan portfolio. We primarily originate construction loans to contractors and builders, and to a lesser extent individuals, to finance the construction of residential dwellings. We also make construction loans for commercial development projects, including small industrial buildings and retail and office buildings. Our construction loans generally are fixed-rate interest-only loans that provide for the payment of interest only during the construction phase, which usually ranges from 12 to 24 months. The interest rates on our construction loans generally give consideration to the prime rate as published in the Wall Street Journal and market conditions. At the end of the construction phase, the loan may be paid in full or converted to a permanent mortgage loan. Construction loans generally can be made with a maximum loan to value ratio of 80% of the appraised market value estimated upon completion of the project. As appropriate to the underwriting and appraisal process, a “discounted cash flow analysis” is utilized. Before making a commitment to fund a construction loan, we generally require an appraisal of the property by an independent licensed appraiser. We also will require an inspection of the property before disbursement of funds during the term of the construction loan. Our construction loans do not provide for interest payments to be funded by interest reserves.

We lend to experienced local builders and our construction loans are primarily secured by properties located with a 15 mile radius of Wellesley, Massachusetts. Our loan policy dictates a minimum equity contribution by the borrower of 20% and an end loan-to-value ratio not greater than 80%. All borrowers are underwritten and evaluated for credit worthiness based on past experience, debt service ability, net worth analysis including available liquidity, and other credit factors. We require personal guarantees on all construction loans. Advances are only made following an inspection of the property confirming completion of the required progress on the project and an update to the title completed by a bank approved attorney.

Most of our loans for the construction of residential properties are for residences being built that have not been sold prior to commencement of construction (speculative loans). At June 30, 2011, our construction loan portfolio consisted of $23.8 million, or 11.4%, of our total loan portfolio in loans that were secured by residential real estate speculative loan projects, $4.9 million, or 2.4%, of our loan portfolio in loans that were secured by owner-occupied residential real estate, and $8.0 million, or 3.8%, of our loan portfolio in loans that were secured by commercial real estate speculative loan projects.

At June 30, 2011, our largest outstanding construction loan relationship was for a speculative project aggregating $3.4 million, substantially all of which was outstanding. This project is secured by two high-end residential homes located in Massachusetts outside of our primary market area. This relationship was performing according to its original repayment terms at June 30, 2011.

Commercial Business Loans. We make commercial business loans primarily in our market area to a variety of professionals, sole proprietorships and small businesses. At June 30, 2011, commercial business loans were $15.2 million, or 7.3% of our total loan portfolio. Commercial lending products include term loans, revolving lines of credit and equipment loans. Commercial

 

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business loans and lines of credit are made with either variable or fixed rates of interest. Variable rates are based on the prime rate as published in The Wall Street Journal, plus a margin. Fixed-rate business loans are generally indexed to a corresponding U.S. Treasury rate, plus a margin. Commercial business loans typically have shorter maturity terms and higher interest spreads than real estate loans, but generally involve more credit risk because of the type and nature of the collateral. We are focusing our efforts on small- to medium-sized, privately-held companies with local or regional businesses that operate in our market area. In addition, commercial business loans are generally made only to existing customers having a business or individual deposit account and new borrowers are expected to establish appropriate deposit relationships with Wellesley Bank if not already a depositor.

When making commercial loans, we consider the financial statements of the borrower, our lending history with the borrower, the debt service capabilities of the borrower, the projected cash flows of the business and the value of the collateral, primarily accounts receivable, inventory and equipment, and are supported by personal guarantees. Depending on the collateral used to secure the loans, commercial business loans are made in amounts of up to 80% of the value of the collateral securing the loan. At June 30, 2011, our largest commercial business loan was a $1.7 million loan and our largest commercial line of credit was $1.2 million, none of which was outstanding at June 30, 2011. All of these loans are secured by assets of the respective borrowers and were performing according to their original terms at June 30, 2011.

Home Equity Lines of Credit. We offer home equity lines of credit, which are secured by owner-occupied residences. At June 30, 2011, home equity lines of credit were $22.6 million, or 10.8% of our total loan portfolio. Home equity lines of credit have adjustable rates of interest with ten-year draws amortized over 15 years that are indexed to the Prime Rate as published by The Wall Street Journal and generally are subject to an interest rate floor. Our home equity lines of credit generally have a monthly variable interest rate. We offer home equity lines of credit with cumulative loan-to-value ratios generally up to 85%, when taking into account both the balance of the home equity loans and first mortgage loan. We typically do not hold a first mortgage position on the homes that secure home equity lines of credit.

The procedures for underwriting home equity lines of credit include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral to the proposed loan amount. The procedures for underwriting residential mortgage loans apply equally to home equity loans.

Other Consumer Loans. We occasionally make fixed-rate second mortgage loans, automobile loans, loans secured by passbook or certificate accounts and overdraft loans. At June 30, 2011, other consumer loans were $429,000, or 0.2% of total loans.

The procedures for underwriting consumer loans include an assessment of the applicant’s payment history on other debts and ability to meet existing obligations and payments on the proposed loan. Although the applicant’s creditworthiness is a primary consideration, the underwriting process also includes a comparison of the value of the collateral, if any, to the proposed loan amount.

Loan Underwriting Risks.

Adjustable-Rate Loans. Due to historically low interest rate levels, borrowers generally have preferred fixed-rate loans in recent years. While we anticipate that our adjustable-rate loans will better offset the adverse effects on our net interest income of an increase in interest rates as compared to fixed-rate mortgages, the increased mortgage payments required of adjustable-rate loans in a rising interest rate environment could cause an increase in delinquencies and defaults. The marketability of the underlying property also may be adversely affected in a high interest rate environment. In addition, although adjustable-rate mortgage loans help make our asset base more responsive to changes in interest rates, the extent of this interest sensitivity is limited by the annual and lifetime interest rate adjustment limits.

Commercial Real Estate Loans. Loans secured by commercial real estate, including multi-family real estate, generally have larger balances and involve a greater degree of risk than residential mortgage loans. Of primary concern in commercial real estate lending is the borrower’s creditworthiness and the feasibility and cash flow potential of the project. Payments on loans secured by income properties often depend on successful operation and management of the properties. As a result, repayment of such loans may be subject to a greater extent than residential real estate loans to adverse conditions in the real estate market or the economy. To monitor cash flows on income properties, we require borrowers and loan guarantors, where applicable, to provide annual financial statements on commercial real estate loans. In reaching a decision on whether to make a commercial real estate loan, we consider the net operating income of the property, the borrower’s expertise, credit history, profitability and the value of the underlying property. We require an environmental survey for commercial real estate loans.

 

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Construction Loans. Construction financing is considered to involve a higher degree of risk of loss than long-term financing on improved, occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the property’s value at completion of construction or development and the estimated cost (including interest) of construction. During the construction phase, a number of factors could result in delays and cost overruns. If the estimate of construction costs proves to be inaccurate, we may be required to advance funds beyond the amount originally committed to permit completion of the development. If the estimate of value proves to be inaccurate, we may be confronted, at or before the maturity of the loan, with a project having a value which is insufficient to assure full repayment. As a result of the foregoing, construction lending often involves the disbursement of substantial funds with repayment dependent, in part, on the success of the ultimate project rather than the ability of the borrower or guarantor to repay principal and interest. If we are forced to foreclose on a project before or at completion due to a default, there can be no assurance that we will be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs.

Commercial Business Loans. Unlike residential mortgage loans, which generally are made on the basis of the borrower’s ability to make repayment from his or her employment or other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself. Further, any collateral securing such loans may depreciate over time, may be difficult to appraise and may fluctuate in value.

Consumer Loans. Consumer loans may entail greater risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In addition, consumer loan collections depend on the borrower’s continuing financial stability, and therefore are more likely to be adversely affected by job loss, divorce, illness or personal bankruptcy. Furthermore, the application of various federal and state laws, including federal and state bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

Loan Originations, Purchases and Sales. Loan originations come from a number of sources. The primary source of loan originations are our in-house loan originators, and to a lesser extent, local mortgage brokers, advertising and referrals from customers. We occasionally purchase commercial real estate loans or participation interests in commercial real estate loans.

Additionally, our current practice is generally (1) to sell to the secondary market newly originated 15-year or longer term conforming fixed-rate residential mortgage loans, and (2) to hold in our portfolio nonconforming loans, shorter-term fixed-rate loans and adjustable-rate loans. Our decision to sell loans is based on prevailing market interest rate conditions and interest rate risk management. Generally, loans are sold to third parties with servicing released. In addition, we sell participation interests in commercial real estate loans to local financial institutions, primarily the portion of loans that exceed our borrowing limits or are in an amount that is considered prudent in concert with recognition of credit risk.

For the six months ended June 30, 2011 and year ended December 31, 2010, we originated $41.4 million and $74.1 million of total loans, and sold $2.1 million and $6.3 million of loans all of which were residential mortgage loans. At June 30, 2011, we had no loans sold with recourse.

Loan Approval Procedures and Authority. Our lending activities follow written, nondiscriminatory, underwriting standards and loan origination procedures established by our board of directors and management. Our board of directors has granted loan approval authority to certain loan officers up to $500,000. All loans in excess of $500,000 also require the President and Chief Executive Officer’s approval. Loans in excess of $1.5 million must be authorized by a member of the Security Committee of the Board of Directors.

Loans-to-One Borrower Limit and Loan Category Concentration. The maximum amount that we may lend to one borrower and the borrower’s related entities is generally limited, by statute, to 20% of our capital, which is defined under Massachusetts law as the sum of our capital stock, surplus account and undivided profits. At June 30, 2011, our regulatory limit on loans-to-one borrower was $4.2 million. At that date, our largest lending relationship consisted of commercial construction loans totaling $3.9 million and was secured by a commercial research and development building. This loan was performing in accordance with its original repayment terms at June 30, 2011. As a result of the offering, our regulatory loans-to-one borrower limit will increase, and we expect to increase our internal loans-to-one borrower limit.

Loan Commitments. We issue commitments for fixed- and adjustable-rate mortgage loans conditioned upon the occurrence of certain events. Commitments to originate mortgage loans are legally binding agreements to lend to our customers. Generally, our loan commitments expire after 60 days.

 

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Investment Activities

We have legal authority to invest in various types of liquid assets, including U.S. Treasury obligations, securities of various government-sponsored enterprises and municipal governments, deposits at the Federal Home Loan Bank of Boston, certificates of deposit of federally insured institutions, investment grade corporate bonds and investment grade marketable equity securities. We also are required to maintain an investment in Federal Home Loan Bank of Boston stock. While we have the authority under applicable law to invest in derivative securities, we had no investments in derivative securities through June 30, 2011.

At June 30, 2011, our investment portfolio consisted primarily of residential mortgage-backed securities issued by U.S. government agencies and government-sponsored enterprises and state and municipal bonds.

Our investment objectives are to provide and maintain liquidity, to establish an acceptable level of interest rate and credit risk, to provide an alternate source of low-risk investments when demand for loans is weak and to generate a favorable return. Our board of directors has the overall responsibility for the investment portfolio, including approval of our investment policy. Management, working with Wellesley Investment Partners, LLC, a wholly-owned subsidiary of Wellesley Bank and a registered investment advisor, is responsible for the day-to-day management of the investment portfolio. The board of directors reviews the status of the portfolio on a monthly basis. The Asset/Liability Committee, which meets on a quarterly basis, reviews an in-depth analysis of the portfolio including performance risk, credit risk and interest rate risk.

Deposit Activities and Other Sources of Funds

General. Deposits, borrowings and loan repayments are the major sources of our funds for lending and other investment purposes. Scheduled loan repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are significantly influenced by general interest rates and money market conditions.

Deposit Accounts. Deposits are attracted, by advertising and through our website, from within our market area through the offering of a broad selection of deposit instruments, including noninterest-bearing demand deposits (such as checking accounts), interest-bearing demand accounts (such as NOW and money market accounts), savings accounts and certificates of deposit. We do not utilize brokered deposits. In addition to accounts for individuals, we also offer several commercial checking accounts designed for the businesses operating in our market area and strongly encourage commercial borrowers to utilize our commercial business deposit products.

Deposit account terms vary according to the minimum balance required, the time periods the funds must remain on deposit and the interest rate, among other factors. In determining the terms of our deposit accounts, we consider the rates offered by our competition, our liquidity needs, profitability to us, and customer preferences and concerns. We generally review our deposit mix and pricing on a weekly basis. Our deposit pricing strategy has generally been to offer competitive rates and to offer periodically special rates in order to attract deposits of a specific type or term.

Business Banking and Cash Management Services. We also offer a variety of deposit accounts designed for the businesses operating in our market area. Our business banking deposit products include a commercial checking account and checking accounts specifically designed for small businesses. We also offer remote capture products for business customers to meet their online banking needs. Additionally, we offer sweep accounts and money market accounts for businesses. We are seeking to increase our commercial deposits through the offering of these types of cash management products.

Borrowings. We may utilize advances from the Federal Home Loan Bank of Boston to supplement our supply of investable funds. The Federal Home Loan Bank functions as a central reserve bank providing credit for its member financial institutions. As a member, we are required to own capital stock in the Federal Home Loan Bank and are authorized to apply for advances on the security of such stock and certain of our whole first mortgage loans and other assets (principally securities which are obligations of, or guaranteed by, the United States), provided certain standards related to creditworthiness have been met. Advances are made under several different programs, each having its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of an institution’s net worth or on the Federal Home Loan Bank’s assessment of the institution’s creditworthiness. At June 30, 2011, we had the ability to borrow a total of $27.7 million from the Federal Home Loan Bank of Boston of which $7.5 million was outstanding. At June 30, 2011, we also had an available line of credit of $1.3 million with the Federal Home Loan Bank of Boston at an interest rate that adjusts daily. We had no overnight advances with the Federal Home Loan Bank on this date. All of our borrowings from the Federal Home Loan Bank are secured by a blanket lien on residential real estate.

The Co-operative Central Bank borrowings for liquidity purposes are available to all cooperative member banks. Loan advances will generally be made on an unsecured basis provided that the aggregate loan balance is less than 5% of total deposits of

 

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the member bank; the member bank’s primary capital ratio is in excess of 5%; the member bank meets the required CAMELS rating; and the quarterly and year-to-date net income before extraordinary items is positive. At June 30, 2011, we had $11.4 million of borrowing capacity with the Co-operative Central Bank, none of which was outstanding.

Securities sold under agreements to repurchase are customer deposits that are invested overnight in mortgage-related securities. The customers, predominantly commercial customers, set a predetermined balance and deposits in excess of that amount are transferred into the repurchase account from each customer’s checking account. The next banking day, the funds are recredited to their individual checking account along with interest earned at market rates. These types of accounts are often referred to as sweep accounts. See “Management’s Discussions and Analysis of Financial Condition and Results of Operations—Comparison of Financial Condition at June 30, 2011 and December 31, 2010 and 2009—Borrowings.”

Financial Services

Our wholly-owned subsidiary, Wellesley Investment Partners, LLC, is a registered investment advisor and offers customers a range of nondeposit products, including mutual funds, stocks, bonds, and exchange traded funds through a third-party registered broker-dealer. The third-party registered broker-dealer also acts as custodian for the customers’ funds. We receive a fee for our investment services based on account values. Investment management fees totaled $52,000, $71,000, and $43,000 during the six months ended June 30, 2011 and the years ended December 31, 2010 and 2009, respectively.

Properties

At June 30, 2011, we conducted business through our executive office and two full service branch offices located in Wellesley, Massachusetts. We own our Central Street branch office. We lease our Church Street executive office (subject to a renewable lease that expires in 2018) and our Linden Street branch office (subject to a renewable lease that expires in 2012). At June 30, 2011, the total net book value of our land, buildings, furniture, fixtures and equipment was $795,000.

Personnel

As of June 30, 2011, we had 27 full-time and five part-time employees, none of whom is represented by a collective bargaining unit. We believe our relationship with our employees is good.

Legal Proceedings

Periodically, there have been various claims and lawsuits against us, such as claims to enforce liens, condemnation proceedings on properties in which we hold security interests, claims involving the making and servicing of real property loans and other issues incident to our business. We are not a party to any pending legal proceedings that we believe would have a material adverse effect on our financial condition, results of operations or cash flows.

Subsidiaries

Wellesley Bancorp currently has no subsidiaries. The following are descriptions of Wellesley Bank’s wholly-owned subsidiaries:

Wellesley Investment Partners, LLC. Wellesley Investment Partners, LLC, established in 2007, is a Massachusetts limited liability company that offers customers a range of nondeposit investment products, including mutual funds and equities, through a third-party registered broker-dealer. Wellesley Investment Partners is a registered investment advisor.

Wellesley Securities Corporation. Wellesley Securities Corporation, established in 1992, is a Massachusetts corporation that engages in buying, selling and holding securities on its own behalf. As a Massachusetts securities corporation, the income earned on Wellesley Securities Corporation’s investment securities is subject to a lower state tax rate than that assessed on income earned on investment securities maintained at Wellesley Bank. At June 30, 2011, Wellesley Securities Corporation has total assets of $6.9 million and total equity of $6.3 million.

Central Linden LLC. Organized in 2010, Central Linden LLC is a Massachusetts limited liability company formed for the purpose of holding, managing and selling foreclosed real estate. Central Linden is currently inactive and at June 30, 2011 had no assets and no equity.

 

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Management’s Discussion and Analysis of

Financial Condition and Results of Operations

The objective of this section is to help potential investors understand our views on our results of operations and financial condition. You should read this discussion in conjunction with the consolidated financial statements and the notes to consolidated financial statements that appear at the end of this prospectus.

Overview

Income. Our primary source of income is net interest income. Net interest income is the difference between interest income, which is the income that we earn on our loans and investments, and interest expense, which is the interest that we pay on our deposits and borrowings. Other sources of income include earnings from customer service fees (mostly from service charges on deposit accounts), bank-owned life insurance, fees from investment management services and gains on the sale of securities.

Provision for Loan Losses. The allowance for loan losses is maintained at a level representing management’s best estimate of inherent losses in the loan portfolio, based upon management’s evaluation of the portfolio’s collectibility. The allowance is established through the provision for loan losses, which is charged against income. Charge-offs, if any, are charged to the allowance. Subsequent recoveries, if any, are credited to the allowance. Allocation of the allowance may be made for specific loans or polls of loans, but the entire allowance is available for the entire loan portfolio.

Expenses. The noninterest expenses we incur in operating our business consist of salaries and employee benefits, occupancy and equipment, data processing, federal deposit insurance and other general and administrative expenses. Following the offering, our noninterest expenses are likely to increase as a result of operating as a public company. These additional expenses will consist primarily of legal and accounting fees, expenses of stockholder communications and meetings and stock exchange listing fees.

Salaries and employee benefits consist primarily of salaries and wages paid to our employees, payroll taxes, and expenses for health insurance, retirement plans and other employee benefits. Following the offering, we will recognize additional annual employee compensation expenses stemming from the adoption of new equity benefit plans. We cannot determine the actual amount of these new stock-related compensation and benefit expenses at this time because applicable accounting practices require that they be based on the fair market value of the shares of common stock or related stock options at specific points in the future. For an illustration of these expenses, see “Pro Forma Data.”

Occupancy and equipment expenses, which are the fixed and variable costs of buildings and equipment, consist primarily of depreciation charges, rental expenses, furniture and equipment expenses, maintenance, real estate taxes and costs of utilities. Depreciation of premises and equipment is computed using a straight-line method based on the estimated useful lives of the related assets, which range from 3 to 40 years, or the expected lease terms, if shorter. Data processing expenses are the fees we pay to third parties for the use of their software and for processing customer information, deposits and loans.

Federal deposit insurance premiums are payments we make to the Federal Deposit Insurance Corporation for insurance of our deposit accounts.

Our contribution to the charitable foundation will be an additional operating expense that will reduce net income during the quarter in which the contribution to the foundation is made. The contribution to the foundation will result in a $979,000 and $1.3 million after-tax expense at the minimum and maximum of the offering range, respectively. Any expense resulting from the contribution to the foundation will not be a recurring expense. See “Pro Forma Data” for a detailed analysis of the cost of the contribution to the foundation.

Other expenses include expenses for professional services, advertising, office supplies, postage, telephone, insurance and other miscellaneous operating expenses.

Business Strategy

Our primary objective is to operate and grow a profitable community-oriented financial institution serving customers in our primary market area. We have sought to achieve this through the adoption of a business strategy designed to maintain a strong capital position and high asset quality. Our operating strategy includes the following:

Increasing our deposit market share within Wellesley, Massachusetts and the surrounding communities. Since its inception in 1911, Wellesley Bank has primarily served the town of Wellesley, Massachusetts and the immediate surrounding communities. Despite considerable competition from larger financial institutions with greater resources than Wellesley Bank, we have made

 

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significant progress in recent years to increase our market presence in the town of Wellesley. Our deposits have increased $84.6 million, or 58.8%, from $143.8 million at December 31, 2006 to $228.4 million at June 30, 2011 and at June 30, 2010 we had 12.71% of the deposits in the town of Wellesley, which represented the third largest market share out of twelve financial institutions with branches in the town of Wellesley. We believe the Wellesley market area will continue to provide us opportunities for growth, and we intend to continue to increase our market share in the town of Wellesley through the opening of our third Wellesley branch office in the first quarter of 2012.

Continuing to emphasize our commercial real estate, construction and commercial business loans, as well as increasing our commercial business depository relationships in our market area. We have worked to increase our commercial relationships by diversifying our loan portfolio beyond residential mortgage loans and offering business deposit and checking products. Since December 31, 2006, our commercial real estate, construction and commercial business loan portfolio has increased $47.0 million, or 66.5%, and at June 30, 2011 was 56.3% of our total loan portfolio. In connection with the increase in our commercial business loan portfolio, we also have focused on providing a full banking relationship and as a result experienced an increase in our business deposit and checking accounts. Since December 31, 2006, our business deposit and checking accounts increased $16.3 million, or 93.7%, and at June 30, 2011 represented 14.8% of our total deposits.

With the additional capital raised in the offering, we expect to continue to pursue the larger lending relationships associated with commercial real estate and construction lending. In addition, we will continue to expand and develop our business deposit and checking products to better serve our commercial customers. We believe our current staff of experienced commercial lenders is capable of managing these increasing commercial and construction relationships and do not expect to hire any additional commercial lending staff in the near future.

Increasing our residential mortgage lending in our market area. We believe there are significant opportunities to increase our residential mortgage lending in our market area. The town of Wellesley and its surrounding communities has a sound economy and has not been as negatively affected by the recent recession as other regions of the United States. As a result, the demand for residential mortgage loans in our market area, in particular larger “jumbo” loans, has not been significantly impacted by the downturn in the economy. In order to take advantage of these opportunities, after the offering we expect to hire an additional residential mortgage lender to complement our existing residential mortgage lending operations and expect to increase our larger residential mortgage relationships.

Continuing conservative underwriting practices while maintaining a high quality loan portfolio. We believe that strong asset quality is a key to long-term financial success. We have sought to maintain a high level of asset quality and moderate credit risk by using conservative underwriting standards and by diligent monitoring and collection efforts. Although nonperforming loans increased from $2.0 million at December 31, 2008 to $3.5 million at June 30, 2011, at June 30, 2011, nonperforming loans were 1.7% of the total loan portfolio and 1.3% of total assets. Although we intend to increase our commercial real estate, construction and commercial business lending, we intend to continue our philosophy of managing large loan exposures through conservative loan underwriting and credit administration standards.

Seeking to enhance fee income by growing investment advisory services. Our profits rely heavily on the spread between the interest earned on loans and securities and interest paid on deposits and borrowings. In order to decrease our reliance on net interest income, we have pursued initiatives to increase noninterest income. In particular, we offer a full array of investment services for individuals and small businesses, including full access to financial market instruments, such as mutual funds and equities, through our wholly-owned subsidiary, Wellesley Investment Partners, LLC, a registered investment advisor. Investment management fees relating to our investment advisory services totaled $52,000, $71,000 and $43,000 for the six months ended June 30, 2011 and years ended December 31, 2010 and 2009, respectively. After the offering, we intend to continue to enhance our fee income through Wellesley Investment Partners by engaging at least one additional sales-focused investment or financial planning professional.

Emphasizing lower cost core deposits to maintain low funding costs. We seek to increase net interest income by controlling costs of funding. Over the past several years, we have sought to reduce our dependence on traditional higher cost certificates of deposits in favor of stable lower cost demand deposits. We have utilized additional product offerings, technology and a focus on customer service in working toward this goal. In addition, we intend to seek demand deposits by growing commercial banking relationships. Core deposits (demand, NOW, money market and savings accounts) comprised 49.8% of our total deposits at June 30, 2011, as compared to 38.4% at December 31, 2008.

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.

 

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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. See notes 1 and 6 of the notes to consolidated financial statements included in this prospectus.

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 carryforward periods, tax planning opportunities and other relevant considerations. We believe the accounting estimate related to the valuation allowance is a critical estimate because the underlying assumptions can change from period to period. For example, tax law changes or variances in future projected operating performance could result in a change in the valuation allowance. Should actual factors and conditions differ materially from those used by management, the actual realization of net deferred tax assets could differ materially from the amounts recorded in the financial statements. If we were not able to realize all or part of our deferred tax assets in the future, an adjustment to the related valuation allowance would be charged to income tax expense in the period such determination was made and could have a negative impact on earnings. In addition, if actual factors and conditions differ materially from those used by management, we could incur penalties and interest imposed by taxing authorities.

Comparison of Financial Condition at June 30, 2011 and December 31, 2010 and 2009

General. Total assets increased $2.8 million, or 1.1%, from $262.0 million at December 31, 2010 to $264.8 million at June 30, 2011. Total assets increased primarily due to an increase in investment securities of $2.9 million, or 11.5%, and an increase in total net loans of $1.3 million, or 0.6%, partially offset by a decrease in funds held in certificates of deposit of $1.7 million, or 50.7%. Funds received from maturing certificates of deposit were invested in securities during the 2011 six-month period.

Total assets increased $16.2 million, or 6.6%, from $245.8 million at December 31, 2009 to $262.0 million at December 31, 2010 due primarily to an increase of $19.7 million, or 10.7%, in total net loans partially offset by a decrease in investment securities of $2.6 million, or 9.3%. The increase in loans during 2010 was due primarily to increases in construction lending and home equity lines of credit.

Loans. Total net loans increased by $1.3 million, or 0.6%, from $204.1 million at December 31, 2010 to $205.4 million at June 30, 2011. The increase in loans was due primarily to an increase of $11.8 million, or 21.9%, in commercial real estate loans. These increases were partially offset by a decrease of $4.6 million, or 6.3%, in residential mortgage loans and a decrease of $4.0 million, or 9.9%, in construction loans. The increase in commercial real estate loans reflects our continued emphasis on originating these types of loans and increased loan demand. The decrease in construction lending was due to pay-offs of existing projects.

Total loans, net, increased by $19.7 million, or 10.7%, from $184.4 million at December 31, 2009 to $204.1 million at December 31, 2010. The increase in loans was due primarily to an increase of $9.5 million, or 30.6%, in construction loans, an increase of $6.4 million, or 35.9%, in home equity lines of credit and an increase of $4.0 million, or 8.0%, in commercial real estate loans. These increases reflect our continued emphasis on originating these types of loans and increased loan demand.

 

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The following table sets forth the composition of our loan portfolio at the dates indicated.

 

     At June 30,
2011
    At December 31,  
     2010     2009  

(Dollars in thousands)

   Amount      Percent     Amount      Percent     Amount      Percent  

Real estate loans:

               

Residential mortgage

   $ 68,329         32.70   $ 72,890         35.18   $ 73,443         39.32

Commercial real estate

     65,720         31.44        53,907         26.02        49,911         26.72   

Construction

     36,746         17.58        40,770         19.68        31,223         16.71   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total real estate loans

     170,795         81.72        167,567         80.88        154,577         82.75   

Commercial loans

     15,208         7.28        14,905         7.20        13,880         7.43   

Consumer loans:

               

Home equity lines of credit

     22,554         10.79        24,198         11.68        17,805         9.53   

Other

     429         0.21        503         0.24        539         0.29   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

     208,986         100.00     207,173         100.00     186,801         100.00
     

 

 

      

 

 

      

 

 

 

Less:

               

Deferred loan origination fees, net

     371           366           371      

Allowance for loan losses

     3,229           2,690           2,060      
  

 

 

      

 

 

      

 

 

    

Net loans

   $ 205,386         $ 204,117         $ 184,370      
  

 

 

      

 

 

      

 

 

    
     At December 31,  
     2008     2007     2006  

(Dollars in thousands)

   Amount      Percent     Amount      Percent     Amount      Percent  

Real estate loans:

               

Residential mortgage

   $ 84,784         43.02   $ 78,336         44.49   $ 70,106         45.60

Commercial real estate

     42,282         21.46        42,895         24.36        36,986         24.06   

Construction

     40,115         20.36        29,498         16.75        23,746         15.45   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total real estate loans

     167,181         84.84        150,729         85.60        130,838         85.11   

Commercial loans

     12,564         6.37        11,400         6.47        9,355         6.08   

Consumer loans:

               

Home equity lines of credit

     16,745         8.50        13,362         7.59        13,226         8.60   

Other

     578         0.29        599         0.34        324         0.21   
  

 

 

    

 

 

   

 

 

    

 

 

   

 

 

    

 

 

 

Total loans

     197,068         100.00     176,090         100.00     153,743         100.00
     

 

 

      

 

 

      

 

 

 

Less:

               

Deferred loan origination fees, net

     382           344           313      

Allowance for loan losses

     2,047           1,605           1,418      
  

 

 

      

 

 

      

 

 

    

Net loans

   $ 194,639         $ 174,141         $ 152,012      
  

 

 

      

 

 

      

 

 

    

Loan Maturity. The following tables set forth certain information at June 30, 2011 and December 31, 2010 regarding scheduled contractual maturities during the periods indicated. The tables do not include any estimate of prepayments which significantly shorten the average life of all loans and may cause our actual repayment experience to differ from that shown below. Demand loans having no stated schedule of repayments and no stated maturity are reported as due in one year or less. The amounts shown below exclude net deferred loan fees.

 

     June 30, 2011  

(In thousands)

   Residential
Mortgage

Loans
     Commercial
Real Estate
Loans
     Construction
Loans
     Commercial
Loans
     Consumer
Loans
     Total
Loans
 

Amounts due in:

                 

One year or less

   $ 222       $ 6,154       $ 30,535       $ 8,200       $ 698       $ 45,809   

More than one year to five years

     520         604         6,211         4,245         8,008         19,588   

More than five years

     67,587         58,962         —           2,763         14,277         143,589   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 68,329       $ 65,720       $ 36,746       $ 15,208       $ 22,983       $ 208,986   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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     December 31, 2010  

(In thousands)

   Residential
Mortgage

Loans
     Commercial
Real Estate
Loans
     Construction
Loans
     Commercial
Loans
     Consumer
Loans
     Total
Loans
 

Amounts due in:

                 

One year or less

   $ 226       $ 5,587       $ 32,331       $ 6,829       $ 687       $ 45,660   

More than one year to five years

     554         494         6,107         4,816         8,280         20,251   

More than five years

     72,110         47,826         2,332         3,260         15,734         141,262   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 72,890       $ 53,907       $ 40,770       $ 14,905       $ 24,701       $ 207,173   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Fixed vs. Adjustable Rate Loans. The following table sets forth the dollar amount of all scheduled maturities of loans at June 30, 2011 that are due after June 30, 2012 and have either fixed interest rates or adjustable interest rates. The amounts shown below exclude net deferred loan fees.

 

(In thousands)

   Fixed
Rates
     Floating  or
Adjustable
Rates
     Total  

Real estate loans:

        

Residential mortgage

   $ 14,912       $ 53,195       $ 68,107   

Commercial real estate

     4,824         54,742         59,566   

Construction

     6,211         —           6,211   

Commercial loans

     6,451         557         7,008   

Consumer loans

     294         21,991         22,285   
  

 

 

    

 

 

    

 

 

 

Total

   $ 32,692       $ 130,485       $ 163,177   
  

 

 

    

 

 

    

 

 

 

The following table sets forth the dollar amount of all scheduled maturities of loans at December 31, 2010 that are due after December 31, 2011 and have either fixed interest rates or adjustable interest rates. The amounts shown below exclude net deferred loan fees.

 

(In thousands)

   Fixed
Rates
     Floating  or
Adjustable
Rates
     Total  

Real estate loans:

        

Residential mortgage

   $ 17,487       $ 55,177       $ 72,664   

Commercial real estate

     4,976         43,344         48,320   

Construction

     7,184         1,255         8,439   

Commercial loans

     7,507         569         8,076   

Consumer loans

     137         23,877         24,014   
  

 

 

    

 

 

    

 

 

 

Total

   $ 37,291       $ 124,222       $ 161,513   
  

 

 

    

 

 

    

 

 

 

Securities. Our securities portfolio consists primarily of residential mortgage-backed securities issued by U.S. government agencies and government sponsored enterprises and state and municipal bonds. Securities increased by $2.9 million, or 11.5%, in the six months ended June 30, 2011 due to the purchase of additional securities resulting from excess liquidity. Securities decreased by $2.6 million, or 9.3%, in the year ended December 31, 2010 primarily due to the sales and maturities of debt securities and paydowns of mortgage-backed securities.

 

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Table of Contents

The following table sets forth the amortized cost and fair values of our securities portfolio at the dates indicated.

 

     At June 30,
2011
     At December 31,  
        2010      2009      2008  

(In thousands)

   Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
     Amortized
Cost
     Fair
Value
 

Residential mortgage-backed securities:

                       

Government National Mortgage Association

   $ 12,257       $ 12,441       $ 11,418       $ 11,614       $ 10,162       $ 10,295       $ 8,903       $ 8,972   

Government-sponsored enterprises

     4,222         4,399         4,503         4,671         7,884         8,147         6,405         6,523   

SBA asset-backed securities

     2,557         2,596         2,700         2,711         960         1,014         1,040         1,070   

State and municipal bonds

     8,031         8,246         5,606         5,713         4,450         4,571         3,791         3,834   

Government-sponsored enterprise obligations

     393         413         422         443         3,148         3,154         7,770         7,895   

Corporate bonds

     406         411         401         413         994         1,007         1,377         1,311   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total debt securities

     27,866         28,506         25,050         25,565         27,598         28,188         29,286         29,605   

Equity securities

     —           —           —           —           —           —           49         16   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total securities available for sale

   $ 27,866       $ 28,506       $ 25,050       $ 25,565       $ 27,598       $ 28,188       $ 29,335       $ 29,621   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

At June 30, 2011, we had no investments in a single company or entity (other than the U.S. Government or an agency of the U.S. Government), including both debt and equity securities, that had an aggregate book value in excess of 10% of equity.

The following table sets forth the stated maturities and weighted average yields of investment securities at June 30, 2011. Weighted average yields on tax-exempt securities are not presented on a tax equivalent basis. Certain mortgage related securities have adjustable interest rates and will reprice annually within the various maturity ranges. These repricing schedules are not reflected in the table below.

 

    One Year or Less     More than One Year
to Five Years
    More than Five Years
to Ten Years
    More than Ten Years