UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

(Mark One)

 

ý

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

 

For the quarterly period ended

June 30, 2012

 

OR

 

o

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

 

For the transition period from ____________ to _______________

 

Commission File No. 0-23433

 

WAYNE SAVINGS BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

Delaware		31-1557791
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)
151 North Market Street
Wooster, Ohio		44691
(Address of principal		(Zip Code)
executive office)

 

Registrant’s telephone number, including area code: (330) 264-5767

 

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

 

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

 

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

 

Large accelerated filer o    Accelerated filer o     Non-accelerated filer  o   Smaller reporting company  ý  

 

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

As of August 9, 2012, the latest practicable date, 3,004,113 shares of the registrant’s common stock, $.10 par value, were issued and outstanding.

 

Wayne Savings Bancshares, Inc.

Index

 

		Page
PART I - FINANCIAL INFORMATION
Item 1	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Income and Comprehensive Income	3
	Condensed Consolidated Statements of Cash Flows	4
	Notes to Condensed Consolidated Financial Statements	6
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3	Quantitative and Qualitative Disclosures About Market Risk	40
Item 4	Controls and Procedures	40
PART II - OTHER INFORMATION
Item 1	Legal Proceedings	41
Item 1A	Risk Factors	41
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3	Defaults Upon Senior Securities	41
Item 4	Mine Safety Disclosures	41
Item 5	Other Information	41
Item 6	Exhibits	42
SIGNATURES		43

 

Wayne Savings Bancshares, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share data)

		June 30, 2012				December 31, 2011
		(Unaudited)
ASSETS
Cash and due from banks		$	11,684			$	14,215
Interest-bearing demand deposits			3,840				5,601
Cash and cash equivalents			15,524				19,816
Available-for-sale securities			129,519				130,637
Held-to-maturity securities			1,636				1,679
Loans receivable – net of allowance for loan losses of $3,592 and $3,854 at June 30, 2012 and December 31, 2011, respectively			235,483				232,099
Premises and equipment			7,153				7,165
Federal Home Loan Bank stock			5,025				5,025
Foreclosed assets held for sale  -  net			70				1,283
Accrued interest receivable			1,302				1,314
Bank-owned life insurance			8,579				7,193
Goodwill			1,719				1,719
Other intangible assets			174				219
Prepaid Federal Deposit Insurance Corporation premiums			727				868
Other assets			1,588				1,026
Prepaid federal income taxes			314				54
Total assets		$	408,813			$	410,097
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Demand		$	78,126			$	76,750
Savings and money market			113,797				108,934
Time			140,085				148,164
Total deposits			332,008				333,848
Other short-term borrowings			8,318				5,278
Federal Home Loan Bank advances			24,157				26,597
Accrued interest payable and other liabilities			2,890				3,751
Deferred federal income taxes			1,301				908
Total liabilities			368,674				370,382
Commitments and Contingencies			—				—
Stockholders’ Equity
Preferred stock, 500,000 shares of $.10 par value authorized; no shares issued			—				—
Common stock, $.10 par value; authorized 9,000,000 shares; 3,978,731 shares issued			398				398
Additional paid-in capital			35,980				35,986
Retained earnings			17,027				16,635
Shares acquired by ESOP			(613	)			(655	)
Accumulated other comprehensive income, net of tax effects			1,877				1,881
Treasury stock, at cost – 974,618 common shares			(14,530	)			(14,530	)
Total stockholders’ equity			40,139				39,715
Total liabilities and stockholders’ equity		$	408,813			$	410,097

Wayne Savings Bancshares, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
For the three and six months ended June 30, 2012 and 2011
(In thousands, except per share data)
(Unaudited)

 

		Three months ended								Six months ended
		June 30, 2012				June 30, 2011				June 30, 2012				June 30, 2011
Interest and Dividend Income
Loans		$	2,945			$	3,137			$	5,931			$	6,312
Securities			862				1,177				1,804				2,239
Dividends on Federal Home Loan Bank stock and other			57				58				116				117
Total interest and dividend income			3,864				4,372				7,851				8,668
Interest Expense
Deposits			544				792				1,154				1,640
Other short-term borrowings			3				5				5				10
Federal Home Loan Bank advances			171				293				350				604
Total interest expense			718				1,090				1,509				2,254
Net Interest Income			3,146				3,282				6,342				6,414
Provision (Credit) for Loan Losses			(394	)			70				393				192
Net Interest Income After Provision (Credit) for Loan Losses			3,540				3,212				5,949				6,222
Noninterest Income
Gain on loan sales			49				18				95				25
Trust income			73				72				165				137
Earnings on bank-owned life insurance			75				57				148				114
Service fees, charges and other operating			296				294				553				529
Total noninterest income			493				441				961				805
Noninterest Expense
Salaries and employee benefits			1,892				1,569				3,529				3,010
Net occupancy and equipment expense			477				452				953				924
Federal deposit insurance premiums			74				85				153				207
Franchise taxes			100				94				201				188
Provision for impairment on foreclosed assets held for sale			35				287				35				708
Loss (Gain) on sale of foreclosed assets held for sale			—				—				13				(4	)
Amortization of intangible assets			22				23				45				46
Other			615				492				1,071				823
Total noninterest expense			3,215				3,002				6,000				5,902
Income Before Federal Income Taxes			818				651				910				1,125
Provision for Federal Income Taxes			194				136				134				205
Net Income		$	624			$	515			$	776			$	920
Other comprehensive income:
Unrealized gains (losses) on available-for-sale securities			153				1,311				(4	)			1,349
Change in defined benefit plan unrecognized net loss			—				—				—				(22	)
Amortization of net loss included in net periodic pension cost			—				—				—				35
Components of other comprehensive income (loss), before tax effect			153				1,311				(4	)			1,362
Tax expense			53				447				—				463
Other comprehensive income (loss)			100				864				(4	)			899
Comprehensive income			724				1,379				772				1,819
Basic Earnings Per Share		$	0.21			$	0.18			$	0.26			$	0.32
Diluted Earnings Per Share		$	0.21			$	0.18			$	0.26			$	0.32
Dividends Per Share		$	0.07			$	0.06			$	0.13			$	0.12

 

Wayne Savings Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 2012 and 2011
(In thousands)
(Unaudited)

		2012				2011
Operating Activities
Net income		$	776			$	920
Items not requiring (providing) cash
Depreciation and amortization			270				257
Provision for loan losses			393				192
Amortization of premiums and discounts on securities – net			1,031				669
Amortization of mortgage servicing rights			24				18
Amortization of deferred loan origination fees			(42	)			(34	)
Amortization of intangible assets			45				46
Increase in value of bank owned life insurance			(143	)			(123	)
Amortization expense of stock benefit plan			35				37
Provision for impairment on foreclosed assets held for sale			35				708
Loss (gain) on sale of foreclosed assets held for sale			13				(4	)
Gain on sale of loans			(95	)			(25	)
Proceeds from sale of loans in secondary market			2,565				898
Origination of loans for sale in the secondary market			(2,470	)			(873	)
Deferred income taxes			394				(180	)
Changes in
Accrued interest receivable			12				(78	)
Other assets			(846	)			386
Prepaid federal deposit insurance premiums			141				191
Interest payable and other liabilities			(141	)			(614	)
Net cash provided by operating activities			1,997				2,391
Investing Activities
Purchase of  available-for-sale securities			(25,177	)			(22,729	)
Proceeds from maturities of available-for-sale securities			25,260				19,543
Proceeds from maturities of held-to-maturity securities			41				28
Net change in loans			(3,734	)			2,101
Purchase of Bank owned life insurance			(1,243	)			—
Purchase of premises and equipment			(258	)			(327	)
Proceeds from the sale of foreclosed assets			1,165				219
Net cash used in investing activities			(3,946	)			(1,165	)

 

Wayne Savings Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows (continued)
For the six months ended June 30, 2012 and 2011
(In thousands)
(Unaudited)

		2012				2011
Financing Activities
Net change in deposits		$	(1,840	)		$	7,830
Net change in other short-term borrowings			3,040				(1,500	)
Proceeds from Federal Home Loan Bank and Federal Reserve advances			10				—
Repayments of Federal Home Loan Bank and Federal Reserve advances			(2,450	)			(4,440	)
Advances by borrowers for taxes and insurance			(750	)			(842	)
Cash dividends paid			(353	)			(353	)
Net cash provided by (used in) financing activities			(2,343	)			695
Increase (decrease) in Cash and Cash Equivalents			(4,292	)			1,921
Cash and Cash Equivalents, Beginning of period			19,816				11,800
Cash and Cash Equivalents, End of period		$	15,524			$	13,721
Supplemental Cash Flows Information
Interest paid on deposits and borrowings		$	1,519			$	1,748
Federal income taxes paid		$	—			$	175
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Transfers from loans to foreclosed assets held for sale		$	—			$	418
Unrealized gains (losses) on securities designated as available-for-sale,
net of related tax effects		$	(4	)		$	889
Dividends payable		$	210			$	180

Wayne Savings Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements

  

Note 1: Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of June 30, 2012 and for the three and six months ended June 30, 2012 and 2011, were prepared in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. Accordingly, these condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Wayne Savings Bancshares, Inc. (the “Company”) included in the Annual Report on Form 10-K for the nine month fiscal period ended December 31, 2011. Reference is made to the accounting policies of the Company described in the Notes to the Consolidated Financial Statements contained in its Annual Report on Form 10-K.

In the opinion of management, all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the unaudited financial statements have been included. The results of operations for the three and six months ended June 30, 2012, are not necessarily indicative of the results which may be expected for the entire fiscal year. The condensed consolidated balance sheet of the Company as of December 31, 2011, has been derived from the consolidated balance sheet of the Company as of that date.

Critical Accounting Policies – The Company’s critical accounting policies relate to the allowance for loan losses and goodwill. The Company has established a systematic method of periodically reviewing the credit quality of the loan portfolio in order to establish a sufficient allowance for loan losses. The allowance for loan losses is based on management’s current judgments about the credit quality of individual loans and segments of the loan portfolio. The allowance for loan losses is established through a provision, and considers all known internal and external factors that affect loan collectibility as of the reporting date. Such evaluation, which includes a review of all loans on which full collectibility may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, historical loan loss experience, management’s knowledge of inherent risks in the portfolio that are probable and reasonably estimable and other factors that warrant recognition in providing an appropriate loan loss allowance. Management has discussed the development and selection of this critical accounting policy with the audit committee of the Board of Directors. The Company recorded all assets and liabilities acquired in prior purchase acquisitions, including goodwill and other intangibles, at fair value as required. Goodwill is subject, at a minimum, to annual tests for impairment. Other intangible assets are amortized over their estimated useful lives using the straight-line method, and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The initial goodwill and other intangibles recorded and subsequent impairment analysis requires management to make subjective judgments concerning estimates of how the acquired asset will perform in the future. Events and factors that may significantly affect the estimates include, among others, customer attrition, changes in revenue growth trends, specific industry conditions and changes in competition.

Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Note 2: Principles of Consolidation

The accompanying condensed consolidated financial statements include Wayne Savings Bancshares, Inc. and the Company’s wholly-owned subsidiary, Wayne Savings Community Bank (“Wayne Savings” or the “Bank”).

Wayne Savings has eleven full-service offices in Wayne, Holmes, Ashland, Medina and Stark counties. All significant intercompany transactions and balances have been eliminated in the consolidation.

Note 3: Securities

The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as follows:

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Approximate Fair Value
		(In thousands)
Available-for-sale securities:
June 30, 2012:
U.S. government agencies		$	754			$	2			$	1			$	755
Mortgage-backed securities of government sponsored entities			97,941				2,435				91				100,285
Private-label collateralized mortgage obligations			1,288				52				—				1,340
State and political subdivisions			25,665				1,513				39				27,139
Totals		$	125,648			$	4,002			$	131			$	129,519

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Approximate Fair Value
		(In thousands)
Available-for-sale securities:
December 31, 2011:
U.S. government agencies		$	1,559			$	26			$	1			$	1,584
Mortgage-backed securities of government sponsored entities			98,816				2,636				124				101,328
Private-label collateralized mortgage obligations			1,693				48				—				1,741
State and political subdivisions			24,694				1,315				25				25,984
Totals		$	126,762			$	4,025			$	150			$	130,637

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Approximate Fair Value
		(In thousands)
Held-to-maturity Securities:
June 30, 2012:
U.S. government agencies		$	135			$	—			$	1			$	134
Mortgage-backed securities of government sponsored entities			1,501				42				—				1,543
		$	1,636			$	42			$	1			$	1,677
December 31, 2011:
U.S. government agencies		$	145			$	—			$	—			$	145
Mortgage-backed securities of government sponsored entities			1,527				16				—				1,543
State and political subdivisions			7				—				—				7
		$	1,679			$	16			$	—			$	1,695

 

Amortized cost and fair value of available-for-sale securities and held-to-maturity securities at June 30, 2012 by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

 

		Available-for-sale								Held-to-maturity
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
		(In thousands)
Within one year		$	593			$	595			$	—			$	—
One to five years			1,543				1,610				—				—
Five to ten years			7,781				8,172				—				—
After ten years			16,502				17,517				135				134
			26,419				27,894				135				134
Mortgage-backed securities of government sponsored entities			97,941				100,285				1,501				1,543
Private-label collateralized mortgage obligations			1,288				1,340				—				—
Totals		$	125,648			$	129,519			$	1,636			$	1,677

 

The carrying value of securities pledged as collateral to secure public deposits and for other purposes was $53.8 million and $53.9 million at June 30, 2012 and December 31, 2011, respectively.

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. The total fair value of these investments at June 30, 2012 and December 31, 2011, was $16.7 million and $17.7 million, which represented approximately 13% and 14%, respectively, of the Company’s aggregate available-for-sale and held-to-maturity investment portfolio. These declines resulted primarily from changes in market interest rates.

Based on an evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these government agency, mortgage-backed and state and political subdivision securities are temporary at June 30, 2012.

Should the impairment of any of these government agency, mortgage-backed and state and political subdivision securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified. The following table shows the gross unrealized losses and fair value of the Company’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

 

 

June 30, 2012
		Less than 12 Months								12 Months or More								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
	(In thousands)
U.S. government agencies		$	—			$	—			$	294			$	2			$	294			$	2
Mortgage-backed securities of government sponsored entities			14,163				83				626				8				14,789				91
State and political subdivisions			836				15				758				24				1,594				39
Total temporarily impaired securities		$	14,999			$	98			$	1,678			$	33			$	16,677			$	132

 

 

December 31, 2011
		Less than 12 Months								12 Months or More								Total
Description of Securities		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
	(In thousands)
U.S. government agencies		$	—			$	—			$	313			$	1			$	313			$	1
Mortgage-backed securities of government sponsored entities			16,624				124				—				—				16,624				124
State and political subdivisions			—				—				759				25				759				25
Total temporarily impaired securities		$	16,624			$	124			$	1,072			$	26			$	17,696			$	150

 

Note 4: Credit Quality of Loans and the Allowance for Loan Losses

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is determined based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current for a period of six months and future payments are reasonably assured.

Allowance for Loan Losses

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

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for

impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

The risk characteristics of each portfolio segment are as follows:

Residential Real Estate Loans

For residential mortgage loans that are secured by one-to-four family residences and are generally owner-occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in 1-4 family residences. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

All Other Mortgage Loans

All other mortgage loans consist of residential construction loans, non-residential real estate loans, land loans and multifamily real estate loans.

Residential construction loan proceeds are disbursed in increments as construction progresses and as inspections warrant. Construction loans are typically structured as permanent one-to-four family loans originated by the Company with a 12-month construction phase. Accordingly, upon completion of the construction phase, there is no change in interest rate or term to maturity of the original construction loan, nor is a new permanent loan originated. These loans are generally owner-occupied and the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded.

Non-residential real estate loans are negotiated on a case by case basis. Loans secured by non-residential real estate generally involve a greater degree of risk than one-to- four family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by non-residential real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.

The Company also originates a limited number of land loans secured by individual improved and unimproved lots for future residential construction. In addition, the Company originated loans to commercial customers with land held as the collateral.

Multi-family real estate loans generally involve a greater degree of credit risk than one-to-four family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family real estate is typically dependent upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.

 

Commercial Business Loans

Commercial business loans carry a higher degree of risk than one-to-four family residential loans. Such lending typically involves large loan balances concentrated in a single borrower or groups of related borrowers for rental or business properties. In addition, the payment experience on loans secured by income-producing properties is typically dependent on the success of the operation of the related project and thus is typically affected by adverse conditions in the real estate market and in the economy. The Company originates commercial loans generally in the $50,000 to $1,000,000 range with the majority of these loans being under $500,000. Commercial loans are generally underwritten based on the borrower’s ability to pay and assets such as buildings, land and equipment are taken as additional loan collateral. Each loan is evaluated for a level of risk and assigned a rating from “1” (the highest rating) to “7” (the lowest rating).

Consumer Loans

Consumer loans entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as automobiles, mobile homes, boats, and recreational vehicles. 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 particular, amounts realizable on the sale of repossessed automobiles may be significantly reduced based upon the condition of the automobiles and the lack of demand for used automobiles.

The following presents by portfolio segment, the activity in the allowance for loan losses for the three and six months ended June 30, 2012 and June 30, 2011:

Three months ended June 30, 2012		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans				Unallocated				Total
		(In thousands)
Beginning balance		$	1,251			$	3,140			$	174			$	9			$	—			$	4,574
Provision charged to expense			(182	)			(181	)			(31	)			—				—				(394	)
Losses charged off			(23	)			(597	)			—				(4	)			—				(624	)
Recoveries			36				—				—				—				—				36
Ending balance		$	1,082			$	2,362			$	143			$	5			$	—			$	3,592

 

Three months ended June 30, 2011		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans				Unallocated				Total
		(In thousands)
Beginning balance		$	1,073			$	1,967			$	158			$	5			$	—			$	3,203
Provision charged to expense			55				(127	)			137				5				—				70
Losses charged off			(53	)			—				—				—				—				(53	)
Recoveries			1				—				—				—				—				1
Ending balance		$	1,076			$	1,840			$	295			$	10			$	—			$	3,221

 

Six months ended June 30, 2012		One-to-four family residential				All other mortgage loans				Commercial  business loans				Consumer loans				Unallocated				Total
		(In thousands)
Beginning balance		$	1,128			$	2,547			$	169			$	10			$	—			$	3,854
Provision charged to expense			3				417				(26	)			(1	)			—				393
Losses charged off			(88	)			(602	)			—				(4	)			—				(694	)
Recoveries			39				—				—				—				—				39
Ending balance		$	1,082			$	2,362			$	143			$	5			$	—			$	3,592

 

Six months ended June 30, 2011		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans				Unallocated				Total
		(In thousands)
Beginning balance		$	1,199			$	1,603			$	253			$	8			$	2			$	3,065
Provision charged to expense			(72	)			222				42				2				(2	)			192
Losses charged off			(53	)			—				—				—				—				(53	)
Recoveries			2				15				—				—				—				17
Ending balance		$	1,076			$	1,840			$	295			$	10			$	—			$	3,221

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on the portfolio segment and impairment method as of June 30, 2012 and December 31, 2011:

 

June 30, 2012		One-to-four family residential				All other  mortgage loans				Commercial business loans				Consumer loans				Unallocated				Total
Allowance Balances:
			(in thousands)
Ending balance:  individually evaluated for impairment		$	291			$	1,834			$	43			$	—			$	—			$	2,168
Ending balance:  collectively evaluated for impairment			791				528				100				5				—				1,424
Total allowance for loan losses		$	1,082			$	2,362			$	143			$	5			$	—			$	3,592
Loan Balances:
Ending balance:  individually evaluated for impairment		$	4,147			$	6,694			$	47			$	—							$	10,888
Ending balance:  collectively evaluated for impairment			150,685				67,980				11,167				2,095								231,927
Ending balance		$	154,832			$	74,674			$	11,214			$	2,095							$	242,815

 

 

 

December 31, 2011		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans				Unallocated				Total
Allowance Balances:
			(in thousands)
Ending balance:  individually evaluated for impairment		$	320			$	1,941			$	53			$	—			$	—			$	2,314
Ending balance:  collectively evaluated for impairment			808				606				116				10				—				1,540
Total allowance for loan losses		$	1,128			$	2,547			$	169			$	10			$	—			$	3,854
Loan Balances:
Ending balance:  individually evaluated for impairment		$	3,744			$	6,955			$	92			$	—							$	10,791
Ending balance:  collectively evaluated for impairment			149,320				65,251				10,434				2,257								227,262
Ending balance		$	153,064			$	72,206			$	10,526			$	2,257							$	238,053

 

Total loans in the above tables do not include deferred loan origination fees of $463,000 and $409,000 or loans in process of $3.3 million and $1.7 million for June 30, 2012 and December 31, 2011, respectively.

The following tables present the credit risk profile of the Bank’s loan portfolio based on rating category and payment activity as of June 30, 2012 and December 31, 2011:

June 30, 2012		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans
						(In thousands)
Rating *
Pass (Risk 1-4)		$	147,697			$	64,073			$	11,022			$	2,095
Special Mention (Risk 5)			2,988				3,907				145				—
Substandard (Risk 6)			4,147				6,694				47				—
Total		$	154,832			$	74,674			$	11,214			$	2,095

 

December 31, 2011		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans
						(In thousands)
Rating *
Pass (Risk 1-4)		$	145,061			$	61,970			$	10,268			$	2,257
Special Mention (Risk 5)			2,979				3,281				166				—
Substandard (Risk 6)			5,024				6,955				92				—
Total		$	153,064			$	72,206			$	10,526			$	2,257

 

* Ratings are generally assigned to consumer and residential mortgage loans on a “pass” or “fail” basis, where “fail” results in a substandard classification. Commercial loans, both secured by real estate or other assets or unsecured are analyzed in accordance with an analytical matrix codified in the Bank’s loan policy that produces a risk rating as described below.

 

Risk 1 is unquestioned credit quality for any credit product. Loans are secured by cash and near cash collateral with immediate access to proceeds.

 

Risk 2 is very low risk with strong credit and repayment sources. Borrower is well capitalized in a stable industry, financial ratios exceed peers and financial trends are positive.

 

Risk 3 is very favorable risk with highly adequate credit strength and repayment sources. Borrower has good overall financial condition and adequate capitalization.

 

Risk 4 is acceptable, average risk with adequate credit strength and repayment sources. Collateral positions must be within Bank policies.

 

Risk 5 or “Special Mention,” also known as “watch,” has potential weakness that deserves Management’s close attention. This risk includes loans where the borrower has developed financial uncertainties or are resolving them. Bank credits have been secured or negotiations will be ongoing to secure further collateral.

 

Risk 6 or “Substandard” loans are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged. This risk category contains loans that exhibit a weakening of the borrower’s credit strength with limited credit access and all non-performing loans.

 

Risk 7 or “Doubtful” loans are significantly under protected by the current net worth and paying capacity of the borrower or of the collateral pledged. This risk category contains loans that are likely to experience a loss of some magnitude, but where the amount of the expected loss is not known with enough certainty to allow for an accurate calculation of a loss amount for charge off. This category is considered to be temporary until a charge off amount can be reasonably determined.

 

The following tables present the Bank’s loan portfolio aging analysis for June 30, 2012 and December 31, 2011:

 

June 30, 2012		30-59 Days Past Due				60-89 Days Past Due				Greater Than 90  Days				Total Past Due				Current				Total Loans Receivable				Total Loans > 90 Days & Accruing
										(In thousands)
One-to-four family residential loans		$	183			$	503			$	344			$	1,030			$	153,802			$	154,832			$	—
All other mortgage loans			967				—				1,775				2,742				71,932				74,674				—
Commercial business loans			—				—				2				2				11,212				11,214				—
Consumer loans			2				3				6				11				2,084				2,095				—
Total		$	1,152			$	506			$	2,127			$	3,785			$	239,030			$	242,815			$	—

 

December 31, 2011		30-59 Days Past Due				60-89 Days Past Due				Greater Than 90 Days				Total Past Due				Current				Total Loans Receivable				Total Loans > 90 Days & Accruing
										(In thousands)
One-to-four family residential loans		$	1,513			$	280			$	844			$	2,637			$	150,427			$	153,064			$	—
All other mortgage loans			903				—				1,905				2,808				69,398				72,206				—
Commercial business loans			17				—				35				52				10,474				10,526				—
Consumer loans			17				9				—				26				2,231				2,257				—
Total		$	2,450			$	289			$	2,784			$	5,523			$	232,530			$	238,053			$	—

 

Non-accrual loans were comprised of the following at:

		June 30, 2012				December 31, 2011
		Nonaccrual				Nonaccrual
		(In thousands)
One-to-four family residential loans		$	2,202			$	2,433
All other mortgage loans			3,102				3,271
Commercial business loans			47				92
Consumer loans			8				12
Total		$	5,359			$	5,808

 

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. Information with respect to the Company’s impaired loans at June 30, 2012 and December 31, 2011 in combination with activity for the three and six month periods ended June 30, 2012 and June 30, 2011 is presented below:

		As of June 30, 2012												3 months ended June 30, 2012								6 months ended June 30, 2012
		Recorded Balance				Unpaid Principal Balance				Specific Allowance				Average Investment in Impaired Loans				Interest Income Recognized				Average Investment in Impaired Loans				Interest Income Recognized
		(in thousands)
Loans without a specific valuation allowance
One-to-four family residential loans		$	2,998			$	2,998			$	—			$	3,148			$	30			$	3,118			$	69
All other mortgage loans			2,060				2,060				—				2,067				28				1,916				55
Loans with a specific valuation allowance
One-to-four family residential loans			1,149				1,149				291				1,224				8				828				33
All other mortgage loans			4,634				4,634				1,834				4,973				19				4,909				39
Commercial business loans			47				47				43				49				—				70				—
Total:
One-to-four family residential loans		$	4,147			$	4,147			$	291			$	4,372			$	38			$	3,946			$	102
All other mortgage loans			6,694				6,694				1,834				7,040				47				6,825				94
Commercial business loans			47				47				43				49				—				70				—
		$	10,888			$	10,888			$	2,168			$	11,461			$	85			$	10,841			$	196

 

		As of December 31, 2011												3 months ended June 30, 2011								6 months ended June 30, 2011
		Recorded Balance				Unpaid Principal  Balance				Specific Allowance				Average Investment in Impaired Loans				Interest Income Recognized				Average Investment in Impaired Loans				Interest Income Recognized
		(in thousands)
Loans without a specific valuation allowance
One-to-four family residential loans		$	3,238			$	3,238			$	—			$	2,603			$	32			$	3,003			$	55
All other mortgage loans			1,771				1,771				—				1,493				—				1,985				10
Commercial business loans			—				—				—				—				—				26				—
Loans with a specific valuation allowance
One-to-four family residential loans			506				506				320				567				8				198				10
All other mortgage loans			5,184				5,184				1,941				5,055				65				4,070				97
Commercial business loans			92				92				53				163				—				149				2
Total:
One-to-four family residential loans		$	3,744			$	3,744			$	320			$	3,170			$	40			$	3,201			$	65
All other mortgage loans			6,955				6,955				1,941				6,548				65				6,055				107
Commercial business loans			92				92				53				163				—				175				2
		$	10,791			$	10,791			$	2,314			$	9,881			$	105			$	9,431			$	174

 

The interest income recognized in the above tables reflects interest income recognized and is not materially different from the cash basis method.

June 30, 2012		Quarter-to-Date												Year-to-Date
		Number  of loans				Pre- modification Unpaid Principal Balance				Post- modification Unpaid Principal Balance				Number of loans				Pre- modification Unpaid Principal Balance				Post- modification Unpaid Principal Balance
Troubled Debt Restructurings		(dollars in thousands)
One-to-four family residential loans			—			$	—			$	—				2			$	538			$	538

 

The TDR classifications which occurred in the year-to-date June 30, 2012 period were due to an effective interest rate below the market interest rate of similar debt. Each TDR has been individually evaluated for impairment with the appropriate specific valuation allowance included in the allowance for loan losses calculation. There were no TDR classifications which defaulted during the six month period ended June 30, 2012.

 

Note 5: Goodwill and Intangible Assets

The composition of goodwill and other intangible assets, all of which is core deposit intangible, at June 30, 2012 and December 31, 2011:

		June 30, 2012				December 31, 2011
		(In thousands)
Goodwill		$	1,719			$	1,719
Other intangible assets - gross			974				974
Other intangible assets - amortization			(800	)			(755	)
Total		$	1,893			$	1,938

 

The Company recorded amortization relative to intangible assets totaling $45,000 for the six month period ended June 30, 2012 and $46,000 for the six month period ended June 30, 2011. The Company anticipates $91,000 of amortization for each of fiscal 2012, 2013 and $37,000 for 2014. Such amortization is derived using the straight line method for the core deposit asset over ten years. Pursuant to FASB ASC 350, the Company is required to annually test goodwill and other intangible assets for impairment. The Company’s testing of goodwill and other intangible assets at March 31, 2012 indicated there was no impairment in the carrying value of these assets.

 

Note 6: Earnings Per Share

Basic earnings per common share is computed based upon the weighted-average number of common shares outstanding during the period, less shares in the Company’s Employee Stock Ownership Plan (“ESOP”) that are unallocated and not committed to be released. Diluted earnings per common share include the dilutive effect of all additional potential common shares issuable under the Company’s stock option plan. The computations are as follows:

		For the three months ended June 30,								For the six months ended June 30,
		2012				2011				2012				2011
Weighted-average common shares			2,938,660				2,930,075				2,938,660				2,930,075
Dilutive effect of assumed exercise			—				—				—				—
Weighted-average common shares			2,938,660				2,930,075				2,938,660				2,930,075

None of the outstanding options were included in the diluted earnings per share calculation for the three and six months ended June 30, 2012 and 2011, as the average fair value of the shares was less than the option exercise prices.

 

Note 7: Stock Option Plan

In fiscal 2004, the Company adopted a Stock Option Plan that provided for the issuance of 142,857 incentive options and 61,224 non-incentive options with respect to authorized common stock. As of June 30, 2012, all options under the 2004 Plan have been granted and (excluding forfeited options), are subject to exercise at the discretion of the grantees, and will expire in August of 2013 unless otherwise exercised or forfeited. The Company accounts for the stock option plan in accordance with the provisions of FASB ASC 718-10. FASB ASC 718-10 requires the recognition of compensation expense related to stock option awards based on the fair value of the option award at the grant date. Compensation cost is then recognized over the vesting period. There were no options granted during the six months ended June 30, 2012 and 2011. There was no compensation expense recognized for the stock option plan during the six months ended June 30, 2012 and 2011, as all options were fully vested prior to these periods.

A summary of the status of the Company’s stock option plan as of and for the six months ended June 30, 2012, and for the year ended December 31, 2011 is presented below:

 

		Six months ended June 30,								Year ended December 31,
		2012								2011
		Shares				Weighted Average exercise price				Shares				Weighted Average exercise price
Outstanding at beginning of period			63,408			$	13.95				83,816			$	13.95
Granted			—				—				—				—
Exercised			—				—				—				—
Forfeited			(2,000	)			13.95				(20,408	)			13.95
Outstanding at end of period			61,408			$	13.95				63,408			$	13.95
Options exercisable at period-end			61,408			$	13.95				63,408			$	13.95

 

The following information applies to options outstanding at June 30, 2012:

Number outstanding		61,408
Exercise price on all remaining options outstanding		$13.95
Weighted-average remaining contractual life		1.25 years

 

Note 8: Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory–and possibly additional discretionary–actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The Bank must give notice to the Federal Reserve Bank of Cleveland prior to declaring a dividend to the Company and is subject to existing regulatory guidance where, in general, a dividend is permissible without regulatory approval if the institution is considered to be “well capitalized” and the dividend does not exceed current year to date net income plus the change in retained earnings for the previous two calendar years.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of risk-based capital (as defined in the regulations) to risk-weighted assets (as defined), and of tangible and core capital (as defined) to adjusted total assets (as defined). As of June 30, 2012, the Bank met all capital adequacy requirements to which it was subject.

As of June 30, 2012, the Bank was classified as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain capital ratios as set forth in the table below. There are no conditions or events since June 30, 2012 that management believes have changed the Bank’s capital classification.

The Bank’s actual capital amounts and ratios as of June 30, 2012 and December 31, 2011 are presented in the following table.

		Actual								For Capital Adequacy Purposes								Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
		(Dollars in thousands)
As of June 30, 2012
Total risk-based capital     (to risk-weighted assets)		$	38,612				16.8	%		$	18,368				8.0	%		$	22,961				10.0	%
Tier I capital     (to risk-weighted assets)			35,738				15.6				9,184				4.0				13,776				6.0
Tier I capital     (to average assets)			35,738				8.8				16,314				4.0				20,393				5.0
As of December 31, 2011
Tangible capital		$	35,132				8.7	%		$	6,074				1.5	%		$	20,248				5.0	%
Core capital			35,132				8.7				16,198				4.0				24,297				6.0
Risk-based capital			38,070				16.2				18,802				8.0				23,503				10.0

 

 

Note 9: Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income, included in stockholders’ equity, are as follows:

		June 30, 2012				December 31, 2011
		(In thousands)
Net unrealized gain on securities available-for-sale		$	3,871			$	3,876
Net unrealized loss for unfunded status of defined benefit plan liability			(1,026	)			(1,026	)
			2,845				2,850
Tax effect			(968	)			(969	)
Net-of-tax amount		$	1,877			$	1,881

 

Note 10: Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of three levels of inputs that may be used to measure fair value:

Level 1	Quoted prices in active markets for identical assets or liabilities
Level 2	Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities
Level 3	Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Recurring Measurements

Following is a description of the valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the Company’s balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models that contain market pricing and information, quoted prices of securities with similar characteristics or discounted cash flows that use credit adjusted discount rates. Level 2 securities include U.S. Government agencies, mortgage-backed securities, certain collateralized mortgage obligations and

certain municipal securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include other less liquid securities.

The following table presents the fair value measurements of assets measured at fair value on a recurring basis and the level within the FASB ASC 820-10 fair value hierarchy in which the fair value measurements fall at June 30, 2012 and December 31, 2011:

						Fair Value Measurements Using
		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
June 30, 2012
U.S. government agencies		$	755			$	—			$	755			$	—
Mortgage-backed securities of government sponsored entities			100,285				—				100,285				—
Private-label collateralized mortgage obligations			1,340				—				1,340				—
State and political subdivisions			27,139				—				27,139				—
December 31, 2011
U.S. government agencies		$	1,584			$	—			$	1,584			$	—
Mortgage-backed securities of government sponsored entities			101,328				—				101,328				—
Private-label collateralized mortgage obligations			1,741				—				1,741				—
State and political subdivisions			25,984				—				25,984				—

Nonrecurring Measurements

Certain assets and liabilities may be required to be measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition. These assets and liabilities are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.

Collateral-dependent Impaired Loans, Net of ALLL

The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the

collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as necessary. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by estimated costs to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral.

Foreclosed Assets Held for Sale

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value (based on current appraised value) at the date of foreclosure, establishing a new cost basis. Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell. Management has determined fair value measurements on other real estate owned primarily through evaluations of appraisals performed, and current and past offers for the other real estate under evaluation.

The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the FASB ASC 820-10 fair value hierarchy in which the fair value measurements fall at June 30, 2012 and December 31, 2011.

						Fair Value Measurements Using
		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
June 30, 2012
Foreclosed assets		$	21			$	—			$	—			$	21
December 31, 2011
Collateral-dependent impaired loans		$	3,468			$	—			$	—			$	3,468
Foreclosed assets			1,283				—				—				1,283

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements in thousands.

	Fair Value at 6/30/12	Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Foreclosed assets	$21	Market comparable properties	Selling Cost	10%

There were no changes in the inputs or methodologies used to determine fair value at June 30, 2012 as compared to December 31, 2011.

 

The following table presents estimated fair values of the Company’s financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.

						Fair Value Measurements Using
		Carrying Amount				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
June 30, 2012			(In thousands)
Financial assets
Cash and cash equivalents		$	15,524			$	15,524			$	—			$	—
Held-to-maturity securities			1,636				—				1,677				—
Loans, net of allowance for loan losses			235,483				—				—				249,181
Federal Home Loan Bank stock			5,025				—				5,025				—
Interest receivable			1,302				—				1,302				—
Financial liabilities
Deposits			332,008				—				331,902				—
Other short-term borrowings			8,318				—				8,318				—
Federal Home Loan Bank advances			24,157				—				25,204				—
Advances from borrowers for taxes and insurance			191				—				191				—
Interest payable			56				—				56				—

 

 

 

 

 

						Fair Value Measurements Using
		Carrying Amount				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
December 31, 2011			(In thousands)
Financial assets
Cash and cash equivalents		$	19,816			$	19,816			$	—			$	—
Held-to-maturity securities			1,679				—				1,695				—
Loans, net of allowance for loan losses			232,099				—				—				239,983
Federal Home Loan Bank stock			5,025				—				5,025				—
Interest receivable			1,314				—				1,314				—
Financial liabilities
Deposits			333,848				—				332,222				—
Other short-term borrowings			5,278				—				5,278				—
Federal Home Loan Bank advances			26,597				—				27,717				—
Advances from borrowers for taxes and insurance			941				—				941				—
Interest payable			66				—				66				—

 

The following methods and assumptions were used to estimate the fair value of each class of financial instruments.

Cash and Cash Equivalents, Interest Receivable and Federal Home Loan Bank Stock

The carrying amount approximates fair value.

Loans

The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations.

Held-to-maturity securities

The fair value of held-to-maturity securities was estimated by using pricing models that contain market pricing and information, quoted prices of securities with similar characteristics or discounted cash flows that use credit adjusted discount rates.

 

Deposits

Deposits include savings accounts, checking accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

Interest Payable, Other Short-Term Borrowings and Advances From Borrowers for Taxes and Insurance

The carrying amount approximates fair value.

Federal Home Loan Bank Advances

Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.

Commitments to Originate Loans, Letters of Credit and Lines of Credit

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. Fair values of commitments were not material at June 30, 2012 and December 31, 2011.

Note 11: Recent Accounting Developments

FASB Accounting Standards Update (ASU) 2011-03 “Reconsideration of Effective Control for Repurchase Agreements” (Topic 860), issued on April 29, 2011, concerns the improvement of accounting for repurchase agreements (repos) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity by amending the criteria for determining effective control of collateral. The guidance is effective for fiscal quarters and years beginning on or after December 15, 2011 (January 1, 2012 for the Company). Early adoption is not permitted. The adoption of FASB ASU 2011-03 did not have a material effect on the Company’s financial condition or results of operations.

FASB Accounting Standards Update (ASU) 2011-04 “Fair Value Measurement” (Topic 820), issued on May 12, 2011, concerns the establishment of a global standard for applying fair value measurement and clarifies three points in topic 820. First, only non-financial assets should be valued via a determination of their best use. Second, an instrument in shareholder’s equity should be measured from the perspective of an investor or trader who owns that instrument. Third, data will need to be provided and methods disclosed for assets valued in level 3 of the fair value hierarchy. The guidance is effective for fiscal quarters and years beginning on or after December 15, 2011 (January 1, 2012 for the Company). Early adoption is not permitted. The adoption of FASB ASU 2011-04 did not have a material effect on the Company’s financial condition or results of operations.

 

FASB Accounting Standards Update (ASU) 2011-05 “Comprehensive Income” (Topic 220), issued on June 16, 2011, concerns the presentation of comprehensive income in financial statements. An entity has the option to present the total comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance is effective for fiscal quarters and years beginning on or after December 15, 2011 (January 1, 2012 for the Company). Early adoption is permitted. The adoption of FASB ASU 2011-05 did not have a material effect on the Company’s financial condition or results of operations.

FASB Accounting Standards Update (ASU) 2011-08 Intangibles – Goodwill and Other” (Topic 350), issued on September 15, 2011, concerns the cost and complexity of performing the first step of the two step goodwill impairment test. The amendments in this update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in the original ASU topic 350. The guidance is effective for fiscal quarters and years beginning on or after December 15, 2011 (January 1, 2012 for the Company). Early adoption is permitted. The adoption of FASB ASU 2011-08 did not have a material effect on the Company’s financial condition or results of operations.

FASB ASU 2011-12, Comprehensive Income (Topic 220), Deferral of the effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-12, issued in December 2011 is a deferral of only those changes in update 2011-05 that relates to the presentation of reclassification adjustments out of accumulated other comprehensive income. All other requirements in Update 2011-05 are not affected by this update, including the requirements to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. This standard did not have a material impact on the Company’s consolidated financial statements.

Note 12: Transfer and Assumption Agreement

On July 2, 2012, the Bank entered into a Transfer and Assumption Agreement with Thomasville National Bank (“TNB”), the national bank subsidiary of Thomasville Bancshares, Inc. headquartered in Thomasville, Georgia. The agreement provides for the transfer of the Bank’s trust business to TNB. As of June 30, 2012, the Bank had approximately $41 million in trust account assets.

Under terms of the agreement, TNB will maintain a trust office in a Wayne Savings branch or office in Wooster, Ohio. The Bank and TNB will also enter into an office support and referral agreement under which the Bank will be compensated for, among other services, the use of facilities and equipment required for the operation of the TNB trust office. The costs of exiting the trust business include a one-time expense of approximately $334,000. Assuming regulatory approval and closing of the transaction, expected about the end of the third quarter of 2012, the Bank will surrender its trust license to the Ohio Department of Financial Institutions. The bank received no consideration and there is no gain or loss on the transfer other than the one-time expense noted above.

The strategic rationale for this transaction is to partner with a stronger provider of trust services, who will absorb the operating expense overhead and assume the fiduciary risk associated with post-closing management of the trust accounts.

Wayne Savings Bancshares, Inc.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations

Strategic Initiatives

As part of an ongoing strategic planning process, which includes annual plan updates and regular progress reviews by the Board of Directors, the Company is engaged in several initiatives to improve the returns to shareholders over a foreseeable time horizon. These initiatives include the development of a comprehensive marketing and sales program to increase top line revenue of the Company through loans and fee income generating activities, a comprehensive review of the branch facilities and staff to identify opportunities for cost effective reductions to improve operational efficiency, evaluation of alternative approaches for the delivery of trust services to ensure profitable operation of the department (which resulted in the transfer and assumption agreement discussed in note 12 to the financial statements above) and evaluation of information technology solutions to improve internal efficiency and customer service. A comprehensive review of the Company’s branch facilities conducted during 2011 yielded no opportunities for consolidation of branch facilities that would not reduce the Company’s current or future profitability as compared to alternatives included in the Company’s strategic plan.

In addition, the Board of Directors has established the position of Chief Risk Officer, with responsibility for the development of a comprehensive Enterprise Risk Management (ERM) program to ensure that the earnings generated through existing and contemplated activities are commensurate with the risks assumed in those activities and consistent with legal requirements, regulatory requirements and general economic conditions.

Discussion of Financial Condition Changes from December 31, 2011 to June 30, 2012

At June 30, 2012, the Company had total assets of $408.8 million, a decrease of $1.3 million, or 0.3%, from total assets at December 31, 2011.

Liquid assets, consisting of cash, interest-bearing demand deposits and available-for-sale securities, decreased by $5.4 million, or 3.6%, to $145.0 million at June 30, 2012 compared to $150.5 million at December 31, 2011. The decrease was primarily due to a decrease of $4.3 million in cash and cash equivalents and a decrease in available-for-sale securities of $1.1 million, or 0.9%. The decrease in available-for-sale securities was due to regular payments and “prepayments” on loans securitized within mortgage-backed securities that reduced the available-for-sale securities portfolio of the Bank. Increased payments on loans, also known as “prepayments,” occur in low interest rate environments where borrowers can exercise an option to refinance existing loans either with or without a prepayment penalty.

Total securities decreased by $1.2 million, or 0.9%, during the six month period ended June 30, 2012. The decrease was primarily due to maturities and principal repayments of $25.3 million and amortization of premiums of $1.0 million partially offset with purchases of $25.2 million for the six month period. Purchases were mainly funded by proceeds from principal payments received from the loan and securities portfolios.

Net loans receivable increased by $3.4 million, or 1.5% at June 30, 2012 compared to December 31, 2011. The Bank originated $32.6 million of loans, received payments of $26.8 million, originated and sold $2.5

million of 30-year fixed-rate mortgage loans into the secondary market and made a provision for loan losses of $393,000. The low interest rate environment has induced a number of residential and commercial borrowers to refinance existing loans, which increases loan repayment activity, while the continuing difficult economic environment continues to limit the demand for new loans by credit worthy borrowers.

As part of an overall strategy to manage liquidity and interest rate risk, management has executed a strategy of immediately selling certain newly originated 30-year fixed-rate mortgage loans into the secondary market to limit the accumulation of interest rate risk on the balance sheet and to keep the secondary market channel open as a backup source of liquidity. Similarly, in order to further limit the accumulation of interest rate risk on the balance sheet, the Company focuses on the origination of shorter-term and adjustable-rate secured commercial loans and limits the origination and retention of long term fixed-rate residential mortgages. To the extent that loan demand is insufficient in the current period, investments in the securities portfolio are made to provide future cash flows to fund loan demand in future periods while also limiting the interest rate risk exposure of the Company. Investments generally contribute to higher risk based capital ratios, compared to loans, as the investments the Company purchases are risk weighted less than the loan originations. When loan volume accelerates, risk based capital will decline.

		June 30, 2012								December 31, 2011
		(Dollars in thousands)
Mortgage loans:
One-to-four family residential(1)		$	154,832				63.77	%		$	153,064				64.30	%
Residential construction loans			1,200				0.49				753				0.32
Multi-family residential			9,412				3.88				8,589				3.61
Non-residential real estate/land(2)			64,062				26.38				62,864				26.40
Total mortgage loans			229,506				94.52				225,270				94.63
Other loans:
Consumer loans(3)			2,095				0.86				2,257				0.95
Commercial business loans			11,214				4.62				10,526				4.42
Total other loans			13,309				5.48				12,783				5.37
Total loans before net items			242,815				100.00	%			238,053				100.00	%
Less:
Loans in process			3,277								1,691
Deferred loan origination fees			463								409
Allowance for loan losses			3,592								3,854
Total loans receivable, net		$	235,483							$	232,099

 

(1)

Includes loans collateralized by second mortgages in the aggregate amount of $15.5 million at June 30, 2012 and $15.9 million at December 31, 2011. Such loans have been underwritten on substantially the same basis as the Company’s first mortgage loans.

(2)

Includes land loans of $2.1 million for June 30, 2012 and $2.7 million for December 31, 2011.

(3)

Includes second mortgage loans of $1.1 million for June 30, 2012 and $1.2 million December 31, 2011.

 

Foreclosed assets held for sale amounted to $70,000 at June 30, 2012 and $1.3 million at December 31, 2011. Activity during the six months consisted of one sale of a nonresidential property of $1.2 million and a writedown of $35,000 as the Bank lowered the listing price. Total non-performing and impaired assets amounted to $12.2 million at both June 30, 2012 and December 31, 2011.

Bank Owned Life Insurance (BOLI) increased by $1.4 million during the period ended June 30, 2012. Management executed a strategy to improve the credit quality of the existing portfolio by exchanging insurance policies. As part of this process, management invested additional funds to generate additional earnings to offset compensation and benefits costs while meeting minimum issuance requirements.

 

Goodwill of $1.7 million is carried on the Company’s balance sheet as a result of the acquisition of Stebbins Bancshares in June 2004. In accordance with FASB ASC 350, this goodwill is tested for impairment on at least an annual basis. Management evaluated the goodwill using an analysis of required measures of value, including the current stock price as an indicator of minority interest value, change of control multiples as a measure of controlling interest value and discounted cash flow analysis as a measure of going concern value and applied a weighting based on appraisal standards to arrive at a valuation conclusion that indicated no impairment at March 31, 2012 and there were no interim impairment indicators that would require another valuation at June 30, 2012.

Deposits totaled $332.0 million at June 30, 2012, a decrease of $1.8 million, or 0.6%,compared to $333.8 million at December 31, 2011. Time deposits decreased by $8.1 million, or 5.5%, offset by a $4.9 million increase in savings and money market accounts and an increase of $1.4 million in demand accounts. Management continued to exercise discipline during the period with regard to the pricing of retail certificates, keeping rates close to market benchmarks and not competing for certificates where a profitable customer relationship was not involved. Given the uncertain status of the economy in general, customers are choosing to increase their liquidity and keep their funds in insured checking, savings and money market products offered by the Bank.

Other short-term borrowings, in the form of recurring repurchase agreements with commercial customers of the Bank, increased $3.0 million over the six months to a balance of $8.3 million. These customer repurchase agreements are offered by the Bank in order to retain commercial customer funds and to afford those commercial customers the opportunity to earn a return on a short-term secured transaction. Average balances are shown in the tables below and reflect no significant variation during the periods. The interest rate paid on these borrowings was 0.15% at both June 30, 2012 and December 31, 2011.

Advances from the Federal Home Loan Bank of Cincinnati (“FHLB”) totaled $24.2 million at June 30, 2012, and $26.6 million at December 31, 2011. The Company uses advances from the FHLB for short-term cash management purposes and to extend liability duration for interest rate risk management purposes, as the cost of duration purchased from the FHLB is less expensive than obtaining a similar duration through retail certificates of deposit. Repricing risk associated with advances is mitigated through the laddering of advance maturities over time. The weighted average cost of FHLB advances was 2.74% at June 30, 2012 compared to 2.67% at December 31, 2011.

Stockholders’ equity increased by $424,000, or 1.1%, during the six months ended June 30, 2012, mainly due to net income of $776,000 partially offset with declared dividends of $390,000.

Comparison of Operating Results for the Three Month Periods Ended June 30, 2012 and 2011

General

Net income for the three months ended June 30, 2012 totaled $624,000, an increase of $109,000, or 21.2%, compared to $515,000 for the three month period ended June 30, 2011. The increase in net income was primarily due to a decrease of $464,000 in provision for loan losses and an increase of $52,000 in noninterest income, partially offset a decrease of $136,000 in net interest income before provision for loan losses, an increase in noninterest expenses of $213,000 and increased provision for federal income taxes of $58,000.

 

Average Balance Sheet

The following table sets forth certain information relating to the Company’s average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.

		For the three months ended June 30,
		2012												2011
		Average Balance				Interest				Average Rate				Average Balance				Interest				Average Rate
		(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1)		$	233,482			$	2,945				5.05	%		$	238,152			$	3,137				5.27	%
Investment securities(2)			132,458				862				2.60				133,338				1,177				3.53
Interest-earning deposits(3)			16,053				57				1.42				14,150				58				1.64
Total interest-earning assets			381,993				3,864				4.05				385,640				4,372				4.53
Noninterest-earning assets			23,626												24,232
Total assets		$	405,619											$	409,872
Interest-bearing liabilities:
Deposits		$	329,182			$	544				0.66	%		$	324,192			$	792				0.98	%
Other short-term borrowings			7,222				3				0.17				5,993				5				0.33
Borrowings			24,935				171				2.74				36,860				293				3.18
Total interest-bearing liabilities			361,339				718				0.79				367,045				1,090				1.19
Noninterest bearing  liabilities			4,251												3,588
Total liabilities			365,590												370,633
Stockholders’ equity			40,029												39,239
Total liabilities and stockholders’ equity		$	405,619											$	409,872
Net interest income						$	3,146											$	3,282
Interest rate spread(4)											3.26	%											3.34	%
Net yield on interest-earning assets(5)											3.29	%											3.40	%
Ratio of average interest-earning assets to average  interest-bearing liabilities											105.72	%											105.07	%

 

(1)

Includes non-accrual loan balances.

(2)

Includes mortgage-backed securities both designated as available-for-sale and held-to-maturity.

(3)

Includes interest-bearing deposits in other financial institutions.

(4)

Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(5)

Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.

 

Interest Income

Interest income decreased by $508,000 or 11.6%, to $3.9 million for the three months ended June 30, 2012, compared to the same period in 2011. The decrease was due to a decline in the weighted-average yield on interest-earning assets to 4.05% in the 2012 period from 4.53% for the 2011 period, accompanied by a decrease of $3.6 million in the average balance of interest-earning assets outstanding to $382.0 million for the 2012 period compared to an average balance of $385.6 million for the 2011 period. The yield decrease was primarily due to the cumulative effect of interest-earning assets repricing to lower current market rates from the 2011 period to the 2012 period through interest rate resets on adjustable rate loans and securities, prepayments, lower rates on new loan originations and reinvestment of securities cashflows at lower market yields.

Interest income on loans decreased by $192,000, or 6.1%, for the three month period ended June 30, 2012, compared to the same period in 2011. The loan portfolio yield decreased from 5.27% for the three months ended June 30, 2011 to 5.05% for the three months ended June 30, 2012, as a result of reduced origination yields and the amortization, prepayment and repricing of higher yielding assets due to the low level of market interest rates. The average balance of loans outstanding decreased $4.7 million, or 2.0%, to $233.5 million for the 2012 period compared to $238.2 million for the 2011 period. Loan prepayments have increased due to the low interest rate environment and loan originations have decreased due to lack of demand from qualified borrowers resulting from the continued difficult economic conditions in 2012.

Interest income on securities decreased by $315,000 during the three months ended June 30, 2012, compared to the same period in 2011. This decrease was due primarily to a decrease of 93 basis points in the weighted-average rate to 2.60% for the 2012 period, compared to 3.53% for the 2011 period, coupled with a decline in the average balance of $880,000. As discussed earlier, maturing securities cash flows are being reinvested at significantly lower market rates, and the duration of purchased securities is being shortened to mitigate the interest rate risk associated with a possible future increase in the level of market interest rates and to provide portfolio cash flows to fund future loan demand.

Dividends on Federal Home Loan Bank stock and other income declined $1,000 for three month periods ended June 30, 2012 from June 30, 2011. The decrease resulted from a 22 bps decline in the weighted average rate from 1.64% at June 30, 2011 to 1.42% at June 30, 2012 and was offset almost entirely by the increase in the average balance of $1.9 million, or 13.4%.

Interest Expense

Interest expense totaled $718,000 for the three month period ended June 30, 2012, a decrease of $372,000, or 34.1%, compared to $1.1 million for the three month period ended June 30, 2011. The decrease was mainly due to a 40 basis point decrease in the weighted-average cost of funds to 0.79% for the 2012 period compared to 1.19% the previous year and, to a lesser extent, with a decrease in the average balance of total interest-bearing liabilities of $5.7 million, or 1.6%, for the 2012 period compared to the 2011 period.

Interest expense on deposits totaled $544,000, a decrease of $248,000, or 31.3%, compared to $792,000 for the same period in the previous year. The decrease was mainly due to a 32 basis point decrease in the

 

weighted-average cost of deposits, to 0.66% for the 2012 period compared to 0.98% for the 2011 period, partially offset by an increase in the average balance of $5.0 million, or 1.5%, to $329.2 million for the period ended June 30, 2012. The decrease in interest expense is slowing as rates paid on deposit products reach floors established by local market competitors and overall market conditions.

Interest expense on other short-term borrowings totaled $3,000 for the three month period ended June 30, 2012, a $2,000 decrease over the same period in the previous year. The weighted-average cost decreased 16 basis points to 0.17% offset by an increase in the average balance of $1.2 million, or 20.5%.

Interest expense on Federal Home Loan Bank advances totaled $171,000 for the three month period ended June 30, 2012, a decrease of $122,000 compared to the expense of $293,000 for the 2011 period. The decrease was mainly due to a decline of $11.9 million, or 32.4%, in the average balance outstanding along with a decrease in the weighted-average cost of 44 basis points to 2.74%. The decrease in the rate paid is mainly due to decreases in market interest rates as maturing advances have either been paid off or refinanced at lower rates.

Net Interest Income

Net interest income totaled $3.1 million for the three month period ended June 30, 2012, a decrease of $136,000, or 4.1%, from the three month period ended June 30, 2011. The interest rate spread decreased 8 basis points to 3.26% for the 2012 period compared to 3.34% for the 2011 period. Similarly, the net interest margin decreased 11 basis points to 3.29% for the three month period ended June 30, 2012 compared to 3.40% for the 2011 period. The decline in the above rates can be attributed to the continued low interest rate environment, inducing a number of residential and commercial borrowers to refinance existing loans at the lower rates. This causes increases in the loan repayment activity, causing prepayments on the real estate based securities portfolio creating excess amortization of premiums and reduced earnings. The cost of funds was managed in a manner that would allow the Bank to compete with existing market interest rates on interest earning assets.

Provision for Loan Losses

Management recorded a reversal of $394,000 in provision for loan losses for the three month period ended June 30, 2012, a decrease of $464,000 compared to the $70,000 provision for the three month period ended June 30, 2011. The negative provision is based on local economic factors such as unemployment and the number of foreclosures within the Bank’s market which moved favorably during the quarter.

 

 

Noninterest Income

Noninterest income, consisting of service fees and charges on deposit accounts, earnings on bank-owned life insurance, trust income and gain on the sale of loans increased by $52,000, or 11.8%, for the three month period ended June 30, 2012, compared to the three month period ended June 30, 2011. The increase was due primarily to increased gain on sale of loans of $31,000 and an increase in bank owned life insurance income of $18,000 mainly due to the additional purchase of $1.3 million of bank owned life insurance. The purchase of bank owned life insurance is used to generate income to offset the costs of employee benefits.

Noninterest Expense

Noninterest expense increased by $213,000, or 7.1%, to $3.2 million for the three months ended June 30, 2012, compared to $3.0 million for the three months ended June 30, 2011. The increase was primarily due to an increase of $323,000, or 20.6%, in salaries and employee benefits, an increase of $123,000, or 25.0%, in other operating expense offset by a decline in provision for impairment on foreclosed assets held for sale of $252,000. The increase in salaries and employee benefits was primarily due to the trust transfer and assumption agreement coupled with the development of a comprehensive marketing and sales program to increase top line revenue of the Company through loans and fee income generating activities and employee training activities in the 2012 quarter which were not in to the 2011 quarter. The increase in other operating expense was primarily increased marketing expenses incurred as part of the Company’s strategic initiative to increase top line revenues coupled with the trust transfer and assumption agreement costs.

Federal Income Taxes

A federal income tax expense of $194,000 was recognized for the three month period ended June 30, 2012, an increase of $58,000 compared to the three month period ended June 30, 2011. The increase was primarily due to a $167,000 increase in pretax income resulting from the factors discussed above.

Comparison of Operating Results for the Six Month Periods Ended June 30, 2012 and 2011

General

Net income for the six months ended June 30, 2012 totaled $776,000, a decrease of $144,000, or 15.7%, compared to $920,000 for the six month period ended June 30, 2011. The decrease in net income was primarily due to an increase of $201,000 in provision for loan losses, an increase in noninterest expenses of $98,000 and a decrease of $72,000 in net interest income partially offset by an increase of $156,000 in noninterest income and decreased provision for federal income taxes of $71,000.

 

Average Balance Sheet

The following table sets forth certain information relating to the Company’s average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.

		For the six months ended June 30,
		2012												2011
		Average Balance				Interest				Average Rate				Average Balance				Interest				Average Rate
		(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1)		$	232,578			$	5,931				5.10	%		$	239,190			$	6,312				5.28	%
Investment securities(2)			134,683				1,804				2.68				132,549				2,239				3.38
Interest-earning deposits(3)			14,958				116				1.55				13,511				117				1.73
Total interest-earning assets			382,219				7,851				4.11				385,250				8,668				4.50
Noninterest-earning assets			23,731												24,427
Total assets		$	405,950											$	409,677
Interest-bearing liabilities:
Deposits		$	329,373			$	1,154				0.70	%		$	322,685			$	1,640				1.02	%
Other short-term borrowings			6,588				5				0.15				6,351				10				0.31
Borrowings			25,767				350				2.72				38,177				604				3.16
Total interest-bearing liabilities			361,728				1,509				0.83				367,213				2,254				1.23
Noninterest bearing  liabilities			4,215												3,952
Total liabilities			365,943												371,165
Stockholders’ equity			40,007												38,512
Total liabilities and stockholders’ equity		$	405,950											$	409,677
Net interest income						$	6,342											$	6,414
Interest rate spread(4)											3.28	%											3.27	%
Net yield on interest-earning assets(5)											3.32	%											3.33	%
Ratio of average interest-earning assets to average  interest-bearing liabilities											105.66	%											104.91	%

 

(1)

Includes non-accrual loan balances.

(2)

Includes mortgage-backed securities both designated as available-for-sale and held-to-maturity.

(3)

Includes interest-bearing deposits in other financial institutions.

(4)

Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(5)

Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.

 

Interest Income

Interest income decreased by $817,000, or 9.4%, to $7.9 million for the six months ended June 30, 2012, compared to the same period in 2011. The decrease was due to a decline in the weighted-average yield on interest-earning assets to 4.11% in the 2012 period from 4.50% for the 2011 period, accompanied by a decrease of $3.0 million in the average balance of interest-earning assets outstanding to $382.2 million for the 2012 period compared to an average balance of $385.2 million for the 2011 period. The yield decrease was primarily due to the cumulative effect of interest-earning assets repricing to lower current market rates from the 2011 period to the 2012 period through interest rate resets on adjustable rate loans and securities, prepayments, lower rates on new loan originations and reinvestment of securities cashflows at lower market yields.

Interest income on loans decreased by $381,000, or 6.0%, for the six month period ended June 30, 2012, compared to the same period in 2011. The loan portfolio yield decreased from 5.28% for the six months ended June 30, 2011 to 5.10% for the six months ended June 30, 2012, from reduced origination yields and the amortization, prepayment and repricing of higher yielding assets due to the low level of market interest rates. The average balance of loans outstanding decreased $6.6 million, or 2.8%, to $232.6 million for the 2012 period compared to $239.2 million for the 2011 period. Loan prepayments have increased due to the low interest rate environment and loan originations have decreased due to lack of demand from qualified borrowers resulting from the continued difficult economic conditions in 2012.

Interest income on securities decreased by $435,000, or 19.4%, during the six months ended June 30, 2012, compared to the same period in 2011. This decrease was due primarily to a decrease of 70 basis points in the weighted-average rate to 2.68% for the 2012 period, compared to 3.38% for the 2011 period, offset with an increase in the average balance of $2.1 million, or 1.6%. As discussed earlier, maturing securities cash flows are being reinvested at significantly lower market rates, and the duration of purchased securities is being shortened to mitigate the interest rate risk associated with a possible future increase in the level of market interest rates and to provide portfolio cash flows to fund future loan demand.

Dividends on Federal Home Loan Bank stock and other income declined $1,000 for six month periods ended June 30, 2012 from June 30, 2011. The decrease resulted from a 18 bps decline in the weighted average rate from 1.73% at June 30, 2011 to 1.55% at June 30, 2012 and was offset almost entirely by the increase in the average balance of $1.4 million, or 10.7%.

Interest Expense

Interest expense totaled $1.5 million for the six month period ended June 30, 2012, a decrease of $745,000, or 33.1%, compared to $2.3 million for the six month period ended June 30, 2011. The decrease was mainly due to a 40 basis point decrease in the weighted-average cost of funds to 0.83% for the 2012 period compared to 1.23% the previous year and, to a lesser extent, with a decrease in the average balance of total interest-bearing liabilities of $5.5 million, or 1.5%, for the 2012 period compared to the 2011 period.

Interest expense on deposits totaled $1.2 million, a decrease of $486,000, or 29.6%, compared to $1.6 million for the same period in the previous year. The decrease was mainly due to a 32 basis point decrease

In the weighted-average cost of deposits, to 0.70% for the 2012 period compared to 1.02% for the 2011 period, partially offset by an increase in the average balance of $6.7 million, or 2.1%, to $329.4 million for the period ended June 30, 2012. The decrease in interest expense is slowing as rates paid on deposit products reach floors established by local market competitors and overall market conditions.

Interest expense on other short-term borrowings totaled $5,000 for the six month period ended June 30, 2012, a $5,000 decrease over the same period in the previous year. The weighted-average cost decreased 16 basis points to 0.15% partially offset with an increase in the average balance of $237,000, or 3.7%.

Interest expense on Federal Home Loan Bank advances totaled $350,000 for the six month period ended June 30, 2012, a decrease of $254,000 compared to the expense of $604,000 for the 2011 period. The decrease was mainly due to a decline of $12.4 million, or 32.5%, in the average balance outstanding along with a decrease in the weighted-average cost of 44 basis points to 2.72%. The decrease in the rate paid is mainly due to decreases in market interest rates as maturing advances have either been paid off or refinanced at lower rates.

Net Interest Income

Net interest income totaled $6.3 million for the six month period ended June 30, 2012, a decrease of $72,000, or 1.1%, from the six month period ended June 30, 2011. The interest rate spread increased 1 basis point to 3.28% for the 2012 period compared to 3.27% for the 2011 period. Similarly, the net interest margin was a marginal change of a decrease of 1 basis point to 3.32% for the six month period ended June 30, 2012 compared to 3.33% for the 2011 period. The pace of the declining cost on interest bearing liabilities declined at a slightly greater rate than the declining yield on interest earning assets. The continued market rate environment continues to push down on the yield the Bank is earning on interest earning assets. The cost of funds was managed in a manner that would allow the Bank to compete with existing market interest rates on interest earning assets.

Provision for Loan Losses

Management recorded a provision for loan losses of $393,000 for the six month period ended June 30, 2012, an increase of $201,000 compared to the $192,000 provision for the six month period ended June 30, 2011. The provision is based on management’s assessment of probable incurred losses in the loan portfolio. The increase was mainly due to a charge-off of a commercial real estate loan where the Bank held a second mortgage position on the collateral and additionally, two other relationships were evaluated based on a change in circumstance that resulted in a recognized impairment. The aforementioned increases were partially offset with a current quarter provision reversal due to the favorable movement of the economic factors related to the Bank’s market area.

 

Noninterest Income

Noninterest income, consisting of service fees and charges on deposit accounts, earnings on bank-owned life insurance, trust income and gain on the sale of loans increased by $156,000, or 19.4%, for the six month period ended June 30, 2012, compared to the six month period ended June 30, 2011. The increase was due primarily to increased gain on sale of loans of $70,000, an increase in bank owned life insurance income of $34,000 mainly due to the additional purchase of $1.3 million of bank owned life insurance, an increase in non-recurring trust income of $34,000 and other service fees related to debit card increased volume. The purchase of bank owned life insurance is used to generate income to offset the costs of employee benefits.

Noninterest Expense

Noninterest expense increased by $98,000, or 1.7%, to $6.0 million for the six months ended June 30, 2012, compared to $5.9 million for the six months ended June 30, 2011. The increase was primarily due to an increase of $519,000, or 17.2%, in salaries and employee benefits, an increase of $248,000, or 30.1%, in other operating expense offset by a decline in provision for impairment on foreclosed assets held for sale of $673,000. The increase in salaries and employee benefits was primarily due to the trust transfer and assumption agreement expenses and the development of a comprehensive marketing and sales program to increase the top line revenue of the Company. Also in the first quarter there was a non-recurring health savings account contribution and increased post-retirement costs compared to the prior year. The increase in other operating expense was primarily increased marketing expenses.

Federal Income Taxes

A federal income tax expense of $134,000 was recognized for the six month period ended June 30, 2012, a decrease of $71,000 compared to the six month period ended June 30, 2011. The decrease was primarily due to a $215,000 decrease in pretax income resulting from the factors discussed above.

Forward-Looking Statements

This document contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and similar expressions. These forward-looking statements include: statements of goals, intentions and expectations, statements regarding prospects and business strategy, statements regarding asset quality and market risk, and estimates of future costs, benefits and results.

These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following: (1) general economic conditions, (2) competitive pressure among financial services companies, (3) changes in interest rates, (4) deposit flows, (5) loan demand, (6) changes in legislation or regulation, (7) changes in accounting principles, policies and guidelines, (8) litigation liabilities, including costs, expenses, settlements and judgments, and (9) other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. We have no obligation to update or revise any forward-looking statements to reflect any changed assumptions, any unanticipated events or any changes in the future.

ITEM 3

Quantitative and Qualitative Disclosures About Market Risk

Management believes there has been no material change in the Company’s market risk since the Company’s Form 10-K filed with the Securities and Exchange Commission for the nine month period ended December 31, 2011.

 

ITEM 4

Controls and Procedures

(a)

Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective in timely alerting them to the material information relating to the Company (or our consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

(b)

Changes in internal controls.

There has been no change made in the Company’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Wayne Savings Bancshares, Inc.
PART II

 

ITEM 1.

Legal Proceedings

Not applicable.

 

ITEM 1A.

Risk Factors

There have been no material changes in the risk factors set forth in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the nine month fiscal period ended December 31, 2011.

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)

Not applicable.

(b)

Not applicable.

(c)

Not applicable.

 

ITEM 3.

Defaults Upon Senior Securities

Not applicable.

 

ITEM 4.

Mine Safety Disclosures

 

Not applicable.

 

ITEM 5.

Other Information

Not applicable.

 

ITEM 6.

Exhibits

	EX-31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
	EX-31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
	EX-32	Written Statement of Chief Executive Officer and Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
	EX-101	Interactive financial data (XBRL)

 

 

SIGNATURES

 

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

 

Date:	August 10, 2012		By:	/s/Rod C. Steiger
				Rod C. Steiger
				President and Chief Executive Officer
Date:	August 10, 2012		By:	/s/Myron Swartzentruber
				Myron Swartzentruber
				Senior Vice President and
				Chief Financial Officer