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

September 30, 2013

 

OR

 

¨

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 ¨

 

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     ¨ 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 ¨

Accelerated filer ¨

Non-accelerated filer  ¨

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 ¨      No ý

As of October 31, 2013, the latest practicable date, 2,885,999 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 (Loss)	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	33
Item 3	Quantitative and Qualitative Disclosures About Market Risk	46
Item 4	Controls and Procedures	46
PART II - OTHER INFORMATION
Item 1	Legal Proceedings	47
Item 1A	Risk Factors	47
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3	Defaults Upon Senior Securities	47
Item 4	Mine Safety Disclosures	47
Item 5	Other Information	48
Item 6	Exhibits	48
SIGNATURES		49

 

 

Wayne Savings Bancshares, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

 

		September 30, 2013				December 31, 2012
Assets			(Unaudited)
Cash and due from banks		$	3,183			$	7,303
Interest-bearing deposits			4,819				4,752
Cash and cash equivalents			8,002				12,055
Available-for-sale securities			100,884				111,518
Held-to-maturity securities			6,646				3,748
Loans, net of allowance for loan losses of $3,042 and $3,328 at         September 30, 2013 and December 31, 2012, respectively			257,979				247,849
Premises and equipment			6,788				7,088
Federal Home Loan Bank stock			5,025				5,025
Foreclosed assets held for sale, net			38				318
Accrued interest receivable			1,371				1,228
Bank-owned life insurance			8,934				8,723
Goodwill			1,719				1,719
Other intangible assets			60				128
Prepaid federal deposit insurance premiums			—				596
Other assets			2,113				1,944
Prepaid federal income taxes			131				178
Total assets		$	399,690			$	402,117
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand		$	79,777			$	80,668
Savings and money market			119,424				112,229
Time			127,414				134,840
Total deposits			326,615				327,737
Other short-term borrowings			6,516				7,077
Federal Home Loan Bank advances			22,957				21,217
Interest payable and other liabilities			4,639				5,173
Deferred federal income taxes			496				1,128
Total liabilities			361,223				362,332
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			35,976				35,975
Retained earnings			18,488				17,567
Shares acquired by ESOP			(511	)			(572	)
Accumulated other comprehensive income (loss)			(187	)			1,340
Treasury stock, at cost: Common: 1,092,732 and 1,017,385 shares at         September 30, 2013 and December 31, 2012, respectively			(15,697	)			(14,923	)
Total stockholders’ equity			38,467				39,785
Total liabilities and stockholders’ equity		$	399,690			$	402,117

 

   

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Income and Comprehensive Income (Loss)

For the three and nine months ended September 30, 2013 and 2012

(In thousands, except per share data)

(Unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2013				2012				2013				2012
Interest and Dividend Income
Loans		$	2,874			$	2,964			$	8,608			$	8,895
Securities			633				788				1,921				2,592
Dividends on Federal Home Loan Bank stock and           other			54				55				165				171
Total interest and dividend income			3,561				3,807				10,694				11,658
Interest Expense
Deposits			417				500				1,283				1,654
Other short term borrowings			3				3				8				8
Federal Home Loan Bank advances			155				165				460				515
Total interest expense			575				668				1,751				2,177
Net Interest Income			2,986				3,139				8,943				9,481
Provision (Credit) for Loan Losses			76				225				(55	)			618
Net Interest Income After Provision (Credit) for      Loan Losses			2,910				2,914				8,998				8,863
Noninterest Income
Gain on loan sales			7				108				80				203
Gain (Loss) on sale of foreclosed assets held for sale			(11	)			—				6				(13	)
Trust Income			—				62				—				227
Earnings on bank-owned life insurance			74				75				221				223
Service fees, charges and other operating			324				271				872				824
Total noninterest income			394				516				1,179				1,464
Noninterest Expense
Salaries and employee benefits			1,484				1,532				4,516				5,061
Net occupancy and equipment expense			508				468				1,462				1,421
Federal deposit insurance premiums			66				72				206				225
Franchise taxes			100				100				300				301
Provision for impairment on foreclosed assets held           for sale			26				11				26				46
Amortization of intangible assets			23				23				68				68
Other			438				634				1,460				1,705
Total noninterest expense			2,645				2,840				8,038				8,827
Income Before Federal Income Taxes			659				590				2,139				1,500
Provision for Federal Income Taxes			151				125				562				259
Net Income		$	508			$	465			$	1,577			$	1,241
Other comprehensive income (loss):
Unrealized gains (losses) on available-for-sale      securities			(262	)			170				(2,314	)			166
Tax benefit (expense)			89				(58	)			787				(58	)
Other comprehensive income (loss)			(173	)			112				(1,527	)			108
Total comprehensive income		$	335			$	577			$	50			$	1,349
Basic Earnings Per Share		$	0.18			$	0.16			$	0.55			$	0.42
Diluted Earnings Per Share		$	0.18			$	0.16			$	0.55			$	0.42
Dividends Per Share		$	0.08			$	0.07			$	0.23			$	0.20

 

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows

For the nine months ended September 30, 2013 and 2012

(In thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		2013				2012
Operating Activities
Net income		$	1,577			$	1,241
Items not requiring (providing) cash
Depreciation and amortization			442				411
Provision (credit) for loan losses			(55	)			618
Amortization of premiums and discounts on securities			1,405				1,565
Amortization of mortgage servicing rights			37				38
Amortization of deferred loan origination fees			(77	)			(92	)
Amortization of intangible asset			68				68
Increase in value of bank-owned life insurance			(211	)			(215	)
Amortization expense of stock benefit plan			61				53
Provision for impairment on foreclosed assets held for sale			26				46
Loss (gain) on sale of foreclosed assets held for sale			(6	)			13
Net gains on sale of loans			(80	)			(203	)
Proceeds from sale of loans in the secondary market			6,581				4,530
Origination of loans for sale in the secondary market			(6,501	)			(4,327	)
Deferred income taxes			155				291
Changes in
Accrued interest receivable			(143	)			(223	)
Prepaid federal deposit insurance premiums			529				207
Other assets			(153	)			(466	)
Interest payable and other liabilities			(65	)			125
Net cash provided by operating activities			3,590				3,680
Investing Activities
Purchases of available-for-sale securities			(24,131	)			(32,049	)
Purchase of  held-to-maturity securities			(2,988	)			(867	)
Proceeds from maturities and paydowns of available-for-sale securities			31,058				38,042
Proceeds from maturities and paydowns of held-to-maturity securities			78				58
Net change in loans			(10,048	)			(8,217	)
Purchase of bank-owned life insurance			—				(1,243	)
Purchase of premises and equipment			(142	)			(400	)
Proceeds from the sale of foreclosed assets			311				1,165
Net cash used in investing activities		$	(5,862	)		$	(3,511	)

 

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (continued)

For the nine months ended September 30, 2013 and 2012

(In thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		2013				2012
Financing Activities
Net change in deposits		$	(1,122	)		$	(6,475	)
Net change in other short-term borrowings			(561	)			1,942
Proceeds from Federal Home Loan Bank  advances			16,490				14,710
Repayments of Federal Home Loan Bank  advances			(14,750	)			(20,120	)
Advances by borrowers for taxes and insurance			(408	)			(305	)
Dividends on common stock			(656	)			(557	)
Treasury stock purchases			(774	)			(92	)
Net cash used in financing activities			(1,781	)			(10,897	)
Decrease in Cash and Cash Equivalents			(4,053	)			(10,728	)
Cash and Cash equivalents, Beginning of period			12,055				19,816
Cash and Cash equivalents, End of period		$	8,002			$	9,088
Supplemental Cash Flows Information
Interest paid on deposits and borrowings		$	1,749			$	2,189
Federal income taxes paid		$	325			$	—
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Transfers from loans to foreclosed assets held for sale		$	50			$	—
Recognition of mortgage servicing rights		$	65			$	—
Dividends payable		$	231			$	209

 

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

 

Note 1:

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of September 30, 2013 and for the three and nine months ended September 30, 2013 and 2012, 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 year ended December 31, 2012. 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 adjustments) which are necessary for a fair presentation of the unaudited financial statements have been included. The results of operations for the three and nine months ended September 30, 2013, are not necessarily indicative of the results which may be expected for the full year. The condensed consolidated balance sheet of the Company as of December 31, 2012, has been derived from the consolidated balance sheet of the Company as of that date.

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
September 30, 2013:
U.S. government agencies		$	139			$	1			$	—			$	140
Mortgage-backed securities of           government sponsored entities			76,693				1,317				573				77,437
Private-label collateralized           mortgage obligations			757				35								792
State and political subdivisions			22,110				587				182				22,515
Totals		$	99,699			$	1,940			$	755			$	100,884

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Approximate Fair Value
		(In thousands)
Available-for-sale securities
December 31, 2012:
U.S. government agencies		$	155			$	1			$	1			$	155
Mortgage-backed securities of           government sponsored entities			83,956				1,979				105				85,830
Private-label collateralized           mortgage obligations			1,067				39				—				1,106
State and political subdivisions			22,842				1,587				2				24,427
Totals		$	108,020			$	3,606			$	108			$	111,518

  

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Approximate Fair Value
		(In thousands)
Held-to-maturity Securities:
September 30, 2013:
U.S. government agencies		$	111			$	—			$	—			$	111
Mortgage-backed securities of         government sponsored entities			1,407				11				2				1,416
State and political subdivisions			5,128				—				441				4,687
Totals		$	6,646			$	11			$	443			$	6,214

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Approximate Fair Value
		(In thousands)
Held-to-maturity Securities:
December 31, 2012:
U.S. government agencies		$	130			$	1			$	—			$	131
Mortgage-backed securities of         government sponsored entities			1,469				45				—				1,514
State and political subdivisions			2,149				—				54				2,095
Totals		$	3,748			$	46			$	54			$	3,740

 

Amortized cost and fair value of available-for-sale securities and held-to-maturity securities at September 30, 2013 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)
One to five years		$	3,183			$	3,346			$	—			$	—
Five to ten years			4,055				4,109				2,637				2,490
After ten years			15,011				15,200				2,602				2,308
			22,249				22,655				5,239				4,798
Mortgage-backed securities of government sponsored entities			76,693				77,437				1,407				1,416
Private-label collateralized mortgage obligations			757				792				—				—
Totals		$	99,699			$	100,884			$	6,646			$	6,214

 

The carrying value of securities pledged as collateral to secure public deposits and for other purposes was $57.5 million and $60.4 million at September 30, 2013 and December 31, 2012, 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 September 30, 2013 and December 31, 2012, was $44.6 million and $19.0 million, which represented approximately 42% and 17%, respectively, of the Company’s total aggregate amortized cost of the available-for-sale and held-to-maturity investment portfolios. These decreases 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 decreases in fair value for these securities are temporary at September 30, 2013.

Should the impairment of any of these 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.

 

		September 30, 2013
		Less than 12 Months								More than 12 Months								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
		(In thousands)
Mortgage-backed securities of government sponsored entities		$	34,283			$	575			$	—			$	—			$	34,283			$	575
State and political subdivisions			9,847				565				424				58				10,271				623
Total temporarily impaired securities		$	44,130			$	1,140			$	424			$	58			$	44,554			$	1,198

 

		December 31, 2012
		Less than 12 Months								More than 12 Months								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
		(In thousands)
U.S. government agencies		$	—			$	—			$	66			$	1			$	66			$	1
Mortgage-backed securities of government sponsored entities			13,636				83				2,107				22				15,743				105
State and political subdivisions			3,162				56				—				—				3,162				56
Total temporarily impaired securities		$	16,798			$	139			$	2,173			$	23			$	18,971			$	162

 

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, chargeoffs, 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 chargeoff 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 one-to-four 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, nonresidential real estate loans, land loans and multi-family 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.

Nonresidential real estate loans are negotiated on a case by case basis. Loans secured by nonresidential 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 nonresidential 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 originates 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 quality rating) to “7” (the lowest quality 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 nine months ended September 30, 2013 and 2012:

 

Three months ended September 30, 2013		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans				Total
		(In thousands)
Beginning balance		$	1,239			$	1,557			$	185			$	6			$	2,987
Provision charged to expense			(84	)			150				16				(6	)			76
Losses charged off			(30	)			—				—				—				(30	)
Recoveries			8				—				—				1				9
Ending balance		$	1,133			$	1,707			$	201			$	1			$	3,042

 

Three months ended September 30, 2012		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans				Total
		(In thousands)
Beginning balance		$	1,082			$	2,362			$	143			$	5			$	3,592
Provision charged to expense			92				117				14				2				225
Losses charged off			(21	)			(1	)			—				—				(22	)
Recoveries			2				1				14				—				17
Ending balance		$	1,155			$	2,479			$	171			$	7			$	3,812

 

 

Nine months ended September 30, 2013		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans				Total
		(In thousands)
Beginning balance		$	1,122			$	1,925			$	275			$	6			$	3,328
Provision (credit) charged to expense			71				(42	)			(76	)			(8	)			(55	)
Losses charged off			(68	)			(176	)			—				(2	)			(246	)
Recoveries			8				—				2				5				15
Ending balance		$	1,133			$	1,707			$	201			$	1			$	3,042

 

Nine months ended September 30, 2012		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans				Total
		(In thousands)
Beginning balance		$	1,128			$	2,547			$	169			$	10			$	3,854
Provision charged to expense			95				534				(12	)			1				618
Losses charged off			(109	)			(603	)			—				(4	)			(716	)
Recoveries			41				1				14				—				56
Ending balance		$	1,155			$	2,479			$	171			$	7			$	3,812

 

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 September 30, 2013 and December 31, 2012:

 

September 30, 2013		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans				Total
Allowance Balances:		(In thousands)
Ending balance:
Individually evaluated for impairment		$	355			$	869			$	69			$	—			$	1,293
Collectively evaluated for impairment			778				838				132				1				1,749
Total allowance for loan losses		$	1,133			$	1,707			$	201			$	1			$	3,042
Loan Balances:
Ending balance:
Individually evaluated for impairment		$	6,913			$	4,727			$	149			$	—			$	11,789
Collectively evaluated for impairment			160,359				82,394				10,825				1,221				254,799
Total balance		$	167,272			$	87,121			$	10,974			$	1,221			$	266,588

 

December 31, 2012		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans				Total
Allowance Balances:		(In thousands)
Ending balance:
Individually evaluated for impairment		$	248			$	1,074			$	100			$	—			$	1,422
Collectively evaluated for impairment			874				851				175				6				1,906
Total allowance for loan losses		$	1,122			$	1,925			$	275			$	6			$	3,328
Loan Balances:
Ending balance:
Individually evaluated for impairment		$	6,878			$	5,837			$	185			$	—			$	12,900
Collectively evaluated for impairment			154,032				71,884				14,060				1,517				241,493
Total balance		$	160,910			$	77,721			$	14,245			$	1,517			$	254,393

 

Total loans in the above tables do not include deferred loan origination fees of $687 and $569 or loans in process of $4.9 million and $2.6 million, respectively, for September 30, 2013 and December 31, 2012.

The following tables present the credit risk profile of the Bank’s loan portfolio based on rating category and payment activity as of September 30, 2013 and December 31, 2012:

September 30, 2013		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans
		(In thousands)
Rating *
Pass (Risk 1-4)		$	158,497			$	80,341			$	10,419			$	1,219
Special Mention (Risk 5)			569				2,053				406				—
Substandard (Risk 6)			8,206				4,727				149				2
Total		$	167,272			$	87,121			$	10,974			$	1,221

 

December 31, 2012		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans
		(In thousands)
Rating *
Pass (Risk 1-4)		$	151,749			$	68,949			$	14,034			$	1,513
Special Mention (Risk 5)			708				2,934				26				—
Substandard (Risk 6)			8,453				5,838				185				4
Total		$	160,910			$	77,721			$	14,245			$	1,517

* 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 the borrower is resolving the financial uncertainties. 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 nonperforming 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 chargeoff amount can be reasonably determined.

The following tables present the Bank’s loan portfolio aging analysis for September 30, 2013 and December 31, 2012:

 

September 30, 2013		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 and Accruing
		(In thousands)
One-to-four family residential loans		$	102			$	229			$	869			$	1,200			$	166,072			$	167,272			$	—
All other mortgage loans			—				—				815				815				86,306				87,121				—
Commercial business loans			70				—				—				70				10,904				10,974				—
Consumer loans			—				—				—				—				1,221				1,221				—
Total		$	172			$	229			$	1,684			$	2,085			$	264,503			$	266,588			$	—

 

December 31, 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 and Accruing
		(In thousands)
One-to-four family residential loans		$	1,049			$	339			$	1,190			$	2,578			$	158,332			$	160,910			$	—
All other mortgage loans			1,544				—				1,309				2,853				74,868				77,721				—
Commercial business loans			—				—				—				—				14,245				14,245				—
Consumer loans			1				2				2				5				1,512				1,517				—
Total		$	2,594			$	341			$	2,501			$	5,436			$	248,957			$	254,393			$	—

 

 

Nonaccrual loans were comprised of the following at:

Nonaccrual loans		September 30, 2013				December 31, 2012
		(In thousands)
One-to-four family residential loans		$	2,238			$	2,097
Nonresidential real estate loans			1,881				3,123
All other mortgage loans			—				—
Commercial business loans			—				32
Consumer loans			2				4
Total		$	4,121			$	5,256

 

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 September 30, 2013 and December 31, 2012 in combination with activity for the three and nine months ended September 30, 2013 and 2012 is presented below:

 

 

		As of September 30, 2013												Three months ended September 30, 2013								Nine months ended September 30, 2013
		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		$	5,602			$	5,602			$	—			$	5,785			$	84			$	5,702			$	222
All other mortgage loans			2,225				2,225				—				2,276				23				2,427				72
Commercial business loans			80				80				—				81				1				83				2
Loans with a specific valuation allowance
One-to-four family residential loans			1,311				1,311				355				1,208				7				1,266				22
All other mortgage loans			2,502				3,097				869				2,504				20				2,730				56
Commercial business loans			69				69				69				73				—				83				2
Total:
One-to-four family residential loans		$	6,913			$	6,913			$	355			$	6,993			$	91			$	6,968			$	244
All other mortgage loans			4,727				5,322				869				4,780				43				5,157				128
Commercial business loans			149				149				69				154				1				166				4
		$	11,789			$	12,384			$	1,293			$	11,927			$	135			$	12,291			$	376

		As of December 31, 2012												Three months ended September 30, 2012								Nine months ended September 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		$	5,587			$	5,587			$	—			$	3,024			$	21			$	3,144			$	90
All other mortgage loans			2,781				2,781				—				2,324				3				2,179				58
Commercial business loans			85				85				—				—				—				—				—
Loans with a specific valuation allowance
One-to-four family residential loans			1,291				1,291				248				1,210				2				889				35
All other mortgage loans			3,056				3,652				1,074				4,723				25				4,998				64
Commercial business loans			100				100				100				43				1				66				1
Total:
One-to-four family residential loans		$	6,878			$	6,878			$	248			$	4,234			$	23			$	4,033			$	125
All other mortgage loans			5,837				6,433				1,074				7,047				28				7,177				122
Commercial business loans			185				185				100				43				1				66				1
		$	12,900			$	13,496			$	1,422			$	11,324			$	52			$	11,276			$	248

 

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

All the TDR classifications listed below occurred as concessions were granted to borrowers experiencing financial difficulties. In the September 30, 2013 quarter, concessions made to borrowers included exceptions to loan policy including high loan to value ratios, no private mortgage insurance (“PMI”) and high debt to income ratios. The TDR classifications that occurred in the 2013 year-to-date period, included those concessions listed above for the current period quarter and an effective interest rate below the market interest rate of similar debt, and an extension of the maturity date. The TDR classifications which occurred in the September 30, 2012 year-to-date period were both 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 three or nine month periods ended September 30, 2013 and 2012. The Company considers TDRs that become 90 days or more past due under modified terms as subsequently defaulted.

 

		Quarter-to-Date												Year-to-Date
Troubled Debt Restructurings		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
		(dollars in thousands)
September 30, 2013
One-to-four family residential loans			4			$	493			$	517				6			$	909			$	933
All other mortgage loans			—				—				—				1				576				576
September 30, 2012
One-to-four family residential loans			—			$	—			$	—				2			$	538			$	538

 

 

Note 5:

Goodwill and Intangible Assets

The composition of goodwill and other intangible assets, all of which is core deposit intangible, at September 30, 2013 and December 31, 2012:

		September 30, 2013				December 31, 2012
		(In thousands)
Goodwill		$	1,719			$	1,719
Other intangible assets – gross			974				974
Other intangible assets – amortization			(914	)			(846	)
Total		$	1,779			$	1,847

 

The Company recorded amortization relative to intangible assets totaling $23,000 and $68,000 for both of the three and nine month periods ended September 30, 2013, and 2012 respectively. The Company anticipates $90,000 of amortization for 2013 and $38,000 for 2014. Such amortization is derived using the straight line method for the core deposit asset over ten years. 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 November 30, 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:

 

		Three months ended September 30,								Nine months ended September 30,
		2013				2012				2013				2012
Weighted-average common shares outstanding (basic)			2,841,213				2,935,469				2,871,754				2,937,589
Dilutive effect of assumed exercise of stock options			—				—				—				—
Weighted-average common shares outstanding (diluted)			2,841,213				2,935,469				2,871,754				2,937,589

 

None of the outstanding options were included in the diluted earnings per share calculation for the three and nine months ended September 30, 2013 and 2012, 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. At September 30, 2013, all options under the 2004 Plan were expired. The Company recognized compensation expense related to stock option awards based on the fair value of the option award at the grant date. Compensation cost was recognized over the vesting period. There were no options granted during the three and nine months ended September 30, 2013 and 2012. There was no compensation expense recognized for the stock option plan during the three and nine months ended September 30, 2013 and 2012, 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 nine months ended September 30, 2013, and for the year ended December 31, 2012 is presented below:

		Nine months ended September 30, 2013								Year ended December 31, 2012
		Shares				Weighted average exercise price				Shares				Weighted average exercise price
Outstanding at beginning of period			58,908			$	13.95				63,408			$	13.95
Granted			—				—				—				—
Exercised			—				—				—				—
Forfeited			17,704			$	13.95				4,500			$	13.95
Expired			41,204			$	13.95				—				—
Outstanding at end of period			—			$	—				58,908			$	13.95
Options exercisable at period-end			—			$	—				58,908			$	13.95

 

 

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. Furthermore the Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements.

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 Tier I capital to average assets, of Tier 1 capital to risk-weighted assets, and of Total Risk-based capital to risk-weighted assets, all as defined in the regulations. Management believes, as of September 30, 2013, that the Bank met all capital adequacy requirements to which it is subject.

 

As of September 30, 2013, based on the computations for the call report the Bank is 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 September 30, 2013 that management believes have changed the Bank’s capital classification.

The Bank’s actual capital amounts and ratios as of September 30, 2013 and December 31, 2012 are presented in the following table.

		Actual								For Capital Adequacy Purposes								To Be well Capitalized Under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
As of September 30, 2013
Tier I Capital to average assets		$	34,768				8.7	%		$	15,970				4.0	%		$	19,962				5.0	%
Tier I Capital to risk- weighted assets			34,768				14.2	%			9,773				4.0	%			14,660				6.0	%
Total Risk-based capital to risk-weighted assets			37,810				15.5	%			19,546				8.0	%			24,433				10.0	%
As of December 31, 2012
Tier I Capital to average assets		$	34,774				8.7	%		$	16,069				4.0	%		$	20,086				5.0	%
Tier I Capital to risk- weighted assets			34,774				14.7	%			9,458				4.0	%			14,187				6.0	%
Total Risk-based capital to risk-weighted assets			37,734				16.0	%			18,916				8.0	%			23,644				10.0	%

 

Note 9:

Accumulated Other Comprehensive Income (Loss)

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

		Gross Unrealized Gains on Available-for-sale Securities				Net Unrealized Loss for Unfunded Status of Split-dollar Life Insurance Plan Liability (tax-free)				Gross Unrealized Loss for Unfunded Status of Defined Benefit Plan				Tax Effect				Total Accumulated Other Comprehensive Income (Loss)
		(In thousands)
September 30, 2013		$	1,186			$	(246	)		$	(1,096	)		$	(31	)		$	(187	)
December 31, 2012		$	3,498			$	(246	)		$	(1,096	)		$	(816	)		$	1,340

 

There were no amounts reclassified out of accumulated other comprehensive (loss) income during the three

and nine months ended September 30, 2013 or 2012.

 

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 consolidated 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 quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy.

The following table presents the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2013 and December 31, 2012:

						Fair Value Measurement 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)
September 30, 2013
U.S. government agencies		$	140			$	—			$	140			$	—
Mortgage-backed securities of government sponsored entities			77,437				—				77,437				—
Private-label collateralized mortgage obligations			792				—				792				—
State and political subdivisions			22,515				—				22,515				—

 

						Fair Value Measurement 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)
December 31, 2012
U.S. government agencies		$	155			$	—			$	155			$	—
Mortgage-backed securities of government sponsored entities			85,830				—				85,830				—
Private-label collateralized mortgage obligations			1,106				—				1,106				—
State and political subdivisions			24,427				—				24,427				—

 

Nonrecurring Measurements

Certain assets may be required to be measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition. These assets 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 deemed necessary by the office of the Chief Financial Officer. Appraisals are reviewed for accuracy and consistency by the office of the Chief Financial Officer. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the office of the Chief Financial Officer by comparison to historical results.

Foreclosed Assets Held for Sale

Foreclosed assets held for sale are carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired. Estimated fair value of real estate is based on appraisals or evaluations. Foreclosed assets held for sale are classified within Level 3 of the fair value hierarchy.

Appraisals of real estate are obtained when the real estate is acquired and subsequently as deemed necessary by the office of the Chief Financial Officer. Appraisals are reviewed for accuracy and consistency by the office of the Chief Financial Officer. Appraisers are selected from the list of approved appraisers maintained by management.

The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2013 and December 31, 2012.

 

						Fair Value Measurement 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)
September 30, 2013
Foreclosed assets		$	38				—				—			$	38
December 31, 2012
Collateral-dependent impaired loans		$	2,437			$	—			$	—			$	2,437
Foreclosed assets			16				—				—				16

 

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				Valuation Technique		Unobservable Inputs		Range (Weighted Average)
September 30, 2013
Foreclosed assets		$	38			Contract sales price		Selling Costs			10	%
December 31, 2012
Collateral-dependent impaired loans		$	2,437			Market comparable properties		Selling Costs			10	%
Foreclosed assets			16			Market comparable properties		Selling Costs			10	%

 

There were no changes in the inputs or methodologies used to determine fair value at September 30, 2013 as compared to December 31, 2012.

 

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)
		(In thousands)
September 30, 2013
Financial assets
Cash and cash equivalents		$	8,002			$	8,002			$	—			$	—
Held-to-maturity securities			6,646				—				6,214				—
Loans, net of allowance for loan losses			257,979				—				—				264,539
Federal Home Loan Bank stock			5,025				—				5,025				—
Interest receivable			1,371				—				1,371				—
Financial liabilities
Deposits			326,615				—				298,337				—
Other short-term borrowings			6,516				—				6,516				—
Federal Home Loan Bank advances			22,957				—				23,513				—
Advances from borrowers for taxes and insurance			662				—				662				—
Interest payable			53				—				53				—

 

						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)
		(In thousands)
December 31, 2012
Financial assets
Cash and cash equivalents		$	12,055			$	12,055			$	—			$	—
Held-to-maturity securities			3,748				—				3,740
Loans, net of allowance for loan losses			247,849				—				—				259,986
Federal Home Loan Bank stock			5,025				—				5,025				—
Interest receivable			1,228				—				1,228				—
Financial liabilities
Deposits			327,737				—				317,312				—
Other short-term borrowings			7,077				—				7,077				—
Federal Home Loan Bank advances			21,217				—				22,048				—
Advances from borrowers for taxes and insurance			1,069				—				1,069				—
Interest payable			51				—				51				—

 

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.

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.

 

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.

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 September 30, 2013 and December 31, 2012.

Note 11:

Recent Accounting Developments

FASB ASU 2013-02, Comprehensive Income (Topic 220), Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2013-02, issued in February 2013 requires the Company to provide information about the amounts reclassified out of accumulated other comprehensive income by component. These amendments are effective prospectively for reporting periods beginning after December 15, 2012, and early adoption is permitted. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

FASB ASU 2013-04, Liabilities (Topic 405), Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date in Accounting Standards Update No. 2013-04, issued in February 2013 requires the Company to measure and report on obligations resulting from joint and several liability. This includes the amount the Company has agreed to pay on the basis of its arrangement among its co-obligors, and any additional amount the Company expects to pay on behalf of its co-obligors. The amendments in this update, should be applied retrospectively, and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2013, and early adoption is permitted. This standard is not expected to have a material impact on the Company’s consolidated financial statements.

Note 12:

Transfer and Assumption Agreement

On November 15, 2012, the Bank completed a Transfer and Assumption Agreement with Thomasville National Bank (“TNB”), the national bank subsidiary of Thomasville Bancshares, Inc. headquartered in Thomasville, Georgia. The agreement provided for the transfer of the Bank’s trust business to TNB.

Under terms of the agreement, TNB maintains a trust office at a Wayne Savings office in Wooster, Ohio. The Bank and TNB entered 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 included a one-time expense of approximately $354,000 that was mainly recognized during the quarter ended June 30, 2012. Closing of the transaction occurred during the fourth quarter of 2012 and the Bank surrendered its trust license to the Ohio Division of Financial Institutions (“ODFI”) in January 2013 after the ODFI confirmed that the Bank had met the conditions for ceasing to conduct trust business. The Bank received no consideration and there was no gain or loss on the transfer other than the one-time expense noted above.

The strategic rationale for this transaction was 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 continues to be engaged in several initiatives to improve the returns to shareholders over a foreseeable time horizon.

These continuing initiatives include the execution of a comprehensive marketing and sales program to increase top line revenue of the Company through both loan and fee income generating activities, recognizing that marketing, product development, sales training and sales management expenses are likely to increase ahead of revenue.

Another ongoing initiative is the review of branch facilities, branch staff and staffing across the Bank to identify opportunities for reductions in staff and facilities costs to improve operational efficiency without impairing revenue generation ability and considering the potential effect on shareholder’ equity.

A further ongoing initiative is the evaluation of information technology solutions to improve internal operating efficiency and customer service while remaining attentive to the potential effect on short and long-term operating results.

The final initiative includes the continuing 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. During the second quarter of 2013, the Board of Directors formed a Risk Management Committee to oversee management’s ERM program. The committee is meeting on a quarterly basis.

Critical Accounting Policies

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.

Discussion of Financial Condition Changes from December 31, 2012 to September 30, 2013

At September 30, 2013, the Company had total assets of $399.7 million, a decrease of $2.4 million, or 0.6%, from total assets at December 31, 2012. The decrease in total assets includes a $4.1 million decrease in cash and a $7.7 million decrease in total securities, partially offset by a $10.1 million increase in net loan balances.

Total securities decreased $7.7 million during the nine months ended September 30, 2013. The decrease was primarily principal repayments of $31.1 million, amortization of premiums of $1.4 million, and a $2.3 million decrease in unrealized gains on available-for-sale securities, partially offset by purchases totaling $27.1 million during the nine months ended September 30, 2013.

Net loans receivable increased by $10.1 million at September 30, 2013 compared to December 31, 2012. The Bank originated $50.0 million of loans, received payments of $33.1 million, and originated and sold $6.5 million of 30-year fixed-rate mortgage loans into the secondary market, and recorded a credit for loan losses of $55,000. The increase in net loan balances is mainly due to the increased sales efforts by our team of commercial lenders supported by marketing activities to increase awareness within our market area regarding the Bank’s commercial, mortgage and consumer loan products and services.

 

Management continues to focus on key areas of risk when reviewing potential loan originations and securities purchases, including interest rate, liquidity and credit risk. Interest rate risk arises mainly from longer term fixed rate loans. Credit risk arises mainly from loan structure and underwriting conditions. The effects of additional loan portfolio risks generated by competitive pressures in the Company’s market area are evaluated relative to the projected returns to ensure acceptable financial performance over a long-term horizon. As part of an overall strategy to manage liquidity and interest rate risk, management continues to execute a strategy of immediately selling certain newly originated 30-year fixed-rate mortgage loans into the secondary market to limit the interest rate risk exposure on the balance sheet and to utilize the secondary market as a backup source of liquidity. Similarly, in order to further limit the overall 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 retention of long-term fixed-rate residential mortgages. These strategies have the effect of generating lower loan yields in the short-term due to the loans being priced off the lower yield short end of the yield curve. The principal source of liquidity is the Bank’s investment securities portfolio. To the extent that loan demand is insufficient in any given period, investments in the securities portfolio are made to provide cash flows to fund loan demand in future periods (a source of liquidity), 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. As loan volume increases relative to investment volume, risk-based capital ratios will decline.

The following table sets forth certain information regarding the Company’s loan portfolio for the dates indicated.

		September 30, 2013								December 31, 2012
		Balance				Percent of total loans				Balance				Percent of total loans
		(Dollars in thousands)
Mortgage loans:
One-to-four family residential(1)		$	167,272				62.74	%		$	160,910				63.25	%
Residential construction loans			4,259				1.60	%			2,170				0.85	%
Multi-family residential			14,042				5.27	%			9,790				3.85	%
Nonresidential real estate/land(2)			68,820				25.82	%			65,761				25.85	%
Total mortgage loans			254,393				95.43	%			238,631				93.80	%
Other loans:
Consumer loans(3)			1,221				0.46	%			1,517				0.60	%
Commercial business loans			10,974				4.11	%			14,245				5.60	%
Total other loans			12,195				4.57	%			15,762				6.20	%
Total loans before net items			266,588				100.00	%			254,393				100.00	%
Less:
Loans in process			4,880								2,647
Deferred loan origination fees			687								569
Allowance for loan losses			3,042								3,328
Total loans receivable, net		$	257,979							$	247,849

(1)

Includes equity loans collateralized by second mortgages in the aggregate amount of $14.2 million at September 30, 2013 and $14.8 million at December 31, 2012. Such loans have been underwritten on substantially the same basis as the Company’s first mortgage loans.

(2)

Includes land loans of $2.8 million at September 30, 2013 and $2.3 million for December 31, 2012.

(3)	Includes second mortgage loans of $603 at September 30, 2013 and $683 at December 31, 2012.

 

Foreclosed assets held for sale totaled $38,000 at September 30, 2013 compared to $318,000 at December 31, 2012. Activity during the current year period included the sale of four residential properties totaling $305,000, that were previously held as foreclosed assets, resulting in a gain of $6,000, and one new foreclosed property was added during the current year period, that was subsequently written down by $26,000, based on a current purchase offer as accepted by the Bank. Total nonperforming and impaired assets totaled $13.1 million, or 3.28% of total assets, and $14.8 million, or 3.68% of total assets, at September 30, 2013 and December 31, 2012, respectively.

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 November 30, 2012, and there were no interim impairment indicators that would require another evaluation at September 30, 2013.

Prepaid federal deposit insurance premiums (FDIC) decreased $596,000 at September 30, 2013 compared to December 31, 2012. The decrease was substantially related to the refund of the prepaid assessment on deposit with the FDIC that was imposed on all insured institutions in December of 2009.

Deposits totaled $326.6 million at September 30, 2013, a decrease of $1.1 million, compared to $327.7 million at December 31, 2012. Demand deposits decreased $891,000, or 1.1%, and time deposits decreased $7.4 million, or 5.5%, which were partially offset by a $7.2 million, or 6.4% increase in savings and money market 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.

Included in Time deposits are funds received from the State of Ohio (“State”) as a result of the Company’s participation in the State-sponsored SaveNow program. The SaveNow program allows eligible customers of the Bank to receive up to 3.25% in interest on their deposits, on balances up to $5,000, for a term no longer than two years. The Bank’s rate paid on $2.3 million of consumer deposits was .25%, while the State added an additional 3.0%, which was funded by deposits from the State, that totaled $8.5 million at September 30, 2013. The State suspended the SaveNOW program during the third quarter of 2013, with no new accounts being allowed to open. Existing accounts will mature in accordance with terms of the program. The last accounts opened under the SaveNOW program will mature during the third quarter of 2015. The Bank’s participation in this program will end corresponding to the maturities of both customer SaveNow accounts and State time deposits associated with the program. As these funds are withdrawn the Company will seek to replace these balances with other funds based on the interest rate environment and liquidity position at that time. As the State deposits are required to be collateralized, the securities currently pledged against these deposits will be released and will become available for other types of liquidity management.

Other short-term borrowings, which consist solely of repurchase agreements with commercial customers of the Bank, decreased by $561,000 and totaled $6.5 million at September 30, 2013. 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 September 30, 2013 and December 31, 2012.

Advances from the Federal Home Loan Bank of Cincinnati (“FHLB”) totaled $23.0 million at September 30, 2013, and increased $1.7 million, or 8.2%, compared to $21.2 million at December 31, 2012. This increase includes a $1.0 million increase in fixed rate term advances, a $650,000 increase in short-term overnight borrowings resulting from the timing of loan and deposit cash flows, and $90,000 related to amortized prepayment penalties. The Company uses advances from the FHLB for both short-term cash management purposes and to extend the term to maturity of liabilities for interest rate risk management purposes. The cost of longer term liabilities purchased from the FHLB is generally less expensive than obtaining a similar term to maturity 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 2.86% at September 30, 2013 compared to 2.69% at December 31, 2012.

 

Stockholders’ equity decreased by $1.3 million during the nine months ended September 30, 2013, primarily due to dividends declared of $656,000, purchases of treasury stock totaling $774,000 and a $1.5 million decrease in accumulated other comprehensive income related solely to a decline in unrealized gains on available-for-sale securities, partially offset by net income of $1.6 million during the current year period.

The purchase of treasury shares during the current year period were made as part of the Company’s share repurchase program that was initially announced during 2012 whereby the Company was authorized to repurchase up to 5.0%, or 150,206 shares of its common stock outstanding. On September 30, 2013 the Company announced the adoption of a new share repurchase program authorizing the repurchase of an additional 2.5% or 72,150, shares of its common stock outstanding. As a result of these two plans, net of shares previously repurchased, the Company may repurchase up to 104,242 shares of its common stock outstanding.

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

General

Net income for the three months ended September 30, 2013, totaled $508,000, reflecting an increase of $43,000, from $465,000 for the three month period ended September 30, 2012. The increase in net income was primarily due to decreases in both the provision for loan losses and noninterest expense, partially offset by decreases in net interest income, noninterest income and an increase in provision for federal income taxes.

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. 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 September 30,
		2013												2012
		Average Balance				Interest				Average Rate				Average Balance				Interest				Average Rate
		(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1)		$	251,703			$	2,874				4.57	%		$	237,377			$	2,964				4.99	%
Investment securities(2)			112,317				633				2.25	%			130,419				788				2.42	%
Interest-earning deposits(3)			10,714				54				2.02	%			11,534				55				1.91	%
Total interest-earning assets			374,734				3,561				3.80	%			379,330				3,807				4.01	%
Noninterest-earning assets			23,999												23,990
Total assets		$	398,733											$	403,320
Interest-bearing liabilities:
Deposits		$	326,772			$	417				0.51	%		$	326,828			$	500				0.61	%
Other short-term borrowings			6,889				3				0.17	%			7,035				3				0.17	%
Borrowings			21,779				155				2.85	%			24,066				165				2.74	%
Total interest-bearing liabilities			355,440				575				0.65	%			357,929				668				0.75	%
Noninterest-bearing liabilities			4,773												4,531
Total liabilities			360,213												362,460
Stockholders’ equity			38,520												40,860
Total liabilities and stockholders’           equity		$	398,733											$	403,320
Net interest income						$	2,986											$	3,139
Interest rate spread(4)											3.15	%											3.26	%
Net yield on interest-earning assets(5)											3.19	%											3.31	%
Ratio of average interest-earning assets      to average interest-bearing liabilities											105.43	%											105.98	%

 

 

(1)	Includes nonaccrual loan balances.

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

(3)	Includes interest-earning 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 $246,000 or 6.5%, to $3.6 million for the three months ended September 30, 2013, compared to the same period in 2012. The decrease was due to 21 basis point decrease in the weighted-average yield on interest-earning assets from 4.01% in the 2012 period to 3.80% for the 2013 period, as well as a $4.6 million decrease in the average balance of interest-earning assets from $379.3 million in the 2012 period to $374.7 million for the 2013 period. The yield decrease was primarily due to a continuation of the overall low market interest rate environment, despite an increase in intermediate and long term interest rates in the second quarter of 2013 that persisted into the third quarter of 2013, partially offset by a shift in the Company’s mix of earning assets from lower yielding securities into higher yielding loans. The 2013 increase in interest rates resulted in a significant decrease in the volume of rate driven loan refinancing compared to the prior year period. However, the continued overall level of market interest rates continues to result in existing interest-earning assets repricing to lower current market rates compared to the 2012 period as a result of lower interest rate resets on adjustable rate loans, lower rates on new loan originations, increased prepayments on loans and securities, amortization of purchase premiums on securities and reinvestment of securities cash flows at lower market yields.

Interest income on loans decreased $90,000, or 3.0%, for the three month period ended September 30, 2013, compared to the same period in 2012. This decrease was primarily due to a 42 basis point decrease in the weighted-average loan portfolio yield from 4.99% for the three months ended September 30, 2012 to 4.57% for the three months ended September 30, 2013, as a result of lower origination yields and the amortization, prepayment and repricing of higher yielding loans due to the low level of market interest rates. The decrease in the weighted-average loan portfolio yield was partially offset by a $14.3 million, or 6.0%, increase in the average balance of loans outstanding from $237.4 million in the 2012 period to $251.7 million for the 2013 period. Interest income on securities decreased $155,000 during the three months ended September 30, 2013, compared to the same period in 2012. This decrease was due to a 17 basis point decrease in the weighted-average rate from 2.42% in the 2012 period to 2.25% for the 2013 period, and an $18.1 million, or 13.9%, decrease in the average balance.

Dividends on Federal Home Loan Bank stock and other income decreased $1,000 for three months ended September 30, 2013 compared to September 30, 2012. The decrease was due to an $820,000 decrease in the average balance, partially offset by an 11 basis point increase in the weighted average rate from 1.91% at September 30, 2012, to 2.02% at September 30, 2013.

Interest Expense

Interest expense totaled $575,000 for the three month period ended September 30, 2013, a decrease of $93,000, or 13.9%, from $668,000 for the three month period ended September 30, 2012. The decrease was due to a 10 basis point decrease in the weighted-average cost of funds from 0.75% in the 2012 period to 0.65% in the current year period as well as a $2.5 million, or .7%, decrease in the average balance of total interest-bearing liabilities from $357.9 million in the 2012 period to $355.4 in the 2013 period.

Interest expense on deposits for the three month period ended September 30, 2013 totaled $417,000, a decrease of $83,000, or 16.6%, from $500,000 for the same period in the previous year. The decrease was substantially due to a 10 basis point decrease in the weighted-average cost of deposits, from 0.61% in the 2012 period to 0.51% for the 2013 period, as the average balance was $326.8 million for both the 2012 and 2013 periods. The decrease in interest expense continues to slow as rates paid on deposit products reach floors established by local market competitors and overall market conditions and as pricing pressure in the local market has begun rising. Interest expense on other short-term borrowings totaled $3,000 for both three month periods ended September 30, 2013, and 2012. The weighted-average cost was unchanged at 0.17%, for both periods, while the average balance decreased by $146,000.

Interest expense on Federal Home Loan Bank advances totaled $155,000 for the three month period ended September 30, 2013, which decreased $10,000 from $165,000 in the 2012 period. The decrease was primarily due to a $2.3 million, or 9.5%, decrease in the average balance outstanding, due to the repayment of maturing advances, partially offset by an 11 basis point increase in the weighted-average cost from 2.74% in the 2012 period to 2.85% in the 2013 period, as the maturing advances were at a lower cost than the remaining portfolio.

Net Interest Income

Net interest income totaled $3.0 million for the three month period ended September 30, 2013, a decrease of $153,000, or 4.9%, from the three month period ended September 30, 2012. The decrease in net interest income was mainly due to a 11 basis point decrease in the net interest rate spread, from 3.26% at September 30, 2012 to 3.15% at September 30, 2013. The decrease in the net interest spread is a result of yields on earning assets declining more than the rate paid on interest-bearing liabilities. During the three months ended September 30, 2013, the yield on earning assets decreased 21 basis points, while the rate paid on interest-bearing liabilities decreased 10 basis points, compared to the same period last year. The yield on earning assets was negatively impacted as a result of reduced origination yields, amortization, prepayment and repricing of higher yielding adjustable rate loans due to the low level of market interest rates, and security purchases at lower yields than in the prior year period, partially offset by a shift in the mix of earning assets from lower yielding securities into higher yielding loans. The decrease in the cost of funds from the prior year period, was mainly due to a continuing preference by customers in the current low interest rate environment for lower cost and more liquid deposit accounts over longer term certificate accounts and management’s continuing strategy of limiting competition for higher cost term deposits by focusing on relationship balances.

Provision for Loan Losses

Management recorded a $76,000 provision for loan losses for the three month period ended September 30, 2013, compared to $225,000 for the three month period ended September 30, 2012. The decrease in the provision for the current year quarter was primarily due to favorable movement in the economic factors considered as part of management’s analysis, partially offset with the effect of growth in the loan portfolio.

Noninterest Income

Noninterest income totaled $394,000, for the three months ended September 30, 2013, a decrease of $122,000, or 23.6%, from $516,000 for the same period in 2012. The decrease was primarily due to a $101,000 decrease in gain on sale of loans, $62,000 decrease in Trust income, and an $11,000 decrease in gain (loss) on sale of foreclosed assets, partially offset by a $53,000 increase in service fees, charges and other operating income. The decrease in gain on sale of loans was due to market price fluctuations which had a negative impact on the premium on loans sold compared to the prior year quarter. The decrease in Trust income was due to the completion of the transfer and assumption agreement between the Bank and Thomasville National Bank (TNB) during November of 2012 that transferred the Bank’s Trust Department assets, and related income, from the Bank to TNB. The decrease in gain (loss) on sale of foreclosed assets was related to a loss on the sale of a residential real estate property previously held in foreclosed assets held for sale. The increase in service fees, charges and other operating income includes a $31,000 increase in fees earned on annuity sales, and $14,000 in facilities and equipment reimbursements from TNB, as a result if the trust transfer and assumption agreement mentioned above, a $5,000 increase in fees related to non-sufficient funds, and a $9,000 increase in visa interchange income.

Noninterest Expense

Noninterest expense totaled $2.6 million for the three months ended September 30, 2013, a decrease of $195,000, or 6.9%, from $2.8 million for the three months ended September 30, 2012. The decrease was primarily due to a $48,000 decrease in salaries and employee benefits, and a $196,000 decrease in other operating expenses, partially offset by a $40,000 increase in occupancy and equipment expense and a $15,000 increase in provision for impairment on foreclosed assets held for sale. The decrease in salaries and employee benefits was primarily due to reduced compensation cost as a result of staff attrition since the prior year quarter. The decrease in other operating expenses was primarily due a decrease in marketing, special services required to assist the Bank with contract negotiations with vendors, legal services, and trust service charges compared to the prior year quarter. The increase in occupancy and equipment expense is primarily due to an increase in building and equipment repairs and maintenance compared to the prior year quarter. The increase in provision for impairment on foreclosed assets held for sale was due to an increase in write-downs related to foreclosed property held for sale compared to the prior year quarter.

Federal Income Taxes

Federal income tax expense totaled $151,000 for the three month period ended September 30, 2013, an increase of $26,000 compared to $125,000 for three month period ended September 30, 2012. The increase was primarily due to a $69,000 increase in pretax income compared to the prior year period. The effective tax rate for the three month period ended September 30, 2013 was 22.9% compared to 21.2% for the prior year period. The effective rate is below the statutory rate of 34% due to certain income items that are not subject to tax.

Comparison of Operating Results for the Nine Months Ended September 30, 2013 and 2012

General

Net income for the nine months ended September 30, 2013 totaled $1.6 million, an increase of $336,000 from $1.2 million for the nine month period ended September 30, 2012. The increase in net income was primarily due to decreases in both the provision (credit) for loan losses, and noninterest expense, partially offset by decreases in net interest income and noninterest income, and an increase in provision for federal income taxes.

 

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. 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 nine months ended September 30,
		2013												2012
		Average Balance				Interest				Average Rate				Average Balance				Interest				Average Rate
		(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1)		$	248,134			$	8,608				4.63	%		$	234,195			$	8,895				5.06	%
Investment securities(2)			114,981				1,921				2.23	%			133,246				2,592				2.59	%
Interest-earning deposits(3)			12,582				165				1.75	%			13,804				171				1.65	%
Total interest-earning assets			375,697				10,694				3.80	%			381,245				11,658				4.08	%
Noninterest-earning assets			24,483												23,818
Total assets		$	400,180											$	405,063
Interest-bearing liabilities:
Deposits		$	327,152			$	1,283				0.52	%		$	328,516			$	1,654				0.67	%
Other short-term borrowings			6,620				8				0.16	%			6,738				8				0.16	%
Borrowings			21,448				460				2.86	%			25,194				515				2.73	%
Total interest-bearing liabilities			355,220				1,751				0.66	%			360,448				2,177				0.81	%
Noninterest bearing  liabilities			5,536												4,322
Total liabilities			360,756												364,770
Stockholders’ equity			39,424												40,293
Total liabilities and stockholders’           equity		$	400,180											$	405,063
Net interest income						$	8,943											$	9,481
Interest rate spread(4)											3.14	%											3.27	%
Net yield on interest-earning assets(5)											3.17	%											3.32	%
Ratio of average interest-earning assets      to average interest-bearing liabilities											105.76	%											105.77	%

 

(1)	Includes nonaccrual loan balances.

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

(3)	Includes interest-earning 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 $964,000 or 8.3%, to $10.7 million for the nine months ended September 30, 2013, compared to the same period in 2012. The decrease was due to 28 basis point decrease in the weighted-average yield on interest-earning assets from 4.08% in the 2012 period to 3.80% for the 2013 period, as well as a $5.5 million decrease in the average balance of interest-earning assets from $381.2 million in the 2012 period to $375.7 million for the 2013 period. The yield decrease was primarily due to a continuation of the overall low market interest rate environment, partially offset by a shift in the Company’s mix of earning assets from lower yielding securities into higher yielding loans. The low market rate environment has resulted in existing interest-earning assets repricing to lower current market rates compared to the 2012 period as a result of lower interest rate resets on adjustable rate loans, lower rates on new loan originations, increased prepayments on loans and securities, amortization of purchase premiums on securities and reinvestment of securities cash flows at lower market yields.

Interest income on loans decreased $287,000, or 3.2%, for the nine month period ended September 30, 2013, compared to the same period in 2012. This decrease was primarily due to a 43 basis point decrease in the weighted-average loan portfolio yield from 5.06% for the nine months ended September 30, 2012 to 4.63% for the nine months ended September 30, 2013, as a result of lower origination yields and the amortization, prepayment and repricing of higher yielding loans due to the low level of market interest rates. The decrease in the weighted-average loan portfolio yield was partially offset by a $13.9 million, or 6.0%, increase in the average balance of loans outstanding from $234.2 million in the 2012 period to $248.1 million for the 2013 period. Interest income on securities decreased $671,000 during the nine months ended September30, 2013, compared to the same period in 2012. This decrease was due to a 36 basis point decrease in the weighted-average rate from 2.59% in the 2012 period to 2.23% for the 2013 period, and an $18.3 million, or 13.7%, decrease in the average balance.

Dividends on Federal Home Loan Bank stock and other income decreased $6,000 for nine months ended September 30, 2013 compared to September 30, 2012. The decrease was due to a $1.2 million decrease in the average balance, partially offset by a 10 basis point increase in the weighted average rate from 1.65% at September 30, 2012, to 1.75% at September 30, 2013.

Interest Expense

Interest expense totaled $1.8 million for the nine month period ended September 30, 2013, a decrease of $426,000, or 19.6%, from $2.2 million for the nine month period ended September 30, 2012. The decrease was due to a 15 basis point decrease in the weighted-average cost of funds from 0.81% in the 2012 period to 0.66% in the current year period as well as a $5.2 million, or 1.5%, decrease in the average balance of total interest-bearing liabilities from $360.4 million in the 2012 period to $355.2 in the 2013 period.

Interest expense on deposits for the nine month period ended September 30, 2013 totaled $1.3 million, a decrease of $371,000, or 22.4%, from $1.7 million for the same period in the previous year. The decrease was due to a 15 basis point decrease in the weighted-average cost of deposits, from 0.67% in the 2012 period to 0.52% for the 2013 period, as well as a $1.3 million decrease in the average balance from $328.5 million in the 2012 period to $327.2 million in the 2013 period. The decrease in interest expense continues to slow as rates paid on deposit products reach floors established by local market competitors and overall market conditions and as pricing pressure in the local market has begun rising.

Interest expense on Federal Home Loan Bank advances totaled $460,000 for the nine month period ended September 30, 2013, which decreased $55,000 from $515,000 in the 2012 period. The decrease was primarily due to a $3.7 million, or 14.9%, decrease in the average balance outstanding, partially offset by a 13 basis point increase in the weighted-average cost from 2.73% in the 2012 period to 2.86% in the 2013 period. The increase in the weighted-average cost is primarily due to the repayment of lower cost maturing advances.

Net Interest Income

Net interest income totaled $8.9 million for the nine month period ended September 30, 2013, a decrease of $538,000, or 5.7%, from the nine month period ended September 30, 2012. The decrease in net interest income was mainly due to a 13 basis point decrease in the net interest rate spread, from 3.27% at September 30, 2012 to 3.14% at September 30, 2013. The decrease in the net interest spread is a result of yields on earning assets declining more than the rate paid on interest-bearing liabilities. During the nine months ended September 30, 2013, the yield on earning assets decreased 28 basis points, while the rate paid on interest-bearing liabilities decreased 15 basis points, compared to the same period last year. The yield on earning assets was negatively impacted as a result of reduced origination yields, amortization, prepayment and repricing of higher yielding adjustable rate loans due to the low level of market interest rates, and security purchases at lower yields than in the prior year period. The cost of funds, which also decreased from the prior year period, was managed in a manner that would allow the Bank to maintain its deposit base, and compete with existing market interest rates on interest-earning assets.

Provision (Credit) for Loan Losses

Management recorded a ($55,000) credit for loan losses for the nine months ended September30, 2013, compared to a provision of $618,000 for the nine months ended September 30, 2012. The decrease was mainly due to the restructuring of commercial real estate loans allowing the release of required reserves as additional collateral was given to the Bank on several classified relationships during the first quarter of 2013 and continued favorable movement in the economic factors considered as part of management’s analysis, partially offset by the effect of growth in the loan portfolio.

Noninterest Income

Noninterest income totaled $1.2 million, for the nine months ended September 30, 2013, a decrease of $285,000, or 19.5%, from $1.5 million for the same period in 2012. The decrease was primarily due to a $227,000 decrease in Trust income, and a $123,000 decrease in gain on sale of loans, partially offset by $48,000 increase in service charges, fees, and other operating income, and a $19,000 increase in gain on sale of foreclosed assets. The decrease in Trust income was due to the completion of the transfer and assumption agreement as previously mentioned. The decrease in gain on sale of loans was due to market price fluctuations which had a negative impact on the premium on loans sold compared to the prior year period. The increase in service charges, fees, and other operating income is primarily due to $47,000 in facilities and equipment reimbursements from TNB. The increase in gain on sale of foreclosed assets was related to a net gain on the sale of four residential properties in the current year period, compared to a loss on the sale of a commercial real estate property in the prior year period.

Noninterest Expense

Noninterest expense totaled $8.0 million for the nine months ended September 30, 2013, a decrease of $789,000, or 8.9%, from $8.8 million for the nine months ended September 30, 2012. The decrease was primarily due to a $545,000 decrease in salaries and employee benefits, a $19,000 decrease in Federal deposit insurance premiums, a $20,000 decrease in provision for impairment on foreclosed assets held for sale, and a $245,000 decrease in other operating expenses, partially offset by a $41,000 increase in occupancy and equipment expenses. The decrease in salaries and employee benefits was mainly due to lower compensation costs resulting from the completion of the trust transfer and assumption agreement which eliminated several positions and the related salary and benefit costs compared to the prior year period, the absence of one-time severance expenses associated with the trust transfer and assumption agreement and staff attrition since the prior year period, and a nonrecurring health savings account contribution made in the prior year period that was not repeated in the current year period. The decrease in Federal deposit insurance premiums was primarily due to a decline in the Bank’s total assets and assessment rate compared to the prior year period. The decrease in provision for impairment on foreclosed assets held for sale was due to decreased write-downs on foreclosed property held for sale compared to the prior year period. The decrease in other operating expenses was primarily due to declines in trust service charges, legal, marketing, and audit accounting-related expenses, partially offset by increases in stationary printing and supplies, postage, and organization dues compared to the prior year period. The increase in occupancy and equipment expenses was primarily due to an increase in depreciation, and furniture and fixture repairs and maintenance compared to the prior year period.

Federal Income Taxes

Federal income tax expense totaled $562,000 for the nine month period ended September 30, 2013, an increase of $303,000 compared to $259,000 for nine month period ended September 30, 2012. The increase was primarily due to a $639,000 increase in pretax income compared to the prior year period, as well as the tax benefit recorded in the prior year period which was a result of the composition of non-taxable earnings. The effective tax rate for the nine month period ended September 30, 2013 was 26.3% compared to 17.3% for the prior year period. The increase in the effective tax rate for the current year period was primarily due to the tax benefit recorded in the prior year period as mentioned above. The effective rate is below the statutory rate of 34% due to certain income items that are not subject to tax.

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 was filed with the Securities and Exchange Commission for the year ended December 31, 2012.

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.

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 year ended December 31, 2012.

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)

Not applicable.

(b)

Not applicable.

(c)

The following table sets forth certain information regarding repurchases by the Company for the quarter ended September 30, 2013.

 

 

Period		Total number of shares purchased				Average price paid per share				Total number of shares purchased as part of the announced plan				Maximum number of shares which may still be purchased as part of the announced plan
July 1 - 31, 2013			—			$	—				98,114				52,092
August 1 - 31, 2013			10,000			$	10.70				108,114				42,092
September 1 - 30, 2013			10,000			$	10.76				118,114				104,242
Total			20,000			$	10.73				118,114				104,242

 

Notes to the Table:

On August 10, 2012, the Company announced the authorization by the Board of Directors of a new program for the repurchase of 150,206 shares, or 5.0%, of the Company’s outstanding shares of common stock. On September 30, 2013 the Company announced the adoption of a new share buy-back program authorizing the repurchase of an additional 2.5% or 72,150, shares of its common stock outstanding. As a result of these two plans, net of shares previously repurchased, the Company may repurchase up to 104,242 shares of its common stock outstanding.

 

ITEM 3.

Defaults Upon Senior Securities

Not applicable.

 

ITEM 4.

Mine Safety Disclosures

 

Not applicable.

 

 

ITEM 5.

Other Information

Not applicable.

 

ITEM 6.

Exhibits

Exhibit
Number	Description
31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
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
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:  November 8, 2013		By:	/s/Rod C. Steiger
			Rod C. Steiger
			President and Chief Executive Officer
Date:  November 8, 2013		By:	/s/Myron Swartzentruber
			Myron Swartzentruber
			Senior Vice President and
			Chief Financial Officer