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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended March 31, 2012  

 

OR

 

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

 

For the transition period from ____________ to _______________

 

Commission File No. 0-23433

 

WAYNE SAVINGS BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

As of May 4, 2012, the latest practicable date, 3,004,113 shares of the registrant’s common stock, $.10 par value, were issued and outstanding.

 

 
 

Wayne Savings Bancshares, Inc.

Index

 

    Page
     
PART I - FINANCIAL INFORMATION  
     
Item 1 Condensed Consolidated Balance Sheets 2
     
  Condensed Consolidated Statements of Income and Comprehensive Income 3
     
  Condensed Consolidated Statements of Cash Flows 4
     
  Notes to Condensed Consolidated Financial Statements 6
     
Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations 30
     
Item 3 Quantitative and Qualitative Disclosures About Market Risk 37
     
Item 4 Controls and Procedures 37
     
     
PART II - OTHER INFORMATION  
     
Item 1  Legal Proceedings 38
     
Item 1A Risk Factors 38
     
Item 2  Unregistered Sales of Equity Securities and Use of Proceeds 38
     
Item 3  Defaults Upon Senior Securities 38
     
Item 4  Mine Safety Disclosures 38
     
Item 5 Other Information 38
     
Item 6 Exhibits 39
     
SIGNATURES   40

 

Wayne Savings Bancshares, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

   March 31, 2012   December 31, 2011 
   (Unaudited)     
ASSETS          
Cash and due from banks  $12,586   $14,215 
Interest-bearing demand deposits   3,911    5,601 
Cash and cash equivalents   16,497    19,816 
           
Available-for-sale securities   132,673    130,637 
Held-to-maturity securities   1,665    1,679 
Loans receivable – net of allowance for loan losses of $4,574 and
     $3,854 at March 31, 2012 and December 31, 2011, respectively
   231,458    232,099 
Premises and equipment   7,105    7,165 
Federal Home Loan Bank stock   5,025    5,025 
Foreclosed assets held for sale  -  net   105    1,283 
Accrued interest receivable   1,547    1,314 
Bank-owned life insurance   8,507    7,193 
Goodwill   1,719    1,719 
Other intangible assets   196    219 
Prepaid Federal Deposit Insurance Corporation premiums   795    868 
Other assets   1,377    1,026 
Prepaid federal income taxes   217    54 
Total assets  $408,886   $410,097 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
Liabilities          
Deposits          
Demand  $75,546   $76,750 
Savings and money market   111,196    108,934 
Time   145,142    148,164 
Total deposits   331,884    333,848 
           
Other short-term borrowings   6,897    5,278 
Federal Home Loan Bank advances   26,627    26,597 
Accrued interest payable and other liabilities   2,916    3,751 
Deferred federal income taxes   958    908 
Total liabilities   369,282    370,382 
           
Commitments and Contingencies        
           
Stockholders’ Equity          
Preferred stock, 500,000 shares of $.10 par value authorized; no
     shares issued
        
Common stock, $.10 par value; authorized 9,000,000 shares;
     3,978,731 shares issued
   398    398 
Additional paid-in capital   35,982    35,986 
Retained earnings   16,611    16,635 
Shares acquired by ESOP   (634)   (655)
Accumulated other comprehensive income, net of tax effects   1,777    1,881 
Treasury stock, at cost – 974,618 common shares   (14,530)   (14,530)
Total stockholders’ equity   39,604    39,715 
Total liabilities and stockholders’ equity  $408,886   $410,097 

See accompanying notes to condensed consolidated financial statements.

2

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Income and Comprehensive Income

For three months ended March 31, 2012 and 2011

(In thousands, except per share data)

(Unaudited)


   Three months ended 
   March 31, 2012   March 31, 2011 
Interest and Dividend Income          
    Loans  $2,986   $3,175 
    Securities   942    1,062 
    Dividends on Federal Home Loan Bank stock and other   59    59 
         Total interest and dividend income   3,987    4,296 
           
Interest Expense          
    Deposits   610    848 
    Other short-term borrowings   2    5 
    Federal Home Loan Bank advances   179    311 
         Total interest expense   791    1,164 
           
Net Interest Income   3,196    3,132 
           
Provision for Loan Losses   787    122 
           
Net Interest Income After Provision for Loan Losses   2,409    3,010 
           
Noninterest Income          
    Gain on loan sales   46    7 
    Trust income   92    65 
    Earnings on bank-owned life insurance   73    57 
    Service fees, charges and other operating   257    235 
         Total noninterest income   468    364 
           
Noninterest Expense          
    Salaries and employee benefits   1,637    1,441 
    Net occupancy and equipment expense   476    472 
    Federal deposit insurance premiums   79    122 
    Franchise taxes   101    94 
    Provision for impairment on foreclosed assets held for sale       421 
    Loss (Gain) on sale of foreclosed assets held for sale   13    (4)
    Amortization of intangible assets   23    23 
    Other   456    331 
         Total noninterest expense   2,785    2,900 
           
Income Before Federal Income Taxes   92    474 
           
Provision (Benefit) for Federal Income Taxes   (60)   69 
           
Net Income  $152   $405 
           
Other comprehensive income (loss):          
           
Unrealized gains (losses) on available-for-sale securities   (157)   38 
Change in defined benefit plan unrecognized net loss       (22)
Amortization of net loss included in net periodic pension cost       35 
    Components of other comprehensive income (loss), before tax effect   (157)   51 
Tax (expense) benefit   53    (16)
           
Other comprehensive income (loss)   (104)   35 
           
Comprehensive income   48    440 
           
Basic Earnings Per Share  $0.05   $0.14 
           
Diluted Earnings Per Share  $0.05   $0.14 
           
Dividends Per Share  $0.06   $0.06 

See accompanying notes to condensed consolidated financial statements.

3

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows

For the three months ended March 31, 2012 and 2011

(In thousands)

(Unaudited)

   2012   2011 
         
Operating Activities          
Net income  $152   $405 
Items not requiring (providing) cash          
Depreciation and amortization   134    127 
Provision for loan losses   787    122 
Amortization of premiums and discounts on securities – net   510    391 
Amortization of mortgage servicing rights   17    11 
Amortization of deferred loan origination fees   (21)   (16)
Amortization of intangible assets   23    23 
Increase in value of bank owned life insurance   (71)   (62)
Amortization expense of stock benefit plan   17    19 
Provision for impairment on foreclosed assets held for sale       421 
Loss (gain) on sale of foreclosed assets held for sale   13    (4)
Gain on sale of loans   (46)   (7)
Proceeds from sale of loans in secondary market   1,374    385 
Origination of loans for sale in the secondary market   (1,328)   (378)
Deferred income taxes   104    (157)
Changes in          
Accrued interest receivable   (233)   (356)
Other assets   (531)   222 
Prepaid federal deposit insurance premiums   73    114 
Interest payable and other liabilities   (502)   (527)
Net cash provided by operating activities   472    733 
           
Investing Activities          
Purchase of  available-for-sale securities   (13,885)   (11,066)
Proceeds from maturities of available-for-sale securities   11,182    10,543 
Proceeds from maturities of held-to-maturity securities   13    12 
Net change in loans   (125)   (2,309)
Purchase of Bank owned life insurance   (1,243)    
Purchase of premises and equipment   (74)   (24)
Proceeds from the sale of foreclosed assets   1,165    121 
Net cash used in investing activities   (2,967)   (2,723)

See accompanying notes to condensed consolidated financial statements.

4

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (continued)

For the three months ended March 31, 2012 and 2011

(In thousands)

(Unaudited)

   2012   2011 
         
         
Financing Activities          
Net change in deposits  $(1,964)  $89 
Net change in other short-term borrowings   1,619    (1,086)
Proceeds from Federal Home Loan Bank and Federal Reserve advances   10     
Repayments of Federal Home Loan Bank and Federal Reserve advances   20    30 
Advances by borrowers for taxes and insurance   (333)   (395)
Cash dividends paid   (176)   (177)
Net cash used in by financing activities   (824)   (1,539)
           
Decrease in Cash and Cash Equivalents   (3,319)   (3,529)
           
Cash and Cash equivalents, Beginning of period   19,816    11,800 
           
Cash and Cash equivalents, End of period  $16,497   $8,271 
           
Supplemental Cash Flows Information:          
Interest paid on deposits and borrowings  $788   $646 
           
Federal income taxes paid  $   $175 
           
Supplemental Disclosure of Non-Cash Investing and Financing Activities          
Transfers from loans to foreclosed assets held for sale  $   $77 
           
Unrealized gains on securities designated as available-for-sale,          
   net of related tax effects  $(104)  $25 
           
Dividends payable  $180   $180 

See accompanying notes to condensed consolidated financial statements.

5

 

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

Note 1: Basis of Presentation

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

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

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

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

6
Index

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

 

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: Earnings Per Share

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

   For the three months ended
March 31,
 
   2012   2011 
Weighted-average common shares outstanding (basic)   2,938,660    2,930,075 
Dilutive effect of assumed exercise of stock options        
Weighted-average common shares outstanding (diluted)   2,938,660    2,930,075 

None of the outstanding options were included in the diluted earnings per share calculation for the three months ended March 31, 2012 and 2011, as the average fair value of the shares was less than the option exercise prices.

 

Note 4: Stock Option Plan

In fiscal 2004, the Company adopted a Stock Option Plan that provided for the issuance of 142,857 incentive options and 61,224 non-incentive options with respect to authorized common stock. As of March 31, 2012, all options under the 2004 Plan have been granted and (excluding forfeited options), are subject to exercise at the discretion of the grantees, and will expire in August of 2013 unless otherwise exercised or forfeited.

7
Index

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

The Company accounts for the stock option plan in accordance with the provisions of FASB ASC 718-10. FASB ASC 718-10 requires the recognition of compensation expense related to stock option awards based on the fair value of the option award at the grant date. Compensation cost is then recognized over the vesting period. There were no options granted during the three months ended March 31, 2012 and 2011. There was no compensation expense recognized for the stock option plan during the three months ended March 31, 2012 and 2011, as all options were fully vested prior to these periods.

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

 

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

 

The following information applies to options outstanding at March 31, 2012:

Number outstanding   61,408 
Exercise price on all remaining options outstanding  $13.95 
Weighted-average remaining contractual life   1.50 years 

 

Note 5: 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.

8
Index

Wayne Savings Bancshares, Inc.
Notes to Condensed Consolidated 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 risk-based capital (as defined in the regulations) to risk-weighted assets (as defined), and of tangible and core capital (as defined) to adjusted total assets (as defined). As of March 31, 2012, the Bank met all capital adequacy requirements to which it was subject.

As of March 31, 2012, the Bank was classified as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain capital ratios as set forth in the table below. There are no conditions or events since March 31, 2012 that management believes have changed the Bank’s capital classification.

The Bank’s actual capital amounts and ratios as of March 31, 2012 and December 31, 2011 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 
   (Dollars in thousands) 
As of March 31, 2012                        
Tangible capital  $35,197    8.7%  $6,106    1.5%  $20,355    5.0%
Core capital   35,197    8.7    16,284    4.0    24,426    6.0 
Risk-based capital   38,016    17.0    17,904    8.0    22,380    10.0 
                               
As of December 31, 2011                              
Tangible capital  $35,132    8.7%  $6,074    1.5%  $20,248    5.0%
Core capital   35,132    8.7    16,198    4.0    24,297    6.0 
Risk-based capital   38,070    16.2    18,802    8.0    23,503    10.0 
                               

 

Note 6: Recent Accounting Developments

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

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

9
Index

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

adoption of FASB ASU 2011-04 did not have a material effect on the Company’s financial condition or results of operations.

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

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

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

Note 7: 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:                    
March 31, 2012:                    
U.S. government agencies  $1,471   $16   $1   $1,486 
Mortgage-backed securities of
     government sponsored entities
   100,771    2,615    73    103,313 
Private-label collateralized mortgage
     obligations
   1,515    49        1,564 
State and political subdivisions   25,198    1,144    32    26,310 
                     
Totals  $128,955   $3,824   $106   $132,673 
10
Index

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

 

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

 

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Approximate
Fair Value
 
   (In thousands) 
Held-to-maturity Securities:                    
March 31, 2012:                    
U.S. government agencies  $143   $   $1   $142 
Mortgage-backed securities of
     government sponsored entities
   1,515    15        1,530 
State and political subdivisions   7            7 
                     
   $1,665   $15   $1   $1,679 
                     
December 31, 2011:                    
U.S. government agencies  $145   $   $   $145 
Mortgage-backed securities of
     government sponsored entities
   1,527    16        1,543 
State and political subdivisions   7            7 
                     
   $1,679   $16   $   $1,695 

 

11
Index

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

Amortized cost and fair value of available-for-sale securities and held-to-maturity securities at March 31, 2012 by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

   Available-for-sale   Held-to-maturity 
   Amortized
Cost
   Fair
Value
   Amortized
Cost
   Fair
Value
 
   (In thousands) 
                 
Within one year  $1,305   $1,321   $7   $7 
One to five years   1,531    1,590         
Five to ten years   7,783    8,111         
After ten years   16,050    16,774    143    142 
                     
    26,669    27,796    150    149 
                     
Mortgage-backed securities of
     government sponsored entities
   100,771    103,313    1,515    1,530 
Private-label collateralized
     mortgage obligations
   1,515    1,564         
                     
    Totals  $128,955   $132,673   $1,665   $1,679 

 

The carrying value of securities pledged as collateral to secure public deposits and for other purposes was $56.8 million and $53.9 million at March 31, 2012 and December 31, 2011, respectively.

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. The total fair value of these investments at March 31, 2012 and December 31, 2011, was $21.8 million and $17.7 million, which represented approximately 16% and 14%, respectively, of the Company’s aggregate available-for-sale and held-to-maturity investment portfolio. These declines resulted primarily from changes in market interest rates.

Based on an evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these government agency, mortgage-backed and state and political subdivision securities are temporary at March 31, 2012.

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

12
Index

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

 

March 31, 2012

   Less than 12 Months   12 Months or More   Total 
Description of
Securities
  Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 
(In thousands)
                         
U.S. government agencies  $   $   $449   $2   $449   $2 
Mortgage-backed securities of government sponsored entities   18,403    62    847    11    19,250    73 
Private-label collateralized mortgage obligations   91    0            91    0 
State and political subdivisions   1,360    7    759    25    2,119    32 
Total temporarily impaired securities  $19,854   $69   $2,055   $38   $21,909   $107 

 

December 31, 2011

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

13
Index

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

Note 8: Fair Value Measurements

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

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

Recurring Measurements

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

Available-for-sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using pricing models that contain market pricing and information, quoted prices of securities with similar characteristics or discounted cash flows that use credit adjusted discount rates. Level 2 securities include U.S. Government agencies, mortgage-backed securities, certain collateralized mortgage obligations and certain municipal securities. In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include other less liquid securities.

14
Index

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

 

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

       Fair Value Measurements Using 
   Fair Value   Quoted Prices in
Active Markets
for Identical
Assets
(Level 1)
   Significant Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
   (In thousands) 
March 31, 2012                
U.S. government agencies  $1,486   $   $1,486   $ 
Mortgage-backed securities of
     government sponsored entities
   103,313        103,313     
Private-label collateralized
     mortgage obligations
   1,564        1,564     
State and political subdivisions   26,310        26,310     
                     
                     
December 31, 2011                    
U.S. government agencies  $1,584   $   $1,584   $ 
Mortgage-backed securities of
     government sponsored entities
   101,328        101,328     
Private-label collateralized
     mortgage obligations
   1,741        1,741     
State and political subdivisions   25,984        25,984     

 

Nonrecurring Measurements

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

Collateral-dependent Impaired Loans, Net of ALLL

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

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-

15
Index

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

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

Foreclosed Assets Held for Sale

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

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

       Fair Value Measurements Using 
   Fair Value   Quoted Prices
in Active
Markets for
Identical
Assets
(Level 1)
   Significant
Other
Observable
Inputs
(Level 2)
   Significant
Unobservable
Inputs
(Level 3)
 
   (In thousands) 
March 31, 2012                 
   Collateral-dependent
   impaired loans
  $419   $   $   $419 
                     
December 31, 2011                    
   Collateral-dependent
   impaired loans
  $3,468   $   $   $3,468 
   Foreclosed assets   1,283            1,283 

 Unobservable (Level 3) Inputs

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

  Fair Value at
3/31/12
Valuation
Technique
Unobservable
Inputs
Range (Weighted
Average)
         
Collateral-dependent impaired loans

$419,000

 

Market comparable properties

Selling Cost

 

10%

 

 

16
Index

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

 

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)
 
March 31, 2012   (In thousands) 
Financial assets                    
              Cash and cash equivalents  $16,497   $16,497   $   $ 
Held-to-maturity securities   1,665        1,679     
Loans, net of allowance for loan losses   231,458            240,596 
Federal Home Loan Bank stock   5,025        5,025     
Interest receivable   1,547        1,547     
                     
                     
Financial liabilities                    
Deposits   331,884        330,035     
Other short-term borrowings   6,897        6,897     
Federal Home Loan Bank advances   26,627        27,692     
Advances from borrowers for taxes and insurance   608        608     
Interest payable   71        71     
                     

 

 

 

17
Index

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

 

 

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

 

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

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

The carrying amount approximates fair value.

Loans

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

18
Index

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

 

Held-to-maturity securities

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

Deposits

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

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

The carrying amount approximates fair value.

Federal Home Loan Bank Advances

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

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

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

19
Index

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

 

Note 9: Credit Quality of Loans and the Allowance for Loan Losses

Loans

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

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

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

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

Allowance for Loan Losses

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

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

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

20
Index

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

 

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

Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

The risk characteristics of each portfolio segment are as follows:

Residential Real Estate Loans

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

All Other Mortgage Loans

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

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

Non-residential real estate loans are negotiated on a case by case basis. Loans secured by non-residential real estate generally involve a greater degree of risk than one-to- four family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by non-residential real estate is typically

21
Index

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

dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.

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

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

Commercial Business Loans

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

Consumer Loans

Consumer loans entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as automobiles, mobile homes, boats, and recreational vehicles. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In particular, amounts realizable on the sale of repossessed automobiles may be significantly reduced based upon the condition of the automobiles and the lack of demand for used automobiles.

 

22
Index

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

The following presents by portfolio segment, the activity in the allowance for loan losses for the three months ended March 31, 2012 and March 31, 2011:

March 31, 2012  One-to-four
family
residential
   All other
mortgage loans
   Commercial
business
loans
   Consumer
loans
   Unallocated   Total 
   (In thousands) 
Beginning balance  $1,128   $2,547   $169   $10   $   $3,854 
Provision charged to expense   185    598    5    (1)       787 
Losses charged off   (65)   (5)               (70)
Recoveries   3                    3 
Ending balance  $1,251   $3,140   $174   $9   $   $4,574 

 

March 31, 2011  One-to-four
family
residential
   All other
mortgage loans
   Commercial
business
loans
   Consumer
loans
   Unallocated   Total 
   (In thousands) 
 
Beginning balance
  $1,199   $1,603   $253   $8   $2   $3,065 
Provision charged to expense   (127)   349    (95)   (3)   (2)   122 
Losses charged off                        
Recoveries   1    15                16 
Ending balance  $1,073   $1,967   $158   $5   $   $3,203 

23
Index

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

 

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 March 31, 2012 and December 31, 2011:

 

March 31, 2012  One-to-four
family
residential
   All other
mortgage loans
   Commercial
business
loans
   Consumer
loans
   Unallocated   Total 
Allowance Balances:                        
   (in thousands) 
Ending balance:  individually evaluated for impairment  $350   $2,461   $42   $   $   $2,853 
Ending balance:  collectively evaluated for impairment  $901   $679   $132   $9   $   $1,721 
Total allowance for loan losses  $1,251   $3,140   $174   $9   $   $4,574 
                               
Loan Balances:                              
                               
Ending balance:  individually evaluated for impairment  $4,596   $7,385   $51   $        $12,032 
Ending balance:  collectively evaluated for impairment  $147,047   $64,003   $11,626   $2,126        $224,802 
Ending balance  $151,643   $71,388   $11,677   $2,126        $236,834 

 

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

 

Total loans in the above tables do not include deferred loan origination fees of $432,000 and $409,000 or loans in process of $370,000 and $1.7 million for March 31, 2012 and December 31, 2011, respectively.

24
Index

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

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

March 31, 2012  One-to-four family
residential
   All other mortgage
loans
   Commercial
business loans
   Consumer loans 
       (In thousands)     
      Rating *                    
        Pass (Risk 1-4)  $145,850   $59,770   $11,466   $2,126 
        Special Mention (Risk 5)   3,012    4,234    160     
        Substandard (Risk 6)   2,781    6,787    51     
        Doubtful (Risk 7)       597         
                     
Total  $151,643   $71,388   $11,677   $2,126 

 

December 31, 2011  One-to-four family
residential
   All other mortgage
loans
   Commercial
business loans
   Consumer loans 
       (In thousands)     
      Rating *                    
        Pass (Risk 1-4)  $145,061   $61,970   $10,268   $2,257 
        Special Mention (Risk 5)   2,979    3,281    166     
        Substandard (Risk 6)   5,024    6,358    92     
                     
Total  $153,064   $72,206   $10,526   $2,257 

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

25
Index

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

 

 

 

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

 

March 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 &
Accruing
 
           (In thousands)             
                             
One-to-four family residential loans  $1,505   $13   $239   $1,757   $149,886   $151,643   $ 
All other mortgage loans   1,106    473    1,902    3,481    67,907    71,388     
Commercial business loans   33    5    3    41    11,636    11,677     
      Consumer loans   6        4    10    2,116    2,126     
                                    
Total  $2,650   $491   $2,148   $5,289   $231,545   $236,834   $ 
                                    

 

December 31, 2011  30-59 Days
Past Due
   60-89 Days
Past Due
   Greater Than
90Days
   Total Past
Due
   Current   Total Loans
Receivable
   Total Loans >
90 Days &
Accruing
 
           (In thousands)             
                             
One-to-four family residential loans  $1,513   $280   $844   $2,637   $150,427   $153,064   $ 
All other mortgage loans   903        1,905    2,808    69,398    72,206     
Commercial business loans   17        35    52    10,474    10,526     
      Consumer loans   17    9        26    2,231    2,257     
                                    
Total  $2,450   $289   $3,188   $5,523   $232,530   $238,053   $ 

 

Non-accrual loans were comprised of the following at:

 

   March 31, 2012   December 31, 2011 
   Nonaccrual   Nonaccrual 
   (In thousands) 
         
One-to-four family residential loans  $2,195   $2,433 
All other mortgage loans   3,732    3,271 
Commercial business loans   54    92 
      Consumer loans   8    12 
           
Total  $5,989   $5,808 

 

26
Index

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

 

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 March 31, 2012 and March 31, 2011 is presented below:

March 31, 2012  Recorded
Balance
   Unpaid
Principal
Balance
   Specific
Allowance
   Average
Investment
in Impaired
Loans
   Interest
Income
Recognized
 
   (in thousands) 
Loans without a specific valuation allowance                         
One-to-four family residential loans  $3,298   $3,298   $   $3,232   $39 
All other mortgage loans   2,074    2,074        1,923    27 
                          
Loans with a specific valuation allowance                         
One-to-four family residential loans   1,298    1,298    350    821    25 
All other mortgage loans   5,311    5,311    2,461    5,248    20 
Commercial business loans   51    51    42    71     
                          
Total:                         
One-to-four family residential loans  $4,596   $4,596   $350   $4,053   $64 
All other mortgage loans   7,385    7,385    2,461    7,171    47 
Commercial business loans   51    51    42    71     
   $12,032   $12,032   $2,853   $11,295   $111 

 

 

27
Index

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

   As of December 31, 2011   3 months ended
March 31, 2011
 
   Recorded
Balance
   Unpaid
Principal
Balance
   Specific
Allowance
   Average
Investment
in Impaired
Loans
   Interest
Income
Recognized
 
Loans without a specific valuation allowance  (in thousands) 
One-to-four family residential loans  $3,238   $3,238   $   $2,441   $23 
All other mortgage loans   1,771    1,771        866    10 
                          
Loans with a specific valuation allowance                         
One-to-four family residential loans   506    506    320    321    2 
All other mortgage loans   5,184    5,184    1,941    3,932    32 
Commercial business loans   92    92    53    107    2 
                          
Total:                         
One-to-four family residential loans  $3,744   $3,744   $320   $2,762   $25 
All other mortgage loans   6,955    6,955    1,941    4,798    42 
Commercial business loans   92    92    53    107    2 
   $10,791   $10,791   $2,314   $7,667   $69 

 

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

   March 31, 2012
Quarter-to-Date
 
   Number
of loans
   Pre-
modification
Unpaid
Principal
Balance
   Post-
modification
Unpaid
Principal
Balance
 
Troubled Debt Restructurings  (dollars in thousands) 
             
One-to-four family residential loans   2   $538   $538 
 
The TDR classifications which occurred in the March 31, 2012 quarter were due to an effective interest rate below the market interest rate of similar debt. Each TDR has been individually evaluated for impairment with the appropriate specific valuation allowance included in the allowance for loan losses calculation.

 

There were no TDR classifications which defaulted during the three month period ended March 31, 2012.

28
Index

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

 

Note 10: Accumulated Other Comprehensive Income

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

   March 31, 2012   December 31, 2011 
   (In thousands) 
         
Net unrealized gain on securities available-for-sale  $3,718   $3,876 
Net unrealized loss for unfunded status of defined
     benefit plan liability
   (1,026)   (1,026)
           
    2,692    2,850 
Tax effect   (915)   (969)
Net-of-tax amount  $1,777   $1,881 

 

Note 11: Goodwill and Intangible Assets

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

   March 31, 2012   December 31, 2011 
   (In thousands) 
Goodwill  $1,719   $1,719 
Other intangible assets - gross   974    974 
Other intangible assets - amortization   (778)   (755)
           
           
Total  $1,915   $1,938 

 

The Company recorded amortization relative to intangible assets totaling $23,000 for both quarters ended March 31, 2012 and March 31, 2011. The Company anticipates $91,000 of amortization for each of fiscal 2012, 2013 and $37,000 for 2014. Such amortization is derived using the straight line method for the core deposit asset over ten years. Pursuant to FASB ASC 350, the Company is required to annually test goodwill and other intangible assets for impairment. The Company’s testing of goodwill and other intangible assets at March 31, 2012 indicated there was no impairment in the carrying value of these assets.

 

29

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

Strategic Initiatives

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

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

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

At March 31, 2012, the Company had total assets of $408.9 million, a decrease of $1.2 million, or 0.3%, from total assets at December 31, 2011.

Liquid assets, consisting of cash, interest-bearing demand deposits and available-for-sale securities, decreased by $1.3 million, or 0.9%, to $149.2 million at March 31, 2012 compared to $150.5 million at December 31, 2011. The decrease was primarily due to a decrease of $3.3 million in cash and cash equivalents and an increase in available-for-sale securities of $2.0 million, or 1.6%. The increase in available-for-sale securities was in turn due to regular payments and “prepayments” on loans that reduced the loan portfolio. Increased payments on loans, also known as “prepayments,” occur in low interest rate environments where borrowers can exercise an option to refinance existing loans either with or without a prepayment penalty. Similarly, low interest rates induce depositors to select liquid types of accounts over time deposits and other investment alternatives.

Total securities increased by $2.0 million, or 1.5%, during the three month period ended March 31, 2012. The increase was primarily due to purchases of $13.9 million partially offset by a decrease in the fair value of available-for-sale investment securities of $157,000 and by maturities and principal repayments of $11.2 million and amortization of premiums of $510,000 for the quarter. Purchases were mainly funded by proceeds from principal payments received from the loan and securities portfolios and an increase in deposit balances as more fully described below.

Net loans receivable decreased by $641,000, or 0.3% at March 31, 2012 compared to December 31, 2011. The Bank originated $13.1 million of loans, received payments of $13.0 million, originated and sold $1.3 million of 30-year fixed-rate mortgage loans into the secondary market and made a provision for loan losses of $787,000. The low interest rate environment has induced a number of residential and commercial borrowers to refinance existing loans, which increases loan repayment activity, while the continuing difficult economic environment continues to limit the demand for new loans by credit worthy borrowers.

30
Index

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

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

   March 31, 2012   December 31, 2011 
   (Dollars in thousands) 
Mortgage loans:                    
One-to-four family residential(1)  $151,643    64.02%  $153,064    64.30%
Residential construction loans   824    0.35    753    0.32 
Multi-family residential   8,520    3.60    8,589    3.61 
Non-residential real estate/land(2)   62,044    26.20    62,864    26.40 
Total mortgage loans   223,031    94.17    225,270    94.63 
Other loans:                    
Consumer loans(3)   2,126    0.90    2,257    0.95 
Commercial business loans   11,677    4.93    10,526    4.42 
Total other loans   13,803    5.83    12,783    5.37 
Total loans before net items   236,834    100.00%   238,053    100.00%
Less:                    
Loans in process   370         1,691      
Deferred loan origination fees   432         409      
Allowance for loan losses   4,574         3,854      
Total loans receivable, net  $231,458        $232,099      

 

 

(1)Includes loans collateralized by second mortgages in the aggregate amount of $15.6 million at March 31, 2012 and $15.9 million at December 31, 2011. Such loans have been underwritten on substantially the same basis as the Company’s first mortgage loans.
(2)Includes land loans of $2.2 million for March 31, 2012 and $2.7 million for December 31, 2011.
(3)Includes second mortgage loans of $1.2 million for both March 31, 2012 and December 31, 2011.

 

Foreclosed assets held for sale amounted to $105,000 at March 31, 2012 and $1.3 million at December 31, 2011. Activity during the quarter consisted of one sale of a nonresidential property of $1.2 million. Total non-performing and impaired assets amounted to $13.8 million at March 31, 2012, compared to $12.2 million at December 31, 2011.

Bank Owned Life Insurance (BOLI) increased by $1.3 million during the period ended March 31, 2012. Management executed a strategy to improve the credit quality of the existing portfolio by exchanging insurance policies. As part of this process, management invested additional funds to generate additional earnings to offset compensation and benefits costs while meeting minimum issuance requirements.

Goodwill of $1.7 million is carried on the Company’s balance sheet as a result of the acquisition of Stebbins Bancshares in June 2004. In accordance with FASB ASC 350, this goodwill is tested for impairment on at least an annual basis. Management evaluated the goodwill using an analysis of required

31
Index

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

 

measures of value, including the current stock price as an indicator of minority interest value, change of control multiples as a measure of controlling interest value and discounted cash flow analysis as a measure of going concern value and applied a weighting based on appraisal standards to arrive at a valuation conclusion that indicated no impairment at March 31, 2012.

Deposits totaled $331.9 million at March 31, 2012, a decrease of $2.0 million, or 0.6%,compared to $333.8 million at December 31, 2011. Demand accounts decreased by $1.2 million and time deposits decreased by $3.0 million, partially offset by a $2.3 million 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.

Other short-term borrowings, in the form of recurring repurchase agreements with commercial customers of the Bank, increased $1.6 million over the three months to a balance of $6.9 million. These customer repurchase agreements are offered by the Bank in order to retain commercial customer funds and to afford those commercial customers the opportunity to earn a return on a short-term secured transaction. Average balances are shown in the tables below and reflect no significant variation during the periods. The interest rate paid on these borrowings was 0.15% at both March 31, 2012 and December 31, 2011.

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

Stockholders’ equity decreased by $111,000, or 0.3%, during the three months ended March 31, 2012, mainly due to declared dividends of $180,000 and the reduction of accumulated other comprehensive income of $104,000 caused by the decline in unrealized gains on securities available for sale partially offset by net income of $152,000.

Comparison of Operating Results for the Three Month Periods Ended March 31, 2012 and 2011

General

Net income for the three months ended March 31, 2012 totaled $152,000, a decrease of $253,000, or 62.5%, compared to $405,000 for the three month period ended March 31, 2011. The decrease in net income was primarily due to an increase of $665,000 in provision for loan losses partially offset by an increase of $104,000 in noninterest income, an increase of $64,000 in net interest income before provision for loan losses, a decrease in noninterest expenses of $115,000 and decreased provision for federal income taxes of $129,000.

 

32
Index

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

 

Average Balance Sheet

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

   For the three months ended March 31, 
   2012   2011 
   Average Balance   Interest   Average
Rate
   Average Balance   Interest   Average Rate 
   (Dollars in thousands) 
Interest-earning assets:                              
Loans receivable, net(1)  $231,663   $2,986    5.16%  $240,338   $3,175    5.28%
Investment securities(2)   136,932    942    2.75    131,759    1,062    3.22 
Interest-earning deposits(3)   13,852    59    1.70    12,871    59    1.83 
Total interest-earning assets   382,447    3,987    4.17    384,968    4,296    4.46 
Noninterest-earning assets   23,837              24,517           
                               
  Total assets  $406,284             $409,485           
                               
Interest-bearing liabilities:                              
Deposits  $329,567   $610    0.74%  $321,182   $848    1.06%
Other short-term borrowings   5,947    2    0.13    6,708    5    0.30 
Borrowings   26,608    179    2.69    39,493    311    3.15 
Total interest-bearing liabilities   362,122    791    0.87    367,383    1,164    1.27 
                               
Noninterest bearing  liabilities   4,173              3,996           
 Total liabilities   366,295              371,379           
 Stockholders’ equity   39,989              38,106           
   Total liabilities and stockholders’ equity  $406,284             $409,485           
     Net interest income       $3,196             $3,132      
Interest rate spread(4)             3.30%             3.19%
Net yield on interest-earning assets(5)             3.34%             3.25%
Ratio of average interest-earning assets to average  interest-bearing liabilities             105.61%             104.79%

 

(1)Includes non-accrual loan balances.
(2)Includes mortgage-backed securities both designated as available-for-sale and held-to-maturity.
(3)Includes interest-bearing deposits in other financial institutions.
(4)Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
(5)Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.
33
Index

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

Interest Income

Interest income decreased by $309,000 or 7.2%, to $4.0 million for the three months ended March 31, 2012, compared to the same period in 2011. The decrease was due to a decline in the weighted-average yield on interest-earning assets to 4.17% in the 2012 period from 4.46% for the 2011 period, accompanied by a decrease of $2.5 million in the average balance of interest-earning assets outstanding to $382.4 million for the 2012 period compared to an average balance of $385.0 million for the 2011 period. The yield decrease was primarily due to the cumulative effect of interest-earning assets repricing to lower current market rates from the 2011 period to the 2012 period through interest rate resets on adjustable rate loans and securities, prepayments, lower rates on new loan originations and reinvestment of securities cashflows at lower market yields.

Interest income on loans decreased by $189,000, or 6.0%, for the three month period ended March 31, 2012, compared to the same period in 2011, due to a decrease in the average balance of loans outstanding of $8.7 million and a reduction of 12bps in the portfolio yield. The yield on the loan portfolio decreased from 5.28% for the three months ended March 31, 2011 to 5.16% for the three months ended March 31, 2012, again due to reduced origination yields and the amortization, prepayment and repricing of higher yielding assets due to the low level of market interest rates. The average balance of loans outstanding decreased $8.7 million, or 3.6%, to $231.7 million for the 2012 period compared to $240.3 million for the 2011 period. Loan prepayments have increased due to the low interest rate environment and loan originations have decreased due to lack of demand from qualified borrowers resulting from the continued difficult economic conditions in 2012.

Interest income on securities decreased by $120,000, or 11.3%, during the three months ended March 31, 2012, compared to the same period in 2011. This decrease was due primarily to a decrease of 47 basis points in the weighted-average rate to 2.75% for the 2012 period, compared to 3.22% for the 2011 period, partially offset by an increase in the average balance of $5.2 million, or 3.9%. As discussed earlier, maturing securities cash flows are being reinvested at significantly lower market rates, and the duration of purchased securities is being shortened to mitigate the interest rate risk associated with a possible future increase in the level of market interest rates and to provide portfolio cash flows to fund future loan demand.

Dividends on Federal Home Loan Bank stock and other income remained constant at $59,000 for both the three month periods ended March 31, 2012 and March 31, 2011. The decrease of 13bps in rate from 1.83% at March 31, 2011 to 1.70% at March 31, 2012 was offset equally by the increase in the average balance of $981,000, or 7.6%.

Interest Expense

Interest expense totaled $791,000 for the three month period ended March 31, 2012, a decrease of $373,000, or 32.0%, compared to $1.2 million for the three month period ended March 31, 2011. The decrease was mainly due to a 40 basis point decrease in the weighted-average cost of funds to 0.87% for the 2012 period compared to 1.27% the previous year and ,to a lesser extent, with a decrease in the average balance of total interest-bearing liabilities of $5.3 million, or 1.4%, for the 2012 period compared to the 2011 period.

Interest expense on deposits totaled $610,000, a decrease of $238,000, or 28.1%, compared to $848,000 for the same period in the previous year. The decrease was mainly due to a 32 basis point decrease in the

34
Index

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

 

weighted-average cost of deposits, to 0.74% for the 2012 period compared to 1.06% for the 2011 period, partially offset by an increase in the average balance of $8.4 million, or 2.6%, to $329.6 million for the period ended March 31, 2012. The decrease in interest expense is slowing as rates paid on deposit products reach floors established by local market competitors and overall market conditions.

Interest expense on other short-term borrowings totaled $2,000 for the three month period ended March 31, 2012, a $3,000 decrease over the same period in the previous year. The weighted-average cost decreased 17 basis points to 0.13% and the average balance decreased $761,000, or 11.3%.

Interest expense on Federal Home Loan Bank advances totaled $179,000 for the three month period ended March 31, 2012, a decrease of $132,000 compared to the expense of $311,000 for the 2011 period. The decrease was mainly due to a decline of $12.9 million, or 32.6%, in the average balance outstanding along with a decrease in the weighted-average cost of 46 basis points to 2.69%. The decrease in the rate paid is mainly due to decreases in market interest rates as maturing advances have either been paid off or refinanced at lower rates.

Net Interest Income

Net interest income totaled $3.2 million for the three month period ended March 31, 2012, an increase of $64,000, or 2.0%, from the three month period ended March 31, 2011. The interest rate spread increased 11 basis points to 3.30% for the 2012 period compared to 3.19% for the 2011 period. Similarly, the net interest margin increased 9 basis points to 3.34% for the three month period ended March 31, 2012 compared to 3.25% for the 2011 period. The relatively equivalent rates can be attributed to management’s close monitoring of borrowed funds balances and pricing of existing loan and deposit products. The cost of funds was managed in a manner that would allow the Bank to compete with existing market interest rates on interest earning assets.

Provision for Loan Losses

Management recorded a $787,000 provision for loan losses for the three month period ended March 31, 2012, an increase of $665,000 compared to the $122,000 provision for the three month period ended March 31, 2011. The provision is based on management’s assessment of probable incurred losses in the loan portfolio. The increase was mainly due to the specific evaluation of a commercial real estate loan where the Bank holds a second mortgage position on the collateral and repayment is now considered doubtful. Additionally, two other relationships were evaluated based on a change in circumstance that resulted in a recognized impairment. One relationship was downgraded and classified as a troubled debt restructuring and the other relationship involved a property where the Bank initiated foreclosure proceedings. Finally, part of the additional provision was due to an increase in classified loan balances.

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Index

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

 Noninterest Income

Noninterest income, consisting of service fees and charges on deposit accounts, earnings on bank-owned life insurance, trust income and gain on the sale of loans increased by $104,000, or 28.6%, for the three month period ended March 31, 2012, compared to the three month period ended March 31, 2011. The increase was due primarily to increased gain on sale of loans of $39,000, nonrecurring trust income of $27,000, an increase in other service fees, charges and other operating income of $22,000 and an increase in bank owned life insurance income of $16,000 mainly due to the additional purchase of $1.3 million of bank owned life insurance. The increase in other service fees, charges and other operating was mainly due to increased debit card fees and nonrecurring income from the Bank’s real estate owned portfolio. The purchase of bank owned life insurance is used to generate income to offset the costs of employee benefits.

Noninterest Expense

Noninterest expense decreased by $115,000, or 4.0%, to $2.8 million for the three months ended March 31, 2012, compared to $2.9 million for the three months ended March 31, 2011. The decrease was primarily due to a $421,000 decrease in provision for impairment on foreclosed assets held for sale of which $400,000 was related to a single commercial real estate property which was sold during the March 2012 quarter. Federal deposit insurance premiums decreased by $43,000 due to lower assessment rates for the 2012 period compared to the 2011 period. These decreases were partially offset with an increase of $196,000, or 13.6% in salaries and employee benefits, an increase of $125,000, or 37.8%, in other operating expense and an increase in loss on sale of foreclosed assets held for sale of $17,000. Salaries and employee benefits increased mainly due to a non-recurring health savings account contribution, newly added corporate staff for the commercial lending and marketing departments as part of the Company’s strategic plan and increased pension plan expense compared to the prior year quarter. Other noninterest expense increased due mainly to additional legal, appraisal and other services related to valuation and compliance activities in the 2012 quarter compared to the 2011 quarter and increased marketing expenses incurred as part of the Company’s strategic initiative to increase top line revenues.

Federal Income Taxes

A federal income tax benefit of $60,000 was recognized for the three month period ended March 31, 2012, a decrease of $129,000 compared to the three month period ended March 31, 2011. The decrease was primarily due to a $382,000 decrease in pretax income resulting from the factors discussed above.

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Index

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

 Forward-Looking Statements

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

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

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

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk

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

 

ITEM 4 Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

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

(b) Changes in internal controls.

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

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Wayne Savings Bancshares, Inc.
PART II

ITEM 1. Legal Proceedings

Not applicable.

 

ITEM 1A. Risk Factors

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

 

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

(a)      Not applicable.

(b)      Not applicable.

(c)      Not applicable.

 

ITEM 3. Defaults Upon Senior Securities

Not applicable.

 

ITEM 4. Mine Safety Disclosures

 

Not applicable.

 

ITEM 5. Other Information

Not applicable.

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Wayne Savings Bancshares, Inc.
PART II

 

ITEM 6. Exhibits

EX-31.1Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

 

EX-31.2Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

 

EX-32Written Statement of Chief Executive Officer and Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

 

EX-101Interactive financial data (XBRL)

 

 

 

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SIGNATURES

 

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

 

Date:  May 9, 2012   By:  /s/Rod C. Steiger
        Rod C. Steiger
        President and Chief Executive Officer
         
         
         
Date:   May 9, 2012   By: /s/Myron Swartzentruber
        Myron Swartzentruber
        Senior Vice President and
        Chief Financial Officer

 

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