UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

(Mark One)

 

ý

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

 

For the quarterly period ended

September 30, 2014

 

OR

 

¨

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

 

For the transition period from ____________ to _______________

 

Commission File No. 0-23433

 

          WAYNE SAVINGS BANCSHARES, INC.          

(Exact name of registrant as specified in its charter)

 

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

 

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

 

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

 

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

 

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

 

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

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.).

Yes ¨                No  ý

 

As of October 31, 2014, the latest practicable date, 2,821,839 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	34
Item 3	Quantitative and Qualitative Disclosures About Market Risk	47
Item 4	Controls and Procedures	47
PART II - OTHER INFORMATION
Item 1	Legal Proceedings	48
Item 1A	Risk Factors	48
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	48
Item 3	Defaults Upon Senior Securities	48
Item 4	Mine Safety Disclosures	48
Item 5	Other Information	49
Item 6	Exhibits	49
SIGNATURES		50

 

 

Wayne Savings Bancshares, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

 

		September 30, 2014				December 31, 2013
		(Unaudited)
Assets
Cash and due from banks		$	9,253			$	7,751
Interest-bearing deposits			3,596				5,630
Cash and cash equivalents			12,849				13,381
Available-for-sale securities			108,017				103,625
Held-to-maturity securities			6,561				6,623
Loans, net of allowance for loan losses of $2,731 and $2,819          at September 30, 2014 and December 31, 2013, respectively			261,042				261,130
Premises and equipment			6,758				6,692
Federal Home Loan Bank stock			4,226				5,025
Foreclosed assets held for sale, net			140				—
Accrued interest receivable			1,397				1,184
Bank-owned life insurance			9,212				9,006
Goodwill			1,719				1,719
Other intangible assets			—				38
Other assets			1,658				1,810
Prepaid federal income taxes			77				60
Total assets		$	413,656			$	410,293
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand		$	86,734			$	85,952
Savings and money market			129,566				121,140
Time			130,043				130,479
Total deposits			346,343				337,571
Other short-term borrowings			6,900				7,212
Federal Home Loan Bank advances			16,417				22,336
Interest payable and other liabilities			3,201				4,257
Deferred federal income taxes			606				365
Total liabilities			373,467				371,741
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			35,990				35,976
Retained earnings			19,997				18,743
Shares acquired by ESOP			(435	)			(492	)
Accumulated other comprehensive income			642				65
Treasury stock, at cost: Common: 1,156,892 and 1,135,292           shares at September 30, 2014 and December 31, 2013, respectively			(16,403	)			(16,138	)
Total stockholders’ equity			40,189				38,552
Total liabilities and stockholders’ equity		$	413,656			$	410,293

 

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Income and Comprehensive Income

For the three and nine months ended September 30, 2014 and 2013

(In thousands, except per share data)

(Unaudited)

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2014				2013				2014				2013
Interest and Dividend Income
Loans		$	2,804			$	2,874			$	8,573			$	8,608
Securities			749				633				2,312				1,921
Dividends on Federal Home Loan Bank stock and other			45				54				146				165
Total interest and dividend income			3,598				3,561				11,031				10,694
Interest Expense
Deposits			390				417				1,178				1,283
Other short-term borrowings			2				3				7				8
Federal Home Loan Bank advances			108				155				387				460
Total interest expense			500				575				1,572				1,751
Net Interest Income			3,098				2,986				9,459				8,943
Provision (Credit) for Loan Losses			195				76				282				(55	)
Net Interest Income After Provision (Credit) for      Loan Losses			2,903				2,910				9,177				8,998
Noninterest Income
Gain on loan sales			83				7				192				80
Gain (loss) on sale of foreclosed assets held for sale			—				(11	)			—				6
Gain on sale of premises and equipment			—				—				7				—
Earnings on bank-owned life insurance			75				74				219				221
Service fees, charges and other operating			365				324				957				872
Total noninterest income			523				394				1,375				1,179
Noninterest Expense
Salaries and employee benefits			1,524				1,484				4,542				4,516
Net occupancy and equipment expense			469				508				1,491				1,462
Federal deposit insurance premiums			68				66				199				206
Franchise taxes			64				100				193				300
Provision for impairment on foreclosed assets           held for sale			14				26				14				26
Amortization of intangible assets			—				23				38				68
Other			503				438				1,466				1,460
Total noninterest expense			2,642				2,645				7,943				8,038
Income Before Federal Income Taxes			784				659				2,609				2,139
Provision for Federal Income Taxes			177				151				632				562
Net Income		$	607			$	508			$	1,977			$	1,577
Other comprehensive income:
Unrealized gains (losses) on available-for-sale securities			(102	)			(262	)			875				(2,314	)
Tax (expense) benefit			34				89				(298	)			787
Other comprehensive income (loss)			(68	)			(173	)			577				(1,527	)
Total comprehensive income		$	539			$	335			$	2,554			$	50
Basic Earnings Per Share		$	0.22			$	0.18			$	0.71			$	0.55
Diluted Earnings Per Share		$	0.22			$	0.18			$	0.71			$	0.55
Dividends Per Share		$	0.09			$	0.08			$	0.26			$	0.23

 

 

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows

For the nine months ended September 30, 2014 and 2013

(In thousands)

(Unaudited)

 

		Nine Months Ended September 30,
		2014				2013
Operating Activities
Net income		$	1,977			$	1,577
Items not requiring (providing) cash
Depreciation and amortization			436				442
Provision (credit) for loan losses			282				(55	)
Amortization of premiums and discounts on securities			869				1,405
Amortization of mortgage servicing rights			29				37
Amortization of deferred loan origination fees			(76	)			(77	)
Amortization of intangible asset			38				68
Increase in value of bank-owned life insurance			(206	)			(211	)
Amortization expense of stock benefit plan			70				61
Provision for impairment on foreclosed assets held for sale			14				26
Gain  on sale of foreclosed assets held for sale			—				(6	)
Gain on sale of premises and equipment			(7	)			—
Net gain on sale of loans			(192	)			(80	)
Proceeds from sale of loans in the secondary market			5,366				6,581
Origination of loans for sale in the secondary market			(5,174	)			(6,501	)
Deferred income taxes			(56	)			155
Changes in
Accrued interest receivable			(213	)			(143	)
Prepaid federal deposit insurance premiums			—				529
Other assets			105				(153	)
Interest payable and other liabilities			(584	)			(65	)
Net cash provided by operating activities			2,678				3,590
Investing Activities
Purchases of available-for-sale securities			(20,635	)			(24,131	)
Purchase of  held-to-maturity securities			—				(2,988	)
Proceeds from maturities and paydowns of available-for-sale securities			16,265				31,058
Proceeds from maturities and paydowns of held-to-maturity securities			47				78
Proceeds from Federal Home Loan Bank stock redemption			799				—
Net change in loans			(272	)			(10,048	)
Purchase of premises and equipment			(502	)			(142	)
Proceeds from the sale of premises and equipment			7				—
Proceeds from the sale of foreclosed assets			—				311
Net cash used in investing activities		$	(4,291	)		$	(5,862	)

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (continued)

For the nine months ended September 30, 2014 and 2013

(In thousands)

(Unaudited)

		Nine Months Ended September 30,
		2014				2013
Financing Activities
Net change in deposits		$	8,772			$	(1,122	)
Net change in other short-term borrowings			(312	)			(561	)
Proceeds from Federal Home Loan Bank advances			2,741				16,490
Repayments of Federal Home Loan Bank advances			(8,660	)			(14,750	)
Advances by borrowers for taxes and insurance			(472	)			(408	)
Dividends on common stock			(723	)			(656	)
Treasury stock purchases			(265	)			(774	)
Net cash provided (used) in financing activities			1,081				(1,781	)
Change in Cash and Cash Equivalents			(532	)			(4,053	)
Cash and Cash Equivalents, Beginning of period			13,381				12,055
Cash and Cash Equivalents, End of period		$	12,849			$	8,002
Supplemental Cash Flows Information
Interest paid on deposits and borrowings		$	1,563			$	1,749
Federal income taxes paid		$	650			$	325
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Transfers from loans to foreclosed assets held for sale		$	154			$	50
Recognition of mortgage servicing rights		$	78			$	65
Dividends payable		$	254			$	231

 

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

 

Note 1:     Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of September 30, 2014 and for the three and nine months ended September 30, 2014 and 2013, were prepared in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. Accordingly, these condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Wayne Savings Bancshares, Inc. (the “Company”) included in the Annual Report on Form 10-K for the year ended December 31, 2013. Reference is made to the accounting policies of the Company described in the Notes to the Consolidated Financial Statements contained in its Annual Report on Form 10-K.

In the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of the unaudited financial statements have been included. The results of operations for the three and nine months ended September 30, 2014, are not necessarily indicative of the results which may be expected for the full year. The condensed consolidated balance sheet of the Company as of December 31, 2013, has been derived from the consolidated balance sheet of the Company as of that date.

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

 

Note 2:      Principles of Consolidation

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

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

Note 3:     Securities

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

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Approximate Fair Value
		(In thousands)
Available-for-sale securities
September 30, 2014:
U.S. government agencies		$	128			$	1			$	—			$	129
Mortgage-backed securities of government         sponsored entities			83,936				1,186				381				84,741
Private-label collateralized mortgage obligations			555				14				1				568
State and political subdivisions			21,727				927				75				22,579
Totals		$	106,346			$	2,128			$	457			$	108,017

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Approximate Fair Value
		(In thousands)
Available-for-sale securities
December 31, 2013:
U.S. government agencies		$	137			$	—			$	—			$	137
Mortgage-backed securities of government           sponsored entities			79,901				1,177				721				80,357
Private-label collateralized mortgage obligations			675				29				—				704
State and political subdivisions			22,116				547				236				22,427
Totals		$	102,829			$	1,753			$	957			$	103,625

 

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Approximate Fair Value
		(In thousands)
Held-to-maturity Securities:
September 30, 2014:
U.S. government agencies		$	102			$	—			$	—			$	102
Mortgage-backed securities of government           sponsored entities			1,347				7				—				1,354
State and political subdivisions			5,112				1				257				4,856
Totals		$	6,561			$	8			$	257			$	6,312

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Approximate Fair Value
		(In thousands)
Held-to-maturity Securities:
December 31, 2013:
U.S. government agencies		$	109			$	—			$	—			$	109
Mortgage-backed securities of government           sponsored entities			1,390				11				21				1,380
State and political subdivisions			5,124				—				492				4,632
Totals		$	6,623			$	11			$	513			$	6,121

 

 

Amortized cost and fair value of available-for-sale securities and held-to-maturity securities at September 30, 2014 by contractual maturity are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

		Available-for-sale								Held-to-maturity
		Amortized Cost				Fair Value				Amortized Cost				Fair Value
		(In thousands)
One to five years		$	6,842			$	7,133			$	—			$	—
Five to ten years			1,772				1,822				3,053				2,956
After ten years			13,241				13,753				2,161				2,002
			21,855				22,708				5,214				4,958
Mortgage-backed securities of      government sponsored entities			83,936				84,741				1,347				1,354
Private-label collateralized mortgage      obligations			555				568				—				—
Totals		$	106,346			$	108,017			$	6,561			$	6,312

 

The carrying value of securities pledged as collateral to secure public deposits and for other purposes was $60.0 million and $62.0 million at September 30, 2014 and December 31, 2013, respectively.

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. The total fair value of these investments at September 30, 2014 and December 31, 2013, was $45.4 million and $51.5 million, which represented approximately 40% and 47%, respectively, of the Company’s total aggregate amortized cost of the available-for-sale and held-to-maturity investment portfolios. These decreases resulted primarily from changes in market interest rates.

Based on an evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the decreases in fair value for these securities are temporary at September 30, 2014.

Should the impairment of any of these securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

The following table shows the gross unrealized losses and fair value of the Company’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

  

		September 30, 2014
		Less than 12 Months								More than 12 Months								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
		(In thousands)
Mortgage-backed securities      of government sponsored      entities		$	23,256			$	107			$	15,789			$	274			$	39,045			$	381
Private-label collateralized      mortgage obligations			111				1				—				—				111				1
State and political      subdivisions			—				—				6,285				332				6,285				332
Total temporarily impaired      securities		$	23,367			$	108			$	22,074			$	606			$	45,441			$	714

 

		December 31, 2013
		Less than 12 Months								More than 12 Months								Total
		Fair Value				Unrealized Losses				Fair Value				Unrealized Losses				Fair Value				Unrealized Losses
		(In thousands)
Mortgage-backed securities      of government sponsored      entities		$	36,004			$	575			$	5,330			$	167			$	41,334			$	742
State and political      subdivisions			8,639				555				1,519				173				10,158				728
Total temporarily impaired      securities		$	44,643			$	1,130			$	6,849			$	340			$	51,492			$	1,470

 

 

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

Loans

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

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

 

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

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

Allowance for Loan Losses

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

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

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

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

 

The risk characteristics of each portfolio segment are as follows:

Residential Real Estate Loans

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

All Other Mortgage Loans

All other mortgage loans consist of residential construction loans, nonresidential real estate loans, land loans and multi-family real estate loans.

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

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

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

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

 

Commercial Business Loans

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

Consumer Loans

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

The following presents by portfolio segment, the activity in the allowance for loan losses for the three and nine months ended September 30, 2014 and 2013:

 

Three months ended September 30, 2014		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans				Total
		(In thousands)
Beginning balance		$	941			$	1,155			$	449			$	4			$	2,549
Provision charged to expense			336				(134	)			(7	)			—				195
Losses charged off			(13	)			—				(1	)			—				(14	)
Recoveries			1				—				—				—				1
Ending balance		$	1,265			$	1,021			$	441			$	4			$	2,731

 

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

 

Nine months ended September 30, 2014		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans				Total
		(In thousands)
Beginning balance		$	1,017			$	1,526			$	271			$	5			$	2,819
Provision charged to expense			264				(262	)			281				(1	)			282
Losses charged off			(24	)			(260	)			(113	)			—				(397	)
Recoveries			8				17				2				—				27
Ending balance		$	1,265			$	1,021			$	441			$	4			$	2,731

 

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

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on the portfolio segment and impairment method as of September 30, 2014 and December 31, 2013:

 

September 30, 2014		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans				Total
		(In thousands)
Allowance Balances:
Ending balance:
Individually evaluated for      impairment		$	520			$	19			$	216			$	—			$	755
Collectively evaluated for      impairment			745				1,002				225				4				1,976
Total allowance for loan losses		$	1,265			$	1,021			$	441			$	4			$	2,731
Loan Balances:
Ending balance:
Individually evaluated for      impairment		$	3,453			$	19			$	216			$	—			$	3,688
Collectively evaluated for      impairment			165,222				84,556				14,718				2,383				266,879
Total balance		$	168,675			$	84,575			$	14,934			$	2,383			$	270,567

 

December 31, 2013		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans				Total
Allowance Balances:		(In thousands)
Ending balance:
Individually evaluated for      impairment		$	226			$	618			$	65			$	—			$	909
Collectively evaluated for      impairment			791				908				206				5				1,910
Total allowance for loan losses		$	1,017			$	1,526			$	271			$	5			$	2,819
Loan Balances:
Ending balance:
Individually evaluated for      impairment		$	6,411			$	3,661			$	142			$	—			$	10,214
Collectively evaluated for      impairment			160,317				82,434				14,773				1,110				258,634
Total balance		$	166,728			$	86,095			$	14,915			$	1,110			$	268,848

 

Total loans in the above tables do not include deferred loan origination fees of $686 and $682 or loans in process of $6.1 million and $4.2 million, respectively, for September 30, 2014 and December 31, 2013.

The following tables present the credit risk profile of the Bank’s loan portfolio based on rating category and payment activity as of September 30, 2014 and December 31, 2013:

September 30, 2014		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans
		(In thousands)
Rating *
Pass (Risk 1-4)		$	158,018			$	81,157			$	14,373			$	2,383
Special Mention (Risk 5)			2,721				859				345				—
Substandard (Risk 6)			7,936				2,559				216				—
Total		$	168,675			$	84,575			$	14,934			$	2,383

 

December 31, 2013		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans
		(In thousands)
Rating *
Pass (Risk 1-4)		$	158,518			$	81,362			$	14,328			$	1,108
Special Mention (Risk 5)			419				1,587				445				—
Substandard (Risk 6)			7,791				3,146				142				2
Total		$	166,728			$	86,095			$	14,915			$	1,110

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

The following tables present the Bank’s loan portfolio aging analysis for September 30, 2014 and December 31, 2013:

 

September 30,  2014		30-59 Days Past Due				60-89 Days Past Due				Greater Than 90 Days				Total Past Due				Current				Total Loans Receivable				Total Loans > 90 Days and Accruing
		(In thousands)
One-to-four family      residential loans		$	229			$	329			$	2,691			$	3,249			$	165,426			$	168,675			$	963
All other mortgage      Loans			62				—				152				214				84,361				84,575				—
Commercial business      loans			—				—				125				125				14,809				14,934				—
Consumer loans			—				—				—				—				2,383				2,383				—
Total		$	291			$	329			$	2,968			$	3,588			$	266,979			$	270,567			$	963

 

December 31, 2013		30-59 Days Past Due				60-89 Days Past Due				Greater Than 90 Days				Total Past Due				Current				Total Loans Receivable				Total Loans > 90 Days and Accruing
		(In thousands)
One-to-four family      residential loans		$	679			$	228			$	624			$	1,531			$	165,197			$	166,728			$	—
All other mortgage      loans			150				64				811				1,025				85,070				86,095				—
Commercial business      loans			—				—				—				—				14,915				14,915				—
Consumer loans			79				—				—				79				1,031				1,110				—
Total		$	908			$	292			$	1,435			$	2,635			$	266,213			$	268,848			$	—

  

Nonaccrual loans were comprised of the following at:

Nonaccrual loans		September 30, 2014				December 31, 2013
		(In thousands)
One-to-four family residential loans		$	3,111			$	1,851
Nonresidential real estate loans			152				1,045
All other mortgage loans			—				—
Commercial business loans			162				2
Consumer loans			—				—
Total		$	3,425			$	2,898

 

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. Information with respect to the Company’s impaired loans at September 30, 2014 and December 31, 2013 in combination with activity for the three and nine months ended September 30, 2014 and 2013 is presented below:

 

		As of September 30, 2014												Three months ended September 30, 2014								Nine months ended September 30, 2014
		Recorded Balance				Unpaid Principal Balance				Specific Allowance				Average Investment in Impaired Loans				Interest Income Recognized				Average Investment in Impaired Loans				Interest Income Recognized
		(In thousands)
Loans without a      specific valuation      allowance
One-to-four family      residential loans		$	1,279			$	1,279			$	—			$	3,088			$	13			$	4,335			$	38
All other mortgage      loans			—				—				—				1,180				—				1,610				—
Commercial business      loans			—				—				—				—				—				38				—
Loans with a      specific valuation      allowance
One-to-four family      residential loans			2,174				2,174				520				1,553				8				1,167				26
All other mortgage      loans			19				19				19				273				—				875				1
Commercial business      loans			216				216				216				229				1				146				2
Total:
One-to-four family      residential loans		$	3,453			$	3,453			$	520			$	4,641			$	21			$	5,502			$	64
All other mortgage      loans			19				19				19				1,453				—				2,486				1
Commercial business      loans			216				216				216				229				1				184				2
		$	3,688			$	3,688			$	755			$	6,323			$	22			$	8,172			$	67

		As of December 31, 2013												Three months ended September 30, 2013								Nine months ended September 30, 2013
		Recorded Balance				Unpaid Principal Balance				Specific Allowance				Average Investment in Impaired Loans				Interest Income Recognized				Average Investment in Impaired Loans				Interest Income Recognized
		(In thousands)
Loans without a      specific valuation      allowance
One-to-four family      residential loans		$	5,569			$	5,569			$	—			$	5,785			$	84			$	5,702			$	222
All other mortgage      loans			2,051				2,051				—				2,276				23				2,427				72
Commercial business      loans			77				77				—				81				1				83				2
Loans with a      specific valuation      allowance
One-to-four family      residential loans			842				842				226				1,208				7				1,266				22
All other mortgage      loans			1,610				2,076				618				2,504				20				2,730				56
Commercial business      loans			65				65				65				73				—				83				2
Total:
One-to-four family      residential loans		$	6,411			$	6,411			$	226			$	6,993			$	91			$	6,968			$	244
All other mortgage      loans			3,661				4,127				618				4,780				43				5,157				128
Commercial business      loans			142				142				65				154				1				166				4
		$	10,214			$	10,680			$	909			$	11,927			$	135			$	12,291			$	376

 

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

All the TDR classifications listed below occurred as concessions were granted to borrowers experiencing financial difficulties. Concessions to borrowers can include exceptions to loan policy including high loan-to-value ratios, no private mortgage insurance (“PMI”) and high debt-to-income ratios, as well as term and rate exceptions. There were no TDR classifications that occurred in the 2014 quarter-to-date period. The TDR classifications that occurred during the 2014 year-to-date period includes capitalizing delinquent real estate taxes and a portion of unpaid late charges, and an extension of the maturity date. In the September 30, 2013 quarter, concessions made to borrowers included exceptions to loan policy including high loan-to-value ratios, no private mortgage insurance (“PMI”) and high debt-to-income ratios. The TDR classifications that occurred in the 2013 year-to-date period, included those concessions listed above for the quarter and an effective interest rate below the market interest rate of similar debt, and an extension of the maturity date. 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 twelve month periods ended September 30, 2014 and 2013. The Company considers TDRs that become 90 days or more past due under modified terms as subsequently defaulted.

 

		Quarter-to-Date												Year-to-Date
Troubled Debt Restructurings		Number of loans				Pre- modification Unpaid Recorded Balance				Post- modification Unpaid Recorded Balance				Number of loans				Pre- modification Unpaid Recorded Balance				Post- modification Unpaid Recorded Balance
		(dollars in thousands)
September 30, 2014
One-to-four family      residential loans						$	—			$	—							$	—			$	—
All other mortgage loans							—				—				2				1,057				1,090
September 30, 2013
One-to-four family      residential loans			4			$	493			$	517				6			$	909			$	933
All other mortgage loans							—				—				1				576				576

 

Note 5:     Goodwill and Intangible Assets

The composition of goodwill and other intangible assets, all of which is core deposit intangible, at September 30, 2014 and December 31, 2013:

		September 30, 2014				December 31, 2013
		(In thousands)
Goodwill		$	1,719			$	1,719
Other intangible assets – gross			974				974
Other intangible assets – amortization			(974	)			(936	)
Total		$	1,719			$	1,757

 

The Company recorded amortization relative to intangible assets totaling $38,000 for the nine month period ended September 30, 2014, and $23,000 and $68,000 for the three and nine months ended September 30, 2013, respectively. The amortizing intangible asset was amortized to zero during the second quarter of the current year period, as such there was no related amortization during the quarter ended September 30, 2014. Such amortization was derived using the straight line method for the core deposit asset over ten years. The Company is required to annually test goodwill and other intangible assets for impairment. The Company’s testing of goodwill and other intangible assets at December 31, 2013 indicated there was no impairment in the carrying value of these assets.

 

Note 6:     Earnings Per Share

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

		Three months ended September 30,								Nine months ended September 30,
		2014				2013				2014				2013
Weighted-average common shares outstanding      (basic)			2,777,362				2,841,213				2,785,348				2,871,754
Dilutive effect of assumed exercise of stock options			—				—				—				—
Weighted-average common shares outstanding      (diluted)			2,777,362				2,841,213				2,785,348				2,871,754

 

There were no options outstanding at September 30, 2014 or September 30, 2013.

During fiscal year 2004, the Company adopted a Stock Option Plan that provided for the issuance of 142,857 incentive options and 61,224 non-incentive options with respect to authorized common stock. At December 31, 2013, all options under the 2004 Plan were expired, and none were outstanding at September 30, 2014. The Company recognized compensation expense related to stock option awards based on the fair value of the option award at the grant date. Compensation cost was recognized over the vesting period. There were no options granted during the three and nine months ended September 30, 2013. There was no compensation expense recognized for the stock option plan during the three and nine months ended September 30, 2013, as all options were fully vested prior to these periods. As of September 30, 2013 there was no unrecognized compensation cost related to non-vested share-based compensation arrangements granted under the Plan. The cost was recognized in the fiscal year ended March 31, 2005 when the Company accelerated full vesting of all the stock options at that time.

Note 7:     Regulatory Matters

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory–and possibly additional discretionary–actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore the Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements.

The Bank must give notice to, or under certain conditions specified by regulation, apply to, the Federal Reserve Bank of Cleveland prior to declaring a dividend to the Company. Under existing regulatory guidance, a dividend is generally permissible without regulatory approval if the institution is considered to be “well capitalized” and the dividend does not exceed current year-to-date net income plus the change in retained earnings for the previous two calendar years.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of Tier I capital to average assets, of Tier 1 capital to risk-weighted assets, and of Total Risk-based capital to risk-weighted assets, all as defined in the regulations. Management believes, as of September 30, 2014, that the Bank met all capital adequacy requirements to which it is subject.

As of September 30, 2014, based on the computations for the call report the Bank is classified as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain capital ratios as set forth in the table below. There are no conditions or events since September 30, 2014 that management believes have changed the Bank’s capital classification.

The Bank’s actual capital amounts and ratios as of September 30, 2014 and December 31, 2013 are presented in the following table.

		Actual								For Capital Adequacy Purposes								To Be Well Capitalized Under Prompt Corrective Action Provisions
		Amount				Ratio				Amount				Ratio				Amount				Ratio
As of  September 30, 2014
Tier I Capital to average assets		$	36,427				8.8%			$	16,508				4.0%			$	20,635				5.0%
Tier I Capital to risk-weighted assets			36,427				14.3%				10,158				4.0%				15,236				6.0%
Total Risk-based capital to risk-      weighted assets			39,158				15.4%				20,315				8.0%				25,394				10.0%
As of December 31, 2013
Tier I Capital to average assets		$	35,065				8.6%			$	16,372				4.0%			$	20,465				5.0%
Tier I Capital to risk-weighted assets			35,065				14.2%				9,866				4.0%				14,798				6.0%
Total Risk-based capital to risk-      weighted assets			37,884				15.4%				19,731				8.0%				24,664				10.0%

 

 

Note 8:     Accumulated Other Comprehensive Income

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

 

		Gross Unrealized Gains on Available-for-sale Securities				Net Unrealized Loss for Unfunded Status of Split-dollar Life Insurance Plan Liability (tax-free)				Gross Unrealized Loss for Unfunded Status of Defined Benefit Plan				Tax Effect				Total Accumulated Other Comprehensive Income
		(In thousands)
September 30, 2014		$	1,671			$	(58	)		$	(609	)		$	(362	)		$	642
December 31, 2013		$	796			$	(58	)		$	(609	)		$	(64	)		$	65

 

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

and nine months ended September 30, 2014 or 2013.

 

Note 9:     Fair Value Measurements

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

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

Recurring Measurements

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

 

Available-for-sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated by using quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy.

The following table presents the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2014 and December 31, 2013:

						Fair Value Measurement Using
		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
September 30, 2014
U.S. government agencies		$	129			$	—			$	129			$	—
Mortgage-backed securities of           government sponsored entities			84,741				—				84,741				—
Private-label collateralized mortgage           obligations			568				—				568				—
State and political subdivisions			22,579				—				22,579				—

 

						Fair Value Measurement Using
		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
December 31, 2013
U.S. government agencies		$	137			$	—			$	137			$	—
Mortgage-backed securities of           government sponsored entities			80,357				—				80,357				—
Private-label collateralized mortgage           obligations			704				—				704				—
State and political subdivisions			22,427				—				22,427				—

 

Nonrecurring Measurements

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

Collateral-dependent Impaired Loans, Net of ALLL

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

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the office of the Chief Financial Officer. Appraisals are reviewed for accuracy and consistency by the Credit Analyst. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the office of the Chief Financial Officer by comparison to historical results.

Foreclosed Assets Held for Sale

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

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

The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2014 and December 31, 2013.

						Fair Value Measurement Using
		Fair Value				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
September 30, 2014
Collateral-dependent           impaired loans		$	822			$	—			$	—			$	822
Foreclosed assets			68				—				—				68
December 31, 2013
Collateral-dependent           impaired loans		$	289			$	—			$	—			$	289

 

Unobservable (Level 3) Inputs

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

		Fair Value				Valuation Technique		Unobservable Inputs		Range (Weighted Average)
September 30, 2014
Collateral-dependent           impaired loans		$	822			Market Comparable Properties, less delinquent real estate taxes		N/A		N/A
Foreclosed assets			68			Sales Contract		Selling Costs		10%
December 31, 2013
Collateral-dependent           impaired loans		$	289			Present value of cashflows		Discount Rate		6.22%

 

There were no changes in the inputs or methodologies used to determine fair value at September 30, 2014 as compared to December 31, 2013.

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

						Fair Value Measurements Using
		Carrying Amount				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
		(In thousands)
September 30, 2014
Financial assets
Cash and cash equivalents		$	12,849			$	12,849			$	—			$	—
Held-to-maturity           securities			6,561				—				6,312				—
Loans, net of allowance           for loan losses			261,042				—				—				268,602
Federal Home Loan Bank           stock			4,226				—				4,226				—
Interest receivable			1,397				—				1,397				—
Financial liabilities
Deposits			346,343				31,294				291,241				—
Other short-term           borrowings			6,900				—				6,900				—
Federal Home Loan Bank           advances			16,417				—				16,498				—
Advances from borrowers           for taxes and insurance			633				—				633				—
Interest payable			77				—				77				—

						Fair Value Measurements Using
		Carrying Amount				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
						(In thousands)
December 31, 2013
Financial assets
Cash and cash equivalents		$	13,381			$	13,381			$	—			$	—
Held-to-maturity           securities			6,623				—				6,121
Loans, net of allowance           for loan losses			261,130				—				—				266,530
Federal Home Loan Bank           stock			5,025				—				5,025				—
Interest receivable			1,184				—				1,184				—
Financial liabilities
Deposits			337,571				30,145				275,357				—
Other short-term           borrowings			7,212				—				7,212				—
Federal Home Loan Bank           advances			22,336				—				22,801				—
Advances from borrowers           for taxes and insurance			1,105				—				1,105				—
Interest payable			68				—				68				—

 

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

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

The carrying amount approximates fair value.

Held-to-maturity securities

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

Loans

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

Deposits

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

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

The carrying amount approximates fair value.

Federal Home Loan Bank Advances

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

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

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. Fair values of commitments were not material at September 30, 2014 and December 31, 2013.

Note 10:     Recent Accounting Developments

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

 

FASB ASU 2013-12, Definition of a Public Business Entity, in Accounting Standards Update No. 2013-12, issued in December 2013 improves the United States Generally Accepted Accounting Principles by providing a single definition of public business entity for use in future financial accounting and reporting guidance. This update states that an entity that is required by the Securities and Exchange Commission (SEC) to file or furnish reports to the SEC is considered a public business entity. There is no actual effective date for the amendments in this update. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

FASB ASU 2014-01, Investments-Equity Method and Joint Ventures (Topic 323), Accounting for Investments in Qualified Affordable Housing Projects in Accounting Standards Update No. 2014-01, issued in January 2014 permits the Company to make an accounting policy election to account for its investments in qualified affordable housing projects using the proportional amortization method if certain conditions are met. The amendments in this update are effective prospectively for public business entities for annual periods and interim reporting periods within those annual periods, beginning after December 15, 2014, and early adoption is permitted. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.

 

FASB ASU 2014-04, Receivables-Troubled Debt Restructurings by Creditors (Subtopic 310-40), Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure, a consensus of the FASB Emerging Issues Task Force, in Accounting Standards Update No. 2014-04, issued in January 2014. The amendments in this update provides clarification on when an in-substance repossession or foreclosure occurs, including when a creditor should be considered to have received physical possession of the residential real estate property collateralizing a consumer mortgage loan, when to derecognize the loan and recognize the foreclosed property. The amendments in this update are effective for public business entities for annual periods, and interim reporting periods within those annual periods, beginning after December 15, 2014. An entity can elect to adopt the amendments in this update using either a modified retrospective transition method or a prospective transition method. This standard is not expected to have a material impact on the Company’s consolidated financial statements.

FASB ASU 2014-06, Technical Corrections and Improvements Related to Glossary Terms, in Accounting Standards Update No. 2014-06, was issued in March 2014. This update contains amendments that affect a wide variety of Topics in the Codification, and represent changes to clarify the Master Glossary of the Codification, consolidate multiple instances of the same term into a single definition, or make improvements to the Master Glossary. The amendments in this update do not have transition guidance and were effective upon issuance for both public and nonpublic entities. This standard did not have a material impact on the Company’s consolidated financial statements.

FASB ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360), Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity, in Accounting Standards Update No. 2014-08, was issued in April 2014. The amendments in this Update change the requirements for reporting discontinued operations in Subtopic 205-20. A discontinued operation may include a component of an entity or a group of components of an entity, or a business or nonprofit activity. A disposal of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. The amendments in this update are effective for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015. All businesses or nonprofit activities that, on acquisition, are classified as held for sale that occur within annual periods beginning on or after December 15, 2014, and interim periods within annual periods beginning on or after December 15, 2015. Early adoption is permitted, but only for disposals (or classifications as held for sale) that have not been reported in financial statements previously issued or available for issuance. This standard is not expected to have a material impact on the Company’s consolidated financial statements.

FASB ASU 2014-11, Transfers and Servicing (Topic 860), Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures, was issued in June 2014. The amendments in this Update require disclosures for certain transactions comprising a transfer of a financial asset accounted for as a sale and an agreement with the same transferee entered into in contemplation of the initial transfer that results in the transferor retaining substantially all of the exposure to the economic return on the transferred financial asset throughout the term of the transaction. This Update also requires certain disclosures for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions that are accounted for as secured borrowings. The accounting changes in this Update are effective for public business entities for the first interim or annual period beginning after December 15, 2014. For public business entities, the disclosure for certain transactions accounted for as a sale is required to be presented for interim and annual periods beginning after December 15, 2014, and for disclosure for repurchase agreements, securities lending transactions, and repurchase-to-maturity transactions accounted for as secured borrowings is required to be presented for annual periods beginning after December 15, 2014, and for interim periods beginning after March 15, 2015. The disclosures are not required to be presented for comparative periods before the effective date. This standard is not expected to have a material impact on the Company’s consolidated financial statements.

FASB ASU 2014-14, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40), Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure, was issued in August 2014. The amendments in this update require that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if: the loan has a government guarantee that is not separable from the loan before foreclosure, at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under that claim, and at the time of foreclosure, any amount of the claim that is determined on the fair basis of the fair value of the real estate is fixed. Upon foreclosure, the separate other receivable should be measured based on the amount of the loan balance (principal and interest) expected to be recovered from the guarantor. The amendments in this update are effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity should adopt the amendments in this update using either a prospective transition method or a modified retrospective transition method. For prospective transition, an entity should apply the amendments in this update to foreclosures that occur after the date of adoption. For modified retrospective transition, an entity should apply the amendments in this this update by means of a cumulative-effect adjustment (through a reclassification to a separate other receivable) as of the beginning of the annual period for adoption. Prior periods should not be adjusted. This standard is not expected to have a material impact on the Company’s consolidated financial statements.

FASB ASU 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, was issued in August 2014. The amendments in this update provide guidance in Generally Accepted Accounting Principles (GAAP) about managements’ responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments in this update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. This standard is not expected to have a material impact on the Company’s consolidated financial statements.

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial Condition

and Results of Operations

Strategic Initiatives

As part of an ongoing strategic planning process, which includes annual plan updates and regular progress reviews by the Board of Directors, the Company continues to be engaged in several initiatives to improve the returns to shareholders over a foreseeable time horizon.

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

Another ongoing initiative is the development of our customer contact staff, through sales/relationship development and product training, to identify opportunities for revenue generation. The Bank’s Director of Customer Service and Sales continues to re-evaluate staff and operational processes related to all aspects of customer interaction. In cooperation with an existing Human Resources Steering Committee, position descriptions have been revised during the third quarter of 2014 and are being implemented in the fourth quarter of 2014. In addition, activity goals are being established and an expanded incentive program is being developed, with careful attention to regulatory requirements for risk management elements in the incentive program.

A further ongoing initiative, following an 18 month review process in 2012 and 2013, is the upgrading of information technology solutions. The implementation schedule began in late 2013 and continues through 2016, with an objective to improve internal operating efficiency and customer service while remaining attentive to potential effect on short and long term operating results to improve internal operating efficiency and customer service.

The final initiative is the continuing development of a comprehensive Enterprise Risk Management (ERM) program to ensure that the earnings generated through existing and contemplated activities are commensurate with the risks assumed in those activities and consistent with legal requirements, regulatory requirements (particularly with respect to capital adequacy, liquidity and interest rate risk) and general economic conditions. The Board of Directors Risk Management Committee, formed during 2013 to oversee management’s ERM program, continues to meet on a quarterly basis to discuss that status of, and development of scorecard measures. The full board reviews the updated scorecard as part of a monthly risk management report to the board.

Management believes that the progress under these initiatives is reflected in increased interest and non-interest revenue, decreased noninterest expense or a combination of increased revenue or decreased expense depending on the activity, which in turn is reflected in the financial results included in this report.

Critical Accounting Policies

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

Discussion of Financial Condition Changes from December 31, 2013 to September 30, 2014

At September 30, 2014, the Company had total assets of $413.7 million, an increase of $3.4 million, from total assets at December 31, 2013. The increase in total assets includes a $4.3 million increase in securities, partially offset by a $532,000 decrease in cash, and a $799,000 decrease in Federal Home Loan Bank stock.

Total securities increased $4.3 million to $114.5 million at September 30, 2014, compared to $110.2 million at December 31, 2013. The increase in securities was primarily due to investing excess cash balances, in turn due to increased deposit balances as described below, into amortizing securities that provide cashflows on an ongoing basis to fund anticipated increases in future loan balances. The increase included purchases totaling $20.6 million and an $875,000 increase in unrealized gains on available-for-sale securities, partially offset by principal repayments of $16.3 million and amortization of premiums of $869,000 during the nine months ended September 30, 2014.

Net loans receivable decreased by $88,000 at September 30, 2014 compared to December 31, 2013. The Bank originated $34.1 million of loans, received payments of $29.0 million, originated and sold $5.2 million of 30-year fixed-rate residential mortgage loans into the secondary market, and transferred $154,000 into foreclosed assets held for sale. The decrease in net loan balances is mainly due to principal reductions and loan sales in excess of new origination during the current year period.

 

Management continues to focus on risk selection and the returns generated in return for risks taken in making its lending and investment decisions. Key areas of risk reviewed for each potential loan origination and securities purchase include credit, interest rate and liquidity risk. Interest rate risk arises mainly from longer term fixed-rate loans. Credit risk arises mainly from loan structure and underwriting conditions. The effects of additional loan portfolio risks generated by competitive pressures in the Company’s market area are evaluated relative to the projected returns to ensure acceptable financial performance over a long-term horizon. As part of an overall strategy to manage liquidity and interest rate risk, management continues to execute a strategy of immediately selling certain newly originated 30-year fixed-rate residential mortgage loans into the secondary market to limit the interest rate risk exposure on the balance sheet and to utilize the secondary market as a backup source of liquidity. Similarly, in order to further limit the overall interest rate risk on the balance sheet, the Company focuses on the origination of shorter-term and adjustable-rate secured commercial loans and limits the retention of long-term fixed-rate residential mortgages. These strategies have the effect of generating lower loan yields in the short-term due to the loans being priced off the lower yield short end of the yield curve. The principal source of liquidity is the Bank’s investment securities portfolio. To the extent that loan demand is insufficient in any given period, investments in the securities portfolio are made to provide cash flows to fund loan demand in future periods (a source of liquidity), while also limiting the interest rate risk exposure of the Company. Investments generally contribute to higher risk-based capital ratios, compared to loans, as the investments the Company purchases are risk weighted less than the loan originations. As loan volume increases relative to investment volume, risk-based capital ratios will decline. As demonstrated by quarterly balance sheet presentations, as a result of general economic and competitive conditions, loan demand and originations are volatile on a sequential quarter basis, which in turn results in volatility in quarterly investment securities balances. The longer term trend and strategic direction is for an increase in higher yielding loan balances relative to lower yielding investment securities balances.

 

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

		September 30, 2014								December 31, 2013
		Balance				Percent of total loans				Balance				Percent of total loans
		(Dollars in thousands)
Mortgage loans:
One-to-four family residential(1)		$	168,675				62.34%			$	166,728				62.02%
Residential construction loans			3,950				1.46%				4,951				1.84%
Multi-family residential			12,512				4.62%				14,011				5.21%
Nonresidential real estate/land(2)			68,113				25.18%				67,133				24.97%
Total mortgage loans			253,250				93.60%				252,823				94.04%
Other loans:
Consumer loans(3)			2,383				0.89%				1,110				0.41%
Commercial business loans			14,934				5.51%				14,915				5.55%
Total other loans			17,317				6.40%				16,025				5.96%
Total loans before net items			270,567				100.00%				268,848				100.00%
Less:
Loans in process			6,108								4,217
Deferred loan origination fees			686								682
Allowance for loan losses			2,731								2,819
Total loans receivable, net		$	261,042							$	261,130

 

(1)

Includes equity loans collateralized by second mortgages in the aggregate amount of $14.7 million at September 30, 2014 and $14.3 million at December 31, 2013. Such loans are secured by one-to-four family residential properties and are underwritten to conform with bank loan policies.

(2)

Includes land loans of $2.9 million at September 30, 2014 and $2.7 million for December 31, 2013.

(3)

Includes second mortgage loans of $446 at September 30, 2014 and $566 at December 31, 2013.

Federal Home Loan Bank stock, totaled $4.2 million, a decrease of $799,000 compared to $5.0 million at December 31, 2013. The decrease was due to a stock repurchase program initiated by the FHLB whereby the FHLB repurchased excess shares held by member banks.

Foreclosed assets held for sale totaled $140,000 at September 30, 2014 while there were no foreclosed assets held for sale at December 31, 2013. Activity during the nine month period includes the addition of two foreclosed properties, totaling $154,000, and the subsequent write-down of $14,000 on one of the properties based on a signed purchase contract on the property, while there were no related sales during the current year. Activity during the prior year nine month period included the sale of four residential properties totaling $311,000, that were previously held as foreclosed assets, resulting in a net gain of $6,000. Total nonperforming and impaired assets totaled $3.8 million, or 0.93% of total assets at September 30, 2014, compared to $11.6 million, or 2.83% of total assets December 31, 2013.

Goodwill of $1.7 million is carried on the Company’s balance sheet as a result of the acquisition of Stebbins Bancshares in June 2004. In accordance with FASB ASC 350, this goodwill is tested for impairment on at least an annual basis. Management evaluated the goodwill using an analysis of required measures of value, including the current stock price as an indicator of minority interest value, change of control multiples as a measure of controlling interest value and discounted cash flow analysis as a measure of going concern value and applied a weighting based on appraisal standards to arrive at a valuation conclusion that indicated no impairment at November 30, 2013. Management believes that there were no interim impairment indicators that would require another evaluation at September 30, 2014.

Deposits totaled $346.3 million at September 30, 2014, an increase of $8.7 million from $337.6 million at December 31, 2013. This increase includes a $782,000 increase in demand deposits, an $8.4 million increase in savings and money market balances, partially offset by a $436,000 decrease in time deposits. The rate of change in the composition of deposits from higher cost term deposits to lower cost liquid deposits slowed during the current year period as the difference between maturing and renewal rates on term deposits has narrowed and customers adjust to the extended period of low interest rates. The Company continues to monitor deposit activity closely to respond to changes in customer preference for types of deposits.

 

Other short-term borrowings, which consist solely of repurchase agreements with commercial customers of the Bank, decreased by $312,000 and totaled $6.9 million at September 30, 2014. These customer repurchase agreements are offered by the Bank in order to retain commercial customer funds and to afford those commercial customers the opportunity to earn a return on a short-term secured transaction. Average balances are shown in the tables below and reflect no significant variation during the periods. The interest rate paid on these borrowings was 0.15% at both September 30, 2014 and December 31, 2013.

Advances from the Federal Home Loan Bank of Cincinnati (“FHLB”) totaled $16.4 million at September 30, 2014, and decreased $5.9 million from $22.3 million at December 31, 2013. This decrease includes the maturity of two fixed-rate advances totaling $6.0 million, that were not replaced, partially offset by $80,000 related to amortized prepayment penalties. The Company uses advances from the FHLB for both short-term cash management purposes and to extend the term to maturity of liabilities for interest rate risk management purposes. The cost of longer term liabilities purchased from the FHLB is generally less expensive than obtaining a similar term to maturity through retail certificates of deposit. Repricing risk associated with advances is mitigated through the laddering of advance maturities over time. The weighted-average cost of FHLB advances was 2.64% at September 30, 2014 compared to 2.82% at December 31, 2013.

Stockholders’ equity increased by $1.6 million during the period ended September 30, 2014, primarily due to net income of $2.0 million, and a $577,000 increase in unrealized gains on available-for-sale securities. These increases were partially offset by dividends of $723,000 and purchases of treasury stock totaling $265,000 during the current year nine month period.

The purchase of treasury shares during the current nine month period was made as part of the Company’s share repurchase program that was initially announced during 2012 whereby the Company was authorized to repurchase up to 5.0%, or 150,206 shares of its common stock outstanding. On September 30, 2013 the Company announced the adoption of a new share repurchase program authorizing the repurchase of an additional 2.5% or 72,150, shares of its common stock outstanding. As a result of these two plans, net of shares previously repurchased, the Company may repurchase up to 40,082 shares of its common stock outstanding.

Comparison of Operating Results for the Three Months Ended September 30, 2014 and 2013

General

Net income for the three months ended September 30, 2014, totaled $607,000, reflecting an increase of $99,000, from $508,000 for the three month period ended September 30, 2013. The increase in net income was primarily due to an increase in both net interest income and noninterest income, and a decrease in noninterest expense, partially offset by an increase in the provision for loan losses and the provision for federal income taxes.

Average Balance Sheet

 

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

 

		For the three months ended September 30,
		2014												2013
		Average Balance				Interest				Average Rate				Average Balance				Interest				Average Rate
		(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1)		$	260,467			$	2,804				4.31%			$	251,703			$	2,874				4.57%
Investment securities(2)			117,023				749				2.56%				112,317				633				2.25%
Interest-earning deposits(3)			13,287				45				1.35%				10,714				54				2.02%
Total interest-earning assets			390,777				3,598				3.68%				374,734				3,561				3.80%
Noninterest-earning assets			23,844												23,999
Total assets		$	414,621											$	398,733
Interest-bearing liabilities:
Deposits		$	348,217			$	390				0.45%			$	326,772			$	417				0.51%
Other short-term borrowings			6,322				2				0.13%				6,889				3				0.17%
Borrowings			16,407				108				2.63%				21,779				155				2.85%
Total interest-bearing liabilities			370,946				500				0.54%				355,440				575				0.65%
Noninterest-bearing  liabilities			3,488												4,773
Total liabilities			374,434												360,213
Stockholders’ equity			40,187												38,520
Total liabilities and stockholders’ equity		$	414,621											$	398,733
Net interest income						$	3,098											$	2,986
Interest rate spread(4)											3.14%												3.15%
Net yield on interest-earning assets(5)											3.17%												3.19%
Ratio of average interest-earning assets to average interest-bearing liabilities											105.35%												105.43%

 

(1)	Includes nonaccrual loan balances.

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

(3)	Includes interest-earning deposits in other financial institutions.

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

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

Interest Income

 

Interest income increased $37,000, and totaled $3.6 million for both the three month periods ended September 30, 2014, and September 30, 2013. The increase was due to a $16.1 million increase in the average balance of interest-earning assets from $374.7 million in the 2013 period to $390.8 million for the 2014 period, substantially offset by a 12 basis point decrease in the weighted-average yield on interest-earning assets from 3.80% in the 2013 period to 3.68% for the 2014 period.

 

Interest income on loans was $2.8 million for the three month period ended September 30, 2014, and decreased $70,000 compared to the three month period ended September 30, 2013. This decrease was primarily due to a 26 basis point decrease in the weighted-average yield from 4.57% for the three months ended September 30, 2013 to 4.31% for the three months ended September 30, 2014, as a result of lower origination yields and the amortization, prepayment and repricing of higher yielding loans due to the low level of market interest rates. The decrease in the weighted-average yield was partially offset by an $8.8 million increase in the average balance of loans from $251.7 million in the 2013 period to $260.5 million for the 2014 period.

Interest income on securities increased $116,000 during the three months ended September 30, 2014, compared to the same period in 2013. This increase was due to a 31 basis point increase in the weighted-average rate from 2.25% in the 2013 period to 2.56% for the 2014 period, and a $4.7 million increase in the average balance. The increase in yield was primarily to the slowing of prepayments causing a decline in premium amortization for the quarter, while the increase in the average balance was due to investing excess cash into the securities portfolio.

Dividends on Federal Home Loan Bank stock and other income decreased $9,000 for the three months ended September 30, 2014 compared to September 30, 2013. The decrease was due to a 67 basis point decrease in the weighted-average rate from 2.02% in the 2013 period to 1.35% in the 2014 period, partially offset by a $2.6 million increase in the average balance.

Interest Expense

Interest expense totaled $500,000 for the three month period ended September 30, 2014, a decrease of $75,000, or 13.0%, from $575,000 for the three month period ended September 30, 2013. The decrease was due to an 11 basis point decrease in the weighted-average cost of funds from 0.65% in the 2013 period to 0.54% in the current year period, partially offset by a $15.5 million, or 4.4%, increase in the average balance of total interest-bearing liabilities from $355.4 million in the 2013 period to $370.9 million in the 2014 period.

Interest expense on deposits for the three month period ended September 30, 2014 totaled $390,000, a decrease of $27,000, or 6.5%, from $417,000 for the same period in the previous year. The decrease was due to a 6 basis point decrease in the weighted-average cost of deposits, from 0.51% in the 2013 period to 0.45% for the 2014 period, partially offset by a $21.4 million increase in the average balance from $326.8 million in the 2013 period to $348.2 million in the 2014 period. The decrease in interest expense continues to slow as rates paid on deposit products reach floors generally established by local market competitors and overall market conditions and as pricing pressure in certain deposit product segments by certain local competitors has increased.

Interest expense on other short-term borrowings totaled $2,000 for three month period ended September 30, 2014, a decrease of $1,000 from the same period last year. The decrease was due to a 4 basis point decrease in the weighted-average cost from 0.17% in the 2013 period to 0.13% in the 2014 period, and a $567,000 decrease in the average balance of short-term borrowings.

Interest expense on Federal Home Loan Bank advances totaled $108,000 for the three month period ended September 30, 2014, which decreased $47,000 from $155,000 in the 2013 period. The decrease was due to a 22 basis point decrease in the weighted-average cost from 2.85% in the 2013 period to 2.63% in the 2014 period, and a $5.4 million, or 24.5%, decrease in the average balance outstanding. The decrease in the weighted-cost was due to the maturity of higher rate advances, while the decrease in the average balance was due to not replacing the scheduled maturity of fixed-rate term advances.

Net Interest Income

Net interest income totaled $3.1 million for the three month period ended September 30, 2014, an increase of $112,000, or 3.8%, from the three month period ended September 30, 2013. The increase in net interest income was due to the growth of interest-earning assets in excess of the growth of interest-bearing liabilities of $537,000, generating increased net interest income, despite a 1 basis point decline in the interest rate spread from 3.15% at September 30, 2013 to 3.14% at September 30, 2014. The yield on earning assets declined as a result of a decline in loan yields as the related loan balances comprise 67% of our earning assets, of which decline was partially offset by increased yield on securities as a result of the slowdown in securities prepayments and amortization of purchased premiums. The decrease in the cost of funds from the prior year period, was mainly due to a continuing preference by customers in the current low interest rate environment for lower cost and more liquid deposit accounts over longer term certificate accounts and management’s continuing strategy of limiting competition for higher cost term deposits by focusing on relationship balances.

Provision for Loan Losses

Management recorded a $195,000 provision for loan losses for the three month period ended September 30, 2014, compared to a provision of $76,000 for the three month period ended September 30, 2013. The increase is primarily due to an increase in impaired nonperforming loans during the current year quarter requiring reserve balances, partially offset with continued improvement in our economic factors.

Noninterest Income

Noninterest income totaled $523,000, for the three months ended September 30, 2014, an increase of $129,000, from $394,000 for the same period in 2013. The increase was primarily due to a $76,000 increase in gain on sale of residential mortgage loans, an $11,000 decrease in loss on sale of foreclosed assets held for sale, and a $41,000 increase in service fees, charges and other operating income. The increase in gain on sale of residential mortgage loans was primarily due to increased loan sales in the 2014 quarter compared to the 2013 quarter. The decrease in loss on sale of foreclosed assets held for sale was primarily due to the sale of a foreclosed property in the 2013 period, compared to no foreclosed property sales in the 2014 period. The increase in service fees, charges and other operating income was primarily due to an increase in fees from service charges on deposit accounts.

Noninterest Expense

Noninterest expense totaled $2.7 million for both of the three month periods ended September 30, 2014, and September 30, 2013. The variance changes in total noninterest expense includes a $39,000 decrease in occupancy and equipment expense, a $36,000 decrease in franchise taxes and a $23,000 decrease in amortization of intangible assets, offset by a $40,000 increase in salaries and employee benefits, and a $65,000 increase in other noninterest expense. The decrease in occupancy and equipment expense was due to lower furniture and fixture expense and reduced building maintenance and depreciation expense compared to the prior year quarter. The decrease in franchise taxes was primarily due to the State of Ohio’s newly enacted Financial Institutions Tax during the 2014 period, which resulted in lower taxes compared to the previous Ohio corporate franchise tax that was in place during the 2013 period. The decrease in amortization of intangible assets was due to a core deposit intangible becoming amortized to zero in the current year period compared to a scheduled amortization amount in the prior year quarter. The increase in salaries and employee benefits was primarily a result of increased compensation due to merit increases and increased staffing, partially offset by lower healthcare and post-retirement benefit costs compared to the prior year quarter. The increase in other noninterest expense was primarily due to increased legal costs related to the increase in nonperforming loans, and an increase in audit and accounting related expense, partially offset by a decrease in internet banking and foreclosure expenses compared to the prior year quarter.

Federal Income Taxes

Federal income tax expense totaled $177,000 for the three month period ended September 30, 2014, an increase of $26,000 compared to $151,000 for three month period ended September 30, 2013. The increase was primarily due to a $125,000 increase in pretax income compared to the prior year period, partially offset by, a slight decrease in the effective tax rate. The effective tax rate in the current year quarter was 22.58% compared to 22.91% for the prior year quarter. The effective rate is below the statutory rate of 34% due to certain income items that are not subject to tax.

Comparison of Operating Results for the Nine Months Ended September 30, 2014 and 2013

General

Net income for the nine months ended September 30, 2014, totaled $2.0 million, an increase of $400,000, from $1.6 million for the nine month period ended September 30, 2013. The increase in net income was primarily due to an increase in both net interest income and noninterest income and a decrease in noninterest expense, partially offset by an increase in the provision (credit) for loan losses and the provision for federal income taxes.

Average Balance Sheet

 

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

 

		For the nine months ended September 30,
		2014												2013
		Average Balance				Interest				Average Rate				Average Balance				Interest				Average Rate
		(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1)		$	261,248			$	8,573				4.38%			$	248,134			$	8,608				4.63%
Investment securities(2)			115,140				2,312				2.68%				114,981				1,921				2.23%
Interest-earning deposits(3)			13,049				146				1.49%				12,582				165				1.75%
Total interest-earning assets			389,437				11,031				3.78%				375,697				10,694				3.80%
Noninterest-earning assets			23,565												24,483
Total assets		$	413,002											$	400,180
Interest-bearing liabilities:
Deposits		$	343,514			$	1,178				0.46%			$	327,152			$	1,283				0.52%
Other short-term borrowings			6,273				7				0.15%				6,620				8				0.16%
Borrowings			19,565				387				2.64%				21,448				460				2.86%
Total interest-bearing liabilities			369,352				1,572				0.57%				355,220				1,751				0.66%
Noninterest-bearing  liabilities			4,025												5,536
Total liabilities			373,377												360,756
Stockholders’ equity			39,625												39,424
Total liabilities and stockholders’ equity		$	413,002											$	400,180
Net interest income						$	9,459											$	8,943
Interest rate spread(4)											3.21%												3.14%
Net yield on interest-earning assets(5)											3.24%												3.17%
Ratio of average interest-earning assets to average interest-bearing liabilities											105.44%												105.76%

 

(1)	Includes nonaccrual loan balances.

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

(3)	Includes interest-earning deposits in other financial institutions.

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

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

Interest Income

Interest income increased $337,000 or 3.2%, to $11.0 million for the nine months ended September 30, 2014, compared to the same period in 2013. The increase was due to a $13.7 million increase in the average balance of interest-earning assets from $375.7 million in the 2013 period to $389.4 million for the 2014 period, partially offset by a 2 basis point decrease in the weighted-average yield on interest-earning assets from 3.80% in the 2013 period to 3.78% for the 2014 period. The decrease in yield was primarily due to a decrease in yields earned on loans and interest-bearing deposits, partially offset by an increase in yields earned on investment securities.

Interest income on loans was $8.6 million for nine months ended September 30, 2014, a decrease of $35,000 compared to the nine months ended September 30, 2013, primarily due to a decrease in the weighted-average yield, substantially offset by an increase in the average balance of loans. The weighted-average yield declined 25 basis points from 4.63% for the nine months ended September 30, 2013 to 4.38% for the nine months ended September 30, 2014, as a result of lower origination yields and the amortization, prepayment and repricing of higher yielding loans due to the low level of market interest rates. The decrease in the weighted-average yield was substantially offset by a $13.1 million increase in the average balance of loans outstanding from $248.1 million in the 2013 period to $261.2 million in the 2014 period.

Interest income on securities increased $391,000 during the nine months ended September 30, 2014, compared to the same period in 2013. This increase was primarily due to a 45 basis point increase in the weighted-average rate from 2.23% in the 2013 period to 2.68% for the 2014 period, and to a lesser extent by a $159,000 increase in the average balance. The increase in yield was primarily to the slowing of prepayments, causing a decline in premium amortization for the current year period.

Dividends on Federal Home Loan Bank stock and other income totaled $146,000 for the nine months ended September 30, 2014, a decrease of $19,000 compared to the nine months ended September 30, 2013. The decrease was due to a 26 basis point decrease in the weighted-average rate from 1.75% in the 2013 period to 1.49% in the 2014 period, partially offset by a $467,000 increase in the average balance.

Interest Expense

Interest expense totaled $1.6 million for the nine month period ended September 30, 2014, a decrease of $179,000, or 10.2%, from $1.8 million for the nine month period ended September 30, 2013. The decrease was due to a 9 basis point decrease in the weighted-average cost of funds from 0.66% in the 2013 period to 0.57% in the current year period, partially offset by a $14.1 million, or 4.0%, increase in the average balance of total interest-bearing liabilities from $355.2 million in the 2013 period to $369.3 million in the 2014 period.

Interest expense on deposits for the nine month period ended September 30, 2014 totaled $1.2 million, a decrease of $105,000, or 8.2%, from $1.3 million for the same period in the previous year. The decrease was due to a 6 basis point decrease in the weighted-average cost of deposits, from 0.52% in the 2013 period to 0.46% for the 2014 period, partially offset by a $16.4 million increase in the average balance from $327.2 million in the 2013 period to $343.5 million in the 2014 period. The decrease in interest expense continues to slow as rates paid on deposit products reach floors established by local market competitors and overall market conditions and as pricing pressure in the local market has begun rising.

Interest expense on other short-term borrowings totaled $7,000 for the nine months ended September 30, 2014, and decreased $1,000 compared to the same period last year. The decrease was primarily due to a $347,000 decrease in the average balance of other short-term borrowings, and a 1 basis point decrease in the weighted-average cost from 0.16% in the 2013 period to 0.15% in the 2014 period.

Interest expense on Federal Home Loan Bank advances totaled $387,000 for the nine month period ended September 30, 2014, which decreased $73,000 from $460,000 in the 2013 period. The decrease was due to a 22 basis point decrease in the weighted-average cost from 2.86% in the 2013 period to 2.64% in the 2014 period, and a $1.9 million decrease in the average balance outstanding. The decrease in the weighted-average cost was due to the maturity of higher rate advances, while the decrease in the average balance was due to not replacing scheduled maturities of fixed-rate term advances.

Net Interest Income

Net interest income totaled $9.5 million for the nine month period ended September 30, 2014, an increase of $516,000, or 5.8%, from the nine month period ended September 30, 2013. The increase in net interest income was mainly due to a 7 basis point increase in the net interest rate spread, from 3.14% at September 30, 2013 to 3.21% at September 30, 2014. The increase in the net interest spread was a result of rates on interest-bearing liabilities repricing downward more than the yields on interest-earning assets. During the nine months ended September 30, 2014, the yield on interest-bearing liabilities decreased 9 basis points, while the rates earned on interest-earning assets decreased 2 basis points compared to the same period last year. The decrease in the cost of funds from the prior year period was mainly due to a continuing preference by customers in the current low interest rate environment for lower cost and more liquid deposit accounts over longer term certificate accounts and management’s continuing strategy of limiting competition for higher cost term deposits by focusing on relationship balances. The yield on earning assets was negatively impacted by a decline in loan yields due to the continued overall low level of market interest rates resulting in new loan originations at lower yields than the existing portfolio and the downward repricing of existing adjustable rate loans that continue to negatively affect the net interest margin.

Provision (credit) for Loan Losses

Management recorded a $282,000 provision for loan losses for the nine month period ended September 30, 2014, compared to a provision reversal of ($55,000) for the nine month period ended September 30, 2013. The increase is primarily due to increased impaired nonperforming loans during the current year period, an increase in charge-offs compared to the prior year period and the restructuring of commercial real estate loans allowing the release of required reserves as additional collateral was given to the Bank on several classified relationships during the first quarter of 2013.

Noninterest Income

Noninterest income totaled $1.4 million for the nine months ended September 30, 2014, an increase of $196,000, from $1.2 million for the same period in 2013. The increase was primarily due to a $112,000 increase in gain on sale of residential mortgage loans, and an increase of $85,000 in service fees, charges and other operating income. The increase in gain on sale of residential mortgage loans was primarily due to more favorable pricing on current year sales and an increase in mortgage servicing rights compared to the 2013 period. The increase in service fees, charges and other operating income was primarily due to an increase in fees from annuity sales and fees from deposit service charges implemented in 2014 that was not in place in the 2013 period.

Noninterest Expense

Noninterest expense totaled $7.9 million for nine months ended September 30, 2014, and decreased $95,000, compared to the nine months ended September 30, 2013. This decrease includes a $107,000 decrease in franchise taxes and a $30,000 decrease in amortization of intangible assets, partially offset by a $26,000 increase in salaries and employee benefits and a $29,000 increase in occupancy and equipment expense. The decrease in franchise taxes was primarily due to the State of Ohio’s newly enacted Financial Institutions Tax during the 2014 period, which resulted in lower taxes compared to the previous Ohio corporate franchise tax that was in place during the 2013 period. The decrease in amortization of intangible assets was due to a core deposit intangible becoming amortized to zero in the current year period compared to a scheduled amortization amount in the prior year period. The increase in salaries and employee benefits was primarily due to an increase in employee compensation expense, and the related payroll taxes and Company 401k match due to merit increases since the prior year period, partially offset by lower costs for both healthcare and post-retirement benefits. The increase in occupancy and equipment expense was due to increases in building maintenance and repairs and data processing.

Federal Income Taxes

Federal income tax expense totaled $632,000 for the nine month period ended September 30, 2014, an increase of $70,000 compared to $562,000 for nine month period ended September 30, 2013. The increase was primarily due to a $470,000 increase in pretax income compared to the prior year period, partially offset by a decrease in the effective tax rate. The effective tax rate in the current year period was 24.22% compared to 26.27% for the prior year period. The effective rate is below the statutory rate of 34% due to certain income items that are not subject to tax.

Forward-Looking Statements

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

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

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

ITEM 3

Quantitative and Qualitative Disclosures About Market Risk

Management believes there has been no material change in the Company’s market risk since the Company’s Form 10-K was filed with the Securities and Exchange Commission for the year ended December 31, 2013.

ITEM 4

Controls and Procedures

(a)

Evaluation of disclosure controls and procedures.

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

(b)

Changes in internal controls.

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

ITEM 1.

Legal Proceedings

Not applicable.

 

ITEM 1A.

Risk Factors

There have been no material changes in the risk factors set forth in Part I, Item 1A of the Company’s Annual Report on Form 10-K for year ended December 31, 2013.

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)

Not applicable.

(b)

Not applicable.

(c)

The following table sets forth certain information regarding repurchases by the Company for the quarter ended September 30, 2014.

 

Period		Total number of shares purchased				Average price paid per share				Total number of shares purchased as part of the announced plan				Maximum number of shares which may still be purchased as part of the announced plan
July 1 - 31, 2014			—			$	—				173,174				49,182
August 1 - 31, 2014			9,100				13.06				182,274				40,082
September 1 - 30, 2014			—				—				182,274				40,082
Total			9,100			$	13.06				182,274				40,082

 

 

 

Notes to the Table:

On August 10, 2012, the Company announced the authorization by the Board of Directors of a new program for the repurchase of 150,206 shares, or 5.0%, of the Company’s outstanding shares of common stock. On September 30, 2013 the Company announced the adoption of a new share buy-back program authorizing the repurchase of an additional 2.5% or 72,150, shares of its common stock outstanding. As a result of these two plans, net of shares previously repurchased, the Company may repurchase up to 40,082 shares of its common stock outstanding.

 

ITEM 3.

Defaults Upon Senior Securities

Not applicable.

 

ITEM 4.

Mine Safety Disclosures

 

Not applicable.

ITEM 5.

Other Information

Not applicable.

 

ITEM 6.

Exhibits

 

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

 

SIGNATURES

 

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

 

 

Date:	November 6, 2014		By:	/s/H. Stewart Fitz Gibbon III
				H. Stewart Fitz Gibbon III
				President and Chief Executive Officer
Date:	November 6, 2014		By:	/s/Myron Swartzentruber
				Myron Swartzentruber
				Senior Vice President and
				Chief Financial Officer