UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended

March 31, 2015

 

 

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  x  No o

 

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

 

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

 

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

 

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

Yes o                No  x

As of April 30, 2015, the latest practicable date, 2,806,839 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	33
Item 3	Quantitative and Qualitative Disclosures About Market Risk	42
Item 4	Controls and Procedures	42
PART II - OTHER INFORMATION
Item 1	Legal Proceedings	43
Item 1A	Risk Factors	43
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3	Defaults Upon Senior Securities	43
Item 4	Mine Safety Disclosures	43
Item 5	Other Information	44
Item 6	Exhibits	44
SIGNATURES		45

 

Wayne Savings Bancshares, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

 

		March 31, 2015				December 31, 2014
		(Unaudited)
Assets
Cash and due from banks		$	7,846			$	6,200
Interest-bearing deposits			4,254				4,583
Cash and cash equivalents			12,100				10,783
Available-for-sale securities			104,336				108,969
Held-to-maturity securities			8,274				6,989
Loans, net of allowance for loan losses of $2,349 and $2,769           at March 31, 2015 and December 31, 2014, respectively			268,233				265,609
Premises and equipment			6,726				6,829
Federal Home Loan Bank stock			4,226				4,226
Foreclosed assets held for sale, net			120				179
Accrued interest receivable			1,331				1,154
Bank-owned life insurance			9,349				9,282
Goodwill			1,719				1,719
Other assets			1,924				1,631
Prepaid federal income taxes			406				343
Total assets		$	418,744			$	417,713
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand		$	90,947			$	91,921
Savings and money market			131,141				129,222
Time			127,795				127,779
Total deposits			349,883				348,922
Other short-term borrowings			7,076				7,000
Federal Home Loan Bank advances			16,459				16,438
Interest payable and other liabilities			4,045				4,678
Deferred federal income taxes			916				673
Total liabilities			378,379				377,711
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			36,001				35,995
Retained earnings			20,594				20,403
Shares acquired by ESOP			(398	)			(416	)
Accumulated other comprehensive income			368				220
Treasury stock, at cost: Common: 1,171,892 shares at both           March 31, 2015 and December 31, 2014.			(16,598	)			(16,598	)
Total stockholders’ equity			40,365				40,002
Total liabilities and stockholders’ equity		$	418,744			$	417,713

See accompanying notes to condensed consolidated financial statements.

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Income and Comprehensive Income

For the three months ended March 31, 2015 and 2014

(In thousands, except per share data)

(Unaudited)

 

		Three Months Ended March 31,
		2015				2014
Interest and Dividend Income
Loans		$	2,810			$	2,890
Securities			704				780
Dividends on Federal Home Loan Bank stock and other			44				51
Total interest and dividend income			3,558				3,721
Interest Expense
Deposits			392				395
Other short-term borrowings			2				2
Federal Home Loan Bank advances			92				145
Total interest expense			486				542
Net Interest Income			3,072				3,179
Provision for Loan Losses			233				8
Net Interest Income After Provision for Loan Losses			2,839				3,171
Noninterest Income
Gain on loan sales			47				25
Earnings on bank-owned life insurance			72				71
Service fees, charges and other operating			312				269
Total noninterest income			431				365
Noninterest Expense
Salaries and employee benefits			1,575				1,493
Net occupancy and equipment expense			487				511
Federal deposit insurance premiums			60				63
Franchise taxes			66				64
Loss on sale of foreclosed assets held for sale			15				—
Loss (gain) on sale of premises and equipment			2				(6	)
Amortization of intangible assets			—				23
Other			498				497
Total noninterest expense			2,703				2,645
Income Before Federal Income Taxes			567				891
Provision for Federal Income Taxes			127				221
Net Income		$	440			$	670
Other comprehensive income:
Unrealized gains on available-for-sale securities			224				542
Tax expense			(76	)			(184	)
Other comprehensive income			148				358
Total comprehensive income		$	588			$	1,028
Basic Earnings Per Share		$	0.16			$	0.24
Diluted Earnings Per Share		$	0.16			$	0.24
Dividends Per Share		$	0.09			$	0.08

See accompanying notes to condensed consolidated financial statements.

 

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows

For the three months ended March 31, 2015 and 2014

(In thousands)

(Unaudited)

 

		Three Months Ended March 31,
		2015				2014
Operating Activities
Net income		$	440			$	670
Items not requiring (providing) cash
Depreciation and amortization			140				146
Provision for loan losses			233				8
Amortization of premiums and discounts on securities			329				266
Amortization of mortgage servicing rights			8				12
Amortization of deferred loan origination fees			(17	)			(22	)
Amortization of intangible asset			—				23
Increase in value of bank-owned life insurance			(67	)			(67	)
Amortization expense of stock benefit plan			24				22
Loss on sale of foreclosed assets held for sale			15				—
Loss (gain) on sale of premises and equipment			2				(6	)
Net gain on sale of loans			(47	)			(25	)
Proceeds from sale of loans in the secondary market			1,425				611
Origination of loans for sale in the secondary market			(1,378	)			(586	)
Deferred income taxes			167				(24	)
Changes in
Accrued interest receivable			(177	)			(235	)
Other assets			(364	)			(28	)
Interest payable and other liabilities			(188	)			(453	)
Net cash provided by operating activities			545				312
Investing Activities
Purchases of available-for-sale securities			(1,927	)			(6,411	)
Purchase of  held-to-maturity securities			(1,306	)			—
Proceeds from maturities and paydowns of available-for-sale securities			6,461				4,982
Proceeds from maturities and paydowns of held-to-maturity securities			15				19
Proceeds from Federal Home Loan Bank stock redemption			—				799
Net change in loans			(2,840	)			(1,418	)
Purchase of premises and equipment			(39	)			(90	)
Proceeds from the sale of premises and equipment			—				6
Proceeds from the sale of foreclosed assets			44				—
Net cash provided (used) in investing activities		$	408			$	(2,113	)

 

See accompanying notes to condensed consolidated financial statements.

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (continued)

For the three months ended March 31, 2015 and 2014

(In thousands)

(Unaudited)

 

		Three Months Ended March 31,
		2015				2014
Financing Activities
Net change in deposits		$	961			$	613
Net change in other short-term borrowings			76				(1,394	)
Proceeds from Federal Home Loan Bank advances			21				2,280
Repayments of Federal Home Loan Bank advances			—				(2,250	)
Advances by borrowers for taxes and insurance			(445	)			(433	)
Dividends on common stock			(249	)			(222	)
Treasury stock purchases			—				(56	)
Net cash provided (used) in financing activities			364				(1,462	)
Change in Cash and Cash Equivalents			1,317				(3,263	)
Cash and Cash Equivalents, Beginning of period			10,783				13,381
Cash and Cash Equivalents, End of period		$	12,100			$	10,118
Supplemental Cash Flows Information
Interest paid on deposits and borrowings		$	468			$	518
Federal income taxes paid		$	—			$	200
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Recognition of mortgage servicing rights		$	21			$	9
Dividends payable		$	253			$	227

 

See accompanying notes to condensed consolidated financial statements.

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

 

Note 1:

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of March 31, 2015 and for the three months ended March 31, 2015 and 2014, 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, 2014. 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 months ended March 31, 2015, 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, 2014, 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
March 31, 2015:
U.S. government agencies		$	123			$	—			$	—			$	123
Mortgage-backed securities of           government sponsored entities			83,437				1,305				168				84,574
Private-label collateralized mortgage           obligations			445				9				—				454
State and political subdivisions			18,213				986				14				19,185
Totals		$	102,218			$	2,300			$	182			$	104,336

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Approximate Fair Value
Available-for-sale securities		(In thousands)
December 31, 2014:
U.S. government agencies		$	126			$	—			$	—			$	126
Mortgage-backed securities of           government sponsored entities			87,284				1,202				273				88,213
Private-label collateralized mortgage           obligations			491				11				—				502
State and political subdivisions			19,174				992				38				20,128
Totals		$	107,075			$	2,205			$	311			$	108,969

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Approximate Fair Value
		(In thousands)
Held-to-maturity Securities:
March 31, 2015:
U.S. government agencies		$	98			$	—			$	—			$	98
Mortgage-backed securities of           government sponsored entities			1,318				30				—				1,348
State and political subdivisions			6,858				33				110				6,781
Totals		$	8,274			$	63			$	110			$	8,227

 

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Approximate Fair Value
Held-to-maturity Securities:		(In thousands)
December 31, 2014:
U.S. government agencies		$	100			$	—			$	—			$	100
Mortgage-backed securities of           government sponsored entities			1,332				22				—				1,354
State and political subdivisions			5,557				7				181				5,383
Totals		$	6,989			$	29			$	181			$	6,837

 

Amortized cost and fair value of available-for-sale securities and held-to-maturity securities at March 31, 2015 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		$	6,236			$	6,600			$	—			$	—
Five to ten years			1,354				1,421				3,050				3,063
After ten years			10,746				11,287				3,906				3,816
			18,336				19,308				6,956				6,879
Mortgage-backed securities      of government sponsored entities			83,437				84,574				1,318				1,348
Private-label collateralized      mortgage obligations			445				454				—				—
Totals		$	102,218			$	104,336			$	8,274			$	8,227

 

The carrying value of securities pledged as collateral to secure public deposits and for other purposes was $60.5 million and $57.5 million at March 31, 2015 and December 31, 2014, respectively.

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. The total fair value of these investments at March 31, 2015 and December 31, 2014, was $32.2 million and $42.9 million, which represented approximately 29% and 38%, 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 March 31, 2015.

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.

		March 31, 2015
		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		$	14,987			$	103			$	11,749			$	65			$	26,736			$	168
State and political subdivisions			2,926				35				2,563				89				5,489				124
Total temporarily impaired securities		$	17,913			$	138			$	14,312			$	154			$	32,225			$	292

 

		December 31, 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		$	22,443			$	118			$	13,947			$	155			$	36,390			$	273
State and political subdivisions			1,082				3				5,421				216				6,503				219
Total temporarily impaired securities		$	23,525			$	121			$	19,368			$	371			$	42,893			$	492

 

 

Note 4:

Credit Quality of Loans and the Allowance for Loan Losses

Loans

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

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

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

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

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the 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 charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by 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 months ended March 31, 2015 and 2014:

 

Three months ended March 31, 2015		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans				Total
		(In thousands)
Beginning balance		$	1,533			$	885			$	343			$	8			$	2,769
Provision charged to           expense			30				170				37				(4	)			233
Losses charged off			(654	)			—				—				—				(654	)
Recoveries			1				—				—				—				1
Ending balance		$	910			$	1,055			$	380			$	4			$	2,349

 

Three months ended March 31, 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			(135	)			127				17				(1	)			8
Losses charged off			—				(260	)			—				—				(260	)
Recoveries			7				—				—				—				7
Ending balance		$	889			$	1,393			$	288			$	4			$	2,574

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on the portfolio segment and impairment method as of March 31, 2015 and December 31, 2014:

 

March 31, 2015		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		$	102			$	17			$	126			$	—			$	245
Collectively evaluated for      impairment			808				1,038				254				4				2,104
Total allowance for loan losses		$	910			$	1,055			$	380			$	4			$	2,349
Loan Balances:
Ending balance:
Individually evaluated for      impairment		$	2,997			$	1,077			$	126			$	—			$	4,200
Collectively evaluated for      impairment			164,664				88,741				17,273				1,771				272,449
Total balance		$	167,661			$	89,818			$	17,399			$	1,771			$	276,649

 

December 31, 2014		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		$	653			$	18			$	145			$	—			$	816
Collectively evaluated for      impairment			880				867				198				8				1,953
Total allowance for loan losses		$	1,533			$	885			$	343			$	8			$	2,769
Loan Balances:
Ending balance:
Individually evaluated for      impairment		$	3,279			$	18			$	145			$	—			$	3,442
Collectively evaluated for      impairment			166,397				86,902				16,130				2,311				271,740
Total balance		$	169,676			$	86,920			$	16,275			$	2,311			$	275,182

 

Total loans in the above tables do not include deferred loan origination fees of $677 and $683 or loans in process of $5.4 million and $6.1 million, respectively, for March 31, 2015 and December 31, 2014.

The following tables present the credit risk profile of the Bank’s loan portfolio based on rating category and payment activity as of March 31, 2015 and December 31, 2014:

 

March 31, 2015		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans
		(In thousands)
Rating *
Pass (Risk 1-4)		$	159,171			$	86,515			$	16,981			$	1,771
Special Mention (Risk 5)			1,207				1,412				144				—
Substandard (Risk 6)			7,283				1,891				274				—
Total		$	167,661			$	89,818			$	17,399			$	1,771

 

December 31, 2014		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans
		(In thousands)
Rating *
Pass (Risk 1-4)		$	160,190			$	84,168			$	15,812			$	2,311
Special Mention (Risk 5)			2,015				851				318				—
Substandard (Risk 6)			7,471				1,901				145				—
Total		$	169,676			$	86,920			$	16,275			$	2,311

* 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 charge-off amount can be reasonably determined.

 

The following tables present the Bank’s loan portfolio aging analysis for March 31, 2015 and December 31, 2014:

 

March 31, 2015		30-59 Days Past Due				60-89 Days Past Due				Greater Than 90 Days				Total Past Due				Current				Total Loans Receivable				Total Loans > 90 Days and Accruing
		(In thousands)
One-to-four family      residential loans		$	1,055			$	281			$	972			$	2,308			$	165,353			$	167,661			$	—
All other mortgage      loans			—				—				352				352				89,466				89,818				—
Commercial business      loans			2				—				45				47				17,352				17,399				—
Consumer loans			1				—				—				1				1,770				1,771				—
Total		$	1,058			$	281			$	1,369			$	2,708			$	273,941			$	276,649			$	—

 

December 31, 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		$	466			$	297			$	1,575			$	2,338			$	167,338			$	169,676			$	—
All other mortgage      loans			—				198				152				350				86,570				86,920				—
Commercial business      loans			—				—				59				59				16,216				16,275				—
Consumer loans			—				—				—				—				2,311				2,311				—
Total		$	466			$	495			$	1,786			$	2,747			$	272,435			$	275,182			$	—

 

Nonaccrual loans were comprised of the following at:

 

Nonaccrual loans		March 31, 2015				December 31, 2014
		(In thousands)
One-to-four family residential loans		$	2,113			$	2,740
Nonresidential real estate loans			352				350
Commercial business loans			81				96
Total		$	2,546			$	3,186

 

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. Information with respect to the Company’s impaired loans at March 31, 2015 and December 31, 2014 in combination with activity for the three months ended March 31, 2015 and 2014 is presented below:

 

 

		As of March 31, 2015												Three months ended March 31, 2015
		Recorded Balance				Unpaid Principal Balance				Specific Allowance				Average Investment in Impaired Loans				Interest Income Recognized
		(In thousands)
Loans without a specific valuation allowance
One-to-four family residential loans		$	2,112			$	2,607			$	—			$	1,610			$	12
All other mortgage loans			1,060				1,060				—				530				18
Commercial business loans			—				—				—				—				—
Loans with a specific valuation allowance
One-to-four family residential loans			885				885				102				1,528				12
All other mortgage loans			17				17				17				18				—
Commercial business loans			126				126				126				136				1
Total:
One-to-four family residential loans		$	2,997			$	3,492			$	102			$	3,138			$	24
All other mortgage loans			1,077				1,077				17				548				18
Commercial business loans			126				126				126				136				1
		$	4,200			$	4,695			$	245			$	3,822			$	43

 

		As of December 31, 2014												Three months ended March 31, 2014
		Recorded Balance				Unpaid Principal Balance				Specific Allowance				Average Investment in Impaired Loans				Interest Income Recognized
		(In thousands)
Loans without a specific valuation allowance
One-to-four family residential loans		$	1,108			$	1,108			$	—			$	5,583			$	64
All other mortgage loans			—				—				—				2,039				20
Commercial business loans			—				—				—				77				1
Loans with a specific valuation allowance
One-to-four family residential loans			2,171				2,171				653				782				9
All other mortgage loans			18				18				18				1,477				14
Commercial business loans			145				145				145				63				1
Total:
One-to-four family residential loans		$	3,279			$	3,279			$	653			$	6,365			$	73
All other mortgage loans			18				18				18				3,516				34
Commercial business loans			145				145				145				140				2
		$	3,442			$	3,442			$	909			$	10,021			$	109

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

All TDR classifications are due to concessions being 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 2015 quarter-to-date period. The TDR classification that occurred in the 2014 quarter-to-date period included 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 three month periods ended March 31, 2015 and 2014. The Company considers TDRs that become 90 days or more past due under modified terms as subsequently defaulted.

Quarter-to-Date

Troubled Debt Restructurings

Number of loans

Pre-modification Recorded Principal Balance

Post-modification Recorded Principal Balance

(dollars in thousands)

March 31, 2014

All other mortgage loans

1

$

261

$

261

 

 

Foreclosed assets held for sale include those properties that the Bank has obtained legal title to, through a formal foreclosure process, or the borrower conveying all interest in the property to the Bank through the completion of a deed in lieu of foreclosure, or similar legal agreement. The following table presents the balance of mortgage loans collateralized by residential real estate properties held as foreclosed assets at March 31, 2015 and December 31, 2014.

 

		March 31, 2015				December 31, 2014
		Recorded Investment
		(In thousands)
One-to-four family residential loans		$	120			$	179

 

 

Banks foreclose on certain properties in the normal course of business when it is more probable than not that the loan balance will not be recovered through scheduled payments. Foreclosure is usually a last resort and begins after all other collection efforts have been exhausted. The following table presents the balance of those mortgage loans collateralized by residential real estate properties that are in the formal process of foreclosure at March 31, 2015 and December 31, 2014.

 

		March 31, 2015				December 31, 2014
		Recorded Investment
		(In thousands)
One-to-four family residential loans		$	159			$	24

 

Note 5:

Goodwill and Intangible Assets

The composition of goodwill and other intangible assets, all of which is core deposit intangible, at March 31, 2015 and December 31, 2014:

 

		March 31, 2015				December 31, 2014
		(In thousands)
Goodwill		$	1,719			$	1,719
Other intangible assets – gross			974				974
Other intangible assets – amortization			(974	)			(974	)
Total		$	1,719			$	1,719

 

The Company did not record any amortization related to intangible assets during the three months ended March 31, 2015, as the intangible asset was amortized to zero at May 31, 2014. The Company recorded amortization totaling $23,000 for the three months ended March 31, 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 November 30, 2014 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. There were no dilutive shares at March 31, 2015 or March 31, 2014.

The computations are as follows:

		Three months ended March 31,
		2015				2014
Weighted-average common shares      outstanding (basic and diluted)			2,765,249				2,793,103

 

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 Common equity capital to risk-weighted 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 March 31, 2015, that the Bank met all capital adequacy requirements to which it is subject.

 

As of March 31, 2015, 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 March 31, 2015 that management believes have changed the Bank’s capital classification.

The Bank’s actual capital amounts and ratios as of March 31, 2015 and December 31, 2014 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 March 31, 2015
Tier I Capital to average assets		$	37,063				8.9%			$	16,602				4.0%			$	20,752				5.0%
Tier 1 Common equity capital to risk-      weighted assets			37,063				14.2%				11,766				4.5%				16,995				6.5%
Tier I Capital to risk-weighted assets			37,063				14.2%				15,688				6.0%				20,917				8.0%
Total Risk-based capital to risk-weighted assets			39,412				15.1%				20,917				8.0%				26,146				10.0%
As of December 31, 2014
Tier I Capital to average assets		$	36,834				8.8%			$	16,694				4.0%			$	20,868				5.0%
Tier I Capital to risk-weighted assets			36,834				14.1%				10,439				4.0%				15,658				6.0%
Total Risk-based capital to risk-      weighted assets			39,603				15.2%				20,878				8.0%				26,097				10.0%

 

 

Effective January 1, 2015 new regulatory capital requirements, commonly referred to as “Basel III” were implemented and are reflected in the March 31, 2015 capital table above. Management opted out of the accumulated other comprehensive income treatment under the new requirements and, as such unrealized gains and losses from available-for-sale securities will continue to be excluded from Bank regulatory capital.

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)
March 31, 2015		$	2,118			$	(244	)		$	(1,191	)		$	(315	)		$	368
December 31, 2014		$	1,894			$	(244	)		$	(1,191	)		$	(239	)		$	220

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

months ended March 31, 2015 or 2014.

 

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 March 31, 2015 and December 31, 2014:

						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)
March 31, 2015
U.S. government agencies		$	123			$	—			$	123			$	—
Mortgage-backed securities of           government sponsored entities			84,574				—				84,574				—
Private-label collateralized mortgage           obligations			454				—				454				—
State and political subdivisions			19,185				—				19,185				—

 

						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, 2014
U.S. government agencies		$	126			$	—			$	126			$	—
Mortgage-backed securities of           government sponsored entities			88,213				—				88,213				—
Private-label collateralized mortgage           obligations			502				—				502				—
State and political subdivisions			20,128				—				20,128				—

 

 

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 March 31, 2015 and December 31, 2014.

 

						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)
March 31, 2015
Collateral-dependent      impaired loans		$	613			$	—			$	—			$	613
December 31, 2014
Collateral-dependent      impaired loans		$	634			$	—			$	—			$	634
Foreclosed assets			59				—				—				59

 

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)

March 31, 2015

Collateral-dependent      impaired loans

$

613

Market Comparable Properties, less delinquent real estate taxes

Selling and fixed costs

10%

December 31, 2014

Collateral-dependent      impaired loans

$

634

Market Comparable properties, less delinquent real estate taxes

N/A

N/A

Foreclosed assets

59

Estimated Selling Price

Selling Costs

10%

 

There were no changes in the inputs or methodologies used to determine fair value at March 31, 2015 as compared to December 31, 2014.

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)
March 31, 2015
Financial assets
Cash and cash equivalents		$	12,100			$	12,100			$	—			$	—
Held-to-maturity      securities			8,274				—				8,227				—
Loans, net of allowance     for loan losses			268,233				—				—				278,305
Federal Home Loan Bank     stock			4,226				—				4,226				—
Interest receivable			1,331				—				1,331				—
Financial liabilities
Deposits			349,883				34,003				297,985				—
Other short-term     borrowings			7,076				—				7,076				—
Federal Home Loan Bank     advances			16,459				—				16,574				—
Advances from borrowers     for taxes and insurance			690				—				690				—
Interest payable			65				—				65				—

 

						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, 2014
Financial assets
Cash and cash      equivalents		$	10,783			$	10,783			$	—			$	—
Held-to-maturity      securities			6,989				—				6,837
Loans, net of allowance      for loan losses			265,609				—				—				274,443
Federal Home Loan Bank      stock			4,226				—				4,226				—
Interest receivable			1,154				—				1,154				—
Financial liabilities
Deposits			348,922				34,403				294,365				—
Other short-term      borrowings			7,000				—				7,000				—
Federal Home Loan Bank      advances			16,438				—				16,572				—
Advances from borrowers      for taxes and insurance			1,135				—				1,135				—
Interest payable			47				—				47				—

 

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 March 31, 2015 and December 31, 2014.

Note 10:

Recent Accounting Developments

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 did not 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. The adoption of this standard did not 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 2014-14, 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. The adoption of this standard did not 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 management’s 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.

FASB ASU 2015-01, Income Statement – Extraordinary and Unusual Items (Subtopic 225-20), Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items, was issued in January, 2015. This update eliminates from Generally Accepted Accounting Principles the concept of extraordinary items, which required that an entity separately classify, present and disclose extraordinary events and transactions. Eliminating the concept of extraordinary items will save time and reduce costs for preparers because they will not have to assess whether a particular event or transaction is extraordinary. It will also alleviate uncertainty for preparers, auditors, and regulators because auditors and regulators will no longer need to evaluate whether the preparer treated an unusual item appropriately. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. The effective date is the same for both public business entities and all other entities. This standard is not expected to have a material impact on the Company’s consolidated financial statements.

FASB ASU 2015-03, Interest – Imputation of Interest (Subtopic 835-30), Simplifying the Presentation of Debt Issuance Costs, was issued in April, 2015. The amendments in this Update require that debt issuance costs related to a recognized debit liability be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this Update. The amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those years. Early adoption of the amendments in this Update is permitted for financial statements that have not been previously issued, and the amendments in this Update should be applied retrospectively. This standard is not expected to have a material impact on the Company’s consolidated financial statements.

FASB ASU 2015-04, Compensation – Retirement Benefits (Subtopic 715), Practical Expedient for the Measurement of an Employer’s Defined Benefit Obligation and Plan Assets, was issued in April, 2015. A reporting entity with a fiscal year-end that does not coincide with a month-end may incur more costs than other entities when measuring the fair value of plan assets of a defined benefit pension or other post-retirement benefit. For an entity with a fiscal year-end that does not coincide with a month-end, the amendments in this Update provide a practical expedient that permits the entity to measure defined benefit plan assets and obligations using the month-end that is closest to the entity’s fiscal year-end and apply that practical expedient consistently from year to year. The amendments in this Update are effective for public business entities for financial statements issued for fiscal years beginning after December 15, 2015, and interim periods within those years. Early application is permitted, and the amendments in this Update should be applied retrospectively. 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 through the following activities:

·

Continued enhancement of balance sheet assets to increase higher yielding, on a risk adjusted basis, commercial and consumer loans, while maintaining a residential mortgage loan portfolio and reducing, subject to liquidity constraints, the investment securities portfolio.

 

·

Continued transition from a transaction oriented thrift culture to a relationship-oriented commercial bank culture through new position descriptions, activity goals, performance reviews and compensation structures consistent with regulatory guidance. In addition, turnover in the existing staff is being used as an opportunity to recruit experienced talent to further change the culture of the organization. Management continues to analyze the staffing levels where decreased customer volume may not warrant continued operations.

 

·

Continued progress on technology upgrades begun in 2014 and scheduled through 2016 to facilitate more efficient customer service and operations.

 

·

Continued focus on enterprise risk management and regulatory compliance. The focus of the ERM program is to ensure the identification, measurement and management of risks, and the pricing of risk to produce acceptable returns to shareholders. As part of ERM and coordinated with internal audit, regulatory compliance is a particular area of attention to facilitate the continued generation of returns to shareholders while avoiding the costs of remedial actions for compliance deficiencies commensurate with the risks assumed in those activities and consistent with legal requirements, regulatory requirements and general economic conditions.

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, 2014 to March 31, 2015

At March 31, 2015, the Company had total assets of $418.7 million, an increase of $1.0 million, from total assets at December 31, 2014. The increase in total assets includes a $1.3 million increase in cash and cash equivalents and a $2.6 million increase in net loans, partially offset by a $3.3 million decrease in securities balances compared to December 31, 2014.

Total securities decreased $3.3 million to $112.6 million at March 31, 2015, compared to $115.9 million at December 31, 2014. The decrease in securities is primarily due to investing the principal and interest cash flows received from securities into higher yielding loans. The decrease included principal repayments of $6.5 million and amortization of premiums of $329,000 partially offset by purchases totaling $3.2 million and a $224,000 increase in unrealized gains on available-for-sale securities during the three months ended March 31, 2015.

Net loans receivable increased $2.6 million at March 31, 2015 compared to December 31, 2014. The Bank originated $11.9 million of loans, received payments of $8.3 million, and originated and sold $1.4 million of 30-year fixed-rate residential mortgage loans into the secondary market. The increase in net loan balances is mainly due to new origination in excess of principal reductions during the current year period, and a $420,000 decrease in the allowance for loan losses. The decrease in the allowance for loan losses was due to charge-offs totaling $654,000 related to nonperforming loans during the current year quarter. These charge-offs included loans that management had evaluated individually for impairment in prior periods and had specific reserves totaling $474,000 at December 31, 2014. The increased charge-offs above the previously recorded level of specific reserves was due to both updated real estate appraisals and delinquent property tax information. Specific reserves are charged off, in whole or in part, as the probability of loss becomes more likely, or reversed if the borrowers financial condition and or collateral values improve to a level where the specific reserve is no longer needed.  

 

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.

		March 31, 2015								December 31, 2014
		Balance				Percent of total loans				Balance				Percent of total loans
		(Dollars in thousands)
Mortgage loans:
One-to-four family residential(1)		$	167,661				60.60%			$	169,676				61.67%
Residential construction loans			2,410				0.87%				2,922				1.06%
Multi-family residential			12,004				4.34%				12,203				4.43%
Nonresidential real estate/land(2)			75,404				27.26%				71,795				26.09%
Total mortgage loans			257,479				93.07%				256,596				93.25%
Other loans:
Consumer loans(3)			1,771				0.64%				2,311				0.84%
Commercial business loans			17,399				6.29%				16,275				5.91%
Total other loans			19,170				6.93%				18,586				6.75%
Total loans before net items			276,649				100.00%				275,182				100.00%
Less:
Loans in process			5,390								6,121
Deferred loan origination fees			677								683
Allowance for loan losses			2,349								2,769
Total loans receivable, net		$	268,233							$	265,609

 

 

(1)

Includes equity loans collateralized by second mortgages in the aggregate amount of $14.9 million at March 31, 2015 and $14.7 million at December 31, 2014. 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 $3.2 million at March 31, 2015 and $2.9 million for December 31, 2014.

(3)

Includes second mortgage loans of $323 at March 31, 2015 and $415 at December 31, 2014.

Foreclosed assets held for sale totaled $120,000 at March 31, 2015, a decrease of $59,000, compared to $179,000 at December 31, 2014. The decrease in foreclosed assets during the current year quarter was due to the sale of a residential property that was previously maintained in foreclosed assets held for sale, resulting in a loss of $15,000. There was no related activity in the prior year quarter. Total impaired assets were $4.3 million, or 1.03% of total assets at March 31, 2015, compared to $3.6 million, or 0.87% of total assets December 31, 2014.

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, 2014. Management believes that there were no interim impairment indicators that would require another evaluation at March 31, 2015.

Deposits totaled $349.9 million at March 31, 2015, an increase of $961,000 from $348.9 million at December 31, 2014. This increase includes a $1.9 million increase in savings and money market balances and a $16,000 increase in time deposits, partially offset by a $974,000 decrease in demand deposits. The increase in savings and money market balances is due to our customers’ preference to maintain liquid deposits, rather than invest in low yielding fixed-rate term certificates, in order to take advantage of future rate increases. 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, increased by $76,000 and totaled $7.1 million at March 31, 2015. These customer repurchase agreements are offered by the Bank in order to retain commercial customer funds and to afford those commercial customers the opportunity to earn a return on a short-term secured transaction. Average balances are shown in the tables below and reflect no significant variation during the periods. The interest rate paid on these borrowings was 0.15% at both March 31, 2015 and December 31, 2014.

Advances from the Federal Home Loan Bank (FHLB) totaled $16.5 million at March 31, 2015, and increased by $21,000 compared to December 31, 2014. The increase of $21,000 is related to the amortization of 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 2.24% at March 31, 2015 compared to 2.58% at December 31, 2014.

 

Stockholders’ equity increased by $363,000 during the quarter ended March 31, 2015, primarily due to net income of $440,000 and a $148,000 increase in unrealized gains on available-for-sale securities, partially offset by dividends of $249,000.

Comparison of Operating Results for the Three Months Ended March 31, 2015 and 2014

General

Net income for the three months ended March 31, 2015, totaled $440,000, reflecting a decrease of $230,000, from $670,000 for the three month period ended March 31, 2014. The decrease in net income was primarily due to a decrease in net interest income and an increase in both the provision for loan losses and noninterest expense, partially offset by an increase in noninterest income and a decrease in 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 March 31,
		2015												2014
		Average Balance				Interest				Average Rate				Average Balance				Interest				Average Rate
		(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1)		$	266,302			$	2,810				4.22%			$	261,588			$	2,890				4.42%
Investment securities(2)			113,826				704				2.47%				112,902				780				2.76%
Interest-earning deposits(3)			12,627				44				1.39%				11,825				51				1.73%
Total interest-earning assets			392,755				3,558				3.62%				386,315				3,721				3.85%
Noninterest-earning assets			24,004												23,357
Total assets		$	416,759											$	409,672
Interest-bearing liabilities:
Deposits		$	348,533			$	392				0.45%			$	337,397			$	395				0.47%
Other short-term borrowings			6,944				2				0.12%				6,595				2				0.12%
Borrowings			16,448				92				2.24%				22,375				145				2.59%
Total interest-bearing liabilities			371,925				486				0.52%				366,367				542				0.59%
Noninterest-bearing  liabilities			4,488												4,435
Total liabilities			376,413												370,802
Stockholders’ equity			40,346												38,870
Total liabilities and stockholders’ equity		$	416,759											$	409,672
Net interest income						$	3,072											$	3,179
Interest rate spread(4)											3.10%												3.26%
Net yield on interest-earning assets(5)											3.13%												3.29%
Ratio of average interest-earning assets to           average interest-bearing liabilities											105.60%												105.44%

 

(1)	Includes nonaccrual loan balances.

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

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

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

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

 

Interest Income

 

Interest income decreased $163,000, and totaled $3.6 million for the three month period ended March 31, 2015, compared to $3.7 million for the three month period ended March 31, 2014. The decrease was primarily due to a 23 basis point decrease in the weighted-average yield on interest-earning assets from 3.85% in the 2014 period to 3.62% for the 2015 period. The decrease in the weighted-average yield was partially offset by a $6.5 million increase in the average balance of interest-earning assets from $386.3 million in the 2014 period to $392.8 million for the 2015 period.

Interest income on loans was $2.8 million for the three month period ended March 31, 2015, and decreased $80,000 compared to the three month period ended March 31, 2014. This decrease was primarily due to a 20 basis point decrease in the weighted-average yield from 4.42% for the three months ended March 31, 2014 to 4.22% for the three months ended March 31, 2015, 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 a $4.7 million increase in the average balance of loans from $261.6 million in the 2014 period to $266.3 million for the 2015 period.

Interest income on securities decreased $76,000 during the three months ended March 31, 2015, compared to the same period in 2014. This decrease was due to a 29 basis point decrease in the weighted-average rate from 2.76% in the 2014 period to 2.47% for the 2015 period. This decrease in the weighted-average rate was partially offset by a $924,000 increase in the average balance. The decrease in yield was primarily due to an increase in prepayments causing an increase 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 $7,000 for the three months ended March 31, 2015 compared to March 31, 2014. The decrease was due to a 34 basis point decrease in the weighted-average rate from 1.73% in the 2014 period to 1.39% in the 2015 period, partially offset by an $802,000 increase in the average balance.

Interest Expense

Interest expense totaled $486,000 for the three month period ended March 31, 2015, a decrease of $56,000, or 10.3%, from $542,000 for the three month period ended March 31, 2014. The decrease was due to a 7 basis point decrease in the weighted-average cost of funds from 0.59% in the 2014 period to 0.52% in the current year period, partially offset by a $5.5 million increase in the average balance of total interest-bearing liabilities from $366.4 million in the 2014 period to $371.9 million in the 2015 period.

Interest expense on deposits for the three month period ended March 31, 2015 totaled $392,000, a decrease of $3,000 from $395,000 for the same period in the previous year. The decrease was due to a 2 basis point decrease in the weighted-average cost of deposits, from 0.47% in the 2014 period to 0.45% for the 2015 period, partially offset by an $11.1 million increase in the average balance from $337.4 million in the 2014 period to $348.5 million in the 2015 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 both of the three month periods ended March 31, 2015, and March 31, 2014. The weighted-average cost of short-term borrowings was 0.12% for both the 2014 and 2015 periods, while the average balance of short-term borrowings increased by $349,000. Interest expense on Federal Home Loan Bank advances totaled $92,000 for the three month period ended March 31, 2015, which decreased $53,000 from $145,000 in the 2014 period. The decrease was due to a 35 basis point decrease in the weighted-average cost from 2.59% in the 2014 period to 2.24% in the 2015 period, and a $5.9 million, or 26.5%, 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 March 31, 2015, a decrease of $107,000, or 3.4%, from the three month period ended March 31, 2014. The decrease in net interest income was mainly due to a 16 basis point decrease in the net interest rate spread, from 3.26% at March 31, 2014 to 3.10% at March 31, 2015. The decrease in the net interest spread is a result of yields on earning assets declining more than the rate paid on interest-bearing liabilities. During the three months ended March 31, 2015, the yield on earning assets decreased 23 basis points, while the rate paid on interest-bearing liabilities decreased 7 basis points, compared to the same period last year. The yield on earning assets was negatively impacted as a result of reduced origination yields, amortization, prepayment and repricing of higher yielding adjustable rate loans due to the low level of market interest rates, and security purchases at lower yields than in the prior year period, partially offset by a shift in the mix of earning assets from lower yielding securities into higher yielding loans. The decrease in the cost of funds from the prior year period, was mainly due to a continuing preference by customers in the current low interest rate environment for lower cost and more liquid deposit accounts over longer term certificate accounts and management’s continuing strategy of limiting competition for higher cost term deposits by focusing on relationship balances.

Provision for Loan Losses

Management recorded a $233,000 provision for loan losses for the three month period ended March 31, 2015, compared to a provision of $8,000 for the three month period ended March 31, 2014. The increase is primarily due to increased charge-offs, and increased loan growth compared to the prior year quarter. Charge-offs totaled $654,000 for the three months ended March 31, 2015, as previously discussed, and increased $394,000, compared to $260,000 for the 2014 quarter. During the three months ended March 31, 2015, gross loans increased by $2.2 million, compared to $1.2 million for the same period in 2014.

Noninterest Income

Noninterest income totaled $431,000 for the three month ended March 31, 2015, an increase of $66,000, from $365,000 for the same period in 2014. The increase was primarily due to a $22,000 increase in gain on sale of residential mortgage loans, and a $43,000 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 2015 quarter compared to the 2014 quarter. 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 three month period ended March 31, 2015, an increase of $58,000 from $2.6 million for the three months ended March 31, 2014. This increase includes an $82,000 increase in salaries and employee benefits and a $15,000 increase in loss on sale of foreclosed assets held for sale, partially offset by a $24,000 decrease in occupancy and equipment expense, and a $23,000 decrease in amortization of intangible assets. The increase in salaries and employee benefits was primarily due to increased compensation as a result of merit increases and the addition of new positions, higher post-retirement benefit costs and education and training, partially offset by lower health care costs compared to the prior year quarter. The increase in the loss on foreclosed assets held for sale was due to a loss on the sale of a foreclosed property held for sale in the current year quarter, while there were no related sales in the prior year quarter. The decrease in occupancy and equipment expense was due to lower furniture, fixture and equipment expense and lower computer data expense compared to the prior year quarter. The decrease in amortization of intangible assets was due to a core deposit intangible becoming amortized to zero in May of 2014 resulting in a full quarter of scheduled amortization in the prior year quarter, compared to no amortization in the current year quarter.

Federal Income Taxes

Federal income tax expense totaled $127,000 for the three month period ended March 31, 2015, a decrease of $94,000 compared to $221,000 for three month period ended March 31, 2014. The decrease was primarily due to a $324,000 decrease 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 22.40% compared to 22.80% 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.

 

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, 2014.

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, 2014.

 

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

(a)

Not applicable.

(b)

Not applicable.

(c)

Not applicable.

 

 

ITEM 3.

Defaults Upon Senior Securities

Not applicable.

 

ITEM 4.

Mine Safety Disclosures

 

Not applicable.

 

ITEM 5.

Other Information

Not applicable.

 

ITEM 6.

Exhibits

 

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:	May 8, 2015		By:	/s/H. Stewart Fitz Gibbon III
				H. Stewart Fitz Gibbon III
				President and Chief Executive Officer
Date:	May 8, 2015		By:	/s/Myron Swartzentruber
				Myron Swartzentruber
				Senior Vice President and
				Chief Financial Officer