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, 2016                                         

 

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, 2016, the latest practicable date, 2,781,839 shares of the registrant’s common stock, $.10 par value, were issued and outstanding.

Wayne Savings Bancshares, Inc.

Index

 

	Page
PART I - FINANCIAL INFORMATION
Item 1  Condensed Consolidated Balance Sheets	2
Condensed Consolidated Statements of Income and Comprehensive Income	3
Condensed Consolidated Statements of Cash Flows	4
Notes to Condensed Consolidated Financial Statements	6
Item 2  Management’s Discussion and Analysis of Financial Condition and Results of Operations	34
Item 3  Quantitative and Qualitative Disclosures About Market Risk	44
Item 4  Controls and Procedures	44
PART II - OTHER INFORMATION
Item 1  Legal Proceedings	45
Item 1A  Risk Factors	45
Item 2  Unregistered Sales of Equity Securities and Use of Proceeds	45
Item 3  Defaults Upon Senior Securities	45
Item 4  Mine Safety Disclosures	45
Item 5  Other Information	46
Item 6  Exhibits	46
SIGNATURES	47

 

Wayne Savings Bancshares, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

 

		March 31, 2016				December 31, 2015
		(Unaudited)
Assets
Cash and due from banks		$	4,512			$	3,487
Interest-bearing deposits			3,624				7,669
Cash and cash equivalents			8,136				11,156
Available-for-sale securities			89,258				95,347
Held-to-maturity securities			8,288				8,307
Loans, net of allowance for loan losses of $2,771and $2,837           at March 31, 2016 and December 31, 2015, respectively			306,121				293,121
Premises and equipment, net			6,639				6,663
Federal Home Loan Bank stock			4,226				4,226
Foreclosed assets held for sale, net			44				14
Accrued interest receivable			1,348				1,149
Bank-owned life insurance			9,621				9,554
Goodwill			1,719				1,719
Other assets			1,927				1,893
Prepaid federal income taxes			268				483
Total assets		$	437,595			$	433,632
Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand		$	99,822			$	101,532
Savings and money market			135,571				132,089
Time			130,181				128,806
Total deposits			365,574				362,427
Other short-term borrowings			6,238				5,606
Federal Home Loan Bank advances			21,000				21,000
Interest payable and other liabilities			3,466				4,258
Deferred federal income taxes			613				436
Total liabilities			396,891				393,727
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			36,022				36,017
Retained earnings			21,520				21,060
Shares acquired by ESOP			(325	)			(343	)
Accumulated other comprehensive income (loss)			25				(291	)
Treasury stock, at cost: Common: 1,196,892 shares at           March 31, 2016 and December 31, 2015			(16,936	)			(16,936	)
Total stockholders’ equity			40,704				39,905
Total liabilities and stockholders’ equity		$	437,595			$	433,632

  

 

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Income and Comprehensive Income

For the three months ended March 31, 2016 and 2015

(In thousands, except per share data)

(Unaudited)

 

		Three Months Ended March 31,
		2016				2015
Interest and Dividend Income
Loans		$	3,169			$	2,810
Securities			628				704
Dividends on Federal Home Loan Bank stock and other			44				44
Total interest and dividend income			3,841				3,558
Interest Expense
Deposits			421				392
Other short-term borrowings			2				2
Federal Home Loan Bank advances			70				92
Total interest expense			493				486
Net Interest Income			3,348				3,072
Provision (Credit) for Loan Losses			(67	)			233
Net Interest Income After Provision (Credit) for Loan Losses			3,415				2,839
Noninterest Income
Gain on loan sales			48				47
Earnings on bank-owned life insurance			73				72
Service fees, charges and other operating			331				312
Total noninterest income			452				431
Noninterest Expense
Salaries and employee benefits			1,686				1,575
Net occupancy and equipment expense			527				487
Federal deposit insurance premiums			71				60
Franchise taxes			88				66
Other			536				515
Total noninterest expense			2,908				2,703
Income Before Federal Income Taxes			959				567
Provision for Federal Income Taxes			252				127
Net Income		$	707			$	440
Other comprehensive income:
Unrealized gains  on available-for-sale securities			479				224
Tax expense			(163	)			(76	)
Other comprehensive income			316				148
Total comprehensive income		$	1,023			$	588
Basic Earnings Per Share		$	0.26			$	0.16
Diluted Earnings Per Share		$	0.26			$	0.16
Dividends Per Share		$	0.09			$	0.09

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows

For the three months ended March 31, 2016 and 2015

(In thousands)

(Unaudited)

 

		Three months Ended March 31,
		2016				2015
Operating Activities
Net income		$	707			$	440
Items not requiring (providing) cash
Depreciation and amortization			157				140
Provision (Credit) for loan losses			(67	)			233
Amortization of premiums and discounts on securities			283				329
Amortization of mortgage servicing rights			7				8
Amortization of deferred loan origination fees			(36	)			(17	)
Increase in value of bank-owned life insurance			(67	)			(67	)
Amortization expense of stock benefit plan			22				24
Provision for impairment on foreclosed assets held for sale			3				—
Loss on sale of foreclosed assets held for sale			4				15
Loss on sale of premises and equipment			—				2
Net gain on sale of loans			(48	)			(47	)
Proceeds from sale of loans in the secondary market			1,114				1,425
Origination of loans for sale in the secondary market			(1,066	)			(1,378	)
Deferred income taxes			14				167
Changes in
Accrued interest receivable			(199	)			(177	)
Other assets			174				(364	)
Interest payable and other liabilities			(310	)			(188	)
Net cash provided by operating activities			692				545
Investing Activities
Purchase of available-for-sale securities			—				(1,927	)
Purchase of  held-to-maturity securities			—				(1,306	)
Proceeds from maturities and paydowns of available-for-sale securities			6,291				6,461
Proceeds from maturities and paydowns of held-to-maturity securities			13				15
Net change in loans			(13,003	)			(2,840	)
Purchase of premises and equipment			(133	)			(39	)
Proceeds from the sale of foreclosed assets			70				44
Net cash (used) provided by investing activities		$	(6,762	)		$	408

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (continued)

For the three months ended March 31, 2016 and 2015

(In thousands)

(Unaudited)

		Three months Ended March 31,
		2016				2015
Financing Activities
Net change in deposits		$	3,147			$	961
Net change in other short-term borrowings			632				76
Proceeds from Federal Home Loan Bank advances			13,375				21
Repayments of Federal Home Loan Bank advances			(13,375	)			—
Advances by borrowers for taxes and insurance			(482	)			(445	)
Dividends on common stock			(247	)			(249	)
Net cash provided in financing activities			3,050				364
Change in Cash and Cash Equivalents			(3,020	)			1,317
Cash and Cash Equivalents, Beginning of period			11,156				10,783
Cash and Cash Equivalents, End of period		$	8,136			$	12,100
Supplemental Cash Flows Information
Interest paid on deposits and borrowings		$	492			$	468
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Transfers from loans to foreclosed assets held for sale		$	106			$	—
Recognition of mortgage servicing rights		$	16			$	21
Dividends payable		$	250			$	253

 

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, 2016 and for the three months ended March 31, 2016 and 2015, 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, 2015 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, 2016, 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, 2015, 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 fair values, together with gross unrealized gains and losses, of securities are as follows:

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In thousands)
Available-for-sale securities
March 31, 2016:
U.S. government agencies		$	98			$	1			$	—			$	99
Mortgage-backed securities of           government sponsored entities			70,962				801				194				71,569
Private-label collateralized mortgage           obligations			221				1				—				222
State and political subdivisions			16,720				681				33				17,368
Totals		$	88,001			$	1,484			$	227			$	89,258

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Available-for-sale securities		(In thousands)
December 31, 2015:
U.S. government agencies		$	101			$	—			$	—			$	101
Mortgage-backed securities of           government sponsored entities			75,972				662				530				76,104
Private-label collateralized mortgage           obligations			274				3				—				277
State and political subdivisions			18,224				677				36				18,865
Totals		$	94,571			$	1,342			$	566			$	95,347

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
		(In thousands)
Held-to-maturity Securities:
March 31, 2016:
U.S. government agencies		$	80			$	—			$	—			$	80
Mortgage-backed securities of           government sponsored entities			1,040				14				—				1,054
State and political subdivisions			7,168				65				75				7,158
Totals		$	8,288			$	79			$	75			$	8,292

 

		Amortized Cost				Gross Unrealized Gains				Gross Unrealized Losses				Fair Value
Held-to-maturity Securities:		(In thousands)
December 31, 2015:
U.S. government agencies		$	82			$	—			$	—			$	82
Mortgage-backed securities of           government sponsored entities			1,052				5				—				1,057
State and political subdivisions			7,173				29				136				7,066
Totals		$	8,307			$	34			$	136			$	8,205

  

 

Amortized cost and fair value of available-for-sale securities and held-to-maturity securities at March 31, 2016 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		$	5,152			$	5,393			$	1,412			$	1,421
Five to ten years			3,426				3,559				2,958				2,968
After ten years			8,240				8,515				2,878				2,849
			16,818				17,467				7,248				7,238
Mortgage-backed securities of      government sponsored entities			70,962				71,569				1,040				1,054
Private-label collateralized mortgage      obligations			221				222				—				—
Totals		$	88,001			$	89,258			$	8,288			$	8,292

 

The carrying value of securities pledged as collateral to secure public deposits and for other purposes was $55.3 million at both March 31, 2016 and December 31, 2015.

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, 2016 and December 31, 2015, was $37.3 million and $53.8 million, which represented approximately 38% and 52%, respectively, of the Company’s total aggregate fair value 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, 2016.

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 temporarily impaired investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

 

 

		March 31, 2016
		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		$	19,623			$	63			$	13,897			$	131			$	33,520			$	194
State and political subdivisions			1,895				13				1,850				95				3,745				108
Total temporarily impaired      securities		$	21,518			$	76			$	15,747			$	226			$	37,265			$	302

 

		December 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		$	32,930			$	269			$	14,560			$	261			$	47,490			$	530
State and political subdivisions			3,756				50				2,515				122				6,271				172
Total temporarily impaired      securities		$	36,686			$	319			$	17,075			$	383			$	53,761			$	702

 

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 collectibility of a loan balance is in question. 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, 2016 and 2015:

Three months ended March 31, 2016		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans				Total
		(In thousands)
Beginning balance		$	1,346			$	1,210			$	279			$	2			$	2,837
Provision (Credit)         charged to expense			(68	)			(3	)			2				2				(67	)
Losses charged off			—				—				—				—				—
Recoveries			1				—				—				—				1
Ending balance		$	1,279			$	1,207			$	281			$	4			$	2,771

 

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

 

 

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, 2016 and December 31, 2015:

 

March 31, 2016		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		$	448			$	21			$	29			$	—			$	498
Collectively evaluated for           impairment			831				1,186				252				4				2,273
Total allowance for loan losses		$	1,279			$	1,207			$	281			$	4			$	2,771
Loan Balances:
Ending balance:
Individually evaluated for           impairment		$	1,682			$	1,220			$	29			$	—			$	2,931
Collectively evaluated for           impairment			179,774				112,031				19,904				1,973				313,682
Total balance		$	181,456			$	113,251			$	19,933			$	1,973			$	316,613

 

December 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		$	506			$	13			$	33			$	—			$	552
Collectively evaluated for           impairment			840				1,197				246				2				2,285
Total allowance for loan losses		$	1,346			$	1,210			$	279			$	2			$	2,837
Loan Balances:
Ending balance:
Individually evaluated for           impairment		$	2,789			$	1,061			$	33			$	—			$	3,883
Collectively evaluated for           impairment			176,943				104,060				17,998				1,904				300,905
Total balance		$	179,732			$	105,121			$	18,031			$	1,904			$	304,788

 

Total loans in the above tables do not include deferred loan origination fees of $778 and $765 or loans in process of $6.9 million and $8.1 million, respectively, for March 31, 2016 and December 31, 2015.

 

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, 2016 and December 31, 2015:

 

March 31, 2016		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans
		(In thousands)
Rating *
Pass (Risk 1-4)		$	174,387			$	110,784			$	19,801			$	1,973
Special Mention (Risk 5)			573				143				103				—
Substandard (Risk 6)			6,496				2,324				29				—
Total		$	181,456			$	113,251			$	19,933			$	1,973

 

December 31, 2015		One-to-four family residential				All other mortgage loans				Commercial business loans				Consumer loans
		(In thousands)
Rating *
Pass (Risk 1-4)		$	172,617			$	100,961			$	17,893			$	1,904
Special Mention (Risk 5)			1,406				1,881				105				—
Substandard (Risk 6)			5,709				2,279				33				—
Total		$	179,732			$	105,121			$	18,031			$	1,904

 

* 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, 2016 and December 31, 2015:

 

March 31, 2016		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		$	468			$	44			$	568			$	1,080			$	180,376			$	181,456			$	—
All other mortgage      loans			177				63				258				498				112,753				113,251				—
Commercial      business loans			44				—				—				44				19,889				19,933				—
Consumer loans			—				—				—				—				1,973				1,973				—
Total		$	689			$	107			$	826			$	1,622			$	314,991			$	316,613			$	—

 

December 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		$	516			$	329			$	903			$	1,748			$	177,984			$	179,732			$	—
All other mortgage      loans			298				—				209				507				104,614				105,121				—
Commercial      business loans			68				—				—				68				17,963				18,031				—
Consumer loans			—				—				—				—				1,904				1,904				—
Total		$	882			$	329			$	1,112			$	2,323			$	302,465			$	304,788			$	—

 

 

Nonaccrual loans were comprised of the following at:

Nonaccrual loans		March 31, 2016				December 31, 2015
		(In thousands)
One-to-four family residential loans		$	1,632			$	1,733
Nonresidential real estate loans			355				208
All other mortgage loans			—				—
Commercial business loans			—				—
Consumer loans			—				—
Total		$	1,987			$	1,941

 

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, 2016 and December 31, 2015 in combination with activity for the three months ended March 31, 2016 and 2015 is presented below:

 

		As of March 31, 2016												Three months ended March 31, 2016
		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		$	905			$	919			$	—			$	1,065			$	10
All other mortgage loans			1,038				1,038				—				519				17
Commercial business loans			—				—				—				—				—
Loans with a specific valuation      allowance
One-to-four family residential      loans			777				777				448				1,171				—
All other mortgage loans			182				182				21				622				—
Commercial business loans			29				29				29				31				1
Total:
One-to-four family residential      loans		$	1,682			$	1,696			$	448			$	2,236			$	10
All other mortgage loans			1,220				1,220				21				1,141				17
Commercial business loans			29				29				29				31				1
		$	2,931			$	2,945			$	498			$	3,408			$	28

 

 

		As of December 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		$	1,224			$	1,238			$	—			$	1,610			$	12
All other mortgage loans			—				—				—				530				18
Commercial business loans			—				—				—				—				—
Loans with a specific valuation      allowance
One-to-four family residential      loans			1,565				1,875				506				1,528				12
All other mortgage loans			1,061				1,061				13				18				—
Commercial business loans			33				33				33				136				1
Total
One-to-four family residential      loans		$	2,789			$	3,113			$	506			$	3,138			$	24
All other mortgage loans			1,061				1,061				13				548				18
Commercial business loans			33				33				33				136				1
		$	3,883			$	4,207			$	552			$	3,822			$	43

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 $415,000 of TDR classifications that occurred in the 2016 period and included the renewal of an interest only loan as the customer repayments had not been in accordance with the original loan terms.

 

 

The remaining loans are to the same borrower and are on a nonaccrual status. There were no TDR classifications that occurred during the 2015 period. 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, 2016 and 2015. 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, 2016

All other mortgage loans

8

$

415

$

415

 

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, 2016 and December 31, 2015.

 

		March 31, 2016				December 31, 2015
		Recorded Investment
		(In thousands)
One-to-four family residential loans		$	44			$	14

 

 

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, 2016 and December 31, 2015.

 

		March 31, 2016				December 31, 2015
		Recorded Investment
		(In thousands)
One-to-four family residential loans		$	209			$	171

 

Note 5:     Goodwill

 

The following table presents the balance of goodwill at March 31, 2016 and December 31, 2015:

 

		March 31, 2016				December 31, 2015
		(In thousands)
Goodwill		$	1,719			$	1,719
Total		$	1,719			$	1,719

 

The Company is required to annually test goodwill for impairment or more frequently if impairment indicators exist. The Company’s testing of goodwill at November 30, 2015 indicated there was no impairment in the carrying value of the related asset.

Note 6:     Repurchase Agreements

Repurchase agreements are offered by the Bank to commercial business customers to provide them with an opportunity to earn a return on their excess cash balances. These repurchase agreements are considered secured borrowings and are reported in other short-term borrowings. On a daily basis the Bank transfers securities to these customers in exchange for their cash and subsequently agrees to repurchase those same securities the next business day. In the event the Bank is unable to repurchase the securities from the customer, the customer will then have a claim against those securities.

The following tables present the contractual maturity of the repurchase agreements, and the fair value and type of securities pledged as collateral in exchange for these short-term borrowings at March 31, 2016 and December 31, 2015.

 

		Remaining Contractual Maturity of the Agreements
		Overnight and Continuous				Up to 30 Days				30 - 90 Days				Greater Than 90 Days				Total
March 31, 2016		(In thousands)
Repurchase Agreements
Mortgage-backed securities           of government           sponsored entities		$	6,238			$	—			$	—			$	—			$	6,238
Gross amount of recognized liabilities for repurchase agreements included in other short-term borrowings																		$	6,238

 

		Remaining Contractual Maturity of the Agreements
		Overnight and Continuous				Up to 30 Days				30 - 90 Days				Greater Than 90 Days				Total
December 31, 2015		(In thousands)
Repurchase Agreements
Mortgage-backed securities           of government           sponsored entities		$	5,606			$	—			$	—			$	—			$	5,606
Gross amount of recognized liabilities for repurchase agreements included in other short-term borrowings																		$	5,606

 

Note 7:     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, 2016 or March 31, 2015.

The computations are as follows:

		Three months ended March 31,
		2016				2015
Net income (in thousands)		$	707			$	440
Weighted-average common shares outstanding			2,747,567				2,765,249
Net income per share		$	0.26			$	0.16

Note 8:     Regulatory Matters

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

The Bank must give notice to, 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 following table) 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, 2016, that the Bank met all capital adequacy requirements to which it is subject.

As of March 31, 2016, 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, 2016, that management believes have changed the Bank’s capital classification.

The Bank’s actual capital amounts and ratios as of March 31, 2016 and December 31, 2015 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, 2016
Tier I Capital to average assets		$	38,238				8.8%			$	17,287				4.0%			$	21,609				5.0%
Tier 1 Common equity capital to risk-      weighted assets			38,238				13.1%				13,112				4.5%				18,939				6.5%
Tier I Capital to risk-weighted assets			38,238				13.1%				17,482				6.0%				23,310				8.0%
Total Risk-based capital to risk-      weighted assets			41,009				14.1%				23,310				8.0%				29,137				10.0%
As of December 31, 2015
Tier I Capital to average assets		$	37,524				8.8%			$	17,092				4.0%			$	21,365				5.0%
Tier 1 Common equity capital to risk-      weighted assets			37,524				13.4%				12,645				4.5%				18,265				6.5%
Tier I Capital to risk-weighted assets			37,524				13.4%				16,860				6.0%				22,480				8.0%
Total Risk-based capital to risk-      weighted assets			40,361				14.4%				22,480				8.0%				28,099				10.0%

 

Effective January 1, 2015, new regulatory capital requirements commonly referred to as “Basel III” were implemented and are reflected in the 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.

Implementation of the deductions and other adjustments to Common Equity Tier 1 (CET1) began on January 1, 2015, and will phase in over a four-year period (beginning at 40% on January 1, 2015, and an additional 20% per year thereafter).  Under the new rule, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of CET1 capital above its minimum risk-based capital requirements.  The implementation of the capital conservation buffer begins on January 1, 2016, at the 0.625% level and will phase in over a four-year period (increasing by that amount on each subsequent January 1 until it reaches 2.5% on January 1, 2019).

Note 9:     Accumulated Other Comprehensive Income (Loss)

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

		Gross Unrealized Gains on Available-for- Sale Securities				Net Unrealized Loss for Unfunded Status of Split- Dollar Life Insurance Plan Liability (tax-free)				Gross Unrealized Loss for Unfunded Status of Defined Benefit Plan				Tax Effect				Total Accumulated Other Comprehensive Income (Loss)
		(In thousands)
March 31, 2016		$	1,256			$	(89	)		$	(1,083	)		$	(59	)		$	25
December 31, 2015		$	777			$	(89	)		$	(1,083	)		$	104			$	(291	)

 

There were no amounts reclassified out of accumulated other comprehensive income (loss) during the three months ended March 31, 2016 or 2015.

Note 10:     Fair Value Measurements

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

Level 1

Quoted prices in active markets for identical assets or liabilities

Level 2

Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3

Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Recurring Measurements

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

Available-for-sale Securities

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

The following table presents the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at March 31, 2016 and December 31, 2015:

						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, 2016
U.S. government agencies		$	99			$	—			$	99			$	—
Mortgage-backed securities of           government sponsored entities			71,569				—				71,569				—
Private-label collateralized mortgage           obligations			222				—				222				—
State and political subdivisions			17,368				—				17,368				—

						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, 2015
U.S. government agencies		$	101			$	—			$	101			$	—
Mortgage-backed securities of           government sponsored entities			76,104				—				76,104				—
Private-label collateralized mortgage           obligations			277				—				277				—
State and political subdivisions			18,865				—				18,865				—

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, 2016 and December 31, 2015.

 

						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, 2016
Collateral-dependent           impaired loans		$	79			$	—			$	—			$	79
Foreclosed assets			7				—				—				7
December 31, 2015
Collateral-dependent           impaired loans		$	292			$	—			$	—			$	292
Foreclosed assets			5				—				—				5

 

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

Weighted Average

March 31, 2016

Collateral-dependent           impaired loans

$

79

Market comparable properties, less estate settlements/costs

Estate costs/Settlement

N/A

Foreclosed assets

7

Agreed upon selling price

N/A

N/A

December 31, 2015

Collateral-dependent           impaired loans

$

292

Market comparable properties, less delinquent real estate taxes

N/A

N/A

Foreclosed assets

5

Agreed upon selling price

Selling Costs

10%

 

There were no changes in the inputs or methodologies used to determine fair value at March 31, 2016 as compared to December 31, 2015.

 

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, 2016
Financial assets
Cash and cash equivalents		$	8,136			$	8,136			$	—			$	—
Held-to-maturity           securities			8,288				—				8,292				—
Loans, net of allowance           for loan losses			306,121				—				—				320,389
Federal Home Loan Bank           stock			4,226				—				4,226				—
Interest receivable			1,348				—				1,348				—
Financial liabilities
Deposits			365,574				42,152				304,689				—
Other short-term           borrowings			6,238				—				6,238				—
Federal Home Loan Bank           advances			21,000				—				21,186				—
Advances from borrowers           for taxes and insurance			758				—				758				—
Interest payable			41				—				41				—

 

						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, 2015
Financial assets
Cash and cash equivalents		$	11,156			$	11,156			$	—			$	—
Held-to-maturity           securities			8,307				—				8,205
Loans, net of allowance           for loan losses			293,121				—				—				302,595
Federal Home Loan Bank           stock			4,226				—				4,226				—
Interest receivable			1,149				—				1,149				—
Financial liabilities
Deposits			362,427				42,630				295,796				—
Other short-term           borrowings			5,606				—				5,606				—
Federal Home Loan Bank           advances			21,000				—				20,978				—
Advances from borrowers           for taxes and insurance			1,240				—				1,240				—
Interest payable			40				—				40				—

 

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, 2016 and December 31, 2015.

Note 11:     Recent Accounting Developments

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. The adoption of this standard did not 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. The adoption of this standard did not 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. The adoption of this standard did not 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. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

 

FASB ASU 2015-10, Technical Corrections and Improvements was issued in June, 2015. The amendments in this Update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to entities. The amendments in this Update that require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon the issuance of this update. The adoption of the amendments that required transition guidance did not have a material impact on the Company’s consolidated financial statements. The adoption of the other amendments in this update did not have a material impact on the Company’s consolidated financial statements.

FASB ASU 2015-14, Revenue from Contracts with Customers, (Topic 606), Deferral of the effective date, was issued in August, 2015. In May 2014, the FASB issued Accounting Standards Update 2014-9, Revenue from Contracts with Customers (ASU 2014-9), which outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. ASU 2014-9 was originally effective for fiscal years and interim periods within those years beginning after December 15, 2016. In August 2015, the FASB issued 2015-14, which deferred the effective date of ASU 2014-9 by one year for periods beginning after December 15, 2017. Early adoption is permitted as of the original effective date and requires either a retrospective or a modified restrospective approach to adoption. The Company is currently evaluating the potential impact on its consolidated financial statements and related notes, as well as the available transition methods.

FASB ASU 2015-15, Interest – Imputation of Interest (Subtopic 835-30), Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements was issued in August, 2015. The amendments in this Update address line-of-credit arrangements. In that, given the absence of authoritative guidance within Update 2015-03 for debt issuance costs related to line-of-credit arrangements, the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the terms of the line-of-credit arrangement. 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. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

FASB ASU 2015-16, Business Combinations (Topic 805), Simplifying the Accounting for Measurement-Period Adjustments was issued in September 2015. The amendments in this Update require that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments in this Update require that the acquirer record, in the same period’s financial statements, the effect on earnings of changes in depreciation, amortization, or other income effects, if any as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. The amendments in this Update are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. The amendments in this Update should be applied prospectively to adjustments to provisional amounts that occur after the effective date. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

FASB ASU 2016-01, Financial Instruments–Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities was issued in January 2016. The amendments in this Update make targeted improvements to generally accepted accounting principles, and address certain aspects of recognition, measurement, presentation, and disclosure of financial statements. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Except as specifically stated, early adoption of the amendments in this Update are not permitted. This standard is not expected to have a material impact on the Company’s consolidated financial statements.

FASB ASU 2016-02, Leases (Topic 842), Section A- Leases, Amendments to the FASB Accounting Standards Codification, Section B – Conforming Amendments Related to Leases: Amendments to the FASB Accounting Standards Codification, and Section C – Background Information and Basis for Conclusions was issued in February 2016. The amendments in this Update are designed to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. The amendments in this Update include disclosures that are required by lessees and lessors to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. The amendments in this Update are effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application of the amendments in this Update is permitted. This standard is not expected to have a material impact on the Company’s consolidated financial statements.

FASB ASU 2016-04, Liabilities-Extinguishments of Liabilities (Subtopic 405-20), was issued in March 2016. The amendments in this Update apply to entities that offer certain prepaid stored-value products, including prepaid gift cards, prepaid telecommunication cards, and travelers checks. The amendments in this Update contain specific guidance for the derecognition of pre-paid stored value product liabilities and are an improvement to GAAP because they specify how pre-paid stored-value product liabilities with the Update’s scope should be derecognized. The amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Earlier application is permitted, including adoption in an interim period. This standard is not expected to have a material impact on the Company’s consolidated financial statements.

FASB ASU 2016-10, Revenue from Contracts with Customers, (Topic 606), Identifying Performance Obligations and Licensing was issued in April 2016. The core principle of the guidance in Topic 606 is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments in this Update clarify the following two aspects in Topic 606, identifying performance obligations and the licensing implementation guidance, while retaining the related principles for those areas. The amendments in this Update affect the guidance in Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606), which is not yet effective. The effective date and transition requirements for the amendments in this Update are the same as the effective date and transition requirements in Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date, defers the effective date of Update 2014-09 by one year. This standard is not expected to have a material impact on the Company’s consolidated financial statements.

 

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:

·

A strategic focus on core mission, vision and values statements that emphasize a balanced and sustainable approach to shareholder returns, customer and community relationships and staff development.

 

·

Continued enhancement of balance sheet assets to increase higher yielding, on a risk-adjusted basis, and/or shorter duration commercial business and real estate (including commercial loans secured by residential real estate) and consumer (including home equity lines of credit secured by residential real estate) loans, while maintaining a residential mortgage loan portfolio and reducing, subject to liquidity constraints, the investment securities portfolio.

 

·

Continued attention to balance sheet liabilities to enhance customer relationships through value -added services that are priced to generate acceptable returns to shareholders while managing risk, particularly liquidity and interest rate risks.

 

·

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 staffing levels and facilities, monitoring customer and transaction volume to ensure appropriate staffing and to justify continued operations if volume levels decrease. Management also continues to evaluate opportunities to add talent tied to revenue-producing activities and contiguous market areas.

 

·

Continued technology upgrades are scheduled to facilitate improved and 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 policy relates 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 repayment as of the reporting date. Such evaluation, which includes a review of all loans on which full repayment 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.

Discussion of Financial Condition Changes from December 31, 2015 to March 31, 2016

At March 31, 2016, the Company had total assets of $437.6 million, an increase of $4.0 million, from total assets at December 31, 2015. The increase in total assets includes a $13.0 million increase in net loans, partially offset by a $3.0 million decrease in cash and cash equivalents and a $6.1 million decrease in securities balances compared to December 31, 2015.

Total securities decreased $6.1 million to $97.5 million at March 31, 2016, compared to $103.6 million at December 31, 2015. 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 $6.3 million and amortization of premiums of $283,000, partially offset by a $480,000 increase in unrealized gains on available-for-sale securities during the three months ended March 31, 2016.

Net loans receivable increased $13.0 million at March 31, 2016 compared to December 31, 2015. The Bank originated $24.0 million of loans, received payments of $10.0 million, and originated and sold $1.1 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.

 

The allowance for loan losses totaled $2.8 million and decreased $66,000 compared to December 31, 2015 due mainly to the provision for loan losses credit of $67,000. The aforementioned provision for loan losses credit was due to reduced loss history and favorable economic factors, including reduced past due loan balances and a reduced number of local foreclosures compared to December, partially offset by additional allocation associated with increased loan balances.

 

 

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. Loans sold into the secondary market are sold with representations and warranties. In the event that those representations and warranties are violated, repurchase of loans may be required. No repurchases have been required in recent periods and management believes that the bank is in full compliance with applicable selling and servicing guides. 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 likely decline, as loans generally require a higher allocation of risk-based capital compared to investments. 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, 2016								December 31, 2015
		Balance				Percent of total loans				Balance				Percent of total loans
		(Dollars in thousands)
Mortgage loans:
One-to-four family residential(1)		$	181,456				57.30	%		$	179,732				58.97	%
Residential construction loans			5,598				1.77	%			6,177				2.03	%
Multi-family residential			12,555				3.97	%			12,474				4.09	%
Nonresidential real estate/land(2)			95,098				30.04	%			86,470				28.37	%
Total mortgage loans			294,707				93.08	%			284,853				93.46	%
Other loans:
Consumer loans(3)			1,973				0.62	%			1,904				0.62	%
Commercial business loans			19,933				6.30	%			18,031				5.92	%
Total other loans			21,906				6.92	%			19,935				6.54	%
Total loans before net items			316,613				100.00	%			304,788				100.00	%
Less:
Loans in process			6,943								8,065
Deferred loan origination fees			778								765
Allowance for loan losses			2,771								2,837
Total loans receivable, net		$	306,121							$	293,121

(1)

Includes equity loans collateralized by second mortgages in the aggregate amount of $15.1 million at March 31, 2016 and $15.3 million at December 31, 2015. Such loans are secured by one-to-four family residential properties and are underwritten to conform with bank loan policies.

(2)

Includes commercial loans secured by residential real estate of $29.7 million at March 31, 2016 and $29.4 million at December 31, 2015.

(3)

Includes land loans of $3.5 million at March 31, 2016 and $3.6 million for December 31, 2015.

(4)

Includes second mortgage loans of $309 at March 31, 2016 and $332 at December 31, 2015.

 

Foreclosed assets held for sale totaled $44,000 at March 31, 2016, an increase of $30,000, compared to $14,000 at December 31, 2015. The increase in foreclosed assets during the current year quarter was due to additions of properties totaling $106,000 and a $3,000 decrease in the provision for loss on foreclosed assets, partially offset by sales totaling $80,000 that resulted in a net loss of $4,000. During the prior year period there were sales totaling $44,000 that resulted in a loss of $15,000. Total impaired assets were $3.0 million, or 0.68% of total assets at March 31, 2016, compared to $3.9 million, or 0.90% of total assets December 31, 2015.

 

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, 2015. Management believes that there were no interim impairment indicators that would require another evaluation at March 31, 2016.

Deposits totaled $365.6 million at March 31, 2016, an increase of $3.2 million from $362.4 million at December 31, 2015. This increase includes a $3.5 million increase in savings and money market balances and a $1.4 million increase in time deposits, partially offset by a $1.7 million decrease in demand deposits. The Company continues to monitor deposit activity closely to respond to changes in customer preference for types of deposits and competitive pressure.

 

Other short-term borrowings, which consist solely of repurchase agreements with commercial customers of the Bank, increased by $632,000 and totaled $6.2 million at March 31, 2016. The increase was due to an increase in excess funds held by those commercial customers holding repurchase agreements. 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, 2016 and December 31, 2015.

Advances from the Federal Home Loan Bank (FHLB) totaled $21.0 million, at both March 31, 2016 and December 31, 2015. 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 1.29% at March 31, 2016 compared to 1.86% at December 31, 2015.

 

Stockholders’ equity increased by $799,000 during the period ended March 31, 2016. This increase was due to net income of $707,000 and a $316,000 increase in unrealized gains on available-for-sale securities, partially offset by $247,000 in shareholder dividends.

 

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,
		2016												2015
		Average Balance				Interest				Average Rate				Average Balance				Interest				Average Rate
		(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1)		$	298,812			$	3,169				4.24	%		$	266,302			$	2,810				4.22	%
Investment securities(2)			101,074				628				2.49	%			113,826				704				2.47	%
Interest-earning deposits(3)			9,795				44				1.80	%			12,627				44				1.39	%
Total interest-earning assets			409,681				3,841				3.75	%			392,755				3,558				3.62	%
Noninterest-earning assets			24,208												24,004
Total assets		$	433,889											$	416,759
Interest-bearing liabilities:
Deposits		$	361,881			$	421				0.47	%		$	348,533			$	392				0.45	%
Other short-term borrowings			5,867				2				0.14	%			6,944				2				0.12	%
Borrowings			21,649				70				1.29	%			16,448				92				2.24	%
Total interest-bearing liabilities			389,397				493				0.51	%			371,925				486				0.52	%
Noninterest-bearing  liabilities			4,101												4,488
Total liabilities			393,498												376,413
Stockholders’ equity			40,391												40,346
Total liabilities and stockholders’ equity		$	433,889											$	416,759
Net interest income						$	3,348											$	3,072
Interest rate spread(4)											3.24	%											3.10	%
Net yield on interest-earning assets(5)											3.27	%											3.13	%
Ratio of average interest-earning assets to      average  interest-bearing liabilities											105.21	%											105.60	%

 

 

⁽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.

 

 

Comparison of Operating Results for the Three Months Ended March 31, 2016 and 2015

General

Net income for the three months ended March 31, 2016, totaled $707,000, an increase of $267,000, compared to $440,000 for the three month period ended March 31, 2015. The increase in net income was due to an increase in both net interest income and noninterest income, and a decrease in the provision for loan losses, partially offset by an increase in both noninterest expense and the provision for federal income taxes.

Interest Income

Interest income increased $283,000, and totaled $3.8 million for the three month period ended March 31, 2016, compared to $3.6 million for the three month period ended March 31, 2015. The increase was due to both an increase in the average balance of interest-earning assets and the weighted-average yield. The average balance of interest-earning assets increased by $16.9 million and totaled $409.7 million for the 2016 period from $392.8 million in the 2015 period. The weighted-average yield was 3.75% for the three months ended March 31, 2016, and increased by 13 basis points compared to 3.62% for the three months ended March 31, 2015.

Interest income on loans was $3.2 million for the three month period ended March 31, 2016, and increased $359,000 compared to the three month period ended March 31, 2015. This increase was primarily due to a $32.5 million increase in the average balance of loans from $266.3 million in the 2015 period to $298.8 million for the 2016 period. In addition to the increase in the average balance of loans outstanding, the weighted-average yield also increased by 2 basis points from 4.22% for the three months ended March 31, 2015 to 4.24% for the three months ended March 31, 2016.

Interest income on securities decreased $76,000 during the three months ended March 31, 2016, compared to the same period in 2015. This decrease was primarily due to a $12.7 million decrease in the average balance of investment securities, from $113.8 million in the 2015 period to $101.1 million in the 2016 period. The decrease in the average balance was partially offset a 2 basis point increase in weighted-average rate from 2.47% in the 2015 period to 2.49% for the 2016 period. The decrease in the average balance was due to investing excess cash into the loan portfolio, while the increase in yield was primarily due to a decrease in prepayments causing a decrease in premium amortization for the quarter.

Dividends on Federal Home Loan Bank stock and other income was $44,000 for both of the three month periods ended March 31, 2016 and March 31, 2015. The weighted-average rate increased 41 basis points from 1.39% in the 2015 period to 1.80% in the 2016 period. This increase in the weighted-average rate was fully offset by a $2.8 million decrease in the average balance.

Interest Expense

Interest expense totaled $493,000 for the three month period ended March 31, 2016, an increase of $7,000 compared to the three month period ended March 31, 2015. The increase was due to a $17.5 million increase in the average balance of total interest-bearing liabilities from $371.9 million in the 2015 period to $389.4 million in the 2016 period, partially offset by a 1 basis point decrease in the weighted-average cost of funds from 0.52% in the 2015 period to 0.51% in the current year period.

 

Interest expense on deposits for the three month period ended March 31, 2016 totaled $421,000, an increase of $29,000 compared to $392,000 for the same period in the previous year. The increase was primarily due to a $13.4 million increase in the average balance from $348.5 million in the 2015 period to $361.9 million in the 2016 period. The weighted-average cost of deposits also increased by 2 basis points, from 0.45% in the 2015 period to 0.47% in the 2016 period. The increase in interest expense on deposits is mainly due to an increase in the average balance, combined with the effect of competitive conditions and overall market conditions that resulted in an increase in the cost of deposits.

Interest expense on other short-term borrowings totaled $2,000 for both of the three month periods ended March 31, 2016, and March 31, 2015. The weighted-average cost of short-term borrowings increased 2 basis points from 0.12% in the 2015 period to 0.14% in the 2016 period. This increase in the weighted-average cost was fully offset by a $1.1 million decrease in the average balance of short-term borrowings.

Interest expense on Federal Home Loan Bank advances totaled $70,000 for the three month period ended March 31, 2016, a decrease of $22,000 from $92,000 in the 2015 period. The decrease was primarily due to a 95 basis point decrease in the weighted-average cost from 2.24% in the 2015 period to 1.29% in the 2016 period. The decrease in the weighted-average cost was partially offset by a $5.2 million increase in the average balance outstanding from $16.4 million in the 2015 period to $21.6 million in the 2016 period. The decrease in the weighted-average cost was due to the maturity of higher rate advances, while the increase in the average balance was due to the addition of new lower cost fixed-rate term advances in excess of the scheduled maturities of fixed-rate term advances in lieu of higher cost retail or wholesale deposits.

Net Interest Income

Net interest income totaled $3.3 million for the three months ended March 31, 2016, and increased $276,000 compared to the three month period ended March 31, 2015. The increase in net interest income was primarily due to a $16.9 million increase in the average balance of interest-earning assets and a favorable shift in the composition of earning assets compared to the prior year quarter. The increase in the average balance of earning assets was substantially due to a $32.5 million increase in the average balance of higher yielding loans, partially offset by a $15.6 million decline in lower yielding investments and interest-earning deposits compared to the prior year quarter. This increase was also due to a 14 basis point increase in the net interest spread from 3.10% at March 31, 2015 to 3.24% at March 31, 2016. The increase in the net interest spread is a result of yields on interest-earning assets increasing more than the rate paid on interest-bearing liabilities. During the three months ended March 31, 2016, the yield on earning assets increased 13 basis points, while the rate paid on interest-bearing liabilities decreased 1 basis point, compared to the same period last year. The yield on earning assets was favorably impacted as a result of an increase in higher yielding loan balances, and reduced prepayments and premium amortization on investment securities.

 

Provision (Credit) for Loan Losses

Management recorded a $67,000 credit for loan losses for the three month period ended March 31, 2016, compared to a provision of $233,000 for the three month period ended March 31, 2015. The decrease is primarily due to a decrease in net charge-offs, and impaired loans from the prior year period, as well as improved economic factors, partially offset by higher loan balances. There were no charge-offs during the current year period compared to charge-offs totaling $654,000 in the prior year period, and impaired loans totaled $3.0 million at March 31, 2016, a decrease of $1.3 million, compared to $4.3 million at March 31, 2015.

Noninterest Income

Noninterest income totaled $452,000 for the three month period ended March 31, 2016, an increase of $21,000, from $431,000 for the same period in 2015. The increase was primarily due to an increase in service fees, charges and other operating income generated from increased service charges on deposit accounts and debit card interchange income.

Noninterest Expense

Noninterest expense totaled $2.9 million for three month period ended March 31, 2016, an increase of $205,000 from $2.7 million for the three months ended March 31, 2015. This increase includes a $111,000 increase in salaries and employee benefits, a $40,000 increase in occupancy and equipment expense, a $22,000 increase in franchise taxes, and a $21,000 increase in other noninterest expense. The increase in salaries and employee benefits was due to increased director and committee fees due to a recent change in the director fee structure, increased compensation due to staff additions and merit increases and higher healthcare costs due to an increase in premiums and staffing levels compared to the prior year period. These increases were partially offset by a decrease in lower disability insurance, education and training, and post-retirement benefit costs. The increase in occupancy and equipment expense was due to depreciation and non-capital furniture and fixture costs and increased ATM network costs compared to the prior year quarter. The increase in franchise taxes was due to the exclusion of the tax credit for the state supervisory exam fee that had previously been recorded in other noninterest expense in the prior year period. The increase in other noninterest expense was due to higher stationary, printing and supplies expense, higher legal costs related to nonperforming loans, and higher audit expenses than recorded during the prior year quarter . These increases were partially offset by lower supervisory exam fees as discussed above and lower appraisal expense compared to the prior year quarter.

Federal Income Taxes

Federal income tax expense totaled $252,000 for the three month period ended March 31, 2016, an increase of $125,000 compared to $127,000 for three month period ended March 31, 2015. The increase was primarily due to a $392,000 increase in pretax income compared to the prior year period, and an increase in the effective tax rate. The effective tax rate in the current year quarter was 26.3% compared to 22.4% 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, 2015.

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 the year ended December 31, 2015.

 

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)

 

Wayne Savings Bancshares, Inc.

Signatures

 

 

 

 

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 6, 2016		By:	/s/H. Stewart Fitz Gibbon III
				H. Stewart Fitz Gibbon III
				President and Chief Executive Officer
Date:	May 6, 2016		By:	/s/Myron Swartzentruber
				Myron Swartzentruber
				Senior Vice President and
				Chief Financial Officer