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EX-32 - EX-32 - WAYNE SAVINGS BANCSHARES INC /DE/ex32.htm
EX-31.2 - EX-31.2 - WAYNE SAVINGS BANCSHARES INC /DE/ex31-2.htm
EX-31.1 - EX-31.1 - WAYNE SAVINGS BANCSHARES INC /DE/ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

 

FORM 10-Q

(Mark One)

 

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

 

For the quarterly period ended September 30, 2016  

 

OR

 

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

 

For the transition period from ____________ to _______________

 

Commission File No. 0-23433

 

               WAYNE SAVINGS BANCSHARES, INC.               

(Exact name of registrant as specified in its charter)

 

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

 

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

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes  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 October 31, 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 35
     
Item 3  Quantitative and Qualitative Disclosures About Market Risk 51
     
Item 4  Controls and Procedures 51
     
     
PART II - OTHER INFORMATION  
     
Item 1  Legal Proceedings 52
     
Item 1A  Risk Factors 52
     
Item 2  Unregistered Sales of Equity Securities and Use of Proceeds 52
     
Item 3  Defaults Upon Senior Securities 52
     
Item 4  Mine Safety Disclosures 52
     
Item 5  Other Information 53
     
Item 6  Exhibits 53
     
SIGNATURES 54

 

 

Wayne Savings Bancshares, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

 

   September 30, 2016   December 31, 2015 
   (Unaudited)     
Assets          
     Cash and due from banks  $5,421   $3,487 
     Interest-bearing deposits   3,443    7,669 
          Cash and cash equivalents   8,864    11,156 
           
     Available-for-sale securities   80,771    95,347 
     Held-to-maturity securities   8,779    8,307 
     Loans, net of allowance for loan losses of $2,907 and $2,837
          at September 30, 2016 and December 31, 2015, respectively
   321,390    293,121 
     Premises and equipment   6,568    6,663 
     Federal Home Loan Bank stock   4,226    4,226 
     Foreclosed assets held for sale, net   4    14 
     Accrued interest receivable   1,350    1,149 
     Bank-owned life insurance   9,758    9,554 
     Goodwill   1,719    1,719 
     Other assets   2,250    1,893 
     Prepaid federal income taxes   118    483 
          Total assets  $445,797   $433,632 
           
Liabilities and Stockholders’ Equity          
Liabilities          
Deposits          
     Demand  $106,166   $101,532 
     Savings and money market   138,218    132,089 
     Time   132,149    128,806 
          Total deposits   376,533    362,427 
     Other short-term borrowings   6,023    5,606 
     Federal Home Loan Bank advances   18,000    21,000 
     Interest payable and other liabilities   3,472    4,258 
     Deferred federal income taxes   365    436 
          Total liabilities   404,393    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   36,032    36,017 
     Retained earnings   22,249    21,060 
     Shares acquired by ESOP   (290)   (343)
     Accumulated other comprehensive income (loss)   (49)   (291)
     Treasury stock, at cost: Common: 1,196,892 shares at
          September 30, 2016 and December 31, 2015.
   (16,936)   (16,936)
          Total stockholders’ equity   41,404    39,905 
          Total liabilities and stockholders’ equity  $445,797   $433,632 

 

See accompanying notes to condensed consolidated financial statements.

 2

 

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Income and Comprehensive Income

For the three and nine months ended September 30, 2016 and 2015

(In thousands, except per share data)

(Unaudited)

 

   Three Months Ended September 30,   Nine Months Ended September 30, 
   2016   2015   2016   2015 
Interest and Dividend Income                    
     Loans  $3,375   $2,933   $9,753   $8,598 
     Securities   516    651    1,712    2,043 
     Dividends on Federal Home Loan Bank
          stock and other
   62    43    155    132 
          Total interest and dividend income   3,953    3,627    11,620    10,773 
                     
Interest Expense                    
     Deposits   464    395    1,332    1,189 
     Other short-term borrowings   3    2    7    7 
     Federal Home Loan Bank advances   67    83    206    273 
          Total interest expense   534    480    1,545    1,469 
                     
Net Interest Income   3,419    3,147    10,075    9,304 
Provision for Loan Losses   208    357    152    1,071 
Net Interest Income After Provision for Loan Losses   3,211    2,790    9,923    8,233 
Noninterest Income                    
     Gain on loan sales   82    80    203    142 
     Earnings on bank-owned life insurance   75    75    223    220 
     Service fees, charges and other operating   366    383    1,104    1,050 
          Total noninterest income   523    538    1,530    1,412 
Noninterest Expense                    
     Salaries and employee benefits   1,779    1,635    5,227    4,794 
     Net occupancy and equipment expense   545    527    1,581    1,505 
     Federal deposit insurance premiums   61    69    201    197 
     Franchise taxes   89    68    266    201 
     Other   550    580    1,607    1,667 
          Total noninterest expense   3,024    2,879    8,882    8,364 
Income Before Federal Income Taxes   710    449    2,571    1,281 
Provision for Federal Income Taxes   160    77    640    226 
Net Income  $550   $372   $1,931   $1,055 
Other comprehensive income (loss):                    
Unrealized gains (losses) on
     available-for-sale securities
   (272)   235    367    (474)
Tax (expense) benefit   92    (80)   (125)   161 
     Other comprehensive income (loss)   (180)   155    242    (313)
     Total comprehensive income  $370   $527   $2,173   $742 
Basic and Diluted Earnings Per Share  $0.20   $0.13   $0.70   $0.38 
Dividends Per Share  $0.09   $0.09   $0.27   $0.27 

 

See accompanying notes to condensed consolidated financial statements.

 3

 

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows

For the nine months ended September 30, 2016 and 2015

(In thousands)

(Unaudited)

 

   Nine Months Ended September 30, 
   2016   2015 
Operating Activities          
     Net income  $1,931   $1,055 
     Items not requiring (providing) cash          
          Depreciation and amortization   496    437 
          Provision for loan losses   152    1,071 
          Amortization of premiums and discounts on securities   909    1,037 
          Amortization of mortgage servicing rights   31    41 
          Amortization of deferred loan origination fees   (85)   (59)
          Increase in value of bank-owned life insurance   (204)   (203)
          Amortization expense of stock benefit plan   68    72 
          Provision for impairment on foreclosed assets held for sale   24    31 
          Loss on sale of foreclosed assets held for sale   6    84 
          Loss on sale of premises and equipment       2 
          Net gain on sale of loans   (203)   (142)
          Proceeds from sale of loans in the secondary market   5,322    4,407 
          Origination of loans for sale in the secondary market   (5,119)   (4,265)
          Deferred income taxes   (196)   (79)
     Changes in          
          Accrued interest receivable   (202)   (185)
          Other assets   (23)   (450)
          Interest payable and other liabilities   (312)   (50)
               Net cash provided by operating activities   2,595    2,804 
Investing Activities          
     Purchase of available-for-sale securities   (3,475)   (12,971)
     Purchase of  held-to-maturity securities   (895)   (1,637)
     Proceeds from maturities and paydowns of available-for-sale securities   17,551    19,107 
     Proceeds from maturities and paydowns of held-to-maturity securities   381    191 
     Net change in loans   (28,442)   (18,068)
     Purchase of premises and equipment   (401)   (357)
     Proceeds from the sale of foreclosed assets   87    256 
               Net cash used in investing activities  $(15,194)  $(13,479)

See accompanying notes to condensed consolidated financial statements.

 4

 

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (continued)

For the nine months ended September 30, 2016 and 2015

(In thousands)

(Unaudited)

   Nine Months Ended September 30, 
   2016   2015 
Financing Activities          
     Net change in deposits  $14,106   $4,322 
     Net change in other short-term borrowings   417    (1,634)
     Proceeds from Federal Home Loan Bank advances   14,875    23,052 
     Repayments of Federal Home Loan Bank advances   (17,875)   (18,500)
     Advances by borrowers for taxes and insurance   (474)   (407)
     Dividends on common stock   (742)   (744)
     Treasury stock purchases       (338)
               Net cash provided by financing activities   10,307    5,751 
Change in Cash and Cash Equivalents   (2,292)   (4,924)
Cash and Cash Equivalents, Beginning of period   11,156    10,783 
           
Cash and Cash Equivalents, End of period  $8,864   $5,859 
Supplemental Cash Flows Information          
     Interest paid on deposits and borrowings  $1,552   $1,465 
           
     Federal income taxes paid  $400   $100 
           
Supplemental Disclosure of Non-Cash Investing and Financing Activities          
     Transfers from loans to foreclosed assets held for sale  $106   $308 
           
     Recognition of mortgage servicing rights  $77   $64 
           
     Dividends payable  $250   $250 

 

See accompanying notes to condensed consolidated financial statements.

 5

 

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

 

Note 1:     Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of September 30, 2016 and for the three and nine months ended September 30, 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 and nine months ended September 30, 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.

 

 6

 

Index 

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

 

Note 2:     Principles of Consolidation

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

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

Note 3:     Securities

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

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair Value 
   (In thousands) 
Available-for-sale securities                    
  September 30, 2016:                    
     U.S. government agencies  $12   $   $   $12 
     Mortgage-backed securities of
          government sponsored entities
   63,700    779    208    64,271 
     Private-label collateralized mortgage
          obligations
   53            53 
     State and political subdivisions   15,862    601    28    16,435 
          Totals  $79,627   $1,380   $236   $80,771 
                     

 

   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 

 

 

 7

 

Index 

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

 

   Amortized
Cost
   Gross
Unrealized
Gains
   Gross
Unrealized
Losses
   Fair
Value
 
   (In thousands) 
Held-to-maturity Securities:                    
  September 30, 2016:                    
     U.S. government agencies  $21   $   $   $21 
     Mortgage-backed securities of
          government sponsored entities
   716    11        727 
     State and political subdivisions   8,042    175    41    8,176 
          Totals  $8,779   $186   $41   $8,924 
                     

 

   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 

 

 

 8

 

Index 

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

 

Amortized cost and fair value of available-for-sale securities and held-to-maturity securities at September 30, 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  $6,118   $6,348   $1,404   $1,422 
Five to ten years   3,337    3,491    3,284    3,360 
After ten years   6,419    6,608    3,375    3,415 
    15,874    16,447    8,063    8,197 
                     
Mortgage-backed securities of
     government sponsored entities
   63,700    64,271    716    727 
Private-label collateralized mortgage
     obligations
   53    53         
     Totals  $79,627   $80,771   $8,779   $8,924 

 

The carrying value of securities pledged as collateral to secure public deposits and for other purposes was $52.5 million at September 30, 2016, compared to $55.3 million at 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 September 30, 2016 and December 31, 2015, was $24.2 million and $53.8 million, which represented approximately 27% 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 September 30, 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.

 

 9

 

Index 

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

 

 

   September 30, 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
  $10,889   $79   $10,786   $129   $21,675   $208 
State and political subdivisions   1,561    3    956    66    2,517    69 
Total temporarily impaired securities  $12,450   $82   $11,742   $195   $24,192   $277 
                               

 

   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.

 

 10

 

Index 

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

 

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 collectibility 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.

 

 11

 

Index 

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

 

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.

 

 12

 

Index 

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

Commercial Business Loans

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

Consumer Loans

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

The following presents by portfolio segment the activity in the allowance for loan losses for the three and nine months ended September 30, 2016 and 2015:

 

Three months ended
September 30, 2016
  One-to-four
family
residential
   All other
mortgage
loans
   Commercial
business
loans
   Consumer
loans
   Unallocated   Total 
   (In thousands) 
Beginning balance  $1,582   $957   $234   $3   $   $2,776 
     Provision charged
          to expense
   (105)   238    75            208 
     Losses charged
          off
       (78)               (78)
     Recoveries           1            1 
Ending balance  $1,477   $1,117   $310   $3   $   $2,907 
                               

 

Three months ended
September 30, 2015
  One-to-four
family
residential
   All other
mortgage
loans
   Commercial
business
loans
   Consumer
loans
   Unallocated   Total 
   (In thousands) 
Beginning balance  $1,115   $1,164   $346   $5   $38   $2,668 
     Provision charged
          to expense
   562    (99)   (68)       (38)   357 
     Losses charged
          off
   (278)                   (278)
     Recoveries   2        1            3 
Ending balance  $1,401   $1,065   $279   $5   $   $2,750 

 

 

 

 13

 

Index 

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

 

Nine months ended
September 30, 2016
  One-to-four
family
residential
   All other
mortgage
loans
   Commercial
business
loans
   Consumer
loans
   Unallocated   Total 
   (In thousands) 
Beginning balance  $1,346   $1,210   $279   $2   $   $2,837 
     Provision charged
          to expense
   130    (10)   30    2        152 
     Losses charged
          off
       (83)       (1)       (84)
     Recoveries   1        1            2 
Ending balance  $1,477   $1,117   $310   $3   $   $2,907 
                               

 

Nine months ended
September 30, 2015
  One-to-four
family
residential
   All other
mortgage
loans
   Commercial
business
loans
   Consumer
loans
   Unallocated   Total 
   (In thousands) 
Beginning balance  $1,533   $885   $343   $8   $   $2,769 
     Provision charged
          to expense
   959    180    (65)   (3)       1,071 
     Losses charged
          off
   (1,137)                   (1,137)
     Recoveries   46        1            47 
Ending balance  $1,401   $1,065   $279   $5   $   $2,750 

 

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on the portfolio segment and impairment method as of September 30, 2016 and December 31, 2015:

 

September 30, 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
  $397   $54   $44   $   $495 
Collectively evaluated
     for impairment
   1,080    1,063    266    3    2,412 
Total allowance for loan losses  $1,477   $1,117   $310   $3   $2,907 
                          
Loan Balances:                         
Ending balance:                         
Individually evaluated
     for impairment
  $1,690   $1,133   $44   $   $2,867 
Collectively evaluated
     for impairment
   184,325    121,563    21,373    1,860    329,121 
Total balance  $186,015   $122,696   $21,417   $1,860   $331,988 

 

 14

 

Index 

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

 

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 $761 and $765 or loans in process of $6.9 million and $8.1 million, respectively, for September 30, 2016 and December 31, 2015.

 

 15

 

Index 

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

The following tables present the credit risk profile of the Bank’s loan portfolio based on rating category and payment activity as of September 30, 2016 and December 31, 2015:

September 30, 2016  One-to-four
family
residential
   All other mortgage
loans
   Commercial
business loans
   Consumer loans 
   (In thousands) 
Rating *                
     Pass (Risk 1-4)  $182,553   $118,645   $20,686   $1,860 
     Special Mention (Risk 5)   282    128    537     
     Substandard (Risk 6)   3,180    3,923    194     
Total  $186,015   $122,696   $21,417   $1,860 
                     

 

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.

 

 16

 

Index 

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

 

The following tables present the Bank’s loan portfolio aging analysis for September 30, 2016 and December 31, 2015:

 

September 30, 2016  30-59 Days
Past Due
   60-89 Days
Past Due
   Greater
Than 90
Days
   Total Past
Due
   Current   Total Loans
Receivable
 
   (In thousands) 
One-to-four family
     residential loans
  $1,366   $155   $706   $2,227   $183,788   $186,015 
All other mortgage loans   115            115    122,581    122,696 
Commercial business
     loans
   15    42    22    79    21,338    21,417 
Consumer loans                   1,860    1,860 
Total  $1,496   $197   $728   $2,421   $329,567   $331,988 
                               

 

December 31, 2015  30-59 Days
Past Due
   60-89 Days
Past Due
   Greater
Than 90
Days
   Total Past
Due
   Current   Total Loans
Receivable
 
   (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 
                               

 

There were no loans greater than 90 days and still accruing at either September 30, 2016 or December 31, 2015.

 

Nonaccrual loans were comprised of the following at:

 

Nonaccrual loans  September 30, 2016   December 31, 2015 
   (In thousands) 
One-to-four family residential loans  $1,392   $1,733 
Nonresidential real estate loans   166    208 
All other mortgage loans        
Commercial business loans        
Consumer loans        
Total  $1,558   $1,941 

 

 

 17

 

Index 

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

 

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. Information with respect to the Company’s impaired loans at September 30, 2016 and December 31, 2015 in combination with activity for the three and nine months ended September 30, 2016 and 2015 is presented below:

 

   As of September 30, 2016  

Three months ended

September 30, 2016

  

Nine months ended

September 30, 2016

 
   Recorded
Balance
  

Unpaid

Principal

Balance

   Specific
Allowance
  

Average

Investment in
Impaired Loans

  

Interest

Income

Recognized

  

Average

Investment in
Impaired Loans

  

Interest

Income
Recognized

 
   (In thousands) 
                             
Loans without a
     specific valuation
     allowance
                                   
One-to-four family
     residential loans
  $1,154   $1,168   $   $1,024   $10   $1,044   $30 
All other mortgage
     loans
   1,060    1,060        1,045    17    782    52 
Commercial business
     loans
                            
                                    
Loans with a
     specific valuation
     allowance
                                   
One-to-four family
     residential loans
   536    536    397    652        911     
All other mortgage
     loans
   73    73    54    159    1    390     
Commercial business
     loans
   44    44    44    49        40    1 
                                    
Total:                                   
One-to-four family
     residential loans
  $1,690   $1,704   $397   $1,676   $10   $1,956   $30 
All other mortgage
     loans
   1,133    1,133    54    1,204    18    1,173    52 
Commercial business
     loans
   44    44    44    49        40    1 
   $2,867   $2,881   $495   $2,929   $28   $3,168   $83 

 

 

 18

 

Index 

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

   As of December 31, 2015  

Three months ended

September 30, 2015

  

Nine months ended

September 30, 2015

 
   Recorded
Balance
   Unpaid
Principal
Balance
   Specific
Allowance
   Average
Investment in
Impaired Loans
   Interest
Income
Recognized
   Average
Investment in
Impaired Loans
   Interest
Income
Recognized
 
   (In thousands) 
Loans without a
     specific valuation
     allowance
                                   
One-to-four family
     residential loans
  $1,224   $1,238   $   $1,317   $10   $1,464   $31 
All other mortgage
     loans
               533        532     
Commercial business
     loans
               18        9     
                                    
Loans with a
     specific valuation
     allowance
                                   
One-to-four family
     residential loans
   1,565    1,875    506    1,468    15    1,498    42 
All other mortgage
     loans
   1,061    1,061    13    610    18    314    54 
Commercial business
     loans
   33    33    33    85        110    1 
                                    
Total:                                   
One-to-four family
     residential loans
  $2,789   $3,113   $506   $2,785   $25   $2,962   $73 
All other mortgage
     loans
   1,061    1,061    13    1,143    18    846    54 
Commercial business
     loans
   33    33    33    103        119    1 
   $3,883   $4,207   $552   $4,031   $43   $3,927   $128 

 

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 $412,000 of TDR classifications that occurred in the 2016 year to date period and included the renewal of an interest only loan as the customer repayments had not been in accordance with the original loan terms.

 

 19

 

Index 

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

The remaining loans are to the same borrower and are on a nonaccrual status. There were no TDR classifications that occurred during the 2015 quarter-to-date or year-to-date 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 and nine month periods ended September 30, 2016 and 2015. The Company considers TDRs that become 90 days or more past due under modified terms as subsequently defaulted.

 

   Quarter-to-Date   Year-to-Date 
Troubled Debt
Restructurings
 

Number

of loans

   Pre-
modification
Recorded
Principal
Balance
   Post-
modification
Recorded
Principal
Balance
   Number
of loans
  

Pre-

modification
Recorded
Principal
Balance

   Post-
modification
Recorded
Principal
Balance
 
       (dollars in thousands)       (dollars in thousands) 
September 30, 2016                              
One-to-four family
     residential loans
       $   $    8   $412   $412 

 

 

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 September 30, 2016 and December 31, 2015.

   September 30, 2016   December 31, 2015 
   Recorded Investment 
   (In thousands) 
One-to-four family residential loans  $4   $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 September 30, 2016 and December 31, 2015.

   September 30, 2016   December 31, 2015 
   Recorded Investment 
   (In thousands) 
One-to-four family residential loans  $179   $171 

 

 20

 

Index 

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

 

Note 5:     Goodwill

The following table presents the balance of goodwill at September 30, 2016 and December 31, 2015:

 

   September 30, 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 September 30, 2016 and December 31, 2015.

 

 21

 

Index 

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

   Remaining Contractual Maturity of the Agreements 
   Overnight and
Continuous
   Up to 30
Days
   30 - 90
Days
   Greater Than 90
Days
   Total 
September 30, 2016  (In thousands) 
Repurchase Agreements                    
Mortgage-backed securities
     of government
     sponsored entities
  $6,023   $   $   $   $6,023 
                          
Gross amount of recognized liabilities for repurchase agreements included in other short-term borrowings   $6,023 
                          
                          

 

   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 September 30, 2016 or September 30, 2015.

The computations are as follows:

   Three months ended September 30,   Nine  months ended September 30, 
   2016   2015   2016   2015 
Net income (in thousands)  $550   $372   $1,931   $1,055 
Weighted-average common shares outstanding   2,747,567    2,740,249    2,747,567    2,755,634 
Net income per share  $0.20   $0.13   $0.70   $0.38 

 

 

 22

 

Index 

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

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 September 30, 2016, that the Bank met all capital adequacy requirements to which it is subject.

As of September 30, 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 September 30, 2016, that management believes have changed the Bank’s capital classification.

The Bank’s actual capital amounts and ratios as of September 30, 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 September 30, 2016                        
Tier I Capital to average assets  $38,981    8.7%   $17,839    4.0%   $22,299    5.0% 
Tier 1 Common equity capital to risk-
     weighted assets
   38,981    13.3%    13,205    4.5%    19,073    6.5% 
Tier I Capital to risk-weighted assets   38,981    13.3%    17,606    6.0%    23,475    8.0% 
Total Risk-based capital to risk-
     weighted assets
   41,891    14.3%    23,475    8.0%    29,344    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% 

 

 23

 

Index 

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

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 began 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) 
September 30, 2016  $1,144   $(89)  $(1,083)  $(21)  $(49)
                          
December 31, 2015  $777   $(89)  $(1,083)  $104   $(291)

 

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

nine months ended September 30, 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

 

 24

 

Index 

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

 

Recurring Measurements

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

Available-for-sale Securities

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

The following table presents the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at September 30, 2016 and December 31, 2015:

       Fair Value Measurement Using 
   Fair Value   Quoted Prices in
Active Markets
for Identica
l Assets (Level 1)
   Significant Other
Observable
Inputs (Level 2)
   Significant
Unobservable
Inputs (Level 3)
 
   (In thousands) 
September 30, 2016                
     U.S. government agencies  $12   $   $12   $ 
     Mortgage-backed securities of
          government sponsored entities
   64,271        64,271     
     Private-label collateralized mortgage
          obligations
   53        53     
     State and political subdivisions   16,435        16,435     
                     

 

 25

 

Index 

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

       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 September 30, 2016 and December 31, 2015.

 

 26

 

Index 

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

       Fair Value Measurement Using 
   Fair Value   Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
   Significant
Other
Observable
Inputs (Level 2)
   Significant
Unobservable
Inputs (Level 3)
 
   (In thousands) 
September 30, 2016                
     Collateral-dependent                
          impaired loans  $37           $37 
      Foreclosed assets   4            4 
                     
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
September 30, 2016             
     Collateral-dependent
          impaired loans
  $37   Historical Proceed from
prior sales
  Selling Costs  41%
     Foreclosed assets   4   Sales contract  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 September 30, 2016 as compared to December 31, 2015.

 

 27

 

Index 

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

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

       Fair Value Measurements Using 
   Carrying Amount  

Quoted Prices

in Active Markets
for Identical Assets
(Level 1)

  

Significant
Other
Observable
Inputs

(Level 2)

  

Significant
Unobservable
Inputs

(Level 3)

 
   (In thousands) 
September 30, 2016                
     Financial assets                    
          Cash and cash
               equivalents
  $8,864   $8,864   $   $ 
          Held-to-maturity
               securities
   8,779        8,924     
          Loans, net of
               allowance for
               loan losses
   321,390            337,922 
     Federal Home Loan
               Bank stock
   4,226        4,226     
     Interest receivable   1,350        1,350     
                     
     Financial liabilities                    
          Deposits   376,533    42,593    321,745     
     Other short-term
          borrowings
   6,023        6,023     
     Federal Home Loan
          Bank advances
   18,000        18,048     
     Advances from
          borrowers for
          taxes and
          insurance
   767        767     
     Interest payable   33        33     

 

 

 28

 

Index 

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

 

       Fair Value Measurements Using 
  

Carrying

Amount

  

Quoted Prices

in Active
Markets for
Identical Assets

(Level 1)

  

Significant

Other

Observable Inputs

(Level 2)

  

Significant
Unobservable
Inputs

(Level 3)

 
   (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.

 

 29

 

Index 

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

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.

Federal Home Loan Bank Advances

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

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

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties. For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates. The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date. Fair values of commitments were not material at September 30, 2016 and December 31, 2015.

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

The carrying amount approximates fair value.

 

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

 

 30

 

Index 

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

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.

 

 31

 

Index 

Wayne Savings Bancshares, Inc.
Notes to Condensed 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 2014-09, Revenue from Contracts with Customers (ASU 2014-09), 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 2014-09 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 2014-09 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 retrospective 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

 

 32

 

Index 

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

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.

 

FASB ASU 2016-12, Revenue from Contracts with Customers (Topic 606), Narrow-Scope Improvements and Practical Expedients, was issued in May 2016. The amendments in this update do not change the core principle of the guidance in Topic 606, but rather clarify certain narrow aspects. The amendments in this update clarify the objective of collectibility and determine whether a contract is valid based on if the customer has the ability and intention to pay, and also to clarify when revenue would be recognized for a contract that fails collectibility. The amendments in this Update affect the guidance in Accounting Standards Update No. 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 for Topic 606 (and any other Topic amended by Update 2014-09). Accounting Standards Update No. 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.

FASB ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, was issued in June 2016. The main objective of this Update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To

 

 33

 

Index 

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

achieve this objective, the amendments in this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal year. Early adoption of the amendments in this Update are allowed for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in this Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The effect of a prospective transition approach is to maintain the same amortized cost basis before and after the effective date of this Update. The Company is studying the implications of this update, including following evolving regulatory and industry guidance, and gathering additional detailed historical data. The effect of this Update on the Company’s financial statements is not known at this time.

 

FASB ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments, was issued in August 2016. The amendments in this Update provide guidance on how certain cash receipts and cash payments are presented and classified in the statement of cash flows. This Update addresses eight specific cash flow issues with the objective of reducing the diversity in practice. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. An entity that elects early adoption must adopt all the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. This amendments in this Update are not expected to have a material impact on the Company’s consolidated financial statements.

 

 

 34

 

Index 

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

Strategic Initiatives

As part of an ongoing strategic planning process, which includes annual plan updates and regular progress reviews by the Board of Directors, our initiatives to improve shareholder returns include:

 

·Enhance balance sheet assets to increase higher yielding and/or shorter duration commercial business and commercial real estate loans and home equity lines of credit and reducing the investment securities portfolio. In the persistent low interest rate environment, the improvement in asset mix will be accelerated by selling off additional newly originated mortgage loans to reduce the proportion of residential mortgage loans held on the balance sheet.

 

·Enhance balance sheet liabilities by focusing on the development of lower cost and higher fee producing transaction account balances and deemphasizing the retention or origination of new retail time deposit accounts. This initiative is the result of several years of investment and development of value added services necessary to support business transaction accounts. The foundation of meaningful customer relationships is the primary transaction account.

 

·Actively manage capital to provide an appropriate return to shareholders. As our earnings improve, we are able to resume stock repurchases within regulatory guidelines and expect that in the absence of higher yielding balance sheet opportunities, that stock repurchases will continue to be used on an ongoing basis to return capital to shareholders in addition to the regular quarterly cash dividend.

 

·Transition from a transaction-oriented thrift culture to a relationship-oriented commercial bank culture and gain customer relationships by taking advantage of disruption in the local banking market resulting from acquisitions of independent local community and regional banks.

 

·Examine staffing levels and facilities and monitor customer and transaction volume in the face of decreasing transaction volume levels through traditional channels with increased emphasis on expense reduction as an offset to continued pressure on margins and fee income.

 

·Offset pressure on net interest margin and customer resistance to fees wherever possible, including by incorporating operating efficiency into the performance goals of managers with fee income and expense responsibility.

 

·Continue to enhance technology for more efficient customer service and operations and effective cybersecurity while ensuring an appropriate return on technology investments.

 

 35

 

Index 

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

Critical Accounting Policies

 

Critical Accounting Policies – The Company’s critical accounting policy relates to the allowance for loan losses. 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.

 

 36

 

Index 

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

Discussion of Financial Condition Changes from December 31, 2015 to September 30, 2016

At September 30, 2016, the Company had total assets of $445.8 million, an increase of $12.2 million, from total assets at December 31, 2015. The increase in total assets includes a $28.3 million increase in net loans, partially offset by a $2.3 million decrease in cash and cash equivalents, and a $14.1 million decrease in securities balances compared to December 31, 2015.

Total securities decreased $14.1 million to $89.5 million at September 30, 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 $17.9 million and amortization of premiums of $909,000, partially offset by purchases totaling $4.4 million, and a $367,000 increase in unrealized gains on available-for-sale securities during the nine months ended September 30, 2016.

Net loans receivable increased $28.3 million at September 30, 2016 compared to December 31, 2015. The Bank originated $54.5 million of loans, received payments of $26.1 million, and originated and sold $5.1 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 $2.9 million and increased $70,000 compared to December 31, 2015 The increase in the allowance for loan losses was primarily due to a provision of $152,000, and recoveries of $2,000, partially offset by loans charged off totaling $84,000.

 

 

 37

 

Index 

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

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.

 

 38

 

Index 

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

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

   September 30, 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)  $186,015    56.03%   $179,732    58.97% 
     Residential construction loans   5,208    1.57%    6,177    2.03% 
     Multi-family residential   12,390    3.73%    12,474    4.09% 
     Nonresidential real estate/land(2)   105,098    31.66%    86,470    28.37% 
          Total mortgage loans   308,711    92.99%    284,853    93.46% 
Other loans:                    
     Consumer loans(3)   1,860    0.56%    1,904    0.62% 
     Commercial business loans   21,417    6.45%    18,031    5.92% 
          Total other loans   23,277    7.01%    19,935    6.54% 
          Total loans before net items   331,988    100.00%    304,788    100.00% 
Less:                    
     Loans in process   6,930         8,065      
     Deferred loan origination fees   761         765      
     Allowance for loan losses   2,907         2,837      
          Total loans receivable, net  $321,390        $293,121      

(1)Includes equity loans collateralized by second mortgages in the aggregate amount of $15.5 million at September 30, 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 $30.9 million at September 30, 2016 and $29.4 million at December 31, 2015.
(3)Includes land loans of $4.3 million at September 30, 2016 and $3.6 million at December 31, 2015.
(4)Includes second mortgage loans of $276 at September 30, 2016 and $332 at December 31, 2015.

 

 

Foreclosed assets held for sale consisted of one property written down to $4,000 at September 30, 2016, a decrease of $10,000, compared to 2 properties at a value of $14,000 at December 31, 2015. The decrease in foreclosed assets during the current year was due to 11 real estate owned property sales resulting in a loss of $6,000, and a $24,000 valuation allowance for the year. During the prior year period there were additions of $308,000, offset with a valuation allowance of $31,000 and sales totaling $354,000 that resulted in a loss of $84,000. Total impaired assets were $2.9 million, or 0.64% of total assets at September 30, 2016, compared to $3.9 million, or 0.90% of total assets at December 31, 2015.

 

 39

 

Index 

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

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 September 30, 2016.

Deposits totaled $376.5 million at September 30, 2016, an increase of $14.1 million from $362.4 million at December 31, 2015. This increase includes a $4.6 million increase in demand deposits, a $6.1 million increase in savings and money market balances and a $3.3 million increase in time 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 $417,000 and totaled $6.0 million at September 30, 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 September 30, 2016 and December 31, 2015.

Advances from the Federal Home Loan Bank (FHLB) totaled $18.0 million, at September 30, 2016, and decreased $3.0 million from December 31, 2015. The decrease was due to the scheduled maturity of a $3.0 million fixed-rate term advance that was not replaced. 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 1.31% at September 30, 2016 compared to 1.86% at December 31, 2015.

 

Stockholders’ equity increased by $1.5 million during the period ended September 30, 2016. This increase was due to net income of $1.9 million, and a $242,000 increase in unrealized gains on available-for-sale securities, partially offset by $742,000 in shareholder dividends.

On September 22, 2016, the Company announced that its Board of Directors adopted a new stock repurchase program. Under the new stock repurchase program, the Company is authorized to repurchase up to 69,546 shares, or 2.5%, of its issued and outstanding shares of common stock.

 

 40

 

Index 

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

Comparison of Operating Results for the Three Months Ended September 30, 2016 and 2015

General

Net income for the three months ended September 30, 2016, totaled $550,000, an increase of $178,000, compared to $372,000 for the three month period ended September 30, 2015. The increase in net income was due to an increase in net interest income and a decrease in the provision for loan losses, partially offset by a decrease in noninterest income, and an increase in both noninterest expense and the provision for federal income taxes.

 

 

 

 41

 

Index 

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

Average Balance Sheet

 

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

 

   For the three months ended September 30, 
   2016   2015 
   Average
Balance
   Interest   Average
Rate
   Average
Balance
   Interest   Average
Rate
 
   (Dollars in thousands) 
Interest-earning assets:                              
     Loans receivable, net(1)  $318,055   $3,375    4.24%   $277,450   $2,933    4.23% 
     Investment securities(2)   93,293    516    2.21%    113,391    651    2.30% 
     Interest-earning deposits(3)   12,296    62    2.02%    9,317    43    1.85% 
          Total interest-earning assets   423,644    3,953    3.73%    400,158    3,627    3.63% 
     Noninterest-earning assets   24,096              24,387           
          Total assets  $447,740             $424,545           
Interest-bearing liabilities:                              
     Deposits  $376,034   $464    0.49%   $354,174   $395    0.45% 
     Other short-term borrowings   5,898    3    0.20%    6,429    2    0.12% 
     Borrowings   20,304    67    1.32%    20,095    83    1.65% 
          Total interest-bearing liabilities   402,236    534    0.53%    380,698    480    0.50% 
     Noninterest-bearing  liabilities   4,048              4,104           
          Total liabilities   406,284              384,802           
     Stockholders’ equity   41,456              39,743           
     Total liabilities and stockholders’
          equity
  $447,740             $424,545           
     Net interest income       $3,419             $3,147      
     Interest rate spread(4)             3.20%              3.13% 
     Net yield on interest-earning assets(5)             3.23%              3.15% 
     Ratio of average interest-earning
          assets to average interest-bearing
          liabilities
             105.32%              105.11% 

 

(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.

 

 42

 

Index 

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

Interest Income

Interest income increased $326,000, and totaled $4.0 million for the three month period ended September 30, 2016, compared to $3.6 million for the three month period ended September 30, 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 $23.5 million and totaled $423.6 million for the 2016 period from $400.2 million in the 2015 period. The weighted-average yield was 3.73% for the three months ended September 30, 2016, and increased by 10 basis points compared to 3.63% for the three months ended September 30, 2015.

Interest income on loans was $3.4 million for the three month period ended September 30, 2016, and increased $442,000 compared to the three month period ended September 30, 2015. The increase was primarily due to an increase in the average balance of loans and to a lesser extent an increase in the weighted-average yield. The average balance of loans increased by $40.6 million from $277.5 million in the 2015 period to $318.1 million for the 2016 period. The weighted-average yield was 4.24% for the three months ended September 30, 2016, and increased by 1 basis point compared to 4.23% for the three months ended September 30, 2015.

Interest income on securities decreased $135,000 during the three months ended September 30, 2016, compared to the same period in 2015. This decrease was due to both a decrease in the average balance of investment securities, and a decrease in the weighted-average rate. The average balance of investment securities decreased $20.1 million from $113.4 million in the 2015 period to $93.3 million in the 2016 period, and the weighted-average rate decreased 9 basis points from 2.30% in the 2015 period to 2.21% for the 2016 period. The decrease in the average balance was due to investing excess cash into the loan portfolio, while the decrease in yield was primarily due to the maturity and repayment of higher yielding investments and purchases of new investment securities at lower yields.

Dividends on Federal Home Loan Bank stock and other income totaled $62,000 for the three month period ended September 30, 2016, and increased $19,000 compared to the same period in 2015. The increase was due to a 17 basis increase in the weighted-average rate from 1.85% in the 2015 period to 2.02% in the 2016 period, and a $3.0 million increase in the average balance outstanding.

Interest Expense

Interest expense totaled $534,000 for the three month period ended September 30, 2016, an increase of $54,000 compared to the three month period ended September 30, 2015. This increase was due to both an increase in the average balance of total interest-bearing liabilities, and an increase in the weighted-average cost of funds. The average balance of total interest-bearing liabilities increased $21.5 million from $380.7 million in the 2015 period to $402.2 million in the 2016 period. The weighted-average cost of funds increased 3 basis points from 0.50% in the 2015 period to 0.53% in the current year period.

 

 43

 

Index 

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

Interest expense on deposits for the three month period ended September 30, 2016 totaled $464,000, an increase of $69,000 compared to $395,000 for the same period in the previous year. The increase was primarily due to a $5.6 million increase in average certificate of deposit balances and a shift from shorter term, lower cost certificates of deposit into longer term, higher cost certificates of deposit. The increase was also due to a $16.3 million increase in the combined average balance of money market and savings accounts and demand deposit accounts. The weighted-average cost of deposits also increased by 4 basis points, from 0.45% in the 2015 period to 0.49% in the 2016 period.

Interest expense on other short-term borrowings totaled $3,000 for the three month period ended September 30, 2016, and increased $1,000 from the same period in the previous year. The weighted-average cost of short-term borrowings increased 8 basis points from 0.12% in the 2015 period to 0.20% in the 2016 period, partially offset by a $531,000 decrease in the average balance of short-term borrowings compared to the prior year period.

Interest expense on Federal Home Loan Bank advances totaled $67,000 for the three month period ended September 30, 2016, a decrease of $16,000 from $83,000 in the 2015 period. The decrease was primarily due to a 33 basis point decrease in the weighted-average cost from 1.65% in the 2015 period to 1.32% in the 2016 period. The decrease in the weighted-average cost was partially offset by a $209,000 increase in the average balance outstanding from $20.1 million in the 2015 period to $20.3 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 $3.4 million for the three months ended September 30, 2016, and increased $272,000 compared to the three month period ended September 30, 2015. The increase in net interest income was primarily due to a $23.5 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 $40.6 million increase in the average balance of higher yielding loans, partially offset by a $17.1 million decline in lower yielding investments and interest-earning deposits compared to the prior year quarter. This increase was also due to a 7 basis point increase in the net interest spread from 3.13% at September 30, 2015 to 3.20% at September 30, 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 September 30, 2016, the yield on earning assets increased 10 basis points while the rate paid on interest-bearing liabilities increased only 3 basis points, 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 partially offset with a decline in the average yield of investment securities.

 

 44

 

Index 

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

Provision for Loan Losses

Management recorded a $208,000 provision for loan losses for the three month period ended September 30, 2016, compared to a provision of $357,000 for the three month period ended September 30, 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 charge-offs totaling $78,000 in the current year quarter compared to charge-offs totaling $278,000 in the prior year quarter, and impaired loans totaled $2.9 million at September 30, 2016, a decrease of $1.2 million, compared to $4.1 million at September 30, 2015.

Noninterest Income

Noninterest income totaled $523,000 for the three month period ended September 30, 2016, and decreased $15,000, from $538,000 for the same period in 2015. The decrease was due to a $17,000 decrease in service fees, charges and other operating income, primarily due to a decrease in income from annuity sales compared to the same period last year.

Noninterest Expense

Noninterest expense totaled $3.0 million for three month period ended September 30, 2016, an increase of $145,000 from $2.9 million for the three months ended September 30, 2015. This increase includes a $144,000 increase in salaries and employee benefits and a $21,000 increase in franchise taxes, partially offset by a $30,000 decrease in other noninterest expense. The increase in salaries and employee benefits was due to increased compensation due to staff additions and merit increases, increased pension expense due to planned retirements, 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 post-retirement benefit costs. The increase in franchise taxes was due to the exclusion of the tax credit for the state supervisory exam fee that had previously been assessed and recorded in other noninterest expense in the prior year period. The decrease in other noninterest expense was due to a decrease in real estate owned expense, legal expense, and supervisory fee expense, partially offset by an increase in audit expense and special services compared to the prior year quarter.

Federal Income Taxes

Federal income tax expense totaled $160,000 for the three month period ended September 30, 2016, an increase of $83,000 compared to $77,000 for three month period ended September 30, 2015. The increase was primarily due to a $261,000 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 22.5% compared to 17.2% 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.

 

 45

 

Index 

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

Comparison of Operating Results for the Nine Months Ended September 30, 2016 and 2015

General

Net income for the nine months ended September 30, 2016, totaled $1.9 million, an increase of $876,000, compared to $1.1 million for the nine month period ended September 30, 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.

 

 46

 

Index 

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

Average Balance Sheet

 

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

 

   For the nine months ended September 30, 
   2016   2015 
   Average
Balance
   Interest   Average
Rate
   Average
Balance
   Interest   Average
Rate
 
   (Dollars in thousands) 
Interest-earning assets:                              
     Loans receivable, net(1)  $308,744   $9,753    4.21%   $270,802   $8,598    4.23% 
     Investment securities(2)   97,161    1,712    2.35%    113,983    2,043    2.39% 
     Interest-earning deposits(3)   12,539    155    1.65%    12,227    132    1.44% 
          Total interest-earning assets   418,444    11,620    3.70%    397,012    10,773    3.62% 
     Noninterest-earning assets   24,157              24,288           
          Total assets  $442,601             $421,300           
Interest-bearing liabilities:                              
     Deposits  $370,678   $1,332    0.48%   $351,421   $1,189    0.45% 
     Other short-term borrowings   5,798    7    0.16%    6,724    7    0.14% 
     Borrowings   20,982    206    1.31%    18,585    273    1.96% 
          Total interest-bearing liabilities   397,458    1,545    0.52%    376,730    1,469    0.52% 
     Noninterest bearing  liabilities   4,188              4,505           
          Total liabilities   401,646              381,235           
     Stockholders’ equity   40,955              40,065           
          Total liabilities and stockholders’
          equity
  $442,601             $421,300           
     Net interest income       $10,075             $9,304      
     Interest rate spread(4)             3.18%              3.10% 
     Net yield on interest-earning assets(5)             3.21%              3.12% 
     Ratio of average interest-earning
          assets to average interest-bearing
          liabilities
             105.28%              105.38% 

 

(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.

 

 47

 

Index 

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

Interest Income

Interest income increased $847,000, and totaled $11.6 million for the nine month period ended September 30, 2016, compared to $10.8 million for the nine month period ended September 30, 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 $21.4 million and totaled $418.4 million for the 2016 period from $397.0 million in the 2015 period. The weighted-average yield was 3.70% for the nine months ended September 30, 2016, and increased by 8 basis points compared to 3.62% for the nine months ended September 30, 2015.

Interest income on loans was $9.8 million for the nine month period ended September 30, 2016, and increased $1.2 million compared to the nine month period ended September 30, 2015. This increase was primarily due to a $37.9 million increase in the average balance of loans from $270.8 million in the 2015 period to $308.7 million for the 2016 period. The increase in the average balance of loans outstanding was partially offset by a 2 basis point decrease in the weighted-average yield from 4.23% for the nine months ended September 30, 2015 to 4.21% for the nine months ended September 30, 2016.

Interest income on securities totaled $1.7 million for the nine months ended September 30, 2016, and decreased $331,000 compared to the nine month period ended September 30, 2015. This decrease was due to both a decrease in the average balance and a decrease in the weighted-average rate. The average balance of investment securities decreased $16.8 million, from $114.0 million in the 2015 period to $97.2 million in the 2016 period. The weighted-average rate of investment securities was 2.35% in the 2016 period and decreased 4 basis points from 2.39% in the 2015 period. The decrease in the average balance was due to investing excess cash into the loan portfolio.

Dividends on Federal Home Loan Bank stock and other income was $155,000 for nine month period ended September 30, 2016, and increased $23,000 compared to the nine month period ending September 30, 2015. The weighted-average rate increased 21 basis points from 1.44% in the 2015 period to 1.65% in the 2016 period, and the average balance increased $312,000 compared to the prior year period.

Interest Expense

Interest expense totaled $1.5 million for the nine month period ended September 30, 2016, and increased $76,000 compared to the nine month period ended September 30, 2015. The increase was primarily due to a $20.8 million increase in the average balance of total interest-bearing liabilities from $376.7 million in the 2015 period to $397.5 million in the 2016 period. The weighted-average cost of funds was 0.52% for both the nine month periods ended September 30, 2016 and 2015.

 

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Index 

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

Interest expense on deposits for the nine month period ended September 30, 2016 totaled $1.3 million, an increase of $143,000 compared to $1.2 million for the same period in the previous year. The increase in interest expense was primarily due to a $5.1 million increase in the average balance of certificate of deposit and a shift from shorter term, lower cost certificates of deposit into longer term, higher cost certificates of deposit. In addition to the increased certificate of deposit balances, the average combined balance of demand deposits and savings and money market balances increased by $14.2. The weighted-average cost of deposits also increased by 3 basis points, from 0.45% in the 2015 period to 0.48% in the 2016 period.

Interest expense on other short-term borrowings totaled $7,000 for the nine month period ended September 30, 2016, and 2015. The weighted-average cost of short-term borrowings increased 2 basis point from 0.14% in the 2015 period to 0.16% in the 2016 period, and was fully offset by a $926,000 decrease in the average balance of short-term borrowings.

Interest expense on Federal Home Loan Bank advances totaled $206,000 for the nine month period ended September 30, 2016, a decrease of $67,000 from $273,000 in the 2015 period. The decrease was primarily due to a 65 basis point decrease in the weighted-average cost from 1.96% in the 2015 period to 1.31% in the 2016 period. The decrease in the weighted-average cost was partially offset by a $2.4 million increase in the average balance outstanding from $18.6 million in the 2015 period to $21.0 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 $10.1 million for the nine months ended September 30, 2016, and increased $771,000 compared to the nine month period ended September 30, 2015. The increase in net interest income was primarily due to a $21.4 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 period. The increase in the average balance of earning assets was substantially due to a $37.9 million increase in the average balance of higher yielding loans, partially offset by a $16.5 million decline in lower yielding investments and interest-earning deposits compared to the prior year period. This increase was also due to an 8 basis point increase in the interest rate spread from 3.10% at September 30, 2015 to 3.18% at September 30, 2016. The increase in the interest rate spread is a result of yields on interest-earning assets increasing more than the rate paid on interest-bearing liabilities. During the nine months ended September 30, 2016, the yield on earning assets increased 8 basis points, while the rate paid on interest-bearing liabilities was 0.52% and remained unchanged from the prior year period. 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 for Loan Losses

Management recorded a $152,000 provision for loan losses for the nine month period ended September 30, 2016, a decrease of $919,000 compared to a provision of $1.1 million for the nine month period ended September 30, 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.

 

 49

 

Index 

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

 

There were $84,000 in charge-offs during the current year period compared to charge-offs totaling $1.1 million in the prior year period.

Noninterest Income

Noninterest income totaled $1.5 million for the nine month period ended September 30, 2016, an increase of $118,000, from $1.4 million for the same period in 2015. The increase was primarily due to a $61,000 increase in gain on sale of loans and a $54,000 increase in service fees, charges and other operating income. The increase in gain on sale of loans was primarily due to 5.1 million in loans sold during the 2016 year to date period compared to loan sales of $4.3 million in the same period one year ago. The increase in service fees, charges and other operating income was primarily due to a $52,000 supervisory fee refund in the current year period, as well as an increase in service charges on deposit accounts and debit card interchange income, partially offset by lower annuity fee income.

Noninterest Expense

Noninterest expense totaled $8.9 million for nine month period ended September 30, 2016, an increase of $518,000 from $8.4 million for the nine months ended September 30, 2015. This increase includes a $433,000 increase in salaries and employee benefits, a $76,000 increase in occupancy and equipment expense, and a $65,000 increase in franchise taxes, partially offset by a $60,000 decrease in other noninterest expense. The increase in salaries and employee benefits was due to increased director and committee fees due to a change in the director fee structure, increased compensation and payroll taxes due to staff additions and merit increases, higher healthcare costs due to an increase in premiums and staffing levels compared to the prior year period, and higher pension costs due to planned retirements. These increases were partially offset by a decrease in disability insurance, education and training, and post-retirement benefit costs. The increase in occupancy and equipment expense was due to increased depreciation, data processing expense and ATM network expenses partially offset by lower building repairs and maintenance and non-capital furniture and fixture costs. The increase in franchise taxes was due to the exclusion of the tax credit for the state supervisory exam fee that had previously been assessed and recorded in other noninterest expense in the prior year period. The decrease in other noninterest expense was due to a decrease in the costs related to foreclosed assets, legal costs, accounting expense, supervisory exam fees as discussed above and lower appraisal expense compared to the prior year. These decreased expenses were partially offset with an increase in stationary, printing and supplies expense, telephone expense, audit related expense, internet banking expense and special services compared to the prior year.

Federal Income Taxes

Federal income tax expense totaled $640,000 for the nine month period ended September 30, 2016, an increase of $414,000 compared to $226,000 for the nine month period ended September 30, 2015. The increase was primarily due to a $1.3 million 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 period was 24.9% compared to 17.6% for the prior year period. The effective rate is below the statutory rate of 34% due to certain income items that are not subject to tax.

 

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Index 

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

 

Forward-Looking Statements

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

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

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

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk

Management believes there has been no material change in the Company’s market risk since the Company’s Form 10-K 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.

 

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Index 

Wayne Savings Bancshares, Inc.
PART II

 
ITEM 1. Legal Proceedings

Not applicable.

 

ITEM 1A. Risk Factors

There have been no material changes in the risk factors set forth in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2015.

 

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
  (a) Not applicable.
  (b) Not applicable.
  (c) The following table sets forth certain information regarding repurchases by the Company for the quarter ended September 30, 2016.

 

Period  Total number of
shares
purchased
   Average price
paid per share
   Total number of
shares purchased
as part of the
announced plan
   Maximum number of
shares which may still
be purchased as part
of the announced plan
 
July 1 - 31, 2016   —     $—      —      —   
August 1 - 31, 2016   —      —      —      —   
September 1 - 30, 2016   —      —      —      69,546 
Total   —     $—      —      69,546 

 

 

Notes to the Table:

On September 22, 2016, the Company announced the authorization by the Board of Directors of a new program for the repurchase of up to 69,546 shares, or 2.5%, of the Company’s outstanding shares of common stock.

 

 

ITEM 3. Defaults Upon Senior Securities

Not applicable.

 

ITEM 4. Mine Safety Disclosures

 

Not applicable.

 

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Index 

Wayne Savings Bancshares, Inc.
PART II

 

 

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)

 

 

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Index 

 

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:  November 7, 2016           By: /s/H. Stewart Fitz Gibbon III                
    H. Stewart Fitz Gibbon III
    President and Chief Executive Officer
     
     
     
Date:    November 7, 2016           By: /s/Myron Swartzentruber                    
    Myron Swartzentruber
    Senior Vice President and
    Chief Financial Officer

 

 

 

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