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WAYN > SEC Filings for WAYN > Form 10-Q on 9-Nov-2012All Recent SEC Filings

Show all filings for WAYNE SAVINGS BANCSHARES INC /DE/

Form 10-Q for WAYNE SAVINGS BANCSHARES INC /DE/


9-Nov-2012

Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations

Strategic Initiatives

As part of an ongoing strategic planning process, which includes annual plan updates and regular progress reviews by the Board of Directors, the Company is engaged in several initiatives to improve the returns to shareholders over a foreseeable time horizon. These initiatives include the development of a comprehensive marketing and sales program to increase top line revenue of the Company through loans and fee income generating activities, a comprehensive review of the branch facilities and staff to identify opportunities for cost effective reductions to improve operational efficiency, evaluation of alternative approaches for the delivery of trust services to ensure profitable operation of the department (which resulted in the transfer and assumption agreement discussed in note 12 to the financial statements above) and evaluation of information technology solutions to improve internal efficiency and customer service. A comprehensive review of the Company's branch facilities conducted during 2011 and updated during 2012 yielded no opportunities for consolidation of branch facilities that would not reduce the Company's current or future profitability as compared to alternatives included in the Company's strategic plan.

Discussion of Financial Condition Changes from December 31, 2011 to September 30, 2012

At September 30, 2012, the Company had total assets of $401.1 million, a decrease of $9.0 million, or 2.2%, from total assets at December 31, 2011.

Liquid assets, consisting of cash, interest-bearing demand deposits and available-for-sale securities, decreased by $18.1 million, or 12.0%, to $132.3 million at September 30, 2012 compared to $150.5 million at December 31, 2011. The decrease was primarily due to a decrease of $10.7 million in cash and cash equivalents and a decrease of $7.4 million, or 5.7%, in available-for-sale securities. The decrease in available-for-sale securities was due to scheduled payments and "prepayments" on loans securitized within mortgage-backed securities that reduced the available-for-sale securities portfolio of the Bank. Increased payments on loans, also known as "prepayments," occur in low interest rate environments where borrowers can exercise an option to refinance existing loans either with or without a prepayment penalty. These decreases were partially offset by a $7.7 million increase in net loans. Increased loan balances were the result of management's ongoing efforts to enhance the development of the commercial business loan program combined with historically low residential mortgage rates resulting in increased origination activity.

Total securities decreased by $6.6 million, or 5.0%, during the nine month period ended September 30, 2012. The decrease was primarily due to principal repayments of $38.1 million and amortization of premiums of $1.6 million partially offset with purchases of $32.9 million for the nine month period. Purchases were mainly funded by proceeds from principal payments received from the securities portfolio.

Net loans receivable increased by $7.7 million, or 3.3%, at September 30, 2012 compared to December 31, 2011. The Bank originated $51.4 million of loans, received payments of $33.1 million, originated and sold $4.3 million of 30-year fixed-rate mortgage loans into the secondary market, and made a provision for loan losses of $618,000. The low interest rate environment has induced a number of residential and commercial borrowers to refinance existing loans, which increases loan repayment activity, while the continuing difficult economic environment continues to limit the demand for new loans by credit worthy borrowers.

As part of an overall strategy to manage liquidity and interest rate risk, management has executed a strategy of immediately selling certain newly originated 30-year fixed-rate mortgage loans into the secondary

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

market to limit the interest rate risk exposure on the balance sheet and to utilize the secondary market as a backup source of liquidity. Similarly, in order to further limit the overall interest rate risk on the balance sheet, the Company focuses on the origination of shorter-term and adjustable-rate secured commercial loans and limits the retention of long term fixed-rate residential mortgages. To the extent that loan demand is insufficient in the current period, investments in the securities portfolio are made to provide cash flows to fund loan demand in future periods, while also limiting the interest rate risk exposure of the Company. Investments generally contribute to higher risk based capital ratios, compared to loans, as the investments the Company purchases are risk weighted less than the loan originations. As loan volume increases relative to investment volume, risk based capital ratios will decline.

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

                                        September 30, 2012          December 31, 2011
                                                    (Dollars in thousands)
Mortgage loans:
One-to-four family residential(1)     $  156,754        63.01 %   $ 153,064        64.30 %
Residential construction loans             2,238         0.90           753         0.32
Multi-family residential                   9,644         3.88         8,589         3.61
Non-residential real estate/land(2)       66,220        26.62        62,864        26.40
Total mortgage loans                     234,856        94.41       225,270        94.63
Other loans:
Consumer loans(3)                          1,677         0.67         2,257         0.95
Commercial business loans                 12,237         4.92        10,526         4.42
Total other loans                         13,914         5.59        12,783         5.37
Total loans before net items             248,770       100.00 %     238,053       100.00 %
Less:
Loans in process                           4,661                      1,691
Deferred loan origination fees               508                        409
Allowance for loan losses                  3,812                      3,854
Total loans receivable, net           $  239,789                  $ 232,099

(1) Includes loans collateralized by second mortgages in the aggregate amount of $15.3 million at September 30, 2012 and $15.9 million at December 31, 2011. Such loans have been underwritten on substantially the same basis as the Company's first mortgage loans.

(2) Includes land loans of $2.1 million for September 30, 2012 and $2.7 million for December 31, 2011.

(3) Includes second mortgage loans of $735,000 for September 30, 2012 and $1.2 million December 31, 2011.

Foreclosed assets held for sale totaled $59,000 at September 30, 2012 compared to $1.3 million at December 31, 2011. Activity during the nine months consisted of the sale of a nonresidential property for $1.2 million with an associated writedown of $46,000 to reflect market values. Total non-performing and impaired assets totaled $13.2 million, or 3.3% of total assets, and $12.2 million, or 2.98% of total assets, at September 30, 2012 and December 31, 2011, respectively.

Bank Owned Life Insurance (BOLI) increased by $1.5 million during the nine month period ended September 30, 2012. Management executed a strategy to improve the credit quality of the existing portfolio by exchanging insurance policies. As part of this process, management invested additional funds to generate increased earnings in order to offset compensation and benefits costs while meeting minimum policy issuance requirements.

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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 March 31, 2012, and there were no interim impairment indicators that would require another evaluation at September 30, 2012.

Deposits totaled $327.4 million at September 30, 2012, a decrease of $6.5 million, or 1.9%, compared to $333.8 million at December 31, 2011. Time deposits decreased by $11.6 million, or 7.8%, partially offset by a $2.8 million increase in savings and money market accounts and an increase of $2.3 million in demand accounts. Management continued to exercise discipline during the period with regard to the pricing of retail certificates, keeping rates close to market benchmarks and not competing for certificates where a profitable customer relationship was not involved. Given the uncertain status of the economy in general, customers are choosing to increase their liquidity and keep their funds in insured checking, savings and money market products offered by the Bank.

Other short-term borrowings, which consists solely of repurchase agreements with commercial customers of the Bank, increased by $1.9 million and totaled $7.2 million at September 30, 2012. 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, 2012 and December 31, 2011.

Advances from the Federal Home Loan Bank of Cincinnati ("FHLB") totaled $21.2 million at September 30, 2012, compared to $26.6 million at December 31, 2011. The Company uses advances from the FHLB for both short-term cash management purposes and to extend liability duration for interest rate risk management purposes, as the cost of duration purchased from the FHLB is less expensive than obtaining a similar duration through retail certificates of deposit. Repricing risk associated with advances is mitigated through the laddering of advance maturities over time. The weighted average cost of FHLB advances was 2.72% at September 30, 2012 compared to 2.67% at December 31, 2011.

Stockholders' equity increased by $724,000, or 1.8%, during the nine months ended September 30, 2012, primarily due to net income of $1.2 million, partially offset by dividends declared of $599,000.

Comparison of Operating Results for the Three Month Periods Ended September 30, 2012 and 2011

General

Net income for the three months ended September 30, 2012 totaled $465,000, reflecting an increase of $156,000, or 50.5%, compared to $309,000 for the three month period ended September 30, 2011. The increase in net income was primarily due to a decrease of $217,000 in provision for loan losses, and a $212,000 decrease in provision for impairment on foreclosed assets held for sale. These decreases were partially offset with an increase in other noninterest expense of $128,000, an increase in federal income taxes of $109,000 and a decrease of $46,000 in net interest income.

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,
                                                                                                    2012                                      2011
                                                                                     Average                     Average       Average                     Average
                                                                                     Balance       Interest        Rate        Balance       Interest        Rate
                                                                                                                (Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1)                                                            $ 237,377     $    2,964         4.99 %   $ 232,467     $    3,067         5.28 %
Investment securities(2)                                                              130,419            788         2.42       139,498          1,091         3.13
Interest-earning deposits(3)                                                           11,534             55         1.91        16,616             54         1.30
Total interest-earning assets                                                         379,330          3,807         4.01       388,581          4,212         4.34
Noninterest-earning assets                                                             23,990                                    23,818

Total assets                                                                        $ 403,320                                 $ 412,399

Interest-bearing liabilities:
Deposits                                                                            $ 326,828     $      500         0.61 %   $ 328,638     $      752         0.92 %
Other short-term borrowings                                                             7,035              3         0.17         5,904              3         0.20
Borrowings                                                                             24,066            165         2.74        34,298            272         3.17
Total interest-bearing liabilities                                                    357,929            668         0.75       368,840          1,027         1.11

Noninterest bearing  liabilities                                                        4,531                                     3,653
Total liabilities                                                                     362,460                                   372,493
Stockholders' equity                                                                   40,860                                    39,906
Total liabilities and stockholders' equity                                          $ 403,320                                 $ 412,399
Net interest income                                                                               $    3,139                                $    3,185
Interest rate spread(4)                                                                                              3.26 %                                    3.23 %
Net yield on interest-earning assets(5)                                                                              3.31 %                                    3.28 %
Ratio of average interest-earning assets to average  interest-bearing liabilities                                  105.98 %                                  105.35 %

(1) Includes non-accrual 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.

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

Interest Income

Interest income decreased by $405,000 or 9.6%, to $3.8 million for the three months ended September 30, 2012, compared to the same period in 2011. The decrease was due to a decline in the weighted-average yield on interest-earning assets to 4.01% in the 2012 period from 4.34% for the 2011 period, as well as a decrease of $9.3 million in the average balance of interest-earning assets to $379.3 million for the 2012 period compared to an average balance of $388.6 million for the 2011 period. The yield decrease was primarily due to the cumulative effect of interest-earning assets repricing to lower current market rates compared to the 2011 period as a result of interest rate resets on adjustable rate loans and securities, prepayments, lower rates on new loan originations and reinvestment of securities cashflows at lower market yields.

Interest income on loans decreased by $103,000, or 3.4%, for the three month period ended September 30, 2012, compared to the same period in 2011. The loan portfolio yield decreased from 5.28% for the three months ended September 30, 2011 to 4.99% for the three months ended September 30, 2012, as a result of reduced origination yields and the amortization, prepayment and repricing of higher yielding assets due to the low level of market interest rates. The average balance of loans outstanding increased $4.9 million, or 2.1%, to $237.4 million for the 2012 period compared to $232.5 million for the 2011 period. Interest income on securities decreased by $303,000 during the three months ended September 30, 2012, compared to the same period in 2011. This decrease was primarily due to a decrease of 71 basis points in the weighted-average rate to 2.42% for the 2012 period, compared to 3.13% for the 2011 period, and a decline in the average balance of $9.1 million, or 6.5%. As discussed earlier, maturing securities cash flows are being reinvested at significantly lower market rates, and the duration of purchased securities is being shortened to mitigate the interest rate risk associated with a possible future increase in the level of market interest rates and to provide cash flows to fund future loan demand.

Dividends on Federal Home Loan Bank stock and other income increased $1,000 for three month periods ended September 30, 2012 from September 30, 2011. The increase was due to a 61 basis point increase in the weighted average rate from 1.30% at September 30, 2011, to 1.91% at September 30, 2012 and was substantially offset by the decrease in the average balance of $5.1 million, or 30.6%.

Interest Expense

Interest expense totaled $668,000 for the three month period ended September 30, 2012, a decrease of $359,000, or 35.0%, compared to $1.0 million for the three month period ended September 30, 2011. The decrease was primarily due to a 36 basis point decrease in the weighted-average cost of funds to 0.75% for the 2012 period compared to 1.11% for the prior year period and to a lesser extent, due to a decrease in the average balance of total interest-bearing liabilities of $10.9 million, or 3.0%, for the 2012 period compared to the 2011 period.

Interest expense on deposits for the three month period ended September 30, 2012 totaled $500,000, a decrease of $252,000, or 33.5%, compared to $752,000 for the same period in the previous year. The decrease was mainly due to a 31 basis point decrease in the weighted-average cost of deposits, to 0.61% for the 2012 period compared to 0.92% for the 2011 period, as well as a decrease in the average balance of $1.8 million to $326.8 million for the period ended September 30, 2012. The decrease in interest expense

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

is slowing as rates paid on deposit products reach floors established by local market competitors and overall market conditions.

Interest expense on other short-term borrowings totaled $3,000 for both three month periods ended September 30, 2012, and 2011. The weighted-average cost decreased 3 basis points to 0.17% which was fully offset by an increase in the average balance of $1.1 million, or 19.1%.

Interest expense on Federal Home Loan Bank advances totaled $165,000 for the three month period ended September 30, 2012, a decrease of $107,000 compared to expense of $272,000 for the 2011 period. The decrease was primarily due to a decline of $10.2 million, or 29.8%, in the average balance outstanding, and a decrease in the weighted-average cost of 43 basis points to 2.74%. The decrease in the rate paid is mainly due to decreases in market interest rates as maturing advances have either been paid off or refinanced at lower rates.

Net Interest Income

Net interest income totaled $3.1 million for the three month period ended September 30, 2012, a decrease of $46,000, or 1.4%, from the three month period ended September 30, 2011. The decline in net interest income was mainly due to a $9.3 million decrease in the average balance of interest-earning assets, partially offset by a $10.9 million decline in the average balances of interest earning liabilities. Despite the decline in net interest income, the interest rate spread increased 3 basis points to 3.26% for the 2012 period compared to 3.23% for the 2011 period. The increase in the above interest rate spread can be attributed to the the higher average balances in higher yielding loans which was more than offset with declines in both the average balances of the lower yielding investment securities and interest earning cash balances. Similarly, the net interest margin increased 3 basis points to 3.31% for the three month period ended September 30, 2012 compared to 3.28% for the 2011 period. This results in increased loan repayment activity, and accelerated the prepayments on the real estate based securities portfolio which creates excess amortization of premiums and reduced earnings. The cost of funds was managed in a manner that would allow the Bank to compete with existing market interest rates on interest earning assets.

Provision for Loan Losses

Management recorded $225,000 in the provision for loan losses for the three month period ended September 30, 2012, resulting in a decrease of $217,000 compared to the $442,000 provision for the three month period ended September 30, 2011. During the 2011 period, the Bank recorded a large provision based on an updated appraisal on a single commercial real estate property. The current provision for loan losses was mainly due to both the increased number of foreclosures within the Bank's market and increased delinquencies during the quarter.

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

Noninterest Income

Noninterest income, consisting of service fees and charges on deposit accounts decreased $77,000 mainly due to a reduction in customer service charges and investment income from non-depository products, partially offset by an increased gain on the sale of loans of $73,000, for the three month period ended September 30, 2012, compared to the three month period ended September 30, 2011.

Noninterest Expense

Noninterest expense decreased by $104,000, or 3.5%, to $2.8 million for the three months ended September 30, 2012, compared to $2.9 million for the three months ended September 30, 2011. The decrease was primarily due to a decrease of $212,000 in provision for impairment on foreclosed assets held for sale, as the prior year required provision of $150,000 for a single commercial real estate property, and a decrease of $38,000 in salaries and employee benefits, partially offset by an increase in other operating expense of $128,000, or 25.3%. The decrease in salaries and employee benefits was primarily due to the decline in participants in the employee healthcare plan in the 2012 quarter compared to the 2011 quarter and the attrition of corporate staff positions. The increase in other operating expense was primarily due to increased marketing expenses incurred as part of the Company's strategic initiative to increase top line revenues as well as with additional special services required to assist the Bank in contract negotiations with vendors and legal services.

Federal Income Taxes

A federal income tax expense of $125,000 was recognized for the three month period ended September 30, 2012, an increase of $109,000 compared to the three month period ended September 30, 2011. The increase was primarily due to a $265,000 increase in pretax income resulting from the factors discussed above.

Comparison of Operating Results for the Nine Month Periods Ended September 30, 2012 and 2011

General

Net income for the nine months ended September 30, 2012 totaled $1.2 million, an increase of $12,000, or 1.0%, compared to the nine month period ended September 30, 2011. The increase in net income was primarily due to an increase of $146,000 in noninterest income, primarily due to gain on sale of loans, partially offset by a $118,000 decrease in net interest income as the interest earning asset balances declined.

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,
                                                                                                    2012                                     2011
                                                                                     Average                    Average       Average                    Average
                                                                                     Balance      Interest        Rate        Balance      Interest        Rate
                                                                                                               (Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1)                                                            $ 234,195     $   8,895         5.06 %   $ 236,921     $   9,379         5.28 %
Investment securities(2)                                                              133,246         2,592         2.59       134,893         3,330         3.29
Interest-earning deposits(3)                                                           13,804           171         1.65        14,560           171         1.57
Total interest-earning assets                                                         381,245        11,658         4.08       386,374        12,880         4.44
Noninterest-earning assets                                                             23,818                                   24,186

Total assets                                                                        $ 405,063                                $ 410,560

Interest-bearing liabilities:
Deposits                                                                            $ 328,516     $   1,654         0.67 %   $ 324,697     $   2,392         0.98 %
Other short-term borrowings                                                             6,738             8         0.16         6,199            13         0.28
Borrowings                                                                             25,194           515         2.73        36,865           876         3.17
Total interest-bearing liabilities                                                    360,448         2,177         0.81       367,761         3,281         1.19

Noninterest bearing  liabilities                                                        4,322                                    3,834
. . .
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