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WAYN > SEC Filings for WAYN > Form 10-Q on 10-May-2013All Recent SEC Filings

Show all filings for WAYNE SAVINGS BANCSHARES INC /DE/ | Request a Trial to NEW EDGAR Online Pro

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


10-May-2013

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 continues to be engaged in several initiatives to improve the returns to shareholders over a foreseeable time horizon.

These continuing initiatives include the execution of a comprehensive marketing and sales program to increase top line revenue of the Company through both loan and fee income generating activities, recognizing that marketing expense is likely to increase ahead of revenue.

Another ongoing initiative is the review of branch facilities and staff to identify opportunities for reductions in staff and facilities costs to improve operational efficiency without impairing revenue generation ability and considering the potential effect on shareholder' equity.

A further ongoing initiative is the evaluation of information technology solutions to improve internal operating efficiency and customer service.

The final initiative includes the continuing development of a comprehensive Enterprise Risk Management (ERM) program to ensure that the earnings generated through existing and contemplated activities are commensurate with the risks assumed in those activities and consistent with legal requirements, regulatory requirements and general economic conditions.

Discussion of Financial Condition Changes from December 31, 2012 to March 31, 2013

At March 31, 2013, the Company had total assets of $399.6 million, a decrease of $2.5 million, or 0.6%, from total assets at December 31, 2012. Cash and cash equivalents decreased $2.1 million, due to funding a $1.0 million decline in total deposits, mainly in higher cost time deposits, and a $1.1 million decline in other short-term borrowings, while net loans decreased $939,000 which was partially used to fund growth of $295,000 in total securities compared to December 31, 2012.

Total securities increased $295,000 during the three months ended March 31, 2013. The increase was primarily due to purchases totaling $12.5 million, partially offset by principal repayments of $11.4 million, amortization of premiums of $472,000, and a $323,000 decline in unrealized gains on available-for-sale securities during the three months ended March 31, 2013.

Net loans receivable decreased by $939,000, at March 31, 2013 compared to December 31, 2012. The Bank originated $15.8 million of loans, received payments of $11.7 million, and originated and sold $4.4 million of 30-year fixed-rate mortgage loans into the secondary market, and recorded a credit for loan losses of $141,000. The low interest rate environment has induced a number of residential and commercial borrowers to refinance existing loans, which increases loan repayment activity. Although the extensive supply of liquidity provided by the Federal Reserve Board has decreased the cost of borrowing, it has not stimulated a substantial amount of loan growth. Employment, manufacturing, and investment in new plant and consumer spending are not doing as well as the housing sector. According to FDIC call report data based on Call Reports filed for March 31, 2013, loan growth analysis for all bank charters with assets exceeding $300 million (a universe of just over 2,100 banks) shows a general contraction of average loan growth compared to loan balances outstanding at December 31, 2012. Similar to the banking industry, loan growth for the Company remains difficult to achieve because the economic environment continues to limit the demand for new loans by credit worthy borrowers.

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

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 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 dates indicated.

                                                 March 31, 2013                     December 31, 2012
                                                       Percent of total                     Percent of total
                                         Balance            loans             Balance            loans
                                                               (Dollars in thousands)

Mortgage loans:
   One-to-four family residential(1)    $ 161,706                  63.95 %   $ 160,910                  63.25 %
   Residential construction loans           2,654                   1.05 %       2,170                   0.85 %
   Multi-family residential                 9,798                   3.88 %       9,790                   3.85 %
   Nonresidential real estate/land(2)      66,574                  26.33 %      65,761                  25.85 %
     Total mortgage loans                 240,732                  95.21 %     238,631                  93.80 %
Other loans:
   Consumer loans(3)                        1,409                   0.56 %       1,517                   0.60 %
   Commercial business loans               10,707                   4.23 %      14,245                   5.60 %
     Total other loans                     12,116                   4.79 %      15,762                   6.20 %
     Total loans before net items         252,848                 100.00 %     254,393                 100.00 %
Less:
   Loans in process                         2,351                                2,647
   Deferred loan origination fees             610                                  569
   Allowance for loan losses                2,977                                3,328
     Total loans receivable, net        $ 246,910                            $ 247,849

(1) Includes equity loans collateralized by second mortgages in the aggregate amount of $14.6 million at March 31, 2013 and $14.8 million at December 31, 2012. 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 March 31, 2013 and $2.3 million for December 31, 2012.

(3) Includes second mortgage loans of $667,000 for March 31, 2013 and $683,000 for December 31, 2012.

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

Foreclosed assets held for sale totaled $193,000 at March 31, 2013 compared to $318,000 at December 31, 2012. Activity during the current year period included the sale of two residential properties totaling $122,000, that were held as foreclosed assets at December 31, 2012, with no new foreclosed assets being added during the current year period. Total nonperforming and impaired assets totaled $14.4 million, or 3.59% of total assets, and $14.8 million, or 3.68% of total assets, at March 31, 2013 and December 31, 2012, respectively.

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, 2012, and there were no interim impairment indicators that would require another evaluation at March 31, 2013.

Deposits totaled $326.7 million at March 31, 2013, a decrease of $1.0 million, compared to $327.7 million at December 31, 2012. Demand deposits decreased $3.3 million, or 4.0%, and time deposits decreased by $3.0 million, or 2.2%, of which declines were partially offset by a $5.2 million, or 4.7% increase in savings and money market 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 consist solely of repurchase agreements with commercial customers of the Bank, decreased by $1.1 million and totaled $6.0 million at March 31, 2013. These customer repurchase agreements are offered by the Bank in order to retain commercial customer funds and to afford those commercial customers the opportunity to earn a return on a short-term secured transaction. Average balances are shown in the tables below and reflect no significant variation during the periods. The interest rate paid on these borrowings was 0.15% at both March 31, 2013 and December 31, 2012.

Advances from the Federal Home Loan Bank of Cincinnati ("FHLB") totaled $21.2 million at both March 31, 2013, and at December 31, 2012. 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 2.86% at March 31, 2013 compared to 2.69% at December 31, 2012.

Stockholders' equity increased by $56,000, during the three months ended March 31, 2013, primarily due to net income of $578,000, partially offset by dividends declared of $206,000, purchases of treasury stock totaling $126,000, and a $213,000 decline in accumulated other comprehensive income related solely to a decline in unrealized gains on available-for-sale securities.

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 March 31, 2013 and 2012

General

Net income for the three months ended March 31, 2013 totaled $578,000, reflecting an increase of $426,000, from $152,000 for the three month period ended March 31, 2012. The increase in net income was primarily due to a $928,000 decrease in provision (credit) for loan losses, and a $52,000 decrease in noninterest expense, partially offset by a $186,000 decrease in net interest income, a $78,000 decrease in noninterest income, and a $290,000 increase in provision (benefit) for federal income taxes.

Average Balance Sheet

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



                                                                       For the three months ended March 31,
                                                                  2013                                      2012
                                                   Average                     Average       Average                     Average
                                                   Balance       Interest        Rate        Balance       Interest        Rate
                                                                              (Dollars in thousands)
Interest-earning assets:
   Loans receivable, net(1)                       $ 247,693     $    2,888         4.66 %   $ 231,663     $    2,986         5.16 %
   Investment securities(2)                         115,023            656         2.28 %     136,932            942         2.75 %
   Interest-earning deposits(3)                      12,740             55         1.73 %      13,852             59         1.70 %
     Total interest-earning assets                  375,456          3,599         3.83 %     382,447          3,987         4.17 %
   Noninterest-earning assets                        24,807                                    23,837
     Total assets                                 $ 400,263                                 $ 406,284
Interest-bearing liabilities:
   Deposits                                       $ 326,495     $      435         0.53 %   $ 329,567     $      610         0.74 %
   Other short-term borrowings                        6,615              2         0.12 %       5,947              2         0.13 %
   Borrowings                                        21,239            152         2.86 %      26,608            179         2.69 %
     Total interest-bearing liabilities             354,349            589         0.66 %     362,122            791         0.87 %
   Noninterest bearing liabilities                    5,942                                     4,173
     Total liabilities                              360,291                                   366,295
   Stockholders' equity                              39,972                                    39,989
     Total liabilities and stockholders' equity   $ 400,263                                 $ 406,284
   Net interest income                                          $    3,010                                $    3,196
   Interest rate spread(4)                                                         3.17 %                                    3.30 %
   Net yield on interest-earning assets(5)                                         3.21 %                                    3.34 %
   Ratio of average interest- earning assets to
     average interest-bearing liabilities                                        105.96 %                                  105.61 %

(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.

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

Interest Income

Interest income decreased $388,000 or 9.7%, to $3.6 million for the three months ended March 31, 2013, compared to the same period in 2012. The decrease was due to 34 basis point decline in the weighted-average yield on interest-earning assets from 4.17% in the 2012 period to 3.83% for the 2013 period, as well as a $7.0 million decrease in the average balance of interest-earning assets from $382.4 million in the 2012 period to $375.4 million for the 2013 period. The yield decrease was primarily due to the cumulative effect of interest-earning assets repricing to lower current market rates compared to the 2012 period as a result of lower interest rate resets on adjustable rate loans, lower rates on new loan originations and reinvestment of securities cash flows at lower market yields.

Interest income on loans decreased $98,000, or 3.3%, for the three month period ended March 31, 2013, compared to the same period in 2012. This decrease was primarily due to a 50 basis point decrease in the weighted-average loan portfolio yield from 5.16% for the three months ended March 31, 2012 to 4.66% for the three months ended March 31, 2013, as a result of reduced origination yields and the amortization, prepayment and repricing of higher yielding loans due to the low level of market interest rates. The decline in the weighted-average loan portfolio yield was partially offset by a $16.0 million, or 6.9%, increase in the average balance of loans outstanding from $231.7 million in the 2012 period to $247.7 million for the 2013 period. Interest income on securities decreased $286,000 during the three months ended March 31, 2013, compared to the same period in 2012. This decrease was due to a 47 basis point decrease in the weighted-average rate from 2.75% in the 2012 period to 2.28% for the 2013 period, and a $21.9 million, or 16.0%, decline in the average balance.

Dividends on Federal Home Loan Bank stock and other income decreased $4,000 for three months ended March 31, 2013 compared to March 31, 2012. The decrease was due to a $1.1 million decline in the average balance, partially offset by a 3 basis point increase in the weighted average rate from 1.70% at March 31, 2012, to 1.73% at March 31, 2013.

Interest Expense

Interest expense totaled $589,000 for the three month period ended March 31, 2013, which decreased $202,000, or 25.5%, from $791,000 for the three month period ended March 31, 2012. The decrease was due to a 21 basis point decrease in the weighted-average cost of funds from 0.87% in the 2012 period to 0.66% in the current year period as well as a $7.8 million, or 2.1%, decrease in the average balance of total interest-bearing liabilities from $362.1 million in the 2012 period to $354.3 in the 2013 period.

Interest expense on deposits for the three month period ended March 31, 2013 totaled $435,000, which decreased $175,000, or 28.7%, from $610,000 for the same period in the previous year. The decrease was due to a 21 basis point decrease in the weighted-average cost of deposits, from 0.74% in the 2013 period to 0.53% for the 2013 period, as well as a $3.1 million decrease in the average balance from $329.6 million in the 2012 period to $326.5 million in the 2013 period. The decrease in interest expense continues to slow as rates paid on deposit products reach floors established by local market competitors and overall market conditions.

Interest expense on other short-term borrowings totaled $2,000 for both three month periods ended March 31, 2013, and 2012. The weighted-average cost decreased 1 basis point to 0.12%, which was fully offset by a $668,000 increase in the average balance.

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

Interest expense on Federal Home Loan Bank advances totaled $152,000 for the three month period ended March 31, 2013, which decreased $27,000 from $179,000 in the 2012 period. The decrease was primarily due to a $5.4 million, or 20.2%, decrease in the average balance outstanding, partially offset by a 17 basis point increase in the weighted-average cost from 2.69% in the 2012 period to 2.86% in the 2013 period. The increase in the weighted-average cost is due to the repayment of lower cost maturing advances without taking out new advances.

Net Interest Income

Net interest income totaled $3.0 million for the three month period ended March 31, 2013, a decrease of $186,000, or 5.8%, from the three month period ended March 31, 2012. The decline in net interest income was mainly due to a 13 basis point decrease in the net interest rate spread, from 3.30% at March 31, 2012 to 3.17% at March 31, 2013. The decrease in the net interest spread is a result of yields on earning-assets declining more than the rate paid on interest-bearing liabilities. During the three months ended March 31, 2013, the yield on earning assets declined 34 basis points, while the rate paid on interest-bearing liabilities declined 21 basis points, compared to the same period last year. The yield on earning assets was negatively impacted as a result of reduced origination yields, amortization, prepayment and repricing of higher yielding adjustable rate loans due to the low level of market interest rates, and security purchases at lower yields than in the prior year period. The cost of funds, which also declined from the prior year period, was managed in a manner that would allow the Bank to maintain its deposit base, and compete with existing market interest rates on interest-earning assets.

Provision (Credit) for Loan Losses

Management recorded a reversal of $141,000 in the provision (credit) for loan losses for the three month period ended March 31, 2013, resulting in a decrease of $928,000 compared to the $787,000 provision for the three month period ended March 31, 2012. The current quarter credit balance provision is based on improved local economic factors including the bank's delinquency ratios and the number of foreclosures within the bank's market area which both moved favorably during the current quarter combined with a decline in loan balances, compared to the prior year quarter. The increased provision in the prior year quarter was a result of several relationships requiring additional reserves, which included a loan downgrade, a foreclosure proceeding, and one that was considered doubtful, as well as an increase in classified loan balances.

Noninterest Income

Noninterest income totaled $390,000, for the three months ended March 31, 2013, which decreased $78,000, or 16.7%, from $468,000 for the same period in 2012. The decrease was primarily due to a $92,000 decline in Trust income related to the trust transfer and assumption agreement. This decrease was partially offset by a $13,000 increase in service fees, charges and other operating income which includes $17,000 in facilities and equipment reimbursements from TNB, as a result of the trust transfer and assumption agreement.

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

Noninterest Expense

Noninterest expense totaled $2.7 million for the three months ended March 31, 2013, which decreased $52,000, or 1.9%, from $2.8 million for the three months ended March 31, 2012. The decrease was primarily due to a $133,000 decrease in salaries and employee benefits and a $10,000 decrease in loss on foreclosed assets held for sale, partially offset by a $95,000 increase in other operating expenses. The decrease in salaries and employee benefits was due to a non-recurring health savings account contribution made in the prior year quarter, lower compensation costs resulting from staff attrition since the prior year quarter and the completion of the trust transfer and assumption agreement which eliminated several positions and the related salary and benefit costs compared to the prior year quarter. The increase in other operating expenses was primarily due to increased marketing expenses incurred as part of the Company's strategic initiative to increase top line revenues compared to the prior year quarter.

Federal Income Taxes

Federal income tax expense totaled $230,000 for the three month period ended March 31, 2013, an increase of $290,000 compared to a $60,000 benefit for three month period ended March 31, 2012. The increase was primarily due to a $716,000 increase in pretax income compared to the prior year period, as well as the tax benefit recorded in the prior year period which was a result of the composition of non-taxable earnings.

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.

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