UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) | |
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended | June 30, 2006 |
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) | |
OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ____________ to _______________
Commission File No. 0-23433
WAYNE SAVINGS BANCSHARES, INC. |
(Exact name of registrant as specified in its charter) |
Delaware | 31-1557791 | |
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification Number) |
151 North Market Street, Wooster, Ohio 44691 |
(Address of principal 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 Sections 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 ý | No o |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one.)
Large accelerated filer o | Accelerated filer o | Non-accelerated filer ý |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes o | No ý |
As of July 27, 2006, the latest practicable date, 3,359,552 shares of the registrant’s common stock, $.10 par value, were issued and outstanding.
1
Wayne Savings Bancshares, Inc.
Page | ||
PART I - | ||
Item 1 | 3 | |
4 | ||
5 | ||
6 | ||
8 | ||
Item 2 | ||
11 | ||
Item 3 | 17 | |
Item 4 | 17 | |
PART II - | ||
Item 1 | 18 | |
Item 1A | 18 | |
Item 2 | 18 | |
Item 3 | 18 | |
Item 4 | 18 | |
Item 5 | 18 | |
Item 6 | 18 | |
20 |
2
Wayne Savings Bancshares, Inc.
(In thousands, except share data)
June 30, | March 31, | ||||||
ASSETS | 2006 | 2006 | |||||
(Unaudited) | |||||||
Cash and due from banks | $ | 2,500 | $ | 2,952 | |||
Federal funds sold | 1,725 | - | |||||
Interest-bearing deposits in other financial institutions | 6,442 | 11,171 | |||||
Cash and cash equivalents | 10,667 | 14,123 | |||||
Investment securities available for sale - at market | 62,920 | 67,505 | |||||
Investment securities held to maturity - at amortized cost, approximate market value | |||||||
of $5,644 and $5,796 as of June 30, 2006 and March 31, 2006, respectively | 5,637 | 5,802 | |||||
Mortgage-backed securities available for sale - at market | 57,199 | 53,932 | |||||
Mortgage-backed securities held to maturity - at cost, approximate market value of | |||||||
$1,699 and $1,805 as of June 30, 2006 and March 31, 2006, respectively | 1,695 | 1,799 | |||||
Loans receivable - net | 237,003 | 235,312 | |||||
Office premises and equipment - net | 8,416 | 8,557 | |||||
Real estate acquired through foreclosure | 97 | 156 | |||||
Federal Home Loan Bank stock - at cost | 4,689 | 4,623 | |||||
Cash surrender value of life insurance | 5,866 | 5,811 | |||||
Accrued interest receivable on loans | 1,099 | 1,075 | |||||
Accrued interest receivable on mortgage-backed securities | 267 | 250 | |||||
Accrued interest receivable on investments and interest-bearing deposits | 571 | 700 | |||||
Prepaid expenses and other assets | 1,867 | 1,526 | |||||
Goodwill and other intangible assets | 2,481 | 2,508 | |||||
Total assets | $ | 400,474 | $ | 403,679 | |||
LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
Deposits | $ | 337,718 | $ | 332,570 | |||
Advances from the Federal Home Loan Bank | 25,000 | 32,750 | |||||
Advances by borrowers for taxes and insurance | 94 | 521 | |||||
Accrued interest payable | 290 | 263 | |||||
Accounts payable on mortgage loans serviced for others | 121 | 225 | |||||
Other liabilities | 1,188 | 1,118 | |||||
Accrued federal income taxes | 129 | 51 | |||||
Deferred federal income taxes | 434 | 665 | |||||
Total liabilities | 364,974 | 368,163 | |||||
Commitments | - | - | |||||
Stockholders’ equity | |||||||
Preferred stock (500,000 shares of $.10 par value authorized- | |||||||
no preferred stock issued as of June 30, 2006 or March 31,2006) | - | - | |||||
Common stock (9,000,000 shares of $ .10 par value authorized; 3,954,874 and 3,934,874 shares | |||||||
issued at June 30, 2006 and March 31, 2006) | 395 | 393 | |||||
Additional paid-in capital | 35,881 | 35,604 | |||||
Retained earnings - substantially restricted | 11,584 | 11,394 | |||||
Less required contributions for shares acquired by Employee Stock Ownership Plan | (1,219 | ) | (1,239 | ) | |||
Less 595,322 shares of treasury stock at both June 30, 2006 and March 31, 2006 - at cost | (9,625 | ) | (9,625 | ) | |||
Accumulated other comprehensive loss - unrealized losses on securities designated | |||||||
as available for sale | (1,516 | ) | (1,011 | ) | |||
Total stockholders’ equity | 35,500 | 35,516 | |||||
Total liabilities and stockholders’ equity | $ | 400,474 | $ | 403,679 |
Wayne Savings Bancshares, Inc.
(In thousands, except share data)
Three months ended | |||||||
June 30, | |||||||
2006 | 2005 | ||||||
(Unaudited) | |||||||
Interest income | |||||||
Loans | $ | 3,891 | $ | 3,284 | |||
Mortgage-backed securities | 699 | 512 | |||||
Investment securities | 743 | 759 | |||||
Interest-bearing deposits and other | 103 | 126 | |||||
Total interest income | 5,436 | 4,681 | |||||
Interest expense | |||||||
Deposits | 2,232 | 1,618 | |||||
Borrowings | 283 | 264 | |||||
Total interest expense | 2,515 | 1,882 | |||||
Net interest income | 2,921 | 2,799 | |||||
Provision for losses on loans | 30 | - | |||||
Net interest income after provision for losses on loans | 2,891 | 2,799 | |||||
Other income | |||||||
Gain on sale of loans | - | 25 | |||||
Increase in cash surrender value of life insurance | 55 | 61 | |||||
Service fees on deposit accounts | 207 | 178 | |||||
Other operating | 164 | 144 | |||||
Total other income | 426 | 408 | |||||
General, administrative and other expense | |||||||
Employee compensation and benefits | 1,398 | 1,569 | |||||
Occupancy and equipment | 458 | 425 | |||||
Franchise taxes | 118 | 129 | |||||
Amortization of goodwill and other intangible assets | 27 | 27 | |||||
Other operating | 486 | 469 | |||||
Total general, administrative and other expense | 2,487 | 2,619 | |||||
Earnings before income taxes | 830 | 588 | |||||
Federal incomes taxes | |||||||
Current | 208 | 148 | |||||
Deferred | 29 | - | |||||
Total federal income taxes | 237 | 148 | |||||
NET EARNINGS | $ | 593 | $ | 440 | |||
EARNINGS PER SHARE | |||||||
Basic | $ | 0.18 | $ | 0.13 | |||
Diluted | $ | 0.18 | $ | 0.13 | |||
DIVIDENDS PER SHARE | $ | 0.12 | $ | 0.12 |
Wayne Savings Bancshares, Inc.
(In thousands)
Three months ended | |||||||
June 30, | |||||||
2006 | 2005 | ||||||
(Unaudited) | |||||||
Net earnings | $ | 593 | $ | 440 | |||
Other comprehensive income: | |||||||
Unrealized holding gains (losses) on securities, net of related | |||||||
taxes (benefits) of $(260) and $367 during the respective periods | (505 | ) | 712 | ||||
Comprehensive income | $ | 88 | $ | 1,152 | |||
Accumulated comprehensive loss | $ | (1,516 | ) | $ | (80 | ) |
Wayne Savings Bancshares, Inc.
For the three months ended June 30,
(In thousands)
2006 | 2005 | ||||||
(Unaudited) | |||||||
Cash flows from operating activities: | |||||||
Net earnings for the period | $ | 593 | $ | 440 | |||
Adjustments to reconcile net earnings to net cash | |||||||
Provided by operating activities: | |||||||
Amortization of discounts and premiums on | |||||||
investments and mortgage-backed securities - net | (8 | ) | 152 | ||||
Amortization of deferred loan origination fees | (10 | ) | (38 | ) | |||
Depreciation and amortization | 173 | 159 | |||||
Amortization of expense related to ESOP | 20 | 21 | |||||
Gain on sale of loans | - | (15 | ) | ||||
Proceeds from sale of loans in the secondary market | - | 1,181 | |||||
Loans originated for sale in the secondary market | - | (1,166 | ) | ||||
Provision for losses on loans | 30 | - | |||||
Federal Home Loan Bank stock dividends | (66 | ) | (53 | ) | |||
Increase (decrease) in cash: | |||||||
Accrued interest receivable on loans | (29 | ) | (173 | ) | |||
Accrued interest receivable on mortgage-backed securities | (13 | ) | 202 | ||||
Accrued interest receivable on investments and interest-bearing deposits | 129 | (41 | ) | ||||
Prepaid expenses and other assets | (341 | ) | (773 | ) | |||
Amortization of expense related to intangibles | 27 | 27 | |||||
Accrued interest payable | 27 | 32 | |||||
Accounts payable on mortgage loans serviced for others | (104 | ) | (13 | ) | |||
Other liabilities | 68 | (169 | ) | ||||
Federal income taxes | |||||||
Current | 73 | 235 | |||||
Deferred | 29 | - | |||||
Net cash provided by operating activities | 598 | 8 | |||||
Cash flows used in investing activities: | |||||||
Purchase of investment securities designated as available for sale | (1,101 | ) | (5,344 | ) | |||
Proceeds from maturity of investment securities designated as held to maturity | 165 | 73 | |||||
Proceeds from maturity of investment securities designated as available for sale | 5,465 | 39 | |||||
Purchase of mortgage-backed securities designated as available for sale | (8,478 | ) | (4,706 | ) | |||
Principal repayments on mortgage-backed securities designated as held to maturity | 103 | 241 | |||||
Principal repayments and sales of mortgage-backed securities designated as available for sale | 4,677 | 8,698 | |||||
Loan principal repayments | 21,477 | 35,273 | |||||
Loan disbursements | (23,188 | ) | (36,264 | ) | |||
Purchase of office premises and equipment - net | (32 | ) | (88 | ) | |||
Proceeds from sale of real estate acquired through foreclosure | 59 | 112 | |||||
Increase in cash surrender value of life insurance | (55 | ) | (61 | ) | |||
Net cash used in investing activities | (908 | ) | (2,027 | ) | |||
Net cash used in operating and investing activities | |||||||
(balance carried forward) | (310 | ) | (2,019 | ) |
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the three months ended June 30,
(In thousands)
2006 | 2005 | ||||||
(Unaudited) | |||||||
Net cash used in operating and investing activities | |||||||
(balance brought forward) | $ | (310 | ) | $ | (2,019 | ) | |
Cash flows provided by (used in) financing activities: | |||||||
Net increase in deposit accounts | 5,148 | 6,915 | |||||
Proceeds from Federal Home Loan Bank advances | 25,250 | 14,000 | |||||
Repayments of Federal Home Loan Bank advances | (33,000 | ) | (15,000 | ) | |||
Advances by borrowers for taxes and insurance | (427 | ) | (461 | ) | |||
Dividends paid on common stock | (401 | ) | (412 | ) | |||
Proceeds from exercise of stock options | 279 | 367 | |||||
Tax benefits of stock options exercised | 5 | - | |||||
Purchase of treasury shares | - | (3,611 | ) | ||||
Net cash provided by (used in) financing activities | (3,146 | ) | 1,798 | ||||
Net decrease in cash and cash equivalents | (3,456 | ) | (221 | ) | |||
Cash and cash equivalents at beginning of period | 14,123 | 29,942 | |||||
Cash and cash equivalents at end of period | $ | 10,667 | $ | 29,721 | |||
Supplemental disclosure of cash flow information: | |||||||
Cash paid during the period for: | |||||||
Federal income taxes | $ | 130 | $ | - | |||
Interest on deposits and borrowings | $ | 2,488 | $ | 1,850 | |||
Supplemental disclosure of noncash investing activities: | |||||||
Transfers from loans to real estate acquired through foreclosure | $ | - | $ | 81 | |||
Unrealized gains (losses) on securities designated as available for sale, | |||||||
net of related tax effects | $ | (505 | ) | $ | 712 | ||
Recognition of mortgage servicing rights in accordance | |||||||
with SFAS No. 140 | $ | - | $ | 10 | |||
Dividends payable | $ | 403 | $ | 412 |
Wayne Savings Bancshares, Inc.
For the three month periods ended June 30, 2006 and 2005
1. Basis of Presentation
The accompanying unaudited consolidated financial statements for the three months ended June 30, 2006 and 2005 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 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 March 31, 2006.
In the opinion of management, all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the unaudited financial statements have been included. The results of operations for the three month period ended June 30, 2006 are not necessarily indicative of the results which may be expected for the entire fiscal year.
Critical Accounting Policy - 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 collectability as of the reporting date. Such evaluation, which included a review of all loans on which full collectability 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 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.
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.
2. | Principles of Consolidation |
The accompanying 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 banking locations in Wayne, Holmes, Ashland, Medina and Stark counties. All significant intercompany transactions and balances have been eliminated in the consolidation.
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended June 30, 2006 and 2005
3. | Earnings Per Share |
Basic earnings per common share are 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, totaling 115,867 and 126,859 for the three month periods ended June 30, 2006 and 2005, respectively. Diluted earnings per common share include the dilutive effect of all additional potential common shares issuable under the Company’s stock option plan. The computations are as follows:
For the three months ended | |||||||
June 30, | |||||||
2006 | 2005 | ||||||
Weighted-average common shares outstanding (basic) | 3,234,972 | 3,439,760 | |||||
Dilutive effect of assumed exercise of stock options | 13,024 | 17,552 | |||||
Weighted-average common shares outstanding (diluted) | 3,247,996 | 3,457,312 |
All outstanding options were included in the diluted earnings per share calculation for the three month periods ended June 30, 2006 and 2005.
4. Stock Option Plan
The Company has a 1993 Incentive Stock Option Plan that provided for the issuance of 196,390 shares of authorized common stock, as adjusted, with 2,567 options outstanding at June 30, 2006. In fiscal 2004, the Company adopted a new Stock Option Plan that provided for the issuance of 142,857 incentive options and 61,224 non-incentive options to purchase shares of authorized common stock. As of June 30, 2006, all options under the 2004 Plan have been granted, are subject to exercise at the discretion of the grantees, and will expire in fiscal 2014 unless otherwise exercised.
There were no options granted during each of the three months ended June 30, 2006 and 2005.
No expense was required to be recognized related to stock options in the three month period ended June 30, 2006, nor does management anticipate any expense for future periods.
A summary of the status of the Company’s stock option plans as of and for the years ended March 31, 2006 and 2005, and the three months ended June 30, 2006 is presented below:
Three months ended | Year ended | ||||||||||||||||||
June 30, | March 31, | ||||||||||||||||||
2006 | 2006 | 2005 | |||||||||||||||||
Weighted- | Weighted- | Weighted- | |||||||||||||||||
average | average | average | |||||||||||||||||
exercise | exercise | exercise | |||||||||||||||||
Shares | price | Shares | price | Shares | price | ||||||||||||||
Outstanding at beginning of period | 179,148 | $ | 13.92 | 214,204 | $ | 13.84 | 214,204 | $ | 13.84 | ||||||||||
Granted | - | - | - | - | 163,265 | 13.95 | |||||||||||||
Exercised | (20,000 | ) | 13.95 | (27,556 | ) | 13.32 | - | - | |||||||||||
Forfeited | - | - | (7,500 | ) | 13.95 | (163,265 | ) | 13.95 | |||||||||||
Outstanding at end of period | 159,148 | $ | 13.91 | 179,148 | $ | 13.92 | 214,204 | $ | 13.84 | ||||||||||
Options exercisable at period-end | 159,148 | $ | 13.91 | 179,148 | $ | 13.92 | 214,204 | $ | 13.84 | ||||||||||
Fair value of options granted | $ | - | $ | - | $ | 4.07 |
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended June 30, 2006 and 2005
4. Stock Option Plan (continued)
The following information applies to options outstanding at June 30, 2006:
Number outstanding | 159,148 | |
Range of exercise prices | $11.67 - $13.95 | |
Weighted-average exercise price | $13.92 | |
Weighted-average remaining contractual life | 7.75 years |
The fair value of options granted has been based on the Black Scholes pricing model using a dividend yield of 4.5% and an expected volatility of 27.3% for fiscal 2005. All options granted in fiscal 2005 have expected lives of nine years.
5. Effects of Recent Accounting Developments
In March 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 156, “Accounting for Servicing of Financial Assets - an amendment of SFAS No. 140,” to simplify the accounting for separately recognized servicing assets and servicing liabilities. Specifically, SFAS No. 156 amends SFAS No. 140 to require an entity to take the following steps:
· | Separately recognize financial assets as servicing assets or servicing liabilities, each time it undertakes an obligation to service a financial asset by entering into certain kinds of servicing contracts; |
· | Initially measure all separately recognized servicing assets and liabilities at fair value, if practicable; and |
· | Separately present servicing assets and liabilities subsequently measured at fair value in the statement of financial condition and additional disclosures for all separately recognized servicing assets and servicing liabilities. |
Additionally, SFAS No. 156 permits, but does not require, an entity to choose either the amortization method or the fair value measurement method for measuring each class of separately recognized servicing assets and servicing liabilities. SFAS No. 156 also permits a servicer that uses derivative financial instruments to offset risks on servicing to use fair value measurement when reporting both the derivative financial instrument and related servicing asset or liability.
SFAS No. 156 applies to all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006, or April 1, 2007 as to the Company, with earlier application permitted. The Company is currently evaluating SFAS No. 156, but does not expect it to have a material effect on the Company’s financial condition or results of operations.
ITEM 2 | ||
CONDITION AND RESULTS OF OPERATIONS |
Average Balance Sheet
The following tables set 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 and the average yields earned and rates paid. 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 June 30, | |||||||||||||||||||
2006 | 2005 | ||||||||||||||||||
Average | Average | Average | Average | ||||||||||||||||
Balance | Interest | Rate | Balance | Interest | Rate | ||||||||||||||
(Dollars in thousands) | |||||||||||||||||||
Interest-earning assets: | |||||||||||||||||||
Loans receivable - net1 | $ | 235,419 | $ | 3,891 | 6.61 | % | $ | 213,111 | $ | 3,284 | 6.16 | % | |||||||
Mortgage-backed | |||||||||||||||||||
securities2 | 58,521 | 699 | 4.78 | 58,657 | 512 | 3.49 | |||||||||||||
Investment securities | 71,001 | 743 | 4.19 | 76,749 | 759 | 3.96 | |||||||||||||
Interest-bearing deposits3 | 10,667 | 103 | 3.86 | 17,617 | 126 | 2.86 | |||||||||||||
Total interest- | |||||||||||||||||||
earning assets | 375,608 | 5,436 | 5.79 | 366,134 | 4,681 | 5.11 | |||||||||||||
Non-interest-earning assets | 22,857 | 25,724 | |||||||||||||||||
Total assets | $ | 398,465 | $ | 391,858 | |||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||
Deposits | $ | 333,773 | 2,232 | 2.67 | $ | 321,346 | 1,618 | 2.01 | |||||||||||
Borrowings | 25,998 | 283 | 4.35 | 29,392 | 264 | 3.59 | |||||||||||||
Total interest- | |||||||||||||||||||
bearing liabilities | 359,771 | 2,515 | 2.8 | 350,738 | 1,882 | 2.15 | |||||||||||||
Non-interest bearing | |||||||||||||||||||
liabilities | 3,056 | 1,364 | |||||||||||||||||
Total liabilities | 362,827 | 352,102 | |||||||||||||||||
Stockholders’ equity | 35,638 | 39,756 | |||||||||||||||||
Total liabilities and | |||||||||||||||||||
stockholders’ equity | $ | 398,465 | $ | 391,858 | |||||||||||||||
Net interest income | $ | 2,921 | $ | 2,799 | |||||||||||||||
Interest rate spread4 | 2.99 | % | 2.96 | % | |||||||||||||||
Net yield on interest- | |||||||||||||||||||
earning assets5 | 3.11 | % | 3.06 | % | |||||||||||||||
Ratio of average interest- | |||||||||||||||||||
earning assets to average | |||||||||||||||||||
interest-bearing liabilities | 104.40 | % | 104.39 | % |
________________________________________________________
1 Includes non-accrual loan balances.
2 Includes mortgage-backed securities designated as available for sale.
3 Includes federal funds sold and interest-bearing 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.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from March 31, 2006 to June 30, 2006
At June 30, 2006, we had total assets of $400.5 million, a decrease of $3.2 million, or .8%, from March 31, 2006 levels.
Liquid assets, consisting of cash, interest-bearing deposits and investment securities, decreased by $8.2 million, or 9.4%, to $79.2 million at June 30, 2006 mainly due to a reduction in interest-bearing deposits in other financial institutions of $4.7 million coupled with a decrease in investment securities available for sale of $4.6 million, or 6.8%. The decrease in interest-bearing deposits in other financial institutions was primarily due to management’s continuous monitoring of cash and redeploying into higher interest-earning assets and paying down short-term liabilities. Mortgage-backed securities increased by $3.2 million, or 5.7%, to $58.9 million as the Company purchased $8.5 million of primarily 15-year fixed-rate mortgage-backed securities, partially offset by $5.3 million of amortization and prepayments on the existing mortgage-backed securities portfolio.
During the three month period ended June 30, 2006 loans receivable increased $1.7 million as the Bank originated and retained $23.2 million of loans and received payments of $21.5 million. Rather than reinvest funds from sales of and repayments on loans in long-term, fixed-rate residential loans, the Company has been able to originate shorter-term and adjustable-rate commercial loans. The Company believes that investing in shorter-term and adjustable-rate commercial loans positions the Company favorably in an increasing interest rate environment, reflecting the Bank’s increased emphasis on commercial lending. The composition of the loan portfolio has continued to change during the most recent three months ended June 30, 2006, due to a net decrease of $2.0 million in residential and construction mortgage loans, offset by an increase in nonresidential real estate loans of $2.6 million and a net increase in commercial loans of $685,000.
June 30, 2006 | March 31, 2006 | ||||||||||||
(Dollars in thousands) | |||||||||||||
Mortgage loans: | |||||||||||||
One-to four-family residential(1) | $ | 148,027 | 61.46 | % | $ | 149,134 | 62.40 | % | |||||
Residential construction loan | 3,994 | 1.66 | 4,675 | 1.96 | |||||||||
Multi-family residential | 7,868 | 3.27 | 7,930 | 3.32 | |||||||||
Non-residential real estate/land(2) | 53,382 | 22.16 | 50,778 | 21.25 | |||||||||
Total mortgage loans | 213,171 | 88.55 | 212,517 | 88.93 | |||||||||
Other loans: | |||||||||||||
Consumer loans(3) | 5,344 | 2.22 | 4,901 | 2.05 | |||||||||
Commercial business loans | 22,235 | 9.23 | 21,550 | 9.02 | |||||||||
Total other loans | 27,679 | 11.45 | 26,451 | 11.07 | |||||||||
Total loans before net items | 240,850 | 100.00 | % | 238,968 | 100.00 | % | |||||||
Less: | |||||||||||||
Loans in process | 1,934 | 1,729 | |||||||||||
Deferred loan origination fees | 444 | 443 | |||||||||||
Allowance for loan losses | 1,469 | 1,484 | |||||||||||
Total loans receivable - net | $ | 237,003 | $ | 235,312 | |||||||||
Mortgage-backed securities, net(4) | $ | 58,894 | $ | 55,731 |
____________________________
(1) | Includes equity loans collateralized by second mortgages in the aggregate amount of $20.7 million and $20.9 million as of June 30, 2006 and March 31, 2006, respectively. Such loans have been underwritten on substantially the same basis as the Company’s first mortgage loans. |
(2) | Includes land loans of $634,000 and $674,000 as of June 30, 2006 and March 31, 2006, respectively. |
(3) | Includes second mortgage loans of $592,000 and $783,000 as of June 30, 2006 and March 31, 2006, respectively. |
(4) Includes mortgage-backed securities designated as available for sale.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from March 31, 2006 to June 30, 2006 (continued)
Nonperforming and impaired loans amounted to $792,000 at June 30, 2006, as compared with $772,000 in nonperforming and impaired loans at March 31, 2006. Such loans consisted, on both dates, of primarily residential mortgage loans. Historically, the Company generally has not recognized losses on nonperforming loans secured by residential mortgages. The following table sets forth information regarding our past due, nonaccrual and impaired loans and real estate acquired through foreclosure as of June 30, 2006 and March 31, 2006.
June 30, | March 31, | ||||||
2006 | 2006 | ||||||
Past due loans 30-89 days: | (Dollars in thousands) | ||||||
Mortgage loans: | |||||||
One- to four-family residential | $ | 514 | $ | 553 | |||
Non-residential | - | - | |||||
Land | - | - | |||||
Non-mortgage loans: | |||||||
Commercial business loans | 26 | 72 | |||||
Consumer loans | 16 | 1 | |||||
556 | 626 | ||||||
Non-accrual loans: | |||||||
Mortgage loans: | |||||||
One- to four-family residential | 792 | 725 | |||||
All other mortgage loans | - | - | |||||
Non-mortgage loans: | |||||||
Commercial business loans | - | 47 | |||||
Consumer | - | - | |||||
Total non-accrual loans | 792 | 772 | |||||
Accruing loans 90 days or more delinquent | - | - | |||||
Total non-performing loans | 792 | 772 | |||||
Loans deemed impaired | - | - | |||||
Total non-performing and impaired loans | 792 | 772 | |||||
Total real estate acquired through foreclosure | 97 | 156 | |||||
Total non-performing and impaired assets | $ | 889 | $ | 928 | |||
Total non-performing and impaired loans to net | |||||||
loans receivable | 0.33 | % | 0.33 | % | |||
Total non-performing and impaired loans to total assets | 0.20 | % | 0.19 | % | |||
Total non-performing and impaired assets to total assets | 0.22 | % | 0.23 | % |
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from March 31, 2006 to June 30, 2006 (continued)
The following table sets forth the analysis of the allowance for loan losses for the periods indicated.
For the three months ended | For the year ended | ||||||||||
June 30,2006 | March 31, 2006 | ||||||||||
(Dollars in thousands) | |||||||||||
Loans receivable - net | $ | 237,003 | $ | 235,312 | |||||||
Average loans receivable - net | $ | 235,419 | $ | 222,944 | |||||||
Allowance balance (at beginning of period) | $ | 1,484 | $ | 1,374 | |||||||
Charge-offs: | |||||||||||
Mortgage loans: | |||||||||||
One- to four-family | (31 | ) | (73 | ) | |||||||
Residential construction | - | - | |||||||||
Multi-family residential | - | - | |||||||||
Non-residential real estate and land | (15 | ) | - | ||||||||
Other loans: | |||||||||||
Consumer | (2 | ) | (75 | ) | |||||||
Commercial | - | (10 | ) | ||||||||
Gross charge-offs | (48 | ) | (158 | ) | |||||||
Recoveries: | |||||||||||
Mortgage loans: | |||||||||||
One- to four-family | - | 14 | |||||||||
Residential construction | - | - | |||||||||
Multi-family residential | - | - | |||||||||
Non-residential real estate and land | - | - | |||||||||
Other loans: | |||||||||||
Consumer | 3 | 35 | |||||||||
Commercial | - | 8 | |||||||||
Gross recoveries | 3 | 57 | |||||||||
Net charge-offs | (45 | ) | (101 | ) | |||||||
Provision charged to operations | 30 | 211 | |||||||||
Allowance for loans losses (at end of period) | $ | 1,469 | $ | 1,484 | |||||||
Allowance for loan losses as a percent of loans | |||||||||||
receivable - net at end of period | 0.62 | % | 0.63 | % | |||||||
Net loans charged off as a percent of average | |||||||||||
loans receivable - net | 0.02 | % | 0.05 | % | |||||||
Ratio of allowance for loan losses to non- | |||||||||||
performing loans at end of period | 185.48 | % | 192.23 | % | |||||||
Deposits totaled $337.7 million at June 30, 2006, an increase of $5.1 million from $332.6 million at March 31, 2006. The increase was due primarily to the Bank’s competitive deposit pricing in all market areas. Certificates of deposit grew by $7.6 million money market accounts increased by $4.7 million and commercial repurchase agreements increased by $823,000. This growth was offset by a decrease of $3.3 million in NOW accounts and a $4.7 million decrease in savings deposits.
Borrowings totaled $25.0 million at June 30, 2006 as compared with $32.8 million at March 31, 2006. The Company was able to repay short-term Federal Home Loan Bank advances during the 2006 three month period.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from March 31, 2006 to June 30, 2006 (continued)
Stockholders’ equity decreased by $16,000 during the three months ended June 30, 2006, due mainly to the decrease in the unrealized gain on available for sale securities of $505,000 and dividends declared of $403,000. These decreases were offset with earnings of $593,000 coupled with the proceeds from stock options exercised of $279,000.
Comparison of Operating Results for the Three Month Periods Ended June 30, 2006 and 2005
General
Net earnings totaled $593,000 for the quarter ended June 30, 2006, an increase of $153,000, or 34.8%, compared to the net earnings of $440,000 for the quarter ended June 30, 2005. The increase in net earnings was primarily attributable to a decrease in general, administrative and other expense of $132,000, or 5.0%, an increase in net interest income after provision for losses on loans of $92,000, or 3.3%, offset by an increase in federal income taxes of $89,000, or 60.1%.
The Company has maintained its strategy to aggressively manage interest rate risk. Management believes that the investment of excess funds primarily in shorter term assets will help the Company in a rising interest rate environment by providing it with the flexibility to redeploy such assets in higher yielding loans and other investments as interest rates rise.
Interest Income
Interest income increased $755,000, or 16.1%, to $5.4 million for the three months ended June 30, 2006, compared to the same period in 2005. This increase was mainly due to an increase in the weighted-average yield on interest-earning assets to 5.79% in the 2006 period from 5.11% for the period ended June 30, 2005. The yield increase is primarily due to the Federal Reserve raising the prime rate 2.0% over the past year and the corresponding impact on the Company’s investment securities and interest-bearing deposits.
Interest income on loans increased $607,000, or 18.5%, for the three months ended June 30, 2006, compared to the same period in 2005, due primarily to an increase in the weighted-average balance of loans period to period of $22.3 million, or 10.5%, to $235.4 million for the 2006 period, coupled with an increase in the weighted-average yield of 45 basis points to 6.61%.
Interest income on mortgage-backed securities increased $187,000 during the three months ended June 30, 2006, compared to the same period in 2005, due primarily to an increase of 129 basis points to a weighted-average yield of 4.78% as compared to 3.49%, from the comparable 2005 period. The slowdown of prepayments causes premium amortization to decrease, resulting in an increase in interest income on mortgage-backed securities.
Interest income on investment securities decreased by $16,000, or 2.1%, during the 2006 period compared to the same period in 2005, reflecting a decrease in the weighted-average balance of $5.7 million, or 7.5%, to $71.0 million from $76.7 million during the comparable 2005 period, offset with an increase in the average yield to 4.19%.
Interest income on interest-bearing deposits decreased by $23,000, or 18.3%, for the three months ended June 30, 2006, due primarily to a decrease in the weighted-average balance of $7.0 million, or 39.5%, offset with an increase in the average yield of 100 basis points to an average yield of 3.86% from an average yield of 2.86% for the quarter ended June 30, 2005.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended June 30, 2006 and 2005 (continued)
Interest Expense
Interest expense for the three months ended June 30, 2006 totaled $2.5 million, an increase of $633,000, or 33.6%, from interest expense for the three months ended June 30, 2005. The increase resulted from a 65 basis point increase in the average cost of funds to 2.80% for the 2006 period coupled with an increase in the average balance of deposits and borrowings outstanding of $9.0 million, or 2.6%, to $359.8 million for the period ended June 30, 2006.
Interest expense on deposits totaled $2.2 million for the three months ended June 30, 2006, an increase of $614,000, or 37.9%, compared to the three months ended June 30, 2005, as a result of an increase in the average balance outstanding of $12.4 million, or 3.9%, to $333.8 million for the 2006 period coupled with a 66 basis point increase in the average cost of deposits to 2.67% for the 2006 period.
Interest expense on borrowings totaled $283,000 for the three months ended June 30, 2006, an increase of $19,000, or 7.2%, from the 2005 period, primarily due to an increase in the weighted-average yield of 76 basis points to an average yield of 4.35% for the three months ended June 30, 2006 offset by a decrease in the weighted-average balance of $3.4 million, or 11.5%.
Net Interest Income
Net interest income totaled $2.9 million for the three months ended June 30, 2006, an increase of $122,000, or 4.4%, from the three month period ended June 30, 2006. The average interest rate spread increased to 2.99% for the three months ended June 30, 2006 from 2.96% for the three months ended June 30, 2005. The net interest margin increased to 3.11% for the three months ended June 30, 2006 from 3.06% for the three months ended June 30, 2005.
Provision for Losses on Loans
For the period ended June 30, 2006, management recorded a $30,000 provision for losses on loans, reflecting, among other factors, the growth and changing composition of the portfolio. The Company did not record any provision for losses on loans for the three month period ending June 30, 2005. To the best of management’s knowledge, all known and inherent losses that are probable and which can be reasonably estimated have been recorded as of June 30, 2006.
Other Income
Other income, consisting primarily of the cash surrender value of life insurance, gains on sale of loans, service fees, and charges on deposit accounts increased by $18,000, or 4.4%, for the three months ended June 30, 2006 as compared with the quarter ended June 30, 2005. Gain on sale of loans was down $25,000 due to management’s decision to retain mortgage loans in an effort to rebuild the declining mortgage loan balances. Earnings from cash surrender value of life insurance decreased by $6,000, or 9.8%, due to a decrease in effective yields on these policies. These decreases were offset by an increase of $29,000 in service fees, on deposit accounts and $20,000 increase in other operating income which was mainly comprised of an increase in trust income.
General, Administrative, and Other Expense
General, administrative and other expense decreased by $132,000, or 5.0%, to $2.5 million for the three months ended June 30, 2006 compared to the three months ended June 30, 2005. The decrease in employee compensation and benefits expense of $171,000, or 10.9%, was mainly due to management’s successful efforts to reduce the number of
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended June 30, 2006 and 2005 (continued)
General, Administrative, and Other Expense (continued)
full time equivalent employees from 132.5 at June 30, 2005 to 119.0 at June 30, 2006. This decrease was offset by an increase of $33,000, or 7.8%, in occupancy and equipment expense, comprised primarily of data processing expenses needed to facilitate growth in internet banking and the implementation of check imaging technology and increased building maintenance, insurance and taxes at our branches.
Federal Income Taxes
The federal income tax expense was $237,000 for the three months ended June 30, 2006, an increase of $89,000, or 60.1%, compared to the same period in 2005, primarily due to the $242,000, or 41.2%, increase in earnings before federal income taxes. The effective tax rates for the periods ended June 30, 2006 and 2005, respectively, were 28.6% and 25.2%. The difference in the effective tax rate from the 34% statutory rate is mainly due to the beneficial effects of income from cash surrender value on life insurance and other tax-exempt obligations.
There has been no material change in the Company’s market risk since the Company’s Form 10-K filed with the Securities and Exchange Commission for the year ended March 31, 2006.
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.
Wayne Savings Bancshares, Inc.
ITEM 1. Legal Proceedings
Neither the Company nor the Bank is involved in any pending legal proceedings other than non-material legal proceedings occurring in the ordinary course of business.
ITEM 1A. Risk Factors
There have been no material changes in the Company’s risk factors from those previously disclosed in the Company’s Form 10-K for the year ended March 31, 2006.
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 June 30, 2006. |
Total # of | Maximum # of shares | ||||
Total | Average | shares purchased | which may still be | ||
# of shares | price paid | as part of the | purchased as part | ||
Period | purchased | per share | announced plan | of the announced plan | |
April 1-30, 2006 | - | $ - | - | 140,105 | |
May 1-31, 2006 | - | $ - | - | 140,105 | |
June 1-30, 2006 | - | $ - | - | 140,105 |
Notes to the Table:
A repurchase program for 185,491, or 5% of the Company’s outstanding shares, was publicly announced on September 2, 2004 and expires on August 26, 2005. On June 6, 2005, the Company announced the completion of the repurchase program and the authorization by the Board of Directors of a new program for the repurchase of 352,433 shares, or 10% of the Company’s outstanding shares.
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
None
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits
Certification of Chief Executive Officer pursuant | ||
to Section 302 of the Sarbanes-Oxley Act of | ||
2002, 18 U.S.C. Section 1350 | ||
Certification of Chief Financial Officer pursuant | ||
to Section 302 of the Sarbanes-Oxley Act of | ||
2002, 18 U.S.C. Section 1350 | ||
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 |
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: | August 4, 2006 | By: | /s/ Phillip E. Becker | |
Phillip E. Becker | ||||
President and Chief Executive Officer | ||||
Date: | August 4, 2006 | By: | H. Stewart Fitz Gibbon III | |
H. Stewart Fitz Gibbon III | ||||
Senior Vice President and Chief Financial Officer | ||||
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