FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20552
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2003
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File No. 0-23433
WAYNE SAVINGS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1557791
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
151 North Market Street
Wooster, Ohio 44691
(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code: (330) 264-5767
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the past
90 days.
Yes |X| No |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12 B-2 of the Exchange Act)
Yes |_| No |X|
As of August 12, 2003, the latest practicable date, 3,907,324 shares of the
registrant's common stock, $.10 par value, were issued and outstanding.
1
Wayne Savings Bancshares, Inc.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 13
Item 3 Quantitative and Qualitative Disclosure About Market Risk 16
Item 4 Controls and Procedures 16
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 17
Item 2 Changes in Securities and Use of Proceeds 17
Item 3 Defaults Upon Senior Securities 17
Item 4 Submission of Matter to a Vote of Security Holders 17
Item 5 Other Information 17
Item 6 Exhibits and Reports on Form 8-K 17
SIGNATURES 19
2
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
June 30, March 31,
2003 2003
ASSETS
Cash and due from banks $ 2,402 $ 2,967
Federal funds sold 5,825 8,000
Interest-bearing deposits in other financial institutions 6,996 6,529
--------- ---------
Cash and cash equivalents 15,223 17,496
Investment securities available for sale - at market 17,221 17,036
Investment securities - at amortized cost, approximate market value of $19,090
and $19,211 as of June 30, 2003 and March 31, 2003, respectively 18,194 18,805
Mortgage-backed securities available for sale - at market 75,615 66,151
Mortgage-backed securities - at cost, approximate market value of $7,987 and
$9,927 as of June 30, 2003 and March 31, 2003, respectively 7,919 9,851
Loans receivable - net 220,510 228,373
Office premises and equipment - net 8,684 8,818
Federal Home Loan Bank stock - at cost 4,081 4,041
Cash surrender value of life insurance 5,188 5,121
Accrued interest receivable on loans 915 948
Accrued interest receivable on mortgage-backed securities 339 380
Accrued interest receivable on investments and interest-bearing deposits 459 313
Prepaid expenses and other assets 2,151 1,532
Prepaid federal income taxes -- 126
--------- ---------
Total assets $ 376,499 $ 378,991
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 298,298 $ 300,931
Advances from the Federal Home Loan Bank 30,000 30,000
Advances by borrowers for taxes and insurance 57 712
Accrued interest payable 260 235
Accounts payable on mortgage loans serviced for others 627 130
Other liabilities 1,006 1,638
Accrued federal income taxes 253 --
Deferred federal income taxes 736 682
--------- ---------
Total liabilities 331,237 334,328
Commitments -- --
Stockholders' equity
Common stock (20,000,000 shares of $ .10 par value authorized; 3,907,324 and
3,888,795 shares issued at June 30, 2003 and March 31, 2003, respectively) 391 389
Additional paid-in capital 34,268 34,208
Retained earnings - substantially restricted 12,122 11,830
Less required contributions for shares acquired by Employee Stock Ownership Plan (1,573) (1,612)
Accumulated other comprehensive income (loss) 54 (152)
--------- ---------
Total stockholders' equity 45,262 44,663
--------- ---------
Total liabilities and stockholders' equity $ 376,499 $ 378,991
========= =========
See accompanying notes to consolidated financial statements.
3
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended June 30,
(In thousands, except share data)
2003 2002
Interest income
Loans $ 3,725 $ 4,432
Mortgage-backed securities 568 222
Investment securities 352 255
Interest-bearing deposits and other 78 140
------- -------
Total interest income 4,723 5,049
Interest expense
Deposits 1,612 2,433
Borrowings 320 65
------- -------
Total interest expense 1,932 2,498
------- -------
Net interest income 2,791 2,551
Provision for losses on loans 32 17
------- -------
Net interest income after provision for losses on loans 2,759 2,534
Other income
Gain on sale of loans 37 16
Increase in cash surrender value of life insurance 67 --
Service fees, charges and other operating 406 328
------- -------
Total other income 510 344
General, administrative and other expense
Employee compensation and benefits 1,266 1,146
Occupancy and equipment 386 379
Federal deposit insurance premiums 13 13
Franchise taxes 77 73
Other operating 470 428
------- -------
Total general, administrative and other expense 2,212 2,039
------- -------
Earnings before income taxes 1,057 839
Federal incomes taxes
Current 375 219
Deferred (49) 66
------- -------
Total federal income taxes 326 285
------- -------
NET EARNINGS $ 731 $ 554
======= =======
EARNINGS PER SHARE
Basic $ 0.20 $ 0.15
======= =======
Diluted $ 0.20 $ 0.15
======= =======
See accompanying notes to consolidated financial statements.
4
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended June 30,
(In thousands)
2003 2002
Net earnings for the period $ 731 $ 554
Other comprehensive income, net of tax:
Unrealized holding gains on securities, net of taxes of
$103 and $14, during the respective periods 206 27
----- -----
Comprehensive income $ 937 $ 581
===== =====
Accumulated comprehensive income $ 54 $ 49
===== =====
See accompanying notes to consolidated financial statements.
5
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended June 30,
(In thousands)
2003 2002
Cash flows from operating activities:
Net earnings for the period $ 731 $ 554
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of discounts and premiums on loans,
investments and mortgage-backed securities - net 411 38
Amortization of deferred loan origination fees (156) (86)
Depreciation and amortization 134 145
Gain on sale of loans (31) (7)
Proceeds from sale of loans in the secondary market 693 3,330
Loans originated for sale in the secondary market (685) --
Provision for losses on loans 32 17
Federal Home Loan Bank stock dividends (40) (45)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans 33 17
Accrued interest receivable on mortgage-backed securities 41 --
Accrued interest receivable on investments and interest-bearing deposits (146) (28)
Prepaid expenses and other assets (619) 100
Accrued interest payable 25 69
Accounts payable on mortgage loans serviced for others 497 127
Other liabilities (632) (218)
Federal income taxes
Current 376 209
Deferred (49) 66
-------- --------
Net cash provided by operating activities 615 4,288
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available for sale (10,023) --
Proceeds from maturity of investment securities designated as held to maturity 599 1,786
Proceeds from maturity of investment securities designated as available for sale 10,029 --
Purchase of mortgage-backed securities designated as held to maturity -- (1,952)
Purchase of mortgage-backed securities designated as available for sale (16,717) --
Principal repayments on mortgage-backed securities designated as held to maturity 1,892 1,165
Principal repayments on mortgage-backed securities designated as available for sale 7,056 339
Loan principal repayments 24,840 16,435
Loan disbursements (16,830) (15,758)
Purchase of office premises and equipment - net -- (70)
Increase in cash surrender value of life insurance (67) --
Proceeds from sale of real estate acquired through foreclosure -- 16
Purchase of Federal Home Loan Bank stock -- (98)
-------- --------
Net cash provided by investing activities 779 1,863
-------- --------
Net cash provided by operating and investing activities
(balance carried forward) 1,394 6,151
-------- --------
6
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the thee months ended June 30,
(In thousands)
2003 2002
Net cash provided by operating and investing activities
(balance brought forward) $ 1,394 $ 6,151
Cash flows provided by (used in) financing activities:
Net decrease in deposit accounts (2,633) (220)
Proceeds from Federal Home Loan Bank advances -- --
Repayment of Federal Home Loan Bank advances -- --
Advances by borrowers for taxes and insurance (655) (656)
Dividends paid on common stock (440) (207)
Proceeds from exercise of stock options 61 6
-------- --------
Net cash used in financing activities (3,667) (1,077)
-------- --------
Net increase (decrease) in cash and cash equivalents (2,273) 5,074
Cash and cash equivalents at beginning of period 17,496 27,883
-------- --------
Cash and cash equivalents at end of period $ 15,223 $ 32,957
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ -- $ 10
======== ========
Interest on deposits and borrowings $ 1,907 $ 2,429
======== ========
Supplemental disclosure of noncash investing activities:
Issuance of mortgage loan upon sale of real estate acquired through foreclosure $ -- $ 450
======== ========
Unrealized gains on securities designated as available for
sale, net of related tax effects $ 206 $ 27
======== ========
Recognition of mortgage servicing rights in accordance
with SFAS No. 140 $ 6 $ 9
======== ========
7
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended June 30, 2003 and 2002
1. Basis of Presentation
The accompanying unaudited consolidated financial statements for the three
months ended June 30, 2003 and 2002 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 financial statements and notes
thereto of Wayne Savings Bancshares, Inc. included in the Annual Report on
Form 10-K for the year ended March 31, 2003.
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, 2003 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 losses on loans. 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 losses on
loans. The allowance for losses on loans is based on management's current
judgments about the credit quality of individual loans and segments of the
loan portfolio. The allowance for losses on loans 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.
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. (the "Company") and the Company's wholly-owned
subsidiary, Wayne Savings Community Bank ("Wayne Savings" or the "Bank")
and the Bank's wholly-owned subsidiary, Village Savings Bank, F.S.B.
("Village"), hereinafter collectively referred to as "the Banks". Wayne
Savings has nine banking locations in Wayne, Holmes, Ashland, and Medina
counties, Ohio, in addition to its Village subsidiary serving Stark
county. All significant intercompany transactions and balances have been
eliminated in the consolidation.
8
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended June 30, 2003 and 2002
3. Earnings Per Share
Basic earnings per common share is computed based upon the
weighted-average number of common shares outstanding during the period,
less shares in the Company's Employee Stock Ownership Plan (ESOP) that are
unallocated and not committed to be released. Diluted earnings per common
share include the dilutive effect of all additional potential common
shares issuable under the Company's stock option plan. Basic and diluted
earnings per share for the three months ended June 30, 2002 has been
restated to give effect to 1.5109 share exchange rates in the Company's
conversion offering. The computations are as follows:
For the three months ended June 30 :
2003 2002
Weighted-average common shares
outstanding (basic) 3,732,364 3,723,761
Dilutive effect of assumed exercise
of stock options 1,170 7,150
--------- ---------
Weighted-average common shares
outstanding (diluted) 3,733,534 3,730,911
========= =========
4. Stock Option Plan
The Company has an incentive Stock Option Plan that provided for the
issuance of 196,390 adjusted shares of authorized, but unissued shares of
common stock. The Company also has a non-incentive Stock Option Plan that
provided for the issuance of 82,223 shares of authorized, but unissued
shares of common stock.
The Company accounts for its stock option plans in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation," which provides a fair
value-based method for valuing stock-based compensation that entities may
use, which measures compensation cost at the grant date based on the fair
value of the award. Compensation is then recognized over the service
period, which is usually the vesting period. Alternatively, SFAS No. 123
permits entities to continue to account for stock options and similar
equity instruments under Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." Entities that continue to
account for stock options using APB Opinion No. 25 are required to make
pro forma disclosures of net earnings and earnings per share, as if the
fair value-based method of accounting defined in SFAS No. 123 had been
applied. Management has determined that the Company will continue to
account for stock based compensation to APB Opinion No. 25. There were no
option granted during the three months ended June 30, 2003 and 2002.
The following information applies to options outstanding at June 30, 2003:
Numbers outstanding................................ 10,123
Range of exercise prices........................... $11.67
Weighted-average exercise price.................... $11.67
Weighted-average remaining contractual life........ 9.33 years
At June 2003, all of the stock options granted were subject to exercise at
the discretion of the grantees and expire in fiscal 2013.
9
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended June 30, 2003 and 2002
A summary of the status of the Company's stock option plans as of March 31, 2003
and 2002, and changes during the June 30, 2003 ending dates is presented below:
Year ended
Three months March 31,
ended -----------
June 30, 2003 2003 2002
------------- ---- ----
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------- -------- ------- --------
Outstanding at beginning of
period 28,666 $ 6.26 23,378 $ 3.31 26,400 $ 3.31
Granted -- -- 10,123 11.67 -- --
Exercised (18,543) 3.31 (4,835) 3.31 (3,022) 3.31
Fortified -- -- -- -- -- --
------- ------- ------- ------- ------- -------
Outstanding at end of period 10,123 $ 11.67 28,666 $ 6.26 23,378 $ 3.31
======= ======= ======= ======= ======= =======
Options exercisable at end of period 10,123 $ 11.67 28,666 $ 6.26 23,378 $ 3.31
======= ======= ======= ======= ======= =======
Fair value of options granted -- $ 3.17 --
======= ======= =======
10
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three month periods ended June 30, 2003 and 2002
5. Effects of Recent Accounting Pronouncements
In October 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 147, "Accounting
for Certain Financial Institutions: An Amendment of FASB Statement No. 72
and 144 and FASB Interpretation No. 9," which removes acquisitions of
financial institutions from the scope of SFAS No. 72, "Accounting for
Certain Acquisitions of Banking and Thrift Institutions," except for
transactions between mutual enterprises. Accordingly, the excess of the
fair value of liabilities assumed over the fair value of tangible and
intangible assets acquired in a business combination should be recognized
and accounted for as goodwill in accordance with SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 147 also requires that the acquisition of a less-than-whole
financial institution, such as a branch, be accounted for as a business
combination if the transferred assets and activities constitute a
business. Otherwise, the acquisition should be accounted for as the
acquisition of net assets.
SFAS No. 147 also amends the scope of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," to include long-term
customer relationship assets of financial institutions (including mutual
enterprises) such as depositor- and borrower-relationship intangible
assets and credit cardholder intangible assets.
The provisions of SFAS No. 147 related to unidentifiable intangible assets
and the acquisition of a less-than-whole financial institution are
effective for acquisitions for which the date of acquisition is on or
after October 1, 2002. The provisions related to impairment of long-term
customer relationship assets are effective October 1, 2002. Transition
provisions for previously recognized unidentifiable intangible assets are
effective on October 1, 2002, with earlier application permitted.
SFAS No. 147 was adopted without material effect on the Company's
financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123
to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS
No. 148 is effective for fiscal years beginning after December 15, 2002.
The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after
December 15, 2002. SFAS No. 148 was adopted without material effects on
the Company's financial position or results of operation.
11
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the three month periods ended June 30, 2003 and 2002
5. Effects of Recent Accounting Pronouncements (continued)
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires
a guarantor entity, at the inception of a guarantee covered by the
measurement provisions of the interpretation, to record a liability for
the fair value of the obligation undertaken in issuing the guarantee. The
Company has financial letters of credit which require the Company to make
payment if the customer's financial condition deteriorates, as defined in
the agreements. FIN 45 requires Wayne to record a liability generally
equal to fees received for these letters of credit when guaranteeing
obligations. FIN 45 applies prospectively to guarantees Wayne issues or
modifies subsequent to December 31, 2002. Wayne had no letters of credit
outstanding at June 30, 2003.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns, or both. FIN 46 also
requires disclosures about variable interest entities that a company is
not required to consolidate, but in which it has a significant variable
interest. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The
consolidation requirements apply to existing entities in the first fiscal
year or interim period beginning after June 15, 2003. Certain of the
disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The Company adopted the disclosure requirements of FIN 46
effective January 31, 2003, without material effect on its financial
statements.
6. Forward-looking Statements
This quarterly report on Form 10-Q contains forward-looking statements.
For this purpose, any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans",
"expects" and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
Company's actual results to differ materially from those contemplated by
such forward-looking statements. These important factors include, without
limitation, the Banks' continued ability to originate quality loans,
fluctuation of interest rates, real estate market conditions in the Banks'
lending areas, general and local economic conditions, the continued
ability of the Banks to attract and retain deposits, new accounting
pronouncements and changing regulatory requirements.
12
ITEM 2 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 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,
---------------------------------------------------------------------
2003 2002
-------------------------------- --------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
-------- -------- -------- -------- -------- --------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1) $224,479 $ 3,725 6.64% $248,688 $ 4,432 7.13%
Mortgage-backed
securities(2) 80,344 568 2.83 18,028 222 4.93
Investment securities 26,803 352 5.25 21,688 255 4.70
Interest-bearing
deposits(3) 18,198 78 1.71 25,992 140 2.15
-------- -------- -------- -------- -------- --------
Total interest-
earning assets 349,824 4,723 5.40 314,396 5,049 6.42
Non-interest-earning assets 23,297 20,739
-------- --------
Total assets $373,121 $335,135
======== ========
Interest-bearing
liabilities:
Deposits $296,895 1,612 2.17 $298,323 2,433 3.26
Borrowings 30,000 320 4.27 5,000 65 5.20
-------- -------- -------- -------- -------- --------
Total interest-
bearing liabilities 326,895 1,932 2.36 303,323 2,498 3.29
Non-interest bearing
liabilities 960 5,527
-------- --------
Total liabilities 327,855 308,850
Stockholders' equity 45,266 26,285
-------- --------
Total liabilities and
stockholders'-
equity $373,121 $335,135
======== -------- ======== --------
Net interest income $ 2,791 $ 2,551
======== -------- ======== --------
Interest rate spread(4) 3.04% 3.13%
======== ========
Net yield on interest-
earning assets(5) 3.19% 3.25%
======== ========
Ratio of average interest-
earning assets to
average interest-
bearing liabilities 107.01% 103.65%
======== ========
- ----------
(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 income as a percentage
of average interest-earning assets.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from March 31, 2003 to June 30, 2003
At June 30, 2003, we had total assets of $376.5 million, a decrease of $2.5
million, or 0.7%, from March 31, 2003 levels.
Liquid assets consisting of cash, interest-bearing deposits, and investment
securities decreased by $2.7 million, or 5.1%, to $50.6 million at June 30,
2003. Mortgage-backed securities increased by $7.5 million, or 9.9%, to $83.5
million as management redeployed excess liquid assets into higher-yielding
assets. The increase was also funded through a reduction in our loan portfolio
totaling $7.9 million, or 3.4%, to $220.5 million, which generally resulted from
higher loan prepayments as borrowers chose to refinance their loans in the
declining interest rate environment. In view of the low interest rate
environment, we chose not to be among the market leaders in loan pricing.
Nonperforming and impaired loans of $2.8 million consisted in large part of a
$1.8 million commercial business and real estate loan relationship which became
delinquent and was designated as impaired during fiscal year 2002. The Company
entered into a workout agreement in July 2003 with the borrower which called for
the sale and disposal of the underlying collateral. The first sale under the
workout agreement is scheduled to close in August and Wayne Savings anticipates
receiving payment of $1.1 million. There are two additional disposals which are
expected to be initiated during the quarter ending September 2003. No allocation
to the allowance has been made for these loans as management believes the value
of the collateral exceeds the related loan balance.
Deposits at June 30, 2003, totaled $298.3 million, a decrease of $2.6 million
from $300.9 million at March 31, 2003. The decline in deposits during the
quarter generally reflected management's conservative pricing strategy in the
current low interest rate environment.
Stockholders' equity increased by $599,000 during the three months ended June
30, 2003, due to $731,000 in net earnings for the three months ended June 30,
2003, an after-tax increase of $206,000 in other comprehensive income and stock
options exercised of $61,000, which were partially offset by dividends paid
totaling $440,000.
Comparison of Operating Results for the Three Month Periods Ended June 30, 2003
and 2002
General
Net earnings totaled $731,000 for the three months ended June 30, 2003, an
increase of $177,000, or 31.9%, over $554,000 of net earnings for the three
months ended June 30, 2002. The growth in net earnings was primarily
attributable to an increase in net interest income of $240,000, or 9.4%, and an
increase in other income of $166,000, or 48.3%, which were partially offset by a
$173,000, or 8.5%, increase in general, administrative and other expense and a
$41,000, or 14.4%, increase in federal income tax expense.
Interest Income
Interest income on loans declined $707,000, or 16.0%, for the three months ended
June 30, 2003, due primarily to a decrease in the weighted average balance of
loans outstanding of $24.2 million, or 9.7%, compared to the 2002 period,
coupled with a 49 basis-point decrease in the weighted average yield on loans to
6.64% for the 2003 period.
Interest income on mortgage-backed securities increased $346,000, or 155.9%,
during the three months ended June 30, 2003, due primarily to a $62.3 million,
or 345.7%, increase in the weighted average balance outstanding from the
comparable 2002 period, which was partially offset by a decrease in the average
yield of 210 basis points to 2.83%.
Interest income on investments and interest-bearing deposits increased by
$35,000, or 8.9%, reflecting an increase to a weighted average rate of 51
basis-points to 3.82% from 3.31% during the comparable 2002 period, partially
offset by a decrease in the weighted average balance of $2.7 million, or 5.6%.
14
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, 2003
and 2002 (continued)
Interest Expense
Interest expense for the three months ended June 30, 2003 totaled $1.9 million,
a decrease of $566,000, or 22.7%, from interest expense of $2.5 million for the
three months ended June 30, 2002. The decrease resulted from a 93 basis point
decrease in the average cost of funds to 2.36% for the 2003 period, which was
partially offset by an increase in the average balance of deposits and
borrowings outstanding of $23.6 million, or 7.8%, to $326.9 million for the
period ended June 30, 2003.
Interest expense on deposits totaled $1.6 million for the three months ended
June 30, 2003, a decrease of $821,000, or 33.7%, from the three months ended
June 30, 2002, as a result of a 109 basis point decrease in the average cost of
deposits to 2.17% for the 2003 period and a decrease in the average balance
outstanding of $1.4 million, or 0.5%, to $296.9 million for the 2003 period.
Interest expense on borrowings totaled $320,000 for the three months ended June
30, 2003, an increase of $255,000, or 392.3%, from the 2002 period, primarily
due to an increase in the average balance of borrowings of $25.0 million to an
average balance of $30.0 million for the three months ended June 30, 2003 from
$5.0 million for the three months ended June 30, 2002, which was partially
offset with a decrease in the average cost of borrowings to 4.27% from the
average cost of 5.20% for the 2002 period.
Net Interest Income
Net interest income totaled $2.8 million for the three months ended June 30,
2003, an increase of $240,000, or 9.4%, from the three month period ended June
30, 2002. The average interest rate spread decreased to 3.04% for the three
months ended June 30, 2003 from 3.13% for the three months ended June 30, 2002.
The net interest margin decreased to 3.19% for the three months ended June 30,
2003 from 3.25% for the three months ended June 30, 2002.
Provision for Losses on Loans
The Company recorded provisions for losses on loans totaling $32,000 and $17,000
for the three month periods ended June 30, 2003 and 2002, respectively. 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, 2003 and
2002.
Other Income
Other income, consisting primarily of an increase in cash surrender value of
life insurance, gains on sale of loans, service fees, and charges on deposit
accounts, increased by $166,000 or 48.3%, to $510,000 for the three months ended
June 30, 2003, from $344,000 for the three months ended June 30, 2002. The
increase resulted primarily from $67,000 in the increase in cash surrender value
of life insurance due to the purchase of life insurance in October 2002.
Additionally, service fees, charges and other operating income which increased
by $78,000, or 23.8%, to $406,000, for the three months ended June 30, 2003, was
due primarily to an enhanced service fee structure implemented on deposit
accounts, coupled with increased income related to credit and debit cards.
General, Administrative, and Other Expense
General, administrative and other expense increased by $173,000, or 8.5%, to
$2.2 million for the three months ended June 30, 2003 compared to the three
months ended June 30, 2002. The increase resulted primarily from a $120,000, or
10.5%, increase in employee compensation and benefits and a $42,000, or 9.8%, ,
increase in other operating expense. The increase in employee compensation and
benefits was primarily
15
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, 2003
and 2002 (continued)
General, Administrative, and Other Expense (continued)
attributable to normal merit increases, an increase in employee benefit plan
costs and additional staff needed for operating a fully converted, publicly
traded stock company. Similarly, the increase in other operating expense was
primarily attributable to increased costs related to routine and ongoing
compliance matters required of a public company.
Federal Income Taxes
The provision for federal income taxes was $326,000 for the three months ended
June 30, 2003, an increase of $41,000, or 14.4%, compared to the same period in
2002. The increase resulted primarily from a $218,000, or 26.0%, increase in
pretax earnings. The effective tax rate for the three months ended June 30,
2003, was 30.8% as compared to 34.0% for the same period in 2002. The decrease
in the effective tax rate period to period is mainly due to the tax advantages
related to the increase in cash surrender value of life insurance.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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, 2003.
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-14(c) 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 on
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.
16
Wayne Savings Bancshares, Inc.
PART II
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities and Use of Proceeds
Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
On July 24, 2003, the Annual Meeting of the Company's Stockholders was
held. Two directors were elected to terms expiring in fiscal 2006 by the
following votes:
James C. Morgan For: 3,357,518 Withheld: 67,961
Kenneth R. Lehman For: 3,348,462 Withheld: 77,017
Three other matters were submitted to the stockholders for ratification,
for which the following votes were cast:
Ratification of the 2003 Stock Option Plan.
For: 2,485,803 Against: 239,602 Abstain: 62,784
Ratification of the 2003 Retention and Recognition Plan.
For: 2,244,857 Against: 481,563 Abstain: 61,618
Ratification of the appointment of Grant Thornton LLP as independent
auditors of the Company for the fiscal year ended March 31, 2004.
For: 3,354,975 Against: 32,425 Abstain: 38,079
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
EX-31.1 Written Statement of Chief Executive Officer
furnished pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
EX-31.2 Written Statement of Chief Financial Officer
furnished pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
EX-32.1 Written Statement of Chief Executive Officer
furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
EX-32.2 Written Statement of Chief Financial Officer
furnished pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
17
Wayne Savings Bancshares, Inc.
PART II (continued)
ITEM 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K:
The Company filed a Form 8-K on June 5, 2003, disclosing management's
decision to consolidate its bank subsidiaries.
The Company filed a Form 8-K on June 2, 2003, announcing the date of the
Company's Annual Meeting of Stockholders.
The Company filed a Form 8-K on April 24, 2003, disclosing its earning
release for the three months and year ended March 31, 2003.
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2003 By:
---------------------------------
Charles F. Finn
Chairman and President
Date: August 14, 2003 By:
---------------------------------
Michael C. Anderson
Chief Financial Officer
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2003 By: /s/Charles C. Finn
--------------------------------
Charles C. Finn
Chairman and President
Date: August 14, 2003 By: /s/Michael C. Anderson
--------------------------------
Michael C. Anderson
Chief Financial Officer
20