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 December 31, 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 February 6, 2004, the latest practicable date, 3,907,318 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 Disclosures About Market Risk 20
Item 4 Controls and Procedures 20
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 21
Item 2 Changes in Securities and Use of Proceeds 21
Item 3 Defaults Upon Senior Securities 21
Item 4 Submission of Matters to a Vote of Security Holders 21
Item 5 Other Information 21
Item 6 Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
December 31, March 31,
ASSETS 2003 2003
Cash and due from banks $ 3,328 $ 2,967
Federal funds sold 2,850 8,000
Interest-bearing deposits in other financial institutions 7,064 6,529
--------- ---------
Cash and cash equivalents 13,242 17,496
Investment securities available for sale - at market 24,777 17,036
Investment securities - at amortized cost, approximate market value of $14,875
and $19,211 as of December 31, 2003 and March 31, 2003, respectively 14,089 18,805
Mortgage-backed securities available for sale - at market 84,072 66,151
Mortgage-backed securities - at cost, approximate market value of $5,008 and
$9,927 as of December 31, 2003 and March 31, 2003, respectively 4,927 9,851
Loans receivable - net 208,745 228,373
Office premises and equipment - net 8,748 8,818
Real estate acquired through foreclosure 167 --
Federal Home Loan Bank stock - at cost 4,164 4,041
Cash surrender value of life insurance 6,252 5,121
Accrued interest receivable on loans 831 948
Accrued interest receivable on mortgage-backed securities 405 380
Accrued interest receivable on investments and interest-bearing deposits 409 313
Prepaid expenses and other assets 1,136 1,532
Prepaid federal income taxes -- 126
--------- ---------
Total assets $ 371,964 $ 378,991
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 294,363 $ 300,931
Advances from the Federal Home Loan Bank 30,000 30,000
Advances by borrowers for taxes and insurance 1,151 712
Accrued interest payable 102 235
Accounts payable on mortgage loans serviced for others 68 130
Other liabilities 1,145 1,638
Accrued federal income taxes 42 --
Deferred federal income taxes 741 682
--------- ---------
Total liabilities 327,612 334,328
Commitments -- --
Stockholders' equity
Common stock (8,000,000 shares of $ .10 par value authorized; 3,907,318 and 3,888,795
shares issued and outstanding at December 31, 2003 and March 31, 2003, respectively) 391 389
Additional paid-in capital 34,365 34,208
Retained earnings - substantially restricted 12,373 11,830
Less required contributions for shares acquired by Employee Stock Ownership Plan (1,495) (1,612)
Shares acquired by Management Recognition Plan (1,142) --
Accumulated other comprehensive loss (140) (152)
--------- ---------
Total stockholders' equity 44,352 44,663
--------- ---------
Total liabilities and stockholders' equity $ 371,964 $ 378,991
========= =========
See accompanying notes to consolidated financial statements.
3
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
Nine months Three months
ended ended
December 31, December 31,
2003 2002 2003 2002
Interest income
Loans $ 10,515 $ 12,866 $ 3,277 $ 4,117
Mortgage-backed securities 1,767 875 648 470
Investment securities 1,113 835 376 346
Interest-bearing deposits and other 191 406 61 123
-------- -------- -------- --------
Total interest income 13,586 14,982 4,362 5,056
Interest expense
Deposits 4,526 6,673 1,423 2,006
Borrowings 938 430 313 299
-------- -------- -------- --------
Total interest expense 5,464 7,103 1,736 2,305
-------- -------- -------- --------
Net interest income 8,122 7,879 2,626 2,751
Provision for losses on loans 63 75 -- 37
-------- -------- -------- --------
Net interest income after provision for losses on loans 8,059 7,804 2,626 2,714
Other income
Gain on sale of loans 91 42 30 26
Increase in cash surrender value of life insurance 211 54 77 54
Loss on disposal of real estate acquired through foreclosure -- (11) -- --
Service fees, charges and other operating 1,177 1,077 383 388
-------- -------- -------- --------
Total other income 1,479 1,162 490 468
General, administrative and other expense
Employee compensation and benefits 3,972 3,475 1,372 1,189
Occupancy and equipment 1,098 1,116 357 371
Federal deposit insurance premiums 36 41 12 14
Franchise taxes 230 231 76 77
Other operating 1,462 1,281 498 456
-------- -------- -------- --------
Total general, administrative and other expense 6,798 6,144 2,315 2,107
-------- -------- -------- --------
Earnings before income taxes 2,740 2,822 801 1,075
Federal incomes taxes
Current 783 969 350 481
Deferred 53 (47) (109) (145)
-------- -------- -------- --------
Total federal income taxes 836 922 241 336
-------- -------- -------- --------
NET EARNINGS $ 1,904 $ 1,900 $ 560 $ 739
======== ======== ======== ========
EARNINGS PER SHARE
Basic $ 0.51 $ 0.50 $ 0.15 $ 0.19
======== ======== ======== ========
Diluted $ 0.51 $ 0.50 $ 0.15 $ 0.19
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
-4-
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Nine months Three months
ended ended
December 31, December 31,
2003 2002 2003 2002
Net earnings $ 1,904 $1,900 $ 560 $739
Other comprehensive income, net of tax:
Unrealized holding gains on securities, net of taxes
of $6, $133, $134 and $100, during the
respective periods 12 259 260 194
------- ------ ----- ----
Comprehensive income $ 1,916 $2,159 $ 820 $933
======= ====== ===== ====
Accumulated comprehensive income (loss) $ (140) $ 281 $(140) $281
======= ====== ===== ====
See accompanying notes to consolidated financial statements.
-5-
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended December 31,
(In thousands)
2003 2002
Cash flows from operating activities:
Net earnings for the period $ 1,904 $ 1,900
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 1,359 253
Amortization of deferred loan origination fees (441) (318)
Depreciation and amortization 392 422
Gain on sale of loans (49) (27)
Proceeds from sale of loans in the secondary market 4,665 3,169
Loans originated for sale in the secondary market (4,627) (1,715)
Provision for losses on loans 63 75
Loss on disposal of real estate acquired through foreclosure -- 11
Federal Home Loan Bank stock dividends (123) (137)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans 117 173
Accrued interest receivable on mortgage-backed securities (25) (165)
Accrued interest receivable on investments and interest-bearing deposits (96) (198)
Prepaid expenses and other assets 396 (674)
Accrued interest payable (133) (120)
Accounts payable on mortgage loans serviced for others (62) 46
Other liabilities (493) 83
Federal income taxes
Current 42 122
Deferred 53 (47)
-------- --------
Net cash provided by operating activities 2,942 2,853
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as held to maturity -- (14,049)
Purchase of investment securities designated as available for sale (21,129) (5,086)
Proceeds from maturity of investment securities designated as held to maturity 4,690 12,927
Proceeds from maturity of investment securities designated as available for sale 13,523 1,673
Purchase of mortgage-backed securities designated as held to maturity -- (3,557)
Purchase of mortgage-backed securities designated as available for sale (44,446) (47,108)
Principal repayments on mortgage-backed securities designated as held to maturity 4,756 5,691
Principal repayments on mortgage-backed securities designated as available for sale 25,360 2,774
Loan principal repayments 73,680 57,709
Loan disbursements (53,646) (45,213)
Purchase of office premises and equipment - net (322) (156)
Purchase of bank-owned life insurance (920) (5,000)
Increase in cash surrender value of life insurance (211) (54)
Proceeds from sale of real estate acquired through foreclosure -- 8
Purchase of Federal Home Loan Bank stock -- (97)
-------- --------
Net cash provided by (used in) investing activities 1,335 (39,538)
-------- --------
Net cash provided by (used in) operating and investing activities
(balance carried forward) 4,277 (36,685)
-------- --------
-6-
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended December 31,
(In thousands)
2003 2002
Net cash provided by (used in) operating and investing activities
(balance brought forward) $ 4,277 $(36,685)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts (6,568) 19,299
Proceeds from Federal Home Loan Bank advances -- 25,000
Advances by borrowers for taxes and insurance 439 544
Dividends paid on common stock (1,341) (623)
Proceeds from exercise of stock options 61 16
Prepaid tax benefits related to employee stock plans 20 --
Shares acquired by Management Recognition Plan (1,142) --
-------- --------
Net cash provided by (used in) financing activities (8,531) 44,236
-------- --------
Net increase (decrease) in cash and cash equivalents (4,254) 7,551
Cash and cash equivalents at beginning of period 17,496 27,883
-------- --------
Cash and cash equivalents at end of period $ 13,242 $ 35,434
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 635 $ 713
======== ========
Interest on deposits and borrowings $ 5,597 $ 7,223
======== ========
Supplemental disclosure of noncash investing activities:
Issuance of mortgage loan upon sale of impaired loan $ -- $ 450
======== ========
Unrealized gains on securities designated as available for
sale, net of related tax effects $ 12 $ 259
======== ========
Recognition of mortgage servicing rights in accordance
with SFAS No. 140 $ 42 $ 15
======== ========
See accompanying notes to consolidated financial statements.
-7-
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three month periods ended December 31, 2003 and 2002
1. Basis of Presentation
The accompanying unaudited consolidated financial statements for the nine
and three months ended December 31, 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 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,
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- and nine-month periods ended December 31, 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. 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"). On September 30, 2003,
Village Savings Bank, F.S.B. ("Village Bank") was merged with and into
Wayne Savings Community Bank to be operated as a branch. Prior to this
date, Village Bank was a wholly-owned subsidiary of Wayne Savings
Community Bank. Wayne Savings has ten banking locations in Wayne, Holmes,
Ashland, Medina and Stark counties. All significant intercompany
transactions and balances have been eliminated in the consolidation.
-8-
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three month periods ended December 31, 2003 and 2002
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. 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 and nine months ended December
31, 2002 has been restated to give effect to 1.5109 share exchange ratio
in the Company's January 2003 secondary stock offering. The computations
are as follows:
For the nine months ended For the three months ended
December 31, December 31,
2003 2002 2003 2002
Weighted-average common shares
outstanding (basic) 3,747,681 3,887,582 3,757,170 3,889,087
Dilutive effect of assumed exercise
of stock options 3,916 6,033 20,154 5,912
--------- --------- --------- ---------
Weighted-average common shares
outstanding (diluted) 3,751,597 3,893,615 3,777,324 3,894,999
========= ========= ========= =========
At December 31, 2003 and 2002 all outstanding options were included in the
diluted earnings per share calculation.
4. Stock Option Plan
The Company has a 1993 incentive Stock Option Plan that provided for the
issuance of 196,390 adjusted shares of authorized shares of common stock
with 10,123 options outstanding at December 31, 2003. 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 of authorized
common stock. As of December 31, 2003, all options under the 2004 Plan
have been granted and expire in fiscal 2014.
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 in accordance with APB Opinion No.
25.
There were 204,081 options granted during the nine months ended December
31, 2003 and 10,123 options granted for the nine month period ended
December 31, 2002.
-9-
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three month periods ended December 31, 2003 and 2002
4. Stock Option Plan (continued)
At December 31, 2003, 10,123 of the stock options granted were subject to
exercise at the discretion of the grantees and expire in fiscal 2013 while
the remaining 204,081 options vest at a rate of 20% annually and will
expire in fiscal 2014.
A summary of the status of the Company's stock option plans as of and for
the years ended March 31, 2003 and 2002, and the nine months ended
December 31, 2003 is presented below:
Nine months ended Year ended
December 31, March 31,
2003 2003 2002
Weighted- Weighted- Weighted-
average average average
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 204,081 13.95 10,123 11.67 -- --
Exercised (18,543) 3.31 (4,835) 3.31 (3,022) 3.31
Forfeited -- -- -- -- -- --
--------- ------ -------- ------ ------- ------
Outstanding at end of period 214,204 $13.84 28,666 $ 6.26 23,378 $ 3.31
========= ====== ======== ====== ======= ======
Options exercisable at period-end $ 10,123 $11.67 28,666 $ 6.26 23,378 $ 3.31
========= ====== ======== ====== ======= ======
Fair value of options granted $ 3.93 $ 3.17 $ --
====== ====== ======
The following information applies to options outstanding at December 31,
2003:
Number outstanding...................................................................... 214,204
Range of exercise prices................................................................ $11.67 - $13.95
Weighted-average exercise price......................................................... $13.84
Weighted-average remaining contractual life............................................. 9.5 years
The fair value of options granted has been based on the Black Scholes
pricing model using a dividend yield of 3.3%, expected volatility of
28.8%, a risk-free interest rate of 4.38% and an expected life of ten
years.
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.
-10-
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three month periods ended December 31, 2003 and 2002
5. Effects of Recent Accounting Pronouncements (continued)
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 on April 1, 2003, 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 on April 1, 2003, without
material effects on the Company's financial position or results of
operation.
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 $97,000 in letters of
credit outstanding at December 31, 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 September 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.
-11-
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the nine and three month periods ended December 31, 2003 and 2002
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 Bank's continued ability to originate quality loans,
fluctuation of interest rates, real estate market conditions in the Bank's
lending areas, general and local economic conditions, the continued
ability of the Bank 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 nine months ended December 31,
-----------------------------------------------------------------------
2003 2002
--------------------------------- --------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1) $216,611 $ 10,515 6.47% $244,848 $ 12,866 7.01%
Mortgage-backed
securities(2) 85,686 1,767 2.75 29,978 875 3.89
Investment securities 31,311 1,113 4.74 22,274 835 5.00
Interest-bearing deposits(3) 16,727 191 1.52 28,700 406 1.89
-------- -------- -------- --------
Total interest-
earning assets 350,335 13,586 5.17 325,800 14,982 6.13
Non-interest-earning assets 22,115 20,504
-------- --------
Total assets $372,450 $346,304
======== ========
Interest-bearing liabilities:
Deposits $297,531 4,526 2.03 $300,517 6,673 2.96
Borrowings 30,000 938 4.17 12,939 430 4.43
-------- -------- -------- --------
Total interest-
bearing liabilities 327,531 5,464 2.22 313,456 7,103 3.02
-------- ------ -------- ------
Non-interest bearing
liabilities 372 6,020
-------- --------
Total liabilities 327,903 319,476
Stockholders' equity 44,547 26,828
-------- --------
Total liabilities and
stockholders' equity $372,450 $346,304
======== ========
Net interest income $ 8,122 $ 7,879
======== ========
Interest rate spread(4) 2.95% 3.11%
====== ======
Net yield on interest-
earning assets(5) 3.09% 3.22%
====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 106.96% 103.94%
====== ======
- ----------
(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.
-13-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Average Balance Sheet (continued)
For the three months ended December 31,
-----------------------------------------------------------------------
2003 2002
--------------------------------- ---------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1) $210,174 $ 3,277 6.24% $239,545 $ 4,117 6.87%
Mortgage-backed
securities(2) 88,758 648 2.92 48,810 470 3.85
Investment securities 33,966 376 4.43 24,765 346 5.59
Interest-bearing deposits(3) 16,695 61 1.46 30,054 123 1.64
-------- -------- -------- --------
Total interest-
earning assets 349,593 4,362 4.99 343,174 5,056 5.89
Non-interest-earning assets 22,234 24,283
-------- --------
Total assets $371,827 $367,457
======== ========
Interest-bearing liabilities:
Deposits $295,793 1,423 1.92 $303,700 2,006 2.64
Borrowings 30,000 313 4.17 28,817 299 4.15
-------- -------- -------- --------
Total interest-
bearing liabilities 325,793 1,736 2.13 332,517 2,305 2.77
-------- ---- -------- ----
Non-interest bearing
liabilities 1,768 7,662
-------- --------
Total liabilities 327,561 340,179
Stockholders' equity 44,266 27,278
-------- --------
Total liabilities and
stockholders' equity $371,827 $367,457
======== ========
Net interest income $ 2,626 $ 2,751
======== ========
Interest rate spread(4) 2.86% 3.12%
====== ======
Net yield on interest-
earning assets(5) 3.00% 3.21%
====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 107.30% 103.20%
====== ======
- ----------
(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.
-14-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from March 31, 2003 to December 31,
2003
At December 31, 2003, we had total assets of $372.0 million, a decrease of $7.0
million, or 1.9%, from March 31, 2003 levels.
Liquid assets consisting of cash, interest-bearing deposits and investment
securities decreased by $1.2 million, or 2.3%, to $52.1 million at December 31,
2003. Mortgage-backed securities increased by $13.0 million, or 17.1%, to $89.0
million as management redeployed excess liquid assets into higher-yielding
assets consisting of short term adjustable-rate mortgage-backed securities and
collateralized mortgage obligations with low extension risks. Management's
intention is to maintain a short term investment duration until rates rise from
near historic low levels. The increase in mortgage-backed securities was funded
by loan repayments and sales exceeding loan originations which contributed to
the reduction of loan portfolio by $19.6 million, or 8.6%, to $208.7 million.
During the nine month period ended December 31, 2003, loan prepayments exceeded
those from the same period in 2002 as customers sought to refinance their loans
in the declining interest rate environment.
Nonperforming and impaired loans of $1.8 million consisted of $1.2 million of
residential mortgage loans, coupled with a $548,000 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 closed in August and
Wayne Savings received payment of $1.1 million. The second sale occurred in
October and Wayne Savings received net proceeds of $157,000. The final sale
occurred during December 2003 in which Wayne Savings, upon finalization will
receive $866,000 representing the recovery of all the principal and interest to
which we are entitled.
Deposits at December 31, 2003, totaled $294.4 million, a decrease of $6.6
million from $300.9 million at March 31, 2003. Management attributes the decline
in deposits mainly to customers seeking to find alternative investment
opportunities due to the low rate environment. The Bank's deposit pricing is
very competitive in all market areas.
Stockholders' equity decreased by $311,000 during the nine months ended December
31, 2003, due to dividends paid totaling $1.3 million and the purchase of common
stock of $1.1 million for the management recognition plan offset by a $1.9
million in net earnings for the nine months ended December 31, 2003, an increase
of $117,000 due to amortization of the ESOP loan and an after-tax increase of
$12,000 in other comprehensive gain.
Comparison of Operating Results for the Nine Month Periods Ended December 31,
2003 and 2002
General
Net earnings totaled $1.9 million for the nine months ended December 31, 2003,
an increase of $4,000 or .2%, over the nine months ended December 31, 2002. The
growth in net earnings was primarily attributable to an increase in net interest
income of $243,000, or 3.1%, an increase in other income of $317,000, or 27.3%,
and an $86,000, or 9.3%, decrease in federal income tax expense, which were
partially offset by a $654,000, or 10.6%, increase in general, administrative
and other expense.
Interest Income
Interest income for the nine months ended December 31, 2003, decreased $1.4
million, or 9.3%, to $13.6 million. This decrease was a result of a 96 basis
point reduction in the yield on interest earning assets to 5.17%, partially
offset by an increase in the weighted average balance of interest-earning assets
totaling $24.5 million, or 7.5%, to $350.3 million for the period ended December
31, 2003.
-15-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine Month Periods Ended December 31,
2003 and 2002 (continued)
Interest Income (continued)
Interest income on loans declined $2.4 million, or 18.3%, for the nine months
ended December 31, 2003, due primarily to a decrease in the weighted average
balance of loans outstanding of $28.2 million, or 11.5%, compared to the 2002
period, coupled with a 54 basis-point decrease in the weighted average yield on
loans to 6.47% for the 2003 period.
Interest income on mortgage-backed securities increased $892,000 during the nine
months ended December 31, 2003, due primarily to a $55.7 million, or 185.8%,
increase in the weighted average balance outstanding from the comparable 2002
period, which was partially offset by a decrease in the average yield of 114
basis points to 2.75%.
Interest income on investments increased by $278,000, or 33.3%, reflecting an
increase in the weighted average balance of $9.0 million, or 40.6%, partially
offset by a decrease in the weighted average rate of 26 basis-points to 4.74%
from 5.00% during the comparable 2002 period.
Interest income on interest-bearing deposits and other decreased by $215,000, or
53.0%, reflecting a decrease in the weighted average balance of $12.0 million,
or 41.7%, coupled with a decrease in the weighted average rate of 37 basis
points to 1.52% from 1.89% during the comparable 2002 period.
Interest Expense
Interest expense for the nine months ended December 31, 2003 totaled $5.5
million, a decrease of $1.6 million, or 23.1%, from interest expense of $7.1
million for the nine months ended December 31, 2002. The decrease resulted from
a 80 basis point decrease in the average cost of funds to 2.22% for the 2003
period, offset by an increase in the average balance of deposits and borrowings
outstanding of $14.1 million, or 4.5%, to $327.5 million for the period ended
December 31, 2003.
Interest expense on deposits totaled $4.5 million for the nine months ended
December 31, 2003, a decrease of $2.1 million, or 32.2%, from the nine months
ended December 31, 2002, as a result of a 93 basis point decrease in the average
cost of deposits to 2.03% for the 2003 period coupled with a decrease in the
average balance outstanding of $3.0 million, or 1.0%, to $297.5 million for the
2003 period.
Interest expense on borrowings totaled $938,000 for the nine months ended
December 31, 2003, an increase of $508,000 from the 2002 period, primarily due
to an increase in the average balance of borrowings of $17.1 million to an
average balance of $30.0 million for the nine months ended December 31, 2003
from $12.9 million for the nine months ended December 31, 2002, offset by a
decrease in the average cost of borrowings to 4.17% from an average cost of
4.43% for the 2002 period. The Company borrowed the additional funds in the nine
month period ended December 31, 2002, to purchase corporate and mortgage-backed
securities which should enhance future earnings and cash flows.
Net Interest Income
Net interest income totaled $8.1 million for the nine months ended December 31,
2003, an increase of $243,000, or 3.1%, from the nine month period ended
December 31, 2002. The average interest rate spread decreased to 2.95% for the
nine months ended December 31, 2003 from 3.11% for the nine months ended
December 31, 2002. The net interest margin decreased to 3.09% for the nine
months ended December 31, 2003 from 3.22% for the nine months ended December 31,
2002.
-16-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine Month Periods Ended December 31,
2003 and 2002 (continued)
Provision for Losses on Loans
The Company recorded provisions for losses on loans totaling $63,000 and $75,000
for the nine month periods ended December 31, 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 December
31, 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 $317,000 or 27.3%, to $1.5 million for the nine months
ended December 31, 2003, from $1.2 million for the nine months ended December
31, 2002. The increase resulted primarily from an increase of $157,000 in cash
surrender value of life insurance which was purchased in October 2002.
Additionally, service fees, charges and other operating income increased by
$100,000, or 9.3%, to $1.2 million for the nine months ended December 31, 2003,
was due primarily to increased income related to credit card merchants. Gain on
sale of loans increased $49,000, or 116.7%, in 2003 as compared to the nine
months ended December 31, 2002, mainly due to management's decision to sell the
majority of the lower rate thirty year residential mortgage loans to the
secondary market.
General, Administrative, and Other Expense
General, administrative and other expense increased by $654,000, or 10.6%, to
$6.8 million for the nine months ended December 31, 2003 compared to the nine
months ended December 31, 2002. The increase resulted primarily from a $497,000,
or 14.3%, increase in employee compensation and benefits and a $181,000, or
14.1%, increase in other operating expense. The increase in employee
compensation and benefits was primarily 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 as well as higher merchant expenses related to credit card activity.
Federal Income Taxes
The provision for federal income taxes was $836,000 for the nine months ended
December 31, 2003, a decrease of $86,000, or 9.3%, compared to the same period
in 2002. The decrease resulted primarily from a $82,000, or 2.9%, decrease in
pretax earnings, coupled with $211,000 of tax-exempt income related to the cash
surrender value of life insurance, as compared to $54,000 of tax-exempt income
from the cash surrender value of life insurance in the 2002 period. The
effective tax rate for the nine months ended December 31, 2003, was 30.5% as
compared to 32.7% for the same period in 2002. The decrease in the effective tax
rate period to period is mainly due to the beneficial effects of the
aforementioned tax-exempt income.
-17-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended December 31,
2003 and 2002
General
Net earnings totaled $560,000 for the three months ended December 31, 2003, a
decrease of $179,000, or 24.2%, from the $739,000 of net earnings for the three
months ended December 31, 2002. The reduction in net earnings was primarily
attributable to an decrease in net interest income of $125,000, or 4.5%, and an
increase in general, administrative and other expense of $208,000, or 9.9%,
which were partially offset by a $95,000, or 28.3%, decrease in federal income
tax expense, coupled with a decrease of $37,000 in provision for loan losses and
an increase of $22,000, or 4.7%, in other income.
Interest Income
Interest income decreased $694,000, or 13.7%, for the three months ended
December 31, 2003, to $4.4 million. This decline was mainly due to a 90 basis
point reduction in the average yield on interest earning assets to 4.99% from
5.89% for the period ended December 31, 2002. The yield reduction was partially
offset with an increase in the weighted-average balance of interest-earning
assets totaling $6.4 million, or 1.9%, to a balance of $349.6 million for the
three months ended December 31, 2003.
Interest income on loans declined $840,000, or 20.4%, for the three months ended
December 31, 2003, due primarily to a decrease in the weighted average
outstanding balance of loans period to period of $29.4 million, or 12.3%,
coupled with a 63 basis-point decrease in the weighted average yield on loans to
6.24% for the 2003 period.
Interest income on mortgage-backed securities increased $178,000 during the
three months ended December 31, 2003, due primarily to a $40.0 million increase
in the weighted average balance outstanding from the comparable 2002 period.
This significant increase in the average outstanding balance was the result of
management's strategy to invest in higher yielding short term mortgage-backed
securities as a defensive measure during the current historic low interest rate
environment. The increase in the weighted-average balance was partially offset
by a decrease in the average yield of 93 basis points to 2.92% for the three
months ended December 31, 2003. The yield on mortgage-backed securities was
adversely affected by the record levels of repayments during the period.
Interest income on investments increased by $30,000, or 8.7%, reflecting an
increase in the weighted average balance of $9.2 million, or 37.2%, to $34.0
million from $24.8 million during the comparable 2002 period, partially offset
with a decrease in the average yield of 116 basis points to 4.43%.
Interest income on interest-bearing deposits declined $62,000, or 50.4%, for the
three months ended December 31, 2003, due primarily to a decrease in the
weighted average balance of $13.4 million, or 44.4%, compared to the 2002 period
of $30.1 million, coupled with a decrease in the average yield of 18 basis
points to an average yield of 1.46% from an average yield of 1.64% for the
quarter ended December 31, 2002.
Interest Expense
Interest expense for the three months ended December 31, 2003 totaled $1.7
million, a decrease of $569,000, or 24.7%, from interest expense of $2.3 million
for the three months ended December 31, 2002. The decrease resulted from a 64
basis point decrease in the average cost of funds to 2.13% for the 2003 period,
coupled with a decrease in the average balance of deposits and borrowings
outstanding of $6.7 million, or 2.0%, to $325.8 million for the period ended
December 31, 2003.
Interest expense on deposits totaled $1.4 million for the three months ended
December 31, 2003, a decrease of $583,000, or 29.1%, from the three months ended
December 31, 2002, as a result of a 72 basis point decrease in the average cost
of deposits to 1.92% for the 2003 period coupled with a decrease in the average
balance outstanding of $7.9 million, or 2.6%, to $295.8 million for the 2003
period.
-18-
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended December 31,
2003 and 2002 (continued)
Interest Expense (continued)
Interest expense on borrowings totaled $313,000 for the three months ended
December 31, 2003, an increase of $14,000 from the 2002 period, primarily due to
an increase in the average balance of borrowings of $1.2 million to an average
outstanding balance of $30.0 million for the three months ended December 31,
2003, coupled with an increase in the average cost of borrowings to 4.17% from
the average cost of 4.15% for the 2002 period.
Net Interest Income
Net interest income totaled $2.6 million for the three months ended December 31,
2003, a decrease of $125,000, or 4.5%, from the three month period ended
December 31, 2002. The average interest rate spread decreased to 2.86% for the
three months ended December 31, 2003 from 3.12% for the three months ended
December 31, 2002. The net interest margin decreased to 3.00% for the three
months ended December 31, 2003 from 3.21% for the three months ended December
31, 2002.
Provision for Losses on Loans
The Company recorded no provision for losses on loans for the three month period
ended December 31, 2003 as compared to $37,000 in 2002. 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 December 31, 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 $22,000, or 4.7%, to $490,000 for the three months ended
December 31, 2003, from $468,000 for the three months ended December 31, 2002.
The increase resulted primarily from $23,000 in the increase in cash surrender
value of life insurance due to the purchase of life insurance in October 2002.
General, Administrative, and Other Expense
General, administrative and other expense increased by $208,000, or 9.9%, to
$2.3 million for the three months ended December 31, 2003 compared to the three
months ended December 31, 2002. The increase resulted primarily from a $183,000,
or 15.4%, increase in employee compensation and benefits and a $42,000, or 9.2%,
increase in other operating expense. The increase in employee compensation and
benefits was primarily 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 merchant expenses
related to credit card activity, coupled with increased costs related to routine
compliance matters required of a public company.
Federal Income Taxes
The provision for federal income taxes was $241,000 for the three months ended
December 31, 2003, a decrease of $95,000, or 28.3%, compared to the same period
in 2002, primarily due to the $274,000 decrease in earnings before federal
income taxes and the aforementioned increase of the cash surrender value of life
insurance. The effective tax rate for the three months ended December 31, 2003,
was 30.1% as compared to 31.3% for the same period in 2002.
-19-
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-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.
-20-
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
None.
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
EX-31.1 Certification of Chief Executive Officer
pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002, 18 U.S.C. Section 1350
EX-31.2 Certification of Chief Financial Officer
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
(b) Reports on Form 8-K:
The Company filed a Form 8-K on October 1, 2003, disclosing the
merger of Wayne Savings Community Bank and Village Savings Bank,
F.S.B.
The Company filed a Form 8-K on October 29, 2003, disclosing its
earnings release for the six months and three months ended September
30, 2003.
The Company filed a Form 8-K on November 5, 2003, disclosing the
signing of the merger agreement to acquire Stebbins Bancshares, Inc.
and its national bank subsidiary, Stebbins National Bank of Creston,
Ohio.
-21-
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: February 12, 2004 By:
---------------------------- --------------------------------
Charles F. Finn
Chairman and President
Date: February 12, 2004 By:
---------------------------- --------------------------------
Michael C. Anderson
Chief Financial Officer
-22-
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: February 12, 2004 By: /s/ Charles C. Finn
----------------------- -------------------------------
Charles C. Finn
Chairman and President
Date: February 12, 2004 By: /s/ Michael C. Anderson
----------------------- -------------------------------
Michael C. Anderson
Chief Financial Officer
-22-