2004 ANNUAL REPORT
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TO STOCKHOLDERS
[PHOTO]
WAYNE SAVINGS BANCSHARES, INC.
Member FDIC
CORPORATE PROFILE
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Wayne Savings Bancshares, Inc. (hereinafter, the "Company") is the stock
holding company parent of Wayne Savings Community Bank (the "Bank" or "Wayne
Savings"), which was established in 1899. On September 30, 2003, Wayne Savings
Bancshares, Inc., merged Village Savings Bank, F.S.B., into Wayne Savings, its
parent company, accounted for in a manner similar to a pooling-of-interest. The
Company concluded that significant cost savings and operating efficiencies could
be achieved by discontinuing the separate corporate existence of Village
Savings. During the fiscal year ended March 31, 2003, the mutual holding company
Wayne Savings Bankshares M.H.C. (the "M.H.C."), which previously owned a
majority of the Company's outstanding shares of common stock, converted from the
M.H.C. form of ownership to full stock form and merged with and into the Bank.
The Company, which owned 100% of the Bank, was succeeded by a Delaware
corporation of the same name. As part of the conversion, shares of the Company's
common stock representing the M.H.C.'s ownership interest were sold in the
offering. The existing publicly-held shares of the Company, which represented
the remaining ownership interest in the Company, were exchanged for new shares
of the Delaware corporation at a share exchange ratio of 1.5109 to 1.0.
The offering of the Company's common stock culminated in the receipt of
gross sale proceeds of $20.6 million which, after consideration of an employee
stock plan of $1.6 million and applicable offering expenses of $1.9 million,
resulted in net proceeds of $17.1 million.
As a result of the conversion, all financial information that is based on
or derived from the actual or outstanding shares of common stock during any
period prior to fiscal 2003 has been appropriately adjusted for the
aforementioned exchange ratio. The conversion was accounted for as a change in
corporate form with no change in the historical basis of assets, liabilities or
stockholders' equity. The Company's common stock is traded on the NASDAQ stock
market under the symbol "WAYN."
The Bank has been serving the financial needs of the residents of Wayne,
Holmes, Ashland, Medina and Stark counties in Ohio for 105 years. Headquartered
in downtown Wooster, Ohio, the Bank also operates 10 full-service banking
locations in Wooster, Millersburg, Ashland, Rittman, Lodi and North Canton.
Throughout its long history and many economic cycles, Wayne Savings has enjoyed
a fine reputation for stability, safety and soundness, and community service.
The Bank has been noted for its sound management, consistent profitability and
quality personal service to customers.
The mission of Wayne Savings is to excel in customer service as a sound,
independent, profitable, and progressive community bank dedicated to providing
an array of services responsive to the financial needs of people in our
communities, with an emphasis on home financing and household savings, and to
provide for the security and development of our employees.
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BOARD OF DIRECTORS
[PHOTO] [PHOTO] [PHOTO]
Charles F. Finn Russell L. Harpster Joseph L. Retzler
Chairman
[PHOTO] [PHOTO] [PHOTO] [PHOTO]
Donald E. Massaro James C. Morgan Terry A. Gardner Kenneth R. Lehman
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DIRECTORS AND OFFICERS
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IN RECOGNITION AND APPRECIATION ... [PHOTO]
Donald E. Massaro
The Board and Management of Wayne Savings Community Bank would like to
extend their sincere thanks and appreciation to Donald E. Massaro for his 40
years of dedicated and loyal service. Mr. Massaro will be stepping down as a
director at this year's Annual Meeting of Stockholders.
Mr. Massaro started with Wayne Savings as a mortgage loan assistant in
1964 and eventually became the Senior Vice President of Lending, a position he
held until his retirement in 1992. Shortly before his retirement he joined the
Board of Directors where his background and knowledge of lending proved to be
invaluable to the organization.
Mr. Massaro will continue to serve the Company as Director Emeritus.
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WAYNE SAVINGS BANCSHARES, INC.
Board of Directors Executive Officers
Charles Finn Charles F. Finn
Chairman Chairman And Chief Executive Officer
Russell Harpster Wanda Christopher-Finn
Joseph Retzler Executive Vice President
Donald Massaro And Chief Administrative Officer
Terry Gardner
James Morgan Michael C. Anderson
Kenneth Lehman Executive Vice President And Chief Financial Officer
Kenneth Rhode, Emeritus Corporate Secretary And Treasurer
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TABLE OF CONTENTS
Page
Stockholder Information ...................................................................... 5
Chairman's Letter ............................................................................ 6
Selected Consolidated Financial and Other Data ............................................... 8
Management's Discussion and Analysis of Financial Condition and Results of Operations ........ 10
Consolidated Statements of Financial Condition ............................................... 18
Consolidated Statements of Earnings .......................................................... 19
Consolidated Statements of Comprehensive Income .............................................. 20
Consolidated Statements of Stockholders' Equity .............................................. 21
Consolidated Statements of Cash Flows ........................................................ 22
Notes to Consolidated Financial Statements ................................................... 24
Report of Independent Certified Public Accountants ........................................... 40
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STOCKHOLDER INFORMATION
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Annual Meeting Transfer Agent
The Annual Meeting of Stockholders Registrar and Transfer Company
will be held at 10:00 a.m. on July 22, 2004, 10 Commerce Drive
at The Greenbriar Conference Centre, Cranford, New Jersey 07016-3572
50 Riffel Road,
Wooster, Ohio 44691
Annual Report on Form 10-K
Special Counsel A copy of the Company's Form 10-K for the fiscal year
ended March 31, 2004, will be furnished upon request
Elias, Matz, Tiernan & Herrick LLP without charge to stockholders.
734 15th Street N.W., 12th Floor
Washington, D.C. 20005
Investor Information
Independent Auditors Executive Offices
Wayne Saving Bancshares, Inc.
Grant Thornton LLP 151 N. Market Street o P.O. Box 858
625 Eden Park Drive o Suite 900 Wooster, Ohio 44691
Cincinnati, Ohio 45202 (330) 264-5767
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WAYNE SAVINGS COMMUNITY BANK
BANK LOCATIONS
WOOSTER ASHLAND
North Market Street Office Claremont Avenue Office
151 North Market Street o Wooster, Ohio 233 Claremont Avenue o Ashland, Ohio
South Market Street Drive Thru Buehlers-Sugarbush Office
329 South Market Street o Wooster, Ohio 1055 Sugarbush Drive o Ashland, Ohio
Cleveland Point Financial Center RITTMAN
1908 Cleveland Road o Wooster, Ohio 237 North Main Street o Rittman, Ohio
Madison South Office LODI
2024 Millersburg Road o Wooster, Ohio 303 Highland Drive o Lodi, Ohio
NorthSide Office
543 Riffel Road o Wooster, Ohio
NORTH CANTON
MILLERSBURG Village Office
90 North Clay Street o Millersburg, Ohio 1265 South Main Street o North Canton, Ohio
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CHAIRMAN'S LETTER
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[PHOTO]
Charles F. Finn
Chairman and Chief Executive Officer
TO OUR STOCKHOLDERS AND CUSTOMERS:
Upon the conclusion of our Company's 105th year of providing community
financial services, it is a pleasure to report another exciting year of progress
and achievement for Wayne Savings Bancshares, Inc.
In the fiscal year ended March 31, 2004, we achieved the second highest
level of earnings in the Company's history, virtually matching the record
earnings accomplishment of the prior fiscal year. For the 2004 fiscal year, net
earnings amounted to $2,704,000, little changed from net earnings of $2,772,000
posted in the 2003 fiscal year. Due to the favorable effects of the Company's
capital management strategy as exemplified by our stock-repurchase program,
earnings per share increased to $.72 per diluted share in fiscal 2004 from $.71
per diluted share in the previous year.
Net earnings remained relatively unchanged year to year primarily because
the large volume of mortgage loan refinancings had the effect of lowering asset
yields. However, we were able to achieve some growth in net interest income by
correspondingly reducing our cost of funds to offset the decline in asset
yields. In the current record low interest rate environment, management has
continued to shorten investment maturities rather than reaching for higher
yields by extending maturities. In anticipation of rising interest rates in the
medium to long term, we have increased liquidity, increased short-term
commercial loans, and decreased our position in long term fixed rate mortgage
loans. With the Company's interest rate risk position enhanced and Federal
Reserve officials signaling their preference to raise interest rates in the near
future, management believes Wayne Savings Bancshares, Inc. is well-positioned to
take advantage of a rising interest rate environment.
Net interest income increased from $10.9 million in the prior fiscal year
to $11.1 million in the 2004 fiscal year, while other income increased from $1.6
million to $1.9 million. The increases in income were largely offset by an
increase of $554,000 in general and administrative expenses, which consisted
mainly of higher compensation and benefit costs, additional staff and increased
costs relating to routine compliance matters required of a public company and
higher transaction expenses in connection with a growing volume of business
accounts.
Asset quality remains strong, evidencing a continuation of our prudent
loan underwriting standards. Total non-performing assets on March 31, 2004
amounted to only $747,000 or 0.20% of total assets, far below industry averages.
Although non-performing assets are at a record low level, we chose to add
$173,000 to our loan loss reserves in fiscal 2004, as compared to $91,000 in the
prior year. The decision to strengthen the loan loss allowance was predicated on
possible short-term softness in the local economy, as well as the origination of
$16.6 million in commercial loans in the 2004 fiscal year. The Company plans to
continue adding to its commercial loan mix and will accordingly monitor its
future loan loss provisions to recognize this fact.
To continue enhancing our Company's franchise and expanding services, we
took some additional strategic steps in the past year. In the third fiscal
quarter, the Company was presented with a wonderful opportunity to expand its
market presence through the signing of a definitive agreement to acquire
Stebbins Bancshares, Inc. and its national bank subsidiary, Stebbins
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National Bank of Creston, Ohio. Regulatory approval has been received and the
closing of the transaction is expected to take place by June 1, 2004. Following
the merger, Stebbins National Bank will continue operations as a branch office
of Wayne Savings Community Bank. The acquisition of Stebbins National Bank will
boost the Company's assets to approximately $400 million with eleven full
service locations. The Stebbins family has managed a respected community bank
for five generations since 1881 and we are pleased they have chosen to be
associated with us. The transaction is expected to be immediately accretive to
earnings per share.
In further organizational restructuring, the consolidation of Village
Savings Bank with Wayne Savings Community Bank was completed on September 30,
2003. Village Savings Bank was established in North Canton, Ohio in July, 1998
as a wholly owned subsidiary of Wayne Savings Community Bank. Following an
intensive review, management concluded last year that a higher level of
services, significant cost savings and operating efficiencies could be achieved
by operating Village Savings Bank as a branch office rather than a separate
corporate entity. The North Canton office of Wayne Savings, formerly Village
Savings Bank, currently has approximately $40 million in deposits.
To capture another source of income, Wayne Savings has partnered in
establishing Oak Tree Title, Ltd. to provide title insurance services for the
Bank's mortgage loan customers. The title agency is located at 143 North Market
Street, Wooster, Ohio, adjacent to the Bank's headquarters.
To broaden our customer base and develop new business, Wayne Savings has
also established a private banking program to provide personal banking services
to busy, high net worth clients. The program is managed by an executive who
provided private banking services for a large regional bank. As noted earlier,
we also made a commitment to expand our commercial loan portfolio by adding two
commercial lending officers to our staff. Due in part to the efforts of these
officers, commercial loan originations in fiscal 2004 amounted to $16.6 million.
To keep pace with today's heightened technology requirements, Wayne
Savings, in May 2004, completed a successful data processing conversion to the
Miser banking software system provided by Aurum Technology, one of the nation's
leading information technology providers. We will continue to operate an
"in-house" data system with our own main frame computer to maintain greater
control over our data processing needs.
Building value for our investors remains a primary objective of your
Management and Board of Directors. We are extremely pleased with the performance
of Wayne Savings Bancshares, Inc. common stock (NASDAQ: WAYN) to date. We
recently calculated the return to an individual who had invested in our "first
step" stock offering in June 1993, and found an exemplary average annual return
of 21% since that date. Since the Company's "second step" stock conversion,
which was completed on January 8, 2003, investors have realized stock price
appreciation in excess of 60%.
In the fourth quarter of the 2004 fiscal year, your Board of Directors
authorized the repurchase of up to 195,000 shares, or 5% of the Company's
outstanding shares of common stock. As of May 4, 2004, 137,500 shares had been
repurchased under this program. Share repurchases will be made from time to time
as market conditions warrant, through open market repurchases, unsolicited
negotiated transactions, or in such other manners deemed appropriate by
management. The repurchase program will expire in January 2005.
We are gratified by the accomplishments of the past year, as summarized in
this Annual Report. We also realize that our Company's achievements were a
direct result of the continued patronage of our stockholders and customers, the
vision and guidance of our officers and directors, and the hard work and
dedication of our quality staff.
Your continued confidence and support is deeply appreciated.
Sincerely,
/s/ Charles F. Finn
Charles F. Finn
Chairman and Chief Executive Officer
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
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The following table sets forth certain consolidated financial and other
data of Wayne Savings Bancshares, Inc., at the dates and for the years
indicated. The consolidated financial statements as of and for the years ended
March 31, 2000 through March 31, 2003, inclusive, are those of Wayne Savings
Bancshares, Inc. prior to the reorganization and change in corporate form
discussed in the Notes to the Consolidated Financial Statements and elsewhere
herein. For additional information about the Company, reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company.
At March 31,
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2004 2003 2002 2001 2000
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(In thousands)
Selected Financial Condition Data
Total assets .......................................... $369,007 $378,991 $334,843 $311,640 $ 304,030
Loans receivable, net(1) .............................. 205,443 228,373 251,172 247,480 237,418
Mortgage-backed securities(2) ......................... 88,428 76,002 17,326 8,574 10,459
Investment securities ................................. 31,582 35,841 22,286 13,641 23,199
Cash and cash equivalents(3) .......................... 19,887 17,496 27,883 20,902 14,296
Deposits .............................................. 291,830 300,931 300,957 277,706 264,952
Stockholders' equity .................................. 43,561 44,663 26,047 25,255 24,962
(1) Includes loans held for sale.
(2) Includes mortgage-backed securities available for sale.
(3) Includes cash and due from banks, interest-bearing deposits in other
financial institutions, and federal funds sold.
Year Ended March 31,
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2004 2003 2002 2001 2000
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(In thousands, except share data)
Selected Operating Data:
Interest income ....................................... $ 18,216 $ 20,023 $ 21,309 $ 21,506 $ 20,700
Interest expense ...................................... 7,147 9,169 12,348 13,100 12,014
-------- -------- -------- -------- ---------
Net interest income ................................. 11,069 10,854 8,961 8,406 8,686
Provision for losses on loans ......................... 173 91 134 96 106
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Net interest income after provision
for losses on loans ................................. 10,896 10,763 8,827 8,310 8,580
Other income .......................................... 1,933 1,643 1,657 1,045 748
General, administrative
and other expense ................................... 8,971 8,417 7,722 7,348 7,434
-------- -------- -------- -------- ---------
Earnings before income taxes .......................... 3,858 3,989 2,762 2,007 1,894
Federal income taxes .................................. 1,154 1,217 939 675 624
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Net earnings before change in
accounting principle ................................ 2,704 2,772 1,823 1,332 1,270
Change in accounting principle related to
allocated organization costs -
net of tax of $63,000 ............................... -- -- -- -- (122)
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NET EARNINGS .......................................... $ 2,704 $ 2,772 $ 1,823 $ 1,332 $ 1,148
======== ======== ======== ======== =========
Basic earnings per share(1) ........................... $ .72 $ .71 $ .47 $ .34 $ .29
======== ======== ======== ======== =========
Diluted earnings per share(1) ......................... $ .72 $ .71 $ .47 $ .34 $ .29
======== ======== ======== ======== =========
Cash dividends declared
per common share(2) ................................. $ .47 $ .45 $ .45 $ .42 $ .42
======== ======== ======== ======== =========
(1) Basic and diluted earnings per share for the fiscal year ended March 31,
2000 reflects a $.03 per share reduction for the cumulative effect of
change in accounting principle. All per share amounts have been restated
to give effect to the 1.5109 to 1.00 share exchange ratio provided for in
the Company's conversion offering.
(2) During the fiscal years ended March 31, 2003, the M.H.C. waived its right
to receive all dividends. During fiscal 2002 and 2001, the M.H.C. waived
approximately $.44 and $.40 of the $.45 and $.42 per share dividends paid
on common stock in each respective year.
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (con't.)
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At or For the Year Ended March 31,
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2004 2003 2002 2001 2000
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Key Operating Ratios and Other Data:
Return on average assets (net earnings divided
by average total assets) ................................... .73% .78% .56% .45% .39%
Return on average equity (net earnings
divided by average equity) ................................. 6.09 8.80 7.12 5.28 4.57
Average equity to average assets ............................. 11.95 8.92 7.93 8.44 8.57
Equity to assets at period end ............................... 11.80 11.78 7.78 8.10 8.21
Interest rate spread (difference between average
yield on interest-earning assets and average
cost of interest-bearing liabilities) ...................... 2.97 3.09 2.77 2.57 2.88
Net interest margin (net interest income
as a percentage of average interest-
earning assets) ............................................ 3.14 3.24 2.93 2.92 3.14
General, administrative and other expense
to average assets(1) ....................................... 2.41 2.38 2.39 2.46 2.54
Non-performing and impaired loans
to loans receivable, net ................................... .36 1.09 1.52 .47 .48
Non-performing and impaired assets
to total assets ............................................ .23 .65 1.14 .41 .40
Average interest-earning assets to average
interest-bearing liabilities ............................... 108.12 105.40 103.98 107.62 106.05
Allowance for loan losses to
non-performing and impaired loans .......................... 109.10 27.35 19.38 54.58 72.09
Allowance for loan losses to
non-performing and impaired assets ......................... 96.22 27.35 19.28 49.47 66.64
Net interest income after provision for
losses on loans, to general, administrative and
other expense(1) ........................................... 121.46 127.87 114.31 113.31 115.51
Number of full-service offices ............................... 10 10 10 10 9
Dividend payout ratio ........................................ 66.83 38.35 46.74 60.06 76.83
(1) In calculating this ratio, general, administrative and other expense does
not include provisions for losses or gains on the sale of real estate
acquired through foreclosure.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
[PHOTO]
Seated: Charles F. Finn, Chairman and Chief Executive Officer; Standing: Michael
C. Anderson, Executive Vice President and Chief Financial Officer; and Wanda
Christopher-Finn, Executive Vice President and Chief Administrative Officer.
General
The consolidated financial statements include Wayne Savings Bancshares,
Inc. and its wholly-owned subsidiary, Wayne Savings Community Bank. Intercompany
transactions and balances are eliminated in the consolidated financial
statements.
The Company's net earnings are primarily dependent on its net interest
income, which is the difference between interest income earned on its loan,
mortgage-backed securities and investment portfolios, and its cost of funds
consisting of interest paid on deposits and borrowings. The Company's net
earnings also are affected by its provision for losses on loans, as well as the
amount of other income, including fees and service charges, and general,
administrative and other expense, such as salaries and employee benefits,
deposit insurance premiums, occupancy and equipment costs, and income taxes.
Earnings of the Company also are affected significantly by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities.
Business Strategy
The Company's current business strategy is to operate a well-capitalized,
profitable and independent community-oriented savings association dedicated to
financing home ownership and providing quality service to its customers. The
Company has sought to implement this strategy in recent years by: (1) closely
monitoring the needs of customers and providing personal, quality customer
service; (2) emphasizing the origination of one-to-four family residential
mortgage loans and consumer loans in the Company's market area; (3) managing
interest rate risk exposure by better matching asset and liability maturities
and rates; (4) increasing fee income; (5) managing asset quality; (6)
maintaining a strong retail deposit base; (7) maintaining capital in excess of
regulatory requirements; and (8) enhancing the commercial loan program to add
high quality, shorter term assets to the Company's balance sheet.
Discussion of Financial Condition Changes from March 31, 2003 to March 31, 2004
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Company's operations, and actual
results could differ significantly from those discussed in forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
interest rates in the nation and the Company's general market area. The
forward-looking statements contained herein include, but are not limited to,
those with respect to the following matters: (1) management's determination of
the amount and adequacy of the allowance for loan losses; (2) the effect of
changes in interest rates; (3) management's opinion as to the effects of recent
accounting pronouncements on the Company's consolidated financial statements;
and (4) management's opinion as to the Bank's ability to maintain regulatory
capital at current levels. The Company considers the allowance for loan losses
and related loss provision to be a critical accounting policy. A detailed
discussion of such policy is set forth on the following pages.
At March 31, 2004, the Company had total assets of $369.0 million, a
decrease of $10.0 million, or 2.6%, below total assets of $379.0 million at
March 31, 2003. Cash and cash equivalents and investment securities totaled
$51.5 million, a decrease of approximately $1.9 million, or 3.5%, from March 31,
2003 levels. During the fiscal year ended March 31, 2004, investment securities
totaling $26.8 million matured or were called while $22.1 million of investment
securities were purchased. Cash and cash equivalents increased by $2.4 million,
or 13.7%, to a total of $19.9 million at March 31, 2004.
Mortgage-backed securities totaled $88.4 million at March 31, 2004, an
increase of $12.4 million, or 16.3%, from the total at March 31, 2003. The
Company has experienced high levels of mortgage prepayments as a result of
borrowers refinancing at the near record low level of mortgage interest rates
that existed throughout the year. The Company has elected to reinvest these
funds into interest rate sensitive mortgage-backed securities with an estimated
average life of five years or less. The Company purchased $55.5 million of
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these securities which were partially offset by principal repayments and sales
of $41.5 million for fiscal 2004.
Loans receivable totaled $205.4 million at March 31, 2004, a decrease of
$22.9 million, or 10.0%, from the March 31, 2003 balance. This decrease resulted
mainly from principal repayments of $89.1 million as borrowers took the
opportunity to refinance during a period of low mortgage interest rates. In
addition, the Company chose to sell $6.3 million of loans in the secondary
market. New loan originations amounted to $71.9 million for the year ended March
31, 2004. The majority of loan disbursements consisted of loans secured by
one-to-four-family residential real estate loans. The Company has enhanced its
commercial lending program by hiring an experienced commercial lending officer
in fiscal 2004 and two commercial loan officers in fiscal 2005. The Company
plans to increase its commercial lending portfolio by focusing on high quality,
smaller balance commercial loans.
At March 31, 2004, the allowance for loan losses totaled $815,000, or .40%
of loans, compared to $678,000 or .30% of loans at March 31, 2003. In
determining the amount of loan loss allowance at any point in time, management
and the Board apply a systematic process focusing on the risk of loss in the
portfolio. First, delinquent nonresidential, multifamily and commercial loans
are evaluated for potential impairments in carrying value. At March 31, 2004,
the delinquent nonresidential, multi-family and commercial loans were viewed as
well-secured, with no loss anticipated. The second step in determining the
allowance for loan loss entails the application of historic loss experience to
the individual loan types in the portfolio. In addition to the historic loss
percentage, management employs an additional risk percentage tailored to the
perception of the overall risk in the economy. This segment of the loss analysis
accounts for nearly the entire balance of the allowance at March 31, 2004. The
analysis of the allowance for loan losses is a critical accounting estimate
which requires an element of judgment and is subject to the possibility that the
allowance may need to be increased, with a corresponding reduction in earnings.
To the best of management's knowledge, all known losses as of March 31, 2004,
have been recorded.
Nonperforming loans totaled $747,000 at March 31, 2004, compared to $2.5
million at March 31, 2003. Nonperforming loans consisted mainly of $731,000 in
one-to four-family residential mortgage loans. The allowance for loan losses
totaled 109.1% and 27.4% of nonperforming and impaired loans at March 31, 2004
and 2003, respectively.
Although management believes that its allowance for loan losses is
adequate based upon the available facts and circumstances, there can be no
assurance that additions to the allowance will not be necessary in future
periods, which would adversely affect the Company's results of operations.
The Company purchased an additional $940,000 in Bank owned life insurance
("BOLI") during fiscal 2004 to help offset the rising costs of employee benefit
programs and to fund two SERP plans created for the Executive Vice Presidents.
This increased the total BOLI to $6.3 million. Under this program, the Company
is the owner of single premium life insurance policies on key executives and
officers.
Deposits decreased by approximately $9.1 million to a total of $291.8
million at March 31, 2004. The decline in deposits during 2004 generally
reflects management's conservative pricing strategy in the current low-rate
environment.
Stockholders' equity totaled $43.6 million at March 31, 2004, a decrease
of $1.1 million, or 2.5%, from March 31, 2003. The decrease was a result of the
stock repurchase plan through which the Company was able to purchase 112,500
shares totaling $1.8 million at March 31, 2004. The plan, which expires January
2005, authorizes the purchase of up to 195,000 shares. Further reductions to
equity resulted from the Company's purchase of $1.1 million, or 81,632 shares,
for the Management Recognition Plan (the "MRP"). The Company also declared
dividends aggregating $1.8 million. These reductions were offset by earnings of
$2.7 million, available for sale securities unrealized gains of $356,000, the
reduction of the minimum pension liability of $275,000, and $254,000 stock
benefit plan amortization.
The Bank is subject to capital standards, which generally require the
maintenance of regulatory capital sufficient to meet each of the three tests;
i.e., the tangible capital requirement, the core capital requirement and the
risk-based capital requirement. At March 31, 2004, the Bank exceeded all
regulatory capital requirements to which they were subject.
Comparison of Operating Results for the Years Ended March 31, 2004 and 2003
General. Net earnings totaled $2.7 million for the fiscal year ended March
31, 2004, a decrease of $68,000, or 2.5%, below the net earnings of $2.8 million
for the fiscal year ended March 31, 2003. The decline in net earnings was
primarily attributable to an increase in general, administrative and other
expense of $554,000, or 6.6% and an increase in provision for losses on loans of
$82,000, or 90.1%. These earnings decreases were mainly offset by an increase in
other income of $290,000, or 17.7%, net interest income of $215,000, or 2.0%,
and a $63,000, and in 5.2%, decrease in federal income tax expense.
Interest Income. Interest income for the fiscal year ended March 31, 2004,
decreased $1.8 million, or 9.0%, to $18.2 million. This decrease was a result of
an 82 basis point reduction in the yield on interest-earning assets to 5.16%,
partially offset by an increase in the weighted average balance of
interest-earning assets totaling $18.0 million, or 5.4%, to $352.7 million for
the period ended March 31, 2004.
Interest income on loans declined $2.9 million, or 17.0%, for the fiscal
year ended March 31, 2004, due primarily to a decrease in the weighted average
balance of loans outstand-
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MANAGEMENT'S DISCUSSION AND ANALYSIS (con't.)
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ing of $27.9 million, or 11.5%, compared to fiscal 2003, coupled with a 43 basis
point decrease in the weighted average yield on loans to 6.53% for fiscal 2004.
Interest income on mortgage-backed securities increased $979,000 or 65.0%
during the fiscal 2004, due primarily to a $46.8 million, or 118.0%, increase in
the weighted average balance outstanding from the comparable 2003 period, which
was partially offset by a decrease in the average yield of 93 basis points to
2.87%.
Interest income on investments increased by $336,000, or 29.0%, reflecting
an increase in the weighted average balance of $10.5 million, or 43.7%,
partially offset by a decrease in the weighted average rate of 49 basis points
to 4.32% from 4.81% during the fiscal 2003 period.
Interest income on interest-bearing deposits and other decreased by
$258,000, or 50.4%, reflecting a decrease in the weighted average balance of
$11.3 million, or 39.3%, coupled with a decrease in the weighted average rate of
33 basis points to 1.45% from 1.78% during the fiscal 2003 period.
Interest Expense. Interest expense for fiscal 2004 totaled $7.1 million, a
decrease of $2.0 million, or 22.1%, from interest expense of $9.2 million for
the fiscal year ended March 31, 2003. The decrease resulted from a 70 basis
point decrease in the average cost of funds to 2.19% for the fiscal 2004 period,
offset by an increase in the average balance of deposits and borrowings
outstanding of $8.7 million, or 2.7%, to $326.2 million for the fiscal 2004
period ended March 31, 2004.
Interest expense on deposits totaled $5.9 million for fiscal 2004, a
decrease of $2.5 million, or 30.0%, from fiscal 2003, as a result of a 82 basis
point decrease in the average cost of deposits to 1.99% for the 2004 period
coupled with a decrease in the average balance outstanding of $4.1 million, or
1.4%, to $296.2 million for fiscal 2004.
Interest expense on borrowings totaled $1.2 million for the fiscal year
ended March 31, 2004, an increase of $511,000 from fiscal 2003, primarily due to
an increase in the average balance of borrowings of $12.8 million to an average
balance of $30.0 million for fiscal 2004 from $17.2 million for year ended March
31, 2003, partially offset by a decrease in the average cost of borrowings to
4.16% from an average cost of 4.28% for the fiscal 2003 period.
Net Interest Income. Net interest income totaled $11.1 million for the
fiscal year ended March 31, 2004, an increase of $215,000, or 2.0%, from the
fiscal 2003 period. The interest rate spread decreased to 2.97% for the year
ended March 31, 2004 from 3.09% for fiscal 2003. The net interest margin
decreased to 3.14% for fiscal 2004 from 3.24% for the year ended March 31, 2003.
Provision for Losses on Loans. The Company recorded provisions for losses
on loans totaling $173,000 and $91,000 for the fiscal years ended March 31, 2004
and 2003, respectively. The increase in provision for loan losses was predicated
on possible short-term softness in the local economy and the increased
origination of commercial loans. 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 March 31, 2004 and 2003.
Other Income. Other income, consisting primarily of an increase in the
cash surrender value of life insurance, gains on sale of loans, service fees,
and charges on deposit accounts, increased by $290,000 or 17.7%, to $1.9 million
for fiscal 2004, from $1.6 million for the year ended March 31, 2003. The
increase resulted primarily from an increase of $139,000 in the cash surrender
value of life insurance. Additionally, service fees, charges and other operating
income increased by $94,000, or 6.6%, to $1.5 million for the fiscal year ended
March 31, 2004, due primarily to increased income related to credit card
merchants. Gain on sale of loans increased $67,000, or 82.7%, in fiscal 2004 as
compared to the fiscal year ended March 31, 2003, due mainly to management's
decision to sell the majority of the lower rate thirty year residential mortgage
loans in the secondary market.
General, Administrative, and Other Expense. General, administrative and
other expense increased by $554,000, or 6.6%, to $9.0 million for the year ended
March 31, 2004 compared to the fiscal year ended March 31, 2003. The increase
resulted primarily from a $432,000, or 9.1%, increase in employee compensation
and benefits, a $64,000, or 3.5%, increase in other operating expense and an
increase of $55,000, or 17.9%, in franchise taxes due to the increase in equity
from the fiscal 2003 stock conversion. 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 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 $1.2
million for the year ended March 31, 2004, a decrease of $63,000, or 5.2%,
compared to the fiscal 2003. The decrease resulted primarily from a $131,000, or
3.3%, decrease in pretax earnings, coupled with an additional $139,000 of
tax-exempt income related to the cash surrender value of life insurance. The
effective tax rate for fiscal 2004 was 29.9%, as compared to 30.5% for fiscal
2003. The decrease in the effective tax rate year to year is mainly due to the
beneficial effects of the aforementioned tax-exempt income.
12
- ------------------------------------------------------------------------------WS
Comparison of Operating Results for the Years Ended March 31, 2003 and March 31,
2002
General. Net earnings totaled $2.8 million for the fiscal year ended March
31, 2003, an increase of $949,000, or 52.1% over the net earnings of $1.8
million for the fiscal year ended March 31, 2002. The increase in net earnings
was due primarily to an increase in net interest income of $1.9 million, or
21.1%, partially offset by an increase of $695,000, or 9.0%, in general,
administrative and other expense and a $278,000, or 29.6%, increase in federal
income taxes.
Interest Income. Interest income on loans totaled $16.9 million for the
fiscal year ended March 31, 2003, a decrease of $2.2 million, or 11.6%, from the
$19.1 million recorded for fiscal 2002. The decrease in interest income on loans
was primarily due to an average yield reduction of 57 basis points to 6.96%
coupled with a decrease in the average loan balances of $10.9 million, or 4.3%,
for the fiscal year ended March 31, 2003.
Interest income on mortgage-backed securities totaled $1.5 million for the
fiscal year ended March 31, 2003, an increase of $935,000, or 163.7%, from
$571,000 for fiscal 2002. The increase was primarily attributable to an increase
in average outstanding balance of $29.3 million, or 283.5%, partially offset by
a decrease in average yield of 172 basis points to 3.80% for fiscal 2003.
Interest income on investments and interest-bearing deposits decreased
$8,000, or .5%, primarily due to a decrease in the average yield of 77 basis
points to 3.16%, partially offset by an increase in the average balance of $10.2
million, or 23.9%, to $52.9 million for the fiscal year ended March 31, 2003.
Interest Expense. Interest expense on deposits totaled $8.4 million for
the fiscal year ended March 31, 2003, a decrease of $3.6 million, or 30.1%,
from the fiscal 2002 expense. The decrease in interest expense on deposits was
primarily attributable to a decrease in the average cost of deposits of 136
basis points to 2.81% for fiscal 2003, which was partially offset by an increase
in the average outstanding balance of $11.4 million, or 4.0%, to $300.3 million
in fiscal 2003.
Interest expense on borrowings totaled $737,000 for the fiscal year ended
March 31, 2003, an increase of $444,000, or 151.5%, from the $293,000 recorded
for fiscal 2002. The increase was attributable to an increase in the average
outstanding balance of $11.7 million, or 212.5%, partially offset by a decrease
in the average yield of 104 basis points to 4.28% for the fiscal year ended
March 31, 2003, from 5.32% for the fiscal year ended March 31, 2002.
Net Interest Income. Net interest income totaled $10.9 million for the
fiscal year ended March 31, 2003, an increase of $1.9 million, or 21.1%, over
the $9.0 million recorded in fiscal 2002. The increase in net interest income
was primarily attributed to a 136 basis point decrease in average cost of
deposits to 2.81%, coupled with an increase in average interest-earning assets
of $28.6 million, or 9.3%, for fiscal 2003. The increase in net interest income
was partially offset by a decrease in the average yield on interest-earning
assets of 98 basis points to 5.98% for fiscal 2003, from 6.96% for fiscal 2002
and an increase of $ 11.7 million, or 212.5%, in average borrowings to $17.2
million for fiscal 2003. The interest rate spread increased 32 basis points to
3.09% in fiscal 2003, from 2.77% in fiscal 2002. The net interest margin
increased to 3.24% for the fiscal year ended March 31, 2003, from 2.93% in
fiscal 2002.
Provision for losses on loans. The Company's provision for losses on loans
totaled $91,000 and $134,000 for the fiscal years ended March 31, 2003 and 2002,
respectively. To the best of management's knowledge, all known losses as of
March 31, 2003 and 2002, have been recorded.
Other Income. Other income, consisting primarily of gain on sale of loans,
gain on sale of mortgage-backed securities, increase in the cash surrender value
of life insurance, and service fees and service charges on deposit accounts,
decreased by $14,000, or .8%, to $1.6 million for the fiscal year ended March
31, 2003. The decrease was the result of a reduction in gain on sale of loans of
$433,000, or 84.2%, to $81,000 for fiscal 2003 from $514,000 for fiscal 2002,
which was partially offset by an increase in service fees, charges and other
operating income of $272,000, or 23.8%, and an increase of $121,000 in the cash
surrender value of life insurance. The decline in gains on sale of loans
generally reflects management's decision to conservatively price originations in
a low-yield environment. This decision reduced the volume of fixed rate loans
available for sale.
General, administrative and other expense. General, administrative and
other expense consisting primarily of employee compensation and benefits,
occupancy and equipment expense, federal deposit and insurance premiums, and
other operating expenses, totaled $8.4 million for the year ended March 31,
2003, an increase of $695,000, or 9.0%, compared to fiscal 2002. The increase
was primarily due to an increase of $443,000, or 10.3%, in employee compensation
and benefits, an increase in other operating expense, including operating
expenses previously paid for or allocated to the M.H.C., of $124,000, or 7.3%,
and an increase in occupancy and equipment of $89,000, or 6.4%. The increase in
employee compensation and benefits was primarily due to normal merit increases,
an increase in employee benefit costs, and the hiring of additional executive
staff needed for operating a fully converted, publicly traded stock company.
Other operating expense increased mainly due to a reduction in deferred loan
origination costs. As stated previously, the
13
MANAGEMENT'S DISCUSSION AND ANALYSIS (con't.)
WS------------------------------------------------------------------------------
Company was strategically positioned to be less aggressive in loan pricing which
slowed loan originations from $96.5 million in fiscal 2002 to $61.2 million in
fiscal 2003. The increase in occupancy and equipment expense was mainly due to
several offices which opened in fiscal 2002 and 2003.
Federal Income Taxes. The provision for federal income taxes was $1.2
million for the fiscal year ended March 31, 2003, an increase of $278,000, or
29.6%, compared to fiscal 2002. The increase resulted primarily from a $1.2
million, or 44.4%, increase in pretax earnings. The effective tax rate for the
fiscal year ended March 31, 2003, was 30.5%, as compared to 34.0% in 2002,
mainly due to tax-free income arising from the investment in various
interest-earning assets.
Average Balance Sheet
The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented.
Year Ended March 31,
--------------------------------------------------------------------------------------------
2004 2003 2002
---------------------------- ----------------------------- ----------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- -------- ------- -------- -------- ------- -------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1) ........... $214,174 $13,982 6.53% $242,120 $16,846 6.96% $253,058 $19,059 7.53%
Mortgage-backed securities (2) ..... 86,440 2,485 2.87 39,652 1,506 3.80 10,340 571 5.52
Investment securities .............. 34,640 1,495 4.32 24,114 1,159 4.81 15,628 871 5.57
Interest-bearing deposits(3) ....... 17,478 254 1.45 28,804 512 1.78 27,083 808 2.98
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-earning assets .... 352,732 18,216 5.16 334,690 20,023 5.98 306,109 21,309 6.96
Non-interest-earning assets .......... 18,853 18,481 17,057
-------- -------- --------
Total assets ..................... $371,585 $353,171 $323,166
======== ======== ========
Interest-bearing liabilities:
Deposits ........................... $296,244 5,899 1.99 $300,326 8,432 2.81 $288,882 12,055 4.17
Borrowings ......................... 30,000 1,248 4.16 17,204 737 4.28 5,505 293 5.32
-------- ------- ------ -------- ------- ------ -------- ------- ------
Total interest-bearing
liabilities .................... 326,244 7,147 2.19 317,530 9,169 2.89 294,387 12,348 4.19
Non-interest-bearing liabilities ..... 923 4,153 3,159
-------- -------- --------
Total liabilities ................ 327,167 321,683 297,546
Stockholders' equity ................. 44,418 31,488 25,620
-------- -------- --------
Total liabilities and
stockholders' equity ........... $371,585 $353,171 $323,166
======== ------- ======== ------- ======== -------
Net interest income .................. $11,069 $10,854 $ 8,961
======= ======= =======
Interest rate spread(4) .............. 2.97% 3.09% 2.77%
====== ====== ======
Net yield on interest-earning
assets(5) .......................... 3.14% 3.24% 2.93%
====== ====== ======
Ratio of average interest-earning
assets to average interest-
bearing liabilities ................ 108.12% 105.40% 103.98%
====== ====== ======
(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.
- --------------------------------------------------------------------------------
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average volume multiplied by old rate); and (ii) changes in rate
(change in rate multiplied by old average volume). Changes in rate-volume
(changes in rate multiplied by the change in average volume) have been allocated
proportionately between changes in rate and changes in volume.
14
- ------------------------------------------------------------------------------WS
Year Ended March 31,
-----------------------------------------------------------------------------
2004 vs. 2003 2003 vs. 2002
----------------------------------- -----------------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due to Total
--------------------- Increase --------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------- ------- ---------- ------- ------- ----------
(In thousands)
Interest income attributable to:
Loans receivable ............................. $(1,861) $(1,003) $(2,864) $ (801) $(1,412) $(2,213)
Mortgage-backed securities ................... 1,426 (447) 979 1,163 (228) 935
Other interest-earning assets ................ (26) 104 78 358 (366) (8)
------- ------- ------- ------- ------- -------
Total interest-earning assets .............. (461) (1,346) (1,807) 720 (2,006) (1,286)
Interest expense attributable to:
Deposits ..................................... (113) (2,420) (2,533) 461 (4,084) (3,623)
Borrowings ................................... 533 (22) 511 623 (179) 444
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities ......... 420 (2,442) (2,022) 1,084 (4,263) (3,179)
------- ------- ------- ------- ------- -------
Increase (decrease) in
net interest income ........................ $ (881) $ 1,096 $ 215 $ (364) $ 2,257 $ 1,893
======= ======= ======= ======= ======= =======
- --------------------------------------------------------------------------------
Asset and Liability Management-Interest Rate Sensitivity Analysis
The Bank, like other financial institutions, is subject to interest rate
risk to the extent that interest-earning assets reprice at a different time than
interest-bearing liabilities. As part of their effort to monitor and manage
interest rate risk, the Bank uses the "net portfolio value" ("NPV") methodology
adopted by the OTS as part of its interest rate sensitivity regulations. The
application of NPV methodology illustrates certain aspects of the Bank's
interest rate risk.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on interest-bearing and other liabilities. The application of the methodology
attempts to quantify interest rate risk as the change in the NPV, which would
result from a theoretical change in market interest rates.
Presented below, as of March 31, 2004 and 2003, is an analysis of the
Bank's interest rate risk as measured by changes in NPV for instantaneous and
sustained 100, 200 and 300 basis point (1 basis point equals .01%) increases and
a 100 basis point decrease in market interest rates. Due to the current low
prevailing interest rate environment, the changes in NPV are not estimated for a
decrease of 200 or 300 basis points.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making the risk calculations.
The Company's policy in recent years has been to reduce its exposure to
interest rate risk generally by better matching the maturities of its interest
rate sensitive assets and liabilities and by originating adjustable rate
mortgage ("ARM") loans and other adjustable rate or short-term loans, as well as
by purchasing short-term investments and mortgage-backed securities. However,
particularly in the lower long-term interest rate environment which currently
exists, borrowers typically prefer fixed rate loans to ARM loans. Accordingly,
ARM loan originations were very limited during the fiscal year ended March 31,
2004. The Company has sought to lengthen the maturities of its deposits by
promoting longer-term certificates; however, the Company was not successful in
lengthening the maturities of its deposits in the declining interest rate
environment that existed throughout fiscal 2004. The Company also negotiates
interest rates on certificates of deposit of $100,000 or more.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS (con't.)
WS------------------------------------------------------------------------------
The Company has an Asset-Liability Management Committee, which is
responsible for reviewing the Company's asset-liability policies. The Committee
meets weekly and reports monthly to the Board of Directors on interest rate
risks and trends, as well as liquidity and capital ratios and requirements. The
Bank has operated within the framework of their prescribed asset/liability risk
ranges for each of the last three years.
As of March 31, 2004
- ----------------------------------------------------------------------------------------------------------------
Net Portfolio Value NPV as % of PV of Assets
Change in Interest ---------------------------------------- ----------------------------------
Rates (Basis points) $ Amount $ Change % Change NPV Ratio Change
-------------------- -------- -------- -------- --------- ------
(In thousands)
+300 bp $42,370 $(11,927) (22)% 11.66% (250 bp)
+200 bp 48,174 (4,097) (8) 12.96 (120 bp)
+100 bp 52,785 (1,512) (3) 13.92 (24 bp)
0 bp 54,297 -- -- 14.16 --
-100 bp 52,271 (2,026) (4) 13.60 (56 bp)
As of March 31, 2003
- ----------------------------------------------------------------------------------------------------------------
Net Portfolio Value NPV as % of PV of Assets
Change in Interest ---------------------------------------- ----------------------------------
Rates (Basis points) $ Amount $ Change % Change NPV Ratio Change
-------------------- -------- -------- -------- --------- ------
(In thousands)
+300 bp $46,905 $(9,213) (16)% 12.55% (171 bp)
+200 bp 52,575 (3,543) (6) 13.73 (53 bp)
+100 bp 56,002 (116) (.2) 14.37 11 bp
0 bp 56,118 -- -- 14.26 --
-100 bp 53,051 (3,067) (6) 13.45 (81 bp)
- --------------------------------------------------------------------------------
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, amortization of loan
principal and prepayment of loans and mortgage-backed securities, maturities of
investment securities and other short-term investments, and earnings and funds
provided from operations. While scheduled principal repayments on loans and
mortgage-backed securities are a relatively predictable source of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. The Bank manages the pricing of deposits to
maintain a desired level of deposits and cost of funds. In addition, the Bank
invests excess funds in federal funds and other short-term interest-earning and
other assets, which provide liquidity to meet lending requirements. Federal
funds sold and other liquid assets outstanding at March 31, 2004, 2003 and 2002,
amounted to $139.9 million, $129.3 million and $67.5 million, respectively. For
additional information about cash flows from the Company's operating, financing
and investing activities, see the Statements of Cash Flows included in the
Consolidated Financial Statements.
A major portion of the Bank's liquidity consists of cash and cash
equivalents, which are a product of their operating, investing and financing
activities. The primary sources of cash are net earnings, principal repayments
on loans and mortgage-backed securities, proceeds from advances from the Federal
Home Loan Bank ("FHLB"), and sales of mortgage-backed securities. Liquidity
management is both a daily and long-term function of business management. If the
Bank requires funds beyond their ability to generate them internally, borrowing
agreements exist with the Federal Home Loan Bank, which provide an additional
source of funds. At March 31, 2004, the Company had $30.0 million in outstanding
advances from the FHLB.
At March 31, 2004, the Company had outstanding loan commitments of $36.0
million, including the unfunded portion of loans in process and commitments
under unused lines of credit. Certificates of deposit scheduled to mature in
less than one year at March 31, 2004, totaled $86.4 million. Based on prior
experience, management believes that a significant portion of such deposits will
remain with the Company.
The following table summarizes the Company's contractual cash obligations
at March 31, 2004.
16
- ------------------------------------------------------------------------------WS
Payments due by period
-----------------------------------------------------------------
< 1 year 1-3 years 3-5 years > 5 years Total
-----------------------------------------------------------------
(In thousands, except share data)
Contractual obligations:
Operating lease obligations .............................. $ 71 $ 114 $ 60 $ 5 $ 250
Advances from the Federal Home Loan Bank ................. 5,000 7,500 7,500 10,000 30,000
Certificates of deposit .................................. 86,381 45,051 22,449 1,284 155,165
Amount of commitments expiring per period
Commitments to originate loans:
Letters of credit ...................................... 360 -- -- -- 360
Credit card/overdraft lines of credit .................. 5,529 -- -- -- 5,529
Home equity/commercial lines of credit ................. 24,735 -- -- -- 24,735
One- to four-family and multi-family loans ............. 4,194 -- -- -- 4,194
Non-residential real estate and land loans ............. 1,639 -- -- -- 1,639
-------- ------- ------- ------- --------
Total contractual obligations .............................. $127,909 $52,665 $30,009 $11,289 $221,872
======== ======= ======= ======= ========
- --------------------------------------------------------------------------------
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with U.S. GAAP,
which requires the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, nearly all the assets and liabilities of the Company
are monetary. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
Common Stock and Related Matters
The Company's common stock trades on the Nasdaq National Market using the
symbol "WAYN." The following table sets forth the high and low trading prices of
the Company's common stock during the three most recent fiscal years, together
with the cash dividends declared. As stated previously, all per share amounts
have been restated for the 1.5109 share exchange ratio provided for in the
Company's conversion offering.
Fiscal Year Ended Cash Dividends
March 31, 2004 High Low Declared
- -------------- ---- --- --------
First quarter $14.10 $11.06 $ .113
Second quarter 14.53 12.70 .113
Third quarter 18.70 13.93 .120
Fourth quarter 18.00 15.00 .120
Fiscal Year Ended Cash Dividends
March 31, 2003 High Low Declared
- -------------- ---- --- --------
First quarter $14.23 $13.24 $ .113
Second quarter 13.51 11.75 .113
Third quarter 15.22 10.25 .113
Fourth quarter 11.55 10.67 .113
Fiscal Year Ended Cash Dividends
March 31, 2002 High Low Declared
- -------------- ---- --- --------
First quarter $11.87 $ 7.48 $ .113
Second quarter 13.60 9.10 .113
Third quarter 11.79 9.17 .113
Fourth quarter 14.56 10.76 .113
As of April 23, 2004, the Company had 1,602 stockholders of record and
3,794,818 shares of common stock outstanding. This does not reflect the number
of persons whose stock is in nominee or "street name" accounts through brokers.
Payment of dividends on the common stock is subject to determination and
declaration by the Board of Directors and will depend upon a number of factors,
including capital requirements, regulatory limitations on the payment of
dividends, the Company's results of operations and financial condition, tax
considerations, and general economic conditions. No assurance can be given that
dividends will be declared or, if declared, what the amount of dividends will
be, or whether such dividends, once declared, will continue.
The Company's primary source of funds with which to pay dividends is cash
and cash equivalents held at the holding company level and dividends from the
Bank. The Bank's ability to pay dividends to the Company is limited by OTS
regulations, and the Bank is required to obtain OTS nonobjection to the payment
of dividends to the Company. In determining whether to object to such dividends,
the OTS considers whether (i) the Bank would be undercapitalized following the
dividend, (ii) the dividend raises safety and soundness concerns, or (iii) the
dividend violates any regulatory prohibition or policy.
In addition to the foregoing, earnings of the Company appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then-current tax rate by the Company on the amount of earnings
removed from the reserves for such distributions. The Company intends to make
full use of this favorable tax treatment and does not contemplate any
distribution that would create federal tax liability.
17
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
WS------------------------------------------------------------------------------
As of March 31,
(Dollars in thousands, except share data)
ASSETS 2004 2003
--------- ---------
Cash and due from banks .......................................................................... $ 3,291 $ 2,967
Federal funds sold ............................................................................... 9,875 8,000
Interest-bearing deposits in other financial institutions ........................................ 6,721 6,529
--------- ---------
Cash and cash equivalents ...................................................................... 19,887 17,496
Investment securities available for sale - at market ............................................. 17,546 17,036
Investment securities held to maturity - at amortized cost, approximate
market value of $14,830 and $19,211 as of March 31, 2004 and 2003, respectively ................ 14,036 18,805
Mortgage-backed securities available for sale - at market ........................................ 83,945 66,151
Mortgage-backed securities held to maturity - at amortized cost, approximate
market value of $4,510 and $9,927 as of March 31, 2004 and 2003, respectively .................. 4,483 9,851
Loans receivable - net ........................................................................... 205,443 228,373
Office premises and equipment - net .............................................................. 8,742 8,818
Real estate acquired through foreclosure ......................................................... 100 --
Federal Home Loan Bank stock - at cost ........................................................... 4,205 4,041
Cash surrender value of life insurance ........................................................... 6,321 5,121
Accrued interest receivable on loans ............................................................. 801 948
Accrued interest receivable on mortgage-backed securities ........................................ 400 380
Accrued interest receivable on investments and interest bearing deposits ......................... 318 313
Prepaid expenses and other assets ................................................................ 2,549 1,532
Prepaid federal income taxes ..................................................................... 231 126
--------- ---------
Total assets ................................................................................. $ 369,007 $ 378,991
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits ......................................................................................... $ 291,830 $ 300,931
Advances from the Federal Home Loan Bank ......................................................... 30,000 30,000
Advances by borrowers for taxes and insurance .................................................... 617 712
Accrued interest payable ......................................................................... 186 235
Accounts payable on mortgage loans serviced for others ........................................... 118 130
Other liabilities ................................................................................ 1,383 1,638
Deferred federal income taxes .................................................................... 1,312 682
--------- ---------
Total liabilities ............................................................................ 325,446 334,328
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 March 31, 2004 and 2003 respectively) ............. 391 389
Additional paid-in capital ..................................................................... 34,365 34,208
Retained earnings - substantially restricted ................................................... 12,727 11,830
Shares acquired by Management Recognition Plan ................................................. (1,142) --
Less required contributions for shares acquired by Employee Stock Ownership Plan ............... (1,456) (1,612)
Less 112,500 shares of treasury stock at March 31, 2004 - at cost .............................. (1,803) --
Accumulated other comprehensive income (loss) .................................................. 479 (152)
--------- ---------
Total stockholders' equity ................................................................... 43,561 44,663
--------- ---------
Total liabilities and stockholders' equity ................................................... $ 369,007 $ 378,991
========= =========
The accompanying notes are an integral part of these statements.
18
CONSOLIDATED STATEMENTS OF EARNINGS
- ------------------------------------------------------------------------------WS
For the year ended March 31,
(Dollars in thousands, except share data)
2004 2003 2002
------- ------- -------
Interest income:
Loans ......................................................................... $13,982 $16,846 $19,059
Mortgage-backed securities .................................................... 2,485 1,506 571
Investment securities ......................................................... 1,495 1,159 871
Interest-bearing deposits and other ........................................... 254 512 808
------- ------- -------
Total interest income ....................................................... 18,216 20,023 21,309
Interest expense:
Deposits ...................................................................... 5,899 8,432 12,055
Borrowings .................................................................... 1,248 737 293
------- ------- -------
Total interest expense ...................................................... 7,147 9,169 12,348
------- ------- -------
Net interest income ......................................................... 11,069 10,854 8,961
Provision for losses on loans ................................................... 173 91 134
------- ------- -------
Net interest income after provision for losses on loans ..................... 10,896 10,763 8,827
Other income:
Gain on sale of mortgage-backed and investment securities ..................... 16 26 --
Gain on sale of loans ......................................................... 148 81 514
Increase in cash surrender value of life insurance ............................ 260 121 --
Service fees, charges and other operating ..................................... 1,509 1,415 1,143
------- ------- -------
Total other income .......................................................... 1,933 1,643 1,657
General, administrative and other expense:
Employee compensation and benefits ............................................ 5,187 4,755 4,312
Occupancy and equipment ....................................................... 1,484 1,477 1,388
Federal deposit insurance premiums ............................................ 47 51 46
Franchise taxes ............................................................... 363 308 274
Other operating ............................................................... 1,890 1,826 1,667
Operating expenses previously paid by or allocated to M.H.C. .................. -- -- 35
------- ------- -------
Total general, administrative and other expense ............................. 8,971 8,417 7,722
------- ------- -------
Earnings before incomes taxes ............................................... 3,858 3,989 2,762
Federal incomes taxes:
Current ....................................................................... 524 1,210 620
Deferred ...................................................................... 630 7 319
------- ------- -------
Total federal income taxes .................................................. 1,154 1,217 939
------- ------- -------
NET EARNINGS ................................................................ $ 2,704 $ 2,772 $ 1,823
======= ======= =======
Basic earnings per share .................................................... $ .72 $ .71 $ .47
======= ======= =======
Diluted earnings per share .................................................. $ .72 $ .71 $ .47
======= ======= =======
The accompanying notes are an integral part of these statements.
19
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
WS------------------------------------------------------------------------------
For the year ended March 31,
(In thousands)
2004 2003 2002
------- ------- -------
Net earnings ............................................................................. $ 2,704 $ 2,772 $ 1,823
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities
during the year, net of taxes (benefits) of $183, $59, and $(6) ...................... 367 118 (11)
Reclassification adjustment for realized gains included in earnings, net of taxes
of $5 and $9 for the years ended March 31, 2004 and 2003 ............................. (11) (17) --
Minimum pension liability adjustment, net of tax (benefits) of $142 and $(142)
for fiscal 2004 and 2003, respectively ................................................. 275 (275) --
------- ------- -------
Comprehensive income ..................................................................... $ 3,335 $ 2,598 $ 1,812
======= ======= =======
Accumulated comprehensive income (loss) .................................................. $ 479 $ (152) $ 22
======= ======= =======
The accompanying notes are an integral part of these statements
20
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------WS
For the years ended March 31, 2004, 2003, and 2002
(Dollars in thousands, except share data)
Other
compre- Total
Additional Shares Shares Treasury hensive stock-
Common paid-in Retained acquired acquired stock - income holders'
stock capital earnings by ESOP by MRP at cost (loss) equity
------- ------- -------- ------- ------- ------- ------ --------
Balance at March 31, 2001 ................... $ 2,639 $14,436 $ 9,150 $ -- $ -- $(1,003) $ 33 $ 25,255
Stock options exercised ..................... 2 8 -- -- -- -- -- 10
Net earnings for the year ended
March 31, 2002 ............................ -- -- 1,823 -- -- -- -- 1,823
Cash dividends of $.45 per share ............ -- -- (852) -- -- -- -- (852)
Purchase of treasury shares - at cost ....... -- -- -- -- -- (178) -- (178)
Unrealized losses on securities
designated as available for sale,
net of related tax effects ................ -- -- -- -- -- -- (11) (11)
------- ------- -------- ------- ------- ------- ----- --------
Balance at March 31, 2002 ................... 2,641 14,444 10,121 -- -- (1,181) 22 26,047
Stock options exercised ..................... 3 13 -- -- -- -- -- 16
Reorganization and related common
stock offering - net ...................... (2,255) 19,751 -- (1,612) -- 1,181 -- 17,065
Net earnings for the year
ended March 31, 2003 ...................... -- -- 2,772 -- -- -- -- 2,772
Dividends declared of $.45 per share ........ -- -- (1,063) -- -- -- -- (1,063)
Minimum pension liability adjustment,
net of related tax effects ................ -- -- -- -- -- -- (275) (275)
Unrealized gains on securities
designated as available for sale,
net of related tax effects ................ -- -- -- -- -- -- 101 101
------- ------- -------- ------- ------- ------- ----- --------
Balance at March 31, 2003 ................... 389 34,208 11,830 (1,612) -- -- (152) 44,663
Shares purchased for MRP .................... -- -- -- -- (1,142) -- -- (1,142)
Stock options exercised ..................... 2 59 -- -- -- -- -- 61
Amortization of stock benefit plans ......... -- 98 -- 156 -- -- -- 254
Net earnings for the year
ended March 31, 2004 ...................... -- -- 2,704 -- -- -- -- 2,704
Dividends declared of $.47 per share ........ -- -- (1,807) -- -- -- -- (1,807)
Minimum pension liability adjustment,
net of related tax effects ................ -- -- -- -- -- -- 275 275
Purchase of treasury shares at cost ......... -- -- -- -- -- (1,803) -- (1,803)
Unrealized gains on securities
designated as available for sale,
net of related tax effects ................ -- -- -- -- -- -- 356 356
------- ------- -------- ------- ------- ------- ----- --------
Balance at March 31, 2004 ................... $ 391 $34,365 $ 12,727 $(1,456) $(1,142) $(1,803) $ 479 $ 43,561
======= ======= ======== ======= ======= ======= ===== ========
The accompany notes are an integral part of these statements.
21
CONSOLIDATED STATEMENTS OF CASH FLOWS
WS------------------------------------------------------------------------------
For the year ended March 31,
(In thousands)
2004 2003 2002
-------- -------- --------
Cash flows provided by (used in) operating activities:
Net earnings for the year ........................................................ $ 2,704 $ 2,772 $ 1,823
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 .............................. 1,409 480 (3)
Amortization of deferred loan origination fees ................................... (512) (460) (432)
Depreciation and amortization .................................................... 507 555 590
Amortization of employee benefit plans ........................................... 254 -- --
Gain on sale of loans ............................................................ (87) (57) (241)
Gain on sale of mortgage-backed securities available for sale .................... (16) (26) --
Proceeds from sale of loans in the secondary market .............................. 6,285 4,055 27,371
Loans originated for sale in the secondary market ................................ (6,203) (2,615) (26,269)
Provision for losses on loans .................................................... 173 91 134
Federal Home Loan Bank stock dividends ........................................... (164) (177) (219)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans ........................................... 147 205 175
Accrued interest receivable on mortgage-backed securities ...................... (20) (297) (41)
Accrued interest receivable on investments
and interest-bearing deposits ................................................ (5) (63) (39)
Prepaid expenses and other assets .............................................. (1,017) 167 (403)
Accrued interest payable ....................................................... (49) 12 (22)
Accounts payable on mortgage loans serviced for others ......................... (12) 14 (118)
Other liabilities .............................................................. (255) 136 (65)
Federal income taxes
Current ...................................................................... (288) (120) 55
Deferred ..................................................................... 630 7 319
-------- -------- --------
Net cash provided by operating activities .................................. 3,481 4,679 2,615
Cash flows provided by (used in) investing activities:
Purchase of investment securities held to maturity ............................... -- (13,953) (16,250)
Purchase of investment securities designated as available for sale ............... (22,067) (25,649) --
Proceeds from maturity of investment securities held to maturity ................. 4,735 17,420 7,617
Proceeds from maturity of investments securities designated
as available for sale .......................................................... 22,088 8,573 --
Purchase of mortgage-backed securities held to maturity .......................... -- (3,545) (12,108)
Purchase of mortgage-backed securities designated available for sale ............. (55,526) (73,897) (2,047)
Principal repayments on mortgage-backed securities held to maturity .............. 5,255 7,368 3,894
Principal repayments on mortgage-backed securities
designated as available for sale ............................................... 31,908 6,596 1,482
Proceeds from sale of mortgage-backed securities ................................. 4,373 4,594 --
Loan principal repayments ........................................................ 89,107 80,362 66,077
Loan disbursements ............................................................... (65,658) (58,616) (70,239)
Purchase of office premises and equipment ........................................ (431) (165) (1,018)
Purchase of bank-owned life insurance ............................................ (940) (5,000) --
Increase in cash surrender value of life insurance ............................... (260) (121) --
Proceeds from sale of land and other real estate ................................. 172 8 12
Decrease in certificates of deposit in other financial institutions .............. -- -- 5,700
Purchase of Federal Home Loan Bank stock ......................................... -- (97) (38)
-------- -------- --------
Net cash provided by (used in) investing activities ............................ 12,756 (56,122) (16,918)
-------- -------- --------
Net cash provided by (used in) operating and investing activities
(balance carried forward) .................................................... 16,237 (51,443) (14,303)
-------- -------- --------
22
- ------------------------------------------------------------------------------WS
For the year ended March 31,
(In thousands)
2004 2003 2002
-------- -------- --------
Net cash provided by (used in) operating and investing activities
(balance brought forward) ....................................................... $ 16,237 $(51,443) $(14,303)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts ......................................... (9,101) (26) 23,251
Proceeds from Federal Home Loan Bank advances ....................................... -- 25,000 5,000
Repayments of Federal Home Loan Bank advances ....................................... -- -- (6,000)
Advances by borrowers for taxes and insurance ....................................... (95) (168) 53
Reorganization and cash proceeds from related
common stock offering - net ....................................................... -- 17,065 --
Dividends paid on common stock ...................................................... (1,786) (831) (852)
Tax benefits related to employee stock plans ........................................ 20 -- --
Proceeds from exercise of stock options ............................................. 61 16 10
Shares acquired by Management Recognition Plan ...................................... (1,142) -- --
Purchase of treasury shares - at cost ............................................... (1,803) -- (178)
-------- -------- --------
Net cash provided by (used in) financing activities ............................... (13,846) 41,056 21,284
-------- -------- --------
Net increase (decrease) in cash and cash equivalents .................................. 2,391 (10,387) 6,981
Cash and cash equivalents at beginning of year ........................................ 17,496 27,883 20,902
-------- -------- --------
Cash and cash equivalents at end of year .............................................. $ 19,887 $ 17,496 $ 27,883
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes .............................................................. $ 630 $ 1,083 $ 637
======== ======== ========
Interest on deposits and borrowings ............................................... $ 7,196 $ 9,157 $ 12,370
======== ======== ========
Supplemental disclosure of noncash investing and financing activities:
Transfers from loans to real estate acquired through foreclosure .................... $ 279 $ -- $ --
======== ======== ========
Issuance of mortgage to facilitate sale of impaired loan collateral ................. $ -- $ 450 $ 93
======== ======== ========
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects ........................................................ $ 356 $ 101 $ (11)
======== ======== ========
Minimum pension liability adjustment,
net of related tax effects ........................................................ $ (275) $ 275 $ --
======== ======== ========
Recognition of mortgage servicing rights
in accordance with SFAS No. 140 ................................................... $ 61 $ 24 $ 273
======== ======== ========
Dividends payable ................................................................... $ 446 $ 232 $ 208
======== ======== ========
The accompanying notes are an integral part of these statements.
23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WS------------------------------------------------------------------------------
March 31, 2004, 2003, and 2002
NOTE A -- SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include Wayne Savings Bancshares,
Inc. (the "Company") and its wholly-owned subsidiary Wayne Savings Community
Bank ("Wayne Savings" or the "Bank"). Prior to the fiscal year ended March 31,
2003, a majority (52.5%) of the Company's shares were owned by Wayne Savings
Bankshares M.H.C. ("Bankshares," "parent" or "M.H.C."), a mutual holding
company, as defined under Office of Thrift Supervision ("OTS") regulations. On
January 8, 2003, the Company completed a reorganization and related common stock
offering which culminated with the M.H.C. merging with and into the Bank in a
manner similar to a pooling-of-interests. In fiscal 1999, Bankshares and Wayne
Savings formed a new federal savings bank subsidiary of Wayne Savings in North
Canton, Ohio, Village Savings Bank, F. S. B. ("Village"), which was merged into
Wayne Savings Community Bank as of September 30, 2003. Intercompany transactions
and balances are eliminated in the consolidated financial statements.
The Bank conducts a general banking business in north central Ohio, which
consists of attracting deposits from the general public and applying those funds
to the origination of loans for residential, consumer and nonresidential
purposes. The Bank's profitability is significantly dependent on their net
interest income, which is the difference between interest income generated from
interest-earning assets (i.e. loans and investments) and the interest expense
paid on interest-bearing liabilities (i.e. customer deposits and borrowed
funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or received
by the Bank can be significantly influenced by a number of environmental
factors, such as governmental monetary policy, that are outside of management's
control.
The financial information presented herein has been prepared in accordance
with accounting principles generally accepted in the United States of America
("U.S. GAAP") and general accounting practices within the financial services
industry. In preparing financial statements in accordance with U.S. GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from such
estimates.
The following is a summary of the Company's significant accounting
policies, which have been consistently applied in the preparation of the
accompanying financial statements.
1. Investment Securities and Mortgage-Backed Securities
The Company accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115
requires that investments be categorized as held-to-maturity, trading, or
available for sale. Securities classified as held-to-maturity are carried at
cost only if the Company has the positive intent and ability to hold these
securities to maturity. Trading securities and securities designated as
available for sale are carried at fair value with resulting unrealized gains or
losses recorded to operations or stockholders' equity, respectively. Realized
gains or losses on sales of securities are recognized using the specific
identification method.
2. Loans Receivable
Loans held in portfolio are stated at the principal amount outstanding,
adjusted for deferred loan origination fees, the allowance for loan losses, and
premiums and discounts on loans purchased and sold. Premiums and discounts on
loans purchased and sold are amortized and accreted to operations using the
interest method over the average life of the underlying loans.
Interest is accrued as earned unless the collectibility of the loan is in
doubt. Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal to
all interest previously accrued, and income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments has returned
to normal, in which case the loan is returned to accrual status.
The Bank recognizes rights to service mortgage loans for others pursuant
to SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." In accordance with SFAS No. 140, an institution
that acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells those loans with servicing rights
retained must allocate some of the cost of the loans to the mortgage servicing
rights.
The Bank recognized $61,000, $24,000 and $273,000 of pre-tax gains on
sales of loans related to capitalized mortgage servicing rights during the
fiscal years ended March 31, 2004, 2003 and 2002, respectively.
SFAS No. 140 requires that capitalized mortgage servicing rights be
assessed for impairment. Impairment is measured based on fair value. The
mortgage servicing rights recorded by the Bank, calculated in accordance with
the provisions of SFAS No. 140, were segregated into pools for valuation
purposes, using as pooling criteria the loan term and coupon rate. Once pooled,
each grouping of loans was evaluated on a discounted earnings basis to determine
the present value of
24
- ------------------------------------------------------------------------------WS
future earnings that a purchaser could expect to realize from each portfolio.
Earnings were projected from a variety of sources including loan servicing fees,
interest earned on float, net interest earned on escrows, miscellaneous income
and costs to service the loans. The present value of future earnings is the
"economic" value for the pool, i.e., the net realizable present value to an
acquirer of the acquired servicing.
The Bank recorded amortization related to mortgage servicing rights
totaling approximately $164,000, $164,000 and $109,000 for the years ended March
31, 2004, 2003 and 2002, respectively. At March 31, 2004 and 2003, the carrying
value of the Bank's mortgage servicing rights, which approximated fair value,
totaled $281,000 and $381,000, respectively.
Loans held for sale are carried at the lower of cost or market, determined
in the aggregate. In computing cost, deferred loan origination fees are deducted
from the principal balances of the related loans. There were no loans identified
as held for sale at either March 31, 2004, or March 31, 2003.
3. Loan Origination Fees
The Bank accounts for loan origination fees in accordance with SFAS No. 91
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases." Pursuant to the provisions
of SFAS No. 91, origination fees received from loans, net of certain direct
origination costs, are deferred and amortized to interest income using the
level-yield method, giving effect to actual loan prepayments. Additionally, SFAS
No. 91 generally limits deferred loan origination costs to the direct costs
attributable to the origination of a loan, i.e. principally actual personnel
costs. Fees received for loan commitments that are expected to be drawn upon,
based on the Banks' experience with similar commitments, are deferred and
amortized over the life of the loan using the level-yield method. Fees for other
loan commitments are deferred and amortized over the loan commitment period on a
straight-line basis.
4. Allowance for Loan Losses
It is the Bank's policy to provide valuation allowances for losses
inherent within the loan portfolio that are both probable and can be reasonably
estimated. When the collection of a loan becomes doubtful, or otherwise
troubled, the Bank records a charge-off equal to the difference between the fair
value of the property securing the loan and the loan's carrying value. In
providing valuation allowances, costs of holding real estate, including the cost
of capital, are considered. Major loans (including development projects) and
major lending areas are reviewed periodically to determine potential problems at
an early date. The allowance for loan losses is increased by charges to earnings
and decreased by charge-offs (net of recoveries).
The Bank accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." This Statement requires that
impaired loans be measured based upon the present value of expected future cash
flows discounted at the loan's effective interest rate or, as an alternative, at
the loan's observable market price or fair value of the collateral.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
applying the provisions of SFAS No. 114, the Bank considers investment in
one-to-four family residential loans and consumer installment loans to be
homogeneous and therefore excluded from separate identification for evaluation
of impairment. With respect to the Bank's investment in multi-family, commercial
and nonresidential loans, and the evaluation of impairment thereof, such loans
are collateral dependent and, as a result, are carried as a practical expedient
at the lower of cost or fair value.
It is the Bank's policy to charge off unsecured credits that are more than
ninety days delinquent. Similarly, collateral dependent loans are evaluated for
impairment at the time it becomes possible that the Bank will not collect all
contractual amounts due. Generally, this analysis is performed before a loan
becomes ninety days delinquent.
Information with respect to loans defined as impaired under SFAS No. 114
is summarized below:
2004 2003 2002
---- ---- ----
(In thousands)
Investment in impaired
loans .................................... $ -- $1,811 $3,012
Impaired loans with no
measurement of loss ...................... -- 1,811 2,493
Impaired loans with
measurement of loss ...................... -- -- 519
Allocated allowance
for loan losses .......................... -- -- 105
Average impaired loans ..................... 906 2,412 1,829
Charge-off of principal
related to impaired
loans .................................... -- 84 --
During the time a loan is deemed impaired, the Bank records interest
income using the cash method of accounting. Interest income on impaired loans
totaled approximately $249,000, $24,000 and $233,000 for the fiscal years ended
March 31, 2004, 2003 and 2002.
5. Office Premises and Equipment
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and minor
renewals are expensed as incurred. For financial reporting, depreciation
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.)
WS------------------------------------------------------------------------------
March 31, 2004, 2003, and 2002
and amortization are provided on the straight-line method over the remaining
useful lives of the assets, estimated to be twenty to fifty-five years for
buildings and improvements, five to ten years for furniture and equipment, ten
to twenty years for leasehold improvements, and forty years for safe deposit
boxes. An accelerated method is used for tax reporting purposes.
6. Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are recorded if
the properties' fair value subsequently declines below the value determined at
the recording date. In determining the lower of cost or fair value at
acquisition, costs relating to development and improvement of property are
capitalized. Costs relating to holding real estate acquired through foreclosure,
net of rental income, are charged against earnings as incurred.
7. Federal Income Taxes
The Company accounts for federal income taxes pursuant to SFAS No. 109
"Accounting for Income Taxes." In accordance with SFAS No. 109, a deferred tax
liability or deferred tax asset is computed by applying the current statutory
tax rates to net taxable or deductible temporary differences between the tax
basis of an asset or liability and its reported amount in the financial
statements that will result in net taxable or deductible amounts in future
periods. Deferred tax assets are recorded only to the extent that the amount of
net deductible temporary differences or carryforward attributes may be utilized
against current period earnings, carried back against prior years' earnings,
offset against taxable temporary differences reversing in future periods, or
utilized to the extent of management's estimate of future taxable income. A
valuation allowance is provided for deferred tax assets to the extent that the
value of net deductible temporary differences and carryforward attributes
exceeds management's estimates of taxes payable on future taxable income.
Deferred tax liabilities are provided on the total amount of net temporary
differences taxable in the future.
The Company's principal temporary differences between pretax financial
income and taxable income result primarily from the different methods of
accounting for deferred loan origination fees, Federal Home Loan Bank stock
dividends, certain components of retirement expense, general loan loss
allowances, percentage of earnings bad debt deductions and mortgage servicing
rights. A temporary difference is also recognized for depreciation expense
computed using accelerated methods for federal income tax purposes.
8. Earnings Per Share
Basic earnings per common share is computed based upon the
weighted-average number of common shares outstanding during the year, restated
as to fiscal 2002 for the effects of the Company's reorganization and related
stock offering. Diluted earnings per common share include the dilutive effect of
additional potential common shares issuable under the Company's stock option
plan. For each of the years presented, there were no shares excluded from the
diluted earnings per share calculation because the related options were
anti-dilutive. The computations are as follows:
2004 2003 2002
--------- --------- ---------
Weighted-average
common shares
outstanding (basic) 3,738,686 3,887,881 3,884,253
Dilutive effect of
assumed exercise
of stock options 12,499 14,196 16,372
--------- --------- ---------
Weighted-average
common shares
outstanding (diluted) 3,751,185 3,902,077 3,900,625
========= ========= =========
9. Stock Option Plans
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 March 31, 2004. 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 March 31, 2004, 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 pursuant to APB Opinion No. 25.
In accordance with APB Opinion No. 25, no compensation cost has been
recognized for the plans. Had compensation
26
- ------------------------------------------------------------------------------WS
cost for the Company's stock option plans been determined based on the fair
value at the grant dates for awards under the plans consistent with the
accounting method utilized in SFAS No. 123, the Company's net earnings and
earnings per share would have been reported in the manner presented below:
2004 2003 2002
--------- --------- ---------
Net earnings $ 2,704 $ 2,772 $ 1,823
Stock-based compensation,
net of tax -- (21) --
--------- --------- ---------
Pro forma net earnings $ 2,704 $ 2,751 $ 1,823
========= ========= =========
Earnings per share
Basic $ .72 $ .71 $ .47
Stock-based compensation,
net of tax -- -- --
--------- --------- ---------
Pro forma earnings per share .72 $ .71 $ .47
========= ========= =========
Diluted $ .72 $ .71 $ .47
Stock-based compensation,
net of tax -- (.01) --
--------- --------- ---------
Pro forma earnings per share $ .72 $ .70 $ .47
========= ========= =========
The following information applies to options outstanding at March 31, 2004:
Number outstanding .......................................... 214,204
Range of exercise prices .................................... $11.67 - $13.95
Weighted-average exercise price ............................. $13.84
Weighted-average remaining contractual life ................. 9.25
At March 31, 2004, 10,123 of the stock options are subject to exercise at
the discretion of the grantees and expire in fiscal 2005, while the remaining
204,081 options are not subject to exercise and will expire in fiscal 2014.
A summary of the status of the Company's stock option plans as of March
31, 2004, 2003 and 2002, and changes during the years ending on those dates is
presented below:
2004 2003 2002
------------------------ ---------------------- ----------------------
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
------- -------- ------ -------- ------ --------
Outstanding at beginning of year 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 year 214,204 $ 13.84 28,666 $ 6.26 23,378 $ 3.31
======= ======== ====== ======== ====== ========
Options exercisable at year-end 10,123 $ 11.67 28,666 $ 6.26 23,378 $ 3.31
======= ======== ====== ======== ====== ========
Fair value of options granted $ 3.93 $ 3.17 --
======== ======== ========
- --------------------------------------------------------------------------------
10. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks, federal funds sold, and interest-bearing deposits due
from other financial institutions with original maturities of less than three
months.
11. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of the fair value of financial instruments, both assets and
liabilities whether or not recognized in the consolidated statements of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair values
are based on estimates using present value and other valuation methods.
The methods used are greatly affected by the assumptions applied,
including the discount rate and estimates of future cash flows. Therefore, the
fair values presented may not represent amounts that could be realized in an
exchange for certain financial instruments.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments at March 31,
2004 and 2003:
Cash and cash equivalents: The carrying amounts presented in the
consolidated statements of financial condition for cash and cash
equivalents are deemed to approximate fair value.
27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.)
WS------------------------------------------------------------------------------
March 31, 2003, 2002, and 2001
Interest-bearing deposits in other financial institutions: The carrying
amounts presented in the consolidated statements of financial condition
for certificates of deposit in other financial institutions are deemed to
approximate fair value.
Investment and mortgage-backed securities: For investment and
mortgage-backed securities, fair value is deemed to equal the quoted
market price.
Loans receivable: The loan portfolio has been segregated into categories
with similar characteristics, such as one-to-four family residential,
multi-family residential and nonresidential real estate. These loan
categories were further delineated into fixed-rate and adjustable-rate
loans. The fair values for the resultant loan categories were computed via
discounted cash flow analysis, using current interest rates offered for
loans with similar terms to borrowers of similar credit quality. For loans
on deposit accounts and consumer and other loans, fair values were deemed
to equal the historic carrying values. The historical carrying amount of
accrued interest on loans is deemed to approximate fair value.
Federal Home Loan Bank stock: The carrying amount presented in the
consolidated statements of financial condition is deemed to approximate
fair value.
Deposits: The fair value of NOW accounts, passbook and club accounts,
money market deposits and advances by borrowers is deemed to approximate
the amount payable on demand. Fair values for fixed-rate certificates of
deposit have been estimated using a discounted cash flow calculation using
the interest rates currently offered for deposits of similar remaining
maturities.
Advances from Federal Home Loan Bank: The fair value of these advances is
estimated using the rates currently offered for similar advances of
similar remaining maturities or, when available, quoted market prices.
Commitments to extend credit: For fixed-rate and adjustable-rate loan
commitments, the fair value estimate considers the difference between
current levels of interest rates and committed rates. At March 31, 2004
and 2003, the difference between the fair value and notional amount of
loan commitments was not material.
Based on the foregoing methods and assumptions, the carrying value and
fair value of the Company's financial instruments at March 31 are as follows:
2004 2003
------------------------- -----------------------
Carrying Fair Carrying Fair
value value value value
-------- -------- -------- --------
(In thousands)
Financial assets
Cash and cash equivalents
and interest-bearing
deposits ........................ $ 19,887 $ 19,887 $ 17,496 $ 17,496
Investment
securities ...................... 31,582 32,376 35,841 36,247
Mortgage-backed
securities ...................... 88,428 88,455 76,002 76,078
Loans receivable .................. 205,443 210,124 228,373 236,633
Federal Home Loan
Bank stock ...................... 4,205 4,205 4,041 4,041
-------- -------- -------- --------
349,545 $355,047 $361,753 $370,495
======== ======== ======== ========
Financial liabilities
Deposits .......................... $291,830 $293,575 $300,931 $303,316
Advances from the
Federal Home
Loan Bank ......................... 30,000 30,966 30,000 30,515
Advances by
borrowers for taxes
and insurance ..................... 617 617 712 712
-------- -------- -------- --------
$322,447 $325,158 $331,643 $334,543
======== ======== ======== ========
12. Advertising
Advertising costs are expensed when incurred. The Company's advertising
expense totaled $132,000, $151,000 and $136,000 for the fiscal years ended March
31, 2004, 2003 and 2002 respectively.
13. Reclassifications
Certain prior year amounts have been reclassified to conform to the March
31, 2004 consolidated financial statement presentation.
28
- ------------------------------------------------------------------------------WS
NOTE B - INVESTMENT AND
MORTGAGE-BACKED SECURITIES
Carrying values and estimated fair values of investment securities at
March 31 are summarized as follows:
March 31, 2004
--------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
(In thousands)
Held-to-maturity
Corporate bonds
and notes .................... $10,054 $704 $ -- $10,758
U.S. Government and
agency obligations ........... 3,868 76 3 3,941
Municipal obligations .......... 114 17 -- 131
------- ---- ------- -------
$14,036 $797 $ 3 $14,830
======= ==== ======= =======
Available for sale
Corporate bonds
and notes .................... $ 1,516 $144 $ -- $ 1,660
U.S. Government and
agency obligations ........... 11,060 261 -- 11,321
Municipal obligations .......... 4,427 138 -- 4,565
------- ---- ------- -------
$17,003 $543 $ -- $17,546
======= ==== ======= =======
March 31, 2003
--------------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
(In thousands)
Held-to-maturity
Corporate bonds
and notes .................... $10,587 $218 $ 22 $10,783
U.S. Government and
agency obligations ........... 8,093 201 4 8,290
Municipal obligations .......... 125 13 -- 138
------- ---- ------- -------
$18,805 $432 $ 26 $19,211
======= ==== ======= =======
Available for sale
Mutual funds ................... $10,009 $ -- $ -- $10,009
Corporate bonds
and notes .................... 1,534 -- 3 1,531
U.S. Government and
agency obligations ........... 2,022 -- 3 2,019
Municipal obligations .......... 3,499 10 32 3,477
------- ---- ------- -------
$17,064 $ 10 $ 38 $17,036
======= ==== ======= =======
The amortized cost and estimated fair value of investment securities at March
31, 2004, by term to maturity are shown below.
Amortized Estimated
cost fair value
--------- ----------
(In thousands)
Held-to-maturity
Due in one year or less ........................ $ 2,000 $ 2,031
Due within one to three years .................. 11,054 11,803
Due in over five years ......................... 982 996
------- -------
$14,036 $14,830
======= =======
Available for sale
Due in one year or less ........................ $ 500 $ 502
Due within one to three years .................. 1,988 2,020
Due within three to five years ................. 10,088 10,459
Due in over five years ......................... 4,427 4,565
------- -------
$17,003 $17,546
======= =======
The Company had pledged $2.3 million and $3.1 million in investment
securities to secure public deposits at March 31, 2004 and 2003, respectively.
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at March 31, 2004 and 2003,
including those designated as available for sale, are summarized as follows:
2004
-----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
(In thousands)
Held-to-maturity
Federal Home Loan
Mortgage Corporation
participation certificates ............. $ 1,190 $ 16 $ -- $ 1,206
Government National
Mortgage Association
participation certificates ............. 1,587 4 12 1,579
Federal National
Mortgage Association
participation certificates ............. 1,706 20 1 1,725
------- ---- ------- -------
$ 4,483 $ 40 $ 13 $ 4,510
======= ==== ======= =======
Available for sale
Federal Home Loan
Mortgage Corporation
participation certificates ............. $32,153 $160 $ 118 $32,195
Government National
Mortgage Association
participation certificates ............. 1,753 9 3 1,759
Federal National
Mortgage Association
participation certificates ............. 47,553 319 212 47,660
Private Issue
Mortgage Association
participation certificates ............. 2,303 28 -- 2,331
------- ---- ------- -------
$83,762 $516 $ 333 $83,945
======= ==== ======= =======
29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.)
WS------------------------------------------------------------------------------
March 31, 2004, 2003, and 2002
2003
----------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
(In thousands)
Held-to-maturity
Federal Home Loan
Mortgage Corporation
participation certificates .......... $ 2,976 $ 19 $ 4 $ 2,991
Government National
Mortgage Association
participation certificates .......... 2,800 32 -- 2,832
Federal National
Mortgage Association
participation certificates .......... 4,075 29 -- 4,104
------- ---- ------- -------
$ 9,851 $ 80 $ 4 $ 9,927
======= ==== ======= =======
Available for sale
Federal Home Loan
Mortgage Corporation
participation certificates .......... $20,403 $120 $ -- $20,523
Government National
Mortgage Association
participation certificates .......... 1,898 23 -- 1,921
Federal National
Mortgage Association
participation certificates .......... 43,636 150 79 43,707
------- ---- ------- -------
$65,937 $293 $ 79 $66,151
======= ==== ======= =======
The amortized cost of mortgage-backed securities, including those
designated as available for sale at March 31, 2004, by contractual term to
maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may generally prepay obligations without prepayment
penalties.
March 31, 2004
Amortized Cost
--------------
(In thousands)
Held-to-maturity
Due within three years ................................ $ 105
Due after three years ................................. 4,378
-------
$ 4,483
=======
Available for sale
Due within three years ................................ $ 60
Due after three years ................................. 83,702
-------
$83,762
=======
- --------------------------------------------------------------------------------
UNREALIZED LOSSES ON AVAILABLE FOR SALE SECURITIES
Less than 12 Months 12 Months or Longer Total
-------------------------------- --------------------------------- -------------------------------
Number of Fair Unrealized Number of Fair Unrealized Number of Fair Unrealized
Investments Value Losses Investments Value Losses Investments Value Losses
----------- ----- ---------- ----------- ----- ---------- ----------- ----- ----------
(Dollars in thousands)
U.S. Government agency
obligations ................. -- $ -- $ -- 1 $ 505 $ 3 1 $ 505 $ 3
Mortgage-backed securities .... 26 32,828 339 1 3,040 7 27 35,868 346
---- ------- ---- --- ------ --- ---- ------- ----
Total temporarily impaired
securities .................. 26 $32,828 $339 2 $3,545 $10 28 $36,373 $349
==== ======= ==== === ====== === ==== ======= ====
Management has the intent and ability to hold these securities for the
foreseeable future and the decline in the fair value is primarily due to an
increase in market interest rates. The fair values are expected to recover as
securities approach maturity dates.
30
- ------------------------------------------------------------------------------WS
NOTE C -- LOANS RECEIVABLE
The composition of the loan portfolio at March 31 is as follows:
2004 2003
-------- --------
(In thousands)
Residential real estate - 1 to 4 family .......... $171,736 $200,764
Residential real estate - multi-family ........... 6,800 8,512
Residential real estate - construction ........... 2,914 3,548
Nonresidential real estate and land .............. 5,994 8,211
Commercial ....................................... 18,916 7,427
Consumer and other ............................... 3,156 3,892
-------- --------
209,516 232,354
Less:
Undisbursed portion of loans in
process ...................................... 2,579 2,244
Deferred loan origination fees ................. 679 1,059
Allowance for loan losses ...................... 815 678
-------- --------
$205,443 $228,373
======== ========
As depicted above, the Bank's lending efforts have historically focused on
one-to-four family residential and multi-family residential real estate loans,
which comprise approximately $178.9 million, or 87%, of the total loan portfolio
at March 31, 2004, and $210.6 million, or 92%, of the total loan portfolio at
March 31, 2003. Generally, such loans have been underwritten on the basis of no
more than an 80% loan-to-value ratio, which has historically provided the
Company with adequate collateral coverage in the event of default. Nevertheless,
the Bank, as with any lending institution, are subject to the risk that real
estate values could deteriorate in their primary lending areas of north central
Ohio, thereby impairing collateral values. However, management is of the belief
that residential real estate values in the Company's primary lending area are
presently stable.
As discussed previously, Wayne Savings has sold whole loans and
participating interests in loans in the secondary market, retaining servicing on
the loans sold. Loans sold and serviced for others totaled approximately $35.3
million, $47.9 million and $60.6 million at March 31, 2004, 2003 and 2002,
respectively.
In the normal course of business, the Bank has made loans to directors,
officers and their related business interests. Related party loans are made on
the same terms that are widely available to other employees, as long as the
director or executive officer is not given preferential treatment compared to
other participating employees. The aggregate dollar amount of loans outstanding
to directors, officers and their related business interests totaled
approximately $2.7 million, $2.6 million and $2.7 million at March 31, 2004,
2003 and 2002, respectively. During fiscal 2004, the Company disbursed $2.5
million of loans to officers and directors and received principal repayments of
$2.4 million. At March 31, 2004, $2.4 million of related party loans was a
nonresidential real estate loan.
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows
for the years ended March 31:
2004 2003 2002
----- ----- -----
(In thousands)
Balance at beginning of year ............ $ 678 $ 730 $ 655
Provision for losses on loans ........... 173 91 134
Charge-offs of loans .................... (65) (158) (63)
Recovery of loans previously
charged off ........................... 29 15 4
----- ----- -----
Balance at end of year .................. $ 815 $ 678 $ 730
===== ===== =====
As of March 31, 2004, the Bank's allowance for loan losses was comprised
solely of a general loan loss allowance, which is includible as a component of
regulatory risk-based capital.
Nonaccrual, nonperforming and impaired loans totaled approximately
$747,000, $2.5 million and $3.8 million at March 31, 2004, 2003 and 2002,
respectively.
During the years ended March 31, 2004, 2003 and 2002, interest income of
approximately $37,000, $208,000 and $99,000, respectively, would have been
recognized had nonaccrual loans been performing in accordance with contractual
terms.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at March 31 are comprised of the following:
2004 2003
------- -------
(In thousands)
Land and improvements .......................... $ 1,656 $ 1,643
Office buildings and improvements .............. 6,622 6,583
Furniture, fixtures and equipment .............. 3,491 3,112
Leasehold improvements ......................... 356 356
------- -------
12,125 11,694
Less accumulated depreciation
and amortization ............................. 3,383 2,876
------- -------
$ 8,742 $ 8,818
======= =======
31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.)
WS------------------------------------------------------------------------------
March 31, 2004, 2003, and 2002
NOTE F - DEPOSITS
Deposits consist of the following major classifications at March 31:
2004 2003
-------- --------
Deposit type and weighted- (In thousands)
average interest rate
NOW accounts
2004 - .33% .............................. $ 42,679
2003 - .56% .............................. $ 39,982
Passbook
2004 - .78% ............................. 82,093
2003 - 1.05% ............................. 84,478
Money Market Investor
2004 - .84% ............................. 11,893
2003 - 1.20% ............................. 13,647
-------- --------
Total demand, transaction and
passbook deposits ........................ 136,665 138,107
Certificates of deposit
Original maturities of:
Less than 12 months
2004 - 1.01% ........................... 15,841
2003 - 1.66% ........................... 19,400
12 months to 24 months
2004 - 1.59% ........................... 43,545
2003 - 2.44% ........................... 53,755
25 months to 36 months
2004 - 3.49% ........................... 17,860
2003 - 3.92% ........................... 15,870
More than 36 months
2004 - 4.49% ........................... 42,781
2003 - 4.75% ........................... 35,184
Jumbo
2004 - 3.29% ........................... 35,138
2003 - 4.04% ........................... 38,615
-------- --------
Total certificates of deposit .............. 155,165 162,824
-------- --------
Total deposit accounts ..................... $291,830 $300,931
======== ========
At March 31, 2004 and 2003, the Bank had certificates of deposit with
balances in excess of $100,000 totaling $34.4 million and $48.7 million,
respectively.
Interest expense on deposits for the years ended March 31 is summarized as
follows:
2004 2003 2002
------ ------- -------
(In thousands)
Passbook ........................... $ 688 $ 1,474 $ 1,674
NOW and money market
deposit accounts ................. 269 540 771
Certificates of deposit ............ 4,942 6,418 9,610
------ ------- -------
$5,899 $ 8,432 $12,055
====== ======= =======
Maturities of outstanding certificates of deposit at March 31 are
summarized as follows:
2004 2003
-------- --------
(In thousands)
Less than one year ....................... $ 86,381 $ 95,625
One to three years ....................... 45,051 34,396
Over three years ......................... 23,733 32,803
-------- --------
$155,165 $162,824
======== ========
NOTE G - ADVANCES FROM THE
FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank were collateralized at March 31,
2004 and 2003 by pledges of certain residential mortgage loans totaling $37.5
million each year, and the Bank's investment in Federal Home Loan Bank stock,
are summarized as follows:
Interest Maturing in year
rate ending March 31, 2004 2003
- -------------- ---------------- ------- -------
(Dollars in thousands)
5.07% - 5.29% 2005 $ 5,000 $ 5,000
3.13% - 3.36% 2007 7,500 7,500
3.51% - 3.61% 2008 5,000 5,000
4.01% 2009 2,500 2,500
4.34% - 4.87% 2010 and
thereafter 10,000 10,000
------- -------
$30,000 $30,000
======= =======
Weighted-average interest rate 4.15% 4.15%
======= =======
32
- ------------------------------------------------------------------------------WS
NOTE H - FEDERAL INCOME TAXES
The effective tax rates were 29.9%, 30.5% and 34.0% for the fiscal years
ended March 31, 2004, 2003 and 2002, respectively. The decreases in the
effective tax rates for fiscal 2004 and 2003 were primarily due to tax-free
income arising from various interest-earning assets.
The composition of the Company's net deferred tax liability at March 31 is
as follows:
2004 2003
------- -------
(In thousands)
Taxes (payable) refundable on
temporary differences at
statutory rate:
Deferred tax assets
Deferred loan origination fees ............... $ 3 $ --
General loan loss allowance .................. 277 231
Pension expense .............................. -- 184
Reserve for uncollected interest ............. 14 71
Real estate acquired through
foreclosure ................................ 38 38
Other ........................................ 23 69
------- -------
Deferred tax assets .......................... 355 593
------- -------
Deferred tax liabilities
Pension ...................................... (147) --
Federal Home Loan Bank
stock dividends ............................ (938) (882)
Book/tax depreciation differences ............ (202) (156)
Deferred loan origination costs .............. -- (33)
Unrealized gains on securities
designated as available for sale ........... (247) (63)
Tax bad debt reserve ......................... -- (11)
Bad debt deduction ........................... (40) --
Mortgage servicing rights .................... (93) (130)
------- -------
Deferred tax liabilities ..................... (1,667) (1,275)
------- -------
Total deferred tax liability ................... $(1,312) $ (682)
======= =======
Prior to fiscal 1997, Wayne Savings was allowed a special bad debt
deduction based on a percentage of earnings, generally limited to 8% of
otherwise taxable income and subject to certain limitations based on aggregate
loans and deposit account balances at the end of the year. This cumulative
percentage of earnings bad debt deduction totaled approximately $2.7 million as
of March 31, 2004. If the amounts that qualified as deductions for federal
income taxes are later used for purposes other than bad debt losses, including
distributions in liquidation, such distributions will be subject to federal
income taxes at the then current corporate income tax rate. The amount of
unrecognized deferred tax liability relating to the cumulative bad debt
deduction was approximately $918,000 at March 31, 2004. Wayne Savings is
required to recapture as taxable income approximately $200,000 of its bad debt
reserve, which represents the post-1987 additions to the reserve, and will be
unable to utilize the percentage of earnings method to compute the reserve in
the future. Wayne Savings has provided deferred taxes for this amount and is
amortizing the recapture of the bad debt reserve in taxable income over a
six-year period, which commenced in fiscal 1999.
At March 31, 2004, the Company's tax return for the year ended March 31,
1999, was under examination. The Company does not expect any material adverse
adjustments as a result of the examination.
NOTE I - COMMITMENTS
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers, including commitments to extend credit. Such commitments involve, to
varying degrees, elements of credit and interest-rate risk in excess of the
amount recognized in the consolidated statements of financial condition. The
contract or notional amounts of the commitments reflect the extent of the
Company's involvement in such financial instruments.
The Company's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations
as those utilized for on-balance-sheet instruments.
At March 31, 2004, the Company had total outstanding commitments of
approximately $3.2 million to originate loans, of which $2.9 million were
comprised of fixed-rate loans at rates ranging from 4.75% to 6.50% and $300,000
were comprised of adjustable-rate loans at rates ranging from 4.50% to 6.25%.
The Bank also had loans in process of $2.6 million at March 31, 2004, consisting
of $1.2 million of one-to-four family loans and $1.4 million nonresidential real
estate loans. The Company had unused lines of credit outstanding under home
equity loans $18.0 million and $17.1 million at March 31, 2004 and 2003. The
Company had unused lines of credit outstanding under credit cards of $5.5
million and $4.7 million at March 31, 2004 and 2003, respectively. Additionally,
the Company had unused lines of credit under commercial loans of $6.7 million
and $4.3 million at March 31, 2004 and 2003. The Company had letters of credit
of $360,000 at the fiscal year ended March 31, 2004, and $5,000 at March 31,
2003. At March 31, 2003, the Company had outstanding commitments to purchase
$2.0 million of mortgage-backed securities.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.)
WS------------------------------------------------------------------------------
March 31, 2004, 2003, and 2002
fixed expiration dates or other termination clauses and may require payment of a
fee. Since many of the commitments may expire without being drawn upon, the
total commitment amounts do not necessarily represent future cash requirements.
The Company evaluates each customer's creditworthiness on a case-by-case basis.
The amount of collateral obtained, if it is deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral on loans may vary but the preponderance of loans
granted generally includes a mortgage interest in real estate as security.
The Company leases certain branch banking facilities under operating
leases. The minimum annual lease payments over the initial lease term are as
follows:
Fiscal year ended (In thousands)
----------------- --------------
2005 ...................................... $ 71
2006 ...................................... 65
2007 ...................................... 49
2008 ...................................... 30
Thereafter ................................ 35
----
Total ..................................... $250
====
The Company incurred rental expense under operating leases totaling
approximately $68,000, $68,000 and $66,000 for the fiscal years ended March 31,
2004, 2003 and 2002, respectively.
There were no material contingent liabilities at March 31, 2004 or 2003.
NOTE J - REGULATORY CAPITAL
The Bank is subject to minimum regulatory capital standards promulgated by
the OTS. Failure to meet minimum capital requirements can initiate certain
mandatory - and possibly additional discretionary - actions by regulators that,
if undertaken, could have a direct material effect on the consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk-weightings and other factors.
The minimum capital standards of the OTS generally require the maintenance of
regulatory capital sufficient to meet each of three tests, hereinafter described
as the tangible capital requirement, the core capital requirement and the
risk-based capital requirement.
The tangible capital requirement provides for minimum tangible capital (defined
as stockholders' equity less all intangible assets) equal to 1.5% of adjusted
total assets. The core capital requirement provides for minimum core capital
(tangible capital plus certain forms of supervisory goodwill and other
qualifying intangible assets) generally equal to 4.0% of adjusted total assets
except for those associations with the highest examination rating and acceptable
levels of risk. The risk-based capital requirement provides for the maintenance
of core capital plus general loss allowances equal to 8.0% of risk-weighted
assets. In computing risk-weighted assets, the Bank multiplies the value of each
asset on their statement of financial condition by a defined risk-weighting
factor, e.g. one- to four-family residential loans carry a risk-weighted factor
of 50%.
As of March 31, 2004, management believes that the Bank met all capital
adequacy requirements to which they were subject. As of the most recent
examination date, the Bank was advised by the OTS that they met the definition
of "well capitalized" institution.
The Bank's management believes that, under the current regulatory capital
regulations, the Bank will continue to meet its minimum capital requirements in
the foreseeable future. However, events beyond the control of the Bank, such as
increased interest rates or a downturn in the economy in the Bank's market area,
could adversely affect future earnings and, consequently, the ability to meet
future minimum regulatory capital requirements.
The Bank is subject to regulations imposed by the OTS regarding the amount
of capital distributions payable to the Company. Generally, the Bank's payment
of dividends is limited, without prior OTS approval, to net earnings for the
current calendar year, plus the two preceding years, less capital distributions
paid over the comparable time period. Insured institutions are required to file
an application with the OTS for capital distributions in excess of the
limitation.
Regulations of the OTS governing mutual holding companies permitted Wayne
Savings Bankshares M.H.C. (the "M.H.C.") to waive the receipt by it of any
dividend declared by the Company or the Bank on the common stock, provided that
the OTS does not object to such waiver. The M.H.C. accepted dividends totalling
$25,000, $260,000 (of which $258,000 was treated as an offset to previously
allocated M.H.C. costs) and $75,000 during fiscal years 2002, 2001 and 2000,
respectively. For the fiscal year ended March 31, 2003, the M.H.C. waived its
share of all dividends declared on the common stock. Total dividends waived by
the M.H.C. through the date of conversion amounted to $6.2 million.
34
- ------------------------------------------------------------------------------WS
Wayne Savings Community Bank as of March 31, 2004
(Dollars in thousands)
Required to be "well-
Required for capital capitalized" under prompt
Actual adequacy purposes corrective action provisions
------------------- --------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
Tangible capital $39,939 10.9% >/=$ 5,492 >/=1.5% >/=$ 18,305 >/= 5.0%
Core capital $39,939 10.9% >/=$14,644 >/=4.0% >/=$ 21,966 >/= 6.0%
Risk-based capital $40,754 21.0% >/=$15,533 >/=8.0% >/=$ 19,416 >/=10.0%
Wayne Savings Community Bank as of March 31, 2003
(Dollars in thousands)
Required to be "well-
Required for capital capitalized" under prompt
Actual adequacy purposes corrective action provisions
------------------- --------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
Tangible capital $38,069 10.2% >/=$ 5,604 >/=1.5% >/=$ 18,680 >/= 5.0%
Core capital $38,069 10.2% >/=$14,944 >/=4.0% >/=$ 22,416 >/= 6.0%
Risk-based capital $38,748 20.2% >/=$15,353 >/=8.0% >/=$ 19,191 >/=10.0%
- --------------------------------------------------------------------------------
Village Savings Bank, F.S.B. as of March 31, 2003
(Dollars in thousands)
Required to be "well-
Required for capital capitalized" under prompt
Actual adequacy purposes corrective action provisions
------------------- --------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
Tangible capital $5,311 10.5% >/=$ 759 >/=1.5% >/=$ 2,529 >/= 5.0%
Core capital $5,311 10.5% >/=$ 2,023 >/=4.0% >/=$ 3,034 >/= 6.0%
Risk-based capital $5,358 28.7% >/=$ 1,471 >/=8.0% >/=$ 1,839 >/=10.0%
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.)
WS------------------------------------------------------------------------------
March 31, 2004, 2003, and 2002
NOTE K - PENSION AND BENEFIT PLANS
The Company had a non-contributory insured defined benefit pension plan
(the "Plan") covering all eligible employees. The Plan benefits were based on
years-of-service and other factors. Effective December 31, 2003, Wayne Savings
froze its defined pension plan. Management believes this action will at a
minimum stabilize employee retirement costs at the fiscal 2004 expense level.
Also in fiscal 2004, management changed the plan's investment structure from
life insurance to stocks and bonds. At March 31, 2004, plan assets consisted of
22.0% cash, 19.0% stocks and 59.0% bonds. The Company made an additional $1.0
million contribution to the fund in the last quarter of fiscal 2004. The
Company's intent is to terminate the plan at some point in the future when
financial considerations are more favorable. Contributions are intended to
provide for benefits attributed for service-to-date.
Information with respect to the Plan for the years ended March 31, 2004,
2003 and 2002 is as follows:
The changes in benefit obligations are computed as follows:
2004 2003 2002
------- ------- -------
(In thousands)
Projected benefit obligation
at beginning of year ............... $ 2,002 $ 1,592 $ 1,280
Service cost ......................... 55 55 63
Interest cost ........................ 137 124 101
Actuarial loss ....................... 351 428 203
Benefits paid ........................ (164) (197) (55)
------- ------- -------
Projected benefit obligation
at end of year ..................... $ 2,381 $ 2,002 $ 1,592
======= ======= =======
The changes in the Plan's assets are computed as follows:
2004 2003 2002
------- ------- -------
(In thousands)
Fair value of plan assets at
beginning of year .................. $ 1,499 $ 1,508 $ 1,283
Actual return on plan assets ......... 145 (22) 68
Employer contributions ............... 1,224 210 212
Benefits paid ........................ (164) (197) (55)
------- ------- -------
Fair value of plan assets
at end of year ..................... $ 2,704 $ 1,499 $ 1,508
======= ======= =======
The following table sets forth the Plan's funded status at March 31:
2004 2003
------ -----
(In thousands)
Funded status ...................................... $ 324 $ (84)
Unrecognized net actuarial gain (loss) ............. 707 --
Unrecognized net transition asset .................. -- --
Minimum additional liability ....................... -- (417)
------ -----
Prepaid (accrued) pension cost ..................... $1,031 $(501)
====== =====
The weighted-average actuarial assumptions used were:
2004 2003 2002
---- ---- ----
Weighted-average
discount rate ...................... 6.50% 8.00% 7.25%
Weighted-average rate of
compensation increase .............. 0.00% 1.00% 1.00%
Weighted-average expected
long-term rate of return on
plan assets ........................ 7.00% 7.00% 7.00%
==== ==== ====
Net periodic pension costs includes the following components:
2004 2003 2002
----- ----- -----
(In thousands)
Service cost ............................... $ 55 $ 55 $ 63
Interest cost .............................. 26 124 101
Actual return on plan assets ............... (145) 22 (68)
Amortization of prior net loss ............. 166 2 199
Amortization of net transition
obligation ............................... -- 6 6
Unrecognized net actuarial loss ............ -- (132) (27)
----- ----- -----
Net periodic pension cost .................. $ 102 $ 77 $ 274
===== ===== =====
As previously stated, the Bank has a savings plan covering substantially
all employees who meet certain age and service requirements. Under the plan, the
Bank matches each participant's contribution - up to 3% of the participant's
salary; a 50% match is provided for up to the next 4% of the participant's
salary. This contribution is dependent on availability of sufficient net
earnings from current or prior years. Additional contributions may be made as
approved by the Board of Directors. Expense under the plan totaled approximately
$78,000, $44,000 and $44,000 for the fiscal years ended March 31, 2004, 2003 and
2002, respectively.
NOTE L - REORGANIZATION AND
CHANGE OF CORPORATE FORM
In fiscal 2002, the Board of Directors of Wayne Savings Bankshares, M.H.C.
(the "M.H.C.") adopted a plan of conversion and reorganization (the "plan") to
convert the M.H.C from mutual to stock form and to complete a related stock
offering in which shares of common stock representing the
36
- ------------------------------------------------------------------------------WS
MHC's ownership interest in the Company would be sold to investors.
The plan was approved by the stockholders of the Company, the depositors
of Wayne Savings Community Bank and the Office of Thrift Supervision ("OTS") in
fiscal 2003, and the related stock offering was completed on January 8, 2003. As
of that date, 1,350,699 shares owned by the M.H.C. were retired and the Company
sold 2,040,816 shares of common stock for $10.00 per share. After consideration
of the employee stock ownership plan ("ESOP") totaling $1.6 million and related
expenses of $1.9 million, net proceeds from the stock offering amounted to $17.1
million. An additional 1,847,820 shares were issued to existing shareholders
based on an exchange rate of 1.5109 new shares of common stock for each existing
share, resulting in 3,888,795 total new shares outstanding.
Upon completion of the conversion and stock offering, Wayne Savings
Bancshares, Inc. changed its charter to a Delaware holding company and is wholly
owned by public stockholders.
In the event of a complete liquidation (and only in such event), each
eligible member of Wayne's depositors will be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then current
adjusted balance of deposit accounts held, before any liquidation distribution
may be made with respect to common stock. Except for the repurchase of stock and
payment of dividends by the Company, the existence of liquidation account will
not restrict the use or application of such retained earnings.
The Company may not declare, pay a cash dividend on, or repurchase any of
its common stock, if the effect thereof would cause retained earnings to be
reduced below either the amount required for the liquidation account or the
regulatory capital requirements of SAIF insured institutions.
NOTE M -- CONDENSED FINANCIAL STATEMENTS OF WAYNE SAVINGS BANCSHARES, INC.
The following condensed financial statements summarize the financial
position of Wayne Savings Bancshares, Inc. as of March 31, 2004 and 2003, and
the results of its operations and its cash flows for the years ended March 31,
2004, 2003, and 2002.
STATEMENTS OF FINANCIAL CONDITION
March 31,
2004 2003
-------- --------
(In thousands)
ASSETS
Cash and due from banks .............................................................. $ 985 $ 263
Investment securities available for sale at market ................................... 502 5,039
Mortgage-backed securities available for sale - at market ............................ 709 --
Notes receivable from Wayne Savings .................................................. 1,456 1,612
Investment in Wayne Savings .......................................................... 40,445 38,233
Prepaid expenses and other ........................................................... 77 48
-------- --------
Total assets ....................................................................... $ 44,174 $ 45,195
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities ............................................... $ 613 $ 532
Stockholders' equity
Common stock and additional paid-in capital ........................................ 34,756 34,597
Retained earnings .................................................................. 12,727 11,830
Less required contributions for ESOP shares ........................................ (1,456) (1,612)
Shares acquired by Management Recognition Plan ..................................... (1,142) --
Less 112,500 shares held in treasury at March 31, 2004 ............................. (1,803) --
Accumulated other comprehensive income (loss) ...................................... 479 (152)
-------- --------
Total stockholders' equity ......................................................... 43,561 44,663
-------- --------
Total liabilities and stockholders' equity ......................................... $ 44,174 $ 45,195
======== ========
STATEMENTS OF EARNINGS
For the years ended March 31,
2004 2003 2002
------- ------- -------
(In thousands)
Income
Interest income ................................................ $ 183 $ 43 $ 1
Gain on sale of investment securities .......................... 2 -- --
Equity in earnings of subsidiary ............................... 2,851 2,800 1,928
------- ------- -------
Total revenue ................................................ 3,036 2,843 1,929
General and administrative expenses .............................. 409 192 160
------- ------- -------
Earnings before income tax credits ............................. 2,627 2,651 1,769
Federal income tax credits ..................................... (77) (121) (54)
------- ------- -------
NET EARNINGS ................................................. $ 2,704 $ 2,772 $ 1,823
======= ======= =======
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.)
WS------------------------------------------------------------------------------
March 31, 2004, 2003, and 2002
STATEMENTS OF CASH FLOWS
For the years ended March 31,
2004 2003 2002
------- -------- -------
Cash flows from operating activities: (In thousands)
Net earnings for the year ................................................................ $ 2,704 $ 2,772 $ 1,823
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Gain on sale of investment securities designated as available for sale ............. (2) -- --
Amortization and depreciation ...................................................... 42 -- --
Undistributed earnings of consolidated subsidiary .................................. (1,351) (2,121) (773)
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets ................................................ (29) 820 (534)
Accrued expenses and other liabilities ........................................... 61 (821) 534
------- -------- -------
Net cash provided by operating activities ...................................... 1,425 650 1,050
Cash flows provided by (used in) investing activities
Purchase of investment securities designated as available for sale ....................... (2,006) (5,052) --
Proceeds from maturity of investment securities designated as available for sale ......... 5,001 -- --
Proceeds from sale of investment securities designated as available for sale ............. 1,502 -- --
Purchase of mortgage-backed securities designated as available for sale .................. (716) -- --
Principal repayment on mortgage-backed securities designated as available for sale ....... 10 -- --
Repayments of ESOP loan .................................................................. 156 -- --
Investment in Wayne Savings - net ........................................................ -- (11,700) --
------- -------- -------
Net cash provided by (used in) investing activities ............................ 3,947 (16,752) --
Cash flows provided by (used in) financing activities:
Proceeds from reorganization and related stock offering - net ............................ -- 17,065 --
Payment of dividends on common stock ..................................................... (1,786) (831) (852)
Purchase of treasury stock ............................................................... (1,803) -- (178)
Proceeds from exercise of stock options .................................................. 61 16 10
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 ............................ (4,650) 16,250 (1,020)
------- -------- -------
Net increase in cash and cash equivalents .................................................. 722 148 30
Cash and cash equivalents at beginning of year ............................................. 263 115 85
------- -------- -------
Cash and cash equivalents at end of year ................................................... $ 985 $ 263 $ 115
======= ======== =======
NOTE N - PENDING BUSINESS COMBINATION
The Company signed a definitive agreement on October 31, 2003, to acquire
Stebbins Bancshares, Inc., (Stebbins) and its national bank subsidiary, Stebbins
National Bank of Creston Ohio. The agreement, which remains subject to
regulatory approval, provides for the Company to pay total cash considerations
of $5.2 million. At March 31, 2004, Stebbins had total assets of $28.2 million
and stockholders' equity of $3.3 million.
38
- ------------------------------------------------------------------------------WS
NOTE O - QUARTERLY RESULTS OF OPERATIONS (unaudited)
The following table summarizes the Company's quarterly results for the
fiscal years ended March 31, 2004 and 2003.
For the three month periods ended
-------------------------------------------------------------------------
June 30, 2003 September 30, 2003 December 31, 2003 March 31, 2004
------------- ------------------ ----------------- --------------
(In thousands, except share data)
Total interest income .............................. $4,723 $4,501 $4,362 $4,630
Total interest expense ............................. 1,932 1,796 1,736 1,683
------ ------ ------ ------
Net interest income ................................ 2,791 2,705 2,626 2,947
Provision for losses on loans ...................... 32 31 -- 110
Other income ....................................... 510 479 490 454
General, administrative and other expense .......... 2,212 2,271 2,315 2,173
------ ------ ------ ------
Earnings before income taxes ....................... 1,057 882 801 1,118
Federal income taxes ............................... 326 269 241 318
------ ------ ------ ------
Net earnings ....................................... $ 731 $ 613 $ 560 $ 800
====== ====== ====== ======
Earnings per share
Basic ............................................ $ .20 $ .16 $ .15 $ .21
====== ====== ====== ======
Diluted .......................................... $ .20 $ .16 $ .15 $ .21
====== ====== ====== ======
For the three month periods ended
-------------------------------------------------------------------------
June 30, 2002 September 30, 2002 December 31, 2002 March 31, 2003
------------- ------------------ ----------------- --------------
(In thousands, except share data)
Total interest income .............................. $5,049 $4,877 $5,056 $5,041
Total interest expense ............................. 2,498 2,300 2,305 2,066
------ ------ ------ ------
Net interest income ................................ 2,551 2,577 2,751 2,975
Provision for losses on loans ...................... 17 21 37 16
Other income ....................................... 344 361 468 476
General, administrative and other expense .......... 2,039 2,009 2,107 2,268
------ ------ ------ ------
Earnings before income taxes ....................... 839 908 1,075 1,167
Federal income taxes ............................... 285 301 336 295
------ ------ ------ ------
Net earnings ....................................... $ 554 $ 607 $ 739 $ 872
====== ====== ====== ======
Earnings per share
Basic ............................................ $ .15 $ .16 $ .19 $ .21
====== ====== ====== ======
Diluted .......................................... $ .15 $ .16 $ .19 $ .21
====== ====== ====== ======
39
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
WS------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Grant Thornton [LOGO]
Accountants and Management Consultants
Report of Independent Certified Public Accountants
Board of Directors
Wayne Savings Bancshares, Inc.
We have audited the accompanying consolidated statements of financial condition
of Wayne Savings Bancshares, Inc. as of March 31, 2004 and 2003, and the related
consolidated statements of earnings, stockholders' equity, comprehensive income
and cash flows for each of the three years in the period ended March 31, 2004.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Wayne
Savings Bancshares, Inc. as of March 31, 2004 and 2003, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 2004, in conformity with accounting principles generally
accepted in the United States of America.
/s/ Grant Thornton LLP
Cincinnati, Ohio
April 29, 2004
Suite 900
625 Eden Park Drive
Cincinnati, OH 45202-4181
T 513.762.5000
F 513.241.6125
W www.grantthornton.com
Grant Thornton LLP
US Member of Grant Thornton International
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