FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20552
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2004
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to _______________
Commission File No. 0-23433
WAYNE SAVINGS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1557791
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
151 North Market Street
Wooster, Ohio 44691
(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code: (330) 264-5767
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the past
90 days.
Yes |X| No |_|
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12 B-2 of the Exchange Act)
Yes |_| No |X|
As of August 12, 2004, the latest practicable date, 3,769,818 shares of the
registrant's common stock, $.10 par value, were issued and outstanding.
Wayne Savings Bancshares, Inc.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk 15
Item 4 Controls and Procedures 15
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 16
Item 2 Changes in Securities and Use of Proceeds 16
Item 3 Defaults Upon Senior Securities 16
Item 4 Submission of Matters to a Vote of Security Holders 16
Item 5 Other Information 16
Item 6 Exhibits and Reports on Form 8-K 16
SIGNATURES 18
2
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
June 30, March 31,
ASSETS 2004 2004
Cash and due from banks $ 5,761 $ 3,291
Federal funds sold 5,500 9,875
Interest-bearing deposits in other financial institutions 3,337 6,721
--------- ---------
Cash and cash equivalents 14,598 19,887
Investment securities available for sale - at market 35,939 17,546
Investment securities held to maturity - at amortized cost, approximate market value
of $14,602 and $14,830 as of June 30, 2004 and March 31, 2004, respectively 14,104 14,036
Mortgage-backed securities available for sale - at market 74,269 83,945
Mortgage-backed securities held to maturity - at cost, approximate market value of
$3,690 and $4,510 as of June 30, 2004 and March 31, 2004, respectively 3,692 4,483
Loans receivable - net 216,141 205,443
Office premises and equipment - net 9,183 8,742
Real estate acquired through foreclosure -- 100
Federal Home Loan Bank stock - at cost 4,247 4,205
Cash surrender value of life insurance 6,392 6,321
Accrued interest receivable on loans 840 801
Accrued interest receivable on mortgage-backed securities 351 400
Accrued interest receivable on investments and interest-bearing deposits 518 318
Prepaid expenses and other assets 5,266 2,549
Prepaid federal income taxes 904 231
--------- ---------
Total assets $ 386,444 $ 369,007
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 316,419 $ 291,830
Advances from the Federal Home Loan Bank 25,000 30,000
Advances by borrowers for taxes and insurance 227 617
Accrued interest payable 200 186
Accounts payable on mortgage loans serviced for others 111 118
Other liabilities 1,103 1,383
Deferred federal income taxes 1,348 1,312
--------- ---------
Total liabilities 344,408 325,446
Commitments -- --
Stockholders' equity
Common stock (8,000,000 shares of $ .10 par value authorized; 3,907,318 shares issued
at both June 30, 2004 and March 31, 2004) 391 391
Additional paid-in capital 34,365 34,365
Retained earnings - substantially restricted 12,742 12,727
Shares acquired by Management Recognition Plan (1,142) (1,142)
Less required contributions for shares acquired by Employee Stock Ownership Plan (1,418) (1,456)
Less 137,500 and 112,500 shares of treasury stock at June 30, 2004 and March 31, 2004 - at cost (2,216) (1,803)
Accumulated other comprehensive income (loss) (686) 479
--------- ---------
Total stockholders' equity 42,036 43,561
--------- ---------
Total liabilities and stockholders' equity $ 386,444 $ 369,007
========= =========
See accompanying notes to consolidated financial statements.
3
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended June 30,
(In thousands, except share data)
2004 2003
Interest income
Loans $ 3,163 $ 3,725
Mortgage-backed securities 595 568
Investment securities 420 352
Interest-bearing deposits and other 66 78
------- -------
Total interest income 4,244 4,723
Interest expense
Deposits 1,332 1,612
Borrowings 293 320
------- -------
Total interest expense 1,625 1,932
------- -------
Net interest income 2,619 2,791
Provision for losses on loans 15 32
------- -------
Net interest income after provision for losses on loans 2,604 2,759
Other income
Gain on sale of loans 16 37
Increase in cash surrender value of life insurance 71 67
Service fees, charges and other operating 318 406
------- -------
Total other income 405 510
General, administrative and other expense
Employee compensation and benefits 1,282 1,266
Occupancy and equipment 421 386
Federal deposit insurance premiums 11 13
Franchise taxes 129 77
Other operating 526 470
------- -------
Total general, administrative and other expense 2,369 2,212
------- -------
Earnings before income taxes 640 1,057
Federal incomes taxes
Current (593) 375
Deferred 771 (49)
------- -------
Total federal income taxes 178 326
------- -------
NET EARNINGS $ 462 $ 731
======= =======
EARNINGS PER SHARE
Basic $ 0.13 $ 0.20
======= =======
Diluted $ 0.13 $ 0.20
======= =======
See accompanying notes to consolidated financial statements.
4
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended June 30,
(In thousands)
2004 2003
Net earnings $ 462 $731
Other comprehensive income, net of tax:
Unrealized holding gains on securities, net of taxes (benefits)
of $(600) and $103, during the respective periods (1,165) 206
------- ----
Comprehensive income (loss) $ (703) $937
======= ====
Accumulated comprehensive income (loss) $ (686) $ 54
======= ====
See accompanying notes to consolidated financial statements.
5
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended June 30,
(In thousands)
2004 2003
Cash flows from operating activities:
Net earnings for the period $ 462 $ 731
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 382 411
Amortization of deferred loan origination fees (87) (156)
Depreciation and amortization 137 134
Gain on sale of loans (16) (37)
Proceeds from sale of loans in the secondary market 926 699
Loans originated for sale in the secondary market (917) (685)
Provision for losses on loans 15 32
Federal Home Loan Bank stock dividends (42) (40)
Increase (decrease) in cash, net of acquisition of Stebbins Bancshares, Inc., due to changes in:
Accrued interest receivable on loans (880) 33
Accrued interest receivable on mortgage-backed securities 49 41
Accrued interest receivable on investments and interest-bearing deposits (200) (146)
Prepaid expenses and other assets (346) (619)
Accrued interest payable (3) 25
Accounts payable on mortgage loans serviced for others (7) 497
Other liabilities (283) (632)
Federal income taxes
Current (673) 376
Deferred 771 (49)
-------- --------
Net cash provided by (used in) operating activities (712) 615
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available for sale (8,255) (10,023)
Proceeds from maturity of investment securities designated as held to maturity 14 599
Proceeds from maturity of investment securities designated as available for sale 500 10,029
Purchase of mortgage-backed securities designated as available for sale (3,049) (16,717)
Principal repayments on mortgage-backed securities designated as held to maturity 779 1,892
Principal repayments on mortgage-backed securities designated as available for sale 11,657 7,056
Loan principal repayments 13,594 24,840
Loan disbursements (11,988) (16,830)
Purchase of office premises and equipment - net (111) --
Increase in cash surrender value of life insurance (71) (67)
Proceeds from sale of real estate acquired through foreclosure 100 --
Net cash used in the purchase of Stebbins Bancshares, Inc. (1,314) --
-------- --------
Net cash provided by investing activities 1,856 779
-------- --------
Net cash provided by operating and investing activities
(balance carried forward) 1,144 1,394
-------- --------
6
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the three months ended June 30,
(In thousands)
2004 2003
Net cash provided by (used in) operating and investing activities
(balance brought forward) $ 1,144 $ 1,394
Cash flows provided by (used in) financing activities:
Net decrease in deposit accounts (221) (2,633)
Repayment of Federal Home Loan Bank advances (5,000) --
Advances by borrowers for taxes and insurance (390) (655)
Amortization of employee stock ownership benefit plan 38 --
Dividends paid on common stock (447) (440)
Proceeds from exercise of stock options -- 61
Purchase of treasury shares at cost (413) --
-------- --------
Net cash provided by (used in) financing activities (6,433) (3,667)
-------- --------
Net decrease in cash and cash equivalents (5,289) (2,273)
Cash and cash equivalents at beginning of period 19,887 17,496
-------- --------
Cash and cash equivalents at end of period $ 14,598 $ 15,223
======== ========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Federal income taxes $ -- $ --
======== ========
Interest on deposits and borrowings $ 1,318 $ 1,907
======== ========
Supplemental disclosure of noncash investing activities:
Issuance of mortgage loan upon sale of real estate acquired through foreclosure $ -- $ --
======== ========
Unrealized gains on securities designated as available for sale, net of
related tax effects $ (1,165) $ 206
======== ========
Recognition of mortgage servicing rights in accordance with SFAS No. 140 $ 8 $ 6
======== ========
Fair value of assets received in the acquisition of Stebbins Bancshares, Inc. $ 24,539 $ --
======== ========
Goodwill recognized in the acquisition of Stebbins Bancshares, Inc. $ 1,470 $ --
======== ========
See accompanying notes to consolidated financial statements.
7
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended June 30, 2004 and 2003
1. Basis of Presentation
The accompanying unaudited consolidated financial statements for the three
months ended June 30, 2004 and 2003 were prepared in accordance with
instructions for Form 10-Q and Article 10 of Regulation S-X and,
therefore, do not include information or footnotes necessary for a
complete presentation of financial position, results of operations and
cash flows in conformity with accounting principles generally accepted in
the United States of America. Accordingly, these financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto of Wayne Savings Bancshares, Inc. (the "Company")
included in the Annual Report on Form 10-K for the year ended March 31,
2004.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) which are necessary for a fair presentation of the
unaudited financial statements have been included. The results of
operations for the three-month period ended June 30, 2004 are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
Critical Accounting Policy - The Company's critical accounting policy
relates to the allowance for losses on loans. The Company has established
a systematic method of periodically reviewing the credit quality of the
loan portfolio in order to establish a sufficient allowance for losses on
loans. The allowance for losses on loans is based on management's current
judgments about the credit quality of individual loans and segments of the
loan portfolio. The allowance for losses on loans is established through a
provision, and considers all known internal and external factors that
affect loan collectability as of the reporting date. Such evaluation,
which included a review of all loans on which full collectability may not
be reasonably assured, considers among other matters, the estimated net
realizable value or the fair value of the underlying collateral, economic
conditions, historical loan loss experience, management's knowledge of
inherent risks in the portfolio that are probable and reasonably estimable
and other factors that warrant recognition in providing an appropriate
loan loss allowance. Management has discussed the development and
selection of this critical accounting policy with the audit committee of
the Board of Directors.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
2. Principles of Consolidation
The accompanying consolidated financial statements include Wayne Savings
Bancshares, Inc. and the Company's wholly-owned subsidiary, Wayne Savings
Community Bank ("Wayne Savings" or the "Bank"). On September 30, 2003,
Village Savings Bank, F.S.B. ("Village Bank") was merged with and into
Wayne Savings Community Bank to be operated as a branch. Prior to this
date, Village Bank was a wholly-owned subsidiary of Wayne Savings
Community Bank.
During fiscal 2004, the Company's Board of Directors approved a business
combination, which was completed in June 2004, whereby Stebbins Bancshares
Inc., the parent of Stebbins National Bank, was merged into Wayne Savings
Bancshares Inc. and Stebbins National Bank merged with and into Wayne
Savings Community Bank resulting in the recognition of goodwill totaling
$1.5 million. The business combination was accounted for using the
purchase method of accounting. Accordingly, the June 30, 2004 consolidated
financial statements herein include the accounts of Stebbins National Bank
from the June 1, 2004 acquisition through June 30, 2004.
8
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended June 30, 2004 and 2003
2. Principles of Consolidation (continued)
Wayne Savings has eleven banking locations in Wayne, Holmes, Ashland,
Medina and Stark counties. All significant intercompany transactions and
balances have been eliminated in the consolidation.
3. Earnings Per Share
Basic earnings per common share are computed based upon the
weighted-average number of common shares outstanding during the period,
less shares in the Company's Employee Stock Ownership Plan ("ESOP") that
are unallocated and not committed to be released. Diluted earnings per
common share include the dilutive effect of all additional potential
common shares issuable under the Company's stock option plan. The
computations are as follows:
For the three months ended
June 30,
2004 2003
Weighted-average common shares
outstanding (basic) 3,636,504 3,732,365
Dilutive effect of assumed exercise
of stock options 32,632 1,170
--------- ---------
Weighted-average common shares
outstanding (diluted) 3,669,136 3,733,535
========= =========
At June 30, 2004 and 2003 all outstanding options were considered in the
diluted earnings per share calculation.
4. Stock Option Plan
The Company has a 1993 incentive Stock Option Plan that provided for the
issuance of 196,390 adjusted shares of authorized shares of common stock
with 10,123 options outstanding at June 30, 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 June 30, 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 in accordance with APB Opinion No.
25.
There were no options granted during the three months ended either June
30, 2004 or June 30, 2003.
9
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended June 30, 2004 and 2003
4. Stock Option Plan (continued)
At June 30, 2004, 10,123 of the stock options granted were subject to
exercise at the discretion of the grantees and expire in fiscal 2013 while
the remaining 204,081 options vest at a rate of 20% annually and will
expire in fiscal 2014.
A summary of the status of the Company's stock option plans as of and for
the years ended March 31, 2004 and 2003, and the three months ended June
30, 2004 is presented below:
Three months ended Year ended
June 30, March 31,
2004 2004 2003
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding at beginning of period 214,204 $ 13.84 28,666 $ 6.26 23,378 $ 3.31
Granted -- -- 204,081 13.95 10,123 11.67
Exercised -- -- (18,543) 3.31 (4,835) 3.31
Forfeited -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Outstanding at end of period 214,204 $ 13.84 214,204 $ 13.84 28,666 $ 6.26
======== ======== ======== ======== ======== ========
Options exercisable at period-end 10,123 $ 11.67 10,123 $ 11.67 28,666 $ 6.26
======== ======== ======== ======== ======== ========
Fair value of options granted $ 3.93 $ 3.17
======== ========
The following information applies to options outstanding at June 30, 2004:
Number outstanding............................................................................. 214,204
Range of exercise prices....................................................................... $11.67 - $13.95
Weighted-average exercise price................................................................ $13.84
Weighted-average remaining contractual life.................................................... 9.0 years
The fair value of options granted has been based on the Black Scholes
pricing model using a dividend yield of 3.3% and 3.8%, expected volatility
of 28.8% and 32.4%, a risk-free interest rate of 4.38% and 3.70% for
fiscal 2004 and 2003, respectively. Both fiscal 2004 and 2003 options
granted have expected lives of ten years.
10
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Average Balance Sheet
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented.
For the three months ended June 30,
------------------------------------------------------------------------------------
2004 2003
------------------------------------ -----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- -------- ------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1) $207,928 $3,163 6.08% $224,479 $3,725 6.64%
Mortgage-backed
securities(2) 84,799 595 2.81 80,344 568 2.83
Investment securities 43,719 420 3.84 26,803 352 5.25
Interest-bearing deposits(3) 29,778 66 .89 18,198 78 1.71
-------- ------ -------- -------- ------ --------
Total interest-
earning assets 366,224 4,244 4.64 349,824 4,723 5.40
Non-interest-earning assets 9,482 23,297
-------- --------
Total assets $375,706 $373,121
======== ========
Interest-bearing liabilities:
Deposits $301,040 1,332 1.77 $296,895 1,612 2.17
Borrowings 28,780 293 4.07 30,000 320 4.27
-------- ------ -------- -------- ------ --------
Total interest-
bearing liabilities 329,820 1,625 1.97 326,895 1,932 2.36
------ -------- ------ --------
Non-interest bearing
liabilities 4,504 960
-------- --------
Total liabilities 334,324 327,855
Stockholders' equity 41,382 45,266
-------- --------
Total liabilities and
stockholders' equity $375,706 $373,121
======== ========
Net interest income $2,619 $2,791
====== ======
Interest rate spread(4) 2.67% 3.04%
======== ========
Net yield on interest-
earning assets(5) 2.86% 3.19%
======== ========
Ratio of average interest-
earning assets to average
interest-bearing liabilities 111.04% 107.01%
======== ========
- ----------
(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.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from March 31, 2004 to June 30, 2004
At June 30, 2004, we had total assets of $386.4 million, an increase of $17.4
million, or 4.7%, from March 31, 2004 levels mainly due to the Stebbins
acquisition of $24.5 million in net assets offset by a decrease in cash to repay
borrowings of $5.0 million and the purchase of Stebbins of $5.2 million.
Liquid assets consisting of cash, interest-bearing deposits and investment
securities increased by $13.2 million, or 25.6%, to $64.6 million at June 30,
2004 mainly due to $13.0 million of liquid assets from the Stebbins acquisition.
Mortgage-backed securities decreased by $10.5 million, or 11.8%, to $78.0
million as these securities continued to receive a high level of principal
repayments due to the general low interest rate environment.
During the three month period ended June 30, 2004 loans receivable increased
$10.7 million as $12.2 million was acquired from the Stebbins acquisition,
offset primarily with a loan sale of $910,000 as management decided to sell
these lower rate mortgage loans because of the low rate environment and
management's preference to use these funds for adjustable rate commercial loan
originations.
Nonperforming and impaired loans of $1.2 million at June 30, 2004 consisted of
$1.1 million of residential mortgage loans as compared with $747,000 in
nonperforming and impaired residential mortgage loans at March 31, 2004. The
Company generally has not recognized losses on impaired and nonperforming loans
secured by residential mortgages.
Deposits at June 30, 2004, totaled $316.4 million, an increase of $24.6 million
from $291.8 million at March 31, 2004 due primarily to the $24.8 million of
deposits acquired from the Stebbins acquisition, offset by a decline in deposits
as customers sought to find alternative investment opportunities due to the low
rate environment. The Bank's deposit pricing is very competitive in all market
areas.
Stockholders' equity decreased by $1.5 million during the three months ended
June 30, 2004, due mainly to an unrealized loss on available for sale securities
of $1.2 million as a result of the recent increase in rates, dividends paid
totaling $447,000 and the purchase of treasury stock of $413,000 offset by
$462,000 in net earnings for the three months ended June 30, 2004 and an
increase of $38,000 due to amortization of the employee stock ownership benefit
plan.
Comparison of Operating Results for the Three Month Periods Ended June 30, 2004
and 2003
General
Net earnings totaled $462,000 for the quarter ended June 30, 2004, a decrease of
$269,000, or 36.8%, compared to the net earnings of $731,000 for the quarter
ended June 30, 2003. The decline in net earnings was primarily attributable to a
decrease in net interest income of $172,000, or 6.2%, mainly due to the
Company's policy of keeping assets with a shorter average life to protect the
Company's interest rate risk position. This short position is a sacrifice in
short-term income but positions the Company favorably to take advantage of
rising rates. Secondly, net earnings decreased due to a decrease in other income
of $105,000, or 20.6%, due primarily to the reduction in both merchant fee
income and the gain on sale of loans due to the slowdown in mortgage loan
refinancing. Finally, an increase in general, administrative and other expense
of $157,000, or 7.1%, contributed to the decline in earnings, was due mainly to
increased franchise tax expense and occupancy and equipment expense. These
earnings decreases were mainly offset by a decrease in federal income tax
expense of $148,000, or 45.4%.
In spite of the increase in interest rates over the last quarter, the Company's
strategy to aggressively manage interest rate risk has resulted in an
improvement to the interest rate risk position as compared to year end.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended June 30, 2004
and 2003 (continued)
Interest Income
Interest income decreased $479,000, or 10.1%, for the three months ended June
30, 2004 to $4.2 million. This decline was mainly due to a 76 basis point
reduction in the average yield on interest earning assets to 4.64% from 5.40%
for the period ended June 30, 2003. The yield reduction was partially offset
with an increase in the weighted-average balance of interest-earning assets
totaling $16.4 million, or 4.7%, to a balance of $366.2 million for the three
months ended June 30, 2004. This reduction in average yield on interest-earning
assets reflects a general decrease in market rates, the refinancing of higher
rate loans and the downward repricing of certain adjustable rate loans. In
addition, the Company purposefully invested excess funds in shorter-term
securities available for sale rather than long-term fixed rate loans. Although
this strategy sacrifices short-term income, it strengthens the Company's
interest rate position and allows the Company to redeploy such assets in a
rising rate environment.
Interest income on loans declined $562,000, or 15.1%, for the three months ended
June 30, 2004, due primarily to a decrease in the weighted average outstanding
balance of loans period to period of $16.6 million, or 7.4%, coupled with a 56
basis-point decrease in the weighted average yield on loans to 6.08% for the
2004 period.
Interest income on mortgage-backed securities increased $27,000 during the three
months ended June 30, 2004, due primarily to a $4.5 million increase in the
weighted average balance outstanding from the comparable 2003 period. This
increase in the average outstanding balance was the result of management's
strategy to invest in shorter term mortgage-backed securities as a defensive
measure during the current low interest rate environment. The yield on
mortgage-backed securities was adversely affected by the record levels of
repayments during the period.
Interest income on investments increased by $68,000, or 19.3%, reflecting an
increase in the weighted average balance of $16.9 million, or 63.1%, to $43.7
million from $26.8 million during the comparable 2003 period, partially offset
by a decrease in the average yield of 141 basis points to 3.84%.
Interest income on interest-bearing deposits declined $12,000, or 15.4%, for the
three months ended June 30, 2004, due primarily to a decrease in the average
yield of 82 basis points to an average yield of .89% from an average yield of
1.71% for the quarter ended June 30, 2003 offset by an increase in the weighted
average balance of $11.6 million, or 63.6%, compared to the 2003 period of $18.2
million
Interest Expense
Interest expense for the three months ended June 30, 2004 totaled $1.6 million,
a decrease of $307,000, or 15.9%, from interest expense of $1.9 million for the
three months ended June 30, 2003. The decrease resulted from a 39 basis point
decrease in the average cost of funds to 1.97% for the 2004 period, offset by an
increase in the average balance of deposits and borrowings outstanding of $2.9
million, or .9%, to $329.8 million for the period ended June 30, 2004.
Interest expense on deposits totaled $1.3 million for the three months ended
June 30, 2004, a decrease of $280,000, or 17.4%, from the three months ended
June 30, 2003, as a result of a 40 basis point decrease in the average cost of
deposits to 1.77% for the 2004 period offset by an increase in the average
balance outstanding of $4.1 million, or 1.4%, to $301.0 million for the 2004
period.
Interest expense on borrowings totaled $293,000 for the three months ended June
30, 2004, a decrease of $27,000 from the 2003 period, primarily due to a
decrease in the average balance of borrowings of $1.2 million to an average
outstanding balance of $28.8 million for the three months ended June 30, 2004,
coupled with a decrease in the average cost of borrowings to 4.07% from the
average cost of 4.27% for the 2003 period.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended June 30, 2004
and 2003 (continued)
Net Interest Income
Net interest income totaled $2.6 million for the three months ended June 30,
2004, a decrease of $172,000, or 6.2%, from the three month period ended June
30, 2003. The average interest rate spread decreased to 2.67% for the three
months ended June 30, 2004 from 3.04% for the three months ended June 30, 2003.
The net interest margin decreased to 2.86% for the three months ended June 30,
2004 from 3.19% for the three months ended June 30, 2003.
Provision for Losses on Loans
The Company recorded a $15,000 provision for losses on loans for the three month
period ended June 30, 2004 as compared to $32,000 in 2003. To the best of
management's knowledge, all known and inherent losses that are probable and
which can be reasonably estimated have been recorded as of June 30, 2004 and
2003.
Other Income
Other income, consisting primarily of an increase in cash surrender value of
life insurance, gains on sale of loans, service fees, and charges on deposit
accounts, decreased by $105,000, or 20.6%, to $405,000 for the three months
ended June 30, 2004, from $510,000 for the three months ended June 30, 2003. The
decrease resulted primarily from a decrease of $70,000 in merchant fee income
and a decrease of $21,000 on the gain on sale of loans due to the slow down in
mortgage loan refinancing. The decrease in merchant fee income was due to
significant transaction decrease from period to period. The Company may not
experience the prior levels in future earnings.
General, Administrative, and Other Expense
General, administrative and other expense increased by $157,000, or 7.1%, to
$2.4 million for the three months ended June 30, 2004 compared to the three
months ended June 30, 2003. The increase resulted primarily from an increase in
other operating expense of $56,000, or 11.9%, a $52,000, or 67.5%, increase in
franchise taxes and a $35,000, or 9.1% in occupancy and equipment. The increase
in franchise taxes is mainly due to the additional capital raised in the full
stock conversion in January 2003. The increase in occupancy and equipment is
mainly due to the new computer operating system depreciation and the increase in
other operating expense was primarily attributable to increased expenses related
to the Stebbins National Bank acquisition and ongoing compliance matters
required of a public company.
Federal Income Taxes
The provision for federal income taxes was $178,000 for the three months ended
June 30, 2004, a decrease of $148,000, or 45.4%, compared to the same period in
2003, primarily due to the $417,000 decrease in earnings before federal income
taxes. The effective tax rate for the three months ended June 30, 2004, was
27.8% as compared to 30.8% for the same period in 2003. The effective tax rate
for June 30, 2004 decreased mainly due to the additional income earned from the
purchase of additional tax advantaged municipal securities.
14
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company's market risk since the
Company's Form 10-K filed with the Securities and Exchange Commission for the
year ended March 31, 2004.
ITEM 4 CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of the Company's
management, including our Chief Executive Officer and Chief Financial Officer,
the Company evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Exchange Act) as of the end of the period covered by this report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures were effective in timely alerting
them to the material information relating to the Company (or our consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
(b) Changes in internal controls.
There has been no change made in the Company's internal control over
financial reporting during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
15
Wayne Savings Bancshares, Inc.
PART II
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities, Use of Proceeds and Issuer of Purchases of Equity
Securities
Shares Maximum shares which may
Purchased as part of still be Purchased as part
# of Shares Price Paid the Announced Plan of the Announced Plan
----------- ---------- ------------------ ---------------------
May 2004 25,000 $16.55 25,000 57,500
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
On July 22, 2004, the Annual Meeting of the Company's Stockholders was
held. Three directors were elected to terms expiring in fiscal 2007 by the
following votes:
Russell L. Harpster For: 3,051,530 Withheld: 221,799
Terry A. Gardner For: 3,188,352 Withheld: 84,977
Frederick J. Krum For: 3,225,321 Withheld: 48,008
Three other matters were submitted to the stockholders for ratification,
for which the following votes were cast:
Proposal to amend and restate the 2003 Stock Option Plan.
For: 2,101,803 Against: 200,682 Abstain: 37,121
Proposal to amend and restate of the 2003 Retention and Recognition Plan.
For: 1,921,486 Against: 370,997 Abstain: 47,123
Ratification of the appointment of Grant Thornton LLP as independent
auditors of the Company for the fiscal year ended March 31, 2005.
For: 3,220,691 Against: 33,375 Abstain: 19,680
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
EX-31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
EX-31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
EX-32 Written Statement of Chief Executive Officer and Chief
Financial Officer furnished pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
16
Wayne Savings Bancshares, Inc.
PART II (CONTINUED)
ITEM 6. Exhibits and Reports on Form 8-K (continued)
(b) Reports on Form 8-K:
The Company filed a Form 8-K on June 29, 2004, disclosing the cash
dividend declared on Wayne Savings Bancshares common stock.
The Company filed a Form 8-K on June 3, 2004, disclosing the completion of
the purchase of Stebbins Bancshares, Inc. and its national bank
subsidiary, Stebbins National Bank of Creston, Ohio.
The Company filed a Form 8-K on May 3, 2004, disclosing its earnings
release for the three months and the year ended March 31, 2004.
17
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 2004 By:
-------------------------------------
Charles F. Finn
Chairman and President
Date: August 13, 2004 By:
-------------------------------------
Michael C. Anderson
Chief Financial Officer
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 13, 2004 By: /s/ Charles C. Finn
-----------------------------------
Charles C. Finn
Chairman and President
Date: August 13, 2004 By: /s/ Michael C. Anderson
-----------------------------------
Michael C. Anderson
Chief Financial Officer
18