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 September 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 12b-2 of the Exchange Act)
Yes |_| No |X|
As of November 8, 2004, the latest practicable date, 3,688,057 shares of the
registrant's common stock, $.10 par value, were issued and outstanding.
1
Wayne Savings Bancshares, Inc.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 11
Item 3 Quantitative and Qualitative Disclosures About Market Risk 15
Item 4 Controls and Procedures 19
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 20
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 20
Item 3 Defaults Upon Senior Securities 20
Item 4 Submission of Matters to a Vote of Security Holders 20
Item 5 Other Information 20
Item 6 Exhibits and Reports on Form 8-K 21
SIGNATURES 22
2
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30, March 31,
2004 2004
ASSETS
Cash and due from banks $ 5,430 $ 3,291
Federal funds sold 8,045 9,875
Interest-bearing deposits in other financial institutions 5,296 6,721
--------- ---------
Cash and cash equivalents 18,771 19,887
Investment securities available for sale - at market 38,433 17,546
Investment securities held to maturity - at amortized cost, approximate market value
of $15,124 and $14,830 as of September 30, 2004 and March 31, 2004, respectively 14,084 14,036
Mortgage-backed securities available for sale - at market 66,520 83,945
Mortgage-backed securities held to maturity - at cost, approximate market value of
$3,284 and $4,510 as of September 30, 2004 and March 31, 2004, respectively 3,265 4,483
Loans receivable - net 213,757 205,443
Office premises and equipment - net 9,171 8,742
Real estate acquired through foreclosure 141 100
Federal Home Loan Bank stock - at cost 4,292 4,205
Cash surrender value of life insurance 6,458 6,321
Accrued interest receivable on loans 900 801
Accrued interest receivable on mortgage-backed securities 312 400
Accrued interest receivable on investments and interest-bearing deposits 515 318
Prepaid expenses and other assets 4,899 2,549
Prepaid federal income taxes -- 231
--------- ---------
Total assets $ 381,518 $ 369,007
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 311,910 $ 291,830
Advances from the Federal Home Loan Bank 25,000 30,000
Advances by borrowers for taxes and insurance 565 617
Accrued interest payable 206 186
Accounts payable on mortgage loans serviced for others 40 118
Other liabilities 1,103 1,383
Accrued federal income taxes 183 --
Deferred federal income taxes 656 1,312
--------- ---------
Total liabilities 339,663 325,446
Commitments -- --
Stockholders' equity
Common stock (8,000,000 shares of $ .10 par value authorized; 3,907,318 shares
issued at both September 30, 2004 and March 31, 2004) 391 391
Additional paid-in capital 34,377 34,365
Retained earnings - substantially restricted 12,799 12,727
Shares acquired by Management Recognition Plan (913) (1,142)
Less required contributions for shares acquired by Employee Stock Ownership Plan (1,380) (1,456)
Less 215,584 and 112,500 shares of treasury stock at September 30, 2004 and
March 31, 2004 - at cost (3,565) (1,803)
Accumulated other comprehensive income - gain on securities designated as
available for sale 146 479
--------- ---------
Total stockholders' equity 41,855 43,561
--------- ---------
Total liabilities and stockholders' equity $ 381,518 $ 369,007
========= =========
See accompanying notes to consolidated financial statements.
3
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
Six months Three months
ended ended
September 30, September 30,
2004 2003 2004 2003
Interest income
Loans $ 6,394 $ 7,238 $ 3,231 $ 3,513
Mortgage-backed securities 1,168 1,119 573 551
Investment securities 925 737 505 385
Interest-bearing deposits and other 138 130 72 52
------- ------- ------- -------
Total interest income 8,625 9,224 4,381 4,501
Interest expense
Deposits 2,695 3,103 1,363 1,491
Borrowings 539 625 246 305
------- ------- ------- -------
Total interest expense 3,234 3,728 1,609 1,796
------- ------- ------- -------
Net interest income 5,391 5,496 2,772 2,705
Provision for losses on loans 30 63 15 31
------- ------- ------- -------
Net interest income after provision for losses on loans 5,361 5,433 2,757 2,674
Other income
Gain on sale of loans 142 61 126 24
Increase in cash surrender value of life insurance 137 134 66 67
Service fees, charges and other operating 619 794 301 388
------- ------- ------- -------
Total other income 898 989 493 479
General, administrative and other expense
Employee compensation and benefits 2,784 2,600 1,436 1,334
Occupancy and equipment 847 741 426 355
Federal deposit insurance premiums 23 24 12 11
Franchise taxes 297 154 168 77
Other operating 998 964 538 494
------- ------- ------- -------
Total general, administrative and other expense 4,949 4,483 2,580 2,271
------- ------- ------- -------
Earnings before income taxes 1,310 1,939 670 882
Federal incomes taxes
Current 9 433 602 58
Deferred 350 162 (421) 211
------- ------- ------- -------
Total federal income taxes 359 595 181 269
------- ------- ------- -------
NET EARNINGS $ 951 $ 1,344 $ 489 $ 613
======= ======= ======= =======
EARNINGS PER SHARE
Basic $ 0.26 $ 0.36 $ 0.13 $ 0.16
======= ======= ======= =======
Diluted $ 0.26 $ 0.36 $ 0.13 $ 0.16
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
4
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Six months ended Three months ended
September 30, September 30,
2004 2003 2004 2003
Net earnings $ 951 $ 1,344 $ 489 $ 613
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities, net of taxes (benefits)
of $(172), $(128), $429 and $(234) during the respective periods (333) (248) 832 (454)
------- ------- ------- -------
Comprehensive income $ 618 $ 1,096 $ 1,321 $ 159
======= ======= ======= =======
Accumulated other comprehensive income (loss) $ 146 $ (400) $ 146 $ (400)
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
5
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended September 30,
(In thousands)
2004 2003
Cash flows from operating activities:
Net earnings for the period $ 951 $ 1,344
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of discounts and premiums on loans,
investments and mortgage-backed securities - net 711 912
Amortization of deferred loan origination fees (134) (342)
Depreciation and amortization 301 261
Gain on sale of loans (142) (39)
Proceeds from sale of loans in the secondary market 2,406 2,529
Loans originated for sale in the secondary market (2,355) (2,329)
Provision for losses on loans 30 63
Federal Home Loan Bank stock dividends (87) (81)
Increase (decrease) in cash, net of acquisition of Stebbins Bancshares, Inc. due to changes in:
Accrued interest receivable on loans (71) 114
Accrued interest receivable on mortgage-backed securities 88 (34)
Accrued interest receivable on investments and interest-bearing deposits (197) (4)
Prepaid expenses and other assets (848) (251)
Accrued interest payable 3 18
Accounts payable on mortgage loans serviced for others (78) 128
Other liabilities (283) (445)
Federal income taxes
Current 414 (202)
Deferred (350) 162
-------- --------
Net cash provided by operating activities 359 1,804
Cash flows provided by investing activities:
Purchase of investment securities designated as available for sale (10,989) (13,017)
Proceeds from maturity of investment securities designated as held to maturity 25 3,640
Proceeds from maturity of investment securities designated as available for sale 1,500 12,523
Purchase of mortgage-backed securities designated as available for sale (3,049) (37,406)
Principal repayments on mortgage-backed securities designated as held to maturity 1,199 3,474
Principal repayments on mortgage-backed securities designated as available for sale 19,594 18,366
Loan principal repayments 24,951 57,642
Loan disbursements (20,986) (42,072)
Purchase of office premises and equipment - net (263) (14)
Proceeds from sale of real estate acquired through foreclosure 100 --
Increase in cash surrender value of life insurance (137) (134)
Net cash used in the purchase of Stebbins Bancshares, Inc. (1,314) --
-------- --------
Net cash provided by investing activities 10,631 3,002
-------- --------
Net cash provided by operating and investing activities
(balance carried forward) 10,990 4,806
-------- --------
6
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended September 30,
(In thousands)
2004 2003
Net cash provided by operating and investing activities
(balance brought forward) $ 10,990 $ 4,806
Cash flows used in financing activities:
Net decrease in deposit accounts (4,730) (5,290)
Repayment of Federal Home Loan Bank Advances (5,000) --
Advances by borrowers for taxes and insurance (52) (88)
Dividends paid on common stock (879) (881)
Proceeds from exercise of stock options -- 61
Amortization of stock benefit plans 317 --
Shares acquired by Management Recognition Plan -- (1,142)
Purchase of treasury shares (1,762) --
-------- --------
Net cash used in financing activities (12,106) (7,340)
-------- --------
Net decrease in cash and cash equivalents (1,116) (2,534)
Cash and cash equivalents at beginning of period 19,887 17,496
-------- --------
Cash and cash equivalents at end of period $ 18,771 $ 14,962
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ -- $ 635
======== ========
Interest on deposits and borrowings $ 3,214 $ 3,710
======== ========
Supplemental disclosure of noncash investing activities:
Issuance of mortgage loan upon sale of real estate acquired through foreclosure $ -- $ --
======== ========
Transfers from loans to real estate acquired through foreclosure $ 141 $ 179
======== ========
Unrealized losses on securities designated as available for sale,
net of related tax effects $ (333) $ (248)
======== ========
Recognition of mortgage servicing rights in accordance
with SFAS No. 140 $ 21 $ 22
======== ========
See accompanying notes to consolidated financial statements.
7
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six and three month periods ended September 30, 2004 and 2003
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements for the six
and three months ended September 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 and six month periods ended September 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. The business combination was accounted
for using the purchase method of accounting. Accordingly, the September
30, 2004 consolidated financial statements herein include the accounts of
Stebbins National Bank from the June 1, 2004 acquisition through September
30, 2004.
8
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six and three month periods ended September 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 is computed based upon the
weighted-average number of common shares outstanding during the period,
less shares in the Company's Employee Stock Ownership Plan ("ESOP") that
are unallocated and not committed to be released. Diluted earnings per
common share include the dilutive effect of all additional potential
common shares issuable under the Company's stock option plan. The
computations are as follows:
For the six months ended For the three months ended
September 30, September 30,
2004 2003 2004 2003
Weighted-average common shares
outstanding (basic) 3,616,294 3,742,188 3,596,303 3,752,400
Dilutive effect of assumed exercise
of stock options 31,175 1,456 29,694 1,574
--------- --------- --------- ---------
Weighted-average common shares
outstanding (diluted) 3,647,469 3,743,644 3,625,997 3,753,974
========= ========= ========= =========
At September 30, 2004 all outstanding options were considered in the
diluted earnings per share calculation. Options to purchase 204,081 shares
of common stock at a weighted average exercise price $13.95 were
outstanding at September 30, 2003 but were excluded from the computation
of diluted earnings per share because the exercise price was greater than
the average market price of the common shares.
4. Stock Option Plan
-----------------
The Company has a 1993 incentive Stock Option Plan that provided for the
issuance of 196,390 shares of authorized common stock, as adjusted, with
10,123 options outstanding at September 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 September 30, 2004, all options under the 2004 Plan
have been granted and will expire in fiscal 2014 unless otherwise
exercised.
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 or six months ended
September 30, 2004. There were 204,081 options granted during the three
and six months ended September 30, 2003.
9
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six and three month periods ended September 30, 2004 and 2003
4. Stock Option Plan (continued)
-----------------
At September 30, 2004, 50,939 of the stock options granted were subject to
exercise at the discretion of the grantees and expire in fiscal 2014 while
the remaining 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 six months ended
September 30, 2004 is presented below:
Six months ended Year ended
September 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 50,939 $13.50 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 September 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.............. 8.75 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. All options granted in fiscal 2004 and
fiscal 2003 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 tables set forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented.
For the six months ended September 30,
--------------------------------------------------------------
2004 2003
----------------------------- -----------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1) $211,424 $6,394 6.05% $219,835 $7,238 6.58%
Mortgage-backed
securities(2) 79,773 1,168 2.93 84,150 1,119 2.66
Investment securities 47,487 925 3.90 30,726 737 4.80
Interest-bearing deposits(3) 21,387 138 1.29 19,814 130 1.31
-------- ------ -------- ------
Total interest-
earning assets 360,071 8,625 4.79 354,525 9,224 5.20
Non-interest-earning assets 21,171 14,674
-------- --------
Total assets $381,242 $369,199
======== ========
Interest-bearing liabilities:
Deposits $307,258 2,695 1.75 $289,750 3,103 2.14
Borrowings 26,900 539 4.01 30,000 625 4.17
-------- ------ -------- ------
Total interest-
bearing liabilities 334,158 3,234 1.94 319,750 3,728 2.33
------ ------
Non-interest bearing
liabilities 4,645 4,209
-------- --------
Total liabilities 338,803 323,959
Stockholders' equity 42,439 45,240
-------- --------
Total liabilities and
stockholders' equity $381,242 $369,199
======== ========
Net interest income $5,391 $5,496
====== ======
Interest rate spread(4) 2.85% 2.87%
====== ======
Net yield on interest-
earning assets(5) 2.99% 3.10%
====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 107.75% 110.88%
====== ======
- ----------
See footnotes on following page.
11
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Average Balance Sheet (continued)
For the three months ended September 30,
--------------------------------------------------------------
2004 2003
----------------------------- -----------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ------- ------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1) $214,958 $3,231 6.01% $215,192 $3,513 6.53%
Mortgage-backed
securities(2) 74,422 573 3.08 87,957 551 2.51
Investment securities 51,013 505 3.96 34,648 385 4.44
Interest-bearing deposits(3) 15,286 72 1.88 21,429 52 .97
-------- ------ -------- ------
Total interest-
earning assets 355,679 4,381 4.93 359,226 4,501 5.01
Non-interest-earning assets 25,790 7,001
-------- --------
Total assets $381,469 $366,227
======== ========
Interest-bearing liabilities:
Deposits $313,544 1,363 1.74 $287,723 1,491 2.07
Borrowings 25,000 246 3.94 30,000 305 4.07
-------- ------ -------- ------
Total interest-
bearing liabilities 338,544 1,609 1.90 317,723 1,796 2.26
------ ------
Non-interest bearing
liabilities 690 3,926
-------- --------
Total liabilities 339,234 321,649
Stockholders' equity 42,235 44,578
-------- --------
Total liabilities and
stockholders' equity $381,469 $366,227
======== ========
Net interest income $2,772 $2,705
====== ======
Interest rate spread(4) 3.03% 2.75%
====== ======
Net yield on interest-
earning assets(5) 3.12% 3.01%
====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 105.06% 113.06%
====== ======
- ----------
(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.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from March 31, 2004 to September 30,
- --------------------------------------------------------------------------------
2004
- ----
At September 30, 2004, we had total assets of $381.5 million, an increase of
$12.5 million, or 3.4%, 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 net purchase of Stebbins of $1.3 million.
Liquid assets, consisting of cash, interest-bearing deposits and investment
securities, increased by $19.8 million, or 38.5%, to $71.3 million at September
30, 2004 mainly due to $13.0 million of liquid assets from the Stebbins
acquisition and the purchase of $11.0 million in available for sale investment
securities offset by the maturing of $1.5 million of the same securities.
Mortgage-backed securities decreased by $18.6 million, or 21.1%, to $69.8
million as these securities continued to receive a high level of principal
repayments due to the general low interest rate environment.
During the six month period ended September 30, 2004 loans receivable increased
$8.3 million as $12.2 million of loans were acquired from the Stebbins
acquisition. This increase in loans receivable was offset by loan sales of $2.4
million consisting primarily of long-term fixed rate residential loans in
furtherance of management's interest rate risk strategy. Rather than reinvest
funds from sales of and repayments on loans in long-term, fixed rate and low
yielding residential loans during this period of historically low interest
rates, management has invested in marketable securities and adjustable rate
commercial loans. The composition of the loan portfolio has changed during the
six months due to repayments of $7.9 million in residential mortgage loans and
increased originations of nonresidential mortgage loans totaling $6.9 million in
connection with the Bank's increased emphasis on commercial lending.
Nonperforming and impaired loans of $1.1 at September 30, 2004 consisted mainly
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. As of September 30, 2004, the Company reclassified $1.3 million of
the Stebbins portfolio as substandard. These loans are not delinquent and are
still being reviewed to determine their proper classification.
Deposits at September 30, 2004, totaled $311.9 million, an increase of $20.1
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 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 $1.7 million during the six months ended
September 30, 2004, due mainly to an unrealized loss on available for sale
securities of $333,000 as a result of the recent increase in rates, dividends
paid totaling $879,000 and the purchase of treasury stock of $1.8 million. These
amounts were offset by $951,000 in net earnings for the six months ended
September 30, 2004 and an increase of $317,000 due to the amortization of the
stock benefit plans.
Comparison of Operating Results for the Six Month Periods Ended September 30,
- --------------------------------------------------------------------------------
2004 and 2003
- -------------
General
- -------
Net earnings totaled $951,000 for the six months ended September 30, 2004, a
decrease of $393,000, or 29.2%, compared to the net earnings of $1.3 million for
the six months ended September 30, 2003. The decline in net earnings was
primarily attributable to a decrease in net interest income of $105,000, or
1.9%, mainly due to the Company's strategy of maintaining assets with a shorter
average life to protect the Company's interest rate risk position. These assets
consist primarily of investment and mortgage-backed securities available for
sale which generally yield less than loans. Although this strategy has adversely
impacted our short-term income, we believe we
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six Month Periods Ended September 30,
- --------------------------------------------------------------------------------
2004 and 2003 (continued)
- -------------
General (continued)
- -------
are favorably positioned for a rising rate environment. Secondly, net earnings
decreased due to a decrease in other income of $91,000, or 9.2%, due primarily
to the reduction in merchant fee income offset with a $81,000 increase in gain
on sale of loans. Finally, general, administrative and other expense increased
$466,000, or 10.4%, due mainly to increased compensation and benefits expense,
franchise tax expense and occupancy and equipment expense. These earnings
decreases were mainly offset by a decrease in federal income tax expense of
$236,000, or 39.7%.
The Company has maintained its strategy to aggressively manage interest rate
risk during the period of low interest rates. This strategy negatively affected
earnings for the first six months of the fiscal year. However, management
believes that the investment of excess funds primarily in shorter term assets
will help the Company in a rising interest rate environment.
Interest Income
- ---------------
Interest income decreased $599,000, or 6.5%, to $8.6 million for the six months
ended September 30, 2004, compared to the same period in 2003. This decline was
mainly due to an 11 basis point reduction in the average yield on
interest-earning assets to 2.99% from 3.10% for the period ended September 30,
2003. The yield reduction was partially offset with an increase in the
weighted-average balance of interest-earning assets of $5.5 million, or 1.6%, to
a balance of $360.1 million for the six months ended September 30, 2004 compared
to the same period in 2003. This reduction in the 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, as part of its interest rate risk strategy,
the Company invested excess funds in shorter-term securities available for sale
rather than long-term fixed rate loans. Although this strategy sacrifices
short-term income since investment securities generally yield less than loans,
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 $844,000, or 11.7%, for the six months ended
September 30, 2004, compared to the same period in 2003, due primarily to a
decrease in the weighted average outstanding balance of loans period to period
of $8.4 million, or 3.8%, coupled with a 53 basis-point decrease in the weighted
average yield on loans to 6.05% for the 2004 period.
Interest income on mortgage-backed securities increased $49,000 during the six
months ended September 30, 2004, compared to the same period in 2003, due
primarily to a decline in premium amortization. The decline in premium
amortization was due primarily to the decrease in the prepayments of these
securities as a result of the prevailing lower interest rate environment. The
weighted average balance decreased by a $4.4 million, or 5.2%, from the
comparable 2003 period offsetting the aforementioned increase in income.
Interest income on investment securities increased by $188,000, or 25.5%, during
the 2004 period compared to the same period in 2003, reflecting an increase in
the weighted average balance of $16.8 million, or 54.5%, to $47.5 million from
$30.7 million during the comparable 2003 period, partially offset by a decrease
in the average yield of 90 basis points to 3.90%.
Interest income on interest-bearing deposits increased by $8,000, or 6.2%, for
the six months ended September 30, 2004, due primarily to an increase in the
weighted average balance of $1.6 million, or 7.9%, compared to the 2003 period
of $19.8 million. The increase in the weighted average balance was offset by a
decline in the average yield of 2 basis points to an average yield of 1.29%
compared to 1.31% for the quarter ended September 30, 2003.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six Month Periods Ended September 30,
- --------------------------------------------------------------------------------
2004 and 2003 (continued)
- -------------
Interest Expense
- ----------------
Interest expense for the six months ended September 30, 2004 totaled $3.2
million, a decrease of $494,000, or 13.3%, compared to interest expense of $3.7
million for the six months ended September 30, 2003. The decrease resulted from
a 39 basis point decrease in the average cost of funds to 1.94% for the 2004
period, offset by an increase in the average balance of deposits and borrowings
outstanding of $14.4 million, or 4.5%, to $334.2 million for the period ended
September 30, 2004.
Interest expense on deposits totaled $2.7 million for the six months ended
September 30, 2004, a decrease of $408,000, or 13.1%, from the six months ended
September 30, 2003, as a result of a 39 basis point decrease in the average cost
of deposits to 1.75% for the 2004 period offset by an increase in the average
balance outstanding of $17.5 million, or 6.0%, to $307.3 million for the 2004
period.
Interest expense on borrowings totaled $539,000 for the six months ended
September 30, 2004, a decrease of $86,000, or 13.8%, from the 2003 period,
primarily due to a decrease in the average balance of borrowings of $3.1 million
to an average outstanding balance of $26.9 million for the six months ended
September 30, 2004, coupled with a decrease in the average cost of borrowings to
4.01% from the average cost of 4.17% for the 2003 period.
Net Interest Income
- -------------------
Net interest income totaled $5.4 million for the six months ended September 30,
2004, a decrease of $105,000, or 1.9%, from the six month period ended September
30, 2003. The average interest rate spread decreased to 2.85% for the six months
ended September 30, 2004 from 2.87% for the six months ended September 30, 2003.
The net interest margin decreased to 2.99% for the six months ended September
30, 2004 from 3.10% for the six months ended September 30, 2003.
Provision for Losses on Loans
- -----------------------------
The Company recorded a $30,000 provision for losses on loans for the six month
period ended September 30, 2004 as compared to $63,000 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 September 30, 2004
and 2003.
Other Income
- ------------
Other income, consisting primarily of the cash surrender value of life
insurance, gains on sale of loans, service fees, and charges on deposit
accounts, decreased by $91,000, or 9.2%, to $898,000 for the six months ended
September 30, 2004, from $989,000 for the six months ended September 30, 2003.
The decrease resulted primarily from a decrease of $146,000 in merchant fee
income offset by an increase of $81,000 on the gain on sale of loans in
connection with management's interest rate risk strategy, as discussed
previously. The Company recognized a $44,000 gain on sale of loans from the
disposal of the credit card portfolio. Management chose to sell the credit card
portfolio due to its minimal performance and to avoid potential future
chargeoffs. The decrease in merchant fee income was due to a significant
transaction decrease from period to period which the Company may not experience
in future earnings.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six Month Periods Ended September 30,
- --------------------------------------------------------------------------------
2004 and 2003 (continued)
- -------------
General, Administrative, and Other Expense
- ------------------------------------------
General, administrative and other expense increased by $466,000, or 10.4%, to
$4.9 million for the six months ended September 30, 2004 compared to the six
months ended September 30, 2003. The increase resulted primarily from an
increase in employee compensation and benefits expense of $184,000, or 7.1%, a
$143,000, or 92.9%, increase in franchise taxes and a $106,000, or 14.3%
increase in occupancy and equipment expense. The increase in employee
compensation and benefits was mainly due to the Stebbins National Bank
acquisition and the normal merit increases and increased benefit plan costs. The
increase in franchise taxes was mainly due to the additional capital raised in
the full stock conversion in January 2003. The increase in occupancy and
equipment expense was mainly due to the new computer operating system
depreciation coupled with the acquisition of Stebbins National Bank.
Federal Income Taxes
- --------------------
The provision for federal income taxes was $359,000 for the six months ended
September 30, 2004, a decrease of $236,000, or 39.7%, compared to the same
period in 2003, primarily due to the $629,000, or 32.4%, decrease in earnings
before federal income taxes. The effective tax rate for the six months ended
September 30, 2004, was 27.4% as compared to 30.7% for the same period in 2003.
The effective tax rate for the six months ended September 30, 2004 decreased
mainly due to the additional income earned from the purchase of additional tax
advantaged municipal securities and the tax free earnings on the bank owned life
insurance.
Comparison of Operating Results for the Three Month Periods Ended September 30,
- --------------------------------------------------------------------------------
2004 and 2003
- -------------
General
- -------
Net earnings totaled $489,000 for the quarter ended September 30, 2004, a
decrease of $124,000, or 20.2%, compared to the net earnings of $613,000 for the
quarter ended September 30, 2003. The decline in net earnings was primarily
attributable to an increase in general, administrative and other expense of
$309,000, or 13.6%, offset primarily by an increase in net interest income of
$67,000, or 2.5%, and a decrease in federal income taxes of $88,000, or 32.7%.
The Company has maintained its strategy to aggressively manage interest rate
risk. This strategy negatively affected earnings for the three months ended
September 30, 2004. However, management believes that the investment of excess
funds primarily in shorter term assets will help the Company in a rising
interest rate environment.
Interest Income
- ---------------
Interest income decreased $120,000, or 2.7%, to $4.4 million for the three
months ended September 30, 2004, compared to the same period in 2003. This
decrease was mainly due to an 8 basis point decrease in the average yield on
interest-earning assets to 4.93% from 5.01% for the period ended September 30,
2003. The yield reduction was coupled with a decrease in the weighted-average
balance of interest-earning assets of $3.5 million, or 1.0%, to a balance of
$355.7 million for the three months ended September 30, 2004. This reduction in
the 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.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended September 30,
- --------------------------------------------------------------------------------
2004 and 2003 (continued)
- -------------
Interest Income (continued)
- ---------------
Interest income on loans declined $282,000, or 8.0%, for the three months ended
September 30, 2004, compared to the same period in 2003, due primarily to a
decrease in the weighted average outstanding balance of loans period to period
of $234,000, coupled with a 52 basis-point decrease in the weighted average
yield on loans to 6.01% for the 2004 period.
Interest income on mortgage-backed securities increased $22,000 during the three
months ended September 30, 2004, compared to the same period in 2003, due
primarily to the slowing of the record levels of prepayments, offset by a
decrease in the weighted average balance of $13.5 million, or 15.4%, from the
comparable 2003 period. The slowdown of prepayments cause the amortization of
the security premium to also decrease causing an increase in interest income on
mortgage-backed securities.
Interest income on investment securities increased by $120,000, or 31.2%, during
the 2004 period compared to the same period in 2003, reflecting an increase in
the weighted average balance of $16.4 million, or 47.2%, to $51.0 million from
$34.6 million during the comparable 2003 period, partially offset by a decrease
in the average yield of 48 basis points to 3.96%.
Interest income on interest-bearing deposits increased by $20,000, or 38.5%, for
the three months ended September 30, 2004, due primarily to an increase in the
average yield of 91 basis points to an average yield of 1.88% from an average
yield of .97% for the quarter ended September 30, 2003 offset by an decrease in
the weighted average balance of $6.1 million, or 28.7%, compared to the 2003
period of $21.4 million
Interest Expense
- ----------------
Interest expense for the three months ended September 30, 2004 totaled $1.6
million, a decrease of $187,000, or 10.4%, from interest expense of $1.8 million
for the three months ended September 30, 2003. The decrease resulted from a 36
basis point decrease in the average cost of funds to 1.90% for the 2004 period,
offset by an increase in the average balance of deposits and borrowings
outstanding of $20.8 million, or 6.6%, to $338.5 million for the period ended
September 30, 2004.
Interest expense on deposits totaled $1.4 million for the three months ended
September 30, 2004, a decrease of $128,000, or 8.6%, compared to the three
months ended September 30, 2003, as a result of a 33 basis point decrease in the
average cost of deposits to 1.74% for the 2004 period offset by an increase in
the average balance outstanding of $25.8 million, or 9.0%, to $313.5 million for
the 2004 period.
Interest expense on borrowings totaled $246,000 for the three months ended
September 30, 2004, a decrease of $59,000, or 19.3%, from the 2003 period,
primarily due to a decrease in the average balance of borrowings of $5.0 million
to an average outstanding balance of $25.0 million for the three months ended
September 30, 2004, coupled with a decrease in the average cost of borrowings to
3.94% from the average cost of 4.07% for the 2003 period.
Net Interest Income
- -------------------
Net interest income totaled $2.8 million for the three months ended September
30, 2004, an increase of $67,000, or 2.5%, from the three month period ended
September 30, 2003. The average interest rate spread increased to 3.03% for the
three months ended September 30, 2004 from 2.75% for the three months ended
September 30, 2003. The net interest margin increased to 3.12% for the three
months ended September 30, 2004 from 3.01% for the three months ended September
30, 2003.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended September 30,
- --------------------------------------------------------------------------------
2004 and 2003 (continued)
- -------------
Provision for Losses on Loans
- -----------------------------
The Company recorded a $15,000 provision for losses on loans for the three month
period ended September 30, 2004 as compared to $31,000 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 September 30, 2004
and 2003.
Other Income
- ------------
Other income, consisting primarily of the cash surrender value of life
insurance, gains on sale of loans, service fees, and charges on deposit
accounts, increased by $14,000, or 2.9%, to $493,000 for the three months ended
September 30, 2004, from $479,000 for the three months ended September 30, 2003.
The increase resulted primarily from an increase of $102,000 on the gain on sale
of loans which included a $44,000 gain on sale of loans from the disposal of the
credit card portfolio. Management chose to sell the credit card portfolio due to
its minimal performance and to avoid potential future charge offs. This increase
was offset mainly by a decrease of $68,000 in merchant fee income due to a
significant decrease in transactions from period to period, coupled with a
decrease in loan servicing fees of $7,000. The Company may not experience the
prior levels in future earnings on merchant fee income and loan servicing fee
income due to the significant transaction decreases.
General, Administrative, and Other Expense
- ------------------------------------------
General, administrative and other expense increased by $309,000, or 13.6%, to
$2.6 million for the three months ended September 30, 2004 compared to the three
months ended September 30, 2003. The increase resulted primarily from an
increase in employee compensation and benefits expense of $102,000, or 7.6%, a
$91,000, or 118.2%, increase in franchise taxes and a $71,000, or 20.0%,
increase in occupancy and equipment expense. The increase in employee
compensation and benefits was mainly due to the Stebbins National Bank
acquisition and the normal merit increases and increased benefit plan costs. The
increase in franchise taxes was mainly due to the additional capital raised in
the full stock conversion in January 2003. The increase in occupancy and
equipment expense was mainly due to depreciation of the new computer operating
system and increased expenses related to the Stebbins National Bank acquisition.
Federal Income Taxes
- --------------------
The provision for federal income taxes was $181,000 for the three months ended
September 30, 2004, a decrease of $88,000, or 32.7%, compared to the same period
in 2003, primarily due to the $212,000 decrease in earnings before federal
income taxes. The effective tax rate for the three months ended September 30,
2004, was 27.0% as compared to 30.5% for the same period in 2003. The effective
tax rate for the three months ended September 30, 2004 decreased mainly due to
the additional income earned from the purchase of additional tax advantaged
municipal securities.
18
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.
19
Wayne Savings Bancshares, Inc.
PART II
ITEM 1. Legal Proceedings
-----------------
Not applicable
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
-----------------------------------------------------------
Total # of Maximum # of shares
Total Average shares purchased which may still be
# of shares price paid as part of the purchased as part
Period purchased per share announced plan of the announced plan
------ --------- --------- ------------- ---------------------
July 1-31, 2004 -- $ -- -- 82,400
August 1-31, 2004 60,000 $16.55 57,500 185,491
September 1-30, 2004 21,761 $16.35 21,761 163,730
Notes to Table:
(a) The Board of Directors of the Company authorized a stock
repurchase program to repurchase 5%, or 195,365 shares of the
Company's outstanding shares. This program was publicly
announced in a press release issued January 29, 2004.
(b) The stock repurchase plan for 195,365 shares, or 5% of
outstanding shares, was completed on August 11, 2004 at an
average share price of $16.25.
(c) The completion of the stock repurchase program was the result
of a block purchase of shares on August 11, 2004 which
included 2,500 shares in excess of the amount required to
complete the program.
(d) On August 26, 2004, the Board of Directors of the Company
authorized a new stock repurchase program to purchase 185,491
shares, or 5% of the Company's outstanding shares. This is the
only program currently in effect. This program was publicly
announced in a press release issued September 2, 2004. The
program has an expiration date of August 26, 2005.
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
20
Wayne Savings Bancshares, Inc.
PART II (CONTINUED)
ITEM 4. Submission of Matters to a Vote of Security Holders (continued)
---------------------------------------------------
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
--------
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
21
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 10, 2004 By: /s/ Charles C. Finn
--------------------- --------------------------------
Charles C. Finn
Chairman and President
Date: November 10, 2004 By: /s/ Michael C. Anderson
--------------------- --------------------------------
Michael C. Anderson
Chief Financial Officer
22