UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended December 31, 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 February 10, 2005, the latest practicable date, 3,655,057 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 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk 22
Item 4 Controls and Procedures 22
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 23
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3 Defaults Upon Senior Securities 23
Item 4 Submission of Matters to a Vote of Security Holders 23
Item 5 Other Information 23
Item 6 Exhibits 23
SIGNATURES 24
2
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
December 31, March 31,
ASSETS 2004 2004
Cash and due from banks $ 4,590 $ 3,291
Federal funds sold 21,550 9,875
Interest-bearing deposits in other financial institutions 7,637 6,721
--------- ---------
Cash and cash equivalents 33,777 19,887
Investment securities available for sale - at market 39,655 17,546
Investment securities held to maturity - at amortized cost, approximate market value
of $12,283 and $14,830 as of December 31, 2004 and March 31, 2004, respectively 11,947 14,036
Mortgage-backed securities available for sale - at market 62,347 83,945
Mortgage-backed securities held to maturity - at cost, approximate market value of
$2,897 and $4,510 as of December 31, 2004 and March 31, 2004, respectively 2,883 4,483
Loans receivable - net 214,663 205,443
Office premises and equipment - net 9,120 8,742
Real estate acquired through foreclosure 116 100
Federal Home Loan Bank stock - at cost 4,338 4,205
Cash surrender value of life insurance 6,520 6,321
Accrued interest receivable on loans 880 801
Accrued interest receivable on mortgage-backed securities 293 400
Accrued interest receivable on investments and interest-bearing deposits 509 318
Prepaid expenses and other assets 4,084 2,549
Prepaid federal income taxes 221 231
--------- ---------
Total assets $ 391,353 $ 369,007
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 321,631 $ 291,830
Advances from the Federal Home Loan Bank 25,000 30,000
Advances by borrowers for taxes and insurance 1,119 617
Accrued interest payable 145 186
Accounts payable on mortgage loans serviced for others 485 118
Other liabilities 912 1,383
Deferred federal income taxes 915 1,312
--------- ---------
Total liabilities 350,207 325,446
Commitments -- --
Stockholders' equity
Common stock (8,000,000 shares of $ .10 par value authorized; 3,907,318 shares
issued at both December 31, 2004 and March 31, 2004) 391 391
Additional paid-in capital 34,492 34,365
Retained earnings - substantially restricted 12,771 12,727
Shares acquired by Management Recognition Plan (914) (1,142)
Less required contributions for shares acquired by Employee Stock Ownership Plan (1,342) (1,456)
Less 252,261 and 112,500 shares of treasury stock at December 31, 2004 and
March 31, 2004 - at cost (4,111) (1,803)
Accumulated other comprehensive income (loss) - unrealized gains (losses)on
securities designated as available for sale, net of related tax effects (141) 479
--------- ---------
Total stockholders' equity 41,146 43,561
--------- ---------
Total liabilities and stockholders' equity $ 391,353 $ 369,007
========= =========
See accompanying notes to consolidated financial statements.
3
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
Nine months Three months
ended ended
December 31, December 31,
2004 2003 2004 2003
Interest income
Loans $ 9,641 $10,515 $ 3,247 $ 3,277
Mortgage-backed securities 1,730 1,767 562 648
Investment securities 1,445 1,113 520 376
Interest-bearing deposits and other 274 191 136 61
------- ------- ------- -------
Total interest income 13,090 13,586 4,465 4,362
Interest expense
Deposits 4,158 4,526 1,463 1,423
Borrowings 787 938 248 313
------- ------- ------- -------
Total interest expense 4,945 5,464 1,711 1,736
------- ------- ------- -------
Net interest income 8,145 8,122 2,754 2,626
Provision for losses on loans 45 63 15 --
------- ------- ------- -------
Net interest income after provision for losses on loans 8,100 8,059 2,739 2,626
Other income
Gain on sale of loans 162 91 20 30
Increase in cash surrender value of life insurance 199 211 62 77
Gain on disposal of real estate acquired through foreclosure 5 -- 5 --
Service fees, charges and other operating 921 1,177 302 383
------- ------- ------- -------
Total other income 1,287 1,479 389 490
General, administrative and other expense
Employee compensation and benefits 4,246 3,972 1,462 1,372
Occupancy and equipment 1,285 1,098 438 357
Federal deposit insurance premiums 34 36 11 12
Franchise taxes 447 230 150 76
Other operating 1,529 1,462 531 498
------- ------- ------- -------
Total general, administrative and other expense 7,541 6,798 2,592 2,315
------- ------- ------- -------
Earnings before income taxes 1,846 2,740 536 801
Federal incomes taxes
Current 434 783 541 350
Deferred 58 53 (408) (109)
------- ------- ------- -------
Total federal income taxes 492 836 133 241
------- ------- ------- -------
NET EARNINGS $ 1,354 $ 1,904 $ 403 $ 560
======= ======= ======= =======
EARNINGS PER SHARE
Basic $ 0.38 $ 0.51 $ 0.11 $ 0.15
======= ======= ======= =======
Diluted $ 0.37 $ 0.51 $ 0.11 $ 0.15
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
4
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Nine months Three months
ended ended
December 31, December 31,
2004 2003 2004 2003
Net earnings $ 1,354 $ 1,904 $ 403 $ 560
Other comprehensive income:
Unrealized holding gains (losses) on securities, net of related taxes
(benefits) of $(319), $6, $(147) and $134, during the
respective periods (620) 12 (287) 260
------- ------- ------- -------
Comprehensive income $ 734 $ 1,916 $ 116 $ 820
======= ======= ======= =======
Accumulated comprehensive loss $ (141) $ (140) $ (141) $ (140)
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
5
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended December 31,
(In thousands)
2004 2003
Cash flows from operating activities:
Net earnings for the period $ 1,354 $ 1,904
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 976 1,359
Amortization of deferred loan origination fees (185) (441)
Depreciation and amortization 437 392
Gain on sale of loans (121) (49)
Proceeds from sale of loans in the secondary market 3,133 4,665
Loans originated for sale in the secondary market (3,108) (4,627)
Provision for losses on loans 45 63
Gain on disposal of real estate acquired through foreclosure (5) --
Federal Home Loan Bank stock dividends (133) (123)
Increase (decrease) in cash, net of acquisition of Stebbins Bancshares, Inc.
due to changes in:
Accrued interest receivable on loans (51) 117
Accrued interest receivable on mortgage-backed securities 107 (25)
Accrued interest receivable on investments and interest-bearing deposits (191) (96)
Prepaid expenses and other assets (33) 396
Accrued interest payable (58) (133)
Accounts payable on mortgage loans serviced for others 367 (62)
Other liabilities (474) (493)
Federal income taxes
Current 10 42
Deferred 58 53
-------- --------
Net cash provided by operating activities 2,128 2,942
Cash flows provided by investing activities:
Purchase of investment securities designated as available for sale (12,933) (21,129)
Proceeds from maturity of investment securities designated as held to maturity 2,159 4,690
Proceeds from maturity of investment securities designated as available for sale 2,002 13,523
Purchase of mortgage-backed securities designated as available for sale (5,632) (44,446)
Principal repayments on mortgage-backed securities designated as held to maturity 1,575 4,756
Principal repayments on mortgage-backed securities designated as available for sale 25,878 25,360
Loan principal repayments 41,842 73,680
Loan disbursements (38,743) (53,646)
Purchase of office premises and equipment - net (348) (322)
Purchase of bank-owned life insurance -- (920)
Proceeds from sale of real estate acquired through foreclosure 130 --
Increase in cash surrender value of life insurance (199) (211)
Net cash used in the acquisition of Stebbins Bancshares, Inc. (1,314) --
-------- --------
Net cash provided by investing activities 14,417 1,335
-------- --------
Net cash provided by operating and investing activities
(balance carried forward) 16,545 4,277
-------- --------
6
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended December 31,
(In thousands)
2004 2003
Net cash provided by operating and investing activities
(balance brought forward) $ 16,545 $ 4,277
Cash flows used in financing activities:
Net increase (decrease) in deposit accounts 4,991 (6,568)
Repayments of Federal Home Loan Bank advances (5,000) --
Advances by borrowers for taxes and insurance 502 439
Dividends paid on common stock (1,310) (1,341)
Proceeds from exercise of stock options -- 61
Amortization of employee stock ownership benefit plan 470 20
Shares acquired by Management Recognition Plan -- (1,142)
Purchase of treasury shares (2,308) --
-------- --------
Net cash used in financing activities (2,655) (8,531)
-------- --------
Net increase (decrease) in cash and cash equivalents 13,890 (4,254)
Cash and cash equivalents at beginning of period 19,887 17,496
-------- --------
Cash and cash equivalents at end of period $ 33,777 $ 13,242
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 393 $ 635
======== ========
Interest on deposits and borrowings $ 5,003 $ 5,597
======== ========
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure $ 51 $ --
======== ========
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects $ (620) $ 12
======== ========
Recognition of mortgage servicing rights in accordance
with SFAS No. 140 $ 41 $ 42
======== ========
Stebbins acquisition, net of cash and cash equivalents acquired, allocated to:
Assets
Securities $ 11,787 $ --
Loans, net 12,225 --
Other assets 662 --
Goodwill 1,470 --
Liabilities assumed
Deposits (24,810) --
Other liabilities (20) --
-------- --------
Net cash and cash equivalents paid in acquisition $ 1,314 $ --
======== ========
See accompanying notes to consolidated financial statements.
7
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three month periods ended December 31, 2004 and 2003
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements for the nine
and three months ended December 31, 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 nine and three month periods ended December 31, 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").
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 December 31,
2004 consolidated financial statements herein include the accounts of
Stebbins National Bank from the June 1, 2004 acquisition date through
December 31, 2004.
All significant intercompany transactions and balances have been
eliminated in the consolidation.
8
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three month periods ended December 31, 2004 and 2003
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 nine months ended For the three months ended
December 31, December 31,
2004 2003 2004 2003
Weighted-average common shares
outstanding (basic) 3,589,224 3,747,681 3,535,379 3,757,170
Dilutive effect of assumed exercise
of stock options 31,763 3,916 32,929 20,154
--------- --------- --------- ---------
Weighted-average common shares
outstanding (diluted) 3,620,987 3,751,597 3,568,308 3,777,324
========= ========= ========= =========
All outstanding options were included in the diluted earnings per share
calculation for the three and nine month periods ending December 31, 2004
and 2003.
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 December 31, 2004. In fiscal 2004, the
Company adopted a new Stock Option Plan that provided for the issuance of
142,857 incentive options and 61,224 non-incentive options of authorized
common stock. As of December 31, 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.
9
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three month periods ended December 31, 2004 and 2003
4. Stock Option Plan (continued)
-----------------
The Company applies APB Opinion No. 25 and related Interpretations in
accounting for the Plan. Accordingly, no compensation cost has been
recognized for the Plan. Had compensation cost for the Plan been
determined based on the fair value at the grant dates for awards under the
Plan consistent with the accounting method utilized in SFAS No. 123, the
Company's net earnings and earnings per share for the nine- and
three-month periods ended December 31, 2004 and 2003, would have been
reported as the pro forma amounts indicated below:
Nine months ended Three months ended
December 31, December,
2004 2003 2004 2003
Net earnings (In thousands) As reported $ 1,354 $ 1,904 $ 403 $ 560
Stock-based compensation, net of tax (106) (27) (27) (27)
------- ------- ------- -------
Pro-forma $ 1,248 $ 1,877 $ 376 $ 533
======= ======= ======= =======
Earnings per share
Basic As reported $ .38 $ .51 $ .11 $ .15
Stock-based compensation, net of tax (.03) (.01) -- (.01)
------- ------- ------- -------
Pro-forma $ .35 $ .50 $ .11 $ .14
======= ======= ======= =======
Diluted As reported $ .38 $ .51 $ .11 $ .15
Stock-based compensation, net of tax (.04) (.01) -- (.01)
------- ------- ------- -------
Pro-forma $ .34 $ .50 $ .11 $ .14
======= ======= ======= =======
There were no options granted during the nine months ended December 31,
2004 and 204,081 options granted for the nine month period ended December
31, 2003.
At December 31, 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 nine months ended
December 31, 2004 is presented below:
Nine months ended Year ended
December 31, 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
-------- -------- -------- -------- -------- --------
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
======== ========
10
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three month periods ended December 31, 2004 and 2003
4. Stock Option Plan (continued)
-----------------
The following information applies to options outstanding at December 31,
2004:
Number outstanding ................................ 214,204
Range of exercise prices .......................... $11.67 - $13.95
Weighted-average exercise price ................... $13.84
Weighted-average remaining contractual life ....... 8.5 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%, and 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.
5. Effects of Recent Accounting Pronouncements
-------------------------------------------
In December 2004, the Financial Accounting Standards Board (the "FASB")
issued a revision to Statement of Financial Accounting Standards ("SFAS")
No. 123 which establishes standards for the accounting for transactions in
which an entity exchanges its equity instruments for goods or services,
primarily on accounting for transactions in which an entity obtains
employee services in share-based transactions. This Statement requires a
public entity to measure the cost of employee services received in
exchange for an award of equity instruments based on the grant-date fair
value of the award, with limited exceptions. That cost will be recognized
over the period during which an employee is required to provide services
in exchange for the award - the requisite service period. No compensation
cost is recognized for equity instruments for which employees do not
render the requisite service. Employee share purchase plans will not
result in recognition of compensation cost if certain conditions are met.
Initially, the cost of employee services received in exchange for an award
of liability instruments will be measured based on current fair value; the
fair value of that award will be remeasured subsequently at each reporting
date through the settlement date. Changes in fair value during the
requisite service period will be recognized as compensation cost over that
period. The grant-date fair value of employee share options and similar
instruments will be estimated using option-pricing models adjusted for the
unique characteristics of those instruments (unless observable market
prices for the same or similar instruments are available). If an equity
award is modified after the grant date, incremental compensation cost will
be recognized in an amount equal to the excess of the fair value of the
modified award over the fair value of the original award immediately
before the modification.
Excess tax benefits, as defined by SFAS 123(R) will be recognized as an
addition to additional paid in capital. Cash retained as a result of those
excess tax benefits will be presented in the statement of cash flows as
financing cash inflows. The write-off of deferred tax assets relating to
unrealized tax benefits associated with recognized compensation cost will
be recognized as income tax expense unless there are excess tax benefits
from previous awards remaining in additional paid in capital to which it
can be offset.
Compensation cost is required to be recognized in the beginning of the
first interim or annual period that begins after June 15, 2005, or July 1,
2005 as to the Company. Management believes the effect on operations will
approximate the economic effects set forth in the pro-forma stock option
disclosure set forth in Note 4 above.
11
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 nine months ended December 31,
---------------------------------------------------------------------------
2004 2003
----------------------------------- -----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
-------- -------- ------- -------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1) $212,383 $ 9,641 6.05% $216,611 $ 10,515 6.47%
Mortgage-backed
securities(2) 76,003 1,730 3.03 85,686 1,767 2.75
Investment securities 49,173 1,445 3.92 31,311 1,113 4.74
Interest-bearing deposits(3) 23,094 274 1.58 16,727 191 1.52
-------- -------- -------- --------
Total interest-
earning assets 360,653 13,090 4.84 350,335 13,586 5.17
Non-interest-earning assets 23,237 22,115
-------- --------
Total assets $383,890 $372,450
======== ========
Interest-bearing liabilities:
Deposits $310,874 4,158 1.78 $297,531 4,526 2.03
Borrowings 26,265 787 4.00 30,000 938 4.17
-------- -------- -------- --------
Total interest-
bearing liabilities 337,139 4,945 1.96 327,531 5,464 2.22
-------- ------- -------- ------
Non-interest bearing
liabilities 4,634 372
-------- --------
Total liabilities 341,773 327,903
Stockholders' equity 42,117 44,547
-------- --------
Total liabilities and
stockholders' equity $383,890 $372,450
======== ========
Net interest income $ 8,145 $ 8,122
======== ========
Interest rate spread(4) 2.88% 2.95%
====== ======
Net yield on interest-
earning assets(5) 3.01% 3.09%
====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 106.97% 106.96%
====== ======
- ----------
See footnotes on following page.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Average Balance Sheet (continued)
For the three months ended December 31,
---------------------------------------------------------------------------
2004 2003
----------------------------------- -----------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
-------- -------- ------- -------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1) $214,291 $ 3,247 6.06% $210,174 $ 3,277 6.24%
Mortgage-backed
securities(2) 68,505 562 3.28 88,758 648 2.92
Investment securities 52,525 520 3.96 33,966 376 4.43
Interest-bearing deposits(3) 26,491 136 2.05 16,695 61 1.46
-------- -------- -------- --------
Total interest-
earning assets 361,812 4,465 4.94 349,593 4,362 4.99
Non-interest-earning assets 25,934 22,234
-------- --------
Total assets $387,746 $371,827
======== ========
Interest-bearing liabilities:
Deposits $318,069 1,463 1.84 $295,793 1,423 1.92
Borrowings 25,000 248 3.97 30,000 313 4.17
-------- -------- -------- --------
Total interest-
bearing liabilities 343,069 1,711 1.99 325,793 1,736 2.13
-------- ------- -------- ------
Non-interest bearing
liabilities 3,200 1,768
-------- --------
Total liabilities 346,269 327,561
Stockholders' equity 41,477 44,266
-------- --------
Total liabilities and
stockholders' equity $387,746 $371,827
======== ========
Net interest income $ 2,754 $ 2,626
======== ========
Interest rate spread(4) 2.95% 2.86%
====== ======
Net yield on interest-
earning assets(5) 3.04% 3.00%
====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 105.46% 107.30%
====== ======
- ----------
(1) Includes non-accrual loan balances.
(2) Includes mortgage-backed securities designated as available for sale.
(3) Includes federal funds sold and interest-bearing deposits in other
financial institutions.
(4) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from March 31, 2004 to December 31,
- --------------------------------------------------------------------------------
2004
- ----
At December 31, 2004, the Company had total assets of $391.4 million, an
increase of $22.3 million, or 6.1%, from March 31, 2004 levels mainly due to the
acquisition of $24.5 million in net assets in the Stebbins purchase and deposit
growth of $5.0 million, which were partially offset by a payment of $1.3 million
to purchase Stebbins, repayments of borrowings totaling $5.0 million, and
treasury stock purchases of $2.3 million.
Liquid assets, consisting of cash, interest-bearing deposits and investment
securities, increased by $33.9 million, or 65.9%, to $85.4 million at December
31, 2004, mainly due to $13.0 million of liquid assets acquired in the Stebbins
transaction and the purchase of $12.9 million in available for sale investment
securities, both of which were partially offset by the maturing of $4.2 million
of securities. The Company has increased its cash position to help continue to
control interest rate risk. In addition, the flat yield curve has prompted the
Company to keep more of its investments in short term assets. Although the
Company has focused on high quality short-term commercial loan production,
intense competition has limited originations and the Company has invested excess
funds in short-term investment securities.
Mortgage-backed securities decreased by $23.2 million, or 26.2%, to $65.2
million as a result of significant principal repayments due to the current
interest rate environment.
During the nine month period ended December 31, 2004, loans receivable increased
$9.2 million, as $12.2 million of loans were acquired in the Stebbins
acquisition. This increase in loans receivable was partially offset by loan
sales of $3.2 million consisting primarily of long-term fixed rate residential
loans in furtherance of management's interest rate risk strategy. Rather than
reinvest funds in long-term, fixed rate and low yielding residential loans,
management is currently investing in marketable securities and adjustable rate
commercial loans. The composition of the loan portfolio changed during the nine
month period ended December 31, 2004, due primarily to a net decrease of $9.1
million in residential mortgage loans and increased net originations of
nonresidential mortgage loans totaling $9.4 million and commercial business
loans totaling $6.3 million. The composition of the Company's loan portfolio at
the specified dates is as follows:
December 31, 2004 March 31, 2004
(Dollars in thousands)
Mortgage loans:
One-to four-family residential(1) $160,276 73.64% $171,736 81.98%
Residential construction loans 4,111 1.89 2,914 1.39
Multi-family residential 7,928 3.64 6,800 3.25
Non-residential real estate/land(2) 27,818 12.78 18,439 8.80
-------- -------- -------- --------
Total mortgage loans 200,133 91.95 199,887 75.42
Other loans:
Consumer loans(3) 4,696 2.16 3,156 1.50
Commercial business loans 12,813 5.87 6,471 3.08
-------- -------- -------- --------
Total other loans 17,509 8.05 9,627 4.58
-------- -------- -------- --------
Total loans before net items 217,642 100.00% 209,516 100.00%
======== ========
Less:
Loans in process 1,405 2,579
Deferred loan origination fees 522 679
Allowance for loan losses 1,052 815
-------- --------
Total loans receivable, net $214,663 $205,443
======== ========
Mortgage-backed securities, net(4) $ 65,230 $ 88,428
======== ========
- ----------
(1) Includes equity loans collateralized by second mortgages in the aggregate
amount of $20.7 million and $20.3 million as of December 31, 2004 and
March 31, 2004, respectively. Such loans have been underwritten on
substantially the same basis as the Company's first mortgage loans.
(2) Includes land loans of $1.4 million and $575,000 as of December 31, 2004
and March 31, 2004, respectively.
(3) Includes second mortgage loans of $1.8 million and $535,000 as of December
31, 2004 and March 31, 2004, respectively.
(4) Includes mortgage-backed securities designated as available for sale.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from March 31, 2004 to December 31,
- --------------------------------------------------------------------------------
2004 (continued)
- ----
Nonperforming and impaired loans amounted to $1.2 million at December 31, 2004,
as compared with $747,000 in nonperforming and impaired loans at March 31, 2004.
Such loans consisted, on both dates, of primarily residential mortgage loans and
historically, the Company generally has not recognized losses on nonperforming
loans secured by residential mortgages. The following table sets forth
information regarding our past due, nonaccrual and impaired loans and real
estate acquired through foreclosure as of December 31, 2004 and March 31, 2004.
December 31, March 31,
2004 2004
Past due loans 30-89 days:
Mortgage loans:
One- to four-family residential $1,711 $ 699
Nonresidential 482 --
Land 49 --
Non-mortgage loans:
Commercial business loans 65 46
Consumer loans 121 11
------ ------
2,428 756
Non-accrual loans:
Mortgage loans:
One- to four-family residential 1,112 714
All other mortgage loans 81 24
Non-mortgage loans:
Commercial business loans 7 --
Consumer 6 9
------ ------
Total non-accrual loans 1,206 747
Accruing loans 90 days or more delinquent -- --
------ ------
Total non-performing loans 1,206 747
Loans deemed impaired (1) -- --
------ ------
Total non-performing and impaired loans 1,206 747
Total real estate acquired through foreclosure (2) 116 100
------ ------
Total non-performing and impaired assets $1,322 $ 847
====== ======
Total non-performing and impaired loans to net
loans receivable 0.56% 0.36%
====== ======
Total non-performing and impaired loans to total assets 0.31% 0.20%
====== ======
Total non-performing and impaired assets to total assets 0.34% 0.23%
====== ======
- ----------
(1) Includes loans deemed impaired that are currently performing.
(2) Represents the net book value of property acquired by the Company through
foreclosure or deed in lieu of foreclosure. These properties are recorded
at the lower of the loan's unpaid principal balance or fair value less
estimated selling expenses.
In addition, the Company reclassified $1.3 million of the Stebbins portfolio as
substandard. These loans are not delinquent, but until they can be restructured
and supported by current financial statements, the Company will continue to
classify them as substandard.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from March 31, 2004 to December 31,
- --------------------------------------------------------------------------------
2004 (continued)
- ----
Historically, the Company has had minimal loan losses charged off through the
allowance. However, as a result of the Company's recent acquisition of Stebbins
and the continuing growth in commercial lending, the Company may need to
reevaluate its historical loss allowance computations. The following table sets
forth the analysis of the allowance for loan losses for the periods indicated.
For the nine months ended For the year ended
December 31, 2004 March 31, 2004
Loans receivable, net $ 214,663 $ 205,443
========= =========
Average loans receivable, net $ 212,383 $ 214,174
========= =========
Allowance balance (at beginning of period) 815 678
Charge-offs:
Mortgage loans:
One- to four-family (31) --
Residential construction -- --
Multi-family residential -- --
Non-residential real estate and land -- --
Other loans:
Consumer (21) (65)
Commercial (7) --
--------- ---------
Gross charge-offs (59) (65)
--------- ---------
Recoveries:
Mortgage loans:
One- to four-family -- --
Residential construction -- --
Multi-family residential -- --
Non-residential real estate and land -- --
Other loans:
Consumer 21 29
Commercial -- --
--------- ---------
Gross recoveries 21 29
--------- ---------
Net charge-offs (38) (36)
--------- ---------
Provision charged to operations 45 173
Stebbins acquisition 230 --
--------- ---------
Allowance for loans losses balance (at end
of period) $ 1,052 $ 815
========= =========
Allowance for loan losses as a percent of loans
receivable, net at end of period 0.49% 0.40%
========= =========
Net loans charged off as a percent of average
loans receivable, net 0.02% 0.02%
========= =========
Ratio of allowance for loan losses to total non-
performing assets at end of period 79.60% 96.22%
========= =========
Ratio of allowance for loan losses to non-
performing loans at end of period 87.20% 109.10%
========= =========
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from March 31, 2004 to December 31,
- --------------------------------------------------------------------------------
2004 (continued)
- ----
Deposits at December 31, 2004, totaled $321.6 million, an increase of $29.8
million from $291.8 million at March 31, 2004, due primarily to the $24.8
million of deposits acquired from the Stebbins acquisition and an increase in
deposits of $5.0 million. For most of the year, the Company elected not to price
deposits aggressively and allowed some runoff in an attempt to keep its cost of
funds down. The Company has recently become more competitive in pricing its
deposits which is reflected in the increased balance of deposits.
Stockholders' equity decreased by $2.4 million during the nine months ended
December 31, 2004, due mainly to an unrealized loss on available for sale
securities of $620,000, generally reflecting the recent increase in interest
rates, dividends paid totaling $1.3 million and purchases of treasury stock
totaling $2.3 million. These amounts were offset by $1.4 million in net earnings
for the nine months ended December 31, 2004 and an increase of $342,000 due to
the amortization of the stock benefit plans.
Comparison of Operating Results for the Nine Month Periods Ended December 31,
- --------------------------------------------------------------------------------
2004 and 2003
- -------------
General
- -------
Net earnings totaled $1.4 million for the nine months ended December 31, 2004, a
decrease of $550,000, or 28.9%, compared to the net earnings of $1.9 million for
the nine months ended December 31, 2003. Net earnings decreased due to a
decrease in other income of $192,000, or 13.0%, due primarily to a $217,000
reduction in merchant fee income, which was partially offset by a $71,000
increase in gain on sale of loans. Finally, general, administrative and other
expense increased $743,000, or 10.9%, due mainly to increased compensation and
benefits expense, franchise tax expense, and occupancy and equipment expense.
These earnings decreases were partially offset by a decrease in federal income
tax expense of $344,000, or 41.1%.
The Company has maintained its strategy to aggressively manage interest rate
risk during the recent period of low interest rates. This strategy negatively
affected earnings for the first nine months of the fiscal year. In addition, the
Company has not been able to invest all of its excess cash in short-term, high
quality loans and as a result, has invested the remaining excess funds in
shorter term, lower yielding assets such as marketable securities. 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 $496,000, or 3.7%, to $13.1 million for the nine
months ended December 31, 2004, compared to the same period in 2003. This
decline was mainly due to an 8 basis point reduction in the average yield on
interest-earning assets to 3.01% from 3.09% for the period ended December 31,
2003. The yield reduction was partially offset with an increase in the
weighted-average balance of interest-earning assets of $10.3 million, or 2.9%,
to a balance of $360.7 million for the nine months ended December 31, 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.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine Month Periods Ended December 31,
- --------------------------------------------------------------------------------
2004 and 2003 (continued)
- -------------
Interest Income (continued)
- ---------------
Interest income on loans declined $874,000, or 8.3%, for the nine months ended
December 31, 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 $4.2 million, or 2.0%, coupled with a 42 basis-point decrease in the weighted
average yield on loans to 6.05% for the 2004 period.
Interest income on mortgage-backed securities decreased $37,000 during the nine
months ended December 31, 2004, compared to the same period in 2003, due
primarily to principal repayments. The weighted average balance decreased by
$9.7 million, or 11.3%, from the comparable 2003 period. The Company is reducing
its emphasis on purchasing mortgage-backed securities with excess cash flow. The
yield and the risk on these products relative to the duration has been adversely
affected by the current demand for these products. The Company feels it can find
other investment vehicles that will provide it enhanced results without
increasing risk.
Interest income on investment securities increased by $332,000, or 29.8%, during
the 2004 period compared to the same period in 2003, reflecting an increase in
the weighted average balance of $17.9 million, or 57.0%, to $49.2 million from
$31.3 million during the comparable 2003 period, partially offset by a decrease
in the average yield of 82 basis points to 3.92%. The increase in the
weighted-average balance from period to period was due to the investment of
excess funds in marketable securities as part of the Company's ongoing interest
rate risk strategy discussed above.
Interest income on interest-bearing deposits increased by $83,000, or 43.5%, for
the nine months ended December 31, 2004, due primarily to an increase in the
weighted average balance of $6.4 million, or 38.1%, compared to the 2003 period
of $16.7 million. The increase in the weighted average balance was enhanced by
an increase in the average yield of 6 basis points to an average yield of 1.58%
compared to 1.52% for the nine months ended December 31, 2003.
Interest Expense
- ----------------
Interest expense for the nine months ended December 31, 2004 totaled $4.9
million, a decrease of $519,000, or 9.5%, compared to interest expense of $5.5
million for the nine months ended December 31, 2003. The decrease resulted from
a 26 basis point decrease in the average cost of funds to 1.96% for the 2004
period, offset by an increase in the average balance of deposits and borrowings
outstanding of $9.6 million, or 2.9%, to $337.1 million for the period ended
December 31, 2004.
Interest expense on deposits totaled $4.2 million for the nine months ended
December 31, 2004, a decrease of $368,000, or 8.1%, from the nine months ended
December 31, 2003, as a result of a 25 basis point decrease in the average cost
of deposits to 1.78% for the 2004 period offset by an increase in the average
balance outstanding of $13.3 million, or 4.5%, to $310.9 million for the 2004
period. The increase in the average balance outstanding was primarily due to the
Stebbins acquisition and, to a lesser extent, deposit growth.
Interest expense on borrowings totaled $787,000 for the nine months ended
December 31, 2004, a decrease of $151,000, or 16.1%, from the 2003 period,
primarily due to a decrease in the average balance of borrowings of $3.7
million, or 12.5%, to an average outstanding balance of $26.3 million for the
nine months ended December 31, 2004, coupled with a decrease in the average cost
of borrowings to 4.0% from the average cost of 4.17% for the 2003 period. The
decrease in the average balance was due to the repayment of advances as the
Company was able to fund its operations through deposit growth.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine Month Periods Ended December 31,
- --------------------------------------------------------------------------------
2004 and 2003 (continued)
- -------------
Net Interest Income
- -------------------
Net interest income totaled $8.1 million for the nine months ended December 31,
2004, an increase of $23,000 from the nine month period ended December 31, 2003.
The average interest rate spread decreased to 2.88% for the nine months ended
December 31, 2004 from 2.95% for the nine months ended December 31, 2003. The
net interest margin decreased to 3.01% for the nine months ended December 31,
2004 from 3.09% for the nine months ended December 31, 2003.
Provision for Losses on Loans
- -----------------------------
The Company recorded a $45,000 provision for losses on loans for the nine month
period ended December 31, 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 December 31, 2004 and
2003.
Other Income
- ------------
Other income, consisting primarily of earnings on the cash surrender value of
life insurance, gains on sale of loans and service fees, and charges on deposit
accounts, decreased by $192,000, or 13.0%, to $1.3 million for the nine months
ended December 31, 2004, from $1.5 million for the nine months ended December
31, 2003. The decrease resulted primarily from a decrease of $217,000 in
merchant fee income and a decline of $12,000 in earnings on the cash surrender
value of life insurance, offset by an increase of $71,000 on the gain on sale of
loans in connection with management's interest rate risk strategy, as discussed
previously. In addition, 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 contribution to earnings and to avoid
potential future chargeoffs. The decrease in merchant fee income was due to a
significant transaction decrease from period to period. The Company may not
experience the prior earnings level on merchant fee income in the future due to
a significant decline in transactions. The decline of earnings from the increase
of cash surrender value of life insurance is mainly due to a decrease in
earnings on the policy investment.
General, Administrative, and Other Expense
- ------------------------------------------
General, administrative and other expense increased by $743,000, or 10.9%, to
$7.5 million for the nine months ended December 31, 2004, compared to the nine
months ended December 31, 2003. The increase resulted primarily from an increase
in employee compensation and benefits expense of $274,000, or 6.9%, an increase
of $187,000, or 17.0% in occupancy and equipment, a $217,000, or 94.3%, increase
in franchise taxes and a $67,000, or 4.6% increase in other operating expense.
The increase in employee compensation and benefits was mainly due to the
Stebbins National Bank acquisition, normal merit increases and increased benefit
plan costs. 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. The increase in franchise taxes was mainly due to the
additional capital raised in the stock conversion in January 2003. Other
operating expense increased mainly due to the increased expense of the Stebbin's
acquisition.
Federal Income Taxes
- --------------------
The provision for federal income taxes was $492,000 for the nine months ended
December 31, 2004, a decrease of $344,000, or 41.1%, compared to the same period
in 2003, primarily due to the $894,000, or 32.6%, decrease in earnings before
federal income taxes. The effective tax rate for the nine months ended December
31, 2004 was 26.7% as compared to 30.5% for the same period in 2003. The
effective tax rate for the nine months ended December 31, 2004 decreased mainly
due to the additional income earned from the purchase of tax advantaged
municipal securities.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended December 31,
- --------------------------------------------------------------------------------
2004 and 2003
- -------------
General
- -------
Net earnings totaled $403,000 for the quarter ended December 31, 2004, a
decrease of $157,000, or 28.0%, compared to the net earnings of $560,000 for the
quarter ended December 31, 2003. The decline in net earnings was primarily
attributable to an increase in general, administrative and other expense of
$277,000, or 12.0%, and a decrease in other income of $101,000, or 20.6%, offset
primarily by an increase in net interest income of $128,000, or 4.9%, and a
decrease in federal income taxes of $108,000, or 44.8%.
As stated previously, the Company has maintained its strategy to aggressively
manage interest rate risk. This strategy negatively affected earnings for the
three months ended December 31, 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 increased $103,000, or 2.4%, to $4.5 million for the three
months ended December 31, 2004, compared to the same period in 2003. This
increase was mainly due to an increase in the weighted-average balance on
interest-earning assets to $361.8 million from $350.0 million for the period
ended December 31, 2003. The yield declined 5 basis points to 4.94% at December
31, 2004 from 4.99% for the period ended December 31, 2003 . 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, it strengthens the
Company's interest rate risk position and allows the Company to profitably
redeploy such assets in a rising rate environment.
Interest income on loans declined $30,000, or 0.9%, for the three months ended
December 31, 2004, compared to the same period in 2003, due primarily to a 18
basis point decrease in the weighted average yield on loans outstanding offset
by an increase in the weighted-average balance of loans period to period of $4.1
million to $214.3 million for the 2004 period.
Interest income on mortgage-backed securities decreased $86,000 during the three
months ended December 31, 2004, compared to the same period in 2003, due
primarily to a decrease of $20.3 million , or 22.8%, in the weighted-average
balance caused mainly by normal repayments. The decrease in the weighted average
balance was offset by an increase of 36 basis points to a weighted average yield
of 3.28% as compared to 2.92%, from the comparable 2003 period. The slowdown of
prepayments causes premium amortization to decrease, resulting in an increase in
interest income on mortgage-backed securities. The Company is reducing its
emphasis on purchasing mortgage-backed securities with excess cash flow. The
yield and the risk on these products relative to the duration has been adversely
affected by the current demand for these products. The Company feels it can find
other investment vehicles that will provide it similar results.
Interest income on investment securities increased by $144,000, or 38.3%, during
the 2004 period compared to the same period in 2003, reflecting an increase in
the weighted average balance of $18.6 million, or 54.6%, to $52.5 million from
$34.0 million during the comparable 2003 period, partially offset by a decrease
in the average yield of 47 basis points to 3.96%. The increase in the
weighted-average balance from period to period was due to the investment of
excess funds in marketable securities as part of the Company's ongoing interest
rate risk strategy discussed above.
Interest income on interest-bearing deposits increased by $75,000, or 123.0%,
for the three months ended December 31, 2004, due primarily to an increase in
the average yield of 59 basis points to an average yield of 2.05% from an
average yield of 1.46% for the quarter ended December 31, 2003 coupled with an
increase in the weighted average balance of $9.8 million, or 58.7%, compared to
the 2003 period of $16.7 million
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended December 31,
- --------------------------------------------------------------------------------
2004 and 2003 (continued)
- -------------
Interest Expense
- ----------------
Interest expense for the three months ended December 31, 2004 totaled $1.7
million, a decrease of $25,000, or 1.4%, from interest expense for the three
months ended December 31, 2003. The decrease resulted from a 14 basis point
decrease in the average cost of funds to 1.99% for the 2004 period, offset by an
increase in the average balance of deposits and borrowings outstanding of $17.3
million, or 5.3%, to $343.1 million for the period ended December 31, 2004.
Interest expense on deposits totaled $1.5 million for the three months ended
December 31, 2004, an increase of $40,000, or 2.8%, compared to the three months
ended December 31, 2003, as a result of an increase in the average balance
outstanding of $22.3 million, or 7.5%, to $318.1 million for the 2004 period
coupled with a 8 basis point decrease in the average cost of deposits to 1.84%
for the 2004 period. The increase in the average balance outstanding was
primarily due to the Stebbins acquisition and, to a lesser extent, deposit
growth.
Interest expense on borrowings totaled $248,000 for the three months ended
December 31, 2004, a decrease of $65,000, or 20.8%, 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
December 31, 2004, coupled with a decrease in the average cost of borrowings to
3.97% from an average cost of 4.17% for the 2003 period. The decrease in the
average balance was due to the repayment of advances as the Company was able to
fund its operations through deposit growth.
Net Interest Income
- -------------------
Net interest income totaled $2.8 million for the three months ended December 31,
2004, an increase of $128,000, or 4.9%, from the three month period ended
December 31, 2003. The average interest rate spread increased to 2.95% for the
three months ended December 31, 2004 from 2.86% for the three months ended
December 31, 2003. The net interest margin increased to 3.04% for the three
months ended December 31, 2004 from 3.0% for the three months ended December 31,
2003.
Provision for Losses on Loans
- -----------------------------
The Company recorded a $15,000 provision for losses on loans for the three month
period ended December 31, 2004. The Company did not record a provision for the
comparable period 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 December 31, 2004 and 2003.
Other Income
- ------------
Other income, consisting primarily of earnings on the cash surrender value of
life insurance, gains on sale of loans, service fees, and charges on deposit
accounts, decreased by $101,000, or 20.6%, to $389,000 for the three months
ended December 31, 2004, from $490,000 for the three months ended December 31,
2003. The decrease resulted primarily from a decrease of $10,000 on the gain on
sale of loans, a decrease of $15,000 in earnings on cash surrender value of life
insurance and decrease of $81,000 in merchant fee income due to a significant
decrease in transactions from period to period. The Company may not experience
the prior earnings levels on merchant fee income in the future due to
significant transaction decreases.
21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended December 31,
- --------------------------------------------------------------------------------
2004 and 2003 (continued)
- -------------
General, Administrative, and Other Expense
- ------------------------------------------
General, administrative and other expense increased by $277,000, or 12.0%, to
$2.6 million for the three months ended December 31, 2004 compared to the three
months ended December 31, 2003. The increase resulted primarily from an increase
in employee compensation and benefits expense of $90,000, or 6.6%, an $81,000,
or 22.7%, increase in occupancy and equipment expense, a $74,000, or 97.4%,
increase in franchise taxes and a $33,000, or 6.6%, increase in other operating
expense. The increase in employee compensation and benefits was mainly due to
the Stebbins National Bank acquisition, as well as normal merit increases and
increased benefit plan costs. 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. The
increase in franchise taxes was mainly due to the additional capital raised in
the stock conversion in January 2003. The increase in other operating expenses
was mainly due to the Stebbins costs related to operations before being
consolidated onto the Wayne Savings data processing system and related costs.
Federal Income Taxes
- --------------------
The provision for federal income taxes was $133,000 for the three months ended
December 31, 2004, a decrease of $108,000, or 44.8%, compared to the same period
in 2003, primarily due to the $265,000, or 33.1%, decrease in earnings before
federal income taxes. The effective tax rate for the three months ended December
31, 2004, was 24.8% as compared to 30.1% for the same period in 2003. The
effective tax rate for the three months ended December 31, 2004 declined mainly
due to income earned from the purchase of additional tax advantaged municipal
securities.
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.
22
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 (a)
------ --------- --------- -------------- -------------------------
October 1-31, 2004 -- $ -- -- 163,730
November 1-30, 2004 33,000 $ 16.55 -- 130,730
December 1-31, 2004 -- $ -- -- 130,730
Notes to the Table:
(a) 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
---------------------------------------------------
None
ITEM 5. Other Information
-----------------
Not applicable
ITEM 6. Exhibits
--------
EX-10 Employment Agreement between Wayne Savings
Community Bank and Phillip E. Becker dated
February 15, 2005
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
23
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 10, 2005 By:
----------------- -----------------------------------
Charles F. Finn
Chairman and President
Date: February 10, 2005 By:
----------------- -----------------------------------
Michael C. Anderson
Chief Financial Officer
24
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 10, 2005 By: /s/ Charles F. Finn
----------------- -----------------------------------
Charles F. Finn
Chairman and President
Date: February 10, 2005 By: /s/ Michael C. Anderson
----------------- -----------------------------------
Michael C. Anderson
Chief Financial Officer
25