Exhibit 13
2005 ANNUAL REPORT
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TO STOCKHOLDERS
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WAYNE SAVINGS BANCSHARES, INC.
Member FDIC
CORPORATE PROFILE
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Wayne Savings Bancshares, Inc. (hereinafter, the "Company") is the holding
company parent of Wayne Savings Community Bank (the "Bank" or "Wayne Savings"),
which was established in 1899. During the fiscal year ended March 31, 2003, the
mutual holding company Wayne Savings Bankshares M.H.C. (the "M.H.C."), which
previously owned a majority of the Company's outstanding shares of common stock,
converted from the M.H.C. form of ownership to full stock form and merged with
and into the Bank. The Company, which owned 100% of the Bank, was succeeded by a
Delaware corporation of the same name. As part of the conversion, shares of the
Company's common stock representing the M.H.C.'s ownership interest were sold in
the offering.
The offering of the Company's common stock culminated in the receipt of
gross sale proceeds of $20.6 million which, after consideration of an employee
stock plan of $1.6 million and applicable offering expenses of $1.9 million,
resulted in net proceeds of $17.1 million.
As a result of the conversion, all financial information that is based on
or derived from the actual or outstanding shares of common stock during any
period prior to fiscal 2003 was appropriately adjusted based on a 1.5109 to 1
exchange ratio. The conversion was accounted for as a change in corporate form
with no change in the historical basis of assets, liabilities or stockholders'
equity. The Company's common stock is traded on the NASDAQ stock market under
the symbol "WAYN."
The Bank has been serving the financial needs of the residents of Wayne,
Holmes, Ashland, Medina and Stark counties in Ohio for 106 years. Headquartered
in downtown Wooster, Ohio, the Bank also operates 11 full-service banking
locations in Wooster, Millersburg, Ashland, Rittman, Lodi, North Canton and
Creston. Throughout its long history and many economic cycles, Wayne Savings has
enjoyed a fine reputation for stability, safety and soundness, and community
service. The Bank has been noted for its sound management, consistent
profitability and quality personal service to customers.
The mission of Wayne Savings is to excel in customer service as a sound,
independent, profitable, and progressive community bank dedicated to providing
an array of services responsive to the financial needs of people in our
communities, with an emphasis on home financing and household savings, and to
provide for the security and development of our employees.
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BOARD OF DIRECTORS
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Charles F. Finn
Chairman
Russell L. Harpster
Joseph L. Retzler
James C. Morgan
Terry A. Gardner
Kenneth R. Lehman
Frederick J. Krum
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DIRECTORS AND OFFICERS
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IN RECOGNITION AND APPRECIATION ...
Joseph L. Retzler
Following 20 years of loyal, dedicated service on the Board of Directors
of Wayne Savings Community Bank, Joseph L. Retzler will be stepping down as a
director at this year's Annual Meeting of Stockholders. Mr. Retzler will
continue to serve the Company in the role of Director Emeritus.
Joseph Retzler is a highly respected businessman and citizen of the
Wooster community, and it has been an honor to have him as a member of our
Board. He was president and chief executive officer of Retzler Hardware in
downtown Wooster until his retirement in 2003, and he has been actively involved
in numerous community and civic organizations.
The Retzler family has served Wayne Savings for 60 years, as Mr. Retzler's
father, Herman Retzler, was a director for 40 years, from 1937 to 1977.
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Joseph L. Retzler
Joe's steadiness and sound business advice will be missed, and the Board
and Management extend sincere thanks and appreciation for his years of service.
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WAYNE SAVINGS BANCSHARES, INC.
Board of Directors Executive Officers
Charles F. Finn Charles F. Finn
Chairman Chairman And Chief Executive Officer
Russell L. Harpster Wanda Christopher-Finn
Joseph L. Retzler Executive Vice President
Terry A. Gardner And Chief Operating Officer
James C. Morgan
Kenneth R. Lehman Michael C. Anderson
Frederick J. Krum Executive Vice President And
Kenneth G. Rhode, Emeritus Chief Financial Officer
Donald E. Massaro, Emeritus Corporate Secretary And Treasurer
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TABLE OF CONTENTS
Page
Stockholder Information ..................................................... 5
Chairman's Letter ........................................................... 6
Selected Consolidated Financial and Other Data .............................. 8
Management's Discussion and Analysis of Financial Condition and
Results of Operations ..................................................... 10
Consolidated Statements of Financial Condition ............................. 20
Consolidated Statements of Earnings ........................................ 21
Consolidated Statements of Comprehensive Income ............................ 22
Consolidated Statements of Stockholders' Equity ............................ 23
Consolidated Statements of Cash Flows ...................................... 24
Notes to Consolidated Financial Statements ................................. 26
Report of Independent Registered Certified Public Accountants .............. 42
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STOCKHOLDER INFORMATION
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Annual Meeting
The Annual Meeting of Stockholders
will be held at 10:00 a.m. on July 28, 2005,
at The Greenbriar Conference Centre,
50 Riffel Road,
Wooster, Ohio 44691
Special Counsel
Elias, Matz, Tiernan & Herrick LLP
734 15th Street N.W., 12th Floor
Washington, D.C. 20005
Independent Registered Certified Public Accountants
Grant Thornton LLP
625 Eden Park Drive o Suite 900
Cincinnati, Ohio 45202
Transfer Agent
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
Annual Report on Form 10-K
A copy of the Company's Form 10-K for the fiscal year ended March 31, 2005, will
be furnished upon request without charge to stockholders.
Investor Information
Executive Offices
Wayne Saving Bancshares, Inc.
151 N. Market Street o P.O. Box 858
Wooster, Ohio 44691
(330) 264-5767
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WAYNE SAVINGS COMMUNITY BANK
BANK LOCATIONS
WOOSTER
North Market Street Office
151 North Market Street o Wooster, Ohio
South Market Street Drive Thru
329 South Market Street o Wooster, Ohio
Cleveland Point Financial Center
1908 Cleveland Road o Wooster, Ohio
Madison South Office
2024 Millersburg Road o Wooster, Ohio
Northside Office
543 Riffel Road o Wooster, Ohio
ASHLAND
Claremont Avenue Office
233 Claremont Avenue o Ashland, Ohio
Buehlers-Sugarbush Office
1055 Sugarbush Drive o Ashland, Ohio
MILLERSBURG
90 North Clay Street o Millersburg, Ohio
RITTMAN
237 North Main Street o Rittman, Ohio
LODI
303 Highland Drive o Lodi, Ohio
NORTH CANTON
Village Office
1265 South Main Street o North Canton, Ohio
CRESTON
Stebbins 0ffice
121 North Main Street o Creston, Ohio
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CHAIRMAN'S LETTER
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TO OUR STOCKHOLDERS AND CUSTOMERS:
It is truly a pleasure to report on the strategic initiatives and results
of operations of Wayne Savings Bancshares, Inc., the parent of 106 year-old
Wayne Savings Community Bank, for the fiscal year ended March 31, 2005.
Fiscal 2005 proved to be a momentous, transitional year in which a solid
foundation was laid to strengthen Wayne Savings' role as the area's premier
independent community bank. The triggering event behind the specific strategic
actions taken in fiscal 2005 was the acquisition of Wayne Savings' primary
competitor, previously Wayne County's oldest and largest independent community
bank, by a major regional bank holding company. Recognizing the community's
preference to do business with a locally-owned bank that demonstrates a high
level of personal service and community involvement, Management and the Board of
Directors believed there was a unique opportunity to expand products and
services in order to capture a larger market share.
Specific actions taken to accomplish greater market penetration were: a
Chief Lending Officer was brought on board to produce quality growth in the
commercial, mortgage and consumer loan portfolios; a trust department staffed by
a team of qualified, experienced trust professionals has been established, and
licensed; and, finally, electronic services are in the process of being expanded
through the introduction of an internet banking program with online bill pay.
[PHOTO OMITTED]
Charles F. Finn
Chairman and Chief Executive Officer
We realized that such an ambitious expansion of products and services
would result in higher administrative costs and reduced earnings in the
short-run. Therefore, to facilitate the introduction of the new banking
programs, we undertook several cost reduction measures to improve our efficiency
ratio. While implementing these cost reduction initiatives did impact the
Company's fourth quarter and fiscal 2005 operating results, we believe the
Company is now positioned to absorb the higher staffing levels and increased
administrative costs associated with the new banking programs. We further expect
the additional income from new trust services and anticipated loan growth will
result in increased growth in assets and earnings in the future.
First, in recognition of the mandatory accounting rule change to expense
stock options, we accelerated vesting and expensed the related stock options at
a pre-tax cost of $664,000. This will save the Company approximately $200,000
per annum over the next several years. Further, the Company accelerated the
vesting of previous share grants under the restricted stock plan at a pre-tax
cost of $738,000. The elimination of the restricted stock plan, coupled with
other vesting adjustments in the Company's benefits plans, will result in
approximate annual pre-tax savings of $425,000 over each of the next four years.
Combined, these
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annual cost savings total $625,000, which will result in a 11% reduction in pro
forma compensation expense for fiscal 2006. While these transactions reduced
fiscal year earnings, they had no effect on stockholders' equity. At March 31,
2005, stockholders' equity amounted to $40.2 million resulting in a
capital-to-asset ratio of 9.97%.
Additionally, because of the growth in our commercial loan portfolio and
an enhancement to our loan grading process related to those loans, we added
approximately $360,000 to our loan loss reserve during fiscal 2005.
Due in part to these actions, the Company reported net earnings of
$381,000, or $.11 per diluted share for fiscal 2005, as compared to net earnings
of $2.7 million, or $.72 per diluted share in fiscal 2004. The effect of these
charges on fourth quarter operations resulted in a net loss of $1.0 million, or
$.27 per basic share compared to net earnings of $800,000, or $.21 per diluted
share for the comparable quarter in fiscal 2004.
Management and the Board of Directors of Wayne Savings Bancshares, Inc.
took some bold but calculated steps in fiscal 2005 to secure the long-term
future of Wayne Savings as the area's premier independent community bank. We
believe the corporate direction set in fiscal 2005 has provided a sound
financial underpinning for our strategic initiatives into commercial lending,
trust services, and internet banking.
Moreover, the dimension of our Company's asset growth in the fiscal 2005
year evidences the positive market response to our strategic plans. During the
fiscal year, total assets grew $34.4 million, or 9.3%, to an unprecedented total
of $403.4 million at year-end. The asset growth was due to an increase in
customer deposits and the acquisition of Stebbins National Bank of Creston,
Ohio, which was completed in fiscal 2005. As a result of this growth, Wayne
Savings Community Bank remains the largest independent bank headquartered in its
five county market area of Wayne, Holmes, Ashland, Medina, and Stark counties,
Ohio.
In regard to shareholder value, we are also very gratified by the total
return performance of the Company's common stock over the last few years.
According to recently released index values by a national stock market
statistics firm, an investment of $100 in the common stock of Wayne Savings
Bancshares, Inc. on March 31, 2000 realized a total return of $188 by March 31,
2005, a period of five years. This computes to an average total return of 17.6%
per annum. In contrast, the NASDAQ Composite index declined in this five-year
time frame from a $100 initial investment to $44, while the SNL All Bank and
Thrift Index grew from $100 to $166. Clearly, the stockholders of Wayne Savings
Bancshares, Inc. have achieved appreciably superior returns over the respective
stock market indices.
As we begin our 107th year of service, Wayne Savings is in strong
financial condition and well-positioned for the future with a talented,
dedicated staff, strategic market locations, a full range of banking products
and services, and state-of-the-art technology to provide outstanding service to
our customers and to increase the value of our stockholders' investment. We are
excited about our Company's future, and we look forward to taking full advantage
of the opportunities we have created. On behalf of our Board of Directors,
Officers, and Staff, we thank you deeply for your continued confidence and
support.
Sincerely,
/s/ Charles F. Finn
Charles F. Finn
Chairman, President and Chief Executive Officer
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
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The following table sets forth certain consolidated financial and other
data of Wayne Savings Bancshares, Inc., at the dates and for the years
indicated. The consolidated financial statements as of and for the years ended
March 31, 2001 through March 31, 2003, inclusive, are those of Wayne Savings
Bancshares, Inc. prior to the reorganization and change in corporate form
discussed in the Notes to the Consolidated Financial Statements and elsewhere
herein. For additional information about the Company, reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company.
At March 31,
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2005 2004 2003 2002 2001
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(In thousands)
Selected Financial Condition Data
Total assets ............................ $ 403,401 $ 369,007 $ 378,991 $ 334,843 $ 311,640
Loans receivable, net(1) ................ 213,627 205,443 228,373 251,172 247,480
Mortgage-backed securities(2) ........... 60,352 88,428 76,002 17,326 8,574
Investment securities ................... 72,856 31,582 35,841 22,286 13,641
Cash and cash equivalents(3) ............ 29,942 19,887 17,496 27,883 20,902
Deposits ................................ 320,586 291,830 300,931 300,957 277,706
Stockholders' equity .................... 40,199 43,561 44,663 26,047 25,255
(1) Includes loans held for sale.
(2) Includes mortgage-backed securities available for sale.
(3) Includes cash and due from banks, interest-bearing deposits in other
financial institutions, and federal funds sold.
Year Ended March 31,
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2005 2004 2003 2002 2001
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(In thousands, except share data)
Selected Operating Data:
Interest income ......................... $ 17,632 $ 18,216 $ 20,023 $ 21,309 $ 21,506
Interest expense ........................ 6,716 7,147 9,169 12,348 13,100
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Net interest income .................. 10,916 11,069 10,854 8,961 8,406
Provision for losses on loans ........... 430 173 91 134 96
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Net interest income after provision
for losses on loans .................. 10,486 10,896 10,763 8,827 8,310
Other income ............................ 1,684 1,933 1,643 1,657 1,045
General, administrative
and other expense(1) ................... 11,874 8,971 8,417 7,722 7,348
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Earnings before income taxes ............ 296 3,858 3,989 2,762 2,007
Federal income taxes (benefits) ......... (85) 1,154 1,217 939 675
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NET EARNINGS ............................ $ 381 $ 2,704 $ 2,772 $ 1,823 $ 1,332
========= ========= ========= ========= =========
Basic earnings per share(2) ............. $ .11 $ .72 $ .71 $ .47 $ .34
========= ========= ========= ========= =========
Diluted earnings per share(2) ........... $ .11 $ .72 $ .71 $ .47 $ .34
========= ========= ========= ========= =========
Cash dividends declared
per common share(3) .................... $ 48 $ .47 $ .45 $ .45 $ .42
========= ========= ========= ========= =========
(1) In 2005, general administrative and other expense includes $738,000 of
costs related to accelerating the Company's Management Recognition Plan
and $664,000 of costs relating to acceleration of the Company's Stock
Option Plan.
(2) All per share amounts have been restated to give effect to the 1.5109 to
1.00 share exchange ratio provided for in the Company's conversion
offering.
(3) During the fiscal year ended March 31, 2003, the M.H.C. waived its right
to receive all dividends. During fiscal 2002 and 2001, the M.H.C. waived
approximately $.44 and $.40 of the $.45 and $.42 per share dividends paid
on common stock in each respective year.
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (con't.)
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At or For the Year Ended March 31,
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2005 2004 2003 2002 2001
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Key Operating Ratios and Other Data:
Return on average assets (net earnings divided
by average total assets) ........................... .10% .73% .78% .56% .45%
Return on average equity (net earnings
divided by average equity) ......................... .90 6.09 8.80 7.12 5.28
Average equity to average assets ...................... 10.93 11.95 8.92 7.93 8.44
Equity to assets at year end .......................... 9.97 11.80 11.78 7.78 8.10
Interest rate spread (difference between average
yield on interest-earning assets and average
cost of interest-bearing liabilities) .............. 2.89 2.97 3.09 2.77 2.57
Net interest margin (net interest income
as a percentage of average interest-
earning assets) .................................... 3.02 3.14 3.24 2.93 2.92
General, administrative and other expense
to average assets(1) ............................... 2.72 2.41 2.38 2.39 2.46
Non-performing and impaired loans
to loans receivable, net ........................... .42 .36 1.09 1.52 .47
Non-performing and impaired assets
to total assets .................................... .22 .23 .65 1.14 .41
Average interest-earning assets to average
interest-bearing liabilities ....................... 106.49 108.12 105.40 103.98 107.62
Allowance for loan losses to
non-performing and impaired loans .................. 151.66 109.10 27.35 19.38 54.58
Allowance for loan losses to
non-performing and impaired assets ................. 146.01 96.22 27.35 19.28 49.47
Net interest income after provision for losses
on loans, to general, administrative and
other expense(1) ................................... 100.13 121.46 127.87 114.31 113.31
Number of full-service offices ........................ 11 10 10 10 10
Dividend payout ratio ................................. 455.91 66.83 38.35 46.74 60.06
(1) In calculating this ratio, general, administrative and other expense does
not include provisions for losses or gains on the sale of real estate
acquired through foreclosure. In 2005, this ratio does not include expense
relating to acceleration of the Company's Management Recognition Plan and
Stock Option Plan.
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MANAGEMENT'S DISCUSSION AND ANALYSIS
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OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The consolidated financial statements include Wayne Savings Bancshares,
Inc. and its wholly-owned subsidiary, Wayne Savings Community Bank. Intercompany
transactions and balances are eliminated in the consolidated financial
statements.
The Company's net earnings are primarily dependent on its net interest
income, which is the difference between interest income earned on its loan,
mortgage-backed securities and investment portfolios, and its cost of funds
consisting of interest paid on deposits and borrowings. The Company's net
earnings also are affected by its provision for losses on loans, as well as the
amount of other income, including fees and service charges, and general,
administrative and other expense, such as salaries and employee benefits,
deposit insurance premiums, occupancy and equipment costs, and income taxes.
Earnings of the Company also are affected significantly by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities.
Business Strategy
The Company's current business strategy is to operate a well-capitalized,
profitable and independent community-oriented savings association dedicated to
financing home ownership and providing quality service to its customers. The
Company has sought to implement this strategy in recent years by: (1) closely
monitoring the needs of customers and providing personal, quality customer
service; (2) continuing the origination of one-to-four family residential
mortgage loans and consumer loans in the Company's market area; (3) managing
interest rate risk exposure by better matching asset and liability maturities
and rates; (4) increasing fee income; (5) managing asset quality; (6)
maintaining a strong retail deposit base; (7) maintaining capital in excess of
regulatory requirements; and (8) enhancing the commercial loan program to add
high quality, adjustable rate assets to the Company's loan portfolio.
Discussion of Financial Condition Changes from March 31, 2004 to March 31, 2005
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Company's operations, and actual
results could differ significantly from those discussed in forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
interest rates in the nation and the Company's general market area. The
forward-looking statements contained herein include, but are not limited to,
those with respect to the following matters: (1) management's determination of
the amount and adequacy of the allowance for loan losses; (2) the effect of
changes in interest rates; (3) management's opinion as to the effects of recent
accounting pronouncements on the Company's consolidated financial statements;
and (4) management's opinion as to the Bank's ability to maintain regulatory
capital at current levels. The Company considers the allowance for loan losses
and related loss provision to be a critical accounting policy. A detailed
discussion of such policy is set forth on the following pages.
[PHOTO OMITTED]
Wayne Savings Community Bank Executive and Senior Officers include, seated:
Wanda Christopher-Finn, Executive Vice President and Chief Operating Officer;
Charles F. Finn, Chairman and Chief Executive Officer; and Michael C. Anderson,
Executive Vice President and Chief Financial Officer; Standing: Wendy S.
Blosser, Senior Vice President, Senior Trust Officer, Phillip E. Becker,
Executive Vice President and Chief Lending Officer; and Bryan K. Fehr, Senior
Vice President, Audit and Compliance Officer.
At March 31, 2005, the Company had total assets of $403.4 million, an
increase of $34.4 million, or 9.3%, above total assets of $369.0 million at
March 31, 2004. This growth primarily resulted from the acquisition of Stebbins
National Bank on June 1, 2004, which added $24.5 million in assets.
Liquid assets consisting of cash, interest-bearing deposits and investment
securities, increased by $51.3 million, or 99.7%, to $102.8 million at March 31,
2005. The Company used repayments from its mortgage and mortgage-backed
securities portfolios to purchase $35.6 million of securities with 2 to 3 year
maturities. The Company has created a short-term structured cash flow maturity
ladder with these securities which will provide the cash needed to fund loan
growth over the next three years. In addition, $11.8 million of securities were
acquired in the Stebbins acquisition. These increases were partially offset by
the maturity of $4.7 million of securities.
Cash and cash equivalents increased by $10.1 million of which $4.6 million
was acquired in the Stebbins acquisition.
Mortgage-backed securities totaled $60.4 million at March
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31, 2005, a decrease of $28.1 million, or 31.8%, as these securities continued
to receive a high level of principal repayments due to the lagging effects of
the low interest rate environment in fiscal 2005, coupled with management's
decision to restructure the Company's investment portfolio into a higher
percentage of bonds with expected average maturities of two to three years. The
Company has pursued this strategy due to the favorable increase in this segment
of the yield curve as interest rates increased. During fiscal 2005, the Company
purchased $8.0 million of mortgage-backed securities, offset by cash repayments
of $34.9 million.
Loans receivable totaled $213.6 million at March 31, 2005 an increase of
$8.2 million, or 4.0%, from the March 31, 2004 total. The growth was mainly due
to $12.2 million in loans acquired from the Stebbins acquisition. The Company
originated loans of $56.2 million offset by loan sales of $6.7 million in
furtherance of management's interest rate risk strategy. Rather than reinvest
funds from sales of and repayments in long-term, fixed rate residential loans
during this period of lower long-term interest rates, management has continued
to increase the investment in short-term marketable securities and adjustable
rate commercial loans. The composition of the loan portfolio has continued to
evolve during fiscal 2005 due to a decrease of $12.9 million in residential
mortgage loans and increases in nonresidential mortgage loans and commercial
loans of $10.8 million and $7.6 million, respectively, in connection with the
Bank's increased emphasis on commercial lending.
At March 31, 2005, the allowance for loan losses totaled $1.4 million, or
..64% of loans, compared to $815,000, or .40% of loans at March 31, 2004. In
determining the amount of loan loss allowance at any point in time, management
and the Board apply a systematic process focusing on the risk of loss in the
portfolio. First, delinquent non-residential , multifamily and commercial loans
are evaluated for potential impairments in carrying value. At March 31, 2005,
the delinquent non-residential, multi-family and commercial loans were viewed as
well-secured, with no loss anticipated. The second step in determining the
allowance for loan loss entails the application of historic loss experience to
individual loan types in the portfolio. In addition to the historic loss
percentage, management employs an additional risk percentage tailored to the
perception of the overall risk in the economy. Management engaged a third party
review of its commercial loan risk ranking system and as a result of this review
has elected to tighten its loan grading process. This enhancement, coupled with
$7.6 million growth in the commercial loan portfolio and the acquisition of
Stebbins resulted in a $559,000 increase in the allowance year over year.
Nonperforming and impaired loans amounted to $906,000 at March 31, 2005,
compared with $715,000 at March 31, 2004. At both dates, such amounts consisted
primarly of nonperforming and impaired residential mortgage loans. The Company
generally has not recognized losses on impaired and nonperforming loans secured
by residential mortgages. The allowance for loan losses totaled 151.7% and
109.1% of nonperforming and impaired loans at March 31, 2005 and 2004,
respectively.
Although management believes that the allowance for loan losses is
adequate based upon the available facts and circumstances, there can be no
assurance that additions to the allowance will not be necessary in future
periods, which will adversely affect the Company's results of operations.
Deposits at March 31, 2005, totaled $320.6 million, an increase of $28.8
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 $4.0 million due to Bank's competitive deposit pricing in all market
areas.
Stockholders' equity totaled $40.2 million, a decrease of $3.4 million, or
7.7%, from March 31, 2004, due mainly to an unrealized loss on available for
sale securities of $1.3 million, dividends totaling $1.7 million, and purchases
of treasury stock totaling $2.8 million. These amounts were partially offset by
the $1.1 million acceleration and amortization of the Management Recognition
Plan shares, $920,000 related to amortization of the Company's ESOP and
accelerated vesting of its Stock Option Plan, and $381,000 in net earnings for
year ended March 31, 2005.
Comparison of Operating Results for the Years Ended March 31, 2005 and 2004
General. Fiscal 2005 was a year of strategic transition for the Company.
The Company's primary competitor was acquired by a major regional bank holding
company, positioning Wayne Savings as the largest independent community bank in
the five county market area.
Management has long perceived the market area preference for local
ownership and decision-making. In recognition of this fact, management believed
that the Company had a unique opportunity to expand its product lines,
particularly in the areas of commercial lending and trust services. Management
also recognized that expansion of such product lines would initially place
pressures on the Company's operating costs. As a result, management undertook a
review of the Company's ability to expand its product lines in view of its
current cost structure.
Such review culminated in the conclusion that several of its benefit
plans, specifically the previous grants under the Management Recognition Plan
and the Stock Option Plan reflected compensation awards which were more closely
aligned with past versus future managerial performance. Moreover, in view of the
mandatory expensing of stock options pursuant to SFAS No. 123(R), management
concluded that the approximate $300,000 in pre-tax savings resulting from
accelerating the expense of the Stock Option Plan was a
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MANAGEMENT'S DISCUSSION AND ANALYSIS (con't.)
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prudent method of expanding the Company's product lines without placing undue
pressure on the Company's future cost structure.
Due in large part to these decisions, net earnings totaled $381,000 for
the fiscal year ended March 31, 2005, a decrease of $2.3 million, or 85.9%,
below the net earnings of $2.7 million for the fiscal year ended March 31, 2004.
The decline in net earnings was primarily attributable to an increase in
general, administrative and other expense of $2.9 million, or 32.4%, an increase
in provision for losses on loans of $257,000, or 148.6% , a decrease in other
income of $249,000, or 12.9%, and a decrease in net interest income of $153,000,
or 1.4%. These earnings reductions were partially offset by a decrease in
federal income tax expense of $1.2 million.
Interest Income. Interest income for the fiscal year ended March 31, 2005,
decreased $584,000, or 3.2%, to $17.6 million. This decrease was the result of a
29 basis point reduction in the yield earned on interest earning assets to
4.87%, partially offset by an increase in the weighted average balance of
interest-earning assets totaling $9.0 million, or 2.6%, to $361.7 million for
the year ended March 31, 2005.
Interest income on loans declined $1.1 million, or 7.8%, for the fiscal
year ended March 31, 2005, due primarily to a decrease in the weighted average
balance of loans outstanding of $1.4 million, or .6%, compared to the fiscal
2004, coupled with a 47 basis point decrease in the weighted average yield on
loans to 6.06% for fiscal 2005.
Interest income on mortgage-backed securities decreased $235,000 during
fiscal 2005, due primarily to a $13.5 million, or 15.7%, decrease in the
weighted average balance outstanding from the 2004 period, which was partially
offset by an increase in the average yield of 22 basis points to 3.09%.
Interest income on investments increased by $553,000, or 37.0%, reflecting
an increase in the weighted average balance of $17.5 million, or 50.6%,
partially offset by a decrease in the weighted average yield of 39 basis points
to 3.93% from 4.32% during fiscal 2004.
Interest income on interest-bearing deposits and other increased by
$182,000, or 71.7%, reflecting an increase in the weighted average balance of
$6.4 million, or 36.6%, coupled with a increase in the weighted average yield of
38 basis points to 1.83% from 1.45% during fiscal 2004.
The decrease in the average balance of loans and mortgage-backed
securities as well as the increase in the average balance of investments and
interest-bearing deposits is consistent with the Company's desire to shorten the
average maturity of the Company's interest-earning assets. The Company has
invested a significant portion of the funds from payments on loans and
mortgage-backed securities in short term investment securities and other short
term investment vehicles. The Company believes that investing in short term
investments positions the Company favorably in an increasing interest rate
environment by providing it with the flexibility to redeploy such assets in
higher yielding loans and other investments as interest rates rise.
Interest Expense. Interest expense for fiscal 2005 totaled $6.7 million, a
decrease of $431,000, or 6.0%, from interest expense of $7.1 million for the
fiscal year ended March 31, 2004. The decrease resulted from a 21 basis point
decrease in the average cost of funds to 1.98% for fiscal 2005, offset by an
increase in the average balance of deposits and borrowings outstanding of $13.4
million, or 4.1%, to $339.7 million for the fiscal 2005.
Interest expense on deposits totaled $5.7 million for fiscal 2005, a
decrease of $215,000, or 3.6%, from fiscal 2004, as a result of an 18 basis
point decrease in the average cost of deposits to 1.81% for the 2005 period
offset by an increase in the average balance outstanding of $17.4 million, or
5.9%, to $313.6 million for fiscal 2005.
Interest expense on borrowings totaled $1.0 million for the fiscal year
ended March 31, 2005, a decrease of $216,000 from fiscal 2004, primarily due to
an decrease in the average balance of borrowings of $3.9 million to an average
balance of $26.1 million for fiscal 2005 from $30.0 million for year ended March
31, 2004, offset by a decrease in the average cost of borrowings to 3.96% from
an average cost of 4.16% for fiscal 2004.
Net Interest Income. Net interest income totaled $10.9 million for the
fiscal year ended March 31, 2005, a decrease of $153,000, or 1.4%, from fiscal
2004. The average interest rate spread decreased to 2.89% for the year ended
March 31, 2005 from 2.97% for fiscal 2004. The net interest margin decreased to
3.02% for fiscal 2005 from 3.14% for the fiscal year ended March 31, 2004.
Provision for Losses on Loans. The Company recorded provisions for losses
on loans totaling $430,000 and $173,000 for the periods ended March 31, 2005 and
2004, respectively. As a result of the increased commercial loan volume, the
acquisition of Stebbins' loan portfolio and an enhancement of the Company's loan
rating standards, management increased the provision for loan losses by $257,000
in fiscal 2005. To the best of management's knowledge, all known and inherent
losses that are probable and which can be reasonably estimated have been
recorded as of March 31, 2005.
Other Income. Other income, consisting primarily of an increase in cash
surrender value of life insurance, gains on sale of loans, service fees, and
charges on deposit accounts, decreased by $249,000 or 12.9%, to $1.7 million for
fiscal 2005, from $1.9 million for the year ended March 31, 2004. The decrease
resulted primarily from a decrease of $256,000 in merchant fee income due to a
significant reduction in volume.
- -------------------------------------- 12 --------------------------------------
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General, Administrative, and Other Expense. General, administrative and
other expense increased by $2.9 million, or 32.4%, to $11.9 million for the year
ended March 31, 2005 compared to 2004 fiscal year ended March 31, 2004. As
stated previously, $1.4 million of this increase resulted from management's
decision to accelerate the vesting and attendant expense of the Mangement
Recognition and Stock Option Plans.
The Company accelerated the vesting of previous share grants under the
Management Recognition Plan at a pre-tax cost of $738,000. In addition, in
recognition of the impending expensing of stock options, the Company accelerated
the vesting of all grants made under the 2004 Stock Option Plan. This resulted
in a pre-tax cost of $664,000.
The increase in employee compensation and benefits of $641,000, or 12.4%,
was primarily attributable to normal merit increases, an increase in employee
benefit plan costs and additional staff needed for operating a fully converted,
expanding, publicly traded stock company. An increase of $355,000, or 23.9%, in
occupancy and equipment expense was primarily due to data conversion and
operations costs related to the Stebbins acquisition. An increase of $214,000,
or 59.0%, in franchise taxes was due to the increase in equity from the fiscal
2003 conversion to stock form. Similarly, the increase in other operating
expense was primarily attributable to increased costs related to the Stebbins
acquisition and routine compliance matters required of a public company.
Federal Income Taxes. The federal income tax benefit was $85,000 for the
year ended March 31, 2005, reflecting a decrease of $1.2 million in federal
income tax expense from fiscal 2004. The reduction resulted primarily from a
$3.6 million, or 92.3%, decrease in pre-tax earnings. The difference in the
effective tax rate or rate of benefits from the 34% statutory rate is mainly due
to the beneficial effects of income from cash surrender value on life insurance
and other tax-exempt obligations.
Comparison of Operating Results for the Years Ended March 31, 2004 and 2003
General. Net earnings totaled $2.7 million for the fiscal year ended March
31, 2004, a decrease of $68,000, or 2.5%, below the net earnings of $2.8 million
for the fiscal year ended March 31, 2003. The decline in net earnings was
primarily attributable to an increase in general, administrative and other
expense of $554,000, or 6.6% and an increase in provision for losses on loans of
$82,000, or 90.1%. These earnings decreases were mainly offset by an increase in
other income of $290,000, or 17.7%, net interest income of $215,000 , or 2.0% ,
and a $63,000, or 5.2%, decrease in federal income tax expense.
Interest Income. Interest income for the fiscal year ended March 31, 2004,
decreased $1.8 million, or 9.0%, to $18.2 million. This decrease was a result of
an 82 basis point reduction in the yield on interest-earning assets to 5.16%,
partially offset by an increase in the weighted average balance of
interest-earning assets totaling $18.0 million, or 5.4%, to $352.7 million for
the period ended March 31, 2004.
Interest income on loans declined $2.9 million, or 17.0%, for the fiscal
year ended March 31, 2004, due primarily to a decrease in the weighted average
balance of loans outstanding of $27.9 million, or 11.5%, compared to fiscal
2003, coupled with a 43 basis point decrease in the weighted average yield on
loans to 6.53% for fiscal 2004.
Interest income on mortgage-backed securities increased $979,000 or 65.0%
during fiscal 2004, due primarily to a $46.8 million, or 118.0%, increase in the
weighted average balance outstanding from fiscal 2003, which was partially
offset by a decrease in the average yield of 93 basis points to 2.87%.
Interest income on investments increased by $336,000, or 29.0%, reflecting
an increase in the weighted average balance of $10.5 million, or 43.7%,
partially offset by a decrease in the weighted average rate of 49 basis points
to 4.32% from 4.81% during fiscal 2003.
Interest income on interest-bearing deposits and other decreased by
$258,000, or 50.4%, reflecting a decrease in the weighted average balance of
$11.3 million, or 39.3%, coupled with a decrease in the weighted average rate of
33 basis points to 1.45% from 1.78% during the fiscal 2003.
Interest Expense. Interest expense for fiscal 2004 totaled $7.1 million, a
decrease of $2.0 million, or 22.1%, from interest expense of $9.2 million for
the fiscal year ended March 31, 2003. The decrease resulted from a 70 basis
point decrease in the average cost of funds to 2.19% for fiscal 2004, offset by
an increase in the average balance of deposits and borrowings outstanding of
$8.7 million, or 2.7%, to $326.2 million for fiscal 2004.
Interest expense on deposits totaled $5.9 million for fiscal 2004, a
decrease of $2.5 million, or 30.0%, from fiscal 2003, as a result of a 82 basis
point decrease in the average cost of deposits to 1.99% for 2004, coupled with a
decrease in the average balance outstanding of $4.1 million, or 1.4%, to $296.2
million for fiscal 2004.
Interest expense on borrowings totaled $1.2 million for the fiscal year
ended March 31, 2004, an increase of $511,000 from fiscal 2003, primarily due to
an increase in the average balance of borrowings of $12.8 million to an average
balance of $30.0 million for fiscal 2004 from $17.2 million for fiscal 2003,
partially offset by a decrease in the average cost of borrowings to 4.16% from
an average cost of 4.28% for fiscal 2003.
- -------------------------------------- 13 --------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (con't.)
[LOGO] -------------------------------------------------------------------------
Net Interest Income. Net interest income totaled $11.1 million for the
fiscal year ended March 31, 2004, an increase of $215,000, or 2.0%, from fiscal
2003. The interest rate spread decreased to 2.97% for the year ended March 31,
2004 from 3.09% for fiscal 2003. The net interest margin decreased to 3.14% for
fiscal 2004 from 3.24% for fiscal 2003.
Provision for Losses on Loans. The Company recorded provisions for losses
on loans totaling $173,000 and $91,000 for the fiscal years ended March 31, 2004
and 2003, respectively. The increase in provision for loan losses for fiscal
2004 was largely predicated on possible short-term softness in the local economy
and increased origination of commercial loans.
Other Income. Other income, consisting primarily of an increase in the
cash surrender value of life insurance, gains on sale of loans, service fees,
and charges on deposit accounts, increased by $290,000 or 17.7%, to $1.9 million
for fiscal 2004, from $1.6 million for the fiscal year ended March 31, 2003. The
increase resulted primarily from an increase of $139,000 in the cash surrender
value of life insurance. Additionally, service fees, charges and other operating
income increased by $94,000, or 6.6%, to $1.5 million for the fiscal year ended
March 31, 2004, due primarily to increased income related to credit card
merchants. Gain on sale of loans increased $67,000, or 82.7%, in fiscal 2004 as
compared to fiscal 2003, due mainly to management's decision to sell the
majority of the lower rate thirty year residential mortgage loans in the
secondary market.
General, Administrative, and Other Expense. General, administrative and
other expense increased by $554,000, or 6.6%, to $9.0 million for the year ended
March 31, 2004 compared to the fiscal year ended March 31, 2003. The increase
resulted primarily from a $432,000, or 9.1%, increase in employee compensation
and benefits, a $64,000, or 3.5%, increase in other operating expense and an
increase of $55,000, or 17.9%, in franchise taxes due to the increase in equity
from the fiscal 2003 stock conversion. The increase in employee compensation and
benefits was primarily attributable to normal merit increases, an increase in
employee benefit plan costs and additional staff needed for operating a fully
converted, publicly traded stock company. Similarly, the increase in other
operating expense was primarily attributable to increased costs related to
routine compliance matters required of a public company, as well as higher
merchant expenses related to credit card activity.
Federal Income Taxes. The provision for federal income taxes was $1.2
million for the year ended March 31, 2004, a decrease of $63,000, or 5.2%,
compared to fiscal 2003. The decrease resulted primarily from a $131,000, or
3.3%, decrease in pre-tax earnings, coupled with an additional $139,000 of
tax-exempt income related to the cash surrender value of life insurance. The
effective tax rate for fiscal 2004 was 29.9%, as compared to 30.5% for fiscal
2003. The decrease in the effective tax rate year to year is mainly due to the
beneficial effects of income on cash surrender value of life insurance and other
tax-exempt obligations.
- -------------------------------------- 14 --------------------------------------
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Average Balance Sheet
The following table sets forth certain information relating to the
Company's average balance sheet and reflects the average yield on assets and
average cost of liabilities for the periods indicated. Such yields and costs are
derived by dividing income or expense by the average balance of assets or
liabilities, respectively, for the periods presented.
Year Ended March 31,
-------------------------------------------------------------------------------------------
2005 2004 2003
---------------------------- ----------------------------- ----------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
--------- -------- ------- --------- -------- -------- --------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1) .......... $ 212,785 $ 12,898 6.06% $ 214,174 $ 13,982 6.53% $ 242,120 $ 16,846 6.96%
Mortgage-backed securities (2) .... 72,911 2,250 3.09 86,440 2,485 2.87 39,652 1,506 3.80
Investment securities ............. 52,172 2,048 3.93 34,640 1,495 4.32 24,114 1,159 4.81
Interest-bearing deposits (3) ..... 23,871 436 1.83 17,478 254 1.45 28,804 512 1.78
--------- -------- ------- --------- -------- -------- --------- -------- -------
Total interest-earning assets ... 361,739 17,632 4.87 352,732 18,216 5.16 334,690 20,023 5.98
Non-interest-earning assets .......... 23,475 18,853 18,481
--------- --------- ---------
Total assets .................... $ 385,214 $ 371,585 $ 353,171
========= ========= =========
Interest-bearing liabilities:
Deposits .......................... $ 313,611 5,684 1.81 $ 296,244 5,899 1.99 $ 300,326 8,432 2.81
Borrowings ........................ 26,076 1,032 3.96 30,000 1,248 4.16 17,204 737 4.28
--------- -------- ------- --------- -------- -------- --------- -------- -------
Total interest-bearing
liabilities .................. 339,687 6,716 1.98 326,244 7,147 2.19 317,530 9,169 2.89
Non-interest-bearing liabilities ..... 3,410 923 4,153
--------- --------- ---------
Total liabilities ............... 343,097 327,167 321,683
Stockholders' equity ................. 42,117 44,418 31,488
--------- --------- ---------
Total liabilities and
stockholders' equity ......... $ 385,214 $ 371,585 $ 353,171
========= -------- ========= -------- ========= --------
Net interest income .................. $ 10,916 $ 11,069 $ 10,854
======== ------- ======== -------- ======== -------
Interest rate spread (4) ............. 2.89% 2.97% 3.09%
======= ======== =======
Net yield on interest-earning
assets(5) ......................... 3.02% 3.14% 3.24%
======= ======== =======
Ratio of average interest-earning
assets to average interest-
bearing liabilities ............... 106.49% 108.12% 105.40%
======= ======== =======
(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.
- -------------------------------------- 15 --------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (con't.)
[LOGO] -------------------------------------------------------------------------
Rate/Volume Analysis
The table below sets forth certain information regarding changes in
interest income and interest expense of the Company for the periods indicated.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average volume multiplied by old rate); and (ii) changes in rate
(change in rate multiplied by old average volume). Changes in rate-volume
(changes in rate multiplied by the change in average volume) have been allocated
proportionately between changes in rate and changes in volume.
Year Ended March 31,
--------------------------------------------------------------------
2005 vs. 2004 2004 vs. 2003
-------------------------------- --------------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due to Total
------------------ Increase ------------------ Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------- ------- ---------- ------- ------- ----------
(In thousands)
Interest income attributable to:
Loans receivable ............................... $ (90) $ (994) $ (1,084) $(1,861) $(1,003) $ (2,864)
Mortgage-backed securities ..................... (408) 173 (235) 1,426 (447) 979
Investment securities .......................... 698 (145) 553 464 (128) 336
Interest-bearing deposits ...................... 108 74 182 (490) 232 (258)
------- ------- ---------- ------- ------- ----------
Total interest-earning assets ................ 308 (892) (584) (461) (1,346) (1,807)
Interest expense attributable to:
Deposits ....................................... 334 (549) (215) (113) (2,420) (2,533)
Borrowings ..................................... (157) (59) (216) 533 (22) 511
------- ------- ---------- ------- ------- ----------
Total interest-bearing liabilities ........... 177 (608) (431) 420 (2,442) (2,022)
------- ------- ---------- ------- ------- ----------
Increase (decrease) in
net interest income .......................... $ 131 $ (284) $ (153) $ (881) $ 1,096 $ 215
======= ======= ========== ======= ======= ==========
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Asset and Liability Management-Interest Rate Sensitivity Analysis
The Bank, like other financial institutions, is subject to interest rate
risk to the extent that interest-earning assets reprice at a different time than
interest-bearing liabilities. As part of their effort to monitor and manage
interest rate risk, the Bank uses the "net portfolio value" ("NPV") methodology
adopted by the OTS as part of its interest rate sensitivity regulations. The
application of NPV methodology illustrates certain aspects of the Bank's
interest rate risk.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on interest-bearing and other liabilities. The application of the methodology
attempts to quantify interest rate risk as the change in the NPV, which would
result from a theoretical change in market interest rates.
Presented below, as of March 31, 2005 and 2004, is an analysis of the
Bank's interest rate risk as measured by changes in NPV for instantaneous and
sustained 100, 200 and 300 basis point (1 basis point equals .01%) increases and
a 100 basis point decrease in market interest rates. Due to the current low
prevailing interest rate environment, the changes in NPV are not estimated for a
decrease of 200 or 300 basis points.
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making the risk calculations.
As of March 31, 2005
- --------------------------------------------------------------------------------
Net Portfolio Value NPV as % of PV of Assets
Change in Interest ----------------------------- ------------------------
Rates (Basis points) $ Amount $ Change % Change NPV Ratio Change
- -------------------- -------- -------- -------- --------- -----------
(In thousands)
+300 bp $ 44,833 $(10,185) (19)% 11.30% (192 bp)
+200 bp 48,854 (6,164) (11) 12.10 (112 bp)
+100 bp 52,617 (2,401) (4) 12.81 (41 bp)
0 bp 55,018 -- -- 13.22 --
-100 bp 54,295 (723) (1) 12.97 (25 bp)
As of March 31, 2004
- --------------------------------------------------------------------------------
Net Portfolio Value NPV as % of PV of Assets
Change in Interest ----------------------------- ------------------------
Rates (Basis points) $ Amount $ Change % Change NPV Ratio Change
- -------------------- -------- -------- -------- --------- -----------
(In thousands)
+300 bp $ 42,370 $(11,927) (22)% 11.66% (250 bp)
+200 bp 48,174 (4,097) (8) 12.96 (120 bp)
+100 bp 52,785 (1,512) (3) 13.92 (24 bp)
0 bp 54,297 -- -- 14.16 --
-100 bp 52,271 (2,026) (4) 13.60 (56 bp)
- -------------------------------------- 17 --------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (con't.)
[LOGO] -------------------------------------------------------------------------
The following table summarizes the Company's contractual cash obligations
at March 31, 2005.
Payments due by period
-------------------------------------------------------
<1 year 1-3 years 3-5 years >5 years Total
-------------------------------------------------------
(In thousands, except share data)
Contractual obligations:
Operating lease obligations ......................... $ 65 $ 114 $ 35 $ -- $ 214
Advances from the Federal Home Loan Bank ............ 15,000 12,500 5,000 7,500 40,000
Certificates of deposit ............................. 91,507 56,360 18,473 905 167,245
Amount of commitments expiring per period
Commitments to originate loans:
Letters of credit ................................. 262 -- -- -- 262
Credit card/overdraft lines of credit ............. 115 -- -- -- 115
Home equity/commercial lines of credit ............ 28,673 -- -- -- 28,673
One- to four-family and multi-family loans ........ 3,547 -- -- -- 3,547
Non-residential real estate and land loans ........ 177 -- -- -- 177
-------- --------- --------- --------- --------
Total contractual obligations .......................... $139,346 $ 68,974 $ 23,508 $ 8,405 $240,233
======== ========= ========= ========= ========
- --------------------------------------------------------------------------------
The Company's policy in recent years has been to reduce its exposure to
interest rate risk generally by better matching the maturities of its interest
rate sensitive assets and liabilities and by originating adjustable rate
mortgage ("ARM") loans and other adjustable rate or short-term loans, as well as
by purchasing short-term investments and mortgage-backed securities. However,
particularly in the lower long-term interest rate environment which currently
exists, borrowers typically prefer fixed rate loans to ARM loans. Accordingly,
ARM loan originations were very limited during the fiscal year ended March 31,
2005. The Company has sought to lengthen the maturities of its deposits by
promoting longer-term certificates; however, the Company was not successful in
lengthening the maturities of its deposits in the interest rate environment that
existed throughout fiscal 2005. The Company also negotiates interest rates on
certificates of deposit of $100,000 or more.
The Company has an Asset-Liability Management Committee, which is
responsible for reviewing the Company's asset-liability policies. The Committee
meets weekly and reports monthly to the Board of Directors on interest rate
risks and trends, as well as liquidity and capital ratios and requirements. The
Bank has operated within the framework of its prescribed asset/liability risk
ranges for each of the last three years.
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, amortization of loan
principal and prepayment of loans and mortgage-backed securities, maturities of
investment securities and other short-term investments, and earnings and funds
provided from operations. While scheduled principal repayments on loans and
mortgage-backed securities are a relatively predictable source of funds, deposit
flows and loan prepayments are greatly influenced by general interest rates,
economic conditions and competition. The Bank manages the pricing of deposits to
maintain a desired level of deposits and cost of funds. In addition, the Bank
invests excess funds in federal funds and other short-term interest-earning
assets, which provide liquidity to meet lending requirements. Federal funds sold
and other liquid assets outstanding at March 31, 2005, 2004 and 2003, amounted
to $163.2 million, $139.9 million and $129.3 million, respectively. For
additional information about cash flows from the Company's operating, financing
and investing activities, see the Statements of Cash Flows included in the
Consolidated Financial Statements.
A major portion of the Bank's liquidity consists of cash and cash
equivalents, which are a product of their operating, investing and financing
activities. The primary sources of cash are net earnings, principal repayments
on loans and mortgage-backed securities, proceeds from advances from the Federal
Home Loan Bank ("FHLB"), and sales of mortgage-backed securities. Liquidity
management is both a daily and long-term function of business management. If the
Bank requires funds beyond its ability to generate funds internally, borrowing
agreements exist with the Federal Home Loan Bank, which provide an additional
source of funds. At March 31, 2005, the Company had $40.0 million in outstanding
advances from the FHLB.
At March 31, 2005, the Company had outstanding loan commitments of $32.5
million, including the unfunded portion of loans in process and commitments
under unused lines of credit. Certificates of deposit scheduled to mature in
less than one year at March 31, 2005, totaled $91.5 million. Based on prior
experience, management believes that a significant portion of such deposits will
remain with the Company.
- -------------------------------------- 18 --------------------------------------
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Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with U.S. GAAP,
which requires the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of the Company's operations. Unlike
most industrial companies, nearly all the assets and liabilities of the Company
are monetary. As a result, interest rates have a greater impact on the Company's
performance than do the effects of general levels of inflation. Interest rates
do not necessarily move in the same direction or to the same extent as the price
of goods and services.
Common Stock and Related Matters
The Company's common stock trades on the Nasdaq National Market using the
symbol "WAYN." The following table sets forth the high and low trading prices of
the Company's common stock during the three most recent fiscal years, together
with the cash dividends declared. As stated previously, all per share amounts
have been restated for the 1.5109 share exchange ratio provided for in the
Company's conversion offering.
Fiscal Year Ended Cash Dividends
March 31, 2005 High Low Declared
First quarter $21.00 $14.82 $ .120
Second quarter 16.79 15.36 .120
Third quarter 16.88 15.92 .120
Fourth quarter 16.40 15.35 .120
Fiscal Year Ended Cash Dividends
March 31, 2004 High Low Declared
First quarter $14.10 $11.06 $ .113
Second quarter 14.53 12.70 .113
Third quarter 18.70 13.93 .120
Fourth quarter 18.00 15.00 .120
Fiscal Year Ended Cash Dividends
March 31, 2003 High Low Declared
First quarter $14.23 $13.24 $ .113
Second quarter 13.51 11.75 .113
Third quarter 15.22 10.25 .113
Fourth quarter 11.55 10.67 .113
As of April 5, 2005, the Company had 1,583 stockholders of record and
3,625,057 shares of common stock outstanding. This does not reflect the number
of persons whose stock is in nominee or "street name" accounts through brokers.
Payment of dividends on the common stock is subject to determination and
declaration by the Board of Directors and will depend upon a number of factors,
including capital requirements, regulatory limitations on the payment of
dividends, the Company's results of operations and financial condition, tax
considerations, and general economic conditions. No assurance can be given that
dividends will be declared or, if declared, what the amount of dividends will
be, or whether such dividends, once declared, will continue.
The Company's primary source of funds with which to pay dividends is cash
and cash equivalents held at the holding company level and dividends from the
Bank. The Bank's ability to pay dividends to the Company is limited by OTS
regulations, and the Bank is required to obtain OTS nonobjection to the payment
of dividends to the Company. In determining whether to object to such dividends,
the OTS considers whether (i) the Bank would be undercapitalized following the
dividend, (ii) the dividend raises safety and soundness concerns, or (iii) the
dividend violates any regulatory prohibition or policy.
In addition to the foregoing, earnings of the Company appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then-current tax rate by the Company on the amount of earnings
removed from the reserves for such distributions. The Company intends to make
full use of this favorable tax treatment and does not contemplate any
distribution that would create federal tax liability.
- -------------------------------------- 19 --------------------------------------
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
[LOGO] -------------------------------------------------------------------------
As of March 31,
(Dollars in thousands, except share data)
2005 2004
--------- ---------
ASSETS
Cash and due from banks ............................................................... $ 4,176 $ 3,291
Federal funds sold .................................................................... 19,400 9,875
Interest-bearing deposits in other financial institutions ............................. 6,366 6,721
--------- ---------
Cash and cash equivalents .......................................................... 29,942 19,887
Investment securities available for sale - at market .................................. 60,844 17,546
Investment securities held to maturity - at amortized cost, approximate
market value of $12,101 and $14,830 as of March 31, 2005 and 2004, respectively .... 12,012 14,036
Mortgage-backed securities available for sale - at market ............................. 57,724 83,945
Mortgage-backed securities held to maturity - at amortized cost, approximate
market value of $2,647 and $4,510 as of March 31, 2005 and 2004, respectively ......... 2,628 4,483
Loans receivable - net ................................................................ 213,627 205,443
Office premises and equipment - net ................................................... 8,922 8,742
Real estate acquired through foreclosure .............................................. 35 100
Federal Home Loan Bank stock - at cost ................................................ 4,386 4,205
Cash surrender value of life insurance ................................................ 6,581 6,321
Accrued interest receivable on loans .................................................. 757 801
Accrued interest receivable on mortgage-backed securities ............................. 444 400
Accrued interest receivable on investments and interest bearing deposits .............. 708 318
Prepaid expenses and other assets ..................................................... 3,996 2,549
Prepaid federal income taxes .......................................................... 795 231
--------- ---------
Total assets .................................................................. $ 403,401 $ 369,007
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits .............................................................................. $ 320,586 $ 291,830
Advances from the Federal Home Loan Bank .............................................. 40,000 30,000
Advances by borrowers for taxes and insurance ......................................... 612 617
Accrued interest payable .............................................................. 198 186
Accounts payable on mortgage loans serviced for others ................................ 231 118
Other liabilities ..................................................................... 1,174 1,383
Deferred federal income taxes ......................................................... 401 1,312
--------- ---------
Total liabilities ............................................................. 363,202 325,446
Commitments ........................................................................... -- --
Stockholders' equity
Common stock (8,000,000 shares of $.10 par value authorized; 3,907,318 shares
issued at both March 31, 2005 and 2004) .......................................... 391 391
Additional paid-in capital ......................................................... 35,133 34,365
Retained earnings - substantially restricted ....................................... 11,371 12,727
Shares acquired by Management Recognition Plan ..................................... -- (1,142)
Less required contributions for shares acquired by Employee Stock Ownership Plan ... (1,304) (1,456)
Less 282,261 and 112,500 shares of treasury stock at March 31, 2005 and 2004
respectively - at cost ........................................................ (4,600) (1,803)
Accumulated other comprehensive income (loss) ...................................... (792) 479
--------- ---------
Total stockholders' equity .................................................... 40,199 43,561
--------- ---------
Total liabilities and stockholders' equity .................................... $ 403,401 $ 369,007
========= =========
The accompanying notes are an integral part of these statements.
- -------------------------------------- 20 --------------------------------------
CONSOLIDATED STATEMENTS OF EARNINGS
- ------------------------------------------------------------------------- [LOGO]
For the year ended March 31,
(Dollars in thousands, except share data)
2005 2004 2003
---------- ---------- ----------
Interest income:
Loans ........................................................................ $ 12,898 $ 13,982 $ 16,846
Mortgage-backed securities ................................................... 2,250 2,485 1,506
Investment securities ........................................................ 2,048 1,495 1,159
Interest-bearing deposits and other .......................................... 436 254 512
---------- ---------- ----------
Total interest income ..................................................... 17,632 18,216 20,023
Interest expense:
Deposits ..................................................................... 5,684 5,899 8,432
Borrowings ................................................................... 1,032 1,248 737
---------- ---------- ----------
Total interest expense ..................................................... 6,716 7,147 9,169
---------- ---------- ----------
Net interest income ........................................................ 10,916 11,069 10,854
Provision for losses on loans .................................................. 430 173 91
---------- ---------- ----------
Net interest income after provision for losses on loans ................... 10,486 10,896 10,763
Other income:
Gain on sale of mortgage-backed and investment securities .................... -- 16 26
Gain on sale of loans ........................................................ 171 148 81
Increase in cash surrender value of life insurance ........................... 260 260 121
Service fees, charges and other operating .................................... 1,253 1,509 1,415
---------- ---------- ----------
Total other income ......................................................... 1,684 1,933 1,643
General, administrative and other expense:
Employee compensation and benefits ........................................... 5,828 5,187 4,755
Management Recognition and Stock Option Plan expense ......................... 1,402 -- --
Occupancy and equipment ...................................................... 1,839 1,484 1,477
Federal deposit insurance premiums ........................................... 45 47 51
Franchise taxes .............................................................. 577 363 308
Other operating .............................................................. 2,183 1,890 1,826
---------- ---------- ----------
Total general, administrative and other expense ............................ 11,874 8,971 8,417
---------- ---------- ----------
Earnings before incomes taxes .............................................. 296 3,858 3,989
Federal incomes taxes (benefits):
Current ...................................................................... 171 524 1,210
Deferred ..................................................................... (256) 630 7
---------- ---------- ----------
Total federal income taxes (benefits) ...................................... (85) 1,154 1,217
---------- ---------- ----------
NET EARNINGS ............................................................... $ 381 $ 2,704 $ 2,772
========== ========== ==========
Basic earnings per share ................................................... $ .11 $ .72 $ .71
========== ========== ==========
Diluted earnings per share ................................................. $ .11 $ .72 $ .71
========== ========== ==========
The accompanying notes are an integral part of these statements.
- -------------------------------------- 21 --------------------------------------
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
[LOGO] -------------------------------------------------------------------------
For the year ended March 31,
(In thousands)
2005 2004 2003
---------- ---------- ----------
Net earnings ................................................................... $ 381 $ 2,704 $ 2,772
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities
during the year, net of taxes (benefits) of $(655), $183, and $ 59 ........ (1,271) 367 118
Reclassification adjustment for realized gains included in earnings, net
of taxes of $5 and $9 for the years ended March 31, 2004 and 2003 ......... -- (11) (17)
Minimum pension liability adjustment, net of taxes (benefits) of $142 and
$(142) for fiscal 2004 and 2003, respectively ............................. -- 275 (275)
---------- ---------- ----------
Comprehensive income (loss) .................................................... $ (890) $ 3,335 $ 2,598
========== ========== ==========
Accumulated comprehensive income (loss) ........................................ $ (792) $ 479 $ (152)
========== ========== ==========
The accompanying notes are an integral part of these statements.
- --------------------------------------- 22 -------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------- [LOGO]
For the years ended March 31, 2005, 2004, and 2003
(Dollars in thousands, except share data)
Other
compre- Total
Additional Shares Shares Treasury hensive stock-
Common paid-in Retained acquired acquired stock - income holders'
stock capital earnings by ESOP by MRP at cost (loss) equity
-------- -------- --------- -------- -------- -------- -------- ---------
Balance at March 31, 2002 ........... $ 2,641 $ 14,444 $ 10,121 $ -- $ -- $ (1,181) $ 22 $ 26,047
Stock options exercised ............. 3 13 -- -- -- -- -- 16
Reorganization and related common
stock offering - net ............ (2,255) 19,751 -- (1,612) -- 1,181 -- 17,065
Net earnings for the year
ended March 31, 2003 ............ -- -- 2,772 -- -- -- -- 2,772
Dividends declared of $.45 per share -- -- (1,063) -- -- -- -- (1,063)
Minimum pension liability adjustment,
net of related tax effects ...... -- -- -- -- -- -- (275) (275)
Unrealized gains on securities
designated as available for sale,
net of related tax effects ...... -- -- -- -- -- -- 101 101
-------- -------- --------- -------- -------- -------- -------- ---------
Balance at March 31, 2003 ........... 389 34,208 11,830 (1,612) -- -- (152) 44,663
Shares purchased for MRP ............ -- -- -- -- (1,142) -- -- (1,142)
Stock options exercised ............. 2 59 -- -- -- -- -- 61
Amortization of stock benefit plans . -- 98 -- 156 -- -- -- 254
Net earnings for the year
ended March 31, 2004 ............ -- -- 2,704 -- -- -- -- 2,704
Dividends declared of $.47 per share -- -- (1,807) -- -- -- -- (1,807)
Minimum pension liability adjustment,
net of related tax effects ...... -- -- -- -- -- -- 275 275
Purchase of treasury shares at cost . -- -- -- -- -- (1,803) -- (1,803)
Unrealized gains on securities
designated as available for sale,
net of related tax effects ...... -- -- -- -- -- -- 356 356
-------- -------- --------- -------- -------- -------- -------- ---------
Balance at March 31, 2004 ........... 391 34,365 12,727 (1,456) (1,142) (1,803) 479 43,561
Amortization of expense related to
ESOP ............................ -- 104 -- 152 -- -- -- 256
Expense under Stock Option Plan, net -- 664 -- -- -- -- -- 664
Acceleration and amortization of
Management Recognition Plan ..... -- -- -- -- 1,142 -- -- 1,142
Net earnings for the year
ended March 31, 2005 ............ -- -- 381 -- -- -- -- 381
Dividends declared of $.48 per share -- -- (1,737) -- -- -- -- (1,737)
Purchase of treasury shares at cost . -- -- -- -- -- (2,797) -- (2,797)
Unrealized losses on securities
Designated as available for sale,
net of related tax effects ...... -- -- -- -- -- -- (1,271) (1,271)
-------- -------- --------- -------- -------- -------- -------- ---------
Balance at March 31, 2005 ........... $ 391 $ 35,133 $ 11,371 $ (1,304) $ -- $ (4,600) $ (792) $ 40,199
======== ======== ========= ======== ======== ======== ======== =========
The accompany notes are an integral part of these statements.
- --------------------------------------- 23 -------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
[LOGO] -------------------------------------------------------------------------
For the year ended March 31,
(In thousands)
2005 2004 2003
---------- ---------- ----------
Cash flows provided by (used in) operating activities:
Net earnings for the year .................................................. $ 381 $ 2,704 $ 2,772
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of discounts and premiums on loans,
investments and mortgage-backed securities -- net ....................... 1,244 1,409 480
Amortization of deferred loan origination fees ............................. (220) (512) (460)
Depreciation and amortization .............................................. 601 507 555
Amortization of expense related to ESOP .................................... 256 254 --
Amortization and acceleration of Management Recognition Plan expense ....... 1,142 -- --
Expense under Stock Option Plan ............................................ 664 -- --
Gain on sale of loans ...................................................... (117) (87) (57)
Gain on sale of mortgage-backed securities available for sale .............. -- (16) (26)
Proceeds from sale of loans in the secondary market ........................ 6,843 6,285 4,055
Loans originated for sale in the secondary market .......................... (6,017) (6,203) (2,615)
Provision for losses on loans .............................................. 430 173 91
Federal Home Loan Bank stock dividends ..................................... (181) (164) (177)
Increase (decrease) in cash, net of acquisition, due to changes in:
Accrued interest receivable on loans .................................... 72 147 205
Accrued interest receivable on mortgage-backed securities ............... (44) (20) (297)
Accrued interest receivable on investments and interest-bearing deposits (390) (5) (63)
Prepaid expenses and other assets ....................................... 273 (1,017) 167
Accrued interest payable ................................................ (5) (49) 12
Accounts payable and other liabilities .................................. (99) (267) 150
Federal income taxes
Current ............................................................. (564) (288) (120)
Deferred ............................................................ (256) 630 7
---------- ---------- ----------
Net cash provided by operating activities ........................ 4,013 3,481 4,679
Cash flows provided by (used in) investing activities:
Purchase of investment securities held to maturity ......................... (93) -- (13,953)
Purchase of investment securities designated as available for sale ......... (35,547) (22,067) (25,649)
Proceeds from maturity of investment securities held to maturity ........... 2,175 4,735 17,420
Proceeds from maturity of investments securities designated
as available for sale ................................................... 2,516 22,088 8,573
Purchase of mortgage-backed securities held to maturity .................... -- -- (3,545)
Purchase of mortgage-backed securities designated available for sale ....... (8,018) (55,526) (73,897)
Principal repayments on mortgage-backed securities held to maturity ........ 1,825 5,255 7,368
Principal repayments on mortgage-backed securities
designated as available for sale ........................................ 33,122 31,908 6,596
Proceeds from sale of mortgage-backed securities ........................... -- 4,373 4,594
Loan principal repayments .................................................. 52,517 89,107 80,362
Loan disbursements ......................................................... (50,178) (65,658) (58,616)
Purchase of office premises and equipment .................................. (421) (431) (165)
Purchase of bank-owned life insurance ...................................... -- (940) (5,000)
Increase in cash surrender value of life insurance ......................... (260) (260) (121)
Proceeds from sale of land and other real estate ........................... 311 172 8
Purchase of Federal Home Loan Bank stock ................................... -- -- (97)
Net cash used in the aquisition of Stebbins Bancshares, Inc. ............... (1,314) -- --
---------- ---------- ----------
Net cash provided by (used in) investing activities ................. (3,365) 12,756 (56,122)
---------- ---------- ----------
Net cash provided by (used in) operating and investing activities
(balance carried forward) ........................................ 648 16,237 (51,443)
---------- ---------- ----------
- --------------------------------------- 24 -------------------------------------
- ------------------------------------------------------------------------- [LOGO]
For the year ended March 31,
(In thousands)
2005 2004 2003
---------- ---------- ----------
Net cash provided by (used in) operating and investing activities
(balance brought forward) ................................................ $ 648 $ 16,237 $ (51,443)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts .................................. 3,946 (9,101) (26)
Proceeds from Federal Home Loan Bank advances ................................ 15,000 -- 25,000
Repayments of Federal Home Loan Bank advances ................................ (5,000) -- --
Advances by borrowers for taxes and insurance ................................ (5) (95) (168)
Reorganization and cash proceeds from related
common stock offering - net ................................................ -- -- 17,065
Dividends paid on common stock ............................................... (1,737) (1,786) (831)
Tax benefits related to employee stock plans ................................. -- 20 --
Proceeds from exercise of stock options ...................................... -- 61 16
Shares acquired by Management Recognition Plan ............................... -- (1,142) --
Purchase of treasury shares - at cost ........................................ (2,797) (1,803) --
---------- ---------- ----------
Net cash provided by (used in) financing activities ........................ 9,407 (13,846) 41,056
---------- ---------- ----------
Net increase (decrease) in cash and cash equivalents ........................... 10,055 2,391 (10,387)
Cash and cash equivalents at beginning of year ................................. 19,887 17,496 27,883
---------- ---------- ----------
Cash and cash equivalents at end of year ....................................... $ 29,942 $ 19,887 $ 17,496
========== ========== ==========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes ....................................................... $ 568 $ 630 $ 1,083
========== ========== ==========
Interest on deposits and borrowings ........................................ $ 6,721 $ 7,196 $ 9,157
========== ========== ==========
Supplemental disclosure of noncash investing and financing activities:
Transfers from loans to real estate acquired through foreclosure ............. $ 268 $ 279 $ --
========== ========== ==========
Issuance of mortgage to facilitate sale of impaired loan collateral .......... $ -- $ -- $ 450
========== ========== ==========
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects ................................................. $ (1,271) $ 356 $ 101
========== ========== ==========
Minimum pension liability adjustment,
net of related tax effects ................................................. $ -- $ (275) $ 275
========== ========== ==========
Recognition of mortgage servicing rights
in accordance with SFAS No. 140 ............................................ $ 54 $ 61 $ 24
========== ========== ==========
Dividends payable ............................................................ $ 428 $ 446 $ 232
========== ========== ==========
Stebbins acquisition, net of cash and cash equivalents acquired:
Assets
Securities ................................................................. $ 11,787 $ -- $ --
Loans, net ................................................................. 12,225 -- --
Other ...................................................................... 662 -- --
Goodwill ................................................................... 1,470 -- --
Liabilities assumed
Deposits ................................................................... (24,810) -- --
Other liabilities .......................................................... (20) -- --
---------- ---------- ----------
Net cash and cash equivalents paid at acquisition .......................... $ 1,314 $ -- $ --
========== ========== ==========
The accompanying notes are an integral part of these statements.
- --------------------------------------- 25 -------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
[LOGO] -------------------------------------------------------------------------
March 31, 2005, 2004, and 2003
NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include Wayne Savings Bancshares,
Inc. (the "Company") and its wholly-owned subsidiary Wayne Savings Community
Bank ("Wayne Savings" or the "Bank"). Prior to the fiscal year ended March 31,
2003, a majority (52.5%) of the Company's shares were owned by Wayne Savings
Bankshares M.H.C. ("Bankshares," "parent" or "M.H.C."), a mutual holding
company, as defined under Office of Thrift Supervision ("OTS") regulations. In
fiscal 2003, the Company completed a reorganization and related common stock
offering which culminated with the M.H.C. merging with and into the Bank in a
manner similarto a pooling-of-interests. 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 March
31, 2005, consolidated financial statements herein include the accounts of
Stebbins Bancshares from the June 1, 2004, acquisition date through March 31,
2005. Intercompany transactions and balances are eliminated in the consolidated
financial statements.
The Bank conducts a general banking business in north central Ohio, which
consists of attracting deposits from the general public and applying those funds
to the origination of loans for residential, consumer and nonresidential
purposes. The Bank's profitability is significantly dependent on its net
interest income, which is the difference between interest income generated from
interest-earning assets (i.e. loans and investments) and the interest expense
paid on interest-bearing liabilities (i.e. customer deposits and borrowed
funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or received
by the Bank can be significantly influenced by a number of environmental
factors, such as governmental monetary policy, that are outside of management's
control.
The financial information presented herein has been prepared in accordance
with accounting principles generally accepted in the United States of America
("U.S. GAAP") and general accounting practices within the financial services
industry. In preparing financial statements in accordance with U.S. GAAP,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from such
estimates.
The following is a summary of the Company's significant accounting
policies, which have been consistently applied in the preparation of the
accompanying financial statements.
1. Investment Securities and Mortgage-Backed Securities
The Company accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115
requires that investments be categorized as held-to-maturity, trading, or
available for sale. Securities classified as held-to-maturity are carried at
cost only if the Company has the positive intent and ability to hold these
securities to maturity. Trading securities and securities designated as
available for sale are carried at fair value with resulting unrealized gains or
losses recorded to operations or stockholders' equity, respectively. Realized
gains or losses on sales of securities are recognized using the specific
identification method.
2. Loans Receivable
Loans held in portfolio are stated at the principal amount outstanding,
adjusted for deferred loan origination fees, the allowance for loan losses, and
premiums and discounts on loans purchased and sold. Premiums and discounts on
loans purchased and sold are amortized and accreted to operations using the
interest method over the average life of the underlying loans.
Interest is accrued as earned unless the collectibility of the loan is in
doubt. Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal to
all interest previously accrued, and income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments has returned
to normal, in which case the loan is returned to accrual status.
The Bank recognizes rights to service mortgage loans for others pursuant
to SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." In accordance with SFAS No. 140, an institution
that acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells those loans with servicing rights
retained must allocate some of the cost of the loans to the mortgage servicing
rights.
The Bank recognized $54,000, $61,000 and $24,000 of pre-tax gains on sales
of loans related to capitalized mortgage servicing rights during the fiscal
years ended March 31, 2005, 2004 and 2003, respectively.
SFAS No. 140 requires that capitalized mortgage servicing rights be
assessed for impairment. Impairment is measured
- --------------------------------------- 26 -------------------------------------
- ------------------------------------------------------------------------- [LOGO]
based on fair value. The mortgage servicing rights recorded by the Bank,
calculated in accordance with the provisions of SFAS No. 140, were segregated
into pools for valuation purposes, using as pooling criteria the loan term and
coupon rate. Once pooled, each grouping of loans was evaluated on a discounted
earnings basis to determine the present value of future earnings that a
purchaser could expect to realize from each portfolio. Earnings were projected
from a variety of sources including loan servicing fees, interest earned on
float, net interest earned on escrows, miscellaneous income and costs to service
the loans. The present value of future earnings is the "economic" value for the
pool, i.e., the net realizable present value to an acquirer of the acquired
servicing.
The Bank recorded amortization related to mortgage servicing rights
totaling approximately $61,000, $164,000 and $164,000 for the years ended March
31, 2005, 2004 and 2003, respectively. At March 31, 2005 and 2004, the carrying
value of the Bank's mortgage servicing rights, which approximated fair value,
totaled $274,000 and $281,000, respectively.
Loans held for sale are carried at the lower of cost or market, determined
in the aggregate. In computing cost, deferred loan origination fees are deducted
from the principal balances of the related loans. There were no loans identified
as held for sale at either March 31, 2005, or March 31, 2004.
3. Loan Origination Fees
The Bank accounts for loan origination fees in accordance with SFAS No. 91
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases." Pursuant to the provisions
of SFAS No. 91, origination fees received from loans, net of certain direct
origination costs, are deferred and amortized to interest income using the
level-yield method, giving effect to actual loan prepayments. Additionally, SFAS
No. 91 generally limits deferred loan origination costs to the direct costs
attributable to the origination of a loan, i.e. principally actual personnel
costs. Fees received for loan commitments that are expected to be drawn upon,
based on the Bank's experience with similar commitments, are deferred and
amortized over the life of the loan using the level-yield method. Fees for other
loan commitments are deferred and amortized over the loan commitment period on a
straight-line basis.
4. Allowance for Loan Losses
It is the Bank's policy to provide valuation allowances for losses
inherent within the loan portfolio that are both probable and can be reasonably
estimated. When the collection of a loan becomes doubtful, or otherwise
troubled, the Bank records a charge-off equal to the difference between the fair
value of the property securing the loan and the loan's carrying value. In
providing valuation allowances, costs of holding real estate, including the cost
of capital, are considered. Major loans (including development projects) and
major lending areas are reviewed periodically to determine potential problems at
an early date. The allowance for loan losses is increased by charges to earnings
and decreased by charge-offs (net of recoveries).
The Bank accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." This Statement requires that
impaired loans be measured based upon the present value of expected future cash
flows discounted at the loan's effective interest rate or, as an alternative, at
the loan's observable market price or fair value of the collateral.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
applying the provisions of SFAS No. 114, the Bank considers investment in
one-to-four family residential loans and consumer installment loans to be
homogeneous and therefore excluded from separate identification for evaluation
of impairment. With respect to the Bank's investment in multi-family, commercial
and nonresidential loans, and the evaluation of impairment thereof, such loans
are collateral dependent and, as a result, are carried as a practical expedient
at the lower of cost or fair value.
It is the Bank's policy to charge off unsecured credits that are more than
ninety days delinquent. Similarly, collateral dependent loans are evaluated for
impairment at the time it becomes possible that the Bank will not collect all
contractual amounts due. Generally, this analysis is performed before a loan
becomes ninety days delinquent.
Information with respect to loans defined as impaired under SFAS No. 114
is summarized below:
2005 2004 2003
------ ------ ------
(In thousands)
Investment in impaired loans ....................... $ -- $ -- $1,811
Impaired loans with no measurement of loss ......... -- -- 1,811
Impaired loans with measurement of loss ............ -- -- --
Allocated allowance for loan losses ................ -- -- --
Average impaired loans ............................. -- 906 2,412
Charge-off of principal related to impaired loans .. -- -- 84
- --------------------------------------- 27 -------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.)
[LOGO] -------------------------------------------------------------------------
March 31, 2005, 2004, and 2003
During the time a loan is deemed impaired, the Bank records interest
income using the cash method of accounting. There was no interest income
recorded on impaired loans in fiscal 2005. Interest income recorded on impaired
loans totaled approximately $249,000 and $24,000 for the fiscal years ended
March 31, 2004 and 2003.
5. Office Premises and Equipment
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and minor
renewals are expensed as incurred. For financial reporting, depreciation and
amortization are provided on the straight-line method over the remaining useful
lives of the assets, estimated to be twenty to fifty-five years for buildings
and improvements, five to ten years for furniture and equipment, ten to twenty
years for leasehold improvements, and forty years for safe deposit boxes. An
accelerated method is used for tax reporting purposes.
6. Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are recorded if
the properties' fair value subsequently declines below the value determined at
the recording date. In determining the lower of cost or fair value at
acquisition, costs relating to development and improvement of property are
capitalized. Costs relating to holding real estate acquired through foreclosure,
net of rental income, are charged against earnings as incurred.
7. Federal Income Taxes
The Company accounts for federal income taxes pursuant to SFAS No. 109
"Accounting for Income Taxes." In accordance with SFAS No. 109, a deferred tax
liability or deferred tax asset is computed by applying the current statutory
tax rates to net taxable or deductible temporary differences between the tax
basis of an asset or liability and its reported amount in the financial
statements that will result in net taxable or deductible amounts in future
periods. Deferred tax assets are recorded only to the extent that the amount of
net deductible temporary differences or carryforward attributes may be utilized
against current period earnings, carried back against prior years' earnings,
offset against taxable temporary differences reversing in future periods, or
utilized to the extent of management's estimate of future taxable income. A
valuation allowance is provided for deferred tax assets to the extent that the
value of net deductible temporary differences and carryforward attributes
exceeds management's estimates of taxes payable on future taxable income.
Deferred tax liabilities are provided on the total amount of net temporary
differences taxable in the future.
The Company's principal temporary differences between pretax financial
income and taxable income result primarily from the different methods of
accounting for deferred loan origination fees, Federal Home Loan Bank stock
dividends, certain components of retirement expense, general loan loss
allowances, percentage of earnings bad debt deductions and mortgage servicing
rights. A temporary difference is also recognized for depreciation expense
computed using accelerated methods for federal income tax purposes.
8. Earnings Per Share
Basic earnings per common share is computed based upon the
weighted-average number of common shares outstanding during the year, reduced by
unallocated shares in the Employee Stock Ownership Plan ("ESOP") totaling
132,925 and 145,209 shares for the fiscal years ended March 31, 2005 and 2004.
Diluted earnings per common share include the dilutive effects of additional
potential common shares issuable under the Company's Stock Option Plan. For each
of the years presented, there were no shares excluded from the diluted earnings
per share calculation because the related options were anti-dilutive. The
computations are as follows:
2005 2004 2003
--------- --------- ---------
Weighted-average common shares
outstanding (basic) 3,571,887 3,738,686 3,887,881
Dilutive effect of assumed exercise
of stock options 31,354 12,499 14,196
--------- --------- ---------
Weighted-average common shares
outstanding (diluted) 3,603,241 3,751,185 3,902,077
========= ========= =========
9. Stock Option and Benefit Plans
The Company has a 1993 incentive Stock Option Plan that provided for the
issuance of 196,390 adjusted shares of authorized shares of common stock with
10,123 options outstanding at March 31, 2005. In fiscal 2004, the Company
adopted a new Stock Option Plan that provided for the issuance of 142,857
incentive options and 61,224 non-incentive options of authorized common stock.
As of March 31, 2005, all options under the 2004 Plan have been granted and
expire in fiscal 2014.
In the fourth quarter of fiscal 2005, the Company adopted the provisions
of SFAS No. 123(R), "Share Based Payment." SFAS No.123(R) requires the
recognition of compensation related to stock option awards based on the fair
value of the option award on the grant date. Compensation cost is then
- --------------------------------------- 28 -------------------------------------
- ------------------------------------------------------------------------- [LOGO]
recognized over the vesting period. Subsequent to adoption of SFAS No. 123(R),
the Company modified 163,265 stock option awards under the 2004 Stock Option
Plan, eliminating the reload options contained therein and immediately vesting
these shares. Pursuant to SFAS No. 123(R), the modification represents a new
grant. Accordingly, in accordance with the modified prospective application
method under SFAS No. 123(R), the Company recognized compensation costs of
$664,000, representing the fair value of the option awards at the date of
modification. This compensation cost represented an after-tax charge to earnings
of $424,000, or $.12 per diluted share in fiscal 2005.
The Company accounted for its stock option plans in fiscal 2004 and 2003
pursuant to SFAS No. 123 "Accounting for Stock Based Compensation," which also
provided for a fair value-based method for measuring compensation cost at the
grant date based on the fair value of the award at the grant date. Compensation
was then recognized over the service period, generally defined as the vesting
period. Alternatively, SFAS No. 123 permitted companies to continue the account
for stock options using APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities that continued to account for stock options using APB
Opinion No. 25 were 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. Wayne Savings had continued to account for stock
option expense pursuant to APB Opinion No. 25.
In accordance with APB Opinion No. 25, no compensation cost has been
recognized for the plans in fiscal 2004 and 2003. Had compensation cost for the
Company's stock option plans been determined based on the fair value at the
grant dates for awards under the plans consistent with the accounting method
utilized in SFAS No. 123(R), the Company's net earnings and earnings per share
would have been reported in the manner presented below:
2004 2003
---------- ----------
Net earnings .............................. $ 2,704 $ 2,772
Stock-based compensation, net of tax .... (106) (21)
---------- ----------
Pro forma net earnings .................. $ 2,598 $ 2,751
========== ==========
Earnings per share
Basic ................................... $ .72 $ .71
Stock-based compensation, net of tax .... (.03) --
---------- ----------
Pro forma earnings per share ............ $ .69 $ .71
========== ==========
Diluted ................................. $ .72 $ .71
Stock-based compensation, net of tax .... (.03) (.01)
---------- ----------
Pro forma earnings per share ............ $ .69 $ .70
========== ==========
The following information applies to options outstanding at March 31, 2005:
Number outstanding ....................................... 214,204
Range of exercise prices ............................ $11.67 - $ 13.95
Weighted-average exercise price .......................... $ 13.84
Weighted-average remaining contractual life .............. 9.00
At March 31, 2005, 214,204 of the stock options are subject to exercise at
the discretion of the grantees and 10,123 expire in fiscal 2006, while the
remaining 204,081 options are also subject to exercise and will expire in fiscal
2014.
A summary of the status of the Company's stock option plans as of March
31, 2005, 2004 and 2003, and changes during the years ending on those dates is
presented below:
- --------------------------------------------------------------------------------
2005 2004 2003
-------------------- -------------------- --------------------
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
Outstanding at beginning of year 214,204 $ 13.84 28,666 $ 6.26 23,378 $ 3.31
Granted 163,265 13.95 204,081 13.95 10,123 11.67
Exercised -- -- (18,543) 3.31 (4,835) 3.31
Forfeited (163,265) (13.95) -- -- -- --
-------- -------- -------- -------- -------- --------
Outstanding at end of year 214,204 $ 13.84 214,204 $ 13.84 28,666 $ 6.26
======== ======== ======== ======== ======== ========
Options exercisable at year-end 214,204 13.84 10,123 $ 11.67 28,666 $ 6.26
======== ======== ======== ======== ======== ========
Fair value of options granted $ 4.07 $ 3.93 $ 3.17
======== ======== ========
- --------------------------------------- 29 -------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.)
[LOGO] -------------------------------------------------------------------------
March 31, 2005, 2004, and 2003
The fair value of each option grant was estimated on the date of grant
using the Black-Scholes option pricing model. The following assumptions were
used for grants in each of the respective years:
2005 2004 2003
-------- -------- --------
Dividend yield .......................... 4.5% 3.3% 3.8%
Expected volatility ..................... 27.3 28.8 32.4
Expected life in years .................. 9 10 10
In connection with conversion to stock form, the Company implemented a
Management Recognition Plan and an ESOP.
The Management Recognition Plan granted share awards to certain members of
management and the directorate. The value of such awards totaled $1.1 million at
acquisition and was originally scheduled to vest over a five year period. The
Company recognized scheduled expense under the plan of $231,000 and $173,000 in
fiscal 2005 and 2004, and accelerated the vesting of the remaining awards in
fiscal 2005 at a cost of $738,000.
Additionally, the Company initiated an ESOP in fiscal 2003 that provided
for the purchase of 163,265 shares in the Company's conversion offering. The
Company recognized expense under the ESOP of $256,000 and $206,000 in fiscal
2005 and 2004, allocating 15,695 and 14,645 shares, respectively. At March
31,2005, 132,925 ESOP shares remain unallocated.
10. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include
cash and due from banks, federal funds sold, and interest-bearing deposits due
from other financial institutions with original maturities of less than three
months.
11. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments,"
requires disclosure of the fair value of financial instruments, both assets and
liabilities whether or not recognized in the consolidated statements of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair values
are based on estimates using present value and other valuation methods.
The methods used are greatly affected by the assumptions applied,
including the discount rate and estimates of future cash flows. Therefore, the
fair values presented may not represent amounts that could be realized in an
exchange for certain financial instruments.
The following methods and assumptions were used by the Company in
estimating its fair value disclosures for financial instruments at March 31,
2005 and 2004:
Cash and cash equivalents: The carrying amounts presented in the
consolidated statements of financial condition for cash and cash
equivalents are deemed to approximate fair value.
Interest-bearing deposits in other financial institutions: The carrying
amounts presented in the consolidated statements of financial condition
for certificates of deposit in other financial institutions are deemed to
approximate fair value.
Investment and mortgage-backed securities: For investment and
mortgage-backed securities, fair value is deemed to equal the quoted
market price.
Loans receivable: The loan portfolio has been segregated into categories
with similar characteristics, such as one-to-four family residential,
multi-family residential and nonresidential real estate. These loan
categories were further delineated into fixed-rate and adjustable-rate
loans. The fair values for the resultant loan categories were computed via
discounted cash flow analysis, using current interest rates offered for
loans with similar terms to borrowers of similar credit quality. For loans
on deposit accounts and consumer and other loans, fair values were deemed
to equal the historic carrying values. The historical carrying amount of
accrued interest on loans is deemed to approximate fair value.
Federal Home Loan Bank stock: The carrying amount presented in the
consolidated statements of financial condition is deemed to approximate
fair value.
Deposits: The fair value of NOW accounts, passbook and club accounts,
money market deposits and advances by borrowers is deemed to approximate
the amount payable on demand. Fair values for fixed-rate certificates of
deposit have been estimated using a discounted cash flow calculation using
the interest rates currently offered for deposits of similar remaining
maturities.
Advances from Federal Home Loan Bank: The fair value of these advances is
estimated using the rates currently offered for similar advances of
similar remaining maturities or, when available, quoted market prices.
Commitments to extend credit: For fixed-rate and adjustable-rate loan
commitments, the fair value estimate considers the difference between
current levels of interest rates and committed rates. At March 31, 2005,
the fair value of loan commitments was not material.
- --------------------------------------- 30 -------------------------------------
- ------------------------------------------------------------------------- [LOGO]
Based on the foregoing methods and assumptions, the carrying value and
fair value of the Company's financial instruments at March 31 are as follows:
2005 2004
----------------------- -----------------------
Carrying Fair Carrying Fair
value value value value
---------- ---------- ---------- ----------
(In thousands)
Financial assets
Cash and cash equivalents and interest-bearing deposits .. $ 29,942 $ 29,942 $ 19,887 $ 19,887
Investment securities .................................... 72,856 72,945 31,582 32,376
Mortgage-backed securities ............................... 60,352 60,371 88,428 88,455
Loans receivable ......................................... 213,627 214,238 205,443 210,124
Federal Home Loan Bank stock ............................. 4,386 4,386 4,205 4,205
---------- ---------- ---------- ----------
$ 381,163 $ 381,882 $ 349,545 $ 355,047
========== ========== ========== ==========
Financial liabilities
Deposits ................................................. $ 320,586 $ 318,534 $ 291,830 $ 293,575
Advances from the Federal Home Loan Bank ................. 40,000 39,533 30,000 30,966
Advances by borrowers for taxes and insurance ............ 612 612 617 617
---------- ---------- ---------- ----------
$ 361,198 $ 358,679 $ 322,447 $ 325,158
========== ========== ========== ==========
12. Advertising
Advertising costs are expensed when incurred. The Company's advertising
expense totaled $163,000, $132,000 and $151,000 for the fiscal years ended March
31, 2005, 2004 and 2003 respectively.
13. Reclassifications
Certain prior year amounts have been reclassified to conform to the March
31, 2005 consolidated financial statement presentation.
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES
Carrying values and estimated fair values of investment securities at
March 31 are summarized as follows:
March 31, 2005
-------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized Fair
cost gains losses value
---------- ---------- ---------- ----------
Held-to-maturity (In thousands)
Corporate bonds and notes ................................... $ 10,021 $ 124 $ 54 $ 10,091
U.S. Government and agency obligations ...................... 1,796 7 -- 1,803
Municipal obligations ....................................... 195 12 -- 207
---------- ---------- ---------- ----------
$ 12,012 $ 143 $ 54 $ 12,101
========== ========== ========== ==========
Available for sale
Corporate bonds and notes ................................... $ 1,011 $ 54 $ -- $ 1,065
U.S. Government and agency obligations ...................... 50,209 1 767 49,443
Municipal obligations ....................................... 10,343 86 93 10,336
---------- ---------- ---------- ----------
$ 61,563 $ 141 $ 860 $ 60,844
========== ========== ========== ==========
March 31, 2004
-------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized Fair
cost gains losses value
---------- ---------- ---------- ----------
Held-to-maturity (In thousands)
Corporate bonds and notes ................................... $ 10,054 $ 704 $ -- $ 10,758
U.S. Government and agency obligations ...................... 3,868 76 3 3,941
Municipal obligations ....................................... 114 17 -- 131
---------- ---------- ---------- ----------
$ 14,036 $ 797 $ 3 $ 14,830
========== ========== ========== ==========
Available for sale
Corporate bonds and notes ................................... $ 1,516 $ 144 $ -- $ 1,660
U.S. Government and agency obligations ...................... 11,060 261 -- 11,321
Municipal obligations ....................................... 4,427 138 -- 4,565
---------- ---------- ---------- ----------
$ 17,003 $ 543 $ -- $ 17,546
========== ========== ========== ==========
- -------------------------------------- 31 --------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.)
[LOGO] -------------------------------------------------------------------------
March 31, 2005, 2004, and 2003
The amortized cost and estimated fair value of investment securities at
March 31, 2005, by term to maturtity are shown below.
Amortized Estimated
cost fair value
---------- ----------
Held-to-maturity (In thousands)
Due in one year or less ..................................... $ 6,032 $ 6,121
Due within one to three years ............................... 4,989 4,976
Due in over five years ...................................... 991 1,004
---------- ----------
$ 12,012 $ 12,101
========== ==========
Available for sale
Due in one year or less ..................................... $ 3,997 $ 3,974
Due within one to three years ............................... 32,711 32,380
Due within three to five years .............................. 12,856 12,509
Due in over five years ...................................... 11,999 11,981
---------- ----------
$ 61,563 $ 60,844
========== ==========
The Company had pledged $7.8 million and $2.3 million in investment
securities to secure public deposits at March 31, 2005 and 2004, respectively.
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at March 31, 2005 and 2004,
including those designated as available for sale, are summarized as follows:
2005
-------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized Fair
cost gains losses value
---------- ---------- ---------- ----------
(In thousands)
Held-to-maturity
Federal Home Loan Mortgage Corporation
participation certificates .............................. $ 604 $ 9 $ -- $ 613
Government National Mortgage Association
participation certificates .............................. 1,014 2 5 1,011
Federal National Mortgage Association
participation certificates .............................. 1,010 13 -- 1,023
---------- ---------- ---------- ----------
$ 2,628 $ 24 $ 5 $ 2,647
========== ========== ========== ==========
Available for sale
Federal Home Loan
Mortgage Corporation
participation certificates ............................. $ 23,043 $ 55 $ 265 $ 22,833
Government National
Mortgage Association
participation certificates ........................... 2,474 3 22 2,455
Federal National
Mortgage Association
participation certificates ............................. 30,686 92 334 30,444
Private Issue
Mortgage Association
participation certificates ............................. 2,001 -- 9 1,992
---------- ---------- ---------- ----------
$ 58,204 $ 150 $ 630 $ 57,724
========== ========== ========== ==========
2004
-------------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized Fair
cost gains losses value
---------- ---------- ---------- ----------
(In thousands)
Held-to-maturity
Federal Home Loan
Mortgage Corporation
participation certificates ............................. $ 1,190 $ 16 $ -- $ 1,206
Government National
Mortgage Association
participation certificates ............................. 1,587 4 12 1,579
Federal National
Mortgage Association
participation certificates ............................. 1,706 20 1 1,725
---------- ---------- ---------- ----------
$ 4,483 $ 40 $ 13 $ 4,510
========== ========== ========== ==========
Available for sale
Federal Home Loan
Mortgage Corporation
participation certificates ............................. $ 32,153 $ 160 $ 118 $ 32,195
Government National
Mortgage Association
participation certificates ............................. 1,753 9 3 1,759
Federal National
Mortgage Association
participation certificates ............................. 47,553 319 212 47,660
Private Issue
Mortgage Association
participation certificates ............................. 2,303 28 -- 2,331
---------- ---------- ---------- ----------
$ 83,762 $ 516 $ 333 $ 83,945
========== ========== ========== ==========
The amortized cost of mortgage-backed securities, including those
designated as available for sale at March 31, 2005, by contractual term to
maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may generally prepay obligations without prepayment
penalties.
March 31, 2005
Amortized Cost
(In thousands)
Held-to-maturity
Due within three years $ 9
Due after three years 2,619
---------
$ 2,628
=========
Available for sale
Due within three years $ 4,366
Due after three years 53,838
---------
$ 58,204
=========
Proceeds from sales of mortgage-backed securities during the year ended
March 31, 2004, totaled $4.4 million resulting in gross realized gains of
$16,000.
- -------------------------------------- 32 --------------------------------------
- --------------------------------------------------------------------------[LOGO]
UNREALIZED LOSSES ON SECURITIES
Less than 12 Months 12 Months or Longer
------------------------------------- ------------------------------------
Number of Fair Unrealized Number of Fair Unrealized
Investments Value Losses Investments Value Losses
----------- ---------- ---------- ----------- ---------- ----------
(Dollars in thousands)
Municipal obligations ...... 5 $ 3,339 $ 45 1 $ 921 $ 48
U.S. Government agency
obligations ............. 43 43,412 717 2 1,948 50
Corporate bonds and notes .. 1 2,466 54 -- -- --
Mortgage-backed securities . 29 30,357 356 13 10,473 279
----------- ---------- ---------- ----------- ---------- ----------
Total temporarily impaired
securities .............. 78 $ 79,574 $ 1,172 16 $ 13,342 $ 377
=========== ========== ========== =========== ========== ==========
Total
-------------------------------------
Number of Fair Unrealized
Investments Value Losses
----------- ---------- ----------
Municipal obligations ...... 6 $ 4,260 $ 93
U.S. Government agency
obligations ............ 45 45,360 767
Corporate bonds and notes .. 1 2,466 54
Mortgage-backed securities . 42 40,830 635
----------- ---------- ----------
Total temporarily impaired
securities ............. 94 $ 92,916 $ 1,549
=========== ========== ==========
Management has the intent and ability to hold these securities for the
foreseeable future and the decline in the fair value is primarily due to an
increase in market interest rates. The fair values are expected to recover as
securities approach maturity dates.
- --------------------------------------------------------------------------------
NOTE C -- LOANS RECEIVABLE
The composition of the loan portfolio at March 31 is as follows:
2005 2004
---------- -----------
(In thousands)
Residential real estate - 1 to 4 family . $ 157,658 $ 171,736
Residential real estate - multi-family .. 7,872 6,800
Residential real estate - construction .. 4,053 2,914
Nonresidential real estate and land ..... 29,187 18,439
Commercial .............................. 14,075 6,471
Consumer and other ...................... 4,306 3,156
---------- -----------
217,151 209,516
Less:
Undisbursed portion of loans in
process .......................... 1,638 2,579
Deferred loan origination fees ...... 512 679
Allowance for loan losses ........... 1,374 815
---------- -----------
$ 213,627 $ 205,443
========== ===========
As depicted above, the Bank's lending efforts have historically focused on
one-to-four family residential and multi-family residential real estate loans,
which comprise approximately $167.9 million, or 79%, of the total loan portfolio
at March 31, 2005, and $178.9 million, or 87%, of the total loan portfolio at
March 31, 2004. Generally, such loans have been underwritten on the basis of no
more than an 80% loan-to-value ratio, which has historically provided the
Company with adequate collateral coverage in the event of default. Nevertheless,
the Bank, as with any lending institution, is subject to the risk that real
estate values could deteriorate in the primary lending area of north central
Ohio, thereby impairing collateral values. However, management is of the belief
that residential real estate values in the Company's primary lending area are
presently stable.
As discussed previously, Wayne Savings has sold whole loans and
participating interests in loans in the secondary market, retaining servicing on
the loans sold. Loans sold and serviced for others totaled approximately $34.0
million, $35.3 million and $47.9 million at March 31, 2005, 2004 and 2003,
respectively.
In the normal course of business, the Bank has made loans to directors,
officers and their related business interests. Related party loans are made on
the same terms that are widely available to other employees, as long as the
director or executive officer is not given preferential treatment compared to
other participating employees. The aggregate dollar amount of loans outstanding
to directors, officers and their related business interests totaled
approximately $2.8 million, $2.7 million and $2.6 million at March 31, 2005,
2004 and 2003, respectively.
- -------------------------------------- 33 --------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.)
[LOGO] -------------------------------------------------------------------------
March 31, 2005, 2004, and 2003
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows for
the years ended March 31:
2005 2004 2003
-------- -------- --------
(in thousands)
Balance at beginning of year .. $ 815 $ 678 $ 730
Provision for losses on loans . 430 173 91
Stebbins acquisition .......... 230 -- --
Charge-offs of loans .......... (126) (65) (158)
Recovery of loans previously
charged off ............... 25 29 15
-------- -------- --------
Balance at end of year ........ $ 1,374 $ 815 $ 678
======== ======== ========
As of March 31, 2005, the Bank's allowance for loan losses was comprised
solely of a general loan loss allowance, which is includible as a component of
regulatory risk-based capital.
Nonaccrual, nonperforming and impaired loans totaled approximately
$906,000, $747,000 and $2.5 million at March 31, 2005, 2004 and 2003,
respectively.
During the years ended March 31, 2005, 2004 and 2003, interest income of
approximately $40,000, $37,000 and $208,000, respectively, would have been
recognized had nonaccrual loans been performing in accordance with contractual
terms.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at March 31 are comprised of the following:
2005 2004
---------- ----------
(in thousands)
Land and improvements .................... $ 1,654 $ 1,656
Office buildings and improvements ........ 7,294 6,622
Furniture, fixtures and equipment ........ 3,776 3,491
Leasehold improvements ................... 356 356
---------- ----------
13,080 12,125
Less accumulated depreciation
and amortization ..................... 4,158 3,383
---------- ----------
$ 8,922 $ 8,742
========== ==========
NOTE F - DEPOSITS
Deposits consist of the following major classifications at March 31:
2005 2004
---------- ----------
Deposit type and weighted- (in thousands)
average interest rate
NOW accounts
2005 - .27% .......................... $ 53,060
2004 - .33% .......................... $ 42,679
Savings accounts
2005 - .79% .......................... 82,184
2004 - .78% .......................... 82,093
Money Market Investor
2005 - 1.34% ......................... 18,097
2004 - .84% .......................... 11,893
---------- ----------
Total demand, transaction and
savings account deposits ............. 153,341 136,665
Certificates of deposit
Original maturities of:
Less than 12 months
2005 - 1.99% ...................... 42,483
2004 - 1.01% ...................... 15,841
12 months to 24 months
2005 - 1.97% ...................... 24,438
2004 - 1.59% ...................... 43,545
25 months to 36 months
2005 - 3.02% ...................... 16,039
2004 - 3.49% ...................... 17,860
More than 36 months
2005 - 4.39% ...................... 53,183
2004 - 4.49% ...................... 42,781
Jumbo
2005 - 3.24% ...................... 31,102
2004 - 3.29% ...................... 35,138
---------- ----------
Total certificates of deposit ............ 167,245 155,165
---------- ----------
Total deposit accounts ................... $ 320,586 $ 291,830
========== ==========
- -------------------------------------- 34 --------------------------------------
- ------------------------------------------------------------------------- [LOGO]
At March 31, 2005 and 2004, the Bank had certificates of deposit with
balances in excess of $100,000 totaling $34.4 million and $48.7 million,
respectively.
Interest expense on deposits for the years ended March 31 is summarized as
follows:
2005 2004 2003
--------- --------- ---------
(In thousands)
Savings accounts .......................... $ 653 $ 688 $ 1,474
NOW and money market deposit accounts .... 383 269 540
Certificates of deposit ................... 4,648 4,942 6,418
--------- --------- ---------
$ 5,684 $ 5,899 $ 8,432
========= ========= =========
Maturities of outstanding certificates of deposit at March 31 are
summarized as follows:
2005 2004
---------- ----------
(In thousands)
Less than one year ........................ $ 91,507 $ 86,381
One to three years ........................ 56,360 45,051
Over three years .......................... 19,378 23,733
---------- ----------
$ 167,245 $ 155,165
========== ==========
NOTE G - ADVANCES FROM THE
FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank were collateralized at March 31,
2005 and 2004 by pledges of certain residential mortgage loans totaling $50.0
million and $37.5 million, respectively, and the Bank's investment in Federal
Home Loan Bank stock, are summarized as follows:
Interest Maturing in year
rate ending March 31, 2005 2004
---------- ----------
(Dollars in thousands)
5.07% - 5.29% 2005 $ -- $ 5,000
Floating rate - 2.95% 2006 15,000 --
3.13% - 3.36% 2007 7,500 7,500
3.51% - 3.61% 2008 5,000 5,000
4.01% 2009 2,500 2,500
4.34% 2010 2,500 2,500
4.60% - 4.87% 2011 and
thereafter 7,500 7,500
---------- ----------
$ 40,000 $ 30,000
========== ==========
Weighted-average interest rate 3.59% 4.15%
========== ==========
NOTE H - FEDERAL INCOME TAXES
The provision for federal income taxes (benefits) at the 34% statutory
composite tax rate is as follows:
2005 2004 2003
--------- --------- ---------
(In thousands)
Federal income taxes computed at expected
34% statutory rate .................... $ 101 $ 1,312 $ 1,356
Cash surrender value of life
insurance ............................. (88) (88) (41)
Tax-exempt obligations, net ............... (129) (80) (102)
Other ..................................... 31 10 4
--------- --------- ---------
Federal income tax
provision (benefits) per
consolidated financial statements ..... $ (85) $ 1,154 $ 1,217
========= ========= =========
The composition of the Company's net deferred tax liability at March 31 is
as follows:
2005 2004
---------- ----------
(In thousands)
Taxes (payable) refundable on temporary differences at statutory rate:
Deferred tax assets
Deferred loan origination fees ....... $ 174 $ 3
General loan loss allowance .......... 467 277
Unrealized losses on securities
designated as available for sale . 408 --
Reserve for uncollected interest ..... 59 14
Stock option expense ................. 240 --
Other ................................ 16 61
---------- ----------
Deferred tax assets .................. 1,364 355
---------- ----------
Deferred tax liabilities
Pension .............................. (306) (147)
Federal Home Loan Bank
stock dividends .................. (1,000) (938)
Book/tax depreciation differences .... (257) (202)
Financed loan fees ................... (89) --
Unrealized gains on securities
designated as available for sale . -- (247)
Bad debt deduction ................... (16) (40)
Mortgage servicing rights ............ (97) (93)
---------- ----------
Deferred tax liabilities ............. (1,765) (1,667)
---------- ----------
Total deferred tax liability ............ $ (401) $ (1,312)
========== ==========
- -------------------------------------- 35 --------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.)
[LOGO] -------------------------------------------------------------------------
March 31, 2005, 2004, and 2003
Prior to fiscal 1997, Wayne Savings was allowed a special bad debt
deduction based on a percentage of earnings, generally limited to 8% of
otherwise taxable income and subject to certain limitations based on aggregate
loans and deposit account balances at the end of the year. This cumulative
percentage of earnings bad debt deduction totaled approximately $2.7 million as
of March 31, 2005. If the amounts that qualified as deductions for federal
income taxes are later used for purposes other than bad debt losses, including
distributions in liquidation, such distributions will be subject to federal
income taxes at the then current corporate income tax rate. The amount of
unrecognized deferred tax liability relating to the cumulative bad debt
deduction was approximately $918,000 at March 31, 2005.
During fiscal 2005, the Company settled all matters related to the IRS's
examination of its 1999 federal income tax return without material consequence.
NOTE I - COMMITMENTS
The Company is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers, including commitments to extend credit. Such commitments involve, to
varying degrees, elements of credit and interest-rate risk in excess of the
amount recognized in the consolidated statements of financial condition. The
contract or notional amounts of the commitments reflect the extent of the
Company's involvement in such financial instruments.
The Company's exposure to credit loss in the event of non-performance by
the other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations
as those utilized for on-balance-sheet instruments.
At March 31, 2005, the Company had total outstanding commitments of
approximately $2.1 million to originate loans, of which $1.9 million were
comprised of fixed-rate loans at rates ranging from 5.25% to 6.625% and a
$141,000, 5.375% adjustable rate loan. The Bank also had loans in process of
$1.6 million at March 31, 2005, consisting of $1.4 million of one-to-four family
loans and $177,000 on residential real estate loans. The Company had unused
lines of credit outstanding under home equity loans of $18.0 million at March
31, 2005. The Company also had $115,000 unused lines of credit outstanding under
overdrafts at March 31, 2005. Additionally, the Company had unused lines of
credit under commercial loans of $10.7 million at March 31, 2005 and 2004. The
Company had outstanding letters of credit of $262,000 at March 31, 2005. At
March 31, 2005, the Company had outstanding commitments to purchase $4.0 million
of mortgage-backed securities, $2.0 million of available for sale investment
securities and a commitment to sell $2.8 million of mortgage-backed securities.
Commitments to extend credit are agreements to lend to a customer as long
as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments may expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained, if
it is deemed necessary by the Company upon extension of credit, is based on
management's credit evaluation of the counterparty. Collateral on loans may vary
but the preponderance of loans granted generally includes a mortgage interest in
real estate as security.
The Company leases certain branch banking facilities under operating
leases. The minimum annual lease payments over the initial lease term are as
follows:
Fiscal year ended (In thousands)
- ----------------- --------------
2006 ..................................... $ 65
2007 ..................................... 49
2008 ..................................... 30
2009 ..................................... 35
Thereafter ............................... 35
------
Total .................................... $ 214
======
The Company incurred rental expense under operating leases totaling
approximately $70,000, $68,000 and $68,000 for the fiscal years ended March 31,
2005, 2004 and 2003, respectively.
There were no material contingent liabilities at March 31, 2005.
- -------------------------------------- 36 --------------------------------------
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NOTE J - REGULATORY CAPITAL
The Bank is subject to minimum regulatory capital standards promulgated by
the OTS. Failure to meet minimum capital requirements can initiate certain
mandatory -and possibly additional discretionary - actions by regulators that,
if undertaken, could have a direct material effect on the consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Bank must meet specific capital guidelines that
involve quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk-weightings and other factors.
The minimum capital standards of the OTS generally require the maintenance of
regulatory capital sufficient to meet each of three tests, hereinafter described
as the tangible capital requirement, the core capital requirement and the
risk-based capital requirement. The tangible capital requirement provides for
minimum tangible capital (defined as stockholders' equity less all intangible
assets) equal to 1.5% of adjusted total assets. The core capital requirement
provides for minimum core capital (tangible capital plus certain forms of
supervisory goodwill and other qualifying intangible assets) generally equal to
4.0% of adjusted total assets except for those associations with the highest
examination rating and acceptable levels of risk. The risk-based capital
requirement provides for the maintenance of core capital plus general loss
allowances equal to 8.0% of risk-weighted assets. In computing risk-weighted
assets, the Bank multiplies the value of each asset on their statement of
financial condition by a defined risk-weighting factor, e.g. one- to four-family
residential loans carry a risk-weighted factor of 50%.
As of March 31, 2005, management believes that the Bank met all capital
adequacy requirements to which they were subject. As of the most recent
examination date, the Bank was advised by the OTS that they met the definition
of a "well capitalized" institution.
The Bank's management believes that, under the current regulatory capital
regulations, the Bank will continue to meet its minimum capital requirements in
the foreseeable future. However, events beyond the control of the Bank, such as
increased interest rates or a downturn in the economy in the Bank's market area,
could adversely affect future earnings and, consequently, the ability to meet
future minimum regulatory capital requirements.
The Bank is subject to regulations imposed by the OTS regarding the amount
of capital distributions payable to the Company. Generally, the Bank's payment
of dividends is limited, without prior OTS approval, to net earnings for the
current calendar year, plus the two preceding years, less capital distributions
paid over the comparable time period. Insured institutions are required to file
an application with the OTS for capital distributions in excess of the
limitation.
- --------------------------------------------------------------------------------
The following table sets forth Wayne Savings' tangible, core and
risk-based capital rates at March 31, 2005 and 2004.
Wayne Savings Community Bank as of March 31, 2005
(Dollars in thousands)
Required to be "well-
Required for capital capitalized" under prompt
Actual adequacy purposes corrective action provisions
------------------- ---------------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
Tangible capital $ 36,796 9.2% >$ 6,022 >1.5% >$ 20,074 > 5.0%
Core capital $ 36,796 9.2% >$ 16,059 >4.0% >$ 24,089 > 6.0%
Risk-based capital $ 38,170 17.7% >$ 17,226 >8.0% >$ 21,533 >10.0%
Wayne Savings Community Bank as of March 31, 2004
(Dollars in thousands)
Required to be "well-
Required for capital capitalized" under prompt
Actual adequacy purposes corrective action provisions
------------------- ---------------------- -----------------------------
Amount Ratio Amount Ratio Amount Ratio
Tangible capital $ 39,939 10.9% >$ 5,492 >1.5% >$ 18,305 > 5.0%
Core capital $ 39,939 10.9% >$ 14,644 >4.0% >$ 21,966 > 6.0%
Risk-based capital $ 40,754 21.0% >$ 15,533 >8.0% >$ 19,416 >10.0%
- --------------------------------------- 37 -------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.)
[LOGO] -------------------------------------------------------------------------
March 31, 2005, 2004, and 2003
NOTE K - RETIREMENT PLANS
The Company had a non-contributory insured defined benefit pension plan
(the "Plan") covering all eligible employees. The Plan benefits were based on
years-of-service and other factors. Effective in fiscal 2004, Wayne Savings
froze its defined benefit pension plan. Also in fiscal 2004, management changed
the Plan's investment structure from life insurance to stocks and bonds. At
March 31, 2005, Plan assets consisted of 1.0% cash, 57.0% stocks and 42.0%
bonds. The Company's intent is to terminate the Plan at some point in the future
when financial considerations are more favorable. Contributions are intended to
provide not only for benefits attributed for service-to-date.
Information with respect to the Plan for the years ended March 31, 2005,
2004 and 2003 is as follows:
The changes in benefit obligations are computed as follows:
2005 2004 2003
---------- ---------- ----------
(In thousands)
Projected benefit obligation
at beginning of year .......... $ 2,381 $ 2,002 $ 1,592
Service cost ...................... -- 55 55
Interest cost ..................... 152 137 124
Actuarial loss .................... 339 351 428
Benefits paid ..................... (549) (164) (197)
---------- ---------- ----------
Projected benefit obligation
at end of year ................ $ 2,323 $ 2,381 $ 2,002
========== ========== ==========
The changes in the Plan's assets are computed as follows:
2005 2004 2003
---------- ---------- ----------
(In thousands)
Fair value of plan assets at
beginning of year ............. $ 2,704 $ 1,499 $ 1,508
Actual return on plan assets ...... 155 145 (22)
Employer contributions ............ 13 1,224 210
Benefits paid ..................... (549) (164) (197)
---------- ---------- ----------
Fair value of plan assets
at end of year ................ $ 2,323 $ 2,704 $ 1,499
========== ========== ==========
The following table sets forth the Plan's funded status at March 31:
2005 2004
---------- ----------
(In thousands)
Funded status ..................... $ -- $ 324
Unrecognized net actuarial loss ... 957 707
---------- ----------
Prepaid pension cost .............. $ 957 $ 1,031
========== ==========
The weighted-average actuarial assumptions used were:
2005 2004 2003
---------- ---------- ----------
Weighted-average
discount rate ................. 6.00% 6.50% 8.00%
Weighted-average rate of
compensation increase ......... 0.00% 0.00% 1.00%
Weighted-average expected
long-term rate of return on
plan assets ................... 7.00% 7.00% 7.00%
Net periodic pension costs includes the following components:
2005 2004 2003
---------- ---------- ----------
(In thousands)
Service cost ...................... $ -- $ 55 $ 55
Interest cost ..................... 152 26 124
Actual return on plan assets, net . (155) (145) 22
Amortization of prior net loss .... 28 166 2
Amortization of net transition
obligation ..................... -- -- 6
Settlement loss ................... 89 -- --
Unrecognized net actuarial loss ... -- -- (132)
---------- ---------- ----------
Net periodic pension cost ......... $ 114 $ 102 $ 77
========== ========== ==========
The following benefit payments are expected to be paid:
Fiscal Benefits
(In thousands)
2006 ............................ $ 115
2007 ............................ 113
2008 ............................ 110
2009 ............................ 151
2010 ............................ 161
Thereafter ...................... 792
The Bank has a savings plan covering substantially all employees who meet
certain age and service requirements. Under the plan, the Bank matches each
participant's contribution - up to 3% of the participant's salary; a 50% match
is provided for up to the next 4% of the participant's salary. This contribution
is dependent on availability of sufficient net earnings from current or prior
years. Additional contributions may be made as approved by the Board of
Directors. Expense under the plan totaled approximately $121,000, $78,000 and
$44,000 for the fiscal years ended March 31, 2005, 2004 and 2003, respectively.
- --------------------------------------- 38 -------------------------------------
- ------------------------------------------------------------------------- [LOGO]
NOTE L -- CONDENSED FINANCIAL STATEMENTS OF WAYNE SAVINGS BANCSHARES, INC.
The following condensed financial statements summarize the financial
position of Wayne Savings Bancshares, Inc. as of March 31, 2005 and 2004, and
the results of its operations and its cash flows for the years ended March 31,
2005, 2004, and 2003.
STATEMENTS OF FINANCIAL CONDITION
March 31,
2005 2004
---------- ----------
(In thousands)
ASSETS
Cash and due from banks ......................................... $ 480 $ 985
Investment securities available for sale - at market ............ -- 502
Mortgage-backed securities available for sale - at market ....... -- 709
Notes receivable from Wayne Savings ............................. 1,304 1,456
Investment in Wayne Savings ..................................... 38,321 40,445
Prepaid expenses and other ...................................... 547 77
---------- ----------
Total assets .................................................. $ 40,652 $ 44,174
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities .......................... $ 453 $ 613
Stockholders' equity
Common stock and additional paid-in capital ................... 35,524 34,756
Retained earnings ............................................. 11,371 12,727
Less required contributions for ESOP shares ................... (1,304) (1,456)
Shares acquired by Management Recognition Plan ................ -- (1,142)
Less 282,261 and 112,500 shares held in treasury
at March 31, 2005 and 2004, respectively ................... (4,600) (1,803)
Accumulated other comprehensive income (loss) ................. (792) 479
---------- ----------
Total stockholders' equity .................................... 40,199 43,561
---------- ----------
Total liabilities and stockholders' equity .................... $ 40,652 $ 44,174
========== ==========
STATEMENTS OF EARNINGS
For the years ended March 31,
2005 2004 2003
---------- ---------- ----------
Income (In thousands)
Interest income ................................ $ 103 $ 183 $ 43
Gain on sale of investment securities .......... -- 2 --
Equity in earnings of subsidiary ............... 1,610 2,851 2,800
---------- ---------- ----------
Total revenue ............................... 1,713 3,036 2,843
General and administrative expenses ................ 1,966 409 192
---------- ---------- ----------
Earnings (loss) before income tax benefits ..... (253) 2,627 2,651
Federal income tax benefits .................... (634) (77) (121)
---------- ---------- ----------
NET EARNINGS ................................ $ 381 $ 2,704 $ 2,772
========== ========== ==========
- --------------------------------------- 39 -------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.)
[LOGO] -------------------------------------------------------------------------
March 31, 2005, 2004, and 2003
STATEMENTS OF CASH FLOWS
For the years ended March 31,
2005 2004 2003
-------- -------- --------
Cash flows from operating activities: (In thousands)
Net earnings for the year .................................................................. $ 381 $ 2,704 $ 2,772
Adjustments to reconcile net earnings to net cash provided by operating activities: .....
Gain on sale of investment securities designated as available for sale ................ -- (2) --
Amortization and depreciation ......................................................... 2 42 --
(Undistributed earnings) excess distributions from consolidated subsidiary ............ 1,791 (1,351) (2,121)
Expense of Management Recognition Plan ................................................ 1,142 -- --
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets .................................................. (471) (29) 820
Accrued expenses and other liabilities ............................................. (177) 61 (821)
-------- -------- --------
Net cash provided by operating activities ....................................... 2,668 1,425 650
Cash flows provided by (used in) investing activities
Purchase of investment securities designated as available for sale ......................... (500) (2,006) (5,052)
Proceeds from maturity of investment securities designated as available for sale ........... 1,000 5,001 --
Proceeds from sale of investment securities designated as available for sale ............... -- 1,502 --
Purchase of mortgage-backed securities designated as available for sale .................... -- (716) --
Principal repayment on mortgage-backed securities designated as available for sale ......... 709 10 --
Repayments of ESOP loan .................................................................... 152 156 --
Investment in Wayne Savings - net .......................................................... -- -- (11,700)
-------- -------- --------
Net cash provided by (used in) investing activities ........................... 1,361 3,947 (16,752)
Cash flows provided by (used in) financing activities:
Proceeds from reorganization and related stock offering - net .............................. -- -- 17,065
Payment of dividends on common stock ....................................................... (1,737) (1,786) (831)
Purchase of treasury stock ................................................................. (2,797) (1,803) --
Proceeds from exercise of stock options .................................................... -- 61 16
Prepaid tax benefits related to employee stock plans ....................................... -- 20 --
Shares acquired by Management Recognition Plan ............................................. -- (1,142) --
-------- -------- --------
Net cash provided by (used in) financing activities .............................. (4,534) (4,650) 16,250
-------- -------- --------
Net increase (decrease) in cash and cash equivalents ......................................... (505) 722 148
Cash and cash equivalents at beginning of year ............................................... 985 263 115
-------- -------- --------
Cash and cash equivalents at end of year ..................................................... $ 480 $ 985 $ 263
======== ======== ========
NOTE M - BUSINESS COMBINATION
During 2004, the Company agreed to acquire Stebbins Bancshares, Inc.
Stebbins Bancshares, Inc., was merged into the Company in June 2004 and its
banking subsidiary, Stebbins National Bank, continued operations as a branch of
Wayne Savings. Wayne Savings Bancshares, Inc., paid $1.3 million in connection
with the acquisition.
Presented below are Wayne Savings Bancshares' pro-forma condensed
consolidated statements of earnings and earnings per share which have been
prepared as if the acquisiton had been consummated as of the beginning of each
of the years ended March 31, 2005 and 2004.
2005 2004
--------- ---------
(In thousands)
(Unaudited)
Total interest income ......................... $ 17,805 $ 19,476
Total interest expense ........................ 6,740 7,349
--------- ---------
Net interest income ........................... 11,065 12,127
Provision for losses on loans ................. 430 213
Other income .................................. 1,719 2,051
General, administrative and other expense ..... 12,025 10,142
--------- ---------
Earnings before income taxes (benefits) ...... 329 3,823
Federal income taxes (benefits) ............... (85) 1,093
--------- ---------
NET EARNINGS .................................. $ 414 $ 2,730
========= =========
Earnings per share
Basic .................................. $ .12 $ .73
========= =========
Diluted ................................ $ .12 $ .73
========= =========
- --------------------------------------- 40 -------------------------------------
- ------------------------------------------------------------------------- [LOGO]
NOTE N - QUARTERLY RESULTS OF OPERATIONS (unaudited)
The following table summarizes the Company's quarterly results for the
fiscal years ended March 31, 2005 and 2004.
For the three month periods ended
------------------------------------------------------------------------
June 30, 2004 September 30, 2004 December 31, 2004 March 31, 2005
------------- ------------------ ----------------- --------------
(In thousands, except share data)
Total interest income .................................. $ 4,244 $ 4,381 $ 4,465 $ 4,542
Total interest expense ................................. 1,625 1,609 1,711 1,771
-------- -------- -------- --------
Net interest income .................................... 2,619 2,772 2,754 2,771
Provision for losses on loans .......................... 15 15 15 385
Other income ........................................... 405 493 389 397
General, administrative and other expense .............. 2,369 2,580 2,592 4,333
-------- -------- -------- --------
Earnings (loss) before income taxes (benefits) ......... 640 670 536 (1,550)
Federal income taxes (benefits) ........................ 178 181 133 (577)
-------- -------- -------- --------
Net earnings (loss) .................................... $ 462 $ 489 $ 403 $ (973)
======== ======== ======== ========
Earnings per share
Basic .............................................. $ .13 $ .13 $ .11 $ (.26)
======== ======== ======== ========
Diluted ............................................ $ .13 $ .13 $ .11 NA
======== ======== ======== ========
For the three month periods ended
------------------------------------------------------------------------
June 30, 2003 September 30, 2003 December 31, 2003 March 31, 2004
------------- ------------------ ----------------- --------------
(In thousands, except share data)
Total interest income .................................. $ 4,723 $ 4,501 $ 4,362 $ 4,630
Total interest expense ................................. 1,932 1,796 1,736 1,683
-------- -------- -------- --------
Net interest income .................................... 2,791 2,705 2,626 2,947
Provision for losses on loans .......................... 32 31 -- 110
Other income ........................................... 510 479 490 454
General, administrative and other expense .............. 2,212 2,271 2,315 2,173
-------- -------- -------- --------
Earnings before income taxes ........................... 1,057 882 801 1,118
Federal income taxes ................................... 326 269 241 318
-------- -------- -------- --------
Net earnings ........................................... $ 731 $ 613 $ 560 $ 800
======== ======== ======== ========
Earnings per share
Basic .............................................. $ .20 $ .16 $ .15 $ .21
======== ======== ======== ========
Diluted ............................................ $ .20 $ .16 $ .15 $ .21
======== ======== ======== ========
- --------------------------------------- 41 -------------------------------------
REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTANTS
[LOGO] -------------------------------------------------------------------------
Grant Thornton [LOGO]
Accountants and Management Consultants
Report of Independent Certified Public Accountants
Board of Directors
Wayne Savings Bancshares, Inc.
We have audited the accompanying consolidated statements of financial condition
of Wayne Savings Bancshares, Inc. as of March 31, 2005 and 2004, and the related
consolidated statements of earnings, stockholders' equity, comprehensive income
and cash flows for each of the three years in the period ended March 31, 2005.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Wayne
Savings Bancshares, Inc. as of March 31, 2005 and 2004, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 2005, in conformity with accounting principles generally
accepted in the United States of America.
As more fully explanied in Note A-9, the Company changed its method of
accounting for stock option expense pursuant to SFAS No. 123(R), "Share-Based
Payment."
/s/ Grant Thornton LLP
Cincinnati, Ohio
April 29, 2005
Suite 900
625 Eden Park Drive
Cincinnati, OH 45202-4181
T 513.762.5000
F 513.241.6125
W www.grantthornton.com
Grant Thornton LLP
US Member of Grant Thornton International
- --------------------------------------- 42 -------------------------------------