UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended June 30, 2005
--------------------------------------------------
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ ---------------
Commission File No. 0-23433
WAYNE SAVINGS BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1557791
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
151 North Market Street
Wooster, Ohio 44691
- ------------------------------- ----------
(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code: (330) 264-5767
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the past
90 days.
Yes X No
----- -----
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act)
Yes X No
----- -----
As of August 3, 2005, the latest practicable date, 3,429,244 shares of the
registrant's common stock, $.10 par value, were issued and outstanding.
1
Wayne Savings Bancshares, Inc.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk 18
Item 4 Controls and Procedures 18
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 19
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3 Defaults Upon Senior Securities 19
Item 4 Submission of Matters to a Vote of Security Holders 19
Item 5 Other Information 19
Item 6 Exhibits 19
SIGNATURES 20
2
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
(unaudited)
June 30, March 31,
ASSETS 2005 2005
Cash and due from banks $ 4,694 $ 4,176
Federal funds sold 14,675 19,400
Interest-bearing deposits in other financial institutions 10,352 6,366
--------- ---------
Cash and cash equivalents 29,721 29,942
Investment securities available for sale - at market 66,989 60,844
Investment securities held to maturity - at amortized cost, approximate market value
of $12,035 and $12,101 as of June 30, 2005 and March 31, 2005, respectively 11,930 12,012
Mortgage-backed securities available for sale - at market 53,829 57,724
Mortgage-backed securities held to maturity - at cost, approximate market value of
$2,408 and $2,647 as of June 30, 2005 and March 31, 2005, respectively 2,384 2,628
Loans receivable - net 214,581 213,627
Office premises and equipment - net 8,850 8,922
Real estate acquired through foreclosure -- 35
Federal Home Loan Bank stock - at cost 4,439 4,386
Cash surrender value of life insurance 6,643 6,581
Accrued interest receivable on loans 930 757
Accrued interest receivable on mortgage-backed securities 242 444
Accrued interest receivable on investments and interest-bearing deposits 749 708
Prepaid expenses and other assets 4,742 3,996
Prepaid federal income taxes 560 795
--------- ---------
Total assets $ 406,589 $ 403,401
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 327,502 $ 320,586
Advances from the Federal Home Loan Bank 39,000 40,000
Advances by borrowers for taxes and insurance 151 612
Accrued interest payable 230 198
Accounts payable on mortgage loans serviced for others 218 231
Other liabilities 1,005 1,174
Deferred federal income taxes 767 401
--------- ---------
Total liabilities 368,873 363,202
Commitments -- --
Stockholders' equity
Common stock (8,000,000 shares of $ .10 par value authorized; 3,934,874 and 3,907,318
shares issued at June 30, 2005 and March 31, 2005) 393 391
Additional paid-in capital 35,498 11,399
Retained earnings - substantially restricted 11,399 11,371
Less required contributions for shares acquired by Employee Stock Ownership Plan (1,283) (1,304)
Less 505,630 and 282,261 shares of treasury stock at June 30, 2005 and
March 31, 2005 - at cost (8,211) (4,600)
Accumulated other comprehensive (loss) - unrealized losses on securities designated
as available for sale (80) (792)
--------- ---------
Total stockholders' equity 37,716 40,199
--------- ---------
Total liabilities and stockholders' equity $ 406,589 $ 403,401
========= =========
See accompanying notes to consolidated financial statements.
3
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
For the three months ended June 30,
(In thousands, except share data)
(unaudited) (unaudited)
2005 2004
Interest income
Loans $ 3,284 $ 3,163
Mortgage-backed securities 512 595
Investment securities 759 420
Interest-bearing deposits and other 126 66
------- -------
Total interest income 4,681 4,244
Interest expense
Deposits 1,618 1,332
Borrowings 264 293
------- -------
Total interest expense 1,882 1,625
------- -------
Net interest income 2,799 2,619
Provision for losses on loans -- 15
------- -------
Net interest income after provision for losses on loans 2,799 2,604
Other income
Gain on sale of loans 25 16
Increase in cash surrender value of life insurance 61 71
Service fees, charges and other operating 322 318
------- -------
Total other income 408 405
General, administrative and other expense
Employee compensation and benefits 1,569 1,348
Occupancy and equipment 425 421
Federal deposit insurance premiums 11 11
Franchise taxes 129 129
Other operating 485 460
------- -------
Total general, administrative and other expense 2,619 2,369
------- -------
Earnings before income taxes 588 640
Federal incomes taxes
Current 148 (593)
Deferred -- 771
------- -------
Total federal income taxes 148 178
------- -------
NET EARNINGS $ 440 $ 462
======= =======
EARNINGS PER SHARE
Basic $ 0.13 $ 0.13
======= =======
Diluted $ 0.13 $ 0.13
======= =======
See accompanying notes to consolidated financial statements.
4
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended June 30,
(In thousands)
2005 2004
Net earnings $ 440 $ 462
Other comprehensive income (loss), net of tax:
Unrealized holding gains on securities, net of taxes (benefits)
of $367 and $(600), during the respective periods 712 (1,165)
------- -------
Comprehensive income (loss) $ 1,152 $ (703)
======= =======
Accumulated comprehensive loss $ (80) $ (686)
======= =======
See accompanying notes to consolidated financial statements.
5
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the three months ended June 30,
(In thousands)
2005 2004
Cash flows from operating activities:
Net earnings for the period $ 440 $ 462
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 152 382
Amortization of deferred loan origination fees (38) (87)
Depreciation and amortization 159 137
Gain on sale of loans (15) (8)
Proceeds from sale of loans in the secondary market 1,181 918
Loans originated for sale in the secondary market (1,166) (917)
Provision for losses on loans -- 15
Federal Home Loan Bank stock dividends (53) (42)
Increase (decrease) in cash:
Accrued interest receivable on loans (173) (880)
Accrued interest receivable on mortgage-backed securities 202 49
Accrued interest receivable on investments and interest-bearing deposits (41) (200)
Prepaid expenses and other assets (746) (346)
Accrued interest payable 32 (3)
Accounts payable on mortgage loans serviced for others (13) (7)
Other liabilities (169) (283)
Federal income taxes
Current 235 (673)
Deferred -- 771
-------- --------
Net cash used in operating activities (13) (712)
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available for sale (5,344) (8,255)
Proceeds from maturity of investment securities designated as held to maturity 73 14
Proceeds from maturity of investment securities designated as available for sale 39 500
Purchase of mortgage-backed securities designated as available for sale (4,706) (3,049)
Principal repayments on mortgage-backed securities designated as held to maturity 241 779
Principal repayments and sales of mortgage-backed securities designated as
available for sale 8,698 11,657
Loan principal repayments 35,273 13,594
Loan disbursements (36,264) (11,988)
Purchase of office premises and equipment - net (87) (111)
Proceeds from sale of real estate acquired through foreclosure 112 100
Increase in cash surrender value of life insurance (62) (71)
Net cash used in the acquisition of Stebbins Bancshares, Inc. -- (1,314)
-------- --------
Net cash provided by (used in) investing activities (2,027) 1,856
-------- --------
Net cash provided by (used in) operating and investing activities
(balance carried forward) (2,040) 1,144
-------- --------
See accompanying notes to consolidated financial statements.
6
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the three months ended June 30,
(In thousands)
2005 2004
Net cash provided by (used in) operating and investing activities
(balance brought forward) $ (2,040) $ 1,144
Cash flows provided by (used) in financing activities:
Net increase (decrease) in deposit accounts 6,915 (221)
Proceeds from Federal Home Loan Bank advances 14,000 --
Repayments of Federal Home Loan Bank advances (15,000) (5,000)
Advances by borrowers for taxes and insurance (461) (390)
Dividends paid on common stock (412) (447)
Proceeds from exercise of stock options 367 --
Amortization of employee stock ownership benefit plan 21 38
Purchase of treasury shares (3,611) (413)
-------- --------
Net cash used in financing activities 1,819 (6,433)
-------- --------
Net decrease in cash and cash equivalents (221) (5,289)
Cash and cash equivalents at beginning of period 29,942 19,887
-------- --------
Cash and cash equivalents at end of period $ 29,721 $ 14,598
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ -- $ --
======== ========
Interest on deposits and borrowings $ 1,850 $ 1,611
======== ========
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure $ 81 $ --
======== ========
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects $ 712 $ (1,165)
======== ========
Recognition of mortgage servicing rights in accordance
with SFAS No. 140 $ 10 $ 8
======== ========
Fair value of assets received in the acquisition of Stebbins Bancshares, Inc. $ -- $ 24,539
======== ========
Goodwill recognized in the acquisition of Stebbins Bancshares, Inc. $ -- $ 1,470
======== ========
See accompanying notes to consolidated financial statements.
7
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended June 30, 2005 and 2004
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements for the three
months ended June 30, 2005 and 2004 were prepared in accordance with
instructions for Form 10-Q and Article 10 of Regulation S-X and,
therefore, do not include information or footnotes necessary for a
complete presentation of financial position, results of operations and
cash flows in conformity with accounting principles generally accepted in
the United States of America. Accordingly, these financial statements
should be read in conjunction with the consolidated financial statements
and notes thereto of Wayne Savings Bancshares, Inc. (the "Company")
included in the Annual Report on Form 10-K for the year ended March 31,
2005.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) which are necessary for a fair presentation of the
unaudited financial statements have been included. The results of
operations for the three month period ended June 30, 2005 are not
necessarily indicative of the results which may be expected for the entire
fiscal year.
Critical Accounting Policy - The Company's critical accounting policy
relates to the allowance for losses on loans. The Company has established
a systematic method of periodically reviewing the credit quality of the
loan portfolio in order to establish a sufficient allowance for losses on
loans. The allowance for losses on loans is based on management's current
judgments about the credit quality of individual loans and segments of the
loan portfolio. The allowance for losses on loans is established through a
provision, and considers all known internal and external factors that
affect loan collectability as of the reporting date. Such evaluation,
which included a review of all loans on which full collectability may not
be reasonably assured, considers among other matters, the estimated net
realizable value or the fair value of the underlying collateral, economic
conditions, historical loan loss experience, management's knowledge of
inherent risks in the portfolio that are probable and reasonably estimable
and other factors that warrant recognition in providing an appropriate
loan loss allowance. Management has discussed the development and
selection of this critical accounting policy with the audit committee of
the Board of Directors.
Use of Estimates - The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
2. Principles of Consolidation
---------------------------
The accompanying consolidated financial statements include Wayne Savings
Bancshares, Inc. and the Company's wholly-owned subsidiary, Wayne Savings
Community Bank ("Wayne Savings" or the "Bank").
During fiscal 2004, the Company's Board of Directors approved a business
combination, which was completed in June 2004, whereby Stebbins
Bancshares, Inc., the parent of Stebbins National Bank, was merged into
Wayne Savings Bancshares, Inc. and Stebbins National Bank merged with and
into Wayne Savings Community Bank. The business combination was accounted
for using the purchase method of accounting. Accordingly, the June 30,
2004 consolidated financial statements herein include the accounts of
Stebbins National Bank from the June 1, 2004 acquisition date through June
30, 2004.
8
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For three month periods ended June 30, 2005 and 2004
2. Principles of Consolidation (continued)
---------------------------
Wayne Savings has eleven banking locations in Wayne, Holmes, Ashland,
Medina and Stark counties. All significant intercompany transactions and
balances have been eliminated in the consolidation.
3. Earnings Per Share
------------------
Basic earnings per common share are computed based upon the
weighted-average number of common shares outstanding during the period,
less shares in the Company's Employee Stock Ownership Plan ("ESOP") that
are unallocated and not committed to be released. Diluted earnings per
common share include the dilutive effect of all additional potential
common shares issuable under the Company's stock option plan. The
computations are as follows:
For the three months ended
June 30,
2005 2004
Weighted-average common shares
outstanding (basic) 3,439,760 3,636,504
Dilutive effect of assumed exercise
of stock options 17,552 32,632
--------- ---------
Weighted-average common shares
outstanding (diluted) 3,457,312 3,669,136
========= =========
All outstanding options were included in the diluted earnings per share
calculation for the three month periods ending June 30, 2005 and 2004.
4. Stock Option Plan
-----------------
The Company has a 1993 incentive Stock Option Plan that provided for the
issuance of 196,390 shares of authorized common stock, as adjusted, with
2,567 options outstanding at June 30, 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 June 30, 2005, all options under the 2004 Plan have been
granted, are subject to exercise at the discretion of the grantees, and
will expire in fiscal 2014 unless otherwise exercised.
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 stock option awards based on the fair
value of the option award at the grant date. Compensation cost is then
recognized over the vesting period. Subsequent to the 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 representing the fair value of the option
awards at the date of modification.
The Company accounted for its stock option plans in fiscal 2004 pursuant
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
9
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For three month periods ended June 30, 2005 and 2004
4. Stock Option Plan (continued)
-----------------
recognized over the service period, generally defined as the vesting
period. Alternatively, SFAS No. 123 permitted entities to continue to
account for stock options using the Accounting Principles Board ("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
based compensation in accordance with APB Opinion No. 25.
In accordance with APB Opinion No. 25, no compensation cost has been
recognized for the plans in the quarter ended June 30, 2004. Had
compensation cost for the Plan been determined based on the fair value at
the grant dates for awards under the Plan consistent with the accounting
method utilized in SFAS No. 123, the Company's net earnings and earnings
per share for the three-month period ended June 30, 2004 would have been
reported as the pro forma amounts indicated below:
Three months
June 30,2004
Net earnings (In thousands) As reported $ 462
Stock-based compensation, net of tax (27)
-------
Pro-forma $ 435
=======
Earnings per share
Basic As reported $ .13
Stock-based compensation, net of tax --
-------
Pro-forma $ .13
=======
Diluted As reported $ .13
Stock-based compensation, net of tax (.01)
-------
Pro-forma $ .12
=======
There were no options granted during the three months ended June 30, 2005
or June 30, 2004.
10
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three month periods ended June 30, 2005 and 2004
4. Stock Option Plan (continued)
-----------------
A summary of the status of the Company's stock option plans as of and for
the years ended March 31, 2005 and 2004, and the three months ended June
30, 2005 is presented below:
Three months ended Year ended
June 30, March 31,
2005 2005 2004
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding at beginning of period 214,204 $ 13.84 214,204 $ 13.84 28,666 $ 6.26
Granted -- -- 163,265 13.95 204,081 13.95
Exercised (27,556) 13.35 -- -- (18,543) 3.31
Forfeited -- -- (163,265) (13.95) -- --
--------- --------- --------- --------- --------- ---------
Outstanding at end of period 186,648 $ 13.92 214,204 $ 13.84 214,204 $ 13.84
========= ========= ========= ========= ========= =========
Options exercisable at period-end 186,648 $ 13.92 214,204 $ 13.84 10,123 $ 11.67
========= ========= ========= ========= ========= =========
Fair value of options granted $ -- $ 4.07 $ 3.93
========= ========= =========
The following information applies to options outstanding at June 30, 2005:
Number outstanding....................................... 186,648
Range of exercise prices................................. $11.67 - $13.95
Weighted-average exercise price.......................... $13.92
Weighted-average remaining contractual life.............. 8.75 years
The fair value of options granted has been based on the Black Scholes
pricing model using a dividend yield of 4.5% and 3.3%, expected volatility
of 27.3% and 28.8% for fiscal 2005 and 2004, respectively. All options
granted in fiscal 2004 have expected lives of ten years, while the options
granted in fiscal 2005 have expected lives of nine years.
5. Reclassifications
-----------------
Certain amounts in the statement of earnings have been reclassified to
conform to the 2005 consolidated financial statement presentation.
11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Average Balance Sheet
The following table sets forth certain information relating to the Company's
average balance sheets and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented.
For the three months ended June 30,
-------------------------------------------------------------
2005 2004
----------------------------- ----------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- ---- ------- -------- ----
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1) $213,111 $ 3,284 6.16% $207,928 $ 3,163 6.08%
Mortgage-backed
securities(2) 58,657 512 3.49 84,799 595 2.81
Investment securities 76,749 759 3.96 43,719 420 3.84
Interest-bearing deposits(3) 17,617 126 2.86 29,778 66 .89
-------- -------- -------- --------
Total interest-
earning assets 366,134 4,681 5.11 366,224 4,244 4.64
Non-interest-earning assets 25,724 9,482
-------- --------
Total assets $391,858 $375,706
======== ========
Interest-bearing liabilities:
Deposits $321,346 $ 1,618 2.01% $301,040 $ 1,332 1.77%
Borrowings 29,392 264 3.59 28,780 293 4.07
-------- -------- -------- --------
Total interest-
bearing liabilities 350,738 1,882 2.15 329,820 1,625 1.97
-------- ------ -------- ------
Non-interest bearing
liabilities 1,364 4,504
-------- --------
Total liabilities 352,102 334,324
Stockholders' equity 39,756 41,382
-------- --------
Total liabilities and
stockholders' equity $391,858 $375,706
======== ========
Net interest income $ 2,799 $ 2,619
======== ========
Interest rate spread(4) 2.96% 2.67%
====== ======
Net yield on interest-
earning assets(5) 3.06% 2.86%
====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 104.39% 111.04%
====== ======
- ------------------------------------------
(1) Includes non-accrual loan balances.
(2) Includes mortgage-backed securities designated as available for sale.
(3) Includes federal funds sold and interest-bearing deposits in other
financial institutions.
(4) Interest rate spread represents the difference between the average yield
on interest-earning assets and the average cost of interest-bearing
liabilities
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from March 31, 2005 to June 30, 2005
- ------------------------------------------------------------------------------
At June 30, 2005, we had total assets of $406.6 million, an increase of $3.2
million, or .8%, from March 31, 2005 levels.
Liquid assets, consisting of cash, interest-bearing deposits and investment
securities, increased by $5.8 million, or 5.7%, to $108.6 million at June 30,
2005 mainly due to purchases of available for sale investment securities
amounting to $5.3 million. Mortgage-backed securities decreased by $4.1 million,
or 6.9%, to $56.2 million as these securities continued to experience
significant principal repayments due to the general low interest rate
environment, partially offset by purchases of mortgage-backed securities
totaling $4.7 million.
During the three month period ended June 30, 2005 loans receivable increased
$954,000 as the Bank originated $37.4 million of loans offset by received
payments of $35.3 million and loan sales totaling $1.2 million. Rather than
reinvest funds from sales of and repayments on loans in long-term, fixed rate
and low yielding residential loans during this period of historically low
interest rates, management has invested in short-term marketable securities and
adjustable rate commercial loans. The Company believes that investing in
short-term securities and adjustable-rate loans 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. The composition of the loan portfolio has changed during
the three months due to a net decrease of $6.4 million in residential and
construction mortgage loans offset by increases in multi-family real estate
loans of $3.6 million, nonresidential mortgage loans totaling $2.8 million and a
net increase in commercial loans of $1.2 million in connection with the Bank's
increased emphasis on commercial lending.
June 30, 2005 March 31, 2005
(Dollars in thousands)
Mortgage loans:
One-to four-family residential(1) $154,280 70.73% $157,658 72.60%
Residential construction loans 4,842 2.22 7,872 3.63
Multi-family residential 7,698 3.53 4,053 1.87
Non-residential real estate/land(2) 31,781 14.57 29,187 13.44
-------- -------- -------- --------
Total mortgage loans 198,601 91.05 198,770 91.54
Other loans:
Consumer loans(3) 4,227 1.94 4,306 1.98
Commercial business loans 15,290 7.01 14,075 6.48
-------- -------- -------- --------
Total other loans 19,517 8.95 18,381 8.46
Total loans before net items 218,118 100.00% 217,151 100.00%
======== ========
Less:
Loans in process 1,694 1,638
Deferred loan origination fees 470 512
Allowance for loan losses 1,373 1,374
-------- --------
Total loans receivable, net $214,581 $213,627
======== ========
Mortgage-backed securities, net(4) $ 56,213 $ 60,352
======== ========
- -----------------------------------
(1) Includes equity loans collateralized by second mortgages in the aggregate
amount of $20.5 million and $20.3 million as of June 30, 2005 and March
31, 2005, respectively. Such loans have been underwritten on substantially
the same basis as the Company's first mortgage loans.
(2) Includes land loans of $1.2 million and $1.4 as of June 30, 2005 and March
31, 2005, respectively.
(3) Includes second mortgage loans of $1.3 million and $1.4 million as of June
30, 2005 and March 31, 2005, respectively.
(4) Includes mortgage-backed securities designated as available for sale.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Nonperforming and impaired loans amounted to $1.4 million at June 30, 2005, as
compared with $906,000 in nonperforming and impaired loans at March 31, 2005.
Such loans consisted, on both dates, of primarily residential mortgage loans.
Historically, the Company generally has not recognized losses on nonperforming
loans secured by residential mortgages. The following table sets forth
information regarding our past due, nonaccrual and impaired loans and real
estate acquired through foreclosure as of June 30, 2005 and March 31, 2005.
June 30, March 31,
2005 2005
Past due loans 30-89 days:
Mortgage loans:
One- to four-family residential $1,039 $ 895
Nonresidential 14 --
Land -- --
Non-mortgage loans:
Commercial business loans 3 --
Consumer loans 72 11
------ ------
1,128 906
Non-accrual loans:
Mortgage loans:
One- to four-family residential 1,227 895
All other mortgage loans 42 --
Non-mortgage loans:
Commercial business loans 102 --
Consumer 8 11
------ ------
Total non-accrual loans 1,379 906
Accruing loans 90 days or more delinquent -- --
------ ------
Total non-performing loans 1,379 906
Loans deemed impaired -- --
------ ------
Total non-performing and impaired loans 1,379 906
Total real estate acquired through foreclosure -- 35
------ ------
Total non-performing and impaired assets $1,379 $ 941
====== ======
Total non-performing and impaired loans to net
loans receivable 0.64% 0.42%
====== ======
Total non-performing and impaired loans to total assets 0.34% 0.22%
====== ======
Total non-performing and impaired assets to total assets 0.34% 0.23%
====== ======
In addition, the Company reclassified $2.8 million of the Stebbins portfolio as
substandard. These loans are not delinquent, but until they can be restructured
and supported by current financial statements, the Company will continue to
classify them as substandard.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from March 31, 2005 to June 30, 2005
- --------------------------------------------------------------------------------
(continued)
- -----------
Historically, the Company has had minimal loan losses charged off through the
allowance. The following table sets forth the analysis of the allowance for loan
losses for the periods indicated.
For the three months For the year
ended ended
June 30, 2005 March 31, 2005
Loans receivable, net $ 214,581 $ 213,627
========= =========
Average loans receivable, net $ 213,111 $ 212,785
========= =========
Allowance balance (at beginning of period) $ 1,374 $ 815
Charge-offs:
Mortgage loans:
One- to four-family (7) (28)
Residential construction -- --
Multi-family residential -- --
Non-residential real estate and land -- --
Other loans:
Consumer (15) (44)
Commercial -- (54)
--------- ---------
Gross charge-offs (22) (126)
--------- ---------
Recoveries:
Mortgage loans:
One- to four-family -- --
Residential construction -- --
Multi-family residential -- --
Non-residential real estate and land -- --
Other loans:
Consumer 13 25
Commercial 8 --
--------- ---------
Gross recoveries 21 25
--------- ---------
Net charge-offs (1) (101)
--------- ---------
Provision charged to operations -- 430
Stebbins acquisition -- 230
--------- ---------
Allowance for loans losses balance (at end
of period) $ 1,373 $ 1,374
========= =========
Allowance for loan losses as a percent of loans
receivable, net at end of period 0.64% 0.64%
========= =========
Net loans charged off as a percent of average
loans receivable, net 0.00% 0.05%
========= =========
Ratio of allowance for loan losses to non-
performing loans at end of period 100.44% 151.66%
========= =========
Deposits at June 30, 2005, totaled $327.5 million, an increase of $6.9 million
from $320.6 million at March 31, 2005, due to Bank's competitive deposit pricing
in all market areas.
Stockholders' equity decreased by $2.5 million during the three months ended
June 30, 2005, due mainly to the purchase of treasury stock of $3.6 million and
dividends totaling $412,000. These amounts were offset by increases in the
unrealized gain on available for sale securities of $712,000, generally
reflecting the recent decrease in rates, $440,000 in net earnings for the three
months ended June 30, 2005 and funds from stock options exercised of $367,000.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended June 30, 2005
- --------------------------------------------------------------------------------
and 2004
- --------
General
- -------
Net earnings totaled $440,000 for the quarter ended June 30, 2005, a decrease of
$22,000, or 4.8%, compared to the net earnings of $462,000 for the quarter ended
June 30, 2004. The decline in net earnings was primarily attributable to an
increase in general, administrative and other expense of $250,000, or 10.6%,
offset by an increase in net interest income of $180,000, or 6.9%, and a
decrease in federal income taxes of $30,000, or 16.9%.
The Company has maintained its strategy to aggressively manage interest rate
risk. This strategy negatively affected earnings for the three months ended June
30, 2005. However, management believes that the investment of excess funds
primarily in shorter term assets will help the Company in a rising 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 Income
- ---------------
Interest income increased $437,000, or 10.3%, to $4.7 million for the three
months ended June 30, 2005, compared to the same period in 2004. This increase
was mainly due to an increase in the weighted-average yield on interest-earning
assets to 5.11% from 4.64% for the period ended June 30, 2004. The yield
increase is primarily due to the Federal Reserve raising the prime rate 2.25%
over the past year and the corresponding impact on the Company's investment
securities and interest-bearing deposits. The Company purposefully invested
excess funds in shorter-term securities available for sale rather than long-term
fixed rate loans. Although this strategy sacrifices short-term income, it
strengthens the Company's interest rate position and allows the Company to
redeploy such assets in a rising rate environment.
Interest income on loans increased $121,000, or 3.8%, for the three months ended
June 30, 2005, compared to the same period in 2004, due primarily to an increase
in the weighted-average balance of loans period to period of $5.2 million to
$213.1 million for the 2005 period coupled with an eight basis point increase in
the weighted average yield on loans outstanding.
Interest income on mortgage-backed securities decreased $83,000 during the three
months ended June 30, 2005, compared to the same period in 2004, due primarily
to a decrease of $26.1 million, or 30.8%, in the weighted-average balance caused
mainly by normal repayments. The decrease in the weighted average balance was
offset by an increase of 68 basis points to a weighted average yield of 3.49% as
compared to 2.81%, from the comparable 2004 period. The slowdown of prepayments
causes premium amortization to decrease, resulting in an increase in interest
income on mortgage-backed securities.
Interest income on investment securities increased by $339,000, or 80.7%, during
the 2005 period compared to the same period in 2004, reflecting an increase in
the weighted average balance of $33.0 million, or 75.6%, to $76.7 million from
$43.7 million during the comparable 2004 period, coupled with an increase in the
average yield of 12 basis points to 3.96%.
Interest income on interest-bearing deposits increased by $60,000, or 90.9%, for
the three months ended June 30, 2005, due primarily to an increase in the
average yield of 197 basis points to an average yield of 2.86% from an average
yield of .89% for the quarter ended June 30, 2004 offset by a decrease in the
weighted average balance of $12.2 million, or 40.8%, compared to the 2004 period
of $29.8 million
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended June 30, 2005
- --------------------------------------------------------------------------------
and 2004 (continued)
- --------------------
Interest Expense
- ----------------
Interest expense for the three months ended June 30, 2005 totaled $1.9 million,
an increase of $257,000, or 15.8%, from interest expense for the three months
ended June 30, 2004. The increase resulted from an increase in the average
balance of deposits and borrowings outstanding of $20.9 million, or 6.3%, to
$350.7 million for the period ended June 30, 2005 and an 18 basis point increase
in the average cost of funds to 2.15% for the 2005 period.
Interest expense on deposits totaled $1.6 million for the three months ended
June 30, 2005, an increase of $286,000, or 21.5%, compared to the three months
ended June 30, 2004, as a result of an increase in the average balance
outstanding of $20.3 million, or 6.7%, to $321.3 million for the 2005 period
coupled with a 24 basis point increase in the average cost of deposits to 2.01%
for the 2005 period.
Interest expense on borrowings totaled $264,000 for the three months ended June
30, 2005, a decrease of $29,000, or 9.9%, from the 2004 period, primarily due to
a decrease on the weighted average yield of 48 basis points to an average yield
of 3.59% for the three months ended June 30, 2005.
Net Interest Income
- -------------------
Net interest income totaled $2.8 million for the three months ended June 30,
2005, an increase of $180,000, or 6.9%, from the three month period ended June
30, 2004. The average interest rate spread increased to 2.96% for the three
months ended June 30, 2005 from 2.67% for the three months ended June 30, 2004.
The net interest margin increased to 3.06% for the three months ended June 30,
2005 from 2.86% for the three months ended June 30, 2004.
Provision for Losses on Loans
- -----------------------------
The Company did not record any provision for losses on loans for the period
ending June 30, 2005. For the period ended June 30, 2004, management recorded a
$15,000 provision for losses on loans. To the best of management's knowledge,
all known and inherent losses that are probable and which can be reasonably
estimated have been recorded as of June 30, 2005.
Other Income
- ------------
Other income, consisting primarily of the cash surrender value of life
insurance, gains on sale of loans, service fees, and charges on deposit accounts
remained relatively unchanged for the three months ended June 30, 2005 as
compared with the quarter ending June 30, 2004. There was a $9,000 increase on
the gain on sale of loans offset by a decrease of $10,000 in the cash surrender
value of life insurance.
General, Administrative, and Other Expense
- ------------------------------------------
General, administrative and other expense increased by $250,000, or 10.6%, to
$2.6 million for the three months ended June 30, 2005 compared to the three
months ended June 30, 2004. The increase resulted primarily from an increase in
employee compensation and benefits expense of $221,000, or 16.4%, coupled with
an increase of $25,000, or 5.4%, increase in other operating expense. The
increase in employee compensation and benefits was mainly due to the addition of
the Stebbins branch acquired in June 2004 and the expansion of personnel needed
to enhance our commercial lending department and to establish a trust department
staffed by a team of qualified, experienced trust professionals. The increase in
other operating expense was primarily due to the amortization of the Stebbin's
intangibles.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended June 30, 2005
- --------------------------------------------------------------------------------
and 2004 (continued)
- --------------------
Federal Income Taxes
- --------------------
The provision for federal income taxes was $148,000 for the three months ended
June 30, 2005, a decrease of $30,000, or 16.9%, compared to the same period in
2004, primarily due to the $52,000, or 8.1%, decrease in earnings before federal
income taxes. The effective tax rate for the three months ended June 30, 2005,
was 25.2% as compared to 27.8% for the same period in 2004. The effective tax
rate for the three months ended June 30, 2005 declined mainly due to income
earned from the purchase of additional tax advantaged municipal securities.
ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There has been no material change in the Company's market risk since the
Company's Form 10-K filed with the Securities and Exchange Commission for the
year ended March 31, 2005.
ITEM 4 CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of the Company's
management, including our Chief Executive Officer and Chief Financial Officer,
the Company evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Exchange Act) as of the end of the period covered by this report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures were effective in timely alerting
them to the material information relating to the Company (or our consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
(b) Changes in internal controls.
There has been no change made in the Company's internal control over
financial reporting during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
18
Wayne Savings Bancshares, Inc.
PART II
ITEM 1. Legal Proceedings
-----------------
Not applicable
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
------------------------------------------------------------
(a) Not applicable
(b) Not applicable
(c) The following table sets forth certain information regarding
repurchases by the Company for the quarter ended June 30,
2005.
Total # of Maximum # of shares
Total Average shares purchased which may still be
# of shares price paid as part of the purchased as part
Period purchased per share announced plan of the announced plan
------ --------- --------- ------------- ---------------------
April 1-30, 2005 -- $ -- -- 100,730
May 1-31, 2005 22,500 $15.39 -- 78,230
June 1-30, 2005(1) 183,369 $16.25 -- 247,294
Notes to the Table:
(1) A repurchase program for 185,491, or 5% of the Company's
outstanding shares, was publicly announced on September 2,
2004 and expires on August 26, 2005. On June 6, 2005, the
Company announced the completion of the repurchase program and
the authorization by the Board of Directors of a new program
for the repurchase of 352,433 shares, or 10% of the Company's
outstanding shares.
ITEM 3. Defaults Upon Senior Securities
-------------------------------
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
ITEM 5. Other Information
-----------------
Not applicable
ITEM 6. Exhibits
--------
EX-31.1 Certification of Chief Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350
EX-31.2 Certification of Chief Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350
EX-32 Written Statement of Chief Executive Officer and Chief
Financial Officer furnished pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
19
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 3, 2005 By: /s/ Charles F. Finn
--------------------------- ----------------------------
Charles F. Finn
Chairman and President
Date: August 3, 2005 By: /s/ Michael C. Anderson
--------------------------- ----------------------------
Michael C. Anderson
Chief Financial Officer
20