UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended December 31, 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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check
one):
Large accelerated filer [_] Accelerated filer [_] Non-accelerated filer [X]
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [_] No [X]
As of January 31, 2006, the latest practicable date, 3,339,552 shares of the
registrant's common stock, $.10 par value, were issued and outstanding.
1
Wayne Savings Bancshares, Inc.
INDEX
Page
PART I - FINANCIAL INFORMATION
Item 1 Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Comprehensive Income 5
Consolidated Statements of Cash Flows 6
Notes to Consolidated Financial Statements 8
Item 2 Management's Discussion and Analysis of
Financial Condition and Results of Operations 12
Item 3 Quantitative and Qualitative Disclosures About Market Risk 22
Item 4 Controls and Procedures 22
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 23
Item 1A Risk Factors 23
Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 23
Item 3 Defaults Upon Senior Securities 23
Item 4 Submission of Matters to a Vote of Security Holders 23
Item 5 Other Information 23
Item 6 Exhibits 23
SIGNATURES 24
2
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
December 31, March 31,
ASSETS 2005 2005
(Unaudited)
Cash and due from banks $ 3,006 $ 4,176
Federal funds sold -- 19,400
Interest-bearing deposits in other financial institutions 10,543 6,366
--------- ---------
Cash and cash equivalents 13,549 29,942
Investment securities available for sale - at market 64,167 60,844
Investment securities held to maturity - at amortized cost, approximate market value
of $10,768 and $12,101 as of December 31, 2005 and March 31, 2005, respectively 10,867 12,012
Mortgage-backed securities available for sale - at market 51,510 57,724
Mortgage-backed securities held to maturity - at cost, approximate market value of
$1,929 and $2,647 as of December 31, 2005 and March 31, 2005, respectively 1,922 2,628
Loans receivable - net 229,802 213,627
Office premises and equipment - net 8,664 8,922
Real estate acquired through foreclosure 54 35
Federal Home Loan Bank stock - at cost 4,559 4,386
Cash surrender value of life insurance 6,828 6,581
Accrued interest receivable on loans 1,177 757
Accrued interest receivable on mortgage-backed securities 292 444
Accrued interest receivable on investments and interest-bearing deposits 509 708
Prepaid expenses and other assets 3,642 3,996
Prepaid federal income taxes 426 795
--------- ---------
Total assets $ 397,968 $ 403,401
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 328,868 $ 320,586
Advances from the Federal Home Loan Bank 30,500 40,000
Advances by borrowers for taxes and insurance 904 612
Accrued interest payable 160 198
Accounts payable on mortgage loans serviced for others 367 231
Other liabilities 1,153 1,174
Deferred federal income taxes 475 401
--------- ---------
Total liabilities 362,427 363,202
Commitments -- --
Stockholders' equity
Preferred stock (500,000 shares of $.10 par value authorized-
no preferred stock issued as of December 31, 2005 or March 31,2005) -- --
Common stock (9,000,000 shares of $ .10 par value authorized; 3,934,874
and 3,907,318 shares issued at December 31, 2005 and March 31, 2005) 393 391
Additional paid-in capital 35,634 35,133
Retained earnings - substantially restricted 11,233 11,371
Less required contributions for shares acquired by Employee Stock Ownership Plan (1,260) (1,304)
Less 595,322 and 282,261 shares of treasury stock at December 31, 2005 and
March 31, 2005 - at cost (9,625) (4,600)
Accumulated other comprehensive loss - unrealized losses on securities designated
as available for sale (834) (792)
--------- ---------
Total stockholders' equity 35,541 40,199
--------- ---------
Total liabilities and stockholders' equity $ 397,968 $ 403,401
========= =========
See accompanying notes to consolidated financial statements.
3
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except share data)
Nine months Three months
ended ended
December 31, December 31,
2005 2004 2005 2004
(Unaudited)
Interest income
Loans $10,351 $ 9,641 $ 3,626 $ 3,247
Mortgage-backed securities 1,462 1,730 483 562
Investment securities 2,296 1,445 763 520
Interest-bearing deposits and other 351 274 109 136
------- ------- ------- -------
Total interest income 14,460 13,090 4,981 4,465
Interest expense
Deposits 5,201 4,158 1,855 1,463
Borrowings 764 787 262 248
------- ------- ------- -------
Total interest expense 5,965 4,945 2,117 1,711
------- ------- ------- -------
Net interest income 8,495 8,145 2,864 2,754
Provision for losses on loans -- 45 -- 15
------- ------- ------- -------
Net interest income after provision for losses on loans 8,495 8,100 2,864 2,739
Other income (losses)
Gain (loss) on sale of loans 68 162 (1) 20
Proceeds due from bank-owned life insurance policy 63 -- 63 --
Increase in cash surrender value of life insurance 184 199 59 62
Service fees, charges and other operating 1,006 926 346 307
------- ------- ------- -------
Total other income 1,321 1,287 467 389
General, administrative and other expense
Employee compensation and benefits 5,070 4,246 1,957 1,462
Occupancy and equipment 1,410 1,285 509 438
Federal deposit insurance premiums 33 34 11 11
Franchise taxes 394 447 133 150
Other operating 1,550 1,529 576 531
------- ------- ------- -------
Total general, administrative and other expense 8,457 7,541 3,186 2,592
------- ------- ------- -------
Earnings before income taxes (credits) 1,359 1,846 145 536
Federal incomes taxes (credits)
Current 82 434 (147)
541
Deferred 199 58 121 (408)
------- ------- ------- -------
Total federal income taxes (credits) 281 492 (26) 133
------- ------- ------- -------
NET EARNINGS $ 1,078 $ 1,354 $ 171 $ 403
======= ======= ======= =======
EARNINGS PER SHARE
Basic $ 0.32 $ 0.38 $ 0.05 $ 0.11
======= ======= ======= =======
Diluted $ 0.32 $ 0.37 $ 0.05 $ 0.11
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
4
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Nine months Three months
ended ended
December 31, December 31,
2005 2004 2005 2004
(Unaudited)
Net earnings $ 1,078 $ 1,354 $ 171 $ 403
Other comprehensive income (loss):
Unrealized holding losses on securities, net of related
benefits of $(22), $(319), $(233) and $(147) during the
respective periods (42) (620) (452) (287)
------- ------- ------- -------
Comprehensive income (loss) $ 1,036 $ 734 $ (281) $ 116
======= ======= ======= =======
Accumulated comprehensive loss $ (834) $ (141) $ (834) $ (141)
======= ======= ======= =======
5
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the nine months ended December 31,
(In thousands)
2005 2004
(Unaudited)
Cash flows from operating activities:
Net earnings for the period $ 1,078 $ 1,354
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Amortization of discounts and premiums on loans,
investments and mortgage-backed securities - net 384 976
Amortization of deferred loan origination fees (110) (185)
Depreciation and amortization 504 437
Gain on sale of loans (17) (126)
Proceeds due from bank-owned life insurance policy (63) --
Proceeds from sale of loans in the secondary market 5,763 3,133
Loans originated for sale in the secondary market (5,749) (3,108)
Provision for losses on loans -- 45
Federal Home Loan Bank stock dividends (173) (133)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (420) (51)
Accrued interest receivable on mortgage-backed securities 152 107
Accrued interest receivable on investments and interest-bearing deposits 199 (191)
Prepaid expenses and other assets 354 (33)
Accrued interest payable (38) (58)
Accounts payable on mortgage loans serviced for others 136 367
Other liabilities (21) (474)
Federal income taxes
Current 170 10
Deferred 199 58
-------- --------
Net cash provided by operating activities 2,348 2,128
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available for sale (7,344) (12,933)
Purchase of investment securities designated as held to maturity (50) --
Proceeds from maturity of investment securities designated as held to maturity 1,168 2,159
Proceeds from maturity of investment securities designated as available for sale 4,135 2,002
Purchase of mortgage-backed securities designated as available for sale (16,215) (5,632)
Principal repayments on mortgage-backed securities designated as held to maturity 698 1,575
Principal repayments and sales of mortgage-backed securities designated as
available for sale 21,900 25,878
Loan principal repayments 24,082 41,842
Loan disbursements (40,228) (38,743)
Purchase of office premises and equipment - net (246) (348)
Proceeds from sale of real estate acquired through foreclosure 163 130
Increase in cash surrender value of life insurance (184) (199)
Net cash used in the acquisition of Stebbins Bancshares, Inc. -- (1,314)
-------- --------
Net cash provided by (used in) investing activities (12,121) 14,417
-------- --------
Net cash provided by (used in) operating and investing activities
(balance carried forward) (9,773) 16,545
-------- --------
6
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the nine months ended December 31,
(In thousands)
2005 2004
(Unaudited)
Net cash provided by (used in) operating and investing activities
(balance brought forward) $ (9,773) $ 16,545
Cash flows used in financing activities:
Net increase in deposit accounts 8,282 4,991
Proceeds from Federal Home Loan Bank advances 37,150 --
Repayments of Federal Home Loan Bank advances (46,650) (5,000)
Advances by borrowers for taxes and insurance 292 502
Dividends paid on common stock (1,216) (1,310)
Tax benefits from exercise of stock options 27 --
Proceeds from exercise of stock options 367 --
Amortization of employee stock benefit plans 153 470
Purchase of treasury shares (5,025) (2,308)
-------- --------
Net cash used in financing activities (6,620) (2,655)
-------- --------
Net increase (decrease) in cash and cash equivalents (16,393) 13,890
Cash and cash equivalents at beginning of period 29,942 19,887
-------- --------
Cash and cash equivalents at end of period $ 13,549 $ 33,777
======== ========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Federal income taxes $ 325 $ 393
======== ========
Interest on deposits and borrowings $ 6,003 $ 5,003
======== ========
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure $ 184 $ 51
======== ========
Unrealized losses on securities designated as available for sale,
net of related tax benefits $ (42) $ (620)
======== ========
Recognition of mortgage servicing rights in accordance
with SFAS No. 140 $ 51 $ 41
======== ========
See accompanying notes to consolidated financial statements.
7
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three month periods ended December 31, 2005 and 2004
1. Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements for the
nine and three months ended December 31, 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 nine and three month periods ended December 31,
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").
In October 2003, the Company's Board of Directors approved a business
combination, which was completed in June 2004, whereby Stebbins
Bancshares, Inc., the parent of Stebbins National Bank, was merged into
Wayne Savings Bancshares, Inc. and Stebbins National Bank merged with
and into Wayne Savings Community Bank. The business combination was
accounted for using the purchase method of accounting. Accordingly, the
December 31, 2004 consolidated financial statements herein include the
accounts of Stebbins National Bank from the June 1, 2004 acquisition
date through December 31, 2004.
8
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For nine and three month periods ended December 31, 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 nine months ended For the three months ended
December 31, December 31,
2005 2004 2005 2004
Weighted-average common shares
outstanding (basic) 3,320,492 3,589,224 3,231,757 3,535,379
Dilutive effect of assumed exercise
of stock options 17,747 31,763 9,778 32,929
--------- --------- --------- ---------
Weighted-average common shares
outstanding (diluted) 3,338,239 3,620,987 3,241,535 3,568,308
========= ========= ========= =========
All outstanding options were included in the diluted earnings per share
calculation for the nine and three month periods ending December 31,
2005 and 2004.
4. Stock Option Plan
-----------------
The Company has a 1993 Stock Option Plan that provided for the issuance
of 196,390 shares of authorized common stock, as adjusted, with 2,567
options outstanding at December 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 December 31, 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.
Prior to the adoption of SFAS No. 123(R), the Company accounted for its
stock option plans 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 recognized over
the service period, generally defined as the vesting period.
9
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For nine and three month periods ended December 31, 2005 and 2004
4. Stock Option Plan (continued)
-----------------
Alternatively, SFAS No. 123 permits 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 continue
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 and prior to the adoption of SFAS
No. 123(R), no compensation cost was recognized for the Plan in the
nine and three month periods ending December 31, 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(R), the Company's net earnings and earnings
per share for the nine and three month periods ended December 31, 2004
would have been reported as the pro forma amounts indicated below:
Nine months ended Three months ended
December 31, December 31,
2004 2004
Net earnings (In thousands) As reported $ 1,354 $ 403
Stock-based compensation, net of tax (81) (27)
--------- ---------
Pro-forma $ 1,273 $ 376
========= =========
Earnings per share
Basic As reported $ .38 $ .11
Stock-based compensation, net of tax (.03) --
--------- ---------
Pro-forma $ .35 .11
========= =========
Diluted As reported $ .37 $ .11
Stock-based compensation, net of tax (.02) --
--------- ---------
Pro-forma $ .35 $ .11
========= =========
There were no options granted during the nine months ended December 31,
2005 or December 31, 2004.
Such pro-forma amounts do not give effect to the Company's acceleration
of vesting for outstanding options in the fourth quarter of fiscal
2005.
10
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the nine and three month periods ended December 31, 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 nine months ended
December 31, 2005 is presented below:
Nine months ended Year ended
December 31, 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 December
31, 2005:
Number outstanding..................................... 186,648
Range of exercise prices............................... $11.67 - $13.95
Weighted-average exercise price........................ $13.92
Weighted-average remaining contractual life............ 8.25 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.
11
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Average Balance Sheet
The following tables set forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented.
For the nine months ended December 31,
-----------------------------------------------------------------
2005 2004
------------------------------ -------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- -------- ------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1) $219,668 $ 10,351 6.28% $212,383 $ 9,641 6.05%
Mortgage-backed
securities(2) 54,229 1,462 3.59 76,003 1,730 3.03
Investment securities 76,906 2,296 3.98 49,173 1,445 3.92
Interest-bearing deposits(3) 15,001 351 3.12 23,094 274 1.58
-------- -------- -------- --------
Total interest-
earning assets 365,804 14,460 5.27 360,653 13,090 4.84
Non-interest-earning assets 25,103 23,237
-------- --------
Total assets $390,907 $383,890
======== ========
Interest-bearing liabilities:
Deposits $324,300 5,201 2.14 $310,874 4,158 1.78
Borrowings 27,340 764 3.73 26,265 787 4.00
-------- -------- -------- --------
Total interest-
bearing liabilities 351,640 5,965 2.26 337,139 4,945 1.96
-------- -------- -------- --------
Non-interest bearing
liabilities 1,662 4,634
-------- --------
Total liabilities 353,302 341,773
Stockholders' equity 37,605 42,117
-------- --------
Total liabilities and
stockholders' equity $390,907 $383,890
======== ========
Net interest income $ 8,495 $ 8,145
======== ========
Interest rate spread(4) 3.01% 2.88%
======== ========
Net yield on interest-
earning assets(5) 3.10% 3.01%
======== ========
Ratio of average interest-
earning assets to average
interest-bearing liabilities 104.03% 106.97%
======== ========
- ----------------------------------------------
(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
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Average Balance Sheet - (continued)
For the three months ended December 31,
-----------------------------------------------------------------
2005 2004
------------------------------ -------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- -------- ------- -------- -------
Interest-earning assets:
Loans receivable, net(1) $227,198 $ 3,626 6.38% $214,291 $ 3,247 6.06%
Mortgage-backed
securities(2) 50,747 483 3.81 68,505 562 3.28
Investment securities 75,893 763 4.02 52,525 520 3.96
Interest-bearing deposits(3) 12,333 109 3.54 26,491 136 2.05
-------- -------- -------- --------
Total interest-
earning assets 366,171 4,981 5.44 361,812 4,465 4.94
Non-interest-earning assets 24,973 25,934
-------- --------
Total assets $391,144 $387,746
======== ========
Interest-bearing liabilities:
Deposits $326,088 1,855 2.28 $318,069 1,463 1.84
Borrowings 27,551 262 3.80 25,000 248 3.97
-------- -------- -------- --------
Total interest-
bearing liabilities 353,639 2,117 2.39 343,069 1,711 1.99
-------- -------- -------- --------
Non-interest bearing
liabilities 1,603 3,200
-------- --------
Total liabilities 355,242 346,269
Stockholders' equity 35,902 41,477
-------- --------
Total liabilities and
stockholders' equity $391,144 $387,746
======== ========
Net interest income $ 2,864 $ 2,754
======== ========
Interest rate spread(4) 3.05% 2.95%
======== ========
Net yield on interest-
earning assets(5) 3.13% 3.04%
======== ========
Ratio of average interest-
earning assets to average
interest-bearing liabilities 103.54% 105.46%
======== ========
- ----------------------------------------------
(1) Includes non-accrual loan balances.
(2) Includes mortgage-backed securities designated as available for sale.
(3) Includes federal funds sold and interest-bearing deposits in other financial
institutions.
(4) Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from March 31, 2005 to December 31,
- --------------------------------------------------------------------------------
2005
- ----
At December 31, 2005, total assets were $398.0 million, a decrease of $5.4
million, or 1.3%, from March 31, 2005 levels.
Liquid assets, consisting of cash, interest-bearing deposits and investment
securities, decreased by $14.2 million, or 13.8%, to $88.6 million at December
31, 2005 mainly due to a reduction in federal funds sold of $19.4 million,
partially offset by purchases of investment securities totaling $7.4 million.
Mortgage-backed securities decreased by $6.9 million, or 11.5%, to $53.4 million
caused by the prepayments management anticipated when purchasing these
relatively shorter term securities. Such prepayments were partially offset by
purchases of mortgage-backed securities during the current nine month period
totaling $16.2 million.
During the nine month period ended December 31, 2005 loans receivable increased
$16.2 million as the Bank originated and retained $40.2 million of loans and
received principal repayments of $24.1 million. Rather than reinvest funds from
sales of and repayments on loans in long-term, fixed rate and low yielding
residential loans, the Bank's lending division originated shorter-term
adjustable rate commercial loans. The Company believes that investing in
shorter-term and adjustable-rate commercial loans favorably positions the
Company in an increasing interest rate environment. The composition of the loan
portfolio has changed during the current nine month period due to a net decrease
of $6.2 million in residential and construction mortgage loans, which was more
than offset by increases in nonresidential real estate loans of $17.0 million
and commercial loans of $5.2 million.
December 31, 2005 March 31, 2005
(Dollars in thousands)
Mortgage loans:
One-to four-family residential(1) $150,825 64.48% $157,658 72.60%
Residential construction loans 5,027 2.15 7,872 3.63
Multi-family residential 7,540 3.22 4,053 1.87
Non-residential real estate/land(2) 46,166 19.73 29,187 13.44
-------- -------- -------- --------
Total mortgage loans 209,558 89.58 198,770 91.54
Other loans:
Consumer loans(3) 5,070 2.17 4,306 1.98
Commercial business loans 19,307 8.25 14,075 6.48
-------- -------- -------- --------
Total other loans 24,377 10.42 18,381 8.46
-------- -------- -------- --------
Total loans before net items 233,935 100.00% 217,151 100.00%
======== ========
Less:
Loans in process 2,347 1,638
Deferred loan origination fees 454 512
Allowance for loan losses 1,332 1,374
-------- --------
Total loans receivable, net $229,802 $213,627
======== ========
Mortgage-backed securities, net(4) $ 53,432 $ 60,352
======== ========
- ---------------------------
(1) Includes equity loans collateralized by second mortgages in the aggregate
amount of $21.5 million and $20.3 million as of December 31, 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 $879,000 and $1.4 million as of December 31, 2005
and March 31, 2005, respectively.
(3) Includes second mortgage loans of $901,000 and $1.4 million as of December
31, 2005 and March 31, 2005, respectively.
(4) Includes mortgage-backed securities designated as held to maturity.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Nonperforming and impaired loans amounted to $893,000 at December 31, 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 past due, nonaccrual and impaired loans and real estate
acquired through foreclosure as of December 31, 2005 and March 31, 2005.
December 31, March 31,
2005 2005
Past due loans 30-89 days:
Mortgage loans:
One- to four-family residential $ 861 $ 895
Nonresidential 81 --
Land 95 --
Non-mortgage loans:
Commercial business loans -- --
Consumer loans 51 11
------ ------
1,088 906
Non-accrual loans:
Mortgage loans:
One- to four-family residential 697 895
All other mortgage loans 178 --
Non-mortgage loans:
Commercial business loans -- --
Consumer 18 11
------ ------
Total non-accrual loans 893 906
Accruing loans 90 days or more delinquent -- --
------ ------
Total non-performing loans 893 906
Loans deemed impaired -- --
------ ------
Total non-performing and impaired loans 893 906
Total real estate acquired through foreclosure 54 35
------ ------
Total non-performing and impaired assets $ 947 $ 941
====== ======
Total non-performing and impaired loans to net
loans receivable 0.39% 0.42%
====== ======
Total non-performing and impaired loans to total assets 0.22% 0.22%
====== ======
Total non-performing and impaired assets to total assets 0.24% 0.23%
====== ======
In addition, the Company had previously reclassified $2.1 million of the
Stebbins portfolio as substandard for regulatory reporting purposes. These loans
have been appropriately restructured and supported by current financial
statements and are no longer classified as substandard.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from March 31, 2005 to December 31,
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 nine months ended For the year ended
December 31, 2005 March 31, 2005
Loans receivable, net $ 229,802 $ 213,627
========= =========
Average loans receivable, net $ 219,668 $ 212,785
========= =========
Allowance balance (at beginning of period) $ 1,374 $ 815
Charge-offs:
Mortgage loans:
One- to four-family (12) (28)
Residential construction -- --
Multi-family residential -- --
Non-residential real estate and land (7) --
Other loans:
Consumer (58) (44)
Commercial (3) (54)
--------- ---------
Gross charge-offs (80) (126)
--------- ---------
Recoveries:
Mortgage loans:
One- to four-family -- --
Residential construction -- --
Multi-family residential -- --
Non-residential real estate and land -- --
Other loans:
Consumer 31 25
Commercial 7 --
--------- ---------
Gross recoveries 38 25
--------- ---------
Net charge-offs (42) (101)
--------- ---------
Provision charged to operations -- 430
Stebbins acquisition -- 230
--------- ---------
Allowance for loans losses balance (at end
of period) $ 1,332 $ 1,374
========= =========
Allowance for loan losses as a percent of loans
receivable, net at end of period 0.58% 0.64%
========= =========
Net loans charged off as a percent of average
loans receivable, net 0.02% 0.05%
========= =========
Ratio of allowance for loan losses to non-
performing loans at end of period 153.63% 151.66%
========= =========
Deposits at December 31, 2005 totaled $328.9 million, an increase of $8.3
million from $320.6 million at March 31, 2005, due primarily to the Bank's
competitive deposit pricing in all market areas. Certificates of deposit grew by
$14.8 million, coupled with $6.5 million of growth in the commercial sweep
program which was initiated during fiscal 2006, a $2.6 million increase in NOW
accounts and money-market deposit growth of $1.9 million. Approximately $17.5
million of the aforementioned deposit growth resulted from transfers from other
Bank deposit types.
Borrowings totaled $30.5 million at December 31, 2005, as compared with $40.0
million at March 31, 2005. The Company was able to repay the short-term Federal
Home Loan Bank advances during the December 31, 2005 nine month period primarily
with excess funds from maturing short-term investments. During the period, the
Company utilized overnight advances from the Federal Home Loan Bank to
supplement liquidity while introducing new deposit products in the market. As
these new deposit products increase, the reliance on overnight borrowings is
anticipated to decline.
16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from March 31, 2005 to December 31,
- --------------------------------------------------------------------------------
2005 (continued)
- ----------------
Stockholders' equity decreased by $4.7 million during the nine months ended
December 31, 2005, due mainly to the purchases of treasury stock totaling $5.0
million, dividends of $1.2 million and an increase in the unrealized loss on
available for sale securities of $42,000. These amounts were offset by $1.1
million in net earnings for the nine months ended December 31, 2005 and proceeds
from the exercise of stock options totaling $367,000.
Comparison of Operating Results for the Nine Month Periods Ended December 31,
- --------------------------------------------------------------------------------
2005 and 2004
- -------------
General
- -------
Net earnings totaled $1.1 million for the nine months ended December 31, 2005, a
decrease of $276,000, or 20.4%, compared to the net earnings of $1.4 million for
the nine months ended December 31, 2004. The decline in net earnings was
primarily attributable to an increase in general, administrative and other
expense of $916,000, or 12.1%. This increase in expense was partially offset by
an increase in net interest income after provision for losses on loans of
$395,000, or 4.9%, and a decrease in the federal income tax provision of
$211,000, or 42.9%.
The Company has maintained its strategy to aggressively manage interest rate
risk. This strategy has favorably affected net interest income for the nine
months ended December 31, 2005. Management believes that the continued
investment of excess funds primarily in shorter term assets will help the
Company in the current interest rate environment by providing flexibility to
redeploy such assets in higher yielding loans and other investments should
interest rates continue to rise.
Interest Income
- ---------------
Interest income increased $1.4 million, or 10.5%, to $14.5 million for the nine
months ended December 31, 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 5.27% from 4.84% for the period ended December 31,
2004 coupled with an increase in the weighted average balance of $5.2 million.
The yield increase was primarily due to the Federal Reserve raising the prime
rate 2.0% over the past year and the corresponding beneficial impact on the
Company's investment securities and interest-bearing deposits and, to a lesser
extent, loans. The Company purposefully invested excess funds in shorter-term
securities available for sale rather than long-term fixed rate loans. Although
this strategy sacrificed short-term income, it strengthens the Company's
interest rate position and allows the Company to redeploy such assets in the
current rising rate environment.
Interest income on loans increased $710,000, or 7.4%, for the nine months ended
December 31, 2005, compared to the same period in 2004, due primarily to an
increase in the weighted-average balance of loans period to period of $7.3
million to $219.7 million for the 2005 period coupled with an 23 basis point
increase in the weighted average yield on loans outstanding.
Interest income on mortgage-backed securities decreased $268,000 during the nine
months ended December 31, 2005, compared to the same period in 2004, due
primarily to a decrease of $21.8 million, or 28.6%, in the weighted-average
balance caused mainly by prepayments management anticipated when purchasing
these relatively shorter-term securities. The decrease in the weighted average
balance was offset by an increase of 56 basis points to a weighted average yield
of 3.59% for the 2005 period as compared to 3.03%, for the comparable 2004
period.
Interest income on investment securities increased by $851,000, or 58.9%, during
the 2005 period compared to the same period in 2004, reflecting an increase in
the weighted average balance of $27.7 million, or 56.4%, to $76.9 million from
$49.2 million during the comparable 2004 period. As part of management's
interest rate risk management strategy, mortgage backed security payments were
reinvested in shorter duration investment securities.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine Month Periods Ended December 31,
- --------------------------------------------------------------------------------
2005 and 2004 (continued)
- -------------------------
Interest income on interest-bearing deposits increased by $77,000, or 28.1%, for
the nine months ended December 31, 2005, due primarily to an increase in the
average yield of 154 basis points to an average yield of 3.12% from an average
yield of 1.58% for the nine months ended December 31, 2004, which was partially
offset by a decrease in the weighted average balance of $8.1 million, or 35.0%,
compared to the 2004 period of $23.1 million. The increase in average yield was
due to the increases in short-term market interest rates.
Interest Expense
Interest expense for the nine months ended December 31, 2005 totaled $6.0
million, an increase of $1.0 million , or 20.6%, from interest expense for the
nine months ended December 31, 2004. The increase resulted from an increase in
the average balance of deposits and borrowings outstanding of $14.5 million, or
4.3%, to $351.6 million for the period ended December 31, 2005 coupled with a 30
basis point increase in the average cost of funds to 2.26% for the 2005 period.
Interest expense on deposits totaled $5.2 million for the nine months ended
December 31, 2005, an increase of $1.0 million, or 25.1%, compared to the nine
months ended December 31, 2004, as a result of an increase in the average
balance outstanding of $13.4 million, or 4.3%, to $324.3 million for the 2005
period coupled with a 36 basis point increase in the average cost of deposits to
2.14% for the 2005 period.
Interest expense on borrowings totaled $764,000 for the nine months ended
December 31, 2005, a decrease of $23,000, or 2.9%, from the 2004 period,
primarily due to a decrease on the weighted average yield of 27 basis points to
an average yield of 3.73% for the nine months ended December 31, 2005.
Net Interest Income
- -------------------
Net interest income totaled $8.5 million for the nine months ended December 31,
2005, an increase of $350,000, or 4.3%, from the nine month period ended
December 31, 2004. The average interest rate spread increased to 3.01% for the
nine months ended December 31, 2005 from 2.88% for the nine months ended
December 31, 2004. The net interest margin increased to 3.10% for the nine
months ended December 31, 2005 from 3.01% for the nine months ended December 31,
2004.
Provision for Losses on Loans
- -----------------------------
The Company did not record any provision for losses on loans for the nine months
ended December 31, 2005. For the period ended December 31, 2004, management
recorded a $45,000 provision for losses on loans. As discussed above, loan
balances increased during the period. Based on management's analysis of
portfolio performance, internal risk ratings, economic factors and peer group
statistics, management concluded that no provision was necessary at this time.
To the best of management's knowledge, all known and inherent losses that are
probable and which can be reasonably estimated have been recorded as of December
31, 2005. There can be no assurances that additions to the allowance for loan
losses or reductions in net carrying values of other real estate owned will not
be necessary in future periods.
18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Nine Month Periods Ended December 31,
- --------------------------------------------------------------------------------
2005 and 2004 (continued)
- -------------------------
Other Income
- ------------
Other income, consisting primarily of increases in the cash surrender value of
life insurance, the pending receipt of life insurance proceeds, gains on sale of
loans, service fees, and charges on deposit accounts increased $34,000, or 2.6%,
for the nine months ended December 31, 2005 as compared with the nine months
ending December 31, 2004. Gain on sale of loans was down $94,000, or 58.0%,
mainly due the sale of the credit card portfolio resulting in a gain of $44,000
in July 2004. No comparable event occurred during the 2005 period. In addition,
more competitive pricing in the 2005 period resulted in a lower gain on the sale
of loans. The decrease in cash surrender value of life insurance was primarily
due to a lower interest rate earned on these assets during the period. The
increase of $80,000 in service fees, charges and other operating income which
was mainly comprised of trust income of $49,000 and increased fees due to
increased volume.
General, Administrative, and Other Expense
- ------------------------------------------
General, administrative and other expense increased by $916,000, or 12.1%, to
$8.5 million for the nine months ended December 31, 2005 compared to the nine
months ended December 31, 2004. The increase resulted primarily from an increase
in employee compensation and benefits expense of $824,000, or 19.4%, coupled
with an increase in occupancy and equipment charges of $125,000, or 9.7%, and an
increase other operating expense of $21,000, or 1.4%. These expense increases
were partially offset by a reduction in franchise tax expense of $53,000, or
11.9%, due to the reduction of taxable equity capital as a result of the stock
repurchase program. The increase in employee compensation and benefits totaling
$486,000 was due to the addition of the Stebbins branch, the expansion of
personnel needed to enhance our commercial lending department and the
establishment of a trust department. The remaining increase in employee
compensation and benefits of $421,000 resulted from a pension expense arising
from the death of the Company's former Chairman and Chief Executive Officer, and
the retirement of the Executive Vice President and Chief Operating Officer.
These increases were partially offset with a reduction of $83,000 in the costs
of the Employee Stock Option Plan. The increase in other occupancy operating
expense was primarily due to additional vendor support and data connectivity
upgrades needed to facilitate operations. The other operating expenses increased
mainly due to pro-rata cost increases.
Federal Income Taxes
- --------------------
The provision for federal income taxes was $281,000 for the nine months ended
December 31, 2005, a decrease of $211,000, or 42.9%, compared to the same period
in 2004, due primarily to a $487,000, or 26.4%, decrease in earnings before
federal income taxes. The effective tax rate for the nine months ended December
31, 2005, was 20.7% as compared to 26.7% for the same period in 2004. The
effective tax rate for the nine months ended December 31, 2005 declined mainly
due to the beneficial effects of income earned from the purchase of tax
advantaged municipal securities and earnings on the cash surrender value of life
insurance.
Comparison of Operating Results for the Three Month Periods Ended December 31,
- --------------------------------------------------------------------------------
2005 and 2004
- -------------
General
- -------
Net earnings totaled $171,000 for the quarter ended December 31, 2005, a
decrease of $232,000, or 57.6%, compared to the net earnings of $403,000 for the
quarter ended December 31, 2004. The decline in net earnings was primarily
attributable to an increase in general, administrative and other expense of
$594,000, or 22.9%, offset with a decrease in federal income taxes of $159,000,
or 119.5%, an increase in net interest income after provision for losses on
loans of $125,000, or 4.6%, and an increase in total other income of $78,000, or
20.1%.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended December 31,
- --------------------------------------------------------------------------------
2005 and 2004 (continued)
- -------------------------
Interest Income
- ---------------
Interest income increased $516,000, or 11.6%, to $5.0 million for the three
months ended December 31, 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 5.44% from 4.94% for the period ended December 31,
2004. The yield increase was primarily due to the Federal Reserve raising the
prime rate 2.0% over the past year and the corresponding beneficial effect on
the Company's investment securities and interest-bearing deposits and, to a
lesser extent, loans.
Interest income on loans increased $379,000, or 11.7%, for the three months
ended December 31, 2005, compared to the same period in 2004, due primarily an
increase in the weighted average balance of loans period to period of $12.9
million, or 6.0%, to $227.2 million for the 2005 period coupled with an increase
in the weighted average yield of 32 basis points to 6.38%.
Interest income on mortgage-backed securities decreased $79,000 during the three
months ended December 31, 2005, compared to the same period in 2004, due
primarily to a decrease of $17.8 million, or 25.9%, in the weighted-average
balance caused mainly by prepayments. The decrease in the weighted average
balance was offset by an increase of 53 basis points to a weighted average yield
of 3.81% as compared to 3.28%, from the comparable 2004 period. The slowdown of
prepayments year over year resulted in a reduction of premium amortization and a
corresponding increase in interest income on mortgage-backed securities.
Interest income on investment securities increased by $243,000, or 46.7%, during
the 2005 period compared to the same period in 2004, reflecting an increase in
the weighted average balance of $23.4 million, or 44.5%, to $75.9 million from
$52.5 million during the comparable 2004 period, coupled with an increase in the
average yield to 4.02%. As part of management's interest rate risk management
strategy, mortgage backed security payments were reinvested in shorter duration
investment securities.
Interest income on interest-bearing deposits decreased by $27,000, or 19.9%, for
the three months ended December 31, 2005, due primarily to a decrease in the
weighted average balance of $14.2 million, or 53.4%, offset with an increase in
the average yield of 149 basis points to an average yield of 3.54% from an
average yield of 2.05% for the quarter ended December 31, 2004. The average
balance of short term investments decreased due to maturities that were
reinvested in higher yielding investment securities.
Interest Expense
- ----------------
Interest expense for the three months ended December 31, 2005 totaled $2.1
million, an increase of $406,000, or 23.7%, from interest expense for the three
months ended December 31, 2004. The increase resulted from an increase in the
average balance of deposits and borrowings outstanding of $10.6 million, or
3.1%, to $353.6 million for the period ended December 31, 2005 and an 40 basis
point increase in the average cost of funds to 2.39% for the 2005 period.
Interest expense on deposits totaled $1.9 million for the three months ended
December 31, 2005, an increase of $392,000, or 26.8%, compared to the three
months ended December 31, 2004, as a result of an increase in the average
balance outstanding of $8.0 million, or 2.5%, to $326.1 million for the 2005
period coupled with a 44 basis point increase in the average cost of deposits to
2.28% for the 2005 period.
Interest expense on borrowings totaled $262,000 for the three months ended
December 31, 2005, an increase of $14,000, or 5.6%, from the 2004 period,
primarily due to an increase on the weighted average balance of $2.6 million, or
10.2%, offset by a decrease in weighted average yield of 17 basis points to an
average yield of 3.80% for the three months ended December 31, 2005.
20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended December 31,
- --------------------------------------------------------------------------------
2005 and 2004 (continued)
- -------------------------
Net Interest Income
- -------------------
Net interest income totaled $2.9 million for the three months ended December 31,
2005, an increase of $110,000, or 4.0%, from the three month period ended
December 31, 2004. The average interest rate spread increased to 3.05% for the
three months ended December 31, 2005 from 2.95% for the three months ended
December 30, 2004. The net interest margin increased to 3.13% for the three
months ended December 31, 2005 from 3.04% for the three months ended December
31, 2004.
Provision for Losses on Loans
- -----------------------------
The Company did not record any provision for losses on loans for the period
ending December 31, 2005. For the period ended December 31, 2004, management
recorded a $15,000 provision for losses on loans. Based on management's analysis
of portfolio performance, internal risk ratings, economic factors and peer group
statistics, management concluded that no provision was necessary at this time.
To the best of management's knowledge, all known and inherent losses that are
probable and which can be reasonably estimated have been recorded as of December
31, 2005. There can be no assurances that additions to the allowance for loan
losses or reductions in net carrying values of other real estate owned will not
be necessary in future periods.
Other Income
- ------------
Other income, consisting primarily of increases in the cash surrender value of
life insurance, pending life insurance proceeds, gains on sale of loans, service
fees, and charges on deposit accounts increased by $78,000, or 20.1%, for the
three months ended December 31, 2005 as compared with the quarter ending
December 31, 2004. Gain on sale of loans declined $21,000 mainly due to
decreased sales of loans. This reduction was more than offset by a $39,000
increase in service fees, charges and other operating income, comprised mainly
of trust income.
General, Administrative, and Other Expense
- ------------------------------------------
General, administrative and other expense increased by $594,000, or 22.9%, to
$3.2 million for the three months ended December 31, 2005 compared to the three
months ended December 31, 2004. The increase resulted primarily from an increase
in employee compensation and benefits expense of $495,000, or 33.9%, coupled
with increases of $71,000, or 16.2%, in occupancy and equipment expense and
other operating expense of $45,000, or 8.5%. These increased expenses were
offset with a reduction in franchise tax expense of $17,000, or 11.3%. The
increase in employee compensation and benefits of $495,000 resulted mainly from
an unanticipated pension expense as a result of the death of the Company's
former Chairman and Chief Executive Officer and the retirement of the Executive
Vice President and Chief Operating Officer coupled with increased salary costs
due to normal merit increases. The increase in occupancy and equipment expense
was primarily due to additional vendor support and data connectivity upgrades
needed to facilitate operations. The reduction in franchise tax is due to the
reduction of taxable equity capital as a result of the stock repurchase
programs.
Federal Income Taxes (Credit)
- -----------------------------
The federal income tax credit was $26,000 for the three months ended December
31, 2005, a decrease of $159,000 compared to the provision for the same period
in 2004. This was primarily due to the $391,000, or 72.9%, decrease in earnings
before federal income taxes. The difference in the effective tax rate of
benefits from the 34% statutory rate is mainly due to the beneficial effects of
earnings from cash surrender value on life insurance and other tax-exempt
obligations.
21
Wayne Savings Bancshares, Inc.
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.
22
Wayne Savings Bancshares, Inc.
PART II
ITEM 1. Legal Proceedings
-----------------
Not applicable
ITEM 1A. Risk Factors
------------
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 December 31,
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
------ --------- --------- ------------- ---------------------
October 1-31, 2005 -- $ -- -- 164,794
November 1-30, 2005 10,000 $14.80 10,000 154,794
December 1-31, 2005 14,692 $15.00 24,692 140,105
Notes to the Table:
A repurchase program for 185,491, or 5% of the Company's
outstanding shares, was publicly announced on September 2,
2004 and expired 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
23
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: February 10, 2006 By: /s/ Phillip E. Becker
----------------- -----------------------------------------
Phillip E. Becker,
President and Chief Executive Officer
Date: February 10, 2006 By: /s/ H. Stewart Fitz Gibbon III
----------------- -----------------------------------------
H. Stewart Fitz Gibbon III
Senior Vice President and Chief Financial
Officer
24