UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Fiscal Year Ended March 31, 2006
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.
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(Exact name of registrant as specified in its charter)
Delaware 31-1557791
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
151 North Market Street, Wooster, Ohio 44691
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(Address of Principal Executive Offices) Zip Code
(330) 264-5767
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(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.10 per share
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(Title of Class)
Indicate by check mark if the Registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. YES [_] NO [X]
Indicate by check mark if the Registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act. YES [_] NO [X]
Indicate by check mark whether the Registrant (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 twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [_]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
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 shell company (as
defined in Rule 12b-2 of the Exchange Act). YES [_]NO [X]
As of June 12, 2006, there were 3,954,874 issued and outstanding shares
of the Registrant's Common Stock.
The aggregate market value of the voting and non-voting common equity
held by non-affiliates of the Registrant, computed by reference to the last sale
price on June 8, 2006, as reported on the Nasdaq National Market, was
approximately $60.1 million.
Wayne Savings Bancshares, Inc.
Form 10-K
For the Year Ended March 31, 2006
PART I.
Item 1. Business.......................................................................1
Item 1A. Risk Factors..................................................................30
Item 1B. Unresolved Staff Comments.....................................................31
Item 2. Properties....................................................................32
Item 3. Legal Proceedings.............................................................33
Item 4. Submission of Matters to a Vote of Security Holders...........................33
PART II.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities............................................33
Item 6. Selected Financial Data.......................................................35
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.............................................................37
Item 7A. Quantitative and Qualitative Disclosures About Market Risk....................47
Item 8. Financial Statements and Supplementary Data...................................49
Item 9. Change in and Disagreements with Accountants on Accounting and
Financial Disclosure......................................................87
Item9A. Controls and Procedures.......................................................87
Item 9B. Other Information.............................................................87
PART III.
Item 10. Directors and Executive Officers of the Registrant............................87
Item 11. Executive Compensation........................................................87
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters...............................................87
Item 13. Certain Relationships and Related Transactions................................87
Item 14. Principal Accountant Fees and Services........................................88
PART IV.
Item 15. Exhibits and Financial Statement Schedules....................................88
PART I
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ITEM 1. Business
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General
Wayne Savings Bancshares, Inc.
Wayne Savings Bancshares, Inc. (the "Company"), is a unitary holding
company for Wayne Savings Community Bank (the "Bank"). The only significant
asset of the Company is its investment in the Bank. A plan of conversion and
reorganization was approved by the stockholders of the Company, the depositors
of Wayne Savings Community Bank and the Office of Thrift Supervision ("OTS") in
fiscal 2003, and the related stock offering was completed on January 8, 2003. As
of that date 1,350,699 shares of common stock of the Company owned by the M.H.C.
were retired and the Company sold 2,040,816 shares of common stock for $10.00
per share. After consideration of funding the employee stock ownership plan
("ESOP") with $1.6 million and related expenses of $1.9 million, net proceeds
from the stock offering amounted to $17.1 million. An additional 1,847,820
shares were issued to existing shareholders based on an exchange rate of 1.5109
new shares of common stock for each existing share, resulting in 3,888,795 total
new shares outstanding. At March 31, 2006, the Company had total assets of
$403.7 million, total deposits of $332.6 million, and stockholders' equity of
$35.5 million. On June 1, 2004, the Company acquired Stebbins Bancshares, Inc.,
and its national bank subsidiary, Stebbins National Bank of Creston, Ohio. The
acquisition of Stebbins National Bank increased the Bank's branches to eleven
full-service locations. The Company's principal office is located at 151 North
Market Street, Wooster, Ohio, and its telephone number at that address is (330)
264-5767.
Wayne Savings Community Bank
The Bank is an Ohio-chartered stock savings and loan association
headquartered in Wooster, Ohio. The Bank's deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC"). The Bank has been a member of the
Federal Home Loan Bank ("FHLB") System since 1937.
The Bank is a community-oriented savings institution offering
traditional financial services to its local community. The Bank's primary
lending and deposit gathering area includes Wayne, Holmes, Ashland, Medina and
Stark counties, where it operates eleven full-service offices. This contiguous
five-county area is located in northeast Ohio, and is an active manufacturing
and agricultural market. The Bank's principal business activities consist of
originating one- to four-family residential real estate loans, multi-family
residential, commercial and non-residential real estate loans. The Bank also
originates consumer loans, and to a lesser extent, construction loans. The Bank
also invests in mortgage-backed securities and currently maintains a significant
portion of its assets in liquid investments, such as United States Government
securities, federal funds, and deposits in other financial institutions.
During the most recent five fiscal years, the Company has rebalanced
the loan portfolio by placing an increased emphasis on nonresidential real
estate and commercial business loans. Nonresidential real estate loans and
commercial loans have increased from $12.4 million, or 4.82% of the loan
portfolio and $3.1 million, or 1.22% of the total loan portfolio at March 31,
2002 to $50.8 million, or 21.25%, and $21.6 million, or 9.02%, at March 31,
2006. Correspondingly, one- to four-family residential loans have decreased from
$220.1 million, or 85.36% of the total loan portfolio at March 31, 2002 to
$149.1 million, or 62.4%, at March 31, 2006. Nonresidential real estate loans
and commercial loans generally carry higher yields and shorter terms than one-
to four-family loans. The increased emphasis on nonresidential real estate and
commercial business loans have diversified the loan portfolio, expanded the
Company's product offerings and broadened the Company's customer base.
1
The Bank's principal executive office is located at 151 North Market
Street, Wooster, Ohio, and its telephone number at that address is (330)
264-5767.
Market Area/Local Economy
The Bank, headquartered in Wooster, Ohio, operates in Wayne, Ashland,
Medina, Holmes and Stark Counties in northeast Ohio. Wooster, Ohio is located in
Wayne County and is approximately midway between Cleveland and Columbus, Ohio.
Wayne County is characterized by a diverse economic base, which is not
dependent on any particular industry. It is one of the leading agricultural
counties in the state. Since 1892, Wooster has been the headquarters of the Ohio
Agricultural Research and Development Center, the agricultural research arm of
The Ohio State University. In addition, Wayne County is also the home base of
such nationally known companies like J.M. Smucker Company, Worthington
Industries/The Gertsenslager Company, and the Wooster Brush Company. It is also
the home of many industrial plants, including Packaging Corporation of America,
International Paper Company, Morton Salt, and FritoLay, Inc. The City of Wooster
has benefited from the commitment of the world renowned Cleveland Clinic as they
have established new state of the art medical facilities. Wayne County is also
known for its excellence in education. The College of Wooster was founded in
1866 and serves 1,800 students during the school season. Other quality
educational opportunities are offered by the Agricultural Technical Institute of
Ohio State University, and Wayne College, a branch of The University of Akron.
Wayne Savings operates four full-service offices in Wooster, one stand-alone
drive-thru facility and one full-service office in both Rittman and Creston.
Ashland County, which is located due west of Wayne County, also has a
diverse economic base. In addition to its agricultural segment, Ashland County
has manufacturing plants producing rubber and plastics, machinery,
transportation equipment, chemicals, apparel, and other items. Ashland is also
the home of Ashland University. The City of Ashland is the county seat and the
location of two of the Bank's branch offices.
Medina County, located just north of Wayne County, is the center of a
fertile agricultural region. Farming remains the largest industry in the county
in terms of dollar value of goods produced. However, over 100 small
manufacturing firms also operate in the county. The City of Medina is located in
the center of the Cleveland-Akron-Lorain Standard Consolidated Statistical
Marketing Area. Medina is located approximately 30 miles south of Cleveland and
15 miles west of Akron. Due to its proximity to Akron and Cleveland, a majority
of Medina County's labor force is employed in these two cities. The Bank
operates one full-service office in Medina County, which is located in the
Village of Lodi.
Holmes County, located directly south of Wayne County, has a mostly
rural economy. The local economy depends mostly upon agriculture, light
manufacturing, fabrics, and wood products. Because of the scenic beauty and a
large Amish settlement, revenues from tourism are becoming increasingly
significant. The county is also noted for its many fine cheese-making
operations. A large number of Holmes County residents are employed in Wayne
County. The City of Millersburg is the county seat and the location of one of
the Bank's branch offices.
Stark County, located directly east of Wayne County, is characterized
by a diverse economy and over 1,500 different products are manufactured in the
county. Stark County also has a strong agricultural base, and ranks fourth in
Ohio in the production of dairy products. The major employers in North Canton
are the Hoover Company, Diebold Incorporated (a major manufacturer of bank
security products and automated teller machines) and the Timken Company (a
world-wide manufacturer of tapered roller bearings and specialty steels). Maytag
Corp., the parent of the Hoover Company, was acquired by Whirlpool Corp. The
future of the Hoover Company in North Canton is uncertain. Timken has also had
plants close, resulting in
2
job losses in the North Canton region of approximately 30%. The Bank does not
have a material concentration of loans in the North Canton market area. Jackson
Township is the home to the Belden Village Shopping Center, while Plain Township
is a residential and agricultural area with a few widely scattered light
industries. North Canton is the location of one of the Bank's branches.
Lending Activities
General. Historically, the principal lending activity of the Company
has been the origination of fixed and adjustable rate mortgage ("ARM") loans
collateralized by one- to four-family residential properties located in its
market area. The Company originates ARM loans for retention in its portfolio,
and fixed rate loans that are eligible for resale in the secondary mortgage
market. The Company also originates loans collateralized by non-residential and
multi-family residential real estate, as well as commercial business loans. The
Company also originates consumer loans to broaden services offered to customers.
The Company has sought to make its interest-earning assets more
interest rate sensitive by originating adjustable rate loans, such as ARM loans,
home equity loans, and medium-term consumer loans. The Company also purchases
mortgage-backed securities generally with estimated remaining average lives of 5
years or less. At March 31, 2006, approximately $70.9 million, or 24.4%, of the
Company's total loans and mortgage-backed securities consisted of loans or
securities with adjustable interest rates.
The Company continues to actively originate fixed rate mortgage loans,
generally with 15 to 30 year terms to maturity, collateralized by one- to
our-family residential properties. One- to four-family fixed rate residential
mortgage loans generally are originated and underwritten according to standards
that allow the Company to resell such loans in the secondary mortgage market for
purposes of managing interest rate risk and liquidity. Since November 2005, the
Company has decided to retain all one- to four-family, fixed rate residential
mortgage loan originations with terms of 15 and 30 years in an attempt to
stabilize this sector of the loan portfolio. The Company retains servicing on
its sold mortgage loans and realizes monthly service fee income. The Company
also originates interim construction loans on one- to four-family residential
properties.
The Company has continued developing the commercial business loan
program. The purpose of this program is to increase the Company's interest rate
sensitive assets, increase interest income and diversify both the loan portfolio
and the Company's customer base. The Company has three experienced commercial
lenders to help in this effort. The Company targets small local businesses with
loan amounts in the $50,000 - $1.0 million range with a majority of loans under
$500,000. Commercial loans increased to $21.6 million at March 31, 2006 as
compared to $14.1 million at March 31, 2005 and $3.1 million at March 31, 2002.
Further, the Company has placed an increased emphasis on nonresidential real
estate loan products over the last five years. Nonresidential real estate and
land loans increased from $12.4 million, or 4.8%, of the total loan portfolio at
March 31, 2002 to $50.8 million, or 21.2%, of the total loan portfolio at March
31, 2006.
3
Analysis of Loan Portfolio. Set forth below are selected data relating
to the composition of the Company's loan portfolio, including loans held for
sale, by type of loan as of the dates indicated.
At March 31,
--------------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
--------------- ---------------- ---------------- ------------------ ---------------
Mortgage loans: $ % $ % $ % $ % $ %
-------- ------ -------- ------ -------- ------ -------- -------- -------- ------
(Dollars in thousands)
One- to four-family
residential(1).................. $149,134 62.40% $157,658 72.60% $171,736 81.97% $200,764 86.41% $220,145 85.36%
Residential construction loans.... 4,675 1.96 4,053 1.87 2,914 1.39 3,548 1.53 8,728 3.38
Multi-family residential.......... 7,930 3.32 7,872 3.63 6,800 3.25 8,512 3.66 7,368 2.86
Non-residential real
estate/land(2).................. 50,778 21.25 29,187 13.44 18,439 8.80 12,067 5.19 12,423 4.82
-------- ------ -------- ------ -------- ------ -------- -------- -------- ------
Total mortgage loans......... 212,517 88.93 198,770 91.54 199,889 95.41 224,891 96.79 248,664 96.42
Other loans:
Consumer loans(3)................. 4,901 2.05 4,306 1.98 3,156 1.51 3,892 1.67 6,096 2.36
Commercial business loans......... 21,550 9.02 14,075 6.48 6,471 3.08 3,571 1.54 3,134 1.22
-------- ------ -------- ------ -------- ------ -------- -------- -------- ------
Total other loans............ 26,451 11.07 18,381 8.46 9,627 4.59 7,463 3.21 9,230 3.58
-------- ------ -------- ------ -------- ------ -------- -------- -------- ------
Total loans before net items...... 238,968 100.00% 217,151 100.00% 209,516 100.00% 232,354 100.00% 257,894 100.00%
====== ====== ====== ======== ======
Less:
Loans in process.................. 1,729 1,638 2,579 2,244 4,616
Deferred loan origination fees.... 443 512 679 1,059 1,376
Allowance for loan losses......... 1,484 1,374 815 678 730
-------- -------- -------- -------- --------
Total loans receivable, net.. $235,312 $213,627 $205,443 $228,373 $251,172
======== ======== ======== ======== ========
Mortgage-backed securities, net(4) $ 55,731 $ 60,352 $ 88,428 $ 76,002 $ 17,326
======== ======== ======== ======== ========
(1) Includes equity loans collateralized by second mortgages in the aggregate
amount of $20.9 million, $20.3 million, $20.3 million, $21.2 million, and
$18.9 million as of March 31, 2006, 2005, 2004, 2003 and 2002,
respectively. Such loans have been underwritten on substantially the same
basis as the Company's first mortgage loans.
(2) Includes land loans of $674,000, $1.4 million, $575,000, $813,000 and
$736,000 as of March 31, 2006, 2005, 2004, 2003 and 2002, respectively.
(3) Includes second mortgage loans of $783,000, $1.4 million, $535,000,
$859,000 and $1.2 million as of March 31, 2006, 2005, 2004, 2003 and 2002,
respectively.
(4) Includes mortgage-backed securities designated as available for sale.
4
Loan and Mortgage-Backed Securities Maturity and Repricing Schedule.
The following table sets forth certain information as of March 31, 2006,
regarding the dollar amount of loans and mortgage-backed securities maturing in
the Company's portfolio based on their contractual terms to maturity. Demand
loans, loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less. Adjustable and floating rate
loans and mortgage-backed securities are included in the period in which
interest rates are next scheduled to adjust rather than in which they mature,
and fixed rate loans and mortgage-backed securities are included in the period
in which the final contractual repayment is due. Fixed rate mortgage-backed
securities are assumed to mature in the period in which the final contractual
payment is due on the underlying mortgage.
One Three Five Ten Beyond
Within Through Through Through Through Twenty
One Year Three Years Five Years Ten Years Twenty Years Years Total
----------- ----------- ----------- ----------- ------------ ----------- -----------
(In Thousands)
Mortgage loans:
One- to four-family residential:
Adjustable ....................... $ 30,781 $ 9,647 $ 1,947 $ 195 $ -- $ -- $ 42,570
Fixed ............................ 2,783 956 1,078 11,291 32,125 58,331 106,564
Construction:(1)
Adjustable ....................... -- -- -- -- -- -- --
Fixed ............................ 473 -- -- -- 509 1,964 2,946
Multi-family residential,
nonresidential and land:
Adjustable ....................... 3,962 11,128 10,438 6,634 -- -- 32,162
Fixed ............................ 2,161 8,711 3,505 3,448 8,721 -- 26,546
Other Loans:
Commercial business loans .......... 17,883 1,276 1,511 172 587 121 21,550
Consumer ........................... 1,271 1,336 1,987 303 4 -- 4,901
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total loans .......................... $ 59,314 $ 33,054 $ 20,466 $ 22,043 $ 41,946 $ 60,416 $ 237,239
=========== =========== =========== =========== =========== =========== ===========
Mortgage-backed securities(2) ........ $ 9,018 $ 2,615 $ 1,527 $ 13,242 $ 19,675 $ 10,155 $ 56,232
=========== =========== =========== =========== =========== =========== ===========
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(1) Amounts shown are net of loans in process of $1.7 million in construction
loans.
(2) Includes mortgage-backed securities available for sale. Does not include
premiums of $514,000, discounts of $287,000 and unrealized losses of
$728,000.
5
The following table sets forth at March 31, 2006, the dollar amount of
all fixed rate and adjustable rate loans and mortgage-backed securities maturing
or repricing after March 31, 2007.
Fixed Adjustable
(In Thousands)
Mortgage loans:
One- to four-family residential ...................... $103,781 $ 11,789
Construction (1) ..................................... 2,473 --
Multi-family residential, non-residential and land (1) 24,385 28,200
Consumer ............................................. 3,630 --
Commercial business .................................. 2,436 1,231
-------- --------
Total loans ................................... $136,705 $ 41,220
======== ========
Mortgage-backed securities(2) .......................... $ 45,164 $ 2,050
======== ========
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(1) Net of loans in process of $1.7 million in residential construction loans.
(2) Includes mortgage-backed securities available for sale, which totaled $53.9
million as of March 31, 2006. Does not include premiums of $514,000,
discounts of $287,000 and unrealized losses of $728,000.
One- to Four-Family Residential Real Estate Loans. The Company's
primary lending activity consists of the origination of one- to four-family,
owner-occupied, residential mortgage loans on properties located in the
Company's market area. The Company generally does not originate one- to
four-family residential loans secured by properties outside of its market area.
At March 31, 2006, the Company had $149.1 million, or 62.4%, of its total loan
portfolio invested in one- to four-family residential mortgage loans.
The Company's fixed rate loans generally are originated and
underwritten according to standards that permit resale in the secondary mortgage
market. Whether the Company can or will sell fixed rate loans into the secondary
market, however, depends on a number of factors including the Company's
portfolio mix, gap and liquidity positions, and market conditions. Moreover, the
Company is more likely to retain fixed rate loans if its one-year gap is
positive. The Company's fixed rate mortgage loans are amortized on a monthly
basis with principal and interest due each month. One- to four-family
residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms because borrowers may refinance or prepay
loans at their option. The Company's one- to four-family residential portfolio
has declined $8.5 million, or 5.4%, from March 31, 2005 to March 31, 2006. This
reduction was due mainly to the low interest rate environment which prompted
many mortgage customers to refinance their loans, coupled with management's
intent to increase the commercial loan portfolio. The Company's secondary market
activities have been limited to sales of $6.1 million, $6.0 million, $6.2
million, $4.0 million and $27.4 million, for the fiscal years ended March 31,
2006, 2005, 2004, 2003 and 2002, respectively. Such sales generally constituted
current period originations. In the third quarter of fiscal 2006, the Company's
management temporarily halted sales of loans to stabilize balances in this
segment of the loan portfolio. There were no loans identified as available for
sale as of March 31, 2006, 2005, 2004, 2003, or 2002.
The Company currently offers one- to four-family residential mortgage
loans with terms typically ranging from 15 to 30 years, and with adjustable or
fixed interest rates. Originations of fixed rate mortgage loans versus ARM loans
are monitored on an ongoing basis and are affected significantly by the level of
market interest rates, customer preference, the Company's interest rate gap
position, and loan products offered by the Company's competitors. Despite the
Company's emphasis on ARM loans, the low interest rate environment over the last
few years has resulted in customer preference for fixed rate mortgage loans. As
a result, during the year ended March 31, 2006, the Company's ARM portfolio
decreased by $3.5 million, or 7.6%.
6
The Company offers one ARM loan product. The Treasury ARM loan adjusts
annually with interest rate adjustment limitations of 2% per year and with a cap
of 3% or 5% on total rate increases or decreases over the life of the loan. The
index on the Treasury ARM loan is the weekly average yield on U.S. Treasury
securities, adjusted to a constant maturity of one year plus a margin. However,
these loans are underwritten at the fully-indexed interest rate. One- to
four-family residential ARM loans totaled $42.6 million, or 17.8%, of the
Company's total loan portfolio at March 31, 2006.
The primary purpose of offering ARM loans is to make the Company's loan
portfolio more interest rate sensitive. However, as the interest income earned
on ARM loans varies with prevailing interest rates, such loans do not offer the
Company predictable cash flows as would long-term, fixed rate loans. ARM loans
carry increased credit risk associated with potentially higher monthly payments
by borrowers as general market interest rates increase. It is possible,
therefore, that during periods of rising interest rates, the risk of default on
ARM loans may increase due to the upward adjustment of interest costs to the
borrower. Management believes that the Company's credit risk associated with its
ARM loans is reduced because the Company has either a 3% or 5% cap on interest
rate increases during the life of its ARM loans.
The Company also offers home equity loans and equity lines of credit
collateralized by a second mortgage on the borrower's principal residence. In
underwriting these home equity loans, the Company requires that the maximum
loan-to-value ratios, including the principal balances of both the first and
second mortgage loans, not exceed 85%. The home equity loan portfolio consists
of adjustable rate loans which use the prime rate as published in The Wall
Street Journal as interest rate indices. Home equity loans include fixed term
adjustable rate loans, as well as lines of credit. As of March 31, 2006, the
Company's equity loan portfolio totaled $20.9 million, or 13.6%, of its one- to
four-family mortgage loan portfolio.
The Company's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the Company
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells or otherwise disposes of the underlying
real property serving as security for the loan. Due-on-sale clauses are an
important means of adjusting the rates on the Company's fixed rate mortgage loan
portfolio.
Regulations limit the amount that a savings association may lend
relative to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. The Company's
lending policies limit the maximum loan-to-value ratio on both fixed rate and
ARM loans without private mortgage insurance to 80% of the lesser of the
appraised value or the purchase price of the property to serve as collateral for
the loan. However, the Company makes one- to four-family real estate loans with
loan-to-value ratios in excess of 80%. For 15 year fixed rate ARM loans with
loan-to-value ratios of 80.01% to 85%, 85.01% to 90%, 90.01% to 95%, and 95.01%
to 97%, the Company requires the first 6%, 12%, 25% and 30%, respectively, of
the loan to be covered by private mortgage insurance. For 30 year fixed rate
loans with loan-to-value ratios of 80.01% to 85%, 85.01% to 90%, and 90.01% to
97%, the Company requires the first 12%, 25%, and 30%, respectively, of the loan
to be covered by private mortgage insurance. The Company requires fire and
casualty insurance, as well as title insurance regarding good title, on all
properties securing real estate loans made by the Company and flood insurance,
where applicable.
Multi-Family Residential Real Estate Loans. Loans secured by
multi-family real estate constituted approximately $7.9 million, or 3.3%, of the
Company's total loan portfolio at March 31, 2006. The Company's multi-family
real estate loans are secured by multi-family residences, such as apartment
buildings. At March 31, 2006, most of the Company's multi-family loans were
secured by properties located within the Company's market area. At March 31,
2006, the Company's multi-family real estate loans had an average balance of
$496,000, and the largest multi-family real estate loan had a principal balance
of $3.2 million. Multi-family real estate loans currently are offered with
adjustable interest rates or short term balloon maturities, although in the past
the Company originated fixed rate long-term multi-family real estate loans. The
terms of each multi-family loan are negotiated on a case by case basis, although
such loans typically have
7
adjustable interest rates tied to a market index, and amortize over 15 to 25
years. The Company currently does not emphasize multi-family real estate
construction loans.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one-to- four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family real
estate is typically dependent upon the successful operation of the related real
estate property. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired.
Non-Residential Real Estate and Land Loans. Loans secured by
non-residential real estate constituted approximately $50.1 million, or 21.0%,
of the Company's total loan portfolio at March 31, 2006. The Company's
non-residential real estate loans are secured by improved property such as
offices, small business facilities, and other non-residential buildings. At
March 31, 2006, most of the Company's non-residential real estate loans were
secured by properties located within the Company's market area. At March 31,
2006, the Company's non-residential loans had an average balance of $241,000 and
the largest non-residential real estate loan had a principal balance of $2.3
million. The terms of each non-residential real estate loan are negotiated on a
case by case basis. Non-residential real estate loans are currently offered with
adjustable interest rates or short term balloon maturities, although in the past
the Company has originated fixed rate long term non-residential real estate
loans. Non-residential real estate loans originated by the Company generally
amortize over 15 to 25 years. The Company currently does not emphasize
non-residential real estate construction loans.
Nonresidential real estate loans have significantly increased from
$12.4 million or 4.82% of the total loan portfolio at March 31, 2002 to $50.8
million or 21.25% of the total loan portfolio at March 31, 2006. The Company
intends to further diversify its loan portfolio and its increased emphasis on
nonresidential real estate lending.
Loans secured by non-residential real estate generally involve a
greater degree of risk than one-to- four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by non-residential
real estate is typically dependent upon the successful operation of the related
real estate project. If the cash flow from the project is reduced, the
borrower's ability to repay the loan may be impaired.
The Company also originates a limited number of land loans secured by
individual improved and unimproved lots for future residential construction.
Land loans are generally offered with a fixed rate and with terms of up to 5
years. Land loans totaled $674,000 at March 31, 2006.
Residential Construction Loans. To a lesser extent, the Company
originates loans to finance the construction of one- to four-family residential
property. At March 31, 2006, the Company had $4.7 million, or 2.0%, of its total
loan portfolio invested in interim construction loans. The Company makes
construction loans to private individuals and to builders. Loan proceeds are
disbursed in increments as construction progresses and as inspections warrant.
Construction loans are typically structured as permanent one- to four-family
loans originated by the Company with a 12-month construction phase. Accordingly,
upon completion of the construction phase, there is no change in interest rate
or term to maturity of the original construction loan, nor is a new permanent
loan originated.
Commercial Business Loans. Commercial business loans totaled $21.6
million, or 9.0% of the Company's total loan portfolio at March 31, 2006. This
represents net growth of $7.5 million which equates
8
to a 53.1% increase as percentage of total loans compared to $14.1 million at
March 31, 2005. The Company has three experienced commercial lenders and is
developing an additional commercial lender internally. The Company has plans to
continue commercial lending growth as market conditions permit.
Commercial loans carry a higher degree of risk than
one-to-four-residential loans. Such lending typically involves large loan
balances concentrated in a single borrower or groups of related borrowers for
rental or business properties. In addition, the payment experience on loans
secured by income-producing properties is typically dependent on the success of
the operation of the related project and thus is typically affected by adverse
conditions in the real estate market and in the economy. The Company makes loans
generally in the $100,000 to $1,000,000 range with the majority of them being
under $500,000. Commercial loans are generally underwritten based on the
borrower's ability to pay and assets such as buildings, land and equipment are
taken as additional loan collateral. Each loan is evaluated for a level of risk
and assigned a rating from "1" (the highest rating) to "7" (the lowest rating).
All loans originated to date have been rated 4 or higher.
Consumer Loans. Ohio savings associations are authorized to invest in
secured and unsecured consumer loans in an aggregate amount which, when combined
with investments in commercial paper and corporate debt securities, does not
exceed 20% of an association's assets. In addition, an Ohio association is
permitted to invest up to 5% of its assets in loans for educational purposes.
As of March 31, 2006, consumer loans totaled $4.9 million, or 2.1%, of
the Company's total loan portfolio. The principal types of consumer loans
offered by the Company are second mortgage loans, fixed rate auto and truck
loans, education loans, credit card loans, unsecured personal loans, and loans
secured by deposit accounts. Consumer loans are offered primarily on a fixed
rate basis with maturities generally of less than ten years.
The Company's second mortgage consumer loans are secured by the
borrower's principal residence with a maximum loan-to-value ratio, including the
principal balances of both the first and second mortgage loans, of 80% or less.
Such loans are offered on a fixed rate basis with terms of up to ten years. At
March 31, 2006, second mortgage loans totaled $783,000, or .5%, of one- to
four-family mortgages.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's credit history and an assessment of
the applicant's ability to meet existing obligations and payments on the
proposed loan. The quality and stability of the applicant's monthly income are
determined by analyzing the gross monthly income from primary employment, and
additionally from any verifiable secondary income. Creditworthiness of the
applicant is of primary consideration. However, where applicable, the
underwriting process also includes a comparison of the value of the collateral
in relation to the proposed loan amount.
Consumer loans entail greater credit risk than residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats, and
recreational vehicles. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly reduced
based upon the condition of the automobiles and the lack of demand for used
automobiles. The Company adds a general provision on a regular basis to its
consumer loan loss allowance, based on, among other factors, general economic
conditions and prior loss experience. See "--Delinquencies and Classified
Assets--Non-Performing and Impaired Assets," and "--Classification of Assets"
for information regarding the Company's loan loss experience and reserve policy.
9
Mortgage-Backed Securities. The Company also invests in mortgage-backed
securities generally issued or guaranteed by the United States Government or
agencies thereof. Investments in mortgage-backed securities are made either
directly or by exchanging mortgage loans in the Company's portfolio for such
securities. These securities consist primarily of adjustable rate
mortgage-backed securities issued or guaranteed by the Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), and the
Government National Mortgage Association ("GNMA"). Total mortgage-backed
securities, including those designated as available for sale, decreased from
$60.4 million at March 31, 2005 to $55.7 million at March 31, 2006 primarily due
to repayments.
The Company's objectives in investing in mortgage-backed securities
vary from time to time depending upon market interest rates, local mortgage loan
demand, and the Company's level of liquidity. Mortgage-backed securities are
more liquid than whole loans and can be readily sold in response to market
conditions and changes in interest rates. Mortgage-backed securities purchased
by the Company also have lower credit risk because principal and interest are
either insured or guaranteed by the United States Government or agencies
thereof.
Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as real estate broker
referrals, existing customers, borrowers, builders, attorneys and walk-in
customers. The Company has also entered into a number of participation loans
with high quality lead lenders. The participations are outside the Company's
normal lending area and diversify the loan portfolio. Upon receiving a loan
application, the Company obtains a credit report and employment verification to
verify specific information relating to the applicant's employment, income, and
credit standing. In the case of a real estate loan, an appraiser approved by the
Company appraises the real estate intended to secure the proposed loan. An
underwriter in the Company's loan department checks the loan application file
for accuracy and completeness, and verifies the information provided. One- to
four-family and multi-family residential, and commercial real estate loans, for
up to $150,000, may be approved by the manager of the mortgage loan department,
loans between $150,000 and $300,000 must be approved by the Chief Executive
Officer and loans in excess of $300,000 must be approved by the Board of
Directors. The Loan Committee meets once a week to review and verify that loan
officer approvals of loans are made within the scope of management's authority.
All approvals subsequently are ratified monthly by the full Board of Directors.
Fire and casualty insurance is required at the time the loan is made and
throughout the term of the loan. After the loan is approved, a loan commitment
letter is promptly issued to the borrower. At March 31, 2006, the Company had
commitments to originate $1.6 million of loans.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property serving as collateral, which insurance must be
maintained during the full term of the loan. A title search of the property is
required on all loans secured by real property.
10
Origination, Purchase and Sale of Loans and Mortgage-Backed Securities.
The table below shows the Company's loan origination, purchase and sales
activity for the periods indicated.
At March 31,
-----------------------------------
2006 2005 2004
--------- --------- ---------
(In Thousands)
Total loans receivable, net at beginning of year ...... $ 213,627 $ 205,443 $ 228,373
Loans originated:
One- to four-family residential(1) ................. 19,929 20,312 53,116
Multi-family residential(2) ........................ 128 18 421
Non-residential real estate/land ................... 30,989 11,237 1,147
Consumer loans ..................................... 3,613 1,932 1,318
Commercial loans ................................... 8,456 22,696 15,859
--------- --------- ---------
Total loans originated .......................... 63,115 56,195 71,861
Loans sold:
Whole loans ........................................ (6,065) (6,726) (6,198)
--------- --------- ---------
Total loans sold ................................ (6,065) (6,726) (6,198)
Mortgage loans transferred to REO ..................... (412) (268) (279)
Loan repayments ....................................... (34,980) (52,517) (89,107)
Other loan activity, net(3) ........................... 27 11,500 793
--------- --------- ---------
Total loans receivable, net at end of year ...... $ 235,312 $ 213,627 $ 205,443
========= ========= =========
Mortgage-backed securities at beginning of year ....... $ 60,352 $ 88,428 $ 76,002
Mortgage-backed securities purchased .................. 22,361 8,018 55,526
Principal repayments and other activity ............... (26,982) (36,094) (43,100)
--------- --------- ---------
Mortgage-backed securities at end of year ....... $ 55,731 $ 60,352 $ 88,428
========= ========= =========
- -------------------
(1) Includes loans to finance the construction of one- to four-family
residential properties, and loans originated for sale in the secondary
market.
(2) Includes loans to finance the sale of real estate acquired through
foreclosure.
(3) For fiscal 2005, includes other activity related to the Stebbins
acquisition.
Loan Origination Fees and Other Income. In addition to interest earned
on loans, the Company generally receives loan origination fees. The Company
accounts for loan origination fees in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 91 "Accounting for Non-refundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases." To the extent that loans are originated or acquired for the Company's
portfolio, SFAS No. 91 requires that the Company defer loan origination fees and
costs and amortize such amounts as an adjustment of yield over the life of the
loan by use of the level yield method. SFAS No. 91 reduces the amount of revenue
recognized by many financial institutions at the time such loans are originated
or acquired. Fees deferred under SFAS No. 91 are recognized into income
immediately upon prepayment or the sale of the related loan. At March 31, 2006,
the Company had $443,000 of deferred loan origination fees. Loan origination
fees are volatile sources of income. Such fees vary with the volume and type of
loans and commitments made and purchased, principal repayments, and competitive
conditions in the mortgage markets, which in turn respond to the demand for and
availability of money.
The Company receives other fees, service charges, and other income that
consist primarily of deposit transaction account service charges, late charges,
credit card fees, and income from REO operations. The Company recognized fees
and service charges of $1.3 million, $1.3 million and $1.5 million, for the
fiscal years ended March 31, 2006, 2005 and 2004, respectively.
11
Loans to One Borrower. Savings associations are subject to the same
limits as those applicable to national banks, which under current regulations
restrict loans to one borrower to an amount equal to 15% of unimpaired capital
and unimpaired surplus on an unsecured basis, and an additional amount equal to
10% of unimpaired capital and unimpaired surplus if the loan is secured by
readily marketable collateral (generally, financial instruments and bullion, but
not real estate). At March 31, 2006, the Company's largest concentration of
loans to one borrower totaled $3.2 million. All of the loans in this
concentration were current at March 31, 2006. The Company had no loans at March
31, 2006, which exceeded the loans to one borrower regulations.
Delinquencies and Classified Assets
Delinquencies. The Company's collection procedures provide that when a
loan is 15 days past due, a computer-generated late charge notice is sent to the
borrower requesting payment, plus a late charge. This notice is followed with a
letter again requesting payment when the payment becomes 20 days past due. If
delinquency continues, at 30 days another collection letter is sent and personal
contact efforts are attempted, either in person or by telephone, to strengthen
the collection process and obtain reasons for the delinquency. Also, plans to
arrange a repayment plan are made. If a loan becomes 60 days past due, the loan
becomes subject to possible legal action if suitable arrangements to repay have
not been made. In addition, the borrower is given information which provides
access to consumer counseling services, to the extent required by HUD
regulations. When a loan continues in a delinquent status for 90 days or more,
and a repayment schedule has not been made or kept by the borrower, a notice of
intent to foreclose is sent to the borrower, giving 30 days to cure the
delinquency. If not cured, foreclosure proceedings are initiated.
Non-Performing and Impaired Assets. Loans are reviewed on a regular
basis and are placed on a non-accrual status when, in the opinion of management,
the collection of additional interest is doubtful. Mortgage loans are placed on
non-accrual status generally when either principal or interest is 90 days or
more past due and management considers the interest uncollectible. Interest
accrued and unpaid at the time a loan is placed on non-accrual status is charged
against interest income.
Under the provisions of SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," a loan is defined as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due under the contractual terms of the loan agreement. In applying
the provisions of SFAS No. 114, the Bank considers investment in one- to
four-family residential loans and consumer installment loans to be homogeneous
and therefore excluded from separate identification for impairment. With respect
to the Bank's investment in multi-family commercial and nonresidential loans,
and the evaluation of impairment thereof, such loans are collateral dependent
and, as a result, are carried as a practical expedient at the lower of cost or
fair value.
At March 31, 2006, the Company had non-performing loans of $772,000 and
a ratio of non-performing and impaired loans to loans receivable of .33%. At
March 31, 2005, the Company had non-performing loans of $906,000 and a ratio of
non-performing and impaired loans to loans receivable of 0.42%. For both fiscal
2006 and 2005, the nonperforming loans consisted mainly of one- to four-family
residential mortgage loans. The Company generally does not recognize losses on
one- to four-family residential mortgage loans primarily because the loan will
generally be a maximum 85% LTV ratio on these mortgages without further
insurance. In the opinion of management, all non-performing loans are adequately
collateralized as of March 31, 2006 and no significant unreserved loss is
anticipated.
Real estate acquired by the Company as a result of foreclosure or by
deed in lieu of foreclosure ("REO") is deemed REO until such time as it is sold.
When REO is acquired, it is recorded at the lower of the unpaid principal
balance of the related loan or its fair value, less estimated selling expenses.
Valuations are periodically performed by management, and any subsequent decline
in fair value is charged to operations.
12
The following table sets forth information regarding our non-accrual
and impaired loans and real estate acquired by foreclosure at the dates
indicated. For all the dates indicated, we did not have any material loans which
had been restructured pursuant to SFAS No. 15.
At March 31,
----------------------------------------------
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
(Dollars In Thousands)
Non-accrual loans:
Mortgage loans:
One- to four-family residential ............. $ 725 $ 895 $ 714 $ 664 $ 616
All other mortgage loans .................... -- -- 24 430 1,070
Non-mortgage loans:
Commercial business loans ................... 47 -- -- 1,380 1,416
Consumer .................................... -- 11 9 6 25
------ ------ ------ ------ ------
Total non-accrual loans ......................... 772 906 747 2,480 3,127
Accruing loans 90 days or more delinquent ....... -- -- -- 15 38
------ ------ ------ ------ ------
Total non-performing loans ...................... 772 906 747 2,495 3,165
Loans deemed impaired (1) ....................... -- -- -- -- 645
------ ------ ------ ------ ------
Total non-performing and impaired loans ......... 772 906 747 2,495 3,810
Total real estate owned (2) ..................... 156 35 100 -- 19
------ ------ ------ ------ ------
Total non-performing and impaired assets ........ $ 928 $ 941 $ 847 $2,495 $3,829
====== ====== ====== ====== ======
Total non-performing and impaired loans to net
loans receivable .............................. 0.33% 0.42% 0.36% 1.09% 1.52%
====== ====== ====== ====== ======
Total non-performing and impaired loans to total
assets ....................................... 0.19% 0.22% 0.20% 0.66% 1.14%
====== ====== ====== ====== ======
Total non-performing and impaired assets to total
assets ....................................... 0.23% 0.23% 0.23% 0.66% 1.14%
====== ====== ====== ====== ======
- --------------------------------
(1) Includes loans deemed impaired that are currently performing.
(2) Represents the net book value of property acquired by the Company through
foreclosure or deed in lieu of foreclosure. These properties are recorded
at the lower of the loan's unpaid principal balance or fair value less
estimated selling expenses.
During the year ended March 31, 2006, 2005 and 2004, gross interest
income of $44,000, $40,000 and $37,000 would have been recorded on loans
currently accounted for on a non-accrual basis if the loans had been current
throughout the period. Interest income recognized on non-accrual loans totaled
$44,000, $45,000 and $23,000 for the years ended March 31, 2006, 2005 and 2004,
respectively. The Company did not record interest income on impaired loans for
fiscal 2006 or 2005. The Company recognized interest income on impaired loans
using the cash method of accounting of approximately $249,000 for the year ended
March 31, 2004.
The following table sets forth information with respect to loans past
due 60-89 days and 90 days or more in our portfolio at the dates indicated.
At March 31,
------------------------------------------
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
(In Thousands)
Loans past due 60-89 days .......... $ 626 $1,084 $ 669 $ 723 $ 431
Loans past due 90 days or more ..... 772 906 747 2,495 3,165
------ ------ ------ ------ ------
Total past due 60 days or more .. $1,398 $1,990 $1,416 $3,218 $3,596
====== ====== ====== ====== ======
Classification of Assets. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the savings institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their
13
Classification of Assets. (continued)
continuance as assets without the establishment of a specific loss reserve is
not warranted. Assets that do not expose the savings institution to risk
sufficient to warrant classification in one of the aforementioned categories,
but which possess some weaknesses, are required to be designated "special
mention" by management.
When a savings institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances for loan
losses in an amount deemed prudent by management. General allowances represent
loss allowances that have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances, have
not been allocated to particular problem assets. When a savings institution
classifies problem assets as "loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the assets so
classified, or to charge off such amount. A savings institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS, which can order the establishment of
additional general or specific loss allowances. The Company regularly reviews
the problem loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations.
The following table sets forth the aggregate amount of the Company's
classified assets at the dates indicated.
At March 31,
------------------------------------------
2006 2005 2004 2003 2002
------ ------ ------ ------ ------
(Dollars in Thousands)
Substandard assets(1) ........ $1,119 $2,767 $ 839 $2,481 $3,303
Doubtful assets .............. -- -- -- -- --
Loss assets .................. -- -- -- -- 105
------ ------ ------ ------ ------
Total classified assets ... $1,119 $2,767 $ 839 $2,481 $3,408
====== ====== ====== ====== ======
- ----------------
(1) Includes REO.
Allowance for Loan Losses. In determining the amount of the allowance
for loan losses at any point in time, management and the Board of Directors
apply a systematic process focusing on the risk of loss in the loan portfolio.
First, delinquent non-residential, multi-family and commercial loans are
evaluated individually for potential impairment in their carrying value. Second,
management applies historic loss experience to the individual loan types in the
portfolio. In addition to the historic loss percentage, management employs an
additional risk percentage tailored to the perception of overall risk in the
economy. However, the analysis of the allowance for loan losses requires an
element of judgment and is subject to the possibility that the allowance may
need to be increased, with the corresponding reduction in earnings.
During the fiscal years ended March 31, 2006, 2005 and 2004, the
Company added $211,000, $430,000 and $173,000, respectively, to the provision
for loan losses. The Company's allowance for loan losses totaled $1.5 million,
$1.4 million and $815,000 at March 31, 2006, 2005 and 2004, respectively.
Management decreased the provision for loan losses by $219,000 in fiscal 2006
mainly due to the Company's decrease in non-accrual loans and classified assets,
coupled with the absence of the additional provisioning related to the Stebbin's
acquisition in fiscal 2005. These positive factors were partially offset by
provisioning related to the Company's portfolio growth in fiscal 2006. While
management believes that the Company's current allowance for loan losses is
adequate, there can be no assurance that the allowance for loan losses will be
adequate to cover losses that may in fact be realized in the future or that
additional provisions for loan losses will not be required. To the best of
management's knowledge, all known losses as of March 31, 2006 have been
recorded.
14
Analysis of the Allowance For Loan Losses. The following table sets
forth the analysis of the allowance for loan losses for the periods indicated.
At or for the Year Ended March 31,
-----------------------------------------------------------------
2006 2005 2004 2003 2002
--------- --------- --------- --------- ---------
(In Thousands)
Loans receivable, net ........................ $ 235,312 $ 213,627 $ 205,443 $ 228,373 $ 251,172
========= ========= ========= ========= =========
Average loans receivable, net ................ 222,944 212,785 214,174 242,120 253,058
========= ========= ========= ========= =========
Allowance balance (at beginning of
period) ...................................... 1,374 815 678 730 655
Provision for losses ......................... 211 430 173 91 134
Stebbins acquisition ......................... -- 230 -- -- --
Charge-offs:
Mortgage loans:
One- to four-family ..................... (73) (28) -- (20) --
Residential construction ................ -- -- -- -- --
Multi-family residential ................ -- -- -- -- --
Non-residential real estate and land .... -- -- -- (84) --
Other loans:
Consumer ................................ (75) (44) (65) (54) (63)
Commercial .............................. (10) (54) -- -- --
--------- --------- --------- --------- ---------
Gross charge-offs ................... (158) (126) (65) (158) (63)
--------- --------- --------- --------- ---------
Recoveries:
Mortgage loans:
One- to four-family ..................... 14 -- -- -- --
Residential construction ................ -- -- -- -- --
Multi-family residential ................ -- -- -- -- --
Non-residential real estate and land .... -- -- -- -- --
Other loans:
Consumer ................................ 35 25 29 15 4
Commercial .............................. 8 -- -- -- --
--------- --------- --------- --------- ---------
Gross recoveries .................... 57 25 29 15 4
--------- --------- --------- --------- ---------
Net charge-offs ..................... (101) (101) (36) (143) (59)
--------- --------- --------- --------- ---------
Allowance for loan losses balance (at
end of period) (1) ........................ $ 1,484 $ 1,374 $ 815 $ 678 $ 730
========= ========= ========= ========= =========
Allowance for loan losses as a percent
of loans receivable, net at end of
period .................................... 0.63% 0.64% 0.40% 0.30% 0.29%
========= ========= ========= ========= =========
Net loans charged off as a percent of
average loans receivable, net ............. 0.05% 0.05% 0.02% 0.06% 0.02%
========= ========= ========= ========= =========
Ratio of allowance for loan losses to
total non-performing assets at end of
period .................................... 159.91% 146.01% 96.22% 27.17% 19.07%
========= ========= ========= ========= =========
Ratio of allowance for loan losses to
non-performing loans at end of period ..... 192.23% 151.66% 109.10% 27.17% 19.16%
========= ========= ========= ========= =========
- -----------------
(1) At March 31, 2002, a specific allowance of $105,000 was reserved for a
nonresidential loan that met the definition of impaired pursuant to SFAS
No. 114.
15
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of allowance for loan losses by loan category for the periods
indicated. Management believes that the allowance can be allocated by category
only on an approximate basis. The allocation of the allowance by category is not
necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
At March 31,
-------------------------------------------------------------------------------------------
2006 2005 2004 2003 2002
--------------- --------------- --------------- --------------- ---------------
% of % of % of % of % of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
(Dollars in Thousands)
Mortgage loans:
One- to four-family ............. $ 97 62.4% $ 99 72.6% $ 100 82.0% $ 162 86.4% $ 126 85.4%
Residential construction ........ -- 2.0 -- 1.9 -- 1.4 -- 1.5 -- 3.4
Multi-family residential ........ -- 3.3 -- 3.6 -- 3.2 7 3.7 47 2.8
Non-residential real estate
and land ........................ 505 21.3 545 13.4 196 8.8 55 5.2 207 4.8
Other loans:
Consumer ........................ 40 2.0 37 2.0 20 1.5 119 1.7 28 2.4
Commercial ...................... 842 9.0 693 6.5 499 3.1 335 1.5 322 1.2
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Total allowance for loan losses ... $1,484 100.0% $1,374 100.0% $ 815 100.0% $ 678 100.0% $ 730 100.0%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
16
Investment Activities
The Company's investment portfolio is comprised of investment
securities, corporate bonds and notes and state and local obligations. The
carrying value of the Company's investment securities totaled $73.3 million at
March 31, 2006, compared to $72.9 million at March 31, 2005. The Company's cash
and cash equivalents, consisting of cash and due from banks, federal funds sold
and interest bearing deposits due from other financial institutions with
original maturities of three months or less, totaled $14.1 million at March 31,
2006 compared to $29.9 million at March 31, 2005, a decrease of $15.8 million,
or 52.8% as the Company was able to repay $7.3 million of short term FHLB
advances with excess federal funds sold.
Liquidity levels may be increased or decreased depending upon the
yields on investment alternatives and upon management's judgment as to the
attractiveness of the yields then available in relation to other opportunities
and its expectation of the level of yield that will be available in the future,
as well as management's projections as to the short term demand for funds to be
used in the Company's loan origination and other activities.
Investment Portfolio. The following table sets forth the carrying value
of the Company's investment securities portfolio, short-term investments and
FHLB stock, at the dates indicated.
At March 31,
---------------------------------------------------------------
2006 2005 2004
------------------- ------------------- -------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- -------- -------- -------- -------- --------
(In Thousands)
Investment securities:
Corporate bonds and notes .................. $ 6,016 $ 5,999 $ 11,086 $ 11,156 $ 11,714 $ 12,418
U.S. Government and agency obligations ..... 55,802 55,803 51,239 51,246 15,189 15,262
Municipal obligations ...................... 11,489 11,499 10,531 10,543 4,679 4,696
-------- -------- -------- -------- -------- --------
Total investment securities ......... 73,307 73,301 72,856 72,945 31,582 32,376
Other Investments:
Interest-bearing deposits in other financial
institutions ............................. 11,171 11,171 6,366 6,366 6,721 6,721
Federal funds sold ......................... -- -- 19,400 19,400 9,875 9,875
Federal Home Loan Bank stock ............... 4,623 4,623 4,386 4,386 4,205 4,205
-------- -------- -------- -------- -------- --------
Total investments ................... $ 89,101 $ 89,095 $103,008 $103,097 $ 52,383 $ 53,177
======== ======== ======== ======== ======== ========
17
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for the
Company's investment securities at March 31, 2006. The Company does not hold any
investment securities with maturities in excess of 30 years.
At March 31, 2006
----------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years
------------------ ------------------ ------------------ -------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- ------- -------- ------- -------- ------- ------- -------
(Dollars in Thousands)
Investment Securities:
Corporate bonds and notes ................. $ 4,992 6.39% $ 1,024 7.62% $ -- -% $ -- -%
U.S. Government and agency obligations .... 17,475 3.31 29,668 3.66 7,348 5.42 1,311 5.09
Municipal obligations ..................... -- -- 1,145 4.90 1,992 5.67 8,352 6.62
------- ------- ------- ------- ------- ------- ------- -------
Total investment securities ............. $22,467 3.99% $31,837 3.83% $ 9,340 5.43% $ 9,663 6.41%
======= ======= ======= ======= ======= ======= ======= =======
At March 31, 2006
-----------------------------------
Total Investment
Securities
-----------------------------------
Average Weighted
Life Carrying Market Average
In Years Value Value Yield
-------- ------- ------- -------
(Dollars in Thousands)
Investment Securities:
Corporate bonds and notes ............... .72 $ 6,016 $ 5,999 6.60%
U.S. Government and agency obligations .. 2.55 55,802 55,803 3.82
Municipal obligations ................... 13.16 11,489 11,499 6.25
------- ------- ------- -------
Total investment securities ............. 4.03 $73,307 $73,301 4.42%
======= ======= ======= =======
18
Sources of Funds
General. Deposits are the major source of the Company's funds for
lending and other investment purposes. In addition to deposits, the Company
derives funds from the amortization, prepayment or sale of loans and
mortgage-backed securities, the sale or maturity of investment securities,
operations and, if needed, advances from the Federal Home Loan Bank ("FHLB").
Scheduled loan principal repayments are a relatively stable source of funds,
while deposit inflows and outflows and loan prepayments are influenced
significantly by general interest rates and market conditions. Borrowings may be
used on a short-term basis to compensate for reductions in the availability of
funds from other sources or on a longer term basis for general business
purposes. The Company had $32.8 million of advances from the FHLB at March 31,
2006.
Deposits. Consumer and commercial deposits are attracted principally
from within the Company's market area through the offering of a broad selection
of deposit instruments including NOW accounts, passbook savings, money market
deposit, term certificate accounts, commercial repurchase agreements, and
individual retirement accounts. The Company accepts deposits of $100,000 or more
and offers negotiated interest rates on such deposits. Deposit account terms
vary according to the minimum balance required, the period of time during which
the funds must remain on deposit, and the interest rate, among other factors.
The Company regularly evaluates its internal cost of funds, surveys rates
offered by competing institutions, reviews the Company's cash flow requirements
for lending and liquidity, and executes rate changes when deemed appropriate.
The Company does not obtain funds through brokers, nor does it solicit funds
outside its market area.
Deposit Portfolio. Savings and other deposits in the Company as of
March 31, 2006, were comprised of the following:
Weighted Percentage
Average Minimum of Total
Interest Rate Minimum Term Checking and Savings Deposits Amount Balances Deposits
- ------------- ------------ ----------------------------- ------ -------- --------
(In Thousands)
0.33% None NOW accounts $ 100 $ 56,791 17.08%
0.58 None Savings accounts 25 61,339 18.44
2.09 None Money market investor 2,500 20,656 6.21
3.76 None Commercial repurchase agreements none 5,704 1.72
Certificates of Deposit
-----------------------
4.05 12 months or less Fixed term, fixed rate 500 61,814 18.59
2.38 12 to 24 months Fixed term, fixed rate 500 19,181 5.76
3.41 25 to 36 months Fixed term, fixed rate 500 18,541 5.58
4.44 36 months or more Fixed term, fixed rate 500 53,641 16.13
4.34 Negotiable Jumbo certificates 100,000 34,903 10.49
--------- ------
$ 332,570 100.00%
========= ======
19
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Company between
the dates indicated.
Balance at Balance at Balance at
March 31, Percent of Increase March 31, Percent of Increase March 31, Percent of
2006 Deposits (Decrease) 2005 Deposits (Decrease) 2004 Deposits
-------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
NOW accounts ................... $ 56,791 17.08% $ 3,731 $ 53,060 16.55% $ 10,381 $ 42,679 14.63%
Savings accounts ............... 61,339 18.44 (20,845) 82,184 25.64 91 82,093 28.13
Money market investor .......... 20,656 6.21 2,559 18,097 5.65 6,204 11,893 4.08
Commercial repurchase agreements 5,704 1.72 5,704 -- -- -- -- --
Certificates of deposit(1)
Original maturities of:
12 months or less ............ 61,814 18.59 19,331 42,483 13.25 26,642 15,841 5.42
12 to 24 months .............. 19,181 5.76 (5,257) 24,438 7.62 (19,107) 43,545 14.92
25 to 36 months .............. 18,541 5.58 2,502 16,039 5.00 (1,821) 17,860 6.12
36 months or more ............ 53,641 16.13 458 53,183 16.59 10,402 42,781 14.66
Negotiated jumbo ............... 34,903 10.49 3,801 31,102 9.70 (4,036) 35,138 12.04
-------- -------- -------- -------- -------- -------- -------- --------
Total ..................... $332,570 100.00% $ 11,984 $320,586 100.00% $ 28,756 $291,830 100.00%
======== ======== ======== ======== ======== ======== ======== ========
- ------------------------------
(1) Certain Individual Retirement Accounts ("IRAs") are included in the
respective certificate balances. IRAs totaled $34.7 million, $34.1
million and $32.8 million, as of March 31, 2006, 2005 and 2004,
respectively.
The following table sets forth the average dollar amount and weighted
average rate of savings deposits in the various types of savings accounts
offered by the Company.
Years Ended March 31,
-----------------------------------------------------------------------------------------------------
2006 2005 2004
------------------------------- ------------------------------- -------------------------------
Percent Weighted Percent Weighted Percent Weighted
Average of Average Average of Average Average of Average
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
-------- -------- -------- -------- -------- -------- -------- -------- --------
(Dollars in Thousands)
Noninterest-bearing
demand deposits ....... $ 12,843 3.96% 0.00% $ 9,849 3.14% 0.00% $ 9,321 3.15% 0.00%
NOW accounts ............ 46,451 14.30 0.40 35,913 11.45 .53 34,190 11.54 .43
Savings accounts ........ 62,582 19.27 0.73 82,817 26.41 .79 81,034 27.35 .85
Money market investor ... 19,055 5.87 1.77 14,238 4.54 1.36 13,217 4.46 .92
Commercial repurchase
agreements ............ 5,335 1.64 2.84 -- -- -- -- -- --
Certificates of deposit . 178,505 54.96 3.54 170,794 54.46 2.96 158,482 53.50 3.12
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total deposits ..... $324,771 100.00% 2.22% $313,611 100.00% 1.81% $296,244 100.00% 1.99%
======== ======== ======== ======== ======== ======== ======== ======== ========
20
The following table sets forth the certificates of deposit in the
Company classified by rates as of the dates indicated:
At March 31,
------------------------------
2006 2005 2004
-------- -------- --------
(Dollars in Thousands)
1.05- 2.00% ....................... $ 9,256 $ 39,272 $ 59,687
2.01- 4.00% ....................... 66,103 82,548 48,536
4.01- 6.00% ....................... 112,721 45,294 46,565
6.01- 6.75% ....................... -- 131 377
-------- -------- --------
Total ........................ $188,080 $167,245 $155,165
======== ======== ========
The following table sets forth the amount and maturities of
certificates of deposit at March 31, 2006.
Amount Due
----------------------------------------------------
Less Than 1-2 2-3 After
One Year Years Years 3 Years Total
-------- -------- -------- -------- --------
Rate (In Thousands)
- ----
1.05- 2.00% ............. $ 9,256 $ -- $ -- $ -- $ 9,256
2.01- 4.00% ............. 38,763 19,655 6,368 1,317 66,103
4.01- 6.00% ............. 81,947 14,799 5,071 10,904 112,721
-------- -------- -------- -------- --------
Total .............. $129,966 $ 34,454 $ 11,439 $ 12,221 $188,080
======== ======== ======== ======== ========
The following table indicates the amount of the Company's certificates
of deposit of $100,000 or more by time remaining until maturity as of March 31,
2006.
Maturity Period Certificates of Deposit
--------------- -----------------------
(In Thousands)
Three months or less.................................. $ 9,814
Over three months through six months.................. 9,902
Over six months through twelve months................. 18,525
Over twelve months.................................... 12,175
-------
Total............................................ $50,416
=======
Borrowings
Savings deposits are the primary source of funds for the Company's
lending and investment activities and for its general business purposes. The
Bank may rely upon advances from the FHLB and the Federal Reserve Bank discount
window to supplement their supply of lendable funds and to meet deposit
withdrawal requirements. Advances from the FHLB typically are collateralized by
stock in the FHLB and a portion of first mortgage loans held by the Bank. At
March 31, 2006, the Company had $32.8 million in advances outstanding.
The FHLB functions as a central reserve bank providing credit for
member savings associations and financial institutions. As members, the Banks
are required to own capital stock in the FHLB and are authorized to apply for
advances on the security of such stock and certain home mortgages and other
assets (principally, securities that are obligations of, or guaranteed by, the
United States) provided certain standards related to creditworthiness have been
met. Advances are made pursuant to several different programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based either on a fixed
percentage of a member institution's net worth or on the FHLB's assessment of
the institution's creditworthiness. Although advances may be used on a
short-term basis for cash management needs, FHLB advances have not been, nor are
they expected to be, a significant long-term funding source for the Company.
21
Year Ended March 31,
--------------------------------
2006 2005 2004
-------- -------- --------
(Dollars in thousands)
Federal Home Loan Bank advances:
Maximum month-end balance ..... $ 39,000 $ 40,000 $ 30,000
Balance at end of period ...... 32,750 40,000 30,000
Average balance ............... 28,424 26,076 30,000
Weighted average interest rate on:
Balance at end of period ...... 4.19% 3.59% 4.15%
Average balance for period .... 3.81 3.96 4.16
Competition
The Company encounters strong competition both in attracting deposits
and in originating real estate and other loans. Its most direct competition for
deposits has come historically from commercial banks, brokerage houses, other
savings associations, and credit unions in its market area, and the Company
expects continued strong competition from such financial institutions in the
foreseeable future. The Company's market area includes branches of several
commercial banks that are substantially larger than the Company in terms of
state-wide deposits. The Company competes for savings by offering depositors a
high level of personal service and expertise together with a wide range of
financial services.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies, and other savings associations.
This competition for loans has increased substantially in recent years as a
result of the large number of institutions competing in the Company's market
area as well as the increased efforts by commercial banks to expand mortgage
loan originations.
The Company competes for loans primarily through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers, and builders. Factors that affect competition
include general and local economic conditions, current interest rate levels, and
volatility of the mortgage markets.
Subsidiaries
At March 31, 2006, the Company did not have any direct unconsolidated
subsidiaries.
Total Employees
The Company had 102 full-time employees and 38 part-time employees at
March 31, 2006. None of these employees are represented by a collective
bargaining agent, and the Company believes that it enjoys good relations with
its personnel.
22
Regulation
As a state-chartered, FDIC insured institution, the Bank is subject to
examination, supervision and extensive regulation by the OTS, the Ohio
Department of Commerce, Division of Financial Institutions ("ODFI") , and the
FDIC. The Bank is a member of, and owns stock in, the FHLB of Cincinnati, which
is one of the twelve regional banks in the Federal Home Loan Bank System. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The OTS and ODFI regularly examine the
Bank and prepare reports for the consideration of the Company's Board of
Directors on any deficiencies that they may find in the Company's operations.
The FDIC also examines the Bank in its role as the administrator of the SAIF.
The Bank's relationship with its depositors and borrowers also is regulated to a
great extent by both federal and state laws especially in such matters as the
ownership of savings accounts and the form and content of the Bank's mortgage
documents. Any change in such regulation, whether by the FDIC, OTS, ODFI, or
Congress, could have a material adverse impact on the Company, the Bank and
their operations.
Federal Regulation of Savings Institutions
Business Activities. The activities of savings associations are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act (the "FDI Act"). These federal
statutes, among other things, (1) limit the types of loans a savings association
may make, (2) prohibit the acquisition of any corporate debt security that is
not rated in one of the four highest rating categories, and (3) restrict the
aggregate amount of loans secured by non-residential real estate property to
400% of capital. The description of statutory provisions and regulations
applicable to savings associations set forth herein does not purport to be a
complete description of such statutes and regulations and their effect on the
Company or the Bank.
Loans to One Borrower. Under the HOLA, savings institutions are
generally subject to the national bank limits on loans to one borrower.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of the institution's unimpaired
capital and surplus. An additional amount may be lent, equal to 10% of
unimpaired capital and surplus, if such loan is secured by readily-marketable
collateral, which is defined to include certain securities and bullion, but
generally does not include real estate. See "--Lending Activities--Loans to One
Borrower."
Qualified Thrift Lender Test. The HOLA requires savings associations to
meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings
association is required to maintain at least 65% of its "portfolio assets"
(total assets less (i) specified liquid assets up to 20% of total assets, (ii)
intangibles, including goodwill, and (iii) the value of property used to conduct
business) in certain "qualified thrift investments," primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities on a monthly basis in 9 out of every 12 months.
A savings association that fails the QTL test must either convert to a
bank charter or operate under certain restrictions. As of March 31, 2006, the
Company maintained 91.7% of its portfolio assets in qualified thrift investments
and, therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. A "well-capitalized" institution can, after prior notice but
without the approval of the OTS, make capital distributions during a calendar
year in an amount up to 100% of its net income during the calendar year, plus
its retained net income for the preceding two years. As of March 31, 2006 the
Bank was a "well-capitalized" institution.
23
Community Reinvestment. Under the Community Reinvestment Act (the
"CRA"), as implemented by OTS regulations, a savings institution has a
continuing and affirmative obligation, consistent with its safe and sound
operation, to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions, nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OTS, in connection with its examination of a savings
institution, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution. The CRA also requires all institutions to make
public disclosure of their CRA ratings. The Company received a "satisfactory"
CRA rating under the current CRA regulations in its most recent federal
examination by the OTS.
Transactions with Related Parties. The Company's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Bank and
any non-savings institution subsidiaries) or to make loans to certain insiders,
is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section
23A limits the aggregate amount of transactions with any individual affiliate to
10% of the capital and surplus of the savings institution and also limits the
aggregate amount of transactions with all affiliates to 20% of the savings
institution's capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending to any affiliate that is engaged in activities that
are not permissible for bank holding companies and no savings institution may
purchase the securities of any affiliate other than a subsidiary.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Criminal
penalties for most financial institution crimes include fines of up to $1
million and imprisonment for up to 30 years. Under the FDI Act, the FDIC has the
authority to recommend to the Director of OTS that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances.
24
Standards for Safety and Soundness. The federal banking agencies have
adopted a final regulation and Interagency Guidelines Prescribing Standards for
Safety and Soundness ("Guidelines") to implement the safety and soundness
standards required under the FDI Act. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The standards set forth in the Guidelines address internal controls
and information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; and compensation, fees
and benefits. The agencies also adopted a proposed rule which proposes asset
quality and earnings standards which, if adopted, would be added to the
Guidelines. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 4.0% leverage ratio (or core capital ratio) and an 8.0% risk-based capital
standard. Core capital is defined as common stockholders' equity (including
retained earnings), certain non-cumulative perpetual preferred stock and related
surplus, minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain qualifying supervisory goodwill and certain
mortgage servicing rights. The OTS regulations also require that, in meeting the
tangible ratio, leverage and risk-based capital standards, institutions must
deduct investments in and loans to subsidiaries engaged in activities not
permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 2 (core) and total capital (which is defined as core capital
and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS
believes are inherent in the type of asset. The components of Tier 1 (core)
capital are equivalent to those discussed earlier under the 4.0% leverage ratio
standard. The components of supplementary capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and allowance for
loan and lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25%. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
Prompt Corrective Regulatory Action
Under the OTS Prompt Corrective Action regulations, the OTS is required
to take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has the total
risk-based capital less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS could also take any
one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and
directors.
25
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the FDIC. Deposits are insured up to applicable
limits by the FDIC and such insurance is backed by the full faith and credit of
the U.S. Government. As insurer, the FDIC imposes deposit insurance premiums and
is authorized to conduct examinations of and to require reporting by
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk to the FDIC. The FDIC also has the authority to initiate
enforcement actions against savings and loan associations, after giving the OTS
an opportunity to take such action, and may terminate the deposit insurance if
it determines that the institution has engaged or is engaging in unsafe or
unsound practices, or is in an unsafe or unsound condition. Currently, FDIC
deposit insurance rates generally range from zero basis points to 27 basis
points, depending on the assessment risk classification assigned to the
depository institution.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the deposit insurance of the Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, as a member of the FHLB, is required to acquire and hold
shares of capital stock in that FHLB in an amount at least equal to 1% of the
aggregate principal amount of its unpaid residential mortgage loans and similar
obligations at the beginning of each year, or 1/20 of its advances (borrowings)
from the FHLB, whichever is greater. The Bank was in compliance with this
requirement with an investment in FHLB-Cincinnati stock, at March 31, 2006, of
$4.6 million.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. FHLB dividends were 5.0% for the fiscal year ended
March 31, 2006. In the likely event that dividends are reduced, or interest on
future FHLB-Cincinnati advances is increased, the Company's net interest income
will decline.
Ohio Regulation
As a savings and loan association organized under the laws of the State
of Ohio, the Bank is subject to regulation by the Ohio Department of Commerce,
Division of Financial Institutions ("ODFI"). Regulation by the ODFI affects the
Bank's internal organization as well as its savings, mortgage lending, and other
investment activities. Periodic examinations by the ODFI are usually conducted
on a joint basis with the OTS. Ohio law requires that the Bank maintain federal
deposit insurance as a condition of doing business.
26
Under Ohio law, an Ohio association may buy any obligation representing
a loan that would be a legal loan if originated by the Bank, subject to various
requirements including: loans secured by liens on income-producing real estate
may not exceed 20% of an association's assets; consumer loans, commercial paper,
and corporate debt securities may not exceed 20% of an association's assets;
loans for commercial, corporate, business, or agricultural purposes may not
exceed 30% of an association's assets, provided that an association's required
reserve must increase proportionately; certain other types of loans may be made
for lesser percentages of the association's assets; and, with certain
limitations and exceptions, certain additional loans may be made if not in
excess of 3% of the association's total assets. In addition, no association may
make real estate acquisition and development loans for primarily residential use
to one borrower in excess of 2% of assets. The total investments in commercial
paper or corporate debt of any issuer cannot exceed 1% of an association's
assets, with certain exceptions.
Ohio law authorizes Ohio-chartered associations to, among other things:
(i) invest up to 15% of assets in the capital stock, obligations, and other
securities of service corporations organized under the laws of Ohio, and an
additional 20% of net worth may be invested in loans to majority owned service
corporations; (ii) invest up to 10% of assets in corporate equity securities,
bonds, debentures, notes, or other evidence of indebtedness; (iii) exceed limits
otherwise applicable to certain types of investments (other than investments in
service corporations) by and between 3% and 10% of assets, depending upon the
level of the institution's permanent stock, general reserves, surplus, and
undivided profits; and (iv) invest up to 15% of assets in any loans or
investments not otherwise specifically authorized or prohibited, subject to
authorization by the institution's board of directors.
An Ohio association may invest in such real property or interests
therein as its board of directors deems necessary or convenient for the conduct
of the business of the association, but the amount so invested may not exceed
the net worth of the association at the time the investment is made.
Additionally, an association may invest an amount equal to 10% of its assets in
any other real estate. This limitation does not apply, however, to real estate
acquired by foreclosure, conveyance in lieu of foreclosure, or other legal
proceedings in relation to loan security interests.
Notwithstanding the above powers authorized under Ohio law and
regulation, a state-chartered savings association, such as the Bank, is subject
to certain limitations on its permitted activities and investments under federal
law, which may restrict the ability of an Ohio-chartered association to engage
in activities and make investments otherwise authorized under Ohio law.
Ohio has adopted statutory limitations on the acquisition of control of
an Ohio savings and loan association by requiring the written approval of the
ODFI prior to the acquisition by any person or company, as defined under the
Ohio Revised Code, of a controlling interest in an Ohio association. Control
exists, for purposes of Ohio law, when any person or company, either directly,
indirectly, or acting in concert with one or more other persons or companies (a)
acquires 15% of any class of voting stock, irrevocable proxies, or any
combination thereof, (b) directs the election of a majority of directors, (c)
becomes the general partner of the savings and loan association, (d) has
influence over the management and policies of the savings and loan association,
(e) has the ability to direct shareholder votes, or (f) anything else deemed to
be control by the ODFI. The ODFI's written permission is required when the total
amount of control held by the acquiror was less than or equal to 25% control
before the acquisition and more than 25% control after the acquisition, or when
the total amount of control held by the acquiror was less than 50% before the
acquisition and more than 50% after the acquisition. Ohio law also prescribes
other situations in which the ODFI must be notified of the acquisition even
though prior approval is not required. Any person or company, which would
include a director, will not be deemed to be in control by virtue of an annual
solicitation of proxies voted as directed by a majority of the board of
directors.
27
Under certain circumstances, interstate mergers and acquisitions
involving associations incorporated under Ohio law are permitted by Ohio law. A
savings and loan association or savings and loan holding company with its
principal place of business in another state may acquire a savings and loan
association or savings and loan holding company incorporated under Ohio law if
the laws of such other state permit an Ohio savings and loan association or an
Ohio holding company reciprocal rights. Additionally, recently enacted
legislation permits interstate branching by savings and loan associations
incorporated under Ohio law.
Ohio law requires prior written approval of the Ohio Superintendent of
Savings and Loans of a merger of an Ohio association with another savings and
loan association or a holding company affiliate.
Holding Company Regulation
Holding Company Acquisitions. The Company is a registered savings and
loan holding company within the meaning of Section 10 of the HOLA, and is
subject to OTS examination and supervision as well as certain reporting
requirements. Federal law generally prohibits a savings and loan holding
company, without prior OTS approval, from acquiring the ownership or control of
any other savings institution or savings and loan holding company, or all, or
substantially all, of the assets or more than 5% of the voting shares thereof.
These provisions also prohibit, among other things, any director or officer of a
savings and loan holding company, or any individual who owns or controls more
than 25% of the voting shares of such holding company, from acquiring control of
any savings institution not a subsidiary of such savings and loan holding
company, unless the acquisition is approved by the OTS.
Holding Company Activities. The Company operates as a unitary savings
and loan holding company. The activities of the Company and its non-savings
institution subsidiaries are restricted to activities traditionally permitted to
multiple savings and loan holding companies and to financial holding companies
under newly added provisions of the Bank Holding Company Act. Multiple savings
and loan holding companies may:
o furnish or perform management services for a savings association
subsidiary of a savings and loan holding company;
o hold, manage or liquidate assets owned or acquired from a savings
association subsidiary of a savings and loan holding company;
o hold or manage properties used or occupied by a savings association
subsidiary of a savings and loan holding company;
o engage in activities determined by the Federal Reserve to be closely
related to banking and a proper incident thereto; and
o engage in services and activities previously determined by the
Federal Home Loan Bank Board by regulation to be permissible for a
multiple savings and loan holding company as of March 5, 1987.
The activities financial holding companies may engage in include:
o lending, exchanging, transferring or investing for others, or
safeguarding money or securities;
o insuring, guaranteeing or indemnifying others, issuing annuities,
and acting as principal, agent or broker for purposes of the
foregoing;
28
o providing financial, investment or economic advisory services,
including advising an investment company;
o issuing or selling interests in pooled assets that a bank could hold
directly;
o underwriting, dealing in or making a market in securities; and
o merchant banking activities.
If the OTS determines that there is reasonable cause to believe that
the continuation by a savings and loan holding company of an activity
constitutes a serious risk to the financial safety, soundness or stability of
its subsidiary savings institution, the OTS may impose such restrictions as
deemed necessary to address such risk. These restrictions include limiting the
following:
o the payment of dividends by the savings institution;
o transactions between the savings institution and its affiliates; and
o any activities of the savings institution that might create a
serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution.
Federal Securities Laws. The Company registered its common stock with
the Securities and Exchange Commission under Section 12(g) of the Securities
Exchange Act of 1934. The Company is subject to the proxy and tender offer
rules, insider trading reporting requirements and restrictions, and certain
other requirements under the Exchange Act.
Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002
("Sarbanes-Oxley Act") implemented legislative reforms intended to address
corporate and accounting fraud. In addition to the establishment of an
accounting oversight board which enforces auditing, quality control and
independence standards, the Sarbanes-Oxley Act restricts provision of both
auditing and consulting services by accounting firms. To ensure auditor
independence, any non-audit services being provided to an audit client requires
pre-approval by the company's audit committee members. In addition, the audit
partners must be rotated. The Sarbanes-Oxley Act requires chief executive
officers and chief financial officers, or their equivalent, to certify to the
accuracy of periodic reports filed with the SEC, subject to civil and criminal
penalties if they knowingly or willfully violate this certification requirement.
In addition, under the Sarbanes-Oxley Act, counsel are required to report
evidence of a material violation of the securities laws or a breach of fiduciary
duty by a company to its chief executive officer or its chief legal officer,
and, if such officer does not appropriately respond, to report such evidence to
the audit committee or other similar committee of the board of directors or the
board itself.
Longer prison terms now apply to corporate executives who violate
federal securities laws, the period during which certain types of suits can be
brought against a company or its officers has been extended, and bonuses issued
to top executives prior to restatement of a company's financial statements are
now subject to disgorgement if such restatement was due to corporate misconduct.
Executives are also prohibited from insider trading during retirement plan
"blackout" periods, and loans to company executives are restricted. In addition,
a provision directs that civil penalties levied by the SEC as a result of any
judicial or administrative action under the Sarbanes-Oxley Act be deposited to a
fund for the benefit of harmed investors. The Federal Accounts for Investor
Restitution ("FAIR") provision also requires the SEC to develop methods of
improving collection rates. The legislation accelerates the time frame for
disclosures by public companies, as they must immediately disclose any material
changes in their financial condition or operations. Directors and executive
officers must also provide information for most changes in ownership in a
company's securities within two business days of the change.
The Sarbanes-Oxley Act also increases the oversight of, and codifies
certain requirements relating to audit committees of public companies and how
they interact with the company's "registered public accounting firm." Audit
Committee members must be independent and are barred from accepting consulting,
29
advisory or other compensatory fees from the issuer. In addition, companies must
disclose whether at least one member of the committee is a "financial expert,"
as such term is defined by the SEC, and if not, why not. Under the
Sarbanes-Oxley Act, a registered public accounting firm is prohibited from
performing statutorily mandated audit services for a company if such company's
chief executive officer, chief financial officer, comptroller, chief accounting
officer or any person serving in equivalent positions has been employed by such
firm and participated in the audit of such company during the one-year period
preceding the audit initiation date. The Sarbanes-Oxley Act also prohibits any
officer or director of a company or any other person acting under their
direction from taking any action to fraudulently influence, coerce, manipulate
or mislead any independent public or certified accountant engaged in the audit
of the company's financial statements for the purpose of rendering the financial
statement's materially misleading. The Sarbanes-Oxley Act also required the SEC
to prescribe rules requiring inclusion of an internal control report and
assessment by management in the annual report to stockholders. The
Sarbanes-Oxley Act requires the registered public accounting firm that issues
the audit report to attest to and report on management's assessment of the
company's internal controls. In addition, the Sarbanes-Oxley Act requires that
each financial report required to be prepared in accordance with, or reconciled
to, generally accepted accounting principles and filed with the SEC reflect all
material correcting adjustments that are identified by a registered public
accounting firm in accordance with generally accepted accounting principles and
the rules and regulations of the SEC.
Federal and State Taxation
Federal Taxation. Income taxes are accounted for under the asset and
liability method which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The Federal tax bad debt reserve method available to thrift
institutions was repealed in 1996 for tax years beginning after 1995. As a
result, the Company was required to change from the reserve method to the
specific charge-off method to compute its bad debt deduction. The recapture
amount resulting from the change in a thrift's method of accounting for its bad
debt reserves was taken into taxable income ratably (on a straight-line basis)
over a six-year period.
Retained earnings as of March 31, 2006 include approximately $2.7
million for which no provision for Federal income tax has been made. This
reserve (base year and supplemental) is frozen/not forgiven as certain events
could trigger a recapture such as stock redemption or distributions to
shareholders in excess of current or accumulated earnings and profits.
The Company's federal income tax returns through March 31, 2003 have
been closed by statute or examination.
Ohio Taxation. The Bank files Ohio franchise tax returns. For Ohio
franchise tax purposes, savings institutions are currently taxed at a rate equal
to 1.3% of taxable net worth. The Bank is not currently under audit with respect
to its Ohio franchise tax returns.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware. The tax is imposed as a percentage of the capital base of the
Company with an annual maximum of $165,000. The Company paid Delaware franchise
taxes of $33,000 in fiscal 2006.
30
ITEM 1A. Risk Factors
- ------------------------
Except for the historical information contained herein, the matters
discussed in this Form 10-K include certain forward-looking statements within
the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), which are
intended to be covered by the safe harbors created thereby. Those statements
include, but may not be limited to, all statements regarding the intent, belief
and expectations of the Company and its management, such as statements
concerning the Company's future profitability. Investors are cautioned that all
forward-looking statements involve risks and uncertainties including, without
limitation, factors detailed from time to time in the Company's filings with the
SEC. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate. Therefore, there can be no assurance that the
forward-looking statements included in this Form 10-K will prove to be accurate,
and in light of the significant uncertainties inherent in the forward-looking
Statements included herein, the inclusion of such information should not be
regarded as a presentation by the Company or any other person that the
objectives and plans of the Company will be achieved. The Company encounters a
number of risks in the conduct of its business. A discussion of such risks
follows.
The Company's results of operations are significantly dependent on
economic conditions and related uncertainties. Commercial banking is affected,
directly and indirectly, by domestic and international economic and political
conditions and by governmental monetary and fiscal policies. Conditions such as
inflation, recession, unemployment, volatile interest rates, real estate values,
government monetary policy, international conflicts, the actions of terrorists
and other factors beyond our control may adversely affect our results of
operations. Changes in interest rates, in particular, could adversely affect our
net interest income and have a number of other adverse effects on our
operations, as discussed in the immediately succeeding risk factor. Adverse
economic conditions also could result in an increase in loan delinquencies,
foreclosures and nonperforming assets and a decrease in the value of the
property or other collateral which secures our loans, all of which could
adversely affect our results of operations. We are particularly sensitive to
changes in economic conditions and related uncertainties in Northeast Ohio
because we derive substantially all of our loans, deposits and other business
from this area. Accordingly, we remain subject to the risks associated with
prolonged declines in national or local economies.
Changes in interest rates could have a material adverse effect on our
operations. The operations of financial institutions such as the Bank are
dependent to a large extent on net interest income, which is the difference
between the interest income earned on interest earning assets such as loans and
investment securities and the interest expense paid on interest bearing
liabilities such as deposits and borrowings. Changes in the general level of
interest rates can affect our net interest income by affecting the difference
between the weighted average yield earned on our interest earning assets and the
weighted average rate paid on our interest bearing liabilities, or interest rate
spread, and the average life of our interest earning assets and interest bearing
liabilities. Changes in interest rates also can affect our ability to originate
loans; the value of our interest earning assets; our ability to obtain and
retain deposits in competition with other available investment alternatives; and
the ability of our borrowers to repay adjustable or variable rate loans.
Interest rates are highly sensitive to many factors, including governmental
monetary policies, domestic and international economic and political conditions
and other factors beyond our control. Although we believe that the estimated
maturities of our interest earning assets currently are well balanced in
relation to the estimated maturities of our interest bearing liabilities (which
involves various estimates as to how changes in the general level of interest
rates will impact these assets and liabilities), there can be no assurance that
our profitability would not be adversely affected during any period of changes
in interest rates.
There are increased risks involved with commercial real estate,
construction, commercial business and consumer lending activities. Our lending
activities include loans secured by existing commercial real estate. Commercial
real estate lending generally is considered to involve a higher degree of risk
than single-family residential lending due to a variety of factors, including
generally larger loan balances,
31
the dependency on successful completion or operation of the project for
repayment, the difficulties in estimating loan terms which often do not require
full amortization of the loan over its term and, instead, provide for a balloon
payment at stated maturity. Our lending activities also include commercial
business loans to small- to medium-sized businesses, which generally are secured
by various equipment, machinery and other corporate assets, and a wide variety
of consumer loans, including home equity and second mortgage loans, automobile
loans, deposit account secured loans and unsecured loans. Although commercial
business loans and consumer loans generally have shorter terms and higher
interest rates than mortgage loans, they generally involve more risk than
mortgage loans because of the nature of, or in certain cases the absence of, the
collateral which secures such loans.
Our allowance for losses on loans may not be adequate to cover probable
losses. We have established an allowance for loan losses which we believe is
adequate to offset probable losses on our existing loans. There can be no
assurance that any future declines in real estate market conditions, general
economic conditions or changes in regulatory policies will not require us to
increase our allowance for loan losses, which would adversely affect our results
of operations.
Growth Strategy. The Company has pursued and continues to pursue a
strategy of growth. The success of the Company's growth strategy will depend
largely upon its ability to manage its credit risk and control its costs while
providing competitive products and services. This growth strategy may present
special risks, such as the risk that the Company will not efficiently handle
growth with its present operations, the risk of dilution of book value and
earnings per share as a result of an acquisition, the risk that earnings will be
adversely affected by the start-up costs associated with establishing new
products and services, the risk that the Company will not be able to attract and
retain qualified personnel needed for expanded operations, and the risk that its
internal monitoring and control systems may prove inadequate.
Control by Management; Anti-Takeover Provisions. The Board of directors
beneficially own in the aggregate approximately 6.0% of the outstanding shares
of Common Stock of the Company at March 31, 2006. In addition to Ohio and
federal laws and regulations governing changes in control of insured depository
institutions, the Company's Articles of Incorporation and Code of Regulations
contain certain provisions that may delay or make more difficult an acquisition
of control of the Company. For example, the Company's Articles of Incorporation
do not exempt the Company from the provisions of Ohio's "control share
acquisition" and "merger moratorium" statutes. Assuming that the principal
stockholders continue to retain the number of the outstanding voting shares of
the Company that they presently own and the law of Delaware requires, as it
presently does, at least two-thirds majority vote of the outstanding shares to
approve a merger or other consolidation, unless the articles of incorporation of
the constituent companies provide for a lower approval percentage for the
transaction, which the Company's articles do not provide, such ownership
position could be expected to deter any prospective acquirer from seeking to
acquire ownership or control of the Company, and the principal stockholders
would be able to defeat any acquisition proposal that requires approval of the
Company's stockholders, if the principal stockholders chose to do so. In
addition, the principal stockholders may make a private sale of shares of common
stock of the Company that they own, including to a person seeking to acquire
ownership or control of the Company. The Company has 500,000 shares of
authorized but unissued preferred stock, par value $ .10 per share, which may be
issued in the future with such rights, privileges and preferences as are
determined by the Board of Directors of the Company.
Limited Trading Market; Shares Eligible for Future Sale; Possible
Volatility of Stock Price. The Common Stock is traded on the Nasdaq Market under
the symbol "WAYN." During the 12 months ended May 15, 2006, the average weekly
trading volume in the Common Stock has been approximately 498 shares per week.
There can be no assurance given as to the liquidity of the market for the Common
Stock or the price at which any sales may occur, which price will depend upon,
among other things, the number of holders thereof, the interest of securities
dealers in maintaining a market in the Common Stock and other
32
factors beyond the control of the Company. The market price of the Common Stock
could be adversely affected by the sale of additional shares of Common Stock
owned by the Company's current shareholders. The principal shareholders are
permitted to sell certain limited amounts of Common Stock without registration,
pursuant to Rule 144 under the Securities Act. The market price for the Common
Stock could be subject to significant fluctuations in response to variations in
quarterly and yearly operating results, general trends in the banking industry
and other factors. In addition, the stock market can experience price and volume
fluctuations that may be unrelated or disproportionate to the operating
performance of affected companies. These broad fluctuations may adversely affect
the market price of the Common Stock.
Dependence on Management. The Company's success depends to a great
extent on its senior management, including its Chairman, Russell L. Harpster;
President, Phillip E. Becker and Chief Financial Officer, H. Stewart Fitz Gibbon
III and Operations Officer, Bryan C. Fehr. The loss of their individual services
could have a material adverse impact on the Company's financial stability and
its operations. In addition, the Company's future performance depends on its
ability to attract and retain key personnel and skilled employees, particularly
at the senior management level. The Company's financial stability and its
operations could be adversely affected if, for any reason, one or more key
executive officers ceased to be active in the Company's management.
Competition. Banking institutions operate in a highly competitive
environment. The Company competes with other commercial banks, credit unions,
savings institutions, finance companies, mortgage companies, mutual funds, and
other financial institutions, many of which have substantially greater financial
resources than the Company. Certain of these competitors offer products and
services that are not offered by the Company and certain competitors are not
subject to the same extensive laws and regulations as the Company. Additionally,
consolidation of the financial services industry in Ohio and in the Midwest in
recent years has increased the level of competition. Recent and proposed
regulatory changes may further intensify competition in the Company's market
area.
Holding Company Structure; Government Regulations and Policies. The
Company is a financial holding company, which is substantially dependent on the
profitability of its subsidiaries and the upstream payment of dividends from
Wayne Savings Community Bank to the Company. Under state and federal banking
law, the payment of dividends by the Company are subject to capital adequacy
requirements. The inability of the Company to generate profits and pay such
dividends to the Company, or regulator restrictions on the payment of such
dividends to the Company even if earned, would have an adverse effect on the
financial condition and results of operations of the Company and the Company's
ability to pay dividends to the shareholders.
ITEM 1B. Unresolved Staff Comments
- -------------------------------------
Not applicable.
33
ITEM 2. Properties
- ----------------------
The Company conducts its business through its main banking office
located in Wooster, Ohio, and its ten additional full service branch offices
located in its market area. The following table sets forth information about its
offices as of March 31, 2006.
Original Year
Leased or Leased or Year of Lease
Location Owned Acquired Expiration
- -------------------------------- -------- ------------- -------------
North Market Street Office
151 N. Market Street
Wooster, Ohio Owned 1902 N/A
Cleveland Point Financial Center
1908 Cleveland Road Owned 1978 N/A
Wooster, Ohio
Madison South Office
2024 Millersburg Road Owned 1999 N/A
Wooster, Ohio
Northside Office
543 Riffel Road Leased 1999 2019
Wooster, Ohio
Millersburg Office
90 N. Clay Street Owned 1964 N/A
Millersburg, Ohio
Claremont Avenue Office
233 Claremont Avenue Owned 1968 N/A
Ashland, Ohio
Buehlers-Sugarbush Office
1055 Sugarbush Drive Leased 2001 2021
Ashland, Ohio
Rittman Office
237 North Main Street Owned 1972 N/A
Rittman, Ohio
Lodi Office
303 Highland Drive Owned 1980 N/A
Lodi, Ohio
Village Office
1265 S. Main Street Owned 1998 N/A
North Canton, Ohio
Stebbins Office
121 N. Main Street
Creston, Ohio Owned 2005 N/A
The Company's accounting and recordkeeping activities are maintained
through an in-house data processing system.
34
ITEM 3. Legal Proceedings
- -----------------------------
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business which, in
the aggregate, involve amounts which are believed by management to be immaterial
to the financial condition and operations of the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
- ---------------------------------------------------------------
During the fourth quarter of the fiscal year covered by this report,
the Registrant did not submit any matters to the vote of security holders.
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters
- --------------------------------------------------------------------------------
and Issuer Purchases of Equity Securities
-----------------------------------------
The Company's common stock trades on the Nasdaq National Market using
the symbol "WAYN." The following table sets forth the high and low trading
prices of the Company's common stock during the two most recent fiscal years,
together with the cash dividends declared.
Cash
Fiscal Year Ended dividend
March 31, 2006 High Low declared
First quarter $16.43 $13.91 $.120
Second quarter $16.50 $14.75 $.120
Third quarter $16.00 $13.83 $.120
Fourth quarter $16.50 $15.01 $.120
Cash
Fiscal Year Ended dividend
March 31, 2005 High Low declared
First quarter $21.00 $14.82 $.120
Second quarter $16.79 $15.36 $.120
Third quarter $16.88 $15.92 $.120
Fourth quarter $16.40 $15.35 $.120
35
As of April 5, 2006, the Company had 1,522 shareholders of record and
3,339,552 shares of common stock outstanding. This does not reflect the number
of persons whose stock is in nominee or "street name" accounts through brokers.
Payment of dividends on the common stock is subject to determination
and declaration by the Board of Directors and depends upon a number of factors,
including capital requirements, regulatory limitations on the payment of
dividends, the Company's results of operations and financial condition, tax
considerations, and general economic conditions. No assurance can be given that
dividends will be declared or, if declared, what the amount of dividends will
be, or whether such dividends, once declared, will continue.
The Company's primary source of funds with which to pay dividends is
cash and cash equivalents held at the holding company level and dividends from
the Bank. The Bank's ability to pay dividends to the Company is limited by OTS
regulations, and the Bank is required to obtain OTS nonobjection to the payment
of dividends to the Company. In determining whether to object to such dividends,
the OTS considers whether (i) the Bank would be undercapitalized following the
dividend, (ii) the dividend raises safety and soundness concerns, or (iii) the
dividend violates any regulatory prohibition or policy.
In addition to the foregoing, earnings of the Company appropriated to
bad debt reserves and deducted for federal income tax purposes are not available
for payment of cash dividends or other distributions to stockholders without
payment of taxes at the then-current tax rate by the Company on the amount of
earnings removed from the reserves for such distributions. The Company intends
to make full use of this favorable tax treatment and does not contemplate any
distribution that would create federal tax liability.
The following table sets forth information with respect to purchases
made by or on behalf of the Company of shares of common stock of the Company
during the indicated periods.
Total Number of
Shares Purchased as Maximum Number of
Total Number Average Part of Publicly Shares that May Yet Be
of Shares Price Paid Announced Plans or Purchased Under the
Period Purchased per Share Programs Plans or Programs(1)
- -------------------- ------------- ---------- ------------------- ---------------------
January 1-31, 2006 -- -- -- 140,105
February 1-28, 2006 -- -- -- 140,105
March 1-31, 2006 -- -- -- 140,105
Total -- -- -- 140,105
- ------------
(1) A repurchase program for 185,491 shares, or 5% of the Company's
outstanding shares, was publicly announced on September 2, 2004 and
expired on August 26, 2005. As of March 31, 2005, 84,761 shares had been
repurchased under that program. 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 over any period.
36
Equity Compensation Plan Information
The following table sets forth information as of March 31, 2006 with
respect to compensation plans under which equity securities of the Company are
authorized for issuance.
Number of Shares Remaining
Number of shares to be issued Weighted-Average Available for Future Issuance
Upon the exercise of outstanding Exercise Price of (Excluding Shares reflected in
Plan Category Options, Warrants and Rights Outstanding Options the First Column)
- ------------- ---------------------------- ------------------- -----------------
Equity Compensation
Plans Approved by
Security Holders 179,148 $13.92 --
Equity Compensation
Plans Not Approved by
Security Holders -- -- --
-- -- --
------- ------ -----
179,148 $13.92 --
======= ====== =====
ITEM 6. Selected Financial Data
- -----------------------------------
The following table set forth certain consolidated financial and other
data of Wayne Savings Bancshares, Inc., at the dates and for the years
indicated. The consolidated financial statements as of and for the years ended
March 31, 2003 and March 31, 2002, inclusive, are those of Wayne Savings
Bancshares, Inc. prior to the reorganization and change in corporate form
discussed in the Notes to the Consolidated Financial Statements and elsewhere
herein. For additional information about the Company, reference is made to
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Consolidated Financial Statements of the Company.
At March 31,
2006 2005 2004 2003 2002
(In thousands)
Selected Financial Condition Data:
Total assets.............................. $403,679 $403,633 $369,007 $378,991 $334,843
Loans receivable, net (1)................. 235,312 213,627 205,443 228,373 251,172
Mortgage-backed securities (2)............ 55,731 60,352 88,428 76,002 17,326
Investment securities..................... 73,307 72,856 31,582 35,841 22,286
Cash and cash equivalents (3)............. 14,123 29,942 19,887 17,496 27,883
Deposits.................................. 332,570 320,586 291,830 300,931 300,957
Stockholders' equity...................... 35,516 40,199 43,561 44,663 26,047
- --------------------------------
(1) Includes loans held for sale.
(2) Includes mortgage-backed securities available for sale.
(3) Includes cash and due from banks, interest-bearing deposits in other
financial institutions, and federal funds sold.
37
Year Ended March 31,
2006 2005 2004 2003 2002
(In thousands, except for share amounts)
Selected Operating Data:
Interest income ........................ $ 19,688 $ 17,632 $ 18,216 $ 20,023 $ 21,309
Interest expense ....................... 8,280 6,716 7,147 9,169 12,348
-------- -------- -------- -------- --------
Net interest income ............... 11,408 10,916 11,069 10,854 8,961
Provision for losses on loans ......... 211 430 173 91 134
-------- -------- -------- -------- --------
Net interest income after provision
for losses on loans .............. 11,197 10,486 10,896 10,763 8,827
Other income ........................... 1,777 1,684 1,933 1,643 1,657
General, administrative and other
expense (1) .......................... 10,899 11,874 8,971 8,417 7,722
-------- -------- -------- -------- --------
Earnings before income taxes ........... 2,075 296 3,858 3,989 2,762
Federal income taxes (benefits) ........ 435 (85) 1,154 1,217 939
-------- -------- -------- -------- --------
NET EARNINGS ........................... $ 1,640 $ 381 $ 2,704 $ 2,772 $ 1,823
======== ======== ======== ======== ========
Basic earnings per share (2) ........... $ 0.50 $ 0.11 $ 0.72 $ 0.71 $ 0.47
======== ======== ======== ======== ========
Diluted earnings per share (2) ......... $ 0.50 $ 0.11 $ 0.72 $ 0.71 $ 0.47
======== ======== ======== ======== ========
Cash dividends declared
per common share (3) ................. $ 0.48 $ 0.48 $ 0.47 $ 0.45 $ 0.45
======== ======== ======== ======== ========
- ------------------
(1) In 2005, general, administrative and other expense includes $1.4 million of
costs related to accelerating the Company's Management Recognition and
Stock Option Plans.
(2) All per share amounts have been restated to give effect to the 1.5109 to
1.00 share exchange ratio provided for in the Company's conversion
offering.
(3) During the fiscal year ended March 31, 2003, the M.H.C. waived its right to
receive all dividends. During fiscal 2002 the M.H.C. waived approximately
$.44 of the $.45 per share dividends paid on common stock.
At or For the Year Ended March 31,
2006 2005 2004 2003 2002
Key Operating Ratios and Other Data:
Return on average assets (net earnings divided
by average total assets) ..................... 0.42% 0.10% 0.73% 0.78% 0.56%
Return on average equity (net earnings
divided by average equity) ................... 4.42 0.90 6.09 8.80 7.12
Average equity to average assets ............... 9.47 10.93 11.95 8.92 7.93
Equity to assets at year end ................... 8.80 9.96 11.80 11.78 7.78
Interest rate spread (difference between average
yield on interest-earning assets and average
cost of interest-bearing liabilities) ........ 3.02 2.89 2.97 3.09 2.77
Net interest margin (net interest income
as a percentage of average interest-
earning assets) .............................. 3.10 3.02 3.14 3.24 2.93
General, administrative and other expense
to average assets (1) ........................ 2.78 2.72 2.41 2.38 2.39
Nonperforming and impaired loans
to loans receivable, net ..................... 0.33 0.42 0.36 1.09 1.52
Nonperforming and impaired assets
to total assets .............................. 0.23 0.23 0.23 0.66 1.14
38
Average interest-earning assets to average
interest-bearing liabilities ................. 104.09 106.49 108.12 105.40 103.98
Allowance for loan losses to nonperforming
and impaired loans ........................... 192.23 151.66 109.10 27.17 19.16
Allowance for loan losses to nonperforming
and impaired assets .......................... 159.91 146.01 96.22 27.17 19.07
Net interest income after provision for losses
on loans, to general, administrative and
other expense (1) ............................ 102.73 100.13 121.46 127.87 114.31
Number of full-service offices ................. 11 11 10 10 10
Dividend payout ratio .......................... 98.60 455.91 66.83 38.35 46.74
- ----------------
(1) In calculating this ratio, general, administrative and other expense does
not include provisions for losses or gains on the sale of real estate
acquired through foreclosure. For fiscal 2005, this ratio does not include
expense relating to acceleration of the Company's Management Recognition Plan
and Stock Option Plan.
ITEM 7. Management's Discussion and Analysis of Financial Condition and
- ---------------------------------------------------------------------------
Results of Operations
---------------------
General
The consolidated financial statements include Wayne Savings Bancshares, Inc. and
its wholly-owned subsidiary, Wayne Savings Community Bank. Intercompany
transactions and balances are eliminated in the consolidated financial
statements.
The Company's net earnings are primarily dependent on its net interest income,
which is the difference between interest income earned on its loan,
mortgage-backed securities and investment portfolios, and its cost of funds
consisting of interest paid on deposits and borrowings. The Company's net
earnings also are affected by its provision for losses on loans, as well as the
amount of other income, including trust fees and service charges, and general,
administrative and other expense, such as salaries and employee benefits,
deposit insurance premiums, occupancy and equipment costs, and income taxes.
Earnings of the Company also are affected significantly by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities.
Business Strategy
The Company's current business strategy is to operate a well-capitalized,
profitable and community-oriented bank dedicated to providing quality service
and products to its customers. The Company has sought to implement this strategy
in recent years by: (1) closely monitoring the needs of customers and providing
personal, quality customer service; (2) continuing the origination of a wide
array of loan products in the Company's market area; (3) managing interest rate
risk exposure by better matching asset and liability maturities and rates; (4)
increasing fee income, including the establishment of a trust department; (5)
managing asset quality; (6) maintaining a strong retail deposit base; (7)
maintaining capital in excess of regulatory requirements; and (8) emphasizing
the commercial loan program to add high quality, higher yielding assets to the
Company's loan portfolio.
39
Discussion of Financial Condition Changes from March 31, 2005 to March 31, 2006
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Company's operations, and actual
results could differ significantly from those discussed in forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
interest rates in the nation and the Company's general market area. The
forward-looking statements contained herein include, but are not limited to,
those with respect to the following matters: (1) management's determination of
the amount and adequacy of the allowance for loan losses; (2) the effect of
changes in interest rates; (3) management's opinion as to the effects of recent
accounting pronouncements on the Company's consolidated financial statements;
and (4) management's opinion as to the Bank's ability to maintain regulatory
capital at current levels. The Company considers the allowance for loan losses
and related loss provision to be a critical accounting policy. A detailed
discussion as to the application of such policy is set forth on the following
pages.
At March 31, 2006, total assets of $403.7 million remained virtually unchanged
from the $403.6 million total at March 31, 2005.
Liquid assets, consisting of cash, interest-bearing deposits and investment
securities, decreased by $15.4 million, or 14.9%, to $87.4 million at March 31,
2006 mainly due to a reduction in federal funds sold of $19.4 million.
Mortgage-backed securities decreased by $4.6 million, or 7.7%, to $55.7 million
as these adjustable rate securities continued to experience significant
principal repayments due to borrowers refinancing to fixed-rate loans in the
current rising interest rate environment. Principal repayments were partially
offset by purchases of mortgage-backed securities totaling $22.4 million.
During the fiscal year ended March 31, 2006, loans receivable increased $21.7
million, or 10.2%, as the Bank originated and retained $63.1 million of loans
and received payments of $35.0 million. Rather than reinvest funds from sales of
and repayments on loans in long-term, fixed rate and lower yielding residential
loans during this period of rising interest rates, the lending division has been
able to originate shorter-term adjustable rate commercial loans. The Company
believes that investing in shorter-term and adjustable-rate commercial loans
positions the Company favorably in the current interest rate environment. The
composition of the loan portfolio continued to evolve during the fiscal year
ending March 31, 2006, as exemplified by a net decrease of $7.9 million in
residential and construction mortgage loans, which were more than offset by
increases in nonresidential real estate loans of $21.6 million and a net
increase in commercial loans of $7.5 million.
At March 31, 2006, the allowance for loan losses totaled $1.5 million, or .63%
of loans, compared to $1.4 million, or .64% of loans at March 31, 2005. In
determining the amount of loan loss analysis at any point of time, management
and the board apply a systematic process of focusing on the risk of loss in the
portfolio. First, delinquent nonresidential, multi-family and commercial loans
are evaluated for potential impairment in carrying value. At March 31, 2006, all
delinquent nonresidential, multi-family and commercial loans were viewed as
well-secured, with no material loss anticipated. The second step in determining
the allowance for loan loss entails the application of historic loss experience
to individual loan types in the portfolio. In addition to the historic loss
percentage, management employs an additional risk percentage tailored to the
Board's and management's perception of the overall risk in the economy. Finally,
to provide additional assurance regarding the validity of the commercial loan
risk rating system, management engages a third party loan reviewer who provides
independent validation of the Bank's loan grading process. Due primarily to the
growth of the nonresidential real estate and the commercial loan portfolio,
management charged $211,000 to the provision during fiscal 2006.
40
Discussion of Financial Condition Changes from March 31, 2005 to March 31, 2006
(continued)
Deposits at March 31, 2006, totaled $332.6 million, an increase of $12.0 million
from $320.6 million at March 31, 2005, generally reflecting the Bank's
competitive deposit pricing in all market areas. Certificates of deposit
increased by $20.8 million, newly implemented commercial repurchase agreements
increased by $5.7 million, NOW accounts increased by $3.7 million and money
market investor accounts increased by $2.6 million. These increases were
partially offset by a reduction of $20.8 million in savings deposits.
Borrowings totaled $32.8 million at March 31, 2006 as compared with $40.0
million at March 31, 2005. The Company was able to repay short-term Federal Home
Loan Bank advances during the fiscal year by utilizing the increase in deposits
and cash flows from the loan and securities portfolios.
Stockholders' equity totaled $35.5 million, a decrease of $4.7 million, or
11.6%, during the year ending March 31, 2006, due primarily to purchases of
treasury stock totaling $5.0 million, dividends totaling $1.6 million and an
increase in the unrealized loss on available for sale securities of $219,000.
These amounts were partially offset by $1.6 million in net earnings for the
fiscal year ended March 31, 2006 and from stock option exercises totaling
$365,000.
Comparison of Operating Results for the Years Ended March 31, 2006 and 2005
General
- -------
The Company has continued to maintain its strategy to aggressively manage
interest rate risk. This strategy negatively affected earnings for fiscal 2005
and 2004, with earnings benefits beginning to appear the last half of fiscal
2006. Management believes that the investment of excess funds primarily in
shorter term assets will continue to help the Company in the current rising
interest rate environment.
Net earnings totaled $1.6 million for fiscal year ended March 31, 2006, an
increase of $1.3 million when compared to the net earnings of $381,000 for the
fiscal year ended March 31, 2005. The increase in net earnings was primarily
attributable to an increase net interest income of $492,000, a decrease in
provision for loan losses of $219,000 and a decrease in general, administrative
and other expense of $975,000, or 8.2%. The growth in pretax earnings was
partially offset by an increase in federal income taxes of $520,000.
Interest Income
- ---------------
Interest income increased $2.1 million or 11.7%, to $19.7 million for the fiscal
year ended March 31, 2006, compared to the same period in 2005. This increase
was mainly due to an increase in the weighted-average yield on interest-earning
assets to 5.36% from 4.87% for the fiscal year ended March 31, 2005, coupled
with an increase in the weighted average balance of $5.9 million, or 1.6%. The
yield increase is primarily due to the Federal Reserve raising the federal funds
rate 2.0% over the past year. These rate increases have beneficially affected
the yields earned on the Company's investment securities and interest-bearing
deposits. The Company has purposefully invested excess funds in shorter-term
securities and adjustable rate loans rather than long-term fixed rate loans.
Although such strategy can sacrifice short-term income, it strengthens the
Company's interest rate position and allows the Company to profitably redeploy
such assets in a rising rate environment.
Interest income on loans increased $1.2 million, or 9.3%, for the year ended
March 31, 2006, compared to the same period in 2005, due primarily to a $10.2
million, or 4.8%, increase in the weighted-average balance of loans year over
year, coupled with a 26 basis point increase in the weighted average yield on
loans outstanding. The increase in the weighted-average balance of loans was
primarily due to the emphasis on nonresidential and commercial loans.
41
Comparison of Operating Results for the Years Ended March 31, 2006 and 2005
(continued)
Interest Income (continued)
- ---------------------------
Interest income on mortgage-backed securities decreased $159,000, or 7.1%,
during fiscal 2006, compared to the same period in 2005, due primarily to a
decrease of $18.3 million, or 25.1%, in the weighted-average balance caused
mainly by continued principal prepayments. The decrease in the weighted average
balance was offset by an increase of 74 basis points to a weighted average yield
of 3.83% as compared to 3.09%, from the comparable 2005 period, generally
reflecting upward interest rate adjustments in the current rising rate
environment.
Interest income on investment securities increased by $1.0 million, or 49.4%
during the 2006 period compared to the same period in 2005, reflecting an
increase in the weighted average balance of $24.1 million, or 46.1%, to $76.2
million from $52.2 million during the comparable 2005 period, coupled with an
increase in the average yield of 8 basis points to 4.01%. The increase in the
weighted-average volume reflects the Company's strategy of investing in
short-term investment securities in the current increasing interest rate
environment. This strategy provides the Company with flexibility to use funds
from securities sales and repayments to originate loans such as nonresidential
and commercial loans with higher yields and in some instances shorter terms.
Interest income on interest-bearing deposits increased by $6,000, or 1.4%, for
the fiscal year ended March 31, 2006, due primarily to an increase in the
average yield of 137 basis points to 3.20%, partially offset by a reduction in
the weighted average balance during fiscal 2006 of $10.1 million, or 42.2%.
Interest Expense
- ----------------
Interest expense for the fiscal year ended March 31, 2006 totaled $8.3 million,
an increase of $1.6 million , or 23.3%, from interest expense for fiscal year
ended March 31, 2005. The increase in interest expense resulted from an increase
in the average cost of funds of 36 basis points to 2.34% for fiscal 2006,
coupled with an increase of $13.5 million, or 4.0%, in the weighted average
balance of deposits and borrowings outstanding in fiscal 2006.
Interest expense on deposits totaled $7.2 million for fiscal 2006, an increase
of $1.5 million, or 26.6%, compared to fiscal 2005. The increase in deposit
costs resulted from an increase of 41 basis points in the average cost of
deposits to 2.22% for fiscal 2006, coupled with a 2006 increase in the average
balance outstanding of $11.2 million, or 3.6%. As noted earlier, a shift in the
composition of deposits from lower cost savings deposits to higher cost
certificates of deposits contributed to the increase in the cost of deposits.
Interest expense on borrowings totaled $1.1 million for the year ended March 31,
2006, an increase of $51,000, or 4.9%, from the 2005 period, due primarily to an
increase in the weighted average balance of $2.3 million, or 9.0%, which was
partially offset by rate reduction of 15 basis points to 3.81% for the fiscal
year ended March 31, 2006 as a result of the repayment of higher rate advances.
Net Interest Income
- -------------------
Net interest income totaled $11.4 million for the fiscal year ended March 31,
2006, an increase of $492,000, or 4.5%, from the amount for fiscal 2005. The
average interest rate spread increased to 3.02% for fiscal 2006 from 2.89% for
fiscal 2005. The net interest margin increased to 3.10% for fiscal 2006 from
3.02% for the fiscal year ended March 31, 2005.
42
Comparison of Operating Results for the Years Ended March 31, 2006 and 2005
(continued)
Provision for Losses on Loans
- -----------------------------
The Company recorded a provision for losses on loans totaling $211,000 and
$430,000 for the fiscal years ended March 31, 2006 and 2005, respectively. To
the best of management's knowledge, all known and inherent losses that are
probable and which can be reasonably estimated have been recorded as of March
31, 2006.
Other Income
- ------------
Other income, consisting primarily of an increase in cash surrender value of
life insurance, gains on sale of loans, service fees, and charges on deposit
accounts increased by $93,000, or 5.5%, to $1.8 million for fiscal 2006, from
$1.7 million for the year ended March 31, 2005. The increase resulted primarily
from an increase in cash surrender value of life insurance of $123,000 and
$74,000 in other service fees, charges and other operating income, partially
offset by a reduction of $104,000 in gain on sale of loans. The decline in gain
on sale of loans is primarily due to a significant reduction in origination
volume, amplified by management's decision during fiscal 2006 to retain certain
fixed rate mortgage loans to facilitate growth in the portfolio.
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense decreased by $975,000, or 8.2%, to
$10.9 million for the fiscal year ended March 31, 2006, compared to fiscal 2005.
The decrease in general, administrative and other expense is primarily due to
the absence of the $1.4 million in accelerated expense related to the management
recognition and stock option plan recognized in 2005. Employee compensation and
benefits decreased by $848,000, or 11.7%. Net of the aforementioned accelerated
expense of the management recognition and stock option plan, employee
compensation and benefits increased $554,000 due primarily to $421,000 in
retirement expense recognized due to the death of the former Chief Executive
Officer and retirement of the Chief Operations Officer and normal merit salary
increases. An increase of $68,000, or 3.7%, in occupancy and equipment expense
was primarily due to increased data line costs related to the online banking
program, coupled with an increase of depreciation expense. A decrease of
$48,000, or 8.3%, in franchise taxes was due to the reduction in equity from the
repurchase of treasury stock. The increase in other operating expense was
primarily attributable to increased professional costs related to routine
compliance matters, the new online banking program, and additional service
charges related to the trust department.
Federal Income Taxes
- --------------------
The federal income tax expense was $435,000 for the year ended March 31, 2006,
reflecting an increase of $520,000 in federal income tax expense from fiscal
2005. The increase resulted primarily from a $1.8 million increase in pre-tax
earnings. The difference in the effective tax rate or rate of benefits from the
34% statutory rate is mainly due to the beneficial effects of income from cash
surrender value of life insurance and other tax-exempt obligations.
Comparison of Operating Results for the Years Ended March 31, 2005 and 2004
General
- -------
Fiscal 2005 was a year of strategic transition for the Company. The Company's
primary competitor was acquired by a major regional bank holding company,
positioning Wayne Savings as the largest independent community bank in the five
county market areas.
43
Comparison of Operating Results for the Years Ended March 31, 2005 and 2004
(continued)
General (continued)
- -------
Management had long perceived the market area preference for local ownership and
decision-making. In recognition of this fact, management believed that the
Company had a unique opportunity to expand its product lines, particularly in
the areas of commercial lending and trust services. Management also recognized
that expansion of such product lines would initially place pressures on the
Company's operating costs. As a result, management undertook a review of the
Company's ability to expand its product lines in view of its current cost
structure.
Such review culminated in the conclusion that several of its benefit plans,
specifically the previous grants under the Management Recognition Plan and the
Stock Ownership Plan reflected compensation awards which were more closely
aligned with past versus future managerial performance. Moreover, in view of the
mandatory expensing of stock options pursuant to SFAS No. 123(R), management
concluded that the approximate $300,000 in annual pre-tax savings resulting from
accelerating the expense of the Stock Option Plan was a prudent method of
expanding the Company's product lines without placing undue pressure on the
Company's future cost structure.
Due in large part to these decisions, net earnings totaled $381,000 for the
fiscal year ended March 31, 2005, a decrease of $2.3 million, or 85.9%, below
the net earnings of $2.7 million for the fiscal year ended March 31, 2004. The
decline in net earnings was primarily attributable to an increase in general,
administrative and other expense of $2.9 million, or 32.4%, an increase in the
provision for losses on loans of $257,000, or 148.6%, a decrease in other income
of $249,000, or 12.9%, and a decrease in net interest income of $153,000, or
1.4%. These earnings reductions were partially offset by a decrease in federal
income tax expense of $1.2 million.
Interest Income
- ---------------
Interest income for the fiscal year ended March 31, 2005, decreased $584,000, or
3.2%, to $17.6 million. This decrease was the result of a 29 basis point
reduction in the yield earned on interest earning assets to 4.87%, partially
offset by an increase in the weighted-average balance of interest-earning assets
totaling $9.0 million, or 2.6%, to $361.7 million for the year ended March 31,
2005.
Interest income on loans declined $1.1 million, or 7.8%, for the fiscal year
ended March 31, 2005, due primarily to a decrease in the weighted-average
balance of loans outstanding of $1.4 million, or 0.6%, compared to the fiscal
2004, coupled with a 47 basis point decrease in the weighted-average yield on
loans to 6.06% for fiscal 2005.
Interest income on mortgage-backed securities decreased $235,000 during fiscal
2005, due primarily to a $13.5 million, or 15.7%, decrease in the
weighted-average balance outstanding from the 2004 period, which was partially
offset by an increase in the average yield of 22 basis points to 3.09%.
Interest income on investments increased by $553,000, or 37.0%, reflecting an
increase in the weighted-average balance of $17.5 million, or 50.6%, partially
offset by a decrease in the weighted-average yield of 39 basis points to 3.93%
from 4.32% during fiscal 2004.
Interest income on interest-bearing deposits and other increased by $182,000, or
71.7%, reflecting an increase in the weighted-average balance of $6.4 million,
or 36.6%, coupled with an increase in the weighted-average yield of 38 basis
points to 1.83% from 1.45% during fiscal 2004.
44
Comparison of Operating Results for the Years Ended March 31, 2005 and 2004
(continued)
Interest Income (continued)
- ---------------
The decrease in the average balance of loans and mortgage-backed securities as
well as the increase in the average balance of investments and interest-bearing
deposits is consistent with the Company's aforementioned strategy to shorten the
average maturity of the Company's interest-earning assets. The Company has
invested a significant portion of the funds from payments on loans and
mortgage-backed securities in short term investment securities and other short
term investment vehicles.
Interest Expense
- ----------------
Interest expense for fiscal 2005 totaled $6.7 million, a decrease of $431,000,
or 6.0%, from interest expense of $7.1 million for the fiscal year ended March
31, 2004. The decrease resulted from a 21 basis point decrease in the average
cost of funds to 1.98% for fiscal 2005, offset by an increase in the average
balance of deposits and borrowings outstanding of $13.4 million, or 4.1%, to
$339.7 million for fiscal 2005.
Interest expense on deposits totaled $5.7 million for fiscal 2005, a decrease of
$215,000, or 3.6%, from fiscal 2004, as a result of an 18 basis point decrease
in the average cost of deposits to 1.81% for the 2005 period offset by an
increase in the average balance outstanding of $17.4 million, or 5.9%, to $313.6
million for fiscal 2005.
Interest expense on borrowings totaled $1.0 million for the fiscal year ended
March 31, 2005, a decrease of $216,000 from fiscal 2004, primarily due to a
reduction in the average balance of borrowings of $3.9 million to an average
balance of $26.1 million for fiscal 2005 from $30.0 million for the year ended
March 31, 2004, coupled with a decrease in the average cost of borrowings to
3.96% from an average cost of 4.16% for fiscal 2004.
Net Interest Income
- -------------------
Net interest income totaled $10.9 million for the fiscal year ended March 31,
2005, a decrease of $153,000, or 1.4%, from fiscal 2004. The average interest
rate spread decreased to 2.89% for the year ended March 31, 2005 from 2.97% for
fiscal 2004. The net interest margin decreased to 3.02% for fiscal 2005 from
3.14% for fiscal 2004.
Provision for Losses on Loans
- -----------------------------
The Company recorded a provision for losses on loans totaling $430,000 and
$173,000 for the fiscal years ended March 31, 2005 and 2004, respectively. As a
result of the increased commercial loan volume, the acquisition of Stebbins'
loan portfolio and an enhancement of the Company's loan rating standards,
management increased the provision for loan losses by $257,000 in fiscal 2005.
To the best of management's knowledge, all known and inherent losses that are
probable and which can be reasonably estimated were recorded at March 31, 2005.
Other Income
- ------------
Other income, consisting primarily of an increase in cash surrender value of
life insurance, gains on sale of loans, service fees, and charges on deposit
accounts, decreased by $249,000, or 12.9%, to $1.7 million for fiscal 2005, from
$1.9 million for the year ended March 31, 2004. The decrease resulted primarily
from a decrease of $256,000 in merchant fee income due to a significant
reduction in volume.
45
Comparison of Operating Results for the Years Ended March 31, 2005 and 2004
(continued)
General, Administrative and Other Expense
- -----------------------------------------
General, administrative and other expense increased by $2.9 million, or 32.4%,
to $11.9 million for the year ended March 31, 2005 compared to the fiscal year
ended March 31, 2004. Approximately $1.4 million of this increase resulted from
management's decision to accelerate the vesting and attendant expense of the
Management Recognition and Stock Option Plans.
The increase in employee compensation and benefits of $2.0 million, or 39.4%,
was primarily attributable to the acceleration of benefit plan costs, normal
merit increases and additional staff needed for operating in a heavily regulated
industry. An increase of $355,000, or 23.9%, in occupancy and equipment expense
was primarily due to a data conversion and operations costs related to the
Stebbins acquisition. An increase of $214,000, or 59.0%, in franchise taxes was
due to the increase in equity from the fiscal 2003 conversion to stock form.
Similarly, the increase in other operating expense was primarily attributable to
increased costs related to the Stebbins acquisition.
Federal Income Taxes
- --------------------
The federal income tax benefit was $85,000 for the year ended March 31, 2005,
reflecting a decrease of $1.2 million in federal income tax expense from fiscal
2004. The reduction resulted primarily from a $3.6 million, or 92.3%, decrease
in pre-tax earnings. The difference in the effective tax rate or rate of
benefits from the 34% statutory rate is mainly due to the beneficial effects of
income from cash surrender value of life insurance and other tax-exempt
obligations.
46
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. Such yields and costs are derived by
dividing income or expense by the average balance of assets or liabilities,
respectively, for the periods presented.
2006 2005 2004
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net (1) $222,944 $14,096 6.32% $212,785 $ 12,898 6.06% $214,174 $ 13,982 6.53%
Mortgage-backed securities (2) 54,629 2,091 3.83 72,911 2,250 3.09 86,440 2,485 2.87
Investment securities 76,246 3,059 4.01 52,172 2,048 3.93 34,640 1,495 4.32
Interest-earning deposits (3) 13,808 442 3.20 23,871 436 1.83 17,478 254 1.45
-------- ------- ------ -------- -------- ------ -------- -------- ------
Total interest-earning assets 367,627 19,688 5.36 361,739 17,632 4.87 352,732 18,216 5.16
Non-interest-earning assets 24,736 23,475 18,853
-------- -------- --------
Total assets $392,363 $385,214 $371,585
======== ======== ========
Interest-bearing liabilities:
Deposits $324,771 7,197 2.22 $313,611 5,684 1.81 $296,244 5,899 1.99
Borrowings 28,424 1,083 3.81 26,076 1,032 3.96 30,000 1,248 4.16
-------- ------- ------ -------- -------- ------ -------- -------- ------
Total interest-bearing liabilities 353,195 8,280 2.34 339,687 6,716 1.98 326,244 7,147 2.19
-------- -------- ------ -------- ------
Non-interest-bearing liabilities 2,025 3,410 923
-------- -------- --------
Total liabilities 355,220 343,097 327,167
Stockholders' equity 37,143 42,117 44,418
-------- -------- --------
Total liabilities and stockholders'
equity $392,363 $385,214 $371,585
======== ======== ========
Net interest income $11,408 $ 10,916 $ 11,069
======= ======== ========
Interest rate spread (4) 3.02% 2.89% 2.97%
====== ====== ======
Net yield on interest-earning assets (5) 3.10% 3.02% 3.14%
====== ====== ======
Ratio of average interest-earning assets to
average interest-bearing liabilities 104.09% 106.49% 108.12%
====== ====== ======
(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.
47
Rate/Volume Analysis.
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average volume multiplied by old rate); and (ii) changes in rate
(change in rate multiplied by old average volume). Changes in rate-volume
(changes in rate multiplied by the change in average volume) have been allocated
proportionately between changes in rate and changes in volume.
Year ended March 31,
2006 vs. 2005 2005 vs. 2004
Increase Increase
(decrease) Total (decrease) Total
due to increase due to increase
Volume Rate (decrease) Volume Rate (decrease)
(In thousands)
Interest income attributable to:
Loans receivable $ 629 $ 569 $ 1,198 $ (90) $ (994) $(1,084)
Mortgage-backed securities (633) 474 (159) (408) 173 (235)
Investment securities 965 46 1,011 698 (145) 553
Interest-bearing deposits (316) 322 6 108 74 182
------- ------- ------- ------- ------- -------
Total interest-earning assets 645 1,411 2,056 308 (892) (584)
Interest expense attributable to:
Deposits 208 1,305 1,513 334 (549) (215)
Borrowings 91 (40) 51 (157) (59) (216)
------- ------- ------- ------- ------- -------
Total interest-bearing liabilities 299 1,265 1,564 177 (608) (431)
------- ------- ------- ------- ------- -------
Increase (decrease) in net interest income $ 346 $ 146 $ 492 $ 131 $ (284) $ (153)
======= ======= ======= ======= ======= =======
Liquidity and Capital Resources
The Bank's primary sources of funds are deposits, principal and prepayments on
loans and mortgage-backed securities, maturities of investment securities and
other short-term investments, and earnings and funds provided from operations.
While scheduled principal repayments on loans and mortgage-backed securities are
a relatively predictable source of funds, deposit flows and loan prepayments are
greatly influenced by the general level of interest rates, economic conditions
and competition. The Bank manages the pricing of deposits to maintain a desired
level of deposits and cost of funds. In addition, the Bank invests excess funds
in federal funds and other short-term interest-earning assets, which provide
liquidity to meet lending requirements. Federal funds sold and other liquid
assets outstanding at March 31, 2006, 2005 and 2004, amounted to $143.2 million,
$163.2 million and $139.9 million, respectively. For additional information
about cash flows from the Company's operating, financing and investing
activities, see the Statements of Cash Flows included in the Consolidated
Financial Statements.
A major portion of the Bank's liquidity consists of cash and cash equivalents,
which are a product of their operating, investing and financing activities. The
primary sources of cash are net earnings, principal repayments on loans and
mortgage-backed securities, proceeds from advances from the Federal Home Loan
Bank ("FHLB"), and sales of mortgage-backed securities. Liquidity management is
both a daily and long-term function of business management. If the Bank requires
funds beyond its ability to generate funds internally, borrowing agreements
exist with the Federal Home Loan Bank, which provide an additional source of
funds. At March 31, 2006, the Company had $32.8 million in outstanding advances
from the FHLB. At March 31, 2006, management believes the Company has additional
borrowing capacity from the FHLB totaling $168.6 million.
48
Contractual Obligations
The following table summarizes the Company's contractual obligations at March
31, 2006.
Payments due by period
Less More
than 1-3 3-5 than
1 year years years 5 years Total
(In thousands)
Contractual obligations:
Operating lease obligations $ 85 $ 172 $ 115 $ 7 $ 379
Advances from the Federal Home Loan Bank 15,250 7,500 5,000 5,000 32,750
Certificates of deposit 129,966 45,893 11,641 580 188,080
Amount of commitments expiring per period:
Commitments to originate loans:
Letters of credit 913 -- -- -- 913
Credit card/overdraft lines of credit 318 -- -- -- 318
Home equity/commercial lines of credit 28,989 -- -- -- 28,989
One- to four-family and multi-family loans 3,372 -- -- -- 3,372
-------- -------- -------- -------- --------
Total contractual obligations $178,893 $ 53,565 $ 16,756 $ 5,587 $254,801
======== ======== ======== ======== ========
Impact of Inflation and Changing Prices
The consolidated financial statements of the Company and notes thereto,
presented elsewhere herein, have been prepared in accordance with U.S. GAAP,
which requires the measurement of financial position and operating results in
terms of historical dollars, without considering the changes in the relative
purchasing power of money over time due to inflation. The impact of inflation is
reflected in the increased cost of the Company's operations. Unlike most
industrial companies, nearly all the assets and liabilities of the Company are
monetary. As a result, interest rates have a greater impact on the Company's
performance than do the effect of general levels of inflation. Interest rates do
not necessarily move in the same direction or to the same extent as the prices
of goods and services.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
- ----------------------------------------------------------------------
Asset and Liability Management-Interest Rate Sensitivity Analysis
The Bank, like other financial institutions, is subject to interest rate risk to
the extent that interest-earning assets reprice at a different time than
interest-bearing liabilities. As part of their effort to monitor and manage
interest rate risk, the Bank uses the "net portfolio value" ("NPV") methodology
adopted by the OTS as part of its interest rate sensitivity regulations. The
application of NPV methodology illustrates certain aspects of the Bank's
interest rate risk.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on interest-bearing and other liabilities. The application of the methodology
attempts to quantify interest rate risk as the change in the NPV, which would
result from a theoretical change in market interest rates.
Presented below, as of March 31, 2006 and 2005, is an analysis of the Bank's
interest rate risk as measured by changes in NPV for instantaneous and sustained
100, 200 and 300 basis point (1 basis point equals .01%) increases and a 100 and
200 basis point decrease in market interest rates. Due to the current interest
rate environment, the changes in NPV are not estimated for a decrease of 300
basis points.
49
Asset and Liability Management-Interest Rate Sensitivity Analysis (continued)
As with any method of measuring interest rate risk, certain shortcomings are
inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making the risk calculations.
As of March 31, 2006
Net Portfolio Value
Change in Net Portfolio Value as % of PV of Assets
Interest Rates
(Basis Points) $ Amount $ Change % Change NPV Ratio Change
(In thousands)
+300 bp $30,755 $(12,524) (29)% 8.25% (261)bp
+200 bp 34,937 (8,342) (19) 9.17 (169)
+100 bp 39,412 (3,867) (9) 10.10 (76)
0 bp 43,279 -- -- 10.86 --
-100 bp 45,021 1,742 4 11.09 23
-200 bp 43,649 370 1 10.63 (23)
As of March 31, 2005
Net Portfolio Value
Change in Net Portfolio Value as % of PV of Assets(4)
Interest Rates
(Basis Points) $ Amount $ Change % Change NPV Ratio Change
(In thousands)
+300 bp $42,370 $(11,927) (22)% 11.66% (250)bp
+200 bp 48,174 (4,097) (8) 12.96 (120)
+100 bp 52,785 (1,512) (3) 13.92 (24)
0 bp 54,297 -- -- 14.16 --
-100 bp 52,271 (2,026) (4) 13.60 (56)
The Company's policy in recent years had been to reduce its exposure to interest
rate risk generally by better matching the maturities of its interest rate
sensitive assets and liabilities and by originating adjustable rate mortgage
("ARM") loans and other adjustable rate or short-term loans, as well as by
purchasing short-term investments and mortgage-backed securities. However,
particularly in the rising short-term interest rate environment which currently
exists, borrowers typically prefer fixed rate loans to ARM loans. Accordingly,
ARM loan originations were very limited during the fiscal year ended March 31,
2006. The Company has sought to lengthen the maturities of its deposits by
promoting longer-term certificates; however, the Company was not successful in
lengthening the maturities of its deposits in the interest rate environment that
existed throughout fiscal 2006.
The Company has an Asset-Liability Management Committee (ALCO), which is
responsible for reviewing the Company's asset-liability policies. The Committee
meets and reports monthly to the Board of Directors on interest rate risks and
trends, as well as liquidity and capital ratios and requirements. The Bank has
operated within the framework of its prescribed asset/liability risk ranges for
each of the last three years.
50
ITEM 8. Financial Statements and Supplementary Data
- -------------------------------------------------------
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Wayne Savings Bancshares, Inc.
We have audited the accompanying consolidated statements of financial condition
of Wayne Savings Bancshares, Inc. as of March 31, 2006 and 2005, and the related
consolidated statements of earnings, comprehensive income, stockholders' equity
and cash flows for each of the three years in the period ended March 31, 2006.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Wayne
Savings Bancshares, Inc. as of March 31, 2006 and 2005, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended March 31, 2006, in conformity with accounting principles generally
accepted in the United States of America.
As more fully explained in Note A-9, the Company changed its method of
accounting for stock-based compensation expense in fiscal 2005 pursuant to SFAS
No. 123(R), "Share-Based Payment."
/s/ Grant Thornton LLP
Cincinnati, Ohio
June 5, 2006
51
WAYNE SAVINGS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
March 31, 2006 and 2005
(Dollars in thousands, except share data)
ASSETS 2006 2005
Cash and due from banks $ 2,952 $ 4,176
Federal funds sold -- 19,400
Interest-earning deposits in other financial institutions 11,171 6,366
--------- ---------
Cash and cash equivalents 14,123 29,942
Investment securities available for sale - at market 67,505 60,844
Investment securities held to maturity - at amortized cost, approximate
market value of $5,796 and $12,101 at March 31, 2006 and 2005, respectively 5,802 12,012
Mortgage-backed securities available for sale - at market 53,932 57,724
Mortgage-backed securities held to maturity - at amortized cost, approximate
market value of $1,805 and $2,647 at March 31, 2006 and 2005, respectively 1,799 2,628
Loans receivable - net 235,312 213,627
Office premises and equipment - net 8,557 8,922
Real estate acquired through foreclosure 156 35
Federal Home Loan Bank stock - at cost 4,623 4,386
Cash surrender value of life insurance 5,811 6,581
Accrued interest receivable on loans 1,075 933
Accrued interest receivable on mortgage-backed securities 250 268
Accrued interest receivable on investments and interest-bearing deposits 700 708
Prepaid expenses and other assets 1,526 1,707
Goodwill and other intangible assets 2,508 2,614
Prepaid federal income taxes -- 702
--------- ---------
Total assets $ 403,679 $ 403,633
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 332,570 $ 320,586
Advances from the Federal Home Loan Bank 32,750 40,000
Advances by borrowers for taxes and insurance 521 481
Accrued interest payable 263 198
Accounts payable on mortgage loans serviced for others 225 231
Other liabilities 1,118 1,305
Accrued federal income tax 51 --
Deferred federal income taxes 665 633
--------- ---------
Total liabilities 368,163 363,434
Commitments -- --
Stockholders' equity
Preferred stock (500,000 shares of $.10 par value authorized - no
preferred stock issued as of March 31, 2006 or 2005) -- --
Common stock (9,000,000 shares of $.10 par value authorized;
3,934,874 and 3,907,318 shares issued at both March 31, 2006 and 2005) 393 391
Additional paid-in capital 35,604 35,133
Retained earnings - substantially restricted 11,394 11,371
Less required contributions for shares acquired by Employee Stock
Ownership Plan (1,239) (1,304)
Less 595,322 and 282,261 shares of treasury stock at March 31, 2006
and 2005, respectively - at cost (9,625) (4,600)
Accumulated comprehensive loss (1,011) (792)
--------- ---------
Total stockholders' equity 35,516 40,199
--------- ---------
Total liabilities and stockholders' equity $ 403,679 $ 403,633
========= =========
The accompanying notes are an integral part of these statements.
52
WAYNE SAVINGS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
For the years ended March 31, 2006, 2005 and 2004
(Dollars in thousands, except per share data)
2006 2005 2004
Interest income
Loans $ 14,096 $ 12,898 $ 13,982
Mortgage-backed securities 2,091 2,250 2,485
Investment securities 3,059 2,048 1,495
Interest-bearing deposits and other 442 436 254
-------- -------- --------
Total interest income 19,688 17,632 18,216
Interest expense
Deposits 7,197 5,684 5,899
Borrowings 1,083 1,032 1,248
-------- -------- --------
Total interest expense 8,280 6,716 7,147
-------- -------- --------
Net interest income 11,408 10,916 11,069
Provision for losses on loans 211 430 173
-------- -------- --------
Net interest income after provision for
losses on loans 11,197 10,486 10,896
Other income
Gain on sale of mortgage-backed and investment securities -- -- 16
Gain on sale of loans 67 171 148
Increase in cash surrender value of life insurance 383 260 260
Service fees, charges and other operating 1,327 1,253 1,509
-------- -------- --------
Total other income 1,777 1,684 1,933
General, administrative and other expense
Employee compensation and benefits 6,382 7,230 5,187
Occupancy and equipment 1,907 1,839 1,484
Federal deposit insurance premiums 43 45 47
Franchise taxes 529 577 363
Amortization of core deposit intangible and other 106 87 --
Other operating 1,932 2,096 1,890
-------- -------- --------
Total general, administrative and other expense 10,899 11,874 8,971
-------- -------- --------
Earnings before income taxes 2,075 296 3,858
Federal income taxes (benefits)
Current 290 171 524
Deferred 145 (256) 630
-------- -------- --------
Total federal income taxes (benefits) 435 (85) 1,154
-------- -------- --------
NET EARNINGS $ 1,640 $ 381 $ 2,704
======== ======== ========
Basic earnings per share $ .50 $ .11 $ .72
======== ======== ========
Diluted earnings per share $ .50 $ .11 $ .72
======== ======== ========
The accompanying notes are an integral part of these statements.
53
WAYNE SAVINGS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended March 31, 2006, 2005 and 2004
(In thousands)
2006 2005 2004
Net earnings $ 1,640 $ 381 $ 2,704
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities during the
year, net of taxes (benefits) of $(113), $(655) and $183 (219) (1,271) 367
Reclassification adjustment for realized gains included in
earnings, net of taxes of $5 for the year ended March 31, 2004 -- -- (11)
Minimum pension liability adjustment, net of taxes of
$142 for fiscal 2004 -- -- 275
------- ------- -------
Comprehensive income (loss) $ 1,421 $ (890) $ 3,335
======= ======= =======
Accumulated comprehensive income (loss) $(1,011) $ (792) $ 479
======= ======= =======
The accompanying notes are an integral part of these statements.
54
WAYNE SAVINGS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended March 31, 2006, 2005 and 2004
(Dollars in thousands, except per share data)
Other
compre- Total
Additional Shares Shares Treasury hensive stock-
Common paid-in Retained acquired acquired stock - income holders'
stock capital earnings by ESOP by MRP at cost (loss) equity
Balance at March 31, 2003 $ 389 $ 34,208 $ 11,830 $ (1,612) $ -- $ -- $ (152) $ 44,663
Shares purchased for MRP -- -- -- -- (1,142) -- -- (1,142)
Stock options exercised 2 59 -- -- -- -- -- 61
Amortization of stock benefit plans -- 98 -- 156 -- -- -- 254
Net earnings for the year ended March 31, 2004 -- -- 2,704 -- -- -- -- 2,704
Dividends declared of $.47 per share -- -- (1,807) -- -- -- -- (1,807)
Minimum pension liability adjustment,
net of related tax effects -- -- -- -- -- -- 275 275
Purchase of treasury shares at cost -- -- -- -- -- (1,803) -- (1,803)
Unrealized gains on securities designated as
available for sale, net of related tax effects -- -- -- -- -- -- 356 356
-------- -------- -------- -------- -------- -------- -------- --------
Balance at March 31, 2004 391 34,365 12,727 (1,456) (1,142) (1,803) 479 43,561
Amortization of expense related to ESOP -- 104 -- 152 -- -- -- 256
Acceleration of Management Recognition and
Stock Option Plan expense -- 664 -- -- 1,142 -- -- 1,806
Net earnings for the year ended March 31, 2005 -- -- 381 -- -- -- -- 381
Dividends declared of $.48 per share -- -- (1,737) -- -- -- -- (1,737)
Purchase of treasury shares at cost -- -- -- -- -- (2,797) -- (2,797)
Unrealized losses on securities designated as
available for sale, net of related tax benefits -- -- -- -- -- -- (1,271) (1,271)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at March 31, 2005
391 35,133 11,371 (1,304) -- (4,600) (792) 40,199
Stock options exercised 2 363 -- -- -- -- -- 365
Amortization of expense related to ESOP -- 108 -- 65 -- -- -- 173
Net earnings for the year ended March 31, 2006 -- -- 1,640 -- -- -- -- 1,640
Dividends declared of $.48 per share -- -- (1,617) -- -- -- -- (1,617)
Purchase of treasury shares at cost -- -- -- -- -- (5,025) -- (5,025)
Unrealized losses on securities designated as
available for sale, net of related tax benefits -- -- -- -- -- -- (219) (219)
-------- -------- -------- -------- -------- -------- -------- --------
Balance at March 31, 2006 $ 393 $ 35,604 $ 11,394 $ (1,239) $ -- $ (9,625) $ (1,011) $ 35,516
======== ======== ======== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these statements.
55
WAYNE SAVINGS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended March 31, 2006, 2005 and 2004
(In thousands)
2006 2005 2004
Cash flows provided by (used in) operating activities:
Net earnings for the year $ 1,640 $ 381 $ 2,704
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of premiums and discounts on loans,
investments and mortgage-backed securities, net (622) 1,244 1,409
Amortization of deferred loan origination fees (110) (220) (512)
Depreciation and amortization 645 601 507
Amortization of expense related to ESOP 173 256 254
Acceleration of Management Recognition and Stock Option Plan expense -- 1,806 --
Gain on sale of loans (13) (117) (87)
Gain on sale of mortgage-backed and investment securities -- -- (16)
Proceeds from sale of loans in the secondary market 6,078 6,843 6,285
Loan origination for sale in the secondary market (6,065) (6,017) (6,203)
Provision for losses on loans 211 430 173
Amortization of core deposit intangible and other 106 87 --
Federal Home Loan Bank stock dividends (237) (181) (164)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (142) 72 147
Accrued interest receivable on mortgage-backed securities 18 (44) (20)
Accrued interest receivable on investments and interest-bearing deposits 8 (390) (5)
Prepaid expenses and other assets 182 186 (1,017)
Accrued interest payable 65 (5) (49)
Accounts payable and other liabilities (193) (99) (267)
Federal income taxes
Current 753 (564) (288)
Deferred 145 (256) 630
-------- -------- --------
Net cash flows provided by operating activities 2,642 4,013 3,481
Cash flows provided by (used in) investing activities:
Purchase of investment securities held to maturity -- (93) --
Purchase of investment securities designated as available for sale (11,850) (35,547) (22,067)
Proceeds from maturity of investment securities held to maturity 6,240 2,175 4,735
Proceeds from maturity of investment securities designated
as available for sale 5,188 2,516 22,088
Purchase of mortgage-backed securities designated as available for sale (22,361) (8,018) (55,526)
Principal repayments on mortgage-backed securities held to maturity 818 1,825 5,255
Principal repayments on mortgage-backed securities designated as
available for sale 23,564 33,122 31,908
Proceeds from sale of mortgage-backed securities 2,860 -- 4,373
Loan principal repayments 34,980 52,517 89,107
Loan disbursements (57,050) (50,178) (65,658)
Purchase of office premises and equipment (280) (421) (431)
Purchase of bank-owned life insurance -- -- (940)
Increase in cash surrender value of life insurance (405) (260) (260)
Proceeds from life insurance 1,175 -- --
Proceeds from sale of real estate acquired through foreclosure 163 311 172
Net cash used in the acquisition of Stebbins Bancshares, Inc. -- (1,314) --
-------- -------- --------
Net cash provided by (used in) investing activities (16,958) (3,365) 12,756
-------- -------- --------
Net cash flows provided by (used in) operating and investing
activities balance carried forward (14,316) 648 16,237
-------- -------- --------
56
WAYNE SAVINGS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the years ended March 31, 2006, 2005 and 2004
(In thousands)
2006 2005 2004
Net cash flows provided by (used in) operating and investing
activities balance brought forward $(14,316) $ 648 $ 16,237
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposits 11,984 3,946 (9,101)
Proceeds from Federal Home Loan Bank advances 80,275 15,000 --
Repayments on Federal Home Loan Bank advances (87,525) (5,000) --
Advances by borrowers for taxes and insurance 40 (5) (95)
Dividends paid on common stock (1,617) (1,737) (1,786)
Tax benefits related to stock benefit plans 80 -- 20
Proceeds from exercise of stock options 285 -- 61
Shares acquired by Management Recognition Plan -- -- (1,142)
Purchase of treasury shares - at cost (5,025) (2,797) (1,803)
-------- -------- --------
Net cash flows provided by (used in)
financing activities (1,503) 9,407 (13,846)
-------- -------- --------
Net increase (decrease) in cash and cash equivalents (15,819) 10,055 2,391
Cash and cash equivalents at beginning of year 29,942 19,887 17,496
-------- -------- --------
Cash and cash equivalents at end of year $ 14,123 $ 29,942 $ 19,887
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 325 $ 568 $ 630
======== ======== ========
Interest on deposits and borrowings $ 8,215 $ 6,728 $ 7,196
======== ======== ========
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through
foreclosure $ 412 $ 268 $ 279
======== ======== ========
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ (219) $ (1,271) $ 356
======== ======== ========
Minimum pension liability adjustment, net of related tax effects $ -- $ -- $ 275
======== ======== ========
Recognition of mortgage servicing rights in accordance
with SFAS No. 140 $ 54 $ 54 $ 61
======== ======== ========
Dividends payable $ 401 $ 428 $ 446
======== ======== ========
Stebbins acquisition, net of cash and cash equivalents acquired:
Assets
Securities $ 11,787
Loans, net 12,225
Other 60
Goodwill and other intangibles 2,701
Liabilities assumed
Deposits (24,810)
Other liabilities (649)
--------
Net cash and cash equivalents paid at acquisition $ 1,314
========
The accompanying notes are an integral part of these statements.
57
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2006, 2005 and 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include Wayne Savings Bancshares, Inc.
(the "Company") and its wholly owned subsidiary Wayne Savings Community Bank
("Wayne Savings" or the "Bank"). During fiscal 2004, the Company's Board of
Directors approved a business combination, which was completed in fiscal 2005,
whereby Stebbins Bancshares, Inc., the parent of Stebbins National Bank, was
merged into Wayne Savings Bancshares, Inc. and Stebbins National Bank merged
with and into Wayne Savings Community Bank. The business combination was
accounted for using the purchase method of accounting. Accordingly, the March
31, 2005 consolidated financial statements herein include the accounts of
Stebbins Bancshares from the June 1, 2004 acquisition date through March 31,
2005. Intercompany transactions and balances are eliminated in the consolidated
financial statements. In addition to the Bank, the Company owns a 49% ownership
interest in Oak Tree Title, Inc., a title insurance agency. The Company accounts
for this investment using the equity method.
The Bank conducts a general banking business in north central Ohio, which
consists of attracting deposits from the general public and applying those funds
to the origination of loans for residential, consumer and nonresidential
purposes. The Bank's profitability is significantly dependent on its net
interest income, which is the difference between interest income generated from
interest-earning assets (i.e. loans and investments) and the interest expense
paid on interest-bearing liabilities (i.e. customer deposits and borrowed
funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or received
by the Bank can be significantly influenced by a number of environmental
factors, such as governmental monetary policy, that are outside of management's
control.
The financial information presented herein has been prepared in accordance with
accounting principles generally accepted in the United States of America ("U.S.
GAAP") and general accounting practices within the financial services industry.
In preparing financial statements in accordance with U.S. GAAP, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from such estimates.
The following is a summary of the Company's significant accounting policies,
which with the exception of the policy described in Note A-9, have been
consistently applied in the preparation of the accompanying financial
statements.
1. Investment Securities and Mortgage-Backed Securities
----------------------------------------------------
The Company accounts for investment and mortgage-backed securities in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting
for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires
that investments be categorized as held-to-maturity, trading, or available for
sale. Securities classified as held-to-maturity are carried at cost only if the
Company has the positive intent and ability to hold these securities to
maturity. Trading securities and securities designated as available for sale are
carried at fair value with resulting unrealized gains or losses recorded to
operations or stockholders' equity, respectively. Realized gains or losses on
sales of securities are recognized using the specific identification method.
58
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Loans Receivable
----------------
Loans held in portfolio are stated at the principal amount outstanding, adjusted
for deferred loan origination fees, the allowance for loan losses, and premiums
and discounts on loans purchased and sold. Premiums and discounts on loans
purchased and sold are amortized and accreted to operations using the interest
method over the average life of the underlying loans.
Interest is accrued as earned unless the collectibility of the loan is in doubt.
Uncollectible interest on loans that are contractually past due is charged off,
or an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued, and income is subsequently recognized only to the extent
that cash payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments has returned to normal,
in which case the loan is returned to accrual status.
The Bank recognizes rights to service mortgage loans for others pursuant to SFAS
No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." In accordance with SFAS No. 140, an institution
that acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells those loans with servicing rights
retained must allocate some of the cost of the loans to the mortgage servicing
rights.
The Bank recognized $54,000, $54,000 and $61,000 of pre-tax gains on sales of
loans related to capitalized mortgage servicing rights during the fiscal years
ended March 31, 2006, 2005 and 2004, respectively.
SFAS No. 140 requires that capitalized mortgage servicing rights be assessed for
impairment. Impairment is measured based on fair value. The mortgage servicing
rights recorded by the Bank, calculated in accordance with the provisions of
SFAS No. 140, were segregated into pools for valuation purposes, using as
pooling criteria the loan term and coupon rate. Once pooled, each grouping of
loans was evaluated on a discounted earnings basis to determine the present
value of future earnings that a purchaser could expect to realize from each
portfolio. Earnings were projected from a variety of sources including loan
servicing fees, interest earned on float, net interest earned on escrows,
miscellaneous income and costs to service the loans. The present value of future
earnings is the "economic" value for the pool, i.e., the net realizable present
value to an acquirer of the acquired servicing.
The Bank recorded amortization related to mortgage servicing rights totaling
approximately $28,000, $61,000 and $164,000 for the years ended March 31, 2006,
2005 and 2004, respectively. At March 31, 2006 and 2005, the carrying value of
the Bank's mortgage servicing rights, which approximated fair value, totaled
$311,000 and $285,000, respectively.
Loans held for sale are carried at the lower of cost or market, determined in
the aggregate. In computing cost, deferred loan origination fees are deducted
from the principal balances of the related loans. There were no loans identified
as held for sale at either March 31, 2006 or March 31, 2005.
59
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3. Loan Origination Fees
---------------------
The Bank accounts for loan origination fees in accordance with SFAS No. 91
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases." Pursuant to the provisions
of SFAS No. 91, origination fees received from loans, net of certain direct
origination costs, are deferred and amortized to interest income using the
level-yield method, giving effect to actual loan prepayments. Additionally, SFAS
No. 91 generally limits deferred loan origination costs to the direct costs
attributable to the origination of a loan, i.e. principally actual personnel
costs. Fees received for loan commitments that are expected to be drawn upon,
based on the Bank's experience with similar commitments, are deferred and
amortized over the life of the loan using the level-yield method. Fees for other
loan commitments are deferred and amortized over the loan commitment period on a
straight-line basis.
4. Allowance for Loan Losses
-------------------------
It is the Bank's policy to provide valuation allowances for losses inherent
within the loan portfolio that are both probable and can be reasonably
estimated. When the collection of a loan becomes doubtful, or otherwise
troubled, the Bank records a charge-off equal to the difference between the fair
value of the property securing the loan and the loan's carrying value. In
providing valuation allowances, costs of holding real estate, including the cost
of capital, are considered. Major loans (including development projects) and
major lending areas are reviewed periodically to determine potential problems at
an early date. The allowance for loan losses is increased by charges to earnings
and decreased by charge-offs (net of recoveries).
The Bank accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." This Statement requires that
impaired loans be measured based upon the present value of expected future cash
flows discounted at the loan's effective interest rate or, as an alternative, at
the loan's observable market price or fair value of the collateral.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
applying the provisions of SFAS No. 114, the Bank considers investment in one-
to four-family residential loans and consumer installment loans to be
homogeneous and therefore excluded from separate identification for evaluation
of impairment. With respect to the Bank's investment in multi-family, commercial
and nonresidential loans, and the evaluation of impairment thereof, such loans
are collateral dependent and, as a result, are carried as a practical expedient
at the lower of cost or fair value of collateral.
It is the Bank's policy to charge off unsecured credits that are more than
ninety days delinquent. Similarly, collateral dependent loans are evaluated for
impairment at the time it becomes possible that the Bank will not collect all
contractual amounts due. Generally, this analysis is performed before a loan
becomes ninety days delinquent.
60
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
4. Allowance for Loan Losses (continued)
-------------------------
Information with respect to loans defined as impaired under SFAS No. 114 is
summarized below:
March 31,
2006 2005 2004
Investment in impaired loans $ -- $ -- $ --
Impaired loans with no measurement of loss -- -- --
Impaired loans with measurement of loss -- -- --
Allocated allowance for loan losses -- -- --
Average impaired loans -- -- 900
Charge-off of principal related to impaired loans -- -- --
During the time a loan is deemed impaired, the Bank records interest income
using the cash method of accounting. There was no interest income recorded on
impaired loans in fiscal 2006 or 2005. Interest income recorded on impaired
loans using the cash recovery method totaled approximately $249,000 for the
fiscal year ended March 31, 2004.
5. Office Premises and Equipment
-----------------------------
Office premises and equipment are carried at cost and include expenditures which
extend the useful lives of existing assets. Maintenance, repairs and minor
renewals are expensed as incurred. For financial reporting, depreciation and
amortization are provided on the straight-line method over the shorter of the
remaining useful lives of the assets, or the lease term, estimated to be twenty
to fifty-five years for buildings and improvements, five to ten years for
furniture and equipment, ten to twenty years for leasehold improvements, and
forty years for safe deposit boxes. An accelerated method is used for tax
reporting purposes.
6. Real Estate Acquired Through Foreclosure
----------------------------------------
Real estate acquired through foreclosure is carried at the lower of the loan's
unpaid principal balance (cost) or fair value less estimated selling expenses at
the date of acquisition. Real estate loss provisions are recorded if the
properties' fair value subsequently declines below the value determined at the
recording date. In determining the lower of cost or fair value at acquisition,
costs relating to development and improvement of property are capitalized. Costs
relating to holding real estate acquired through foreclosure, net of rental
income, are charged against earnings as incurred.
7. Federal Income Taxes
--------------------
The Company accounts for federal income taxes pursuant to SFAS No. 109
"Accounting for Income Taxes." In accordance with SFAS No. 109, a deferred tax
liability or deferred tax asset is computed by applying the current statutory
tax rates to net taxable or deductible temporary differences between the tax
basis of an asset or liability and its reported amount in the financial
statements that will result in net taxable or deductible amounts in future
periods. Deferred tax assets are recorded only to the extent that the amount of
net deductible temporary differences or carryforward attributes may be utilized
against current period earnings, carried back against prior years' earnings,
offset against taxable temporary
61
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
7. Federal Income Taxes (continued)
--------------------
differences reversing in future periods, or utilized to the extent of
management's estimate of future taxable income. A valuation allowance is
provided for deferred tax assets to the extent that the value of net deductible
temporary differences and carryforward attributes exceeds management's estimates
of taxes payable on future taxable income. Deferred tax liabilities are provided
on the total amount of net temporary differences taxable in the future.
The Company's principal temporary differences between pretax financial income
and taxable income result primarily from the different methods of accounting for
deferred loan origination fees, Federal Home Loan Bank stock dividends, certain
components of retirement expense, general loan loss allowances, percentage of
earnings bad debt deductions and mortgage servicing rights. A temporary
difference is also recognized for depreciation expense computed using
accelerated methods for federal income tax purposes.
8. Earnings Per Share
------------------
Basic earnings per common share is computed based upon the weighted-average
number of common shares outstanding during the year, reduced by unallocated
shares in the Employee Stock Ownership Plan ("ESOP") totaling 118,717, 129,109
and 145,209 shares for the fiscal years ended March 31, 2006, 2005 and 2004.
Diluted earnings per common share include the dilutive effects of additional
potential common shares issuable under the Company's Stock Option Plan. For each
of the years presented, there were no shares excluded from the diluted earnings
per share calculation because the related options were anti-dilutive. The
computations are as follows:
2006 2005 2004
Weighted-average common shares outstanding (basic) 3,296,674 3,571,736 3,738,686
Dilutive effect of assumed exercise of stock options 17,222 31,354 12,499
--------- --------- ---------
Weighted-average common shares outstanding (diluted) 3,313,896 3,603,090 3,751,185
========= ========= =========
9. Stock Option and Benefit Plans
------------------------------
The Company has a 1993 incentive Stock Option Plan that provided for the
issuance of 196,390 adjusted shares of common stock. In fiscal 2004, the Company
adopted a new Stock Option Plan that provided for the issuance of 204,081
options of authorized common stock.
62
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. Stock Option and Benefit Plans (continued)
------------------------------
In the fourth quarter of fiscal 2005, the Company adopted the provisions of SFAS
No. 123(R), "Share Based Payment." SFAS No.123(R) requires the recognition of
compensation related to stock option awards based on the fair value of the
option award on the grant date. Compensation cost is then recognized over the
vesting period. Subsequent to adoption of SFAS No. 123(R), the Company modified
163,265 stock option awards under the 2003 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. This change in measuring
compensation cost, integrated with the incremental expense of accelerating the
Management Recognition Plan resulted in pre-tax charge of $664,000 and an
after-tax charge to earnings of $450,000, or $.12 per diluted share in fiscal
2005. During fiscal 2006, the Company recognized tax benefits on exercised
options totaling $80,000.
The Company accounted for its stock option plans in fiscal 2004 and prior
pursuant to SFAS No. 123 "Accounting for Stock Based Compensation," which also
provided for a fair value-based method for measuring compensation cost at the
grant date based on the fair value of the award at the grant date. Compensation
was then recognized over the service period, generally defined as the vesting
period. Alternatively, SFAS No. 123 permitted companies to continue the account
for stock options using APB Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities that continued to account for stock options using APB
Opinion No. 25 were required to make pro forma disclosures of net earnings and
earnings per share, as if the fair value-based method of accounting defined in
SFAS No. 123 had been applied. Wayne Savings had continued to account for stock
option expense pursuant to APB Opinion No. 25.
In accordance with APB Opinion No. 25, no compensation cost has been recognized
for the plans in fiscal 2004. Had compensation cost for the Company's stock
option plans been determined based on the fair value at the grant dates for
awards under the plans consistent with the accounting method utilized in SFAS
No. 123(R), the Company's net earnings and earnings per share would have been
reported in the manner presented below:
2004
Net earnings $ 2,704
Stock-based compensation, net of tax (106)
---------
Pro-forma net earnings $ 2,598
=========
Earnings per share
Basic $ .72
Stock-based compensation, net of tax (.03)
---------
Pro-forma earnings per share $ .69
=========
Diluted $ .72
Stock-based compensation, net of tax (.03)
---------
Pro-forma earnings per share $ .69
=========
63
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. Stock Option and Benefit Plans (continued)
------------------------------
The following information applies to options outstanding at March 31, 2006:
Number outstanding 179,148
Range of exercise prices $11.67 - $13.95
Weighted-average exercise price $13.92
Weighted-average remaining contractual life 8.00
At March 31, 2006, all of the stock options are subject to exercise at the
discretion of the grantees with 2,567 options expiring in fiscal 2013, and
176,581 options expiring in fiscal 2014.
A summary of the status of the Company's stock option plans as of March 31,
2006, 2005 and 2004, and changes during the years ending on those dates is
presented below:
2006 2005 2004
Exercise Exercise Exercise
Shares price Shares price Shares price
Outstanding at beginning of year 214,204 $ 13.84 214,204 $ 13.84 28,666 $ 6.26
Granted -- -- 163,265 13.95 204,081 13.95
Exercised (27,556) 13.32 -- -- (18,543) 3.31
Forfeited (7,500) (13.95) (163,265) (13.95) -- --
-------- -------- -------- -------- -------- --------
Outstanding at end of year 179,148 $ 13.92 214,204 $ 13.84 214,204 $ 13.84
======== ======== ======== ======== ======== ========
Options exercisable at year-end 179,148 $ 13.92 214,204 $ 13.84 10,123 $ 11.67
======== ======== ======== ======== ======== ========
Fair value of options granted $ -- $ 4.07 $ 3.93
======== ======== ========
The fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model. The following assumptions were used for
grants in each of the respective years:
2005 2004
Dividend yield 4.5% 3.3%
Expected volatility 27.3 28.8
Expected life in years 9 10
64
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
9. Stock Option and Benefit Plans (continued)
------------------------------
In connection with conversion to stock form, the Company implemented a
Management Recognition Plan and an ESOP. The Management Recognition Plan granted
share awards to certain members of management and the directorate. The value of
such awards totaled $1.1 million at acquisition and was originally scheduled to
vest over a five year period. The Company recognized scheduled expense under the
plan of $231,000 and $173,000 in fiscal 2005 and 2004, and accelerated the
vesting of the remaining awards in fiscal 2005.
Additionally, the Company initiated an ESOP in fiscal 2003 that provided for the
purchase of 163,265 shares in the Company's conversion offering. The Company
recognized expense under the ESOP of $161,000, $256,000 and $206,000 in fiscal
2006, 2005 and 2004, allocating 11,358, 15,695 and 14,645 shares, respectively.
At March 31,2006, 118,717 ESOP shares remain unallocated.
10. Cash and Cash Equivalents
-------------------------
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks, federal funds sold, and interest-bearing deposits due from other
financial institutions with original maturities of less than three months.
11. Fair Value of Financial Instruments
-----------------------------------
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of the fair value of financial instruments, both assets and
liabilities whether or not recognized in the consolidated statements of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair values
are based on estimates using present value and other valuation methods.
The methods used are greatly affected by the assumptions applied, including the
discount rate and estimates of future cash flows. Therefore, the fair values
presented may not represent amounts that could be realized in an exchange for
certain financial instruments.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments at March 31, 2006 and 2005:
Cash and cash equivalents: The carrying amounts presented in the
---------------------------
consolidated statements of financial condition for cash and cash
equivalents are deemed to approximate fair value.
65
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
11. Fair Value of Financial Instruments (continued)
-----------------------------------
Investment and mortgage-backed securities: For investment and
-----------------------------------------------
mortgage-backed securities, fair value is deemed to equal the quoted
market price.
Loans receivable: The loan portfolio has been segregated into
------------------
categories with similar characteristics, such as one- to four-family
residential, multi-family residential and nonresidential real estate,
and commercial. These loan categories were further delineated into
fixed-rate and adjustable-rate loans. The fair values for the resultant
loan categories were computed via discounted cash flow analysis, using
current interest rates offered for loans with similar terms to
borrowers of similar credit quality. For loans on deposit accounts and
consumer and other loans, fair values were deemed to equal the historic
carrying values. The historical carrying amount of accrued interest on
loans is deemed to approximate fair value.
Federal Home Loan Bank stock: The carrying amount presented in the
-----------------------------
consolidated statements of financial condition is deemed to approximate
fair value.
Deposits: The fair value of NOW accounts, passbook and club accounts,
--------
money market deposits, commercial repurchase accounts and advances by
borrowers is deemed to approximate the amount payable on demand. Fair
values for fixed-rate certificates of deposit have been estimated using
a discounted cash flow calculation using the interest rates currently
offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank: The fair value of these advances
------------------------------------
is estimated using the rates currently offered for similar advances of
similar remaining maturities or, when available, quoted market prices.
Commitments to extend credit: For fixed-rate and adjustable-rate loan
----------------------------
commitments, the fair value estimate considers the difference between
current levels of interest rates and committed rates. At March 31, 2006
and 2005, the fair value of loan commitments was not material.
66
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
11. Fair Value of Financial Instruments (continued)
-----------------------------------
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Company's financial instruments at March 31 are as follows:
2006 2005
Carrying Fair Carrying Fair
value value value value
(In thousands)
Financial assets
Cash and cash equivalents $ 14,123 $ 14,123 $ 29,942 $ 29,942
Investment securities 73,307 73,301 72,856 72,945
Mortgage-backed securities 55,731 55,737 60,352 60,371
Loans receivable 235,312 232,733 213,627 214,238
Federal Home Loan Bank stock 4,623 4,623 4,386 4,386
-------- -------- -------- --------
$383,096 $380,517 $381,163 $381,882
======== ======== ======== ========
Financial liabilities
Deposits $332,570 $319,617 $320,586 $318,534
Advances from the Federal Home
Loan Bank 32,750 32,225 40,000 39,533
Advances by borrowers for taxes
and insurance 521 521 481 481
-------- -------- -------- --------
$365,841 $352,363 $361,067 $358,548
======== ======== ======== ========
12. Investment in Federal Home Loan Bank Stock
------------------------------------------
The Company is required as a condition of membership in the Federal Home Loan
Bank of Cincinnati (FHLB) to maintain an investment in FHLB common stock. The
stock is redeemable at par and, therefore, its cost is equivalent to its
redemption value. The Company's ability to redeem FHLB shares is dependent on
the redemption practices of the FHLB of Cincinnati. At March 31, 2006, the FHLB
of Cincinnati placed no restrictions on redemption of shares in excess of a
member's required investment in the stock.
13. Advertising
-----------
Advertising costs are expensed when incurred. The Company's advertising expense
totaled $146,000, $163,000 and $132,000 for the fiscal years ended March 31,
2006, 2005 and 2004, respectively.
67
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
14. Goodwill and Other Intangible Assets
------------------------------------
In connection with the Stebbins acquisition in fiscal 2005, the Company
initially recorded goodwill and other intangible assets totaling $2.7 million.
The composition of these assets at March 31, 2006 and 2005 is as follows:
March 31,
2006 2005
(In thousands)
Goodwill $1,719 $1,719
Core deposit intangible, net 789 895
------ ------
Total $2,508 $2,614
====== ======
The Company recorded amortization relative to the core deposit intangible
totaling $106,000 and $87,000 for the fiscal years ended March 31, 2006 and
2005. Such amortization is derived using the interest method over a twelve year
estimated useful life. Pursuant to SFAS No. 142, the Company is required to
annually test goodwill and other intangible assets for impairment. The Company's
testing of goodwill and other intangible assets in the current fiscal year
indicated there was no impairment in the carrying value of these assets.
During fiscal 2006, the Company reclassified goodwill and other intangible
assets as a separate financial statement line item, giving effect therein to the
tax effects related to the acquisition.
15. Reclassifications
-----------------
Certain prior year amounts have been reclassified to conform to the March 31,
2006 consolidated financial statement presentation.
68
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES
Carrying values and estimated fair values of investment securities at March 31
are summarized as follows:
March 31, 2006
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Held to maturity:
Corporate bonds and notes $ 4,992 $ 2 $ 19 $ 4,975
U.S. Government and agency
obligations 641 1 -- 642
Municipal obligations 169 10 -- 179
---------- ---------- ---------- ----------
$ 5,802 $ 13 $ 19 $ 5,796
========== ========== ========== ==========
Available for sale:
Corporate bonds and notes $ 1,006 $ 18 $ -- $ 1,024
U.S. Government and agency
obligations 56,122 1 962 55,161
Municipal obligations 11,183 180 43 11,320
---------- ---------- ---------- ----------
$ 68,311 $ 199 $ 1,005 $ 67,505
========== ========== ========== ==========
March 31, 2005
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Held to maturity:
Corporate bonds and notes $ 10,021 $ 124 $ 54 $ 10,091
U.S. Government and agency
obligations 1,796 7 -- 1,803
Municipal obligations 195 12 -- 207
---------- ---------- ---------- ----------
$ 12,012 $ 143 $ 54 $ 12,101
========== ========== ========== ==========
Available for sale:
Corporate bonds and notes $ 1,011 $ 54 $- $ 1,065
U.S. Government and agency
obligations 50,209 1 767 49,443
Municipal obligations 10,343 86 93 10,336
---------- ---------- ---------- ----------
$ 61,563 $ 141 $ 860 $ 60,844
========== ========== ========== ==========
69
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
The Company has pledged $14.8 million and $7.8 million in investment securities
to secure public deposits and commercial repurchase agreements at March 31, 2006
and 2005, respectively.
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at March 31, 2006 and 2005,
including those designated as available for sale, are summarized as follows:
2006
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Held to maturity:
Federal Home Loan Mortgage
Corporation participation certificates $ 381 $ 4 $ -- $ 385
Government National Mortgage
Association participation certificates 609 1 6 604
Federal National Mortgage
Association participation certificates 809 7 -- 816
---------- ---------- ---------- ----------
$ 1,799 $ 12 $ 6 $ 1,805
========== ========== ========== ==========
Available for sale:
Federal Home Loan Mortgage
Corporation participation certificates $ 21,746 $ 24 $ 271 $ 21,499
Government National Mortgage
Association participation certificates 1,835 -- 40 1,795
Federal National Mortgage
Association participation certificates 27,105 69 407 26,767
Private Issue Mortgage Association
participation certificates 3,974 -- 103 3,871
---------- ---------- ---------- ----------
$ 54,660 $ 93 $ 821 $ 53,932
========== ========== ========== ==========
70
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
2005
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Held to maturity:
Federal Home Loan Mortgage
Corporation participation certificates $ 604 $ 9 $ -- $ 613
Government National Mortgage
Association participation certificates 1,014 2 5 1,011
Federal National Mortgage
Association participation certificates 1,010 13 -- 1,023
---------- ---------- ---------- ----------
$ 2,628 $ 24 $ 5 $ 2,647
========== ========== ========== ==========
Available for sale:
Federal Home Loan Mortgage
Corporation participation certificates $ 23,043 $ 55 $ 265 $ 22,833
Government National Mortgage
Association participation certificates 2,474 3 22 2,455
Federal National Mortgage
Association participation certificates 30,686 92 334 30,444
Private Issue Mortgage Association
participation certificates 2,001 -- 9 1,992
---------- ---------- ---------- ----------
$ 58,204 $ 150 $ 630 $ 57,724
========== ========== ========== ==========
71
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost of investment and mortgage-backed securities, including those
designated as available for sale, at March 31, 2006 and 2005, by contractual
terms to maturity, are shown below. Expected maturities will differ from
contractual maturities because borrowers may generally prepay obligations
without prepayment penalties.
March 31,
2006 2005
Estimated Estimated
Amortized fair Amortized fair
cost value cost value
(In thousands)
Held to maturity:
Due within one year or less $ 4,992 $ 4,975 $ 6,032 $ 6,121
Due in one to five years -- -- 4,989 4,976
Due in five to ten years 169 179 194 207
Due after ten years 641 642 797 797
---------- ---------- ---------- ----------
5,802 5,796 12,012 12,101
Mortgage-backed securities 1,799 1,805 2,628 2,647
---------- ---------- ---------- ----------
$ 7,601 $ 7,601 $ 14,640 $ 14,748
========== ========== ========== ==========
Available for sale:
Due within one year or less $ 17,643 $ 17,475 $ 3,997 $ 3,974
Due in one to five years 32,537 31,837 45,567 44,890
Due in five to ten years 9,287 9,171 992 980
Due after ten years 8,844 9,022 11,007 11,000
---------- ---------- ---------- ----------
68,311 67,505 61,563 60,844
Mortgage-backed securities 54,660 53,932 58,204 57,724
---------- ---------- ---------- ----------
$ 122,971 $ 121,437 $ 119,767 $ 118,568
========== ========== ========== ==========
Proceeds from the sale of mortgage-backed securities during the year ended March
31, 2005, totaled $2.9 million resulting in no gross realized gain or loss.
Proceeds from the sales of mortgage-backed securities during the year ended
March 31, 2004, totaled $4.4 million resulting in gross realized gains of
$16,000.
72
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
The table below indicates the length of time individual securities have been in
a continuous unrealized loss position at March 31, 2006 and 2005:
March 31, 2006
Less than 12 months 12 months or longer Total
Estimated Estimated Estimated
Description of Number of fair Unrealized Number of fair Unrealized Number of fair Unrealized
securities investments value losses investments value losses investments value losses
(Dollars in thousands)
Municipal obligations 5 $ 3,323 $ 43 -- $ -- $ -- 5 $ 3,323 $ 43
U.S. Government and
agency obligations 20 22,103 273 28 31,395 689 48 53,498 962
Corporate bonds
and notes 1 2,487 19 -- -- -- 1 2,487 19
Mortgage-backed
securities 23 22,735 256 29 21,211 571 52 43,946 827
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total temporarily
impaired securities 49 $ 50,648 $ 591 57 $ 52,606 $ 1,260 106 $ 103,254 $ 1,851
========= ========= ========= ========= ========= ========= ========= ========= =========
March 31, 2005
Less than 12 months 12 months or longer Total
Estimated Estimated Estimated
Description of Number of fair Unrealized Number of fair Unrealized Number of fair Unrealized
securities investments value losses investments value losses investments value losses
Municipal obligations 5 $ 3,339 $ 45 1 $ 921 $ 48 6 $ 4,260 $ 93
U.S. Government and
agency obligations 43 43,412 717 2 1,948 50 45 45,360 767
Corporate bonds
and notes 1 2,466 54 -- -- -- 1 2,466 54
Mortgage-backed
securities 29 30,357 356 13 10,473 279 42 40,830 635
--------- --------- --------- --------- --------- --------- --------- --------- ---------
Total temporarily
impaired securities 78 $ 79,574 $ 1,172 16 $ 13,342 $ 377 94 $ 92,916 $ 1,549
========= ========= ========= ========= ========= ========= ========= ========= =========
Management has the intent and ability to hold these securities for the
foreseeable future and the decline in the fair value is primarily due to an
increase in market interest rates. The fair values are expected to recover as
securities approach the respective maturity dates.
73
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at March 31 is as follows:
2006 2005
(In thousands)
One- to four-family residential $149,134 $157,658
Multi-family residential 7,930 7,872
Construction 4,675 4,053
Nonresidential real estate and land 50,778 29,187
Commercial 21,550 14,075
Consumer and other 4,901 4,306
-------- --------
238,968 217,151
Less:
Undisbursed portion of loans in process 1,729 1,638
Deferred loan origination fees 443 512
Allowance for loan losses 1,484 1,374
-------- --------
$235,312 $213,627
======== ========
The Bank's lending efforts have historically focused on one- to four-family
residential and multi-family residential real estate loans, which comprise
approximately $160.0 million, or 68%, of the total loan portfolio at March 31,
2006, and $167.9 million, or 79%, of the total loan portfolio at March 31, 2005.
Generally, such loans have been underwritten on the basis of no more than an 80%
loan-to-value ratio, which has historically provided the Company with adequate
collateral coverage in the event of default. Nevertheless, the Bank, as with any
lending institution, is subject to the risk that real estate values could
deteriorate in the primary lending area of north central Ohio, thereby impairing
collateral values. However, management is of the belief that residential real
estate values in the Company's primary lending area are presently stable.
As discussed previously, Wayne Savings has sold whole loans and participating
interests in loans in the secondary market, retaining servicing on the loans
sold. Loans sold and serviced for others totaled approximately $34.4 million,
$34.0 million and $35.3 million at March 31, 2006, 2005 and 2004, respectively.
In the normal course of business, the Bank has made loans to directors, officers
and their related business interests. Related party loans are made on the same
terms that are widely available to other employees, as long as the director or
executive officer is not given preferential treatment compared to other
participating employees. The aggregate dollar amount of loans outstanding to
directors, officers and their related business interests totaled approximately
$2.8 million, $2.8 million and $2.7 million at March 31, 2006, 2005 and 2004,
respectively.
74
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows for the
years ended March 31:
2006 2005 2004
(In thousands)
Balance at beginning of year $ 1,374 $ 815 $ 678
Provision for losses on loans 211 430 173
Stebbins acquisition -- 230 --
Charge-offs of loans (158) (126) (65)
Recovery of loans previously charged off 57 25 29
------- ------- -------
Balance at end of year $ 1,484 $ 1,374 $ 815
======= ======= =======
As of March 31, 2006, the Bank's allowance for loan losses was comprised solely
of a general loan loss allowance, which is includible as a component of
regulatory risk-based capital.
Non-accrual and nonperforming loans totaled approximately $772,000 and $906,000
at March 31, 2006 and 2005, respectively.
During the years ended March 31, 2006, 2005 and 2004, interest income of
approximately $44,000, $40,000 and $37,000, respectively, would have been
recognized had non-accrual loans been performing in accordance with contractual
terms.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment are comprised of the following at March 31:
2006 2005
(In thousands)
Land and improvements $ 1,654 $ 1,654
Office buildings and improvements 7,310 7,294
Furniture, fixtures and equipment 4,038 3,776
Leasehold improvements 356 356
------- -------
13,358 13,080
Less accumulated depreciation and amortization 4,801 4,158
------- -------
$ 8,557 $ 8,922
======= =======
75
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE F - DEPOSITS
Deposits consist of the following major classifications at March 31:
Deposit type and weighted-average
interest rate 2006 2005
(In thousands)
NOW accounts
2006 - 0.33% $ 56,791
2005 - 0.43% $ 53,060
Savings accounts
2006 - 0.58% 61,339
2005 - 0.74% 82,184
Money market investor
2006 - 2.09% 20,656
2005 - 1.34% 18,097
Commercial repurchase agreements
2006 -3.76% 5,704 --
-------- --------
Total demand, transaction and
Savings account deposits 144,490 153,341
Certificates of deposit
Original maturities of:
Less than 12 months
2006 - 4.05% 61,814
2005 - 1.99% 42,483
12 to 24 months
2006 - 2.38% 19,181
2005 - 1.97% 24,438
25 to 36 months
2006 - 3.41% 18,541
2005 - 3.02% 16,039
More than 36 months
2006 - 4.44% 53,641
2005 - 4.39% 53,183
Jumbo
2006 - 4.34% 34,903
2005 - 3.24% 31,102
-------- --------
Total certificates of deposit 188,080 167,245
-------- --------
Total deposit accounts $332,570 $320,586
======== ========
At March 31, 2006 and 2005, the Bank had certificates of deposit with balances
in excess of $100,000 totaling $37.8 million and $34.4 million, respectively.
76
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE F - DEPOSITS (continued)
Interest expense on deposits for the years ended March 31 is summarized as
follows:
2006 2005 2004
Savings accounts $ 464 $ 653 $ 688
NOW and money market deposit accounts 527 383 269
Commercial repurchase agreements 148 -- --
Certificates of deposit 6,058 4,648 4,942
------ ------ ------
$7,197 $5,684 $5,899
====== ====== ======
Maturities of outstanding certificates of deposit at March 31 are summarized
as follows:
2006 2005
(In thousands)
Maturing year ending March 31,
2006 $ -- $ 91,507
2007 129,966 38,083
2008 34,454 18,277
2009 11,439 9,056
2010 10,370 9,333
2011 1,271 289
2012 and thereafter 580 700
---------- ---------
$ 188,080 $ 167,245
========== =========
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank were collateralized at March 31, 2006
and 2005 by pledges of certain residential mortgage loans totaling $40.9 million
and $50.0 million, respectively, and the Bank's investment in Federal Home Loan
Bank stock, are summarized as follows:
Maturing
year ending
Interest rate range March 31, 2006 2005
(Dollars in thousands)
Floating rate - 2.95% 2006 $ -- $15,000
3.13% - 3.36% 2007 15,250 7,500
3.51% - 3.61% 2008 5,000 5,000
4.01% 2009 2,500 2,500
4.34% 2010 2,500 2,500
4.60% 2011 2,500 2,500
4.77% - 4.87% 2012 and thereafter 5,000 5,000
-------- -------
$ 32,750 $40,000
======== =======
Weighted-average interest rate 4.19% 3.59%
======== =======
77
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE H - FEDERAL INCOME TAXES
The provision for federal income taxes (benefits) at the 34% statutory composite
tax rate is as follows:
2006 2005 2004
(In thousands)
Federal income taxes computed at
expected 34% statutory rate $ 706 $ 101 $ 1,312
Cash surrender value of life insurance (130) (88) (88)
Tax-exempt obligations, net (159) (129) (80)
Other 18 31 10
------- ------- -------
Federal income tax provision (benefit)
per consolidated financial statements $ 435 $ (85) $ 1,154
======= ======= =======
The composition of the Corporation's net deferred tax liability at March 31 is
as follows:
Taxes (payable) refundable on temporary 2006 2005
differences at statutory rate: (In thousands)
Deferred tax assets:
Deferred loan origination fees $ 151 $ 174
General loan loss allowance 516 487
Unrealized losses on securities available for sale 522 409
Reserve for uncollected interest 16 59
Benefit plan expense 128 166
Other 10 38
------- -------
Total deferred tax assets 1,343 1,333
Deferred tax liabilities:
Prepaid pension (187) (306)
Federal Home Loan Bank stock dividends (1,080) (1,000)
Book/tax depreciation differences (312) (257)
Financed loan fees (109) (90)
Bad debt deduction -- (16)
Mortgage servicing rights (106) (97)
Purchase price adjustments - net (214) (200)
------- -------
Total deferred tax liabilities (2,008) (1,966)
------- -------
Net deferred tax liability $ (665) $ (633)
======= =======
78
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE H - FEDERAL INCOME TAXES (continued)
Prior to fiscal 1997, Wayne Savings was allowed a special bad debt deduction
based on a percentage of earnings, generally limited to 8% of otherwise taxable
income and subject to certain limitations based on aggregate loans and deposit
account balances at the end of the year. This cumulative percentage of earnings
bad debt deduction totaled approximately $2.7 million as of March 31, 2006. If
the amounts that qualified as deductions for federal income taxes are later used
for purposes other than bad debt losses, including distributions in liquidation,
such distributions will be subject to federal income taxes at the then current
corporate income tax rate. The amount of unrecognized deferred tax liability
relating to the cumulative bad debt deduction was approximately $918,000 at
March 31, 2006.
NOTE I - COMMITMENTS
The Company is a party to financial instruments with off balance-sheet risk in
the normal course of business to meet the financing needs of its customers,
including commitments to extend credit. Such commitments involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amount
recognized in the consolidated statements of financial condition. The contract
or notional amounts of the commitments reflect the extent of the Company 's
involvement in such financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations
as those utilized for on-balance-sheet instruments.
At March 31, 2006, the Company had total outstanding commitments of
approximately $1.6 million to originate loans at rates ranging from 5.875% to
6.50%. The Bank also had loans in process of $1.7 million at March 31, 2006,
consisting entirely of one- to four-family loans. The Company had unused lines
of credit outstanding under home equity loans of $18.4 million at March 31,
2006. The Company also had $306,000 unused lines of credit outstanding under
overdraft lines at March 31, 2006. Additionally, the Company had unused lines of
credit on commercial loans of $10.6 million at March 31, 2006 and 2005, and
outstanding letters of credit of $913,000 at March 31, 2006.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash
79
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE I - COMMITMENTS (continued)
requirements. Management believes that all disbursements for commitments will be
funded via normal cash flow from operations and existing excess liquidity. The
Company evaluates each customer's creditworthiness on a case-by-case basis. The
amount of collateral obtained, if it is deemed necessary by the Company upon
extension of credit, is based on management's credit evaluation of the
counterparty. Collateral on loans may vary but the preponderance of loans
granted generally includes a mortgage interest in real estate as security.
The Company leases certain branch banking facilities under operating leases. The
minimum annual lease payments over the initial lease term are as follows:
Fiscal year ended (In thousands)
2007 $ 85
2008 86
2009 86
2010 59
2011 63
----
Total $379
====
The Company incurred rental expense under operating leases totaling
approximately $71,000, $70,000 and $68,000 for the fiscal years ended March 31,
2006, 2005 and 2004, respectively.
There were no other material commitments or contingencies at March 31, 2006.
NOTE J - REGULATORY CAPITAL
The Bank is subject to minimum regulatory capital standards promulgated by the
OTS. Failure to meet minimum capital requirements can initiate certain mandatory
and possibly additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the Bank must meet specific capital guidelines that involve
quantitative measures of the Bank's assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Bank's capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk-weightings and other factors.
The minimum capital standards of the OTS generally require the maintenance of
regulatory capital sufficient to meet each of three tests, hereinafter described
as the tangible capital requirement, the core capital requirement and the
risk-based capital requirement. The tangible capital requirement provides for
minimum tangible capital (defined as stockholders' equity less all intangible
assets) equal to 1.5% of adjusted total assets. The core capital requirement
provides for minimum core capital (tangible capital plus certain forms of
supervisory goodwill and other qualifying intangible assets) generally equal to
4.0% of adjusted total assets except for those associations with the highest
examination rating and acceptable levels of risk. The risk-based capital
requirement provides for the maintenance of core capital plus general loss
allowances equal to 8.0% of risk-weighted assets. In computing risk-weighted
assets, the Bank multiplies the value of each asset on their statement of
financial condition by a defined risk-weighting factor, e.g. one- to four-family
residential loans carry a risk-weighted factor of 50%.
80
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE J - REGULATORY CAPITAL (continued)
As of March 31, 2006, management believes that the Bank met all capital adequacy
requirements to which it was subject. As of the most recent examination date,
management was advised by the OTS that the Bank met the definition of a "well
capitalized" institution.
The Bank's management believes that, under the current regulatory capital
regulations, the Bank will continue to maintain its well-capitalized
classification in the foreseeable future. However, events beyond the control of
the Bank, such as increased interest rates or a downturn in the economy in the
Bank's market area, could adversely affect future earnings and, consequently,
the ability to meet future minimum regulatory capital requirements.
The Bank is subject to regulations imposed by the OTS regarding the amount of
capital distributions payable to the Company. Generally, the Bank's payment of
dividends is limited, without prior OTS approval, to net earnings for the
current calendar year, plus the two preceding years, less capital distributions
paid over the comparable time period. Insured institutions are required to file
an application with the OTS for capital distributions in excess of the
limitation. In fiscal 2006, the Bank received capital distributions in excess of
the last two year's earnings. As a result, the Bank will have to file
applications for future capital distributions. Management does not believe
future dividend payments will be unreasonably restricted given the Bank's
current well-capitalized status.
The following tables sets forth Wayne Savings' tangible, core and risk-based
capital rates at March 31, 2006 and 2005.
As of March 31, 2006
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
---------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Tangible capital $33,078 8.2% =>$ 6,046 =>1.5% =>$20,152 => 5.0%
Core capital $33,078 8.2% =>$16,122 =>4.0% =>$24,183 => 6.0%
Risk-based capital $34,562 15.0% =>$18,410 =>8.0% =>$23,010 =>10.0%
As of March 31, 2005
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
---------------- -------------------- ---------------------
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Tangible capital $36,471 9.1% =>$ 6,017 =>1.5% =>$20,057 => 5.0%
Core capital $36,471 9.1% =>$16,046 =>4.0% =>$24,069 => 6.0%
Risk-based capital $37,845 17.6% =>$17,200 =>8.0% =>$21,500 =>10.0%
81
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE K - RETIREMENT PLANS
The Company had a non-contributory insured defined benefit pension plan (the
"Plan") covering all eligible employees. The Plan benefits were based on
years-of-service and other factors . In fiscal 2004, Wayne Savings froze its
defined benefit pension plan. Also in fiscal 2004, management changed the Plan's
investment structure from life insurance to stocks and bonds. At March 31, 2006,
Plan assets consisted of 2% cash, 61% stocks and 37% bonds. The Company's intent
is to terminate the Plan at some point in the future when financial
considerations are more favorable. Contributions are intended to provide only
for benefits accrued for service to the plan freeze date.
Information with respect to the Plan for the years ended March 31, 2006, 2005
and 2004 is as follows:
The changes in benefit obligations are computed as follows:
2006 2005 2004
(In thousands)
Projected benefit obligation at beginning of year $ 2,323 $ 2,381 $ 2,002
Service cost -- -- 55
Interest cost 136 152 137
Actuarial (gain) loss (236) 339 351
Benefits paid (1,216) (549) (164)
------- ------- -------
Projected benefit obligation at end of year $ 1,007 $ 2,323 $ 2,381
======= ======= =======
The changes in the Plan's assets are computed as follows:
2006 2005 2004
(In thousands)
Fair value of plan assets at beginning of year $ 2,323 $ 2,704 $ 1,499
Actual return on plan assets 149 155 145
Employer contributions -- 13 1,224
Benefits paid (1,216) (549) (164)
------- ------- -------
Fair value of plan assets at end of year $ 1,256 $ 2,323 $ 2,704
======= ======= =======
The following table sets forth the Plan's funded status at March 31:
2006 2005
(In thousands)
Funded status $249 $ --
Unrecognized net actuarial loss 300 957
---- ----
Prepaid pension cost $549 $957
==== ====
82
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE K - RETIREMENT PLANS (continued)
The weighted-average actuarial assumptions used in the valuations were:
2006 2005 2004
Weighted-average discount rate 6.50% 6.00% 6.50%
Weighted-average expected long-term rate
of return on plan assets 7.00% 7.00% 7.00%
Net periodic pension costs includes the following components:
2006 2005 2004
(In thousands)
Service cost $ -- $ -- $ 55
Interest cost 136 152 26
Actual return on plan assets, net (159) (155) (145)
Amortization of prior net loss 73 28 166
Settlement losses 358 89 --
----- ----- -----
Net periodic pension cost $ 408 $ 114 $ 102
===== ===== =====
The following benefit payments are expected to be paid in future years:
iscal Benefits
(In thousands)
2007 $ 28
2008 28
2009 28
2010 44
2011 44
Thereafter 189
The Bank has a savings plan covering substantially all employees who meet
certain age and service requirements. Under the plan, the Bank matches each
participant's contribution - up to 3% of the participant's salary; a 50% match
is provided for up to the next 4% of the participant's salary. This contribution
is dependent on availability of sufficient net earnings from current or prior
years. Additional contributions may be made as approved by the Board of
Directors. Expense under the plan totaled approximately $135,000, $121,000 and
$78,000 for the fiscal years ended March 31, 2006, 2005 and 2004, respectively.
83
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE L - CONDENSED FINANCIAL STATEMENTS OF WAYNE SAVINGS BANCSHARES, INC.
The following condensed financial statements summarize the financial position of
Wayne Savings Bancshares, Inc. as of March 31, 2006 and 2005, and the results of
its operations and its cash flows for the years ended March 31, 2006, 2005 and
2004:
WAYNE SAVINGS BANCSHARES, INC.
STATEMENT OF FINANCIAL CONDITION
March 31, 2006 and 2005
(In thousands)
ASSETS 2006 2005
Cash and due from banks $ 98 $ 480
Notes receivable from Wayne Savings 1,240 1,304
Investment in Wayne Savings 34,569 38,321
Prepaid expenses and other assets 22 547
-------- --------
Total assets $ 35,929 $ 40,652
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities $ 413 $ 453
Stockholders' equity
Common stock and additional paid-in capital 35,997 35,524
Retained earnings 11,394 11,371
Less required contributions for shares acquired by ESOP (1,239) (1,304)
Less 595,322 and 282,261 of treasury stock at
March 31, 2006 and 2005, respectively - at cost (9,625) (4,600)
Accumulated other comprehensive loss (1,011) (792)
-------- --------
Total stockholders' equity 35,516 40,199
-------- --------
Total liabilities and stockholders' equity $ 35,929 $ 40,652
======== ========
84
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE L - CONDENSED FINANCIAL STATEMENTS OF WAYNE SAVINGS BANCSHARES, INC.
(continued)
WAYNE SAVINGS BANCSHARES, INC.
STATEMENT OF EARNINGS
Year ended March 31, 2006, 2005 and 2004
(In thousands)
2006 2005 2004
Income
Interest income $ 85 $ 103 $ 183
Gain on sale of investment securities -- -- 2
Equity in earnings of subsidiary 1,715 1,610 2,851
------- ------- -------
Total income 1,800 1,713 3,036
General, administrative and other expense 199 1,966 409
------- ------- -------
Earnings (loss) before federal income tax benefits 1,601 (253) 2,627
Federal income tax benefits (39) (634) (77)
------- ------- -------
Net earnings $ 1,640 $ 381 $ 2,704
======= ======= =======
85
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE L - CONDENSED FINANCIAL STATEMENTS OF WAYNE SAVINGS BANCSHARES, INC.
(continued)
WAYNE SAVINGS BANCSHARES, INC.
STATEMENT OF CASH FLOWS
Year ended March 31, 2006, 2005 and 2004
(In thousands)
2006 2005 2004
Cash flows from operating activities:
Net earnings for the year $ 1,640 $ 381 $ 2,704
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Gain on sale of investment securities designated as available for sale -- -- (2)
Amortization and depreciation -- 2 42
(Undistributed earnings) excess distributions from consolidated
subsidiary 3,704 1,791 (1,351)
Acceleration of Stock Option and Management Recognition Plan expense -- 1,142 --
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets 526 (471) (29)
Accrued expenses and other liabilities (40) (177) 61
------- ------- -------
Net cash provided by operating activities 5,830 2,668 1,425
Cash flows provided by investing activities:
Purchase of investment securities designated as available for sale -- (500) (2,006)
Proceeds from maturity of investment securities designated
as available for sale -- 1,000 5,001
Proceeds from sale of investment securities designated as
available for sale -- -- 1,502
Purchase of mortgage-backed securities designated as available for sale -- -- (716)
Principal repayment on mortgage-backed securities designated as
available for sale -- 709 10
Repayment of ESOP loan 65 152 156
------- ------- -------
Net cash provided by investing activities 65 1,361 3,947
Cash flows used in financing activities:
Payment of dividends on common stock (1,617) (1,737) (1,786)
Purchase of treasury stock (5,025) (2,797) (1,803)
Proceeds from exercise of stock options 285 -- 61
Tax benefits related to employee stock plans 80 -- 20
Shares acquired by Management Recognition Plan -- -- (1,142)
------- ------- -------
Net cash used in financing activities (6,277) (4,534) (4,650)
------- ------- -------
Net increase (decrease) in cash and cash equivalents (382) (505) 722
Cash and cash equivalents at beginning of year 480 985 263
------- ------- -------
Cash and cash equivalents at end of year $ 98 $ 480 $ 985
======= ======= =======
86
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE M - BUSINESS COMBINATION
During 2004, the Company agreed to acquired Stebbins Bancshares, Inc. Stebbins
Bancshares, Inc. was merged into the Company in fiscal 2005 and its banking
subsidiary Stebbins National Bank, continued operations as a branch of Wayne
Savings. Wayne Savings Bancshares, Inc. paid $1.3 million in connection with the
acquisition.
Presented below are Wayne Savings Bancshares' pro-forma condensed consolidated
statements of earnings and earnings per share which have been prepared as if the
acquisition had been consummated as of the beginning of each of the years ended
March 31, 2005 and 2004.
2005 2004
(In thousands)
(Unaudited)
Total interest income $ 17,805 $ 19,476
Total interest expense 6,740 7,349
-------- --------
Net interest income 11,065 12,127
Provision for losses on loans 430 213
Other income 1,719 2,051
General, administrative and other expense 12,025 10,142
-------- --------
Earnings before income taxes (benefits) 329 3,823
Federal income taxes (benefits) (85) 1,093
-------- --------
NET EARNINGS $ 414 $ 2,730
======== ========
Earnings per share
Basic $ .12 $ .73
======== ========
Diluted $ .12 $ .73
======== ========
NOTE N - RELATED PARTIES
The Bank paid legal fees to the law firm to which one of the Directors is a
partner. The amount paid totaled approximately $35,000, $24,000 and $22,000 for
the years ended March 31, 2006, 2005 and 2004, respectively.
In the normal course of business Wayne Savings received demand and time deposits
from directors, officers and their related business interests of approximately
$702,000 and $904,000 at March 31, 2006 and 2005, respectively.
87
WAYNE SAVINGS BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
March 31, 2006, 2005 and 2004
NOTE O - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following table summarizes the Company's quarterly results for the fiscal
years ended March 31, 2006 and 2005.
Three Months Ended
June 30, September 30, December 31, March 31,
2006: (In thousands, except per share data)
Total interest income $ 4,681 $ 4,798 $ 4,981 $ 5,228
Total interest expense 1,882 1,966 2,117 2,315
------------ ------------ ------------ ------------
Net interest income 2,799 2,832 2,864 2,913
Provision for losses on loans -- -- -- 211
Other income 408 446 467 456
General, administrative and other expense 2,619 2,652 3,186 2,442
------------ ------------ ------------ ------------
Earnings before income taxes 588 626 145 716
Federal income taxes 148 159 (26) 154
------------ ------------ ------------ ------------
Net earnings $ 440 $ 467 $ 171 $ 562
============ ============ ============ ============
Earnings per share:
Basic $ .13 $ .14 $ .05 $ .18
============ ============ ============ ============
Diluted $ .13 $ .14 $ .05 $ .18
============ ============ ============ ============
Three Months Ended
June 30, September 30, December 31, March 31,
2005: (In thousands, except per share data)
Total interest income $ 4,244 $ 4,381 $ 4,465 $ 4,542
Total interest expense 1,625 1,609 1,711 1,771
------------ ------------ ------------ ------------
Net interest income 2,619 2,772 2,754 2,771
Provision for losses on loans 15 15 15 385
Other income 405 493 389 397
General, administrative and other expense 2,369 2,580 2,592 4,333
------------ ------------ ------------ ------------
Earnings before income taxes 640 670 536 (1,550)
Federal income taxes 178 181 133 (577)
------------ ------------ ------------ ------------
Net earnings $ 462 $ 489 $ 403 $ (973)
============ ============ ============ ============
Earnings per share:
Basic $ .20 $ .16 $ .15 $ (.40)
============ ============ ============ ============
Diluted $ .20 $ .16 $ .15 $ (.40)
============ ============ ============ ============
88
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
- ---------------------------------------------------------------------------
Financial Disclosure
--------------------
Not Applicable
ITEM 9A. Controls and Procedures
- -----------------------------------
Our management evaluated, with the participation of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based on such evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures are
designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and regulations and are operating in an effective manner.
ITEM 9B. Other Information
- -----------------------------
Not Applicable
PART III
--------
ITEM 10. Directors and Executive Officers of the Registrant
- --------------------------------------------------------------
The information required herein is incorporated by reference from the
section captioned "Information with Respect to Nominees for Director, Continuing
Directors and Executive Officers" in the Company's definitive proxy statement
for the annual meeting of shareholders to be held on July 27, 2006, (the "Proxy
Statement") expected to be filed with the Securities and Exchange Commission on
or about June 29, 2006.
Incorporated by reference to "Beneficial Ownership of Common Stock by
Certain Beneficial Owners and Management - Section 16(a) Beneficial Ownership
Reporting Compliance" in the Proxy Statement.
The Company has adopted a Code of Conduct and Ethics that applies to
its principal executive officer and principal financial officer, as well as
other officers and employees of the Company and the Bank. Upon receipt of a
written request we will furnish without charge to any stockholder a copy of the
Code of Conduct and Ethics. Such written requests should be directed to Mr. H.
Stewart Fitz Gibbon III, Secretary, Wayne Savings Bancshares, Inc., 151 North
Market Street, Wooster, Ohio 44691.
ITEM 11. Executive Compensation
- ----------------------------------
The information required herein is incorporated by reference from the
sections captioned "Management Compensation," "Report of the Compensation
Committee" and "Performance Graph" in the Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and
- --------------------------------------------------------------------------------
Related Stockholder Matters
---------------------------
The information required herein is incorporated herein by reference
from the section captioned "Beneficial Ownership of Common Stock by Certain
Beneficial Owners and Management" and Item 5 hereof.
89
ITEM 13. Certain Relationships and Related Transactions
- ----------------------------------------------------------
The information required by this Item 13 of Form 10-K is incorporated
by reference from the section captioned "Management Compensation - Indebtedness
of Management and Related Party Transactions" in the Proxy Statement.
ITEM 14. Principal Accountant Fees and Services
- --------------------------------------------------
The information required herein is incorporated by reference from the
section captioned "Proposal II - Ratification of Appointment of Independent
Registered Public Accounting Firm" in the Proxy Statement.
PART IV
-------
ITEM 15. Exhibits, Financial Statement Schedules
- ---------------------------------------------------
(a)(1) Financial Statements
The following documents have been filed under "Item 8,
Financial Statement and Supplementary Data" of this Form 10.
(i) Report of Independent Registered Certified Public Accountants;
(ii) Consolidated Statements of Financial Condition;
(iii) Consolidated Statements of Earnings;
(iv) Consolidated Statements of Stockholders' Equity;
(v) Consolidated Statements of Cash Flows; and (vi) Notes to
Consolidated Financial Statements.
(a)(2) Financial Statement Schedules
-----------------------------
All financial statement schedules have been omitted as the
required information is inapplicable or has been included in the Notes
to Consolidated Financial Statements.
(a)(3) Exhibits
--------
Exhibit Number Description
-------------- -----------------------------------------------------
3.1(1) Articles of Incorporation
3.2(1) Bylaws
4.0(2) Form of Common Stock Certificate of Wayne Savings
Bancshares, Inc.
10.1(3) Employment Agreement between Wayne Savings Community
Bank and Bryan C. Fehr dated May 27, 2004
10.2(3) Employment Agreement between Wayne Savings Community
Bank and H. Stewart Fitz Gibbon III dated November
14, 2005
10.3(4) Employment Agreement between Wayne Savings Community
Bank and Phillip E. Becker dated February 15, 2005
10.4(5) The Wayne Savings and Loan Company 1993 Incentive
Stock Option Plan
10.5(6) Wayne Savings Bancshares, Inc. Amended and Restated
2003 Stock Option Plan
11.0(7) Statement re: computation of per share earnings
21.0 Subsidiaries of Registrant-Reference is made to Item
1 - "Business" for the Required Information
23.0 Consent of Grant Thornton LLP
90
Exhibit Number Description
-------------- -----------------------------------------------------
31.1 Certification pursuant to Rule 13a-14(a) and
15d-14(a) of the Securities Exchange Act of 1934 of
the Chief Executive Officer
31.2 Certification pursuant to Rule 13a-14(a) and
15d-14(a) of the Securities Exchange Act of 1934 of
the Chief Financial Officer
32.0 Certification pursuant to 18 U.S.C. Section 1350
------------------------
(1) Filed as exhibits to the Plan of Conversion and Reorganization
filed as Exhibit 2 to the Registrant's registration statement
on Form SB-2, initially filed on September 18, 2001, as
amended (Registration No. 333-69600).
(2) Filed as Exhibit 4, to the Registrant's registration statement
on Form SB-2, initially filed on September 18, 2001, as
amended (Registration No. 333-69600).
(3) Incorporated by reference to the Exhibits to the Company's
Form 10-K for year ended March 31, 2004, filed on June 29,
2004 (File No. 000-23433).
(4) Incorporated by reference to the Exhibits to the Company's
Form 10-Q for quarter ended December 31, 2004, filed on
February 11, 2005 (File No. 000-23433).
(5) Incorporated by reference from the Company's Registration
Statement on Form S-8 filed on December 4, 1997 (File No.
333-41479).
(6) Incorporated by reference from the Company's Registration
Statement on Form S-8 filed on October 5, 2004 (File No.
333-119556).
(7) Incorporated by reference to Note A.8. of "Notes to
Consolidated Financial Statements" in Item 8 hereof.
(b) The Exhibits listed under (a)(3) of this Item 15 are filed
herewith.
(c) Reference is made to (a)(2) of this Item 15.
91
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) 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.
WAYNE SAVINGS BANCSHARES, INC.
Date: June 28, 2006 By: /s/Phillip E. Becker
-------------------------------------
Phillip E. Becker
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/Phillip E. Becker By: /s/H. Stewart Fitz Gibbon III
------------------------------------ -----------------------------------
Phillip E. Becker, President and H. Stewart Fitz Gibbon III, Senior Vice President,
Chief Executive Officer and Director Chief Financial Officer, Corporate Secretary and
(Principal Executive Officer) Treasurer
Date: June 28, 2006 Date: June 28, 2006
By: /s/Myron Swartzentruber By: /s/Kenneth R. Lehman
------------------------------------ -----------------------------------
Myron Swartzentruber, Vice President Kenneth R. Lehman, Director
Controller (Principal Accounting Officer)
Date: June 28, 2006 Date: June 28, 2006
By: /s/Frederick J. Krum By: /s/James C. Morgan
------------------------------------ -----------------------------------
Frederick J. Krum, Director James C. Morgan, Director
Date: June 28, 2006 Date: June 28, 2006
By: /s/Terry A. Gardner By: /s/Russell L. Harpster
------------------------------------ -----------------------------------
Terry A. Gardner, Director Russell L. Harpster,
Chairman of the Board of Directors
Date: June 28, 2006 Date: June 28, 2006
By: /s/Daniel R. Buehler
------------------------------------
Daniel R. Buehler, Director
Date: June 28, 2006
STOCKHOLDER INFORMATION
==========================================================================================================
Annual Meeting Transfer Agent
The Annual Meeting of Stockholders will be Registrar and Transfer Company
held at 10:00 a.m., on July 27, 2006, at 10 Commerce Drive
The Greenbriar Conference Centre, Cranford, New Jersey 07016-3572
50 Riffel Road
Wooster, Ohio 44691
Special Counsel Investor Information
Elias, Matz, Tiernan & Herrick LLP Executive Offices
734 15th Street N.W., 12th Floor Wayne Savings Bancshares, Inc.
Washington, DC 20005 151 N. Market Street - P.O. Box 858
Wooster, Ohio 44691
(330) 264-5767
Independent Registered Certified
Public Accountants
Grant Thornton LLP
4000 Smith Road
Suite 500
Cincinnati, Ohio 45209
==========================================================================================================
DIRECTORS AND OFFICERS
WAYNE SAVINGS BANCSHARES, INC.
Board of Directors Executive Officers
Russell L. Harpster Phillip E. Becker
Chairman President and Chief Executive Officer
Phillip E. Becker H. Stewart Fitz Gibbon III
Daniel R. Buehler Senior Vice President and Chief Financial Officer
Terry A. Gardner Corporate Secretary and Treasurer
James C. Morgan
Kenneth R. Lehman Bryan K. Fehr
Frederick J. Krum Senior Vice President and Operations Officer
Kenneth G. Rhode, Emeritus
Donald E. Massaro, Emeritus
Joseph L. Retzler, Emeritus