10-Q 1 form10q-63856_wayne.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20552 (Mark One) |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 ---------------------- OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________________ to ________________ Commission File No. 0-23433 WAYNE SAVINGS BANCSHARES, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 31-1557791 ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 151 North Market Street Wooster, Ohio 44691 ----------------------- ---------- (Address of principal (Zip Code) executive office) Registrant's telephone number, including area code: (330) 264-5767 Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes |_| No |X| As of November 8, 2004, the latest practicable date, 3,688,057 shares of the registrant's common stock, $.10 par value, were issued and outstanding. 1 Wayne Savings Bancshares, Inc. INDEX Page PART I - FINANCIAL INFORMATION Item 1 Consolidated Statements of Financial Condition 3 Consolidated Statements of Earnings 4 Consolidated Statements of Comprehensive Income 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 11 Item 3 Quantitative and Qualitative Disclosures About Market Risk 15 Item 4 Controls and Procedures 19 PART II - OTHER INFORMATION Item 1 Legal Proceedings 20 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 20 Item 3 Defaults Upon Senior Securities 20 Item 4 Submission of Matters to a Vote of Security Holders 20 Item 5 Other Information 20 Item 6 Exhibits and Reports on Form 8-K 21 SIGNATURES 22 2 Wayne Savings Bancshares, Inc. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In thousands, except share data)
September 30, March 31, 2004 2004 ASSETS Cash and due from banks $ 5,430 $ 3,291 Federal funds sold 8,045 9,875 Interest-bearing deposits in other financial institutions 5,296 6,721 --------- --------- Cash and cash equivalents 18,771 19,887 Investment securities available for sale - at market 38,433 17,546 Investment securities held to maturity - at amortized cost, approximate market value of $15,124 and $14,830 as of September 30, 2004 and March 31, 2004, respectively 14,084 14,036 Mortgage-backed securities available for sale - at market 66,520 83,945 Mortgage-backed securities held to maturity - at cost, approximate market value of $3,284 and $4,510 as of September 30, 2004 and March 31, 2004, respectively 3,265 4,483 Loans receivable - net 213,757 205,443 Office premises and equipment - net 9,171 8,742 Real estate acquired through foreclosure 141 100 Federal Home Loan Bank stock - at cost 4,292 4,205 Cash surrender value of life insurance 6,458 6,321 Accrued interest receivable on loans 900 801 Accrued interest receivable on mortgage-backed securities 312 400 Accrued interest receivable on investments and interest-bearing deposits 515 318 Prepaid expenses and other assets 4,899 2,549 Prepaid federal income taxes -- 231 --------- --------- Total assets $ 381,518 $ 369,007 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 311,910 $ 291,830 Advances from the Federal Home Loan Bank 25,000 30,000 Advances by borrowers for taxes and insurance 565 617 Accrued interest payable 206 186 Accounts payable on mortgage loans serviced for others 40 118 Other liabilities 1,103 1,383 Accrued federal income taxes 183 -- Deferred federal income taxes 656 1,312 --------- --------- Total liabilities 339,663 325,446 Commitments -- -- Stockholders' equity Common stock (8,000,000 shares of $ .10 par value authorized; 3,907,318 shares issued at both September 30, 2004 and March 31, 2004) 391 391 Additional paid-in capital 34,377 34,365 Retained earnings - substantially restricted 12,799 12,727 Shares acquired by Management Recognition Plan (913) (1,142) Less required contributions for shares acquired by Employee Stock Ownership Plan (1,380) (1,456) Less 215,584 and 112,500 shares of treasury stock at September 30, 2004 and March 31, 2004 - at cost (3,565) (1,803) Accumulated other comprehensive income - gain on securities designated as available for sale 146 479 --------- --------- Total stockholders' equity 41,855 43,561 --------- --------- Total liabilities and stockholders' equity $ 381,518 $ 369,007 ========= =========
See accompanying notes to consolidated financial statements. 3 Wayne Savings Bancshares, Inc. CONSOLIDATED STATEMENTS OF EARNINGS (In thousands, except share data)
Six months Three months ended ended September 30, September 30, 2004 2003 2004 2003 Interest income Loans $ 6,394 $ 7,238 $ 3,231 $ 3,513 Mortgage-backed securities 1,168 1,119 573 551 Investment securities 925 737 505 385 Interest-bearing deposits and other 138 130 72 52 ------- ------- ------- ------- Total interest income 8,625 9,224 4,381 4,501 Interest expense Deposits 2,695 3,103 1,363 1,491 Borrowings 539 625 246 305 ------- ------- ------- ------- Total interest expense 3,234 3,728 1,609 1,796 ------- ------- ------- ------- Net interest income 5,391 5,496 2,772 2,705 Provision for losses on loans 30 63 15 31 ------- ------- ------- ------- Net interest income after provision for losses on loans 5,361 5,433 2,757 2,674 Other income Gain on sale of loans 142 61 126 24 Increase in cash surrender value of life insurance 137 134 66 67 Service fees, charges and other operating 619 794 301 388 ------- ------- ------- ------- Total other income 898 989 493 479 General, administrative and other expense Employee compensation and benefits 2,784 2,600 1,436 1,334 Occupancy and equipment 847 741 426 355 Federal deposit insurance premiums 23 24 12 11 Franchise taxes 297 154 168 77 Other operating 998 964 538 494 ------- ------- ------- ------- Total general, administrative and other expense 4,949 4,483 2,580 2,271 ------- ------- ------- ------- Earnings before income taxes 1,310 1,939 670 882 Federal incomes taxes Current 9 433 602 58 Deferred 350 162 (421) 211 ------- ------- ------- ------- Total federal income taxes 359 595 181 269 ------- ------- ------- ------- NET EARNINGS $ 951 $ 1,344 $ 489 $ 613 ======= ======= ======= ======= EARNINGS PER SHARE Basic $ 0.26 $ 0.36 $ 0.13 $ 0.16 ======= ======= ======= ======= Diluted $ 0.26 $ 0.36 $ 0.13 $ 0.16 ======= ======= ======= =======
See accompanying notes to consolidated financial statements. 4 Wayne Savings Bancshares, Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)
Six months ended Three months ended September 30, September 30, 2004 2003 2004 2003 Net earnings $ 951 $ 1,344 $ 489 $ 613 Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) on securities, net of taxes (benefits) of $(172), $(128), $429 and $(234) during the respective periods (333) (248) 832 (454) ------- ------- ------- ------- Comprehensive income $ 618 $ 1,096 $ 1,321 $ 159 ======= ======= ======= ======= Accumulated other comprehensive income (loss) $ 146 $ (400) $ 146 $ (400) ======= ======= ======= =======
See accompanying notes to consolidated financial statements. 5 Wayne Savings Bancshares, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended September 30, (In thousands)
2004 2003 Cash flows from operating activities: Net earnings for the period $ 951 $ 1,344 Adjustments to reconcile net earnings to net cash provided by operating activities: Amortization of discounts and premiums on loans, investments and mortgage-backed securities - net 711 912 Amortization of deferred loan origination fees (134) (342) Depreciation and amortization 301 261 Gain on sale of loans (142) (39) Proceeds from sale of loans in the secondary market 2,406 2,529 Loans originated for sale in the secondary market (2,355) (2,329) Provision for losses on loans 30 63 Federal Home Loan Bank stock dividends (87) (81) Increase (decrease) in cash, net of acquisition of Stebbins Bancshares, Inc. due to changes in: Accrued interest receivable on loans (71) 114 Accrued interest receivable on mortgage-backed securities 88 (34) Accrued interest receivable on investments and interest-bearing deposits (197) (4) Prepaid expenses and other assets (848) (251) Accrued interest payable 3 18 Accounts payable on mortgage loans serviced for others (78) 128 Other liabilities (283) (445) Federal income taxes Current 414 (202) Deferred (350) 162 -------- -------- Net cash provided by operating activities 359 1,804 Cash flows provided by investing activities: Purchase of investment securities designated as available for sale (10,989) (13,017) Proceeds from maturity of investment securities designated as held to maturity 25 3,640 Proceeds from maturity of investment securities designated as available for sale 1,500 12,523 Purchase of mortgage-backed securities designated as available for sale (3,049) (37,406) Principal repayments on mortgage-backed securities designated as held to maturity 1,199 3,474 Principal repayments on mortgage-backed securities designated as available for sale 19,594 18,366 Loan principal repayments 24,951 57,642 Loan disbursements (20,986) (42,072) Purchase of office premises and equipment - net (263) (14) Proceeds from sale of real estate acquired through foreclosure 100 -- Increase in cash surrender value of life insurance (137) (134) Net cash used in the purchase of Stebbins Bancshares, Inc. (1,314) -- -------- -------- Net cash provided by investing activities 10,631 3,002 -------- -------- Net cash provided by operating and investing activities (balance carried forward) 10,990 4,806 -------- --------
6 Wayne Savings Bancshares, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the six months ended September 30, (In thousands)
2004 2003 Net cash provided by operating and investing activities (balance brought forward) $ 10,990 $ 4,806 Cash flows used in financing activities: Net decrease in deposit accounts (4,730) (5,290) Repayment of Federal Home Loan Bank Advances (5,000) -- Advances by borrowers for taxes and insurance (52) (88) Dividends paid on common stock (879) (881) Proceeds from exercise of stock options -- 61 Amortization of stock benefit plans 317 -- Shares acquired by Management Recognition Plan -- (1,142) Purchase of treasury shares (1,762) -- -------- -------- Net cash used in financing activities (12,106) (7,340) -------- -------- Net decrease in cash and cash equivalents (1,116) (2,534) Cash and cash equivalents at beginning of period 19,887 17,496 -------- -------- Cash and cash equivalents at end of period $ 18,771 $ 14,962 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Federal income taxes $ -- $ 635 ======== ======== Interest on deposits and borrowings $ 3,214 $ 3,710 ======== ======== Supplemental disclosure of noncash investing activities: Issuance of mortgage loan upon sale of real estate acquired through foreclosure $ -- $ -- ======== ======== Transfers from loans to real estate acquired through foreclosure $ 141 $ 179 ======== ======== Unrealized losses on securities designated as available for sale, net of related tax effects $ (333) $ (248) ======== ======== Recognition of mortgage servicing rights in accordance with SFAS No. 140 $ 21 $ 22 ======== ========
See accompanying notes to consolidated financial statements. 7 Wayne Savings Bancshares, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the six and three month periods ended September 30, 2004 and 2003 1. Basis of Presentation --------------------- The accompanying unaudited consolidated financial statements for the six and three months ended September 30, 2004 and 2003 were prepared in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Wayne Savings Bancshares, Inc. (the "Company") included in the Annual Report on Form 10-K for the year ended March 31, 2004. In the opinion of management, all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the unaudited financial statements have been included. The results of operations for the three and six month periods ended September 30, 2004 are not necessarily indicative of the results which may be expected for the entire fiscal year. Critical Accounting Policy - The Company's critical accounting policy relates to the allowance for losses on loans. The Company has established a systematic method of periodically reviewing the credit quality of the loan portfolio in order to establish a sufficient allowance for losses on loans. The allowance for losses on loans is based on management's current judgments about the credit quality of individual loans and segments of the loan portfolio. The allowance for losses on loans is established through a provision, and considers all known internal and external factors that affect loan collectability as of the reporting date. Such evaluation, which included a review of all loans on which full collectability may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, historical loan loss experience, management's knowledge of inherent risks in the portfolio that are probable and reasonably estimable and other factors that warrant recognition in providing an appropriate loan loss allowance. Management has discussed the development and selection of this critical accounting policy with the audit committee of the Board of Directors. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Principles of Consolidation --------------------------- The accompanying consolidated financial statements include Wayne Savings Bancshares, Inc. and the Company's wholly-owned subsidiary, Wayne Savings Community Bank ("Wayne Savings" or the "Bank"). On September 30, 2003, Village Savings Bank, F.S.B. ("Village Bank") was merged with and into Wayne Savings Community Bank to be operated as a branch. Prior to this date, Village Bank was a wholly-owned subsidiary of Wayne Savings Community Bank. During fiscal 2004, the Company's Board of Directors approved a business combination, which was completed in June 2004, whereby Stebbins Bancshares, Inc., the parent of Stebbins National Bank, was merged into Wayne Savings Bancshares, Inc. and Stebbins National Bank merged with and into Wayne Savings Community Bank. The business combination was accounted for using the purchase method of accounting. Accordingly, the September 30, 2004 consolidated financial statements herein include the accounts of Stebbins National Bank from the June 1, 2004 acquisition through September 30, 2004. 8 Wayne Savings Bancshares, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the six and three month periods ended September 30, 2004 and 2003 2. Principles of Consolidation (continued) --------------------------- Wayne Savings has eleven banking locations in Wayne, Holmes, Ashland, Medina and Stark counties. All significant intercompany transactions and balances have been eliminated in the consolidation. 3. Earnings Per Share ------------------ Basic earnings per common share is computed based upon the weighted-average number of common shares outstanding during the period, less shares in the Company's Employee Stock Ownership Plan ("ESOP") that are unallocated and not committed to be released. Diluted earnings per common share include the dilutive effect of all additional potential common shares issuable under the Company's stock option plan. The computations are as follows:
For the six months ended For the three months ended September 30, September 30, 2004 2003 2004 2003 Weighted-average common shares outstanding (basic) 3,616,294 3,742,188 3,596,303 3,752,400 Dilutive effect of assumed exercise of stock options 31,175 1,456 29,694 1,574 --------- --------- --------- --------- Weighted-average common shares outstanding (diluted) 3,647,469 3,743,644 3,625,997 3,753,974 ========= ========= ========= =========
At September 30, 2004 all outstanding options were considered in the diluted earnings per share calculation. Options to purchase 204,081 shares of common stock at a weighted average exercise price $13.95 were outstanding at September 30, 2003 but were excluded from the computation of diluted earnings per share because the exercise price was greater than the average market price of the common shares. 4. Stock Option Plan ----------------- The Company has a 1993 incentive Stock Option Plan that provided for the issuance of 196,390 shares of authorized common stock, as adjusted, with 10,123 options outstanding at September 30, 2004. In fiscal 2004, the Company adopted a new Stock Option Plan that provided for the issuance of 142,857 incentive options and 61,224 non-incentive options of authorized common stock. As of September 30, 2004, all options under the 2004 Plan have been granted and will expire in fiscal 2014 unless otherwise exercised. The Company accounts for its stock option plans in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," which provides a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, SFAS No. 123 permits entities to continue to account for stock options and similar equity instruments under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net earnings and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. Management has determined that the Company will continue to account for stock based compensation in accordance with APB Opinion No. 25. There were no options granted during the three or six months ended September 30, 2004. There were 204,081 options granted during the three and six months ended September 30, 2003. 9 Wayne Savings Bancshares, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the six and three month periods ended September 30, 2004 and 2003 4. Stock Option Plan (continued) ----------------- At September 30, 2004, 50,939 of the stock options granted were subject to exercise at the discretion of the grantees and expire in fiscal 2014 while the remaining options vest at a rate of 20% annually and will expire in fiscal 2014. A summary of the status of the Company's stock option plans as of and for the years ended March 31, 2004 and 2003, and the six months ended September 30, 2004 is presented below:
Six months ended Year ended September 30, March 31, 2004 2004 2003 Weighted- Weighted- Weighted- average average average exercise exercise exercise Shares price Shares price Shares price Outstanding at beginning of period 214,204 $13.84 28,666 $ 6.26 23,378 $ 3.31 Granted -- -- 204,081 13.95 10,123 11.67 Exercised -- -- (18,543) 3.31 (4,835) 3.31 Forfeited -- -- -- -- -- -- ------- ------ ------- ------ -------- ------ Outstanding at end of period 214,204 $13.84 214,204 $13.84 28,666 $ 6.26 ======= ====== ======= ====== ======== ====== Options exercisable at period-end 50,939 $13.50 10,123 $11.67 28,666 $ 6.26 ======= ====== ======= ====== ======== ====== Fair value of options granted $ 3.93 $ 3.17 ====== ======
The following information applies to options outstanding at September 30, 2004: Number outstanding....................................... 214,204 Range of exercise prices................................. $11.67 - 13.95 Weighted-average exercise price.......................... $13.84 Weighted-average remaining contractual life.............. 8.75 years The fair value of options granted has been based on the Black Scholes pricing model using a dividend yield of 3.3% and 3.8%, expected volatility of 28.8% and 32.4%, a risk-free interest rate of 4.38% and 3.70% for fiscal 2004 and 2003, respectively. All options granted in fiscal 2004 and fiscal 2003 have expected lives of ten years. 10 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Average Balance Sheet The following tables set forth certain information relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.
For the six months ended September 30, -------------------------------------------------------------- 2004 2003 ----------------------------- ----------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ------- -------- ------- ------- -------- ------- (Dollars in thousands) Interest-earning assets: Loans receivable, net(1) $211,424 $6,394 6.05% $219,835 $7,238 6.58% Mortgage-backed securities(2) 79,773 1,168 2.93 84,150 1,119 2.66 Investment securities 47,487 925 3.90 30,726 737 4.80 Interest-bearing deposits(3) 21,387 138 1.29 19,814 130 1.31 -------- ------ -------- ------ Total interest- earning assets 360,071 8,625 4.79 354,525 9,224 5.20 Non-interest-earning assets 21,171 14,674 -------- -------- Total assets $381,242 $369,199 ======== ======== Interest-bearing liabilities: Deposits $307,258 2,695 1.75 $289,750 3,103 2.14 Borrowings 26,900 539 4.01 30,000 625 4.17 -------- ------ -------- ------ Total interest- bearing liabilities 334,158 3,234 1.94 319,750 3,728 2.33 ------ ------ Non-interest bearing liabilities 4,645 4,209 -------- -------- Total liabilities 338,803 323,959 Stockholders' equity 42,439 45,240 -------- -------- Total liabilities and stockholders' equity $381,242 $369,199 ======== ======== Net interest income $5,391 $5,496 ====== ====== Interest rate spread(4) 2.85% 2.87% ====== ====== Net yield on interest- earning assets(5) 2.99% 3.10% ====== ====== Ratio of average interest- earning assets to average interest-bearing liabilities 107.75% 110.88% ====== ======
---------- See footnotes on following page. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Average Balance Sheet (continued)
For the three months ended September 30, -------------------------------------------------------------- 2004 2003 ----------------------------- ----------------------------- Average Average Average Average Balance Interest Rate Balance Interest Rate ------- -------- ------- ------- -------- ------- (Dollars in thousands) Interest-earning assets: Loans receivable, net(1) $214,958 $3,231 6.01% $215,192 $3,513 6.53% Mortgage-backed securities(2) 74,422 573 3.08 87,957 551 2.51 Investment securities 51,013 505 3.96 34,648 385 4.44 Interest-bearing deposits(3) 15,286 72 1.88 21,429 52 .97 -------- ------ -------- ------ Total interest- earning assets 355,679 4,381 4.93 359,226 4,501 5.01 Non-interest-earning assets 25,790 7,001 -------- -------- Total assets $381,469 $366,227 ======== ======== Interest-bearing liabilities: Deposits $313,544 1,363 1.74 $287,723 1,491 2.07 Borrowings 25,000 246 3.94 30,000 305 4.07 -------- ------ -------- ------ Total interest- bearing liabilities 338,544 1,609 1.90 317,723 1,796 2.26 ------ ------ Non-interest bearing liabilities 690 3,926 -------- -------- Total liabilities 339,234 321,649 Stockholders' equity 42,235 44,578 -------- -------- Total liabilities and stockholders' equity $381,469 $366,227 ======== ======== Net interest income $2,772 $2,705 ====== ====== Interest rate spread(4) 3.03% 2.75% ====== ====== Net yield on interest- earning assets(5) 3.12% 3.01% ====== ====== Ratio of average interest- earning assets to average interest-bearing liabilities 105.06% 113.06% ====== ======
---------- (1) Includes non-accrual loan balances. (2) Includes mortgage-backed securities designated as available for sale. (3) Includes federal funds sold and interest-bearing deposits in other financial institutions. (4) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities (5) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets. 12 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Discussion of Financial Condition Changes from March 31, 2004 to September 30, -------------------------------------------------------------------------------- 2004 ---- At September 30, 2004, we had total assets of $381.5 million, an increase of $12.5 million, or 3.4%, from March 31, 2004 levels mainly due to the Stebbins acquisition of $24.5 million in net assets offset by a decrease in cash to repay borrowings of $5.0 million and the net purchase of Stebbins of $1.3 million. Liquid assets, consisting of cash, interest-bearing deposits and investment securities, increased by $19.8 million, or 38.5%, to $71.3 million at September 30, 2004 mainly due to $13.0 million of liquid assets from the Stebbins acquisition and the purchase of $11.0 million in available for sale investment securities offset by the maturing of $1.5 million of the same securities. Mortgage-backed securities decreased by $18.6 million, or 21.1%, to $69.8 million as these securities continued to receive a high level of principal repayments due to the general low interest rate environment. During the six month period ended September 30, 2004 loans receivable increased $8.3 million as $12.2 million of loans were acquired from the Stebbins acquisition. This increase in loans receivable was offset by loan sales of $2.4 million consisting primarily of long-term fixed rate residential loans in furtherance of management's interest rate risk strategy. Rather than reinvest funds from sales of and repayments on loans in long-term, fixed rate and low yielding residential loans during this period of historically low interest rates, management has invested in marketable securities and adjustable rate commercial loans. The composition of the loan portfolio has changed during the six months due to repayments of $7.9 million in residential mortgage loans and increased originations of nonresidential mortgage loans totaling $6.9 million in connection with the Bank's increased emphasis on commercial lending. Nonperforming and impaired loans of $1.1 at September 30, 2004 consisted mainly of residential mortgage loans as compared with $747,000 in nonperforming and impaired residential mortgage loans at March 31, 2004. The Company generally has not recognized losses on impaired and nonperforming loans secured by residential mortgages. As of September 30, 2004, the Company reclassified $1.3 million of the Stebbins portfolio as substandard. These loans are not delinquent and are still being reviewed to determine their proper classification. Deposits at September 30, 2004, totaled $311.9 million, an increase of $20.1 million from $291.8 million at March 31, 2004 due primarily to the $24.8 million of deposits acquired from the Stebbins acquisition, offset by a decline in deposits as customers sought alternative investment opportunities due to the low rate environment. The Bank's deposit pricing is very competitive in all market areas. Stockholders' equity decreased by $1.7 million during the six months ended September 30, 2004, due mainly to an unrealized loss on available for sale securities of $333,000 as a result of the recent increase in rates, dividends paid totaling $879,000 and the purchase of treasury stock of $1.8 million. These amounts were offset by $951,000 in net earnings for the six months ended September 30, 2004 and an increase of $317,000 due to the amortization of the stock benefit plans. Comparison of Operating Results for the Six Month Periods Ended September 30, -------------------------------------------------------------------------------- 2004 and 2003 ------------- General ------- Net earnings totaled $951,000 for the six months ended September 30, 2004, a decrease of $393,000, or 29.2%, compared to the net earnings of $1.3 million for the six months ended September 30, 2003. The decline in net earnings was primarily attributable to a decrease in net interest income of $105,000, or 1.9%, mainly due to the Company's strategy of maintaining assets with a shorter average life to protect the Company's interest rate risk position. These assets consist primarily of investment and mortgage-backed securities available for sale which generally yield less than loans. Although this strategy has adversely impacted our short-term income, we believe we 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparison of Operating Results for the Six Month Periods Ended September 30, -------------------------------------------------------------------------------- 2004 and 2003 (continued) ------------- General (continued) ------- are favorably positioned for a rising rate environment. Secondly, net earnings decreased due to a decrease in other income of $91,000, or 9.2%, due primarily to the reduction in merchant fee income offset with a $81,000 increase in gain on sale of loans. Finally, general, administrative and other expense increased $466,000, or 10.4%, due mainly to increased compensation and benefits expense, franchise tax expense and occupancy and equipment expense. These earnings decreases were mainly offset by a decrease in federal income tax expense of $236,000, or 39.7%. The Company has maintained its strategy to aggressively manage interest rate risk during the period of low interest rates. This strategy negatively affected earnings for the first six months of the fiscal year. However, management believes that the investment of excess funds primarily in shorter term assets will help the Company in a rising interest rate environment. Interest Income --------------- Interest income decreased $599,000, or 6.5%, to $8.6 million for the six months ended September 30, 2004, compared to the same period in 2003. This decline was mainly due to an 11 basis point reduction in the average yield on interest-earning assets to 2.99% from 3.10% for the period ended September 30, 2003. The yield reduction was partially offset with an increase in the weighted-average balance of interest-earning assets of $5.5 million, or 1.6%, to a balance of $360.1 million for the six months ended September 30, 2004 compared to the same period in 2003. This reduction in the average yield on interest-earning assets reflects a general decrease in market rates, the refinancing of higher rate loans and the downward repricing of certain adjustable rate loans. In addition, as part of its interest rate risk strategy, the Company invested excess funds in shorter-term securities available for sale rather than long-term fixed rate loans. Although this strategy sacrifices short-term income since investment securities generally yield less than loans, it strengthens the Company's interest rate position and allows the Company to redeploy such assets in a rising rate environment. Interest income on loans declined $844,000, or 11.7%, for the six months ended September 30, 2004, compared to the same period in 2003, due primarily to a decrease in the weighted average outstanding balance of loans period to period of $8.4 million, or 3.8%, coupled with a 53 basis-point decrease in the weighted average yield on loans to 6.05% for the 2004 period. Interest income on mortgage-backed securities increased $49,000 during the six months ended September 30, 2004, compared to the same period in 2003, due primarily to a decline in premium amortization. The decline in premium amortization was due primarily to the decrease in the prepayments of these securities as a result of the prevailing lower interest rate environment. The weighted average balance decreased by a $4.4 million, or 5.2%, from the comparable 2003 period offsetting the aforementioned increase in income. Interest income on investment securities increased by $188,000, or 25.5%, during the 2004 period compared to the same period in 2003, reflecting an increase in the weighted average balance of $16.8 million, or 54.5%, to $47.5 million from $30.7 million during the comparable 2003 period, partially offset by a decrease in the average yield of 90 basis points to 3.90%. Interest income on interest-bearing deposits increased by $8,000, or 6.2%, for the six months ended September 30, 2004, due primarily to an increase in the weighted average balance of $1.6 million, or 7.9%, compared to the 2003 period of $19.8 million. The increase in the weighted average balance was offset by a decline in the average yield of 2 basis points to an average yield of 1.29% compared to 1.31% for the quarter ended September 30, 2003. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparison of Operating Results for the Six Month Periods Ended September 30, -------------------------------------------------------------------------------- 2004 and 2003 (continued) ------------- Interest Expense ---------------- Interest expense for the six months ended September 30, 2004 totaled $3.2 million, a decrease of $494,000, or 13.3%, compared to interest expense of $3.7 million for the six months ended September 30, 2003. The decrease resulted from a 39 basis point decrease in the average cost of funds to 1.94% for the 2004 period, offset by an increase in the average balance of deposits and borrowings outstanding of $14.4 million, or 4.5%, to $334.2 million for the period ended September 30, 2004. Interest expense on deposits totaled $2.7 million for the six months ended September 30, 2004, a decrease of $408,000, or 13.1%, from the six months ended September 30, 2003, as a result of a 39 basis point decrease in the average cost of deposits to 1.75% for the 2004 period offset by an increase in the average balance outstanding of $17.5 million, or 6.0%, to $307.3 million for the 2004 period. Interest expense on borrowings totaled $539,000 for the six months ended September 30, 2004, a decrease of $86,000, or 13.8%, from the 2003 period, primarily due to a decrease in the average balance of borrowings of $3.1 million to an average outstanding balance of $26.9 million for the six months ended September 30, 2004, coupled with a decrease in the average cost of borrowings to 4.01% from the average cost of 4.17% for the 2003 period. Net Interest Income ------------------- Net interest income totaled $5.4 million for the six months ended September 30, 2004, a decrease of $105,000, or 1.9%, from the six month period ended September 30, 2003. The average interest rate spread decreased to 2.85% for the six months ended September 30, 2004 from 2.87% for the six months ended September 30, 2003. The net interest margin decreased to 2.99% for the six months ended September 30, 2004 from 3.10% for the six months ended September 30, 2003. Provision for Losses on Loans ----------------------------- The Company recorded a $30,000 provision for losses on loans for the six month period ended September 30, 2004 as compared to $63,000 in 2003. To the best of management's knowledge, all known and inherent losses that are probable and which can be reasonably estimated have been recorded as of September 30, 2004 and 2003. Other Income ------------ Other income, consisting primarily of the cash surrender value of life insurance, gains on sale of loans, service fees, and charges on deposit accounts, decreased by $91,000, or 9.2%, to $898,000 for the six months ended September 30, 2004, from $989,000 for the six months ended September 30, 2003. The decrease resulted primarily from a decrease of $146,000 in merchant fee income offset by an increase of $81,000 on the gain on sale of loans in connection with management's interest rate risk strategy, as discussed previously. The Company recognized a $44,000 gain on sale of loans from the disposal of the credit card portfolio. Management chose to sell the credit card portfolio due to its minimal performance and to avoid potential future chargeoffs. The decrease in merchant fee income was due to a significant transaction decrease from period to period which the Company may not experience in future earnings. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparison of Operating Results for the Six Month Periods Ended September 30, -------------------------------------------------------------------------------- 2004 and 2003 (continued) ------------- General, Administrative, and Other Expense ------------------------------------------ General, administrative and other expense increased by $466,000, or 10.4%, to $4.9 million for the six months ended September 30, 2004 compared to the six months ended September 30, 2003. The increase resulted primarily from an increase in employee compensation and benefits expense of $184,000, or 7.1%, a $143,000, or 92.9%, increase in franchise taxes and a $106,000, or 14.3% increase in occupancy and equipment expense. The increase in employee compensation and benefits was mainly due to the Stebbins National Bank acquisition and the normal merit increases and increased benefit plan costs. The increase in franchise taxes was mainly due to the additional capital raised in the full stock conversion in January 2003. The increase in occupancy and equipment expense was mainly due to the new computer operating system depreciation coupled with the acquisition of Stebbins National Bank. Federal Income Taxes -------------------- The provision for federal income taxes was $359,000 for the six months ended September 30, 2004, a decrease of $236,000, or 39.7%, compared to the same period in 2003, primarily due to the $629,000, or 32.4%, decrease in earnings before federal income taxes. The effective tax rate for the six months ended September 30, 2004, was 27.4% as compared to 30.7% for the same period in 2003. The effective tax rate for the six months ended September 30, 2004 decreased mainly due to the additional income earned from the purchase of additional tax advantaged municipal securities and the tax free earnings on the bank owned life insurance. Comparison of Operating Results for the Three Month Periods Ended September 30, -------------------------------------------------------------------------------- 2004 and 2003 ------------- General ------- Net earnings totaled $489,000 for the quarter ended September 30, 2004, a decrease of $124,000, or 20.2%, compared to the net earnings of $613,000 for the quarter ended September 30, 2003. The decline in net earnings was primarily attributable to an increase in general, administrative and other expense of $309,000, or 13.6%, offset primarily by an increase in net interest income of $67,000, or 2.5%, and a decrease in federal income taxes of $88,000, or 32.7%. The Company has maintained its strategy to aggressively manage interest rate risk. This strategy negatively affected earnings for the three months ended September 30, 2004. However, management believes that the investment of excess funds primarily in shorter term assets will help the Company in a rising interest rate environment. Interest Income --------------- Interest income decreased $120,000, or 2.7%, to $4.4 million for the three months ended September 30, 2004, compared to the same period in 2003. This decrease was mainly due to an 8 basis point decrease in the average yield on interest-earning assets to 4.93% from 5.01% for the period ended September 30, 2003. The yield reduction was coupled with a decrease in the weighted-average balance of interest-earning assets of $3.5 million, or 1.0%, to a balance of $355.7 million for the three months ended September 30, 2004. This reduction in the average yield on interest-earning assets reflects a general decrease in market rates, the refinancing of higher rate loans and the downward repricing of certain adjustable rate loans. In addition, the Company purposefully invested excess funds in shorter-term securities available for sale rather than long-term fixed rate loans. Although this strategy sacrifices short-term income, it strengthens the Company's interest rate position and allows the Company to redeploy such assets in a rising rate environment. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparison of Operating Results for the Three Month Periods Ended September 30, -------------------------------------------------------------------------------- 2004 and 2003 (continued) ------------- Interest Income (continued) --------------- Interest income on loans declined $282,000, or 8.0%, for the three months ended September 30, 2004, compared to the same period in 2003, due primarily to a decrease in the weighted average outstanding balance of loans period to period of $234,000, coupled with a 52 basis-point decrease in the weighted average yield on loans to 6.01% for the 2004 period. Interest income on mortgage-backed securities increased $22,000 during the three months ended September 30, 2004, compared to the same period in 2003, due primarily to the slowing of the record levels of prepayments, offset by a decrease in the weighted average balance of $13.5 million, or 15.4%, from the comparable 2003 period. The slowdown of prepayments cause the amortization of the security premium to also decrease causing an increase in interest income on mortgage-backed securities. Interest income on investment securities increased by $120,000, or 31.2%, during the 2004 period compared to the same period in 2003, reflecting an increase in the weighted average balance of $16.4 million, or 47.2%, to $51.0 million from $34.6 million during the comparable 2003 period, partially offset by a decrease in the average yield of 48 basis points to 3.96%. Interest income on interest-bearing deposits increased by $20,000, or 38.5%, for the three months ended September 30, 2004, due primarily to an increase in the average yield of 91 basis points to an average yield of 1.88% from an average yield of .97% for the quarter ended September 30, 2003 offset by an decrease in the weighted average balance of $6.1 million, or 28.7%, compared to the 2003 period of $21.4 million Interest Expense ---------------- Interest expense for the three months ended September 30, 2004 totaled $1.6 million, a decrease of $187,000, or 10.4%, from interest expense of $1.8 million for the three months ended September 30, 2003. The decrease resulted from a 36 basis point decrease in the average cost of funds to 1.90% for the 2004 period, offset by an increase in the average balance of deposits and borrowings outstanding of $20.8 million, or 6.6%, to $338.5 million for the period ended September 30, 2004. Interest expense on deposits totaled $1.4 million for the three months ended September 30, 2004, a decrease of $128,000, or 8.6%, compared to the three months ended September 30, 2003, as a result of a 33 basis point decrease in the average cost of deposits to 1.74% for the 2004 period offset by an increase in the average balance outstanding of $25.8 million, or 9.0%, to $313.5 million for the 2004 period. Interest expense on borrowings totaled $246,000 for the three months ended September 30, 2004, a decrease of $59,000, or 19.3%, from the 2003 period, primarily due to a decrease in the average balance of borrowings of $5.0 million to an average outstanding balance of $25.0 million for the three months ended September 30, 2004, coupled with a decrease in the average cost of borrowings to 3.94% from the average cost of 4.07% for the 2003 period. Net Interest Income ------------------- Net interest income totaled $2.8 million for the three months ended September 30, 2004, an increase of $67,000, or 2.5%, from the three month period ended September 30, 2003. The average interest rate spread increased to 3.03% for the three months ended September 30, 2004 from 2.75% for the three months ended September 30, 2003. The net interest margin increased to 3.12% for the three months ended September 30, 2004 from 3.01% for the three months ended September 30, 2003. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparison of Operating Results for the Three Month Periods Ended September 30, -------------------------------------------------------------------------------- 2004 and 2003 (continued) ------------- Provision for Losses on Loans ----------------------------- The Company recorded a $15,000 provision for losses on loans for the three month period ended September 30, 2004 as compared to $31,000 in 2003. To the best of management's knowledge, all known and inherent losses that are probable and which can be reasonably estimated have been recorded as of September 30, 2004 and 2003. Other Income ------------ Other income, consisting primarily of the cash surrender value of life insurance, gains on sale of loans, service fees, and charges on deposit accounts, increased by $14,000, or 2.9%, to $493,000 for the three months ended September 30, 2004, from $479,000 for the three months ended September 30, 2003. The increase resulted primarily from an increase of $102,000 on the gain on sale of loans which included a $44,000 gain on sale of loans from the disposal of the credit card portfolio. Management chose to sell the credit card portfolio due to its minimal performance and to avoid potential future charge offs. This increase was offset mainly by a decrease of $68,000 in merchant fee income due to a significant decrease in transactions from period to period, coupled with a decrease in loan servicing fees of $7,000. The Company may not experience the prior levels in future earnings on merchant fee income and loan servicing fee income due to the significant transaction decreases. General, Administrative, and Other Expense ------------------------------------------ General, administrative and other expense increased by $309,000, or 13.6%, to $2.6 million for the three months ended September 30, 2004 compared to the three months ended September 30, 2003. The increase resulted primarily from an increase in employee compensation and benefits expense of $102,000, or 7.6%, a $91,000, or 118.2%, increase in franchise taxes and a $71,000, or 20.0%, increase in occupancy and equipment expense. The increase in employee compensation and benefits was mainly due to the Stebbins National Bank acquisition and the normal merit increases and increased benefit plan costs. The increase in franchise taxes was mainly due to the additional capital raised in the full stock conversion in January 2003. The increase in occupancy and equipment expense was mainly due to depreciation of the new computer operating system and increased expenses related to the Stebbins National Bank acquisition. Federal Income Taxes -------------------- The provision for federal income taxes was $181,000 for the three months ended September 30, 2004, a decrease of $88,000, or 32.7%, compared to the same period in 2003, primarily due to the $212,000 decrease in earnings before federal income taxes. The effective tax rate for the three months ended September 30, 2004, was 27.0% as compared to 30.5% for the same period in 2003. The effective tax rate for the three months ended September 30, 2004 decreased mainly due to the additional income earned from the purchase of additional tax advantaged municipal securities. 18 ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the Company's market risk since the Company's Form 10-K filed with the Securities and Exchange Commission for the year ended March 31, 2004. ITEM 4 CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. Under the supervision and with the participation of the Company's management, including our Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective in timely alerting them to the material information relating to the Company (or our consolidated subsidiaries) required to be included in the Company's periodic SEC filings. (b) Changes in internal controls. There has been no change made in the Company's internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company's internal control over financial reporting. 19 Wayne Savings Bancshares, Inc. PART II ITEM 1. Legal Proceedings ----------------- Not applicable ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds -----------------------------------------------------------
Total # of Maximum # of shares Total Average shares purchased which may still be # of shares price paid as part of the purchased as part Period purchased per share announced plan of the announced plan ------ --------- --------- ------------- --------------------- July 1-31, 2004 -- $ -- -- 82,400 August 1-31, 2004 60,000 $16.55 57,500 185,491 September 1-30, 2004 21,761 $16.35 21,761 163,730
Notes to Table: (a) The Board of Directors of the Company authorized a stock repurchase program to repurchase 5%, or 195,365 shares of the Company's outstanding shares. This program was publicly announced in a press release issued January 29, 2004. (b) The stock repurchase plan for 195,365 shares, or 5% of outstanding shares, was completed on August 11, 2004 at an average share price of $16.25. (c) The completion of the stock repurchase program was the result of a block purchase of shares on August 11, 2004 which included 2,500 shares in excess of the amount required to complete the program. (d) On August 26, 2004, the Board of Directors of the Company authorized a new stock repurchase program to purchase 185,491 shares, or 5% of the Company's outstanding shares. This is the only program currently in effect. This program was publicly announced in a press release issued September 2, 2004. The program has an expiration date of August 26, 2005. ITEM 3. Defaults Upon Senior Securities ------------------------------- Not applicable ITEM 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- On July 22, 2004, the Annual Meeting of the Company's Stockholders was held. Three directors were elected to terms expiring in fiscal 2007 by the following votes: Russell L. Harpster For: 3,051,530 Withheld: 221,799 Terry A. Gardner For: 3,188,352 Withheld: 84,977 Frederick J. Krum For: 3,225,321 Withheld: 48,008 20 Wayne Savings Bancshares, Inc. PART II (CONTINUED) ITEM 4. Submission of Matters to a Vote of Security Holders (continued) --------------------------------------------------- Three other matters were submitted to the stockholders for ratification, for which the following votes were cast: Proposal to amend and restate the 2003 Stock Option Plan. For: 2,101,803 Against: 200,682 Abstain: 37,121 Proposal to amend and restate of the 2003 Retention and Recognition Plan. For: 1,921,486 Against: 370,997 Abstain: 47,123 Ratification of the appointment of Grant Thornton LLP as independent auditors of the Company for the fiscal year ended March 31, 2005. For: 3,220,691 Against: 33,375 Abstain: 19,680 ITEM 5. Other Information ----------------- Not applicable ITEM 6. Exhibits -------- EX-31.1 Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 EX-31.2 Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 EX-32 Written Statement of Chief Executive Officer and Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350 21 SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: November 10, 2004 By: /s/ Charles C. Finn --------------------- -------------------------------- Charles C. Finn Chairman and President Date: November 10, 2004 By: /s/ Michael C. Anderson --------------------- -------------------------------- Michael C. Anderson Chief Financial Officer 22