-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, IKTszuggBL4tLPm7ygo0FLnxVJGcB5pRYESR1uRF9yh9FuVOV/d1sb4iuS0ixtDa SMMWN8EwLRF6R4oALqm1Zg== 0000914317-05-003481.txt : 20051114 0000914317-05-003481.hdr.sgml : 20051111 20051114161831 ACCESSION NUMBER: 0000914317-05-003481 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20050930 FILED AS OF DATE: 20051114 DATE AS OF CHANGE: 20051114 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WAYNE SAVINGS BANCSHARES INC /DE/ CENTRAL INDEX KEY: 0001036030 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 311557791 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-23433 FILM NUMBER: 051201774 BUSINESS ADDRESS: STREET 1: 151 N MARKET ST CITY: WOOSTER STATE: OH ZIP: 44691-4809 BUSINESS PHONE: 3302645767 MAIL ADDRESS: STREET 1: 151 N MARKET ST CITY: WOOSTER STATE: OH ZIP: 44691-4809 FORMER COMPANY: FORMER CONFORMED NAME: WAYNE SAVINGS BANKSHARES INC DATE OF NAME CHANGE: 19970319 10-Q 1 form10q-71850_wayne.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D. C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2005 ------------------ OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to _______________ Commission File No. 0-23433 WAYNE SAVINGS BANCSHARES, INC. - -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 31-1557791 - ------------------------------- ---------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 151 North Market Street Wooster, Ohio 44691 - ------------------------------- ---------- (Address of principal (Zip Code) executive office) Registrant's telephone number, including area code: (330) 264-5767 Check whether the issuer: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act) Yes |_| No |X| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes |_| No |X| As of October 28, 2005, the latest practicable date, 3,364,244 shares of the registrant's common stock, $.10 par value, were issued and outstanding. 1 Wayne Savings Bancshares, Inc. INDEX Page PART I - FINANCIAL INFORMATION Item 1 Consolidated Statements of Financial Condition 3 Consolidated Statements of Earnings 4 Consolidated Statements of Comprehensive Income 5 Consolidated Statements of Cash Flows 6 Notes to Consolidated Financial Statements 8 Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations 12 Item 3 Quantitative and Qualitative Disclosures About Market Risk 23 Item 4 Controls and Procedures 23 PART II - OTHER INFORMATION Item 1 Legal Proceedings 24 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds 24 Item 3 Defaults Upon Senior Securities 24 Item 4 Submission of Matters to a Vote of Security Holders 24 Item 5 Other Information 24 Item 6 Exhibits 24 SIGNATURES 25 2 Wayne Savings Bancshares, Inc. CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (In thousands, except share data)
September 30, March 31, ASSETS 2005 2005 (Unaudited) Cash and due from banks $ 2,734 $ 4,176 Federal funds sold -- 19,400 Interest-bearing deposits in other financial institutions 11,460 6,366 --------- --------- Cash and cash equivalents 14,194 29,942 Investment securities available for sale - at market 65,664 60,844 Investment securities held to maturity - at amortized cost, approximate market value of $11,979 and $12,101 as of September 30, 2005 and March 31, 2005, respectively 11,904 12,012 Mortgage-backed securities available for sale - at market 47,099 57,724 Mortgage-backed securities held to maturity - at cost, approximate market value of $2,110 and $2,647 as of September 30, 2005 and March 31, 2005, respectively 2,092 2,628 Loans receivable - net 225,698 213,627 Office premises and equipment - net 8,738 8,922 Real estate acquired through foreclosure 49 35 Federal Home Loan Bank stock - at cost 4,494 4,386 Cash surrender value of life insurance 6,706 6,581 Accrued interest receivable on loans 973 757 Accrued interest receivable on mortgage-backed securities 215 444 Accrued interest receivable on investments and interest-bearing deposits 755 708 Prepaid expenses and other assets 4,180 3,996 Prepaid federal income taxes 432 795 --------- --------- Total assets $ 393,193 $ 403,401 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $ 325,818 $ 320,586 Advances from the Federal Home Loan Bank 28,500 40,000 Advances by borrowers for taxes and insurance 461 481 Accrued interest payable 239 198 Accounts payable on mortgage loans serviced for others 194 231 Other liabilities 828 1,305 Deferred federal income taxes 690 401 --------- --------- Total liabilities 356,730 363,202 Commitments -- -- Stockholders' equity Preferred stock (500,000 shares of $.10 par value authorized- no preferred stock issued as of September 30, 2005 or March 31,2005) -- -- Common stock (9,000,000 shares of $ .10 par value authorized; 3,934,874 and 3,907,318 shares issued at September 30, 2005 and March 31, 2005) 393 391 Additional paid-in capital 35,525 35,133 Retained earnings - substantially restricted 11,463 11,371 Less required contributions for shares acquired by Employee Stock Ownership Plan (1,280) (1,304) Less 570,630 and 282,261 shares of treasury stock at September 30, 2005 and March 31, 2005 - at cost (9,256) (4,600) Accumulated other comprehensive loss - unrealized losses on securities designated as available for sale (382) (792) --------- --------- Total stockholders' equity 36,463 40,199 --------- --------- Total liabilities and stockholders' equity $ 393,193 $ 403,401 ========= =========
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, 2005 2004 2005 2004 (Unaudited) Interest income Loans $ 6,725 $ 6,394 $ 3,441 $ 3,231 Mortgage-backed securities 979 1,168 467 573 Investment securities 1,533 925 774 505 Interest-bearing deposits and other 242 138 116 72 ------- ------- ------- ------- Total interest income 9,479 8,625 4,798 4,381 Interest expense Deposits 3,346 2,695 1,728 1,363 Borrowings 502 539 238 246 ------- ------- ------- ------- Total interest expense 3,848 3,234 1,966 1,609 ------- ------- ------- ------- Net interest income 5,631 5,391 2,832 2,772 Provision for losses on loans -- 30 -- 15 ------- ------- ------- ------- Net interest income after provision for losses on loans 5,631 5,361 2,832 2,757 Other income Gain on sale of loans 69 142 44 126 Increase in cash surrender value of life insurance 125 137 63 66 Service fees, charges and other operating 660 619 339 301 ------- ------- ------- ------- Total other income 854 898 446 493 General, administrative and other expense Employee compensation and benefits 3,113 2,784 1,544 1,436 Occupancy and equipment 901 847 476 426 Federal deposit insurance premiums 22 23 11 12 Franchise taxes 261 297 132 168 Other operating 974 998 489 538 ------- ------- ------- ------- Total general, administrative and other expense 5,271 4,949 2,652 2,580 ------- ------- ------- ------- Earnings before income taxes 1,214 1,310 626 670 Federal incomes taxes Current 229 414 81 602 Deferred 78 (55) 78 (421) ------- ------- ------- ------- Total federal income taxes 307 359 159 181 ------- ------- ------- ------- NET EARNINGS $ 907 $ 951 $ 467 $ 489 ======= ======= ======= ======= EARNINGS PER SHARE Basic $ 0.27 $ 0.26 $ 0.14 $ 0.13 ======= ======= ======= ======= Diluted $ 0.27 $ 0.26 $ 0.14 $ 0.13 ======= ======= ======= =======
See accompanying notes to consolidated financial statements. 4 Wayne Savings Bancshares, Inc. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)
Six months Three months ended ended September 30, September 30, 2005 2004 2005 2004 (Unaudited) Net earnings $ 907 $ 951 $ 467 $ 489 Other comprehensive income: Unrealized holding gains (losses) on securities, net of related taxes (benefits) of $211, $(172), $(156) and $429 during the respective periods 410 (333) (302) 832 ------- ------- ------- ------- Comprehensive income $ 1,317 $ 618 $ 165 $ 1,321 ======= ======= ======= ======= Accumulated comprehensive income (loss) $ (382) $ 146 $ (382) $ 146 ======= ======= ======= =======
5 Wayne Savings Bancshares, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS For the six months ended September 30, (In thousands)
2005 2004 Cash flows from operating activities: Net earnings for the period $ 907 $ 951 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 281 711 Amortization of deferred loan origination fees (74) (134) Depreciation and amortization 319 301 Gain on sale of loans (17) (142) Proceeds from sale of loans in the secondary market 5,669 2,406 Loans originated for sale in the secondary market (5,654) (2,355) Provision for losses on loans -- 30 Federal Home Loan Bank stock dividends (108) (87) Increase (decrease) in cash: Accrued interest receivable on loans (216) (71) Accrued interest receivable on mortgage-backed securities 229 88 Accrued interest receivable on investments and interest-bearing deposits (47) (197) Prepaid expenses and other assets (184) (848) Accrued interest payable 41 3 Accounts payable on mortgage loans serviced for others (37) (78) Other liabilities (477) (283) Federal income taxes Current 363 414 Deferred 78 (350) -------- -------- Net cash provided by operating activities 1,073 359 Cash flows provided by (used in) investing activities: Purchase of investment securities designated as available for sale (5,344) (10,989) Proceeds from maturity of investment securities designated as held to maturity 89 25 Proceeds from maturity of investment securities designated as available for sale 1,051 1,500 Purchase of mortgage-backed securities designated as available for sale (5,706) (3,049) Principal repayments on mortgage-backed securities designated as held to maturity 530 1,199 Principal repayments on mortgage-backed securities designated as available for sale 13,309 19,594 Proceeds from sale of mortgage-backed securities designated as available for sale 2,860 -- Loan principal repayments 18,325 24,951 Loan disbursements (30,449) (20,986) Purchase of office premises and equipment - net (135) (263) Proceeds from sale of real estate acquired through foreclosure 115 100 Increase in cash surrender value of life insurance (125) (137) Net cash used in the acquisition of Stebbins Bancshares, Inc. -- (1,314) -------- -------- Net cash provided by (used in) investing activities (5,480) 10,631 -------- -------- Net cash provided by (used in) operating and investing activities (balance carried forward) (4,407) 10,990 -------- --------
6 Wayne Savings Bancshares, Inc. CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) For the six months ended September 30, (In thousands)
2005 2004 Net cash provided by (used in) operating and investing activities (balance brought forward) $ (4,407) $ 10,990 Cash flows used in financing activities: Net increase (decrease) in deposit accounts 5,232 (4,730) Proceeds from Federal Home Loan Bank advances 17,500 -- Repayments of Federal Home Loan Bank advances (29,000) (5,000) Advances by borrowers for taxes and insurance (20) (52) Dividends paid on common stock (815) (879) Proceeds from exercise of stock options 367 -- Tax benefits from exercise of stock options 27 -- Amortization of employee stock ownership benefit plan 24 317 Purchase of treasury shares (4,656) (1,762) -------- -------- Net cash used in financing activities (11,341) (12,106) -------- -------- Net decrease in cash and cash equivalents (15,748) (1,116) Cash and cash equivalents at beginning of period 29,942 19,887 -------- -------- Cash and cash equivalents at end of period $ 14,194 $ 18,771 ======== ======== Supplemental disclosure of cash flow information: Cash paid during the period for: Federal income taxes $ 325 $ -- ======== ======== Interest on deposits and borrowings $ 3,807 $ 3,214 ======== ======== Supplemental disclosure of noncash investing activities: Transfers from loans to real estate acquired through foreclosure $ 129 $ 141 ======== ======== Unrealized gains (losses) on securities designated as available for sale, net of related tax effects $ 410 $ (333) ======== ======== Recognition of mortgage servicing rights in accordance with SFAS No. 140 $ 52 $ 21 ======== ========
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, 2005 and 2004 1. Basis of Presentation --------------------- The accompanying unaudited consolidated financial statements for the six and three months ended September 30, 2005 and 2004 were prepared in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Wayne Savings Bancshares, Inc. (the "Company") included in the Annual Report on Form 10-K for the year ended March 31, 2005. In the opinion of management, all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the unaudited financial statements have been included. The results of operations for the six and three month period ended September 30, 2005 are not necessarily indicative of the results which may be expected for the entire fiscal year. Critical Accounting Policy - The Company's critical accounting policy relates to the allowance for losses on loans. The Company has established a systematic method of periodically reviewing the credit quality of the loan portfolio in order to establish a sufficient allowance for losses on loans. The allowance for losses on loans is based on management's current judgments about the credit quality of individual loans and segments of the loan portfolio. The allowance for losses on loans is established through a provision, and considers all known internal and external factors that affect loan collectability as of the reporting date. Such evaluation, which included a review of all loans on which full collectability may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, historical loan loss experience, management's knowledge of inherent risks in the portfolio that are probable and reasonably estimable and other factors that warrant recognition in providing an appropriate loan loss allowance. Management has discussed the development and selection of this critical accounting policy with the audit committee of the Board of Directors. Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 2. Principles of Consolidation --------------------------- The accompanying consolidated financial statements include Wayne Savings Bancshares, Inc. and the Company's wholly-owned subsidiary, Wayne Savings Community Bank ("Wayne Savings" or the "Bank"). During fiscal 2004, the Company's Board of Directors approved a business combination, which was completed in June 2004, whereby Stebbins Bancshares, Inc., the parent of Stebbins National Bank, was merged into Wayne Savings Bancshares, Inc. and Stebbins National Bank merged with and into Wayne Savings Community Bank. The business combination was accounted for using the purchase method of accounting. Accordingly, the September 30, 2004 consolidated financial statements herein include the accounts of Stebbins National Bank from the June 1, 2004 acquisition date through September 30, 2004. 8 Wayne Savings Bancshares, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For six and three month periods ended September 30, 2005 and 2004 2. Principles of Consolidation (continued) --------------------------- Wayne Savings has eleven banking locations in Wayne, Holmes, Ashland, Medina and Stark counties. All significant intercompany transactions and balances have been eliminated in the consolidation. 3. Earnings Per Share ------------------ Basic earnings per common share are computed based upon the weighted-average number of common shares outstanding during the period, less shares in the Company's Employee Stock Ownership Plan ("ESOP") that are unallocated and not committed to be released. Diluted earnings per common share include the dilutive effect of all additional potential common shares issuable under the Company's stock option plan. The computations are as follows:
For the six months ended For the three months ended September 30, September 30, 2005 2004 2005 2004 Weighted-average common shares outstanding (basic) 3,365,102 3,616,294 3,273,901 3,596,303 Dilutive effect of assumed exercise of stock options 18,808 31,175 14,354 29,694 --------- --------- --------- --------- Weighted-average common shares outstanding (diluted) 3,383,910 3,647,469 3,288,255 3,625,997 ========= ========= ========= =========
All outstanding options were included in the diluted earnings per share calculation for the three and six month periods ending September 30, 2005 and 2004. 4. Stock Option Plan ----------------- The Company has a 1993 Incentive Stock Option Plan that provided for the grant of options covering 196,390 shares of authorized common stock, as adjusted, with 2,567 options outstanding at September 30, 2005. In fiscal 2004, the Company adopted a new Stock Option Plan that provided for the issuance of 142,857 incentive options and 61,224 non-incentive options with respect to a corresponding number of shares of common stock. As of September 30, 2005, all options under the 2004 Plan have been granted, are subject to exercise at the discretion of the grantees, and will expire in fiscal 2014 unless otherwise exercised. In the fourth quarter of fiscal 2005, the Company adopted the provisions of SFAS No. 123(R), "Share Based Payment." SFAS No. 123(R) requires the recognition of compensation related stock option awards based on the fair value of the option award at the grant date. Compensation cost is then recognized over the vesting period. Subsequent to the adoption of SFAS No. 123(R), the Company modified 163,265 stock option awards under the 2004 Stock Option Plan, eliminating the reload options contained therein and immediately vesting these shares. Pursuant to SFAS No. 123(R), the modification represented a new grant. Accordingly, in accordance with the modified prospective application method under SFAS No. 123(R), the Company recognized compensation costs representing the fair value of the option awards at the date of modification. Prior to the fourth quarter of 2005, the Company accounted for its stock option plans pursuant SFAS No. 123, "Accounting for Stock-Based Compensation," which also provided for a fair value-based method for measuring compensation cost at the grant date based on the fair value of the award at the grant date. Compensation was then recognized over the service period, generally defined as the vesting period. 9 Wayne Savings Bancshares, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For six and three month periods ended September 30, 2005 and 2004 4. Stock Option Plan (continued) ----------------------------- Alternatively, SFAS No. 123 permits entities to continue to account for stock options using the Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities that continue to account for stock options using APB Opinion No. 25 were required to make pro forma disclosures of net earnings and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. Wayne Savings had continued to account for stock based compensation in accordance with APB Opinion No. 25. In accordance with APB Opinion No. 25, no compensation cost has been recognized for the plans in the six months or quarter ending September 30, 2004. Had compensation cost for the Plan been determined based on the fair value at the grant dates for awards under the Plan consistent with the accounting method utilized in SFAS No. 123, the Company's net earnings and earnings per share for the three-month period ended September 30, 2004 would have been reported as the pro forma amounts indicated below:
Six months ended Three months ended September 30, September, 30 2004 2004 Net earnings (In thousands) As reported $951 $489 Stock-based compensation, net of tax (54) (27) ---- ---- Pro-forma $897 $462 ==== ==== Earnings per share Basic As reported $.26 $.13 Stock-based compensation, net of tax (.01) -- ---- ---- Pro-forma $.25 $.13 ==== ==== Diluted As reported $.26 $.13 Stock-based compensation, net of tax (.01) -- ---- ---- Pro-forma $.25 $.13 ==== ====
There were no options granted during the six months ended September 30, 2005 or September 30, 2004. 10 Wayne Savings Bancshares, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the six and three month periods ended September 30, 2005 and 2004 4. Stock Option Plan (continued) A summary of the status of the Company's stock option plans as of and for the years ended March 31, 2005 and 2004, and the six months ended September 30, 2005 is presented below:
Six months ended Year ended September 30, March 31, 2005 2005 2004 Weighted- Weighted- Weighted- average average average exercise exercise exercise Shares price Shares price Shares price Outstanding at beginning of period 214,204 $13.84 214,204 $13.84 28,666 $ 6.26 Granted -- -- 163,265 13.95 204,081 13.95 Exercised (27,556) 13.35 -- -- (18,543) 3.31 Forfeited -- -- (163,265) (13.95) -- -- -------- ------ -------- ------ -------- ------ Outstanding at end of period 186,648 $13.92 214,204 $13.84 214,204 $13.84 ======== ====== ======== ====== ======== ====== Options exercisable at period-end 186,648 $13.92 214,204 $13.84 10,123 $11.67 ======== ====== ======== ====== ======== ====== Fair value of options granted $ -- $ 4.07 $ 3.93 ====== ====== ======
The following information applies to options outstanding at September 30, 2005: Number outstanding...................................... 186,648 Range of exercise prices................................ $11.67 - $13.95 Weighted-average exercise price......................... $13.92 Weighted-average remaining contractual life............. 8.5 years The fair value of options granted was based on the Black Scholes pricing model using a dividend yield of 4.5% and 3.3% and an expected volatility of 27.3% and 28.8% for fiscal 2005 and 2004, respectively. All options granted in fiscal 2004 have expected lives of ten years, while the options granted in fiscal 2005 have expected lives of nine years. 11 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Average Balance Sheet The following tables set forth certain information relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.
For the six months ended September 30, ------------------------------------------------------------------------------- 2005 2004 ------------------------------------ ------------------------------------ Average Average Average Average Balance Interest Rate Balance Interest Rate -------- -------- -------- -------- -------- -------- (Dollars in thousands) Interest-earning assets: Loans receivable, net(1) $215,902 $ 6,725 6.23% $211,424 $ 6,394 6.05% Mortgage-backed securities(2) 55,971 979 3.50 79,773 1,168 2.93 Investment securities 77,412 1,533 3.96 47,487 925 3.90 Interest-bearing deposits(3) 16,335 242 2.96 21,387 138 1.29 -------- -------- -------- -------- Total interest- earning assets 365,620 9,479 5.19 360,071 8,625 4.79 Non-interest-earning assets 25,169 21,171 -------- -------- Total assets $390,789 $381,242 ======== ======== Interest-bearing liabilities: Deposits $323,406 3,346 2.07 $307,258 2,695 1.75 Borrowings 27,234 502 3.69 26,900 539 4.01 -------- -------- -------- -------- Total interest- bearing liabilities 350,640 3,848 2.19 334,158 3,234 1.94 -------- -------- -------- -------- Non-interest bearing liabilities 1,692 4,645 -------- -------- Total liabilities 352,332 338,803 Stockholders' equity 38,457 42,439 -------- -------- Total liabilities and stockholders' equity $390,789 $381,242 ======== ======== Net interest income $ 5,631 $ 5,391 ======== ======== Interest rate spread(4) 3.00% 2.85% ======== ======== Net yield on interest- earning assets(5) 3.08% 2.99% ======== ======== Ratio of average interest- earning assets to average interest-bearing liabilities 104.27% 107.75% ======== ========
- ---------- (1) Includes non-accrual loan balances. (2) Includes mortgage-backed securities designated as available for sale. (3) Includes federal funds sold and interest-bearing deposits in other financial institutions. (4) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities (5) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets. 12 ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Average Balance Sheet - (continued)
For the three months ended September 30, ------------------------------------------------------------------------------- 2005 2004 ------------------------------------ ------------------------------------ Average Average Average Average Balance Interest Rate Balance Interest Rate -------- -------- -------- -------- -------- -------- (Dollars in thousands) Interest-earning assets: Loans receivable, net(1) $218,695 $ 3,441 6.29% $214,958 $ 3,231 6.01% Mortgage-backed securities(2) 53,284 467 3.51 74,422 573 3.08 Investment securities 78,075 774 3.97 51,013 505 3.96 Interest-bearing deposits(3) 15,053 116 3.08 15,286 72 1.88 -------- -------- -------- -------- Total interest- earning assets 365,107 4,798 5.26 355,679 4,381 4.93 Non-interest-earning assets 24,609 25,790 -------- -------- Total assets $389,716 $381,469 ======== ======== Interest-bearing liabilities: Deposits $325,465 1,728 2.12 $313,544 1,363 1.74 Borrowings 25,076 238 3.80 25,000 246 3.94 -------- -------- -------- -------- Total interest- bearing liabilities 350,541 1,966 2.24 338,544 1,609 1.90 -------- -------- -------- -------- Non-interest bearing liabilities 2,018 690 -------- -------- Total liabilities 352,559 339,234 Stockholders' equity 37,157 42,235 -------- -------- Total liabilities and stockholders' equity $389,716 $381,469 ======== ======== Net interest income $ 2,832 $ 2,772 ======== ======== Interest rate spread(4) 3.02% 3.03% ======== ======== Net yield on interest- earning assets(5) 3.10% 3.12% ======== ======== Ratio of average interest- earning assets to average interest-bearing liabilities 104.16% 105.06% ======== ========
- ---------- (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. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Discussion of Financial Condition Changes from March 31, 2005 to September 30, - -------------------------------------------------------------------------------- 2005 - ---- At September 30, 2005, we had total assets of $393.2 million, a decrease of $10.2 million, or 2.5%, from March 31, 2005 levels. Liquid assets, consisting of cash, interest-bearing deposits and investment securities, decreased by $11.0 million, or 10.7%, to $91.8 million at September 30, 2005 mainly due to a reduction in federal funds sold of $19.4 million, offset by purchases of investment securities designated as available for sale totaling $5.3 million. This decrease in liquid assets of $11.0 million was used to pay down the Federal Home Loan Bank advances in the absence of immediate lending or investment opportunities. Mortgage-backed securities decreased by $11.2 million, or 18.5%, to $49.2 million due to the short duration of the securities; such decline was partially offset by purchases of mortgage-backed securities totaling $5.7 million. During the six month period ended September 30, 2005 loans receivable increased $12.1 million as the Bank originated and retained $30.4 million of loans and received payments of $18.3 million. Rather than reinvest funds from sales of and repayments on loans in long-term, fixed rate and low yielding residential loans during this period of low 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 an increasing interest rate environment. The composition of the loan portfolio has changed during the six months due to a net decrease of $10.2 million in residential and construction mortgage loans offset by increases in nonresidential real estate loans of $12.6 million and a net increase in commercial loans of $5.6 million in connection with the Bank's increased emphasis on commercial lending.
September 30, 2005 March 31, 2005 (Dollars in thousands) Mortgage loans: One- to four-family residential(1) $148,905 64.64% $157,658 72.60% Residential construction loans 7,633 3.31 7,872 3.63 Multi-family residential 7,768 3.37 4,053 1.87 Non-residential real estate/land(2) 41,748 18.12 29,187 13.44 -------- ------ -------- ------ Total mortgage loans 206,054 89.44 198,770 91.54 Other loans: Consumer loans(3) 4,604 2.00 4,306 1.98 Commercial business loans 19,717 8.56 14,075 6.48 -------- ------ -------- ------ Total other loans 24,321 10.56 18,381 8.46 -------- ------ -------- ------ Total loans before net items 230,375 100.00% 217,151 100.00% ====== ====== Less: Loans in process 2,845 1,638 Deferred loan origination fees 462 512 Allowance for loan losses 1,370 1,374 -------- -------- Total loans receivable, net $225,698 $213,627 ======== ======== Mortgage-backed securities, net(4) $ 49,191 $ 60,352 ======== ========
- ---------- (1) Includes equity loans collateralized by second mortgages in the aggregate amount of $21.4 million and $20.3 million as of September 30, 2005 and March 31, 2005, respectively. Such loans have been underwritten on substantially the same basis as the Company's first mortgage loans. (2) Includes land loans of $1.3 million and $1.4 million as of September 30, 2005 and March 31, 2005, respectively. (3) Includes second mortgage loans of $1.0 million and $1.4 million as of September 30, 2005 and March 31, 2005, respectively. (4) Includes mortgage-backed securities designated as available for sale. 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Nonperforming and impaired loans amounted to $1.2 million at September 30, 2005, as compared with $906,000 in nonperforming and impaired loans at March 31, 2005. Such loans consisted, on both dates, of primarily residential mortgage loans. Historically, the Company generally has not recognized losses on nonperforming loans secured by residential mortgages. The following table sets forth information regarding our past due, nonaccrual and impaired loans and real estate acquired through foreclosure as of September 30, 2005 and March 31, 2005.
September 30, March 31, 2005 2005 (Dollars in thousands) Past due loans 30-89 days: Mortgage loans: One- to four-family residential $ 643 $1,298 Nonresidential -- 35 Land -- -- Non-mortgage loans: Commercial business loans 3 4 Consumer loans 44 98 ------ ------ $ 690 $1,435 ====== ====== Non-accrual loans: Mortgage loans: One- to four-family residential $ 974 $ 895 All other mortgage loans 178 -- Non-mortgage loans: Commercial business loans -- -- Consumer 18 11 ------ ------ Total non-accrual loans 1,170 906 Accruing loans 90 days or more delinquent -- -- ------ ------ Total non-performing loans 1,170 906 Loans deemed impaired -- -- ------ ------ Total non-performing and impaired loans 1,170 906 Total real estate acquired through foreclosure 49 35 ------ ------ Total non-performing and impaired assets $1,219 $ 941 ====== ====== Total non-performing and impaired loans to net loans receivable 0.52% 0.42% ====== ====== Total non-performing and impaired loans to total assets 0.30% 0.22% ====== ====== Total non-performing and impaired assets to total assets 0.31% 0.23% ====== ======
The Company reclassified $2.1 million of the Stebbins portfolio as substandard pursuant to the definitions set forth under Office of Thrift Supervision Regulations. These loans are not delinquent, but until they can be restructured and supported by current financial statements, the Company will continue to classify such loans as substandard. 15 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Discussion of Financial Condition Changes from March 31, 2005 to September 30, - -------------------------------------------------------------------------------- 2005 (continued) - ---------------- Historically, the Company has had minimal loan losses charged off through the allowance. The following table sets forth the analysis of the allowance for loan losses for the periods indicated.
For the six months ended For the year ended September 30, 2005 March 31, 2005 Loans receivable, net $ 225,698 $ 213,627 ========= ========= Average loans receivable, net $ 215,902 $ 212,785 ========= ========= Allowance balance (at beginning of period) $ 1,374 $ 815 Charge-offs: Mortgage loans: One- to four-family (7) (28) Residential construction -- -- Multi-family residential -- -- Non-residential real estate and land -- -- Other loans: Consumer (21) (44) Commercial -- (54) --------- --------- Gross charge-offs (28) (126) --------- --------- Recoveries: Mortgage loans: One- to four-family -- -- Residential construction -- -- Multi-family residential -- -- Non-residential real estate and land -- -- Other loans: Consumer 16 25 Commercial 8 -- --------- --------- Gross recoveries 24 25 --------- --------- Net charge-offs (4) (101) --------- --------- Provision charged to operations -- 430 Stebbins acquisition -- 230 --------- --------- Allowance for loans losses balance (at end of period) $ 1,370 $ 1,374 ========= ========= Allowance for loan losses as a percent of loans receivable, net at end of period 0.61% 0.64% ========= ========= Net loans charged off as a percent of average loans receivable, net 0.01% 0.05% ========= ========= Ratio of allowance for loan losses to non- performing loans at end of period 117.09% 151.66% ========= =========
Deposits at September 30, 2005, totaled $325.8 million, an increase of $5.2 million from $320.6 million at March 31, 2005, due to Bank's competitive deposit pricing in all market areas. Certificates of deposit grew by $9.4 million coupled with $5.9 million of growth in the commercial sweep program and money market growth of $1.4 million. This growth was offset by a decrease of $11.9 million in savings deposits. The increase in higher rate certificates of deposit, combined with the decrease in relatively lower rate savings deposits contributed to the increase in the average rate paid on deposits for the three and six months ended September 30, 2005, compared to the same periods in 2004. Borrowings totaled $28.5 million at September 30, 2005 as compared with $40.0 million at March 31, 2005. As described above, the Company repaid short-term federal home loan advances during the six months ended September 30, 2005 with excess cash balances. 16 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Discussion of Financial Condition Changes from March 31, 2005 to September 30, - -------------------------------------------------------------------------------- 2005 (continued) - ---------------- Stockholders' equity decreased by $3.8 million during the six months ended September 30, 2005, due mainly to the purchase of treasury stock of $4.7 million and dividends totaling $815,000. These amounts were offset by $907,000 in net earnings for the six months ended September 30, 2005, unrealized gains on available for sale securities of $410,000, and proceeds from stock options exercised of $394,000. Comparison of Operating Results for the Six Month Periods Ended September 30, - -------------------------------------------------------------------------------- 2005 and 2004 - ------------- General - ------- Net earnings totaled $907,000 for the six months ended September 30, 2005, a decrease of $44,000, or 4.6%, compared to the net earnings of $951,000 for the six months ended September 30, 2004. The decline in net earnings was primarily attributable to an increase in general, administrative and other expense of $322,000, or 6.5% coupled with a decline of $44,000, or 4.9%, from total other income. These decreases in earnings were offset by an increase in net interest income after provision for losses on loans of $270,000, or 5.0%, and a decrease in federal income taxes of $52,000, or 14.5%. The Company has maintained its strategy to aggressively manage interest rate risk. This strategy negatively affected earnings for the six months ended September 30, 2005. However, management believes that the investment of excess funds primarily in shorter term assets will help the Company in the current rising interest rate environment by providing flexibility to redeploy such assets in higher yielding loans and other investments as interest rates rise. Interest Income - --------------- Interest income increased $854,000, or 9.9%, to $9.5 million for the six months ended September 30, 2005, compared to the same period in 2004. This increase was mainly due to an increase in the weighted-average yield on interest-earning assets to 5.19% from 4.79% for the six month period ended September 30, 2004. The yield increase was primarily due to the Federal Reserve raising the prime rate 2.75% over the past year and the corresponding impact on the Company's investment securities and interest-bearing deposits. The Company purposefully invested excess funds in shorter-term securities available for sale rather than long-term fixed rate mortgage 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. The Company continued to pursue its strategy of originating shorter term and variable rate commercial loans to diversify its loan portfolio to achieve higher yields and manage interest rate risk. Interest income on loans increased $331,000, or 5.2%, for the six months ended September 30, 2005, compared to the same period in 2004, due primarily to an increase in the weighted-average balance of loans period to period of $4.5 million to $215.9 million for the 2005 period coupled with an 18 basis point increase in the weighted average yield on loans outstanding. Interest income on mortgage-backed securities decreased $189,000, or 16.2%, during the six months ended September 30, 2005, compared to the same period in 2004, due primarily to a decrease of $23.8 million, or 29.8%, in the weighted-average balance due mainly to prepayments. The decrease in the weighted average balance was offset by an increase of 57 basis points to a weighted average yield of 3.50% as compared to 2.93%, from the comparable 2004 period. 17 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, - -------------------------------------------------------------------------------- 2005 and 2004 (continued) - ------------------------- Interest Income (continued) - --------------- Interest income on investment securities increased by $608,000, or 65.7%, during the 2005 period compared to the same period in 2004, reflecting an increase in the weighted average balance of $29.9 million, or 63.0%, to $77.4 million from $47.5 million during the comparable 2004 period, coupled with an increase in the average yield of 6 basis points to 3.96%. Interest income on interest-bearing deposits increased by $104,000, or 75.4%, for the six months ended September 30, 2005, due primarily to an increase in the average yield of 167 basis points to an average yield of 2.96% from an average yield of 1.29% for the six months ended September 30, 2004, offset by a decrease in the weighted average balance of $5.1 million, or 23.6%, compared to the 2004 period of $21.4 million. Interest Expense - ---------------- Interest expense for the six months ended September 30, 2005 totaled $3.8 million, an increase of $614,000, or 19.0%, from interest expense for the six months ended September 30, 2004. The increase resulted from an increase in the average balance of deposits and borrowings outstanding of $16.5 million, or 4.9%, to $350.6 million for the period ended September 30, 2005 and a 25 basis point increase in the average cost of funds to 2.19% for the 2005 period. Interest expense on deposits totaled $3.3 million for the three months ended September 30, 2005, an increase of $651,000, or 24.2%, compared to the six months ended September 30, 2004, as a result of an increase in the average balance outstanding of $16.1 million, or 5.3%, to $323.4 million for the 2005 period coupled with a 32 basis point increase in the average cost of deposits to 2.07% for the 2005 period. During the six month period the composition of deposits shifted from lower cost savings deposits toward higher cost certificates of deposit. Interest expense on borrowings totaled $502,000 for the six months ended September 30, 2005, a decrease of $37,000, or 6.9%, from the 2004 period, primarily due to a decrease on the weighted average yield of 32 basis points to an average yield of 3.69% for the six months ended September 30, 2005. Net Interest Income - ------------------- Net interest income totaled $5.6 million for the six months ended September 30, 2005, an increase of $240,000, or 4.5%, from the six month period ended September 30, 2004. The average interest rate spread increased to 3.00% for the six months ended September 30, 2005 from 2.85% for the six months ended September 30, 2004. The net interest margin increased to 3.08% for the three months ended September 30, 2005 from 2.99% for the six months ended September 30, 2004. Provision for Losses on Loans - ----------------------------- The Company did not record any provision for losses on loans for the period ending September 30, 2005. For the period ended September 30, 2004, management recorded a $30,000 provision for losses on loans. To the best of management's knowledge, all known and inherent losses that are probable and which can be reasonably estimated have been recorded as of September 30, 2005. 18 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, - -------------------------------------------------------------------------------- 2005 and 2004 (continued) - ------------------------- 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 $44,000, or 4.9%, for the six months ended September 30, 2005 as compared with the six months ending September 30, 2004. Gain on sale of loans was down $73,000, or 51.4% mainly due the sale of the credit card portfolio resulting in a gain of $44,000 in July 2004, coupled with more competitive pricing in 2005 which resulted in a lower gain on the sale of loans. The increase in cash surrender value of life insurance was also down $12,000, or 8.8%, as a result of the individual insurance policies' performance. These decreases were offset with a $41,000 increase in service fees, charges and other operating income which was mainly comprised of trust income of $28,000 and increased annuity sales of $9,000. General, Administrative, and Other Expense - ------------------------------------------ General, administrative and other expense increased by $322,000, or 6.5%, to $5.3 million for the six months ended September 30, 2005 compared to the six months ended September 30, 2004. The increase resulted primarily from an increase in employee compensation and benefits expense of $329,000, or 11.8% coupled with an increase in occupancy and equipment charges of $54,000, or 6.4%, offset by a reduction in franchise tax expense of $36,000, or 12.1%, and other operating expense reduction of $24,000, or 2.4%. The increase in employee compensation and benefits was mainly due to the Stebbins acquisition in June 2004 and the expansion of personnel needed to enhance our commercial lending department and to establish a trust department staffed by a team of qualified, experienced trust professionals. The increase in other occupancy operating expense was primarily due to additional vendor support and data connectivity upgrades needed to facilitate operations. The reduction in franchise tax is mainly the result of increased treasury stock due to the stock repurchase programs. The other operating expenses were reduced mainly due to the elimination of the temporary systems operating costs associated with the Stebbins acquisition until the November 2004 data conversion. Federal Income Taxes - -------------------- The provision for federal income taxes was $307,000 for the six months ended September 30, 2005, a decrease of $52,000, or 14.5%, compared to the same period in 2004, primarily due to the $96,000, or 7.3%, decrease in earnings before federal income taxes. The effective tax rate for the six months ended September 30, 2005, was 25.3% as compared to 27.4% for the same period in 2004. The effective tax rate for the six months ended September 30, 2005 declined mainly due to income earned from the purchase of additional tax-advantaged municipal securities. Comparison of Operating Results for the Three Month Periods Ended September 30, - -------------------------------------------------------------------------------- 2005 and 2004 - ------------- General - ------- Net earnings totaled $467,000 for the quarter ended September 30, 2005, a decrease of $22,000, or 4.5%, compared to the net earnings of $489,000 for the quarter ended September 30, 2004. The decline in net earnings was primarily attributable to an increase in general, administrative and other expense of $72,000, or 2.8%, coupled with a decrease in other income of $47,000, or 9.5%, offset by an increase in net interest income after provision for losses on loans of $75,000, or 2.7%, and a decrease in federal income taxes of $22,000, or 12.2%. The Company has maintained its strategy to aggressively manage interest rate risk. This strategy negatively affected earnings for the quarter ended September 30, 2005. However, management believes that the investment of excess funds primarily in shorter term assets will help the Company in a rising interest rate environment by providing it with the flexibility to redeploy such assets in higher yielding loans and other investments as interest rates rise. 19 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, - -------------------------------------------------------------------------------- 2005 and 2004 (continued) - ------------------------- Interest Income - --------------- Interest income increased $417,000, or 9.5%, to $4.8 million for the three months ended September 30, 2005, compared to the same period in 2004. This increase was mainly due to an increase in the weighted-average yield on interest-earning assets to 5.26% from 4.93% for the period ended September 30, 2004. The yield increase is primarily due to the Federal Reserve raising the prime rate 2.75% over the past year and the corresponding impact on the Company's investment securities and interest-bearing deposits. Interest income on loans increased $210,000, or 6.5%, for the three months ended September 30, 2005, compared to the same period in 2004, due primarily to an increase in the weighted-average yield of 28 basis points to 6.29% coupled with an increase in the weighted average balance of loans period to period of $3.7 million to $218.7 million for the 2005 period. Interest income on mortgage-backed securities decreased $106,000, or 18.5%, during the three months ended September 30, 2005, compared to the same period in 2004, due primarily to a decrease of $21.1 million, or 28.4%, in the weighted-average balance caused mainly by principal repayments. The decrease in the weighted average balance was offset by an increase of 43 basis points to a weighted average yield of 3.51% as compared to 3.08%, from the comparable 2004 period. Interest income on investment securities increased by $269,000, or 53.3%, during the 2005 period compared to the same period in 2004, reflecting an increase in the weighted average balance of $27.1 million, or 53.0%, to $78.1 million from $51.0 million during the comparable 2004 period. Interest income on interest-bearing deposits increased by $44,000, or 61.1%, for the three months ended September 30, 2005, due primarily to an increase in the average yield of 120 basis points to an average yield of 3.08% from an average yield of 1.88% for the quarter ended September 30, 2004. The Company continued to pursue its strategy of shorter term and variable rate commercial loans to diversify its loan portfolio to achieve higher yields and manage interest rate risk. Interest Expense - ---------------- Interest expense for the three months ended September 30, 2005 totaled $2.0 million, an increase of $357,000, or 22.2%, from interest expense for the three months ended September 30, 2004. The increase resulted from an increase in the average balance of deposits and borrowings outstanding of $12.0 million, or 3.5%, to $350.5 million for the period ended September 30, 2005 and an 34 basis point increase in the average cost of funds to 2.24% for the 2005 period. Interest expense on deposits totaled $1.7 million for the three months ended September 30, 2005, an increase of $365,000, or 26.8%, compared to the three months ended September 30, 2004, as a result of an increase in the average balance outstanding of $11.9 million, or 3.8%, to $325.5 million for the 2005 period coupled with a 38 basis point increase in the average cost of deposits to 2.12% for the 2005 period. The composition of deposits continued to shift from lower cost savings deposits toward higher cost certificates of deposit. Interest expense on borrowings totaled $238,000 for the three months ended September 30, 2005, a decrease of $8,000, or 3.3%, from the 2004 period, primarily due to a decrease on the weighted average yield of 14 basis points to an average yield of 3.80% for the three months ended September 30, 2005. 20 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Comparison of Operating Results for the Three Month Periods Ended September 30, - -------------------------------------------------------------------------------- 2005 and 2004 (continued) - ------------------------- Net Interest Income - ------------------- Net interest income totaled $2.8 million for the three months ended September 30, 2005, an increase of $60,000, or 2.2%, from the three month period ended September 30, 2004. The average interest rate spread decreased to 3.02% for the three months ended September 30, 2005 from 3.03% for the three months ended September 30, 2004. The net interest margin decreased to 3.10% for the three months ended September 30, 2005 from 3.12% for the three months ended September 30, 2004. Provision for Losses on Loans - ----------------------------- The Company did not record any provision for losses on loans for the period ending September 30, 2005. For the period ended September 30, 2004, management recorded a $15,000 provision for losses on loans. To the best of management's knowledge, all known and inherent losses that are probable and which can be reasonably estimated have been recorded as of September 30, 2005. Other Income - ------------ Other income, consisting primarily of the cash surrender value of life insurance, gains on sale of loans, service fees, and charges on deposit accounts decreased by $47,000, or 9.5%, for the three months ended September 30, 2005 as compared with the quarter ended September 30, 2004. Gain on sale of loans was down $82,000, or 65.1% mainly due to the sale of the credit card portfolio which resulted in a gain of $44,000 in July 2004 coupled with more competitive pricing in 2005 which resulted in a lower gain on the sale of loans. This decrease was offset with a $38,000 increase in service fees, charges and other operating income which was mainly comprised of trust income of $18,000 and increased annuity sales of $12,000. General, Administrative, and Other Expense - ------------------------------------------ General, administrative and other expense increased by $72,000, or 2.8%, to $2.7 million for the three months ended September 30, 2005 compared to the three months ended September 30, 2004. The increase resulted primarily from an increase in employee compensation and benefits expense of $108,000, or 7.5%, coupled with an increase of $50,000, or 11.7%, in occupancy and equipment expense. These increased expenses were offset with a reduction in franchise tax expense of $36,000, or 21.4%, and other operating expense of $49,000, or 9.1%. The increase in employee compensation and benefits was mainly due to the expansion of personnel needed to enhance our commercial lending department and to establish a trust department staffed by a team of qualified, experienced trust professionals. The increase in other occupancy operating expense was primarily due to additional vendor support and data connectivity upgrades needed to facilitate operations. The reduction in franchise tax is mainly the result of increased treasury stock due to stock repurchases. The other operating expenses were reduced mainly due to the elimination of the temporary system operating costs associated with the Stebbins acquisition until the November 2004 data conversion. 21 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, - -------------------------------------------------------------------------------- 2005 and 2004 (continued) - ------------------------- Federal Income Taxes - -------------------- The provision for federal income taxes was $159,000 for the three months ended September 30, 2005, a decrease of $22,000, or 12.2%, compared to the same period in 2004, primarily due to the $44,000, or 6.6%, decrease in earnings before federal income taxes. The effective tax rate for the three months ended September 30, 2005, was 25.4% as compared to 27.0% for the same period in 2004. The effective tax rate for the three months ended September 30, 2005 declined mainly due to income earned from the purchase of additional tax-advantaged municipal securities. Other Information - ----------------- On October 11, 2005, the Company filed a report on Form 8-K which, in part, announced the appointment of Phillip E. Becker as Interim Chief Executive Officer in response to the illness of the Company's Chairman Chief Executive Officer, Charles F. Finn. As set forth in that filing, it is management's current belief that Mr. Finn will return to the Company as Chairman upon completion of an appropriate recuperation period. IMPACT OF INFLATION AND CHANGING PRICES The financial statements and related data presented herein have been prepared in accordance with U.S. generally accepted accounting principles, which require the measurement of financial position and operating results in terms of historical dollars without considering changes in the relative purchasing power of money over time due to inflation. Unlike most industrial companies, substantially all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates have a more significant impact on a financial institution's performance than the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or in the same magnitude as the prices of goods and services as measured by the consumer price index. FORWARD LOOKING STATEMENTS This Form 10-Q contains certain forward-looking statements and information relating to the Company that are based on the beliefs of management as well as assumptions made by and information currently available to management. In addition, in those and other portions of this document, the words "anticipate," "believe," "estimate," "except," "intend," "should" and similar expressions, or the negative thereof, as they relate to the Company or the Company's management, are intended to identify forward-looking statements. Such statements reflect the current views of the Company with respect to future looking events and are subject to certain risks, uncertainties and assumptions. Should one or more of these risks or uncertainties materialize or should underlying assumptions prove incorrect, actual results may vary from those described herein as anticipated, believed, estimated, expected or intended. Factors that could have a material adverse effect on our operations and future prospects include, but are not limited to, changes in: interest rates, general economic conditions, legislative/regulatory changes, monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System, the quality or composition of the loan or investment portfolios, demand for loan products, deposit flows, competition, demand for financial services in our market area and accounting principles, policies and guidelines. These risks and uncertainties should be considered in evaluating forward-looking statements contained herein, and you should not place undue reliance on such statements, which reflect our position as of the date of this report. 22 Wayne Savings Bancshares, Inc. ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK There has been no material change in the Company's market risk since the Company's Form 10-K filed with the Securities and Exchange Commission for the year ended March 31, 2005. ITEM 4 CONTROLS AND PROCEDURES (a) Evaluation of disclosure controls and procedures. Under the supervision and with the participation of the Company's management, including our Interim 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 Interim 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. 23 Wayne Savings Bancshares, Inc. PART II ITEM 1. Legal Proceedings ----------------- Not applicable ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds ----------------------------------------------------------- (a) Not applicable (b) Not applicable (c) The following table sets forth certain information regarding repurchases by the Company for the quarter ended September 30, 2005.
Total # of Maximum # of shares Total Average shares purchased which may still be # of shares price paid as part of the purchased as part Period purchased per share announced plan of the announced plan ------ --------- --------- -------------- --------------------- July 1-31, 2005 -- $ -- -- 229,794 August 1-31, 2005 -- $ -- -- 229,794 September 1-30, 2005 65,000 $ 16.08 65,000 164,794
Notes to the Table: A repurchase program for 185,491, or 5% of the Company's outstanding shares, was publicly announced on September 2, 2004 and expired on August 26, 2005. On June 6, 2005, the Company announced the completion of the repurchase program and the authorization by the Board of Directors of a new program for the repurchase of 352,433 shares, or 10%, of the Company's outstanding shares. ITEM 3. Defaults Upon Senior Securities ------------------------------- Not applicable ITEM 4. Submission of Matters to a Vote of Security Holders --------------------------------------------------- None ITEM 5. Other Information ----------------- Not applicable ITEM 6. Exhibits -------- EX-10 Form of Employment Agreement between Wayne Savings Community Bank and H. Stewart Fitz Gibbon III 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 24 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 14, 2005 By: /s/Phillip E. Becker ----------------------------- ------------------------------------ Phillip E. Becker, EVP and Chief Lending Officer, Interim Chief Executive Officer Date: November 14, 2005 By: /s/H. Stewart Fitz Gibbon ----------------------------- ------------------------------------ H. Stewart Fitz Gibbon III SVP and Chief Financial Officer 25 EX-10 2 ex10.txt Exhibit 10 EMPLOYMENT AGREEMENT This Agreement is made effective as of October __, 2005 by and between Wayne Savings Community Bank (the "Bank"), an Ohio savings and loan association, with its principal administrative office at 151 North Market Street, Wooster, Ohio and H. Stewart Fitz Gibbon III (the "Executive"). Any reference to "Company" herein shall mean Wayne Savings Bancshares, Inc. the stock holding company parent of the Bank or any successor thereto. WHEREAS, the Bank wishes to assure itself of the continued services of Executive for the period provided in this Agreement; and WHEREAS, Executive is willing to continue to serve in the employ of the Bank on a full-time basis for said period. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. POSITION AND RESPONSIBILITIES During the period of his employment hereunder, Executive agrees to serve as Senior Vice President and Chief Financial Officer of the Bank (the "Executive Position"). As Senior Vice President and Chief Financial Officer, the Executive shall be the principal financial and accounting officer of the Bank, and shall be responsible for the financial and accounting function at the Bank, including financial reporting, preparation of periodic securities reports filed with the Securities and Exchange Commission, and preparation of financial reports filed with the Bank's banking regulators. During said period, Executive also agrees to serve, if elected, as an officer of any subsidiary or affiliate of the Bank. Failure to reelect Executive to the Executive Position without the consent of the Executive during the term of this Agreement (except for any termination for Cause, as defined herein) shall constitute a breach of this Agreement. 2. TERMS AND DUTIES (a) The period of Executive's employment under this Agreement shall begin as of the date first above written and shall continue for a period of twenty-four full calendar months thereafter. Within thirty days prior to the first anniversary date of this Agreement, and within thirty days prior to each anniversary date thereafter, the Board of Directors of the Bank ("Board") will conduct a performance evaluation and review of the Executive for purposes of determining whether to extend the Agreement, and the results thereof shall be included in the minutes of the Board's meeting and communicated to Executive. Upon a favorable performance evaluation, the Board shall renew the term of the Agreement for an additional year from the anniversary date such that the remaining term shall be two years; provided, however, if written notice of nonrenewal is provided to Executive at least ten days and not more than thirty days prior to any anniversary date, the Agreement shall expire at the end of twenty-four months following such anniversary date. (b) During the period of his employment hereunder, except for periods of absence occasioned by illness, reasonable vacation periods, and reasonable leaves of absence, Executive shall devote substantially all his business time, attention, skill, and efforts to the faithful performance of his duties hereunder including activities and services related to the organization, operation and management of the Bank; provided, however, that, with the approval of the Board, as evidenced by a resolution of such Board, from time to time, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, business companies or business organizations, which, in such Board's judgment, will not present any conflict of interest with the Bank, or materially affect the performance of Executive's duties pursuant to this Agreement (for purposes of this Section 2(b), Board approval shall be deemed provided as to service with any such business companies or organizations that Executive was serving as of the date of this Agreement). 3. COMPENSATION AND REIMBURSEMENT. (a) The compensation specified under this Agreement shall constitute the salary and benefits paid for the duties described in Section 2(b). The Bank shall pay Executive as compensation a salary of not less than $______ per year ("Base Salary"). Such Base Salary shall be payable biweekly. During the period of this Agreement, Executive's Base Salary shall be reviewed at least annually. Such review shall be conducted by a Committee designated by the Board, and the Board may increase, but not decrease (except a decrease that is generally applicable to all employees), Executive's Base Salary (any increase in Base Salary shall become the "Base Salary" for purposes of this Agreement). In addition to the Base Salary provided in this Section 3(a), the Bank shall provide Executive at no cost to Executive with all such other benefits as are provided uniformly to permanent full-time employees of the Bank. Base Salary shall include any amounts of compensation deferred by Executive under qualified and nonqualified plans maintained by the Bank. (b) The Bank will provide Executive with employee benefit plans, arrangements and perquisites substantially equivalent to those in which Executive was participating or otherwise deriving benefit from immediately prior to the beginning of the term of this Agreement, and the Bank will not, without Executive's prior written consent, make any changes in such plans, arrangements or perquisites which would adversely affect Executive's rights or benefits thereunder, except as to any changes that are applicable to all employees or as reasonably or customarily available. Without limiting the generality of the foregoing provisions of this Subsection (b), Executive will be entitled to participate in or receive benefits under any employee benefit plans including but not limited to, retirement plans, supplemental retirement plans, pension plans, profit-sharing plans, health-and-accident plans, medical coverage or any other employee benefit plan or arrangement made available by the Bank in the future to its senior executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Executive will be entitled to incentive compensation and bonuses as provided in any plan of the Bank in which Executive is eligible to participate (and he shall be entitled to a pro rata distribution under any incentive compensation or bonus plan as to any year in which a termination of employment occurs, other than termination for Cause). Nothing paid to the Executive under any such plan or arrangement 2 will be deemed to be in lieu of other compensation to which the Executive is entitled under this Agreement. (c) In addition to the Base Salary provided for by paragraph (a) of this Section 3, the Bank shall pay or reimburse Executive for all reasonable travel and other reasonable expenses incurred by Executive performing his obligations under this Agreement and may provide such additional compensation in such form and such amounts as the Board may from time to time determine. 4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION. (a) Upon the occurrence of an Event of Termination (as herein defined) during the Executive's term of employment under this Agreement, the provisions of this Section shall apply. As used in this Agreement, an "Event of Termination" shall mean and include any one or more of the following: (i) the termination by the Bank or the Company of Executive's full-time employment hereunder for any reason other than (A) termination for Cause (as defined in Section 7 hereof), (B) upon Retirement (as defined in Section 6 hereof), or (C) for Disability (as set forth in Section 5 hereof); (ii) Executive's resignation from the Bank's employ following (A) any failure to elect or reelect or to appoint or reappoint Executive to the Executive Position, (B) a material change in Executive's function, duties, or responsibilities, which change would cause Executive's position to become one of lesser responsibility, importance, or scope from the position and attributes thereof described in Section 1 above, to which Executive has not agreed in writing (and any such material change shall be deemed a continuing breach of this Agreement), (C) a relocation of Executive's principal place of employment to a location more than 30 miles outside the City of Wooster, or a material reduction in the benefits and perquisites, including Base Salary, to the Executive from those being provided as of the effective date of this Agreement (except for any reduction that is part of an employee-wide reduction in pay or benefits), (D) a liquidation or dissolution of the Bank or the Company, or (E) material breach of this Agreement by the Bank; and (iii) the event specified in Section 4(b) hereof. Upon the occurrence of any event described in clauses (ii) (A), (B), (C), (D) or (E) above, Executive shall have the right to elect to terminate his employment under this Agreement by resignation upon not less than thirty (30) days prior written notice given within a reasonable period of time (not to exceed, except in case of a continuing breach, four calendar months) after the event giving rise to said right to elect, which termination by Executive shall be an Event of Termination. No payments or benefits shall be due to Executive under this Agreement upon the termination of Executive's employment except as provided in Sections 3, 4 or 5 hereof. (b) As used in this Agreement, an Event of Termination shall also mean and include Executive's involuntary termination or voluntary resignation from the Bank's employ on the effective date of, or at any time following, a Change in Control during the term of this Agreement. For these purposes, a Change in Control of the Bank or the Company shall mean a change in control of a nature that: [(i) would be required to be reported in response to Item 1(a) of the current report on Form 8-K, as in effect on the date hereof, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 (the "Exchange Act")]; or (ii) results in a Change in Control of the Bank or the Company within the meaning of the Bank Holding Company Act ("BHCA"), as amended, and applicable rules and regulations promulgated 3 thereunder (collectively, the "BHCA") as in effect at the time of the Change in Control; or (iii) without limitation such a Change in Control shall be deemed to have occurred at such time as (a) any "person" (as the term is used in Sections 13(d) and 14(d) of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing 25% or more of the combined voting power of Company's outstanding securities, except for any securities purchased by the Bank's employee stock ownership plan or trust; or (b) individuals who constitute the Board on the date hereof (the "Incumbent Board") cease for any reason to constitute at least a majority thereof, provided that any person becoming a director subsequent to the date hereof whose election was approved by a vote of at least three-quarters of the directors comprising the Incumbent Board, or whose nomination for election by the Company's stockholders was approved by the same Nominating Committee serving under an Incumbent Board, shall be, for purposes of this clause (b), considered as though he were a member of the Incumbent Board; or (c) a plan of reorganization, merger, consolidation, sale of all or substantially all the assets of the Bank or the Company or similar transaction in which the Bank or Company is not the surviving institution occurs; or (d) a proxy statement soliciting proxies from stockholders of the Company, by someone other than the current management of the Company, seeking stockholder approval of a plan of reorganization, merger or consolidation of the Company or similar transaction with one or more corporations as a result of which the outstanding shares of the class of securities then subject to the plan are to be exchanged for or converted into cash or property or securities not issued by the Company; or (e) a tender offer is made for 25% or more of the voting securities of the Company and the shareholders owning beneficially or of record 25% or more of the outstanding securities of the Company have tendered or offered to sell their shares pursuant to such tender offer and such tendered shares have been accepted by the tender offeror. (c) Upon the occurrence of an Event of Termination, as defined in Section 4(a) or 4(b), the Bank shall pay Executive, or, in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a cash amount equal to the greater of the payments due for the remaining term of the Agreement, or two (2) times the sum of: (i) the highest annual rate of Base Salary paid to Executive at any time under this Agreement, and (ii) the greater of (x) the average annual cash bonus paid to Executive with respect to the two completed fiscal years prior to the Event of Termination, or (y) the cash bonus paid to Executive with respect to the fiscal year ended prior to the Event of Termination; provided however, that if the Bank is not in compliance with its minimum capital requirements or if such payments would cause the Bank's capital to be reduced below its minimum capital requirements, such payments shall be deferred until such time as the Bank is in capital compliance. At the election of the Executive, which election may be made annually by January 31 of each year and is irrevocable for the year in which made (and once payments commence), such payments shall be made in a lump sum or paid quarterly during the remaining term of the agreement following the Executive's termination. In the event that no election is made, payment to the Executive will be made on a quarterly basis during the remaining term of the Agreement. Such payments shall not be reduced in the event the Executive obtains other employment following termination of employment. (d) Upon the occurrence of an Event of Termination, the Bank will cause to be continued life, medical and dental coverage substantially comparable, as reasonably or 4 customarily available, to the coverage maintained by the Bank for Executive prior to his termination, except to the extent such coverage may be changed in its application to all Bank employees or is not available on an individual basis to a terminated employee. Such coverage shall cease twenty-four (24) months following the Event of Termination. (e) Notwithstanding anything to the contrary in this Agreement, in the event that: (i) the aggregate payments or benefits to be made or afforded to Executive (the "Termination Benefits") would be deemed to include an "excess parachute payment" under Section 280G of the Code or any successor thereto, and (ii) if such Termination Benefits were reduced to an amount (the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an amount equal to the total amount of payments permissible under Section 280G of the Code or any successor thereto, then the Termination Benefits to be paid to Executive shall be so reduced so as to be a Non-Triggering Amount. The allocation of the reduction required hereby among Termination Benefits provided by the preceding paragraphs of this Section 4 shall be determined by the Executive. 5. TERMINATION FOR DISABILITY. (a) If, as a result of Executive's incapacity due to physical or mental illness, he shall have been absent from his duties with the Bank or the Company on a full-time basis for six (6) consecutive months, and within thirty (30) days after written notice of potential termination is given he shall not have returned to the full-time performance of his duties, the Bank may terminate Executive's employment for "Disability." (b) The Bank will pay Executive, as disability pay, a bi-weekly payment equal to 75% of the Executive's bi-weekly rate of Base Salary on the effective date of such termination. These disability payments shall commence on the effective date of Executive's termination and will end on the earlier of (i) the date Executive returns to the full-time employment of the Bank in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Bank; (ii) Executive's full-time employment by another employer; (iii) Executive attaining a Retirement age as identified in Section 6; or (iv) Executive's death. The disability pay shall be reduced by the amount, if any, paid to the Executive under any plan of the Bank or the Company providing disability benefits to the Executive. (c) The Bank will cause to be continued life, medical, and dental coverage substantially comparable, as reasonable or customarily available, to the coverage maintained by the Bank for Executive prior to his termination for Disability, except to the extent such coverage may be changed in its application to all Bank employees. This coverage shall cease upon the earlier of (i) the date Executive returns to the full-time employment of the Bank in the same 5 capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Bank; (ii) Executive's full-time employment by another employer; (iii) Executive attaining the Retirement age as identified in Section 6; or (iv) Executive's death. (d) Notwithstanding the foregoing, there will be no reduction in the compensation otherwise payable to Executive during any period during which Executive is incapable of performing his duties hereunder by reason of temporary disability. 6. TERMINATION UPON RETIREMENT. Termination by the Bank of the Executive based on "Retirement" shall mean termination of executive in accordance with any retirement policy established with Executive's consent with respect to him. Upon termination of Executive upon Retirement, no amounts or benefits shall be due Executive under this Agreement and the Executive shall be entitled to all benefits under any retirement plan of the Bank and other plans to which Executive is a party. 7. TERMINATION FOR CAUSE. The term "Termination for Cause" shall mean termination because of the Executive's personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. Notwithstanding the foregoing, Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. The Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause. Any non-vested stock options or restricted stock granted to Executive under any stock option plan or restricted stock plan of the Bank, the Company or any subsidiary or affiliate thereof, shall become null and void effective upon Executive's receipt of Notice of Termination for Cause pursuant to Section 8 hereof, and any non-vested stock options shall not be exercisable by Executive at any time subsequent to such Termination for Cause, (unless it is determined in arbitration that grounds for termination of Executive for Cause did not exist, in which event all terms of the options or restricted stock as of the date of termination shall apply, and any time periods for exercising such options shall commence from the date of resolution in arbitration). 8. NOTICE. (a) Any purported termination by the Bank for Cause shall be communicated by Notice of Termination to the Executive. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision 6 in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. If, within thirty (30) days after any Notice of Termination for Cause is given, the Executive notifies the Bank or the Company that a dispute exists concerning the termination, the parties shall promptly proceed to arbitration. Notwithstanding the pendency of any such dispute, the Bank and the Company may discontinue to pay Executive compensation until the dispute is finally resolved in accordance with this Agreement. If it is determined that Executive is entitled to compensation and benefits under Section 4 of this Agreement, the payment of such compensation and benefits by the Bank and Company shall commence immediately following the date of resolution by arbitration, with interest due Executive on the cash amount that would have been paid pending arbitration (at the prime rate as published in the Wall Street Journal from time to time). (b) Any other purported termination by the Bank or by Executive shall be communicated by a Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. "Date of Termination" shall mean the date of the Notice of Termination. If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the parties shall promptly proceed to arbitration as provided in Section 18 of this Agreement. Notwithstanding the pendency of any such dispute, the Bank shall continue to pay the Executive his Base Salary, and other compensation and benefits in effect when the notice giving rise to the dispute was given (except as to termination of Executive for Cause). In the event of the voluntary termination by the Executive of his employment, which is disputed by the Bank, and if it is determined in arbitration that Executive is not entitled to termination benefits pursuant to this Agreement, he shall return all cash payments made to him pending resolution by arbitration, with interest thereon at the prime rate as published in the Wall Street Journal from time to time if it is determined in arbitration that Executive's voluntary termination of employment was not taken in good faith and not in the reasonable belief that grounds existed for his voluntary termination. 9. POST-TERMINATION OBLIGATIONS. (a) All payments and benefits to Executive under this Agreement shall be subject to Executive's compliance with paragraph (b) of this Section 9 during the term of this Agreement and for one (1) full year after the expiration or termination hereof. (b) Executive shall, upon reasonable notice, furnish such information and assistance to the Bank as may reasonably be required by the Bank in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party. (c) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Bank and affiliates thereof, as it may exist from time to time, is a valuable, special and unique asset of the business of the Bank. Executive will not, during or after the term of his employment, disclose any knowledge of the past, present, 7 planned or considered business activities of the Bank or affiliates thereof to any person, firm, corporation, or other entity for any reason or purpose whatsoever (except for such disclosure as may be required to be provided to the Office of Thrift Supervision ("OTS"), the Federal Deposit Insurance Corporation (the "FDIC"), or other federal banking agency with jurisdiction over the Bank or Executive). Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Bank, and Executive may disclose any information regarding the Bank or the Company which is otherwise publicly available. In the event of a breach or threatened breach by the Executive of the provisions of this Section 9, the Bank will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Bank or affiliates thereof, or from rendering any services to any person, firm, corporation, other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Bank from pursuing any other remedies available to the Bank for such breach or threatened breach, including the recovery of damages from Executive. 10. SOURCE OF PAYMENTS. All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Bank. The Company, however, guarantees payment and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Bank are not timely paid or provided by the Bank, such amounts and benefits shall be paid or provided by the Company. 11. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Bank or any predecessor of the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. 12. NO ATTACHMENT. (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive and the Bank and their respective successors and assigns. 8 13. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. Notwithstanding the foregoing, in the event that the Board of Directors of either the Bank or the Company determines, after a review of Section 409A of the Code and all applicable Internal Revenue Service guidance, that this Agreement should be amended to comply with Section 409A of the Code then the Board of Directors of either the Bank or the Company may amend this Agreement to make any changes required to comply with Section 409A of the Code. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived. 14. REQUIRED REGULATORY PROVISIONS. (a) The Bank's Board of Directors may terminate the Executive's employment at any time, but any termination by the Bank's Board of Directors, other than Termination for Cause, shall not prejudice Executive's right to compensation or other benefits under this Agreement. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause as defined in Section 7 hereinabove. (b) If the Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) (12 U.S.C. ss.ss. 1818(e)(3)) or 8(g) (12 U.S.C. ss. 1818(g)) of the Federal Deposit Insurance Act (the "FDI Act"), as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, the Bank's obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Executive all or part of the compensation withheld while their contract obligations were suspended and (ii) reinstate (in whole or in part) any of the obligations which were suspended. (c) If the Executive is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e) (12 U.S.C. ss.ss. 1818(e)) or 8(g) (12 U.S.C. ss. 1818(g)) of the FDI Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of the Bank under this contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (d) If the Bank is in default as defined in Section 3(x) (12 U.S.C. ss. 1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of the Bank under this contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. 9 (e) All obligations of the Bank under this contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the institution, (i) by the Director, at the time FDIC or the Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Bank; or (ii) by the OTS at the time the OTS or its District Director approves a supervisory merger to resolve problems related to the operations of the Bank or when the Bank is determined by the OTS or FDIC to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. (f) Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 USC Section 1828(k) and any regulations promulgated thereunder. 15. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 16. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 17. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Ohio but only to the extent not superseded by federal law. 18. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by the employee within the Cleveland metropolitan area, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 19. PAYMENT OF LEGAL FEES. All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank, 10 provided that the dispute or interpretation has been settled by Executive and the Bank or resolved in the Executive's favor. 20. INDEMNIFICATION. The Bank and the Company shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense, and shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted under federal law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Bank or the Company (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements (such settlements must be approved by the Board of Directors of the Bank or the Company, as appropriate), provided, however, neither the Bank nor Company shall be required to indemnify or reimburse the Executive for legal expenses or liabilities incurred in connection with an action, suit or proceeding arising from any illegal or fraudulent act committed by the Executive. 21. SUCCESSOR TO THE BANK. The Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank or the Company, expressly and unconditionally to assume and agree to perform the Bank's obligations under this Agreement, in the same manner and to the same extent that the Bank would be required to perform if no such succession or assignment had taken place. [Signature page follows] 11 SIGNATURES IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement to be executed and their seals to be affixed hereunto by their duly authorized officers, and Executive has signed this Agreement, on the day and date first above written. ATTEST: WAYNE SAVINGS COMMUNITY BANK By: - --------------------------------- ------------------------------------- President and Chief Executive Officer WITNESS: EXECUTIVE: By: - --------------------------------- ------------------------------------- H. Stewart Fitz Gibbon III CONSENT OF GUARANTOR (PURSUANT TO SECTION TEN HEREOF) WAYNE SAVINGS BANCSHARES, INC. By: -------------------------------------------- President and Chief Executive Officer 12 EX-31.1 3 ex31-1.txt Exhibit 31.1 PURSUANT TO RULE 13a-14(a) AND 15d-14(a) OF THE SECURITIES AND EXCHANGE ACT OF 1934 CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER I, Phillip E. Becker, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Wayne Savings Bancshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements and other financial information included in this quarterly report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c) disclosed in this quarterly report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weakness in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. November 14, 2005 /s/Phillip E. Becker - --------------------------------- ---------------------------------------- Date Phillip E Becker, EVP and Chief Lending Officer, Interim Chief Executive Officer EX-31.2 4 ex31-2.txt Exhibit 31.2 PURSUANT TO RULE 13a-14(a) AND 15d-14(a) OF THE SECURITIES AND EXCHANGE ACT OF 1934 CERTIFICATION OF THE CHIEF FINANCIAL OFFICER I, H. Stewart Fitz Gibbon III, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Wayne Savings Bancshares, Inc.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements and other financial information included in this quarterly report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15(e)) for the registrant and have: a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and c) disclosed in this quarterly report any changes in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies and material weakness in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. November 14, 2005 /s/H. Stewart Fitz Gibbon III - ----------------------------- ---------------------------------------- Date H. Stewart Fitz Gibbon III SVP and Chief Financial Officer EX-32 5 ex32.txt EXHIBIT 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 I, Phillip E. Becker, EVP and Chief Lending Officer, Interim Chief Executive Officer and H. Stewart Fitz Gibbon III, SVP and Chief Financial Officer, of Wayne Savings Bancshares, Inc. (the "Company"), hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. section 1350, that:. (1) The Quarterly Report on Form 10-Q of the Company for the quarter ended September 30, 2005 (the "Report") fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. November 14, 2005 /s/ Phillip E. Becker - ------------------------- ---------------------------------------- Date Phillip E. Becker, EVP and Chief Lending Officer, Interim Chief Executive Officer November 14, 2005 /s/ H. Stewart Fitz Gibbon III - ------------------------- ---------------------------------------- Date H. Stewart Fitz Gibbon III, SVP and Chief Financial Officer -----END PRIVACY-ENHANCED MESSAGE-----