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