FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20552
(Mark One)
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended September 30, 2003
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 12 B-2 of the Exchange Act)
Yes |_| No |X|
As of November 10, 2003, the latest practicable date, 3,907,319 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 13
Item 3 Quantitative and Qualitative Disclosure About Market Risk 21
Item 4 Controls and Procedures 21
PART II - OTHER INFORMATION
Item 1 Legal Proceedings 22
Item 2 Changes in Securities and Use of Proceeds 22
Item 3 Defaults Upon Senior Securities 22
Item 4 Submission of Matter to a Vote of Security Holders 22
Item 5 Other Information 22
Item 6 Exhibits and Reports on Form 8-K 22
SIGNATURES 23
2
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30, March 31,
ASSETS 2003 2003
Cash and due from banks $ 2,505 $ 2,967
Federal funds sold 6,250 8,000
Interest-bearing deposits in other financial institutions 6,207 6,529
--------- ---------
Cash and cash equivalents 14,962 17,496
Investment securities available for sale - at market 17,560 17,036
Investment securities - at amortized cost, approximate market value of $15,916
and $19,211 as of September 30, 2003 and March 31, 2003, respectively 15,148 18,805
Mortgage-backed securities available for sale - at market 84,029 66,151
Mortgage-backed securities - at cost, approximate market value of $6,317 and
$9,927 as of September 30, 2003 and March 31, 2003, respectively 6,299 9,851
Loans receivable - net 212,741 228,373
Office premises and equipment - net 8,571 8,818
Real estate acquired through foreclosure 179 --
Federal Home Loan Bank stock - at cost 4,122 4,041
Cash surrender value of life insurance 5,255 5,121
Accrued interest receivable on loans 834 948
Accrued interest receivable on mortgage-backed securities 413 380
Accrued interest receivable on investments and interest-bearing deposits 317 313
Prepaid expenses and other assets 1,783 1,532
Prepaid federal income taxes 328 126
--------- ---------
Total assets $ 372,541 $ 378,991
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 295,641 $ 300,931
Advances from the Federal Home Loan Bank 30,000 30,000
Advances by borrowers for taxes and insurance 624 712
Accrued interest payable 253 235
Accounts payable on mortgage loans serviced for others 258 130
Other liabilities 1,193 1,638
Deferred federal income taxes 716 682
--------- ---------
Total liabilities 328,685 334,328
Commitments -- --
Stockholders' equity
Common stock (8,000,000 shares of $ .10 par value authorized; 3,907,319 and
3,888,795 shares issued at September 30, 2003 and March 31, 2003, respectively) 391 389
Additional paid-in capital 34,268 34,208
Retained earnings - substantially restricted 12,273 11,830
Less required contributions for shares acquired by Employee Stock Ownership Plan (1,534) (1,612)
Shares acquired by Management Recognition Plan (1,142) --
Accumulated other comprehensive loss (400) (152)
--------- ---------
Total stockholders' equity 43,856 44,663
--------- ---------
Total liabilities and stockholders' equity $ 372,541 $ 378,991
========= =========
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,
2003 2002 2003 2002
Interest income
Loans $7,238 $8,749 $3,513 $4,317
Mortgage-backed securities 1,119 405 551 183
Investment securities 737 489 385 234
Interest-bearing deposits and other 130 283 52 143
------ ------ ------ ------
Total interest income 9,224 9,926 4,501 4,877
Interest expense
Deposits 3,103 4,667 1,491 2,234
Borrowings 625 131 305 66
------ ------ ------ ------
Total interest expense 3,728 4,798 1,796 2,300
------ ------ ------ ------
Net interest income 5,496 5,128 2,705 2,577
Provision for losses on loans 63 38 31 21
------ ------ ------ ------
Net interest income after provision for losses on loans 5,433 5,090 2,674 2,556
Other income
Gain on sale of loans 61 16 24 --
Increase in cash surrender value of life insurance 134 -- 67 --
Service fees, charges and other operating 794 689 388 361
------ ------ ------ ------
Total other income 989 705 479 361
General, administrative and other expense
Employee compensation and benefits 2,600 2,286 1,334 1,140
Occupancy and equipment 741 745 355 366
Federal deposit insurance premiums 24 27 11 14
Franchise taxes 154 154 77 81
Other operating 964 836 494 408
------ ------ ------ ------
Total general, administrative and other expense 4,483 4,048 2,271 2,009
------ ------ ------ ------
Earnings before income taxes 1,939 1,747 882 908
Federal incomes taxes
Current 433 488 58 269
Deferred 162 98 211 32
------ ------ ------ ------
Total federal income taxes 595 586 269 301
------ ------ ------ ------
NET EARNINGS $1,344 $1,161 $ 613 $ 607
====== ====== ====== ======
EARNINGS PER SHARE
Basic $ 0.36 $ 0.31 $ 0.16 $ 0.16
====== ====== ====== ======
Diluted $ 0.36 $ 0.31 $ 0.16 $ 0.16
====== ====== ====== ======
See accompanying notes to consolidated financial statements.
4
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Six months ended Three months ended
September 30, September 30,
2003 2002 2003 2002
Net earnings $ 1,344 $ 1,161 $ 613 $ 607
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities, net of taxes (benefits)
of $(128), $33, $(234) and $20 during the respective periods (248) 65 (454) 38
------- ------- ------- -------
Comprehensive income $ 1,096 $ 1,226 $ 159 $ 645
======= ======= ======= =======
Accumulated other comprehensive income (loss) $ (400) $ 87 $ (400) $ 87
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
5
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the six months ended September 30,
(In thousands)
2003 2002
Cash flows from operating activities:
Net earnings for the period $ 1,344 $ 1,161
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of discounts and premiums on loans,
investments and mortgage-backed securities - net 912 106
Amortization of deferred loan origination fees (342) (165)
Depreciation and amortization 261 289
Gain on sale of loans (39) (7)
Proceeds from sale of loans in the secondary market 2,529 2,372
Loans originated for sale in the secondary market (2,329) --
Provision for losses on loans 63 38
Federal Home Loan Bank stock dividends (81) (92)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans 114 (272)
Accrued interest receivable on mortgage-backed securities (34) 24
Accrued interest receivable on investments and interest-bearing deposits (4) 233
Prepaid expenses and other assets (251) 272
Accrued interest payable 18 74
Accounts payable on mortgage loans serviced for others 128 112
Other liabilities (445) (393)
Federal income taxes
Current (202) 126
Deferred 162 98
-------- --------
Net cash provided by operating activities 1,804 3,976
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as held to maturity -- (3,850)
Purchase of investment securities designated as available for sale (13,017) (4,501)
Proceeds from maturity of investment securities designated as held to maturity 3,640 9,336
Proceeds from maturity of investment securities designated as available for sale 12,523 --
Purchase of mortgage-backed securities designated as held to maturity -- (3,545)
Purchase of mortgage-backed securities designated as available for sale (37,406) (14,220)
Principal repayments on mortgage-backed securities designated as held to maturity 3,474 3,288
Principal repayments on mortgage-backed securities designated as available for sale 18,366 833
Loan principal repayments 57,642 32,239
Loan disbursements (42,072) (27,898)
Purchase of office premises and equipment - net (14) (126)
Proceeds from sale of real estate acquired through foreclosure -- 16
Increase in cash surrender value of life insurance (134) --
Purchase of Federal Home Loan Bank stock -- (98)
-------- --------
Net cash provided by (used in) investing activities 3,002 (8,526)
-------- --------
Net cash provided by (used in) operating and investing activities
(balance carried forward) 4,806 (4,550)
-------- --------
6
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended September 30,
(In thousands)
2003 2002
Net cash provided by (used in) operating and investing activities
(balance brought forward) $ 4,806 $ (4,550)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts (5,290) 1,401
Advances by borrowers for taxes and insurance (88) (100)
Dividends paid on common stock (881) (416)
Proceeds from exercise of stock options 61 16
Shares acquired by Management Recognition Plan (1,142) --
-------- --------
Net cash provided by (used in) financing activities (7,340) 901
-------- --------
Net decrease in cash and cash equivalents (2,534) (3,649)
Cash and cash equivalents at beginning of period 17,496 27,883
-------- --------
Cash and cash equivalents at end of period $ 14,962 $ 24,234
======== ========
Supplemental disclosure of cash flow information: Cash paid during the period
for:
Federal income taxes $ 635 $ 363
======== ========
Interest on deposits and borrowings $ 3,710 $ 4,724
======== ========
Supplemental disclosure of noncash investing activities:
Issuance of mortgage loan upon sale of real estate acquired through foreclosure $ -- $ 450
======== ========
Transfers from loans to real estate acquired through foreclosure $ 179 $ --
======== ========
Unrealized gains (losses) on securities designated as available for
sale, net of related tax effects $ (248) $ 65
======== ========
Recognition of mortgage servicing rights in accordance
with SFAS No. 140 $ 22 $ 9
======== ========
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, 2003 and 2002
1. Basis of Presentation
The accompanying unaudited consolidated financial statements for the six
and three months ended September 30, 2003 and 2002 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 financial statements and notes
thereto of Wayne Savings Bancshares, Inc. included in the Annual Report on
Form 10-K for the year ended March 31, 2003.
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-month period ended September 30, 2003 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.
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. (the "Company") and the Company's wholly-owned
subsidiary, Wayne Savings Community Bank ("Wayne Savings" or the "Bank").
At September 30, 2003, Village Savings Bank, F.S.B. was merged with and
into Wayne Savings Community Bank and will be operated as a branch. Prior
to this date, Village Bank was a wholly-owned subsidiary of Wayne Savings
Community Bank. Wayne Savings has ten banking locations in Wayne, Holmes,
Ashland, Medina and Stark counties. All significant intercompany
transactions and balances have been eliminated in the consolidation.
8
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six and three month periods ended September 30, 2003 and 2002
3. Earnings Per Share
Basic earnings per common share is computed based upon the
weighted-average number of common shares outstanding during the period,
less shares in the Company's Employee Stock Ownership Plan (ESOP) that are
unallocated and not committed to be released. Diluted earnings per common
share include the dilutive effect of all additional potential common
shares issuable under the Company's stock option plan. Basic and diluted
earnings per share for the three months ended September 30, 2002 has been
restated to give effect to 1.5109 share exchange ratio in the Company's
January 2003 conversion offering. The computations are as follows:
For the six months ended For the three months ended
September 30, September 30,
2003 2002 2003 2002
Weighted-average common shares
outstanding (basic) 3,742,188 3,886,812 3,752,400 3,888,754
Dilutive effect of assumed exercise
of stock options 1,456 6,088 1,574 6,024
--------- --------- --------- ---------
Weighted-average common shares
outstanding (diluted) 3,743,644 3,892,900 3,753,974 3,894,778
========= ========= ========= =========
Options to purchase 204,081 shares of common stock at a weighted average
exercise price $13.95 were outstanding at September 30, 2003 but were
excluded from the computation of diluted earnings per share because the
exercise price was greater than the average market price of the common
shares. At September 30, 2002 all outstanding options were included in the
diluted earnings per share calculation.
4. Stock Option Plan
The Company has a 1993 incentive Stock Option Plan that provided for the
issuance of 196,390 adjusted shares of authorized, but unissued shares of
common stock with 10,123 options outstanding at September 30, 2003. In
fiscal 2004, the Company adopted a new Stock Option Plan that provided for
the issuance of 142,857 incentive options and 62,224 non-incentive options
of authorized, but unissued common stock. As of September 30, 2003, all
options under the 2004 Plan have been granted and expire in fiscal 2014.
The Company accounts for its stock option plans in accordance with SFAS
No. 123, "Accounting for Stock-Based Compensation," which provides a fair
value-based method for valuing stock-based compensation that entities may
use, which measures compensation cost at the grant date based on the fair
value of the award. Compensation is then recognized over the service
period, which is usually the vesting period. Alternatively, SFAS No. 123
permits entities to continue to account for stock options and similar
equity instruments under Accounting Principles Board ("APB") Opinion No.
25, "Accounting for Stock Issued to Employees." Entities that continue to
account for stock options using APB Opinion No. 25 are required to make
pro forma disclosures of net earnings and earnings per share, as if the
fair value-based method of accounting defined in SFAS No. 123 had been
applied. Management has determined that the Company will continue to
account for stock based compensation to APB Opinion No. 25.
There were 204,081 options granted during the three months ended September
30, 2003 and none granted for the three or six months periods ended
September 30, 2002.
9
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six and three month periods ended September 30, 2003 and 2002
4. Stock Option Plan (continued)
At September 30, 2003, 10,123 of the stock options granted were subject to
exercise at the discretion of the grantees and expire in fiscal 2013 while
the remaining 204,081 vest at a rate of 20% annually and will expire in
fiscal 2014.
A summary of the status of the Company's stock option plans as of and for
the periods ended March 31, 2003 and 2002, and the six months ended
September 30, 2003 is presented below:
Six months ended Year ended
September 30, March 31,
2003 2003 2002
Weighted- Weighted- Weighted-
average average average
exercise exercise exercise
Shares price Shares price Shares price
Outstanding at beginning of period 28,666 $ 6.26 23,378 $ 3.31 26,400 $ 3.31
Granted 204,081 13.95 10,123 11.67 -- --
Exercised (18,543) 3.31 (4,835) 3.31 (3,022) 3.31
Forfeited -- -- -- -- -- --
-------- -------- -------- -------- -------- --------
Outstanding at end of period 214,204 $ 13.84 28,666 $ 6.26 23,378 $ 3.31
======== ======== ======== ======== ======== ========
Options exercisable at period-end 10,123 $ 13.84 28,666 $ 6.26 23,378 $ 3.31
======== ======== ======== ======== ======== ========
Fair value of options granted $ 3.93 $ 3.17 $ --
======== ======== ========
The following information applies to options outstanding at September 30,
2003:
Number outstanding......................................... 214,204
Range of exercise prices................................... $11.67 - 13.95
Weighted-average exercise price............................ $13.84
Weighted-average remaining contractual life................ 9.8 years
5. Effects of Recent Accounting Pronouncements
In October 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 147, "Accounting
for Certain Financial Institutions: An Amendment of FASB Statement No. 72
and 144 and FASB Interpretation No. 9," which removes acquisitions of
financial institutions from the scope of SFAS No. 72, "Accounting for
Certain Acquisitions of Banking and Thrift Institutions," except for
transactions between mutual enterprises. Accordingly, the excess of the
fair value of liabilities assumed over the fair value of tangible and
intangible assets acquired in a business combination should be recognized
and accounted for as goodwill in accordance with SFAS No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets."
SFAS No. 147 also requires that the acquisition of a less-than-whole
financial institution, such as a branch, be accounted for as a business
combination if the transferred assets and activities constitute a
business. Otherwise, the acquisition should be accounted for as the
acquisition of net assets.
10
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six and three month periods ended September 30, 2003 and 2002
5. Effects of Recent Accounting Pronouncements (continued)
SFAS No. 147 also amends the scope of SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets," to include long-term
customer relationship assets of financial institutions (including mutual
enterprises) such as depositor and borrower-relationship intangible assets
and credit cardholder intangible assets.
The provisions of SFAS No. 147 related to unidentifiable intangible assets
and the acquisition of a less-than-whole financial institution are
effective for acquisitions for which the date of acquisition is on or
after October 1, 2002. The provisions related to impairment of long-term
customer relationship assets are effective October 1, 2002. Transition
provisions for previously recognized unidentifiable intangible assets are
effective on October 1, 2002, with earlier application permitted.
SFAS No. 147 was adopted on April 1, 2003, without material effect on the
Company's financial condition or results of operations.
In December 2002, the FASB issued SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends
SFAS No. 123, "Accounting for Stock-Based Compensation," to provide
alternative methods of transition for a voluntary change to the fair value
based method of accounting for stock-based employee compensation. In
addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123
to require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS
No. 148 is effective for fiscal years beginning after December 15, 2002.
The interim disclosure provisions are effective for financial reports
containing financial statements for interim periods beginning after
December 15, 2002. SFAS No. 148 was adopted on April 1, 2003, without
material effects on the Company's financial position or results of
operation.
In November 2002, the FASB issued FASB Interpretation No. 45 ("FIN 45"),
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires
a guarantor entity, at the inception of a guarantee covered by the
measurement provisions of the interpretation, to record a liability for
the fair value of the obligation undertaken in issuing the guarantee. The
Company has financial letters of credit which require the Company to make
payment if the customer's financial condition deteriorates, as defined in
the agreements. FIN 45 requires Wayne to record a liability generally
equal to fees received for these letters of credit when guaranteeing
obligations. FIN 45 applies prospectively to guarantees Wayne issues or
modifies subsequent to December 31, 2002. Wayne had $97,000 in letters of
credit outstanding at September 30, 2003.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." FIN 46 requires a variable interest entity to be
consolidated by a company if that company is subject to a majority of the
risk of loss from the variable interest entity's activities or entitled to
receive a majority of the entity's residual returns, or both. FIN 46 also
requires disclosures about variable interest entities that a company is
not required to consolidate, but in which it has a significant variable
interest. The consolidation requirements of FIN 46 apply immediately to
variable interest entities created after January 31, 2003. The
consolidation requirements apply to existing entities in the first fiscal
year or interim period beginning after September 15, 2003. Certain of the
disclosure requirements apply in all financial statements issued after
January 31, 2003, regardless of when the variable interest entity was
established. The Company adopted the disclosure requirements of FIN 46
effective January 31, 2003, without material effect on its financial
statements.
11
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six and three month periods ended September 30, 2003 and 2002
6. Forward-looking Statements
This quarterly report on Form 10-Q contains forward-looking statements.
For this purpose, any statements contained herein that are not statements
of historical fact may be deemed to be forward-looking statements. Without
limiting the foregoing, the words "believes," "anticipates," "plans",
"expects" and similar expressions are intended to identify forward-looking
statements. There are a number of important factors that could cause the
Company's actual results to differ materially from those contemplated by
such forward-looking statements. These important factors include, without
limitation, the Bank's continued ability to originate quality loans,
fluctuation of interest rates, real estate market conditions in the Bank's
lending areas, general and local economic conditions, the continued
ability of the Bank to attract and retain deposits, new accounting
pronouncements and changing regulatory requirements.
12
ITEM 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Average Balance Sheet
The following table sets 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,
------------------------------------------------------------------------------------
2003 2002
------------------------------------ -------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- -------- ------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1) $219,835 $7,238 6.58% $247,500 $8,749 7.07%
Mortgage-backed
securities(2) 84,150 1,119 2.66 20,562 405 3.94
Investment securities 30,726 737 4.80 21,028 489 4.65
Interest-bearing deposits(3) 19,814 130 1.31 28,023 283 2.02
-------- ------ -------- ------
Total interest-
earning assets 354,525 9,224 5.20 317,113 9,926 6.26
Non-interest-earning assets 14,674 18,552
-------- --------
Total assets $369,199 $335,665
======== ========
Interest-bearing liabilities:
Deposits $289,750 3,103 2.14 $298,924 4,667 3.12
Borrowings 30,000 625 4.17 5,000 131 5.24
-------- ------ -------- ------
Total interest-
bearing liabilities 319,750 3,728 2.33 303,924 4,798 3.16
------ ------
Non-interest bearing
liabilities 4,209 5,200
-------- --------
Total liabilities 323,959 309,124
Stockholders' equity 45,240 26,541
-------- --------
Total liabilities and
stockholders' equity $369,199 $335,665
======== ========
Net interest income $5,496 $5,128
====== ======
Interest rate spread(4) 2.87% 3.10%
====== ======
Net yield on interest-
earning assets(5) 3.10% 3.23%
====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 110.88% 104.34%
====== ======
(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)
Average Balance Sheet (continued)
For the three months ended September 30,
------------------------------------------------------------------------------------
2003 2002
------------------------------------ -------------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
------- -------- -------- ------- -------- -------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1) $215,192 $3,513 6.53% $246,312 $4,317 7.01%
Mortgage-backed
securities(2) 87,957 551 2.51 23,095 183 3.17
Investment securities 34,648 385 4.44 20,367 234 4.60
Interest-bearing deposits(3) 21,429 52 .97 30,055 143 1.90
-------- ------ -------- ------
Total interest-
earning assets 359,226 4,501 5.01 319,829 4,877 6.10
Non-interest-earning assets 7,001 16,367
-------- --------
Total assets $366,227 $336,196
======== ========
Interest-bearing liabilities:
Deposits $287,723 1,491 2.07 $299,527 2,234 2.98
Borrowings 30,000 305 4.07 5,000 66 5.28
-------- ------ -------- ------
Total interest-
bearing liabilities 317,723 1,796 2.26 304,527 2,300 3.02
------ ------
Non-interest bearing
liabilities 3,926 4,872
-------- --------
Total liabilities 321,649 309,399
Stockholders' equity 44,578 26,797
-------- --------
Total liabilities and
stockholders' equity $366,227 $336,196
======== ========
Net interest income $2,705 $2,577
====== ======
Interest rate spread(4) 2.75% 3.08%
====== ======
Net yield on interest-
earning assets(5) 3.01% 3.22%
====== ======
Ratio of average interest-
earning assets to average
interest-bearing liabilities 113.06% 105.02%
====== ======
(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.
14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Discussion of Financial Condition Changes from March 31, 2003 to September 30,
2003
At September 30, 2003, we had total assets of $372.5 million, a decrease of $6.5
million, or 1.7%, from March 31, 2003 levels.
Liquid assets consisting of cash, interest-bearing deposits and investment
securities decreased by $5.7 million, or 10.6%, to $47.7 million at September
30, 2003. Mortgage-backed securities increased by $14.3 million, or 18.8%, to
$90.3 million as management redeployed excess liquid assets into higher-yielding
assets consisting of short term adjustable-rate mortgage-backed securities and
collateralized mortgage obligations with low extension risks. Management's
intention is to maintain a short term investment duration until rates rise from
near historic low levels. The increase in mortgage-backed securities was also
funded by loan repayments and sales exceeding loan originations which reduced
the loan portfolio by $15.6 million, or 6.8%, to $212.7 million, which generally
resulted from higher loan prepayments as borrowers chose to refinance their
loans in the declining interest rate environment.
Nonperforming and impaired loans of $1.7 million consisted of $1.0 million of
residential mortgage loans, coupled with a $668,000 commercial business and real
estate loan relationship which became delinquent and was designated as impaired
during fiscal year 2002. The Company entered into a workout agreement in July
2003 with the borrower which called for the sale and disposal of the underlying
collateral. The first sale under the workout agreement closed in August and
Wayne Savings received payment of $1.1 million. The second sale occurred in
October and Wayne is anticipating net proceeds of $140,000. The final sale is
expected to be initiated during the quarter ending December 2003. No allocation
to the allowance has been made for the remainder of these loans as management
believes the value of the collateral exceeds the related loan balance.
Deposits at September 30, 2003, totaled $295.6 million, a decrease of $5.3
million from $300.9 million at March 31, 2003. Management attributes the decline
in deposits mainly to customers seeking to find alternative investment
opportunities due to the low rate environment. The Bank's deposit pricing is
very competitive in all market areas.
Stockholders' equity decreased by $807,000 during the three months ended
September 30, 2003, due to the purchase of common stock of $1.1 million for the
management recognition plan, dividends paid totaling $881,000 and an after-tax
increase of $248,000 in other comprehensive loss, partially offset by $1.3
million in net earnings for the six months ended September 30, 2003.
Comparison of Operating Results for the Six Month Periods Ended September 30,
2003 and 2002
General
Net earnings totaled $1.3 million for the six months ended September 30, 2003,
an increase of $183,000 or 15.8%, over $1.2 million of net earnings for the six
months ended September 30, 2002. The growth in net earnings was primarily
attributable to an increase in net interest income of $368,000, or 7.2%, and an
increase in other income of $284,000, or 40.3%, which were partially offset by a
$435,000, or 10.8%, increase in general, administrative and other expense and a
$9,000, or 1.5%, increase in federal income tax expense.
Interest Income
Interest income for the six months ended September 30, 2003, decreased $702,000,
or 7.1%, to $9.2 million. This decrease was a result of a 106 basis point
reduction in the yield on interest earning assets to 5.20%, partially offset by
an increase in the weighted average balance of $37.4 million, or 11.8%, to
$354.5 million for the period ended September 30, 2003.
15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six Month Periods Ended September 30,
2003 and 2002 (continued)
Interest Income (continued)
Interest income on loans declined $1.5 million, or 17.3%, for the six months
ended September 30, 2003, due primarily to a decrease in the weighted average
balance of loans outstanding of $27.7 million, or 11.2%, compared to the 2002
period, coupled with a 49 basis-point decrease in the weighted average yield on
loans to 6.58% for the 2003 period.
Interest income on mortgage-backed securities increased $714,000 during the six
months ended September 30, 2003, due primarily to a $63.6 million, or 309.3%,
increase in the weighted average balance outstanding from the comparable 2002
period, which was partially offset by a decrease in the average yield of 128
basis points to 2.66%.
Interest income on investments increased by $248,000, or 50.7%, reflecting an
increase in the weighted average balance of $9.7 million, or 46.1%, coupled with
an increase in the weighted average rate of 15 basis-points to 4.80% from 4.65%
during the comparable 2002 period.
Interest income on interest-bearing deposits and other decreased by $153,000, or
54.1%, reflecting a decrease in the weighted average balance of $8.2 million, or
29.3%, coupled with a decrease in the weighted average rate of 71 basis-points
to 1.31% from 2.02% during the comparable 2002 period.
Interest Expense
Interest expense for the six months ended September 30, 2003 totaled $3.7
million, a decrease of $1.1 million, or 22.3%, from interest expense of $4.8
million for the six months ended September 30, 2002. The decrease resulted from
an 83 basis point decrease in the average cost of funds to 2.33% for the 2003
period, offset by an increase in the average balance of deposits and borrowings
outstanding of $15.8 million, or 5.2%, to $319.7 million for the period ended
September 30, 2003.
Interest expense on deposits totaled $3.1 million for the six months ended
September 30, 2003, a decrease of $1.6 million, or 33.5%, from the six months
ended September 30, 2002, as a result of a 98 basis point decrease in the
average cost of deposits to 2.14% for the 2003 period coupled with a decrease in
the average balance outstanding of $9.2 million, or 3.1%, to $289.8 million for
the 2003 period.
Interest expense on borrowings totaled $625,000 for the six months ended
September 30, 2003, an increase of $494,000 from the 2002 period, primarily due
to an increase in the average balance of borrowings of $25.0 million to an
average balance of $30.0 million for the six months ended September 30, 2003
from $5.0 million for the six months ended September 30, 2002, which was
partially offset with a decrease in the average cost of borrowings to 4.17% from
the average cost of 5.24% for the 2002 period. The Company borrowed the
additional funds in order to purchase corporate and mortgage-backed securities
in order to enhance earnings and future cash flows.
Net Interest Income
Net interest income totaled $5.5 million for the six months ended September 30,
2003, an increase of $368,000, or 7.2%, from the six month period ended
September 30, 2002. The average interest rate spread decreased to 2.87% for the
six months ended September 30, 2003 from 3.10% for the six months ended
September 30, 2002. The net interest margin decreased to 3.10% for the six
months ended September 30, 2003 from 3.23% for the six months ended September
30, 2002.
16
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,
2003 and 2002 (continued)
Provision for Losses on Loans
The Company recorded provisions for losses on loans totaling $63,000 and $38,000
for the six month periods ended September 30, 2003 and 2002, respectively. To
the best of management's knowledge, all known and inherent losses that are
probable and which can be reasonably estimated have been recorded as of
September 30, 2003 and 2002.
Other Income
Other income, consisting primarily of an increase in cash surrender value of
life insurance, gains on sale of loans, service fees, and charges on deposit
accounts, increased by $284,000 or 40.3%, to $989,000 for the six months ended
September 30, 2003, from $705,000 for the six months ended September 30, 2002.
The increase resulted primarily from $134,000 in the increase in cash surrender
value of life insurance due to the purchase of life insurance in October 2002.
Additionally, service fees, charges and other operating income which increased
by $105,000, or 15.2%, to $794,000, for the six months ended September 30, 2003,
was due primarily to an increase in non-sufficient fund fees on transaction
accounts, coupled with increased income related to credit card merchants and
debit card income. Gain on sale of loans increased $45,000 in 2003 as compared
to the six months ended September 30, 2002, mainly due to management's decision
to sell the majority of the lower rate thirty year residential mortgage loans to
the secondary market.
General, Administrative, and Other Expense
General, administrative and other expense increased by $435,000, or 10.7%, to
$4.5 million for the six months ended September 30, 2003 compared to the six
months ended September 30, 2002. The increase resulted primarily from a
$314,000, or 13.7%, increase in employee compensation and benefits and a
$128,000, or 15.3%, , increase in other operating expense. The increase in
employee compensation and benefits was primarily attributable to normal merit
increases, an increase in employee benefit plan costs and additional staff
needed for operating a fully converted, publicly traded stock company.
Similarly, the increase in other operating expense was primarily attributable to
increased costs related to routine and ongoing compliance matters required of a
public company in addition to higher merchant and bank service charge expenses.
Federal Income Taxes
The provision for federal income taxes was $595,000 for the six months ended
September 30, 2003, an increase of $9,000, or 1.5%, compared to the same period
in 2002. The increase resulted primarily from a $192,000, or 11.0%, increase in
pretax earnings, which was mitigated by $134,000 of tax-exempt income related to
the cash surrender value of life insurance. The effective tax rate for the three
months ended September 30, 2003, was 30.7% as compared to 33.5% for the same
period in 2002. The decrease in the effective tax rate period to period is
mainly due to the advantages related to the aforementioned tax-exempt income.
Comparison of Operating Results for the Three Month Periods Ended September 30,
2003 and 2002
General
Net earnings totaled $613,000 for the three months ended September 30, 2003, an
increase of $6,000, or 1.0%, over the $607,000 of net earnings for the three
months ended September 30, 2002. The growth in net earnings was primarily
attributable to an increase in net interest income of $128,000, or 5.0%, and an
increase in other income of $118,000, or 32.7%, which were partially offset by a
$262,000, or 13.0%, increase in general, administrative and other expense and a
$32,000, or 10.6% decrease in federal income tax expense.
17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended September 30,
2003 and 2002 (continued)
Interest Income
Interest income decreased $376,000, or 7.7%, for the three months ended
September 30, 2003, to $4.5 million. This decline was mainly due to a 109 basis
point reduction in the average yield on interest earning assets to 5.01% from
6.10% for the period ending September 30, 2002. The yield reduction was
partially offset with an increase in the weighted-average balance of $39.4
million, or 12.3%, to a balance of $359.2 million at September 30, 2003.
Interest income on loans declined $804,000, or 18.6%, for the three months ended
September 30, 2003, due primarily to a decrease in the weighted average balance
of loans outstanding of $31.1 million, or 12.6%, compared to the 2002 period,
coupled with a 48 basis-point decrease in the weighted average yield on loans to
6.53% for the 2003 period.
Interest income on mortgage-backed securities increased $368,000 during the
three months ended September 30, 2003, due primarily to a $64.9 million increase
in the weighted average balance outstanding from the comparable 2002 period.
This significant increase is the result of management's strategy to invest in
higher yielding short term mortgage-backed securities as a defensive measure
during the current historic low interest rate environment. The increase in the
weighted-average balance was partially offset by a decrease in the average yield
of 66 basis points to 2.51% for the three months ended September 30, 2003. The
yield on mortgage-backed securities was adversely affected by the record levels
of repayments during the period.
Interest income on investments increased by $151,000, or 64.5%, reflecting an
increase to a weighted average balance of $14.3 million to $34.6 million from
$20.4 million during the comparable 2002 period, partially offset with a
decrease in the average yield of 16 basis points to 4.44%.
Interest income on interest-bearing deposits declined $91,000, or 63.6%, for the
three months ended September 30, 2003, due primarily to a decrease in the
average yield of 93 basis points to an average yield of .97% from an average
yield of 1.90% for the quarter ended September 30, 2002, coupled with a decrease
in the weighted average balance of $8.6 million, or 28.7%, compared to the 2002
period of $30.1 million.
Interest Expense
Interest expense for the three months ended September 30, 2003 totaled $1.8
million, a decrease of $504,000, or 21.9%, from interest expense of $2.3 million
for the three months ended September 30, 2002. The decrease resulted from a 76
basis point decrease in the average cost of funds to 2.26% for the 2003 period,
which was offset with an increase in the average balance of deposits and
borrowings outstanding of $13.2 million, or 4.3%, to $317.7 million for the
period ended September 30, 2003.
Interest expense on deposits totaled $1.5 million for the three months ended
September 30, 2003, a decrease of $743,000, or 33.3%, from the three months
ended September 30, 2002, as a result of a 91 basis point decrease in the
average cost of deposits to 2.07% for the 2003 period and a decrease in the
average balance outstanding of $11.8 million, or 3.9%, to $287.7 million for the
2003 period.
Interest expense on borrowings totaled $305,000 for the three months ended
September 30, 2003, an increase of $239,000 from the 2002 period, primarily due
to an increase in the average balance of borrowings of $25.0 million to an
average balance of $30.0 million for the three months ended September 30, 2003,
which was partially offset with a decrease in the average cost of borrowings to
4.07% from the average cost of 5.28% for the 2002 period.
18
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,
2003 and 2002 (continued)
Net Interest Income
Net interest income totaled $2.7 million for the three months ended September
30, 2003, an increase of $128,000, or 5.0%, from the three month period ended
September 30, 2002. The average interest rate spread decreased to 2.75% for the
three months ended September 30, 2003 from 3.08% for the three months ended
September 30, 2002. The net interest margin decreased to 3.01% for the three
months ended September 30, 2003 from 3.22% for the three months ended September
30, 2002.
Provision for Losses on Loans
The Company recorded provisions for losses on loans totaling $31,000 and $21,000
for the three month periods ended September 30, 2003 and 2002, respectively. To
the best of management's knowledge, all known and inherent losses that are
probable and which can be reasonably estimated have been recorded as of
September 30, 2003 and 2002.
Other Income
Other income, consisting primarily of an increase in cash surrender value of
life insurance, gains on sale of loans, service fees, and charges on deposit
accounts, increased by $118,000 or 32.7%, to $479,000 for the three months ended
September 30, 2003, from $361,000 for the three months ended September 30, 2002.
The increase resulted primarily from $67,000 in the increase in cash surrender
value of life insurance due to the purchase of life insurance in October 2002.
Gain on sale of loans accounted for an additional $24,000 increase over the
three months ended September 30, 2002, mainly due to management's decision to
sell the majority of the lower rate thirty year residential mortgage loans to
the secondary market. Additionally, service fees, charges and other operating
income which increased by $27,000, or 7.5%, to $388,000, for the three months
ended September 30, 2003, was due primarily to increased income related to
credit card merchants and debit cards.
General, Administrative, and Other Expense
General, administrative and other expense increased by $262,000, or 13.0%, to
$2.3 million for the three months ended September 30, 2003 compared to the three
months ended September 30, 2002. The increase resulted primarily from a
$194,000, or 17.0%, increase in employee compensation and benefits and a
$86,000, or 21.1%, , increase in other operating expense. The increase in
employee compensation and benefits was primarily attributable to normal merit
increases, an increase in employee benefit plan costs and additional staff
needed for operating a fully converted, publicly traded stock company.
Similarly, the increase in other operating expense was primarily attributable to
increased costs related to routine and ongoing compliance matters required of a
public company.
Federal Income Taxes
The provision for federal income taxes was $269,000 for the three months ended
September 30, 2003, a decrease of $32,000, or 10.6%, compared to the same period
in 2002. The effective tax rate for the three months ended September 30, 2003,
was 30.5% as compared to 33.1% for the same period in 2002. The decrease in the
effective tax rate period to period is mainly due to tax-exempt income relating
to the increase in cash surrender value of life insurance.
19
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
Subsequent Event
On October 31, 2003, the Company entered into a definitive agreement to acquire
Stebbins Bancshares, Inc. and its national bank subsidiary, Stebbins National
Bank of Creston, Ohio (collectively "Stebbins"), in an acquisition valued at
$5.2 million. At September 30, 2003, Stebbins National Bank had assets of $27.6
million, total deposits of $24.4 million and stockholders' equity of $3.3
million. The Board of Directors of each company has approved the transaction and
due diligence has been completed.
20
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, 2003.
ITEM 4 CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Under the supervision and with the participation of the Company's
management, including our Chief Executive Officer and Chief Financial Officer,
the Company evaluated the effectiveness of the design and operation of its
disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
under the Exchange Act) as of the end of the period covered by this report.
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that, as of the end of the period covered by this report, the
Company's disclosure controls and procedures were effective in timely alerting
them to the material information relating to the Company (or our consolidated
subsidiaries) required to be included in the Company's periodic SEC filings.
(b) Changes in internal controls.
There has been no change made in the Company's internal control over
financial reporting during the period covered by this report that has materially
affected, or is reasonably likely to materially affect, the Company's internal
control over financial reporting.
21
Wayne Savings Bancshares, Inc.
PART II
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities and Use of Proceeds
Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
On July 24, 2003, the Annual Meeting of the Company's Stockholders was
held. Two directors were elected to terms expiring in fiscal 2006 by the
following votes:
James C. Morgan For: 3,357,518 Withheld: 67,961
Kenneth R. Lehman For: 3,348,462 Withheld: 77,017
Three other matters were submitted to the stockholders for ratification,
for which the following votes were cast:
Ratification of the 2003 Stock Option Plan.
For: 2,485,803 Against: 239,602 Abstain: 62,784
Ratification of the 2003 Retention and Recognition Plan.
For: 2,244,857 Against: 481,563 Abstain: 61,618
Ratification of the appointment of Grant Thornton LLP as independent
auditors of the Company for the fiscal year ended March 31, 2004.
For: 3,354,975 Against: 32,425 Abstain: 38,079
ITEM 5. Other Information
Not applicable
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
EX-31.1 Certification of Chief Executive Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
EX-31.2 Certification of Chief Financial Officer pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.
Section 1350
EX-32.1 Written Statement of Chief Executive Officer furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350
EX-32.2 Written Statement of Chief Financial Officer furnished
pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, 18 U.S.C. Section 1350
(b) Reports on Form 8-K:
The Company filed a Form 8-K on July 23, 2003, disclosing its earnings
release for the three months ended June 30, 2003.
22
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, 2003 By: /s/Charles F. Finn
------------------------ -----------------------------------
Charles F. Finn
Chairman and President
Date: November 14, 2003 By: /s/Michael C. Anderson
------------------------ -----------------------------------
Michael C. Anderson
Chief Financial Officer
23