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
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SIGNATURES
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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