-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, HtrPxBh87oSpeeJEZI7bNtjEA9VhU3ZqZpapD1jLsLlvopL+aGZ7iX7yHJj87phJ Cw685JvUMMBY0dSVQQAjSw== 0000914317-05-002196.txt : 20050629 0000914317-05-002196.hdr.sgml : 20050629 20050629165941 ACCESSION NUMBER: 0000914317-05-002196 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20050331 FILED AS OF DATE: 20050629 DATE AS OF CHANGE: 20050629 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WAYNE SAVINGS BANCSHARES INC /DE/ CENTRAL INDEX KEY: 0001036030 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 311557791 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23433 FILM NUMBER: 05925538 BUSINESS ADDRESS: STREET 1: 151 N MARKET ST CITY: WOOSTER STATE: OH ZIP: 44691-4809 BUSINESS PHONE: 3302645767 MAIL ADDRESS: STREET 1: 151 N MARKET ST CITY: WOOSTER STATE: OH ZIP: 44691-4809 FORMER COMPANY: FORMER CONFORMED NAME: WAYNE SAVINGS BANKSHARES INC DATE OF NAME CHANGE: 19970319 10-K 1 form10k-69349_wayne.txt UNITED STATES SECURITIES AND EXCHANGE COMMISSION 450 Fifth Street, N.W. Washington, D.C. 20549 FORM 10-K |X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended March 31, 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 Executive Offices) Zip Code (330) 264-5767 -------------- (Registrant's telephone number) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share -------------------------------------- (Title of Class)
Indicate by check mark whether the Registrant (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 twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES |X| NO |_| Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X| Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2). YES |_| NO |X| The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the average of the bid and asked prices of the Registrant's stock, as reported on the Nasdaq National Market on June 20, 2005, was approximately $53.5 million. As of June 20, 2005, there were issued and outstanding 3,429,244 shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE List hereunder the following documents incorporated by reference and the Part of the Form 10-K into which the document is incorporated. (1) Portions of the Annual Report to Stockholders for the year ended March 31, 2005 are incorporated into Part II, Items 5 through 8 of this Form 10-K. (2) Portions of the definitive proxy statement for the 2005 Annual Meeting of Stockholders are incorporated into Part III, Items 10 through 14 of this Form 10-K. PART I ------ ITEM 1. Business - ---------------- General Wayne Savings Bancshares, Inc. Wayne Savings Bancshares, Inc. (the "Company"), initially was a federal corporation which was organized on August 5, 1997. The Company was majority-owned by Wayne Savings Bankshares, M.H.C., a federally-chartered mutual holding company (the "Mutual Holding Company" or "M.H.C."). On November 25, 1997, the Company acquired all of the issued and outstanding common stock of Wayne Savings Community Bank (the "Bank") in connection with the Bank's reorganization into the "two-tier" form of mutual holding company ownership. In fiscal 2002, the Board of Directors of the M.H.C. adopted a plan of conversion and reorganization (the "plan") to convert the M.H.C. from mutual to stock form and to complete a related stock offering in which shares of common stock representing the M.H.C.'s ownership interest in the Company would be sold to investors. The only significant asset of the Company is its investment in the Bank. The plan was approved by the stockholders of the Company, the depositors of Wayne Savings Community Bank and the Office of Thrift Supervision ("OTS") in fiscal 2003, and the related stock offering was completed on January 8, 2003. As of that date 1,350,699 shares of common stock of the Company owned by the M.H.C. were retired and the Company sold 2,040,816 shares of common stock for $10.00 per share. After consideration of funding the employee stock ownership plan ("ESOP") with $1.6 million and related expenses of $1.9 million, net proceeds from the stock offering amounted to $17.1 million. An additional 1,847,820 shares were issued to existing shareholders based on an exchange rate of 1.5109 new shares of common stock for each existing share, resulting in 3,888,795 total new shares outstanding. Upon completion of the conversion and stock offering, Wayne Savings Bancshares, Inc. changed its charter to a Delaware holding company and is wholly owned by public stockholders. At March 31, 2005, the Company had total assets of $403.4 million, total deposits of $320.6 million, and stockholders' equity of $40.2 million. On June 1, 2004, the Company acquired Stebbins Bancshares, Inc., and its national bank subsidiary, Stebbins National Bank of Creston, Ohio. The acquisition of Stebbins National Bank increased the Bank's branches to eleven full service locations. The Company's principal office is located at 151 North Market Street, Wooster, Ohio, and its telephone number at that address is (330) 264-5767. Wayne Savings Community Bank The Bank is an Ohio-chartered stock savings and loan association headquartered in Wooster, Ohio. The Bank's deposits are insured by the Federal Deposit Insurance Corporation ("FDIC") under the Savings Association Insurance Fund ("SAIF"). The Bank has been a member of the Federal Home Loan Bank ("FHLB") System since 1937. On September 30, 2003, Wayne Savings Bancshares, Inc. merged its wholly owned subsidiary, Village Savings Bank, F.S.B., into Wayne Savings Community Bank. The Company concluded that significant cost savings and operating efficiencies could be achieved by discontinuing the separate corporate existence of Village Savings. The Bank is a community-oriented savings institution offering traditional financial services to its local community. The Bank's primary lending and deposit gathering area includes Wayne, Holmes, Ashland, Medina and Stark counties, where it operates eleven full-service offices. This contiguous five-county area is located in northeast Ohio, and is an active manufacturing and agricultural market. The Bank's principal business activity consists of originating one- to four-family residential real estate loans in its market area. The Bank also originates multi-family residential and non-residential real estate loans, although such loans constitute a small portion of the Bank's lending activities and a small portion of the Bank's loan portfolio. The Bank also originates consumer loans, and to a lesser 2 extent, construction loans. Recently, the Bank has hired experienced commercial lenders to help develop a commercial lending program. The Bank also invests in mortgage-backed securities and currently maintains a significant portion of its assets in liquid investments, such as United States Government securities, federal funds, and deposits in other financial institutions. The Bank's principal executive office is located at 151 North Market Street, Wooster, Ohio, and its telephone number at that address is (330) 264-5767. Market Area/Local Economy The Bank, headquartered in Wooster, Ohio, operates in Wayne, Ashland, Medina, Holmes and Stark Counties in northeast Ohio. Wooster, Ohio is located in Wayne County and is approximately midway between Cleveland and Columbus, Ohio. Wayne County is characterized by a diverse economic base, which is not dependent on any particular industry. The manufacturing sector employs 26% of the county's workforce with services and trade sectors employing 20% and 19%, respectively. It is one of the leading agricultural counties in the state. Since 1892, Wooster has been the headquarters of the Ohio Agricultural Research and Development Center, the agricultural research arm of The Ohio State University. In addition, Wayne County is also the home base of such nationally known companies like J.M. Smucker Company, Worthington Industries/The Gertsenslager Company, and the Wooster Brush Company. It is also the home of many industrial plants, including Packaging Corporation of America, International Paper Company, Morton Salt, and FritoLay, Inc. The City of Wooster has benefited from the commitment of the world renowned Cleveland Clinic as they have established new state of the art medical facilities. Wayne County is also known for its excellence in education. The College of Wooster was founded in 1866 and serves 1,800 students during the school season. Other quality educational opportunities are offered by the Agricultural Technical Institute of Ohio State University, and Wayne College, a branch of The University of Akron. Wayne Savings operates four full-service offices in Wooster, one stand-alone drive-thru facility and one full-service office in Rittman and Creston. Ashland County, which is located due west of Wayne County, also has a diverse economic base. In addition to its agricultural segment, Ashland County has manufacturing plants producing rubber and plastics, machinery, transportation equipment, chemicals, apparel, and other items. Ashland is also the home of Ashland University. The City of Ashland is the county seat and the location of two of the Bank's branch offices. Medina County, located just north of Wayne County, is the center of a fertile agricultural region. Farming remains the largest industry in the county in terms of dollar value of goods produced. However, over 100 small manufacturing firms also operate in the county. The City of Medina is located in the center of the Cleveland-Akron-Lorain Standard Consolidated Statistical Marketing Area. Medina is located approximately 30 miles south of Cleveland and 15 miles west of Akron. Due to its proximity to Akron and Cleveland, a majority of Medina County's labor force is employed in these two cities. The Bank operates one full-service office in Medina County, which is located in the Village of Lodi. Holmes County, located directly south of Wayne County, has a mostly rural economy. The local economy depends mostly upon agriculture, light manufacturing, fabrics, and wood products. Because of the scenic beauty and a large Amish settlement, revenues from tourism are becoming increasingly significant. The county is also noted for its many fine cheese-making operations. A large number of Holmes County residents are employed in Wayne County. The City of Millersburg is the county seat and the location of one of the Bank's branch offices. Stark County, located directly east of Wayne County, is characterized by a diverse economy and over 1,500 different products are manufactured in the county. Stark County also has a strong agricultural base, and ranks fourth in Ohio in the production of dairy products. The major employers in North Canton are the Hoover Company, Diebold Incorporated (a major manufacturer of bank security products and automated teller machines) and the Timken Company (a world-wide manufacturer of tapered roller bearings and specialty steels). The Hoover Company is currently relocating to Maytag's headquarters in Iowa. Timken has also had plants close resulting in job loss in the North Canton Region of approximately 30%. Jackson Township is the home to the Belden Village 3 Shopping Center, while Plain Township is a residential and agricultural area with a few widely scattered light industries. Lending Activities General. Historically, the principal lending activity of the Company has been the origination of fixed and adjustable rate mortgage ("ARM") loans collateralized by one- to four-family residential properties located in its market area. The Company originates ARM loans for retention in its portfolio, and fixed rate loans that are eligible for resale in the secondary mortgage market. The Company also originates loans collateralized by non-residential and multi-family residential real estate as well as commercial business loans. The Company also originates consumer loans to broaden services offered to customers. The Company has sought to make its interest-earning assets more interest rate sensitive by originating adjustable rate loans, such as ARM loans, home equity loans, and medium-term consumer loans. The Company also purchases mortgage-backed securities generally with estimated remaining average lives of 5 years or less. At March 31, 2005, approximately $107.3 million, or 38.7%, of the Company's total loans and mortgage-backed securities consisted of loans or securities with adjustable interest rates. The Company continues to actively originate fixed rate mortgage loans, generally with 15 to 30 year terms to maturity, collateralized by one- to four-family residential properties. One- to four-family fixed rate residential mortgage loans generally are originated and underwritten according to standards that allow the Company to resell such loans in the secondary mortgage market for purposes of managing interest rate risk and liquidity. The majority of such one- to four-family fixed rate 30 year residential mortgage loans, however, are sold by the Company, while the 15 year originations are generally retained. The Company retains servicing on its sold mortgage loans and realizes monthly service fee income. The Company also originates interim construction loans on one- to four-family residential properties. The Company has begun developing a commercial business loan program. The purpose of this program is to increase the Company's interest rate sensitive assets, increase interest income and diversify both the loan portfolio and the Company's customer base. The Company has three experienced commercial lenders to help in this program. The Company targets small local businesses with loan amounts in the $50,000 - $1,000,000 range with a majority of loans under $500,000. Commercial loans increased to $14.1 million at March 31, 2005 as compared to $6.5 million at March 31, 2004. Nonresidential real estate and land loans increased from $18.4 million, or 8.8%, of the total loan portfolio at March 31, 2004 to $29.2 million, or 13.4%, of the total loan portfolio at March 31, 2005. 4 Analysis of Loan Portfolio. Set forth below are selected data relating to the composition of the Company's loan portfolio by type of loan as of the dates indicated.
At March 31, ----------------------------------------------------------------- 2005 2004 2003 ------------------- ------------------- ------------------- $ % $ % $ % -------- -------- -------- -------- -------- -------- (Dollars in thousands) Mortgage loans: One-to four-family residential(1) ...... $157,658 72.60% $171,736 81.97% $200,764 86.41% Residential construction loans ......... 4,053 1.87 2,914 1.39 3,548 1.53 Multi-family residential ............... 7,872 3.63 6,800 3.25 8,512 3.66 Non-residential real estate/land(2) .... 29,187 13.44 18,439 8.80 12,067 5.19 -------- -------- -------- -------- -------- -------- Total mortgage loans ................. 198,770 91.54 199,889 95.41 224,891 96.79 Other loans: Consumer loans(3) ...................... 4,306 1.98 3,156 1.51 3,892 1.67 Commercial business loans .............. 14,075 6.48 6,471 3.08 3,571 1.54 -------- -------- -------- -------- -------- -------- Total other loans .................... 18,381 8.46 9,627 4.59 7,463 3.21 -------- -------- -------- -------- -------- -------- Total loans before net items ........... 217,151 100.00% 209,516 100.00% 232,354 100.00% ======== ======== ======== Less: Loans in process ....................... 1,638 2,579 2,244 Deferred loan origination fees ......... 512 679 1,059 Allowance for loan losses .............. 1,374 815 678 -------- -------- -------- Total loans receivable, net .......... $213,627 $205,443 $228,373 ======== ======== ======== Mortgage-backed securities, net(4) ..... $ 60,352 $ 88,428 $ 76,002 ======== ======== ======== At March 31, ------------------------------------------ 2002 2001 ------------------- ------------------- $ % $ % -------- -------- -------- -------- (Dollars in thousands) Mortgage loans: One-to four-family residential(1) ...... $220,145 85.36% $217,236 85.69% Residential construction loans ......... 8,728 3.38 7,078 2.79 Multi-family residential ............... 7,368 2.86 9,039 3.57 Non-residential real estate/land(2) .... 12,423 4.82 7,525 2.97 -------- -------- -------- -------- Total mortgage loans ................. 248,664 96.42 240,878 95.02 Other loans: Consumer loans(3) ...................... 6,096 2.36 7,858 3.10 Commercial business loans .............. 3,134 1.22 4,765 1.88 -------- -------- -------- -------- Total other loans .................... 9,230 3.58 12,623 4.98 -------- -------- -------- -------- Total loans before net items ........... 257,894 100.00% 253,501 100.00% ======== ======== Less: Loans in process ....................... 4,616 4,764 Deferred loan origination fees ......... 1,376 1,463 Allowance for loan losses .............. 730 655 -------- -------- Total loans receivable, net .......... $251,172 $246,619 ======== ======== Mortgage-backed securities, net(4) ..... $ 17,326 $ 8,574 ======== ========
________________ (1) Includes equity loans collateralized by second mortgages in the aggregate amount of $20.3 million, $20.3 million, $21.2 million, $18.9 million and $15.7 million as of March 31, 2005, 2004, 2003, 2002 and 2001, respectively. Such loans have been underwritten on substantially the same basis as the Company's first mortgage loans. (2) Includes land loans of $1.4 million, $575,000, $813,000, $736,000 and $923,000 as of March 31, 2005, 2004, 2003, 2002, and 2001, respectively. (3) Includes second mortgage loans of $1.4 million, $535,000, $859,000, $1.2 million and $1.8 million as of March 31, 2005, 2004, 2003, 2002 and 2001, respectively. (4) Includes mortgage-backed securities designated as available for sale. 5 Loan and Mortgage-Backed Securities Maturity and Repricing Schedule. The following table sets forth certain information as of March 31, 2005, regarding the dollar amount of loans and mortgage-backed securities maturing in the Company's portfolio based on their contractual terms to maturity. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Adjustable and floating rate loans and mortgage-backed securities are included in the period in which interest rates are next scheduled to adjust rather than in which they mature, and fixed rate loans and mortgage-backed securities are included in the period in which the final contractual repayment is due. Fixed rate mortgage-backed securities are assumed to mature in the period in which the final contractual payment is due on the underlying mortgage.
One Three Five Ten Within Through Through Through Through One Year Three Years Five Years Ten Years Twenty Years -------- ----------- ---------- --------- ------------ (In Thousands) Mortgage loans: One- to four-family residential: Adjustable .......................................... $ 31,199 $ 10,870 $ 3,959 $ 65 $ -- Fixed ............................................... 1,516 1,543 1,897 18,797 40,475 Construction:(1) Adjustable .......................................... -- 81 -- -- -- Fixed ............................................... 176 -- -- 30 72 Multi-family residential, nonresidential and land:(1) Adjustable .......................................... 6,507 6,824 10,554 1 -- Fixed ............................................... 1,356 3,258 5,317 1,542 1,523 Other Loans: Commercial business loans ............................. 11,671 655 1,324 53 221 Consumer .............................................. 924 1,463 1,676 243 -- -------- -------- -------- -------- -------- Total loans ............................................. $ 53,349 $ 24,694 $ 24,727 $ 20,731 $ 42,291 ======== ======== ======== ======== ======== Mortgage-backed securities(2) ........................... $ 15,792 $ 4,443 $ 770 $ 3,809 $ 18,611 ======== ======== ======== ======== ======== Beyond Twenty Years Total -------- -------- (In Thousands) Mortgage loans: One- to four-family residential: Adjustable .......................................... $ -- $ 46,093 Fixed ............................................... 47,337 111,565 Construction:(1) Adjustable .......................................... -- 81 Fixed ............................................... 2,233 2,511 Multi-family residential, nonresidential and land:(1) Adjustable .......................................... -- 23,886 Fixed ............................................... -- 12,996 Other Loans: Commercial business loans ............................. 151 14,075 Consumer .............................................. -- 4,306 -------- -------- Total loans ............................................. $ 49,721 $215,513 ======== ======== Mortgage-backed securities(2) ........................... $ 16,484 $ 59,909 ======== ========
- ---------- (1) Amounts shown are net of loans in process of $1.5 million in construction loans and $177,000 in multi-family residential and nonresidential loans. (2) Includes mortgage-backed securities available for sale. Does not include premiums of $972,000, discounts of $49,000 and unrealized losses of $480,000. 6 The following table sets forth at March 31, 2005, the dollar amount of all fixed rate and adjustable rate loans and mortgage-backed securities maturing or repricing after March 31, 2006.
Fixed Adjustable ---------- ---------- (In Thousands) Mortgage loans: One- to four-family residential ........................... $110,049 $ 14,894 Construction (2) .......................................... 2,335 81 Multi-family residential, non-residential and land (2) .... 11,640 17,379 Consumer .................................................. 3,382 -- Commercial business ....................................... 1,714 690 -------- -------- Total loans ............................................. $129,120 $ 33,044 ======== ======== Mortgage-backed securities(1) ............................... $ 39,674 $ 4,443 ======== ========
- ---------- (1) Includes mortgage-backed securities available for sale, which totaled $57.7 million as of March 31, 2005. Does not include premiums of $972,000, discounts of $49,000 and unrealized losses of $480,000. (2) Net of loans in process of $1.5 million in construction loans and $177,000 in multi-family residential and non-residential loans. One- to Four-Family Residential Real Estate Loans. The Company's primary lending activity consists of the origination of one- to four-family, owner-occupied, residential mortgage loans on properties located in the Company's market area. The Company generally does not originate one- to four-family residential loans on properties outside of its market area. At March 31, 2005, the Company had $157.7 million, or 72.6%, of its total loan portfolio invested in one- to four-family residential mortgage loans. The Company's fixed rate loans generally are originated and underwritten according to standards that permit resale in the secondary mortgage market. Whether the Company can or will sell fixed rate loans into the secondary market, however, depends on a number of factors including the Company's portfolio mix, gap and liquidity positions, and market conditions. Moreover, the Company is more likely to retain fixed rate loans if its one-year gap is positive. The Company's fixed rate mortgage loans are amortized on a monthly basis with principal and interest due each month. One- to four-family residential real estate loans often remain outstanding for significantly shorter periods than their contractual terms because borrowers may refinance or prepay loans at their option. The Company's one- to four-family residential portfolio has declined $14.1 million, or 8.2%, from fiscal 2004 to 2005. This reduction was due mainly to the low interest rate environment which prompted many mortgage customers to refinance their loans. The Company chose not to aggressively price its mortgage loans during this period and, as a result, experienced significant principal repayments. The Company used the proceeds of the principal reductions to originate non-residential real estate and commercial business loans. The Company's secondary market activities have been limited to sales of $6.7 million, $6.2 million, $4.0 million, $27.4 million and $9.2 million, for the fiscal years ended March 31, 2005, 2004, 2003, 2002 and 2001, respectively. Such sales generally constituted current period originations. There were no loans identified as available for sale as of March 31, 2005, 2004, 2003, or 2002. Mortgage loans held for sale at March 31, 2001 totaled $861,000 . The Company currently offers one- to four-family residential mortgage loans with terms typically ranging from 15 to 30 years, and with adjustable or fixed interest rates. Originations of fixed rate mortgage loans versus ARM loans are monitored on an ongoing basis and are affected significantly by the level of market interest rates, customer preference, the Company's interest rate gap position, and loan products offered by the Company's competitors. Despite the Company's emphasis on ARM loans, the low interest rate environment over the last few years has resulted in customer preference for fixed rate mortgage loans. As a result, during the year ended March 31, 2005, the Company's ARM portfolio decreased by $2.9 million, or 6.0%. The Company offers two ARM loan products. The Treasury ARM loan adjusts annually with interest rate adjustment limitations of 2% per year and with a cap of 5% on total rate increases or decreases over the life of the loan. The index on the Treasury ARM loan is the weekly average yield on U.S. Treasury securities, adjusted to a constant maturity of one year plus a margin. However, these loans are underwritten at the fully-indexed interest rate. The second ARM product is the Cost of Funds ARM loan which adjusts annually and has periodic and lifetime interest rate caps of 1% and 3%, respectively. The index is the Ohio Cost of Funds from SAIF Insured Savings 7 Associations, which index is published quarterly by the OTS. The initial interest rate on the Cost of Funds ARM loans is not discounted. One- to four-family residential ARM loans totaled $46.1 million, or 21.4%, of the Company's total loan portfolio at March 31, 2005. The primary purpose of offering ARM loans is to make the Company's loan portfolio more interest rate sensitive. However, as the interest income earned on ARM loans varies with prevailing interest rates, such loans do not offer the Company predictable cash flows as would long-term, fixed rate loans. ARM loans carry increased credit risk associated with potentially higher monthly payments by borrowers as general market interest rates increase. It is possible, therefore, that during periods of rising interest rates, the risk of default on ARM loans may increase due to the upward adjustment of interest costs to the borrower. Management believes that the Company's credit risk associated with its ARM loans is reduced because the Company has either a 3% or 5% cap on interest rate increases during the life of its ARM loans. The Company also offers home equity loans and equity lines of credit collateralized by a second mortgage on the borrower's principal residence. In underwriting these home equity loans, the Company requires that the maximum loan-to-value ratios, including the principal balances of both the first and second mortgage loans, not exceed 85%. The home equity loan portfolio consists of adjustable rate loans which use the prime rate as published in The Wall Street Journal as interest rate indices. Home equity loans include fixed term adjustable rate loans, as well as lines of credit. As of March 31, 2005, the Company's equity loan portfolio totaled $20.3 million, or 12.6%, of its one- to four-family mortgage loan portfolio. The Company's one- to four-family residential first mortgage loans customarily include due-on-sale clauses, which are provisions giving the Company the right to declare a loan immediately due and payable in the event, among other things, that the borrower sells or otherwise disposes of the underlying real property serving as security for the loan. Due-on-sale clauses are an important means of adjusting the rates on the Company's fixed rate mortgage loan portfolio. Regulations limit the amount that a savings association may lend relative to the appraised value of the real estate securing the loan, as determined by an appraisal at the time of loan origination. The Company's lending policies limit the maximum loan-to-value ratio on both fixed rate and ARM loans without private mortgage insurance to 80% of the lesser of the appraised value or the purchase price of the property to serve as collateral for the loan. However, the Company makes one- to four-family real estate loans with loan-to-value ratios in excess of 80%. For 15 year fixed rate ARM loans with loan-to-value ratios of 80.01% to 85%, 85.01% to 90%, 90.01% to 95%, and 95.01% to 97%, the Company requires the first 6%, 12%, 25% and 30%, respectively, of the loan to be covered by private mortgage insurance. For 30 year fixed rate loans with loan-to-value ratios of 80.01% to 85%, 85.01% to 90%, and 90.01% to 97%, the Company requires the first 12%, 25%, and 30%, respectively, of the loan to be covered by private mortgage insurance. The Company requires fire and casualty insurance, as well as title insurance regarding good title, on all properties securing real estate loans made by the Company and flood insurance, where applicable. Multi-Family Residential Real Estate Loans. Loans secured by multi-family real estate constituted approximately $7.9 million, or 3.6%, of the Company's total loan portfolio at March 31, 2005. The Company's multi-family real estate loans are secured by multi-family residences, such as apartment buildings. At March 31, 2005, most of the Company's multi-family loans were secured by properties located within the Company's market area. At March 31, 2005, the Company's multi-family real estate loans had an average balance of $463,000, and the largest multi-family real estate loan had a principal balance of $3.3 million. Multi-family real estate loans currently are offered with adjustable interest rates or short term balloon maturities, although in the past the Company originated fixed rate long term multi-family real estate loans. The terms of each multi-family loan are negotiated on a case by case basis, although such loans typically have adjustable interest rates tied to a market index, and amortize over 15 to 25 years. The Company currently does not emphasize multi-family real estate construction loans. Loans secured by multi-family real estate generally involve a greater degree of credit risk than one- to four-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family real estate is typically dependent 8 upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired. Non-Residential Real Estate and Land Loans. Loans secured by non-residential real estate constituted approximately $27.8 million, or 12.8%, of the Company's total loan portfolio at March 31, 2005. The Company's non-residential real estate loans are secured by improved property such as offices, small business facilities, and other non-residential buildings. At March 31, 2005, most of the Company's non-residential real estate loans were secured by properties located within the Company's market area. At March 31, 2005, the Company's non-residential loans had an average balance of $147,000 and the largest non-residential real estate loan had a principal balance of $2.4 million. The terms of each non-residential real estate loan are negotiated on a case by case basis. Non-residential real estate loans are currently offered with adjustable interest rates or short term balloon maturities, although in the past the Company has originated fixed rate long term non-residential real estate loans. Non-residential real estate loans originated by the Company generally amortize over 15 to 25 years. The Company currently does not emphasize non-residential real estate construction loans. Loans secured by non-residential real estate generally involve a greater degree of risk than one- to four-family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by non-residential real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced, the borrower's ability to repay the loan may be impaired. The Company also originates a limited number of land loans secured by individual improved and unimproved lots for future residential construction. Land loans are generally offered with a fixed rate and with terms of up to 5 years. Land loans totaled $1.4 million at March 31, 2005. Residential Construction Loans. To a lesser extent, the Company originates loans to finance the construction of one- to four-family residential property. At March 31, 2005, the Company had $4.1 million, or 1.9%, of its total loan portfolio invested in interim construction loans. The Company makes construction loans to private individuals and to builders. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. Construction loans are typically structured as permanent one- to four-family loans originated by the Company with a 12-month construction phase. Accordingly, upon completion of the construction phase, there is no change in interest rate or term to maturity of the original construction loan, nor is a new permanent loan originated. Commercial Business Loans. Commercial business loans totaled $14.1 million, or 6.5% of the Company's total loan portfolio at March 31, 2005. This represents net growth of $7.6 million which equates to a 3.6% increase as percentage of total loans compared to $6.5 million at March 31, 2004. The Company has three experienced commercial lenders and is developing an additional commercial lender internally. The Company has plans to continue commercial lending growth as market conditions permit. Commercial loans carry a higher degree of risk than one- to four- residential loans. Such lending typically involves large loan balances concentrated in a single borrower or groups of related borrowers for rental or business properties. In addition, the payment experience on loans secured by income-producing properties is typically dependent on the success of the operation of the related project and thus is typically affected by adverse conditions in the real estate market and in the economy. The Company makes loans generally in the $100,000 to $1,000,000 range with the majority of them being under $500,000. Commercial loans are generally underwritten based on the borrower's ability to pay and assets such as buildings, land and equipment are taken as additional loan collateral. Each loan is evaluated for a level of risk and assigned a rating from "1" (the highest rating) to "7" (the lowest rating). All loans originated to date have been rated 4 or higher. Consumer Loans. Ohio savings associations are authorized to invest in secured and unsecured consumer loans in an aggregate amount which, when combined with investments in commercial paper and corporate debt securities, does not exceed 20% of an association's assets. In addition, an Ohio association is permitted to invest up to 5% of its assets in loans for educational purposes. 9 As of March 31, 2005, consumer loans totaled $4.3 million, or 2.0%, of the Company's total loan portfolio. The principal types of consumer loans offered by the Company are second mortgage loans, fixed rate auto and truck loans, education loans, credit card loans, unsecured personal loans, and loans secured by deposit accounts. Consumer loans are offered primarily on a fixed rate basis with maturities generally of less than ten years. The Company's second mortgage consumer loans are secured by the borrower's principal residence with a maximum loan-to-value ratio, including the principal balances of both the first and second mortgage loans, of 80% or less. Such loans are offered on a fixed rate basis with terms of up to ten years. At March 31, 2005, second mortgage loans totaled $1.4 million, or .9%, of one- to four-family mortgage. The underwriting standards employed by the Company for consumer loans include a determination of the applicant's credit history and an assessment of the applicant's ability to meet existing obligations and payments on the proposed loan. The quality and stability of the applicant's monthly income are determined by analyzing the gross monthly income from primary employment, and additionally from any verifiable secondary income. Creditworthiness of the applicant is of primary consideration. However, where applicable, the underwriting process also includes a comparison of the value of the collateral in relation to the proposed loan amount. Consumer loans entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as automobiles, mobile homes, boats, and recreational vehicles. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In particular, amounts realizable on the sale of repossessed automobiles may be significantly reduced based upon the condition of the automobiles and the lack of demand for used automobiles. The Company adds a general provision on a regular basis to its consumer loan loss allowance, based on, among other factors, general economic conditions and prior loss experience. See "--Delinquencies and Classified Assets--Non-Performing and Impaired Assets," and "--Classification of Assets" for information regarding the Company's loan loss experience and reserve policy. Mortgage-Backed Securities. The Company also invests in mortgage-backed securities generally issued or guaranteed by the United States Government or agencies thereof. Investments in mortgage-backed securities are made either directly or by exchanging mortgage loans in the Company's portfolio for such securities. These securities consist primarily of adjustable rate mortgage-backed securities issued or guaranteed by the Federal National Mortgage Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), and the Government National Mortgage Association ("GNMA"). Total mortgage-backed securities, including those designated as available for sale, decreased from $88.4 million at March 31, 2004 to $60.4 million at March 31, 2005 primarily due to repayments. The Company's objectives in investing in mortgage-backed securities vary from time to time depending upon market interest rates, local mortgage loan demand, and the Company's level of liquidity. Mortgage-backed securities are more liquid than whole loans and can be readily sold in response to market conditions and changes in interest rates. Mortgage-backed securities purchased by the Company also have lower credit risk because principal and interest are either insured or guaranteed by the United States Government or agencies thereof. Loan Originations, Solicitation, Processing, and Commitments. Loan originations are derived from a number of sources such as real estate broker referrals, existing customers, borrowers, builders, attorneys, walk-in customers. The Company has also entered into a number of participation loans with high quality lead lenders. The participations are outside the Company's normal lending area and diversify the loan portfolio. Upon receiving a loan application, the Company obtains a credit report and employment verification to verify specific information relating to the applicant's employment, income, and credit standing. In the case of a real estate loan, an appraiser approved by the Company appraises the real estate intended to secure the proposed loan. An underwriter in the Company's loan department checks the loan application file for accuracy and completeness, and verifies the information provided. One- to four-family and multi-family residential, and commercial real estate loans, for up to $150,000, may be approved by the manager of the mortgage loan department, loans between $150,000 and $300,000 must be approved by the Chief Executive Officer and loans in excess of $300,000 must be approved by the Board of Directors. The Loan Committee meets once a week to review and verify that loan officer approvals of loans are made within the scope of management's authority. All approvals subsequently are ratified monthly by the full 10 Board of Directors. Fire and casualty insurance is required at the time the loan is made and throughout the term of the loan. After the loan is approved, a loan commitment letter is promptly issued to the borrower. At March 31, 2005, the Company had commitments to originate $2.1 million of loans. If the loan is approved, the commitment letter specifies the terms and conditions of the proposed loan including the amount of the loan, interest rate, amortization term, a brief description of the required collateral, and required insurance coverage. The borrower must provide proof of fire and casualty insurance on the property serving as collateral, which insurance must be maintained during the full term of the loan. A title search of the property is required on all loans secured by real property. Origination, Purchase and Sale of Loans and Mortgage-Backed Securities. The table below shows the Company's loan origination, purchase and sales activity for the periods indicated.
At March 31, ---------------------------------- 2005 2004 2003 -------- -------- -------- (In Thousands) Total loans receivable, net at beginning of year .... $205,443 $228,373 $251,172 Loans originated: One- to four-family residential(1) ............... 20,312 53,116 52,523 Multi-family residential(2) ...................... 18 421 2,761 Non-residential real estate/land .................... 11,237 1,147 1,074 Consumer loans ................................... 1,932 1,318 1,900 Commercial loans ................................. 22,696 15,859 2,973 -------- -------- -------- Total loans originated ........................ 56,195 71,861 61,231 Loans sold: Whole loans ...................................... (6,726) (6,198) (3,998) -------- -------- -------- Total loans sold .............................. (6,726) (6,198) (3,998) Mortgage loans transferred to REO ................... (268) (279) -- Loan repayments ..................................... (52,517) (89,107) (80,362) Other loan activity, net(3) ......................... 11,500 793 330 -------- -------- -------- Total loans receivable, net at end of year .... $213,627 $205,443 $228,373 ======== ======== ======== Mortgage-backed securities at beginning of year ..... $ 88,428 $ 76,002 $ 17,326 Mortgage-backed securities purchased ................ 8,018 55,526 77,442 Principal repayments and other activity ............. (36,094) (43,100) (18,766) -------- -------- -------- Mortgage-backed securities at end of year ..... $ 60,352 $ 88,428 $ 76,002 ======== ======== ========
- ---------- (1) Includes loans to finance the construction of one- to four-family residential properties, and loans originated for sale in the secondary market. (2) Includes loans to finance the sale of real estate acquired through foreclosure. (3) For fiscal 2005, includes other activity related to the Stebbins acquisition. Loan Origination Fees and Other Income. In addition to interest earned on loans, the Company generally receives loan origination fees. The Company accounts for loan origination fees in accordance with Statement of Financial Accounting Standards ("SFAS") No. 91 "Accounting for Non-refundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." To the extent that loans are originated or acquired for the Company's portfolio, SFAS No. 91 requires that the Company defer loan origination fees and costs and amortize such amounts as an adjustment of yield over the life of the loan by use of the level yield method. SFAS No. 91 reduces the amount of revenue recognized by many financial institutions at the time such loans are originated or acquired. Fees deferred under SFAS No. 91 are recognized into income immediately upon prepayment or the sale of the related loan. At March 31, 2005, the Company had $512,000 of deferred loan origination fees. Loan origination fees are volatile sources of income. Such fees vary with the volume and type of loans and commitments made and purchased, principal repayments, and competitive conditions in the mortgage markets, which in turn respond to the demand for and availability of money. The Company receives other fees, service charges, and other income that consist primarily of deposit transaction account service charges, late charges, credit card fees, and income from REO operations. The Company 11 recognized fees and service charges of $1.3 million, $1.5 million and $1.4 million, for the fiscal years ended March 31, 2005, 2004 and 2003, respectively. Loans to One Borrower. Savings associations are subject to the same limits as those applicable to national banks, which under current regulations restrict loans to one borrower to an amount equal to 15% of unimpaired capital and unimpaired surplus on an unsecured basis, and an additional amount equal to 10% of unimpaired capital and unimpaired surplus if the loan is secured by readily marketable collateral (generally, financial instruments and bullion, but not real estate). At March 31, 2005, the Company's largest concentration of loans to one borrower totaled $3.9 million. All of such loans were current at March 31, 2005. The Company had no loans at March 31, 2005 that exceeded the loans to one borrower regulations. Delinquencies and Classified Assets Delinquencies. The Company's collection procedures provide that when a loan is 15 days past due, a computer-generated late charge notice is sent to the borrower requesting payment, plus a late charge. This notice is followed with a letter again requesting payment when the payment becomes 20 days past due. If delinquency continues, at 30 days another collection letter is sent and personal contact efforts are attempted, either in person or by telephone, to strengthen the collection process and obtain reasons for the delinquency. Also, plans to arrange a repayment plan are made. If a loan becomes 60 days past due, the loan becomes subject to possible legal action if suitable arrangements to repay have not been made. In addition, the borrower is given information which provides access to consumer counseling services, to the extent required by HUD regulations. When a loan continues in a delinquent status for 90 days or more, and a repayment schedule has not been made or kept by the borrower, a notice of intent to foreclose is sent to the borrower, giving 30 days to cure the delinquency. If not cured, foreclosure proceedings are initiated. Non-Performing and Impaired Assets. Loans are reviewed on a regular basis and are placed on a non-accrual status when, in the opinion of management, the collection of additional interest is doubtful. Mortgage loans are placed on non-accrual status generally when either principal or interest is 90 days or more past due and management considers the interest uncollectible. Interest accrued and unpaid at the time a loan is placed on non-accrual status is charged against interest income. Under the provisions of SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," a loan is defined as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due under the contractual terms of the loan agreement. In applying the provisions of SFAS No. 114, the Bank considers investment in one- to four-family residential loans and consumer installment loans to be homogeneous and therefore excluded from separate identification for impairment. With respect to the Bank's investment in multi-family commercial and nonresidential loans, and the evaluation of impairment thereof, such loans are collateral dependent and, as a result, are carried as a practical expedient at the lower of cost or fair value. At March 31, 2005, the Company had non-performing loans of $906,000 and a ratio of non-performing and impaired loans to loans receivable of 0.42%. At March 31, 2004, the Company had non-performing and impaired loans of $747,000 and a ratio of non-performing loans to loans receivable of .36%. For both fiscal 2005 and 2004, the nonperforming loans consisted mainly of one to four residential mortgage loans. The Company generally does not recognize losses on one to four residential mortgage loans primarily because the loan will generally be a maximum 85% LTV ratio on these mortgages without further insurance. In the opinion of management, all non-performing loans are adequately collateralized as of March 31, 2005 and no significant loss is presently anticipated. Real estate acquired by the Company as a result of foreclosure or by deed in lieu of foreclosure ("REO") is deemed REO until such time as it is sold. When REO is acquired, it is recorded at the lower of the unpaid principal balance of the related loan or its fair value, less estimated selling expenses. Valuations are periodically performed by management, and any subsequent decline in fair value is charged to operations. 12 The following table sets forth information regarding our non-accrual and impaired loans and real estate acquired by foreclosure at the dates indicated. For all the dates indicated, we did not have any material loans which had been restructured pursuant to SFAS No. 15.
At March 31, -------------------------------------------------- 2005 2004 2003 2002 2001 ------ ------ ------ ------ ------ (Dollars In Thousands) Non-accrual loans: Mortgage loans: One- to four-family residential ......................... $ 895 $ 714 $ 664 $ 616 $ 443 All other mortgage loans ................................ -- 24 430 1,070 -- Non-mortgage loans: Commercial business loans ............................... -- -- 1,380 1,416 -- Consumer ................................................ 11 9 6 25 72 ------ ------ ------ ------ ------ Total non-accrual loans ..................................... 906 747 2,480 3,127 515 Accruing loans 90 days or more delinquent ................... -- -- 15 38 -- ------ ------ ------ ------ ------ Total non-performing loans .................................. 906 747 2,495 3,165 515 Loans deemed impaired (1) ................................... -- -- -- 645 645 ------ ------ ------ ------ ------ Total non-performing and impaired loans ..................... 906 747 2,495 3,810 1,160 Total real estate owned (2) ................................. 35 100 -- 19 124 ------ ------ ------ ------ ------ Total non-performing and impaired assets .................... $ 941 $ 847 $2,495 $3,829 $1,284 ====== ====== ====== ====== ====== Total non-performing and impaired loans to net loans receivable ................................................ 0.42% 0.36% 1.09% 1.52% 0.47% ====== ====== ====== ====== ====== Total non-performing and impaired loans to total assets ..... 0.22% 0.23% .65% 1.14% 0.37% ====== ====== ====== ====== ====== Total non-performing and impaired assets to total assets .... 0.22% 0.23% .65% 1.14% 0.41% ====== ====== ====== ====== ======
- ---------- (1) Includes loans deemed impaired that are currently performing. (2) Represents the net book value of property acquired by us through foreclosure or deed in lieu of foreclosure. These properties are recorded at the lower of the loan's unpaid principal balance or fair value less estimated selling expenses. During the year ended March 31, 2005, 2004 and 2003, gross interest income of $40,000, $37,000 and $208,000 would have been recorded on loans currently accounted for on a non-accrual basis if the loans had been current throughout the period. Interest income recognized on nonaccrual loans totaled $45,000, $23,000 and $362,000 for the years ended March 31, 2005, 2004 and 2003, respectively. The Company had no interest income from impaired loans for fiscal 2005. The Company recognized interest income on impaired loans using the cash method of accounting of approximately $249,000 and $24,000 for the years ended March 31, 2004 and 2003. The following table sets forth information with respect to loans past due 60-89 days and 90 days or more in our portfolio at the dates indicated.
At March 31, ---------------------------------------------- 2005 2004 2003 2002 2001 ------ ------ ------ ------ ------ (In Thousands) Loans past due 60-89 days ............ $1,084 $ 669 $ 723 $ 431 $2,536 Loans past due 90 days or more ....... 906 747 2,495 3,165 515 ------ ------ ------ ------ ------ Total past due 60 days or more .... $1,990 $1,416 $3,218 $3,596 $3,051 ====== ====== ====== ====== ======
Classification of Assets. Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by the OTS to be of lesser quality as "substandard," "doubtful," or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the savings institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets that do not expose the savings institution to risk sufficient to warrant classification 13 in one of the aforementioned categories, but which possess some weaknesses, are required to be designated "special mention" by management. When a savings institution classifies problem assets as either substandard or doubtful, it is required to establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When a savings institution classifies problem assets as "loss," it is required either to establish a specific allowance for losses equal to 100% of the amount of the assets so classified, or to charge off such amount. A savings institution's determination as to the classification of its assets and the amount of its valuation allowances is subject to review by the OTS, which can order the establishment of additional general or specific loss allowances. The Company regularly reviews the problem loans in its portfolio to determine whether any loans require classification in accordance with applicable regulations. The following table sets forth the aggregate amount of the Company's classified assets at the dates indicated. At March 31, ---------------------------------------------- 2005 2004 2003 2002 2001 ------ ------ ------ ------ ------ (Dollars in Thousands) Substandard assets(1) ......... $2,767 $ 839 $2,481 $3,303 $ 569 Doubtful assets ............... -- -- -- -- -- Loss assets ................... -- -- -- 105 -- ------ ------ ------ ------ ------ Total classified assets .... $2,767 $ 839 $2,481 $3,408 $ 569 ====== ====== ====== ====== ====== - ---------- (1) Includes REO. Allowance for Loan Losses. In determining the amount of the allowance for loan losses at any point in time, management and the Board of Directors apply a systematic process focusing on the risk of loss in the loan portfolio. First, delinquent non-residential, multi-family and commercial loans are evaluated individually for potential impairment in their carrying value. Second, management applies historic loss experience to the individual loan types in the portfolio. In addition to the historic loss percentage, management employs an additional risk percentage tailored to the perception of overall risk in the economy. However, the analysis of the allowance for loan losses requires an element of judgment and is subject to the possibility that the allowance may need to be increased, with the corresponding reduction in earnings. During the fiscal years ended March 31, 2005, 2004 and 2003, the Company added $430,000, $173,000 and $91,000, respectively, to the provision for loan losses. The Company's allowance for loan losses totaled $1.4 million, $815,000 and $678,000 at March 31, 2005, 2004 and 2003, respectively. As a result of the increased commercial loan volume, the acquisition of Stebbins' loan portfolio and an enhancement of the Company's loan rating standards, management increased the provision for loan losses by $257,000 in fiscal 2005. While management believes that the Company's current allowance for loan losses is adequate, there can be no assurance that the allowance for loan losses will be adequate to cover losses that may in fact be realized in the future or that additional provisions for loan losses will not be required. To the best of management's knowledge, all known losses as of March 31, 2005 have been recorded. 14 Analysis of the Allowance For Loan Losses. The following table sets forth the analysis of the allowance for loan losses for the periods indicated.
At or for the Year Ended March 31, ---------------------------------------------------------------- 2005 2004 2003 2002 2001 -------- -------- -------- -------- -------- (In Thousands) Loans receivable, net ............................... $213,627 $205,443 $228,373 $251,172 $247,480 ======== ======== ======== ======== ======== Average loans receivable, net ....................... 212,785 214,174 242,120 253,058 245,624 ======== ======== ======== ======== ======== Allowance balance (at beginning of period) .......... 815 678 730 655 793 Provision for losses ................................ 430 173 91 134 96 Stebbins acquisition ................................ 230 -- -- -- -- Charge-offs: Mortgage loans: One- to four-family ............................ (28) -- (20) -- (7) Residential construction ....................... -- -- -- -- -- Multi-family residential ....................... -- -- -- -- -- Non-residential real estate and land(1) ........ -- -- (84) -- (172) Other loans: Consumer ....................................... (44) (65) (54) (63) (61) Commercial ..................................... (54) -- -- -- -- -------- -------- -------- -------- -------- Gross charge-offs .......................... (126) (65) (158) (63) (240) -------- -------- -------- -------- -------- Recoveries: Mortgage loans: One- to four-family ............................ -- -- -- -- -- Residential construction ....................... -- -- -- -- -- Multi-family residential ....................... -- -- -- -- -- Non-residential real estate and land ........... -- -- -- -- -- Other loans: Consumer ....................................... 25 29 15 4 6 Commercial ..................................... -- -- -- -- -- -------- -------- -------- -------- -------- Gross recoveries ........................... 25 29 15 4 6 -------- -------- -------- -------- -------- Net charge-offs ............................ (101) (36) (143) (59) (234) -------- -------- -------- -------- -------- Allowance for loan losses balance (at end of period) (2) ...................................... $ 1,374 $ 815 $ 678 $ 730 $ 655 ======== ======== ======== ======== ======== Allowance for loan losses as a percent of loans receivable, net at end of period ................. 0.64% 0.40% 0.30% 0.29% 0.27% ======== ======== ======== ======== ======== Net loans charged off as a percent of average loans receivable, net .................... 0.05% 0.02% 0.06% 0.02% 0.10% ======== ======== ======== ======== ======== Ratio of allowance for loan losses to total non- performing assets at end of period ............... 146.01% 96.22% 27.17% 19.07% 51.01% ======== ======== ======== ======== ======== Ratio of allowance for loan losses to non- performing loans at end of period ................ 151.66% 109.10% 27.35% 19.16% 56.47% ======== ======== ======== ======== ========
- ---------- (1) The fiscal 2001 charge-offs include a $172,000 charge-off related to an impaired loan. This loan was current at March 31, 2002 and March 31, 2001. This loan was paid off in fiscal 2003. (2) At March 31, 2002, a specific allowance of $105,000 was reserved for a nonresidential loan that met the definition of impaired pursuant to SFAS No. 114. 15 Allocation of Allowance for Loan Losses. The following table sets forth the allocation of allowance for loan losses by loan category for the periods indicated. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance by category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.
At March 31, ----------------------------------------------------------------------------------------- 2005 2004 2003 2002 2001 ---------------- ---------------- ---------------- ---------------- ---------------- % of % of % of % of % of Loans Loans Loans Loans Loans in Each in Each in Each in Each in Each Category Category Category Category Category to to to to to Total Total Total Total Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (Dollars in Thousands) Mortgage loans: One- to four-family ................... $ 99 72.6% $100 82.0% $162 86.4% $126 85.4% $551 85.7% Residential construction .............. -- 1.9 -- 1.4 -- 1.5 -- 3.4 23 2.8 Multi-family residential .............. -- 3.6 -- 3.2 7 3.7 47 2.8 24 3.6 Non-residential real estate and land .. 545 13.4 196 8.8 55 5.2 207 4.8 20 3.4 Other loans: Consumer .............................. 37 2.0 20 1.5 119 1.7 28 2.4 6 3.1 Commercial ............................ 693 6.5 499 3.1 335 1.5 322 1.2 31 1.4 ------ ----- ---- ----- ---- ----- ---- ----- ---- ----- Total allowance for loan losses ......... $1,374 100.0% $815 100.0% $678 100.0% $730 100.0% $655 100.0% ====== ===== ==== ===== ==== ===== ==== ===== ==== =====
16 Investment Activities The Company's investment portfolio is comprised of investment securities, corporate bonds and notes and state and local obligations. The carrying value of the Company's investment securities totaled $72.9 million at March 31, 2005, compared to $31.6 million at March 31, 2004, an increase of $41.3 million, or 130.7%. Such increase was primarily due to the use of repayments from our mortgage-backed securities portfolio to provide a short-term structured cash flow maturity ladder to fund projected loan growth over the next three years. The Company's cash and cash equivalents, consisting of cash and due from banks, federal funds sold and interest bearing deposits due from other financial institutions with original maturities of three months or less, totaled $29.9 million at March 31, 2005 compared to $19.9 million at March 31, 2004, an increase of $10.1 million, or 50.6%. Liquidity levels may be increased or decreased depending upon the yields on investment alternatives and upon management's judgment as to the attractiveness of the yields then available in relation to other opportunities and its expectation of the level of yield that will be available in the future, as well as management's projections as to the short term demand for funds to be used in the Company's loan origination and other activities. Investment Portfolio. The following table sets forth the carrying value of the Company's investment securities portfolio, short-term investments and FHLB stock, at the dates indicated.
At March 31, -------------------------------------------------------------------- 2005 2004 2003 -------------------- -------------------- -------------------- Carrying Market Carrying Market Carrying Market Value Value Value Value Value Value -------- -------- -------- -------- -------- -------- (In Thousands) Investment securities: Mutual funds ....................................... $ -- $ -- $ -- $ -- $ 10,009 $ 10,009 Corporate bonds and notes .......................... 11,086 11,156 11,714 12,418 12,118 12,314 U.S. Government and agency securities .............. 51,239 51,246 15,189 15,262 10,115 10,309 Obligations of state and political subdivisions .... 10,531 10,543 4,679 4,696 3,599 3,615 -------- -------- -------- -------- -------- -------- Total investment securities ................. 72,856 72,945 31,582 32,376 35,841 36,247 Other Investments: Interest-bearing deposits in other financial institutions ..................................... 6,366 6,366 6,721 6,721 6,529 6,529 Federal funds sold ................................. 19,400 19,400 9,875 9,875 8,000 8,000 Federal Home Loan Bank stock ....................... 4,386 4,386 4,205 4,205 4,041 4,041 -------- -------- -------- -------- -------- -------- Total investments ........................... $103,008 $103,097 $ 52,383 $ 53,177 $ 54,411 $ 54,817 ======== ======== ======== ======== ======== ========
17 Investment Portfolio Maturities. The following table sets forth the scheduled maturities, carrying values, market values and average yields for the Company's investment securities at March 31, 2005. The Company does not hold any investment securities with maturities in excess of 30 years.
At March 31, 2005 ------------------------------------------------------------------------------ One Year or Less One to Five Years Five to Ten Years More than Ten Years ----------------- ----------------- ----------------- ------------------- Carrying Average Carrying Average Carrying Average Carrying Average Value Yield Value Yield Value Yield Value Yield -------- ------- -------- ------- -------- ------- -------- ------- (Dollars in Thousands) Investment Securities: Corporate bonds and notes ........................ $ 5,032 5.64% $ 6,054 6.59% $ -- --% $ -- --% U.S. Government and agency ....................... 4,974 2.98 43,724 3.64 980 3.12 1,561 3.10 Obligations of state and political subdivisions .. -- -- 100 3.08 194 6.66 10,237 5.78 ------- ------ ------- ------ ------- ------ ------- ------ Total investment securities .................... $10,006 4.31% $49,878 3.99% $ 1,174 3.73% $11,798 5.43% ======= ====== ======= ====== ======= ====== ======= ====== At March 31, 2005 ---------------------------------------- Total Investment Securities ---------------------------------------- Average Weighted Life Carrying Market Average In Years Value Value Yield -------- -------- ------- -------- (Dollars in Thousands) Investment Securities: Corporate bonds and notes ......................... 1.31 $11,086 $11,156 6.17% U.S. Government and agency ........................ 2.37 51,239 51,246 3.43 Obligations of state and political subdivisions ... 10.09 10,531 10,543 5.66 ------ ------- ------- ------ Total investment securities ....................... 4.98 $72,856 $72,945 4.94% ====== ======= ======= ======
18 Sources of Funds General. Deposits are the major source of the Company's funds for lending and other investment purposes. In addition to deposits, the Company derives funds from the amortization, prepayment or sale of loans and mortgage-backed securities, the sale or maturity of investment securities, operations and, if needed, advances from the Federal Home Loan Bank ("FHLB"). Scheduled loan principal repayments are a relatively stable source of funds, while deposit inflows and outflows and loan prepayments are influenced significantly by general interest rates and market conditions. Borrowings may be used on a short-term basis to compensate for reductions in the availability of funds from other sources or on a longer term basis for general business purposes. The Company had $40.0 million of advances from the FHLB at March 31, 2005. Deposits. Consumer and commercial deposits are attracted principally from within the Company's market area through the offering of a broad selection of deposit instruments including NOW accounts, passbook savings, money market deposit, term certificate accounts and individual retirement accounts. The Company accepts deposits of $100,000 or more and offers negotiated interest rates on such deposits. Deposit account terms vary according to the minimum balance required, the period of time during which the funds must remain on deposit, and the interest rate, among other factors. The Company regularly evaluates its internal cost of funds, surveys rates offered by competing institutions, reviews the Company's cash flow requirements for lending and liquidity, and executes rate changes when deemed appropriate. The Company does not obtain funds through brokers, nor does it solicit funds outside its market area. Deposit Portfolio. Savings and other deposits in the Company as of March 31, 2005, were comprised of the following:
Weighted Percentage Average Minimum of Total Interest Rate Minimum Term Checking and Savings Deposits Amount Balances Deposits - ------------- ------------ ----------------------------- ------ -------- -------- (In Thousands) 0.27% None NOW Accounts $ 100 $ 53,060 16.55% 0.79 None Passbook 25 82,184 25.64 1.34 None Money Market Investor 2,500 18,097 5.65 Certificates of Deposit ----------------------- 1.99 12 months or less Fixed term, fixed rate 500 42,483 13.25 1.97 12 to 24 months Fixed term, fixed rate 500 24,438 7.62 3.02 25 to 36 months Fixed term, fixed rate 500 16,039 5.00 4.39 36 months or more Fixed term, fixed rate 500 53,183 16.59 3.24 Negotiable Jumbo Certificates 100,000 31,102 9.70 -------- ------ $320,586 100.00% ======== ======
19 The following table sets forth the change in dollar amount of savings deposits in the various types of savings accounts offered by the Company between the dates indicated.
Balance at Balance at Balance at March 31, % Increase March 31, % Increase March 31, % 2005 Deposits (Decrease) 2004 Deposits (Decrease) 2003 Deposits ---------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- (Dollars in Thousands) NOW accounts ................... $ 53,060 16.55% $ 10,381 $ 42,679 14.63% $ 2,697 $ 39,982 13.29% Passbook statement accounts .... 82,184 25.64 91 82,093 28.13 (2,385) 84,478 28.07 Money market passbook .......... 18,097 5.65 6,204 11,893 4.08 (1,754) 13,647 4.54 Certificates of deposit(1) Original maturities of: 12 months or less ............ 42,483 13.25 26,642 15,841 5.42 (3,559) 19,400 6.45 12 to 24 months .............. 24,438 7.62 (19,107) 43,545 14.92 (10,210) 53,755 17.86 25 to 36 months .............. 16,039 5.00 (1,821) 17,860 6.12 1,990 15,870 5.27 36 months or more ............ 53,183 16.59 10,402 42,781 14.66 7,597 35,184 11.69 Negotiated jumbo ............... 31,102 9.70 (4,036) 35,138 12.04 (3,477) 38,615 12.83 -------- -------- -------- -------- -------- -------- -------- -------- Total ..................... $320,586 100.00% $ 28,756 $291,830 100.00% $ (9,101) $300,931 100.00% ======== ======== ======== ======== ======== ======== ======== ========
- ---------- (1) Certain Individual Retirement Accounts ("IRAs") are included in the respective certificate balances. IRAs totaled $34.1 million, $32.8 million and $33.7 million, as of March 31, 2005, 2004 and 2003, respectively. The following table sets forth the average dollar amount and weighted average rate of savings deposits in the various types of savings accounts offered by the Company.
Years Ended March 31, ------------------------------------------------------------------------------------------ 2005 2004 2003 ---------------------------- ---------------------------- ---------------------------- Percent Weighted Percent Weighted Percent Weighted Average of Average Average of Average Average of Average Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate -------- -------- -------- -------- -------- -------- -------- -------- -------- (Dollars in Thousands) Noninterest-bearing demand deposits ... $ 9,849 3.14% 0.00% $ 9,321 3.15% 0.00% $ 8,830 2.94% 0.00% NOW accounts .......................... 35,913 11.45 .53 34,190 11.54 .43 39,344 13.10 .77 Passbook statement accounts ........... 82,817 26.41 .79 81,034 27.35 .85 73,486 24.47 1.05 Money market passbook ................. 14,238 4.54 1.36 13,217 4.46 .92 13,682 4.56 1.20 Certificates of deposit ............... 170,794 54.46 2.96 158,482 53.50 3.12 164,984 54.93 3.89 -------- ------ ------ -------- ------ ------ -------- ------ ------ Total deposits ................... $313,611 100.00% 1.81% $296,244 100.00% 1.99% $300,326 100.00% 2.81% ======== ====== ====== ======== ====== ====== ======== ====== ======
20 The following table sets forth the certificates of deposit in the Company classified by rates as of the dates indicated: At March 31, -------------------------------- 2005 2004 2003 -------- -------- -------- (Dollars in Thousands) 1.05- 2.00%................................. $ 39,272 $ 59,687 $ 29,681 2.01- 4.00%................................. 82,548 48,536 70,834 4.01- 6.00%................................. 45,294 46,565 61,425 6.01- 6.75%................................. 131 377 884 -------- -------- -------- Total.................................. $167,245 $155,165 $162,824 ======== ======== ======== The following table sets forth the amount and maturities of certificates of deposit at March 31, 2004.
Amount Due ---------------------------------------------------- Less Than 1-2 2-3 After One Year Years Years 3 Years Total --------- -------- -------- -------- -------- Rate (In Thousands) - ---- 1.05- 2.00%.............. $ 36,283 $ 2,989 $ -- $ -- $ 39,272 2.01- 4.00%.............. 48,821 16,582 10,351 6,794 82,548 4.01- 6.00%.............. 6,261 18,522 7,926 12,585 45,294 6.01- 6.75%.............. 131 -- -- -- 131 -------- -------- -------- -------- -------- Total............... $ 91,496 $ 38,093 $ 18,277 $ 19,379 $167,245 ======== ======== ======== ======== ========
The following table indicates the amount of the Company's certificates of deposit of $100,000 or more by time remaining until maturity as of March 31, 2005. Maturity Period Certificates of Deposit --------------- ----------------------- (In Thousands) Three months or less .......................... $ 9,050 Over three months through six months .......... 6,702 Over six months through twelve months ......... 13,222 Over twelve months ............................ 17,391 ------- Total .................................... $46,365 ======= Borrowings Savings deposits are the primary source of funds for the Company's lending and investment activities and for its general business purposes. The Bank may rely upon advances from the FHLB and the Federal Reserve Bank discount window to supplement their supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB typically are collateralized by stock in the FHLB and a portion of first mortgage loans held by the Bank. At March 31, 2005 the Company had $40.0 million in advances outstanding. The FHLB functions as a central reserve bank providing credit for member savings associations and financial institutions. As members, the Banks are required to own capital stock in the FHLB and are authorized to apply for advances on the security of such stock and certain home mortgages and other assets (principally, securities that are obligations of, or guaranteed by, the United States) provided certain standards related to creditworthiness have been met. Advances are made pursuant to several different programs. Each credit program has its own interest rate and range of maturities. Depending on the program, limitations on the amount of advances are based either on a fixed percentage of a member institution's net worth or on the FHLB's assessment of the institution's creditworthiness. Although advances may be used on a short-term basis for cash management needs, FHLB advances have not been, nor are they expected to be, a significant long-term funding source for the Company. Year Ended March 31, ----------------------------- 2005 2004 2003 ------- ------- ------- (Dollars in thousands) Federal Home Loan Bank advances: Maximum month-end balance .................. $40,000 $30,000 $30,000 Balance at end of period ................... 40,000 30,000 30,000 Average balance ............................ 26,076 30,000 17,204 Weighted average interest rate on: Balance at end of period ................... 3.59% 4.15% 4.15% Average balance for period ................. 3.96 4.16 4.28 Competition The Company encounters strong competition both in attracting deposits and in originating real estate and other loans. Its most direct competition for deposits has come historically from commercial banks, brokerage houses, other savings associations, and credit unions in its market area, and the Company expects continued strong competition from such financial institutions in the foreseeable future. The Company's market area includes branches of several commercial banks that are substantially larger than the Company in terms of state-wide deposits. The Company competes for savings by offering depositors a high level of personal service and expertise together with a wide range of financial services. The competition for real estate and other loans comes principally from commercial banks, mortgage banking companies, and other savings associations. This competition for loans has increased substantially in recent years as a result of the large number of institutions competing in the Company's market area as well as the increased efforts by commercial banks to expand mortgage loan originations. The Company competes for loans primarily through the interest rates and loan fees it charges and the efficiency and quality of services it provides borrowers, real estate brokers, and builders. Factors that affect competition include general and local economic conditions, current interest rate levels, and volatility of the mortgage markets. Subsidiaries At March 31, 2005, the Company did not have any direct unconsolidated subsidiaries. Total Employees The Company had 115 full-time employees and 32 part-time employees at March 31, 2005. None of these employees are represented by a collective bargaining agent, and the Company believes that it enjoys good relations with its personnel. Regulation As a state-chartered, SAIF-insured savings association, the Bank is subject to examination, supervision and extensive regulation by the OTS, the Ohio Division of Financial Institutions (the "Ohio Division"), and the FDIC. The Bank is a member of, and owns stock in, the FHLB of Cincinnati, which is one of the twelve regional banks in the Federal Home Loan Bank System. This regulation and supervision establishes a comprehensive framework of activities in which an institution can engage and is intended primarily for the protection of the insurance fund and depositors. The OTS and Ohio Division regularly examine the Bank and prepare reports for the consideration of the Company's Board of Directors on any deficiencies that they may find in the Company's operations. The FDIC also examines the Bank in its role as the administrator of the SAIF. The Bank's relationship with its depositors and borrowers also is regulated to a great extent by both federal and state laws especially in such matters as the ownership of savings accounts and the form and content of the Bank's mortgage documents. Any change in such regulation, whether by the FDIC, OTS, Ohio Division, or Congress, could have a material adverse impact on the Company, the Bank and their operations. Federal Regulation of Savings Institutions Business Activities. The activities of savings associations are governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the Federal Deposit Insurance Act (the "FDI Act"). These federal statutes, among other things, (1) limit the types of loans a savings association may make, (2) prohibit the acquisition of any corporate debt security that is not rated in one of the four highest rating categories, and (3) restrict the aggregate amount of loans secured by non-residential real estate property to 400% of capital. The description of statutory provisions and regulations applicable to savings associations set forth herein does not purport to be a complete description of such statutes and regulations and their effect on the Company or the Bank. Loans to One Borrower. Under the HOLA, savings institutions are generally subject to the national bank limits on loans to one borrower. Generally, savings institutions may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the institution's unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan is secured by readily-marketable collateral, which is defined to include certain securities and bullion, but generally does not include real estate. See "--Lending Activities--Loans to One Borrower." Qualified Thrift Lender Test. The HOLA requires savings associations to meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings association is required to maintain at least 65% of its "portfolio assets" (total assets less (i) specified liquid assets up to 20% of total assets, (ii) intangibles, including goodwill, and (iii) the value of property used to conduct business) in certain "qualified thrift investments," primarily residential mortgages and related investments, including certain mortgage-backed and related securities on a monthly basis in 9 out of every 12 months. A savings association that fails the QTL test must either convert to a bank charter or operate under certain restrictions. As of March 31, 2005, the Company maintained 87.2% of its portfolio assets in qualified thrift investments and, therefore, met the QTL test. Limitation on Capital Distributions. OTS regulations impose limitations upon all capital distributions by savings institutions, such as cash dividends, payments to repurchase or otherwise acquire its shares, payments to stockholders of another institution in a cash-out merger and other distributions charged against capital. A "well capitalized" institution can, after prior notice but without the approval of the OTS, make capital distributions during a calendar year in an amount up to 100% of its net income during the calendar year, plus its retained net income for the preceding two years. As of March 31, 2005 the Bank was a "well-capitalized" institution. Community Reinvestment. Under the Community Reinvestment Act (the "CRA"), as implemented by OTS regulations, a savings institution has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions, nor does it limit an institution's discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA. The CRA requires the OTS, in connection with its examination of a savings institution, to assess the institution's record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such institution. The CRA also requires all institutions to make public disclosure of their CRA ratings. The Company received a "satisfactory" CRA rating under the current CRA regulations in its most recent federal examination by the OTS. Transactions with Related Parties. The Company's authority to engage in transactions with related parties or "affiliates" (i.e., any company that controls or is under common control with an institution, including the Bank and any non-savings institution subsidiaries) or to make loans to certain insiders, is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of transactions with any individual affiliate to 10% of the capital and surplus of the savings institution and also limits the aggregate amount of transactions with all affiliates to 20% of the savings institution's capital and surplus. Certain transactions with affiliates are required to be secured by collateral in an amount and of a type described in Section 23A and the purchase of low quality assets from affiliates is generally prohibited. Section 23B provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary. Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility over savings institutions and has the authority to bring enforcement action against all "institution-related parties," including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institutions, receivership, conservatorship or the termination of deposit insurance. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. Criminal penalties for most financial institution crimes include fines of up to $1 million and imprisonment for up to 30 years. Under the FDI Act, the FDIC has the authority to recommend to the Director of OTS that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Standards for Safety and Soundness. The federal banking agencies have adopted a final regulation and Interagency Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to implement the safety and soundness standards required under the FDI Act. The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The standards set forth in the Guidelines address internal controls and information systems; internal audit system; credit underwriting; loan documentation; interest rate risk exposure; asset growth; and compensation, fees and benefits. The agencies also adopted a proposed rule which proposes asset quality and earnings standards which, if adopted, would be added to the Guidelines. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the Guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDI Act. The final regulations establish deadlines for the submission and review of such safety and soundness compliance plans. Capital Requirements. The OTS capital regulations require savings institutions to meet three capital standards: a 1.5% tangible capital standard, a 4.0% leverage ratio (or core capital ratio) and an 8.0% risk-based capital standard. Core capital is defined as common stockholders' equity (including retained earnings), certain non-cumulative perpetual preferred stock and related surplus, minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain qualifying supervisory goodwill and certain mortgage servicing rights. The OTS regulations also require that, in meeting the tangible ratio, leverage and risk-based capital standards, institutions must deduct investments in and loans to subsidiaries engaged in activities not permissible for a national bank. The risk-based capital standard for savings institutions requires the maintenance of Tier 2 (core) and total capital (which is defined as core capital and supplementary capital) to risk weighted assets of 4.0% and 8.0%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight of 0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS believes are inherent in the type of asset. The components of Tier 1 (core) capital are equivalent to those discussed earlier under the 4.0% leverage ratio standard. The components of supplementary capital currently include cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt and intermediate preferred stock and allowance for loan and lease losses. Allowance for loan and lease losses includable in supplementary capital is limited to a maximum of 1.25%. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. Prompt Corrective Regulatory Action Under the OTS Prompt Corrective Action regulations, the OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of capitalization. Generally, a savings institution that has total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0% is considered to be undercapitalized. A savings institution that has the total risk-based capital less than 6.0%, a Tier 1 core risk-based capital ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered to be "significantly undercapitalized" and a savings institution that has a tangible capital to assets ratio equal to or less than 2.0% is deemed to be "critically undercapitalized." Subject to a narrow exception, the banking regulator is required to appoint a receiver or conservator for an institution that is "critically undercapitalized." The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date an institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." In addition, numerous mandatory supervisory actions become immediately applicable to the institution, including, but not limited to, restrictions on growth, investment activities, capital distributions, and affiliate transactions. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Insurance of Accounts and Regulation by the FDIC The Bank is a member of the SAIF, which is administered by the FDIC. Deposits are insured up to applicable limits by the FDIC and such insurance is backed by the full faith and credit of the U.S. Government. As insurer, the FDIC imposes deposit insurance premiums and is authorized to conduct examinations of and to require reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured institution from engaging in any activity the FDIC determines by regulation or order to pose a serious risk to the FDIC. The FDIC also has the authority to initiate enforcement actions against savings and loan associations, after giving the OTS an opportunity to take such action, and may terminate the deposit insurance if it determines that the institution has engaged or is engaging in unsafe or unsound practices, or is in an unsafe or unsound condition. Currently, FDIC deposit insurance rates generally range from zero basis points to 27 basis points, depending on the assessment risk classification assigned to the depository institution. The FDIC may terminate the deposit insurance of any insured depository institution, including the Bank, if it determines after a hearing that the institution has engaged or is engaging in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, order or any condition imposed by an agreement with the FDIC. It also may suspend deposit insurance temporarily during the hearing process for the permanent termination of insurance, if the institution has no tangible capital. If insurance of accounts is terminated, the accounts at the institution at the time of the termination, less subsequent withdrawals, shall continue to be insured for a period of six months to two years, as determined by the FDIC. Management is aware of no existing circumstances which would result in termination of the deposit insurance of the Bank. Federal Home Loan Bank System The Banks are members of the FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. The Banks, as members of the FHLB, are required to acquire and hold shares of capital stock in that FHLB in an amount at least equal to 1% of the aggregate principal amount of its unpaid residential mortgage loans and similar obligations at the beginning of each year, or 1/20 of its advances (borrowings) from the FHLB, whichever is greater. The Banks were in compliance with this requirement with an investment in FHLB-Cincinnati stock, at March 31, 2005, of $4.4 million. The FHLBs are required to provide funds for the resolution of insolvent thrifts and to contribute funds for affordable housing programs. These requirements could reduce the amount of dividends that the FHLBs pay to their members and could also result in the FHLBs imposing a higher rate of interest on advances to their members. FHLB dividends were 4.25% for the fiscal year ended March 31, 2005. If dividends were reduced, or interest on future FHLB-Cincinnati advances increased, the Company's net interest income would likely also be reduced. Ohio Regulation As a savings and loan association organized under the laws of the State of Ohio, the Bank is subject to regulation by the Ohio Division. Regulation by the Ohio Division affects the Bank's internal organization as well as its savings, mortgage lending, and other investment activities. Periodic examinations by the Ohio Division are usually conducted on a joint basis with the OTS. Ohio law requires that the Bank maintain federal deposit insurance as a condition of doing business. Under Ohio law, an Ohio association may buy any obligation representing a loan that would be a legal loan if originated by the Bank, subject to various requirements including: loans secured by liens on income-producing real estate may not exceed 20% of an association's assets; consumer loans, commercial paper, and corporate debt securities may not exceed 20% of an association's assets; loans for commercial, corporate, business, or agricultural purposes may not exceed 30% of an association's assets , provided that an association's required reserve must increase proportionately; certain other types of loans may be made for lesser percentages of the association's assets; and, with certain limitations and exceptions, certain additional loans may be made if not in excess of 3% of the association's total assets. In addition, no association may make real estate acquisition and development loans for primarily residential use to one borrower in excess of 2% of assets. The total investments in commercial paper or corporate debt of any issuer cannot exceed 1% of an association's assets, with certain exceptions. Ohio law authorizes Ohio-chartered associations to, among other things: (i) invest up to 15% of assets in the capital stock, obligations, and other securities of service corporations organized under the laws of Ohio, and an additional 20% of net worth may be invested in loans to majority owned service corporations; (ii) invest up to 10% of assets in corporate equity securities, bonds, debentures, notes, or other evidence of indebtedness; (iii) exceed limits otherwise applicable to certain types of investments (other than investments in service corporations) by and between 3% and 10% of assets, depending upon the level of the institution's permanent stock, general reserves, surplus, and undivided profits; and (iv) invest up to 15% of assets in any loans or investments not otherwise specifically authorized or prohibited, subject to authorization by the institution's board of directors. An Ohio association may invest in such real property or interests therein as its board of directors deems necessary or convenient for the conduct of the business of the association, but the amount so invested may not exceed the net worth of the association at the time the investment is made. Additionally, an association may invest an amount equal to 10% of its assets in any other real estate. This limitation does not apply, however, to real estate acquired by foreclosure, conveyance in lieu of foreclosure, or other legal proceedings in relation to loan security interests. Notwithstanding the above powers authorized under Ohio law and regulation, a state-chartered savings association, such as the Bank, is subject to certain limitations on its permitted activities and investments under federal law, which may restrict the ability of an Ohio-chartered association to engage in activities and make investments otherwise authorized under Ohio law. Ohio has adopted statutory limitations on the acquisition of control of an Ohio savings and loan association by requiring the written approval of the Ohio Division prior to the acquisition by any person or company, as defined under the Ohio Revised Code, of a controlling interest in an Ohio association. Control exists, for purposes of Ohio law, when any person or company, either directly, indirectly, or acting in concert with one or more other persons or companies (a) acquires 15% of any class of voting stock, irrevocable proxies, or any combination thereof, (b) directs the election of a majority of directors, (c) becomes the general partner of the savings and loan association, (d) has influence over the management and policies of the savings and loan association, (e) has the ability to direct shareholder votes, or (f) anything else deemed to be control by the Ohio Division. The Ohio Division's written permission is required when the total amount of control held by the acquiror was less than or equal to 25% control before the acquisition and more than 25% control after the acquisition, or when the total amount of control held by the acquiror was less than 50% before the acquisition and more than 50% after the acquisition. Ohio law also prescribes other situations in which the Ohio Division must be notified of the acquisition even though prior approval is not required. Any person or company, which would include a director, will not be deemed to be in control by virtue of an annual solicitation of proxies voted as directed by a majority of the board of directors. Under certain circumstances, interstate mergers and acquisitions involving associations incorporated under Ohio law are permitted by Ohio law. A savings and loan association or savings and loan holding company with its principal place of business in another state may acquire a savings and loan association or savings and loan holding company incorporated under Ohio law if the laws of such other state permit an Ohio savings and loan association or an Ohio holding company reciprocal rights. Additionally, recently enacted legislation permits interstate branching by savings and loan associations incorporated under Ohio law. Ohio law requires prior written approval of the Ohio Superintendent of Savings and Loans of a merger of an Ohio association with another savings and loan association or a holding company affiliate. Holding Company Regulation Holding Company Acquisitions. The Company is a registered savings and loan holding company within the meaning of Section 10 of the HOLA, and is subject to OTS examination and supervision as well as certain reporting requirements. Federal law generally prohibits a savings and loan holding company, without prior OTS approval, from acquiring the ownership or control of any other savings institution or savings and loan holding company, or all, or substantially all, of the assets or more than 5% of the voting shares thereof. These provisions also prohibit, among other things, any director or officer of a savings and loan holding company, or any individual who owns or controls more than 25% of the voting shares of such holding company, from acquiring control of any savings institution not a subsidiary of such savings and loan holding company, unless the acquisition is approved by the OTS. Holding Company Activities. The Company operates as a unitary savings and loan holding company. The activities of the Company and its non-savings institution subsidiaries are restricted to activities traditionally permitted to multiple savings and loan holding companies and to financial holding companies under newly added provisions of the Bank Holding Company Act. Multiple savings and loan holding companies may: o furnish or perform management services for a savings association subsidiary of a savings and loan holding company; o hold, manage or liquidate assets owned or acquired from a savings association subsidiary of a savings and loan holding company; o hold or manage properties used or occupied by a savings association subsidiary of a savings and loan holding company; o engage in activities determined by the Federal Reserve to be closely related to banking and a proper incident thereto; and o engage in services and activities previously determined by the Federal Home Loan Bank Board by regulation to be permissible for a multiple savings and loan holding company as of March 5, 1987. The activities financial holding companies may engage in include: o lending, exchanging, transferring or investing for others, or safeguarding money or securities; o insuring, guaranteeing or indemnifying others, issuing annuities, and acting as principal, agent or broker for purposes of the foregoing; o providing financial, investment or economic advisory services, including advising an investment company; o issuing or selling interests in pooled assets that a bank could hold directly; o underwriting, dealing in or making a market in securities; and o merchant banking activities. If the OTS determines that there is reasonable cause to believe that the continuation by a savings and loan holding company of an activity constitutes a serious risk to the financial safety, soundness or stability of its subsidiary savings institution, the OTS may impose such restrictions as deemed necessary to address such risk. These restrictions include limiting the following: o the payment of dividends by the savings institution; o transactions between the savings institution and its affiliates; and o any activities of the savings institution that might create a serious risk that the liabilities of the holding company and its affiliates may be imposed on the savings institution. Federal Securities Laws. The Company registered its common stock with the Securities and Exchange Commission under Section 12(g) of the Securities Exchange Act of 1934. The Company is subject to the proxy and tender offer rules, insider trading reporting requirements and restrictions, and certain other requirements under the Exchange Act. Pursuant to OTS regulations, the Company has agreed to maintain such registration for a minimum of three years following the conversion in January 2003. Federal and State Taxation Federal Taxation. Income taxes are accounted for under the asset and liability method which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method deferred tax liabilities and assets are determined based on the difference between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Federal tax bad debt reserve method available to thrift institutions was repealed in 1996 for tax years beginning after 1995. As a result, the Company was required to change from the reserve method to the specific charge-off method to compute its bad debt deduction The recapture amount resulting from the change in a thrift's method of accounting for its bad debt reserves generally will be taken into taxable income ratably (on a straight-line basis) over a six-year period. The Bank began recapture of the bad debt reserve during fiscal 1999. Retained earnings as of March 31, 2005 include approximately $2.7 million for which no provision for Federal income tax has been made. This reserve (base year and supplemental) is frozen/not forgiven as certain events could trigger a recapture such as stock redemption or distributions to shareholders in excess of current or accumulated earnings and profits. The Company's 1999 federal income tax return was under examination by the IRS. Such examination was concluded without material effect on results of operations or financial position. Ohio Taxation. The Bank files Ohio franchise tax returns. For Ohio franchise tax purposes, savings institutions are currently taxed at a rate equal to 1.3% of taxable net worth. The Bank is not currently under audit with respect to its Ohio franchise tax returns. Delaware Taxation. As a Delaware holding company not earning income in Delaware, the Company is exempt from Delaware corporate income tax but is required to file an annual report with and pay an annual franchise tax to the State of Delaware. The tax is imposed as a percentage of the capital base of the Company with an annual maximum of $165,000. The Company paid Delaware franchise taxes of $22,801 in fiscal 2005. ITEM 2. Properties - ------------------ The Company conducts its business through its main banking office located in Wooster, Ohio, and its ten additional full service branch offices located in its market area. The following table sets forth information about its offices as of March 31, 2005. Original Year Leased or Leased or Year of Lease Location Owned Acquired Expiration - --------------------------- ------------- ---------------- --------------- North Market Street Office 151 N. Market Street Wooster, Ohio Owned 1902 N/A Cleveland Point Financial Center 1908 Cleveland Road Wooster, Ohio Owned 1978 N/A Madison South Office 2024 Millersburg Road Wooster, Ohio Owned 1999 N/A Northside Office 543 Riffel Road Wooster, Ohio Leased 1999 2019 Millersburg Office 90 N. Clay Street Millersburg, Ohio Owned 1964 N/A Claremont Avenue Office 233 Claremont Avenue Ashland, Ohio Owned 1968 N/A Buehlers-Sugarbush Office 1055 Sugarbush Drive Ashland, Ohio Leased 2001 2021 Rittman Office 237 North Main Street Rittman, Ohio Owned 1972 N/A Lodi Office 303 Highland Drive Lodi, Ohio Owned 1980 N/A Village Office 1265 S. Main Street North Canton, Ohio Owned 1998 N/A Stebbins Office Owned 2005 N/A 121 North Main Street Creston, Ohio 44217 The Company's accounting and recordkeeping activities are maintained through an in-house data processing system. ITEM 3. Legal Proceedings - ------------------------- The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, involve amounts which are believed by management to be immaterial to the financial condition and operations of the Company. ITEM 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- During the fourth quarter of the fiscal year covered by this report, the Registrant did not submit any matters to the vote of security holders. PART II ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and - ------------------------------------------------------------------------------ Issuer Purchases of Equity Securities ------------------------------------- The "Stockholder Information" and "Management's Discussion and Analysis of Financial Condition and Results of Operations - Common Stock and Related Matters" sections of the Company's Annual Report to Stockholders for the fiscal year ended March 31, 2005 (the "2005 Annual Report to Stockholders") are incorporated herein by reference. No other sections of the 2005 Annual Report to Stockholders are incorporated herein by this reference. The following table sets forth information with respect to purchases made by or on behalf of the Company of shares of common stock of the Company during the indicated periods.
Total Number of Maximum Number of Shares Purchased as Shares that May Total Number Average Part of Publicly Yet Be Purchased of Shares Price Paid Announced Plans or Under the Plans or Period Purchased per Share Programs Programs(1)(2) - ------------------- --------------- -------------- --------------------- --------------------- January 1-31, 2005 -- $ -- 54,761 130,730 February 1-28, 2005 10,000 16.30 64,761 120,730 March 1-31, 2005 20,000 16.25 84,761 100,730 ------- ------- ------- ------- Total 30,000 $ 16.02 84,761 100,730 ======= ======= ======= =======
- ---------- (1) A repurchase program for 185,491, or 5% of the Company's outstanding shares, was publicly announced on September 2, 2004 and expires on August 26, 2005. As of March 31, 2005, 84,761 shares had been repurchased under that program. 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. Equity Compensation Plan Information The following table sets forth information as of March 31, 2005 with respect to compensation plans under which equity securities of the Company are authorized for issuance.
Number of Shares Remaining Available for Number of shares to be issued Weighted-Average Future Issuance Upon the exercise of outstanding Exercise Price of (Excluding Shares reflected Plan Category Options, Warrants and Rights Outstanding Options in the First Column) - ------------- -------------------------------- ------------------- --------------------------- Equity Compensation Plans Approved by Security Holders 279,510(1) $13.84 -- Equity Compensation Plans Not Approved by Security Holders -- -- -- ---------- ---------- 279,510 -- ========== ==========
- ---------- (1) Included in such number are 65,306 shares which are subject to restricted stock grants which were accelerated as to vesting as of March 31, 2005. The weighted average price excluded restricted stock grants. ITEM 6. Selected Financial Data - ------------------------------- The information required herein is incorporated by reference from pages 8 to 9 of the 2005Annual Report to Stockholders. ITEM 7. Management's Discussion and Analysis of Financial Condition and Results - ------------------------------------------------------------------------------- of Operations ------------- The "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the Company's 2005 Annual Report to Stockholders is incorporated herein by reference. No other sections of the 2005 Annual report to Stockholders are incorporated herein by this reference. ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- The information required herein is incorporated by reference from pages 16 to 18 of the 2005 Annual Report to Stockholders. ITEM 8. Financial Statements and Supplementary Data - --------------------------------------------------- The material identified in Item 15(a)(1) hereof is incorporated herein by reference. ITEM 9. Changes in and Disagreements With Accountants on Accounting and - ----------------------------------------------------------------------- Financial Disclosure -------------------- Not Applicable ITEM 9A. Controls and Procedures - -------------------------------- Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and regulations and are operating in an effective manner. ITEM 9B. Other Information - -------------------------- Not Applicable PART III -------- ITEM 10. Directors and Executive Officers of the Registrant - ----------------------------------------------------------- The information required herein is incorporated herein by reference from pages 3 to 6 and page 16 of the Proxy Statement. The Company has adopted a Code of Conduct and Ethics that applies to its principal executive officer and principal financial officer, as well as other officers and employees of the Company and the Bank. Upon receipt of a written request we will furnish without charge to any stockholder a copy of the Code of Conduct and Ethics. Such written requests should be directed to Mr. Michael C. Anderson, Secretary, Wayne Savings Bancshares, Inc., 151 North Market Street, Wooster, Ohio 44691. ITEM 11. Executive Compensation - ------------------------------- The information required herein is incorporated herein by reference from pages 7 to 12 and page 14 of the Proxy Statement. ITEM 12. Security Ownership of Certain Beneficial Owners and Management and - --------------------------------------------------------------------------- Related Stockholder Matters --------------------------- The information required herein is incorporated herein by reference from pages 15 to page 16 of the Proxy Statement and Item 5 hereof. ITEM 13. Certain Relationships and Related Transactions - ------------------------------------------------------- The information required by Item 13 of Form 10-K is incorporated by reference from "Management Compensation - Indebtedness of Management and Related Party Transactions" on page 11 in the Proxy Statement. ITEM 14. Principal Accountant Fees and Services - ----------------------------------------------- The information required herein in incorporated by reference from "Proposal II - Ratification of Appointment of Auditors" on page 17 in the Proxy Statement. PART IV ------- ITEM 15. Exhibits, Financial Statement Schedules - ------------------------------------------------ (a)(1) Financial Statements -------------------- The following documents appear in sections of the Company's 2005 Annual Report to Stockholders under the same captions, and are incorporated herein by reference. No other sections of the 2005 Annual Report to Stockholders are incorporated herein by this reference: (i) Selected Consolidated Financial and Other Data; (ii) Management's Discussion and Analysis of Financial Condition and Results of Operations; (iii) Report of Independent Registered Certified Public Accountants; (iv) Consolidated Statements of Financial Condition; (v) Consolidated Statements of Earnings; (vi) Consolidated Statements of Stockholders' Equity; (vii) Consolidated Statements of Cash Flows; and (viii) Notes to Consolidated Financial Statements. With the exception of the aforementioned sections, the Company's 2005 Annual Report to Stockholders is not deemed filed as part of this Annual Report on Form 10-K, and no other sections of the 2005 Annual Report to Stockholders are incorporated herein by this reference. (a)(2) Financial Statement Schedules ----------------------------- All financial statement schedules have been omitted as the required information is inapplicable or has been included in the Notes to Consolidated Financial Statements. (a)(3) Exhibits -------- Exhibit Number Description 3.1(1) Articles of Incorporation 3.2(1) Bylaws 4.0(2) Form of Common Stock Certificate of Wayne Savings Bancshares, Inc. 10.1(3) Employment Agreement between Wayne Savings Community Bank and Charles F. Finn dated April 1, 2004 10.2(3) Employment Agreement between Wayne Savings Community Bank and Wanda Christopher-Finn dated April 1, 2004 10.3(3) Employment Agreement between Wayne Savings Community Bank and Michael C. Anderson dated April 1, 2004 10.4(4) Employment Agreement between Wayne Savings Community Bank and Phillip E. Becker dated February 15, 2005 10.5(5) The Wayne Savings and Loan Company 1993 Incentive Stock Option Plan 10.6(6) Wayne Savings Bancshares, Inc. Amended and Restated 2003 Stock Option Plan 11.0(7) Statement re: computation of per share earnings 13.0 Annual Report to Security Holders 21.0 Subsidiaries of Registrant-Reference is made to Item 1 - "Business" for the Required Information 23.0 Consent of Grant Thornton LLP 31.1 Certification pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 of the Chief Executive Officer 31.2 Certification pursuant to Rule 13a-14(a) and 15d-14(a) of the Securities Exchange Act of 1934 of the Chief Financial Officer 32.0 Certification pursuant to 18 U.S.C. Section 1350 - ------------------------ (1) Filed as exhibits to the Plan of Conversion and Reorganization filed as Exhibit 2 to the Registrant's registration statement on Form SB-2, initially filed on September 18, 2001, as amended (Registration No. 333-69600). (2) Filed as Exhibit 4, to the Registrant's registration statement on Form SB-2, initially filed on September 18, 2001, as amended (Registration No. 333-69600). (3) Incorporated by reference to the Exhibits to the Company's Form 10-K for year ended March 31, 2004, filed on June 29, 2004 (File No. 000-23433). (4) Incorporated by reference to the Exhibits to the Company's Form 10-Q for quarter ended December 31, 2004, filed on February 11, 2005 (File No. 000-23433). (5) Incorporated by reference from the Company's Registration Statement on Form S-8 filed on December 4, 1997 (File No. 333-41479). (6) Incorporated by reference from the Company's Registration Statement on Form S-8 filed on October 5, 2004 (File No. 333-119556). (7) Incorporated by reference to Note A.8. of "Notes to Consolidated Financial Statements" of the 2005 Annual Report to Stockholders. Date Item and Description ----------------------- ---------------------------------------- January 28, 2005 5, 7, 12 - On January 28, 2005, the Company issued a press release reporting its earnings for the quarter ended December 31, 2004. Date Item and Description ----------------------- ---------------------------------------- March 28, 2005 5, 7, 12 - On March 28, 2005, the Company issued a press release reporting its quarterly cash dividend for the period ending March 31, 2005. SIGNATURES ---------- Pursuant to the requirements of Section 13 or 15(d) 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. WAYNE SAVINGS BANCSHARES, INC. Date: June 28, 2005 By: /s/Charles F. Finn ------------------------------------- Charles F. Finn President and Chief Executive Officer 34 Pursuant to the requirements of the Securities Exchange of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. By: /s/Charles F. Finn By: /s/Michael C. Anderson ----------------------------------- ---------------------------------------------- Charles F. Finn, President, Chief Michael C. Anderson, Senior Vice President and Executive Officer and Director Corporate Secretary (Principal Executive Officer) (Principal Financial Officer) Date: June 28, 2005 Date: June 28, 2005 By: /s/Myron Swartzentruber By: /s/Kenneth R. Lehman ----------------------------------- --------------------------- Myron Swartzentruber, Vice President Kenneth R. Lehman, Director (Principal Accounting Officer) Date: June 28, 2005 Date: June 28, 2005 By: /s/Frederick J. Krum By: /s/James C. Morgan ----------------------------------- ------------------------- Frederick J. Krum, Director James C. Morgan, Director Date: June 28, 2005 Date: June 28, 2005 By: /s/Terry A. Gardner By: /s/Russell L. Harpster ----------------------------------- ----------------------------- Terry A. Gardner, Director Russell L. Harpster, Director Date: June 28, 2005 Date: June 28, 2005 By: /s/Joseph L. Retzler ----------------------------------- Joseph L. Retzler, Director Date: June 28, 2005
EX-13 2 ex13.txt 2005 ANNUAL REPORT ------------------ TO STOCKHOLDERS [GRAPHIC OMITTED] WAYNE SAVINGS BANCSHARES, INC. Member FDIC CORPORATE PROFILE - ------------------------------------------------------------------------- [LOGO] Wayne Savings Bancshares, Inc. (hereinafter, the "Company") is the holding company parent of Wayne Savings Community Bank (the "Bank" or "Wayne Savings"), which was established in 1899. During the fiscal year ended March 31, 2003, the mutual holding company Wayne Savings Bankshares M.H.C. (the "M.H.C."), which previously owned a majority of the Company's outstanding shares of common stock, converted from the M.H.C. form of ownership to full stock form and merged with and into the Bank. The Company, which owned 100% of the Bank, was succeeded by a Delaware corporation of the same name. As part of the conversion, shares of the Company's common stock representing the M.H.C.'s ownership interest were sold in the offering. The offering of the Company's common stock culminated in the receipt of gross sale proceeds of $20.6 million which, after consideration of an employee stock plan of $1.6 million and applicable offering expenses of $1.9 million, resulted in net proceeds of $17.1 million. As a result of the conversion, all financial information that is based on or derived from the actual or outstanding shares of common stock during any period prior to fiscal 2003 was appropriately adjusted based on a 1.5109 to 1 exchange ratio. The conversion was accounted for as a change in corporate form with no change in the historical basis of assets, liabilities or stockholders' equity. The Company's common stock is traded on the NASDAQ stock market under the symbol "WAYN." The Bank has been serving the financial needs of the residents of Wayne, Holmes, Ashland, Medina and Stark counties in Ohio for 106 years. Headquartered in downtown Wooster, Ohio, the Bank also operates 11 full-service banking locations in Wooster, Millersburg, Ashland, Rittman, Lodi, North Canton and Creston. Throughout its long history and many economic cycles, Wayne Savings has enjoyed a fine reputation for stability, safety and soundness, and community service. The Bank has been noted for its sound management, consistent profitability and quality personal service to customers. The mission of Wayne Savings is to excel in customer service as a sound, independent, profitable, and progressive community bank dedicated to providing an array of services responsive to the financial needs of people in our communities, with an emphasis on home financing and household savings, and to provide for the security and development of our employees. - -------------------------------------------------------------------------------- BOARD OF DIRECTORS [PHOTOS OMITTED] Charles F. Finn Chairman Russell L. Harpster Joseph L. Retzler James C. Morgan Terry A. Gardner Kenneth R. Lehman Frederick J. Krum - -------------------------------------- 3 --------------------------------------- DIRECTORS AND OFFICERS [LOGO] ------------------------------------------------------------------------- IN RECOGNITION AND APPRECIATION ... Joseph L. Retzler Following 20 years of loyal, dedicated service on the Board of Directors of Wayne Savings Community Bank, Joseph L. Retzler will be stepping down as a director at this year's Annual Meeting of Stockholders. Mr. Retzler will continue to serve the Company in the role of Director Emeritus. Joseph Retzler is a highly respected businessman and citizen of the Wooster community, and it has been an honor to have him as a member of our Board. He was president and chief executive officer of Retzler Hardware in downtown Wooster until his retirement in 2003, and he has been actively involved in numerous community and civic organizations. The Retzler family has served Wayne Savings for 60 years, as Mr. Retzler's father, Herman Retzler, was a director for 40 years, from 1937 to 1977. [PHOTO OMITTED] Joseph L. Retzler Joe's steadiness and sound business advice will be missed, and the Board and Management extend sincere thanks and appreciation for his years of service. - -------------------------------------------------------------------------------- WAYNE SAVINGS BANCSHARES, INC. Board of Directors Executive Officers Charles F. Finn Charles F. Finn Chairman Chairman And Chief Executive Officer Russell L. Harpster Wanda Christopher-Finn Joseph L. Retzler Executive Vice President Terry A. Gardner And Chief Operating Officer James C. Morgan Kenneth R. Lehman Michael C. Anderson Frederick J. Krum Executive Vice President And Chief Financial Officer Kenneth G. Rhode, Emeritus Corporate Secretary And Treasurer Donald E. Massaro, Emeritus - -------------------------------------------------------------------------------- TABLE OF CONTENTS Page Stockholder Information ..................................................... 5 Chairman's Letter ........................................................... 6 Selected Consolidated Financial and Other Data .............................. 8 Management's Discussion and Analysis of Financial Condition and Results of Operations ..................................................... 10 Consolidated Statements of Financial Condition ............................. 20 Consolidated Statements of Earnings ........................................ 21 Consolidated Statements of Comprehensive Income ............................ 22 Consolidated Statements of Stockholders' Equity ............................ 23 Consolidated Statements of Cash Flows ...................................... 24 Notes to Consolidated Financial Statements ................................. 26 Report of Independent Registered Certified Public Accountants .............. 42 - -------------------------------------- 4 --------------------------------------- STOCKHOLDER INFORMATION - ------------------------------------------------------------------------- [LOGO] Annual Meeting The Annual Meeting of Stockholders will be held at 10:00 a.m. on July 28, 2005, at The Greenbriar Conference Centre, 50 Riffel Road, Wooster, Ohio 44691 Special Counsel Elias, Matz, Tiernan & Herrick LLP 734 15th Street N.W., 12th Floor Washington, D.C. 20005 Independent Registered Certified Public Accountants Grant Thornton LLP 625 Eden Park Drive o Suite 900 Cincinnati, Ohio 45202 Transfer Agent Registrar and Transfer Company 10 Commerce Drive Cranford, New Jersey 07016-3572 Annual Report on Form 10-K A copy of the Company's Form 10-K for the fiscal year ended March 31, 2005, will be furnished upon request without charge to stockholders. Investor Information Executive Offices Wayne Saving Bancshares, Inc. 151 N. Market Street o P.O. Box 858 Wooster, Ohio 44691 (330) 264-5767 - -------------------------------------------------------------------------------- WAYNE SAVINGS COMMUNITY BANK BANK LOCATIONS WOOSTER North Market Street Office 151 North Market Street o Wooster, Ohio South Market Street Drive Thru 329 South Market Street o Wooster, Ohio Cleveland Point Financial Center 1908 Cleveland Road o Wooster, Ohio Madison South Office 2024 Millersburg Road o Wooster, Ohio Northside Office 543 Riffel Road o Wooster, Ohio ASHLAND Claremont Avenue Office 233 Claremont Avenue o Ashland, Ohio Buehlers-Sugarbush Office 1055 Sugarbush Drive o Ashland, Ohio MILLERSBURG 90 North Clay Street o Millersburg, Ohio RITTMAN 237 North Main Street o Rittman, Ohio LODI 303 Highland Drive o Lodi, Ohio NORTH CANTON Village Office 1265 South Main Street o North Canton, Ohio CRESTON Stebbins 0ffice 121 North Main Street o Creston, Ohio - -------------------------------------- 5 --------------------------------------- CHAIRMAN'S LETTER [LOGO] ------------------------------------------------------------------------- TO OUR STOCKHOLDERS AND CUSTOMERS: It is truly a pleasure to report on the strategic initiatives and results of operations of Wayne Savings Bancshares, Inc., the parent of 106 year-old Wayne Savings Community Bank, for the fiscal year ended March 31, 2005. Fiscal 2005 proved to be a momentous, transitional year in which a solid foundation was laid to strengthen Wayne Savings' role as the area's premier independent community bank. The triggering event behind the specific strategic actions taken in fiscal 2005 was the acquisition of Wayne Savings' primary competitor, previously Wayne County's oldest and largest independent community bank, by a major regional bank holding company. Recognizing the community's preference to do business with a locally-owned bank that demonstrates a high level of personal service and community involvement, Management and the Board of Directors believed there was a unique opportunity to expand products and services in order to capture a larger market share. Specific actions taken to accomplish greater market penetration were: a Chief Lending Officer was brought on board to produce quality growth in the commercial, mortgage and consumer loan portfolios; a trust department staffed by a team of qualified, experienced trust professionals has been established, and licensed; and, finally, electronic services are in the process of being expanded through the introduction of an internet banking program with online bill pay. [PHOTO OMITTED] Charles F. Finn Chairman and Chief Executive Officer We realized that such an ambitious expansion of products and services would result in higher administrative costs and reduced earnings in the short-run. Therefore, to facilitate the introduction of the new banking programs, we undertook several cost reduction measures to improve our efficiency ratio. While implementing these cost reduction initiatives did impact the Company's fourth quarter and fiscal 2005 operating results, we believe the Company is now positioned to absorb the higher staffing levels and increased administrative costs associated with the new banking programs. We further expect the additional income from new trust services and anticipated loan growth will result in increased growth in assets and earnings in the future. First, in recognition of the mandatory accounting rule change to expense stock options, we accelerated vesting and expensed the related stock options at a pre-tax cost of $664,000. This will save the Company approximately $200,000 per annum over the next several years. Further, the Company accelerated the vesting of previous share grants under the restricted stock plan at a pre-tax cost of $738,000. The elimination of the restricted stock plan, coupled with other vesting adjustments in the Company's benefits plans, will result in approximate annual pre-tax savings of $425,000 over each of the next four years. Combined, these - -------------------------------------- 6 --------------------------------------- - ------------------------------------------------------------------------- [LOGO] annual cost savings total $625,000, which will result in a 11% reduction in pro forma compensation expense for fiscal 2006. While these transactions reduced fiscal year earnings, they had no effect on stockholders' equity. At March 31, 2005, stockholders' equity amounted to $40.2 million resulting in a capital-to-asset ratio of 9.97%. Additionally, because of the growth in our commercial loan portfolio and an enhancement to our loan grading process related to those loans, we added approximately $360,000 to our loan loss reserve during fiscal 2005. Due in part to these actions, the Company reported net earnings of $381,000, or $.11 per diluted share for fiscal 2005, as compared to net earnings of $2.7 million, or $.72 per diluted share in fiscal 2004. The effect of these charges on fourth quarter operations resulted in a net loss of $1.0 million, or $.27 per basic share compared to net earnings of $800,000, or $.21 per diluted share for the comparable quarter in fiscal 2004. Management and the Board of Directors of Wayne Savings Bancshares, Inc. took some bold but calculated steps in fiscal 2005 to secure the long-term future of Wayne Savings as the area's premier independent community bank. We believe the corporate direction set in fiscal 2005 has provided a sound financial underpinning for our strategic initiatives into commercial lending, trust services, and internet banking. Moreover, the dimension of our Company's asset growth in the fiscal 2005 year evidences the positive market response to our strategic plans. During the fiscal year, total assets grew $34.4 million, or 9.3%, to an unprecedented total of $403.4 million at year-end. The asset growth was due to an increase in customer deposits and the acquisition of Stebbins National Bank of Creston, Ohio, which was completed in fiscal 2005. As a result of this growth, Wayne Savings Community Bank remains the largest independent bank headquartered in its five county market area of Wayne, Holmes, Ashland, Medina, and Stark counties, Ohio. In regard to shareholder value, we are also very gratified by the total return performance of the Company's common stock over the last few years. According to recently released index values by a national stock market statistics firm, an investment of $100 in the common stock of Wayne Savings Bancshares, Inc. on March 31, 2000 realized a total return of $188 by March 31, 2005, a period of five years. This computes to an average total return of 17.6% per annum. In contrast, the NASDAQ Composite index declined in this five-year time frame from a $100 initial investment to $44, while the SNL All Bank and Thrift Index grew from $100 to $166. Clearly, the stockholders of Wayne Savings Bancshares, Inc. have achieved appreciably superior returns over the respective stock market indices. As we begin our 107th year of service, Wayne Savings is in strong financial condition and well-positioned for the future with a talented, dedicated staff, strategic market locations, a full range of banking products and services, and state-of-the-art technology to provide outstanding service to our customers and to increase the value of our stockholders' investment. We are excited about our Company's future, and we look forward to taking full advantage of the opportunities we have created. On behalf of our Board of Directors, Officers, and Staff, we thank you deeply for your continued confidence and support. Sincerely, /s/ Charles F. Finn Charles F. Finn Chairman, President and Chief Executive Officer - -------------------------------------- 7 --------------------------------------- SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA [LOGO] ------------------------------------------------------------------------- The following table sets forth certain consolidated financial and other data of Wayne Savings Bancshares, Inc., at the dates and for the years indicated. The consolidated financial statements as of and for the years ended March 31, 2001 through March 31, 2003, inclusive, are those of Wayne Savings Bancshares, Inc. prior to the reorganization and change in corporate form discussed in the Notes to the Consolidated Financial Statements and elsewhere herein. For additional information about the Company, reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company.
At March 31, --------------------------------------------------------- 2005 2004 2003 2002 2001 --------------------------------------------------------- (In thousands) Selected Financial Condition Data Total assets ............................ $ 403,401 $ 369,007 $ 378,991 $ 334,843 $ 311,640 Loans receivable, net(1) ................ 213,627 205,443 228,373 251,172 247,480 Mortgage-backed securities(2) ........... 60,352 88,428 76,002 17,326 8,574 Investment securities ................... 72,856 31,582 35,841 22,286 13,641 Cash and cash equivalents(3) ............ 29,942 19,887 17,496 27,883 20,902 Deposits ................................ 320,586 291,830 300,931 300,957 277,706 Stockholders' equity .................... 40,199 43,561 44,663 26,047 25,255
(1) Includes loans held for sale. (2) Includes mortgage-backed securities available for sale. (3) Includes cash and due from banks, interest-bearing deposits in other financial institutions, and federal funds sold.
Year Ended March 31, --------------------------------------------------------- 2005 2004 2003 2002 2001 --------------------------------------------------------- (In thousands, except share data) Selected Operating Data: Interest income ......................... $ 17,632 $ 18,216 $ 20,023 $ 21,309 $ 21,506 Interest expense ........................ 6,716 7,147 9,169 12,348 13,100 --------- --------- --------- --------- --------- Net interest income .................. 10,916 11,069 10,854 8,961 8,406 Provision for losses on loans ........... 430 173 91 134 96 --------- --------- --------- --------- --------- Net interest income after provision for losses on loans .................. 10,486 10,896 10,763 8,827 8,310 Other income ............................ 1,684 1,933 1,643 1,657 1,045 General, administrative and other expense(1) ................... 11,874 8,971 8,417 7,722 7,348 --------- --------- --------- --------- --------- Earnings before income taxes ............ 296 3,858 3,989 2,762 2,007 Federal income taxes (benefits) ......... (85) 1,154 1,217 939 675 --------- --------- --------- --------- --------- NET EARNINGS ............................ $ 381 $ 2,704 $ 2,772 $ 1,823 $ 1,332 ========= ========= ========= ========= ========= Basic earnings per share(2) ............. $ .11 $ .72 $ .71 $ .47 $ .34 ========= ========= ========= ========= ========= Diluted earnings per share(2) ........... $ .11 $ .72 $ .71 $ .47 $ .34 ========= ========= ========= ========= ========= Cash dividends declared per common share(3) .................... $ 48 $ .47 $ .45 $ .45 $ .42 ========= ========= ========= ========= =========
(1) In 2005, general administrative and other expense includes $738,000 of costs related to accelerating the Company's Management Recognition Plan and $664,000 of costs relating to acceleration of the Company's Stock Option Plan. (2) All per share amounts have been restated to give effect to the 1.5109 to 1.00 share exchange ratio provided for in the Company's conversion offering. (3) During the fiscal year ended March 31, 2003, the M.H.C. waived its right to receive all dividends. During fiscal 2002 and 2001, the M.H.C. waived approximately $.44 and $.40 of the $.45 and $.42 per share dividends paid on common stock in each respective year. - -------------------------------------- 8 --------------------------------------- SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (con't.) - ------------------------------------------------------------------------- [LOGO]
At or For the Year Ended March 31, ------------------------------------------------ 2005 2004 2003 2002 2001 ------------------------------------------------ Key Operating Ratios and Other Data: Return on average assets (net earnings divided by average total assets) ........................... .10% .73% .78% .56% .45% Return on average equity (net earnings divided by average equity) ......................... .90 6.09 8.80 7.12 5.28 Average equity to average assets ...................... 10.93 11.95 8.92 7.93 8.44 Equity to assets at year end .......................... 9.97 11.80 11.78 7.78 8.10 Interest rate spread (difference between average yield on interest-earning assets and average cost of interest-bearing liabilities) .............. 2.89 2.97 3.09 2.77 2.57 Net interest margin (net interest income as a percentage of average interest- earning assets) .................................... 3.02 3.14 3.24 2.93 2.92 General, administrative and other expense to average assets(1) ............................... 2.72 2.41 2.38 2.39 2.46 Non-performing and impaired loans to loans receivable, net ........................... .42 .36 1.09 1.52 .47 Non-performing and impaired assets to total assets .................................... .22 .23 .65 1.14 .41 Average interest-earning assets to average interest-bearing liabilities ....................... 106.49 108.12 105.40 103.98 107.62 Allowance for loan losses to non-performing and impaired loans .................. 151.66 109.10 27.35 19.38 54.58 Allowance for loan losses to non-performing and impaired assets ................. 146.01 96.22 27.35 19.28 49.47 Net interest income after provision for losses on loans, to general, administrative and other expense(1) ................................... 100.13 121.46 127.87 114.31 113.31 Number of full-service offices ........................ 11 10 10 10 10 Dividend payout ratio ................................. 455.91 66.83 38.35 46.74 60.06
(1) In calculating this ratio, general, administrative and other expense does not include provisions for losses or gains on the sale of real estate acquired through foreclosure. In 2005, this ratio does not include expense relating to acceleration of the Company's Management Recognition Plan and Stock Option Plan. - -------------------------------------- 9 --------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS [LOGO] ------------------------------------------------------------------------- OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The consolidated financial statements include Wayne Savings Bancshares, Inc. and its wholly-owned subsidiary, Wayne Savings Community Bank. Intercompany transactions and balances are eliminated in the consolidated financial statements. The Company's net earnings are primarily dependent on its net interest income, which is the difference between interest income earned on its loan, mortgage-backed securities and investment portfolios, and its cost of funds consisting of interest paid on deposits and borrowings. The Company's net earnings also are affected by its provision for losses on loans, as well as the amount of other income, including fees and service charges, and general, administrative and other expense, such as salaries and employee benefits, deposit insurance premiums, occupancy and equipment costs, and income taxes. Earnings of the Company also are affected significantly by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities. Business Strategy The Company's current business strategy is to operate a well-capitalized, profitable and independent community-oriented savings association dedicated to financing home ownership and providing quality service to its customers. The Company has sought to implement this strategy in recent years by: (1) closely monitoring the needs of customers and providing personal, quality customer service; (2) continuing the origination of one-to-four family residential mortgage loans and consumer loans in the Company's market area; (3) managing interest rate risk exposure by better matching asset and liability maturities and rates; (4) increasing fee income; (5) managing asset quality; (6) maintaining a strong retail deposit base; (7) maintaining capital in excess of regulatory requirements; and (8) enhancing the commercial loan program to add high quality, adjustable rate assets to the Company's loan portfolio. Discussion of Financial Condition Changes from March 31, 2004 to March 31, 2005 In addition to the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. Economic circumstances, the Company's operations, and actual results could differ significantly from those discussed in forward-looking statements. Some of the factors that could cause or contribute to such differences are discussed herein but also include changes in the economy and interest rates in the nation and the Company's general market area. The forward-looking statements contained herein include, but are not limited to, those with respect to the following matters: (1) management's determination of the amount and adequacy of the allowance for loan losses; (2) the effect of changes in interest rates; (3) management's opinion as to the effects of recent accounting pronouncements on the Company's consolidated financial statements; and (4) management's opinion as to the Bank's ability to maintain regulatory capital at current levels. The Company considers the allowance for loan losses and related loss provision to be a critical accounting policy. A detailed discussion of such policy is set forth on the following pages. [PHOTO OMITTED] Wayne Savings Community Bank Executive and Senior Officers include, seated: Wanda Christopher-Finn, Executive Vice President and Chief Operating Officer; Charles F. Finn, Chairman and Chief Executive Officer; and Michael C. Anderson, Executive Vice President and Chief Financial Officer; Standing: Wendy S. Blosser, Senior Vice President, Senior Trust Officer, Phillip E. Becker, Executive Vice President and Chief Lending Officer; and Bryan K. Fehr, Senior Vice President, Audit and Compliance Officer. At March 31, 2005, the Company had total assets of $403.4 million, an increase of $34.4 million, or 9.3%, above total assets of $369.0 million at March 31, 2004. This growth primarily resulted from the acquisition of Stebbins National Bank on June 1, 2004, which added $24.5 million in assets. Liquid assets consisting of cash, interest-bearing deposits and investment securities, increased by $51.3 million, or 99.7%, to $102.8 million at March 31, 2005. The Company used repayments from its mortgage and mortgage-backed securities portfolios to purchase $35.6 million of securities with 2 to 3 year maturities. The Company has created a short-term structured cash flow maturity ladder with these securities which will provide the cash needed to fund loan growth over the next three years. In addition, $11.8 million of securities were acquired in the Stebbins acquisition. These increases were partially offset by the maturity of $4.7 million of securities. Cash and cash equivalents increased by $10.1 million of which $4.6 million was acquired in the Stebbins acquisition. Mortgage-backed securities totaled $60.4 million at March - -------------------------------------- 10 -------------------------------------- - ------------------------------------------------------------------------- [LOGO] 31, 2005, a decrease of $28.1 million, or 31.8%, as these securities continued to receive a high level of principal repayments due to the lagging effects of the low interest rate environment in fiscal 2005, coupled with management's decision to restructure the Company's investment portfolio into a higher percentage of bonds with expected average maturities of two to three years. The Company has pursued this strategy due to the favorable increase in this segment of the yield curve as interest rates increased. During fiscal 2005, the Company purchased $8.0 million of mortgage-backed securities, offset by cash repayments of $34.9 million. Loans receivable totaled $213.6 million at March 31, 2005 an increase of $8.2 million, or 4.0%, from the March 31, 2004 total. The growth was mainly due to $12.2 million in loans acquired from the Stebbins acquisition. The Company originated loans of $56.2 million offset by loan sales of $6.7 million in furtherance of management's interest rate risk strategy. Rather than reinvest funds from sales of and repayments in long-term, fixed rate residential loans during this period of lower long-term interest rates, management has continued to increase the investment in short-term marketable securities and adjustable rate commercial loans. The composition of the loan portfolio has continued to evolve during fiscal 2005 due to a decrease of $12.9 million in residential mortgage loans and increases in nonresidential mortgage loans and commercial loans of $10.8 million and $7.6 million, respectively, in connection with the Bank's increased emphasis on commercial lending. At March 31, 2005, the allowance for loan losses totaled $1.4 million, or ..64% of loans, compared to $815,000, or .40% of loans at March 31, 2004. In determining the amount of loan loss allowance at any point in time, management and the Board apply a systematic process focusing on the risk of loss in the portfolio. First, delinquent non-residential , multifamily and commercial loans are evaluated for potential impairments in carrying value. At March 31, 2005, the delinquent non-residential, multi-family and commercial loans were viewed as well-secured, with no loss anticipated. The second step in determining the allowance for loan loss entails the application of historic loss experience to individual loan types in the portfolio. In addition to the historic loss percentage, management employs an additional risk percentage tailored to the perception of the overall risk in the economy. Management engaged a third party review of its commercial loan risk ranking system and as a result of this review has elected to tighten its loan grading process. This enhancement, coupled with $7.6 million growth in the commercial loan portfolio and the acquisition of Stebbins resulted in a $559,000 increase in the allowance year over year. Nonperforming and impaired loans amounted to $906,000 at March 31, 2005, compared with $715,000 at March 31, 2004. At both dates, such amounts consisted primarly of nonperforming and impaired residential mortgage loans. The Company generally has not recognized losses on impaired and nonperforming loans secured by residential mortgages. The allowance for loan losses totaled 151.7% and 109.1% of nonperforming and impaired loans at March 31, 2005 and 2004, respectively. Although management believes that the allowance for loan losses is adequate based upon the available facts and circumstances, there can be no assurance that additions to the allowance will not be necessary in future periods, which will adversely affect the Company's results of operations. Deposits at March 31, 2005, totaled $320.6 million, an increase of $28.8 million from $291.8 million at March 31, 2004, due primarily to the $24.8 million of deposits acquired from the Stebbins acquisition and an increase in deposits of $4.0 million due to Bank's competitive deposit pricing in all market areas. Stockholders' equity totaled $40.2 million, a decrease of $3.4 million, or 7.7%, from March 31, 2004, due mainly to an unrealized loss on available for sale securities of $1.3 million, dividends totaling $1.7 million, and purchases of treasury stock totaling $2.8 million. These amounts were partially offset by the $1.1 million acceleration and amortization of the Management Recognition Plan shares, $920,000 related to amortization of the Company's ESOP and accelerated vesting of its Stock Option Plan, and $381,000 in net earnings for year ended March 31, 2005. Comparison of Operating Results for the Years Ended March 31, 2005 and 2004 General. Fiscal 2005 was a year of strategic transition for the Company. The Company's primary competitor was acquired by a major regional bank holding company, positioning Wayne Savings as the largest independent community bank in the five county market area. Management has long perceived the market area preference for local ownership and decision-making. In recognition of this fact, management believed that the Company had a unique opportunity to expand its product lines, particularly in the areas of commercial lending and trust services. Management also recognized that expansion of such product lines would initially place pressures on the Company's operating costs. As a result, management undertook a review of the Company's ability to expand its product lines in view of its current cost structure. Such review culminated in the conclusion that several of its benefit plans, specifically the previous grants under the Management Recognition Plan and the Stock Option Plan reflected compensation awards which were more closely aligned with past versus future managerial performance. Moreover, in view of the mandatory expensing of stock options pursuant to SFAS No. 123(R), management concluded that the approximate $300,000 in pre-tax savings resulting from accelerating the expense of the Stock Option Plan was a - -------------------------------------- 11 -------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS (con't.) [LOGO] ------------------------------------------------------------------------- prudent method of expanding the Company's product lines without placing undue pressure on the Company's future cost structure. Due in large part to these decisions, net earnings totaled $381,000 for the fiscal year ended March 31, 2005, a decrease of $2.3 million, or 85.9%, below the net earnings of $2.7 million for the fiscal year ended March 31, 2004. The decline in net earnings was primarily attributable to an increase in general, administrative and other expense of $2.9 million, or 32.4%, an increase in provision for losses on loans of $257,000, or 148.6% , a decrease in other income of $249,000, or 12.9%, and a decrease in net interest income of $153,000, or 1.4%. These earnings reductions were partially offset by a decrease in federal income tax expense of $1.2 million. Interest Income. Interest income for the fiscal year ended March 31, 2005, decreased $584,000, or 3.2%, to $17.6 million. This decrease was the result of a 29 basis point reduction in the yield earned on interest earning assets to 4.87%, partially offset by an increase in the weighted average balance of interest-earning assets totaling $9.0 million, or 2.6%, to $361.7 million for the year ended March 31, 2005. Interest income on loans declined $1.1 million, or 7.8%, for the fiscal year ended March 31, 2005, due primarily to a decrease in the weighted average balance of loans outstanding of $1.4 million, or .6%, compared to the fiscal 2004, coupled with a 47 basis point decrease in the weighted average yield on loans to 6.06% for fiscal 2005. Interest income on mortgage-backed securities decreased $235,000 during fiscal 2005, due primarily to a $13.5 million, or 15.7%, decrease in the weighted average balance outstanding from the 2004 period, which was partially offset by an increase in the average yield of 22 basis points to 3.09%. Interest income on investments increased by $553,000, or 37.0%, reflecting an increase in the weighted average balance of $17.5 million, or 50.6%, partially offset by a decrease in the weighted average yield of 39 basis points to 3.93% from 4.32% during fiscal 2004. Interest income on interest-bearing deposits and other increased by $182,000, or 71.7%, reflecting an increase in the weighted average balance of $6.4 million, or 36.6%, coupled with a increase in the weighted average yield of 38 basis points to 1.83% from 1.45% during fiscal 2004. The decrease in the average balance of loans and mortgage-backed securities as well as the increase in the average balance of investments and interest-bearing deposits is consistent with the Company's desire to shorten the average maturity of the Company's interest-earning assets. The Company has invested a significant portion of the funds from payments on loans and mortgage-backed securities in short term investment securities and other short term investment vehicles. The Company believes that investing in short term investments positions the Company favorably in an increasing interest rate environment by providing it with the flexibility to redeploy such assets in higher yielding loans and other investments as interest rates rise. Interest Expense. Interest expense for fiscal 2005 totaled $6.7 million, a decrease of $431,000, or 6.0%, from interest expense of $7.1 million for the fiscal year ended March 31, 2004. The decrease resulted from a 21 basis point decrease in the average cost of funds to 1.98% for fiscal 2005, offset by an increase in the average balance of deposits and borrowings outstanding of $13.4 million, or 4.1%, to $339.7 million for the fiscal 2005. Interest expense on deposits totaled $5.7 million for fiscal 2005, a decrease of $215,000, or 3.6%, from fiscal 2004, as a result of an 18 basis point decrease in the average cost of deposits to 1.81% for the 2005 period offset by an increase in the average balance outstanding of $17.4 million, or 5.9%, to $313.6 million for fiscal 2005. Interest expense on borrowings totaled $1.0 million for the fiscal year ended March 31, 2005, a decrease of $216,000 from fiscal 2004, primarily due to an decrease in the average balance of borrowings of $3.9 million to an average balance of $26.1 million for fiscal 2005 from $30.0 million for year ended March 31, 2004, offset by a decrease in the average cost of borrowings to 3.96% from an average cost of 4.16% for fiscal 2004. Net Interest Income. Net interest income totaled $10.9 million for the fiscal year ended March 31, 2005, a decrease of $153,000, or 1.4%, from fiscal 2004. The average interest rate spread decreased to 2.89% for the year ended March 31, 2005 from 2.97% for fiscal 2004. The net interest margin decreased to 3.02% for fiscal 2005 from 3.14% for the fiscal year ended March 31, 2004. Provision for Losses on Loans. The Company recorded provisions for losses on loans totaling $430,000 and $173,000 for the periods ended March 31, 2005 and 2004, respectively. As a result of the increased commercial loan volume, the acquisition of Stebbins' loan portfolio and an enhancement of the Company's loan rating standards, management increased the provision for loan losses by $257,000 in fiscal 2005. 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 March 31, 2005. 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, decreased by $249,000 or 12.9%, to $1.7 million for fiscal 2005, from $1.9 million for the year ended March 31, 2004. The decrease resulted primarily from a decrease of $256,000 in merchant fee income due to a significant reduction in volume. - -------------------------------------- 12 -------------------------------------- - ------------------------------------------------------------------------- [LOGO] General, Administrative, and Other Expense. General, administrative and other expense increased by $2.9 million, or 32.4%, to $11.9 million for the year ended March 31, 2005 compared to 2004 fiscal year ended March 31, 2004. As stated previously, $1.4 million of this increase resulted from management's decision to accelerate the vesting and attendant expense of the Mangement Recognition and Stock Option Plans. The Company accelerated the vesting of previous share grants under the Management Recognition Plan at a pre-tax cost of $738,000. In addition, in recognition of the impending expensing of stock options, the Company accelerated the vesting of all grants made under the 2004 Stock Option Plan. This resulted in a pre-tax cost of $664,000. The increase in employee compensation and benefits of $641,000, or 12.4%, was primarily attributable to normal merit increases, an increase in employee benefit plan costs and additional staff needed for operating a fully converted, expanding, publicly traded stock company. An increase of $355,000, or 23.9%, in occupancy and equipment expense was primarily due to data conversion and operations costs related to the Stebbins acquisition. An increase of $214,000, or 59.0%, in franchise taxes was due to the increase in equity from the fiscal 2003 conversion to stock form. Similarly, the increase in other operating expense was primarily attributable to increased costs related to the Stebbins acquisition and routine compliance matters required of a public company. Federal Income Taxes. The federal income tax benefit was $85,000 for the year ended March 31, 2005, reflecting a decrease of $1.2 million in federal income tax expense from fiscal 2004. The reduction resulted primarily from a $3.6 million, or 92.3%, decrease in pre-tax earnings. The difference in the effective tax rate or rate of benefits from the 34% statutory rate is mainly due to the beneficial effects of income from cash surrender value on life insurance and other tax-exempt obligations. Comparison of Operating Results for the Years Ended March 31, 2004 and 2003 General. Net earnings totaled $2.7 million for the fiscal year ended March 31, 2004, a decrease of $68,000, or 2.5%, below the net earnings of $2.8 million for the fiscal year ended March 31, 2003. The decline in net earnings was primarily attributable to an increase in general, administrative and other expense of $554,000, or 6.6% and an increase in provision for losses on loans of $82,000, or 90.1%. These earnings decreases were mainly offset by an increase in other income of $290,000, or 17.7%, net interest income of $215,000 , or 2.0% , and a $63,000, or 5.2%, decrease in federal income tax expense. Interest Income. Interest income for the fiscal year ended March 31, 2004, decreased $1.8 million, or 9.0%, to $18.2 million. This decrease was a result of an 82 basis point reduction in the yield on interest-earning assets to 5.16%, partially offset by an increase in the weighted average balance of interest-earning assets totaling $18.0 million, or 5.4%, to $352.7 million for the period ended March 31, 2004. Interest income on loans declined $2.9 million, or 17.0%, for the fiscal year ended March 31, 2004, due primarily to a decrease in the weighted average balance of loans outstanding of $27.9 million, or 11.5%, compared to fiscal 2003, coupled with a 43 basis point decrease in the weighted average yield on loans to 6.53% for fiscal 2004. Interest income on mortgage-backed securities increased $979,000 or 65.0% during fiscal 2004, due primarily to a $46.8 million, or 118.0%, increase in the weighted average balance outstanding from fiscal 2003, which was partially offset by a decrease in the average yield of 93 basis points to 2.87%. Interest income on investments increased by $336,000, or 29.0%, reflecting an increase in the weighted average balance of $10.5 million, or 43.7%, partially offset by a decrease in the weighted average rate of 49 basis points to 4.32% from 4.81% during fiscal 2003. Interest income on interest-bearing deposits and other decreased by $258,000, or 50.4%, reflecting a decrease in the weighted average balance of $11.3 million, or 39.3%, coupled with a decrease in the weighted average rate of 33 basis points to 1.45% from 1.78% during the fiscal 2003. Interest Expense. Interest expense for fiscal 2004 totaled $7.1 million, a decrease of $2.0 million, or 22.1%, from interest expense of $9.2 million for the fiscal year ended March 31, 2003. The decrease resulted from a 70 basis point decrease in the average cost of funds to 2.19% for fiscal 2004, offset by an increase in the average balance of deposits and borrowings outstanding of $8.7 million, or 2.7%, to $326.2 million for fiscal 2004. Interest expense on deposits totaled $5.9 million for fiscal 2004, a decrease of $2.5 million, or 30.0%, from fiscal 2003, as a result of a 82 basis point decrease in the average cost of deposits to 1.99% for 2004, coupled with a decrease in the average balance outstanding of $4.1 million, or 1.4%, to $296.2 million for fiscal 2004. Interest expense on borrowings totaled $1.2 million for the fiscal year ended March 31, 2004, an increase of $511,000 from fiscal 2003, primarily due to an increase in the average balance of borrowings of $12.8 million to an average balance of $30.0 million for fiscal 2004 from $17.2 million for fiscal 2003, partially offset by a decrease in the average cost of borrowings to 4.16% from an average cost of 4.28% for fiscal 2003. - -------------------------------------- 13 -------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS (con't.) [LOGO] ------------------------------------------------------------------------- Net Interest Income. Net interest income totaled $11.1 million for the fiscal year ended March 31, 2004, an increase of $215,000, or 2.0%, from fiscal 2003. The interest rate spread decreased to 2.97% for the year ended March 31, 2004 from 3.09% for fiscal 2003. The net interest margin decreased to 3.14% for fiscal 2004 from 3.24% for fiscal 2003. Provision for Losses on Loans. The Company recorded provisions for losses on loans totaling $173,000 and $91,000 for the fiscal years ended March 31, 2004 and 2003, respectively. The increase in provision for loan losses for fiscal 2004 was largely predicated on possible short-term softness in the local economy and increased origination of commercial loans. Other Income. Other income, consisting primarily of an increase in the cash surrender value of life insurance, gains on sale of loans, service fees, and charges on deposit accounts, increased by $290,000 or 17.7%, to $1.9 million for fiscal 2004, from $1.6 million for the fiscal year ended March 31, 2003. The increase resulted primarily from an increase of $139,000 in the cash surrender value of life insurance. Additionally, service fees, charges and other operating income increased by $94,000, or 6.6%, to $1.5 million for the fiscal year ended March 31, 2004, due primarily to increased income related to credit card merchants. Gain on sale of loans increased $67,000, or 82.7%, in fiscal 2004 as compared to fiscal 2003, due mainly to management's decision to sell the majority of the lower rate thirty year residential mortgage loans in the secondary market. General, Administrative, and Other Expense. General, administrative and other expense increased by $554,000, or 6.6%, to $9.0 million for the year ended March 31, 2004 compared to the fiscal year ended March 31, 2003. The increase resulted primarily from a $432,000, or 9.1%, increase in employee compensation and benefits, a $64,000, or 3.5%, increase in other operating expense and an increase of $55,000, or 17.9%, in franchise taxes due to the increase in equity from the fiscal 2003 stock conversion. 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 compliance matters required of a public company, as well as higher merchant expenses related to credit card activity. Federal Income Taxes. The provision for federal income taxes was $1.2 million for the year ended March 31, 2004, a decrease of $63,000, or 5.2%, compared to fiscal 2003. The decrease resulted primarily from a $131,000, or 3.3%, decrease in pre-tax earnings, coupled with an additional $139,000 of tax-exempt income related to the cash surrender value of life insurance. The effective tax rate for fiscal 2004 was 29.9%, as compared to 30.5% for fiscal 2003. The decrease in the effective tax rate year to year is mainly due to the beneficial effects of income on cash surrender value of life insurance and other tax-exempt obligations. - -------------------------------------- 14 -------------------------------------- - ------------------------------------------------------------------------- [LOGO] 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. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.
Year Ended March 31, ------------------------------------------------------------------------------------------- 2005 2004 2003 ---------------------------- ----------------------------- ---------------------------- Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate --------- -------- ------- --------- -------- -------- --------- -------- ------- (Dollars in thousands) Interest-earning assets: Loans receivable, net(1) .......... $ 212,785 $ 12,898 6.06% $ 214,174 $ 13,982 6.53% $ 242,120 $ 16,846 6.96% Mortgage-backed securities (2) .... 72,911 2,250 3.09 86,440 2,485 2.87 39,652 1,506 3.80 Investment securities ............. 52,172 2,048 3.93 34,640 1,495 4.32 24,114 1,159 4.81 Interest-bearing deposits (3) ..... 23,871 436 1.83 17,478 254 1.45 28,804 512 1.78 --------- -------- ------- --------- -------- -------- --------- -------- ------- Total interest-earning assets ... 361,739 17,632 4.87 352,732 18,216 5.16 334,690 20,023 5.98 Non-interest-earning assets .......... 23,475 18,853 18,481 --------- --------- --------- Total assets .................... $ 385,214 $ 371,585 $ 353,171 ========= ========= ========= Interest-bearing liabilities: Deposits .......................... $ 313,611 5,684 1.81 $ 296,244 5,899 1.99 $ 300,326 8,432 2.81 Borrowings ........................ 26,076 1,032 3.96 30,000 1,248 4.16 17,204 737 4.28 --------- -------- ------- --------- -------- -------- --------- -------- ------- Total interest-bearing liabilities .................. 339,687 6,716 1.98 326,244 7,147 2.19 317,530 9,169 2.89 Non-interest-bearing liabilities ..... 3,410 923 4,153 --------- --------- --------- Total liabilities ............... 343,097 327,167 321,683 Stockholders' equity ................. 42,117 44,418 31,488 --------- --------- --------- Total liabilities and stockholders' equity ......... $ 385,214 $ 371,585 $ 353,171 ========= -------- ========= -------- ========= -------- Net interest income .................. $ 10,916 $ 11,069 $ 10,854 ======== ------- ======== -------- ======== ------- Interest rate spread (4) ............. 2.89% 2.97% 3.09% ======= ======== ======= Net yield on interest-earning assets(5) ......................... 3.02% 3.14% 3.24% ======= ======== ======= Ratio of average interest-earning assets to average interest- bearing liabilities ............... 106.49% 108.12% 105.40% ======= ======== =======
(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. - -------------------------------------- 15 -------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS (con't.) [LOGO] ------------------------------------------------------------------------- Rate/Volume Analysis The table below sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in average volume (changes in average volume multiplied by old rate); and (ii) changes in rate (change in rate multiplied by old average volume). Changes in rate-volume (changes in rate multiplied by the change in average volume) have been allocated proportionately between changes in rate and changes in volume.
Year Ended March 31, -------------------------------------------------------------------- 2005 vs. 2004 2004 vs. 2003 -------------------------------- -------------------------------- Increase (Decrease) Increase (Decrease) Due to Total Due to Total ------------------ Increase ------------------ Increase Volume Rate (Decrease) Volume Rate (Decrease) ------- ------- ---------- ------- ------- ---------- (In thousands) Interest income attributable to: Loans receivable ............................... $ (90) $ (994) $ (1,084) $(1,861) $(1,003) $ (2,864) Mortgage-backed securities ..................... (408) 173 (235) 1,426 (447) 979 Investment securities .......................... 698 (145) 553 464 (128) 336 Interest-bearing deposits ...................... 108 74 182 (490) 232 (258) ------- ------- ---------- ------- ------- ---------- Total interest-earning assets ................ 308 (892) (584) (461) (1,346) (1,807) Interest expense attributable to: Deposits ....................................... 334 (549) (215) (113) (2,420) (2,533) Borrowings ..................................... (157) (59) (216) 533 (22) 511 ------- ------- ---------- ------- ------- ---------- Total interest-bearing liabilities ........... 177 (608) (431) 420 (2,442) (2,022) ------- ------- ---------- ------- ------- ---------- Increase (decrease) in net interest income .......................... $ 131 $ (284) $ (153) $ (881) $ 1,096 $ 215 ======= ======= ========== ======= ======= ==========
- -------------------------------------- 16 -------------------------------------- - ------------------------------------------------------------------------- [LOGO] Asset and Liability Management-Interest Rate Sensitivity Analysis The Bank, like other financial institutions, is subject to interest rate risk to the extent that interest-earning assets reprice at a different time than interest-bearing liabilities. As part of their effort to monitor and manage interest rate risk, the Bank uses the "net portfolio value" ("NPV") methodology adopted by the OTS as part of its interest rate sensitivity regulations. The application of NPV methodology illustrates certain aspects of the Bank's interest rate risk. Generally, NPV is the discounted present value of the difference between incoming cash flows on interest-earning and other assets and outgoing cash flows on interest-bearing and other liabilities. The application of the methodology attempts to quantify interest rate risk as the change in the NPV, which would result from a theoretical change in market interest rates. Presented below, as of March 31, 2005 and 2004, is an analysis of the Bank's interest rate risk as measured by changes in NPV for instantaneous and sustained 100, 200 and 300 basis point (1 basis point equals .01%) increases and a 100 basis point decrease in market interest rates. Due to the current low prevailing interest rate environment, the changes in NPV are not estimated for a decrease of 200 or 300 basis points. As with any method of measuring interest rate risk, certain shortcomings are inherent in the NPV approach. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and mortgage-backed securities and early withdrawal levels from certificates of deposit would likely deviate significantly from those assumed in making the risk calculations. As of March 31, 2005 - -------------------------------------------------------------------------------- Net Portfolio Value NPV as % of PV of Assets Change in Interest ----------------------------- ------------------------ Rates (Basis points) $ Amount $ Change % Change NPV Ratio Change - -------------------- -------- -------- -------- --------- ----------- (In thousands) +300 bp $ 44,833 $(10,185) (19)% 11.30% (192 bp) +200 bp 48,854 (6,164) (11) 12.10 (112 bp) +100 bp 52,617 (2,401) (4) 12.81 (41 bp) 0 bp 55,018 -- -- 13.22 -- -100 bp 54,295 (723) (1) 12.97 (25 bp) As of March 31, 2004 - -------------------------------------------------------------------------------- Net Portfolio Value NPV as % of PV of Assets Change in Interest ----------------------------- ------------------------ Rates (Basis points) $ Amount $ Change % Change NPV Ratio Change - -------------------- -------- -------- -------- --------- ----------- (In thousands) +300 bp $ 42,370 $(11,927) (22)% 11.66% (250 bp) +200 bp 48,174 (4,097) (8) 12.96 (120 bp) +100 bp 52,785 (1,512) (3) 13.92 (24 bp) 0 bp 54,297 -- -- 14.16 -- -100 bp 52,271 (2,026) (4) 13.60 (56 bp) - -------------------------------------- 17 -------------------------------------- MANAGEMENT'S DISCUSSION AND ANALYSIS (con't.) [LOGO] ------------------------------------------------------------------------- The following table summarizes the Company's contractual cash obligations at March 31, 2005.
Payments due by period ------------------------------------------------------- <1 year 1-3 years 3-5 years >5 years Total ------------------------------------------------------- (In thousands, except share data) Contractual obligations: Operating lease obligations ......................... $ 65 $ 114 $ 35 $ -- $ 214 Advances from the Federal Home Loan Bank ............ 15,000 12,500 5,000 7,500 40,000 Certificates of deposit ............................. 91,507 56,360 18,473 905 167,245 Amount of commitments expiring per period Commitments to originate loans: Letters of credit ................................. 262 -- -- -- 262 Credit card/overdraft lines of credit ............. 115 -- -- -- 115 Home equity/commercial lines of credit ............ 28,673 -- -- -- 28,673 One- to four-family and multi-family loans ........ 3,547 -- -- -- 3,547 Non-residential real estate and land loans ........ 177 -- -- -- 177 -------- --------- --------- --------- -------- Total contractual obligations .......................... $139,346 $ 68,974 $ 23,508 $ 8,405 $240,233 ======== ========= ========= ========= ========
- -------------------------------------------------------------------------------- The Company's policy in recent years has been to reduce its exposure to interest rate risk generally by better matching the maturities of its interest rate sensitive assets and liabilities and by originating adjustable rate mortgage ("ARM") loans and other adjustable rate or short-term loans, as well as by purchasing short-term investments and mortgage-backed securities. However, particularly in the lower long-term interest rate environment which currently exists, borrowers typically prefer fixed rate loans to ARM loans. Accordingly, ARM loan originations were very limited during the fiscal year ended March 31, 2005. The Company has sought to lengthen the maturities of its deposits by promoting longer-term certificates; however, the Company was not successful in lengthening the maturities of its deposits in the interest rate environment that existed throughout fiscal 2005. The Company also negotiates interest rates on certificates of deposit of $100,000 or more. The Company has an Asset-Liability Management Committee, which is responsible for reviewing the Company's asset-liability policies. The Committee meets weekly and reports monthly to the Board of Directors on interest rate risks and trends, as well as liquidity and capital ratios and requirements. The Bank has operated within the framework of its prescribed asset/liability risk ranges for each of the last three years. Liquidity and Capital Resources The Bank's primary sources of funds are deposits, amortization of loan principal and prepayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Bank manages the pricing of deposits to maintain a desired level of deposits and cost of funds. In addition, the Bank invests excess funds in federal funds and other short-term interest-earning assets, which provide liquidity to meet lending requirements. Federal funds sold and other liquid assets outstanding at March 31, 2005, 2004 and 2003, amounted to $163.2 million, $139.9 million and $129.3 million, respectively. For additional information about cash flows from the Company's operating, financing and investing activities, see the Statements of Cash Flows included in the Consolidated Financial Statements. A major portion of the Bank's liquidity consists of cash and cash equivalents, which are a product of their operating, investing and financing activities. The primary sources of cash are net earnings, principal repayments on loans and mortgage-backed securities, proceeds from advances from the Federal Home Loan Bank ("FHLB"), and sales of mortgage-backed securities. Liquidity management is both a daily and long-term function of business management. If the Bank requires funds beyond its ability to generate funds internally, borrowing agreements exist with the Federal Home Loan Bank, which provide an additional source of funds. At March 31, 2005, the Company had $40.0 million in outstanding advances from the FHLB. At March 31, 2005, the Company had outstanding loan commitments of $32.5 million, including the unfunded portion of loans in process and commitments under unused lines of credit. Certificates of deposit scheduled to mature in less than one year at March 31, 2005, totaled $91.5 million. Based on prior experience, management believes that a significant portion of such deposits will remain with the Company. - -------------------------------------- 18 -------------------------------------- - ------------------------------------------------------------------------- [LOGO] Impact of Inflation and Changing Prices The consolidated financial statements of the Company and notes thereto, presented elsewhere herein, have been prepared in accordance with U.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Company are monetary. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. Common Stock and Related Matters The Company's common stock trades on the Nasdaq National Market using the symbol "WAYN." The following table sets forth the high and low trading prices of the Company's common stock during the three most recent fiscal years, together with the cash dividends declared. As stated previously, all per share amounts have been restated for the 1.5109 share exchange ratio provided for in the Company's conversion offering. Fiscal Year Ended Cash Dividends March 31, 2005 High Low Declared First quarter $21.00 $14.82 $ .120 Second quarter 16.79 15.36 .120 Third quarter 16.88 15.92 .120 Fourth quarter 16.40 15.35 .120 Fiscal Year Ended Cash Dividends March 31, 2004 High Low Declared First quarter $14.10 $11.06 $ .113 Second quarter 14.53 12.70 .113 Third quarter 18.70 13.93 .120 Fourth quarter 18.00 15.00 .120 Fiscal Year Ended Cash Dividends March 31, 2003 High Low Declared First quarter $14.23 $13.24 $ .113 Second quarter 13.51 11.75 .113 Third quarter 15.22 10.25 .113 Fourth quarter 11.55 10.67 .113 As of April 5, 2005, the Company had 1,583 stockholders of record and 3,625,057 shares of common stock outstanding. This does not reflect the number of persons whose stock is in nominee or "street name" accounts through brokers. Payment of dividends on the common stock is subject to determination and declaration by the Board of Directors and will depend upon a number of factors, including capital requirements, regulatory limitations on the payment of dividends, the Company's results of operations and financial condition, tax considerations, and general economic conditions. No assurance can be given that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends, once declared, will continue. The Company's primary source of funds with which to pay dividends is cash and cash equivalents held at the holding company level and dividends from the Bank. The Bank's ability to pay dividends to the Company is limited by OTS regulations, and the Bank is required to obtain OTS nonobjection to the payment of dividends to the Company. In determining whether to object to such dividends, the OTS considers whether (i) the Bank would be undercapitalized following the dividend, (ii) the dividend raises safety and soundness concerns, or (iii) the dividend violates any regulatory prohibition or policy. In addition to the foregoing, earnings of the Company appropriated to bad debt reserves and deducted for federal income tax purposes are not available for payment of cash dividends or other distributions to stockholders without payment of taxes at the then-current tax rate by the Company on the amount of earnings removed from the reserves for such distributions. The Company intends to make full use of this favorable tax treatment and does not contemplate any distribution that would create federal tax liability. - -------------------------------------- 19 -------------------------------------- CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION [LOGO] ------------------------------------------------------------------------- As of March 31, (Dollars in thousands, except share data)
2005 2004 --------- --------- ASSETS Cash and due from banks ............................................................... $ 4,176 $ 3,291 Federal funds sold .................................................................... 19,400 9,875 Interest-bearing deposits in other financial institutions ............................. 6,366 6,721 --------- --------- Cash and cash equivalents .......................................................... 29,942 19,887 Investment securities available for sale - at market .................................. 60,844 17,546 Investment securities held to maturity - at amortized cost, approximate market value of $12,101 and $14,830 as of March 31, 2005 and 2004, respectively .... 12,012 14,036 Mortgage-backed securities available for sale - at market ............................. 57,724 83,945 Mortgage-backed securities held to maturity - at amortized cost, approximate market value of $2,647 and $4,510 as of March 31, 2005 and 2004, respectively ......... 2,628 4,483 Loans receivable - net ................................................................ 213,627 205,443 Office premises and equipment - net ................................................... 8,922 8,742 Real estate acquired through foreclosure .............................................. 35 100 Federal Home Loan Bank stock - at cost ................................................ 4,386 4,205 Cash surrender value of life insurance ................................................ 6,581 6,321 Accrued interest receivable on loans .................................................. 757 801 Accrued interest receivable on mortgage-backed securities ............................. 444 400 Accrued interest receivable on investments and interest bearing deposits .............. 708 318 Prepaid expenses and other assets ..................................................... 3,996 2,549 Prepaid federal income taxes .......................................................... 795 231 --------- --------- Total assets .................................................................. $ 403,401 $ 369,007 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Deposits .............................................................................. $ 320,586 $ 291,830 Advances from the Federal Home Loan Bank .............................................. 40,000 30,000 Advances by borrowers for taxes and insurance ......................................... 612 617 Accrued interest payable .............................................................. 198 186 Accounts payable on mortgage loans serviced for others ................................ 231 118 Other liabilities ..................................................................... 1,174 1,383 Deferred federal income taxes ......................................................... 401 1,312 --------- --------- Total liabilities ............................................................. 363,202 325,446 Commitments ........................................................................... -- -- Stockholders' equity Common stock (8,000,000 shares of $.10 par value authorized; 3,907,318 shares issued at both March 31, 2005 and 2004) .......................................... 391 391 Additional paid-in capital ......................................................... 35,133 34,365 Retained earnings - substantially restricted ....................................... 11,371 12,727 Shares acquired by Management Recognition Plan ..................................... -- (1,142) Less required contributions for shares acquired by Employee Stock Ownership Plan ... (1,304) (1,456) Less 282,261 and 112,500 shares of treasury stock at March 31, 2005 and 2004 respectively - at cost ........................................................ (4,600) (1,803) Accumulated other comprehensive income (loss) ...................................... (792) 479 --------- --------- Total stockholders' equity .................................................... 40,199 43,561 --------- --------- Total liabilities and stockholders' equity .................................... $ 403,401 $ 369,007 ========= =========
The accompanying notes are an integral part of these statements. - -------------------------------------- 20 -------------------------------------- CONSOLIDATED STATEMENTS OF EARNINGS - ------------------------------------------------------------------------- [LOGO] For the year ended March 31, (Dollars in thousands, except share data)
2005 2004 2003 ---------- ---------- ---------- Interest income: Loans ........................................................................ $ 12,898 $ 13,982 $ 16,846 Mortgage-backed securities ................................................... 2,250 2,485 1,506 Investment securities ........................................................ 2,048 1,495 1,159 Interest-bearing deposits and other .......................................... 436 254 512 ---------- ---------- ---------- Total interest income ..................................................... 17,632 18,216 20,023 Interest expense: Deposits ..................................................................... 5,684 5,899 8,432 Borrowings ................................................................... 1,032 1,248 737 ---------- ---------- ---------- Total interest expense ..................................................... 6,716 7,147 9,169 ---------- ---------- ---------- Net interest income ........................................................ 10,916 11,069 10,854 Provision for losses on loans .................................................. 430 173 91 ---------- ---------- ---------- Net interest income after provision for losses on loans ................... 10,486 10,896 10,763 Other income: Gain on sale of mortgage-backed and investment securities .................... -- 16 26 Gain on sale of loans ........................................................ 171 148 81 Increase in cash surrender value of life insurance ........................... 260 260 121 Service fees, charges and other operating .................................... 1,253 1,509 1,415 ---------- ---------- ---------- Total other income ......................................................... 1,684 1,933 1,643 General, administrative and other expense: Employee compensation and benefits ........................................... 5,828 5,187 4,755 Management Recognition and Stock Option Plan expense ......................... 1,402 -- -- Occupancy and equipment ...................................................... 1,839 1,484 1,477 Federal deposit insurance premiums ........................................... 45 47 51 Franchise taxes .............................................................. 577 363 308 Other operating .............................................................. 2,183 1,890 1,826 ---------- ---------- ---------- Total general, administrative and other expense ............................ 11,874 8,971 8,417 ---------- ---------- ---------- Earnings before incomes taxes .............................................. 296 3,858 3,989 Federal incomes taxes (benefits): Current ...................................................................... 171 524 1,210 Deferred ..................................................................... (256) 630 7 ---------- ---------- ---------- Total federal income taxes (benefits) ...................................... (85) 1,154 1,217 ---------- ---------- ---------- NET EARNINGS ............................................................... $ 381 $ 2,704 $ 2,772 ========== ========== ========== Basic earnings per share ................................................... $ .11 $ .72 $ .71 ========== ========== ========== Diluted earnings per share ................................................. $ .11 $ .72 $ .71 ========== ========== ==========
The accompanying notes are an integral part of these statements. - -------------------------------------- 21 -------------------------------------- CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME [LOGO] ------------------------------------------------------------------------- For the year ended March 31, (In thousands)
2005 2004 2003 ---------- ---------- ---------- Net earnings ................................................................... $ 381 $ 2,704 $ 2,772 Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) on securities during the year, net of taxes (benefits) of $(655), $183, and $ 59 ........ (1,271) 367 118 Reclassification adjustment for realized gains included in earnings, net of taxes of $5 and $9 for the years ended March 31, 2004 and 2003 ......... -- (11) (17) Minimum pension liability adjustment, net of taxes (benefits) of $142 and $(142) for fiscal 2004 and 2003, respectively ............................. -- 275 (275) ---------- ---------- ---------- Comprehensive income (loss) .................................................... $ (890) $ 3,335 $ 2,598 ========== ========== ========== Accumulated comprehensive income (loss) ........................................ $ (792) $ 479 $ (152) ========== ========== ==========
The accompanying notes are an integral part of these statements. - --------------------------------------- 22 ------------------------------------- CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - ------------------------------------------------------------------------- [LOGO] For the years ended March 31, 2005, 2004, and 2003 (Dollars in thousands, except share data)
Other compre- Total Additional Shares Shares Treasury hensive stock- Common paid-in Retained acquired acquired stock - income holders' stock capital earnings by ESOP by MRP at cost (loss) equity -------- -------- --------- -------- -------- -------- -------- --------- Balance at March 31, 2002 ........... $ 2,641 $ 14,444 $ 10,121 $ -- $ -- $ (1,181) $ 22 $ 26,047 Stock options exercised ............. 3 13 -- -- -- -- -- 16 Reorganization and related common stock offering - net ............ (2,255) 19,751 -- (1,612) -- 1,181 -- 17,065 Net earnings for the year ended March 31, 2003 ............ -- -- 2,772 -- -- -- -- 2,772 Dividends declared of $.45 per share -- -- (1,063) -- -- -- -- (1,063) Minimum pension liability adjustment, net of related tax effects ...... -- -- -- -- -- -- (275) (275) Unrealized gains on securities designated as available for sale, net of related tax effects ...... -- -- -- -- -- -- 101 101 -------- -------- --------- -------- -------- -------- -------- --------- Balance at March 31, 2003 ........... 389 34,208 11,830 (1,612) -- -- (152) 44,663 Shares purchased for MRP ............ -- -- -- -- (1,142) -- -- (1,142) Stock options exercised ............. 2 59 -- -- -- -- -- 61 Amortization of stock benefit plans . -- 98 -- 156 -- -- -- 254 Net earnings for the year ended March 31, 2004 ............ -- -- 2,704 -- -- -- -- 2,704 Dividends declared of $.47 per share -- -- (1,807) -- -- -- -- (1,807) Minimum pension liability adjustment, net of related tax effects ...... -- -- -- -- -- -- 275 275 Purchase of treasury shares at cost . -- -- -- -- -- (1,803) -- (1,803) Unrealized gains on securities designated as available for sale, net of related tax effects ...... -- -- -- -- -- -- 356 356 -------- -------- --------- -------- -------- -------- -------- --------- Balance at March 31, 2004 ........... 391 34,365 12,727 (1,456) (1,142) (1,803) 479 43,561 Amortization of expense related to ESOP ............................ -- 104 -- 152 -- -- -- 256 Expense under Stock Option Plan, net -- 664 -- -- -- -- -- 664 Acceleration and amortization of Management Recognition Plan ..... -- -- -- -- 1,142 -- -- 1,142 Net earnings for the year ended March 31, 2005 ............ -- -- 381 -- -- -- -- 381 Dividends declared of $.48 per share -- -- (1,737) -- -- -- -- (1,737) Purchase of treasury shares at cost . -- -- -- -- -- (2,797) -- (2,797) Unrealized losses on securities Designated as available for sale, net of related tax effects ...... -- -- -- -- -- -- (1,271) (1,271) -------- -------- --------- -------- -------- -------- -------- --------- Balance at March 31, 2005 ........... $ 391 $ 35,133 $ 11,371 $ (1,304) $ -- $ (4,600) $ (792) $ 40,199 ======== ======== ========= ======== ======== ======== ======== =========
The accompany notes are an integral part of these statements. - --------------------------------------- 23 ------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS [LOGO] ------------------------------------------------------------------------- For the year ended March 31, (In thousands)
2005 2004 2003 ---------- ---------- ---------- Cash flows provided by (used in) operating activities: Net earnings for the year .................................................. $ 381 $ 2,704 $ 2,772 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 ....................... 1,244 1,409 480 Amortization of deferred loan origination fees ............................. (220) (512) (460) Depreciation and amortization .............................................. 601 507 555 Amortization of expense related to ESOP .................................... 256 254 -- Amortization and acceleration of Management Recognition Plan expense ....... 1,142 -- -- Expense under Stock Option Plan ............................................ 664 -- -- Gain on sale of loans ...................................................... (117) (87) (57) Gain on sale of mortgage-backed securities available for sale .............. -- (16) (26) Proceeds from sale of loans in the secondary market ........................ 6,843 6,285 4,055 Loans originated for sale in the secondary market .......................... (6,017) (6,203) (2,615) Provision for losses on loans .............................................. 430 173 91 Federal Home Loan Bank stock dividends ..................................... (181) (164) (177) Increase (decrease) in cash, net of acquisition, due to changes in: Accrued interest receivable on loans .................................... 72 147 205 Accrued interest receivable on mortgage-backed securities ............... (44) (20) (297) Accrued interest receivable on investments and interest-bearing deposits (390) (5) (63) Prepaid expenses and other assets ....................................... 273 (1,017) 167 Accrued interest payable ................................................ (5) (49) 12 Accounts payable and other liabilities .................................. (99) (267) 150 Federal income taxes Current ............................................................. (564) (288) (120) Deferred ............................................................ (256) 630 7 ---------- ---------- ---------- Net cash provided by operating activities ........................ 4,013 3,481 4,679 Cash flows provided by (used in) investing activities: Purchase of investment securities held to maturity ......................... (93) -- (13,953) Purchase of investment securities designated as available for sale ......... (35,547) (22,067) (25,649) Proceeds from maturity of investment securities held to maturity ........... 2,175 4,735 17,420 Proceeds from maturity of investments securities designated as available for sale ................................................... 2,516 22,088 8,573 Purchase of mortgage-backed securities held to maturity .................... -- -- (3,545) Purchase of mortgage-backed securities designated available for sale ....... (8,018) (55,526) (73,897) Principal repayments on mortgage-backed securities held to maturity ........ 1,825 5,255 7,368 Principal repayments on mortgage-backed securities designated as available for sale ........................................ 33,122 31,908 6,596 Proceeds from sale of mortgage-backed securities ........................... -- 4,373 4,594 Loan principal repayments .................................................. 52,517 89,107 80,362 Loan disbursements ......................................................... (50,178) (65,658) (58,616) Purchase of office premises and equipment .................................. (421) (431) (165) Purchase of bank-owned life insurance ...................................... -- (940) (5,000) Increase in cash surrender value of life insurance ......................... (260) (260) (121) Proceeds from sale of land and other real estate ........................... 311 172 8 Purchase of Federal Home Loan Bank stock ................................... -- -- (97) Net cash used in the aquisition of Stebbins Bancshares, Inc. ............... (1,314) -- -- ---------- ---------- ---------- Net cash provided by (used in) investing activities ................. (3,365) 12,756 (56,122) ---------- ---------- ---------- Net cash provided by (used in) operating and investing activities (balance carried forward) ........................................ 648 16,237 (51,443) ---------- ---------- ----------
- --------------------------------------- 24 ------------------------------------- - ------------------------------------------------------------------------- [LOGO] For the year ended March 31, (In thousands)
2005 2004 2003 ---------- ---------- ---------- Net cash provided by (used in) operating and investing activities (balance brought forward) ................................................ $ 648 $ 16,237 $ (51,443) Cash flows provided by (used in) financing activities: Net increase (decrease) in deposit accounts .................................. 3,946 (9,101) (26) Proceeds from Federal Home Loan Bank advances ................................ 15,000 -- 25,000 Repayments of Federal Home Loan Bank advances ................................ (5,000) -- -- Advances by borrowers for taxes and insurance ................................ (5) (95) (168) Reorganization and cash proceeds from related common stock offering - net ................................................ -- -- 17,065 Dividends paid on common stock ............................................... (1,737) (1,786) (831) Tax benefits related to employee stock plans ................................. -- 20 -- Proceeds from exercise of stock options ...................................... -- 61 16 Shares acquired by Management Recognition Plan ............................... -- (1,142) -- Purchase of treasury shares - at cost ........................................ (2,797) (1,803) -- ---------- ---------- ---------- Net cash provided by (used in) financing activities ........................ 9,407 (13,846) 41,056 ---------- ---------- ---------- Net increase (decrease) in cash and cash equivalents ........................... 10,055 2,391 (10,387) Cash and cash equivalents at beginning of year ................................. 19,887 17,496 27,883 ---------- ---------- ---------- Cash and cash equivalents at end of year ....................................... $ 29,942 $ 19,887 $ 17,496 ========== ========== ========== Supplemental disclosure of cash flow information: Cash paid during the year for: Federal income taxes ....................................................... $ 568 $ 630 $ 1,083 ========== ========== ========== Interest on deposits and borrowings ........................................ $ 6,721 $ 7,196 $ 9,157 ========== ========== ========== Supplemental disclosure of noncash investing and financing activities: Transfers from loans to real estate acquired through foreclosure ............. $ 268 $ 279 $ -- ========== ========== ========== Issuance of mortgage to facilitate sale of impaired loan collateral .......... $ -- $ -- $ 450 ========== ========== ========== Unrealized gains (losses) on securities designated as available for sale, net of related tax effects ................................................. $ (1,271) $ 356 $ 101 ========== ========== ========== Minimum pension liability adjustment, net of related tax effects ................................................. $ -- $ (275) $ 275 ========== ========== ========== Recognition of mortgage servicing rights in accordance with SFAS No. 140 ............................................ $ 54 $ 61 $ 24 ========== ========== ========== Dividends payable ............................................................ $ 428 $ 446 $ 232 ========== ========== ========== Stebbins acquisition, net of cash and cash equivalents acquired: Assets Securities ................................................................. $ 11,787 $ -- $ -- Loans, net ................................................................. 12,225 -- -- Other ...................................................................... 662 -- -- Goodwill ................................................................... 1,470 -- -- Liabilities assumed Deposits ................................................................... (24,810) -- -- Other liabilities .......................................................... (20) -- -- ---------- ---------- ---------- Net cash and cash equivalents paid at acquisition .......................... $ 1,314 $ -- $ -- ========== ========== ==========
The accompanying notes are an integral part of these statements. - --------------------------------------- 25 ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS [LOGO] ------------------------------------------------------------------------- March 31, 2005, 2004, and 2003 NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include Wayne Savings Bancshares, Inc. (the "Company") and its wholly-owned subsidiary Wayne Savings Community Bank ("Wayne Savings" or the "Bank"). Prior to the fiscal year ended March 31, 2003, a majority (52.5%) of the Company's shares were owned by Wayne Savings Bankshares M.H.C. ("Bankshares," "parent" or "M.H.C."), a mutual holding company, as defined under Office of Thrift Supervision ("OTS") regulations. In fiscal 2003, the Company completed a reorganization and related common stock offering which culminated with the M.H.C. merging with and into the Bank in a manner similarto a pooling-of-interests. 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 March 31, 2005, consolidated financial statements herein include the accounts of Stebbins Bancshares from the June 1, 2004, acquisition date through March 31, 2005. Intercompany transactions and balances are eliminated in the consolidated financial statements. The Bank conducts a general banking business in north central Ohio, which consists of attracting deposits from the general public and applying those funds to the origination of loans for residential, consumer and nonresidential purposes. The Bank's profitability is significantly dependent on its net interest income, which is the difference between interest income generated from interest-earning assets (i.e. loans and investments) and the interest expense paid on interest-bearing liabilities (i.e. customer deposits and borrowed funds). Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances. The level of interest rates paid or received by the Bank can be significantly influenced by a number of environmental factors, such as governmental monetary policy, that are outside of management's control. The financial information presented herein has been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and general accounting practices within the financial services industry. In preparing financial statements in accordance with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from such estimates. The following is a summary of the Company's significant accounting policies, which have been consistently applied in the preparation of the accompanying financial statements. 1. Investment Securities and Mortgage-Backed Securities The Company accounts for investment and mortgage-backed securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that investments be categorized as held-to-maturity, trading, or available for sale. Securities classified as held-to-maturity are carried at cost only if the Company has the positive intent and ability to hold these securities to maturity. Trading securities and securities designated as available for sale are carried at fair value with resulting unrealized gains or losses recorded to operations or stockholders' equity, respectively. Realized gains or losses on sales of securities are recognized using the specific identification method. 2. Loans Receivable Loans held in portfolio are stated at the principal amount outstanding, adjusted for deferred loan origination fees, the allowance for loan losses, and premiums and discounts on loans purchased and sold. Premiums and discounts on loans purchased and sold are amortized and accreted to operations using the interest method over the average life of the underlying loans. Interest is accrued as earned unless the collectibility of the loan is in doubt. Uncollectible interest on loans that are contractually past due is charged off, or an allowance is established based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments has returned to normal, in which case the loan is returned to accrual status. The Bank recognizes rights to service mortgage loans for others pursuant to SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." In accordance with SFAS No. 140, an institution that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells those loans with servicing rights retained must allocate some of the cost of the loans to the mortgage servicing rights. The Bank recognized $54,000, $61,000 and $24,000 of pre-tax gains on sales of loans related to capitalized mortgage servicing rights during the fiscal years ended March 31, 2005, 2004 and 2003, respectively. SFAS No. 140 requires that capitalized mortgage servicing rights be assessed for impairment. Impairment is measured - --------------------------------------- 26 ------------------------------------- - ------------------------------------------------------------------------- [LOGO] based on fair value. The mortgage servicing rights recorded by the Bank, calculated in accordance with the provisions of SFAS No. 140, were segregated into pools for valuation purposes, using as pooling criteria the loan term and coupon rate. Once pooled, each grouping of loans was evaluated on a discounted earnings basis to determine the present value of future earnings that a purchaser could expect to realize from each portfolio. Earnings were projected from a variety of sources including loan servicing fees, interest earned on float, net interest earned on escrows, miscellaneous income and costs to service the loans. The present value of future earnings is the "economic" value for the pool, i.e., the net realizable present value to an acquirer of the acquired servicing. The Bank recorded amortization related to mortgage servicing rights totaling approximately $61,000, $164,000 and $164,000 for the years ended March 31, 2005, 2004 and 2003, respectively. At March 31, 2005 and 2004, the carrying value of the Bank's mortgage servicing rights, which approximated fair value, totaled $274,000 and $281,000, respectively. Loans held for sale are carried at the lower of cost or market, determined in the aggregate. In computing cost, deferred loan origination fees are deducted from the principal balances of the related loans. There were no loans identified as held for sale at either March 31, 2005, or March 31, 2004. 3. Loan Origination Fees The Bank accounts for loan origination fees in accordance with SFAS No. 91 "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." Pursuant to the provisions of SFAS No. 91, origination fees received from loans, net of certain direct origination costs, are deferred and amortized to interest income using the level-yield method, giving effect to actual loan prepayments. Additionally, SFAS No. 91 generally limits deferred loan origination costs to the direct costs attributable to the origination of a loan, i.e. principally actual personnel costs. Fees received for loan commitments that are expected to be drawn upon, based on the Bank's experience with similar commitments, are deferred and amortized over the life of the loan using the level-yield method. Fees for other loan commitments are deferred and amortized over the loan commitment period on a straight-line basis. 4. Allowance for Loan Losses It is the Bank's policy to provide valuation allowances for losses inherent within the loan portfolio that are both probable and can be reasonably estimated. When the collection of a loan becomes doubtful, or otherwise troubled, the Bank records a charge-off equal to the difference between the fair value of the property securing the loan and the loan's carrying value. In providing valuation allowances, costs of holding real estate, including the cost of capital, are considered. Major loans (including development projects) and major lending areas are reviewed periodically to determine potential problems at an early date. The allowance for loan losses is increased by charges to earnings and decreased by charge-offs (net of recoveries). The Bank accounts for impaired loans in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." This Statement requires that impaired loans be measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate or, as an alternative, at the loan's observable market price or fair value of the collateral. A loan is defined under SFAS No. 114 as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In applying the provisions of SFAS No. 114, the Bank considers investment in one-to-four family residential loans and consumer installment loans to be homogeneous and therefore excluded from separate identification for evaluation of impairment. With respect to the Bank's investment in multi-family, commercial and nonresidential loans, and the evaluation of impairment thereof, such loans are collateral dependent and, as a result, are carried as a practical expedient at the lower of cost or fair value. It is the Bank's policy to charge off unsecured credits that are more than ninety days delinquent. Similarly, collateral dependent loans are evaluated for impairment at the time it becomes possible that the Bank will not collect all contractual amounts due. Generally, this analysis is performed before a loan becomes ninety days delinquent. Information with respect to loans defined as impaired under SFAS No. 114 is summarized below: 2005 2004 2003 ------ ------ ------ (In thousands) Investment in impaired loans ....................... $ -- $ -- $1,811 Impaired loans with no measurement of loss ......... -- -- 1,811 Impaired loans with measurement of loss ............ -- -- -- Allocated allowance for loan losses ................ -- -- -- Average impaired loans ............................. -- 906 2,412 Charge-off of principal related to impaired loans .. -- -- 84 - --------------------------------------- 27 ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.) [LOGO] ------------------------------------------------------------------------- March 31, 2005, 2004, and 2003 During the time a loan is deemed impaired, the Bank records interest income using the cash method of accounting. There was no interest income recorded on impaired loans in fiscal 2005. Interest income recorded on impaired loans totaled approximately $249,000 and $24,000 for the fiscal years ended March 31, 2004 and 2003. 5. Office Premises and Equipment Office premises and equipment are carried at cost and include expenditures which extend the useful lives of existing assets. Maintenance, repairs and minor renewals are expensed as incurred. For financial reporting, depreciation and amortization are provided on the straight-line method over the remaining useful lives of the assets, estimated to be twenty to fifty-five years for buildings and improvements, five to ten years for furniture and equipment, ten to twenty years for leasehold improvements, and forty years for safe deposit boxes. An accelerated method is used for tax reporting purposes. 6. Real Estate Acquired Through Foreclosure Real estate acquired through foreclosure is carried at the lower of the loan's unpaid principal balance (cost) or fair value less estimated selling expenses at the date of acquisition. Real estate loss provisions are recorded if the properties' fair value subsequently declines below the value determined at the recording date. In determining the lower of cost or fair value at acquisition, costs relating to development and improvement of property are capitalized. Costs relating to holding real estate acquired through foreclosure, net of rental income, are charged against earnings as incurred. 7. Federal Income Taxes The Company accounts for federal income taxes pursuant to SFAS No. 109 "Accounting for Income Taxes." In accordance with SFAS No. 109, a deferred tax liability or deferred tax asset is computed by applying the current statutory tax rates to net taxable or deductible temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements that will result in net taxable or deductible amounts in future periods. Deferred tax assets are recorded only to the extent that the amount of net deductible temporary differences or carryforward attributes may be utilized against current period earnings, carried back against prior years' earnings, offset against taxable temporary differences reversing in future periods, or utilized to the extent of management's estimate of future taxable income. A valuation allowance is provided for deferred tax assets to the extent that the value of net deductible temporary differences and carryforward attributes exceeds management's estimates of taxes payable on future taxable income. Deferred tax liabilities are provided on the total amount of net temporary differences taxable in the future. The Company's principal temporary differences between pretax financial income and taxable income result primarily from the different methods of accounting for deferred loan origination fees, Federal Home Loan Bank stock dividends, certain components of retirement expense, general loan loss allowances, percentage of earnings bad debt deductions and mortgage servicing rights. A temporary difference is also recognized for depreciation expense computed using accelerated methods for federal income tax purposes. 8. Earnings Per Share Basic earnings per common share is computed based upon the weighted-average number of common shares outstanding during the year, reduced by unallocated shares in the Employee Stock Ownership Plan ("ESOP") totaling 132,925 and 145,209 shares for the fiscal years ended March 31, 2005 and 2004. Diluted earnings per common share include the dilutive effects of additional potential common shares issuable under the Company's Stock Option Plan. For each of the years presented, there were no shares excluded from the diluted earnings per share calculation because the related options were anti-dilutive. The computations are as follows: 2005 2004 2003 --------- --------- --------- Weighted-average common shares outstanding (basic) 3,571,887 3,738,686 3,887,881 Dilutive effect of assumed exercise of stock options 31,354 12,499 14,196 --------- --------- --------- Weighted-average common shares outstanding (diluted) 3,603,241 3,751,185 3,902,077 ========= ========= ========= 9. Stock Option and Benefit Plans The Company has a 1993 incentive Stock Option Plan that provided for the issuance of 196,390 adjusted shares of authorized shares of common stock with 10,123 options outstanding at March 31, 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 of authorized common stock. As of March 31, 2005, all options under the 2004 Plan have been granted and expire in fiscal 2014. 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 to stock option awards based on the fair value of the option award on the grant date. Compensation cost is then - --------------------------------------- 28 ------------------------------------- - ------------------------------------------------------------------------- [LOGO] recognized over the vesting period. Subsequent to 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 represents a new grant. Accordingly, in accordance with the modified prospective application method under SFAS No. 123(R), the Company recognized compensation costs of $664,000, representing the fair value of the option awards at the date of modification. This compensation cost represented an after-tax charge to earnings of $424,000, or $.12 per diluted share in fiscal 2005. The Company accounted for its stock option plans in fiscal 2004 and 2003 pursuant to 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. Alternatively, SFAS No. 123 permitted companies to continue the account for stock options using APB Opinion No. 25, "Accounting for Stock Issued to Employees." Entities that continued 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 option expense pursuant to APB Opinion No. 25. In accordance with APB Opinion No. 25, no compensation cost has been recognized for the plans in fiscal 2004 and 2003. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards under the plans consistent with the accounting method utilized in SFAS No. 123(R), the Company's net earnings and earnings per share would have been reported in the manner presented below: 2004 2003 ---------- ---------- Net earnings .............................. $ 2,704 $ 2,772 Stock-based compensation, net of tax .... (106) (21) ---------- ---------- Pro forma net earnings .................. $ 2,598 $ 2,751 ========== ========== Earnings per share Basic ................................... $ .72 $ .71 Stock-based compensation, net of tax .... (.03) -- ---------- ---------- Pro forma earnings per share ............ $ .69 $ .71 ========== ========== Diluted ................................. $ .72 $ .71 Stock-based compensation, net of tax .... (.03) (.01) ---------- ---------- Pro forma earnings per share ............ $ .69 $ .70 ========== ========== The following information applies to options outstanding at March 31, 2005: Number outstanding ....................................... 214,204 Range of exercise prices ............................ $11.67 - $ 13.95 Weighted-average exercise price .......................... $ 13.84 Weighted-average remaining contractual life .............. 9.00 At March 31, 2005, 214,204 of the stock options are subject to exercise at the discretion of the grantees and 10,123 expire in fiscal 2006, while the remaining 204,081 options are also subject to exercise and will expire in fiscal 2014. A summary of the status of the Company's stock option plans as of March 31, 2005, 2004 and 2003, and changes during the years ending on those dates is presented below: - --------------------------------------------------------------------------------
2005 2004 2003 -------------------- -------------------- -------------------- Exercise Exercise Exercise Shares Price Shares Price Shares Price -------- -------- -------- -------- -------- -------- Outstanding at beginning of year 214,204 $ 13.84 28,666 $ 6.26 23,378 $ 3.31 Granted 163,265 13.95 204,081 13.95 10,123 11.67 Exercised -- -- (18,543) 3.31 (4,835) 3.31 Forfeited (163,265) (13.95) -- -- -- -- -------- -------- -------- -------- -------- -------- Outstanding at end of year 214,204 $ 13.84 214,204 $ 13.84 28,666 $ 6.26 ======== ======== ======== ======== ======== ======== Options exercisable at year-end 214,204 13.84 10,123 $ 11.67 28,666 $ 6.26 ======== ======== ======== ======== ======== ======== Fair value of options granted $ 4.07 $ 3.93 $ 3.17 ======== ======== ========
- --------------------------------------- 29 ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.) [LOGO] ------------------------------------------------------------------------- March 31, 2005, 2004, and 2003 The fair value of each option grant was estimated on the date of grant using the Black-Scholes option pricing model. The following assumptions were used for grants in each of the respective years: 2005 2004 2003 -------- -------- -------- Dividend yield .......................... 4.5% 3.3% 3.8% Expected volatility ..................... 27.3 28.8 32.4 Expected life in years .................. 9 10 10 In connection with conversion to stock form, the Company implemented a Management Recognition Plan and an ESOP. The Management Recognition Plan granted share awards to certain members of management and the directorate. The value of such awards totaled $1.1 million at acquisition and was originally scheduled to vest over a five year period. The Company recognized scheduled expense under the plan of $231,000 and $173,000 in fiscal 2005 and 2004, and accelerated the vesting of the remaining awards in fiscal 2005 at a cost of $738,000. Additionally, the Company initiated an ESOP in fiscal 2003 that provided for the purchase of 163,265 shares in the Company's conversion offering. The Company recognized expense under the ESOP of $256,000 and $206,000 in fiscal 2005 and 2004, allocating 15,695 and 14,645 shares, respectively. At March 31,2005, 132,925 ESOP shares remain unallocated. 10. Cash and Cash Equivalents For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold, and interest-bearing deposits due from other financial institutions with original maturities of less than three months. 11. Fair Value of Financial Instruments SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of the fair value of financial instruments, both assets and liabilities whether or not recognized in the consolidated statements of financial condition, for which it is practicable to estimate that value. For financial instruments where quoted market prices are not available, fair values are based on estimates using present value and other valuation methods. The methods used are greatly affected by the assumptions applied, including the discount rate and estimates of future cash flows. Therefore, the fair values presented may not represent amounts that could be realized in an exchange for certain financial instruments. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments at March 31, 2005 and 2004: Cash and cash equivalents: The carrying amounts presented in the consolidated statements of financial condition for cash and cash equivalents are deemed to approximate fair value. Interest-bearing deposits in other financial institutions: The carrying amounts presented in the consolidated statements of financial condition for certificates of deposit in other financial institutions are deemed to approximate fair value. Investment and mortgage-backed securities: For investment and mortgage-backed securities, fair value is deemed to equal the quoted market price. Loans receivable: The loan portfolio has been segregated into categories with similar characteristics, such as one-to-four family residential, multi-family residential and nonresidential real estate. These loan categories were further delineated into fixed-rate and adjustable-rate loans. The fair values for the resultant loan categories were computed via discounted cash flow analysis, using current interest rates offered for loans with similar terms to borrowers of similar credit quality. For loans on deposit accounts and consumer and other loans, fair values were deemed to equal the historic carrying values. The historical carrying amount of accrued interest on loans is deemed to approximate fair value. Federal Home Loan Bank stock: The carrying amount presented in the consolidated statements of financial condition is deemed to approximate fair value. Deposits: The fair value of NOW accounts, passbook and club accounts, money market deposits and advances by borrowers is deemed to approximate the amount payable on demand. Fair values for fixed-rate certificates of deposit have been estimated using a discounted cash flow calculation using the interest rates currently offered for deposits of similar remaining maturities. Advances from Federal Home Loan Bank: The fair value of these advances is estimated using the rates currently offered for similar advances of similar remaining maturities or, when available, quoted market prices. Commitments to extend credit: For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. At March 31, 2005, the fair value of loan commitments was not material. - --------------------------------------- 30 ------------------------------------- - ------------------------------------------------------------------------- [LOGO] Based on the foregoing methods and assumptions, the carrying value and fair value of the Company's financial instruments at March 31 are as follows:
2005 2004 ----------------------- ----------------------- Carrying Fair Carrying Fair value value value value ---------- ---------- ---------- ---------- (In thousands) Financial assets Cash and cash equivalents and interest-bearing deposits .. $ 29,942 $ 29,942 $ 19,887 $ 19,887 Investment securities .................................... 72,856 72,945 31,582 32,376 Mortgage-backed securities ............................... 60,352 60,371 88,428 88,455 Loans receivable ......................................... 213,627 214,238 205,443 210,124 Federal Home Loan Bank stock ............................. 4,386 4,386 4,205 4,205 ---------- ---------- ---------- ---------- $ 381,163 $ 381,882 $ 349,545 $ 355,047 ========== ========== ========== ========== Financial liabilities Deposits ................................................. $ 320,586 $ 318,534 $ 291,830 $ 293,575 Advances from the Federal Home Loan Bank ................. 40,000 39,533 30,000 30,966 Advances by borrowers for taxes and insurance ............ 612 612 617 617 ---------- ---------- ---------- ---------- $ 361,198 $ 358,679 $ 322,447 $ 325,158 ========== ========== ========== ==========
12. Advertising Advertising costs are expensed when incurred. The Company's advertising expense totaled $163,000, $132,000 and $151,000 for the fiscal years ended March 31, 2005, 2004 and 2003 respectively. 13. Reclassifications Certain prior year amounts have been reclassified to conform to the March 31, 2005 consolidated financial statement presentation. NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES Carrying values and estimated fair values of investment securities at March 31 are summarized as follows:
March 31, 2005 ------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized Fair cost gains losses value ---------- ---------- ---------- ---------- Held-to-maturity (In thousands) Corporate bonds and notes ................................... $ 10,021 $ 124 $ 54 $ 10,091 U.S. Government and agency obligations ...................... 1,796 7 -- 1,803 Municipal obligations ....................................... 195 12 -- 207 ---------- ---------- ---------- ---------- $ 12,012 $ 143 $ 54 $ 12,101 ========== ========== ========== ========== Available for sale Corporate bonds and notes ................................... $ 1,011 $ 54 $ -- $ 1,065 U.S. Government and agency obligations ...................... 50,209 1 767 49,443 Municipal obligations ....................................... 10,343 86 93 10,336 ---------- ---------- ---------- ---------- $ 61,563 $ 141 $ 860 $ 60,844 ========== ========== ========== ==========
March 31, 2004 ------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized Fair cost gains losses value ---------- ---------- ---------- ---------- Held-to-maturity (In thousands) Corporate bonds and notes ................................... $ 10,054 $ 704 $ -- $ 10,758 U.S. Government and agency obligations ...................... 3,868 76 3 3,941 Municipal obligations ....................................... 114 17 -- 131 ---------- ---------- ---------- ---------- $ 14,036 $ 797 $ 3 $ 14,830 ========== ========== ========== ========== Available for sale Corporate bonds and notes ................................... $ 1,516 $ 144 $ -- $ 1,660 U.S. Government and agency obligations ...................... 11,060 261 -- 11,321 Municipal obligations ....................................... 4,427 138 -- 4,565 ---------- ---------- ---------- ---------- $ 17,003 $ 543 $ -- $ 17,546 ========== ========== ========== ==========
- -------------------------------------- 31 -------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.) [LOGO] ------------------------------------------------------------------------- March 31, 2005, 2004, and 2003 The amortized cost and estimated fair value of investment securities at March 31, 2005, by term to maturtity are shown below.
Amortized Estimated cost fair value ---------- ---------- Held-to-maturity (In thousands) Due in one year or less ..................................... $ 6,032 $ 6,121 Due within one to three years ............................... 4,989 4,976 Due in over five years ...................................... 991 1,004 ---------- ---------- $ 12,012 $ 12,101 ========== ========== Available for sale Due in one year or less ..................................... $ 3,997 $ 3,974 Due within one to three years ............................... 32,711 32,380 Due within three to five years .............................. 12,856 12,509 Due in over five years ...................................... 11,999 11,981 ---------- ---------- $ 61,563 $ 60,844 ========== ==========
The Company had pledged $7.8 million and $2.3 million in investment securities to secure public deposits at March 31, 2005 and 2004, respectively. The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of mortgage-backed securities at March 31, 2005 and 2004, including those designated as available for sale, are summarized as follows:
2005 ------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized Fair cost gains losses value ---------- ---------- ---------- ---------- (In thousands) Held-to-maturity Federal Home Loan Mortgage Corporation participation certificates .............................. $ 604 $ 9 $ -- $ 613 Government National Mortgage Association participation certificates .............................. 1,014 2 5 1,011 Federal National Mortgage Association participation certificates .............................. 1,010 13 -- 1,023 ---------- ---------- ---------- ---------- $ 2,628 $ 24 $ 5 $ 2,647 ========== ========== ========== ========== Available for sale Federal Home Loan Mortgage Corporation participation certificates ............................. $ 23,043 $ 55 $ 265 $ 22,833 Government National Mortgage Association participation certificates ........................... 2,474 3 22 2,455 Federal National Mortgage Association participation certificates ............................. 30,686 92 334 30,444 Private Issue Mortgage Association participation certificates ............................. 2,001 -- 9 1,992 ---------- ---------- ---------- ---------- $ 58,204 $ 150 $ 630 $ 57,724 ========== ========== ========== ==========
2004 ------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized Fair cost gains losses value ---------- ---------- ---------- ---------- (In thousands) Held-to-maturity Federal Home Loan Mortgage Corporation participation certificates ............................. $ 1,190 $ 16 $ -- $ 1,206 Government National Mortgage Association participation certificates ............................. 1,587 4 12 1,579 Federal National Mortgage Association participation certificates ............................. 1,706 20 1 1,725 ---------- ---------- ---------- ---------- $ 4,483 $ 40 $ 13 $ 4,510 ========== ========== ========== ========== Available for sale Federal Home Loan Mortgage Corporation participation certificates ............................. $ 32,153 $ 160 $ 118 $ 32,195 Government National Mortgage Association participation certificates ............................. 1,753 9 3 1,759 Federal National Mortgage Association participation certificates ............................. 47,553 319 212 47,660 Private Issue Mortgage Association participation certificates ............................. 2,303 28 -- 2,331 ---------- ---------- ---------- ---------- $ 83,762 $ 516 $ 333 $ 83,945 ========== ========== ========== ==========
The amortized cost of mortgage-backed securities, including those designated as available for sale at March 31, 2005, by contractual term to maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may generally prepay obligations without prepayment penalties. March 31, 2005 Amortized Cost (In thousands) Held-to-maturity Due within three years $ 9 Due after three years 2,619 --------- $ 2,628 ========= Available for sale Due within three years $ 4,366 Due after three years 53,838 --------- $ 58,204 ========= Proceeds from sales of mortgage-backed securities during the year ended March 31, 2004, totaled $4.4 million resulting in gross realized gains of $16,000. - -------------------------------------- 32 -------------------------------------- - --------------------------------------------------------------------------[LOGO] UNREALIZED LOSSES ON SECURITIES
Less than 12 Months 12 Months or Longer ------------------------------------- ------------------------------------ Number of Fair Unrealized Number of Fair Unrealized Investments Value Losses Investments Value Losses ----------- ---------- ---------- ----------- ---------- ---------- (Dollars in thousands) Municipal obligations ...... 5 $ 3,339 $ 45 1 $ 921 $ 48 U.S. Government agency obligations ............. 43 43,412 717 2 1,948 50 Corporate bonds and notes .. 1 2,466 54 -- -- -- Mortgage-backed securities . 29 30,357 356 13 10,473 279 ----------- ---------- ---------- ----------- ---------- ---------- Total temporarily impaired securities .............. 78 $ 79,574 $ 1,172 16 $ 13,342 $ 377 =========== ========== ========== =========== ========== ==========
Total ------------------------------------- Number of Fair Unrealized Investments Value Losses ----------- ---------- ---------- Municipal obligations ...... 6 $ 4,260 $ 93 U.S. Government agency obligations ............ 45 45,360 767 Corporate bonds and notes .. 1 2,466 54 Mortgage-backed securities . 42 40,830 635 ----------- ---------- ---------- Total temporarily impaired securities ............. 94 $ 92,916 $ 1,549 =========== ========== ========== Management has the intent and ability to hold these securities for the foreseeable future and the decline in the fair value is primarily due to an increase in market interest rates. The fair values are expected to recover as securities approach maturity dates. - -------------------------------------------------------------------------------- NOTE C -- LOANS RECEIVABLE The composition of the loan portfolio at March 31 is as follows: 2005 2004 ---------- ----------- (In thousands) Residential real estate - 1 to 4 family . $ 157,658 $ 171,736 Residential real estate - multi-family .. 7,872 6,800 Residential real estate - construction .. 4,053 2,914 Nonresidential real estate and land ..... 29,187 18,439 Commercial .............................. 14,075 6,471 Consumer and other ...................... 4,306 3,156 ---------- ----------- 217,151 209,516 Less: Undisbursed portion of loans in process .......................... 1,638 2,579 Deferred loan origination fees ...... 512 679 Allowance for loan losses ........... 1,374 815 ---------- ----------- $ 213,627 $ 205,443 ========== =========== As depicted above, the Bank's lending efforts have historically focused on one-to-four family residential and multi-family residential real estate loans, which comprise approximately $167.9 million, or 79%, of the total loan portfolio at March 31, 2005, and $178.9 million, or 87%, of the total loan portfolio at March 31, 2004. Generally, such loans have been underwritten on the basis of no more than an 80% loan-to-value ratio, which has historically provided the Company with adequate collateral coverage in the event of default. Nevertheless, the Bank, as with any lending institution, is subject to the risk that real estate values could deteriorate in the primary lending area of north central Ohio, thereby impairing collateral values. However, management is of the belief that residential real estate values in the Company's primary lending area are presently stable. As discussed previously, Wayne Savings has sold whole loans and participating interests in loans in the secondary market, retaining servicing on the loans sold. Loans sold and serviced for others totaled approximately $34.0 million, $35.3 million and $47.9 million at March 31, 2005, 2004 and 2003, respectively. In the normal course of business, the Bank has made loans to directors, officers and their related business interests. Related party loans are made on the same terms that are widely available to other employees, as long as the director or executive officer is not given preferential treatment compared to other participating employees. The aggregate dollar amount of loans outstanding to directors, officers and their related business interests totaled approximately $2.8 million, $2.7 million and $2.6 million at March 31, 2005, 2004 and 2003, respectively. - -------------------------------------- 33 -------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.) [LOGO] ------------------------------------------------------------------------- March 31, 2005, 2004, and 2003 NOTE D - ALLOWANCE FOR LOAN LOSSES The activity in the allowance for loan losses is summarized as follows for the years ended March 31: 2005 2004 2003 -------- -------- -------- (in thousands) Balance at beginning of year .. $ 815 $ 678 $ 730 Provision for losses on loans . 430 173 91 Stebbins acquisition .......... 230 -- -- Charge-offs of loans .......... (126) (65) (158) Recovery of loans previously charged off ............... 25 29 15 -------- -------- -------- Balance at end of year ........ $ 1,374 $ 815 $ 678 ======== ======== ======== As of March 31, 2005, the Bank's allowance for loan losses was comprised solely of a general loan loss allowance, which is includible as a component of regulatory risk-based capital. Nonaccrual, nonperforming and impaired loans totaled approximately $906,000, $747,000 and $2.5 million at March 31, 2005, 2004 and 2003, respectively. During the years ended March 31, 2005, 2004 and 2003, interest income of approximately $40,000, $37,000 and $208,000, respectively, would have been recognized had nonaccrual loans been performing in accordance with contractual terms. NOTE E - OFFICE PREMISES AND EQUIPMENT Office premises and equipment at March 31 are comprised of the following: 2005 2004 ---------- ---------- (in thousands) Land and improvements .................... $ 1,654 $ 1,656 Office buildings and improvements ........ 7,294 6,622 Furniture, fixtures and equipment ........ 3,776 3,491 Leasehold improvements ................... 356 356 ---------- ---------- 13,080 12,125 Less accumulated depreciation and amortization ..................... 4,158 3,383 ---------- ---------- $ 8,922 $ 8,742 ========== ========== NOTE F - DEPOSITS Deposits consist of the following major classifications at March 31: 2005 2004 ---------- ---------- Deposit type and weighted- (in thousands) average interest rate NOW accounts 2005 - .27% .......................... $ 53,060 2004 - .33% .......................... $ 42,679 Savings accounts 2005 - .79% .......................... 82,184 2004 - .78% .......................... 82,093 Money Market Investor 2005 - 1.34% ......................... 18,097 2004 - .84% .......................... 11,893 ---------- ---------- Total demand, transaction and savings account deposits ............. 153,341 136,665 Certificates of deposit Original maturities of: Less than 12 months 2005 - 1.99% ...................... 42,483 2004 - 1.01% ...................... 15,841 12 months to 24 months 2005 - 1.97% ...................... 24,438 2004 - 1.59% ...................... 43,545 25 months to 36 months 2005 - 3.02% ...................... 16,039 2004 - 3.49% ...................... 17,860 More than 36 months 2005 - 4.39% ...................... 53,183 2004 - 4.49% ...................... 42,781 Jumbo 2005 - 3.24% ...................... 31,102 2004 - 3.29% ...................... 35,138 ---------- ---------- Total certificates of deposit ............ 167,245 155,165 ---------- ---------- Total deposit accounts ................... $ 320,586 $ 291,830 ========== ========== - -------------------------------------- 34 -------------------------------------- - ------------------------------------------------------------------------- [LOGO] At March 31, 2005 and 2004, the Bank had certificates of deposit with balances in excess of $100,000 totaling $34.4 million and $48.7 million, respectively. Interest expense on deposits for the years ended March 31 is summarized as follows: 2005 2004 2003 --------- --------- --------- (In thousands) Savings accounts .......................... $ 653 $ 688 $ 1,474 NOW and money market deposit accounts .... 383 269 540 Certificates of deposit ................... 4,648 4,942 6,418 --------- --------- --------- $ 5,684 $ 5,899 $ 8,432 ========= ========= ========= Maturities of outstanding certificates of deposit at March 31 are summarized as follows: 2005 2004 ---------- ---------- (In thousands) Less than one year ........................ $ 91,507 $ 86,381 One to three years ........................ 56,360 45,051 Over three years .......................... 19,378 23,733 ---------- ---------- $ 167,245 $ 155,165 ========== ========== NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank were collateralized at March 31, 2005 and 2004 by pledges of certain residential mortgage loans totaling $50.0 million and $37.5 million, respectively, and the Bank's investment in Federal Home Loan Bank stock, are summarized as follows: Interest Maturing in year rate ending March 31, 2005 2004 ---------- ---------- (Dollars in thousands) 5.07% - 5.29% 2005 $ -- $ 5,000 Floating rate - 2.95% 2006 15,000 -- 3.13% - 3.36% 2007 7,500 7,500 3.51% - 3.61% 2008 5,000 5,000 4.01% 2009 2,500 2,500 4.34% 2010 2,500 2,500 4.60% - 4.87% 2011 and thereafter 7,500 7,500 ---------- ---------- $ 40,000 $ 30,000 ========== ========== Weighted-average interest rate 3.59% 4.15% ========== ========== NOTE H - FEDERAL INCOME TAXES The provision for federal income taxes (benefits) at the 34% statutory composite tax rate is as follows: 2005 2004 2003 --------- --------- --------- (In thousands) Federal income taxes computed at expected 34% statutory rate .................... $ 101 $ 1,312 $ 1,356 Cash surrender value of life insurance ............................. (88) (88) (41) Tax-exempt obligations, net ............... (129) (80) (102) Other ..................................... 31 10 4 --------- --------- --------- Federal income tax provision (benefits) per consolidated financial statements ..... $ (85) $ 1,154 $ 1,217 ========= ========= ========= The composition of the Company's net deferred tax liability at March 31 is as follows: 2005 2004 ---------- ---------- (In thousands) Taxes (payable) refundable on temporary differences at statutory rate: Deferred tax assets Deferred loan origination fees ....... $ 174 $ 3 General loan loss allowance .......... 467 277 Unrealized losses on securities designated as available for sale . 408 -- Reserve for uncollected interest ..... 59 14 Stock option expense ................. 240 -- Other ................................ 16 61 ---------- ---------- Deferred tax assets .................. 1,364 355 ---------- ---------- Deferred tax liabilities Pension .............................. (306) (147) Federal Home Loan Bank stock dividends .................. (1,000) (938) Book/tax depreciation differences .... (257) (202) Financed loan fees ................... (89) -- Unrealized gains on securities designated as available for sale . -- (247) Bad debt deduction ................... (16) (40) Mortgage servicing rights ............ (97) (93) ---------- ---------- Deferred tax liabilities ............. (1,765) (1,667) ---------- ---------- Total deferred tax liability ............ $ (401) $ (1,312) ========== ========== - -------------------------------------- 35 -------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.) [LOGO] ------------------------------------------------------------------------- March 31, 2005, 2004, and 2003 Prior to fiscal 1997, Wayne Savings was allowed a special bad debt deduction based on a percentage of earnings, generally limited to 8% of otherwise taxable income and subject to certain limitations based on aggregate loans and deposit account balances at the end of the year. This cumulative percentage of earnings bad debt deduction totaled approximately $2.7 million as of March 31, 2005. If the amounts that qualified as deductions for federal income taxes are later used for purposes other than bad debt losses, including distributions in liquidation, such distributions will be subject to federal income taxes at the then current corporate income tax rate. The amount of unrecognized deferred tax liability relating to the cumulative bad debt deduction was approximately $918,000 at March 31, 2005. During fiscal 2005, the Company settled all matters related to the IRS's examination of its 1999 federal income tax return without material consequence. NOTE I - COMMITMENTS The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers, including commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated statements of financial condition. The contract or notional amounts of the commitments reflect the extent of the Company's involvement in such financial instruments. The Company's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as those utilized for on-balance-sheet instruments. At March 31, 2005, the Company had total outstanding commitments of approximately $2.1 million to originate loans, of which $1.9 million were comprised of fixed-rate loans at rates ranging from 5.25% to 6.625% and a $141,000, 5.375% adjustable rate loan. The Bank also had loans in process of $1.6 million at March 31, 2005, consisting of $1.4 million of one-to-four family loans and $177,000 on residential real estate loans. The Company had unused lines of credit outstanding under home equity loans of $18.0 million at March 31, 2005. The Company also had $115,000 unused lines of credit outstanding under overdrafts at March 31, 2005. Additionally, the Company had unused lines of credit under commercial loans of $10.7 million at March 31, 2005 and 2004. The Company had outstanding letters of credit of $262,000 at March 31, 2005. At March 31, 2005, the Company had outstanding commitments to purchase $4.0 million of mortgage-backed securities, $2.0 million of available for sale investment securities and a commitment to sell $2.8 million of mortgage-backed securities. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral on loans may vary but the preponderance of loans granted generally includes a mortgage interest in real estate as security. The Company leases certain branch banking facilities under operating leases. The minimum annual lease payments over the initial lease term are as follows: Fiscal year ended (In thousands) - ----------------- -------------- 2006 ..................................... $ 65 2007 ..................................... 49 2008 ..................................... 30 2009 ..................................... 35 Thereafter ............................... 35 ------ Total .................................... $ 214 ====== The Company incurred rental expense under operating leases totaling approximately $70,000, $68,000 and $68,000 for the fiscal years ended March 31, 2005, 2004 and 2003, respectively. There were no material contingent liabilities at March 31, 2005. - -------------------------------------- 36 -------------------------------------- - ------------------------------------------------------------------------- [LOGO] NOTE J - REGULATORY CAPITAL The Bank is subject to minimum regulatory capital standards promulgated by the OTS. Failure to meet minimum capital requirements can initiate certain mandatory -and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors. The minimum capital standards of the OTS generally require the maintenance of regulatory capital sufficient to meet each of three tests, hereinafter described as the tangible capital requirement, the core capital requirement and the risk-based capital requirement. The tangible capital requirement provides for minimum tangible capital (defined as stockholders' equity less all intangible assets) equal to 1.5% of adjusted total assets. The core capital requirement provides for minimum core capital (tangible capital plus certain forms of supervisory goodwill and other qualifying intangible assets) generally equal to 4.0% of adjusted total assets except for those associations with the highest examination rating and acceptable levels of risk. The risk-based capital requirement provides for the maintenance of core capital plus general loss allowances equal to 8.0% of risk-weighted assets. In computing risk-weighted assets, the Bank multiplies the value of each asset on their statement of financial condition by a defined risk-weighting factor, e.g. one- to four-family residential loans carry a risk-weighted factor of 50%. As of March 31, 2005, management believes that the Bank met all capital adequacy requirements to which they were subject. As of the most recent examination date, the Bank was advised by the OTS that they met the definition of a "well capitalized" institution. The Bank's management believes that, under the current regulatory capital regulations, the Bank will continue to meet its minimum capital requirements in the foreseeable future. However, events beyond the control of the Bank, such as increased interest rates or a downturn in the economy in the Bank's market area, could adversely affect future earnings and, consequently, the ability to meet future minimum regulatory capital requirements. The Bank is subject to regulations imposed by the OTS regarding the amount of capital distributions payable to the Company. Generally, the Bank's payment of dividends is limited, without prior OTS approval, to net earnings for the current calendar year, plus the two preceding years, less capital distributions paid over the comparable time period. Insured institutions are required to file an application with the OTS for capital distributions in excess of the limitation. - -------------------------------------------------------------------------------- The following table sets forth Wayne Savings' tangible, core and risk-based capital rates at March 31, 2005 and 2004. Wayne Savings Community Bank as of March 31, 2005 (Dollars in thousands)
Required to be "well- Required for capital capitalized" under prompt Actual adequacy purposes corrective action provisions ------------------- ---------------------- ---------------------------- Amount Ratio Amount Ratio Amount Ratio Tangible capital $ 36,796 9.2% >$ 6,022 >1.5% >$ 20,074 > 5.0% Core capital $ 36,796 9.2% >$ 16,059 >4.0% >$ 24,089 > 6.0% Risk-based capital $ 38,170 17.7% >$ 17,226 >8.0% >$ 21,533 >10.0%
Wayne Savings Community Bank as of March 31, 2004 (Dollars in thousands)
Required to be "well- Required for capital capitalized" under prompt Actual adequacy purposes corrective action provisions ------------------- ---------------------- ----------------------------- Amount Ratio Amount Ratio Amount Ratio Tangible capital $ 39,939 10.9% >$ 5,492 >1.5% >$ 18,305 > 5.0% Core capital $ 39,939 10.9% >$ 14,644 >4.0% >$ 21,966 > 6.0% Risk-based capital $ 40,754 21.0% >$ 15,533 >8.0% >$ 19,416 >10.0%
- --------------------------------------- 37 ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.) [LOGO] ------------------------------------------------------------------------- March 31, 2005, 2004, and 2003 NOTE K - RETIREMENT PLANS The Company had a non-contributory insured defined benefit pension plan (the "Plan") covering all eligible employees. The Plan benefits were based on years-of-service and other factors. Effective in fiscal 2004, Wayne Savings froze its defined benefit pension plan. Also in fiscal 2004, management changed the Plan's investment structure from life insurance to stocks and bonds. At March 31, 2005, Plan assets consisted of 1.0% cash, 57.0% stocks and 42.0% bonds. The Company's intent is to terminate the Plan at some point in the future when financial considerations are more favorable. Contributions are intended to provide not only for benefits attributed for service-to-date. Information with respect to the Plan for the years ended March 31, 2005, 2004 and 2003 is as follows: The changes in benefit obligations are computed as follows: 2005 2004 2003 ---------- ---------- ---------- (In thousands) Projected benefit obligation at beginning of year .......... $ 2,381 $ 2,002 $ 1,592 Service cost ...................... -- 55 55 Interest cost ..................... 152 137 124 Actuarial loss .................... 339 351 428 Benefits paid ..................... (549) (164) (197) ---------- ---------- ---------- Projected benefit obligation at end of year ................ $ 2,323 $ 2,381 $ 2,002 ========== ========== ========== The changes in the Plan's assets are computed as follows: 2005 2004 2003 ---------- ---------- ---------- (In thousands) Fair value of plan assets at beginning of year ............. $ 2,704 $ 1,499 $ 1,508 Actual return on plan assets ...... 155 145 (22) Employer contributions ............ 13 1,224 210 Benefits paid ..................... (549) (164) (197) ---------- ---------- ---------- Fair value of plan assets at end of year ................ $ 2,323 $ 2,704 $ 1,499 ========== ========== ========== The following table sets forth the Plan's funded status at March 31: 2005 2004 ---------- ---------- (In thousands) Funded status ..................... $ -- $ 324 Unrecognized net actuarial loss ... 957 707 ---------- ---------- Prepaid pension cost .............. $ 957 $ 1,031 ========== ========== The weighted-average actuarial assumptions used were: 2005 2004 2003 ---------- ---------- ---------- Weighted-average discount rate ................. 6.00% 6.50% 8.00% Weighted-average rate of compensation increase ......... 0.00% 0.00% 1.00% Weighted-average expected long-term rate of return on plan assets ................... 7.00% 7.00% 7.00% Net periodic pension costs includes the following components: 2005 2004 2003 ---------- ---------- ---------- (In thousands) Service cost ...................... $ -- $ 55 $ 55 Interest cost ..................... 152 26 124 Actual return on plan assets, net . (155) (145) 22 Amortization of prior net loss .... 28 166 2 Amortization of net transition obligation ..................... -- -- 6 Settlement loss ................... 89 -- -- Unrecognized net actuarial loss ... -- -- (132) ---------- ---------- ---------- Net periodic pension cost ......... $ 114 $ 102 $ 77 ========== ========== ========== The following benefit payments are expected to be paid: Fiscal Benefits (In thousands) 2006 ............................ $ 115 2007 ............................ 113 2008 ............................ 110 2009 ............................ 151 2010 ............................ 161 Thereafter ...................... 792 The Bank has a savings plan covering substantially all employees who meet certain age and service requirements. Under the plan, the Bank matches each participant's contribution - up to 3% of the participant's salary; a 50% match is provided for up to the next 4% of the participant's salary. This contribution is dependent on availability of sufficient net earnings from current or prior years. Additional contributions may be made as approved by the Board of Directors. Expense under the plan totaled approximately $121,000, $78,000 and $44,000 for the fiscal years ended March 31, 2005, 2004 and 2003, respectively. - --------------------------------------- 38 ------------------------------------- - ------------------------------------------------------------------------- [LOGO] NOTE L -- CONDENSED FINANCIAL STATEMENTS OF WAYNE SAVINGS BANCSHARES, INC. The following condensed financial statements summarize the financial position of Wayne Savings Bancshares, Inc. as of March 31, 2005 and 2004, and the results of its operations and its cash flows for the years ended March 31, 2005, 2004, and 2003. STATEMENTS OF FINANCIAL CONDITION March 31,
2005 2004 ---------- ---------- (In thousands) ASSETS Cash and due from banks ......................................... $ 480 $ 985 Investment securities available for sale - at market ............ -- 502 Mortgage-backed securities available for sale - at market ....... -- 709 Notes receivable from Wayne Savings ............................. 1,304 1,456 Investment in Wayne Savings ..................................... 38,321 40,445 Prepaid expenses and other ...................................... 547 77 ---------- ---------- Total assets .................................................. $ 40,652 $ 44,174 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY Accrued expenses and other liabilities .......................... $ 453 $ 613 Stockholders' equity Common stock and additional paid-in capital ................... 35,524 34,756 Retained earnings ............................................. 11,371 12,727 Less required contributions for ESOP shares ................... (1,304) (1,456) Shares acquired by Management Recognition Plan ................ -- (1,142) Less 282,261 and 112,500 shares held in treasury at March 31, 2005 and 2004, respectively ................... (4,600) (1,803) Accumulated other comprehensive income (loss) ................. (792) 479 ---------- ---------- Total stockholders' equity .................................... 40,199 43,561 ---------- ---------- Total liabilities and stockholders' equity .................... $ 40,652 $ 44,174 ========== ==========
STATEMENTS OF EARNINGS For the years ended March 31,
2005 2004 2003 ---------- ---------- ---------- Income (In thousands) Interest income ................................ $ 103 $ 183 $ 43 Gain on sale of investment securities .......... -- 2 -- Equity in earnings of subsidiary ............... 1,610 2,851 2,800 ---------- ---------- ---------- Total revenue ............................... 1,713 3,036 2,843 General and administrative expenses ................ 1,966 409 192 ---------- ---------- ---------- Earnings (loss) before income tax benefits ..... (253) 2,627 2,651 Federal income tax benefits .................... (634) (77) (121) ---------- ---------- ---------- NET EARNINGS ................................ $ 381 $ 2,704 $ 2,772 ========== ========== ==========
- --------------------------------------- 39 ------------------------------------- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.) [LOGO] ------------------------------------------------------------------------- March 31, 2005, 2004, and 2003 STATEMENTS OF CASH FLOWS For the years ended March 31,
2005 2004 2003 -------- -------- -------- Cash flows from operating activities: (In thousands) Net earnings for the year .................................................................. $ 381 $ 2,704 $ 2,772 Adjustments to reconcile net earnings to net cash provided by operating activities: ..... Gain on sale of investment securities designated as available for sale ................ -- (2) -- Amortization and depreciation ......................................................... 2 42 -- (Undistributed earnings) excess distributions from consolidated subsidiary ............ 1,791 (1,351) (2,121) Expense of Management Recognition Plan ................................................ 1,142 -- -- Increase (decrease) in cash due to changes in: Prepaid expenses and other assets .................................................. (471) (29) 820 Accrued expenses and other liabilities ............................................. (177) 61 (821) -------- -------- -------- Net cash provided by operating activities ....................................... 2,668 1,425 650 Cash flows provided by (used in) investing activities Purchase of investment securities designated as available for sale ......................... (500) (2,006) (5,052) Proceeds from maturity of investment securities designated as available for sale ........... 1,000 5,001 -- Proceeds from sale of investment securities designated as available for sale ............... -- 1,502 -- Purchase of mortgage-backed securities designated as available for sale .................... -- (716) -- Principal repayment on mortgage-backed securities designated as available for sale ......... 709 10 -- Repayments of ESOP loan .................................................................... 152 156 -- Investment in Wayne Savings - net .......................................................... -- -- (11,700) -------- -------- -------- Net cash provided by (used in) investing activities ........................... 1,361 3,947 (16,752) Cash flows provided by (used in) financing activities: Proceeds from reorganization and related stock offering - net .............................. -- -- 17,065 Payment of dividends on common stock ....................................................... (1,737) (1,786) (831) Purchase of treasury stock ................................................................. (2,797) (1,803) -- Proceeds from exercise of stock options .................................................... -- 61 16 Prepaid tax benefits related to employee stock plans ....................................... -- 20 -- Shares acquired by Management Recognition Plan ............................................. -- (1,142) -- -------- -------- -------- Net cash provided by (used in) financing activities .............................. (4,534) (4,650) 16,250 -------- -------- -------- Net increase (decrease) in cash and cash equivalents ......................................... (505) 722 148 Cash and cash equivalents at beginning of year ............................................... 985 263 115 -------- -------- -------- Cash and cash equivalents at end of year ..................................................... $ 480 $ 985 $ 263 ======== ======== ========
NOTE M - BUSINESS COMBINATION During 2004, the Company agreed to acquire Stebbins Bancshares, Inc. Stebbins Bancshares, Inc., was merged into the Company in June 2004 and its banking subsidiary, Stebbins National Bank, continued operations as a branch of Wayne Savings. Wayne Savings Bancshares, Inc., paid $1.3 million in connection with the acquisition. Presented below are Wayne Savings Bancshares' pro-forma condensed consolidated statements of earnings and earnings per share which have been prepared as if the acquisiton had been consummated as of the beginning of each of the years ended March 31, 2005 and 2004. 2005 2004 --------- --------- (In thousands) (Unaudited) Total interest income ......................... $ 17,805 $ 19,476 Total interest expense ........................ 6,740 7,349 --------- --------- Net interest income ........................... 11,065 12,127 Provision for losses on loans ................. 430 213 Other income .................................. 1,719 2,051 General, administrative and other expense ..... 12,025 10,142 --------- --------- Earnings before income taxes (benefits) ...... 329 3,823 Federal income taxes (benefits) ............... (85) 1,093 --------- --------- NET EARNINGS .................................. $ 414 $ 2,730 ========= ========= Earnings per share Basic .................................. $ .12 $ .73 ========= ========= Diluted ................................ $ .12 $ .73 ========= ========= - --------------------------------------- 40 ------------------------------------- - ------------------------------------------------------------------------- [LOGO] NOTE N - QUARTERLY RESULTS OF OPERATIONS (unaudited) The following table summarizes the Company's quarterly results for the fiscal years ended March 31, 2005 and 2004.
For the three month periods ended ------------------------------------------------------------------------ June 30, 2004 September 30, 2004 December 31, 2004 March 31, 2005 ------------- ------------------ ----------------- -------------- (In thousands, except share data) Total interest income .................................. $ 4,244 $ 4,381 $ 4,465 $ 4,542 Total interest expense ................................. 1,625 1,609 1,711 1,771 -------- -------- -------- -------- Net interest income .................................... 2,619 2,772 2,754 2,771 Provision for losses on loans .......................... 15 15 15 385 Other income ........................................... 405 493 389 397 General, administrative and other expense .............. 2,369 2,580 2,592 4,333 -------- -------- -------- -------- Earnings (loss) before income taxes (benefits) ......... 640 670 536 (1,550) Federal income taxes (benefits) ........................ 178 181 133 (577) -------- -------- -------- -------- Net earnings (loss) .................................... $ 462 $ 489 $ 403 $ (973) ======== ======== ======== ======== Earnings per share Basic .............................................. $ .13 $ .13 $ .11 $ (.26) ======== ======== ======== ======== Diluted ............................................ $ .13 $ .13 $ .11 NA ======== ======== ======== ========
For the three month periods ended ------------------------------------------------------------------------ June 30, 2003 September 30, 2003 December 31, 2003 March 31, 2004 ------------- ------------------ ----------------- -------------- (In thousands, except share data) Total interest income .................................. $ 4,723 $ 4,501 $ 4,362 $ 4,630 Total interest expense ................................. 1,932 1,796 1,736 1,683 -------- -------- -------- -------- Net interest income .................................... 2,791 2,705 2,626 2,947 Provision for losses on loans .......................... 32 31 -- 110 Other income ........................................... 510 479 490 454 General, administrative and other expense .............. 2,212 2,271 2,315 2,173 -------- -------- -------- -------- Earnings before income taxes ........................... 1,057 882 801 1,118 Federal income taxes ................................... 326 269 241 318 -------- -------- -------- -------- Net earnings ........................................... $ 731 $ 613 $ 560 $ 800 ======== ======== ======== ======== Earnings per share Basic .............................................. $ .20 $ .16 $ .15 $ .21 ======== ======== ======== ======== Diluted ............................................ $ .20 $ .16 $ .15 $ .21 ======== ======== ======== ========
- --------------------------------------- 41 ------------------------------------- REPORT OF INDEPENDENT REGISTERED CERTIFIED PUBLIC ACCOUNTANTS [LOGO] ------------------------------------------------------------------------- Grant Thornton [LOGO] Accountants and Management Consultants Report of Independent Certified Public Accountants Board of Directors Wayne Savings Bancshares, Inc. We have audited the accompanying consolidated statements of financial condition of Wayne Savings Bancshares, Inc. as of March 31, 2005 and 2004, and the related consolidated statements of earnings, stockholders' equity, comprehensive income and cash flows for each of the three years in the period ended March 31, 2005. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company's internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wayne Savings Bancshares, Inc. as of March 31, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 2005, in conformity with accounting principles generally accepted in the United States of America. As more fully explanied in Note A-9, the Company changed its method of accounting for stock option expense pursuant to SFAS No. 123(R), "Share-Based Payment." /s/ Grant Thornton LLP Cincinnati, Ohio April 29, 2005 Suite 900 625 Eden Park Drive Cincinnati, OH 45202-4181 T 513.762.5000 F 513.241.6125 W www.grantthornton.com Grant Thornton LLP US Member of Grant Thornton International - --------------------------------------- 42 ------------------------------------- -----END PRIVACY-ENHANCED MESSAGE-----