FORM 10-QSB
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20552
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
-----------------------------------------
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)
United States 31-1557791
State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
151 North Market Street
Wooster, Ohio 44691
(Address of principal (Zip Code)
executive office)
Registrant's telephone number, including area code: (330) 264-5767
Check whether the issuer: (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports) and (2) has been subject to such filing requirements for the past
90 days.
Yes X No ___
As of November 9, 1998, the latest practicable date, 2,489,248 shares of the
registrant's common stock, $1.00 par value, were issued and outstanding.
Page 1 of 18 pages
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Wayne Savings Bancshares, Inc.
INDEX
Page
PART I - FINANCIAL INFORMATION
Consolidated Statements of Financial Condition 3
Consolidated Statements of Earnings 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Management's Discussion and Analysis of
Financial Condition and Results of
Operations 11
PART II - OTHER INFORMATION 16
SIGNATURES 17
2
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<TABLE>
The Wayne Savings and Loan Company
<CAPTION>
STATEMENTS OF FINANCIAL CONDITION
(In thousands, except share data)
September 30, March 31,
ASSETS 1998 1998
<S> <C> <C>
Cash and due from banks $ 1,571 $ 1,422
Federal funds sold 2,150 4,100
Interest-bearing deposits in other financial institutions 14,070 7,647
------- -------
Cash and cash equivalents 17,791 13,169
Certificates of deposit in other financial institutions 1,500 8,500
Investment securities - at amortized cost, approximate
market value of $11,291 and $13,335 as of September 30, 1998
and March 31, 1998 11,253 13,401
Mortgage-backed securities available for sale - at market 6,400 4,032
Mortgage-backed securities - at cost, approximate market value of $685 and $245
as of September 30, 1998
and March 31, 1998 702 243
Loans receivable - net 208,207 206,685
Loans held for sale - at lower of cost or market 617 1,194
Real estate acquired through foreclosure 943 946
Office premises and equipment - at depreciated cost 7,228 6,461
Federal Home Loan Bank stock - at cost 2,820 2,719
Accrued interest receivable on loans 1,178 1,152
Accrued interest receivable on mortgage-backed securities 32 23
Accrued interest receivable on investments and
interest-bearing deposits 137 180
Prepaid expenses and other assets 1,086 1,047
Prepaid federal income taxes 87 -
------- -------
Total assets $259,981 $259,752
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $221,495 $217,621
Advances from the Federal Home Loan Bank 12,000 16,000
Advances by borrowers for taxes and insurance 786 783
Accrued interest payable 173 197
Accounts payable on mortgage loans serviced for others 159 199
Other liabilities 309 291
Accrued federal income taxes - 1
Deferred federal income taxes 245 234
------- -------
Total liabilities 235,167 235,326
Stockholders' equity
Common stock (20,000,000 shares of $1.00 par value authorized; 2,497,275 and
2,258,007 shares issued and outstanding at September 30, 1998
and March 31, 1998) 2,497 2,258
Additional paid-in capital 12,447 5,963
Retained earnings - substantially restricted 10,074 16,198
Less 10,492 shares of treasury stock (243) (10)
Unrealized gains on securities available for sale, net of related tax effects 39 17
------- -------
Total stockholders' equity 24,814 24,426
------- -------
Total liabilities and stockholders' equity $259,981 $259,752
======= =======
</TABLE>
3
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<TABLE>
The Wayne Savings and Loan Company
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS
(In thousands, except per share data)
Six months ended Three months ended
September 30, September 30,
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Interest income
Loans $8,515 $8,559 $4,221 $4,279
Mortgage-backed securities 180 29 109 14
Investment securities 443 526 224 266
Interest-bearing deposits and other 536 486 255 249
----- ----- ----- -----
Total interest income 9,674 9,600 4,809 4,808
Interest expense
Deposits 5,250 5,044 2,643 2,526
Borrowings 389 464 195 228
----- ----- ----- -----
Total interest expense 5,639 5,508 2,838 2,754
----- ----- ----- -----
Net interest income 4,035 4,092 1,971 2,054
Provision for losses on loans 31 30 16 15
----- ----- ----- -----
Net interest income after provision
for losses on loans 4,004 4,062 1,955 2,039
Other income
Gain on sale of loans 188 124 99 67
Gain on sale of assets 1 - - -
Service fees, charges and other operating 361 313 191 162
----- ----- ----- -----
Total other income 550 437 290 229
General, administrative and other expense
Employee compensation and benefits 1,650 1,581 813 803
Occupancy and equipment 548 473 276 240
Federal deposit insurance premiums 101 104 51 53
Franchise taxes 174 152 92 76
Other operating 703 675 358 347
----- ----- ----- -----
Total general, administrative and other expense 3,176 2,985 1,590 1,519
----- ----- ----- -----
Earnings before federal income taxes 1,378 1,514 655 749
Federal income taxes
Current 458 469 212
253
Deferred 11 45 11 -
----- ----- ----- -----
Total federal income taxes 469 514 223 253
----- ----- ----- -----
NET EARNINGS $ 909 $1,000 $ 432 $ 496
===== ===== ===== =====
EARNINGS PER SHARE
Basic $0.37 $0.40 $0.17 $0.20
==== ==== ==== ====
Diluted $0.36 $0.40 $0.17 $0.20
==== ==== ==== ====
</TABLE>
4
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<TABLE>
The Wayne Savings and Loan Company
<CAPTION>
STATEMENTS OF CASH FLOWS
For the six months ended September 30,
(In thousands)
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net earnings for the period $ 909 $ 1,000
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 13 9
Amortization of deferred loan origination fees (253) (177)
Amortization expense of employee benefit plans - 21
Depreciation and amortization 237 207
Loans originated for sale in the secondary market (7,280) (4,880)
Proceeds from sale of loans 7,969 3,894
Gain on sale of loans (112) (67)
Provision for losses on loans 31 30
Federal Home Loan Bank stock dividends (100) (93)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (26) (58)
Accrued interest receivable on mortgage-backed securities (9) 2
Accrued interest receivable on investments and interest-bearing deposits 43 (26)
Prepaid expenses and other assets (39) 65
Accrued interest payable (24) (56)
Accounts payable on mortgage loans serviced for others (40) 62
Other liabilities 18 (65)
Federal income taxes
Current (88) 261
Deferred 11 45
------ ------
Net cash provided by operating activities 1,260 174
Cash flows provided by (used in) investing activities:
Purchase of investment securities (4,062) -
Proceeds from maturity of investment securities 6,222 2,504
Purchase of mortgage-backed securities (3,913) -
Principal repayments on mortgage-backed securities 1,047 183
Loan principal repayments 34,310 25,997
Loan disbursements (36,006) (23,134)
Purchase of office premises and equipment - net (1,004) (1,564)
Proceeds from sale of real estate acquired through foreclosure 63 -
Additions to real estate acquired through foreclosure (60) (90)
Decrease in certificates of deposit in other financial institutions 7,000 -
------ ------
Net cash provided by investing activities 3,597 3,896
------ ------
Net cash provided by operating and investing activities
(balance carried forward) 4,857 4,070
------ ------
</TABLE>
5
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<TABLE>
The Wayne Savings and Loan Company
<CAPTION>
STATEMENTS OF CASH FLOWS (CONTINUED)
For the six months ended September 30,
(In thousands)
1998 1997
<S> <C> <C>
Net cash provided by operating and investing activities
(balance brought forward) $ 4,857 $4,070
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts 3,874 (707)
Proceeds from Federal Home Loan Bank advances 10,000 3,000
Repayment of Federal Home Loan Bank advances (14,000) (5,000)
Advances by borrowers for taxes and insurance 3 68
Proceeds from exercise of stock options 74 42
Dividends paid on common stock (186) (168)
------ -----
Net cash provided by financing activities (235) (2,765)
------ -----
Net increase in cash and cash equivalents 4,622 1,305
Cash and cash equivalents at beginning of period 13,169 7,606
------ -----
Cash and cash equivalents at end of period $17,791 $8,911
====== =====
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 553 $ 224
====== =====
Interest on deposits and borrowings $ 5,663 $5,564
====== =====
Supplemental disclosure of noncash investing activities:
Unrealized gains (losses) on securities designated as
available for sale, net of related tax effects $ 22 $ (1)
====== =====
Recognition of mortgage servicing rights in accordance
with SFAS No. 125 $ 76 $ 57
====== =====
</TABLE>
6
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Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended September 30, 1998
1. Basis of Presentation
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-QSB and,
therefore, do not include information or footnotes necessary for a
complete presentation of financial position, results of operations and
cash flows in conformity with generally accepted accounting principles.
Accordingly, these financial statements should be read in conjunction
with the financial statements and notes thereto of Wayne Savings
Bancshares, Inc. included in the Annual Report on Form 10-KSB for the
year ended March 31, 1998.
Effective November 25, 1997, Wayne Savings Community Bank (the
"Company"), formerly named The Wayne Savings and Loan Company,
completed its reorganization into a two-tier mutual holding company
structure with the establishment of a stock holding company as parent
of the Company. In the reorganization, each share of Wayne Savings
Community Bank's common stock was automatically converted into one
share of Wayne Savings Bancshares, Inc. common stock. The
reorganization of the Company was structured as a tax-free
reorganization and was accounted for in the same manner as a
pooling-of-interests. Wayne Savings Community Bank is now the wholly
owned subsidiary of Wayne Savings Bancshares, Inc., the stock holding
company ("Wayne").
During the quarter ended September 30, 1998, Wayne Savings Community
Bank opened Village Savings Bank, F.S.B. ("Village"), a wholly-owned
subsidiary of the Company, located in Stark County, Ohio. Additionally,
the Company announced plans to establish a new branch office at the
southern edge of Wooster, Ohio.
In the opinion of management, all adjustments (consisting only of
normal recurring accruals) which are necessary for a fair presentation
of the financial statements have been included. The results of
operations for the three and six month periods ended September 30, 1998
are not necessarily indicative of the results which may be expected for
an entire fiscal year.
2. Principles of Consolidation
The accompanying consolidated financial statements include the accounts
of Wayne, Village, and the Company. All significant inter-company items
have been eliminated.
7
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Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six months ended September 30, 1998
3. Earnings Per Share
Basic earnings per share is computed based upon the weighted-average
shares outstanding during the period, less shares in the ESOP that are
unallocated and not committed to be released. The Company had no
unallocated ESOP shares during the six months ended September 30, 1998.
Weighted-average common shares outstanding totaled 2,485,070 and
2,486,549 for the six and three month periods ended September 30, 1998,
respectively. Weighted average common shares outstanding, which gives
effect to 5,972 unallocated ESOP shares totaled 2,468,519 and 2,469,921
for the six and three months periods ended September 30, 1997,
respectively.
Diluted earnings per share is computed taking into consideration common
shares outstanding and dilutive potential common shares to be issued
under Wayne's stock option plan. Weighted-average common shares deemed
outstanding for purposes of computing diluted earnings per share
totaled 2,511,796 and 2,513,275 for the six and three months periods
ended September 30, 1998 respectively, and 2,507,759 and 2,509,161 for
the six and three month periods ended September 30, 1997, respectively.
4. Effects of Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 125,
"Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities", that provides accounting guidance on
transfers of financial assets, servicing of financial assets, and
extinguishment of liabilities. SFAS No. 125 introduces an approach to
accounting for transfers of financial assets that provides a means of
dealing with more complex transactions in which the seller disposes of
only a partial interest in the assets, retains rights or obligations,
makes use of special purpose entities in the transaction, or otherwise
has continuing involvement with the transferred assets.
The new accounting method, the financial components approach, provides
that the carrying amount of the financial assets transferred be
allocated to components of the transaction based on their relative fair
values. SFAS No. 125 provides criteria for determining whether control
of assets has been relinquished and whether a sale has occurred. If the
transfer does not qualify as a sale, it is accounted for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125
include, among others, transfers involving repurchase agreements,
securitizations of financial assets, loan participations, factoring
arrangements, and transfers of receivables with recourse.
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability for the servicing
contract (unless related to a securitization of assets, and all the
securitized assets are retained and classified as held-to-maturity). A
servicing asset or liability that is purchased or assumed is initially
recognized at its fair value. Servicing assets and liabilities are
amortized in proportion to and over the period of estimated net
servicing income or net servicing loss and are subject to subsequent
assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance
sheet only if the debtor either pays the creditor and is relieved of
its obligation for the liability or is legally released from being the
primary obligor.
8
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Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six months ended September 30, 1998
4. Effects of Recent Accounting Pronouncements (continued)
SFAS No. 125 is effective for transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31,
1997, and is to be applied prospectively. Earlier or retroactive
application is not permitted. Management adopted SFAS No. 125 effective
January 1, 1998, as required, without material effect on the Company's
financial position or results of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains
and losses) in a full set of general-purpose financial statements. SFAS
No. 130 requires that all items that are required to be recognized
under accounting standards as components of comprehensive income be
reported in a financial statement that is displayed with the same
prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income
for the period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the
equity section of a statement of financial position. SFAS No. 130 is
effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided
for comparative purposes is required. Management adopted SFAS No. 130
effective April 1, 1998, as required, without a material impact on the
Corporation's financial statements. Comprehensive income totaled
$931,000 and $999,000 for the six month periods ended September 30,
1998 and 1997, respectively. The components of comprehensive income
consisted solely of unrealized gains and losses on securities
designated as available for sale, net of related tax effects totaling a
gain of $22,000 and a loss of $1,000 for those respective periods.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131 significantly
changes the way that public business enterprises report information
about operating segments in annual financial statements and requires
that those enterprises report selected information about reportable
segments in interim financial reports issued to shareholders. It also
establishes standards for related disclosures about products and
services, geographic areas and major customers. SFAS No. 131 uses a
"management approach" to disclose financial and descriptive information
about the way that management organizes the segments within the
enterprise for making operating decisions and assessing performance.
For many enterprises, the management approach will likely result in
more segments being reported. In addition, SFAS No. 131 requires
significantly more information to be disclosed for each reportable
segment than is presently being reported in annual financial statements
and also requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for fiscal years
beginning after December 15, 1997. SFAS No. 131 is not expected to have
a material impact on the Corporation's financial statements.
9
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Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
For the six months ended September 30, 1998
4. Effects of Recent Accounting Pronouncements (continued)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to
recognize all derivatives in their financial statements as either
assets or liabilities measured at fair value. SFAS No. 133 also
specifies new methods of accounting for hedging transactions,
prescribes the items and transactions that may be hedged, and specifies
detailed criteria to be met to qualify for hedge accounting.
The definition of a derivative financial instrument is complex, but in
general, it is an instrument with one or more underlyings, such as an
interest rate or foreign exchange rate, that is applied to a notional
amount, such as an amount of currency, to determine the settlement
amounts(s). It generally requires no significant initial investment and
can be settled net or by delivery of an asset that is readily
convertible to cash. SFAS No. 133 applies to derivatives embedded in
other contracts, unless the underlying of the embedded derivative is
clearly and closely related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. On adoption, entities are permitted to transfer held-to-maturity
debt securities to the available-for-sale or trading category without
calling into question their intent to hold other debt securities to
maturity in the future. SFAS No. 133 is not expected to have a material
impact on the Company's financial statements.
10
<PAGE>
Wayne Savings Bancshares, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Discussion of Financial Condition Changes from March 31, 1998 to September 30,
1998
At September 30, 1998, Wayne Savings Bancshares, Inc. ("Wayne"), the stock
holding company parent of Wayne Savings Community Bank (the "Company") and
Village Savings Bank, F.S.B. ("Village"), had total assets of $260.0 million, an
increase of $229,000, or 0.1%, from March 31, 1998.
Cash and due from banks, federal funds sold, interest-bearing deposits,
certificates of deposit and investment securities totaled approximately $30.5
million, a decrease of approximately $4.5 million, from March 31, 1998 levels.
The decrease resulted primarily from the use of excess liquidity to repay $4.0
million in FHLB Advances. Regulatory liquidity approximated 12.3% at September
30, 1998, compared to 16.0% at March 31, 1998.
Loans receivable increased by approximately $945,000, or .5%, from the March 31,
1998 total. This increase resulted from loan disbursements of $43.3 million,
which were partially offset by principal repayments of $34.3 million and sales
of $7.9 million. The allowance for loan losses totaled $749,000 at September 30,
1998, as compared to $721,000 at March 31, 1998. Nonperforming loans totaled
$387,000 at September 30, 1998 and $308,000 at March 31, 1998. The allowance for
loan losses totaled 193.5% and 234.1% of nonperforming loans at September 30,
1998 and March 31, 1998, respectively. Although management believes that its
allowance for loan losses at September 30, 1998 is adequate based upon the
available facts and circumstances, there can be no assurance that additions to
such allowance will not be necessary in future periods, which would adversely
affect the Company's results of operations.
Deposits increased by approximately $3.9 million to a total of $221.5 million at
September 30, 1998. The increase in deposits generally reflects the results of
opening the new federal savings bank subsidiary in North Canton, Ohio.
The Company and Village are subject to capital standards which 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. At September 30, 1998, the
Company's tangible and core capital of $24.4 million, or 9.4%, exceeded the
minimum 1.5% and 3.0% requirements of $3.9 million and $7.8 million,
respectively, by $20.5 million and $16.6 million. The Company's risk-based
capital of $25.1 million, or 17.5%, exceeded the 8.0% minimum requirement by
approximately $13.6 million. At September 30, 1998, Village's tangible and core
capital of $2.8 million, or 51.2%, exceeded the minimum 1.5% and 3.0%
requirements of $81,000 and $161,000, respectively, by $2.7 million and $2.6
million. Village's risk-based capital of $2.8 million, or 152.9%, exceeded the
8.0% minimum requirement by approximately $2.6 million.
Comparison of Operating Results for the Six Month Periods Ended September 30,
1998 and 1997
Net earnings totaled $909,000 for the six months ended September 30, 1998, as
compared to net earnings of $1.0 million for the same period in 1997, a decrease
of $91,000, or 9.1%. The decrease in net earnings resulted primarily from an
increase of $191,000, or 6.4%, in general, administrative and other expense and
a decrease of $57,000, or 1.4%, in net interest income, the effects of which
were partially offset by an increase of $113,000, or 25.9%, in other income.
11
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Wayne Savings Bancshares, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six Month Periods Ended September 30,
1998 and 1997 (continued)
Net Interest Income
Interest on loans and mortgage-backed securities increased by $107,000, or 1.2%,
for the six months ended September 30, 1998, from the same period in 1997. The
increase in interest income resulted primarily from a $151,000 increase in
interest income from mortgage-backed securities and a $76,000 increase in loan
fee income. The increase in loan fee income resulted primarily from accelerated
fee income due to refinances and loan sales. The increases were offset by a
decrease in interest income on loans of $123,000, the result of a decline in
earning asset yields caused by falling interest rates.
Interest on investments and interest-bearing deposits decreased by $33,000, or
3.3%, during the six months ended September 30, 1998, as compared to the same
period in 1997 as a result of a decrease in the average yield from year to year.
Interest expense on deposits and borrowings increased by $131,000, or 2.4%,
during the six months ended September 30, 1998, over the same period in 1997.
The increase can be primarily attributed to an increase in the average balance
of interest-bearing liabilities, which increased by $7.5 million from $226.1
million, coupled with an increase in the average cost of funds year to year.
As a result of the foregoing changes in interest income and interest expense,
net interest income decreased by $57,000, or 1.4%, during the six months ended
September 30, 1998, as compared to the same period in 1997.
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management based
on historical experience, the volume and type of lending conducted by the
Company, the status of past due principal and interest payments, general
economic conditions, particularly as such conditions relate to the Company's
market area, and other factors related to the collectibility of the Company's
loan portfolio. As a result of such analysis, management recorded a $31,000
provision for losses on loans during the six months ended September 30, 1998, a
slight increase from the same period in 1997. The provision for losses on loans
is recorded based upon management's assessment of the risk inherent in the loan
portfolio and management's assessment of the collateral securing non-performing
loans. There can be no assurance that the loan loss allowance of the Company
will be adequate to cover losses on nonperforming assets in the future.
Other Income
Other income totaled $550,000 for the six months ended September 30, 1998, an
increase of $113,000, or 25.9%, over the comparable 1997 period. This increase
was due primarily to the $64,000, or 51.6%, increase in gain on sale of loans
coupled with a $48,000, or 15.3%, increase in service fees, charges and other
operating income.
12
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Wayne Savings Bancshares, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Six Month Periods Ended September 30,
1998 and 1997 (continued)
General, Administrative and Other Expense
General, administrative and other expense increased by $191,000, or 6.4%, during
the current six month period, due primarily to a $69,000, or 4.4%, increase in
employee compensation and benefits, a $75,000, or 15.9%, increase in occupancy
and equipment and a $28,000, or 4.1%, increase in other operating expenses. Such
increases in operating expenses were primarily attributable to the cost
associated with the new bank subsidiary.
Federal Income Taxes
The provision for federal income taxes amounted to $469,000 for the six months
ended September 30, 1998, a decrease of $45,000 as compared to the same period
in 1997. The decrease resulted primarily from a decrease in pretax earnings year
to year. The effective tax rates for the six months ended September 30, 1998 and
1997 were 34.0% and 33.9%, respectively.
Comparison of Operating Results for the Three Month Periods Ended September 30,
1998 and 1997
Net earnings totaled $432,000 for the three months ended September 30, 1998, as
compared to net earnings of $496,000 for the same period in 1997, a decrease of
$64,000, or 12.9%. The earnings for the three month period were similarly
reduced by an increase of $71,000, or 4.7%, in general, administrative and other
expense, a decrease of $83,000, or 4.0%, in net interest income, which were
partially offset by an increase of $61,000, or 26.6%, in other income.
Net Interest Income
Interest on loans and mortgage-backed securities increased by $37,000, or 0.9%,
for the three months ended September 30, 1998 over the same period in 1997. The
increase resulted primarily from an increase of $95,000 in interest income from
mortgage-backed securities. The increase was offset by a $58,000 decrease in
interest income on loans, a result of a decline in earning asset yields caused
by falling interest rates.
Interest on investments and interest-bearing deposits decreased by $36,000, or
7.0%, during the current three month period as a result of a decrease in the
average yield from year to year.
Interest expense on deposits and borrowings increased by $84,000, or 3.1%,
during the three months ended September 30, 1998 as compared to the same period
in 1997. The increase can be primarily attributed to an increase in the average
balance of interest-bearing liabilities.
13
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Wayne Savings Bancshares, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended September 30,
1998 and 1997 (continued)
Provision for Losses on Loans
A provision for losses on loans is charged to earnings to bring the total
allowance for loan losses to a level considered appropriate by management.
Management recorded a $16,000 provision for losses on loans during the three
months ended September 30, 1998, a slight increase from the same period in 1997.
The provision for losses on loans is recorded based upon management's assessment
of the risk inherent in the loan portfolio and management's assessment of the
collateral securing non-performing loans. There can be no assurance that the
loan loss allowance of the Company will be adequate to cover losses on
non-performing assets in the future.
Other Income
Other income increased by $61,000, or 26.6%, during the current period over the
comparable 1997 period due to a $32,000, or 47.8%, increase in gain on sale of
loans, coupled with a $29,000, or 17.9%, increase in service fees, charges, and
other operating income.
General, Administrative and Other Expense
General, administrative and other expense increased by $71,000, or 4.7%, during
the current three month period over the comparable 1997 period, due primarily to
increased costs associated with the new bank subsidiary.
Federal Income Taxes
The provision for federal income taxes amounted to $223,000 for the three months
ended September 30, 1998, as compared to $253,000 for the same period last year.
The effective tax rates for the three months ended September 30, 1998 and 1997
were 34.0% and 33.8% respectively.
Year 2000 Compliance Matters
The Year 2000 ("Y2K") issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Such computer systems
will be unable to interpret dates beyond the year 1999, which could cause a
system failure or other computer errors, leading to disruption in operations.
The potential impact is that date sensitive calculations would be based on
erroneous data or could cause a system failure. This affects all forms of
financial accounting including interest computation, due dates,
pensions/personnel benefits, and investments. It can also affect record keeping.
In 1997, the Company developed a five-phase program for Y2K information systems
compliance. Phase I is awareness which consisted of establishing a Y2K project
team and gaining executive-level support for resources necessary to perform
compliance work. Phase II is assessment which consisted of the identification of
all hardware, software, networks, automated teller machines, other various
processing platforms, and customer and vendor interdependencies affected by the
Y2K date change. Phase III is renovation consisting of hardware and software
upgrades, system replacements, vendor certification, and other associated
changes for known non-compliant applications. Phase IV is validation consisting
of testing hardware, software, and systems to assure Y2K compliance. Phase V is
implementation whereby a contingency plan is enacted for any system failing Y2K
testing.
14
<PAGE>
Wayne Savings Bancshares, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (CONTINUED)
Comparison of Operating Results for the Three Month Periods Ended September 30,
1998 and 1997 (continued)
Year 2000 Compliance Matters (continued)
The Company does not perform in-house programming. All systems have been
purchased from third-party vendors. Therefore, the primary thrust of the
Company's Y2K effort has been ongoing discussions and monitoring of vendors'
progress. As of the date of this Form 10-QSB, the Company has received
confirmation from its vendors that Y2K -compliant versions of their systems are
available. The Company either had the compliant version in place or has replaced
a non-compliant version with the compliant one.
The most critical phase is validation. Although vendors have certified that
their systems are compliant, the Company plans to test these systems, using
critical future dates. There are numerous testing methodologies to cover the
unique interdependencies between the vendors and the Company. Testing
methodologies used by the Company will include point-to-point (tests verify the
ability of a financial institution to transmit data directly to another entity
or system); end-to-end (tests verify the ability of a financial institution
originating a transaction to transmit test data to a receiving entity or system
through an intermediary); and proxy (the service provider tests with a
representative sample of financial institutions who use a particular service on
the same platform).
The Company's Y2K action plan requires that mission-critical systems testing be
substantially completed by March 31, 1999. A mission-critical system is an
application or system that is vital to the successful continuance of a core
business activity. The Company had identified 10 mission critical systems. As of
the date of the Form 10-QSB, testing has been completed on one system and
testing has begun on 5 other systems. The Company plans to commence testing on
all mission-critical systems by December 31, 1998. Testing of material non
mission-critical systems are planned to begin by March 31, 1999 with completion
by June 30, 1999.
The Company has budgeted approximately $25,000 for hard costs related to
renovation and testing. As of the date of this Form 10-QSB, approximately $9,000
of the budget has been expended.
The Company is in the process of developing a business resumption contingency
plan for each mission-critical system in the event that there are system
failures at critical dates. The contingency plan will consist of: event
timelines, business impact analysis, alternative options, minimum acceptable
levels of output and services, and core business processes that need to be
recovered. The Company plans to have contingency plans in place by March 31,
1999.
15
<PAGE>
Wayne Savings Bancshares, Inc.
PART II
ITEM 1. Legal Proceedings
Not applicable
ITEM 2. Changes in Securities and Use of Proceeds
Not applicable
ITEM 3. Defaults Upon Senior Securities
Not applicable
ITEM 4. Submission of Matters to a Vote of Security Holders
Not applicable
ITEM 5. Other Information
The Board of Directors of Wayne Savings Bancshares, Inc., in July 1998
authorized the repurchase of up to 124,322 shares, or approximately 5%
of Wayne's outstanding stock, over the following 12 months. Any
repurchased shares will be held as treasury stock and will be
available for general corporate purposes.
ITEM 6. Exhibits and Reports on Form 8-K
Report on Form 8-K: None
Exhibits:
27 Financial Data Schedule for the six
month period ended September 30, 1998.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 13, 1998 By: /s/Charles F. Finn
------------------------- --------------------------------
Charles F. Finn
Chairman and President
Date: November 13, 1998 By: /s/Todd J. Tappel
------------------------- --------------------------------
Todd J. Tappel
Senior Vice President
Chief Financial Officer
17
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