-----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, Ul1+2YNdZ7vqEZAiHpXNQwLK4syy9FxpIbXLKN92cvM6vDg8ezPCSyj7X509avmG DV02qgbiJ1lvwwKCQo/YZg== /in/edgar/work/20000628/0000950164-00-000027/0000950164-00-000027.txt : 20000920 0000950164-00-000027.hdr.sgml : 20000920 ACCESSION NUMBER: 0000950164-00-000027 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 5 CONFORMED PERIOD OF REPORT: 20000331 FILED AS OF DATE: 20000628 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WAYNE SAVINGS BANCSHARES INC /OH/ CENTRAL INDEX KEY: 0001036030 STANDARD INDUSTRIAL CLASSIFICATION: [6035 ] IRS NUMBER: 000000000 STATE OF INCORPORATION: OH FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-23433 FILM NUMBER: 662930 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 10KSB 1 0001.txt FORM 10-KSB SECURITIES AND EXCHANGE COMMISSION 450 FIFTH STREET, N.W. WASHINGTON, D.C. 20549 FORM 10-KSB [X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended March 31, 2000 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) FEDERAL 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 $1.00 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-KSB or any amendment to this Form 10-KSB. [ ]. The issuer's revenues for the fiscal year ended March 31, 2000, were $21.4 million. The aggregate market value of the voting stock held by non-affiliates of the Registrant, computed by reference to the closing sales price of the Registrant's stock, as reported on the Nasdaq SmallCap Market on June 15, 2000, was approximately $16.3 million. This amount excludes shares held by Wayne Savings Bankshares, M.H.C., and the Registrant's directors and senior officers. As of April 13, 2000, there were issued and outstanding 2,599,015 shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE 1. Sections of Annual Report to Stockholders for the fiscal year ended March 31, 2000 (Parts II and III). 2. Proxy Statement for the 2000 Annual Meeting of Stockholders (Parts I and III). PART I ITEM 1. BUSINESS GENERAL WAYNE SAVINGS BANCSHARES, INC. Wayne Savings Bancshares, Inc. (the "Company") is a federal corporation which was organized on August 5, 1997. The only significant asset of the Company is its investment in Wayne Savings Community Bank (the "Bank"). The Company is majority-owned by Wayne Savings Bankshares, M.H.C., a federally-chartered mutual holding company (the "Mutual Holding Company"). On November 25, 1997, the Company acquired all of the issued and outstanding common stock of the Bank in connection with the Bank's reorganization into the "two-tier" form of mutual holding company ownership. At that time, each share of the Bank's common stock was automatically converted into one share of Company common stock, par value $1.00 per share (the "Common Stock"). At March 31, 2000, the Company had total assets of $304.1 million, total deposits of $265.0 million, and stockholders' equity of $25.1 million. 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. 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, and Medina counties, where it operates eight full-service offices. This contiguous four-county area is located in north central 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 extent, construction loans. 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. VILLAGE SAVINGS BANK, F.S.B. Village Savings Bank, F.S.B. ("Village") is a federally-chartered stock savings bank headquartered in North Canton, Ohio that was chartered as a wholly-owned subsidiary of the Bank in July, 1998. Village's deposits are insured by the FDIC under the SAIF. Village is a member of the FHLB system. Village is a community-oriented savings institution offering traditional financial services to its local community. Village's primary lending and deposit gathering area includes North Canton, Jackson Township and Plain Township, which are all located in Stark County. Village's principal business activity consists of originating one- to four-family residential real estate loans in its market area. Village also -1- originates multi-family residential and non- residential real estate loans, although such loans constitute a small portion of Village's lending activities. Village also originates consumer loans, and to a lesser extent, construction loans. Village 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. Village's principal executive office is located at 1265 South Main Street, North Canton, Ohio, and its telephone number at that address is (330) 494-5262. MARKET AREA/LOCAL ECONOMY The Bank, headquartered in Wooster, Ohio, operates in Wayne, Ashland, Medina and Holmes Counties in north central Ohio. Wooster, Ohio is located in Wayne County and is approximately midway between Cleveland and Columbus, Ohio. Village, headquartered in North Canton, Ohio, operates in Stark County in north central Ohio. Wayne County is characterized by a diverse economic base, which is not dependent on any particular industry. It is one of the leading agricultural counties in the state. In addition, since 1892, Wooster has been the headquarters of the Ohio Agricultural Research and Development Center, the agricultural research arm of The Ohio State University. Wayne County is also the home base of such nationally known companies as Rubbermaid Incorporated, J.M. Smucker Company (located in the City of Orrville) and the Wooster Brush Company. It is also the home of many industrial plants, including those of Packaging Corporation of America, Morton Salt, Bell and Howell Micro Photo Division, FritoLay, Inc., and The Gerstenslager Company. Wayne County is also known for its excellence in education. The College of Wooster was founded in 1866. 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 two full-service offices in Wooster. 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 one 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). Jackson Township is the home to the Belden Village Shopping Center, while Plain Township is a residential and agricultural area with a few widely scattered light industries. -2- 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; however, such lending has been reduced significantly in recent years and currently constitutes a relatively small portion of the Company's lending activities. The Company also originates consumer loans to broaden services offered to customers and to decrease the Company's interest rate risk exposure. 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, 2000, approximately $67.0 million, or 26.4%, of the Company's total loans and mortgage-backed securities, due after March 31, 2000, consisted of loans or securities with adjustable interest rates. The Company continues actively to 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 residential mortgage loans, however, are retained by the Company. 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. 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, ----------------------------------------------------------------------- 2000 1999 1998 ------------------ ------------------- ------------------- $ % $ % $ % --- --- --- --- --- --- (Dollars in Thousands) Mortgage loans: One- to four-family residential(1) $211,222 86.72% $187,638 84.82% $180,895 85.58% Residential construction loans.... 4,035 1.66 7,668 3.47 3,963 1.87 Multi-family residential.......... 8,028 3.30 7,086 3.20 7,091 3.36 Non-residential real estate/land(2) 6,068 2.49 5,610 2.53 5,838 2.76 -------- ------ -------- ------ -------- ------ Total mortgage loans............ 229,353 94.17 208,002 94.02 197,787 93.57 Other loans: Consumer loans.................... 9,041 3.71 8,415 3.80 10,477 4.96 Commercial business loans......... 5,168 2.12 4,810 2.18 3,112 1.47 -------- ----- -------- ------ -------- ------ Total other loans............... 14,209 5.83 13,225 5.98 13,589 6.43 -------- ----- -------- ------ -------- ------ Total loans before net items........ 243,562 100.00% 221,227 100.00% 211,376 100.00% ====== ====== ====== Less: Loans in process.................. 4,136 4,600 2,088 Deferred loan origination fees.... 1,538 1,855 1,882 Allowance for loan losses......... 793 678 721 -------- -------- -------- Total loans receivable, net..... $237,095 $214,094 $206,685 ======== ======== ======== Mortgage-backed securities, net(3).. $ 10,496 $ 7,230 $ 4,275 ========= ======== ========
- --------- (1) Includes equity loans collateralized by second mortgages in the aggregate amount of $11.1 million, $8.7 million and $7.9 million, as of March 31, 2000, 1999 and 1998, respectively. Such loans have been underwritten on substantially the same basis as the Company's first mortgage loans. (2) Includes land loans of $949,000, $951,000 and $584,000 as of March 31, 2000, 1999 and 1998, respectively. (3) Includes mortgage-backed securities designated as available for sale. -3- LOAN AND MORTGAGE-BACKED SECURITIES MATURITY AND REPRICING SCHEDULE. The following table sets forth certain information as of March 31, 2000, 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 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 Beyond Within Through Through Through Through Twenty One Year Three Years Five Years Ten Years Twenty Years Years Total -------- ----------- ---------- --------- ------------ ----- ----- (In Thousands) Mortgage loans(1): One to four family residential: Adjustable ........................... $ 46,169 $ 639 $ -- $ -- $ -- $ -- $ 46,808 Fixed ................................ 1,716 964 1,881 17,779 66,039 76,359 164,738 Multi-family residential and nonresidential: Adjustable ........................... 10,467 -- -- -- -- -- 10,467 Fixed ................................ 477 1,956 566 35 -- -- 3,034 Second Mortgage Loans ................... 9 89 251 1,134 67 -- 1,550 Other Loans: Commercial ............................. 3,574 284 105 1,203 2 -- 5,168 Consumer ............................... 2,389 1,366 2,035 1,646 25 -- 7,461 -------- -------- -------- -------- -------- -------- -------- Total loans ............................. $ 64,801 $ 5,298 $ 4,838 $ 21,797 $ 66,133 $ 76,359 $239,226 ======== ======== ======== ======== ======== ======== ======== Mortgage-backed securities(2) ........... $ 441 $ 1,136 $ 1,134 $ 975 $ 122 $ 6,647 $ 10,455 ======== ======== ======== ======== ======== ======== ========
- ----------- (1) Amounts shown are net of loans in process of $4.1 million. Does not include loans held for sale, nor $200,000 of non-performing loans. (2) Includes mortgage-backed securities available for sale. Does not include premiums of $133,000, discounts of $30,000 and unrealized losses of $62,000. -4- The following table sets forth at March 31, 2000 the dollar amount of all fixed rate and adjustable rate loans due after March 31, 2001. Fixed Adjustable Total ----- ---------- ----- (In Thousands) Mortgage loans(1): One- to four-family residential ....................... $163,101 $ 46,782 $209,883 Multi-family residential and nonresidential ................ 10,467 3,034 13,501 Other loans: Commercial business ................ 950 2,680 3,630 Consumer ........................... 7,427 395 7,822 -------- -------- -------- Total loans ...................... $181,945 $ 52,891 $234,836 ======== ======== ======== Mortgage-backed securities(2) ........ $ 3,103 $ 6,911 $ 10,014 ======== ======== ======== - ----------- (1) Includes loans held for sale. (2) Includes mortgage-backed securities available for sale. 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, 2000, the Company had $200.1 million, or 82.1%, 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 but not limited to 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 secondary market activities over the past three years have been limited to sales of $6.4 million, $15.9 million and $7.1 million for the fiscal years ended March 31, 2000, 1999 and 1998, respectively. Such sales generally constituted current period originations. Mortgage loans held for sale at March 31, 2000, 1999 and 1998 totaled $317,000, $1.6 million and $1.2 million, respectively. 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. Particularly in a relatively low interest rate environment, borrowers typically prefer fixed rate loans to ARM loans. Therefore, even if management's strategy is to emphasize ARM loans, market conditions may be such that there is greater demand for fixed rate mortgage loans. During the year ended March 31, 2000, the Company's ARM portfolio decreased by $785,000, or 1.4%. 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. The treasury ARM loan has an initially discounted rate of 1% below the current index, plus margin. However, these loans are underwritten at the fully-indexed interest rate. The cost of fund ARM loan 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 Associations, which index is published quarterly by the OTS. The initial interest rate on cost of fund ARM loans is not discounted. In the past, the Company has -5- used different indices for ARM loans, such as the National Average Contract Rate for Previously Occupied Homes and the National Average Cost of Funds. Consequently, the interest rate adjustments on the Company's portfolio of ARM loans do not reflect changes in a particular interest rate index. One- to four-family residential ARM loans totaled $35.7 million, or 14.6%, of the Company's total loan portfolio at March 31, 2000. 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 Ohio Average Cost of Funds for SAIF-Insured Savings Association and 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, 2000, the Company's equity loan portfolio totaled $11.1 million, or 5.26%, 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 and all ARM loans with loan-to-value ratios of 80.01% to 90%, and 90.01% to 95%, the Company requires the first 20%, and 25%, 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 95%, 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. In recent years, the Company has significantly reduced its originations of multi-family real estate loans. Loans secured by multi-family real estate constituted approximately $8.0 million, or 3.3%, of the Company's total loan portfolio at March 31, 2000. The Company's multi-family real estate loans are secured by multi-family residences, such as apartment buildings. At March 31, 2000, 89.1% of the Company's multi-family loans were secured by properties located within the Company's market area. At March 31, 2000, the Company's multi-family real estate loans had an average balance of $211,000, and the largest multi-family real estate loan had a principal balance of $1.2 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 -6- market index, and amortize over 15 to 25 years. The Company currently does not emphasize multi-family real estate construction loans; however, the Company's policies do not preclude such lending. 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 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. The Company also has reduced significantly its non-residential real estate loan originations in recent years. Loans secured by non-residential real estate constituted approximately $5.1 million, or 2.1%, of the Company's total loan portfolio at March 31, 2000. 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, 2000, 80.4% of the Company's non-residential real estate loans were secured by properties located within the Company's market area. At March 31, 2000, the Company's non-residential loans had an average balance of $115,000 and the largest non-residential real estate loan had a principal balance of $940,000. 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; however, the Company's policies do not preclude such lending. 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 $949,000 at March 31, 2000. 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, 2000, the Company had $4.0 million, or 1.7%, 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 LOANS. Commercial loans totaled $5.2 million, or 2.1% of the Company's total loan portfolio at March 31, 2000. The Company does not emphasize commercial lending, but evaluates and meets the needs of its customer base. 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 -7- 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. As of March 31, 2000, consumer loans totaled $9.0 million, or 3.7%, of the Company's total loan portfolio. The principal types of consumer loans offered by the Company are fixed rate and fixed term second mortgage loans, 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, 2000, second mortgage loans totaled $1.6 million, or 17.7%, of consumer loans. The underwriting standards employed by the Company for consumer loans include a determination of the applicant's credit history and an assessment of 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, 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 do 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 general economic conditions and prior loss experience. See "--Delinquencies and Classified Assets--Non-Performing 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 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, increased from $7.2 million at March 31, 1999 to $10.5 million at March 31, 2000. The Company's objectives in investing in mortgage-backed securities varies 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 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, and walk-in customers. 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 -8- department, loans between $150,000 and $250,000 must be approved by the Chief Lending Officer. The Chief Executive Officer can approve loans up to $300,000, 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 management's approvals of loans are made within the scope of management's authority. All approvals subsequently are ratified monthly by the full 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, 2000, the Company had commitments to originate $2.3 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. Although in the past the Company has purchased loans originated by other lenders, the Company has not purchased any such loans in at least 10 years. At March 31, 2000, less than 1% of all loans in the Company's portfolio were purchased from others and the majority of such loans were collateralized by properties located in Ohio. 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, ---------------------------------- 2000 1999 1998 ---- ---- ---- (In Thousands) Total loans receivable, net at beginning of period ................. $ 214,094 $ 206,685 $ 209,404 Loans originated: One- to four-family residential(1) .... 52,485 59,578 42,561 Multi-family residential(2) ........... 549 1,930 600 Non-residential real estate/land ...... 223 179 674 Consumer loans ........................ 7,498 6,498 6,101 Commercial loans ...................... 4,194 3,681 4,287 --------- --------- --------- Total loans originated ............. 64,949 71,866 54,223 Loans sold: Whole loans ........................... (6,425) (15,860) (7,066) --------- --------- --------- Total loans sold ................... (6,425) (15,860) (7,066) Mortgage loans transferred to REO ....... (64) (58) (162) Loan repayments ......................... (37,106) (48,814) (49,359) Other loan activity, net ................ 1,647 (275) (355) --------- --------- --------- Total loans receivable, net at end of period ..................... $ 237,095 $ 214,094 $ 206,685 ========= ========= ========= Mortgage-backed securities at beginning of period .................... $ 7,230 $ 4,275 $ 873 Mortgage-backed securities purchased .... 8,030 6,576 4,010 Principal repayments and other activity ............................... (4,764) (3,621) (608) --------- --------- --------- Mortgage-backed securities at end of period ..................... $ 10,496 $ 7,230 $ 4,275 ========= ========= ========= - ------------ (1) Includes loans to finance the construction of one- to four-family residential properties, and loans disbursed for sale in the secondary market. (2) Includes loans to finance the sale of real estate acquired through foreclosure. 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 on the accounting for non-refundable fees and costs associated with originating or acquiring loans. 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 -9- acquired. Fees deferred under SFAS No. 91 are recognized into income immediately upon prepayment or the sale of the related loan. At March 31, 2000, the Company had $1.5 million 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 recognized fees and service charges of $720,000, $682,000 and $617,000, for the fiscal years ended March 31, 2000, 1999 and 1998, 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, 2000, the Company's largest real estate related borrower had an aggregate principal outstanding balance of $2.5 million. The Company had no loans at March 31, 2000 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 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. At March 31, 2000, the Company had non-performing assets of $290,000 and a ratio of non-performing assets to total assets of 0.10%. At March 31, 1999 and 1998, the Company had non-performing assets of $321,000 and $1.3 million, respectively. The Company's levels of non-performing assets during the three year period ended March 31, 2000 were below peer group averages. Real estate acquired by the Company as a result of foreclosure or by deed in lieu of foreclosure 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. -10- The following table sets forth information regarding the Company's non-accrual loans and real estate acquired by foreclosure at the dates indicated. For all the dates indicated, the Company did not have any material restructured loans within the meaning of SFAS 15. At March 31, ------------------------------ 2000 1999 1998 ---- ---- ---- (Dollars in Thousands) Non-accrual loans: Mortgage loans: Permanent loans secured by one- to four-family dwelling units ....... $ 170 $ 224 $ 299 All other mortgage loans ............. -- -- 1 Non-mortgage loans: Commercial ........................... -- -- -- Consumer ............................. 30 12 -- ------ ------ ------ Total non-accrual loans .................... 200 236 300 Accruing loans 90 days or more delinquent .. -- 44 8 ------ ------ ------ Total non-performing loans ................. 200 280 308 Total real estate owned(1) ................. 90 41 946 ------ ------ ------ Total non-performing assets ................ $ 290 $ 321 $1,254 ====== ====== ====== Total non-performing loans to net loans receivable ...................... .08% .13% .15% Total non-performing loans to total assets .............................. .07% .10% .12% Total non-performing assets to total assets .............................. .10% .12% .48% - ----------- (1) Represents the net book value of property acquired by the Company 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, 2000, gross interest income of $8,000 would have been recorded on loans currently accounted for on a non-accrual basis if the loans had been current throughout the period. The following table sets forth information with respect to loans past due by 60-89 days and 90 days or more in the Company's portfolio at the dates indicated. At March 31, ----------------------------- 2000 1999 1998 ---- ---- ---- (Dollars in Thousands) Loans past due 60-89 days .................. $1,539 $1,710 $1,136 Loans past due 90 days or more ............. 200 280 308 ------ ------ ------ Total past due 60 days or more .......... $1,739 $1,990 $1,444 ====== ====== ====== 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 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 -11- 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, -------------------------------- 2000 1999 1998 ---- ---- ---- (Dollars in Thousands) Substandard assets(1) ................... $ 290 $ 206 $1,243 Doubtful assets ......................... -- -- -- Loss assets ............................. -- 8 15 ------ ------ ------ Total classified assets .............. $ 290 $ 214 $1,258 ====== ====== ====== - --------- (1) Includes REO. ALLOWANCE FOR LOAN LOSSES. Management's policy is to provide for estimated losses on the Company's loan portfolio based on management's evaluation of the potential losses that may be incurred. The Company regularly reviews its loan portfolio, including problem loans, to determine whether any loans require classification or the establishment of appropriate reserves or allowances for losses. Such evaluation, which includes a review of all loans of which full collectibility of interest and principal may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral. Other factors considered by management include the size and risk exposure of each segment of the loan portfolio, present indicators such as delinquency rates and the borrower's current financial condition, and the potential for losses in future periods. Management calculates the general allowance for loan losses in part based on past experience, and in part based on specified percentages of loan balances. While both general and specific loss allowances are charged against earnings, general loan loss allowances are added back to capital in computing risk-based capital under OTS regulations. During fiscal years ended March 31, 2000, 1999 and 1998, the Company added $120,000, $64,000 and $60,000, respectively, to the provision for loan losses. The Company's allowance for loan losses totaled $793,000, $678,000 and $721,000, at March 31, 2000, 1999 and 1998, respectively. The Company bases the provision for loan loss on several factors, including loan volume, portfolio mix, delinquencies, etc. Management believes that the Company's current allowance for loan losses is adequate, however, 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. -12- 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 March 31, ------------------------------------- 2000 1999 1998 ---- ---- ---- (Dollars in Thousands) Loans receivable, net ................ $ 237,095 $ 214,094 $ 206,685 Average loans receivable, net ........ 229,845 209,178 207,377 Allowance balance (at beginning of period) .......................... 678 721 914 Provision for losses: Mortgage .......................... -- -- -- Non-mortgage ...................... -- -- -- General ........................... 120 64 60 (Charge-offs) Recoveries: Mortgage .......................... -- (108) (231) Non-Mortgage ...................... (5) 1 (22) --------- --------- --------- Allowance balance (at end of period) ............................. $ 793 $ 678 $ 721 ========= ========= ========= Allowance for loan losses as a percent of loans receivable, net at end of period ................ .33% .32% .35% Net loans charged off as a percent of average loans receivable, net ..................... --% .05% .12% Ratio of allowance for loan losses to total non- performing assets at end of period ........................... 273.45% 211.21% 57.50% Ratio of allowance for loan losses to non-performing loans at end of period .............. 396.50% 242.14% 234.09% 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, --------------------------------------------------------------------------- 2000 1999 1998 ---------------------- ---------------------- ---------------------- % of Loans % of Loans % of Loans in Each in Each in Each Category to Category to Category to Amount Total Loans Amount Total Loans Amount Total Loans ------ ----------- ------ ----------- ------ ----------- (Dollars in Thousands) Balance at end of period applicable to: One- to four-family residential loans ..... $423 88.4% $386 88.3% $446 87.4% Multi-family residential loans ............ 37 3.3 38 3.2 36 3.4 Consumer and commercial ................... 333 5.8 252 6.0 54 6.4 Non-residential real estate ............... -- 2.5 2 2.5 185 2.8 ---- ----- ---- ----- ---- ----- Total allowance for loan losses ........... $793 100.0% $678 100.0% $721 100.0% ==== ===== ==== ===== ==== =====
INVESTMENT ACTIVITIES The Company's investment portfolio is comprised of investment securities and certificates of deposit in other financial institutions. The carrying value of the Company's investment securities totaled $27.2 million at March 31, 2000, compared to $17.8 million at March 31, 1999, an increase of $8.9 million, or 50.0%. 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 $14.3 million at March 31, 2000 compared to $16.2 at March 31, 1999, a decrease of $1.9 million, or 11.9%. The Company is required under federal regulations to maintain a minimum amount of liquid assets that may be invested in specified short term securities and certain other investments. See "Regulation--Liquidity Requirements" below and Item 7. The Company generally has maintained a portfolio of liquid assets that exceeds regulatory requirements. Liquidity levels may be increased or decreased depending upon the yields on investment alternatives -13- 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, ------------------------------------------------------------------------ 2000 1999 1998 ----------------------- --------------------- --------------------- Carrying Market Carrying Market Carrying Market Value Value Value Value Value Value --------- --------- --------- -------- -------- ------- (In Thousands) Investment securities: Corporate bonds and notes .......................... $ 2,987 $ 2,951 $ -- $ -- $ -- $ -- U.S. Government and agency securities .............. 20,057 19,528 11,666 11,588 13,228 13,162 Obligations of state and political subdivisions .... 155 155 164 164 173 173 Certificates of deposit in other financial institutions .............................. 4,000 4,000 6,000 6,000 8,500 8,500 ------- ------- ------- ------- ------- ------- Total investment securities .......................... 27,199 26,634 17,830 17,752 21,901 21,835 Other Investments: Interest-bearing deposits in other financial institutions .............................. 8,332 8,332 10,410 10,410 7,647 7,647 Federal funds sold ................................... 3,475 3,475 4,295 4,295 4,100 4,100 Federal Home Loan Bank stock ......................... 3,160 3,160 2,919 2,919 2,719 2,719 ------- ------- ------- ------- ------- ------- Total investments ................................ $42,166 $41,601 $35,454 $35,376 $36,367 $36,301 ======= ======= ======= ======= ======= =======
-14- 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, 2000. The Company does not hold any investment securities with maturities in excess of 16 years.
At March 31, 2000 --------------------------------------------------------------------------------------- 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 ......... $ -- --% $ 2,987 6.71% $ -- --% $ -- --% U.S. Government and agency ........ -- -- 17,557 6.36 2,000 7.10 500 6.70 Obligations of state and political subdivisions ........... -- -- -- -- -- -- 155 5.50 Certificates of deposit in other financial institutions ..... 4,000 5.84 -- -- -- -- -- -- ------- ---- ------- ---- ------- ---- ------- ---- Total investment securities ..... $ 4,000 5.84% $20,544 6.41% $ 2,000 7.10% $ 655 6.42% ======= ==== ======= ==== ======= ==== ======= ====
At March 31, 2000 ------------------------------------- Total Investment Securities ------------------------------------- Average Weighted Life Carrying Market Average In Years Value Value Yield -------- ----- ----- ----- (Dollars in Thousands) Investment Securities: Corporate bonds and notes ........... 2.36 $ 2,987 $ 2,951 6.71% U.S. Government and agency .......... 3.62 20,057 19,528 6.13 Obligations of state and political subdivisions ............. 12.17 155 155 5.50 Certificates of deposit in other financial institutions ....... .15 4,000 4,000 5.84 ----- ------- ------- ---- Total investment securities ....... 3.02 $27,199 $26,634 6.15% ===== ======= ======= ==== -15- 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 $12.0 million of advances from the FHLB at March 31, 2000. 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. In past years the Company's total deposits had remained relatively stable, whereas deposit growth this fiscal year increased nearly 13%, primarily attributable to the expanded banking locations. DEPOSIT PORTFOLIO. Savings and other deposits in the Company as of March 31, 2000, comprised the following:
Weighted Percentage Average Minimum of Total Interest Rate Minimum Term Checking and Savings Deposits Amount Balances Deposits - ------------- ------------ ----------------------------- ------ -------- -------- (In Thousands) 2.08% None NOW Accounts $ -- $ 31,014 11.71% 3.13 None Passbook -- 53,074 20.03 3.28 None Money Market Investor 2,500 10,827 4.09 Certificates of Deposit ----------------------- 5.00 12 months or less Fixed term, fixed rate 500 41,722 15.74 5.60 12 to 24 months Fixed term, fixed rate 500 54,341 20.51 5.71 25 to 36 months Fixed term, fixed rate 500 24,787 9.36 5.52 36 months or more Fixed term, fixed rate 500 8,888 3.35 6.07 Negotiable Jumbo Certificates 100,000 40,299 15.21 --------- ------ $ 264,952 100.00% ========= ======
-16- 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, % 2000 Deposits (Decrease) 1999 Deposits (Decrease) 1998 Deposits ---- -------- ---------- ---- -------- ---------- ---- -------- (Dollars in Thousands) NOW accounts........................ $ 31,014 11.71% $ 6,135 $24,879 10.57% $ 3,817 $ 21,062 9.68% Passbook statement accounts......... 53,074 20.03 6,608 46,466 19.75 7,355 39,111 17.97 Money market passbook............... 10,827 4.09 (438) 11,265 4.79 1,817 9,448 4.34 Certificates of deposit(1) Original maturities of: 12 months or less............... 41,722 15.74 3,909 37,813 16.07 8,463 29,350 13.49 12 to 24 months................. 54,341 20.51 20,340 34,001 14.45 (3,068) 37,069 17.03 25 to 36 months................. 24,787 9.36 (13,909) 38,696 16.44 (2,166) 40,862 18.78 36 months or more............... 8,888 3.35 (2,532) 11,420 4.85 (2,103) 13,523 6.21 Negotiated jumbo................ 40,299 15.21 9,512 30,787 13.08 3,591 27,196 12.50 -------- ------- ------- ------- ------ -------- -------- ------- Total........................... $264,952 100.00% $29,625 $235,327 100.00% $ 17,706 $217,621 100.00% ======== ======= ======= ======== ====== ======== ======== =======
- -------- (1) Certain Individual Retirement Accounts ("IRAs") are included in the respective certificate balances. IRAs totaled $31.1 million, $31.2 million and $30.9 million, as of March 31, 2000, 1999 and 1998, respectively. -17- The following table sets forth the certificates of deposit in the Company classified by rates as of the dates indicated: At March 31, ------------------------------------------ 2000 1999 1998 ---- ---- ---- (Dollars in Thousands) 4.01- 6.00% ................. $127,653 $120,446 $105,021 6.01- 8.00% ................. 42,382 29,486 38,148 8.01-10.00% ................. 2 2,785 4,831 -------- -------- -------- Total .................... $170,037 $152,717 $148,000 ======== ======== ======== The following table sets forth the amount and maturities of certificates of deposit at March 31, 2000. Amount Due ------------------------------------------------------------- Less Than 1-2 2-3 After One Year Years Years 3 Years Total -------- ----- ----- ------- ----- Rate (In Thousands) - ---- 4.01- 6.00%..... $ 102,627 $ 18,452 $ 2,917 $ 3,657 $127,653 6.01- 8.00%..... 21,241 18,363 2,123 655 42,382 8.01-10.00%..... 2 -- -- -- 2 --------- --------- --------- --------- -------- Total........ $ 123,870 $ 36,815 $ 5,040 $ 4,312 $170,037 ========= ========= ========= ========= ======== The following table indicates the amount of the Company's negotiable certificates of deposit of $100,000 or more by time remaining until maturity as of March 31, 2000. Maturity Period Certificates of Deposit --------------- ----------------------- (In Thousands) Three months or less............................. $ 12,964 Over three months through six months............. 7,367 Over six months through twelve months............ 10,573 Over twelve months............................... 9,395 --------- Total....................................... $ 40,299 ========= BORROWINGS Savings deposits are the primary source of funds for the Company's lending and investment activities and for its general business purposes. The Company, if the need arises, may rely upon advances from the FHLB and the Federal Reserve Bank discount window to supplement its supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB typically are collateralized by the Company's stock in the FHLB and a portion of the Company's first mortgage loans. At March 31, 2000, the Company had $12.0 million in advances outstanding. The FHLB functions as a central reserve bank providing credit for the Company and other member savings associations and financial institutions. As a member, the Company is required to own capital stock in the FHLB and is authorized to apply for advances on the security of such stock and certain of its 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 -18- 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. 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. REGULATION As a state-chartered, SAIF-insured savings association, the Company 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 and Village are members of and own 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 Company also is subject to regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") governing reserves to be maintained against deposits and certain other matters. The OTS and Ohio Division regularly examine the Banks 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 and Village in its role as the administrator of the SAIF. The Company'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 Company'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 Village and their operations. FEDERAL REGULATION OF SAVINGS INSTITUTIONS BUSINESS ACTIVITIES. The activities of savings institutions are governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the Federal Deposit Insurance Act (the "FDI Act"). The federal banking statutes, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation Improvement Act ("FDICIA") (1) restrict the solicitation of brokered deposits by savings institutions that are troubled or not well-capitalized, (2) prohibit the acquisition of any corporate debt security that is not rated in one of the four highest rating categories, (3) restrict the aggregate amount of loans secured by non-residential real estate property to 400% of capital, (4) permit savings and loan holding companies to acquire up to 5% of the voting shares of non-subsidiary savings institutions or savings and loan holding companies without prior approval, and (5) permit bank holding companies to acquire healthy savings institutions. The -19- 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. 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 institutions 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, 2000, the Company maintained 98.4% 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 percent of its net income during the calendar year, plus its retained net income for the preceding two years. As of March 31, 2000 the Bank was a "well-capitalized" institution. In addition, OTS regulations require the Mutual Holding Company to notify the OTS of any proposed waiver of its right to receive dividends. It is the OTS' recent practice to review dividend waiver notices on a case-by-case basis, and, in general, not object to any such waiver if: (i) the mutual holding company's board of directors determines that such waiver is consistent with such directors' fiduciary duties to the mutual holding company's members; (ii) for as long as the savings association subsidiary is controlled by the mutual holding company, the dollar amount of dividends waived by the mutual holding company are considered as a restriction on the retained earnings of the savings association, which restriction, if material, is disclosed in the public financial statements of the savings association as a note to the financial statements; (iii) the amount of any dividend waived by the mutual holding company is available for declaration as a dividend solely to the mutual holding company, and, in accordance with SFAS 5, where the savings association determines that the payment of such dividend to the mutual holding company is probable, an appropriate dollar amount is recorded as a liability; (iv) the amount of any waived dividend is considered as having been paid by the savings association (and the savings association's capital ratios adjusted accordingly) in evaluating any proposed dividend under OTS capital distribution regulations; and (v) in the event the mutual holding company converts to stock form, the appraisal submitted to the OTS in connection with the conversion application takes into account the aggregate amount of the dividends waived by the mutual holding company. LIQUIDITY. The Company is required to maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances, specified U.S. Government, state or federal agency obligations, shares of certain mutual funds and certain corporate debt securities and commercial paper) equal to a monthly average of not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement which is currently 4%, may be changed from time to time by the OTS to any amount within the range of 4% to 10% depending upon economic conditions and the savings flow of member institutions. Monetary penalties may be imposed for failure to meet these liquidity requirements. The Company's average liquidity ratio for March 2000 was 19.6%, -20- which exceeded the then applicable requirements. The Company has never been subject to monetary penalties for failure to meet its liquidity requirements. 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 Holding Company 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. -21- 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 ("MSRs"). 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. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." An OTS regulatory capital rule also incorporates an interest rate risk component. Savings associations with "above normal" interest rate risk exposure are subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. A savings association's interest rate risk is measured by the decline in the net portfolio value of its assets (i.e., the difference between incoming and outgoing discounted cash flows from assets, liabilities and off-balance sheet contracts) that would result from a hypothetical 200-basis point increase or decrease in market interest rates, divided by the estimated economic value of the association's assets. In calculating its total capital under the risk-based rule, a savings association whose measured interest rate risk exposure exceeds 2%, must deduct an interest rate component equal to one-half of the excess change. The OTS has deferred, for the present time, the date on which the interest rate component is to be deducted from total capital. The rule also provides that the Director of the OTS may waive or defer an institution's interest rate risk component on a case-by-case basis. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 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. -22- INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC The Bank and Village are members 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. The FDIC's deposit insurance premiums are assessed through a risk-based system under which all insured depository institutions are placed into one of nine categories and assessed insurance premiums, ranging from .23% to .31% of deposits, based upon their level of capital and supervisory evaluation. Under the system, institutions classified as well capitalized (i.e., a core capital ratio of at least 5%, a ratio of core capital to risk-weighted assets of at least 6% and a risk-based capital ratio of at least 10%) and considered healthy would pay the lowest premium while institutions that are less than adequately capitalized (i.e., a core capital or core capital to risk-based capital ratios of less than 4% or a risk-based capital ratio of less than 8%) and considered of substantial supervisory concern would pay the highest premium. Risk classification of all insured institutions will be made by the FDIC for each semi-annual assessment period. The FDIC is authorized to increase assessment rates, on a semiannual basis, if it determines that the reserve ratio of the SAIF will be less than the designated reserve ratio of 1.25% of SAIF insured deposits. In setting these increased assessments, the FDIC must seek to restore the reserve ratio to that designated reserve level, or such higher reserve ratio as established by the FDIC. The FDIC may also impose special assessments on SAIF members to repay amounts borrowed from the United States Treasury or for any other reason deemed necessary by the FDIC. FEDERAL HOME LOAN BANK SYSTEM The Company and Village are members of the FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. The Company, as a member of the FHLB, is 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 Company was in compliance with this requirement with an investment in FHLB-Cincinnati stock, at March 31, 2000, of $3.2 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. Over the past five years such dividends have averaged 5.75%, and were 7.25% for the fiscal year ended March 31, 2000. If dividends were reduced, or interest on future FHLB-Cincinnati advances increased, the Company's net interest income would likely also be reduced. FEDERAL RESERVE SYSTEM The Federal Reserve Board regulations require savings institutions to maintain non-interest-earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts as follows: for accounts aggregating $54.0 million or less (subject to adjustment by the Federal Reserve Board) the reserve requirement is 3%; and for accounts greater than $54.0 million, the reserve requirement is $1.6 million plus 10% (subject to adjustment by the Federal Reserve Board between 8% and 14%) against that portion of total transaction accounts in excess of $54.0 million. The first $4.2 million of otherwise reservable balances (subject to adjustments by the Federal Reserve Board) are exempted from the reserve requirements. The Company is in compliance with the -23- foregoing requirements. The balances maintained to meet the reserve requirements imposed by the FRB may be used to satisfy liquidity requirements imposed by the OTS. 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 of Financial Institutions (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 10% of an association's assets unless the Ohio Division increases the limitation to 30%, 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 Company, 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 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 -24- 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 GENERAL. The Company and the Mutual Holding Company are non-diversified mutual savings and loan holding companies within the meaning of the HOLA. As such, the Company and the Mutual Holding Company are registered with the OTS and are subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company and the Mutual Holding Company and any non- savings institution subsidiaries. Among other things, this authority permits the OTS to restrict or prohibit activities that are determined to be a serious risk to the subsidiary savings institution. The Bank must notify the OTS 30 days before declaring any dividend to the Company and Village must notify the OTS 30 days before declaring any dividend to the Bank. RESTRICTIONS APPLICABLE TO MUTUAL HOLDING COMPANIES. Pursuant to Section 10(o) of the HOLA and OTS regulations, a mutual holding company may engage in the following activities: (i) investing in the stock of a savings association; (ii) acquiring a mutual association through the merger of such association into a savings association subsidiary of such holding company or an interim savings association subsidiary of such holding company; (iii) merging with or acquiring another holding company; one of whose subsidiaries is a savings association; (iv) investing in a corporation, the capital stock of which is available for purchase by a savings association under federal law or under the law of any state where the subsidiary savings association or associations share their home offices; (v) furnishing or performing management services for a savings association subsidiary of such company; (vi) holding, managing or liquidating assets owned or acquired from a savings subsidiary of such company; (vii) holding or managing properties used or occupied by a savings association subsidiary of such company properties used or occupied by a savings association subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix) any other activity (A) that the Federal Reserve Board, by regulation, has determined to be permissible for bank holding companies under Section 4(c) of the Bank Holding Company Act of 1956, unless the Director, by regulation, prohibits or limits any such activity for savings and loan holding companies; or (B) in which multiple savings and loan holding companies were authorized (by regulation) to directly engage on March 5, 1987; and (x) purchasing, holding, or disposing of stock acquired in connection with a qualified stock issuance if the purchase of such stock by such savings and loan holding company is approved by the Director. If a mutual holding company acquires or merges with another holding company, the holding company acquired or the holding company resulting from such merger or acquisition may only invest in assets and engage in activities listed in (i) through (x) above, and has a period of two years to cease any non-conforming activities and divest of any non-conforming investments. The HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring another savings institution or holding company thereof, without prior written approval of the OTS. It also prohibits the acquisition or retention of, with certain exceptions, more than 5% of a non-subsidiary savings institution, a non-subsidiary holding company, or a non-subsidiary company engaged in activities other than those permitted by the HOLA; or acquiring or retaining control of an institution that is not federally insured. In evaluating applications by holding companies to acquire savings institutions, the OTS must consider the financial and -25- managerial resources, future prospects of the company and institution involved, the effect of the acquisition on the risk to the insurance fund, the convenience and needs of the community and competitive factors. The OTS is prohibited from approving any acquisition that would result in a multiple savings and loan holding company controlling savings institutions in more than one state, subject to two exceptions: (i) the approval of interstate supervisory acquisitions by savings and loan holding companies, and (ii) the acquisition of a savings institution in another state if the laws of the state of the target savings institution specifically permit such acquisitions. 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. In addition, the Company is required generally to recapture into income the portion of its bad debt reserve (other than the supplemental reserve) that exceeds its base year reserves, approximately $250,000. 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, 2000 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 tax returns have been audited or closed without audit through fiscal year 1996. OHIO TAXATION. The Company 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 Company is not currently under audit with respect to its Ohio franchise tax returns. ITEM 2. PROPERTIES The Bank conducts its business through its main office located in Wooster, Ohio, and seven full service branch offices located in four counties. The following table sets forth certain information concerning the main office and each branch office of the Bank at March 31, 2000. The aggregate net book value of the Company's premises and equipment was $8.2 million at March 31, 2000. -26- WAYNE SAVINGS COMMUNITY BANK Location Year Opened Owned or Leased -------- ----------- --------------- 151 N. Market St. 1902 Owned Wooster, Ohio 44691 1908 Cleveland Rd. 1978 Owned Wooster, Ohio 44691 90 North Clay St. 1964 Owned Millersburg, Ohio 44654 233 Claremont Ave. 1968 Owned Ashland, Ohio 44805 237 North Main St. 1972 Owned Rittman, Ohio 44270 303 Highland Dr. 1980 Owned Lodi, Ohio 44254 2024 Millersburg Rd. 1999 Owned Wooster, Ohio 44691 543 Riffle Rd. 1999 Leased Wooster, Ohio 44691 VILLAGE SAVINGS BANK Village conducts its business through its office located in Stark County, Ohio. Location Year Opened Owned or Leased 1265 South Main Street 1998 Owned North Canton, Ohio 44720 The Company's accounting and record keeping activities are maintained through an in-house data processing system. ITEM 3. LEGAL PROCEEDINGS A former executive officer and director of Village has filed Harbert v. Wayne Savings Bankshares, M.H.C. and Finn and Village Savings Bank, alleging breach of contract and misrepresentation. The plaintiff brought the lawsuit in the Court of Common Pleas of Stark County, Ohio, on May 19, 1999, and is seeking wages and compensatory damages of $500,000, punitive damages of $500,000, and attorney fees and costs. Although there can be no certainty as to the outcome of this matter, management has retained counsel to vigorously contest the claim. The Company is not involved in any other pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, involved amounts which are believed by management to be immaterial to the financial condition and operations of the Company. -27- 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 STOCK AND RELATED STOCKHOLDER MATTERS The "Stockholder Information" and Common Stock and Related Matters sections of the Company's annual report to stockholders for the fiscal year ended March 31, 2000 (the "2000 Annual Report to Stockholders") are incorporated herein by reference. No other sections of the 2000 Annual Report to Stockholders are incorporated herein by this reference. ITEM 6. 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 2000 Annual Report to Stockholders is incorporated herein by reference. No other sections of the 2000 Annual Report to Stockholders are incorporated herein by this reference. ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The material identified in Item 13(a)(1) hereof is incorporated herein by reference. ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Not Applicable PART III ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE BANK The "Proposal I--Election of Directors" section of the Company's definitive proxy statement for its 2000 annual meeting of stockholders (the "Proxy Statement") is incorporated herein by reference. ITEM 10. EXECUTIVE COMPENSATION The "Proposal I--Election of Directors" section of the Company's Proxy Statement is incorporated herein by reference. ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The "Proposal I--Election of Directors" section of the Company's Proxy Statement is incorporated herein by reference. -28- ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The "Proposal I--Election of Directors" section of the Company's Proxy Statement is incorporated herein by reference. PART IV ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FROM 8-K (a)(1) Financial Statements The following documents appear in sections of the Company's 2000 Annual Report to Stockholders under the same captions, and are incorporated herein by reference. No other sections of the 2000 Annual Report to Stockholders are incorporated herein by this reference. (i) Selected Financial and Other Data; (ii) Management's Discussion and Analysis of Financial Condition and Results of Operations; (iii) Report of Independent 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 2000 Annual Report to Stockholders is not deemed filed as part of this Annual Report on Form 10-KSB, and no other sections of the 2000 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 Reference to Prior Filing or Exhibit Regulation S-B Number Attached Exhibit Number Document Hereto -------------- -------- ------ 3 Articles of Incorporation * 3 Bylaws * -29- 4 Instruments defining the * rights of security holders, including debentures 9 Voting trust agreement None 10 Material contracts None 11 Statement re: computation Not of per share earnings Required 13 Annual Report to 13 Security Holders 16 Letter re: change in certifying None accountants 18 Letter re: change in accounting None principles 21 Subsidiaries of Registrant None 22 Published report regarding None matters submitted to vote of security holders 23 Consent of Grant Thornton LLP 23 27 EDGAR Financial Data Schedule 27 28 Information from reports None furnished to state insurance regulatory authorities 99 Additional Exhibits None - ----------------- * Filed as exhibits to the Registrant's Form 8-K Current Report filed with the SEC on November 26, 1997. (b) Reports on Form 8-K: ------------------- Not Applicable -30- 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 26, 2000 By: /s/ Charles F. Finn -------------------------------- Charles F. Finn, President and Chief Executive Officer 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/ Todd J. Tappel --------------------------------- --------------------------------- Charles F. Finn, President, Chief Todd J. Tappel, Senior Vice Executive Officer and Director President and Corporate Secretary (Principal Executive Officer) Secretary (Principal Financial Officer) Date: June 26, 2000 Date: June 26, 2000 By: /s/ Anthony Volpe By: /s/ Kenneth G. Rhode --------------------------------- ---------------------------------- Anthony Volpe, Vice President Kenneth G. Rhode, Director (Principal Accounting Officer) Date: June 26, 2000 Date: June 26, 2000 By: By: ----------------------------------- ---------------------------------- Donald E. Massaro, Director James C. Morgan, Director Date: Date: By: /s/ Terry A Gardner By: /s/ Russell L. Harpster ----------------------------------- ----------------------------------- Terry A. Gardner, Director Russell L. Harpster, Director Date: June 26, 2000 Date: June 26, 2000 By: /s/ Joseph L. Retzler ----------------------------------- Joseph L. Retzler, Director Date: June 26, 2000 -31- EX-13 2 0002.txt EXHIBIT 13 EXHIBIT 13 2000 ANNUAL REPORT TO STOCKHOLDERS DIRECTORS AND OFFICERS WAYNE SAVINGS BANCSHARES, INC. Board of Directors Executive Officers Charles Finn Charles Finn Chairman President And Chief Executive Officer Kenneth Rhode Wanda Christopher-Finn Executive Vice President Russell Harpster And Chief Administrative Officer Joseph Retzler Gary Miller Senior Vice President And Donald Massaro Chief Lending Officer Terry Gardner Todd Tappel Senior Vice President And James Morgan Chief Financial Officer; Corporate Secretary And Treasurer 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 Report of Independent Certified Public Accountants ........................ 20 Consolidated Statements of Financial Condition ............................ 21 Consolidated Statements of Earnings ....................................... 22 Consolidated Statements of Comprehensive Income ........................... 23 Consolidated Statements of Stockholders' Equity ........................... 24 Consolidated Statements of Cash Flows ..................................... 25 Notes to Consolidated Financial Statements ................................ 27 4 STOCKHOLDER INFORMATION Annual Meeting The Annual Meeting of Stockholders will be held at 10:00 a.m. on July 27, 2000, at The Black Tie Affair Conference Center, 50 Riffel Road, Wooster, Ohio. Special Counsel Luse Lehman Gorman Pomerenk &Schick 5335 Wisconsin Avenue NW Suite 400 Washington, D. C. 20015 Independent Auditors Grant Thornton LLP 625 Eden Park Drive o Suite 900 Cincinnati, Ohio 45202 Transfer Agent ChaseMellon Shareholder Services 85 Challenger Road o Overpeck Centre Ridgefield Park, New Jersey 07660 Annual Report on Form 10-KSB A copy of the Company's Form 10-KSB for the fiscal year ended March 31, 2000, will be furnished without charge to stockholders upon written request to the Corporate Secretary, Wayne Savings Bancshares, Inc., 151 North Market Street, Wooster, Ohio 44691 (330) 264-5767 Investor Information Executive Offices Wayne Saving Bancshares, Inc. 151 N. Market Street o P.O. Box 858 Wooster, Ohio 44691 (330) 264-5767 5 CHAIRMAN'S LETTER TO OUR STOCKHOLDERS AND CUSTOMERS: It is a great privilege to present this Annual Report to the Stockholders and Customers of Wayne Savings Bancshares, Inc., our first annual report of the 21st century. The fiscal year ended March 31, 2000, was another exciting year of progress and achievement for our Company, and we believe the accomplishments during the past year further strengthened the foundation of Wayne Savings as we move forward into the new millennium. First of all, we were quite gratified by the public response to the year-long 100th anniversary celebration of Wayne Savings Community Bank, the wholly-owned subsidiary of Wayne Savings Bancshares, Inc. The extensive publicity and community events surrounding the centennial celebration greatly enhanced the image and public awareness of Wayne Savings. The current generation of officers, directors, and staff are indeed proud to represent Wayne Savings at this momentous time in the Company's history. The most obvious accomplishment for Wayne Savings Bancshares, Inc. in Fiscal 2000 was accelerated growth, as our investment in expanded banking locations continued to produce the anticipated gains in new customers and deposits. One of the key objectives of our business plan has been to achieve internal asset growth of the Company through market expansion and new branch facilities. In May 1999, we successfully opened our new Madison South office at the southern perimeter of Wooster, and, in July 1999, the NorthSide office was established in Wooster's rapidly developing northend commercial and residential area. The opening of the two additional branch offices in the past year increased the number of Wayne Savings' full-service banking locations from six to eight, with four being in the Wooster area. Our expanded market place has enhanced our ability to cross-sell our products and services and to serve our customer base. We are pleased that our strategic investment in people, technology, and expanded banking locations is producing the desired results, as evidenced by a 12% growth in assets in the past year, a 13% growth in deposits, a 10% growth in loans receivable, and a 7% growth in net interest income. The Company reached a new growth milestone at March 31, 2000, as assets topped the $300 million mark. Total assets amounted to $304.1 million, a $32.8 million growth from total assets of $271.3 million a year ago. Deposit account balances increased $29.6 million during the fiscal year to a new total of $265.0 million, and loans receivable increased $21.7 million, from $215.7 million to $237.4 million, in the same twelve month period. As anticipated, the start-up costs related to the opening of the two additional banking offices in Fiscal 2000 did result in what is expected to be a temporary decrease in net earnings. For the fiscal year ended March 31, 2000, Wayne Savings 6 Bancshares, Inc. reported net earnings of $1.3 million or $.48 per diluted share, as compared to $1.6 million or $.62 per diluted share in the prior year. In addition to the increased operating costs related to branch office openings, gains on sale of loans were $287,000 less than in the prior year. Net interest income increased $578,000, or 7%, from $8.1 million in the prior year to $8.7 million in the current fiscal year. For the fourth quarter ended March 31, 2000, net earnings amounted to $301,000 or $.11 per diluted share, compared to $294,000 or $.11 per diluted share for the same quarter last year. Net interest income in the quarter ended March 31, 2000, increased $180,000, or 9%, over the prior year quarter, from $2.0 million to $2.2 million. Another hallmark of Wayne Savings is the continuing high quality of our loan portfolio, as the level of non-performing loans remains far below the industry average. At the end of the 2000 fiscal year, stockholders' equity amounted to $25.1 million, resulting in a capital-to-assets ratio of 8.26%. For its continued operation as a safe and sound bank, Wayne Savings has received a five-star rating for 23 consecutive quarters from Bauer Financial Reports Inc., a nationally recognized firm that rates financial institutions. This is the highest safety and soundness rating awarded to banks. It is also a pleasure to report on the substantial progress of Village Savings Bank, F.S.B., the "de novo" federal savings bank established July 1998 in North Canton, Ohio. While Village Savings Bank has an independent charter and separate federal insurance of accounts, it is a wholly-owned subsidiary of Wayne Savings Community Bank. The Bank operates as a local community bank specializing in responsive, personal customer service. At March 31, 2000, the Bank had grown to $21.2 million in assets, $17.8 million in deposits, and $15.0 million in loans. Village Savings Bank became profitable in February 2000 after 20 months of operation, only two months longer than our original 18 month projection. Village Savings Bank is expected to make a substantial profit contribution to Wayne Savings and its stockholders in the months and years ahead. In the past two years, Wayne Savings has made a considerable investment in building our capabilities to attract and retain valuable customer relationships and to enhance revenue growth. We have also put much effort into diversifying our products and services to keep pace with the changes in financial modernization laws and trends. For example, we plan to expand our alternative investments this year to include the sale of mutual funds and variable rate annuities to complement our current fixed-rate annuity offerings. In the past year, we believe the Company has gained significant momentum that will result in positive long-term results. The ultimate goal of our efforts is to increase the investment value of our franchise for our stockholders and to improve our ability to serve our customers. On behalf of the directors, officers, and staff of Wayne Savings, 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 The following table sets forth certain consolidated financial and other data of Wayne Savings Bancshares, Inc. (the "Company"), the stock holding company parent of Wayne Savings Community Bank ("Wayne Savings" or the "Bank"), and Village Savings Bank, F.S.B. ("Village"), a wholly-owned subsidiary of Wayne Savings, together referred to as the "Banks," at the dates and for the periods indicated. 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 and related notes included elsewhere herein.
At March 31, --------------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (In thousands) Selected Financial Condition Data Total assets ................. $304,069 $271,274 $259,752 $252,175 $248,503 Loans receivable, net(1)...... 237,412 215,679 207,879 209,404 206,513 Mortgage-backed securities(2). 10,496 7,230 4,275 873 1,929 Investment securities(3)...... 27,199 17,830 21,901 24,470 19,675 Cash and cash equivalents(4).. 14,309 16,245 13,169 7,606 10,190 Deposits ..................... 264,952 235,327 217,621 211,442 210,158 Stockholders' equity ......... 25,121 24,956 24,426 23,115 22,852
- ----------- (1) Includes loans held for sale. (2) Includes mortgage-backed securities available for sale. (3) Includes certificates of deposit in other financial institutions. (4) Includes cash and due from banks, interest-bearing deposits in other financial institutions, and federal funds sold. Year Ended March 31, ----------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- (In thousands) Selected Operating Data: Interest income .............. $20,701 $19,296 $19,236 $18,719 $18,328 Interest expense ............. 12,014 11,187 11,084 10,610 10,541 ------- ------- ------- ------- ------- Net interest income ......... 8,687 8,109 8,152 8,109 7,787 Provision for loan losses .... 120 64 60 20 20 ------- ------- ------- ------- ------- Net interest income after provision for loan losses .. 8,567 8,045 8,092 8,089 7,767 Other income ................. 742 991 854 575 607 General, administrative and other expense(1)......... 7,414 6,547 6,144 7,588 6,189 ------- ------- ------- ------- ------- Earnings before income taxes . 1,895 2,489 2,802 1,076 2,185 Federal income taxes ......... 644 846 953 367 774 ------- ------- ------- ------- ------- Net earnings ................ $ 1,251 $ 1,643 $ 1,849 $ 709 $ 1,411 ======= ======= ======= ======= ======= - ----------- (1) The fiscal year ended March 31, 1997, includes a one-time pre-tax charge of $1.3 million to recapitalize the Savings Association Insurance Fund ("SAIF") and a $113,000 write-off of certain fixed assets relating to construction of a new facility at the Cleveland Road location. 8 SELECTED CONSOLIDATED FINANCIAL AND OTHER ATA (con't.)
At or For the Year Ended March 31, --------------------------------------------- 2000 1999 1998 1997 1996 ---- ---- ---- ---- ---- Key Operating Ratios and Other Data: Return on average assets (net earnings divided by average total assets)(1)............... .43% .63% .73% .29% .58% Return on average equity (net earnings divided by average equity)(1)............. 4.98 6.90 7.72 3.08 6.32 Average equity to average assets ratio .................. 8.57 9.07 9.42 9.32 9.21 Equity to assets at period end . 8.26 9.20 9.40 9.17 9.20 Interest rate spread (difference between average yield on interest earning assets and average cost of interest bearing liabilities) . 2.88 2.93 2.98 3.03 2.92 Net interest margin (net interest income as a percentage of average interest- earning assets) ............... 3.14 3.23 3.34 3.40 3.30 General, administrative and other expense to average assets(1)(2)................... 2.53 2.45 2.42 3.07 2.57 Non-performing loans to loans receivable, net ......... .08 .13 .15 .46 1.01 Non-performing assets to total assets ........................ .10 .12 .48 .70 1.35 Average interest-earning assets to average interest-bearing liabilities .. 106.05 106.99 108.02 108.35 108.48 Allowance for loan losses to non-performing loans .......... 396.50 242.14 234.09 95.01 42.57 Allowance for loan losses to non-performing assets ......... 273.45 211.21 57.50 51.61 26.41 Net interest income after provision for loan losses, to general, administrative and other expense(1)(2)........ 115.72 124.98 131.71 106.60 124.77 Number of full-service offices ....................... 9 7 6 6 6 Dividend payout ratio .......... 70.50 45.89 36.45 88.94 52.66
- ----------- (1) The fiscal year ended March 31, 1997, includes a one-time pre-tax charge of $1.3 million to recapitalize the SAIF and a $113,000 write-off of certain fixed assets relating to construction of a new facility at the Cleveland Point location. (2) 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. 9 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS General The consolidated financial statements include Wayne Savings Bancshares, Inc. (the "Company") and its wholly-owned subsidiaries. In fiscal year 1999, Wayne Savings Community Bank ("Wayne Savings" or the "Bank") formed a new federal savings bank subsidiary in North Canton, Ohio named Village Savings Bank, F.S.B. ("Village"), together referred to as the "Banks." Intercompany transactions and balances are eliminated in the consolidated financial statements. Effective November 25, 1997, Wayne Savings completed its reorganization into a two-tier mutual holding company structure. In the reorganization, each share of Wayne Savings common stock was automatically converted into one share of Company common stock. The reorganization of Wayne Savings was structured as a tax-free reorganization and was accounted for in the same manner as a pooling-of-interests. As a result of the reorganization, the Company now serves as the stock holding company parent of Wayne Savings. 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 loan losses, 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) emphasizing the origination of one-to-four family residential mortgage loans and consumer loans in the Company's market area; (3) reducing interest rate risk exposure by better matching asset and liability maturities and rates; (4) maintaining high asset quality; (5) maintaining a strong retail deposit base; and (6) maintaining capital in excess of regulatory requirements. Discussion of Financial Condition 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; and (3) management's opinion as to the effects of recent accounting pronouncements on the Company's consolidated financial statements. At March 31, 2000, the Company had total assets of $304.1 million, an increase of $32.8 million, or 12.1%, from total assets of $271.3 million at March 31, 1999. Cash and due from banks, federal funds sold, interest-bearing deposits, certificates of deposit and investment securities totaled approximately $41.5 million, an increase of approximately $7.4 million, or 21.8% from March 31, 1999 levels. Regulatory liquidity approximated 19.6% at 10 March 31, 2000, compared to 20.5% at March 31, 1999. Loans receivable, including loans held for sale, increased by approximately $21.7 million, or 10.1%, to $237.4 million at March 31, 2000, from $215.7 million at March 31, 1999. This increase resulted from loan disbursements of $64.9 million, which were partially offset by principal repayments of $37.1 million and sales of $6.4 million. Loans secured by one-to-four family residential real estate increased by $22.3 million during fiscal 2000. The allowance for loan losses totaled $793,000 at March 31, 2000, as compared to $678,000 at March 31, 1999. Nonperforming loans totaled $200,000 at March 31, 2000, and $280,000 at March 31, 1999. The allowance for loan losses totaled 396.5% and 242.1% of nonperforming loans at March 31, 2000 and 1999, respectively. Although management believes that its allowance for loan losses 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 $29.6 million, or 12.6%, from $235.3 million at March 31, 1999, to a total of $265.0 million at March 31, 2000. The increase in deposits is primarily attributable to growth achieved at the two new branch locations and management's continuing efforts to achieve a moderate rate of growth through marketing and business strategies. Advances from the Federal Home Loan Bank increased by $3.0 million, or 33.3%, from $9.0 million outstanding at March 31, 1999, to $12.0 million outstanding at March 31, 2000. The Banks are subject to capital standards which generally require the maintenance of regulatory capital sufficient to meet each of three tests; i.e., the tangible capital requirement, the core capital requirement, and the risk-based capital requirement. At March 31, 2000, the Banks' capital met all regulatory requirements to which they were subject. Results of Operations General. The earnings of the Company depend primarily on its level of net interest income, which is the difference between interest earned on the Company's interest-earning assets and the interest paid on interest-bearing liabilities. Net interest income is substantially affected by the Company's interest rate spread, which is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities, as well as by the average balance of interest-earning assets as compared to interest-bearing liabilities. The Company reported net earnings of $1.3 million for the fiscal year ended March 31, 2000. This represents a 23.9% decrease from net earnings of $1.6 million reported in the prior fiscal year. Net interest income increased $578,000, or 7.1% from the prior fiscal year, representing growth in core earnings. The decrease in earnings in fiscal 2000 was due primarily to start up costs related to the opening of two additional full-service banking offices in Wooster, coupled with a $287,000 decrease in gain on sale of loans. Interest Income. Interest income totaled $20.7 million for the fiscal year ended March 31, 2000, an increase of $1.4 million, or 7.3%, from interest income of $19.3 million for the fiscal year ended March 31, 1999. Interest income increased due to an increase in the average balance of interest-earning assets of $26.0 million, or 10.4%, to $276.7 million, partially offset by a decrease in the average yield to 7.48% from 7.70% for the prior year. Interest income on loans receivable increased by $891,000, or 5.2%, due to a $20.7 million, or 9.9%, increase in the average balance of loans outstanding, which was partially offset by a decrease in the average yield from 8.14% to 7.80%. Interest income on mortgage-backed securities increased by $197,000, or 48.6%, primarily due to an increase in the average balance of $3.0 million, or 41.6%, to $10.2 million for the year ended March 31, 2000. The yield on these assets increased to 5.93%, from 5.65%for the previous year. Interest income on both investment securities and interest-bearing deposits increased for the year, primarily as a result of an increase in the average yield on these assets as interest rates continually rose throughout the fiscal year. The yield on investment securities increased to 6.86%, from 6.03%for the prior year, while the yield on interest-bearing deposits rose to 5.25%, from 5.01% for the prior fiscal year. The average balance of these assets increased approximately $2.4 million, as the Company maintained a liquid position to take advantage of a future increase in rates. Interest income totaled $19.3 million for the fiscal year ended March 31, 1999, a slight increase from interest income of $19.2 million for the fiscal year ended March 31, 1998. Interest income remained stable, while the average balance of interest-earning assets increased $6.9 million, or 2.8%, to $250.7 million, while the average yield decreased to 7.70% from 7.89% the prior year. Interest income on loans receivable remained stable, as a drop in interest rates offset an increase in the average balance of $1.8 million, or .9%, as compared to the previous year's average balance of $207.4 million. Interest income on mortgage-backed securities increased by $302,000, to $405,000 from $103,000. The increase was due to a $5.5 million, or 319.8% increase in the average balance, to $7.2 million, for the year ended March 31, 1999, offset by a drop in the yield to 5.65%, from 6.03% the previous year. Interest income on both investment securities and 11 MANAGEMENT'S DISCUSSION AND ANALYSIS (con't. ) interest-bearing deposits decreased for the year ended March 31, 1999, primarily as a result of a decrease in the average yield on these assets as interest rates dropped throughout the fiscal year. The yield on investment securities dropped to 6.03% in fiscal 1999, from 6.26% the prior year, while the yield on interest-bearing deposits fell to 5.01%, from 5.69% the prior fiscal year. The average balance of these assets remained stable at approximately $34 million, as the Company maintained a liquid position to take advantage of a future increase in rates. Interest Expense. Interest expense for the fiscal year ended March 31, 2000, totaled $12.0 million, an increase of $827,000, or 7.4%, from interest expense of $11.2 million for the previous year. The increase resulted from an increase in the average balance of interest bearing liabilities of $26.6 million, or 11.4%, to $260.9 million, which was offset by a decrease in the average cost of funds to 4.60% for the current year from 4.77% for the previous fiscal year. Interest expense on deposits increased $1.0 million, or 9.6%, to $11.5 million as a result of an increase in the average deposits outstanding from $222.6 million for fiscal 1999 to $252.3 million in fiscal 2000, partially offset by a decrease in the cost of deposits from 4.72% to 4.57% in fiscal 2000. Interest expense on borrowings for the fiscal year ended March 31, 2000, decreased $187,000, or 27.9%, to $484,000. The decrease was the result of a decrease in the average balance of borrowings outstanding of $3.1 million, or 26.3%, coupled with a decrease in interest rates from 5.75% to 5.63%, in fiscal 2000. Interest expense for the fiscal year ended March 31, 1999, totaled $11.2 million, an increase of $103,000, or .9%, from interest expense of $11.1 million for the previous year. The increase resulted from an increase in the average balance of interest bearing liabilities of $8.6 million, or 3.8%, to $234.3 million, which was partially offset by a decrease in the average cost of funds to 4.77% in fiscal year 1999, from 4.91% in the previous fiscal year. Interest expense on deposits increased $322,000, or 3.2%, to $10.5 million as a result of an increase in the average deposits outstanding from $210.7 million for fiscal 1998 to $222.6 million in fiscal 1999, partially offset by a decrease in the cost of deposits from 4.84% to 4.72% in fiscal 1999. Interest expense on borrowings for the fiscal year ended March 31, 1999, decreased $219,000, or 24.6%, to $671,000. The decrease was the result of a reduction in the average balance in borrowings of $3.3 million, or 22.3%, coupled with the reduction in interest rates from 5.93% to 5.75%, in fiscal 1999. Net Interest Income. Net interest income for fiscal year 2000 was $8.7 million, compared to $8.1 million for the previous fiscal year, as the Company grew $26.0 million in average interest-earning assets. This was partially offset by a decline in the Company's average interest rate spread and a decrease in the ratio of average interest-earning assets to average interest-bearing liabilities, from 106.99% in fiscal 1999 to 106.05% in fiscal 2000. Net interest income for 1999 was $8.1 million, compared to $8.2 million for the previous fiscal year, as the interest rate spread was narrowed due primarily to falling interest rates on the Company's assets throughout the fiscal year, as well as a decrease in the ratio of average interest-earning assets to average interest-bearing liabilities, from 108.02% in fiscal 1998 to 106.99% in fiscal 1999. Provision for Losses on Loans. The Company maintains an allowance for loan losses based on prior loss experience, the level of non-performing and problem loans in the portfolio, and the potential effects on the portfolio of general economic conditions. The Company's allowance for loan losses was $793,000, or .33% of loans receivable at March 31, 2000, $678,000, or .32% of loans receivable at March 31, 1999, and $721,000, or .35% of loans receivable at March 31, 1998. The Company recorded a provision for loan losses of $120,000 for the fiscal year ended March 31, 2000, primarily due to growth in the loan portfolio coupled with management's assessment of the collateral securing non-performing loans. The Company recorded its provision for loan losses at $64,000 and $60,000 for the fiscal years ended March 31, 1999 and 1998, respectively, primarily as a result of the Company's low level of non-performing loans. At March 31, 2000, 1999, and 1998, respectively, the Company's loss allowance was primarily composed of $793,000, $670,000, and $706,000, in general allowances as defined by Office of Thrift Supervision ("OTS") regulations. The breakdown of general loss allowances and specific loss allowances is made for regulatory accounting only. General loan valuation allowances are added back to capital in computing risk-based capital. Both general and specific loss allowances are charged against earnings. The financial statements of the Company are prepared in accordance with Generally Accepted Accounting Principles ("GAAP") and, accordingly, provisions for loan losses are based on management's assessment of the factors set forth above. The Company reviews on a monthly basis its loan portfolio, including problem loans, to determine whether any loans require classification and/or the establishment of appropriate allowances. 12 Other Income. Other income consisting primarily of gain on sale of loans, service fees, and charges on deposit accounts decreased $249,000, or 25.1%, to $742,000 for fiscal 2000. The decrease was a result of a decrease of $287,000, or 92.9%, in gain on sale of fixed-rate mortgage loans. Fixed-rate mortgage loans sold totaled $6.4 million compared to $15.9 million sold in the previous fiscal year. Service fees, charges, and other operating income increased $38,000, or 5.6%, to $720,000 in fiscal 2000 as fee activity related to the deposit accounts increased. Other income increased $137,000, or 16.0%, to $991,000 for fiscal 1999. The increase was a result of an increase of $72,000, or 30.4%, in gain on sales of loans in fiscal 1999, due to a higher volume of sales. Fixed-rate mortgage loans sold totaled $15.9 million in fiscal 1999 compared to $7.1 million sold in the previous fiscal year. Service fees, charges, and other operating income increased $69,000, or 11.3%, to $682,000 in fiscal 1999 as fee activity related to the deposit accounts increased. General Administrative and Other Expense General, administrative and other expense, consisting primarily of employee compensation and benefits, occupancy and equipment expense, federal deposit insurance premiums, and other operating expenses, totaled $7.4 million for the year ended March 31, 2000, an increase of $867,000, or 13.2%, compared to 1999. The increase was primarily a result of increased operating costs as reflected in higher employee compensation, occupancy and equipment, and other operating expenses at the new branch locations. General, administrative and other expense totaled $6.5 million for the year ended March 31, 1999, an increase of $403,000, or 6.6% compared to 1998. The increase was primarily a result of operating costs at Village totaling $419,000 and the loss on the sale of real estate owned totaling $110,000. The increases due to the subsidiary bank are reflected in the increases in employee compensation, occupancy and equipment, and franchise taxes. Income Taxes. The provision for income taxes totaled $644,000 for the year ended March 31, 2000, a decrease of $202,000, or 23.9%, compared to the $846,000 provision recorded for the previous fiscal year. The decrease in income taxes is reflective of the lower level of pre-tax earnings for the period ended March 31, 2000, as the effective tax rate was 34.0% for both periods. The provision for income taxes totaled $846,000 for the year ended March 31, 1999, a decrease of $107,000, or 11.2%, compared to the $953,000 provision recorded for the previous fiscal year. The decrease in income taxes is reflective of the lower levels of pre-tax earnings for the period ended March 31, 1999, as the effective tax rate was 34.0% for both periods. 13 MANAGEMENT'S DISCUSSION AND ANALYSIS (con't.) Average Balance Sheet The following table sets forth certain information relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.
Year Ended March 31, ---------------------------------------------------------------------------------------- 2000 1999 1998 ---------------------------- ---------------------------- ---------------------------- 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)......... $229,845 $ 17,928 7.80 $209,178 $ 17,037 8.14 $207,377 $ 17,068 8.23% Mortgage-backed securities(2).... 10,152 602 5.93 7,170 405 5.65 1,708 103 6.03 Investment securities ........... 15,053 1,033 6.86 12,999 784 6.03 15,598 977 6.26 Interest-bearing deposits(3)..... 21,669 1,138 5.25 21,345 1,070 5.01 19,112 1,088 5.69 ------ ----- ---- ------ ----- ---- ------ ----- ---- Total interest-earning assets .. 276,719 20,701 7.48 250,692 19,296 7.70 243,795 19,236 7.89 Non-interest -earning assets ...... 16,165 11,988 10,531 ------ ------ ------ Total assets ................... $292,884 $262,680 $254,326 ======== ======== ======== Interest-bearing liabilities: Deposits ........................ $252,346 11,530 4.57 $222,645 10,516 4.72 $210,697 10,194 4.84 Borrowings ...................... 8,596 484 5.63 11,667 671 5.75 15,007 890 5.93 ----- --- ---- ------ --- ---- ------ --- ---- Total interest-bearing liabilities ................... 260,942 12,014 4.60 234,312 11,187 4.77 225,704 11,084 4.91 Non-interest-bearing liabilities... 6,844 4,549 4,666 ----- ----- ----- Total liabilities .............. 267,786 238,861 230,370 Stockholders' equity .............. 25,098 23,819 23,956 ------ ------ ------ Total liabilities and stockholders' equity .......... $292,884 $262,680 $254,326 ======== -------- ======== -------- ======== ------- Net interest income ............... $ 8,687 $ 8,109 $ 8,152 ======== ---- ======== ---- ======= ---- Interest rate sprea(4) ............ 2.88% 2.93% 2.98% ==== ==== ==== Net yield on interest-earning assets(5)........................ 3.14% 3.23% 3.34% ==== ==== ==== Ratio of average interest-earning assets to average interest- bearing liabilities ............. 106.05% 106.99% 108.02% ====== ====== ======
(1) Includes non-accrual loan balances. (2) Includes mortgage-backed securities designated as available for sale. (3) Includes federal funds sold and interest-bearing deposits in other financial institutions. (4) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (5) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets. 14 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), and the net change in rate- volume (changes in rate multiplied by the change in average volume) has been allocated proportionately between changes in rate and changes in volume.
Year Ended March 31, --------------------------------------------------------- 2000 vs. 1999 1999 vs. 1998 ----------------------------- --------------------------- 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 .................... $ 1,625 $(734) $ 891 $ 151 $(182) $ (31) Mortgage-backed securities .......... 176 21 197 361 (59) 302 Other interest-earning assets ....... 134 183 317 (22) (189) (211) --- --- --- --- ---- ---- Total interest-earning assets ...... 1,935 (530) 1,405 490 (430) 60 Interest expense attributable to: Deposits ............................ 1,358 (344) 1,014 575 (253) 322 Borrowings .......................... (173) (14) (187) (193) (26) (219) ---- --- ---- ---- --- ---- Total interest-bearing liabilities.. 1,185 (358) 827 382 (279) 103 ----- ---- --- --- ---- --- Increase (decrease) in net interest income ................ $ 750 $(172) $ 578 $ 108 $(151) $ (43) ======= ===== ======= ===== ===== =====
15 MANAGEMENT'S DISCUSSION AND ANALYSIS (con't.) Asset and Liability Management-Interest Rate Sensitivity Analysis The Banks, like other financial institutions, are subject to interest rate risk to the extent that their interest-earning assets reprice differently than their interest-bearing liabilities. As part of their effort to monitor and manage interest rate risk, the Banks use the "net portfolio value" ("NPV") methodology adopted by the Office of Thrift Supervision ("OTS") as part of its capital regulations. The application of NPV methodology illustrates certain aspects of the Banks 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 200 basis point (1 basis point equals .01%) change in market interest rates. Both a 200 basis point increase in market interest rates and a 200 basis point decrease in market interest rates are considered. If the NPV would decrease more than 2% of the present value of the institution's assets with either an increase or a decrease in market rates, the institution must deduct 50% of the amount of the decrease in excess of such 2% in the calculation of the institution's risk-based capital. See "Liquidity and Capital Resources." Presented below, as of March 31, 2000 and 1999, is an analysis of the Banks' interest rate risk as measured by changes in NPV for instantaneous and sustained parallel shifts of 100-300 basis points in market interest rates. As of March 31, 2000 - -------------------------------------------------------------------------------- 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 $ 9,103 $(18,531) (67)% 3.22% (585 bp) +200 bp 15,310 (12,324) (45) 5.28 (379 bp) +100 bp 21,549 (6,085) (22) 7.24 (183 bp) 0 bp 27,634 -- -- 9.07 -- -100 bp 32,731 5,097 18 10.53 146 bp -200 bp 35,593 7,959 29 11.30 223 bp -300 bp 37,958 10,324 37 11.91 284 bp As of March 31, 1999 - -------------------------------------------------------------------------------- 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 $ 15,602 $(13,730) (47)% 6.02% (463 bp) +200 bp 20,989 (8,343) (28) 7.91 (274 bp) +100 bp 25,715 (3,617) (12) 9.49 (116 bp) 0 bp 29,332 -- -- 10.65 -- -100 bp 32,110 2,778 9 11.50 85 bp -200 bp 34,161 4,829 16 12.09 144 bp -300 bp 36,776 7,444 25 12.83 218 bp 16 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. 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 ARM loans and other adjustable rate or short-term loans, as well as by purchasing short-term investments. However, particularly in the 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, 2000. The Company seeks to lengthen the maturities of its deposits by promoting longer-term certificates; however, the Company has not been successful in lengthening the maturities of its deposits in the current increasing interest rate environment. 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 Banks have operated within the framework of their prescribed asset/liability risk ranges for each of the last three years. Liquidity and Capital Resources The Banks are required to maintain minimum levels of liquid assets as defined by OTS regulations. This requirement, which varies from time to time depending upon economic conditions and deposit flows, is based upon a percentage of deposits and short-term borrowings. The required ratio currently is 4%. The Company's liquidity ratio averaged 17.9% during the month of March 2000 and 16.4% during the fiscal year ended March 31, 2000. The Company adjusts liquidity as appropriate to meet its asset and liability management objectives. The Banks' primary sources of funds are deposits, amortization 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 Banks manage the pricing of deposits to maintain a desired level of deposits and cost of funds. In addition, the Banks invest excess funds in federal funds, and other short-term interest-earning and other assets, which provide liquidity to meet lending requirements. Federal funds sold and other assets qualifying for liquidity outstanding at March 31, 2000, 1999, and 1998, amounted to $47.8 million, $37.7 million, and $38.9 million, respectively. For additional information about cash flows from the Company's operating, financing, and investing activities, see Statements of Cash Flows included in the Financial Statements. A major portion of the Banks' liquidity consists of cash and cash equivalents, which are a product of its operating, investing, and financing activities. The primary sources of cash were net earnings, principal repayments on loans and mortgage-backed securities, and increases in deposit accounts. Liquidity management is both a daily and long-term function of business management. If the Banks require funds beyond their ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank ("FHLB") which provide an additional source of funds. At March 31, 2000, the Company had $12.0 million in outstanding advances from the FHLB. At March 31, 2000, the Company had outstanding loan commitments of $20.3 million, including the unfunded portion of loans in process. Certificates of deposit scheduled to mature in less than one year at March 31, 2000, totaled $123.9 million. Based on prior experience, management believes that a significant portion of such deposits will remain with the Company. Year 2000 Compliance Matters The Year 2000 ("Y2K") issue related to certain computer programs which used a two-digit format, as opposed to four digits, to indicate the year. Such computer systems may have been unable to interpret dates beyond the year 1999, which could have caused a system failure or other computer errors, leading to disruption in operations. The potential impact was that date sensitive calculations would be based on erroneous data, or could cause a system failure. The Y2K issue may have affected all forms of financial accounting, including interest computation, due dates, pensions/personnel benefits, investments, and record keeping. During the three year period leading up to January 1, 2000, the Company developed and implemented a program to ensure Y2K information systems compliance. The Company does not perform in-house programming. All systems have been purchased from third-party vendors. 17 MANAGEMENT'S DISCUSSION AND ANALYSIS (con't.) Therefore, the primary thrust of the Company's Y2K effort involved ongoing discussions and monitoring of vendors' progress, including receipt of confirmation from its vendors that Y2K compliant versions of their systems were in place. The Company had expended a total of approximately $50,000 for hard costs related to renovation and testing, approximately $30,000 of which was expensed during fiscal 2000. The Company experienced no technology-related problems upon arrival of January 1, 2000, nor was there any disruption of services to its customers. The Company could incur losses if loan payments are delayed due to Year 2000 problems affecting any major borrowers in the Company's primary market area. Because the Company's loan portfolio is highly diversified with regard to individual borrowers and types of businesses and the primary market area is not significantly dependent upon one employer or industry, the Company does not expect, and to date has not realized, any significant or prolonged difficulties that will affect net earnings or cash flow. 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 Generally Accepted Accounting Principles ("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. Impact of Recent Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (the "FASB") issued Statement of Financial Accounting Standards ("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 amount(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, as amended by SFAS No. 137, is effective for fiscal years beginning after June 15, 2000. 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. Common Stock and Related Matters Effective June 23, 1993, the Bank reorganized from mutual to stock form and established Wayne Savings Bankshares, M.H.C., a mutual holding company (the "Holding Company"). The Bank's initial public offering of Common Stock closed on June 23, 1993. Shares of Common Stock were issued and sold in that offering at $5.00 (adjusted) per share. On June 10, 1999, the Company, paid a 5% stock dividend. In June of 1998 and 1997, the Company paid a 10% stock dividend, and a three-for-two stock split, respectively. References herein to an adjusted number of shares or price per share reflect an adjustment due to these stock distributions. Effective November 25, 1997, Wayne Savings Community Bank completed its reorganization into a two-tier mutual holding company structure with the establishment of a stock holding company parent of the Bank. In the reorganization, each share of the Bank's common stock was automatically converted into one share of Wayne Savings Bancshares, Inc. common stock. The reorganization of Wayne Savings was structured as a tax-free reorganization and was accounted for in the same manner as a pooling-of-interests. As a result of the reorganization, the Company now serves as the stock holding company parent of the Bank. The Company's Common Stock trades over-the-counter on the Nasdaq SmallCap Market using the symbol "WAYN." The following table sets forth the high and low trading prices of the Company's common stock (adjusted) during the two most recent fiscal years, together with the cash dividends declared (adjusted). 18 Fiscal Year Ended Cash Dividends March 31, 1999 High Low Declared -------------- ---- --- -------- First quarter $27.27 $24.76 $.148 Second quarter 24.76 17.14 .148 Third quarter 21.19 16.07 .148 Fourth quarter 17.86 14.29 .148 Fiscal Year Ended Cash Dividends March 31, 2000 High Low Declared -------------- ---- --- -------- First quarter $17.00 $15.24 $.160 Second quarter 16.88 14.13 .160 Third quarter 17.25 14.25 .160 Fourth quarter 16.63 10.50 .160 As of April 13, 2000, the Company had 858 stockholders of record and 2,599,015 shares of outstanding Common Stock. 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. A "well capitalized" institution such as Wayne Savings can, after prior notice but without the approval of the OTS, make capital distributions during a calendar year in an amount up to 100 percent of its net income during the calendar year, plus its retained net income for the preceding two years. 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 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS [GRANT THORNTON LLP LETTERHEAD] 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, 2000 and 1999, and the related consolidated statements of earnings, stockholders' equity, comprehensive income and cash flows for each of the three years ended March 31, 2000, 1999, and 1998. 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 generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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, 2000 and 1999, and the consolidated results of its operations and its cash flows for each of the three years ended March 31, 2000, 1999, and 1998, in conformity with generally accepted accounting principles. /s/Grant Thornton LLP Cincinnati, Ohio May 26, 2000 20 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION As of March 31, (Dollars in thousands, except share data) ASSETS 2000 1999 -------- -------- Cash and due from banks.................................... $ 2,502 $ 1,540 Federal funds sold......................................... 3,475 4,295 Interest-bearing deposits in other financial institutions.. 8,332 10,410 -------- -------- Cash and cash equivalents.............................. 14,309 16,245 Certificates of deposit in other financial institutions.... 4,000 6,000 Investment securities held to maturity - at amortized cost, approximate market value of $22,634 and $11,752 as of March 31, 2000 and 1999.................................. 23,199 11,830 Mortgage-backed securities available for sale - at market.. 3,450 3,846 Mortgage-backed securities held to maturity - at amortized cost, approximate market value of $6,938 and $3,363 as of March 31, 2000 and 1999............................... 7,046 3,384 Loans receivable - net..................................... 237,095 214,094 Loans held for sale - at lower of cost or market........... 317 1,585 Office premises and equipment - net........................ 8,160 7,748 Real estate acquired through foreclosure................... 90 41 Federal Home Loan Bank stock - at cost..................... 3,160 2,919 Accrued interest receivable on loans....................... 1,255 1,134 Accrued interest receivable on mortgage-backed securities.. 60 28 Accrued interest receivable on investments and interest-bearing deposits................................ 354 184 Prepaid expenses and other assets.......................... 1,390 1,933 Prepaid federal income taxes............................... 184 303 -------- -------- Total assets........................................... $304,069 $271,274 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits................................................... $264,952 $235,327 Advances from Federal Home Loan Bank....................... 12,000 9,000 Advances by borrowers for taxes and insurance.............. 777 821 Accrued interest payable................................... 228 179 Accounts payable on mortgage loans serviced for others..... 100 108 Other liabilities.......................................... 516 497 Deferred federal income taxes.............................. 375 386 -------- -------- Total liabilities...................................... 278,948 246,318 Commitments................................................ -- -- Stockholders' equity Common stock (20,000,000 shares of $1.00 par value authorized; 2,632,229 and 2,505,082 shares issued at March 31, 2000 and 1999, respectively).............. 2,632 2,505 Additional paid-in capital................................. 14,393 12,480 Retained earnings - substantially restricted............... 8,777 10,437 Less 33,214 and 22,583 shares of treasury stock, respectively - at cost................................... (645) (468) Accumulated other comprehensive income (loss), unrealized gain (loss) on securities designated as available for sale, net of related tax effects......................... (36) 2 -------- -------- Total stockholders' equity............................. 25,121 24,956 -------- -------- Total liabilities and stockholders' equity............. $304,069 $271,274 ======== ======== The accompanying notes are an integral part of these statements. 21 CONSOLIDATED STATEMENTS OF EARNINGS For the year ended March 31, (Dollars in thousands, except share data) 2000 1999 1998 ---- ---- ---- Interest income: Loans ............................................. $17,928 $17,037 $17,068 Mortgage-backed securities ........................ 602 405 103 Investment securities ............................. 1,033 784 977 Interest-bearing deposits and other ............... 1,138 1,070 1,088 ----- ----- ----- Total interest income ............................ 20,701 19,296 19,236 Interest expense: Deposits .......................................... 11,530 10,516 10,194 Borrowings ........................................ 484 671 890 ----- ----- ----- Total interest expense ........................... 12,014 11,187 11,084 ------ ------ ------ Net interest income .............................. 8,687 8,109 8,152 Provision for losses on loans ....................... 120 64 60 ------ ------ ------ Net interest income after provision for losses on loans ................... 8,567 8,045 8,092 Other income: Gain on sale of loans ............................. 22 309 237 Service fees, charges and other operating ......... 720 682 617 ------ ------ ------ Total other income ............................... 742 991 854 General, administrative and other expense: Employee compensation and benefits ................ 3,817 3,308 3,203 Occupancy and equipment ........................... 1,394 1,111 982 Federal deposit insurance premiums ................ 209 202 203 Franchise taxes ................................... 318 335 298 Loss on disposal of real estate acquired through foreclosure ..................... 11 110 -- Other operating ................................... 1,665 1,481 1,458 ------ ------ ------ Total general, administrative and other expense ............................... 7,414 6,547 6,144 ------ ------ ------ Earnings before incomes taxes .................... 1,895 2,489 2,802 Federal incomes taxes: Current ........................................... 600 686 860 Deferred .......................................... 44 160 93 ------ ------ ------ Total federal income taxes ....................... 644 846 953 NET EARNINGS ................................... $ 1,251 $ 1,643 $ 1,849 ======= ======= ======= EARNINGS PER SHARE Basic ........................................ $ .48 $ .63 $ .71 ======= ======= ======= Diluted ...................................... $ .48 $ .62 $ .70 ======= ======= ======= The accompanying notes are an integral part of these statements 22 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the year ended March 31, (In thousands) 2000 1999 1998 ---- ---- ---- Net earnings ........................................... $1,251 $1,643 $1,849 Other comprehensive loss,net of tax: Unrealized holding losses on securities during the period, net of tax of $(20), $(8),and $(7) .. (38) (15) (13) ------ ------ ------ Comprehensive income ................................... $1,213 $1,628 $1,836 ====== ====== ====== Accumulated comprehensive income (loss) ................ $ (36) $ 2 $ 17 ====== ====== ====== The accompanying notes are an integral part of these statements 23 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY For the years ended March 31, 2000, 1999, and 1998 (Dollars in thousands, except share data)
Unrealized gains (losses) on securities Total Additional Shares Treasury designated stock- Common paid-in Retained acquired stock- as available holders' stock capital earnings by ESOP at cost for sale equity ----- ------- -------- ------- ------- -------- ------ Balance at April 1, 1997 ................... $ 1,499 $ 5,844 $ 15,777 $ (35) $-- $ 30 $ 23,115 Principal payments on loan to ESOP ......... -- 71 -- 35 -- -- 106 Stock options exercised .................... 10 48 -- -- (10) -- 48 Net earnings for the year ended March 31, 1998 ...................... -- -- 1,849 -- -- -- 1,849 Effect of three-for-two stock split ........ 749 -- (754) -- -- -- (5) Cash dividends of $.54 per share ........... -- -- (674) -- -- -- (674) Unrealized losses on securities designated as available for sale, net of related tax effects ................ -- -- -- -- -- (13) (13) ------- ------- ------- ------- ------- ------- ------- Balance at March 31, 1998 .................. 2,258 5,963 16,198 -- (10) 17 24,426 Stock options exercised .................... 22 92 -- -- (27) -- 87 Net earnings for the year ended March 31, 1999 ...................... -- -- 1,643 -- -- -- 1,643 Stock dividend ............................. 225 6,425 (6,650) -- -- -- -- Cash dividends of $.59 per share ........... -- -- (754) -- -- -- (754) Purchase of treasury shares - at cost ...... -- -- -- -- (431) -- (431) Unrealized losses on securities designated as available for sale, net of related tax effects ................ -- -- -- -- -- (15) (15) ------- ------- ------- ------- ------- ------- ------- Balance at March 31, 1999 .................. 2,505 12,480 10,437 -- (468) 2 24,956 Stock options exercised .................... 2 9 -- -- -- -- 11 Net earnings for the year ended March 31, 2000 ............................ -- -- 1,251 -- -- -- 1,251 Stock dividend ............................. 125 1,904 (2,029) -- -- -- -- Cash dividends of $.64 per share ........... -- -- (882) -- -- -- (882) Purchase of treasury shares - at cost ...... -- -- -- -- (177) -- (177) Unrealized losses on securities designated as available for sale, net of related tax effects ....................... -- -- -- -- -- (38) (38) ------- ------- ------- ------- ------- ------- ------- Balance at March 31, 2000 .................. $ 2,632 $ 14,393 $ 8,777 $ -- $ (645) $ (36) $ 25,121 ======== ======== ======== ======= ======== ======== ========
The accompany notes are an integral part of these statements 24 CONSOLIDATED STATEMENTS OF CASH FLOWS For the year ended March 31,
2000 1999 1998 ---- ---- ---- (In thousands) Cash flows from operating activities: Net earnings for the year .......................................... $ 1,251 $ 1,643 $ 1,849 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 ................ 18 (25) 14 Amortization of deferred loan origination fees .................... (532) (574) (399) Depreciation and amortization ..................................... 653 481 430 (Gain) loss on sale of loans ...................................... 42 (149) (130) Proceeds from sale of loans in the secondary market ............... 6,383 16,009 7,196 Loans originated for sale in the secondary market ................. (5,157) (16,251) (8,260) Provision for losses on loans ..................................... 120 64 60 (Gain) loss on sale of real estate acquired through foreclosure ... 11 110 (4) Federal Home Loan Bank stock dividends ............................ (214) (199) (188) Amortization expense of employee stock benefit plans .............. -- -- 161 Increase (decrease) in cash due to changes in: Accrued interest receivable on loans ............................. (121) 18 (13) Accrued interest receivable on mortgage-backed securities ........ (32) (5) (16) Accrued interest receivable on investments and interest-bearing deposits ................................... (170) (4) 46 Prepaid expenses and other assets ................................ 543 (886) (257) Accrued interest payable.. ....................................... 49 (18) (29) Accounts payable on mortgage loans serviced for others ........... (8) (91) 73 Other liabilities ................................................ 19 206 (91) Federal income taxes Current ......................................................... 119 (304) (330) Deferred ........................................................ 44 160 93 ------- ------ ------ Net cash provided by operating activities ...................... 3,018 185 205 Cash flows provided by (used in) investing activities: Purchase of investment securities .................................. (13,411) (12,484) (11,000) Proceeds from the maturity of investment securities ................ 2,080 14,055 14,569 Purchase of mortgage-backed securities ............................. (8,030) (6,576) (4,010) Principal repayments on mortgage-backed securities ................. 4,620 3,470 614 Loan principal repayments .......................................... 37,106 48,814 49,359 Loan disbursements ................................................. (59,792) (55,615) (45,963) Purchase of office premises and equipment .......................... (1,065) (1,768) (2,900) Proceeds from sale of real estate acquired through foreclosure ..... 5 820 59 (Increase) decrease in certificates of deposit in other financial institutions ............................................ 2,000 2,500 (1,000) ------- ------ ------ Net cash used in investing activities ......................... (36,487) (6,784) (272) ------- ------ ------ Net cash used in operating and investing activities (balance carried forward) .................................... (33,469) (6,599) (67) ------- ------ ------
25 CONSOLIDATED STATEMENTS OF CASH FLOWS (con't.) For the year ended March 31,
2000 1999 1998 ---- ---- ---- (In thousands) Net cash used in operating and investing activities (balance brought forward) .............................. $(33,469) $ (6,599) $ (67) Cash flows provided by (used in) financing activities: Net increase in deposit accounts ...................................... 29,625 17,706 6,179 Proceeds from Federal Home Loan Bank advances ......................... 4,000 16,000 13,000 Repayment of Federal Home Loan Bank advances .......................... (1,000) (23,000) (13,000) Advances by borrowers for taxes and insurance ......................... (44) 38 82 Dividends paid on common stock ........................................ (882) (725) (679) Proceeds from the exercise of stock options ........................... 11 87 48 Purchase of treasury shares - at cost ................................. (177) (431) -- -------- -------- -------- Net cash provided by financing activities ............................ 31,533 9,675 5,630 -------- -------- -------- Net increase (decrease) in cash and cash equivalents .................. (1,936) 3,076 5,563 Cash and cash equivalents at beginning of year ........................ 16,245 13,169 7,606 -------- -------- -------- Cash and ash equivalents at end of year .............................. $ 14,309 $ 16,245 $ 13,169 ======== ======== ======== Supplemental disclosure of cash flow information: Cash paid during the year for: Federal income taxes ................................................. $ 516 $ 892 $ 797 ======== ======== ======== Interest on deposits and borrowings .................................. $ 11,965 $ 11,205 $ 11,113 ======== ======== ======== Supplemental disclosure of noncash investing activities: Transfers from loans to real estate acquired through foreclosure ...... $ 64 $ 58 $ 162 ======== ======== ======== Issuance of mortgage loan upon sale of real estate acquired through foreclosure .......................................... $-- $ 699 $-- ======== ======== ======== Unrealized losses on securities designated as available for sale, net of related tax effects ............................................ $ (38) $ (15) $ (13) ======== ======== ======== Recognition of mortgage servicing rights in accordance with SFAS No. 125 ...................................... $ 64 $ 160 $ 107 ======== ======== ======== Supplemental disclosure of noncash financing activities Acquisition of treasury stock in exchange for outstanding shares ............................................... $ -- $ 27 $ 10 ======== ======== ========
The accompanying notes are an integral part of these statements. 26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 2000, 1999, and 1998 NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include Wayne Savings Bancshares, Inc. (the "Company") and its wholly-owned subsidiaries. In fiscal year 1999, Wayne Savings Community Bank ("Wayne Savings" or the "Bank") formed a new federal savings bank subsidiary in North Canton, Ohio, Village Savings Bank, F. S. B. ("Village"), together referred to as "the Banks." Intercompany transactions and balances are eliminated in the consolidated financial statements. Effective November 25, 1997, Wayne Savings, 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 Bank. In the reorganization, each share of Wayne Savings' common stock was automatically converted into one share of Wayne Savings Bancshares, Inc. common stock. The reorganization of the Bank 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. The Banks conduct 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 Banks' profitability is significantly dependent on their 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 Banks 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 generally accepted accounting principles ("GAAP") and general accounting practices within the financial services industry. In preparing financial statements in accordance with 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. At March 31, 2000 and 1999, the Company's equity accounts reflected a net unrealized gain (loss) on securities designated as available for sale of $(36,000) and $2,000, 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 amortization of premiums and accretion of 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 retains the servicing on any loans sold and agrees to remit to the investor loan principal and interest at agreed-upon rates. These rates generally differ from the loan's contractual interest rate resulting in a "yield differential." In addition to previously deferred loan origination fees and cash gains, gains on sale of loans can represent the present value of the future yield differential less a normal servicing fee, capitalized over the estimated life of the loans sold. Normal servicing fees are determined by reference to the stipulated servicing fee set forth in the loan sale agreement. Such fees approximate the Bank's normal servicing costs. The resulting capitalized excess servicing fee is amortized to operations over the estimated life of the loans using the interest method. If prepayments are higher than 27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.) March 31, 2000, 1999, and 1998 expected, an immediate charge to operations is made. If prepayments are lower, then adjustments are made prospectively. The Bank recognizes rights to service mortgage loans for others, pursuant to SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." In accordance with SFAS No. 125, 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 $64,000, $160,000, and $107,000 of pre-tax gains on sales of loans related to capitalized mortgage servicing rights during the fiscal years ended March 31, 2000, 1999, and 1998, respectively. SFAS No. 125 requires that capitalized mortgage servicing rights and capitalized excess servicing receivables be assessed for impairment. Impairment is measured based on fair value. The mortgage servicing rights recorded by the Bank, calculated in accordance with the provisions of SFAS No. 125, 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 $44,000, $32,000, and $12,000 for the years ended March 31, 2000, 1999, and 1998, respectively. At March 31, 2000 and 1999, the fair carrying value of the Bank's mortgage servicing rights totaled approximately $317,000 and $296,000, 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. At March 31, 2000 and 1999, loans held for sale were carried at cost. 3. Loan Origination Fees The Banks account 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 Banks' 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 Banks' policy to provide valuation allowances for estimated losses on loans based on past loss experience, trends in the level of delinquent and problem loans, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral and current and anticipated economic conditions in their primary market areas. When the collection of a loan becomes doubtful, or otherwise troubled, the Banks record 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 determined 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 Banks account 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 Banks consider 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 Banks' investment in multi-family and nonresidential loans, and their 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 Banks' policy to charge off unsecured credits that are more than ninety days delinquent. Similarly, collateral dependent loans which are more than ninety days delinquent are considered to constitute more than a minimum delay in repayment and are evaluated for impairment 28 under SFAS No. 114 at that time. At March 31, 2000, the Banks' investment in impaired loans totaled approximately $940,000. The Banks' investment in impaired loans at March 31, 1999, totaled approximately $44,000. 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 and declining-balance methods over the useful lives of the assets, estimated to be twenty to fifty years for buildings and improvements, and five to ten years for furniture and equipment. 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. Benefit Plans The Banks have a defined benefit pension plan covering all employees who have attained 21 years of age and have completed one full year of service. Annual contributions are made to fund current service costs and amortization of past service costs. The Banks' provision for pension expense totaled $222,000, $144,000, and $114,000 for the three years ended March 31, 2000, 1999, and 1998, respectively. These amounts reflect the expense computed by the Banks' actuaries utilizing the modified aggregate funding method and implicitly assuming a 7.50% rate of return on plan assets. As of November 1, 1999, the most recent valuation date, the amount of net assets available for benefits was $1.1 million. The Company has not provided disclosures required by SFAS No. 87, "Accounting for Pension Plans," based upon materiality. During fiscal 1999, the Banks instituted a Section 401(k) savings plan covering substantially all their employees who meet certain age and service requirements. Under the plan, the Banks match participant contributions up to 2% of each participant's compensation during the year. 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 $39,000 and $36,000 for the fiscal years ended March 31, 2000 and 1999, respectively. 9. Stock Benefit Plan The Bank has an Employee Stock Ownership Plan ("ESOP"), which provides retirement benefits for substantially all employees who have completed one year of service and have attained the age of 21. The final allocation of shares to plan participants occurred in fiscal 1998. The Company made no contributions to the ESOP during fiscal years ended March 31, 2000 and 1999. Expense recognized related to the ESOP totaled approximately $161,000 for the year ended March 31, 1998. 29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.) March 31, 2000, 1999, and 1998 10. Earnings Per Share Basic earnings per common share is computed based upon the weighted average number of common shares outstanding during the period, less shares in the ESOP that are unallocated and not committed to be released. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under stock option. Earnings and dividends per share have been restated for the fiscal 1998 stock split and all stock dividends through the date of issuance of the financial statements. The computations were as follows: 2000 1999 1998 ---- ---- ---- Weighted average common shares outstanding (basic) ... 2,602,141 2,609,762 2,602,228 Dilutive effect of assumed exercise of stock options .... 18,735 26,104 43,120 ------ ------ ------ Weighted average common shares outstanding (diluted). 2,620,876 2,635,866 2,645,348 ========= ========= ========= 11. 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. 12. 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, 2000 and 1999: 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. Certificates of deposit 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 cur- rently 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, 2000 and 1999, the difference between the fair value and notional amount of loan commitments was not material. 30 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: 2000 1999 ----------------- ------------------ Carrying Fair Carrying Fair value value value value ----- ----- ----- ----- (In thousands) Financial assets Cash and cash equivalents and certificates of deposit ....... $ 18,309 $ 18,309 $ 22,245 $ 22,245 Investment securities .......... 23,199 22,634 11,830 11,752 Mortgage-backed securities ..... 10,496 10,388 7,230 7,209 Loans receivable ............... 237,412 228,469 215,679 220,159 Stock in Federal Home Loan Bank. 3,160 3,160 2,919 2,919 -------- -------- -------- -------- $292,576 $282,960 $259,903 $264,284 ======== ======== ======== ======== Financial liabilities Deposits ....................... $264,952 $265,428 $235,327 $235,876 Advances from the Federal Home Loan Bank ................ 12,000 11,999 9,000 9,001 Advances by borrowers for taxes and insurance ........... 777 777 821 821 -------- -------- -------- -------- $277,729 $278,204 $245,148 $245,698 ======== ======== ======== ======== 13. Reclassifications Certain prior year amounts have been reclassified to conform to the 2000 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: 2000 1999 -------------------- -------------------- Estimated Estimated Carrying fair Carrying fair value value value value ----- ----- ----- ----- (In thousands) Corporate bonds and notes .... $ 2,987 $ 2,951 $ -- $ -- U.S. Government and agency obligations .......... 20,057 19,528 11,666 11,588 Municipal obligations ........ 155 155 164 164 ------- ------- ------- ------- $23,199 $22,634 $11,830 $11,752 ======= ======= ======= ======= At March 31, 2000, the carrying value of the Company's investment securities in excess of estimated fair value totaled $565, 000 in gross unrealized losses. At March 31, 1999, the carrying value of the Company's investment securities in excess of estimated fair value totaled $78,000 in gross unrealized losses. The amortized cost and estimated fair value of U. S. Government and agency obligations, corporate bonds and notes and municipal obligations at March 31, 2000, by term to maturity are shown below. Estimated Amortized fair cost value ---- ----- (In thousands) Due in one to three years ............ $14,954 $14,740 Due in three to five years ........... 5,590 5,345 Due in over five years ............... 2,655 2,549 ------- ------- $23,199 $22,634 ======= ======= The Company had not pledged any investment or mortgage-backed securities to secure public deposits at either March 31, 2000 or 1999. The amortized cost, gross unrealized gains, gross unrealized losses, and estimated fair values of mortgage-backed securities at March 31, 2000 and 1999, including those designated as available for sale, are summarized as follows: 2000 ------------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ---- ----- ------ ----- (In thousands) Held-to-maturity Federal Home Loan Mortgage Corporation participation certificates .... $1,044 $-- $ 21 $1,023 Government National Mortgage Association participation certificates .... 2,701 -- 34 2,667 Federal National Mortgage Association participation certificates .... 3,301 -- 53 3,248 ------ ---- ------ ------ $7,046 $-- $ 108 $6,938 ====== ==== ====== ====== Available for sale Federal Home Loan Mortgage Corporation participation certificates .... $1,519 -- $ 16 $1,503 Government National Mortgage Association participation certificates .... 82 15 -- 97 Federal National Mortgage Association participation certificates .... 1,904 -- 54 1,850 ------ ---- ------ ------ $3,505 $15 $ 70 $3,450 ====== ==== ====== ====== 31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.) March 31, 2000, 1999, and 1998 1999 ---------------------------------------------- Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value ---- ----- ------ ----- (In thousands) Held-to-maturity REMICs ......................... $ 53 $-- $-- $ 53 Federal Home Loan Mortgage Corporation participation certificates .... 409 -- 7 402 Government National Mortgage Association participation certificates .................. 1,005 -- 14 991 Federal National Mortgage Association participation certificates .... 1,917 5 5 1,917 ----- --- --- ----- $3,384 $ 5 $26 $3,363 ====== === === ====== Available for sale Federal Home Loan Mortgage Corporation participation certificates .... $ 757 $ 3 $-- $ 760 Government National Mortgage Association participation certificates .... 135 19 -- 154 Federal National Mortgage Association participation certificates .... 2,951 9 28 2,932 ----- --- --- ----- $3,843 $31 $28 $3,846 ====== === === ====== The amortized cost of mortgage-backed securities, including those designated as available for sale at March 31, 2000, by contractual term to maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may generally prepay obligations without prepayment penalties. Amortized Cost -------------- (In thousands) Due in one year or less ................. $ 450 Due within one to three years ........... 1,153 Due within three to five years .......... 1,139 Due after five years .................... 7,809 ------- $10,551 ======= NOTE C -- LOANS RECEIVABLE The composition of the loan portfolio at March 31 is as follows: 2000 1999 ---- ---- (In thousands) Residential real estate - 1 to 4 family ............... $211,222 $187,638 Residential real estate - multi--family ............... 8,028 7,086 Residential real estate - construction ................ 4,035 7,668 Nonresidential real estate and land ................... 6,068 5,610 Education ............................................. 2,780 3,245 Commercial ............................................ 5,168 4,810 Consumer and other .................................... 6,261 5,170 -------- -------- 243,562 221,227 Less: Undisbursed portion of loans in process .............. 4,136 4,600 Deferred loan origination fees ....................... 1,538 1,855 Allowance for loan losses ............................ 793 678 -------- -------- $237,095 $214,094 ======== ======== As depicted above, the Banks' lending efforts have historically focused on one-to-four family residential and multi-family residential real estate loans, which comprise approximately $219.1 million, or 92%, of the total loan portfolio at March 31, 2000, and $197.8 million, or 92%, of the total loan portfolio at March 31, 1999. 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 Banks, as with any lending institution, are subject to the risk that real estate values could deteriorate in their primary lending areas 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 $44.3 million, $44.0 million, and $37.8 million at March 31, 2000, 1999, and 1998, respectively. In the normal course of business, the Banks have made loans to their directors, officers and their related business interests. Prior to fiscal 1999, related party loans were made on the same terms including interest rates and collateral, as unrelated persons and do not involve more than the normal risk of collectiblilty. However, regulations now permit executive officers and directors to receive the same terms through benefit or compensation plans that are widely available to other employees, as long as the director or 32 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 $189,000, $340,000 and $209,000 at March 31, 2000, 1999, and 1998, respectively. NOTE D - ALLOWANCE FOR LOAN LOSSES The activity in the allowance for loan losses is summarized as follows for the years ended March 31: 2000 1999 1998 ---- ---- ---- (In thousands) Balance at beginning of year ................ $678 $721 $914 Provision for loan losses ................... 120 64 60 Charge-offs of loans--net ................... (5) (107) (253) ---- ---- ---- Balance at end of year ...................... $793 $678 $721 ==== ==== ==== As of March 31, 2000, the Banks' 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 and nonperforming loans totaled approximately $200,000, $280,000, and $308,000 at March 31, 2000, 1999, and 1998, respectively. During the years ended March 31, 2000, 1999, and 1998, interest income of approximately $8,000, $7,000 and $23,000, 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: 2000 1999 ---- ---- (In thousands) Land and improvements ..................... $ 1,750 $ 1,596 Office buildings and improvements ......... 6,752 6,194 Furniture,fixtures and equipment .......... 4,463 4,127 Automobiles ............................... 60 84 ------- ------- 13,025 12,001 Less accumulated depreciation and amortization ...................... 4,865 4,253 ------- ------- $ 8,160 $ 7,748 ======= ======= NOTE F - DEPOSITS Deposits consist of the following major classifications at March 31: 2000 1999 ---- ---- Deposit type and weighted- (In thousands) average interest rate NOW accounts 2000 - 2.08% .................... $ 31,014 1999 - 2.11% .................... $ 24,879 Passbook 2000 - 3.13% .................... 53,074 1999 - 3.10% .................... 46,466 Money Market Investor 2000 - 3.28% .................... 10,827 1999 - 3.31% .................... 11,265 -------- -------- Total demand,transaction and passbook deposits ........... 94,915 82,610 2000 1999 ---- ---- (In thousands) Certificates of deposit Original maturities of: Less than 12 months 2000 - 5.00% .................... 41,722 1999 - 4.81% .................... 37,813 12 months to 24 months 2000 - 5.60% .................... 54,341 1999 - 5.18% .................... 34,001 25 months to 36 months 2000 - 5.71% .................... 24,787 1999 - 5.84% .................... 38,696 More than 36 months 2000 - 5.52% .................... 8,888 1999 - 5.99% .................... 11,420 Jumbo 2000 - 6.07% .................... 40,299 1999 - 5.92% .................... 30,787 -------- -------- Total certificates of deposit.. 170,037 152,717 -------- -------- Total deposit accounts ........ $264,952 $235,327 ======== ======== At March 31, 2000 and 1999, the Banks had certificates of deposit with balances in excess of $100,000 totaling $34.7 million and $29.4 million, respectively. Interest expense on deposits for the years ended March 31 is summarized as follows: 2000 1999 1998 ---- ---- ---- (In thousands) Passbook ................................ $ 1,569 $ 1,220 $ 1,181 NOW and money market deposit accounts ... 979 787 732 Certificates of deposit ................. 8,982 8,509 8,281 ------- ------- ------- $11,530 $10,516 $10,194 ======= ======= ======= 33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.) March 31, 2000, 1999, and 1998 Maturities of outstanding certificates of deposit at March 31 are summarized as follows: 2000 1999 ---- ---- (In thousands) Less than one year .................... $123,870 $107,483 One to three years .................... 41,855 40,595 Over three years ...................... 4,312 4,639 -------- -------- $170,037 $152,717 ======== ======== NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank, collateralized at March 31, 2000 and 1999 by pledges of certain residential mortgage loans totaling $18.0 million and $13.5 million and the Banks' investment in Federal Home Loan Bank stock, are summarized as follows: Interest Maturing in year rate ending March 31, 2000 1999 ---- ---------------- ---- ---- (Dollars in thousands) 5.35% 2000 $ -- $ 1,000 6.20%-6.50% 2001 6,000 2,000 5.04%-5.98% 2002 6,000 6,000 ------- ------- $12,000 $ 9,000 ======= ======= Weighted-average interest rate .......... 5.98% 5.68% ======= ======= NOTE H - FEDERAL INCOME TAXES The provision for federal income taxes on earnings differs from that computed at the statutory corporate tax rate for the years ended March 31 as follows: 2000 1999 1998 ---- ---- ---- (In thousands) Federal income taxes computed at statutory rate ........... $644 $846 $953 Increase (decrease) in taxes resulting from: Tax exempt interest ................................... (7) (3) (3) Other ................................................. 7 3 3 ---- ---- ---- Federal income tax provision per financial statements ..... $644 $846 $953 ==== ==== ==== The composition of the Company's net deferred tax liability at March 31 is as follows: 2000 1999 ---- ---- (In thousands) Taxes (payable) refundable on temporary differences at statutory rate: Deferred tax assets Deferred loan origination fees ...................... $ 218 $ 272 General loan loss allowance ......................... 308 228 Unrealized loss on securities designated as available for sale .................. 19 -- Other ............................................... 11 14 ----- ----- Deferred tax assets ....................................... 556 514 Deferred tax liabilities Federal Home Loan Bank stock dividends ................... (664) (591) Book/tax depreciation differences ........................ (91) (122) Unrealized gains on securities designated as available for sale ..................................... -- (1) Percentage of earnings bad debt deduction ................ (68) (85) Mortgage servicing rights ................................ (108) (101) ----- ----- Deferred tax liabilities .................................. (931) (900) ----- ----- Total deferred tax liability .......................... $(375) $(386) ===== ===== The Bank 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. The percentage of earnings bad debt deduction for additions prior to fiscal 1988 totaled approximately $2.7 million as of March 31, 2000. If the amounts that qualify 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 is approximately $918,000 at March 31, 2000. Wayne Savings is required to recapture as taxable income approximately $250,000 of its bad debt reserve, which represents the post-1987 additions to the reserve, and will be unable to utilize the percentage of earnings method to compute the reserve in the future. Wayne Savings has provided deferred taxes for this amount and will amortize the recapture of the bad debt reserve in taxable income over a six-year period, which commenced in fiscal 1999. 34 NOTE I - COMMITMENTS The Company is 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 nonperformance 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, 2000 and 1999, the Company had outstanding commitments to originate fixed rate loans of approximately $1.8 million and $8.8 million, respectively, and adjustable rate loans of approximately $520,000 and $436,000, respectively. The Company had unused lines of credit under home equity loans of $10.7 million and $8.2 million at March 31, 2000 and 1999, respectively. Additionally, the Company had unused lines of credit under commercial loans of $3.1 million and $1.8 million at March 31, 2000 and 1999, respectively. Management believes that all loan commitments are able to be funded through cash flow from operations and existing excess liquidity. Fees received in connection with these commitments have not been recognized in earnings. 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 include a mortgage interest in real estate as security. In connection with the opening of the NorthSide branch in July 1999, the Company assumed a lease of branch banking facilities. The lease of the banking facility is in Wooster and requires the Company to make payments of approximately $30,000 per year. The lease expires in April 2009, and contains two renewable five year options with lease payments to be determined by the parties upon such time of a renewal. NOTE J - REGULATORY CAPITAL The Banks are subject to minimum regulatory capital standards promulgated by the Office of Thrift Supervision (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 their financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of the Banks' assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The Banks' 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. Effective April 1999, 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. In fiscal 1999, the core capital requirement was equal to 3.0% of adjusted total assets. 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 Banks multiply 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, 2000 and 1999, management believes that the Banks met all capital adequacy requirements to which they were subject. 35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.) March 31, 2000, 1999, and 1998 Wayne Savings Community Bank as of March 31, 2000 (Dollars in thousands)
To be "well-capitalized" For capital under prompt corrective Actual adequacy purposes action provisions ------ ----------------- ----------------- Amount Ratio Amount Ratio Amount Ratio Tangible capital .... $24,305 8.1% > or equal $ 4,558 > or equal 1.5% > or equal $15,192 > or equal 5.0% Core capital ........ $24,305 8.1% > or equal $12,155 > or equal 4.0% > or equal $18,230 > or equal 6.0% Risk-based capital .. $25,098 15.7% > or equal $12,802 > or equal 8.0% > or equal $16,003 > or equal 10.0%
Wayne Savings Community Bank as of March 31, 1999 (Dollars in thousands)
To be "well-capitalized" For capital under prompt corrective Actual adequacy purposes action provisions ------ ----------------- ----------------- Amount Ratio Amount Ratio Amount Ratio Tangible capital .... $23,146 8.6% > or equal $ 4,039 > or equal 1.5% > or equal $13,462 > or equal 5.0% Core capital ........ $23,146 8.6% > or equal $ 8,078 > or equal 3.0% > or equal $16,154 > or equal 6.0% Risk-based capital .. $23,816 16.4% > or equal $11,616 > or equal 8.0% > or equal $14,520 > or equal 10.0%
Village Savings Bank, F.S.B. as of March 31, 2000 (Dollars in thousands)
To be "well-capitalized" For capital under prompt corrective Actual adequacy purposes action provisions ------ ----------------- ----------------- Amount Ratio Amount Ratio Amount Ratio Tangible capital .... $2,683 12.7% > or equal $318 > or equal 1.5% > or equal $1,060 > or equal 5.0% Core capital ........ $2,683 12.7% > or equal $848 > or equal 4.0% > or equal $1,272 > or equal 6.0% Risk-based capital .. $2,717 24.8% > or equal $875 > or equal 8.0% > or equal $1,094 > or equal 10.0%
Village Savings Bank, F.S.B. as of March 31, 1999 (Dollars in thousands)
To be "well-capitalized" For capital under prompt corrective Actual adequacy purposes action provisions ------ ----------------- ----------------- Amount Ratio Amount Ratio Amount Ratio Tangible capital .... $2,638 19.5% > or equal $207 > or equal 1.5% > or equal $691 > or equal 5.0% Core capital ........ $2,638 19.5% > or equal $414 > or equal 3.0% > or equal $829 > or equal 6.0% Risk-based capital .. $2,641 53.3% > or equal $397 > or equal 8.0% > or equal $496 > or equal 10.0%
36 The Banks' management believes that, under the current regulatory capital regulations, the Banks will continue to meet their minimum capital requirements in the foreseeable future. However, events beyond the control of the Banks, such as increased interest rates or a downturn in the economy in the Banks' market area, could adversely affect future earnings and, consequently, the ability to meet future minimum regulatory capital requirements. The Banks are subject to regulations imposed by the OTS regarding the amount of capital distributions payable to the Company. Generally, the Banks' 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. Pursuant to such OTS dividend regulations, the Banks had the ability to pay approximately $4.9 million at March 31, 2000. NOTE K - STOCK OPTION PLANS The Company has an incentive Stock Option Plan that provides for the issuance of 84,044 shares of authorized, but unissued shares of common stock. The Company also has a non-incentive Stock Option Plan that provides for the issuance of 36,018 (adjusted) shares of authorized, but unissued shares of common stock. The number of shares under option have been adjusted to reflect the three-for two stock split and all stock dividends through the date of issuance of the financial statements. The Company accounts for its stock option plans in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," which provides a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, SFAS No. 123 permits entities to continue to account for stock options and similar equity instruments under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net earnings and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. Management has determined that the Company will continue to account for stock based compensation pursuant to APB Opinion No. 25. The pro-forma disclosures required by SFAS No. 123 are not applicable as no options were granted by the Company during the fiscal years ended March 31, 2000, 1999, and 1998. A summary of the status of the Company's stock option plans as of March 31, 2000, 1999, and 1998, and changes during the periods ending on those dates is presented below:
2000 1999 1998 ---------------- ----------------- ----------------- Exercise Exercise Exercise Shares Price Shares Price Shares Price ------ ----- ------ ----- ------ ----- Outstanding at beginning of year ... 34,596 $5.00 60,548 $5.00 74,441 $5.00 Granted ............................ -- -- -- -- -- -- Exercised .......................... 2,301 5.00 22,743 5.00 11,651 5.00 Forfeited .......................... 4,638 5.00 3,209 5.00 2,242 5.00 ----- ---- ----- ---- ------ ---- Outstanding at end of year ......... 27,657 $5.00 34,596 $5.00 60,548 $5.00 ------ ----- ------ ----- ------ ----- Options exercisable at year-end .... 27,657 $5.00 34,596 $5.00 60,548 $5.00 ====== ===== ====== ===== ====== =====
The following information applies to options outstanding at March 31, 2000: Number outstanding ............................. 27,657 Range of exercise prices ....................... $5.00 Weighted-average exercise price ................ $5.00 Weighted-average remaining contractual life .... 3.25 At March 31, 2000, all of the stock options granted were subject to exercise at the discretion of the grantees and expire in 2003. 37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.) March 31, 2000, 1999, and 1998 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, 2000 and 1999, and the results of its operations and its cash flows for periods ended March 31, 2000, 1999, and 1998.
Wayne Savings Bancshares, Inc. STATEMENTS OF FINANCIAL CONDITION March 31, 2000 1999 ---- ---- (In thousands) ASSETS Cash and due from banks ................................................... $ 169 $ 86 Interest-bearing deposits in other financial institutions ................. 475 1,625 Investment in subsidiaries ................................................ 24,596 23,332 Prepaid expenses and other ................................................ 100 102 -------- -------- Total assets ............................................................. $ 25,340 $ 25,145 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Other liabilities ......................................................... $ 219 $ 189 Stockholders' equity Common stock and additional paid-in capital .............................. 17,025 14,985 Retained earnings ........................................................ 8,777 10,437 Less shares held in treasury (33,214 and 22,583 shares, respectively) .... (645) (468) Accumulated other comprehensive income (loss), unrealized gain (loss) on securities designated as available for sale, net .................... (36) 2 -------- -------- Total stockholders' equity ........................................... 25,121 24,956 -------- -------- Total liabilities and stockholders' equity ........................... $ 25,340 $ 25,145 ======== ========
Wayne Savings Bancshares,Inc. STATEMENTS OF EARNINGS For the periods ended March 31, 2000 1999 1998 ---- ---- ---- Income (In thousands) Interest income ...................... $ 58 $ 53 $ 5 Equity in earnings of subsidiary ..... 1,302 1,676 580 ------ ------ --- Total revenue ....................... 1,360 1,729 585 General and administrative expenses ... 135 102 64 ------ ------ ------ Earnings before income tax credits ... 1,225 1,627 521 Federal income tax credits ............ (26) (16) (20) ------ ------ ------ NET EARNINGS ....................... $1,251 $1,643 $ 541 ====== ====== ====== Wayne Savings Bancshares,Inc. STATEMENTS OF CASH FLOWS For the periods ended March 31,
2000 1999 1998 ---- ---- ---- (In thousands) Cash flows from operating activities: Net earnings for the period ............................. $ 1,251 $ 1,643 $ 541 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Excess contributions (undistributed earnings) of consolidated subsidiary .............................. (1,238) 324 (580) Increase (decrease) in cash due to changes in: Prepaid expenses and other assets .................... (2) (25) (24) Other liabilities .................................... (30) (8) -- ------- ------- ------- Net cash provided by (used in) operating activities.. (19) 1,934 (63) Cash flows provided by investing activities: Effect of corporate reorganization ...................... -- -- 1,076 ------- ------- ------- Net cash provided by investing activities ........... -- -- 1,076 Cash flows provided by (used in) financing activities: Payment of dividends on common stock .................... (882) (725) (169) Purchase of treasury stock - at cost .................... (177) (431) -- Proceeds from exercise of stock options ................. 11 87 2 ------- ------- ------- Net cash used in financing activities .................... (1,048) (1,069) (167) ------- ------- ------- Net increase (decrease) in cash and cash equivalents ..... (1,067) 865 846 ------- ------- ------- Cash and cash equivalents at beginning of period ......... 1,711 846 -- ------- ------- ------- Cash and cash equivalents at end of period ............... $ 644 $ 1,711 $ 846 ======= ======= =======
38 NOTE M - QUARTERLY RESULTS OF OPERATIONS (unaudited) The following table summarizes the Company's quarterly results for the fiscal years ended March 31, 2000 and 1999. Certain amounts, as previously reported, have been reclassified to conform to the fiscal 2000 presentation.
For the three months periods ended -------------------------------------------------------------------- June 30, 1999 September 30, 1999 December 31, 1999 March 31, 2000 ------------- ------------------ ----------------- -------------- (In thousands, except share data) Total interest income ..................... $4,906 $5,180 $5,282 $5,333 Total interest expense .................... 2,809 2,964 3,077 3,164 ------ ------ ------ ------ Net interest income ....................... 2,097 2,216 2,205 2,169 Provision for losses on loans ............. 21 23 38 38 Other income .............................. 190 167 211 174 General, administrative and other expense.. 1,749 1,899 1,917 1,849 ------ ------ ------ ------ Earnings before income taxes .............. 517 461 461 456 Federal income taxes ...................... 175 158 156 155 ------ ------ ------ ------ Net earnings .............................. $ 342 $ 303 $ 305 $ 301 ====== ====== ====== ====== Earnings per share Basic .................................... $ .13 $ .12 $ .12 $ .11 ====== ====== ====== ====== Diluted .................................. $ .13 $ .12 $ .12 $ .11 ====== ====== ====== ======
For the three months periods ended -------------------------------------------------------------------- June 30, 1998 September 30, 1998 December 31, 1998 March 31,1999 ------------- ------------------ ----------------- ------------- (In thousands, except share data) Total interest income ..................... $4,865 $4,809 $4,854 $4,768 Total interest expense .................... 2,801 2,838 2,769 2,779 ------ ------ ------ ------ Net interest income ....................... 2,064 1,971 2,085 1,989 Provision for losses on loans ............. 15 16 16 17 Other income .............................. 260 290 225 217 General, administrative and other expense.. 1,586 1,590 1,627 1,745 ------ ------ ------ ------ Earnings before income taxes .............. 723 655 667 444 Federal income taxes ...................... 246 223 227 150 ------ ------ ------ ------ Net earnings .............................. $ 477 $ 432 $ 440 $ 294 ====== ====== ====== ====== Earnings per share Basic .................................... $ .18 $ .16 $ .17 $ .12 ====== ====== ====== ====== Diluted .................................. $ .18 $ .16 $ .17 $ .11 ====== ====== ====== ======
39 EX-21 3 0003.txt EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF REGISTRANT SUBSIDIARIES OF THE REGISTRANT Name State of Incorporation ---- ---------------------- Wayne Savings Community Bank Ohio | | Village Savings Bank, F.S.B. Federal EX-23 4 0004.txt EXHIBIT 23 EXHIBIT 23 CONSENT OF GRANT THORNTON LLP ACCOUNTANTS' CONSENT We have issued our report dated May 26, 2000, accompanying the consolidated financial statements of Wayne Savings Bancshares, Inc. which are incorporated within the Annual Report on Form 10-KSB for the year ended March 31, 2000. We hereby consent to the incorporation by reference of said report in the Corporation's Form S-8 (333-41479). /s/Grant Thornton LLP Cincinnati, Ohio June 26, 2000 EX-27 5 0005.txt FINANCIAL DATA SCHEDULE
9 1,000 Year MAR-31-2000 MAR-31-2000 2,502 8,332 3,475 0 3,450 34,245 33,572 237,888 793 304,069 264,952 6,000 1,996 6,000 0 0 2,632 22,489 304,069 17,928 1,635 1,138 20,701 11,530 12,014 8,687 120 0 7,414 1,895 1,895 0 0 1,251 0.48 0.48 2.99 200 0 0 0 678 5 0 793 793 0 0
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