<PAGE>
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, 1998
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission File No. 0-23433
WAYNE SAVINGS BANCSHARES, INC.
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(Exact name of registrant as specified in its charter)
Federal 31-1557791
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
151 North Market Street, Wooster, Ohio 44691
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(Address of Principal Executive Offices) Zip Code
(330) 264-5767
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(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
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value $1.00 per share
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(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
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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. [X].
The issuer's revenues for the fiscal year ended March 31, 1998, were $20.1
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 12, 1998,
was approximately $25.5 million. This amount excludes shares held by Wayne
Savings Bankshares, M.H.C., and the Registrant's directors and senior officers.
As of June 12, 1998, there were issued and outstanding 2,483,481 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, 1998 (Parts II and III).
2. Proxy Statement for the 1998 Annual Meeting of Stockholders (Parts I and
III).
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PART I
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ITEM 1. Business
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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, 1998, the Company
had total assets of $259.8 million, total deposits of $217.6 million, and
stockholders' equity of $24.4 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 six 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 decreasing 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.
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.
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
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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.
Recent Developments
On November 22, 1997, the Bank, the Company and the Mutual Holding Company
applied to the Office of Thrift Supervision (the "OTS") for approval to charter
Village Savings Bank, F.S.B. ("Village Savings"), as a wholly-owned subsidiary
of the Bank to be located in North Canton, Ohio. The OTS has approved the
formation of Village Savings, and the FDIC has approved Village Savings'
application for federal insurance of deposit accounts. Village Savings will be
capitalized by the Bank with an initial investment of $3.0 million. It is
anticipated that Village Savings will open for business during the third quarter
of 1998.
Lending Activities
General. Historically, the principal lending activity of the Bank 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 Bank originates ARM loans for retention in its portfolio, and
fixed rate loans that are eligible for resale in the secondary mortgage market.
The Bank 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 Bank's lending activities. The
Bank also originates consumer loans to broaden services offered to customers and
to decrease the Bank's interest rate risk exposure.
The Bank 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 Bank also purchases mortgage-backed
securities generally with estimated remaining average lives of 5 years or less.
At March 31, 1998, approximately $69.6 million, or 32.9%, of the Bank's total
loans and mortgage-backed securities, due after March 31, 1999, consisted of
loans or securities with adjustable interest rates.
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The Bank continues actively to originate fixed rate mortgage loans,
generally with 15 to 30 year terms to maturity, collateralized by one- to four-
family residential properties. One- to four-family fixed rate residential
mortgage loans generally are originated and underwritten according to standards
that allow the Bank to resell such loans in the secondary mortgage market for
purposes of managing interest rate risk and liquidity. The majority of such
one- to four-family fixed rate residential mortgage loans, however, are retained
by the Bank. The Bank retains servicing on its sold mortgage loans and realizes
monthly service fee income. The Bank also originates interim construction loans
on one- to four-family residential properties.
Analysis of Loan Portfolio. Set forth below are selected data relating to
the composition of the Bank's loan portfolio by type of loan as of the dates
indicated.
<TABLE>
<CAPTION>
At March 31,
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1998 1997 1996
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$ % $ % $ %
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family residential(1)... $180,895 85.58% $184,381 85.98% $177,267 83.60%
Residential construction loans....... 3,963 1.87 5,717 2.67 5,250 2.48
Multi-family residential............. 7,091 3.36 5,491 2.56 10,215 4.82
Non-residential real estate/land(2).. 5,838 2.76 6,519 3.04 6,831 3.22
-------- ------- -------- ------- -------- -------
Total mortgage loans................ 197,787 93.57 202,108 94.25 199,563 94.12
Other loans:
Consumer loans....................... 10,477 4.96 11,568 5.39 11,708 5.52
Commercial business loans............ 3,112 1.47 769 .36 767 .36
-------- ------- -------- ------- -------- -------
Total other loans................... 13,589 6.43 12,337 5.75 12,475 5.88
-------- ------- -------- ------- -------- -------
Total loans before net items.......... 211,376 100.00% 214,445 100.00% 212,038 100.00%
======= ======= =======
Less:
Loans in process..................... 2,088 2,111 2,540
Deferred loan origination fees....... 1,882 2,016 2,097
Allowance for loan losses............ 721 914 888
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Total loans receivable, net......... $206,685 $209,404 $206,513
======== ======== ========
Mortgage-backed securities, net (3)... $ 4,275 $ 873 $ 1,929
======== ======== ========
</TABLE>
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(1) Includes equity loans collateralized by second mortgages in the aggregate
amount of $7.9 million, $7.3 million and $5.8 million, as of March 31, 1998,
1997 and 1996, respectively. Such loans have been underwritten on
substantially the same basis as the Bank's first mortgage loans.
(2) Includes land loans of $584,000, $449,000 and $348,000 as of March 31, 1998,
1997, and 1996, respectively.
(3) Includes mortgage-backed securities designated as available for sale.
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Loan and Mortgage-Backed Securities Maturity and Repricing Schedule. The
following table sets forth certain information as of March 31, 1998, regarding
the dollar amount of loans and mortgage-backed securities maturing in the Bank'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.
<TABLE>
<CAPTION>
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)
<S> <C> <C> <C> <C> <C> <C> <C>
Mortgage loans (1):
One to four family residential:
Adjustable.................................. $ 58,049 $ 777 $ -- $ -- $ -- $ -- $ 58,826
Fixed....................................... 545 414 3,216 15,412 46,705 58,846 125,138
Multi-family residential and nonresidential:
Adjustable.................................. 10,662 120 -- -- -- -- 10,782
Fixed....................................... -- 954 35 1,153 10 -- 2,152
Second Mortgage Loans......................... 8 221 369 2,188 10 -- 2,796
Other Loans:..................................
Commercial................................... 3,095 8 7 2 -- -- 3,112
Consumer..................................... 3,136 2,173 707 1,658 2 -- 7,676
-------- ----------- ---------- --------- ------------ ------- --------
Total loans................................... $ 75,495 $ 4,667 $ 4,334 $ 20,413 $ 46,727 $58,846 $210,482
======== =========== ========== ========= ============ ======= ========
Mortgage-backed securities (2)................ $ 821 $ 971 $ 776 $ 1,339 $ 311 $ -- $ 4,218
======== =========== ========== ========= ============ ======= ========
</TABLE>
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(1) Amounts shown are net of loans in process of $2.1 million and include loans
held for sale.
(2) Includes mortgage-backed securities available for sale. Does not include
premiums of $36,000, unrealized gains of $26,000, and discounts of $5,000.
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The following table sets forth at March 31, 1998, the dollar amount of all
fixed rate and adjustable rate loans due after March 31, 1999.
Fixed Adjustable Total
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(In Thousands)
Mortgage loans(1):
One- to four-family residential.. $124,280 $58,785 $183,065
Multi-family residential......... 2,152 10,782 12,934
Other loans:
Commercial business.............. 19 2,134 2,153
Consumer......................... 7,053 622 7,675
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Total loans..................... $133,504 $72,323 $205,827
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Mortgage-backed securities (2).... $ 3,397 $ -- $ 3,397
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(1) Includes loans held for sale.
(2) Includes mortgage-backed securities available for sale.
One- to Four-Family Residential Real Estate Loans. The Bank's primary
lending activity consists of the origination of one- to four-family, owner-
occupied, residential mortgage loans on properties located in the Bank's market
area. The Bank generally does not originate one- to four-family residential
loans on properties outside of its market area. At March 31, 1998, the Bank had
$180.9 million, or 85.6%, of its total loan portfolio invested in one-to four-
family residential mortgage loans.
The Bank's fixed rate loans generally are originated and underwritten
according to standards that permit resale in the secondary mortgage market.
Whether the Bank can or will sell fixed rate loans into the secondary market,
however, depends on a number of factors including but not limited to the Bank's
portfolio mix, gap and liquidity positions, and market conditions. Moreover,
the Bank is more likely to retain fixed rate loans if its one year gap is
positive. The Bank'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 Bank's secondary market activities over the past three years
have been limited to sales of $7.1 million, $1.9 million and $3.1 million for
the fiscal years ended March 31, 1998, 1997 and 1996, respectively. Such sales
generally constituted current period originations. Mortgage loans held for sale
at March 31, 1998 totaled $1.2 million. No mortgage loans were held for sale as
of March 31, 1997 and 1996.
The Bank 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 Bank's interest rate gap
position, and loan products offered by the Bank'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, 1998, the Bank's
ARM portfolio decreased by $3.2 million, or 4.4%.
The Bank's ARM loans adjust annually with interest rate adjustment
limitations of 1% per year and with a cap of 3% on total rate increases or
decreases over the life of the loan. The Bank's current index on its ARM loans
is the Ohio Cost of Funds for SAIF-Insured Savings Associations, which index is
published quarterly by the OTS. In the past, the Bank has used different
interest indices for ARM loans, such as the National Average Contract Rate
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for Previously Occupied Homes and the National Average Cost of Funds.
Consequently, the interest rate adjustments on the Bank's portfolio of ARM loans
do not reflect changes in a particular interest rate index. The Bank does not
originate ARM loans with initially discounted rates. The Bank determines whether
a borrower qualifies for an ARM loan based on the contractual rate of the ARM
loan at the time the loan is originated. One- to four-family residential ARM
loans totaled $58.8 million, or 27.8%, of the Bank's total loan portfolio at
March 31, 1998.
The primary purpose of offering ARM loans is to make the Bank'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
Bank 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 Bank's credit risk associated with its
ARM loans is reduced because the Bank has a 3% cap on interest rate increases
during the life of its ARM loans.
The Bank 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 Bank 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, 1998, the Bank's equity loan
portfolio totaled $7.9 million, or 4.4%, of its one- to four-family mortgage
loan portfolio.
The Bank's one- to four-family residential first mortgage loans customarily
include due-on-sale clauses, which are provisions giving the Bank 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 Bank'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 Bank'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 Bank
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 Bank 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 Bank requires the first 12%, 25%, and 30%, respectively,
of the loan to be covered by private mortgage insurance. The Bank requires fire
and casualty insurance, as well as title insurance regarding good title, on all
properties securing real estate loans made by the Bank and flood insurance,
where applicable.
Multi-Family Residential Real Estate Loans. In recent years, the Bank has
significantly reduced its originations of multi-family real estate loans. Loans
secured by multi-family real estate constituted approximately $7.1 million, or
3.4%, of the Bank's total loan portfolio at March 31, 1998. The Bank's multi-
family real estate loans are secured by multi-family residences, such as
apartment buildings. At March 31, 1998, 86.6% of the Bank's multi-family loans
were secured by properties located within the Bank's market area. At March 31,
1998, the Bank's multi-family real estate loans had an average balance of
$249,000, 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 Bank originated fixed rate long term multi-family real estate loans. The
terms of each multi-family loan are negotiated on a case by case basis, although
such loans typically have adjustable interest rates tied to a market index, and
amortize over 15 to 25 years. The Bank currently does not emphasize multi-
family real estate construction loans; however, the Bank's policies do not
preclude such lending.
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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 Bank also has reduced
significantly its non-residential real estate loan originations in recent years.
Loans secured by non-residential real estate constituted approximately $5.3
million, or 2.5%, of the Bank's total loan portfolio at March 31, 1998. The
Bank'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, 1998, 81.7% of the Bank's non-residential real estate loans were
secured by properties located within the Bank's market area. At March 31, 1998,
the Bank's non-residential loans had an average balance of $91,000 and the
largest non-residential real estate loan had a principal balance of $967,000.
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 Bank has originated fixed rate long term non-residential real estate loans.
Non-residential real estate loans originated by the Bank generally amortize over
15 to 25 years. The Bank currently does not emphasize non-residential real
estate construction loans; however, the Bank'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 Bank 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 $584,000 at March 31, 1998.
Residential Construction Loans. To a lesser extent, the Bank originates
loans to finance the construction of one- to four-family residential property.
At March 31, 1998, the Bank had $4.0 million, or 1.9%, of its total loan
portfolio invested in interim construction loans. The Bank 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 Bank 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.
Consumer Loans. Ohio savings associations are authorized to invest in
secured and unsecured consumer loans in an aggregate amount which, when combined
with investments in commercial paper and corporate debt securities, does not
exceed 20% of an association's assets. In addition, an Ohio association is
permitted to invest up to 5% of its assets in loans for educational purposes.
As of March 31, 1998, consumer loans totaled $10.5 million, or 5.0%, of the
Bank's total loan portfolio. The principal types of consumer loans offered by
the Bank 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 Bank'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
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loans are offered on a fixed rate basis with terms of up to ten years. At March
31, 1998, second mortgage loans totaled $2.8 million, or 26.7%, of consumer
loans.
The underwriting standards employed by the Bank 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 Bank 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 Bank's
loan loss experience and reserve policy.
Mortgage-Backed Securities. The Bank 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 Bank's portfolio for such securities. These
securities consist primarily of fixed rate mortgage-backed securities issued or
guaranteed by the Federal National Mortgage Association ("FNMA"), Freddie Mac,
and the Government National Mortgage Association ("GNMA"). Total mortgage-
backed securities, including those designated as available for sale, increased
from $873,000 at March 31, 1997, to $4,275,000 at March 31, 1998, primarily as a
result of purchases of $4.0 million.
The Bank's objectives in investing in mortgage-backed securities varies
from time to time depending upon market interest rates, local mortgage loan
demand, and the Bank'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 Bank 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 Bank 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 Bank appraises the real estate
intended to secure the proposed loan. An underwriter in the Bank's loan
department checks the loan application file for accuracy and completeness, and
verifies the information provided. One- to four-family and multi-family
residential, and commercial real estate loans, for up to $150,000, may be
approved by the manager of the mortgage loan department, loans between $150,000
and $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, 1998, the Bank had commitments to originate $6.7 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
-8-
<PAGE>
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 Bank has purchased loans originated by other
lenders, the Bank has not purchased any such loans in at least 10 years. At
March 31, 1998, less than 2% of all loans in the Bank'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 Bank's loan origination, purchase and sales activity
for the periods indicated.
At March 31,
------------------------------
1998 1997 1996
-------- -------- --------
(In Thousands)
Total loans receivable, net at beginning
of period................................ $209,404 $206,513 $201,857
Loans originated:
One- to four-family residential (1)...... 42,561 37,302 35,868
Multi-family residential (2)............. 600 1,268 1,001
Non-residential real estate/land......... 674 1,586 587
Consumer loans........................... 6,101 6,269 7,620
Commercial loans......................... 4,287 1,344 576
-------- -------- --------
Total loans originated................. 54,223 47,769 45,652
Loans sold:
Whole loans.............................. (7,066) (1,930) (3,098)
-------- -------- --------
Total loans sold....................... (7,066) (1,930) (3,098)
Mortgage loans transferred to REO......... (162) -- (1,344)
Loan repayments........................... (49,359) (43,274) (36,943)
Other loan activity, net.................. (355) 326 389
-------- -------- --------
Total loans receivable, net at end of
period................................ $206,685 $209,404 $206,513
======== ======== ========
Mortgage-backed securities at beginning
of period................................ $ 873 $ 1,929 $ 2,920
Mortgage-backed securities purchased...... 4,010 -- --
Principal repayments and other activity... (608) (1,056) (991)
-------- -------- --------
Mortgage-backed securities at end of
period................................ $ 4,275 $ 873 $ 1,929
======== ======== ========
- ------------------
(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 Bank generally receives loan origination fees. The Bank accounts for
loan and origination fees in accordance with Statement of Financial Accounting
Standards No. 91 (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 Bank's portfolio, SFAS No. 91 requires that
the Bank defer loan origination fees and costs and amortize such amounts as an
adjustment of yield over the life of the loan by use of the level yield method.
SFAS No. 91 reduces the amount of revenue recognized by many financial
institutions at the time such loans are originated or acquired. Fees deferred
under SFAS No. 91 are recognized into income immediately upon prepayment or the
sale of the related loan. At March 31, 1998, the Bank had $1.9 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.
-9-
<PAGE>
In addition to loan origination fees, the Bank also 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 Bank recognized fees and service charges of $613,000, $519,000
and $509,000, for the fiscal years ended March 31, 1998, 1997 and 1996,
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, 1998, the Bank's largest real estate related borrower
had an aggregate principal outstanding balance of $1.7 million. The Bank had no
loans at March 31, 1998 that exceeded the loans to one borrower regulations.
Delinquencies and Classified Assets
Delinquencies. The Bank'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, 1998, the Bank had non-performing assets of $1.3 million and a
ratio of non-performing assets to total assets of .48%. At March 31, 1998, 1997,
and 1996, the Bank had non-performing assets of $1.3 million, $1.8 million and
$3.4 million, respectively. The Bank's levels of non-performing assets during
the three year period ended March 31, 1998 were below peer group averages.
Real estate acquired by the Bank 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. At March 31, 1998, one of the properties the Bank
held as REO had a book value of $841,000. The property was acquired during
fiscal 1996 as the result of foreclosure. A portion of the property was sold
during fiscal 1997. At March 31, 1996, the property had a book value of $1.3
million.
-10-
<PAGE>
The following table sets forth information regarding the Bank's non-
accrual loans and real estate acquired by foreclosure at the dates indicated.
For all the dates indicated, the Bank did not have any material restructured
loans within the meaning of SFAS 15.
<TABLE>
<CAPTION>
At March 31,
------------------------------------
1998 1997 1996
----------- ---------- -----------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
Permanent loans secured by one- to
four-family dwelling units................ $ 299 $ 560 $ 409
All other mortgage loans................... 1 -- 260
Non-mortgage loans:
Commercial................................. -- 364 352
Consumer................................... -- 5 5
---------- --------- ----------
Total non-accrual loans....................... 300 929 1,026
Accruing loans 90 days or more delinquent..... 8 33 1,060
---------- --------- ----------
Total non-performing loans.................... 308 962 2,086
Total real estate owned (1)................... 946 809 1,277
---------- --------- ----------
Total non-performing assets................... $ 1,254 $ 1,771 $ 3,363
========== ========= ==========
Total non-performing loans to net loans
receivable................................... .15% .46% 1.01%
Total non-performing loans to total assets.... .12% .38% .84%
Total non-performing assets to total assets... .48% .70% 1.35%
</TABLE>
- -----------------------
(1) Represents the net book value of property acquired by the Bank 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, 1998, gross interest income of $23,000
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 Bank's portfolio at the dates
indicated.
At March 31,
----------------------
1998 1997 1996
------ ------ ------
(Dollars in Thousands)
Loans past due 60-89 days............................ $1,136 $ 373 $ 157
Loans past due 90 days or more....................... 308 962 2,086
------ ------ ------
Total past due 60 days or more..................... $1,444 $1,335 $2,243
====== ====== ======
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.
-11-
<PAGE>
When a savings institution classifies problem assets as either substandard
or doubtful, it is required to establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances that have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the assets so classified, or
to charge off such amount. A savings institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS, which can order the establishment of additional
general or specific loss allowances. The Bank 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 Bank's
classified assets at the dates indicated.
At March 31,
----------------------
1998 1997 1996
------ ------ ------
(Dollars in Thousands)
Substandard assets (1)................................ $1,243 $1,509 $3,046
Doubtful assets....................................... -- -- --
Loss assets........................................... 15 227 10
------ ------ ------
Total classified assets............................ $1,258 $1,736 $3,056
====== ====== ======
- --------------------------
(1) Includes REO.
As of March 31, 1998, the Bank's principal classified asset consisted of
$841,000 on motel property in real estate owned. This asset accounted for 66.9%
of classified assets at March 31, 1998.
Allowance for Loan Losses. Management's policy is to provide for estimated
losses on the Bank's loan portfolio based on management's evaluation of the
potential losses that may be incurred. The Bank 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, 1998, 1997, and 1996, the Bank added
$60,000, $20,000 and $20,000, respectively, to the provision for loan losses.
The Bank's allowance for loan losses totaled $721,000, $914,000 and $888,000, at
March 31, 1998, 1997 and 1996, respectively. The Bank bases the provision for
loan loss on several factors, including loan volume, portfolio mix,
delinquencies, etc. Management believes that the Bank'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-
<PAGE>
Analysis of the Allowance For Loan Losses. The following table sets forth
the analysis of the allowance for loan losses for the periods indicated.
<TABLE>
<CAPTION>
At March 31,
-------------------------------
1998 1997 1996
--------- --------- ---------
(Dollars in Thousands)
<S> <C> <C> <C>
Loans receivable, net.......................... $206,685 $209,404 $206,513
Average loans receivable, net.................. 207,377 209,219 206,775
Allowance balance (at beginning of period)..... 914 888 981
Provision for losses:
Mortgage..................................... -- -- 101
Non-mortgage................................. -- 214 7
General...................................... 60 (194) (88)
(Charge-offs) Recoveries:
Mortgage..................................... (231) (6) (105)
Non-mMortgage................................ (22) 12 (8)
-------- -------- --------
Allowance balance (at end of period)........... $ 721 $ 914 $ 888
======== ======== ========
Allowance for loan losses as a percent of
loans receivable, net at end of period....... .35% .44% .43%
Net loans charged off as a percent of average
loans receivable, net........................ 0.1% 0.0% (1) 0.0% (1)
Ratio of allowance for loan losses to total
non-performing assets at end of period...... 57.50% 51.61% 26.41%
Ratio of allowance for loan losses to
non-performing loans at end of period....... 234.09% 95.01% 42.57%
</TABLE>
- -------------------------------------
(1) Computes to less than .1%.
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.
<TABLE>
<CAPTION>
At March 31,
--------------------------------------------------------------------------
1998 1997 1996
------------------------- ------------------------- --------------------
% 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)
<S> <C> <C> <C> <C> <C> <C>
Balance at end of period applicable to:
One- to four-family residential loans.... $ 446 87.4% $ 368 88.7% $ 386 86.1%
Multi-family residential loans........... 36 3.4 38 2.6 175 4.8
Consumer and commercial.................. 54 6.4 290 5.7 69 5.9
Non-residential real estate.............. 185 2.8 218 3.0 258 3.2
------- ------- -------- -------- ----- --------
Total allowance for loan losses.......... $ 721 100.0% $ 914 100.0% $ 888 100.0%
======= ======= ======== ======== ===== ========
</TABLE>
Investment Activities
In recent years, the Bank has increased the percentage of its assets held
in its investment portfolio as part of its strategy of maintaining higher levels
of liquidity. The Bank's investment portfolio is comprised of investment
securities and certificates of deposit in other financial institutions. The
carrying value of the Bank's investment securities totaled $21.9 million at
March 31, 1998, compared to $24.5 million at March 31, 1997, a decrease of $2.6
million, or 10.5%. The decrease in the Bank's investment securities has occurred
as a result of investing into mortgage-backed securities, federal funds sold,
and interest bearing deposits in other financial institutions. The Bank's cash
and cash equivalents, consisting of cash and due from banks, federal funds sold,
and interest bearing deposits
-13-
<PAGE>
due from other financial institutions with original maturities of three months
or less, totaled $13.2 at March 31, 1998 compared to $7.6 million at March 31,
1997, an increase of $5.6 million, or 73.1%.
The Bank 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 Bank 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 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 Bank's loan origination and other
activities.
Investment Portfolio. The following table sets forth the carrying value of
the Bank's investment securities portfolio, short-term investments and FHLB
stock, at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
--------------------------------------------------------
1998 1997 1996
----------------- ----------------- ------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- ------- -------- ------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities:
U.S. Government and agency securities...................... $13,228 $13,162 $16,789 16,723 $14,487 $14,499
Obligations of state and political subdivisions............ 173 173 181 181 188 188
Certificates of deposit in other financial institutions.... 8,500 8,500 7,500 7,500 5,000 5,000
------- ------- ------- ------- ------- -------
Total investment securities................................ 21,901 21,835 24,470 24,404 19,675 19,687
Other Investments:
Interest-bearing deposits in other financial institutions.. 7,647 7,647 5,179 5,179 6,495 6,495
Federal funds sold......................................... 4,100 4,100 1,125 1,125 2,475 2,475
Federal Home Loan Bank stock............................... 2,719 2,719 2,531 2,531 2,362 2,362
------- ------- ------- ------- ------- -------
Total investments......................................... $36,367 $36,301 $33,305 $33,239 $31,007 $31,019
======= ======= ======= ======= ======= =======
</TABLE>
-14-
<PAGE>
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for the
Bank's investment securities at March 31, 1998. The Bank does not hold any
investment securities with maturities in excess of 16 years.
<TABLE>
<CAPTION>
At March 31, 1998
----------------------------------------------------------------------------------------------
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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Investment Securities:
U.S. Government and agency....... $ 3,000 5.64% $ 7,999 6.13% $ 229 6.25% $ 2,000 7.00%
Obligations of state and
political subdivisions.......... -- -- -- -- -- -- 173 5.50
Certificates of deposit
in other financial
institutions.................... 8,500 5.59 -- -- -- -- -- --
------- ---- ------- ----- ------ ---- ------ -----
Total investment
securities..................... $11,500 5.60% $ 7,999 6.13% $ 229 6.25% $ 2,173 6.78%
======= ==== ======= ===== ====== ==== ======= ====
<CAPTION>
At March 31, 1998
------------------------------------------------
Total Investment
Securities
------------------------------------------------
Average Weighted
Life Carrying Market Average
In Years Value Value Yield
-------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Investment Securities:
U.S. Government and agency....... 3.75 $13,228 $13,162 6.09%
Obligations of state and
political subdivisions.......... 14.18 173 173 5.50
Certificates of deposit in other
financial institutions.......... .14 8,500 8,500 5.59
------- ------- ------- -----
Total investment
securities..................... 2.43 $21,901 $21,835 5.89%
======= ======= ======= =====
</TABLE>
-15-
<PAGE>
Sources of Funds
General. Deposits are the major source of the Bank's funds for lending and
other investment purposes. In addition to deposits, the Bank 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 Bank had $16.0 million of
advances from the FHLB at March 31, 1998.
Deposits. Consumer and commercial deposits are attracted principally from
within the Bank'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 Bank
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 Bank regularly evaluates its
internal cost of funds, surveys rates offered by competing institutions, reviews
the Bank's cash flow requirements for lending and liquidity, and executes rate
changes when deemed appropriate. The Bank does not obtain funds through brokers,
nor does it solicit funds outside its market area. In recent years the Bank's
total deposits have remained relatively stable.
Deposit Portfolio. Savings and other deposits in the Bank as of March 31,
1998, comprised the following:
<TABLE>
<CAPTION>
Weighted Percentage
Average Minimum of Total
Interest Rate Minimum Term Checking and Savings Deposits Amount Balances Deposits
- ------------- ------------ ----------------------------- ------ -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
2.14% None NOW Accounts $ -- $ 21,062 9.68%
2.98 None Passbook -- 39,111 17.97
3.00 None Money Market Investor 2,500 9,448 4.34
<CAPTION> Certificates of Deposit
-----------------------
<S> <C> <C> <C> <C> <C>
5.39 12 months or less Fixed term, fixed rate 500 29,350 13.49
5.50 12 to 24 months Fixed term, fixed rate 500 37,069 17.03
5.93 25 to 36 months Fixed term, fixed rate 500 40,862 18.78
6.71 36 months or more Fixed term, fixed rate 500 13,523 6.21
6.11 Negotiable Jumbo Certificates 100,000 27,196 12.50
-------- ------
$217,621 100.00%
======== ======
</TABLE>
-16-
<PAGE>
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Bank between
the dates indicated.
<TABLE>
<CAPTION>
Balance at Balance at Balance at
March 31, % Increase March 31, % Increase March 31, %
1998 Deposits (Decrease) 1997 Deposits (Decrease) 1996 Deposits
---------- -------- ---------- ---------- -------- ---------- ----------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW Accounts................... $ 21,062 9.68% $ 1,834 19,228 9.09% $ (324) $ 19,552 9.30%
Passbook statement accounts.... 39,111 17.97 (2,122) 41,233 19.50 (3,254) 44,487 21.17
Money market passbook.......... 9,448 4.34 (367) 9,815 4.64 (778) 10,593 5.04
Certificates of Deposit (1)
Original maturities of:
12 months or less........... 29,350 13.49 8,334 21,016 9.94 7,807 13,209 6.29
12 to 24 months............. 37,069 17.03 (7,067) 44,136 20.88 (7,020) 51,156 24.34
25 to 36 months............. 40,862 18.78 12,271 28,591 13.52 3,295 25,296 12.04
36 months or more........... 13,523 6.21 (3,472) 16,995 8.04 (1,039) 18,034 8.58
Negotiated Jumbo............ 27,196 12.50 (3,232) 30,428 14.39 2,597 27,831 13.24
-------- ------ ------- -------- ------ ------- --------- ------
$217,621 100.00% $ 6,179 $211,442 100.00% $ 1,284 $ 210,158 100.00%
======== ====== ======= ======== ====== ======= ========= ======
</TABLE>
- -------------------------------
(1) Certain Individual Retirement Accounts ("IRAs") are included in the
respective certificate balances. IRAs totaled $30.9 million, $31.9 million
and $30.9 million, as of March 31, 1998, 1997, and 1996, respectively.
-17-
<PAGE>
The following table sets forth the certificates of deposit in the Bank
classified by rates as of the dates indicated:
<TABLE>
<CAPTION>
At March 31,
----------------------------
1998 1997 1996
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
3.00% or less................................... $ -- $ -- $ 2
3.01- 4.00%..................................... -- 17 771
4.01- 6.00%..................................... 105,021 100,794 90,914
6.01- 8.00%..................................... 38,148 34,482 38,353
8.01-10.00%..................................... 4,831 5,873 5,486
-------- -------- --------
Total........................................... $148,000 $141,166 $135,526
======== ======== ========
</TABLE>
The following table sets forth the amount and maturities of certificates of
deposit at March 31, 1998.
<TABLE>
<CAPTION>
Amount Due
------------------------------------------------
Less Than 1-2 2-3 After
One Year Years Years 3 Years Total
--------- -------- ------- -------- --------
Rate (In Thousands)
- ----
<S> <C> <C> <C> <C> <C>
4.01- 6.00%................ $71,096 $23,610 $ 7,198 $ 3,117 $105,021
6.01- 8.00%................ 17,065 12,236 7,699 1,148 38,148
8.01-10.00%................ 3,706 1,061 64 -- 4,831
------- ------- ------- -------- --------
Total...................... $91,867 $36,907 $14,961 $ 4,265 $148,000
======= ======= ======= ======== ========
</TABLE>
The following table indicates the amount of the Bank's negotiable
certificates of deposit of $100,000 or more by time remaining until maturity as
of March 31, 1998.
<TABLE>
<CAPTION>
Maturity Period Certificates of Deposit
--------------- -----------------------
(In Thousands)
<S> <C>
Three months or less.................... $11,380
Over three months through six months.... 4,617
Over six months through twelve months... 5,625
Over twelve months...................... 5,574
-------
Total............................... $27,196
=======
</TABLE>
Borrowings
Savings deposits are the primary source of funds for the Bank's lending and
investment activities and for its general business purposes. The Bank, 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 Bank's stock in the FHLB and a portion of the Bank's first mortgage loans.
At March 31, 1998, the Bank had $16.0 million in advances outstanding.
The FHLB functions as a central reserve bank providing credit for the Bank
and other member savings associations and financial institutions. As a member,
the Bank 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
-18-
<PAGE>
to creditworthiness have been met. Advances are made pursuant to several
different programs. Each credit program has its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of a member institution's net worth or on the
FHLB's assessment of the institution's creditworthiness. Although advances may
be used on a short-term basis for cash management needs, FHLB advances have not
been, nor are they expected to be, a significant long-term funding source for
the Bank.
Asset and Liability Management-Interest Rate Sensitivity Analysis
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. During a period of rising
interest rates, a negative gap would tend to adversely affect net interest
income while a positive gap would tend to positively affect net interest income.
Similarly, during a period of falling interest rates, a negative gap would tend
to positively affect net interest income while a positive gap would tend to
adversely affect net interest income.
The Bank'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 a low interest rate environment, borrowers
typically prefer fixed rate loans to ARM loans. Accordingly, ARM loan
originations were limited during the year ended March 31, 1998 as long-term
interest rates remained historically low during the year. The Bank seeks to
lengthen the maturities of its deposits by promoting longer-term certificates;
however, the Bank has not been successful in lengthening the maturities of its
deposits in the current low interest rate environment. The Bank also negotiates
interest rates on certificates of deposit of $100,000 or more.
The Bank has an Asset-Liability Management Committee which is responsible
for reviewing the Bank's assets and 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 Board of
Directors has adopted a policy that requires the Bank to maintain a one-year gap
between negative 10% and positive 10%. As of March 31, 1998, based on internal
calculations, the Bank's gap position was within the approved range as noted on
the following table.
-19-
<PAGE>
Gap Table
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 1998, that are expected to
reprice or mature, based upon certain assumptions, in each of the future time
periods shown. Except as stated below, the amounts of assets and liabilities
shown that reprice or mature during a particular period were determined in
accordance with the earlier of repricing or the contractual terms of the asset
or liability. The Bank has assumed that its transaction accounts, which totaled
$69.6 million at March 31, 1998, are withdrawn at the assumed decay rates set
forth below. These withdrawal rates as well as loan prepayment assumptions were
computed internally and are based on recent OTS assumptions for loan prepayments
and deposit withdrawals. Management believes that these assumptions approximate
actual experience and considers them appropriate and reasonable.
<TABLE>
<CAPTION>
At March 31, 1998
----------------------------------------------------------------------------------
Within Over
1 Year 1-3 Years 3-5 Years 5-10 Years 10-20 Years 20 Years Total
--------- ---------- ---------- ----------- ------------ --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
(Dollars in Thousands)
Interest-earning assets:
Real estate mortgages(1):
Adjustable rate.......................... $ 68,587 $ 971 $ 50 $ -- $ -- $ -- $ 69,608
Fixed.................................... 20,351 31,930 23,175 34,325 15,707 1,802 127,290
Other Loans............................... 6,746 4,528 1,933 369 -- 8 13,584
Mortgage-backed securities................ 821 971 776 1,339 311 -- 4,218
Investment securities..................... 23,975 4,500 3,000 -- 2,173 -- 33,648
-------- -------- -------- -------- -------- -------- --------
Total interest-earning assets.............. 120,480 42,900 28,934 36,033 18,191 1,810 248,348
-------- -------- -------- -------- -------- -------- --------
Rate sensitive liabilities:
Transaction accounts...................... 21,504 19,590 10,055 11,129 5,322 946 68,546
Certificate accounts...................... 98,257 45,553 4,190 -- -- -- 148,000
Non-interest bearing deposits (2)......... 233 386 298 485 401 254 2,057
Other borrowings.......................... 9,455 6,545 -- -- -- -- 16,000
-------- -------- -------- -------- -------- -------- --------
Total rate sensitive liabilities......... 129,449 72,074 14,543 11,614 5,723 1,200 234,603
-------- -------- -------- -------- -------- -------- --------
Interest sensitivity gap................... (8,969) (29,174) 14,391 24,419 12,468 610
======== ======== ======== ======== ======== ========
Cumulative interest-sensitivity gap........ $ (8,969) $(38,143) $(23,752) $ 667 $ 13,135 $ 13,745
======== ======== ======== ======== ======== ========
Cumulative interest-sensitivity gap
to total assets........................... (3.5)% (14.7)% (9.1)% 0.3% 5.1% 5.3%
======== ======== ======== ======== ======== ========
Ratio of interest-earning assets to
interest-bearing liabilities.............. 93.07% 59.52% 198.95% 310.25% 317.86% 150.85%
======== ======== ======== ======== ======== ========
Cumulative ratio of interest sensitive
assets to interest sensitive liabilities.. 93.07% 81.07% 89.01% 100.29% 105.63% 105.86%
======== ======== ======== ======== ======== ========
Total assets............................... $259,752 $259,752 $259,752 $259,752 $259,752 $259,752 $259,752
Cumulative interest sensitive assets....... $120,480 $163,380 $192,314 $228,347 $246,538 $247,357 $248,348
Cumulative interest sensitive liabilities.. $129,449 $201,523 $216,066 $227,680 $233,403 $234,525 $234,603
</TABLE>
- ----------------------------
(1) Includes $1.2 million of loans held for sale and are shown net of loans-in-
process of $2.1 million.
(2) Includes $783,000 of advances by borrowers for taxes and insurance and
$199,000 of accounts payable on mortgage loans serviced by others.
-20-
<PAGE>
In preparing the table above, it has been assumed in assessing the interest
rate sensitivity of savings associations, that: (i) adjustable-rate first
mortgage loans will prepay at a rate of 15.0% per year; (ii) second mortgage
loans on one- to- four-family residences will prepay at a rate of 18.0% per
year; (iii) fixed rate first mortgage loans and mortgage backed securities on
one- to-four family residential properties will prepay annually as follows:
Prepayment Assumptions
-----------------------------------------
30-Years FHA 15-Year Loans
Interest Rate: Loans and MBS and VA and MBS
------------- ------------- ----------- -------------
Less than 8.00%...... 9.00% 6.00% 8.00%
8.00% to 9.00%....... 10.00% 7.00% 11.00%
9.00% to 10.00%...... 14.00% 10.00% 17.00%
10.00% to 11.00%..... 18.00% 13.00% 26.00%
11.00% and above..... 18.00% 13.00% 26.00%
(iv) fixed and adjustable rate first mortgage loans on residential properties of
five or more units and non-residential properties will prepay at a rate of 12%
per year; (v) fixed maturity deposits will not be withdrawn prior to maturity;
and (vi) NOW, deposit accounts, money market deposit accounts and passbook
accounts will decay at a rate of 37.0%, 79.0% and 17.0% annually.
The above assumptions should not be regarded as indicative of the actual
prepayments and withdrawals that may be experienced by the Bank. Moreover,
certain shortcomings are inherent in the analysis presented by the foregoing
table. For example, although certain assets and liabilities may have similar
maturities or periods to repricing, they may react in different degrees to
changes in market interest rates. Also, interest rates on certain types of
assets and liabilities may fluctuate in advance of or lag behind changes in
market interest rates. Additionally, certain assets, such as ARM loans, have
features that restrict changes in interest rates on a short-term basis and over
the life of the asset. Moreover, in the event of a change in interest rates,
prepayment and early withdrawal levels would likely deviate significantly from
those assumed in calculating the table.
Competition
The Bank 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 Bank expects
continued strong competition from such financial institutions in the foreseeable
future. The Bank's market area includes branches of several commercial banks
that are substantially larger than the Bank in terms of state-wide deposits.
The Bank 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 Bank's market area
as well as the increased efforts by commercial banks to expand mortgage loan
originations.
The Bank 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.
As of June 1996, the Bank was one of two savings institutions headquartered
in its market area. The Bank held approximately 14% of all financial
institution deposits in its market area, competing against 14 other local and
regional institutions.
-21-
<PAGE>
Regulation
As a state-chartered, SAIF-insured savings association, the Bank is subject
to examination, supervision and extensive regulation by the OTS, the Ohio
Division of Financial Institutions (the "Ohio Division"), and the FDIC. The Bank
is a member of and owns stock in the FHLB of Cincinnati, which is one of the
twelve regional banks in the Federal Home Loan Bank System. This regulation and
supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The Bank 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 Bank and prepare reports for the
consideration of the Bank's Board of Directors on any deficiencies that they may
find in the Bank's operations. The FDIC also examines the Bank in its role as
the administrator of the SAIF. The Bank's relationship with its depositors and
borrowers also is regulated to a great extent by both federal and state laws
especially in such matters as the ownership of savings accounts and the form and
content of the Bank's mortgage documents. Any change in such regulation, whether
by the FDIC, OTS, Ohio Division, or Congress, could have a material adverse
impact on the Company and the Bank 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 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 Bank.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to one borrower. Generally, savings
institutions may not make a loan or extend credit to a single or related group
of borrowers in excess of 15% of the institution's unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain securities and bullion, but generally does not
include real estate. See "--Lending Activities--Loans to One Borrower."
Qualified Thrift Lender Test. The HOLA requires savings 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, 1998, the Bank
maintained 94.20% 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. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that
-22-
<PAGE>
exceeds all fully phased-in capital requirements before and after a proposed
capital distribution ("Tier 1 Association") and has not been advised by the OTS
that it is in need of more than normal supervision, could, after prior notice
but without the approval of the OTS, make capital distributions during a
calendar year equal to the greater of: (i) 100% of its net earnings to date
during the calendar year plus the amount that would reduce by one-half its
"surplus capital ratio" (the excess capital over its fully phased-in capital
requirements) at the beginning of the calendar year; or (ii) 75% of its net
earnings for the previous four quarters; provided that the institution would not
be undercapitalized, as that term is defined in the OTS Prompt Corrective Action
regulations, following the capital distribution. Any additional capital
distributions would require prior regulatory approval. In the event the Bank's
capital fell below its fully-phased in requirement or the OTS notified it that
it was in need of more than normal supervision, the Bank's ability to make
capital distributions could be restricted. In addition, the OTS could prohibit a
proposed capital distribution by any institution, which would otherwise be
permitted by the regulation, if the OTS determines that such distribution would
constitute an unsafe or unsound practice.
The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal would allow savings associations which
would remain adequately capitalized following a capital distribution to make
such a distribution without providing the OTS with prior notice. However,
savings associations which are subsidiaries of holding companies would still be
required to provide the OTS with notice prior to making capital distributions.
No assurance can be given as to whether or in what form the regulation may be
adopted.
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 Bank 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 Bank's average liquidity ratio for March 1998
was 15.7%, which exceeded the then applicable requirements. The Bank 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
-23-
<PAGE>
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 Bank received a "satisfactory" CRA rating under the current CRA regulations
in its most recent federal examination by the OTS.
Transactions with Related Parties. The Bank'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.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 3.0% 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
purchased mortgage servicing rights ("PMSRs"). 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.
-24-
<PAGE>
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 3.0% 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.
At March 31, 1998, the Bank exceeded each of the three OTS capital
requirements on a fully phased-in basis. Set forth below is a summary of the
Bank's compliance with the OTS capital standards as of March 31, 1998.
At March 31, 1998
-----------------------
Percent of
Amount Assets (1)
--------- ------------
(Dollars in Thousands)
Tangible capital:
Capital level.............................. $23,637 9.13%
Requirement................................ 3,885 1.50%
------- -----
Excess..................................... $19,752 7.63%
======= =====
Core capital:
Capital level.............................. $23,637 9.13%
Requirement (2)............................ 7,770 3.00%
------- -----
Excess..................................... $15,867 6.13%
======= =====
Fully phased-in risk-based capital:
Capital level.............................. $24,343 17.38%
Requirement................................ 11,210 8.00%
------- -----
Excess..................................... $13,133 9.38%
======= =====
(1) Tangible and core capital levels are calculated on the basis of a percentage
of total adjusted assets; risk-based capital levels are calculated on the
basis of a percentage of risk-weighted assets.
(2) The OTS has proposed a core capital requirement for savings associations
comparable to the new requirement for national banks. The OTS proposed core
capital ratio would be at least 3% of total adjusted assets for thrifts that
receive the highest supervisory rating for safety and soundness ("MACRO
rating"), with a 4% to 5% core capital requirement for all other thrifts.
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.
-25-
<PAGE>
The following table presents the Bank's NPV as of March 31, 1998, as
calculated by the OTS, based on information provided to the OTS by the Bank.
<TABLE>
<CAPTION>
Change in Change in NPV
Interest Rates as a percentage of
in Basis Points Net Portfolio Value Estimated Market
-----------------------------------
(Rate Shock) Amount $ Change % Change Value of Assets
--------------- -------- --------- -------- ------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
400 $13,080 $ (18,863) (59)% (7.07)%
200 $23,324 $ (8,619) (27)% (3.23)%
Static $31,943 -- -- --
(200) $35,304 $ 3,361 11% 1.26%
(400) $37,920 $ 5,977 19% 2.24%
</TABLE>
Prompt Corrective Regulatory Action
Under the OTS Prompt Corrective Action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has the total
risk-based capital less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS could also take any
one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and
directors.
Insurance of Accounts and Regulation by the FDIC
Wayne Savings is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings and loan associations,
after giving the OTS an opportunity to take such action, and may terminate the
deposit insurance if it determines that the institution has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition.
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.
-26-
<PAGE>
The FDIC 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.
In September 1996, Congress enacted legislation to recapitalize the SAIF by
a one-time assessment on all SAIF-insured deposits held as of March 31, 1995.
The assessment was 65.7 basis points per $100 in deposits, payable on November
30, 1996. For the Bank, the assessment amounted to $1.3 million (or $887,000
when adjusted for taxes), based on the Bank's deposits on March 31, 1995. In
addition, pursuant to the legislation, interest payments on FICO bonds issued in
the late 1980's by the Financing Corporation to recapitalize the now defunct
Federal Savings and Loan Insurance Corporation are paid jointly by BIF-insured
institutions and SAIF-insured institutions. The FICO assessment is 1.29 basis
points per $100 in BIF deposits and 6.44 basis points per $100 in SAIF deposits.
Beginning January 1, 2000, the FICO interest payments will be paid pro rata by
banks and thrifts based on deposits (approximately 2.4 basis points per $100 in
deposits).
The legislation further provides that the BIF and SAIF will merge on
January 1, 1999 if there are no more savings associations as of that date. A
bill introduced in the current Congress would have eliminated the federal thrift
charter and OTS; as passed by the House of Representatives, the bill merely
limited the activities of savings and loan holding companies. The Senate has not
yet acted on this bill, and the Bank is unable to predict whether the
legislation will be enacted or, given such uncertainty, determine the extent to
which the legislation, if enacted, would affect its business. The Bank is also
unable to predict whether the SAIF and BIF funds will eventually be merged.
While the legislation has reduced the disparity between premiums paid on
BIF deposits and SAIF deposits, and has relieved the thrift industry of a
portion of the contingent liability represented by the FICO bonds, the premium
disparity between SAIF-insured institutions, such as the Bank, and BIF-insured
institutions will continue until at least January 1, 1999. For the year ended
March 31, 1998, the Bank's SAIF premium was $203,000.
Federal Home Loan Bank System
The Bank is a member of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Bank, 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 Bank was in compliance with this
requirement with an investment in FHLB-Cincinnati stock, at March 31, 1998, of
$2.7 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, 1998. If dividends
were reduced, or interest on future FHLB-Cincinnati advances increased, the
Bank'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
-27-
<PAGE>
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 Bank is in compliance with the
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 Bank, is subject to certain
limitations on its permitted activities and investments under federal law, which
may restrict the ability of an Ohio-chartered association to engage in
activities and make investments otherwise authorized under Ohio law.
Ohio has adopted statutory limitations on the acquisition of control of an
Ohio savings and loan association by requiring the written approval of the Ohio
Division prior to the acquisition by any person or company, as defined under the
Ohio Revised Code, of a controlling interest in an Ohio association. Control
exists, for purposes of Ohio law, when any person or company, either directly,
indirectly, or acting in concert with one or more other persons or companies (a)
acquires 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
-28-
<PAGE>
votes, or (f) anything else deemed to be control by the Ohio Division. The Ohio
Division's written permission is required when the total amount of control held
by the acquiror was less than or equal to 25% control before the acquisition and
more than 25% control after the acquisition, or when the total amount of control
held by the acquiror was less than 50% before the acquisition and more than 50%
after the acquisition. Ohio law also prescribes other situations in which the
Ohio Division must be notified of the acquisition even though prior approval is
not required. Any person or company, which would include a director, will not be
deemed to be in control by virtue of an annual solicitation of proxies voted as
directed by a majority of the board of directors.
Under certain circumstances, interstate mergers and acquisitions involving
associations incorporated under Ohio law are permitted by Ohio law. A savings
and loan association or savings and loan holding company with its principal
place of business in another state may acquire a savings and loan association or
savings and loan holding company incorporated under Ohio law if the laws of such
other state permit an Ohio savings and loan association or an Ohio holding
company reciprocal rights. Additionally, recently enacted legislation permits
interstate branching by savings and loan associations incorporated under Ohio
law.
Ohio law requires prior written approval of the Ohio Superintendent of
Savings and Loans of a merger of an Ohio association with another savings and
loan association or a holding company affiliate.
Holding Company Regulation
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.
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
-29-
<PAGE>
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 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 Bank
must change from the reserve method to the specific charge-off method to compute
its bad debt deduction. In addition, the Bank 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 $200,000.
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. If the Bank meets a
"residential loan requirement" for a tax year beginning in 1996 or 1997, the
recapture of the reserves will be suspended for such tax year. Thus, recapture
can potentially be deferred for up to two years. The residential loan
requirement is met if the principal amount of housing loans made by the Bank
during the year at issue (1996 and 1997) is at least as much as the average of
the principal amount of loans made during the six most recent tax years prior to
1996. Refinancings and home equity loans are excluded.
Retained earnings as of March 31, 1998 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 Bank was last audited for tax years through 1993. The examination was
concluded in May 1995, and all matters requiring payment of taxes were resolved
with no material effect on the Bank's financial statements.
Ohio Taxation. The Bank files Ohio franchise tax returns. For Ohio
franchise tax purposes, savings institutions are currently taxed at a rate equal
to 1.5% of taxable net worth. The Bank is not currently under audit with respect
to its Ohio franchise tax returns.
Year 2000 Issue
As with all providers of financial services, the Company's operations are
heavily dependent on information technology systems. The Company is addressing
the potential problems associated with the possibility that the computers that
control or operate the Company's information technology system and
infrastructure may not be programmed to read four-digit date codes and, upon
arrival of the year 2000, may recognize the two-digit code "00" as the year
1900, causing systems to fail to function or to generate erroneous data. The
Company is working with
-30-
<PAGE>
the companies that supply or service its information technology system to
identify and remedy any year 2000 related problems.
As of March 31, 1998, the Company has not identified any specific expenses
that are reasonably likely to be incurred by the Company in connection with this
issue and does not expect to incur significant expense to implement the
necessary corrective measures. No assurance can be given, however, that
significant expense will not be incurred in future periods. In the event that
the Company is ultimately required to purchase replacement computer systems,
programs and equipment, or incur substantial expense to make the Company's
current systems, programs and equipment year 2000 compliant, the Company's net
earnings and financial condition could be adversely affected.
In addition to possible expense related to its own systems, 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 business and the Company's primary market area is not
significantly dependent upon one employer or industry, the Company does not
expect any significant or prolonged difficulties that will affect net earnings
or cash flow.
ITEM 2. Properties
- --------------------
The Bank conducts its business through its main office located in Wooster,
Ohio, and five 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, 1998. The aggregate net book value
of the Bank's premises and equipment was $6.5 million at March 31, 1998.
<TABLE>
<CAPTION>
Location Year Opened Owned or Leased
- ----------------------------- ----------- ---------------
<S> <C> <C>
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
</TABLE>
The Bank's accounting and record keeping activities are maintained through
an in-house data processing system.
-31-
<PAGE>
ITEM 3. Legal Proceedings
- ---------------------------
There are various claims and lawsuits in which the Company is periodically
involved incident to the Company's business. In the opinion of management, no
material loss is expected from any of such pending claims or lawsuits.
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, 1998 (the "1998 Annual Report to Stockholders") are incorporated herein by
reference. No other sections of the 1998 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 1998 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 1998
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 1998 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.
-32-
<PAGE>
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.
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 1998 Annual
Report to Stockholders under the same captions, and are incorporated herein by
reference. No other sections of the 1998 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 1998
Annual Report to Stockholders is not deemed filed as part of this Annual Report
on Form 10-KSB, and no other sections of the 1998 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.
-33-
<PAGE>
(a)(3) Exhibits
--------
<TABLE>
<CAPTION>
Reference to Prior
Filing or Exhibit
Regulation S-B Number Attached
Exhibit Number Document Hereto
-------------- -------- ---------------
<C> <S> <C>
3 Articles of Incorporation *
3 Bylaws *
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 Subsidiary 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
</TABLE>
- ---------------
* 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
-34-
<PAGE>
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 25, 1998 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.
<TABLE>
<S> <C>
By: /s/ Charles F. Finn By: /s/ Todd J. Tappel
-------------------------------------------- --------------------------------------------
Charles F. Finn, President, Chief Todd J. Tappel, Senior Vice President and
Executive Officer and Director Corporate Secretary
(Principal Executive Officer) (Principal Financial Officer)
Date: June 25, 1998 Date: June 25, 1998
By: /s/ Anthony Volpe By: /s/ Kenneth G. Rhode
-------------------------------------------- --------------------------------------------
Anthony Volpe, Vice President Kenneth G. Rhode, Director
(Principal Accounting Officer)
Date: June 25, 1998 Date: June 25, 1998
By: /s/ Donald E. Massaro By: /s/ James C. Morgan
-------------------------------------------- --------------------------------------------
Donald E. Massaro, Director James C. Morgan, Director
Date: June 25, 1998 Date: June 25, 1998
By: /s/ Terry A. Gardner By: /s/ Russell L. Harpster
-------------------------------------------- --------------------------------------------
Terry A. Gardner, Director Russell L. Harpster, Director
Date: June 25, 1998 Date: June 25, 1998
By: /s/ Joseph L. Retzler
--------------------------------------------
Joseph L. Retzler, Director
Date: June 25, 1998
</TABLE>
<PAGE>
1998 ANNUAL REPORT
------------------------------
TO STOCKHOLDERS
WAYNE SAVINGS BANCSHARES, INC.
<PAGE>
CORPORATE PROFILE
Wayne Savings Bancshares, Inc. (and hereafter, the "Company") is the stock
holding company parent of Wayne Savings Community Bank (the "Bank"), formerly
The Wayne Savings and Loan Company, which was established in 1899. Since
November 1997, the Company has operated under a two-tier holding company
structure. The mutual holding company, Wayne Savings Bankshares M.H.C., owns
52% of the Company's common stock and 48% is owned by the public. The common
stock is traded on the NASDAQ stock market under the symbol "WAYN".
The Bank (also "Wayne Savings") has been serving the financial needs of the
residents of Wayne, Holmes, Ashland and Medina counties in Ohio for 99 years.
Headquartered in downtown Wooster, Ohio, the Bank also operates full-service
branch offices in Wooster, Millersburg, Ashland, Rittman, and Lodi. Throughout
its long history and many economic cycles, Wayne Savings has enjoyed a fine
reputation for stability, safety and soundness, and community service. The Bank
has been noted for its sound management, consistent profitability, and quality,
personal service to customers.
The mission of Wayne Savings is to excel in customer service as a sound,
independent, profitable, and progressive community bank dedicated to providing
an array of services responsive to the financial needs of people in our
communities, with an emphasis on home financing and household savings, and to
provide for the security and development of our employees.
BOARD OF DIRECTORS
[BOARD OF DIRECTORS PHOTO APPEARS HERE]
Seated: Donald E. Massaro, Joseph L. Retzler, Charles F. Finn,
Chairman of Wayne Savings Bancshares, Inc., Kenneth G. Rhode,
Chairman of Wayne Savings Community Bank, Russell L. Harpster
Standing: James C. Morgan, Terry A. Gardner
3
<PAGE>
DIRECTORS AND OFFICERS
WAYNE SAVINGS BANCSHARES, INC.
Board Of Directors
Charles Finn
Chairman
Kenneth Rhode
Russell Harpster
Joseph Retzler
Donald Massaro
Terry Gardner
James Morgan
Officers
Charles Finn
President And Chief
Executive Officer
Wanda Christopher-Finn
Executive Vice President
And Chief Administrative
Officer
Gary Miller
Senior Vice President And
Chief Lending Officer
Todd Tappel
Senior Vice President And
Chief Financial Officer;
Corporate Secretary And
Treasurer
- --------------------------------------------------------------------------------
WAYNE SAVINGS COMMUNITY BANK
Board Of Directors
Kenneth Rhode
Chairman
Charles Finn
Russell Harpster
Joseph Retzler
Donald Massaro
Terry Gardner
James Morgan
Officers
Charles Finn
President And Chief
Executive Officer
Wanda Christopher-Finn
Executive Vice President
And Chief Administrative
Officer
Gary Miller
Senior Vice President And
Chief Lending Officer
Todd Tappel
Senior Vice President And
Chief Financial Officer
First Vice President
Nancy Schafrath
Vice Presidents
Catherine Baker
Cathy Brandenburg
Al Burger, Jr.
Jane DalPra
Dan Franks
Edward Grabenstetter
Brenda Greegor
Jeri Hagans
M. Jeanne Hanson
Pamela Manges
Jerry Race
George Suppan
Shyanne Vansickle
David Weiss
Steve Workman
Tina Zickefoose
Vice President and Controller
Anthony Volpe
Senior Accountants
Deborah Clevidence
Jeffrey Vincent
Assistant Vice Presidents
Paul Bayus
Timothy Farver
H. Frank Garrett
Tammy Noble
Julia Norris
Victoria Pruitt
Jeanne Rausch
Melinda Smith
4
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
Page
<S> <C>
Stockholder Information 6
Chairman's Letter 7
Looking Forward to 100 Years of Service 9
Selected Consolidated Financial and Other Data 12
Management's Discussion and Analysis of Financial Condition and Results of Operations 15
Report of Independent Certified Public Accountants 23
Consolidated Statements of Financial Condition 24
Consolidated Statements of Earnings 25
Consolidated Statements of Stockholders' Equity 26
Consolidated Statements of Cash Flows 27
Notes to Consolidated Financial Statements 29
</TABLE>
Bank Office Locations
[GRAPH OF BANK OFFICE LOCATIONS APPEARS HERE]
5
<PAGE>
STOCKHOLDER INFORMATION
Annual Meeting
The Annual Meeting of Stockholders will be held at 10:00 a.m. on July 23,
1998, 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 . Suite 900
Cincinnati, Ohio 45202
Transfer Agent
Chase Mellon Shareholder Services
85 Challenger Road . 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, 1998,
will be furnished without charge to Stockholders as of June 12, 1998, 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 Savings Bancshares, Inc.
151 North Market Street . P.O. Box 858
Wooster, Ohio 44691
(330) 264-5767
6
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CHAIRMAN'S LETTER
TO OUR STOCKHOLDERS AND CUSTOMERS:
Upon the conclusion of Wayne Savings' 99th year of service, it is a pleasure
to report on another exciting year of progress for our Company.
In the fiscal year ended March 31, 1998, we achieved the second highest year
of earnings in the Company's 99 year history, and we made notable strides in
activating our strategic plans to enhance stockholder value and to keep Wayne
Savings thriving as a community bank in an evolving financial services
environment.
In October, 1997, the Bank's name was changed from The Wayne Savings and Loan
Company to Wayne Savings Community Bank to better reflect the broad range of
banking services now available to our customers. A month later, as approved by
the stockholders at last year's Annual Meeting, the formation of a mid-tier
stock holding company was completed. As a result of the corporate
restructuring, Wayne Savings Community Bank became the wholly-owned subsidiary
of Wayne Savings Bancshares, Inc., the newly formed stock holding company. Each
share of Wayne Savings Community Bank's common stock was automatically converted
into one share of Wayne Savings Bancshares, Inc. common stock.
Therefore, this is a historic occasion as we are proud to present this first
annual report on behalf of Wayne Savings Bancshares, Inc. to our stockholders.
For the fiscal year ended March 31, 1998, Wayne Savings Bancshares, Inc.
posted net earnings of $1,849,000 or $.73 per diluted share. This represents an
increase of 11% over net earnings of $1,671,000, or $.67 per diluted share
reported in the prior fiscal year (excluding the one time special assessment to
recapitalize the Savings Association Insurance Fund and write-off of certain
fixed assets relating to construction of a new facility). The increase in net
earnings was primarily due to an increase in net interest income, a decrease in
operating expenses, and an increase in other income, which consisted mainly of
greater gains on sale of loans.
In addition to the growth in earnings, Wayne Savings experienced growth in
several key areas in fiscal 1998. Total assets on March 31, 1998 amounted to
$259.8 million, up $7.6 million from $252.2 million at the end of the prior
year. Stockholders' equity increased $1.3 million to $24.4 million, resulting
in a tangible capital-to-assets ratio of 9.40%. Deposit account balances
increased $6.2 million during the fiscal year from a total of $211.4 million to
$217.6 million.
7
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CHAIRMAN'S LETTER (CON'T.)
Asset quality remains strong and we have not relaxed our prudent loan
underwriting standards, despite the strong economic growth cycle over the past
several years. Also, we have continued to make loans only in our normal market
area in north central Ohio. Based on our Bank's record of safety and soundness,
Wayne Savings again received a Five-Star rating in each of the four quarters of
fiscal 1998 from Bauer Financial Reports, Inc., a nationally recognized firm
that rates financial institutions. This is the highest rating awarded to banks.
To accomplish our growth objectives, we took key strategic steps in fiscal
1998 to increase market share and expand our market area. The highlight of the
year was the opening of our new Cleveland Point Financial Center in Wooster in
December, 1997. We are very gratified by the public's response to the new
office, and deposit growth in a few short months has far exceeded our
expectations. The expansion of the main office building in downtown Wooster was
also finished, which provided valuable additional space for an Operations
Center, a Board / Conference room, and a Training Center.
In the past year, Wayne Savings filed an application for permission to
establish a newly chartered federal savings bank in North Canton, Ohio to be
named Village Savings Bank. We are excited to have received regulatory approval
recently, and the Savings Bank is scheduled to open its doors for business in
the second fiscal quarter of 1999. The Board and Management believe there is a
great opportunity in the North Canton market for a small community bank
providing a high level of personal service, and we have high expectations for
deposit and loan growth.
With Wayne Savings now having a presence at seven locations in five contiguous
counties in Ohio, the Bank is continuing to look seriously at other branch
locations that will cost-effectively expand our customer base and provide new
growth opportunities. It is our desire to open another branch office in our
market area in the current fiscal year.
We are very pleased with investors' confidence in Wayne Savings and the growth
in the price of our common stock in the past year. The total return to
stockholders, in the twelve months ended December 31, 1997, was 70.89%, based on
our stock's market value appreciation and quarterly cash dividends. We believe
this excellent return to stockholders was due to the Company's strategic
initiatives and favorable market conditions. In fiscal 1998, our stockholders
received quarterly dividends totaling $.62 per share. On April 23, 1998, your
Board of Directors declared a 10% stock dividend, which was paid on June 10,
1998. All information in this report pertaining to stock price, earnings per
share, and dividends history has been adjusted to reflect the payment of the 10%
stock dividend.
By the end of this current fiscal year on March 31, 1999, Wayne Savings will
have completed a century of service to the local community, a very significant
milestone. We look forward to the celebration of the Bank's 100th anniversary
next year and the officers and directors pledge a continuation of our efforts to
enhance the value of our stockholders' investment. We will also strive to
provide quality, personal service to our customers.
Your confidence and support is deeply appreciated.
Sincerely,
/s/ Charles F. Finn
Charles F. Finn
Chairman and Chief Executive Officer
8
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LOOKING FORWARD TO 100 YEARS OF SERVICE
REVIEW OF 1998 ACCOMPLISHMENTS
INCREASING INVESTMENT VALUE
FOR STOCKHOLDERS
Five years ago, Wayne Savings converted to the stock form of ownership through
an initial $6,000,000 stock offering, and Management and the Board of Directors
have consistently focused on investment value for the Company's stockholders.
Since the initial stock offering in June, 1993, charter stockholders experienced
a 400% price appreciation in the Company's common stock. At December 31, 1997,
stockholders had realized a one year total return of 70.89%, based on our
stock's market value growth and quarterly dividend yields. We believe this
exceptional return to stockholders was due to investors' confidence in our
company's strategic plans and favorable market conditions. Of course, past
performance is no guarantee of future performance.
Wayne Savings has also maintained a policy of paying a continuing stream of
above average dividends. In the past year, our stockholders received a total of
$.62 per share in quarterly dividends. The dividend yield, based on the March
31, 1998 stock price, was 2.16%
On April 23, 1998, your Board of Directors declared a 10% stock dividend,
which was paid on June 10, 1998. At the same time, the Board voted to continue
the cash dividend of $.155 per share in the quarter ending June 30, 1998. The
cash dividend will be paid on new and existing shares, which will result in an
effective increase in the cash dividend of 10%. The cash dividend is to be paid
on July 21, 1998 to stockholders of record as of July 6, 1998.
In the five years since the initial stock offering, Wayne Savings' Board of
Directors has declared two 10% stock dividends, a 5% stock dividend, and a
three-for-two stock split in the form of a 50% stock dividend. In one of those
years, a special cash dividend was declared.
The Automatic Dividend Reinvestment Plan continues to be very attractive to
stockholders. Of approximately 884 registered stockholders, there were 317
enrolled in the plan as of March 31, 1998, a participation rate of 36%. We are
very pleased to have so many stockholders express their long-term confidence in
our common stock by steadily increasing their holdings.
[PHOTO OF STOCK PERFORMANCE GRAPH APPEARS HERE]
FY 94 $ 9.71
FY 95 $10.10
FY 96 $12.41
FY 97 $15.76
FY 98 $26.14
[PHOTO OF SENIOR MANAGEMENT APPEARS HERE]
The Automatic Dividend Reinvestment Plan enables our stockholders to purchase
additional shares of common stock quarterly at market value without having to
pay brokerage commissions and service charges. It is a convenient and
inexpensive way for investors to accumulate our common stock.
We remain committed to enhancing the franchise value of Wayne Savings in the
future by investing intelligently in people, marketing, new business
opportunities, strategic branch locations, and technology.
A NAME CHANGE:
WAYNE SAVINGS COMMUNITY BANK
Since its incorporation in 1899, The Wayne Savings and Loan Company had
operated as a traditional thrift for most of its years, focusing strictly on
savings accounts and home loans. In the 1990's, the financial services business
became much more competitive with a blurring of the lines that used to separate
commercial banks and savings and loans.
9
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LOOKING FORWARD TO 100 YEARS OF SERVICE (CON'T.)
In recent years, Wayne Savings began to add more and more bank-like services
to keep pace with the changing financial services environment. In addition to
savings accounts and home loans, we added new product lines, such as consumer
loans, checking accounts, Mastercard/Visa credit cards, commercial loans,
retirement plans, and merchant accounts. We also began to offer trust services
and annuity investments.
In fiscal 1998, Management and the Board of Directors decided it was time to
change the Bank's name in a way that would preserve our 99 year identity, but
would better reflect the broad range of diversified banking services now
available to our customers. We also wanted a name that would distinguish Wayne
Savings as a local financial institution committed to personal, traditional,
customer service.
As a result, in October, 1997, regulatory approval was received to change the
company's corporate name to Wayne Savings Community Bank. The name change was
timed to coincide with the opening and publicity for our new Cleveland Point
Financial Center in Wooster.
[LOGO OF WAYNE SAVINGS APPEARS HERE]
This was a name change only, and there was no change in charter or ownership.
Wayne Savings Community Bank continues to operate as an Ohio-chartered stock
savings association.
THE NEW STOCK HOLDING COMPANY:
WAYNE SAVINGS BANCSHARES, INC.
In November, 1997, Wayne Savings Community Bank completed its reorganization
into a two-tier holding company structure. The plan of reorganization was
previously approved by regulatory agencies and by stockholders at last year's
annual meeting.
As a result of the corporate restructuring, Wayne Savings Community Bank is
now the wholly-owned subsidiary of Wayne Savings Bancshares, Inc., the newly
formed stock holding company. The existing mutual holding company, Wayne Savings
Bankshares M.H.C. now owns a majority of the common stock of the new stock
holding company.
The reorganization posed no inconvenience to stockholders, as each share of
Wayne Savings Community Bank's common stock was automatically converted into one
share of Wayne Savings Bancshares, Inc. common stock. The company's common
stock continues to be listed on the NASDAQ stock system under the trading symbol
"WAYN".
Management and the Board of Directors are extremely pleased with the
establishment of the new mid-tier stock holding company. As announced at last
year's annual meeting, we are now better positioned to take advantage of new
business opportunities that may arise. Although no actions have been taken to
date, the stock holding company form of organization will permit enhanced
investment opportunities, facilitate mergers and acquisitions, and enable us to
repurchase outstanding common stock, if so desired.
We firmly believe the formation of the stock holding company was in the best
interests of stockholders and will provide us with more capabilities to enhance
stockholder value.
THE OPENING OF
CLEVELAND POINT FINANCIAL CENTER
In last year's annual report, we announced that we had outgrown our branch
office on Cleveland Road, Wooster, Ohio, and expansion at this site had become
necessary due to the rapid residential and commercial development occurring in
the northern part of the city.
Construction of the new Cleveland Point Financial Center began last summer and
it was completed in time for a grand opening in December, 1997, at the height of
the Christmas holiday season. As mentioned earlier, we are most gratified by
the public's reception to this new banking facility, and growth in deposits and
loans has far surpassed our projections.
Planning for the Cleveland Point Financial Center was five years in the
making. This amount of time was required to purchase two adjacent land parcels,
obtain approvals for a zoning change and rerouting of a street, and develop the
architectural and landscape design. Our ability to serve customers more
efficiently and conveniently made the wait well worthwhile.
The new two-story modern structure was constructed 100 yards south of the
former Cleveland Road office, where we had served our customers since 1978. The
[PHOTO OF CLEVELAND POINT FINANCIAL CENTER APPEARS HERE]
10
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former building was razed to provide increased parking space for the new
financial center.
In addition to the lobby and teller station area, the 5,000 square feet
Cleveland Point Financial Center has five private offices, a conference room, a
walk-in vault with safe deposit boxes, three drive-through lanes and a drive-up
automatic teller machine.
Besides the traditional banking products and services, Wayne Savings has
placed its Consumer Investments Department at this location, which includes
trust services, annuity investments, and all types of retirement account plans.
VILLAGE SAVINGS BANK
In November, 1997, Wayne Savings filed applications with the Office of Thrift
Supervision and the Federal Deposit Insurance Corporation for permission to
establish a newly chartered federal savings bank in North Canton, Ohio.
Regulatory approval by the OTS was received on March 30, 1998, and the FDIC
added their approval on May 19, 1998.
The "de novo" community bank will be named Village Savings Bank, F.S.B. and is
scheduled to open for business in the third calendar quarter of 1998. In its
application, Wayne Savings Community Bank agreed to invest $ 3 million to
provide the initial capitalization for the new bank. Although Village Savings
Bank has received an independent charter and separate federal insurance of
accounts, it is a wholly-owned operating subsidiary of Wayne Savings Community
Bank.
Several business people and former bankers from the North Canton area will
comprise the officers and a majority of the Board of Directors. Charles F.
Finn, President of Wayne Savings Community Bank will serve as Chairman of the
Board, and Executive Vice President Wanda Christopher-Finn will also be a
director.
An existing bank building on South Main Street in North Canton was purchased
last year to house Village Savings Bank. The one-story brick building, formerly
occupied as a branch office by a large regional bank, is situated in a primarily
residential area and has three drive-in lanes, a drive-up ATM, and a walk-in
vault with safe deposit boxes. The bank building has been completely refurbished
in preparation for the opening of Village Savings Bank.
[LOGO OF VILLAGE SAVINGS BANK APPEARS HERE]
Due to the prevalence of large regional banks in the North Canton area, we
believe a great opportunity exists for a local community bank specializing in
personalized financial services. The Stark County, Ohio market is expected to
be a significant new source for growth in deposits, home loans, and consumer
loans.
OTHER 1998 ACCOMPLISHMENTS
. Conducted two very successful promotions for home equity lines of credit with
staff incentives, resulting in an increase of $3 million in outstanding
balances.
. Entered into an agreement with a regional commercial bank for the offering of
Trust Referral Services to assist our customers with estate planning.
. Introduced the "Equilink" variable annuity, which is tied to the S&P 500
stock index. This new product complements our fixed-rate annuity investment
product.
. Installed consolidated accounting systems to account for and segregate
reporting of the activities of the holding company and subsidiaries.
. Developed an Action Plan to ensure Year 2000 computer systems readiness and
compliance.
. Completed the installation of Marketing Customer Information File (MCIF)
technology to more efficiently identify our target markets.
[PHOTO OF VILLAGE SAVINGS BANK APPEARS NERE]
11
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SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth certain consolidated financial and other data
of Wayne Savings Bancshares, Inc., ("Wayne" or the "Company") the stock holding
company parent of Wayne Savings Community Bank (the "Bank"), formerly named The
Wayne Savings and Loan Company, at the dates and for the periods indicated. For
additional information about Wayne, 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.
<TABLE>
<CAPTION>
At March 31,
----------------------------------------------------
1998 1997 1996 1995 1994
------------ -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data
Total assets $259,752 $252,175 $248,503 $241,359 $239,614
Loans receivable, net/1/ 207,879 209,404 206,513 201,857 182,963
Mortgage-backed securities/2/ 4,275 873 1,929 2,920 4,032
Investment securities/3/ 21,901 24,470 19,675 25,542 33,114
Cash and cash equivalents/4/ 13,169 7,606 10,190 3,073 11,389
Deposits 217,621 211,442 210,158 205,497 216,873
Stockholders' equity 24,426 23,115 22,852 21,860 20,358
</TABLE>
/1/ Includes loans held for sale.
/2/ Includes mortgage-backed securities held as either available for sale or
held 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.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------
1998 1997 1996 1995 1994
------------ -------- -------- -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income $19,236 $18,719 $18,328 $17,360 $18,262
Interest expense 11,084 10,610 10,541 9,249 9,844
------- ------- ------- ------- -------
Net interest income. 8,152 8,109 7,787 8,111 8,418
Provision for loan losses 60 20 20 25 110
------- ------- ------- ------- -------
Net interest income after provision
for loan losses 8,092 8,089 7,767 8,086 8,308
Other income 854 575 607 489 856
General, administrative
and other expense1 6,144 7,588 6,189 6,051 5,948
------- ------- ------- ------- -------
Earnings before income taxes 2,802 1,076 2,185 2,524 3,216
Federal income taxes 953 367 774 882 1,044
------- ------- ------- ------- -------
Net earnings $ 1,849 $ 709 $ 1,411 $ 1,642 $ 2,172
------- ------- ------- ------- -------
</TABLE>
/1/ The fiscal year ended March 31, 1997 includes a one-time 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.
12
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FINANCIAL HIGHLIGHTS
As of and for the years ended March 31, 1998, 1997, 1996, 1995 and 1994
[FINANCIAL HIGHLIGHTS GRAPHS APPEARS HERE]
Net Earnings Net Interest Margin
------------ -------------------
FY 94 $ 2.2 million FY 94 3.62%
FY 95 $ 1.6 million FY 95 3.51%
FY 96 $ 1.4 million FY 96 3.30%
FY 97 $ 0.7 million FY 97 3.40%
FY 98 $ 1.8 million FY 98 3.34%
Total Assets Stockholders' Equity
------------ -------------------
FY 94 $239.6 million FY 94 $20.4 million
FY 95 $241.4 million FY 95 $21.9 million
FY 96 $248.5 million FY 96 $22.9 million
FY 97 $252.2 million FY 97 $23.1 million
FY 98 $259.8 million FY 98 $24.4 million
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (CON'T.)
<TABLE>
<CAPTION>
At or For the Year Ended March 31,
-------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Key Operating Ratios and Other Data:
Return on average assets (net earnings
divided by average total assets)/1/ .73% .29% .58% .69% .91%
Return on average equity (net earnings
divided by average equity)/1/ 7.72 3.08 6.32 7.74 12.77
Average equity to average assets ratio 9.42 9.32 9.21 8.92 7.12
Equity to assets at period end 9.40 9.17 9.20 9.06 8.50
Interest rate spread (difference between
average yield on interest-earning
assets and average cost of interest-
bearing liabilities) 2.98 3.03 2.92 3.18 3.32
Net interest margin (net interest income
as a percentage of average interest-
earning assets) 3.34 3.40 3.30 3.51 3.62
General, administrative and other
expense to average assets/1/, /2/ 2.42 3.07 2.57 2.54 2.48
Non-performing loans to loans
receivable, net .15 .46 1.01 .83 .24
Non-performing assets to total assets .48 .70 1.35 .70 .19
Average interest-earning assets to
average interest-bearing liabilities 108.02 108.35 108.48 108.16 106.98
Allowance for loan losses to
non-performing loans 234.09 95.01 42.57 58.32 214.54
Allowance for loan losses to
non-performing assets 57.50 51.61 26.41 57.74 214.54
Net interest income after provision for
loan losses, to general, administrative
and other expense1, /2/ 131.71 106.60 124.77 133.65 140.77
Number of full-service offices 6 6 6 6 6
</TABLE>
/1/ The fiscal year ended March 31, 1997 includes a one-time 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 branch facility.
/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.
14
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MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Effective November 25, 1997, Wayne Savings Community Bank (the "Bank"),
formerly named The Wayne Savings and Loan Company, completed its reorganization
into a two-tier mutual holding company structure. In the reorganization, each
share of the Bank's common stock was automatically converted into one share of
Wayne Savings Bancshares, Inc. ("Wayne" or the "Company") 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. As a result of the
reorganization, the Company now serves as the stock holding company parent of
the Bank.
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, the
following matters: (1) management's determination of the amount and adequacy of
the allowance for loan losses; (2) the effect of changes in interest rates; (3)
the effect of the year 2000 on information technology systems; and (4)
management's opinion as to the effects of recent accounting pronouncements on
the Company's consolidated financial statements.
At March 31, 1998, the Company had total assets of $259.8 million, an increase
of $7.6 million, or 3.0%, from March 31, 1997.
Cash and due from banks, federal funds sold, interest-bearing deposits,
certificates of deposit and investment securities totaled approximately $35.1
million, an increase of approximately $3.0 million, or 9.3%, from March 31, 1997
levels. Regulatory liquidity approximated 15.7% at March 31, 1998, compared to
15.4% at March 31, 1997.
Loans receivable decreased by approximately $1.5 million to $207.9 million at
March 31, 1998 from $209.4 million at March 31, 1997. This decrease resulted
from principal repayments of $49.4 million and sales of loans totaling $7.1
million, which were offset by loan disbursements of $54.2 million. The
allowance for loan losses totaled $721,000 at March 31, 1998, as compared to
$914,000 at March 31, 1997. Nonperforming loans totaled $308,000 at March 31,
1998 and $962,000 at March 31, 1997. The allowance for loan losses totaled
234.1% and 95.0% of nonperforming loans at March 31, 1998 and March 31, 1997
respectively. Although management believes that the allowance for loan losses
is adequate based upon the available facts and circumstances, there can be no
assurance that additions to such allowance will not be necessary in future
periods, which would adversely affect the Company's results of operations.
Deposits increased by approximately $6.2 million from $211.4 million at March
31, 1997 to a total of $217.6 million at March 31, 1998. The increase in
deposits was primarily attributable to management's continuing efforts to
achieve a moderate rate of growth through marketing and business strategies.
The Bank is subject to capital standards which generally require the
maintenance of regulatory capital sufficient to meet each of three tests,
hereinafter described as the tangible capital requirement, the core capital
requirement and the risk-based capital requirement. At March 31, 1998, the
Bank's tangible and core capital of $23.6 million, or 9.1%, exceeded the minimum
1.5% and 3.0% requirements of $3.9 million and $7.8 million, respectively, by
$19.7 million and $15.8 million. The Bank's risk-based capital of $24.3
million, or 17.4%, exceeded the 8.0% minimum requirement by approximately $13.1
million.
15
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CON'T.)
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
$1.8 million, $709,000 and $1.4 million for fiscal years ended March 31, 1998,
1997 and 1996, respectively.
Interest Income. Interest income totaled $19.2 million for the fiscal year
ended March 31, 1998, an increase of $517,000, or 2.8%, from interest income of
$18.7 million for the fiscal year ended March 31, 1997. The increase was
primarily due to an increase in the average yield on interest-earning assets to
7.89% for the fiscal year ended March 31, 1998, from 7.85% for the fiscal year
ended March 31, 1997, and by a $5.3 million, or 2.2%, increase in average
interest-earning assets from $238.5 million to $243.8 million. Interest income
on loans receivable for the year ended March 31, 1998 totaled $17.1 million,
unchanged from the previous year. Interest income on mortgage-backed securities
increased by $6,000, or 6.2%, from $97,000 to $103,000. This increase was
caused by an increase in the average balance of mortgage-backed securities by
$351,000 which was partially offset by the yield decreasing from 7.15% to 6.03%.
Interest income on investment securities increased by $172,000, or 21.4% from
$805,000 to $977,000. This increase was caused by a $2.8 million, or 22.3%,
increase in the average balance of investment securities, which was offset by a
decrease in the yield on those securities from 6.31% to 6.26%. The decrease in
yield is due to the decrease in interest rates over the past year. Interest
income from interest-bearing deposits increased by $330,000, or 43.5%, from
$758,000 to $1.1 million. The increase was caused by an increase of $3.9
million in the average balance outstanding, along with an increase in the yield
from 5.00% to 5.69%.
Interest income totaled $18.7 million for the fiscal year ended March 31,
1997, an increase of $391,000, or 2.1% from interest income of $18.3 million for
the fiscal year ended March 31, 1996. The increase was primarily due to an
increase in the average yield on interest-earning assets to 7.85% for the fiscal
year ended March 31, 1997, from 7.77% for the fiscal year ended March 31, 1996,
and by a $2.5 million, or 1.1% increase in average interest-earning assets from
$236.0 million to $238.5 million. Interest income on loans receivable for the
year ended March 31, 1997 totaled $17.1 million, an increase of $419,000, or
2.5% from the previous year. This increase resulted from an increase in the
average loans receivable balance from $206.8 million to $209.2 million and an
increase in the average yield from 8.05% to 8.15%. Interest income on mortgage-
backed securities decreased by $50,000, or 34.0%, from $147,000 to $97,000.
This decrease was caused by a $1.4 million decrease in the average balance of
mortgage-backed securities, which was partially offset by the yield increasing
from 5.36% to 7.15%. Interest income on investment securities decreased by
$45,000, or 5.3%, from $850,000 to $805,000. This decrease was caused by a $1.3
million, or 9.5%, decrease in the average balance of investment securities,
which was partially offset by an increase in the yield on those securities from
6.04% to 6.31%. The decrease in the average balance is a result of using
proceeds from maturing securities to fund loan growth. The increase in yield is
due to the increase in short term interest rates over the past year. Interest
income from interest bearing deposits increased by $67,000, or 9.7%, from
$691,000 to $758,000. The increase was caused by an increase of $2.8 million in
the average balance outstanding, which was partially offset by a decrease in the
yield from 5.58% to 5.00%. The increase in the average balance outstanding is a
result of short term investment of deposit growth.
Interest Expense. Interest expense for the fiscal year ended March 31, 1998
totaled $11.1 million, an increase of $474,000, or 4.5%, from interest expense
of $10.6 million for the fiscal year ended March 31, 1997. The increase was a
result of an increase in average interest-bearing liabilities to $225.7 million
from $220.1 million, accompanied by an increase in the average cost of funds to
4.91% in the current fiscal year from 4.82% in the previous fiscal year.
Interest expense on deposits increased by $188,000, or 1.9%, to $10.2 million
from $10.0 million in the previous fiscal year. This increase was caused by a
$2.4 million increase in the average deposits outstanding, from $208.3 million
for fiscal 1997 to $210.7 million in fiscal 1998 and an increase in the cost of
deposits to 4.84% from 4.80%. Interest expense on borrowings for the fiscal
year ended March 31, 1998 was $890,000, an increase of $286,000 over the
previous fiscal year. The increase was due to a $3.2 million increase in the
average balance outstanding and an increase in the average cost of borrowings to
5.93% from 5.10%.
Interest expense for the fiscal year ended March 31, 1997 totaled $10.6
million, an increase of $69,000, or .7% over interest expense of $10.5 million
for the fiscal year ended March 31, 1996. The increase was a result of an
increase in the average interest-bearing liabilities to $220.1 million from
$217.5 million, which was partially offset by a decrease in the average cost of
funds, to 4.82% from 4.85% in the previous fiscal year. Interest expense on
deposits increased by $233,000, or 2.4%, to $10.0 million from $9.8
16
<PAGE>
million in the previous fiscal year. This increase was caused by a $3.9 million
increase in the average deposits outstanding, from $204.4 million for fiscal
1996 to $208.3 million in fiscal 1997 and an increase in the average cost of
deposits to 4.80% from 4.78%. Interest expense on borrowings for the fiscal year
ended March 31, 1997 was $604,000, a decrease of $164,000 from the previous
fiscal year. The decrease was due to a $1.3 million decrease in the average
balance outstanding and a decrease in the average cost of borrowings to 5.10%
from 5.83%.
Net Interest Income. Net interest income totaled $8.2 million for the year
ended March 31, 1998, an increase of $43,000, or 0.5%, from net interest income
of $8.1 million for the fiscal year ended March 31, 1997. The increase in net
interest income resulted primarily from the increase in the Company's balance of
interest-earning assets at a slightly higher yield, which were offset by an
increase in interest-bearing liabilities accompanied by an increased average
cost.
Net interest income totaled $8.1 million for the year ended March 31, 1997, an
increase of $322,000, or 4.1%, from net interest income of $7.8 million for the
fiscal year ended March 31, 1996. The increase in net interest income resulted
primarily from the increase in the Company's average yield on loans to 8.15% for
the year ended March 31, 1997 from 8.05% for the year ended March 31, 1996.
Provision for Losses on Loans. The Bank 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 Bank's allowance for loan losses was $721,000, or .35%
of loans receivable at March 31, 1998, $914,000, or .44% of loans receivable at
March 31, 1997, and $888,000, or .43% of loans receivable at March 31, 1996.
The Bank increased its provision for loan losses to $60,000 for the fiscal year
ended March 31, 1998, primarily based upon management's assessment of the risk
inherent in the loan portfolio and management's assessment of the collateral
securing non-performing loans. The Bank maintained its provision for loan
losses at $20,000 for the fiscal years ended March 31, 1997 and 1996, primarily
as a result of the Bank's low level of non-performing loans.
At March 31, 1998, 1997, and 1996, the Bank's loss allowance was primarily
composed of $706,000, $684,000, and $878,000, general allowance respectively, 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
when computing risk-based capital. Both general and specific loss allowances
are charged against earnings. The financial statements of the Bank 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 Bank 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.
Other Income. Other income, consisting primarily of gains on the sale of
loans, service fees, and charges on deposit accounts increased by $279,000, or
48.5%, to $854,000 for the year ended March 31, 1998, from $575,000 for the
fiscal year ended March 31, 1997. The increase was primarily attributed to an
increase of $181,000 in gain on sale of fixed-rate mortgage loans due to a
higher volume of sales during the fiscal year ended March 31, 1998. Fixed-rate
mortgage loans totaling $7.1 million were sold in fiscal year ended March 31,
1998 as compared to $1.9 million in fiscal year ended March 31, 1997.
Other income decreased by $32,000, or 5.3%, to $575,000 for the fiscal year
ended March 31, 1997, from $607,000 for the fiscal year ended March 31, 1996.
The decrease was primarily attributed to a decrease of $33,000 in gain on sale
of fixed-rate mortgage loans due to a lower volume of sales during the fiscal
year ended March 31, 1997. Fixed-rate mortgage loans totaling $1.9 million were
sold in fiscal year ended March 31, 1997 as compared to $3.1 million in fiscal
year ended March 31, 1996.
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 $6.1 million for the year ended March 31, 1998, a decrease of
$1.4 million, or 19.0% compared to fiscal 1997. The decrease was primarily
attributed to a $1.6 million, or 88.6%, decrease in federal deposit insurance
premiums and a $129,000 decrease in loss on disposition of office premises and
equipment as explained below.
General, administrative and other expense, totaled $7.6 million for the year
ended March 31, 1997, an increase of $1.4 million, or 22.6% over fiscal 1996.
The increase was primarily attributed to a $1.2 million, or 230.7%, increase in
federal deposit insurance premiums and a $165,000 increase in loss on
disposition of office premises and equipment. The increase in federal deposit
insurance premiums was due to the one-time special assessment to recapitalize
the Savings Association Insurance Fund ("SAIF"). The assessment was finalized
at $.657 per $100 of deposits as of March 31, 1995, which amounted to $1.3
million, or $887,000 after taxes for the Company. The increase in loss
on disposition of office premises and equipment was due to
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CON'T.)
the write-off of certain fixed assets relating to the construction of the new
facility at the Cleveland Road branch.
Income Taxes. The provision for income taxes totaled $953,000 for the year
ended March 31, 1998, compared to $367,000 for the year ended March 31, 1997.
The increase in income taxes reflected the higher levels of pre-tax earnings for
the period ended March 31, 1998.
The provision for income taxes totaled $367,000 for the year ended March 31,
1997, compared to $774,000 for the year ended March 31, 1996. The decrease in
income taxes generally reflected the lower levels of pre-tax earnings for the
period ended March 31, 1997.
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. Average balances are derived from month-end balances. Management
does not believe that the use of month-end balances instead of daily average
balances has caused any material difference in the information presented.
<TABLE>
<CAPTION>
Year Ended March 31,
---------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------ ------------------------------ ------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
----------- ----------- ------------ --------- --------- ----------- --------- -------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net $207,377 $ 17,068 8.23% $209,219 $17,059 8.15% $206,775 $16,640 8.05%
Mortgage-backed
securities1 1,708 103 6.03 1,357 97 7.15 2,740 147 5.36
Investment securities 15,598 977 6.26 12,750 805 6.31 14,083 850 6.04
Interest-bearing
deposits2 19,112 1,088 5.69 15,171 758 5.00 12,381 691 5.58
-------- -------- ------ -------- -------- ---------- -------- -------- -----
Total interest-earning
assets 243,795 19,236 7.89 238,497 18,719 7.85 235,979 18,328 7.77
-------- ------ -------- ---------- -------- -----
Non-interest-earning assets 10,531 8,553 6,422
-------- -------- --------
Total assets $254,326 $247,050 $242,401
======== ======== ========
Interest-bearing
liabilities:
Deposits $210,697 10,194 4.84 $208,289 10,006 4.80 $204,353 9,773 4.78
Borrowings 15,007 890 5.93 11,835 604 5.10 13,176 768 5.83
-------- -------- ------ -------- -------- ---------- -------- -------- -----
Total interest-bearing
liabilities 225,704 11,084 4.91 220,124 10,610 4.82 217,529 10,541 4.85
-------- ------ -------- ---------- -------- -----
Non-interest-bearing
liabilities 4,666 3,901 2,559
-------- -------- --------
Total liabilities 230,370 224,025 220,088
Stockholders' equity 23,956 23,025 22,313
-------- -------- --------
Total liabilities and
stockholders' equity $254,326 $247,050 $242,401
-------- -------- --------
Net interest income $ 8,152 $ 8,109 $ 7,787
======== ======== ========
Interest rate spread3 2.98% 3.03% 2.92%
====== ========== =====
Net yield on
interest-earning
assets4 3.34% 3.40% 3.30%
====== ========== =====
Ratio of average
interest-earning
assets to average
interest-bearing
liabilities 108.02% 108.35% 108.48%
====== ========== =====
</TABLE>
/1/ Includes mortgage-backed securities desgnated as available for sale.
/2/ Includes federal funds sold and interest-bearing deposits in other financial
institutions.
/3/ Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing liabilities.
/4/ Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
18
<PAGE>
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); (ii) changes in rate (change
in rate multiplied by old average volume); (iii) changes in rate-volume (changes
in rate multiplied by the change in average volume) which have been allocated
proportionately between changes in rate and changes in volume; and (iv) the net
change.
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
--------------------------------------------- -------------------------------------
Increase (Decrease) Increase (Decrease)
Due to Total Due to Total
--------------------------- Increase ----------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease)
---------- ---------- ----------- --------- --------- ----------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Loans receivable $(154) $163 $ 9 $204 $215 $ 419
Mortgage-backed securities 23 (17) 6 (87) 37 (50)
Other interest-earning assets 412 90 502 61 (39) 22
----- ---- ---- ---- ---- -----
Total interest-earning assets 281 236 517 178 213 391
Interest expense attributable to:
Deposits 110 78 188 190 43 233
Borrowings 178 108 286 (74) (90) (164)
----- ---- ---- ---- ---- -----
Total interest-bearing liabilities 288 186 474 116 (47) 69
----- ---- ---- ---- ---- -----
Increase (decrease) in
net interest income $ (7) $ 50 $ 43 $ 62 $260 $ 322
===== ==== ==== ==== ==== =====
</TABLE>
Asset and Liability Management-Interest Rate
Sensitivity Analysis
The matching of assets and liabilities may be analyzed by examining the extent
to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. During a period of rising
interest rates, a negative gap would tend to adversely affect net interest
income while a positive gap would tend to positively affect net interest income.
Similarly, during a period of falling interest rates, a negative gap would tend
to positively affect net interest income while a positive gap would tend to
adversely affect net interest income.
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 a low 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, 1998. 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 low
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 and 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 Board of
Directors has adopted a policy that requires the Company to maintain a gap
between negative 10% and positive 10%. As of March 31, 1998, based on internal
calculations, the Company's gap position was within the approved range.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CON'T.)
Liquidity and Capital Resources
The Bank is 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
Bank's liquidity ratio averaged 15.72% during the month of March 1998 and 16.05%
during the fiscal year ended March 31, 1998. The Bank adjusts liquidity as
appropriate to meet its asset and liability management objectives.
The Bank's 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 Bank manages the pricing of its deposits to maintain a desired
level of deposits and cost of funds. In addition, the Bank invests excess funds
in federal funds, and other short-term interest-earning and other assets, which
provide liquidity to meet lending requirements. Federal funds sold and other
assets qualifying for liquidity outstanding at March 31, 1998, 1997, and 1996,
amounted to $34.4 million, $32.3 million, and $30.9 million, respectively. For
additional information about cash flows from the Company's operating, financing,
and investing activities, see Consolidated Statements of Cash Flows included in
the Consolidated Financial Statements.
A major portion of the Bank's liquidity consists of cash and cash equivalents,
which are a product of its operating, investing, and financing activities. The
primary sources of cash were net income, 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 Bank requires funds beyond its ability to generate them
internally, borrowing agreements exist with the Federal Home Loan Bank ("FHLB")
to provide an additional source of funds. At March 31, 1998, the Company had
$16.0 million in outstanding advances from the FHLB.
At March 31, 1998, the Company had outstanding loan commitments of $6.7
million. This amount does not include the unfunded portion of loans in process.
Certificates of deposit scheduled to mature in less than one year at March 31,
1998, totaled $91.9 million. Based on prior experience, management believes
that a significant portion of such deposits will remain with the Company.
Other Matters
As with all providers of financial services, the Company's operations are
heavily dependent on information technology systems. The Company is addressing
the potential problems associated with the possibility that the computers that
control or operate the Company's information technology system and
infrastructure may not be programmed to read four-digit date codes and, upon
arrival of the year 2000, may recognize the two-digit code "00" as the year
1900, causing systems to fail to function or to generate erroneous data. The
Company is working with the companies that supply or service its information
technology system to identify and remedy any year 2000 related problems.
As of the date of this annual report, the Company has not identified any
specific expenses that are reasonably likely to be incurred by the Company in
connection with this issue and does not expect to incur significant expense to
implement the necessary corrective measures. No assurance can be given,
however, that significant expense will not be incurred in future periods. In
the event that the Company is ultimately required to purchase replacement
computer systems, programs and equipment, or incur substantial expense to make
the Company's current systems, programs and equipment year 2000 compliant, the
Company's net earnings and financial condition could be adversely affected.
In addition to possible expense related to its own systems, 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 business and the Company's primary market area is not significantly
dependent upon one employer or industry, the Company does not expect 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 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.
20
<PAGE>
Impact of Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets, and Extinguishments of
Liabilities", that provides accounting guidance on transfers of financial
assets, servicing of financial assets, and extinguishment of liabilities. SFAS
No. 125 introduces an approach to accounting for transfers of financial assets
that provides a means of dealing with more complex transactions in which the
seller disposes of only a partial interest in the assets, retains rights or
obligations, makes use of special purpose entities in the transaction, or
otherwise has continuing involvement with the transferred assets. The new
accounting method, the financial components approach, provides that the carrying
amount of the financial assets transferred be allocated to components of the
transaction based on their relative fair values. SFAS No. 125 provides criteria
for determining whether control of assets has been relinquished and whether a
sale has occurred. If the transfer does not qualify as a sale, it is accounted
for as a secured borrowing. Transactions subject to the provisions of SFAS No.
125 include, among others, transfers involving repurchase agreements,
securitizations of financial assets, loan participations, factoring
arrangements, and transfers of receivables with recourse.
An entity that undertakes an obligation to service financial assets recognizes
either a servicing asset or liability for the servicing contract (unless related
to a securitization of assets, and all the securitized assets are retained and
classified as held-to-maturity). A servicing asset or liability that is
purchased or assumed is initially recognized at its fair value. Servicing
assets and liabilities are amortized in proportion to and over the period of
estimated net servicing income or net servicing loss and are subject to
subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet only
if the debtor either pays the creditor and is relieved of its obligation for the
liability or is legally released from being the primary obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1997, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management adopted SFAS 125 effective January 1, 1998, as required, without
material effect on the Company's financial position or results of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
SFAS No. 130 establishes standards for reporting and display of comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. SFAS No. 130 requires that all items
that are required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. It does not require a
specific format for that financial statement but requires that an enterprise
display an amount representing total comprehensive income for the period in that
financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. SFAS No. 130 is not expected to
have a material impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 131 significantly changes the way
that public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about reportable segments in interim financial reports issued to
stockholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. SFAS No. 131 uses
a "management approach" to disclose financial and descriptive information about
the way that management organizes the segments within the enterprise for making
operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements and also requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for fiscal years beginning
after December 15, 1997. SFAS No. 131 is not expected to have a material impact
on the 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 $5.25 (adjusted) per share. On June 10, 1998, the Bank paid a 10% stock
dividend. In addition, on June 12, 1997 and June 11, 1996, the Bank paid a
three-for two stock split, and a 5% stock dividend, respectively. References
herein to an adjusted number of shares or price per share reflect an adjustment
due to these stock distributions.
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (CON'T.)
Effective November 25, 1997, the Bank completed its reorganization into a two-
tier mutual holding company structure. 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 the Bank 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 Small-Cap
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).
<TABLE>
<CAPTION>
Fiscal Year Ended Cash Dividends
March 31, 1997 High Low Declared
- ----------------- ------ ------ --------------
<S> <C> <C> <C>
First quarter $13.34 $12.12 $.134
Second quarter 12.12 11.52 .139
Third quarter 14.85 11.66 .139
Fourth quarter 16.52 14.39 .139
<CAPTION>
Fiscal Year Ended Cash Dividends
March 31, 1998 High Low Declared
- ----------------- ------ ------ --------------
<S> <C> <C> <C>
First quarter $16.82 $15.30 $.141
Second quarter 22.50 15.68 .141
Third quarter 30.00 21.59 .141
Fourth quarter 27.73 25.00 .141
</TABLE>
As of April 10, 1998, the Company had 884 stockholders of record and 2,483,415
outstanding shares (adjusted) of 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.
OTS regulations impose limitations upon all "capital distributions" by savings
associations, including cash dividends, payments by a savings association to
repurchase or otherwise acquire its stock, payments to stockholders of another
savings association in a cash-out merger, and other distributions charged
against capital. The regulations establish a three-tiered system of regulation,
with the greatest flexibility being afforded to well-capitalized or Tier 1
savings associations. As of the date hereof, the Bank was a Tier 1 association.
Accordingly, under the OTS capital distribution regulations, the Bank would be
permitted to pay dividends during any calendar year up to 100 percent of its net
income during that calendar year, plus the amount that would reduce by one-half
its surplus capital ratio at the beginning of the calendar year.
In addition to the foregoing, earnings of the Bank 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 Bank does not contemplate
any distribution in a manner that would create federal tax liability.
22
<PAGE>
[LETTERHEAD OF GRANT THORNTON LLP APPEARS HERE]
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
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. (successor-in-interest to The Wayne Savings
and Loan Company) as of March 31, 1998 and 1997, and the related consolidated
statements of earnings, stockholders' equity and cash flows for each of the
three years ended March 31, 1998, 1997 and 1996. 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, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the three years ended
March 31, 1998, 1997 and 1996, in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
Cincinnati, Ohio
May 29, 1998
23
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
As of March 31,
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks $ 1,422 $ 1,302
Federal funds sold 4,100 1,125
Interest-bearing deposits in other financial institutions 7,647 5,179
-------- --------
Cash and cash equivalents 13,169 7,606
Certificates of deposit in other financial institutions 8,500 7,500
Investment securities - at amortized cost, approximate market value
of $13,335 and $16,904 as of March 31, 1998 and 1997 13,401 16,970
Mortgage-backed securities designated as available for sale - at market 4,032 378
Mortgage-backed securities held to maturity - at cost, approximate market value
of $245 and $497 as of March 31, 1998 and 1997 243 495
Loans receivable - net 206,685 209,404
Loans held for sale - at lower of cost or market 1,194 -
Office premises and equipment - at depreciated cost 6,461 3,991
Real estate acquired through foreclosure - net 946 809
Federal Home Loan Bank stock - at cost 2,719 2,531
Accrued interest receivable on loans 1,152 1,139
Accrued interest receivable on mortgage-backed securities 23 7
Accrued interest receivable on investments and interest-bearing deposits 180 226
Prepaid expenses and other assets 1,047 790
Prepaid federal income taxes - 329
-------- --------
Total assets $259,752 $252,175
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $217,621 $211,442
Advances from the Federal Home Loan Bank 16,000 16,000
Loan payable to Employee Stock Ownership Plan - 35
Advances by borrowers for taxes and insurance 783 701
Accrued interest payable 197 226
Accounts payable on mortgage loans serviced for others 199 126
Other liabilities 291 382
Accrued federal income taxes 1 -
Deferred federal income taxes 234 148
-------- --------
Total liabilities 235,326 229,060
Commitments - -
Stockholders' equity
Common stock (20,000,000 shares of $1.00 par value authorized;
2,258,007 and 1,498,889 shares issued at March 31, 1998
and 1997, respectively) 2,258 1,499
Additional paid-in capital 5,963 5,844
Retained earnings - substantially restricted 16,198 15,777
Less required contributions for shares acquired by Employee Stock Ownership Plan - (35)
Less 357 shares of treasury stock (10) -
Unrealized gains on securities designated as available for sale,
net of related tax effects 17 30
-------- --------
Total stockholders' equity 24,426 23,115
-------- --------
Total liabilities and stockholders' equity $259,752 $252,175
-------- --------
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
For the year ended March 31,
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Interest income:
Loans $17,068 $17,059 $16,640
Mortgage-backed securities 103 97 147
Investment securities 977 805 850
Interest-bearing deposits and other 1,088 758 691
------- ------- -------
Total interest income 19,236 18,719 18,328
Interest expense:
Deposits 10,194 10,006 9,773
Borrowings 890 604 768
------- ------- -------
Total interest expense 11,084 10,610 10,541
------- ------- -------
Net interest income 8,152 8,109 7,787
Provision for losses on loans 60 20 20
------- ------- -------
Net interest income after provision for losses on loans 8,092 8,089 7,767
Other income:
Gain on sale of loans 237 56 89
Gain on sale of real estate acquired through foreclosure 4 - 9
Service fees, charges and other operating 613 519 509
------- ------- -------
Total other income 854 575 607
General, administrative and other expense:
Employee compensation and benefits 3,203 3,271 3,284
Occupancy and equipment 982 864 828
Federal deposit insurance premiums 203 1,779 538
Franchise taxes 298 291 278
(Gain) loss on disposition of office premises and equipment - 129 (36)
Other operating 1,458 1,254 1,297
------- ------- -------
Total general, administrative and other expense 6,144 7,588 6,189
------- ------- -------
Earnings before income taxes 2,802 1,076 2,185
Federal income taxes:
Current 860 142 339
Deferred 93 225 435
------- ------- -------
Total federal income taxes 953 367 774
------- ------- -------
NET EARNINGS $ 1,849 $ 709 $ 1,411
------- ------- -------
Earnings per share
Basic $.75 $.29 $.58
------- ------- -------
Diluted $.73 $.28 $.58
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended March 31, 1998, 1997 and 1996
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Unrealized
gains
(losses) on
securities Total
Additional Shares Shares Treasury designated stock-
Common paid-in Retained acquired acquired stock- as available holders'
stock capital earnings by ESOP by MRP at cost for sale equity
------- ---------- -------- ---------- ------- ------------ ------------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1995 $1,412 $4,243 $16,464 $(220) $(75) $ - $ 36 $21,860
Principal payments on
loan to ESOP - - - 95 - - - 95
Amortization of Management
Recognition Plan - 68 - - 60 - - 128
Stock options exercised 12 96 - - - - - 108
Net earnings for the year
ended March 31, 1996 - - 1,411 - - - - 1,411
Cash dividends of $.48
per share - - (743) - - - - (743)
Unrealized losses on
securities designated as
available for sale, net of
related tax effects - - - - - - (7) (7)
------- -------- -- ------- ---------- ------- ------------ -------- -------
Balance at March 31, 1996 1,424 4,407 17,132 (125) (15) - 29 22,852
Principal payments on loan
to ESOP - 57 - 90 - - - 147
Amortization of Management
Recognition Plan - - - - 15 - - 15
Stock options exercised 4 35 - - - - - 39
Net earnings for the year
ended March 31, 1997 - - 709 - - - - 709
Stock dividend 71 1,345 (1,424) - - - - (8)
Cash dividends of $.55
per share - - (640) - - - - (640)
Unrealized gains on
securities designated as
available for sale, net of
related tax effects - - - - - - 1 1
------- -------- -- ------- ---------- ------- ------------ -------- -------
Balance at March 31, 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 $.56
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
------- -------- -- ------- ---------- ------- ------------ -------- -------
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended March 31,
<TABLE>
<CAPTION>
1998 1997 1996
-------------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year $ 1,849 $ 709 $ 1,411
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 14 2 72
Amortization of deferred loan origination fees (399) (338) (342)
Depreciation and amortization 430 402 213
(Gain) loss on disposition of office premises and equipment -... 129 (36)
Gain on sale of loans (130) (27) (43)
Proceeds from sale of loans in the secondary market 7,196 1,957 3,141
Loans originated for sale in the secondary market (8,260) (1,901) (3,103)
Provision for losses on loans 60 20 20
Gain on sale of real estate acquired through foreclosure (4) -... (9)
Federal Home Loan Bank stock dividends (188) (169) (157)
Amortization expense of employee stock benefit plans 161 64 128
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans (13) 57 16
Accrued interest receivable on mortgage-backed securities (16) 5 5
Accrued interest receivable on investments and
interest-bearing deposits 46 19 175
Prepaid expenses and other assets (257) 509 (424)
Accrued interest payable (29) 34 86
Accounts payable on mortgage loans serviced for others 73 (115) (263)
Other liabilities (91) 29 (206)
Federal income taxes
Current (330) (267) (103)
Deferred 93 225 435
-------- -------- --------
Net cash provided by operating activities 205 1,344 1,016
Cash flows provided by (used in) investing activities:
Purchase of investment securities (11,000) (10,000) (5,032)
Proceeds from the maturity of investment securities 14,569 7,713 7,030
Purchase of mortgage-backed securities designated as available for sale (4,010) - -
Principal repayments on mortgage-backed securities 614 1,048 952
Loan principal repayments 49,359 43,274 36,943
Loan disbursements (45,963) (45,868) (42,549)
Purchase of office premises and equipment (2,900) (857) (1,185)
Proceeds from sale of office equipment - - 55
Proceeds from sale of real estate acquired through foreclosure 59 468 26
(Increase) decrease in certificates of deposit in other financial institutions - net (1,000) (2,500) 3,825
-------- -------- --------
Net cash provided by (used in) investing activities (272) (6,722) 65
-------- -------- --------
Net cash provided by (used in) operating and investing activities
(balance carried forward) (67) (5,378) 1,081
-------- -------- --------
</TABLE>
27
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (con't.)
For the year ended March 31,
<TABLE>
<CAPTION>
1998 1997 1996
----------- -------------- ----------
(In thousands)
<S> <C> <C> <C>
Net cash provided by (used in) operating and investing activities $ (67) $ (5,378) $ 1,081
(balance brought forward)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts 6,179 1,284 4,661
Proceeds from Federal Home Loan Bank advances 13,000 26,000 38,500
Repayments of Federal Home Loan Bank advances (13,000) (24,000) (36,500)
Advances by borrowers for taxes and insurance 82 119 10
Dividends paid on common stock (679) (648) (743)
Proceeds from the exercise of stock options 48 39 108
-------- -------- --------
Net cash provided by financing activities 5,630 2,794 6,036
-------- -------- --------
Net increase (decrease) in cash and cash equivalents 5,563 (2,584) 7,117
Cash and cash equivalents at beginning of year 7,606 10,190 3,073
-------- -------- --------
Cash and cash equivalents at end of year $ 13,169 $ 7,606 $ 10,190
======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes $ 797 $ 396 $ 410
======== ======== ========
Interest on deposits and borrowings $ 11,113 $ 10,576 $ 10,455
======== ======== ========
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure $ 162 $ - $ 1,344
======== ======== ========
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects $ (13) $ 1 $ (7)
======== ======== ========
Recognition of mortgage servicing rights in accordance with SFAS No. 125 $ 107 $ 29 $ 46
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1998, 1997 and 1996
NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Effective November 25, 1997, Wayne Savings Community Bank (the "Bank"),
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 Community Bank's 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 ("Wayne" or the "Company").
The Bank conducts a general banking business in north central Ohio which
consists of attracting deposits from the general public and applying those funds
to the origination of loans for residential, consumer and nonresidential
purposes. The Bank's profitability is significantly dependent on its net
interest income, which is the difference between interest income generated from
interest-earning assets (i.e. loans and investments) and the interest expense
paid on interest-bearing liabilities (i.e. customer deposits and borrowed
funds). Net interest income is affected by the relative amount of interest-
earning assets and interest-bearing liabilities and the interest received or
paid on these balances. The level of interest rates paid or received by the
Bank can be significantly influenced by a number of environmental factors, such
as governmental monetary policy, that are outside of management's control.
The financial information presented herein has been prepared in accordance
with 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, 1998 and 1997, the Company's equity accounts reflected a net unrealized gain
on securities designated as available for sale of $17,000 and $30,000,
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 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 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
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T.)
March 31, 1998, 1997 and 1996
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 would allocate some of the cost of
the loans to the mortgage servicing rights.
SFAS No. 125 requires that securitization of mortgage loans be accounted for
as sales of mortgage loans and acquisitions of mortgage-backed securities.
Additionally, 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 Bank recognized $107,000, $29,000 and $46,000 of pre-tax gains on sales of
loans related to capitalized mortgage servicing rights during the fiscal years
ended March 31, 1998, 1997 and 1996, respectively.
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 $12,000 and $1,000 for the years ended March 31, 1998 and 1997,
respectively. At March 31, 1998 and 1997, the fair value of the Company's
mortgage servicing rights totaled approximately $168,000 and $74,000,
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, 1998, loans held
for sale were carried at cost. The Bank had not identified any loans as held
for sale at March 31, 1997.
3. LOAN ORIGINATION FEES
The Bank accounts for loan origination fees in accordance with SFAS No. 91
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases". Pursuant to the provisions
of SFAS No. 91, origination fees received from loans, net of certain direct
origination costs, are deferred and amortized to interest income using the
level-yield method, giving effect to actual loan prepayments. Additionally,
SFAS No. 91 generally limits deferred loan origination costs to the direct costs
attributable to the origination of a loan, i.e. principally, actual personnel
costs. Fees received for loan commitments that are expected to be drawn upon,
based on the Bank's experience with similar commitments, are deferred and
amortized over the life of the loan using the level-yield method. Fees for
other loan commitments will be deferred and amortized over the loan commitment
period on a straight-line basis.
4. ALLOWANCE FOR LOAN LOSSES
It is the Bank's policy to provide valuation allowances for 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 its primary market area. When the collection
of a loan becomes doubtful, or otherwise troubled, the Bank records a charge-off
equal to the difference between the fair value of the property securing the loan
and the loan's carrying value. In providing valuation allowances, costs of
holding real estate, including the cost of capital, are considered. Major loans
(including development projects), and major lending areas are reviewed
periodically to determine potential problems at an early date. The allowance
for loan losses is increased by charges to earnings and decreased by charge-offs
(net of recoveries).
The Bank accounts for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". This Statement requires
that impaired loans be measured based upon the present value of expected future
cash flows discounted at the loan's effective interest rate or, as an
alternative, at the loan's observable market price or fair value of the
collateral.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
applying the provisions of SFAS No. 114, the Bank considers its investment in
one-to-four family residential loans and consumer installment loans to be
homogeneous and therefore excluded from separate identification for evaluation
of impairment. With respect to the Bank's investment in multi-family and
nonresidential loans, and its evaluation of impairment thereof, such loans are
collateral dependent and, as a result, are carried as a practical expedient at
the lower of cost or fair value.
It is the Bank's policy to charge off unsecured credits that are more than
ninety days delinquent. Similarly, collateral dependent loans which are more
than ninety days delinquent are considered to constitute more than a minimum
delay in repayment and are evaluated for impairment under SFAS No. 114 at that
time.
30
<PAGE>
At March 31, 1998 and 1997, the Bank's investment in impaired loans, as
defined, totaled approximately $9,000 and $601,000, respectively. The allowance
for credit losses related to such impaired loans totaled $9,000 and $225,000 at
those respective dates.
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 forty 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". SFAS No. 109 established financial accounting
and reporting standards for the effects of income taxes that result from the
Company's activities within the current and previous years. 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. PENSION PLAN
The Bank has 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 Bank's provision for pension expense totaled $114,000,
$114,000 and $151,000 for the three years ended March 31, 1998, 1997 and 1996,
respectively. These amounts reflect the expense computed by the Bank's
actuaries utilizing the modified aggregate funding method and implicitly
assuming a 7.50% rate of return on plan assets. As of November 1, 1997, the
most recent valuation date, the amount of net assets available for benefits was
$1.6 million. The Company has not provided disclosures required by SFAS No. 87,
"Accounting for Pension Plans," based upon materiality.
9. RETIREMENT PLANS AND STOCK OPTION PLANS
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 Bank accounts for the ESOP in
accordance with Statement of Position ("SOP") 93-6, "Employers' Accounting for
Employee Stock Ownership Plans." SOP 93-6 requires compensation expense
recorded by employers to be measured based upon the fair value of ESOP shares
allocated to participants during a fiscal year. Expense recognized related to
the ESOP totaled approximately $161,000, $174,000 and $210,000 for the years
ended March 31, 1998, 1997 and 1996, respectively.
The Bank had a Management Recognition Plan ("MRP"). The MRP purchased 20,790
shares (adjusted for the Bank's ten percent stock dividend paid during fiscal
1995) of the Bank's common stock in the open market. All of the shares
available under the plan were granted to executive officers of the Bank
effective upon consummation of the offering. Common stock granted under the MRP
vested ratably over a three year period, commencing in June 1993. A provision
of $28,000 and $111,000 was charged to expense for the years ended March 31,
1997 and 1996, respectively.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T.)
March 31, 1998, 1997 and 1996
10. EARNINGS PER SHARE
Basic earnings per share is computed based upon the weighted-average shares
outstanding during the period, less shares in the ESOP that are unallocated and
not committed to be released. Weighted-average common shares outstanding
totaled 2,478,312, 2,447,578 and 2,432,396 for the years ended March 31, 1998,
1997 and 1996, respectively.
Diluted earnings per share is computed taking into consideration common shares
outstanding and dilutive potential common shares to be issued under the
Company's stock option plan. Weighted-average common shares deemed outstanding
for purposes of computing diluted earnings per share totaled 2,519,379,
2,490,022 and 2,451,638 for the years ended March 31, 1998, 1997 and 1996,
respectively.
Effective March 31, 1998, the Company began presenting earnings per share
pursuant to the provisions of SFAS No. 128 "Earnings Per Share." Accordingly,
the fiscal 1997 and 1996 earnings per share presentation has been revised to
conform to SFAS No. 128.
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, 1998 and 1997:
CASH AND CASH EQUIVALENTS: The carrying amounts presented in the statement
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 statements of financial condition for certificates
of deposit in other financial institutions are deemed to approximate fair
value.
INVESTMENT AND MORTGAGE-BACKED SECURITIES: For investment and mortgage-
backed securities, fair value is deemed to equal the quoted market price.
LOANS RECEIVABLE: The loan portfolio has been segregated into categories
with similar characteristics, such as one-to-four family residential, multi-
family residential and nonresidential real estate. These loan categories
were further delineated into fixed-rate and adjustable-rate loans. The fair
values for the resultant loan categories were computed via discounted cash
flow analysis, using current interest rates offered for loans with similar
terms to borrowers of similar credit quality. For loans on deposit accounts
and consumer and other loans, fair values were deemed to equal the historic
carrying values. The historical carrying amount of accrued interest on loans
is deemed to approximate fair value.
FEDERAL HOME LOAN BANK STOCK: The carrying amount presented in the
consolidated statements of financial condition is deemed to approximate fair
value.
DEPOSITS: The fair value of NOW accounts, passbook and club accounts, money
market deposits and advances by borrowers is deemed to approximate the
amount payable on demand. Fair values for fixed-rate certificates of deposit
have been estimated using a discounted cash flow calculation using the
interest rates currently offered for deposits of similar remaining
maturities.
ADVANCES FROM FEDERAL HOME LOAN BANK: The fair value of these advances is
estimated using the rates currently offered for similar advances of similar
remaining maturities or, when available, quoted market prices.
COMMITMENTS TO EXTEND CREDIT: For fixed-rate and adjustable-rate loan
commitments, the fair value estimate considers the difference between
current levels of interest rates and committed rates. At March 31, 1998 and
1997, the difference between the fair value and notional amount of loan
commitments was not material.
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:
32
<PAGE>
<TABLE>
<CAPTION>
1998 1997
------------------- ------------------
Carrying Fair Carrying Fair
value value value value
--------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and certificates
of deposit.................... $ 21,669 $ 21,669 $ 15,106 $ 15,106
Investment securities........... 13,401 13,335 16,970 16,904
Mortgage-backed
securities.................... 4,275 4,277 873 875
Loans receivable................ 207,879 209,743 209,404 208,426
Stock in Federal
Home Loan Bank................ 2,719 2,719 2,531 2,531
-------- -------- -------- --------
$249,943 $251,743 $244,884 $243,842
======== ======== ======== ========
Financial liabilities
Deposits........................ $217,621 $217,602 $211,442 $205,718
Advances from the
Federal Home
Loan Bank..................... 16,000 15,965 16,000 15,718
Advances by
borrowers for taxes
and insurance................. 783 783 701 701
-------- -------- -------- --------
$234,404 $234,350 $228,143 $222,137
======== ======== ======== ========
</TABLE>
13. RECLASSIFICATIONS
Certain prior year amounts have been reclassified to conform to the 1998
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:
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
-------- --------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C>
U. S. Government and
agency obligations................. $ 13,228 $ 13,162 $ 16,789 $ 16,723
Municipal obligations................ 173 173 181 181
-------- -------- -------- --------
$ 13,401 $ 13,335 $ 16,970 $ 16,904
======== ======== ======== ========
</TABLE>
At March 31, 1998, the carrying value of the Company's investment securities
in excess of estimated fair value totaled $66,000, comprised of $6,000 in gross
unrealized gains and $72,000 in gross unrealized losses. At March 31, 1997, the
carrying value of the Company's investment securities in excess of estimated
fair value totaled $66,000, comprised of $95,000 in gross unrealized gains and
$161,000 in gross unrealized losses.
The amortized cost and estimated fair value of U. S. Government and agency
obligations and municipal obligations at March 31, 1998 by term to maturity are
shown below.
<TABLE>
<CAPTION>
Estimated
Amortized fair
cost value
--------- -------
(In thousands)
<S> <C> <C>
Due in one year or less............................. $ 3,000 $ 2,999
Due in one to three years........................... 4,500 4,488
Due in three to five years.......................... 3,499 3,476
Due in over five years.............................. 2,402 2,372
------- -------
$13,401 $13,335
======= =======
</TABLE>
The Company had not pledged any investment or mortgage-backed securities to
secure public deposits at eith er March 31, 1998 or 1997.
The amortized cost, gross un realized gains, gross unrealized losses, and
estimated fair values of mortg age-backed securities at March 31, 1998 and 1997,
including those designated as available for sale, are summarized as follows:
<TABLE>
<CAPTION>
1998
---------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Held-to-maturity
REMICs $ 243 $ 2 $ -- $ 245
====== ==== ==== ======
Available for sale
Government National
Mortgage Association
participation
certificates $ 152 $ 20 $ -- $ 172
Federal National
Mortgage Association
participation
certificates 3,854 16 10 3,860
------ ---- ---- ------
$4,006 $ 36 $ 10 $4,032
====== ==== ==== ======
<CAPTION>
1997
---------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Held-to-maturity
REMICs $ 495 $ 2 $ -- $ 497
====== ==== ==== ======
Available for sale
Government National
Mortgage Association
participation
certificates $ 236 $ 31 $ -- $ 267
Federal National
Mortgage Association
participation
certificates 96 15 -- 111
------ ---- ---- ------
$ 332 $ 46 $ -- $ 378
====== ==== ==== ======
</TABLE>
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T.)
March 31, 1998, 1997 and 1996
The amortized cost of mortgage-backed securities, including those designated
as available for sale at March 31, 1998, by contractual term to maturity are
shown below. Expected maturities will differ from contractual maturities because
borrowers may generally prepay obligations without prepayment penalties.
<TABLE>
<CAPTION>
Amortized Cost
--------------
(In thousands)
<S> <C>
Due in one year or less $ 40
Due within one to three years 1,196
Due within three to five years 852
Due after five years 2,161
--------
$ 4,249
========
</TABLE>
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at March 31 is as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Residential real estate - 1 to 4 family $180,895 $184,381
Residential real estate - multi-family 7,091 5,491
Residential real estate - construction 3,963 5,717
Nonresidential real estate and land 5,838 6,519
Education 3,868 4,355
Automobile 890 1,761
Consumer and other 8,831 6,221
-------- --------
211,376 214,445
Less:
Undisbursed portion of loans in
process 2,088 2,111
Deferred loan origination fees 1,882 2,016
Allowance for loan losses 721 914
-------- --------
$206,685 $209,404
======== ========
</TABLE>
As depicted above, the Bank's lending efforts have historically focused on
one-to-four-family residential and multi-family residential real estate loans,
which comprise approximately $189.9 million, or 92%, of the total loan portfolio
at March 31, 1998, and $193.5 million, or 92%, of the total loan portfolio at
March 31, 1997. Generally, such loans have been underwritten on the basis of no
more than an 80% loan-to-value ratio, which has historically provided the Bank
with adequate collateral coverage in the event of default. Nevertheless, the
Bank, as with any lending institution, is subject to the risk that real estate
values could deteriorate in its primary lending area of north central Ohio,
thereby impairing collateral values. However, management is of the belief that
residential real estate values in the Bank's primary lending area are presently
stable.
As discussed previously, the Bank 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 $37.8 million,
$37.5 million and $41.5 million at March 31, 1998, 1997 and 1996, respectively.
In the normal course of business, the Bank has made loans to its directors,
officers and their related business interests. Related party loans must be made
on the same terms, including interest rates and collateral, as those prevailing
at the time for comparable transactions with unrelated persons and do not
involve more than the normal risk of collectibility. However, recent
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 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 $209,000, $400,000 and $352,000 at
March 31, 1998, 1997 and 1996, 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:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year $ 914 $ 888 $ 981
Provision for loan losses 60 20 20
(Charge-offs) recoveries - net (253) 6 (113)
----- ----- -----
Balance at end of year $ 721 $ 914 $ 888
===== ===== =====
</TABLE>
As of March 31, 1998, the Bank's allowance for loan losses was comprised of a
general loan loss allowance of $706,000, which is includible as a component of
regulatory risk-based capital, and a specific loan loss allowance of $15,000.
Nonaccrual and nonperforming loans totaled approximately $308,000, $962,000
and $2.1 million at March 31, 1998, 1997 and 1996, respectively.
During the years ended March 31, 1998, 1997 and 1996 interest income of
approximately $23,000, $62,000 and $135,000, respectively, would have been
recognized had nonaccrual loans been performing in accordance with contractual
terms.
34
<PAGE>
NOTE E - OFFICE PREMISES
AND EQUIPMENT
Office premises and equipment at March 31 are comprised of the following:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Land and improvements $ 1,390 $ 1,355
Office buildings and improvements 3,776 2,477
Furniture, fixtures and equipment 4,992 3,876
Automobiles 84 84
-------- --------
10,242 7,792
Less accumulated depreciation
and amortization 3,781 3,801
-------- --------
$ 6,461 $ 3,991
======== ========
</TABLE>
NOTE F - DEPOSITS
Deposits consist of the following major classifications at March 31:
<TABLE>
<CAPTION>
1998 1997
-------- --------
DEPOSIT TYPE AND WEIGHTED- (In thousands)
AVERAGE INTEREST RATE
<S> <C> <C>
NOW accounts
1998 - 2.14% $ 21,062
1997 - 2.23% $ 19,228
Passbook
1998 - 2.98% 39,111
1997 - 2.98% 41,233
Money Market Investor
1998 - 3.00% 9,448
1997 - 2.99% 9,815
-------- --------
Total demand, transaction and
passbook deposits 69,621 70,276
Certificates of deposit
Original maturities of:
Less than 12 months
1998 - 5.39% 29,350
1997 - 5.34% 21,016
12 months to 24 months
1998 - 5.50% 37,069
1997 - 5.38% 44,136
25 months to 36 months
1998 - 5.93% 40,862
1997 - 6.07% 28,591
More than 36 months
1998 - 6.71% 13,523
1997 - 6.61% 16,995
Jumbo
1998 - 6.11% 27,196
1997 - 6.12% 30,428
-------- --------
Total certificates of deposit 148,000 141,166
-------- --------
Total deposit accounts $217,621 $211,442
======== ========
</TABLE>
At March 31, 1998 and 1997, the Bank had deposits with balances in excess of
$100,000 totaling $33.4 million and $32.1 million, respectively.
Interest expense on deposits for the years ended March 31 is summarized as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------- -------- --------
(In thousands)
<S> <C> <C> <C>
Passbook $ 1,181 $ 1,291 $ 1,355
NOW and money market
deposit accounts 732 750 758
Certificates of deposit 8,281 7,965 7,660
-------- -------- -------
$ 10,194 $ 10,006 $ 9,773
======== ======== =======
</TABLE>
Maturities of outstanding certificates of deposit at March 31 are summarized
as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
(In thousands)
<S> <C> <C>
Less than one year $ 91,867 $ 99,684
One to three years 51,868 37,486
Over three years 4,265 3,996
-------- --------
$148,000 $141,166
======== ========
</TABLE>
NOTE G - ADVANCES FROM THE
FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at March 31, 1998 and
1997 by pledges of certain residential mortgage loans totaling $24.0 million and
the Bank's investment in Federal Home Loan Bank stock, are summarized as
follows:
<TABLE>
<CAPTION>
Interest Maturing in year
Rate ending March 31, 1998 1997
---------------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
5.55% - 5.85% 1998 $ -- $87,000
5.60% - 6.15% 1999 14,000 7,000
6.20% - 6.35% 2001 2,000 2,000
------- -------
$16,000 $16,000
------- -------
Weighted-average interest rate 5.94% 5.91%
------- -------
</TABLE>
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:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed
at statutory rate $ 953 $ 366 $ 743
Increase (decrease) in taxes
resulting from:
Tax exempt interest (3) (3) (4)
Other 3 4 35
----- ----- -----
Federal income tax provision
per financial statements $ 953 $ 367 $ 774
===== ===== =====
</TABLE>
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T.)
March 31, 1998, 1997 and 1996
The composition of the Company's net deferred tax liability at March 31 is as
follows:
<TABLE>
<CAPTION>
1998 1997
------ ------
(In thousands)
<S> <C> <C>
Taxes (payable) refundable on temporary
differences at statutory rate:
Deferred tax assets
Deferred loan origination fees $ 262 $ 238
General loan loss allowance 240 233
Other 48 53
----- -----
Deferred tax assets 550 524
Deferred tax liabilities
Federal Home Loan Bank
stock dividends (524) (460)
Book/tax depreciation differences (127) (104)
Unrealized gains on securities
designated as available for sale (9) (16)
Percentage of earnings bad debt
deduction (67) (67)
Mortgage servicing rights (57) (25)
----- -----
Deferred tax liabilities (784) (672)
----- -----
Total deferred tax liability $(234) $(148)
----- -----
</TABLE>
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, 1998.
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, 1998. See Note L for additional information regarding
future percentage of earnings bad debt deductions.
NOTE I - COMMITMENTS
The Bank 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 Bank's involvement in such
financial instruments.
The Bank'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 Bank
uses the same credit policies in making commitments and conditional obligations
as those utilized for on-balance-sheet instruments.
At March 31, 1998 and 1997, the Bank had outstanding commitments to originate
fixed rate loans of approximately $6.6 million and $1.5 million, respectively,
and adjustable rate loans of approximately $140,000 and $638,000, respectively.
Additionally, the Bank had unused lines of credit under home equity loans of
$9.8 million at March 31, 1998. 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 Bank evaluates each customer's creditworthiness
on a case-by-case basis. The amount of collateral obtained, if it is deemed
necessary by the Bank 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.
NOTE J - REGULATORY CAPITAL
The Bank is 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 its financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Bank must meet
specific capital guidelines that involve quantitative measures of the Bank's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors.
The minimum capital standards of the OTS generally require the maintenance of
regulatory capital sufficient to meet each of three tests, hereinafter described
as the tangible capital requirement, the core capital requirement and
36
<PAGE>
the risk-based capital requirement. The tangible capital requirement provides
for minimum tangible capital (defined as stockholders' equity less all
intangible assets) equal to 1.5% of adjusted total assets. The core capital
requirement provides for minimum core capital (tangible capital plus certain
forms of supervisory goodwill and other qualifying intangible assets) equal to
3.0% of adjusted total assets. An OTS proposal, if adopted in present form,
would increase the core capital requirement to a range of 4.0% - 5.0% of
adjusted total assets for substantially all savings associations. Management
anticipates no material change to the Bank's excess regulatory capital position
as a result of this proposed change in the regulatory capital requirement. The
risk-based capital requirement provides for the maintenance of core capital plus
general loss allowances equal to 8.0% of risk-weighted assets. In computing
risk-weighted assets, the Bank multiplies the value of each asset on its
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, 1998 and 1997, management believes that the Bank met all
capital adequacy requirements to which it is subject.
<TABLE>
<CAPTION>
As of March 31, 1998
To be "well-capitalized"
For capital under prompt corrective
Actual adequacy purposes action provisions
-------------- ------------------------------- --------------------------------
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Greater Greater Greater Greater
than or than or than or than or
Tangible capital $23,637 9.1% equal to $ 3,885 equal to 1.5% equal to $12,951 equal to 5.0%
Core capital $23,637 9.1% $ 7,770 3.0% $15,541 6.0%
Risk-based capital $24,343 17.4% $11,210 8.0% $14,013 10.0%
<CAPTION>
As of March 31, 1998
To be "well-capitalized"
For capital under prompt corrective
Actual adequacy purposes action provisions
-------------- ------------------------------- --------------------------------
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Greater Greater Greater Greater
than or than or than or than or
Tangible capital $23,078 9.2% equal to $ 3,782 equal to 1.5% equal to $12,608 equal to 5.0%
Core capital $23,078 9.2% $ 7,565 3.0% $15,130 6.0%
Risk-based capital $23,762 17.4% $10,894 8.0% $13,617 10.0%
</TABLE>
The Bank's management believes that, under the current regulatory capital
regulations, the Bank will continue to meet its minimum capital requirements ins
the foreseeable future. However, events beyond the control of the Bank, such as
increased interest rates or a downturn in the economy in the Bank's market area,
could adversely affect future earnings and, consequently, the ability to meet
future minimum regulatory capital requirements.
Regulations of the OTS impose limitations on the payment of dividends and
other capital distributions by savings associations. Under such regulations, a
savings association that, immediately prior to, and on a pro forma basis after
giving effect to, a proposed capital distribution, has total capital (as defined
by OTS regulation) that is equal to or greater than the amount of its fully
phased-in capital requirement is generally permitted without OTS approval (but
subsequent to 30 days prior notice to the OTS of the planned dividend) to make
capital distributions during a calendar year in the amount of (i) up to 100% of
its net earnings to date during the year plus an amount equal to one-half of the
amount by which its total capital to assets ratio exceeded its fully phased-in
capital to assets ratio at the beginning of the year (ii) or 75% of its net
earnings for the most recent four quarters. Pursuant to such OTS dividend
regulations, the Bank had the ability to pay dividends of approximately $7.8
million at March 31, 1998.
NOTE K - STOCK OPTION PLANS
The Company has an incentive Stock Option Plan that provides for the issuance
of 80,042 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 34,303 (adjusted) shares of authorized, but unissued shares of
common stock. The number of shares under option have been adjusted to reflect
the 5% stock dividend declared and paid during fiscal 1997, the three-for-two
stock split effected during fiscal 1998, and the 10% stock dividend declared
during April, 1998.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T.)
March 31, 1998, 1997 and 1996
On April 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-
Based Compensation," which contains 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 year ended March 31, 1998, 1997 and 1996.
A summary of the status of the Company's stock option plans as of March 31,
1998, 1997 and 1996, and changes during the periods ending on those dates is
presented below:
<TABLE>
<CAPTION>
1998 1997 1996
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 70,896 $5.245 78,430 $5.245 98,998 $5.245
Granted - - - - -
Exercised 11,096 5.245 7,534 5.245 20,568 5.245
Forfeited 2,135 5.245 - - - -
------ ------ -------- ------ ------ ------
Outstanding at end of year 57,665 $5.245 70,896 $5.245 78,430 $5.245
------ ------ -------- ------ ------ ------
Options exercisable at year-end 57,665 $5.245 70,896 $5.245 78,430 $5.245
------ ------ -------- ------ ------ ------
Weighted-average fair value of
options granted during the year N/A N/A N/A
</TABLE>
The following information applies to options outstanding at March 31, 1998:
<TABLE>
<CAPTION>
<S> <C>
Number outstanding 57,665
Range of exercise prices $5.245
Weighted-average exercise price $5.245
Weighted-average remaining contractual life 5.25 years
</TABLE>
At March 31, 1998, all of the stock options granted were subject to exercise
at the discretion of the grantees and expire in 2003.
NOTE L - LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Bank and of other savings associations are insured
by the FDIC through the Savings Association Insurance Fund ("SAIF"). The
reserves of the SAIF were below the level required by law, because a significant
portion of the assessments paid into the fund were used to pay the cost of prior
thrift failures. The deposit accounts of commercial banks are insured by the
FDIC through the Bank Insurance Fund ("BIF"), except to the extent such banks
have acquired SAIF deposits. The reserves of the BIF met the level required by
law in May 1995. As a result of the respective reserve levels of the funds,
deposit insurance assessments paid by healthy savings associations exceeded
those paid by healthy commercial banks by approximately $.19 per $100 in
deposits in 1995. In 1996 and 1997, no BIF assessments were required for
healthy commercial banks except for a $2,000 minimum fee.
Legislation was enacted to recapitalize the SAIF that provided for a special
assessment totaling $.657 per $100 of SAIF deposits held at March 31, 1995, in
order to increase SAIF reserves to the level required by law. The Bank held
$204.5 million in deposits at March 31, 1995, resulting in an assessment of
approximately $1.3 million, or $887,000 after tax, which was charged to
operations in fiscal 1997.
Under separate legislation related to the recapitalization plan, the Bank is
required to recapture as taxable income approximately $197,000 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. The Bank has provided deferred taxes for this amount and will be
permitted to amortize the recapture of the bad debt reserve in taxable income
over six years.
38
<PAGE>
NOTE M - 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, 1998, and the results of its
operations for the period then ended.
WAYNE SAVINGS BANCSHARES, INC.
STATEMENT OF FINANCIAL CONDITION
March 31, 1998
(In thousands)
<TABLE>
<CAPTION>
<S> <C>
ASSETS
Cash and due from banks $ 46
Interest-bearing deposits in
other financial institutions 800
Investment in subsidiary 23,671
Prepaid expenses and other 77
-------
Total assets $24,594
-------
LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $ 168
Stockholders' equity
Common stock and additional
paid-in capital 8,221
Retained earnings 16,198
Less shares held in treasury (357 shares) (10)
Unrealized gains on securities
designated as available for sale, net 17
-------
Total stockholders' equity 24,426
-------
Total liabilities and stockholders'
equity $24,594
=======
</TABLE>
WAYNE SAVINGS BANCSHARES, INC.
STATEMENT OF EARNINGS
For the period ended March 31, 1998
(In thousands)
<TABLE>
<CAPTION>
<S> <C>
Income
Interest income $ 5
Equity in earnings of subsidiary 580
-------
Total revenue 585
General and administrative expenses 64
-------
Earnings before income taxes 521
Federal income tax credits (20)
-------
NET EARNINGS $ 541
=======
</TABLE>
WAYNE SAVINGS BANCSHARES, INC.
STATEMENT OF CASH FLOWS
For the period ended March 31, 1998,
(In thousands)
<TABLE>
<CAPTION>
<S> <C>
Cash flows from operating activities:
Net earnings for the period $ 541
Adjustments to reconcile net earnings
to net cash used in operating activities
Undistributed earnings of
consolidated subsidiary (580)
Decrease in cash due to changes in:
Prepaid expenses and other assets (24)
------
Net cash used in operating
activities (63)
Cash flows provided by (used in)
investing activities:
Acquisition of Wayne Savings
Community Bank (24)
Effect of corporate reorganization 1,100
------
Net cash provided by investing activities 1,076
Cash flows provided by (used in)
financing activities:
Payment of dividends on common stock (169)
Proceeds from exercise of stock options 2
------
Net cash used in financing activities (167)
Net increase in cash and cash equivalents 846
Cash and cash equivalents at beginning of period -
------
Cash and cash equivalents at end of period $ 846
======
</TABLE>
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T.)
March 31, 1998, 1997 and 1996
NOTE N - QUARTERLY RESULTS OF OPERATIONS (unaudited)
The following table summarizes the Company's quarterly results for the
fiscalyears ended March 31, 1998 and 1997. Certain amounts, as previously
reported, have been reclassified to conform to the 1998 presentation.
<TABLE>
<CAPTION>
For the three month periods ended
--------------------------------------------------------------------
June 30, 1997 September 30, 1997 December 31, 1997 March 31, 1998
------------- ------------------ ----------------- --------------
(In thousands, except share data)
<S> <C> <C> <C> <C>
Total interest income $4,792 $4,808 $4,778 $4,858
Total interest expense 2,754 2,754 2,755 2,821
------ ------ ------ ------
Net interest income 2,038 2,054 2,023 2,037
Provision for losses on loans 15 15 15 15
Other income 208 229 220 197
General, administrative and other expense 1,466 1,519 1,527 1,632
------ ------ ------ ------
Earnings before income taxes 765 749 701 587
Federal income taxes 261 253 240 199
------ ------ ------ ------
Net earnings $ 504 $ 496 $ 461 $ 388
====== ====== ====== ======
Earnings per share
Basic $ .20 $ .20 $ .18 $ .17
====== ====== ====== ======
Diluted $ .20 $ .20 $ .17 $ .16
====== ====== ====== ======
<CAPTION>
For the three month periods ended
--------------------------------------------------------------------
June 30, 1996 September 30, 1996 December 31, 1996 March 31, 1997
------------- ------------------ ----------------- --------------
(In thousands, except share data)
<S> <C> <C> <C> <C>
Total interest income $4,730 $4,661 $4,649 $4,679
Total interest expense 2,646 2,626 2,640 2,698
------ ------ ------ ------
Net interest income 2,084 2,035 2,009 1,981
Provision for losses on loans 5 5 5 5
Other income 139 155 146 134
General, administrative and other expense 1,567 3,018 1,540 1,462
------ ------ ------ ------
Earnings (loss) before income taxes
(benefits) 651 (833) 610 648
Federal income taxes (benefits) 221 (283) 209 220
------ ------ ------ ------
Net earnings (loss) $ 430 $ (550) $ 401 $ 428
====== ====== ====== ======
Earnings (loss) per share
Basic $ .18 $ (.23) $ .16 $ .18
====== ====== ====== ======
Diluted $ .18 $ (.23) $ .16 $ .17
====== ====== ====== ======
</TABLE>
40
<PAGE>
[LOGO OF WAYNE SAVINGS APPEARS HERE]
<PAGE>
EXHIBIT 23
CONSENT OF GRANT THORNTON, LLP
<PAGE>
EXHIBIT 23
ACCOUNTANTS' CONSENT
We have issued our report dated May 29, 1998, 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, 1998. We
hereby consent to the incorporation by reference of said report in
Corporation's Form S-8 (333-41479).
/s/ Grant Thornton LLP
- ---------------------------------------
Cincinnati, Ohio
June 26, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1998
<PERIOD-START> APR-01-1997
<PERIOD-END> MAR-31-1998
<CASH> 1,422
<INT-BEARING-DEPOSITS> 7,647
<FED-FUNDS-SOLD> 4,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,032
<INVESTMENTS-CARRYING> 22,144
<INVESTMENTS-MARKET> 22,080
<LOANS> 208,600
<ALLOWANCE> 721
<TOTAL-ASSETS> 259,752
<DEPOSITS> 217,621
<SHORT-TERM> 14,000
<LIABILITIES-OTHER> 1,705
<LONG-TERM> 2,000
2,258
0
<COMMON> 0
<OTHER-SE> 22,168
<TOTAL-LIABILITIES-AND-EQUITY> 259,752
<INTEREST-LOAN> 17,068
<INTEREST-INVEST> 1,080
<INTEREST-OTHER> 1,088
<INTEREST-TOTAL> 19,236
<INTEREST-DEPOSIT> 10,194
<INTEREST-EXPENSE> 11,084
<INTEREST-INCOME-NET> 8,152
<LOAN-LOSSES> 60
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,144
<INCOME-PRETAX> 2,802
<INCOME-PRE-EXTRAORDINARY> 1,849
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,849
<EPS-PRIMARY> .75
<EPS-DILUTED> .73
<YIELD-ACTUAL> 3.34
<LOANS-NON> 300
<LOANS-PAST> 8
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 914
<CHARGE-OFFS> 349
<RECOVERIES> 96
<ALLOWANCE-CLOSE> 721
<ALLOWANCE-DOMESTIC> 15
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 706
</TABLE>
