<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, 1999
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to ______________________
Commission File No. 0-23433
WAYNE SAVINGS BANCSHARES, INC.
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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. [ ].
The issuer's revenues for the fiscal year ended March 31, 1999, were $20.3
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 11, 1999,
was approximately $16.8 million. This amount excludes shares held by Wayne
Savings Bankshares, M.H.C., and the Registrant's directors and senior officers.
As of June 11, 1999, there were issued and outstanding 2,603,056 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, 1999 (Parts II and III).
2. Proxy Statement for the 1999 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, 1999, the Company had total
assets of $271.3 million, total deposits of $235.3 million, and stockholders'
equity of $25.0 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.
Village Savings Bank, F.S.B.
Village Savings Bank, F.S.B. ("Village") is a federally-chartered stock
savings bank headquartered in North Canton, Ohio that was chartered as a wholly-
owned subsidiary of the Bank in July, 1998. Village's deposits are insured by
the FDIC under the SAIF. Village is a member of the FHLB system.
Village is a community-oriented savings institution offering traditional
financial services to its local community. Village's primary lending and deposit
gathering area includes North Canton, Jackson Township and Plain Township, which
are all located in Stark County. Village's principal business activity consists
of originating one- to four-family residential real estate loans in its market
area. Village also originates multi-family residential and non-residential real
estate loans, although such loans constitute a small portion of Village's
lending activities. Village also
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originates consumer loans, and to a lesser extent, construction loans. Village
also invests in mortgage-backed securities and currently maintains a significant
portion of its assets in liquid investments, such as United States Government
securities, federal funds, and deposits in other financial institutions.
Village's principal executive office is located at 1265 South Main Street,
North Canton, Ohio, and its telephone number at that address is (330) 494-5262.
Market Area/Local Economy
The Bank, headquartered in Wooster, Ohio, operates in Wayne, Ashland,
Medina and Holmes Counties in north central Ohio. Wooster, Ohio is located in
Wayne County and is approximately midway between Cleveland and Columbus, Ohio.
Village, headquartered in North Ca
nton, Ohio, operates in Stark County in north
central Ohio.
Wayne County is characterized by a diverse economic base, which is not
dependent on any particular industry. It is one of the leading agricultural
counties in the state. In addition, since 1892, Wooster has been the
headquarters of the Ohio Agricultural Research and Development Center, the
agricultural research arm of The Ohio State University. Wayne County is also the
home base of such nationally known companies as Rubbermaid Incorporated, J.M.
Smucker Company (located in the City of Orrville) and the Wooster Brush Company.
It is also the home of many industrial plants, including those of Packaging
Corporation of America, Morton Salt, Bell and Howell Micro Photo Division,
FritoLay, Inc., and The Gerstenslager Company. Wayne County is also known for
its excellence in education. The College of Wooster was founded in 1866. Other
quality educational opportunities are offered by the Agricultural Technical
Institute of Ohio State University, an
d 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 Ak
ron. Due to its proximity to Akron and Cleveland, a majority
of Medina County's labor force is employed in these two cities. The Bank
operates one full-service office in Medina County, which is located in the
Village of Lodi.
Holmes County, located directly south of Wayne County, has a mostly rural
economy. The local economy depends mostly upon agriculture, light manufacturing,
fabrics, and wood products. Because of the scenic beauty and a large Amish
settlement, revenues from tourism are becoming increasingly significant. The
county is also noted for its many fine cheese-making operations. A large number
of Holmes County residents are employed in Wayne County. The City of Millersburg
is the county seat and the location of one of the Bank's branch offices.
Stark County, located directly east of Wayne County, is characterized by a
diverse economy and over 1,500 different products are manufactured in the
county. Stark County also has a strong agricultural base, and ranks fourth in
Ohio in the p
roduction of dairy products. The major employers in North Canton
are the Hoover Company, Diebold Incorporated (a major manufacturer of bank
security products and automated teller machines) and the Timken Company (a
world-wide manufacturer of tapered roller bearings and specialty steels).
Jackson Township is the home to the Belden Village Shopping Center, while Plain
Township is a residential and agricultural area with a few widely scattered
light industries.
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Lending Activities
General. Historically, the principal lending activity of the Company has
been the origination of fixed and adjustable rate mortgage ("ARM") loans
collateralized by one- to four-family residential properties located in its
market area. The Company originates ARM loans for retention in its portfolio,
and fixed rate loans that are eligible for resale in the secondary mortgage
market. The Company also originates loans collateralized by non-residential and
multi-family residential real estate as well as commercial business loans;
however, such lending has been reduced significantly in recent years and
currently constitutes a relatively small portion of the Company's lending
activities. The Company also originates consumer loans to broaden services
offered to customers and to decrease the Company's interest rate risk exposure.
The Company has sought to make its interest-earning assets more interest
rate sensitive by originating adjustable rate loans, such as ARM loans, home
equity loans, and medium-term consumer loans. The Company also purchases
mortgage-backed securities generally with estimated remaining average lives of 5
years or less. At March 31, 1999, approximately $61.9 million, or 27.1%, of the
Company's total loans and mortgage-backed securities, due after March 31, 2000,
consisted of loans or securities with adjustable interest rates.
The Company continues actively to originate fixed rate mortgage loans,
generally with 15 to 30 year terms to maturity, collateralized by one- to four-
family residential properties. One- to four-family fixed rate residential
mortgage loans generally are originated and underwritten according to standards
that allow the Company to resell such loans in the secondary mortgage market for
purposes of managing interest rate risk and liquidity. The majority of such one-
to four-family fixed rate residential mortgage loans, however, are retained by
the Company. The Company retains servicing on its sold mortgage loans and
realizes monthly service fee income. The Company also originates interim
construction loans on one- to four-family residential properties.
Analysis of Loan Portfolio. Set forth below are selected data relating to
the composition of the Company's loan portfolio by type of loan as of the dates
indicated.
<TABLE>
<CAPTION>
At March 31,
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1999 1998 1997
-------- -------- --------
$ % $ % $ %
-------- -------- -------- -------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage loans:
One- to four-family residential/(1)/... $187,638 84.82% $180,895 85.58% $184,381 85.98%
Residential construction loans......... 7,668 3.47 3,963 1.87 5,717 2.67
Multi-family residential............... 7,086 3.20 7,091 3.36 5,491 2.56
Non-residential real estate/land/(2)/.. 5,610 2.53 5,838 2.76 6,519 3.04
-------- ------- -------- ------- -------- -------
Total mortgage loans.................. 208,002 94.02 197,787 93.57 202,108 94.25
Other loans:
Consumer loans......................... 8,415 3.80 10,477 4.96 11,568 5.39
Commercial business loans.............. 4,810 2.18 3,112 1.47 769 .36
-------- ------- -------- ------- -------- -------
Total other loans..................... 13,225 5.98 13,589 6.43 12,337 5.75
-------- ------- -------- ------- -------- -------
Total loans before net items............ 221,227 100.00% 211,376 100.00% 214,445 100.00%
======= ======= =======
Less:
Loans in process....................... 4,600 2,088 2,111
Deferred loan origination fees......... 1,855 1,882 2,016
Allowance for loan losses.............. 678 721 914
-------- -------- --------
Total loans receivable, net........... $214,094 $206,685 $209,404
======== ======== ========
Mortgage-backed securities, net/(3)/.... $ 7,230 $ 4,275 $ 873
======== ======== ========
</TABLE>
/(1)/ Includes equity loans collateralized by second mortgages in the aggregate
amount of $8.7 million, $7.9 million and $7.3 million, as of March 31,
1999, 1998 and 1997, respectively. Such loans have been underwritten on
substantially the same basis as the Company's first mortgage loans.
/(2)/ Includes land loans of $951,000, $584,000 and $449,000 as of March 31,
1999, 1998, and 1997, 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, 1999, regarding
the dollar amount of loans and mortgage-backed securities maturing in the
Company's portfolio based on their contractual terms to maturity. Demand loans,
loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less. Adjustable and floating rate
loans are included in the period in which interest rates are next scheduled to
adjust rather than in which they mature, and fixed rate loans and mortgage-
backed securities are included in the period in which the final contractual
repayment is due. Fixed rate mortgage-backed securities are assumed to mature in
the period in which the final contractual payment is due on the underlying
mortgage.
<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.................................. $47,357 $ 317 $ -- $ -- $ -- $ -- $ 47,674
Fixed....................................... 14 513 3,151 18,011 59,266 60,450 141,404
Multi-family residential and nonresidential:
Adjustable.................................. 10,386 -- -- -- -- -- 10,386
Fixed....................................... 2 12 731 1,261 106 2,112
Second Mortgage Loans......................... 14 135 224 1,361 6 -- 1,740
Other Loans:..................................
Commercial................................... 3,138 7 174 4 789 -- 4,111
Consumer..................................... 1,414 1,351 1,060 1,810 -- -- 5,640
------- ------ ------ ------- ------- -------- --------
Total loans................................... $62,329 $2,336 $5,340 $22,446 $60,166 $ 60,450 $213,067
======= ====== ====== ======= ======= ======== ========
Mortgage-backed securities/(2)/............... $ 535 $ 356 $1,358 $ 1,440 $ 1,925 $ 1,530 $ 7,144
======= ====== ====== ======= ======= ======== =========
</TABLE>
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/(1)/ Amounts shown are net of loans in process of $4.6 million, include loans
held for sale, and do not include $269,000 of non-performing loans.
/(2)/ Includes mortgage-backed securities available for sale. Does not include
premiums of $106,000, discounts of $5,000 and unrealized losses of $4,000.
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The following table sets forth at March 31, 1999 the dollar amount of all
fixed rate and adjustable rate loans due after March 31, 2000.
<TABLE>
<CAPTION>
Fixed Adjustable Total
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(In Thousands)
<S> <C> <C> <C>
Mortgage loans/(1)/:
One- to four-family residential.. $141,390 $47,643 $189,033
Multi-family residential......... 2,110 10,385 12,495
Other loans:
Commercial business.............. 973 -- 973
Consumer......................... 4,998 501 5,499
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Total loans..................... $149,471 $58,529 $208,000
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Mortgage-backed securities/(2)/... $ 6,609 $ -- $ 6,609
======== ======= ========
</TABLE>
_____________________________
/(1)/ Includes loans held for sale.
/(2)/ Includes mortgage-backed securities available for sale.
One- to Four-Family Residential Real Estate Loans. The Company's primary
lending activity consists of the origination of one- to four-family, owner-
occupied, residential mortgage loans on properties located in the Company's
market area. The Company generally does not originate one- to four-family
residential loans on properties outside of its market area. At March 31, 1999,
the Company had $187.6 million, or 84.8%, of its total loan portfolio invested
in one- to four-family residential mortgage loans.
The Company's fixed rate loans generally are originated and underwritten
according to standards that permit resale in the secondary mortgage market.
Whether the Company can or will sell fixed rate loans into the secondary market,
however, depends on a number of factors including but not limited to the
Company's portfolio mix, gap and liquidity positions, and market conditions.
Moreover, the Company is more likely to retain fixed rate loans if its one year
gap is positive. The Company's fixed rate mortgage loans are amortized on a
monthly basis with principal and interest due each month. One- to four-family
residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms because borrowers may refinance or prepay
loans at their option. The Company's secondary market activities over the past
three years have been limited to sales of $15.9 million, $7.1 million and $1.9
million for the fiscal years ended March 31, 1999, 1998 and 1997, respectively.
Such sales generally constituted current period originations. Mortgage loans
held for sale at March 31, 1999 and 1998 totaled $1.6 million and $1.2 million,
respectively. No mortgage loans were held for sale as of March 31, 1997.
The Company currently offers one- to four-family residential mortgage loans
with terms typically ranging from 15 to 30 years, and with adjustable or fixed
interest rates. Originations of fixed rate mortgage loans versus ARM loans are
monitored on an ongoing basis and are affected significantly by the level of
market interest rates, customer preference, the Company's interest rate gap
position, and loan products offered by the Company's competitors. Particularly
in a relatively low interest rate environment, borrowers typically prefer fixed
rate loans to ARM loans. Therefore, even if management's strategy is to
emphasize ARM loans, market conditions may be such that there is greater demand
for fixed rate mortgage loans. During the year ended March 31, 1999, the
Company's ARM portfolio decreased by $7.7 million, or 11.1%.
The Company'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 Company'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 Company has used
different interest indices for ARM loans, such as the National Average Contract
Rate for Previously Occupied Homes and the National Average Cost of Funds.
Consequently, the interest rate adjustments on the Company's portfolio of ARM
loans do not reflect changes in a particular interest rate index. The Company
does not originate ARM loans with initially discounted rates. The Company
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.
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One- to four-family residential ARM loans totaled $47.7 million, or 21.6%, of
the Company's total loan portfolio at March 31, 1999.
The primary purpose of offering ARM loans is to make the Company's loan
portfolio more interest rate sensitive. However, as the interest income earned
on ARM loans varies with prevailing interest rates, such loans do not offer the
Company predictable cash flows as would long-term, fixed rate loans. ARM loans
carry increased credit risk associated with potentially higher monthly payments
by borrowers as general market interest rates increase. It is possible,
therefore, that during periods of rising interest rates, the risk of default on
ARM loans may increase due to the upward adjustment of interest costs to the
borrower. Management believes that the Company's credit risk associated with
its ARM loans is reduced because the Company has a 3% cap on interest rate
increases during the life of its ARM loans.
The Company also offers home equity loans and equity lines of credit
collateralized by a second mortgage on the borrower's principal residence. In
underwriting these home equity loans, the Company requires that the maximum
loan-to-value ratios, including the principal balances of both the first and
second mortgage loans, not exceed 85%. The home equity loan portfolio consists
of adjustable rate loans, which use the Ohio Average Cost of Funds for SAIF-
Insured Savings Association and the prime rate as published in The Wall Street
Journal as interest rate indices. Home equity loans include fixed term
adjustable rate loans, as well as lines of credit. As of March 31, 1999, the
Company's equity loan portfolio totaled $8.7 million, or 4.6%, of its one- to
four-family mortgage loan portfolio.
The Company's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the Company
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells or otherwise disposes of the underlying
real property serving as security for the loan. Due-on-sale clauses are an
important means of adjusting the rates on the Company's fixed rate mortgage loan
portfolio.
Regulations limit the amount that a savings association may lend relative
to the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. The Company's lending policies limit
the maximum loan-to-value ratio on both fixed rate and ARM loans without private
mortgage insurance to 80% of the lesser of the appraised value or the purchase
price of the property to serve as collateral for the loan. However, the Company
makes one- to four-family real estate loans with loan-to-value ratios in excess
of 80%. For 15 year fixed rate and all ARM loans with loan-to-value ratios of
80.01% to 90%, and 90.01% to 95%, the Company requires the first 20%, and 25%,
respectively, of the loan to be covered by private mortgage insurance. For 30
year fixed rate loans with loan-to-value ratios of 80.01% to 85%, 85.01% to 90%,
and 90.01% to 95%, the Company requires the first 12%, 25%, and 30%,
respectively, of the loan to be covered by private mortgage insurance. The
Company requires fire and casualty insurance, as well as title insurance
regarding good title, on all properties securing real estate loans made by the
Company and flood insurance, where applicable.
Multi-Family Residential Real Estate Loans. In recent years, the Company
has significantly reduced its originations of multi-family real estate loans.
Loans secured by multi-family real estate constituted approximately $7.1
million, or 3.2%, of the Company's total loan portfolio at March 31, 1999. The
Company's multi-family real estate loans are secured by multi-family residences,
such as apartment buildings. At March 31, 1999, 89.1% of the Company's multi-
family loans were secured by properties located within the Company's market
area. At March 31, 1999, the Company's multi-family real estate loans had an
average balance of $207,000, and the largest multi-family real estate loan had a
principal balance of $1.2 million. Multi-family real estate loans currently are
offered with adjustable interest rates or short term balloon maturities,
although in the past the Company originated fixed rate long term multi-family
real estate loans. The terms of each multi-family loan are negotiated on a case
by case basis, although such loans typically have adjustable interest rates tied
to a market index, and amortize over 15 to 25 years. The Company currently does
not emphasize multi-family real estate construction loans; however, the
Company's policies do not preclude such lending.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one- to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
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factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family
real estate is typically dependent upon the successful operation of the related
real estate property. If the cash flow from the project is reduced, the
borrower's ability to repay the loan may be impaired.
Non-Residential Real Estate and Land Loans. The Company also has reduced
significantly its non-residential real estate loan originations in recent years.
Loans secured by non-residential real estate constituted approximately $4.7
million, or
2.1%, of the Company's total loan portfolio at March 31, 1999. The
Company's non-residential real estate loans are secured by improved property
such as offices, small business facilities, and other non-residential buildings.
At March 31, 1999, 77.9% of the Company's non-residential real estate loans were
secured by properties located within the Company's market area. At March 31,
1999, the Company's non-residential loans had an average balance of $90,000 and
the largest non-residential real estate loan had a principal balance of
$953,000. The terms of each non-residential real estate loan are negotiated on
a case by case basis. Non-residential real estate loans are currently offered
with adjustable interest rates or short term balloon maturities, although in the
past the Company has originated fixed rate long term non-residential real estate
loans. Non-residential real estate loans originated by the Company generally
amortize over 15 to 25 years. The Company currently does not emphasize non-
reside
ntial real estate construction loans; however, the Company's policies do
not preclude such lending.
Loans secured by non-residential real estate generally involve a greater
degree of risk than one- to four-family residential mortgage loans and carry
larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by non-residential
real estate is typically dependent upon the successful operation of the related
real estate project. If the cash flow from the project is reduced, the
borrower's ability to repay the loan may be impaired.
The Company also originates a limited number of land loans secured by
individual improved and unimproved lots for future residential construction.
Land loans are gen
erally offered with a fixed rate and with terms of up to 5
years. Land loans totaled $951,000 at March 31, 1999.
Residential Construction Loans. To a lesser extent, the Company originates
loans to finance the construction of one- to four-family residential property.
At March 31, 1999, the Company had $7.7 million, or 3.5%, of its total loan
portfolio invested in interim construction loans. The Company makes
construction loans to private individuals and to builders. Loan proceeds are
disbursed in increments as construction progresses and as inspections warrant.
Construction loans are typically structured as permanent one- to four-family
loans originated by the Company with a 12-month construction phase.
Accordingly, upon completion of the construction phase, there is no change in
interest rate or term to maturity of the original construction loan, nor is a
new permanent loan originated.
Commercial Loans. Commercial loans totaled $4.8 million, or 2.2% of the
Company's total loan portfolio
at March 31, 1999. The Company does not emphasize
commercial lending, but evaluates and meet the needs of its customer base.
Consumer Loans. Ohio savings associations are authorized to invest in
secured and unsecured consumer loans in an aggregate amount which, when combined
with investments in commercial paper and corporate debt 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, 1999, consumer loans totaled $8.4 million, or 3.8%, of the
Company's total loan portfolio. The principal types of consumer loans offered by
the Company are fixed rate and fixed term second mortgage loans, auto and truck
loans, education loans, credit card loans, unsecured personal loans, and loans
secured by deposit accounts. Consumer loans are offered primarily on a fixed
rate basis with maturities generally of less than ten years. The Company's
second mortgage consumer loans
are secured by the borrower's principal residence
with a maximum
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<PAGE>
loan-to-value ratio, including the principal balances of both the first and
second mortgage loans, of 80% or less. Such loans are offered on a fixed rate
basis with terms of up to ten years. At March 31, 1999, second mortgage loans
totaled $1.7 million, or 20.2%, of consumer loans.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's credit history and an assessment of
ability to meet existing obligations and payments on the proposed loan. The
quality and stability of the applicant's monthly income are determined by
analyzing the gross monthly income from primary employment, and additionally
from any verifiable secondary income. Creditworthiness of the applicant is of
primary consideration; however, the underwriting process also includes a
comparison of the value of the collateral in relation to the proposed loan
amount.
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats, and
recreational vehicles. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly reduced
based upon the condition of the automobiles and the lack of demand for used
automobiles. The Company adds a general provision on a regular basis to its
consumer loan loss allowance, based on general economic conditions and prior
loss experience. See "--Delinquencies and Classified Assets--Non-Performing
Assets," and "--Classification of Assets" for information regarding the
Company's loan loss experience and reserve policy.
Mortgage-Backed Securities. The Company also invests in mortgage-backed
securities issued or guaranteed by the United States Government or agencies
thereof. Investments in mortgage-backed securities are made either directly or
by exchanging mortgage loans in the Company's portfolio for such securities.
These securities consist primarily of fixed rate mortgage-backed securities
issued or guaranteed by the Federal National Mortgage Association ("FNMA"),
Federal Home Loan Mortgage Corporation ("FHLMC"), and the Government National
Mortgage Association ("GNMA"). Total mortgage-backed securities, including
those designated as available for sale, increased from $4.3 million at March 31,
1998 to $7.2 million at March 31, 1999.
The Company's objectives in investing in mortgage-backed securities varies
from time to time depending upon market interest rates, local mortgage loan
demand, and the Company's level of liquidity. Mortgage-backed securities are
more liquid than whole loans and can be readily sold in response to market
conditions and interest rates. Mortgage-backed securities purchased by the
Company also have lower credit risk because principal and interest are either
insured or guaranteed by the United States Government or agencies thereof.
Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as real estate broker
referrals, existing customers, borrowers, builders, attorneys, and walk-in
customers. Upon receiving a loan application, the Company obtains a credit
report and employment verification to verify specific information relating to
the applicant's employment, income, and credit standing. In the case of a real
estate loan, an appraiser approved by the Company appraises the real estate
intended to secure the proposed loan. An underwriter in the Company's loan
department checks the loan application file for accuracy and completeness, and
verifies the information provided. One- to four-family and multi-family
residential, and commercial real estate loans, for up to $150,000, may be
approved by the manager of the mortgage loan 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, 1999, the Company had commitments to originate $9.2 million of loans.
-8-
<PAGE>
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property serving as collateral, which insurance must be
maintained during the full term of the loan. A title search of the property is
required on all loans secured by real property.
Although in the past the Company has purchased loans originated by other
lenders, the Company has not purchased any such loans in at least 10 years. At
March 31, 1999, less than 2% of all loans in the Company's portfolio were
purchased from others and the majority of such loans were collateralized by
properties located in Ohio.
Origination, Purchase and Sale of Loans and Mortgage-Backed Securities.
The table below shows the Company's loan origination, purchase and sales
activity for the periods indicated.
<TABLE>
<CAPTION>
At March 31,
-------------------------------
1999 1998 1997
--------- --------- ---------
(In Thousands)
<S> <C> <C> <C>
Total loans receivable, net at beginning of period.. $206,685 $209,404 $206,513
Loans originated:
One- to four-family residential/(1)/............... 60,277 42,561 37,302
Multi-family residential/(2)/...................... 1,930 600 1,268
Non-residential real estate/land................... 179 674 1,586
Consumer loans..................................... 6,498 6,101 6,269
Commercial loans................................... 3,681 4,287 1,344
-------- -------- --------
Total loans originated........................... 72,565 54,223 47,769
Loans sold:
Whole loans........................................ (15,860) (7,066) (1,930)
-------- -------- --------
Total loans sold................................. (15,860) (7,066) (1,930)
Mortgage loans transferred to REO................... (58) (162) --
Loan repayments..................................... (48,776) (49,359) (43,274)
Other loan activity, net............................ (462) (355) 326
-------- -------- --------
Total loans receivable, net at end of period..... $214,094 $206,685 $209,404
======== ======== ========
Mortgage-backed securities at beginning of period... $ 4,275 $ 873 $ 1,929
Mortgage-backed securities purchased................ 6,576 4,010 --
Principal repayments and other activity............. (3,621) (608) (1,056)
-------- -------- --------
Mortgage-backed securities at end of period...... $ 7,230 $ 4,275 $ 873
======== ======== ========
</TABLE>
- --------------------------
(1) Includes loans to finance the construction of one- to four-family
residential properties, and loans disbursed for sale in the secondary
market.
(2) Includes loans to finance the sale of real estate acquired through
foreclosure.
Loan Origination Fees and Other Income. In addition to interest earned on
loans, the Company generally receives loan origination fees. The Company
accounts for loan origination fees in accordance with Statement of Financial
Accounting Standards 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 Company's portfolio, SFAS No. 91
requires that the Company defer loan origination fees and costs and amortize
such amounts as an adjustment of yield over the life of the loan by use of the
level yield method. SFAS No. 91 reduces the amount of revenue recognized by
many financial institutions at the time such loans are originated or acquired.
Fees deferred under SFAS No. 91 are recognized into income immediately upon
prepayment or the sale of the related loan. At March 31, 1999, the Company 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.
In addition to loan origination fees, the Company 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
-9-
<PAGE>
REO operations. The Company recognized fees and service charges of $682,000,
$613,000 and $519,000, for the fiscal years ended March 31, 1999, 1998 and 1997,
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, 1999, the Company's largest real estate related
borrower had an aggregate principal outstanding balance of $2.1 million. The
Company had no loans at March 31, 1999 that exceeded the loans to one borrower
regulations.
Delinquencies and Classified Assets
Delinquencies. The Company's collection procedures provide that when a
loan is 15 days past due, a computer-generated late charge notice is sent to the
borrower requesting payment, plus a late charge. This notice is followed with a
letter again requesting payment when the payment becomes 20 days past due. If
delinquency continues, at 30 days another collection letter is sent and personal
contact efforts are attempted, either in person or by telephone, to strengthen
the collection process and obtain reasons for the delinquency. Also, plans to
arrange a repayment plan are made. If a loan becomes 60 days past due, the loan
becomes subject to possible legal action if suitable arrangements to repay have
not been made. In addition, the borrower is given information which provides
access to consumer counseling services, to the extent required by HUD
regulations. When a loan continues in a delinquent status for 90 days or more,
and a repayment schedule has not been made or kept by the borrower, a notice of
intent to foreclose is sent to the borrower, giving 30 days to cure the
delinquency. If not cured, foreclosure proceedings are initiated.
Non-Performing Assets. Loans are reviewed on a regular basis and are
placed on a non-accrual status when, in the opinion of management, the
collection of additional interest is doubtful. Mortgage loans are placed on
non-accrual status generally when either principal or interest is 90 days or
more past due and management considers the interest uncollectible. Interest
accrued and unpaid at the time a loan is placed on non-accrual status is charged
against interest income.
At March 31, 1999, the Company had non-performing assets of $321,000 and a
ratio of non-performing assets to total assets of 0.12%. At March 31, 1998 and
1997, the Company had non-performing assets of $1.3 million and $1.8 million,
respectively. The Company's levels of non-performing assets during the three
year period ended March 31, 1999 were below peer group averages.
Real estate acquired by the Company as a result of foreclosure or by deed
in lieu of foreclosure is deemed REO until such time as it is sold. When REO is
acquired, it is recorded at the lower of the unpaid principal balance of the
related loan or its fair value, less estimated selling expenses. Valuations are
periodically performed by management, and any subsequent decline in fair value
is charged to operations.
-10-
<PAGE>
The following table sets forth information regarding the Company's non-
accrual loans and real estate acquired by foreclosure at the dates indicated.
For all the dates indicated, the Company did not have any material restructured
loans within the meaning of SFAS 15.
<TABLE>
<CAPTION>
At March 31,
-------------------------------
1999 1998 1997
------------- ------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Non-accrual loans:
Mortgage loans:
Permanent loans secured by one- to four-family dwelling units.. $ 224 $ 299 $ 560
All other mortgage loans....................................... -- 1 --
Non-mortgage loans:
Commercial..................................................... -- -- 364
Consumer....................................................... 12 -- 5
----- ------ ------
Total non-accrual loans........................................... 236 300 929
Accruing loans 90 days or more delinquent......................... 44 8 33
----- ------ ------
Total non-performing loans........................................ 280 308 962
Total real estate owned/(1)/...................................... 41 946 809
----- ------ ------
Total non-performing assets....................................... $ 321 $1,254 $1,771
===== ====== ======
Total non-performing loans to net loans receivable................ .13% .15% .46%
Total non-performing loans to total assets........................ .10% .12% .38%
Total non-performing assets to total assets....................... .12% .48% .70%
</TABLE>
- --------------------------
/(1)/ Represents the net book value of property acquired by the Company through
foreclosure or deed in lieu of foreclosure. These properties are recorded
at the lower of the loan's unpaid principal balance or fair value less
estimated selling expenses.
During the year ended March 31, 1999, gross interest income of $7,000 would
have been recorded on loans currently accounted for on a non-accrual basis if
the loans had been current throughout the period.
The following table sets forth information with respect to loans past due
by 60-89 days and 90 days or more in the Company's portfolio at the dates
indicated.
<TABLE>
<CAPTION>
At March 31,
-----------------------------
1999 1998 1997
------------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Loans past due 60-89 days........ $1,710 $1,136 $ 373
Loans past due 90 days or more... 280 308 962
------ ------ ------
Total past due 60 days or more.. $1,990 $1,444 $1,335
====== ====== ======
</TABLE>
Classification of Assets. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the savings institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated "special mention" by management.
When a savings institution classifies problem assets as either substandard
or doubtful, it is required to establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances that have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings institution
-11-
<PAGE>
classifies problem assets as "loss," it is required either to establish a
specific allowance for losses equal to 100% of the amount of the assets so
classified, or to charge off such amount. A savings institution's determination
as to the classification of its assets and the amount of its valuation
allowances is subject to review by the OTS, which can order the establishment of
additional general or specific loss allowances. The Company regularly reviews
the problem loans in its portfolio to determine whether any loans require
classification in accordance with applicable regulations.
The following table sets forth the aggregate amount of the Company's
classified assets at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
----------------------------
1999 1998 1997
------------ ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
Substandard assets/(1)/... $ 206 $1,243 $1,509
Doubtful assets........... -- -- --
Loss assets............... 8 15 227
----- ------ ------
Total classified assets.. $ 214 $1,258 $1,736
===== ====== ======
</TABLE>
- -----------------------------
/(1)/ Includes REO.
Allowance for Loan Losses. Management's policy is to provide for estimated
losses on the Company's loan portfolio based on management's evaluation of the
potential losses that may be incurred. The Company regularly reviews its loan
portfolio, including problem loans, to determine whether any loans require
classification or the establishment of appropriate reserves or allowances for
losses. Such evaluation, which includes a review of all loans of which full
collectibility of interest and principal may not be reasonably assured,
considers, among other matters, the estimated fair value of the underlying
collateral. Other factors considered by management include the size and risk
exposure of each segment of the loan portfolio, present indicators such as
delinquency rates and the borrower's current financial condition, and the
potential for losses in future periods. Management calculates the general
allowance for loan losses in part based on past experience, and in part based on
specified percentages of loan balances. While both general and specific loss
allowances are charged against earnings, general loan loss allowances are added
back to capital in computing risk-based capital under OTS regulations.
During fiscal years ended March 31, 1999, 1998, and 1997, the Company added
$64,000, $60,000 and $20,000, respectively, to the provision for loan losses.
The Company's allowance for loan losses totaled $678,000, $721,000 and $914,000,
at March 31, 1999, 1998 and 1997, respectively. The Company bases the provision
for loan loss on several factors, including loan volume, portfolio mix,
delinquencies, etc. Management believes that the Company's current allowance
for loan losses is adequate, however, there can be no assurance that the
allowance for loan losses will be adequate to cover losses that may in fact be
realized in the future or that additional provisions for loan losses will not be
required.
-12-
<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,
--------------------------------------
1999 1998 1997
------------- --------- ------------
(Dollars in Thousands)
<S> <C> <C> <C>
Loans receivable, net................................................ $214,094 $206,685 $ 209,404
Average loans receivable, net........................................ 209,178 207,377 209,219
Allowance balance (at beginning of period)........................... 721 914 888
Provision for losses:
Mortgage............................................................ -- -- --
Non-mortgage........................................................ -- -- 214
General............................................................. 64 60 (194)
(Charge-offs) Recoveries:
Mortgage............................................................ (108) (231) (6)
Non-Mortgage........................................................ 1 (22) 12
-------- -------- -----------
Allowance balance (at end of period)................................. $ 678 $ 721 $ 914
======== ======== ===========
Allowance for loan losses as a percent of loans receivable,
net at end of period................................................ .32% .35% .44%
Net loans charged off as a percent of average loans receivable, net.. .05% .12% 0.0% /(1)/
Ratio of allowance for loan losses to total
non-performing assets at end of period............................ 211.21% 57.50% 51.61%
Ratio of allowance for loan losses to
non-performing loans at end of period............................. 242.14% 234.09% 95.01%
</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,
--------------------------------------------------------------------------
1999 1998 1997
------------------------- ------------------------- --------------------
% 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.... $386 88.3% $ 446 87.4% $ 368 88.7%
Multi-family residential loans........... 38 3.2 36 3.4 38 2.6
Consumer and commercial.................. 252 6.0 54 6.4 290 5.7
Non-residential real estate.............. 2 2.5 185 2.8 218 3.0
---- ----- ----- ----- ----- -----
Total allowance for loan losses.......... $678 100.0% $ 721 100.0% $ 914 100.0%
==== ===== ===== ===== ===== =====
</TABLE>
Investment Activities
The Company's investment portfolio is comprised of investment securities
and certificates of deposit in other financial institutions. The carrying value
of the Company's investment securities totaled $17.8 million at March 31, 1999,
compared to $21.9 million at March 31, 1998, a decrease of $4.1 million, or
18.6%. The decrease in the Company'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 Company's cash
and cash equivalents, consisting of cash and due from banks, federal funds sold,
and interest bearing deposits due from other financial institutions with
original maturities of three months or less, totaled $16.2 million at March 31,
1999 compared to $13.2 at March 31, 1998, an increase of $3.1 million, or 23.4%.
-13-
<PAGE>
The Company is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short term securities
and certain other investments. See "Regulation--Liquidity Requirements" below
and Item 7. The Company generally has maintained a portfolio of liquid assets
that exceeds regulatory requirements. Liquidity levels may be increased or
decreased depending upon the yields on investment alternatives and upon
management's judgment as to the attractiveness of the yields then available in
relation to other opportunities and its expectation of the level of yield that
will be available in the future, as well as management's projections as to the
short term demand for funds to be used in the Company's loan origination and
other activities.
Investment Portfolio. The following table sets forth the carrying value of
the Company's investment securities portfolio, short-term investments and FHLB
stock, at the dates indicated.
<TABLE>
<CAPTION>
At March 31,
-------------------------------------------------------
1999 1998 1997
----------------- ----------------- -----------------
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...................... $11,666 $11,588 $13,228 $13,162 $16,789 16,723
Obligations of state and political subdivisions............ 164 164 173 173 181 181
Certificates of deposit in other financial institutions.... 6,000 6,000 8,500 8,500 7,500 7,500
------- ------- ------- ------- ------- -------
Total investment securities................................ 17,830 17,752 21,901 21,835 24,470 24,404
Other Investments:
Interest-bearing deposits in other financial institutions.. 10,410 10,410 7,647 7,647 5,179 5,179
Federal funds sold......................................... 4,295 4,295 4,100 4,100 1,125 1,125
Federal Home Loan Bank stock............................... 2,919 2,919 2,719 2,719 2,531 2,531
------- ------- ------- ------- ------- -------
Total investments......................................... $35,454 $35,376 $36,367 $36,301 $33,305 $33,239
======= ======= ======= ======= ======= =======
</TABLE>
-14-
<PAGE>
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for the
Company's investment securities at March 31, 1999. The Company does not hold
any investment securities with maturities in excess of 16 years.
<TABLE>
<CAPTION>
At March 31, 1999
-------------------------------------------------------------------------------------------------------
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 $ -- --% $ 6,168 5.73% $4,998 6.14% $500 6.70%
Obligations of state and
political subdivisions... -- -- -- -- -- -- 164 5.50
Certificates of deposit
in other financial
institutions............. 6,000 4.75 -- -- -- -- -- --
------ ------- ------- ----- -------- ------- -------- -------
Total investment
securities.............. $6,000 4.75% $ 6,168 5.73% $4,998 6.14% $664 6.40%
====== ======= ======= ===== ======== ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
At March 31, 1999
--------------------------------------------------------------
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.................................. 5.12 $11,666 $11,588 5.96%
Obligations of state and political subdivisions............. 13.18 164 164 5.50
Certificates of deposit in other financial institutions..... .06 6,000 6,000 4.75
----------- ------- ------- -----
Total investment securities................................ 3.49 $17,830 $17,752 5.55%
=========== ======= ======= =====
</TABLE>
-15-
<PAGE>
Sources of Funds
General. Deposits are the major source of the Company's funds for lending
and other investment purposes. In addition to deposits, the Company derives
funds from the amortization, prepayment or sale of loans and mortgage-backed
securities, the sale or maturity of investment securities, operations and, if
needed, advances from the Federal Home Loan Bank ("FHLB"). Scheduled loan
principal repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are influenced significantly by
general interest rates and market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources or on a longer term basis for general business purposes. The
Company had $9.0 million of advances from the FHLB at March 31, 1999.
Deposits. Consumer and commercial deposits are attracted principally from
within the Company's market area through the offering of a broad selection of
deposit instruments including NOW accounts, passbook savings, money market
deposit, term certificate accounts and individual retirement accounts. The
Company accepts deposits of $100,000 or more and offers negotiated interest
rates on such deposits. Deposit account terms vary according to the minimum
balance required, the period of time during which the funds must remain on
deposit, and the interest rate, among other factors. The Company regularly
evaluates its internal cost of funds, surveys rates offered by competing
institutions, reviews the Company's cash flow requirements for lending and
liquidity, and executes rate changes when deemed appropriate. The Company does
not obtain funds through brokers, nor does it solicit funds outside its market
area. In recent years the Company's total deposits have remained relatively
stable.
Deposit Portfolio. Savings and other deposits in the Company as of March
31, 1999, comprised the following:
<TABLE>
<CAPTION>
Weighted Percentage
Average Minimum of Total
Interest Rate Minimum Term Checking and Saving Deposits Amount Balances Deposits
---------------- ------------- ---------------------------- ----------- -------- ---------
(In Thousands)
<S> <C> <C> <C> <C> <C>
2.11% None NOW Accounts $ -- $24,879 10.57%
3.10 None Passbook -- 46,466 19.74
3.31 None Money Market Investor 2,500 11,265 4.79
Certificates of Deposit
-----------------------
4.81 12 months or less Fixed term, fixed rate 500 37,813 16.07
5.18 12 to 24 months Fixed term, fixed rate 500 34,001 14.45
5.84 25 to 36 months Fixed term, fixed rate 500 38,696 16.44
5.99 36 months or more Fixed term, fixed rate 500 11,420 4.85
5.92 Negotiable Jumbo Certificates 100,000 30,787 13.09
-------- ------
$235,327 100.00%
======== ======
</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 Company between
the dates indicated.
<TABLE>
<CAPTION>
Balance at Balance at Balance at
March 31, % Increase March 31, % Increase March 31, %
1999 Deposits (Decrease) 1998 Deposits (Decrease) 1997 Deposits
---------- -------- ---------- ---------- -------- ---------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW accounts.................. $ 24,879 10.57% $ 3,817 $ 21,062 9.68% $ 1,834 $ 19,228 9.09%
Passbook statement accounts... 46,466 19.74 7,355 39,111 17.97 (2,122) 41,233 19.50
Money market passbook......... 11,265 4.79 1,817 9,448 4.34 (367) 9,815 4.64
Certificates of deposit/(1)/
Original maturities of:
12 months or less........... 37,813 16.07 8,463 29,350 13.49 8,334 21,016 9.94
12 to 24 months............. 34,001 14.45 (3,068) 37,069 17.03 (7,067) 44,136 20.88
25 to 36 months............. 38,696 16.44 (2,166) 40,862 18.78 12,271 28,591 13.52
36 months or more........... 11,420 4.85 (2,103) 13,523 6.21 (3,472) 16,995 8.04
Negotiated jumbo............ 30,787 13.09 3,591 27,196 12.50 (3,232) 30,428 14.39
-------- ------ ------- -------- ------ ------- -------- ------
Total....................... $235,327 100.00% $17,706 $217,621 100.00% $ 6,179 $211,442 100.00%
======== ====== ======= ======== ====== ======= ======== ======
</TABLE>
__________________
/(1)/ Certain Individual Retirement Accounts ("IRAs") are included in the
respective certificate balances. IRAs totaled $31.2 million, $30.9 million
and $31.9 million, as of March 31, 1999, 1998 and 1997, respectively.
-17-
<PAGE>
The following table sets forth the certificates of deposit in the Company
classified by rates as of the dates indicated:
<TABLE>
<CAPTION>
At March 31,
----------------------------
1999 1998 1997
-------- -------- --------
(Dollars in Thousands)
<S> <C> <C> <C>
3.00% or less............................. -- $ -- $ --
3.01- 4.00%............................... -- -- 17
4.01- 6.00%............................... 120,446 105,021 100,794
6.01- 8.00%............................... 29,486 38,148 34,482
8.01-10.00%............................... 2,785 4,831 5,873
-------- -------- --------
Total.................................... $152,717 $148,000 $141,166
======== ======== ========
</TABLE>
The following table sets forth the amount and maturities of certificates of
deposit at March 31, 1999.
<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%................. $ 85,368 $27,901 $ 3,006 $ 4,171 $120,446
6.01- 8.00%................. 20,241 8,188 589 468 29,486
8.01-10.00%................. 1,874 911 -- -- 2,785
--------- ------- ------- ------- --------
Total....................... $ 107,483 $37,000 $ 3,595 $ 4,639 $152,717
========= ======= ======= ======= ========
</TABLE>
The following table indicates the amount of the Company's negotiable
certificates of deposit of $100,000 or more by time remaining until maturity as
of March 31, 1999.
<TABLE>
<CAPTION>
Maturity Period Certificates of Deposit
--------------- -----------------------
(In Thousands)
<S> <C>
Three months or less................... $11,436
Over three months through six months... 3,379
Over six months through twelve months.. 8,418
Over twelve months..................... 7,554
-------
Total.............................. $30,787
=======
</TABLE>
Borrowings
Savings deposits are the primary source of funds for the Company's lending
and investment activities and for its general business purposes. The Company, if
the need arises, may rely upon advances from the FHLB and the Federal Reserve
Bank discount window to supplement its supply of lendable funds and to meet
deposit withdrawal requirements. Advances from the FHLB typically are
collateralized by the Company's stock in the FHLB and a portion of the Company's
first mortgage loans. At March 31, 1999, the Company had $9.0 million in
advances outstanding.
The FHLB functions as a central reserve bank providing credit for the
Company and other member savings associations and financial institutions. As a
member, the Company is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities that are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met. Advances are made pursuant to several
different programs. Each credit program
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has its own interest rate and range of maturities. Depending on the program,
limitations on the amount of advances are based either on a fixed percentage of
a member institution's net worth or on the FHLB's assessment of the
institution's creditworthiness. Although advances may be used on a short-term
basis for cash management needs, FHLB advances have not been, nor are they
expected to be, a significant long-term funding source for the Company.
Competition
The Company encounters strong competition both in attracting deposits and
in originating real estate and other loans. Its most direct competition for
deposits has come historically from commercial banks, brokerage houses, other
savings associations, and credit unions in its market area, and the Company
expects continued strong competition from such financial institutions in the
foreseeable future. The Company's market area includes branches of several
commercial banks that are substantially larger than the Company in terms of
state-wide deposits. The Company competes for savings by offering depositors a
high level of personal service and expertise together with a wide range of
financial services.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies, and other savings associations.
This competition for loans has increased substantially in recent years as a
result of the large number of institutions competing in the Company's market
area as well as the increased efforts by commercial banks to expand mortgage
loan originations.
The Company competes for loans primarily through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers, and builders. Factors that affect competition
include general and local economic conditions, current interest rate levels, and
volatility of the mortgage markets.
Regulation
As a state-chartered, SAIF-insured savings association, the Company is
subject to examination, supervision and extensive regulation by the OTS, the
Ohio Division of Financial Institutions (the "Ohio Division"), and the FDIC. The
Bank and Village are members of and own stock in the FHLB of Cincinnati, which
is one of the twelve regional banks in the Federal Home Loan Bank System. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The Company also is subject to regulation
by the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") governing reserves to be maintained against deposits and certain other
matters. The OTS and Ohio Division regularly examine the Banks and prepare
reports for the consideration of the Company's Board of Directors on any
deficiencies that they may find in the Company's operations. The FDIC also
examines the Bank and Village in its role as the administrator of the SAIF. The
Company's relationship with its depositors and borrowers also is regulated to a
great extent by both federal and state laws especially in such matters as the
ownership of savings accounts and the form and content of the Company's mortgage
documents. Any change in such regulation, whether by the FDIC, OTS, Ohio
Division, or Congress, could have a material adverse impact on the Company, the
Bank, and Village and their operations.
Federal Regulation of Savings Institutions
Business Activities. The activities of savings institutions are governed
by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects,
the Federal Deposit Insurance Act (the "FDI Act"). The federal banking statutes,
as amended by the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") and the Federal Deposit Insurance Corporation Improvement Act
("FDICIA") (1) restrict the solicitation of brokered deposits by savings
institutions that are troubled or not well-capitalized, (2) prohibit the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories, (3) restrict the aggregate amount of loans secured by
non-residential real estate property to 400% of capital, (4) permit savings and
loan holding companies to acquire up to 5% of the voting shares of non-
subsidiary savings institutions or savings and loan holding
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<PAGE>
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 Company.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to one borrower. Generally, savings
institutions may not make a loan or extend credit to a single or related group
of borrowers in excess of 15% of the institution's unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain securities and bullion, but generally does not
include real estate. See "--Lending Activities--Loans to One Borrower."
Qualified Thrift Lender Test. The HOLA requires savings institutions to
meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings
association is required to maintain at least 65% of its "portfolio assets"
(total assets less (i) specified liquid assets up to 20% of total assets, (ii)
intangibles, including goodwill, and (iii) the value of property used to conduct
business) in certain "qualified thrift investments," primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities on a monthly basis in 9 out of every 12 months.
A savings association that fails the QTL test must either convert to a bank
charter or operate under certain restrictions. As of March 31, 1999, the Company
maintained 91.7% of its portfolio assets in qualified thrift investments and,
therefore, met the QTL test.
Limitation on Capital Distributions. Under current OTS regulations, a
savings institution may make a capital distribution without notice to the OTS,
unless it is a subsidiary of a holding company, provided that it has a
regulatory rating in the two top categories, is not of supervisory concern, and
would remain adequately capitalized, as defined in the OTS prompt corrective
action regulations, following the proposed distribution. Savings institutions
that would remain adequately capitalized following the proposed distribution but
do not meet the other noted requirements must notify the OTS 30 days prior to
declaring a capital distribution. The OTS stated it will generally regard as
permissible that amount of capital distributions that do not exceed 50% of the
institution's excess regulatory capital plus net income to date during the
calendar year. A savings institution may not make a capital distribution without
prior approval of the OTS and the FDIC if it is undercapitalized before, or as a
result of, such a distribution. The OTS may object to a capital distribution if
it would constitute an unsafe or unsound practice.
In addition, OTS regulations require the Mutual Holding Company to notify
the OTS of any proposed waiver of its right to receive dividends. It is the OTS'
recent practice to review dividend waiver notices on a case-by-case basis, and,
in general, not object to any such waiver if: (i) the mutual holding company's
board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members; (ii) for as
long as the savings association subsidiary is controlled by the mutual holding
company, the dollar amount of dividends waived by the mutual holding company are
considered as a restriction on the retained earnings of the savings association,
which restriction, if material, is disclosed in the public financial statements
of the savings association as a note to the financial statements; (iii) the
amount of any dividend waived by the mutual holding company is available for
declaration as a dividend solely to the mutual holding company, and, in
accordance with SFAS 5, where the savings association determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; (iv) the amount of any
waived dividend is considered as having been paid by the savings association
(and the savings association's capital ratios adjusted accordingly) in
evaluating any proposed dividend under OTS capital distribution regulations; and
(v) in the event the mutual holding company converts to stock form, the
appraisal submitted to the OTS in connection with the conversion application
takes into account the aggregate amount of the dividends waived by the mutual
holding company.
Liquidity. The Company is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified U.S.
Government, state or federal agency obligations, shares of certain mutual funds
and certain corporate debt securities and commercial paper) equal to a monthly
average of not less than
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<PAGE>
a specified percentage of its net withdrawable deposit accounts plus short-term
borrowings. This liquidity requirement which is currently 4%, may be changed
from time to time by the OTS to any amount within the range of 4% to 10%
depending upon economic conditions and the savings flow of member institutions.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Company's average liquidity ratio for March 1999 was 10.9%,
which exceeded the then applicable requirements. The Company has never been
subject to monetary penalties for failure to meet its liquidity requirements.
Community Reinvestment. Under the Community Reinvestment Act (the "CRA"),
as implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation, consistent with its safe and sound operation, to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions, nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Company received a "satisfactory" CRA
rating under the current CRA regulations in its most recent federal examination
by the OTS.
Transactions with Related Parties. The Company's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Holding
Company and any non-savings institution subsidiaries) or to make loans to
certain insiders, is limited by Sections 23A and 23B of the Federal reserve Act
("FRA"). Section 23A limits the aggregate amount of transactions with any
individual affiliate to 10% of the capital and surplus of the savings
institution and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B provides that
certain transactions with affiliates, including loans and asset purchases, must
be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Criminal
penalties for most financial institution crimes include fines of up to $1
million and imprisonment for up to 30 years. Under the FDI Act, the FDIC has the
authority to recommend to the Director of OTS that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances.
Standards for Safety and Soundness. The federal banking agencies have
adopted a final regulation and Interagency Guidelines Prescribing Standards for
Safety and Soundness ("Guidelines") to implement the safety and soundness
standards required under the FDI Act. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The standards set forth in the Guidelines address internal controls
and information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; and compensation, fees
and benefits. The agencies also adopted a proposed rule which proposes asset
quality and earnings standards which, if adopted, would be added to the
Guidelines. If the appropriate federal banking agency determines
-21-
<PAGE>
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
mortgage servicing rights ("MSRs"). The OTS regulations also require that, in
meeting the tangible ratio, leverage and risk-based capital standards,
institutions must deduct investments in and loans to subsidiaries engaged in
activities not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 2 (core) and total capital (which is defined as core capital
and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS
believes are inherent in the type of asset. The components of Tier 1 (core)
capital are equivalent to those discussed earlier under the 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. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
An OTS regulatory capital rule also incorporates an interest rate risk
component. Savings associations with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates,
divided by the estimated economic value of the association's assets. In
calculating its total capital under the risk-based rule, a savings association
whose measured interest rate risk exposure exceeds 2%, must deduct an interest
rate component equal to one-half of the excess change. The OTS has deferred, for
the present time, the date on which the interest rate component is to be
deducted from total capital. The rule also provides that the Director of the OTS
may waive or defer an institution's interest rate risk component on a case-by-
case basis. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Prompt Corrective Regulatory Action
Under the OTS Prompt Corrective Action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has the total
risk-based capital less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS could also take any
one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and
directors.
-22-
<PAGE>
Insurance of Accounts and Regulation by the FDIC
The Bank and Village are members of the SAIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the U.S. Government. As
insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious risk to the FDIC.
The FDIC also has the authority to initiate enforcement actions against savings
and loan associations, after giving the OTS an opportunity to take such action,
and may terminate the deposit insurance if it determines that the institution
has engaged or is engaging in unsafe or unsound practices, or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, ranging from .23% to .31% of
deposits, based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as well capitalized (i.e., a core capital
ratio of at least 5%, a ratio of core capital to risk-weighted assets of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
would pay the lowest premium while institutions that are less than adequately
capitalized (i.e., a core capital or core capital to risk-based capital ratios
of less than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern would pay the highest premium. Risk
classification of all insured institutions will be made by the FDIC for each
semi-annual assessment period.
The FDIC authorized to increase assessment rates, on a semiannual basis, if
it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
Federal Home Loan Bank System
The Company and Village are members of the FHLB System, which consists of
12 regional FHLBs. The FHLB provides a central credit facility primarily for
member institutions. The Company, as a member of the FHLB, is required to
acquire and hold shares of capital stock in that FHLB in an amount at least
equal to 1% of the aggregate principal amount of its unpaid residential mortgage
loans and similar obligations at the beginning of each year, or 1/20 of its
advances (borrowings) from the FHLB, whichever is greater. The Company was in
compliance with this requirement with an investment in FHLB-Cincinnati stock, at
March 31, 1999, of $2.9 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
6.81%, and were 7.125% for the fiscal year ended March 31, 1999. If dividends
were reduced, or interest on future FHLB-Cincinnati advances increased, the
Company's net interest income would likely also be reduced.
Federal Reserve System
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $54.0 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $54.0 million, the reserve requirement is $1.6
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $54.0
million. The first $4.2 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Company is in compliance with the
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<PAGE>
foregoing requirements. The balances maintained to meet the reserve requirements
imposed by the FRB may be used to satisfy liquidity requirements imposed by the
OTS.
Ohio Regulation
As a savings and loan association organized under the laws of the State of
Ohio, the Bank is subject to regulation by the Ohio Division of Financial
Institutions (the "Ohio Division"). Regulation by the Ohio Division affects the
Bank's internal organization as well as its savings, mortgage lending, and other
investment activities. Periodic examinations by the Ohio Division are usually
conducted on a joint basis with the OTS. Ohio law requires that the Bank
maintain federal deposit insurance as a condition of doing business.
Under Ohio law, an Ohio association may buy any obligation representing a
loan that would be a legal loan if originated by the Bank, subject to various
requirements including: loans secured by liens on income-producing real estate
may not exceed 20% of an association's assets; consumer loans, commercial paper,
and corporate debt securities may not exceed 20% of an association's assets;
loans for commercial, corporate, business, or agricultural purposes may not
exceed 10% of an association's assets unless the Ohio Division increases the
limitation to 30%, provided that an association's required reserve must increase
proportionately; certain other types of loans may be made for lesser percentages
of the association's assets; and, with certain limitations and exceptions,
certain additional loans may be made if not in excess of 3% of the association's
total assets. In addition, no association may make real estate acquisition and
development loans for primarily residential use to one borrower in excess of 2%
of assets. The total investments in commercial paper or corporate debt of any
issuer cannot exceed 1% of an association's assets, with certain exceptions.
Ohio law authorizes Ohio-chartered associations to, among other things: (i)
invest up to 15% of assets in the capital stock, obligations, and other
securities of service corporations organized under the laws of Ohio, and an
additional 20% of net worth may be invested in loans to majority owned service
corporations; (ii) invest up to 10% of assets in corporate equity securities,
bonds, debentures, notes, or other evidence of indebtedness; (iii) exceed limits
otherwise applicable to certain types of investments (other than investments in
service corporations) by and between 3% and 10% of assets, depending upon the
level of the institution's permanent stock, general reserves, surplus, and
undivided profits; and (iv) invest up to 15% of assets in any loans or
investments not otherwise specifically authorized or prohibited, subject to
authorization by the institution's board of directors.
An Ohio association may invest in such real property or interests therein
as its board of directors deems necessary or convenient for the conduct of the
business of the association, but the amount so invested may not exceed the net
worth of the association at the time the investment is made. Additionally, an
association may invest an amount equal to 10% of its assets in any other real
estate. This limitation does not apply, however, to real estate acquired by
foreclosure, conveyance in lieu of foreclosure, or other legal proceedings in
relation to loan security interests.
Notwithstanding the above powers authorized under Ohio law and regulation,
a state-chartered savings association, such as the Company, is subject to
certain limitations on its permitted activities and investments under federal
law, which may restrict the ability of an Ohio-chartered association to engage
in activities and make investments otherwise authorized under Ohio law.
Ohio has adopted statutory limitations on the acquisition of control of an
Ohio savings and loan association by requiring the written approval of the Ohio
Division prior to the acquisition by any person or company, as defined under the
Ohio Revised Code, of a controlling interest in an Ohio association. Control
exists, for purposes of Ohio law, when any person or company, either directly,
indirectly, or acting in concert with one or more other persons or companies (a)
acquires any class of voting stock, irrevocable proxies, or any combination
thereof, (b) directs the election of a majority of directors, (c) becomes the
general partner of the savings and loan association, (d) has influence over the
management and policies of the savings and loan association, (e) has the ability
to direct shareholder votes, or (f) anything else deemed to be control by the
Ohio Division. The Ohio Division's written permission is required when the total
amount of control held by the acquiror was less than or equal to 25% control
before the acquisition and more than 25% control after the acquisition, or when
the total amount of control held by the acquiror
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<PAGE>
was less than 50% before the acquisition and more than 50% after the
acquisition. Ohio law also prescribes other situations in which the Ohio
Division must be notified of the acquisition even though prior approval is not
required. Any person or company, which would include a director, will not be
deemed to be in control by virtue of an annual solicitation of proxies voted as
directed by a majority of the board of directors.
Under certain circumstances, interstate mergers and acquisitions involving
associations incorporated under Ohio law are permitted by Ohio law. A savings
and loan association or savings and loan holding company with its principal
place of business in another state may acquire a savings and loan association or
savings and loan holding company incorporated under Ohio law if the laws of such
other state permit an Ohio savings and loan association or an Ohio holding
company reciprocal rights. Additionally, recently enacted legislation permits
interstate branching by savings and loan associations incorporated under Ohio
law.
Ohio law requires prior written approval of the Ohio Superintendent of
Savings and Loans of a merger of an Ohio association with another savings and
loan association or a holding company affiliate.
Holding Company Regulation
General. The Company and the Mutual Holding Company are non-diversified
mutual savings and loan holding companies within the meaning of the HOLA. As
such, the Company and the Mutual Holding Company are registered with the OTS and
are subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Company
and the Mutual Holding Company and any non-savings institution subsidiaries.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution. The Bank must notify the OTS 30 days before declaring any
dividend to the Company and Village must notify the OTS 30 days before declaring
any dividend to the Bank.
Restrictions Applicable to Mutual Holding Companies. Pursuant to Section
10(o) of the HOLA and OTS regulations, a mutual holding company may engage in
the following activities: (i) investing in the stock of a savings association;
(ii) acquiring a mutual association through the merger of such association into
a savings association subsidiary of such holding company or an interim savings
association subsidiary of such holding company; (iii) merging with or acquiring
another holding company; one of whose subsidiaries is a savings association;
(iv) investing in a corporation, the capital stock of which is available for
purchase by a savings association under federal law or under the law of any
state where the subsidiary savings association or associations share their home
offices; (v) furnishing or performing management services for a savings
association subsidiary of such company; (vi) holding, managing or liquidating
assets owned or acquired from a savings subsidiary of such company; (vii)
holding or managing properties used or occupied by a savings association
subsidiary of such company properties used or occupied by a savings association
subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix)
any other activity (A) that the Federal Reserve Board, by regulation, has
determined to be permissible for bank holding companies under Section 4(c) of
the Bank Holding Company Act of 1956, unless the Director, by regulation,
prohibits or limits any such activity for savings and loan holding companies; or
(B) in which multiple savings and loan holding companies were authorized (by
regulation) to directly engage on March 5, 1987; and (x) purchasing, holding, or
disposing of stock acquired in connection with a qualified stock issuance if the
purchase of such stock by such savings and loan holding company is approved by
the Director. If a mutual holding company acquires or merges with another
holding company, the holding company acquired or the holding company resulting
from such merger or acquisition may only invest in assets and engage in
activities listed in (i) through (x) above, and has a period of two years to
cease any non-conforming activities and divest of any non-conforming
investments.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
OTS. It also prohibits the acquisition or retention of, with certain
exceptions, more than 5% of a non-subsidiary savings institution, a non-
subsidiary holding company, or a non-subsidiary company engaged in activities
other than those permitted by the HOLA; or acquiring or retaining control of an
institution that is not federally insured. In evaluating applications by
holding companies to acquire savings institutions, the OTS must consider the
financial and
-25-
<PAGE>
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 un
der the asset and
liability method which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The Federal tax bad debt reserve method available to thrift institutions
was repealed in 1996 for tax years beginning after 1995. As a result, the
Company must change from the reserve method to the specific charge-off method to
compute its bad debt deduction. In addition, the Company is required generally
to recapture into income the portion of its bad debt reserve (other than the
supplemental reserve) that exceeds its base year reserves, approximately
$200,000.
The recapture amount resulting from the change in a thr
ift's method of
accounting for its bad debt reserves generally will be taken into taxable income
ratably (on a straight-line basis) over a six-year period. The Bank must begin
recapture of the bad debt reserve during fiscal 1999.
Retained earnings as of March 31, 1999 include approximately $2.7 million
for which no provision for Federal income tax has been made. This reserve (base
year and supplemental) is frozen/not forgiven as certain events could trigger a
recapture such as stock redemption or distributions to shareholders in excess of
current or accumulated earnings and profits.
The Company 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 Company's financial statements.
Ohio Taxation. The Company files Ohio franchise tax returns. For Ohio
franchise tax purposes, savings institutions are currently taxed at a rate equal
to 1.4% of taxable net worth. The
Company is not currently under audit with
respect to its Ohio franchise tax returns.
ITEM 2. Properties
- --------------------
The Bank conducts its business through its main office located in Wooster,
Ohio, and 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, 1999. The aggregate net book value
of the Company's premises and equipment was $7.7 million at March 31, 1999.
-26-
<PAGE>
Wayne Savings Community Bank
<TABLE>
<CAPTION>
Location Year Opened Owned or Leased
-------- ----------- ---------------
<S> <C> <C>
151 N. Market St.
Wooster, Ohio 44691 1902 Owned
1908 Cleveland Rd.
Wooster, Ohio 44691
1978 Owned
90 North Clay St.
Millersburg, Ohio 44654 1964 Owned
233 Claremont Ave.
Ashland, Ohio 44805 1968 Owned
237 North Main St.
Rittman, Ohio 44270 1972 Owned
303 Highland Dr.
Lodi, Ohio 44254 1980 Owned
</TABLE>
Village Savings Bank
Village conducts its business through its office located in Stark County, Ohio.
<TABLE>
<CAPTION>
Location Year Opened Owned or Leased
-------- ----------- ---------------
<S> <C> <C>
1265 South Main Street 1998 Owned
North Canton, Ohio 44720
</TABLE>
The Company's accounting and record keeping activities are maintained
through an in-house data processing system.
ITEM 3. Legal Proceedings
- ---------------------------
A former executive officer and director of Village has filed Harbert v.
----------
Wayne Savings Bankshares, M.H.C. and Finn and Village Savings Bank, alleging
- ------------------------------------------------------------------
breach of contract and misrepresentation. The plaintiff brought the lawsuit in
the Court of Common Pleas of Stark County, Ohio on May 19, 1999, and is seeking
wages and compensatory damages of $500,000, punitive damages of $500,000, and
attorney fees and costs. Although there can be no certainty as to the outcome of
this matter, management has retained counsel to vigorously contest the claim.
The Company is not involved in any other pending legal proceedings other
than routine legal proceedings occurring in the ordinary course of business
which, in the aggregate, involved amounts which are believed by management to be
immaterial to the financial condition and operations of the Company.
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.
-27-
<PAGE>
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, 1999 (the "1999 Annual Report to Stockholders") are incorporated herein by
reference. No other sections of the 1999 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 1999 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 1999
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 1999 annual meeting of stockholders (the "Proxy
Statement") is incorporated herein by reference.
ITEM 10. Executive Compensation
- --------------------------------
The "Proposal I--Election of Directors" section of the Company's Proxy
Statement is incorporated herein by reference.
ITEM 11. Security Ownership of Certain Beneficial Owners and Management
- ------------------------------------------------------------------------
The "Proposal I--Election of Directors" section of the Company's Proxy
Statement is incorporated herein by reference.
-28-
<PAGE>
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 1999 Annual
Report to Stockholders under the same captions, and are incorporated herein by
reference. No other sections of the 1999 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 1999
Annual Report to Stockholders is not deemed filed as part of this Annual Report
on Form 10-KSB, and no other sections of the 1999 Annual Report to Stockholders
are incorporated herein by this reference.
(a)(2) Financial Statement Schedules
-----------------------------
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(a)(3) Exhibits
Reference to Prior
Filing or Exhibit
Regulation S-B Number Attached
Exhibit Number Document Hereto
- -------------- -------- --------------
3 Articles of Incorporation *
3 Bylaws *
-29-
<PAGE>
<TABLE>
<S> <C> <C>
4 Instruments defining the *
rights of security holders,
including debentures
9 Voting trust agreement None
10 Material contracts None
11 Statement re: computation Not
of per share earnings Required
13 Annual Report to 13
Security Holders
16 Letter re: change in certifying None
accountants
18 Letter re: change in accounting None
principles
21 Subsidiaries of Registrant None
22 Published report regarding None
matters submitted to vote of
security holders
23 Consent of Grant Thornton LLP 23
27 EDGAR Financial Data Schedule 27
28 Information from reports None
furnished to state
insurance regulatory
authorities
99 Additional Exhibits None
</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
-30-
<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 24, 1999 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 th
e following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Charles F. Finn By: /s/ Todd J. Tappel
--------------------------------- ----------------------------------
Charles F. Finn, President, Chief Todd J. Tappel, Senior Vice
Executive Officer and Director President and Corporate Secretary
(Principal Executive Officer) (Principal Financial Officer)
Date: June 24, 1999 Date: June 24, 1999
By: /s/ Anthony Volpe By: /s/ Kenneth G. Rhode
--------------------------------- --------------------------------
Anthony Volpe, Vice President Kenneth G. Rhode, Director
(Principal Accounting Officer)
Date: June 24, 1999 Date: June 24, 1999
By: By:
--------------------------------- ---------------------------------
Donald E. M
assaro, Director James C. Morgan, Director
Date: Date:
By: /s/ Terry A. Gardner By: /s/ Russell L. Harpster
--------------------------------- ---------------------------------
Terry A. Gardner, Director Russell L. Harpster, Director
Date: June 24, 1999 Date: June 24, 1999
By: /s/ Joseph L. Retzler
---------------------------------
Joseph L. Retzler, Director
Date: June 24, 1999
<PAGE>
EXHIBIT 13
1999 ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
STOCKHOLDER INFORMATION
Annual Meeting
The Annual Meeting of Stockholders will be held at 10:00 a.m. on July 22,
1999, at The Black Tie Affair Conference Center, 50 Riffel Road, Wooster, Ohio.
Special Counsel
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Avenue NW
Washington, D.C. 20015
Independent Auditors
Grant Thornton LLP
625 Eden Park Drive . Suite 900
Cincinnati, Ohio 45202
Transfer Agent
ChaseMellon 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,
1999, will be furnished without charge to Stockholders upon written request to
the Corporate Secretary, Wayne Savings Bancshares, Inc., 151 North Market
Street, Wooster, Ohio 44691 (330) 264-5767.
Investor Information
Executive Offices
Wayne Savings Bancshares, Inc.
151 N. Market Street . P.O. Box 858
Wooster, Ohio 44691
(330) 264-5767
6
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
The following table sets forth certain consolidated financial and other
data of Wayne Savings Bancshares, Inc., (the "Company") the stock holding
company parent of Wayne Savings Community Bank ("Wayne Savings" or the "Bank"),
and Village Savings Bank, F.S.B. ("Village"), a wholly-owned subsidiary of Wayne
Savings, at the dates and for the periods indicated. For additional information
about the Company, reference is made to "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company and related notes included elsewhere herein.
<TABLE>
<CAPTION>
At March 31,
----------------------------------------------------
1999 1998 1997 1996 1995
------------ -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Condition Data
Total assets...................... $ 271,274 $ 259,752 $ 252,175 $ 248,503 $ 241,359
Loans receivable, net/1/.......... 215,679 207,879 209,404 206,513 201,857
Mortgage-backed securities/2/..... 7,230 4,275 873 1,929 2,920
Investment securities/3/.......... 17,830 21,901 24,470 19,675 25,542
Cash and cash equivalents/4/...... 16,245 13,169 7,606 10,190 3,073
Deposits.......................... 235,327 217,621 211,442 210,158 205,497
Stockholders' equity.............. 24,956 24,426 23,115 22,852 21,860
</TABLE>
/1/ Includes loans held for sale.
/2/ Includes mortgage-backed securities available for sale.
/3/ Includes certificates of deposit in other financial institutions.
/4/ Includes cash and due from banks, interest-bearing deposits in other
financial institutions, and federal funds sold.
<TABLE>
<CAPTION>
Year Ended March 31,
-------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Interest income.............................. $19,296 $19,236 $18,719 $18,328 $17,360
Interest expense............................. 11,187 11,084 10,610 10,541 9,249
------- ------- ------- ------- -------
Net interest income........................ 8,109 8,152 8,109 7,787 8,111
Provision for loan losses.................... 64 60 20 20 25
------- ------- ------- ------- -------
Net interest income after provision
for loan losses.......................... 8,045 8,092 8,089 7,767 8,086
Other income................................. 991 854 575 607 489
General, administrative
and other expense/1/....................... 6,547 6,144 7,588 6,189 6,051
------- ------- ------- ------- -------
Earnings before income taxes................. 2,489 2,802 1,076 2,185 2,524
Federal income taxes......................... 846 953 367 774 882
------- ------- ------- ------- -------
Net earnings............................... $ 1,643 $ 1,849 $ 709 $ 1,411 $ 1,642
======= ======= ======= ======= =======
</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
<PAGE>
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (con't.)
<TABLE>
<CAPTION>
At or For the Year Ended March 31,
-------------------------------------------
1999 1998 1997 1996 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Key Operating Ratios and Other Data:
Return on average assets (net earnings
divided by average total assets)/1/.............. .63% .73% .29% .58% .69%
Return on average equity (net earnings
divided by average equity)/1/.................... 6.90 7.72 3.08 6.32 7.74
Average equity to average assets ratio............. 9.07 9.42 9.32 9.21 8.92
Equity to assets at period end..................... 9.20 9.40 9.17 9.20 9.06
Interest rate spread (difference between
average yield on interest-earning
assets and average cost of interest-
bearing liabilities)............................. 2.93 2.98 3.03 2.92 3.18
Net interest margin (net interest income
as a percentage of average interest-
earning assets).................................. 3.23 3.34 3.40 3.30 3.51
General, administrative and other
expense to average assets/1/,/2/................. 2.45 2.42 3.07 2.57 2.54
Non-performing loans to loans
receivable, net.................................. .13 .15 .46 1.01 .83
Non-performing assets to total assets.............. .12 .48 .70 1.35 .70
Average interest-earning assets to
average interest-bearing liabilities............. 106.99 108.02 108.35 108.48 108.16
Allowance for loan losses to
non-performing loans............................. 242.14 234.09 95.01 42.57 58.32
Allowance for loan losses to
non-performing assets............................ 211.21 57.50 51.61 26.41 57.74
Net interest income after provision for
loan losses, to general, administrative
and other expense/1/,/2/......................... 124.98 131.71 106.60 124.77 133.65
Number of full-service offices..................... 7 6 6 6 6
Dividend payout ratio.............................. 45.86 36.48 88.94 52.66 29.85
</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
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The consolidated financial statements include Wayne Savings Bancshares, Inc.
(the "Company") and its wholly-owned subsidiaries. In fiscal year 1999, Wayne
Savings Community Bank ("Wayne Savings" or the "Bank") formed a new federal
savings bank subsidiary in North Canton, Ohio named Village Savings Bank, F.S.B.
("Village"), together referred to as "the Banks." Intercompany transactions and
balances are eliminated in the consolidation.
Effective November 25, 1997, Wayne Savings completed its reorganization into a
two-tier mutual holding company structure. In the reorganization, each share of
Wayne Savings common stock was automatically converted into one share of Company
common stock. The reorganization of Wayne Savings was structured as a tax-free
reorganization and was accounted for in the same manner as a pooling-of-
interests. As a result of the reorganization, the Company now serves as the
stock holding company parent of Wayne Savings.
The Company's net earnings are primarily dependent on its net interest income,
which is the difference between interest income earned on its loan, mortgage-
backed securities, and investment portfolios, and its cost of funds consisting
of interest paid on deposits and borrowings. The Company's net earnings also
are affected by its provision for loan losses, as well as the amount of other
income, including fees and service charges, and general, administrative and
other expense, such as salaries and employee benefits, deposit insurance
premiums, occupancy and equipment costs, and income taxes. Earnings of the
Company also are affected significantly by general economic and competitive
conditions, particularly changes in market interest rates, government policies,
and actions of regulatory authorities.
Business Strategy
The Company's current business strategy is to operate a well-capitalized,
profitable and independent community-oriented savings association dedicated to
financing home ownership and providing quality service to its customers. The
Company has sought to implement this strategy in recent years by: (1) closely
monitoring the needs of customers and providing personal, quality customer
service; (2) emphasizing the origination of one- to four-family residential
mortgage loans and consumer loans in the Company's market area; (3) reducing
interest rate risk exposure by better matching asset and liability maturities
and rates; (4) maintaining high asset quality; (5) maintaining a strong retail
deposit base; and (6) maintaining capital in excess of regulatory requirements.
Discussion of Financial Condition
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Company's operations and actual
results could differ significantly from those discussed in forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
interest rates in the nation and the Company's general market area. The
forward-looking statements contained herein include, but are not limited to,
those with respect to the following matters: (1) management's determination of
the amount and adequacy of the allowance for loan losses; (2) the effect of
changes in interest rates; (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, 1999, the Company had total assets of $271.3 million, an increase
of $11.5 million, or 4.4% from March 31, 1998.
Cash and due from banks, federal funds sold, interest-bearing deposits,
certificates of deposit and investment securities totaled approximately $34.1
million, a decrease of approximately $1.0 million, or 2.8% from March 31, 1998
levels. Regulatory liquidity approximated 11.0% at March 31, 1999, compared to
15.7% at March 31, 1998.
Loans receivable increased by approximately $7.8 million to $215.7 million at
March 31, 1999 from $207.9 million at March 31, 1998. This increase resulted
from loan disbursements of $71.9 million, which were partially offset by
principal repayments of $48.8 million and sales of $15.9 million. The allowance
for loan losses totaled $678,000 at March 31, 1999, as compared to $721,000 at
March 31, 1998. Nonperforming loans totaled $280,000 at March 31, 1999 and
$308,000 at March 31, 1998. The allowance for loan losses totaled 242.1% and
234.1% of nonperforming loans at March 31, 1999 and March 31, 1998 respectively.
Although management believes that its allowance for loan losses is adequate
based upon the available facts and circumstances, there can be no assurance
that additions to such allowance will not be necessary in future periods, which
would adversely affect the Company's results of operations.
Commercial loans increased by 54.8% to $4.8 million, from $3.1 million a year
ago. Commercial loans only comprise 2.2% of the loan portfolio, and the
Company's strategy is not to emphasize an increase in commercial lending, but to
evaluate and meet the needs of it's customer base.
Deposits increased by approximately $17.7 million from $217.6 million at March
31, 1998 to a total of $235.3 million at March 31, 1999. The increase in
deposits is primarily attributable to management's continuing efforts to achieve
a moderate rate of growth through marketing and business strategies, as well as
Village commencing operations.
Advances from the Federal Home Loan Bank decreased by $7.0 million, or 43.8%,
from $16.0 million outstanding at March 31, 1998 to $9.0 million outstanding at
March 31, 1999. The growth in deposits was partially used to pay down existing
advances.
15
<PAGE>
The Banks are subject to capital standards which generally require the
maintenance of regulatory capital sufficient to meet each of three tests,
hereinafter described as the tangible capital requirement, the core capital
requirement, and the risk-based capital requirement. At March 31, 1999, the
Banks capital met all regulatory requirements to which they were subject.
Results of Operations
General. The earnings of the Company depend primarily on its level of net
interest income, which is the difference between interest earned on the
Company's interest-earning assets and the interest paid on interest-bearing
liabilities. Net interest income is substantially affected by the Company's
interest rate spread, which is the difference between the average yield earned
on interest-earning assets and the average rate paid on interest-bearing
liabilities, as well as by the average balance of interest-earning assets as
compared to interest-bearing liabilities.
The Company reported net earnings of $1.6 million for the fiscal year ended
March 31, 1999. This represents an 11% decrease over net earnings of $1.8
million reported in the prior fiscal year.
In fiscal 1999, the Company and Wayne Savings formed Village, which incurred
a net loss of $309,000, or $204,000 after tax. In addition, the Company elected
to sell its only earning piece of commercial real estate property recording a
loss of $112,000, or $74,000 after tax.
Before consideration of the preceding items, the Company posted net earnings
of $1.9 million for the year ended March 31, 1999.
Interest Income. Interest income totaled $19.3 million for the fiscal year
ended March 31, 1999, a slight increase from interest income of $19.2 million
for the fiscal year ended March 31, 1998. Interest income remained stable,
while the average balance of interest-earning assets increased $6.9 million, or
2.8%, to $250.7 million, while the average yield decreased to 7.70% from 7.89%
the prior year.
Interest income on loans receivable remained stable, as a drop in interest
rates offset an increase in the average balance of $1.8 million, or .9%, as
compared to the previous year of $207.4 million.
Interest income on mortgage-backed securities increased by $302,000, to
$405,000 from $103,000. The increase was due to a $5.5 million, or 319.8%
increase in the average balance, to $7.2 million, for the year ended March 31,
1999, offset by a drop in the yield to 5.65%, from 6.03% the previous year.
Interest income on both investment securities and interest-bearing deposits
decreased for the year, primarily as a result of a decrease in the average yield
on these assets as interest rates dropped throughout the fiscal year. The yield
on investment securities dropped to 6.03%, from 6.26% the prior year, while the
yield on interest-bearing deposits fell to 5.01%, from 5.69% the prior fiscal
year. The average balance of these assets remained stable at approximately $34
million, as the Company maintained a liquid position to take advantage of a
future increase in rates.
Interest 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 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 $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 was due to the decrease in interest rates
over the 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 Expense. Interest expense for the fiscal year ended March 31, 1999
totaled $11.2 million, an increase of $103,000 from interest expense of $11.1
million for the previous year. The increase resulted from an increase in the
average balance of interest bearing liabilities of $8.6 million, or 3.8%, to
$234.3 million, which was partially offset by a decrease in the average cost of
funds to 4.77% in the current year from 4.91% in the previous fiscal year.
Interest expense on deposits increased $322,000, or 3.2%, to $10.5 million as
a result of an increase in the average deposits outstanding from $210.7 million
for fiscal 1998 to $222.6 million in fiscal 1999, partially offset by a decrease
in the cost of deposits from 4.84% to 4.72% in fiscal 1999.
Interest expense on borrowings for the fiscal year ended March 31, 1999
decreased $219,000, or 24.6%, to $671,000. The decrease was the result of a
reduction in the average balance in borrowings of $3.3 million, or 22.3%,
coupled with a reduction in interest rates from 5.93% to 5.75%, in fiscal 1999.
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 the average interest-bearing liabilities to $225.7 million from
$220.1 million, accompanied by an increase in the average cost
16
<PAGE>
of funds to 4.91% in the current 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 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%. 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%.
Net Interest Income. Net interest income for 1999 was $8.1 million, compared
to $8.2 million for the previous fiscal year, as the interest rate spread was
narrowed due primarily to falling interest rates throughout the fiscal year, as
well as a decrease in the ratio of average interest-earning assets to average
interest-bearing liabilities from 108.02% in fiscal 1998 to 106.99% in fiscal
1999.
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, offset by an increase in interest-bearing
liabilities accompanied by an increased average cost.
Provision for Losses on Loans. The Company maintains an allowance for loan
losses based on prior loss experience, the level of non-performing and problem
loans in the portfolio, and the potential effects on the portfolio of general
economic conditions. The Company's allowance for loan losses was $678,000, or
.32% of loans receivable at March 31, 1999, $721,000, or .35% of loans
receivable at March 31, 1998, and $914,000, or .44% of loans receivable at March
31, 1997. The Company recorded a provision for loan losses of $64,000 for the
fiscal year ended March 31, 1999, primarily due to growth in the loan portfolio
coupled with management's assessment of the collateral securing non-performing
loans. The Company recorded its provision for loan losses at $60,000 and
$20,000 for the fiscal years ended March 31, 1998, and 1997, respectively,
primarily as a result of the Company's low level of non-performing loans.
At March 31, 1999, 1998, and 1997, respectively, the Company's loss allowance
was primarily composed of $670,000, $706,000 and $684,000, in general allowances
as defined by the Office of Thrift Supervision ("OTS") regulations. The
breakdown of general loss allowances and specific loss allowances is made for
regulatory accounting only. General loan valuation allowances are added back to
capital in computing risk-based capital. Both general and specific loss
allowances are charged against earnings. The financial statements of the
Company are prepared in accordance with Generally Accepted Accounting Principles
("GAAP") and, accordingly, provisions for loan losses are based on management's
assessment of the factors set forth above. The Company reviews on a monthly
basis its loan portfolio, including problem loans, to determine whether any
loans require classification and/or the establishment of appropriate allowances.
Other Income. Other income consisting primarily of gain on sale of loans,
service fees, and charges on deposit accounts increased $137,000, or 16.0%, to
$991,000 for fiscal 1999. The increase was a result of an increase of $72,000,
or 30.4%, in gain on sale of fixed-rate mortgage loans due to a higher volume of
sales in 1999. Fixed-rate mortgage loans sold totaled $15.9 million in fiscal
1999 compared to $7.1 million sold in the previous fiscal year. Service fees,
charges, and other operating income increased $69,000, or 11.3%, to $682,000 in
fiscal 1999 as fee activity related to the deposit accounts increased.
Other income 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.
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 $6.5 million for the year ended March 31, 1999, an increase of
$403,000, or 6.6%, compared to 1998. The increase was primarily a result of
operating costs at the new subsidiary bank totaling $419,000 and the loss on the
sale of real estate owned totaling $110,000. The increases due to the
subsidiary bank are reflected in the increases in employee compensation,
occupancy and equipment, and franchise taxes.
General, administrative and other expense totaled $6.1 million for the year
ended March 31, 1998, a decrease of $1.4 million, or 19.0% compared to 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.
Income Taxes. The provision for income taxes totaled $846,000 for the year
ended March 31, 1999, compared to $953,000 for the previous fiscal year. The
decrease in income taxes is reflective of the lower level of pre-tax earnings
for the period ended March 31, 1999, as the effective tax rate was 34% for both
periods.
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
17
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (con't)
the higher levels of pre-tax earnings for the period ended March 31, 1998.
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,
--------------------------------------------------------------------------------------------------
1999 1998 1997
------------ --------- -------- --------- --------- --------- --------- -------- --------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
------------ --------- -------- --------- --------- --------- --------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans receivable, net/1/... $209,178 $ 17,037 8.14% $207,377 $17,068 8.23% $209,219 $17,059 8.15%
Mortgage-backed
securities/2/............. 7,170 405 5.65 1,708 103 6.03 1,357 97 7.15
Investment securities...... 12,999 784 6.03 15,598 977 6.26 12,750 805 6.31
Interest-bearing
deposits/3/............... 21,345 1,070 5.01 19,112 1,088 5.69 15,171 758 5.00
-------- -------- ---- -------- -------- -------- -------- -------- ------
Total interest-earning
assets................. 250,692 19,296 7.70 243,795 19,236 7.89 238,497 18,719 7.85
Non-interest-earning assets.. 11,988 10,531 8,553
-------- -------- --------
Total assets............. $262,680 $254,326 $247,050
======== ======== ========
Interest-bearing
liabilities:
Deposits................... $222,645 10,516 4.72 $210,697 10,194 4.84 $208,289 10,006 4.80
Borrowings................. 11,667 671 5.75 15,007 890 5.93 11,835 604 5.10
-------- -------- ---- -------- -------- -------- -------- -------- ------
Total interest-bearing
liabilities............ 234,312 11,187 4.77 225,704 11,084 4.91 220,124 10,610 4.82
Non-interest-bearing
liabilities................. 4,549 4,666 3,901
------- -------- --------
Total liabilities........ 238,861 230,370 224,025
Stockholders' equity......... 23,819 23,956 23,025
-------- -------- --------
Total liabilities and
stockholders' equity... $262,680 $254,326 $247,050
======== -------- ======== -------- -------- -------
Net interest income.......... $ 8,109 $ 8,152 $ 8,109
======== ======== -------- ======= -------
Interest rate spread/4/...... 2.93% 2.98% 3.03%
------ ======== =======
Net yield on
interest-earning
assets/5/.................. 3.23% 3.34% 3.40%
====== ======== =======
Ratio of average
interest-earning
assets to average
interest-
bearing liabilities........ 106.99% 108.02% 108.35%
====== ======== =======
</TABLE>
/1/ Includes non-accrual loan balances.
/2/ Includes mortgage-backed securities designated as available for sale.
/3/ Includes federal funds sold and interest-bearing deposits in other
financial institutions.
/4/ Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
/5/ Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
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); and (ii) changes in rate
(change in rate multiplied by old average volume). Changes in rate-volume
(changes in rate multiplied by the change in average volume) have been allocated
proportionately between changes in rate and changes in volume, and the net
change.
<TABLE>
<CAPTION>
Year Ended March 31,
----------------------------------------------------------------------------------------
1999 vs. 1998 1998 vs. 1997
------------------------------------ ------------------------------
Increase (Decrease) Total Increase (Decrease) Total
Due to Increase Due to Increase
-------------------- --------------------
Volume Rate (Decrease) Volume Rate (Decrease)
-------- ------- ------------ --------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income attributable to:
Loans receivable................... $ 151 $(182) $ (31) $(154) $163 $ 9
Mortgage-backed securities......... 361 (59) 302 23 (17) 6
Other interest-earning assets...... (22) (189) (211) 412 90 502
----- ----- ----- ----- ---- ----
Total interest-earning assets.... 490 (430) 60 281 236 517
Interest expense attributable to:
Deposits........................... 575 (253) 322 110 78 188
Borrowings......................... (193) (26) (219) 178 108 286
----- ----- ----- ----- ---- ----
Total interest-bearing
liabilities..................... 382 (279) 103 288 186 474
----- ----- ----- ----- ---- ----
Increase (decrease) in
net interest income............. $ 108 $(151) $ (43) $ (7) $ 50 $ 43
===== ===== ===== ===== ==== ====
</TABLE>
Asset and Liability Management-Interest Rate Sensitivity Analysis
The Banks, like other financial institutions, are subject to interest rate
risk to the extent that their interest-earning assets reprice differently than
their interest-bearing liabilities. As part of their effort to monitor and
manage interest rate risk, the Banks use the "net portfolio value" ("NPV")
methodology adopted by the Office of Thrift Supervision ("OTS") as part of its
capital regulations. Although the Banks are not currently subject to the NPV
regulation because such regulation does not apply to institutions with less than
$300 million in assets and risk-based capital in excess of 12%, the application
of NPV methodology illustrates certain aspects of the Banks interest rate risk.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on interest-bearing and other liabilities. The application of the methodology
attempts to quantify interest rate risk as the change in the NPV which would
result from a theoretical 200 basis point (1 basis point equals .01%) change in
market interest rates. Both a 200 basis point increase in market interest rates
and a 200 basis point decrease in market interest rates are considered. If the
NPV would decrease more than 2% of the present value of the institution's assets
with either an increase or a decrease in market rates, the institution must
deduct 50% of the amount of the decrease in excess of such 2% in the calculation
of the institution's risk-based capital. See "Liquidity and Capital Resources."
Presented below, as of March 31, 1999 and 1998, is an analysis of the Banks
interest rate risk as measured by changes in NPV for instantaneous and sustained
parallel shifts of 100-300 basis points in market interest rates.
19
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (con't.)
<TABLE>
<CAPTION>
As of March 31, 1999
Change in Interest Net Portfolio Value NPV as % of PV of Assets
Rates (Basis Points) $ Amount $ Change % Change NPV Ratio Change
- -------------------- -------- -------- -------- --------- ------
(In thousands)
<S> <C> <C> <C> <C> <C>
+300 bp $ 15,602 $ (13,730) (47)% 6.02% (463 bp)
+200 bp 20,989 (8,343) (28) 7.91 (274 bp)
+100 bp 25,715 (3,617) (12) 9.49 (116 bp)
0 bp 29,332 -- -- 10.65 --
-100 bp 32,110 2,778 9 11.50 85 bp
-200 bp 34,161 4,830 16 12.09 144 bp
-300 bp 36,776 7,444 25 12.83 218 bp
<CAPTION>
As of March 31, 1999
Change in Interest Net Portfolio Value NPV as % of PV of Assets
Rates (Basis Points) $ Amount $ Change % Change NPV Ratio Change
- -------------------- -------- -------- -------- --------- ------
(In thousands)
<S> <C> <C> <C> <C> <C>
+300 bp $ 18,176 $ (13,767) (43)% 7.28% (469 bp)
+200 bp 23,324 (8,619) (27) 9.12 (285 bp)
+100 bp 28,073 (3,870) (12) 10.73 (124 bp)
0 bp 31,943 -- -- 11.97 --
-100 bp 34,491 2,548 8 12.75 78 bp
-200 bp 35,304 3,361 11 12.94 97 bp
-300 bp 36,079 4,136 13 13.11 114 bp
</TABLE>
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may react
in different degrees to changes in market interest rates. Also, the interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. Further, in the event of a change in interest
rates, expected rates of prepayment on loans and mortgage-backed securities and
early withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making the risk calculations.
The Company's policy in recent years has been to reduce its exposure to
interest rate risk generally by better matching the maturities of its interest
rate sensitive assets and liabilities and by originating ARM loans and other
adjustable rate or short-term loans, as well as by purchasing short-term
investments. However, particularly in 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, 1999. 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 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 Banks have operated within the framework of the Banks' prescribed
asset/liability risk ranges for each of the last three years.
Liquidity and Capital Resources
The Banks are required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required ratio currently is 4%. The
Company's liquidity ratio averaged 10.86% during the month of March 1999 and
12.33% during the fiscal year ended March 31, 1999. The Company adjusts
liquidity as appropriate to meet its asset and liability management objectives.
The Banks' primary sources of funds are deposits, amortization and
repayment of loans and mortgage-backed securities, maturities of investment
securities and other short-term investments, and earnings and funds provided
from operations. While scheduled principal repayments on loans and mortgage-
backed securities are a relatively predictable source of funds, deposit flows
and loan prepayments are greatly influenced by general interest rates, economic
conditions, and competition. The Banks manage the pricing of deposits to
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (con't.)
maintain a desired level of deposits and cost of funds. In addition, the Banks
invest excess funds in federal funds, and other short-term interest-earning and
other assets, which provide liquidity to meet lending requirements. Federal
funds sold and other assets qualifying for liquidity outstanding at March 31,
1999, 1998 and 1997, amounted to $32.5 million, $34.4 million, and $32.3
million, respectively. For additional information about cash flows from the
Company's operating, financing, and investing activities, see Statements of Cash
Flows included in the Financial Statements.
A major portion of the Banks' liquidity consists of cash and cash
equivalents, which are a product of its operating, investing, and financing
activities. The primary sources of cash were net earnings, principal repayments
on loans and mortgage-backed securities, and increases in deposit accounts.
Liquidity management is both a daily and long-term function of business
management. If the Banks require funds beyond their ability to generate them
internally, borrowing agreements exist with the Federal Home Loan Bank ("FHLB")
which provide an additional source of funds. At March 31, 1999, the Company had
$9.0 million in outstanding advances from the FHLB.
At March 31, 1999 the Company had outstanding loan commitments of $21.6
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,
1999, totaled $107.5 million. Based on prior experience, management believes
that a significant portion of such deposits will remain with the Company.
Year 2000 Compliance Matters
The Year 2000 ("Y2K") issue is the result of computer programs using a two-
digit format, as opposed to four digits, to indicate the year. Such computer
systems will be unable to interpret dates beyond the year 1999, which could
cause a system failure or other computer errors, leading to disruption in
operations. The potential impact is that date sensitive calculations would be
based on erroneous data or could cause a system failure. This affects all forms
of financial accounting including interest computation, due dates,
pensions/personnel benefits, and investments. It can also affect record
keeping.
In 1997, the Company developed a five-phase program for Y2K information
systems compliance. Phase I is awareness which consisted of establishing a Y2K
project team and gaining executive-level support for resources necessary to
perform compliance work. Phase II is assessment which consisted of the
identification of all hardware, software, networks, automated teller machines,
other various processing platforms, and customer and vendor interdependencies
affected by the Y2K date change. Phase III is renovation consisting of hardware
and software upgrades, system replacements, vendor certification, and other
associated changes for known non-compliant applications. Phase IV is validation
consisting of testing hardware, software, and systems to assure Y2K compliance.
Phase V is implementation whereby a contingency plan is enacted for any system
failing Y2K testing.
The Company does not perform in-house programming. All systems have been
purchased from third-party vendors. Therefore, the primary thrust of the
Company's Y2K effort has been ongoing discussions and monitoring of vendors'
progress. The Company has received confirmation from its vendors that Y2K-
compliant versions of their systems are available. The Company either had the
compliant version in place or has replaced a non-compliant version with the
compliant one.
The most critical phase is validation. Although vendors have certified that
their systems are compliant, the Company plans to test these systems, using
critical future dates. There are numerous testing methodologies to cover the
unique interdependencies between the vendors and the Company. Testing
methodologies used by the Company will include point-to-point (tests verify the
ability of a financial institution to transmit data directly to another entity
or system); end-to-end (tests verify the ability of a financial institution
originating a transaction to transmit test data to a receiving entity or system
through an intermediary); and proxy (the service provider tests with a
representative sample of financial institutions who use a particular service on
the same platform).
The Company's Y2K action plan requires that mission-critical systems
testing be substantially completed by March 31, 1999. A mission-critical system
is an application or system that is vital to the successful continuance of a
core business activity. The Company complied with the March 31, 1999 deadline
and all mission critical systems have been deemed Y2K compliant. Testing of
material nonmission-critical systems began by March 31, 1999 with planned
completion by June 30, 1999.
The Company has budgeted approximately $50,000 for hard costs related to
renovation and testing. Approximately $20,000 of the budget has been expended.
The Company has developed a business resumption contingency plan for each
mission-critical system in the event that there are system failures at critical
dates. The contingency plan consists of: event timelines, business impact
analysis, alternative options, minimum acceptable levels of output and services,
and core business processes that need to be recovered. The contingency plan is
not static, it will receive constant attention through the remainder of the
year.
The Company expects that customers may desire to withdraw funds in the
weeks preceding the century date change. In order to address that potential
consequence, the Company will need to have sufficient liquid assets towards the
end of the year. The Company is currently significantly in excess of OTS
liquidity requirements and anticipates remaining significantly in excess
throughout fiscal year 2000.
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
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (con't.)
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Unlike most industrial companies,
nearly all the assets and liabilities of the Company are monetary. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
Impact of Recent Accounting Pronouncements
In June 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 No. 125 effective January 1, 1998, as required, without
material effect on the Company's financial position or results of operations.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income." SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. SFAS No. 130 requires
that all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. It does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
SFAS No. 130 requires that an enterprise (a) classify items of other
comprehensive income by their nature in a financial statement and (b) display
the accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial condition. SFAS No. 130 is effective for fiscal years beginning after
December 15, 1997. Reclassification of financial statements for earlier periods
provided for comparative purposes is required. Management adopted SFAS No. 130
effective April 1, 1998, as required, without material impact on the Company's
consolidated 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 shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS No. 131
uses a "management approach" to disclose financial and descriptive information
about the way that management organizes the segments within the enterprise for
making operating decisions and assessing performance. For many enterprises, the
management approach will likely result in more segments being reported. In
addition, SFAS No. 131 requires significantly more information to be disclosed
for each reportable segment than is presently being reported in annual financial
statements and also requires that selected information be reported in interim
financial statements. SFAS No. 131 is effective for fiscal years beginning after
December 15, 1997. Management adopted SFAS No. 131 effective April 1, 1998, as
required, without material impact on the Company's consolidated financial
statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which requires entities to recognize all
derivatives in their financial
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS (con't.)
statements as either assets or liabilities measured at fair value. SFAS No. 133
also specifies new methods of accounting for hedging transactions, prescribes
the items and transactions that may be hedged, and specifies detailed criteria
to be met to qualify for hedge accounting.
The definition of a derivative financial instrument is complex, but in
general, it is an instrument with one or more underlyings, such as an interest
rate or foreign exchange rate, that is applied to a notional amount, such as an
amount of currency, to determine the settlement amount(s). It generally
requires no significant initial investment and can be settled net or by delivery
of an asset that is readily convertible to cash. SFAS No. 133 applies to
derivatives embedded in other contracts, unless the underlying of the embedded
derivative is clearly and closely related to the host contract.
SFAS No. 133 is effective for fiscal years beginning after June 15, 2000.
On adoption, entities are permitted to transfer held-to-maturity debt securities
to the available-for-sale or trading category without calling into question
their intent to hold other debt securities to maturity in the future. SFAS No.
133 is not expected to have a material impact on the Company's financial
statements.
Common Stock and Related Matters
Effective June 23, 1993, Wayne Savings (formerly named the Wayne Savings
and Loan Company) reorganized from mutual to stock form and established Wayne
Savings Bankshares, M.H.C., a mutual holding company (the "Holding Company").
Wayne Savings' initial public offering of Common Stock closed on June 23, 1993.
Shares of Common Stock were issued and sold in that offering at $5.00 (adjusted)
per share. On June 10, 1999, the Company, paid a 5% stock dividend. In addition,
in June of 1998, 1997, and 1996, the Company paid a 10% stock dividend, 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.
Effective November 25, 1997, Wayne Savings completed its reorganization
into a two-tier mutual holding company structure with the establishment of the
Company as parent of Wayne Savings. In the reorganization, each share of Wayne
Savings' common stock was automatically converted into one share of Company
common stock. The reorganization of Wayne Savings was structured as a tax-free
reorganization and was accounted for in the same manner as a pooling-of-
interests. As a result of the reorganization, the Company now serves as the
stock holding company parent of Wayne.
The Company's Common Stock trades over-the-counter on the Nasdaq SmallCap
Market using the symbol "WAYN." The following table sets forth the high and low
trading prices of the Company's common stock (adjusted) during the two most
recent fiscal years, together with the cash dividends declared (adjusted).
<TABLE>
<CAPTION>
Fiscal Year Ended Cash Dividends
March 31, 1998 High Low Declared
- ----------------- ---- --- --------------
<S> <C> <C> <C>
First quarter $ 16.02 $ 14.57 $ .134
Second quarter 21.43 14.93 .134
Third quarter 28.57 20.56 .134
Fourth quarter 26.41 23.81 .134
Fiscal Year Ended Cash Dividends
March 31, 1999 High Low Declared
- ----------------- ---- --- --------------
First quarter $ 27.27 $ 24.76 $ .148
Second quarter 24.76 17.14 .148
Third quarter 21.19 16.07 .148
Fourth quarter 17.86 14.29 .148
</TABLE>
As of April 12, 1999, the Company had 870 stockholders of record and
2,605,153 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.
Under current OTS regulations, a savings institution may make a capital
distribution without notice to the OTS, unless it is a subsidiary of a holding
company, provided that it has a regulatory rating in the two top categories, is
not of supervisory concern, and would remain adequately capitalized, as defined
in the OTS prompt corrective action regulations, following the proposed
distribution. Savings institutions that would remain adequately capitalized
following the proposed distribution but do not meet the other noted requirements
must notify the OTS 30 days prior to declaring a capital distribution. The OTS
stated it will generally regard as permissible that amount of capital
distributions that do not exceed 50% of the institution's excess regulatory
capital plus net earnings to date during the calendar year. A savings
institution may not make a capital distribution without prior approval of the
OTS and the FDIC if it is undercapitalized before, or as a result of, such a
distribution. The OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice.
In addition to the foregoing, earnings of the Company appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then-current tax rate by the Company on the amount of earnings
removed from the reserves for such distributions. The Company intends to make
full use of this favorable tax treatment and does not contemplate any
distribution by the Company in a manner that would limit the Company's bad debt
deduction or create federal tax liability.
23
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
[LETTERHEAD OF GRANT THORNTON APPEARS HERE]
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
Wayne Savings Bancshares, Inc.
We have audited the accompanying consolidated statements of financial condition
of Wayne Savings Bancshares, Inc. as of March 31, 1999 and 1998, and the related
consolidated statements of earnings, stockholders' equity, comprehensive income
and cash flows for each of the three years ended March 31, 1999, 1998 and 1997.
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, 1999 and 1998, and the consolidated
results of its operations and its cash flows for each of the three years ended
March 31, 1999, 1998 and 1997, in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
Cincinnati, Ohio
May 27, 1999
24
<PAGE>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
As of March 31,
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Cash and due from banks................................................................ $ 1,540 $ 1,422
Federal funds sold..................................................................... 4,295 4,100
Interest-bearing deposits in other financial institutions.............................. 10,410 7,647
-------- --------
Cash and cash equivalents.......................................................... 16,245 13,169
Certificates of deposit in other financial institutions................................ 6,000 8,500
Investment securities held to maturity -- at amortized cost, approximate
market value of $11,752 and $13,335 as of March 31, 1999 and 1998.................... 11,830 13,401
Mortgage-backed securities available for sale -- at market............................. 6,411 4,032
Mortgage-backed securities held to maturity -- at cost, approximate
market value of $811 and $245 as of March 31, 1999 and 1998.......................... 819 243
Loans receivable -- net................................................................ 214,094 206,685
Loans held for sale -- at lower of cost or market...................................... 1,585 1,194
Office premises and equipment -- at depreciated cost................................... 7,748 6,461
Real estate acquired through foreclosure............................................... 41 946
Federal Home Loan Bank stock -- at cost................................................ 2,919 2,719
Accrued interest receivable on loans................................................... 1,134 1,152
Accrued interest receivable on mortgage-backed securities.............................. 28 23
Accrued interest receivable on investments and interest-bearing deposits............... 184 180
Prepaid expenses and other assets...................................................... 1,933 1,047
Prepaid federal income taxes........................................................... 303 --
-------- --------
Total assets....................................................................... $271,274 $259,752
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits............................................................................... $235,327 $217,621
Advances from the Federal Home Loan Bank............................................... 9,000 16,000
Advances by borrowers for taxes and insurance.......................................... 821 783
Accrued interest payable............................................................... 179 197
Accounts payable on mortgage loans serviced for others................................. 108 199
Other liabilities...................................................................... 497 291
Accrued federal income taxes........................................................... -- 1
Deferred federal income taxes.......................................................... 386 234
-------- --------
Total liabilities.................................................................. 246,318 235,326
Commitments............................................................................ -- --
Stockholders' equity
Common stock (20,000,000 shares of $1.00 par value authorized;
2,505,082 and 2,258,007 shares issued at March 31, 1999
and 1998, respectively)............................................................ 2,505 2,258
Additional paid-in capital........................................................... 12,480 5,963
Retained earnings -- substantially restricted........................................ 10,437 16,198
Less 22,583 and 357 shares of treasury stock, respectively........................... (468) (10)
Accumulated other comprehensive income --
unrealized gains on securities designated as available for sale,
net of related tax effects......................................................... 2 17
-------- --------
Total stockholders' equity......................................................... 24,956 24,426
-------- --------
Total liabilities and stockholders' equity......................................... $271,274 $259,752
======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
25
<PAGE>
CONSOLIDATED STATEMENTS OF EARNINGS
For the year ended March 31,
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
1999 1998 1997
------- ------- -------
<S> <C> <C> <C>
Interest income:
Loans............................................................ $17,037 $17,068 $17,059
Mortgage-backed securities....................................... 405 103 97
Investment securities............................................ 784 977 805
Interest-bearing deposits and other.............................. 1,070 1,088 758
------- ------- -------
Total interest income......................................... 19,296 19,236 18,719
Interest expense:
Deposits......................................................... 10,516 10,194 10,006
Borrowings....................................................... 671 890 604
------- ------- -------
Total interest expense........................................ 11,187 11,084 10,610
------- ------- -------
Net interest income........................................... 8,109 8,152 8,109
Provision for losses on loans...................................... 64 60 20
------- ------- -------
Net interest income after provision for losses on loans....... 8,045 8,092 8,089
Other income:
Gain on sale of loans............................................ 309 237 56
Gain on sale of real estate acquired through foreclosure......... -- 4 --
Service fees, charges and other operating........................ 682 613 519
------- ------- -------
Total other income............................................ 991 854 575
General, administrative and other expense:
Employee compensation and benefits............................... 3,329 3,203 3,271
Occupancy and equipment.......................................... 1,111 982 864
Federal deposit insurance premiums............................... 202 203 1,779
Franchise taxes.................................................. 335 298 291
Loss on disposition of office premises and equipment............. -- -- 129
Loss on disposal of real estate acquired through foreclosure..... 110 -- --
Other operating.................................................. 1,460 1,458 1,254
------- ------- -------
Total general, administrative and other expense............... 6,547 6,144 7,588
------- ------- -------
Earnings before income taxes.................................. 2,489 2,802 1,076
Federal income taxes:
Current.......................................................... 686 860 142
Deferred......................................................... 160 93 225
------- ------- -------
Total federal income taxes..................................... 846 953 367
------- ------- -------
NET EARNINGS.................................................. $ 1,643 $ 1,849 $ 709
======= ======= =======
Earnings per share
Basic....................................................... $.63 $.71 $.28
======= ======= =======
Diluted..................................................... $.62 $.70 $.27
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
26
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the year ended March 31,
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
1999 1998 1997
------ ------ ----
<S> <C> <C> <C>
Net earnings.................................................. $1,643 $1,849 $709
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities
during the period, net of tax............................. (15) (13) 1
------ ------ ----
Comprehensive income.......................................... $1,628 $1,836 $710
====== ====== ====
</TABLE>
The accompanying notes are an integral part of these statements.
27
<PAGE>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended March 31, 1999, 1998 and 1997
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Accumulated other
comprehensive income
-- unrealized gains
(losses) on
securities
Additional Shares Shares Treasury designated
Common paid-in Retained acquired acquired stock- as available
stock capital earnings by ESOP by MRP at cost for sale
------- ----------- -------- -------- ------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at April 1, 1996................ $ 1,424 $ 4,407 $17,132 $(125) $ (15) $ -- $ 29
Principal payments on
loan to ESOP.......................... -- 57 -- 90 -- -- --
Amortization of Management
Recognition Plan...................... -- -- -- -- 15 -- --
Stock options exercised................. 4 35 -- -- -- -- --
Net earnings for the year
ended March 31, 1997.................. -- -- 709 -- -- -- --
Stock dividend.......................... 71 1,345 (1,424) -- -- -- --
Cash dividends of $.52
per share............................. -- -- (640) -- -- -- --
Unrealized gains on
securities designated as
available for sale, net of
related tax effects................... -- -- -- -- -- -- 1
------- ----------- -------- -------- ------- -------- --------
Balance at March 31, 1997............... 1,499 5,844 15,777 (35) -- -- 30
Principal payments on loan
to ESOP............................... -- 71 -- 35 -- -- --
Stock options exercised................. 10 48 -- -- -- (10) --
Net earnings for the year
ended March 31, 1998.................. -- -- 1,849 -- -- -- --
Effect of three-for-two
stock split........................... 749 -- (754) -- -- -- --
Cash dividends of $.54
per share............................. -- -- (674) -- -- -- --
Unrealized losses on
securities designated as
available for sale, net of
related tax effects................... -- -- -- -- -- -- (13)
------- ----------- -------- -------- ------- -------- --------
Balance at March 31, 1998............... 2,258 5,963 16,198 -- -- (10) 17
Stock options exercised................. 22 92 -- -- -- (27) --
Net earnings for the year
ended March 31, 1999.................. -- -- 1,643 -- -- -- --
Stock dividend.......................... 225 6,425 (6,650) -- -- -- --
Cash dividends of $.59
per share............................. -- -- (754) -- -- -- --
Purchase of treasury shares
-- at cost............................ -- -- -- -- -- (431) --
Unrealized losses on
securities designated as
available for sale, net of
related tax effects................... -- -- -- -- -- -- (15)
------- ----------- -------- -------- ------- -------- --------
Balance at March 31, 1999............... $ 2,505 $12,480 $ 10,437 $ -- $ -- $ (468) $ 2
------- ----------- -------- -------- ------- -------- --------
<CAPTION>
Total
stock-
holders'
equity
---------
<S> <C>
Balance at April 1, 1996................ $22,852
Principal payments on
loan to ESOP.......................... 147
Amortization of Management
Recognition Plan...................... 15
Stock options exercised................. 39
Net earnings for the year
ended March 31, 1997.................. 709
Stock dividend.......................... (8)
Cash dividends of $.52
per share............................. (640)
Unrealized gains on
securities designated as
available for sale, net of
related tax effects................... 1
-------
Balance at March 31, 1997............... 23,115
Principal payments on loan
to ESOP............................... 106
Stock options exercised................. 48
Net earnings for the year
ended March 31, 1998.................. 1,849
Effect of three-for-two
stock split........................... (5)
Cash dividends of $.54
per share............................. (674)
Unrealized losses on
securities designated as
available for sale, net of
related tax effects................... (13)
-------
Balance at March 31, 1998............... 24,426
Stock options exercised................. 87
Net earnings for the year
ended March 31, 1999.................. 1,643
Stock dividend.......................... --
Cash dividends of $.59
per share............................. (754)
Purchase of treasury shares
-- at cost............................ (431)
Unrealized losses on
securities designated as
available for sale, net of
related tax effects................... (15)
-------
Balance at March 31, 1999............... $24,956
-------
</TABLE>
The accompanying notes are an integral part of these statements.
28
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended March 31,
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings for the year................................................................... $ 1,643 $ 1,849 $ 709
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........................................ (25) 14 2
Amortization of deferred loan origination fees............................................. (574) (399) (338)
Depreciation and amortization.............................................................. 519 430 402
Loss on disposition of office premises and equipment....................................... -- -- 129
Gain on sale of loans...................................................................... (149) (130) (27)
Proceeds from sale of loans in the secondary market........................................ 16,009 7,196 1,957
Loans originated for sale in the secondary market.......................................... (16,251) (8,260) (1,901)
Provision for losses on loans.............................................................. 64 60 20
(Gain) loss on sale of real estate acquired through foreclosure............................ 110 (4) --
Federal Home Loan Bank stock dividends..................................................... (199) (188) (169)
Amortization expense of employee stock benefit plans....................................... -- 161 64
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans..................................................... 18 (13) 57
Accrued interest receivable on mortgage-backed securities................................ (5) (16) 5
Accrued interest receivable on investments and
interest-bearing deposits.............................................................. (4) 46 19
Prepaid expenses and other assets........................................................ (886) (257) 509
Accrued interest payable................................................................. (18) (29) 34
Accounts payable on mortgage loans serviced for others................................... (91) 73 (115)
Other liabilities........................................................................ 206 (91) 29
Federal income taxes
Current................................................................................. (304) (330) (267)
Deferred................................................................................ 160 93 225
--------- --------- ---------
Net cash provided by operating activities............................................. 223 205 1,344
Cash flows provided by (used in) investing activities:
Purchase of investment securities........................................................... (12,484) (11,000) (10,000)
Proceeds from the maturity of investment securities......................................... 14,055 14,569 7,713
Purchase of mortgage-backed securities...................................................... (6,576) (4,010) --
Principal repayments on mortgage-backed securities.......................................... 3,470 614 1,048
Loan principal repayments................................................................... 48,776 49,359 43,274
Loan disbursements.......................................................................... (55,615) (45,963) (45,868)
Purchase of office premises and equipment................................................... (1,768) (2,900) (857)
Proceeds from sale of real estate acquired through foreclosure.............................. 820 59 468
(Increase) decrease in certificates of deposit in other financial institutions.............. 2,500 (1,000) (2,500)
--------- --------- ---------
Net cash used in investing activities................................................. (6,822) (272) (6,722)
--------- --------- ---------
Net cash used in operating and investing activities
(balance carried forward)........................................................... (6,599) (67) (5,378)
--------- --------- ---------
</TABLE>
29
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (con't.)
For the year ended March 31,
<TABLE>
<CAPTION>
1999 1998 1997
--------- --------- ---------
(In thousands)
<S> <C> <C> <C>
Net cash used in operating and investing activities
(balance brought forward)....................................................... $ (6,599) $ (67) $ (5,378)
Cash flows provided by (used in) financing activities:
Net increase in deposit accounts........................................................ 17,706 6,179 1,284
Proceeds from Federal Home Loan Bank advances........................................... 16,000 13,000 26,000
Repayments of Federal Home Loan Bank advances........................................... (23,000) (13,000) (24,000)
Advances by borrowers for taxes and insurance........................................... 38 82 119
Dividends paid on common stock.......................................................... (725) (679) (648)
Proceeds from the exercise of stock options............................................. 87 48 39
Purchase of treasury shares............................................................. (431) (10) --
--------- --------- ---------
Net cash provided by financing activities......................................... 9,675 5,630 2,794
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents...................................... 3,076 5,563 (2,584)
Cash and cash equivalents at beginning of year............................................ 13,169 7,606 10,190
--------- --------- ---------
Cash and cash equivalents at end of year.................................................. $ 16,245 $ 13,169 $ 7,606
========= ========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Federal income taxes.................................................................. $ 892 $ 797 $ 396
========= ========= =========
Interest on deposits and borrowings................................................... $ 11,205 $ 11,113 $ 10,576
========= ========= =========
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure........................ $ 58 $ 162 $ --
========= ========= =========
Issuance of mortgage loan upon sale of real estate
acquired through foreclosure.......................................................... $ 699 $ -- $ --
========= ========= =========
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects............................................................ $ (15) $ (13) $ 1
========= ========= =========
Recognition of mortgage servicing rights................................................ $ 160 $ 107 $ 29
========= ========= =========
Supplemental disclosure of noncash financing activities:
Acquisition of treasury stock in exchange for outstanding shares........................ $ 27 $ 10 $ --
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include Wayne Savings Bancshares,
Inc, (the "Company") and its wholly-owned subsidiaries. In fiscal year 1999,
Wayne Savings Community Bank ("Wayne Savings" or the "Bank") formed a new
federal savings bank subsidiary in North Canton, Ohio, Village Savings Bank,
F.S.B. ("Village"), together referred to as "the Banks." Intercompany
transactions and balances are eliminated in the consolidation.
Effective November 25, 1997, Wayne Savings, formerly named The Wayne
Savings and Loan Company, completed its reorganization into a two-tier mutual
holding company structure with the establishment of a stock holding company as
parent of the Bank. In the reorganization, each share of Wayne Savings' common
stock was automatically converted into one share of Wayne Savings Bancshares,
Inc. common stock. The reorganization of the Bank was structured as a tax-free
reorganization and was accounted for in the same manner as a pooling-of-
interests. Wayne Savings Community Bank is now the wholly-owned subsidiary of
Wayne Savings Bancshares, Inc., the stock holding company.
The Banks conduct a general banking business in north central Ohio which
consists of attracting deposits from the general public and applying those funds
to the origination of loans for residential, consumer and nonresidential
purposes. The Banks' profitability is significantly dependent on 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, 1999 and 1998, the Company's equity accounts reflected a net unrealized gain
on securities designated as available for sale of $2,000 and $17,000,
respectively. Realized gains or losses on sales of securities are recognized
using the specific identification method.
2. Loans Receivable
Loans held in portfolio are stated at the principal amount outstanding,
adjusted for deferred loan origination fees, the allowance for loan losses and
amortization of premiums and accretion of discounts on loans purchased and sold.
Premiums and discounts on loans purchased and sold are amortized and accreted to
operations using the interest method over the average life of the underlying
loans.
Interest is accrued as earned unless the collectibility of the loan is in
doubt. Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal
to all interest previously accrued, and income is subsequently recognized only
to the extent that cash payments are received until, in management's judgment,
the borrower's ability to make periodic interest and principal payments has
returned to normal, in which case the loan is returned to accrual status.
The Bank retains the servicing on any loans sold and agrees to remit to the
investor loan principal and interest at agreed-upon rates. These rates generally
differ from the loan's contractual interest rate resulting in a "yield
differential." In addition to previously deferred loan origination fees and cash
gains, gains on sale of loans can represent the present value of the future
yield differential less a normal servicing fee, capitalized over the estimated
life of the loans sold. Normal servicing fees are determined by reference to the
stipulated servicing fee set forth in the loan sale agreement. Such fees
approximate the Bank's normal servicing costs. The resulting capitalized excess
servicing fee is amortized to operations over the estimated life of the loans
using the interest method. If prepayments are higher than expected, an immediate
charge to operations is made.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999, 1998 and 1997
If prepayments are lower, then adjustments are made prospectively.
The Bank recognizes rights to service mortgage loans for others, pursuant
to SFAS No. 125 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." In accordance with SFAS No. 125, an institution
that acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells those loans with servicing rights
retained would allocate some of the cost of the loans to the mortgage servicing
rights.
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 $160,000, $107,000, and $29,000 of pre-tax gains on
sales of loans related to capitalized mortgage servicing rights during the
fiscal years ended March 31, 1999, 1998, and 1997, 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 $32,000, $12,000, and $1,000 for the years ended March
31, 1999, 1998, and 1997, respectively. At March 31, 1999 and 1998, the fair
value of the Bank's mortgage servicing rights totaled approximately $296,000 and
$168,000, 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, 1999, loans held
for sale were carried at cost.
3. Loan Origination Fees
The Banks account for loan origination fees in accordance with SFAS No. 91
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases". Pursuant to the provisions
of SFAS No. 91, origination fees received from loans, net of certain direct
origination costs, are deferred and amortized to interest income using the
level-yield method, giving effect to actual loan prepayments. Additionally, SFAS
No. 91 generally limits deferred loan origination costs to the direct costs
attributable to the origination of a loan, i.e. principally, actual personnel
costs. Fees received for loan commitments that are expected to be drawn upon,
based on the Banks' experience with similar commitments, are deferred and
amortized over the life of the loan using the level-yield method. Fees for other
loan commitments will be deferred and amortized over the loan commitment period
on a straight-line basis.
4. Allowance for Loan Losses
It is the Banks' policy to provide valuation allowances for estimated
losses on loans based on past loss experience, trends in the level of delinquent
and problem loans, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral and current and
anticipated economic conditions in their primary market areas. When the
collection of a loan becomes doubtful, or otherwise troubled, the Banks record a
charge-off equal to the difference between the fair value of the property
securing the loan and the loan's carrying value. In providing valuation
allowances, costs of holding real estate, including the cost of capital, are
considered. Major loans (including development projects), and major lending
areas are reviewed periodically to 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 Banks account for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan". This statement requires
that impaired loans be measured based upon the present value of expected future
cash flows discounted at the loan's effective interest rate or, as an
alternative, at the loan's observable market price or fair value of the
collateral.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
applying the provisions of SFAS No. 114, the Banks consider investment in one-
to-four family residential loans and consumer installment loans to be
homogeneous and therefore excluded from separate identification for evaluation
of impairment. With respect to the Banks' investment in multi-family and
nonresidential loans, and their evaluation of impairment thereof, such loans are
collateral dependent and, as a result, are carried as a practical expedient at
the lower of cost or fair value.
It is the Banks' policy to charge off unsecured credits that are more than
ninety days delinquent. Similarly, collateral dependent loans which are more
than ninety days delinquent are considered to constitute more than a minimum
delay in repayment and are evaluated for impairment under SFAS No. 114 at that
time.
At March 31, 1999 and 1998, the Banks' investment in impaired loans, as
defined, totaled approximately $44,000 and $9,000, respectively.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999, 1998 and 1997
5. Office Premises and Equipment
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and
minor renewals are expensed as incurred. For financial reporting, depreciation
and amortization are provided on the straight-line and declining-balance methods
over the useful lives of the assets, estimated to be twenty to fifty years for
buildings and improvements, and five to ten years for furniture and equipment.
An accelerated method is used for tax reporting purposes.
6. Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are recorded if
the properties' fair value subsequently declines below the value determined at
the recording date. In determining the lower of cost or fair value at
acquisition, costs relating to development and improvement of property are
capitalized. Costs relating to holding real estate acquired through foreclosure,
net of rental income, are charged against earnings as incurred.
7. Federal Income Taxes
The Company accounts for federal income taxes pursuant to SFAS No. 109
"Accounting for Income Taxes". In accordance with SFAS No. 109, a deferred tax
liability or deferred tax asset is computed by applying the current statutory
tax rates to net taxable or deductible temporary differences between the tax
basis of an asset or liability and its reported amount in the financial
statements that will result in net taxable or deductible amounts in future
periods. Deferred tax assets are recorded only to the extent that the amount of
net deductible temporary differences or carryforward attributes may be utilized
against current period earnings, carried back against prior years' earnings,
offset against taxable temporary differences reversing in future periods, or
utilized to the extent of management's estimate of future taxable income. A
valuation allowance is provided for deferred tax assets to the extent that the
value of net deductible temporary differences and carryforward attributes
exceeds management's estimates of taxes payable on future taxable income.
Deferred tax liabilities are provided on the total amount of net temporary
differences taxable in the future.
The Company's principal temporary differences between pretax financial
income and taxable income result primarily from the different methods of
accounting for deferred loan origination fees, Federal Home Loan Bank stock
dividends, certain components of retirement expense, general loan loss
allowances, percentage of earnings bad debt deductions and mortgage servicing
rights. A temporary difference is also recognized for depreciation expense
computed using accelerated methods for federal income tax purposes.
8. Benefit Plans
The Banks have a defined benefit pension plan covering all employees who
have attained 21 years of age and have completed one full year of service.
Annual contributions are made to fund current service costs and amortization of
past service costs. The Banks' provision for pension expense totaled $144,000,
$114,000 and $114,000 for the three years ended March 31, 1999, 1998 and 1997,
respectively. These amounts reflect the expense computed by the Banks' actuaries
utilizing the modified aggregate funding method and implicitly assuming a 7.50%
rate of return on plan assets. As of November 1, 1998, the most recent valuation
date, the amount of net assets available for benefits was $1.4 million. The
Company has not provided disclosures required by SFAS No. 87, "Accounting for
Pension Plans," based upon materiality.
The Banks instituted a Section 401(K) savings plan covering substantially
all its employees who meet certain age and service requirements. Under the plan,
the Banks match participant contributions up to 2% of each participant's
compensation during the year. This contribution is dependent on availability of
sufficient net earnings from current or prior years. Additional contributions
may be made as approved by the Board of Directors. Expense under the plan for
fiscal 1999 was approximately $36,000.
9. Stock Benefit Plans
The Bank had 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 and $174,000 for the years ended March
31, 1998 and 1997, respectively.
The Bank had a Management Recognition Plan ("MRP"). The MRP purchased
20,790 split-adjusted shares of common stock in the open market. All of the
shares available under the MRP 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 was charged to expense for the year ended March 31, 1997.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999, 1998 and 1997
10. Earnings Per Share
Basic earnings per common share is computed based upon the weighted average
number of common shares outstanding during the period, less shares in the ESOP
that are unallocated and not committed to be released. Diluted earnings per
common share include the dilutive effect of additional potential common shares
issuable under the Bank's stock option plan. Earnings and dividends per share
are restated for the stock split and all stock dividends through the date of
issuance of the financial statements. The computations were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Weighted average
common shares
outstanding (basic) 2,609,762 2,602,228 2,569,957
Dilutive effect of
assumed exercise
of stock options 26,104 43,120 44,566
--------- --------- ---------
Weighted average
common shares
outstanding (diluted) 2,635,866 2,645,348 2,614,523
========= ========= =========
</TABLE>
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. Comprehensive Income
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," as of
April 1, 1998. The Statement establishes standards for reporting and
presentation of comprehensive income and its components in a full set of
general-purpose financial statements. It 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 presented with
the same prominence as other financial statements. SFAS No. 130 requires that
companies (i) classify items of other comprehensive income by their nature in a
financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital. Financial statements for earlier periods have been restated for
comparative purposes. Accumulated comprehensive income consists solely of the
change in unrealized gains/losses on securities designated as available for sale
in accordance with SFAS No. 115.
13. 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,
1999 and 1998:
Cash and cash equivalents: The carrying amounts presented in the
consolidated statements of financial condition for cash and cash
equivalents are deemed to approximate fair value.
Certificates of deposit in other financial institutions: The carrying
amounts presented in the consolidated statements of financial
condition for certificates of deposit in other financial institutions
are deemed to approximate fair value.
Investment and mortgage-backed securities: For investment and
mortgage-backed securities, fair value is deemed to equal the quoted
market price.
Loans receivable: The loan portfolio has been segregated into
categories with similar characteristics, such as one-to-four family
residential, multi-family residential and nonresidential real estate.
These loan categories were further delineated into fixed-rate and
adjustable-rate loans. The fair values for the resultant loan
categories were computed via discounted cash flow analysis, using
current interest rates offered for loans with similar terms to
borrowers of similar credit quality. For loans on deposit accounts and
consumer and other loans, fair values were deemed to equal the
historic carrying values. The historical carrying amount of accrued
interest on loans is deemed to approximate fair value.
Federal Home Loan Bank stock: The carrying amount presented in the
consolidated statements of financial condition is deemed to
approximate fair value.
Deposits: The fair value of NOW accounts, passbook and club accounts,
money market deposits and advances by borrowers is deemed to
approximate the amount payable on demand. Fair values for fixed-rate
certificates of deposit have been estimated using a discounted cash
flow calculation using the interest rates currently offered for
deposits of similar remaining maturities.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999, 1998 and 1997
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,
1999 and 1998, 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:
<TABLE>
<CAPTION>
1999 1998
------------------ ------------------
Carrying Fair Carrying Fair
value value value value
--------- -------- -------- -------
(In thousands)
<S> <C> <C> <C> <C>
Financial assets
Cash and cash
equivalents and
certificates of
deposit............... $ 22,245 $ 22,245 $ 21,669 $ 21,669
Investment securities... 11,830 11,752 13,401 13,335
Mortgage-backed
securities............ 7,230 7,222 4,275 4,277
Loans receivable........ 215,679 220,159 207,879 209,743
Stock in Federal
Home Loan Bank........ 2,919 2,919 2,719 2,719
-------- -------- -------- --------
$259,903 $264,297 $249,943 $251,743
======== ======== ======== ========
Financial liabilities
Deposits................ $235,327 $235,876 $217,621 $217,602
Advances from the
Federal Home
Loan Bank............. 9,000 9,001 16,000 15,965
Advances by
borrowers for taxes
and insurance......... 821 821 783 783
-------- -------- -------- --------
$245,148 $245,698 $234,404 $234,350
======== ======== ======== ========
</TABLE>
14. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1999
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>
1999 1998
------------------- -------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
--------- -------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C>
U. S. Government and
agency obligations.......... $ 11,666 $ 11,588 $ 13,228 $ 13,162
Municipal obligations......... 164 164 173 173
-------- -------- -------- --------
$ 11,830 $ 11,752 $ 13,401 $ 13,335
======== ======== ======== ========
</TABLE>
At March 31, 1999, the carrying value of the Company's investment
securities in excess of estimated fair value totaled $78,000 in gross unrealized
losses.
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.
The amortized cost and estimated fair value of U. S. Government and agency
obligations and municipal obligations at March 31, 1999 by term to maturity are
shown below.
<TABLE>
<CAPTION>
Estimated
Amortized fair
Cost value
--------- ---------
(In thousands)
<S> <C> <C>
Due in one to three years..... $ 1,995 $ 1,996
Due in three to five years.... 3,174 3,152
Due in over five years........ 6,661 6,604
-------- --------
$ 11,830 $ 11,752
======== ========
</TABLE>
The Company had not pledged any investment or mortgage-backed securities to
secure public deposits at either March 31, 1999 or 1998.
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair values of mortgage-backed securities at March 31, 1999 and 1998,
including those designated as available for sale, are summarized as follows:
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't..)
March 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999
---------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
---------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
(In thousands)
Held-to-maturity
REMICs.................. $ 53 $ -- $ -- $ 53
Federal Home Loan
Mortgage Corporation
participation
certificates.......... 409 -- 7 402
Federal National
Mortgage Association
participation
certificates.......... 357 -- 1 356
---------- ---------- ---------- ---------
$ 819 $ -- $ 8 $ 811
========== ========== ========== =========
Available for sale
Federal Home Loan
Mortgage Corporation
participation
certificates.......... $ 757 $ 3 $ -- $ 760
Government National
Mortgage Association
participation
certificates.......... 1,141 5 -- 1,146
Federal National
Mortgage Association
participation
certificates.......... 4,510 18 23 4,505
---------- ---------- ---------- ---------
$ 6,408 $ 26 $ 23 $ 6,411
========== ========== ========== =========
<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
======== ====== ======= ======
</TABLE>
The amortized cost of mortgage-backed securities, including those designated
as available for sale at March 31, 1999, 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............. $ 535
Due within one to three years....... 357
Due within three to five years...... 2,144
Due after five years................ 4,191
--------
$ 7,227
========
</TABLE>
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at March 31 is as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Residential real estate - 1 to 4 family.. $187,638 $180,895
Residential real estate - multi-family... 7,086 7,091
Residential real estate - construction... 7,668 3,963
Nonresidential real estate and land...... 5,610 5,838
Education................................ 3,245 3,868
Automobile............................... 1,029 890
Consumer and other....................... 8,951 8,831
-------- --------
221,227 211,376
Less:
Undisbursed portion of loans in
process.............................. 4,600 2,088
Deferred loan origination fees......... 1,855 1,882
Allowance for loan losses.............. 678 721
-------- --------
$214,094 $206,685
======== ========
</TABLE>
As depicted above, the Banks' lending efforts have historically focused on
one-to-four-family residential and multi-family residential real estate loans,
which comprise approximately $197.8 million, or 92%, of the total loan portfolio
at March 31, 1999 and $189.9 million, or 92%, of the total loan portfolio at
March 31, 1998. Generally, such loans have been underwritten on the basis of no
more than an 80% loan-to-value ratio, which has historically provided the Banks
with adequate collateral coverage in the event of default. Nevertheless, the
Banks, as with any lending institution, are subject to the risk that real estate
values could deteriorate in their primary lending areas of north central Ohio,
thereby impairing collateral values. However, management is of the belief that
residential real estate values in the Banks' primary lending area are presently
stable.
As discussed previously, Wayne Savings has sold whole loans and participating
interests in loans in the secondary market, retaining servicing on the loans
sold. Loans sold and serviced for others totaled approximately $44.0 million,
$37.8 million and $37.5 million at March 31, 1999, 1998 and 1997, respectively.
In the normal course of business, the Banks have made loans to their
directors, officers and their related business interests. Related party loans
must be made on the same
36
<PAGE>
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 $340,000, $209,000 and $400,000 at March 31, 1999, 1998 and 1997,
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>
1999 1998 1997
------ ------ -----
(In thousands)
<S> <C> <C> <C>
Balance at beginning of year.......... $ 721 $ 914 $ 888
Provision for loan losses............. 64 60 20
(Charge-offs) recoveries -- net....... (107) (253) 6
----- ----- -----
Balance at end of year................ $ 678 $ 721 $ 914
===== ===== =====
</TABLE>
As of March 31, 1999, the Banks' allowance for loan losses was comprised of a
general loan loss allowance of $670,000, which is includible as a component of
regulatory risk-based capital, and a specific loan loss allowance of $8,000.
Nonaccrual and nonperforming loans totaled approximately $280,000, $308,000
and $962,000 at March 31, 1999, 1998 and 1997, respectively.
During the years ended March 31, 1999, 1998 and 1997 interest income of
approximately $7,000, $23,000 and $62,000, respectively, would have been
recognized had nonaccrual loans been performing in accordance with contractual
terms.
NOTE E - OFFICE PREMISES
AND EQUIPMENT
Office premises and equipment at March 31 are comprised of the following:
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
(In thousands)
Land and improvements.................... $ 1,596 $ 1,390
Office buildings and improvements........ 6,194 3,776
Furniture, fixtures and equipment........ 4,127 4,992
Automobiles.............................. 84 84
------- ------
12,001 10,242
Less accumulated depreciation
and amortization....................... 4,253 3,781
------- -------
$ 7,748 $ 6,461
======= =======
</TABLE>
As of March 31, 1999, the Bank had outstanding commitments of approximately
$430,000 for the construction of the Madison South branch which opened on May
15, 1999.
NOTE F - DEPOSITS
Deposits consist of the following major classifications at March 31:
<TABLE>
<CAPTION>
1999 1998
-------- --------
Deposit type and weighted- (In thousands)
average interest rate
<S> <C> <C>
NOW accounts
1999 - 2.11%................. $ 24,879
1998 - 2.14%................. $ 21,062
Passbook
1999 - 3.10%................. 46,466
1998 - 2.98%................. 39,111
Money Market Investor
1999 - 3.31%................. 11,265
1998 - 3.00%................. 9,448
-------- ------
Total demand, transaction and
passbook deposits............ 82,610 69,621
Certificates of deposit
Original maturities of:
Less than 12 months
1999 - 4.81%............... 37,813
1998 - 5.39%............... 29,350
12 months to 24 months
1999 - 5.18%............... 34,001
1998 - 5.50%............... 37,069
25 months to 36 months
1999 - 5.84%............... 38,696
1998 - 5.93%............... 40,862
More than 36 months
1999 - 5.99%............... 11,420
1998 - 6.71%............... 13,523
Jumbo
1999 - 5.92%............... 30,787
1998 - 6.11%............... 27,196
-------- --------
Total certificates of deposit.. 152,717 148,000
-------- --------
Total deposit accounts $235,327 $217,621
======== ========
</TABLE>
At March 31, 1999 and 1998, the Banks had deposits with balances in excess of
$100,000 totaling $38.0 million and $33.4 million, respectively.
Interest expense on deposits for the years ended March 31 is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- -------
(In thousands)
<S> <C> <C> <C>
Passbook........................... $ 1,220 $ 1,181 $ 1,291
NOW and money market
deposit accounts................. 787 732 750
Certificates of deposit............ 8,509 8,281 7,965
-------- ------- -------
$ 10,516 $10,194 $10,006
======== ======= =======
</TABLE>
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't)
Maturities of outstanding certificates of deposit at March 31 are summarized
as follows:
<TABLE>
<CAPTION>
1999 1998
-------- --------
(In thousands)
<S> <C> <C>
Less than one year.............. $107,483 $ 91,867
One to three years.............. 40,595 51,868
Over three years................ 4,639 4,265
-------- --------
$152,717 $148,000
======== ========
</TABLE>
NOTE G - ADVANCES FROM THE
FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at March 31, 1999 and
1998 by pledges of certain residential mortgage loans totaling $13.5 million and
$24.0 million and the Banks' investment in Federal Home Loan Bank stock, are
summarized as follows:
<TABLE>
<CAPTION>
Interest Maturing in year
Rate ending March 31, 1999 1998
-------- ---------------- ------ ------
(Dollars in thousands)
<S> <C> <C> <C>
5.60% - 6.15% 1999 $ -- $14,000
5.35% 2000 1,000 --
5.86% - 6.35% 2001 3,000 2,000
5.04% - 5.98% 2002 5,000 --
------- -------
$ 9,000 $16,000
======= =======
Weighted-average interest rate 5.68% 5.94%
======= =======
</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>
1999 1998 1997
------ ------ ------
(In thousands)
<S> <C> <C> <C>
Federal income taxes computed
at statutory rate............ $ 846 $ 953 $ 366
Increase (decrease) in taxes
resulting from:
Tax exempt interest.......... (3) (3) (3)
Other........................ 3 3 4
----- ----- -----
Federal income tax provision
per financial statements $ 846 $ 953 $ 367
===== ===== =====
</TABLE>
The composition of the Company's net deferred tax liability at March 31 is as
follows:
<TABLE>
<CAPTION>
1999 1998
----- ------
(In thousands)
<S> <C> <C>
Taxes (payable) refundable on temporary
differences at statutory rate:
Deferred tax assets
Deferred loan origination fees....... $ 272 $ 262
General loan loss allowance.......... 228 240
Other................................ 14 48
----- -----
Deferred tax assets.................... 514 550
Deferred tax liabilities
Federal Home Loan Bank
stock dividends.................... (591) (524)
Book/tax depreciation differences.... (122) (127)
Unrealized gains on securities
designated as available for sale... (1) (9)
Percentage of earnings bad debt
deduction.......................... (85) (67)
Mortgage servicing rights............ (101) (57)
----- -----
Deferred tax liabilities............... (900) (784)
----- -----
Total deferred tax liability......... $(386) $(234)
===== =====
</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, 1999.
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, 1999. See Note L for additional information regarding
future percentage of earnings bad debt deductions.
NOTE I - COMMITMENTS
The Company is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers
including commitments to extend credit. Such commitments involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amount
recognized in the consolidated statements of financial condition. The contract
or notional amounts of the commitments reflect the extent of the Company's
involvement in such financial instruments.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Con't.)
March 31, 1999, 1998 and 1997
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations
as those utilized for on-balance-sheet instruments.
At March 31, 1999 and 1998, the Company had outstanding commitments to
originate fixed rate loans of approximately $8.8 million and $6.6 million,
respectively, and adjustable rate loans of approximately $436,000 and $140,000,
respectively. Additionally, the Company h
ad unused lines of credit under home
equity loans of $12.0 million and $9.8 million at March 31, 1999, and 1998,
respectively. Management believes that all loan commitments are able to be
funded through cash flow from operations and existing excess liquidity. Fees
received in connection with these commitments have not been recognized in
earnings.
Commitments to extend credit are agreements to lend a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if it is deemed necessary
by the Company upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral o
n loans may vary but the
preponderance of loans granted generally include a mortgage interest in real
estate as security.
In connection with the opening of the NorthSide branch in July 1999, the
Company assumed a lease of branch banking facilities. The lease of the banking
facility is in Wooster and requires the Company to make payments of
approximately $30,000 per year. The lease commences in May, 1999 and expires in
April 2009, and contains two renewable five year options with lease payments to
be determined by the parties upon such time of a renewal.
NOTE J - REGULATORY CAPITAL
The Banks are subject to minimum regulatory capital standards promulgated
by the Office of Thrift Supervision (the "OTS"). Failure to meet minimum capital
requirements can initiate certain mandatory - and possibly additional
discretionary - actions by regulators that, if undertaken, could have a direct
material effect on their financial statements. Under capital adequacy guidelines
and the
regulatory framework for prompt corrective action, the Banks must meet
specific capital guidelines that involve quantitative measures of the Banks'
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Banks capital amounts and classification
are also subject to qualitative judgments by the regulators about components,
risk weightings, and other factors. The minimum capital standards of the OTS
generally require the maintenance of regulatory capital sufficient to meet each
of three tests, hereinafter described as the tangible capital requirement, the
core capital requirement and the risk-based capital requirement. The tangible
capital requirement provides for minimum tangible capital (defined as
stockholders' equity less all intangible assets) equal to 1.5% of adjusted total
assets. 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 Banks' 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 Banks multiply the
value of each asset on their statement of financial condition by a defined risk-
weighting factor, e.g. one- to four-family residential loans carry a risk-
weighted factor of 50%.
As of March 31, 1999 and 1998, management believes that the Banks met all
capital adequacy requirements to which they were subject.
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Con't.)
March 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Wayne Savings Community Bank as of March 31, 1999
For capital
Actual adequacy purposes
--------------------- ------------------------------------------------------------
Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tangible capital $ 23,176 8.6% less than an equal to $ 4,039 less than an equal to 1.5%
Core capital $ 23,176 8.6% less than an equal to $ 8,078 less than an equal to 3.0%
Risk-based capital $ 23,846 16.4% less than an equal to $ 11,616 less than an equal to 8.0%
<CAPTION>
To be "well-capitalized"
under prompt corrective
action provisions
----------------------------------------------------------------
Amount
Ratio
<S> <C> <C>
Tangible capital less than an equal to $ 13,462 less than an equal to 5.0%
Core capital less than an equal to $ 16,154 less than an equal to 6.0%
Risk-based capital less than an equal to $ 14,520 less than an equal to 10.0%
<CAPTION>
As of March 31, 1998
For capital
Actual adequacy purposes
--------------------- -----------------------------------------------------------
Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tangible capital $ 23,637 9.1% less than an equal to $ 3,885 less than an equal to 1.5%
Core capital $ 23,637 9.1% less than an equal to $ 7,770 less than an equal to 3.0%
Risk-based capital $ 24,343 17.4% less than an equal to $ 11,210 less than an equal to 8.0%
<CAPTION>
To be "well-capitalized"
under prompt corrective
action provisions
----------------------------------------------------------------
Amount
Ratio
<S> <C> <C>
Tangible capital less than an equal to $ 12,951 less than an equal to 5.0%
Core capital less than an equal to $ 15,541 less than an equal to 6.0%
Risk-based capital less than an equal to $ 14,013 less than an equal to 10.0%
<CAPTION>
Village Savings Bank, F.S.B. as of March 31, 1999
For capital
Actual adequacy purposes
--------------------- -----------------------------------------------------------
Amount Ratio Amount Ratio
(Dollars in thousands)
<S> <C> <C> <C> <C>
Tangible capital $ 2,638 19.5% less than an equal to $ 207 less than an equal to 1.5%
Core capital $ 2,638 19.5% less than an equal to $ 414 less than an equal to 3.0%
Risk-based capital $ 2,641 53.3% less than an equal to $ 397 less than an equal to 8.0%
<CAPTION>
To be "well-capitalized"
under prompt corrective
action provisions
----------------------------------------------------------------
Amount Ratio
<S> <C>
<C>
Tangible capital less than an equal to $ 691 less than an equal to 5.0%
Core capital less than an equal to $ 829 less than an equal to 6.0%
Risk-based capital less than an equal to $ 496 less than an equal to 10.0%
</TABLE>
The Banks' management believes that, under the current regulatory capital
regulations, the Banks will continue to meet their minimum capital requirements
in the foreseeable future. However, events beyond the control of the Banks, such
as increased interest rates or a downturn in the economy in the Banks' market
area, could adversely affect future earnings and, consequently, the ability to
meet future minimum regulatory capital requirements.
Under current OTS regulations, a savings institution may make a capital
distribution without notice to the OTS, unless it is a subsidiary of a holding
company, provided that it has a regulatory rating in the two top categories,
is
not of supervisory concern, and would remain adequately capitalized, as defined
in the OTS prompt corrective action regulations, following the proposed
distribution. Savings institutions that would remain adequately capitalized
following the proposed distribution but do not meet the other noted requirements
must notify the OTS 30 days prior to declaring a capital distribution. The OTS
stated it will generally regard as permissible that amount of capital
distributions that do not exceed 50% of the institution's excess regulatory
capital plus net earnings to date during the calendar year. A savings
institution may not make a capital distribution without prior approval of the
OTS and the FDIC if it is undercapitalized before, or as a result of, such a
distribution. The OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. Pursuant to such OTS dividend
regulations, the Banks had the ability to pay dividends of approximately $6.9
million at March 31, 1999.
NOTE K
- - STOCK OPTION PLANS
The Company has an incentive Stock Option Plan that provides for the
issuance of 84,044 shares of authorized, but unissued shares of common stock.
The Company also has a non-incentive Stock Option Plan that provides for the
issuance of 36,018 (adjusted) shares of authorized, but unissued shares of
common stock. The number of shares under option have been adjusted to reflect
the three-for two stock split and all stock dividends through the date of issue
of the financial statements.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Con't.)
March 31, 1999, 1998 and 1997
The Company accounts for its stock option plan in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation," which provides for a fair value-
based method for valuing stock-based compensation that entities may use, which
measures compensation cost at the grant date based on the fair value of the
award. Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, SFAS No. 123 permits entities to continue to
account for stock options and similar equity instruments under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities
that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net earnings and
earnings per share, as if the fair value-based method of accounting defined in
SFAS No. 123 had been applied. Management has determined that the Company will
continue to account for stock based compensation pursuant to APB Opinion No. 25.
The pro-forma disclosures required by SFAS No. 123 are not applicable as no
options were granted by the Company during the fiscal years ended March 31,
1999, 1998 and 1997.
A summary of the status of the Company's stock option plans as of March 31,
1999, 1998 and 1997, and changes during the periods ending on those dates is
presented below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------- ------------------ ------------------
Exercise
Exercise Exercise
Shares Price Shares Price Shares Price
------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 60,548 $ 5.000 74,441 $ 5.000 82,352 $ 5.000
Granted -- -- -- -- -- --
Exercised 22,743 5.000 11,651 5.000 7,911 5.000
Forfeited 3,209 5.000 2,242 5.000 -- --
------ ------- ------- ------- ------
-------
Outstanding at end of year 34,596 $ 5.000 60,548 $ 5.000 74,441 $ 5.000
====== ======= ======= ======= ====== =======
Options exercisable at year-end 34,596 $ 5.000 60,548 $ 5.000 74,441 $ 5.000
====== ======= ======= ======= ====== =======
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, 1999:
Number outstanding 34,596
Range of exercise prices $ 5.000
Weighted-average exercise price $ 5.000
Weighted-av
erage remaining contractual life 4.25
At March 31, 1999, all of the stock options granted were subject to
exercise at the discretion of the grantees and expire in 2003.
NOTE L - LEGISLATIVE MATTERS
The deposit accounts of the Banks 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.
L
egislation 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
amortize the recapture of the bad debt reserve in taxable income over six years,
commencing in fiscal 1999.
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (con't.)
March 31, 1999, 1998, and 1997
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, 1999 and 1998, and the results
of its operations for the periods then ended.
<TABLE>
<CAPTION>
Wayne Savings Bancshares, Inc.
STATEMENTS OF FINANCIAL CONDITION
<S> <C> <C>
For the periods ended March 31,
(In thousands)
1999 1998
------- -------
ASSETS
Cash and due from banks $ 86 $ 46
Interest-bearing deposits in
other financial institutions 1,625 800
Investment in subsidiaries 23,332 23,671
Prepaid expenses and other 102 77
------- -------
Total assets $25,145 $24,594
======= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Other liabilities $ 189 $ 168
Stockholders' equity
Common stock and additional
paid-in capital 14,985 8,221
Retained earnings 10,437 16,198
Less shares held in treasury (22,583
and 357 shares, respectively) (468) (10)
Accumulated other comprehensive
income -- unrealized gains on
securities designated as
available for sale, net 2 17
------- -------
Total stockholders' equity 24,956 24,426
------- -------
Total liabilities and
stockholders' equity $25,145 $24,594
======= =======
Wayne Savings Bancshares, Inc.
STATEMENTS OF EARNINGS
For the periods ended March 31,
(In thousands)
1999 1998
------- -------
Income
Interest income $ 53 $ 5
Equity in earnings of subsidiary 1,676 580
------- -------
Total revenue 1,729 585
General and administrative expenses 102 64
------- -------
Earnings before income tax credits 1,627 521
Federal income tax credits (16) (20)
------- -------
NET EARNINGS $ 1,643 $ 541
======= =======
Wayne Savings Bancshares, Inc.
STATEMENTS OF CASH FLOWS
For the periods ended March 31,
(In thousands)
1999 1998
------- -------
Cash flows from operating activities:
Net earnings for the period $ 1,643 $ 541
Adjustments to reconcile net
earnings to net cash provided
by (used in) operating activities
Excess contributions/
(undistributed earnings) of
consolidated subsidiary 324 (580)
Increase (decrease) in cash due
to changes in:
Prepaid expenses and other
assets (25) (24)
Other liabilities (8) --
------- -------
Net cash provided by (used
in) operating activities 1,934 (63)
Cash flows provided by (used in)
investing activities:
Effect of corporate reorganization -- 1,076
------- -------
Net cash provided by
investing activities -- 1,076
Cash flows provided by (used in)
financing activities:
Payment of dividends on
common stock (725) (169)
Purchase of treasury stock (431) --
Proceeds from exercise of stock
options 87 2
------- -------
Net cash used in
financing activities (1,069) (167)
------- -------
Net increase in cash and cash
equivalents 865 846
Cash and cash equivalents at beginning
of period 846 --
------- -------
Cash and cash equivalents at end
of period $ 1,711 $ 846
======= =======
</TABLE>
42
<PAGE>
NOTE N - QUARTERLY RESULTS OF OPERATIONS (unaudited)
The following table summarizes the Company's quarterly results for the fiscal
years ended March 31, 1999 and 1998. Certain amounts, as previously reported,
have been reclassified to conform to the fiscal 1999 presentation.
<TABLE>
<CAPTION>
For the three month periods ended
----------------------------------------------------------------------------------
June 30, 1998 September 30, 1998 December 31, 1998 March 31, 1999
----------------- ------------------ ----------------- --------------
(In thousands, except share data)
<S> <C> <C> <C> <C>
Total interest income $4,865 $4,809 $4,854 $4,768
Total interest expense 2,801 2,838 2,769 2,779
------ ------ ------ ------
Net interest income 2,064 1,971 2,085 1,989
Provision for losses on loans 15 16 16 17
Other income 260 290 225 217
General, administrative and other expense 1,586 1,590 1,627 1,745
------ ------ ------ ------
Earnings before income taxes 723 655 667 444
Federal income taxes 246 223 227 150
------ ------ ------ ------
Net earnings $ 477 $ 432 $ 440 $ 294
====== ====== ====== ======
Earnings per share
Basic $ .18 $ .16 $ .17 $ .12
====== ====== ====== ======
Diluted $ .18 $ .16 $ .17 $ .11
====== ====== ====== ======
</TABLE>
<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 $ .19 $ .19 $ .17 $ .16
====== ====== ====== ======
Diluted $ .19 $ .19 $ .17 $ .15
====== ====== ====== ======
</TABLE>
43
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
Name State of Incorporation
- ---- ----------------------
<S> <C>
Wayne Savings Community Bank Ohio
Village Savings Bank, F.S.B. Federal
</TABLE>
<PAGE>
EXHIBIT 23
ACCOUNTANTS' CONSENT
We have issued our report dated May 27, 1999, 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, 1999. We
hereby consent to the incorporation by reference of said report in the
Corporation's Form S-8 (333-41479).
/s/ Grant Thornton LLP
- ----------------------
Cincinnati, Ohio
June 28, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> MAR-31-1999
<CASH> 1,540
<INT-BEARING-DEPOSITS> 10,410
<FED-FUNDS-SOLD> 4,295
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 6,411
<INVESTMENTS-CARRYING> 12,649
<INVESTMENTS-MARKET> 12,563
<LOANS> 215,679
<ALLOWANCE> 678
<TOTAL-ASSETS> 271,274
<DEPOSITS> 235,327
<SHORT-TERM> 0
<LIABILITIES-OTHER> 497
<LONG-TERM> 0
0
9,000
<COMMON> 2,505
<OTHER-SE> 22,451
<TOTAL-LIABILITIES-AND-EQUITY> 271,274
<INTEREST-LOAN> 17,037
<INTEREST-INVEST> 1,189
<INTEREST-OTHER> 1,070
<INTEREST-TOTAL> 19,296
<INTEREST-DEPOSIT> 10,516
<INTEREST-EXPENSE> 11,187
<INTEREST-INCOME-NET> 8,109
<LOAN-LOSSES> 64
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,460
<INCOME-PRETAX> 2,489
<INCOME-PRE-EXTRAORDINARY> 2,489
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,643
<EPS-BASIC> .63
<EPS-DILUTED> .62
<YIELD-ACTUAL> 3.23
<LOANS-NON> 236
<LOANS-PAST> 44
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 721
<CHARGE-OFFS> 108
<RECOVERIES> 1
<ALLOWANCE-CLOSE> 678
<ALLOWANCE-DOMESTIC> 678
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
