SECURITIES AND EXCHANGE COMMISSION
450 FIFTH STREET, N.W.
WASHINGTON, D.C. 20549
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Fiscal Year Ended March 31, 2000
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to ______________________
COMMISSION FILE NO. 0-23433
WAYNE SAVINGS BANCSHARES, INC.
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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)
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Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR VALUE $1.00 PER SHARE
---------------------------------------
(Title of Class)
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES [X] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ].
The issuer's revenues for the fiscal year ended March 31, 2000, were
$21.4 million.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the closing sales price of the
Registrant's stock, as reported on the Nasdaq SmallCap Market on June 15, 2000,
was approximately $16.3 million. This amount excludes shares held by Wayne
Savings Bankshares, M.H.C., and the Registrant's directors and senior officers.
As of April 13, 2000, there were issued and outstanding 2,599,015 shares of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended March
31, 2000 (Parts II and III).
2. Proxy Statement for the 2000 Annual Meeting of Stockholders (Parts I and
III).
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
WAYNE SAVINGS BANCSHARES, INC.
Wayne Savings Bancshares, Inc. (the "Company") is a federal corporation
which was organized on August 5, 1997. The only significant asset of the Company
is its investment in Wayne Savings Community Bank (the "Bank"). The Company is
majority-owned by Wayne Savings Bankshares, M.H.C., a federally-chartered mutual
holding company (the "Mutual Holding Company"). On November 25, 1997, the
Company acquired all of the issued and outstanding common stock of the Bank in
connection with the Bank's reorganization into the "two-tier" form of mutual
holding company ownership. At that time, each share of the Bank's common stock
was automatically converted into one share of Company common stock, par value
$1.00 per share (the "Common Stock"). At March 31, 2000, the Company had total
assets of $304.1 million, total deposits of $265.0 million, and stockholders'
equity of $25.1 million.
The Company's principal office is located at 151 North Market Street,
Wooster, Ohio, and its telephone number at that address is (330) 264-5767.
WAYNE SAVINGS COMMUNITY BANK
The Bank is an Ohio-chartered stock savings and loan association
headquartered in Wooster, Ohio. The Bank's deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC") under the Savings Association Insurance
Fund ("SAIF"). The Bank has been a member of the Federal Home Loan Bank ("FHLB")
System since 1937.
The Bank is a community-oriented savings institution offering
traditional financial services to its local community. The Bank's primary
lending and deposit gathering area includes Wayne, Holmes, Ashland, and Medina
counties, where it operates eight full-service offices. This contiguous
four-county area is located in north central Ohio, and is an active
manufacturing and agricultural market. The Bank's principal business activity
consists of originating one- to four-family residential real estate loans in its
market area. The Bank also originates multi-family residential and
non-residential real estate loans, although such loans constitute a small
portion of the Bank's lending activities and a small portion of the Bank's loan
portfolio. The Bank also originates consumer loans, and to a lesser extent,
construction loans. The Bank also invests in mortgage-backed securities and
currently maintains a significant portion of its assets in liquid investments,
such as United States Government securities, federal funds, and deposits in
other financial institutions.
The Bank's principal executive office is located at 151 North Market
Street, Wooster, Ohio, and its telephone number at that address is (330)
264-5767.
VILLAGE SAVINGS BANK, F.S.B.
Village Savings Bank, F.S.B. ("Village") is a federally-chartered stock
savings bank headquartered in North Canton, Ohio that was chartered as a
wholly-owned subsidiary of the Bank in July, 1998. Village's deposits are
insured by the FDIC under the SAIF. Village is a member of the FHLB system.
Village is a community-oriented savings institution offering
traditional financial services to its local community. Village's primary lending
and deposit gathering area includes North Canton, Jackson Township and Plain
Township, which are all located in Stark County. Village's principal business
activity consists of originating one- to four-family residential real estate
loans in its market area. Village also
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originates multi-family residential and non- residential real estate loans,
although such loans constitute a small portion of Village's lending activities.
Village also originates consumer loans, and to a lesser extent, construction
loans. Village also invests in mortgage-backed securities and currently
maintains a significant portion of its assets in liquid investments, such as
United States Government securities, federal funds, and deposits in other
financial institutions.
Village's principal executive office is located at 1265 South Main
Street, North Canton, Ohio, and its telephone number at that address is (330)
494-5262.
MARKET AREA/LOCAL ECONOMY
The Bank, headquartered in Wooster, Ohio, operates in Wayne, Ashland,
Medina and Holmes Counties in north central Ohio. Wooster, Ohio is located in
Wayne County and is approximately midway between Cleveland and Columbus, Ohio.
Village, headquartered in North Canton, Ohio, operates in Stark County in north
central Ohio.
Wayne County is characterized by a diverse economic base, which is not
dependent on any particular industry. It is one of the leading agricultural
counties in the state. In addition, since 1892, Wooster has been the
headquarters of the Ohio Agricultural Research and Development Center, the
agricultural research arm of The Ohio State University. Wayne County is also the
home base of such nationally known companies as Rubbermaid Incorporated, J.M.
Smucker Company (located in the City of Orrville) and the Wooster Brush Company.
It is also the home of many industrial plants, including those of Packaging
Corporation of America, Morton Salt, Bell and Howell Micro Photo Division,
FritoLay, Inc., and The Gerstenslager Company. Wayne County is also known for
its excellence in education. The College of Wooster was founded in 1866. Other
quality educational opportunities are offered by the Agricultural Technical
Institute of Ohio State University, and Wayne College, a branch of The
University of Akron. Wayne Savings operates two full-service offices in Wooster.
Ashland County, which is located due west of Wayne County, also has a
diverse economic base. In addition to its agricultural segment, Ashland County
has manufacturing plants producing rubber and plastics, machinery,
transportation equipment, chemicals, apparel, and other items. Ashland is also
the home of Ashland University. The City of Ashland is the county seat and the
location of one of the Bank's branch offices.
Medina County, located just north of Wayne County, is the center of a
fertile agricultural region. Farming remains the largest industry in the county
in terms of dollar value of goods produced. However, over 100 small
manufacturing firms also operate in the county. The City of Medina is located in
the center of the Cleveland-Akron- Lorain Standard Consolidated Statistical
Marketing Area. Medina is located approximately 30 miles south of Cleveland and
15 miles west of Akron. Due to its proximity to Akron and Cleveland, a majority
of Medina County's labor force is employed in these two cities. The Bank
operates one full-service office in Medina County, which is located in the
Village of Lodi.
Holmes County, located directly south of Wayne County, has a mostly
rural economy. The local economy depends mostly upon agriculture, light
manufacturing, fabrics, and wood products. Because of the scenic beauty and a
large Amish settlement, revenues from tourism are becoming increasingly
significant. The county is also noted for its many fine cheese-making
operations. A large number of Holmes County residents are employed in Wayne
County. The City of Millersburg is the county seat and the location of one of
the Bank's branch offices.
Stark County, located directly east of Wayne County, is characterized
by a diverse economy and over 1,500 different products are manufactured in the
county. Stark County also has a strong agricultural base, and ranks fourth in
Ohio in the production of dairy products. The major employers in North Canton
are the Hoover Company, Diebold Incorporated (a major manufacturer of bank
security products and automated teller machines) and the Timken Company (a
world-wide manufacturer of tapered roller bearings and specialty steels).
Jackson Township is the home to the Belden Village Shopping Center, while Plain
Township is a residential and agricultural area with a few widely scattered
light industries.
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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, 2000, approximately $67.0 million, or 26.4%, of the
Company's total loans and mortgage-backed securities, due after March 31, 2000,
consisted of loans or securities with adjustable interest rates.
The Company continues actively to originate fixed rate mortgage loans,
generally with 15 to 30 year terms to maturity, collateralized by one- to
four-family residential properties. One- to four-family fixed rate residential
mortgage loans generally are originated and underwritten according to standards
that allow the Company to resell such loans in the secondary mortgage market for
purposes of managing interest rate risk and liquidity. The majority of such one-
to four-family fixed rate residential mortgage loans, however, are retained by
the Company. The Company retains servicing on its sold mortgage loans and
realizes monthly service fee income. The Company also originates interim
construction loans on one- to four-family residential properties.
ANALYSIS OF LOAN PORTFOLIO. Set forth below are selected data relating
to the composition of the Company's loan portfolio by type of loan as of the
dates indicated.
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At March 31,
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2000 1999 1998
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$ % $ % $ %
--- --- --- --- --- ---
(Dollars in Thousands)
Mortgage loans:
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One- to four-family residential(1) $211,222 86.72% $187,638 84.82% $180,895 85.58%
Residential construction loans.... 4,035 1.66 7,668 3.47 3,963 1.87
Multi-family residential.......... 8,028 3.30 7,086 3.20 7,091 3.36
Non-residential real estate/land(2) 6,068 2.49 5,610 2.53 5,838 2.76
-------- ------ -------- ------ -------- ------
Total mortgage loans............ 229,353 94.17 208,002 94.02 197,787 93.57
Other loans:
Consumer loans.................... 9,041 3.71 8,415 3.80 10,477 4.96
Commercial business loans......... 5,168 2.12 4,810 2.18 3,112 1.47
-------- ----- -------- ------ -------- ------
Total other loans............... 14,209 5.83 13,225 5.98 13,589 6.43
-------- ----- -------- ------ -------- ------
Total loans before net items........ 243,562 100.00% 221,227 100.00% 211,376 100.00%
====== ====== ======
Less:
Loans in process.................. 4,136 4,600 2,088
Deferred loan origination fees.... 1,538 1,855 1,882
Allowance for loan losses......... 793 678 721
-------- -------- --------
Total loans receivable, net..... $237,095 $214,094 $206,685
======== ======== ========
Mortgage-backed securities, net(3).. $ 10,496 $ 7,230 $ 4,275
========= ======== ========
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(1) Includes equity loans collateralized by second mortgages in the aggregate
amount of $11.1 million, $8.7 million and $7.9 million, as of March 31,
2000, 1999 and 1998, respectively. Such loans have been underwritten on
substantially the same basis as the Company's first mortgage loans.
(2) Includes land loans of $949,000, $951,000 and $584,000 as of March 31,
2000, 1999 and 1998, respectively.
(3) Includes mortgage-backed securities designated as available for sale.
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LOAN AND MORTGAGE-BACKED SECURITIES MATURITY AND REPRICING SCHEDULE.
The following table sets forth certain information as of March 31, 2000,
regarding the dollar amount of loans and mortgage-backed securities maturing in
the Company's portfolio based on their contractual terms to maturity. Demand
loans, loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less. Adjustable and floating rate
loans are included in the period in which interest rates are next scheduled to
adjust rather than in which they mature, and fixed rate loans and
mortgage-backed securities are included in the period in which the final
contractual repayment is due. Fixed rate mortgage-backed securities are assumed
to mature in the period in which the final contractual payment is due on the
underlying mortgage.
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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)
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Mortgage loans(1):
One to four family
residential:
Adjustable ........................... $ 46,169 $ 639 $ -- $ -- $ -- $ -- $ 46,808
Fixed ................................ 1,716 964 1,881 17,779 66,039 76,359 164,738
Multi-family residential
and nonresidential:
Adjustable ........................... 10,467 -- -- -- -- -- 10,467
Fixed ................................ 477 1,956 566 35 -- -- 3,034
Second Mortgage Loans ................... 9 89 251 1,134 67 -- 1,550
Other Loans:
Commercial ............................. 3,574 284 105 1,203 2 -- 5,168
Consumer ............................... 2,389 1,366 2,035 1,646 25 -- 7,461
-------- -------- -------- -------- -------- -------- --------
Total loans ............................. $ 64,801 $ 5,298 $ 4,838 $ 21,797 $ 66,133 $ 76,359 $239,226
======== ======== ======== ======== ======== ======== ========
Mortgage-backed securities(2) ........... $ 441 $ 1,136 $ 1,134 $ 975 $ 122 $ 6,647 $ 10,455
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(1) Amounts shown are net of loans in process of $4.1 million. Does not include
loans held for sale, nor $200,000 of non-performing loans.
(2) Includes mortgage-backed securities available for sale. Does not include
premiums of $133,000, discounts of $30,000 and unrealized losses of
$62,000.
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The following table sets forth at March 31, 2000 the dollar amount of
all fixed rate and adjustable rate loans due after March 31, 2001.
Fixed Adjustable Total
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(In Thousands)
Mortgage loans(1):
One- to four-family
residential ....................... $163,101 $ 46,782 $209,883
Multi-family residential
and nonresidential ................ 10,467 3,034 13,501
Other loans:
Commercial business ................ 950 2,680 3,630
Consumer ........................... 7,427 395 7,822
-------- -------- --------
Total loans ...................... $181,945 $ 52,891 $234,836
======== ======== ========
Mortgage-backed securities(2) ........ $ 3,103 $ 6,911 $ 10,014
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(1) Includes loans held for sale.
(2) Includes mortgage-backed securities available for sale.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The Company's
primary lending activity consists of the origination of one- to four-family,
owner-occupied, residential mortgage loans on properties located in the
Company's market area. The Company generally does not originate one- to
four-family residential loans on properties outside of its market area. At March
31, 2000, the Company had $200.1 million, or 82.1%, of its total loan portfolio
invested in one- to four-family residential mortgage loans.
The Company's fixed rate loans generally are originated and
underwritten according to standards that permit resale in the secondary mortgage
market. Whether the Company can or will sell fixed rate loans into the secondary
market, however, depends on a number of factors including but not limited to the
Company's portfolio mix, gap and liquidity positions, and market conditions.
Moreover, the Company is more likely to retain fixed rate loans if its one year
gap is positive. The Company's fixed rate mortgage loans are amortized on a
monthly basis with principal and interest due each month. One- to four-family
residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms because borrowers may refinance or prepay
loans at their option. The Company's secondary market activities over the past
three years have been limited to sales of $6.4 million, $15.9 million and $7.1
million for the fiscal years ended March 31, 2000, 1999 and 1998, respectively.
Such sales generally constituted current period originations. Mortgage loans
held for sale at March 31, 2000, 1999 and 1998 totaled $317,000, $1.6 million
and $1.2 million, respectively.
The Company currently offers one- to four-family residential mortgage
loans with terms typically ranging from 15 to 30 years, and with adjustable or
fixed interest rates. Originations of fixed rate mortgage loans versus ARM loans
are monitored on an ongoing basis and are affected significantly by the level of
market interest rates, customer preference, the Company's interest rate gap
position, and loan products offered by the Company's competitors. Particularly
in a relatively low interest rate environment, borrowers typically prefer fixed
rate loans to ARM loans. Therefore, even if management's strategy is to
emphasize ARM loans, market conditions may be such that there is greater demand
for fixed rate mortgage loans. During the year ended March 31, 2000, the
Company's ARM portfolio decreased by $785,000, or 1.4%.
The Company offers two ARM loan products. The treasury ARM loan adjusts
annually with interest rate adjustment limitations of 2% per year and with a cap
of 5% on total rate increases or decreases over the life of the loan. The index
on the treasury ARM loan is the weekly average yield on U.S. Treasury
securities, adjusted to a constant maturity of one year. The treasury ARM loan
has an initially discounted rate of 1% below the current index, plus margin.
However, these loans are underwritten at the fully-indexed interest rate. The
cost of fund ARM loan adjusts annually and has periodic and lifetime interest
rate caps of 1% and 3%, respectively. The index is the Ohio Cost of Funds from
SAIF Insured Savings Associations, which index is published quarterly by the
OTS. The initial interest rate on cost of fund ARM loans is not discounted. In
the past, the Company has
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used different indices for ARM loans, such as the National Average Contract Rate
for Previously Occupied Homes and the National Average Cost of Funds.
Consequently, the interest rate adjustments on the Company's portfolio of ARM
loans do not reflect changes in a particular interest rate index. One- to
four-family residential ARM loans totaled $35.7 million, or 14.6%, of the
Company's total loan portfolio at March 31, 2000.
The primary purpose of offering ARM loans is to make the Company's loan
portfolio more interest rate sensitive. However, as the interest income earned
on ARM loans varies with prevailing interest rates, such loans do not offer the
Company predictable cash flows as would long-term, fixed rate loans. ARM loans
carry increased credit risk associated with potentially higher monthly payments
by borrowers as general market interest rates increase. It is possible,
therefore, that during periods of rising interest rates, the risk of default on
ARM loans may increase due to the upward adjustment of interest costs to the
borrower. Management believes that the Company's credit risk associated with its
ARM loans is reduced because the Company has either a 3% or 5% cap on interest
rate increases during the life of its ARM loans.
The Company also offers home equity loans and equity lines of credit
collateralized by a second mortgage on the borrower's principal residence. In
underwriting these home equity loans, the Company requires that the maximum
loan-to-value ratios, including the principal balances of both the first and
second mortgage loans, not exceed 85%. The home equity loan portfolio consists
of adjustable rate loans, which use the Ohio Average Cost of Funds for
SAIF-Insured Savings Association and the prime rate as published in The Wall
Street Journal as interest rate indices. Home equity loans include fixed term
adjustable rate loans, as well as lines of credit. As of March 31, 2000, the
Company's equity loan portfolio totaled $11.1 million, or 5.26%, of its one- to
four-family mortgage loan portfolio.
The Company's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the Company
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells or otherwise disposes of the underlying
real property serving as security for the loan. Due-on-sale clauses are an
important means of adjusting the rates on the Company's fixed rate mortgage loan
portfolio.
Regulations limit the amount that a savings association may lend
relative to the appraised value of the real estate securing the loan, as
determined by an appraisal at the time of loan origination. The Company's
lending policies limit the maximum loan-to-value ratio on both fixed rate and
ARM loans without private mortgage insurance to 80% of the lesser of the
appraised value or the purchase price of the property to serve as collateral for
the loan. However, the Company makes one- to four-family real estate loans with
loan-to-value ratios in excess of 80%. For 15 year fixed rate and all ARM loans
with loan-to-value ratios of 80.01% to 90%, and 90.01% to 95%, the Company
requires the first 20%, and 25%, respectively, of the loan to be covered by
private mortgage insurance. For 30 year fixed rate loans with loan-to-value
ratios of 80.01% to 85%, 85.01% to 90%, and 90.01% to 95%, the Company requires
the first 12%, 25%, and 30%, respectively, of the loan to be covered by private
mortgage insurance. The Company requires fire and casualty insurance, as well as
title insurance regarding good title, on all properties securing real estate
loans made by the Company and flood insurance, where applicable.
MULTI-FAMILY RESIDENTIAL REAL ESTATE LOANS. In recent years, the
Company has significantly reduced its originations of multi-family real estate
loans. Loans secured by multi-family real estate constituted approximately $8.0
million, or 3.3%, of the Company's total loan portfolio at March 31, 2000. The
Company's multi-family real estate loans are secured by multi-family residences,
such as apartment buildings. At March 31, 2000, 89.1% of the Company's
multi-family loans were secured by properties located within the Company's
market area. At March 31, 2000, the Company's multi-family real estate loans had
an average balance of $211,000, and the largest multi-family real estate loan
had a principal balance of $1.2 million. Multi-family real estate loans
currently are offered with adjustable interest rates or short term balloon
maturities, although in the past the Company originated fixed rate long term
multi-family real estate loans. The terms of each multi-family loan are
negotiated on a case by case basis, although such loans typically have
adjustable interest rates tied to a
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market index, and amortize over 15 to 25 years. The Company currently does not
emphasize multi-family real estate construction loans; however, the Company's
policies do not preclude such lending.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one- to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family real
estate is typically dependent upon the successful operation of the related real
estate property. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired.
NON-RESIDENTIAL REAL ESTATE AND LAND LOANS. The Company also has
reduced significantly its non-residential real estate loan originations in
recent years. Loans secured by non-residential real estate constituted
approximately $5.1 million, or 2.1%, of the Company's total loan portfolio at
March 31, 2000. The Company's non-residential real estate loans are secured by
improved property such as offices, small business facilities, and other
non-residential buildings. At March 31, 2000, 80.4% of the Company's
non-residential real estate loans were secured by properties located within the
Company's market area. At March 31, 2000, the Company's non-residential loans
had an average balance of $115,000 and the largest non-residential real estate
loan had a principal balance of $940,000. The terms of each non-residential real
estate loan are negotiated on a case by case basis. Non-residential real estate
loans are currently offered with adjustable interest rates or short term balloon
maturities, although in the past the Company has originated fixed rate long term
non-residential real estate loans. Non-residential real estate loans originated
by the Company generally amortize over 15 to 25 years. The Company currently
does not emphasize non-residential real estate construction loans; however, the
Company's policies do not preclude such lending.
Loans secured by non-residential real estate generally involve a
greater degree of risk than one- to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by non-residential
real estate is typically dependent upon the successful operation of the related
real estate project. If the cash flow from the project is reduced, the
borrower's ability to repay the loan may be impaired.
The Company also originates a limited number of land loans secured by
individual improved and unimproved lots for future residential construction.
Land loans are generally offered with a fixed rate and with terms of up to 5
years. Land loans totaled $949,000 at March 31, 2000.
RESIDENTIAL CONSTRUCTION LOANS. To a lesser extent, the Company
originates loans to finance the construction of one- to four-family residential
property. At March 31, 2000, the Company had $4.0 million, or 1.7%, of its total
loan portfolio invested in interim construction loans. The Company makes
construction loans to private individuals and to builders. Loan proceeds are
disbursed in increments as construction progresses and as inspections warrant.
Construction loans are typically structured as permanent one- to four-family
loans originated by the Company with a 12-month construction phase. Accordingly,
upon completion of the construction phase, there is no change in interest rate
or term to maturity of the original construction loan, nor is a new permanent
loan originated.
COMMERCIAL LOANS. Commercial loans totaled $5.2 million, or 2.1% of the
Company's total loan portfolio at March 31, 2000. The Company does not emphasize
commercial lending, but evaluates and meets the needs of its customer base.
CONSUMER LOANS. Ohio savings associations are authorized to invest in
secured and unsecured consumer loans in an aggregate amount which, when combined
with investments in commercial paper and corporate debt
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securities, does not exceed 20% of an association's assets. In addition, an Ohio
association is permitted to invest up to 5% of its assets in loans for
educational purposes.
As of March 31, 2000, consumer loans totaled $9.0 million, or 3.7%, of
the Company's total loan portfolio. The principal types of consumer loans
offered by the Company are fixed rate and fixed term second mortgage loans, auto
and truck loans, education loans, credit card loans, unsecured personal loans,
and loans secured by deposit accounts. Consumer loans are offered primarily on a
fixed rate basis with maturities generally of less than ten years. The Company's
second mortgage consumer loans are secured by the borrower's principal residence
with a maximum loan-to-value ratio, including the principal balances of both the
first and second mortgage loans, of 80% or less. Such loans are offered on a
fixed rate basis with terms of up to ten years. At March 31, 2000, second
mortgage loans totaled $1.6 million, or 17.7%, of consumer loans.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's credit history and an assessment of
ability to meet existing obligations and payments on the proposed loan. The
quality and stability of the applicant's monthly income are determined by
analyzing the gross monthly income from primary employment, and additionally
from any verifiable secondary income. Creditworthiness of the applicant is of
primary consideration; however, the underwriting process also includes a
comparison of the value of the collateral in relation to the proposed loan
amount.
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats, and
recreational vehicles. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly reduced
based upon the condition of the automobiles and the lack of demand for used
automobiles. The Company adds a general provision on a regular basis to its
consumer loan loss allowance, based on general economic conditions and prior
loss experience. See "--Delinquencies and Classified Assets--Non-Performing
Assets," and "--Classification of Assets" for information regarding the
Company's loan loss experience and reserve policy.
MORTGAGE-BACKED SECURITIES. The Company also invests in mortgage-backed
securities issued or guaranteed by the United States Government or agencies
thereof. Investments in mortgage-backed securities are made either directly or
by exchanging mortgage loans in the Company's portfolio for such securities.
These securities consist primarily of adjustable rate mortgage-backed securities
issued or guaranteed by the Federal National Mortgage Association ("FNMA"),
Federal Home Loan Mortgage Corporation ("FHLMC"), and the Government National
Mortgage Association ("GNMA"). Total mortgage-backed securities, including those
designated as available for sale, increased from $7.2 million at March 31, 1999
to $10.5 million at March 31, 2000.
The Company's objectives in investing in mortgage-backed securities
varies from time to time depending upon market interest rates, local mortgage
loan demand, and the Company's level of liquidity. Mortgage-backed securities
are more liquid than whole loans and can be readily sold in response to market
conditions and interest rates. Mortgage-backed securities purchased by the
Company also have lower credit risk because principal and interest are either
insured or guaranteed by the United States Government or agencies thereof.
LOAN ORIGINATIONS, SOLICITATION, PROCESSING, AND COMMITMENTS. Loan
originations are derived from a number of sources such as real estate broker
referrals, existing customers, borrowers, builders, attorneys, and walk-in
customers. Upon receiving a loan application, the Company obtains a credit
report and employment verification to verify specific information relating to
the applicant's employment, income, and credit standing. In the case of a real
estate loan, an appraiser approved by the Company appraises the real estate
intended to secure the proposed loan. An underwriter in the Company's loan
department checks the loan application file for accuracy and completeness, and
verifies the information provided. One- to four-family and multi-family
residential, and commercial real estate loans, for up to $150,000, may be
approved by the manager of the mortgage loan
-8-
<PAGE>
department, loans between $150,000 and $250,000 must be approved by the Chief
Lending Officer. The Chief Executive Officer can approve loans up to $300,000,
and loans in excess of $300,000 must be approved by the Board of Directors. The
Loan Committee meets once a week to review and verify that management's
approvals of loans are made within the scope of management's authority. All
approvals subsequently are ratified monthly by the full Board of Directors. Fire
and casualty insurance is required at the time the loan is made and throughout
the term of the loan. After the loan is approved, a loan commitment letter is
promptly issued to the borrower. At March 31, 2000, the Company had commitments
to originate $2.3 million of loans.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property serving as collateral, which insurance must be
maintained during the full term of the loan. A title search of the property is
required on all loans secured by real property.
Although in the past the Company has purchased loans originated by
other lenders, the Company has not purchased any such loans in at least 10
years. At March 31, 2000, less than 1% of all loans in the Company's portfolio
were purchased from others and the majority of such loans were collateralized by
properties located in Ohio.
ORIGINATION, PURCHASE AND SALE OF LOANS AND MORTGAGE-BACKED SECURITIES.
The table below shows the Company's loan origination, purchase and sales
activity for the periods indicated.
At March 31,
----------------------------------
2000 1999 1998
---- ---- ----
(In Thousands)
Total loans receivable, net
at beginning of period ................. $ 214,094 $ 206,685 $ 209,404
Loans originated:
One- to four-family residential(1) .... 52,485 59,578 42,561
Multi-family residential(2) ........... 549 1,930 600
Non-residential real estate/land ...... 223 179 674
Consumer loans ........................ 7,498 6,498 6,101
Commercial loans ...................... 4,194 3,681 4,287
--------- --------- ---------
Total loans originated ............. 64,949 71,866 54,223
Loans sold:
Whole loans ........................... (6,425) (15,860) (7,066)
--------- --------- ---------
Total loans sold ................... (6,425) (15,860) (7,066)
Mortgage loans transferred to REO ....... (64) (58) (162)
Loan repayments ......................... (37,106) (48,814) (49,359)
Other loan activity, net ................ 1,647 (275) (355)
--------- --------- ---------
Total loans receivable, net at
end of period ..................... $ 237,095 $ 214,094 $ 206,685
========= ========= =========
Mortgage-backed securities at
beginning of period .................... $ 7,230 $ 4,275 $ 873
Mortgage-backed securities purchased .... 8,030 6,576 4,010
Principal repayments and other
activity ............................... (4,764) (3,621) (608)
--------- --------- ---------
Mortgage-backed securities at
end of period ..................... $ 10,496 $ 7,230 $ 4,275
========= ========= =========
------------
(1) Includes loans to finance the construction of one- to four-family
residential properties, and loans disbursed for sale in the secondary
market.
(2) Includes loans to finance the sale of real estate acquired through
foreclosure.
LOAN ORIGINATION FEES AND OTHER INCOME. In addition to interest earned
on loans, the Company generally receives loan origination fees. The Company
accounts for loan origination fees in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 91 on the accounting for non-refundable fees
and costs associated with originating or acquiring loans. To the extent that
loans are originated or acquired for the Company's portfolio, SFAS No. 91
requires that the Company defer loan origination fees and costs and amortize
such amounts as an adjustment of yield over the life of the loan by use of the
level yield method. SFAS No. 91 reduces the amount of revenue recognized by many
financial institutions at the time such loans are originated or
-9-
<PAGE>
acquired. Fees deferred under SFAS No. 91 are recognized into income immediately
upon prepayment or the sale of the related loan. At March 31, 2000, the Company
had $1.5 million of deferred loan origination fees. Loan origination fees are
volatile sources of income. Such fees vary with the volume and type of loans and
commitments made and purchased, principal repayments, and competitive conditions
in the mortgage markets, which in turn respond to the demand for and
availability of money.
The Company receives other fees, service charges, and other income that
consist primarily of deposit transaction account service charges, late charges,
credit card fees, and income from REO operations. The Company recognized fees
and service charges of $720,000, $682,000 and $617,000, for the fiscal years
ended March 31, 2000, 1999 and 1998, respectively.
LOANS TO ONE BORROWER. Savings associations are subject to the same
limits as those applicable to national banks, which under current regulations
restrict loans to one borrower to an amount equal to 15% of unimpaired capital
and unimpaired surplus on an unsecured basis, and an additional amount equal to
10% of unimpaired capital and unimpaired surplus if the loan is secured by
readily marketable collateral (generally, financial instruments and bullion, but
not real estate). At March 31, 2000, the Company's largest real estate related
borrower had an aggregate principal outstanding balance of $2.5 million. The
Company had no loans at March 31, 2000 that exceeded the loans to one borrower
regulations.
DELINQUENCIES AND CLASSIFIED ASSETS
DELINQUENCIES. The Company's collection procedures provide that when a
loan is 15 days past due, a computer-generated late charge notice is sent to the
borrower requesting payment, plus a late charge. This notice is followed with a
letter again requesting payment when the payment becomes 20 days past due. If
delinquency continues, at 30 days another collection letter is sent and personal
contact efforts are attempted, either in person or by telephone, to strengthen
the collection process and obtain reasons for the delinquency. Also, plans to
arrange a repayment plan are made. If a loan becomes 60 days past due, the loan
becomes subject to possible legal action if suitable arrangements to repay have
not been made. In addition, the borrower is given information which provides
access to consumer counseling services, to the extent required by HUD
regulations. When a loan continues in a delinquent status for 90 days or more,
and a repayment schedule has not been made or kept by the borrower, a notice of
intent to foreclose is sent to the borrower, giving 30 days to cure the
delinquency. If not cured, foreclosure proceedings are initiated.
NON-PERFORMING ASSETS. Loans are reviewed on a regular basis and are
placed on a non-accrual status when, in the opinion of management, the
collection of additional interest is doubtful. Mortgage loans are placed on
non-accrual status generally when either principal or interest is 90 days or
more past due and management considers the interest uncollectible. Interest
accrued and unpaid at the time a loan is placed on non-accrual status is charged
against interest income.
At March 31, 2000, the Company had non-performing assets of $290,000
and a ratio of non-performing assets to total assets of 0.10%. At March 31, 1999
and 1998, the Company had non-performing assets of $321,000 and $1.3 million,
respectively. The Company's levels of non-performing assets during the three
year period ended March 31, 2000 were below peer group averages.
Real estate acquired by the Company as a result of foreclosure or by
deed in lieu of foreclosure is deemed REO until such time as it is sold. When
REO is acquired, it is recorded at the lower of the unpaid principal balance of
the related loan or its fair value, less estimated selling expenses. Valuations
are periodically performed by management, and any subsequent decline in fair
value is charged to operations.
-10-
<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.
At March 31,
------------------------------
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
Non-accrual loans:
Mortgage loans:
Permanent loans secured by one-
to four-family dwelling units ....... $ 170 $ 224 $ 299
All other mortgage loans ............. -- -- 1
Non-mortgage loans:
Commercial ........................... -- -- --
Consumer ............................. 30 12 --
------ ------ ------
Total non-accrual loans .................... 200 236 300
Accruing loans 90 days or more delinquent .. -- 44 8
------ ------ ------
Total non-performing loans ................. 200 280 308
Total real estate owned(1) ................. 90 41 946
------ ------ ------
Total non-performing assets ................ $ 290 $ 321 $1,254
====== ====== ======
Total non-performing loans to
net loans receivable ...................... .08% .13% .15%
Total non-performing loans to
total assets .............................. .07% .10% .12%
Total non-performing assets to
total assets .............................. .10% .12% .48%
-----------
(1) Represents the net book value of property acquired by the Company through
foreclosure or deed in lieu of foreclosure. These properties are recorded
at the lower of the loan's unpaid principal balance or fair value less
estimated selling expenses.
During the year ended March 31, 2000, gross interest income of $8,000
would have been recorded on loans currently accounted for on a non-accrual basis
if the loans had been current throughout the period.
The following table sets forth information with respect to loans past
due by 60-89 days and 90 days or more in the Company's portfolio at the dates
indicated.
At March 31,
-----------------------------
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
Loans past due 60-89 days .................. $1,539 $1,710 $1,136
Loans past due 90 days or more ............. 200 280 308
------ ------ ------
Total past due 60 days or more .......... $1,739 $1,990 $1,444
====== ====== ======
CLASSIFICATION OF ASSETS. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the savings institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated "special mention" by management.
When a savings institution classifies problem assets as either
substandard or doubtful, it is required to establish general allowances for loan
losses in an amount deemed prudent by management. General allowances represent
loss allowances that have been established to recognize the inherent risk
associated with lending activities, but which, unlike specific allowances, have
not been allocated to particular problem assets. When a
-11-
<PAGE>
savings institution classifies problem assets as "loss," it is required either
to establish a specific allowance for losses equal to 100% of the amount of the
assets so classified, or to charge off such amount. A savings institution's
determination as to the classification of its assets and the amount of its
valuation allowances is subject to review by the OTS, which can order the
establishment of additional general or specific loss allowances. The Company
regularly reviews the problem loans in its portfolio to determine whether any
loans require classification in accordance with applicable regulations.
The following table sets forth the aggregate amount of the Company's
classified assets at the dates indicated.
At March 31,
--------------------------------
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
Substandard assets(1) ................... $ 290 $ 206 $1,243
Doubtful assets ......................... -- -- --
Loss assets ............................. -- 8 15
------ ------ ------
Total classified assets .............. $ 290 $ 214 $1,258
====== ====== ======
---------
(1) Includes REO.
ALLOWANCE FOR LOAN LOSSES. Management's policy is to provide for
estimated losses on the Company's loan portfolio based on management's
evaluation of the potential losses that may be incurred. The Company regularly
reviews its loan portfolio, including problem loans, to determine whether any
loans require classification or the establishment of appropriate reserves or
allowances for losses. Such evaluation, which includes a review of all loans of
which full collectibility of interest and principal may not be reasonably
assured, considers, among other matters, the estimated fair value of the
underlying collateral. Other factors considered by management include the size
and risk exposure of each segment of the loan portfolio, present indicators such
as delinquency rates and the borrower's current financial condition, and the
potential for losses in future periods. Management calculates the general
allowance for loan losses in part based on past experience, and in part based on
specified percentages of loan balances. While both general and specific loss
allowances are charged against earnings, general loan loss allowances are added
back to capital in computing risk-based capital under OTS regulations.
During fiscal years ended March 31, 2000, 1999 and 1998, the Company
added $120,000, $64,000 and $60,000, respectively, to the provision for loan
losses. The Company's allowance for loan losses totaled $793,000, $678,000 and
$721,000, at March 31, 2000, 1999 and 1998, respectively. The Company bases the
provision for loan loss on several factors, including loan volume, portfolio
mix, delinquencies, etc. Management believes that the Company's current
allowance for loan losses is adequate, however, there can be no assurance that
the allowance for loan losses will be adequate to cover losses that may in fact
be realized in the future or that additional provisions for loan losses will not
be required.
-12-
<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.
At March 31,
-------------------------------------
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
Loans receivable, net ................ $ 237,095 $ 214,094 $ 206,685
Average loans receivable, net ........ 229,845 209,178 207,377
Allowance balance (at beginning
of period) .......................... 678 721 914
Provision for losses:
Mortgage .......................... -- -- --
Non-mortgage ...................... -- -- --
General ........................... 120 64 60
(Charge-offs) Recoveries:
Mortgage .......................... -- (108) (231)
Non-Mortgage ...................... (5) 1 (22)
--------- --------- ---------
Allowance balance (at end of
period) ............................. $ 793 $ 678 $ 721
========= ========= =========
Allowance for loan losses as a
percent of loans receivable,
net at end of period ................ .33% .32% .35%
Net loans charged off as a
percent of average loans
receivable, net ..................... --% .05% .12%
Ratio of allowance for loan
losses to total non-
performing assets at end
of period ........................... 273.45% 211.21% 57.50%
Ratio of allowance for
loan losses to non-performing
loans at end of period .............. 396.50% 242.14% 234.09%
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the allocation of allowance for loan losses by loan category for the periods
indicated. Management believes that the allowance can be allocated by category
only on an approximate basis. The allocation of the allowance by category is not
necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
<TABLE>
<CAPTION>
At March 31,
---------------------------------------------------------------------------
2000 1999 1998
---------------------- ---------------------- ----------------------
% of Loans % of Loans % of Loans
in Each in Each in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------ ----------- ------ ----------- ------ -----------
(Dollars in Thousands)
Balance at end of period applicable to:
<S> <C> <C> <C> <C> <C> <C>
One- to four-family residential loans ..... $423 88.4% $386 88.3% $446 87.4%
Multi-family residential loans ............ 37 3.3 38 3.2 36 3.4
Consumer and commercial ................... 333 5.8 252 6.0 54 6.4
Non-residential real estate ............... -- 2.5 2 2.5 185 2.8
---- ----- ---- ----- ---- -----
Total allowance for loan losses ........... $793 100.0% $678 100.0% $721 100.0%
==== ===== ==== ===== ==== =====
</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 $27.2 million at
March 31, 2000, compared to $17.8 million at March 31, 1999, an increase of $8.9
million, or 50.0%. The Company's cash and cash equivalents, consisting of cash
and due from banks, federal funds sold, and interest bearing deposits due from
other financial institutions with original maturities of three months or less,
totaled $14.3 million at March 31, 2000 compared to $16.2 at March 31, 1999, a
decrease of $1.9 million, or 11.9%.
The Company is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short term securities
and certain other investments. See "Regulation--Liquidity Requirements" below
and Item 7. The Company generally has maintained a portfolio of liquid assets
that exceeds regulatory requirements. Liquidity levels may be increased or
decreased depending upon the yields on investment alternatives
-13-
<PAGE>
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,
------------------------------------------------------------------------
2000 1999 1998
----------------------- --------------------- ---------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
--------- --------- --------- -------- -------- -------
(In Thousands)
Investment securities:
<S> <C> <C> <C> <C> <C> <C>
Corporate bonds and notes .......................... $ 2,987 $ 2,951 $ -- $ -- $ -- $ --
U.S. Government and agency securities .............. 20,057 19,528 11,666 11,588 13,228 13,162
Obligations of state and political subdivisions .... 155 155 164 164 173 173
Certificates of deposit in other
financial institutions .............................. 4,000 4,000 6,000 6,000 8,500 8,500
------- ------- ------- ------- ------- -------
Total investment securities .......................... 27,199 26,634 17,830 17,752 21,901 21,835
Other Investments:
Interest-bearing deposits in other
financial institutions .............................. 8,332 8,332 10,410 10,410 7,647 7,647
Federal funds sold ................................... 3,475 3,475 4,295 4,295 4,100 4,100
Federal Home Loan Bank stock ......................... 3,160 3,160 2,919 2,919 2,719 2,719
------- ------- ------- ------- ------- -------
Total investments ................................ $42,166 $41,601 $35,454 $35,376 $36,367 $36,301
======= ======= ======= ======= ======= =======
</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, 2000. The Company does not hold any
investment securities with maturities in excess of 16 years.
<TABLE>
<CAPTION>
At March 31, 2000
---------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years
------------------- ------------------- -------------------- -------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
--------- -------- -------- --------- --------- --------- --------- -------
(Dollars in Thousands)
Investment Securities:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Corporate bonds and notes ......... $ -- --% $ 2,987 6.71% $ -- --% $ -- --%
U.S. Government and agency ........ -- -- 17,557 6.36 2,000 7.10 500 6.70
Obligations of state and
political subdivisions ........... -- -- -- -- -- -- 155 5.50
Certificates of deposit in
other financial institutions ..... 4,000 5.84 -- -- -- -- -- --
------- ---- ------- ---- ------- ---- ------- ----
Total investment securities ..... $ 4,000 5.84% $20,544 6.41% $ 2,000 7.10% $ 655 6.42%
======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
At March 31, 2000
-------------------------------------
Total Investment
Securities
-------------------------------------
Average Weighted
Life Carrying Market Average
In Years Value Value Yield
-------- ----- ----- -----
(Dollars in Thousands)
Investment Securities:
Corporate bonds and notes ........... 2.36 $ 2,987 $ 2,951 6.71%
U.S. Government and agency .......... 3.62 20,057 19,528 6.13
Obligations of state and
political subdivisions ............. 12.17 155 155 5.50
Certificates of deposit in
other financial institutions ....... .15 4,000 4,000 5.84
----- ------- ------- ----
Total investment securities ....... 3.02 $27,199 $26,634 6.15%
===== ======= ======= ====
-15-
<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 $12.0 million of advances from the FHLB at March 31,
2000.
DEPOSITS. Consumer and commercial deposits are attracted principally
from within the Company's market area through the offering of a broad selection
of deposit instruments including NOW accounts, passbook savings, money market
deposit, term certificate accounts and individual retirement accounts. The
Company accepts deposits of $100,000 or more and offers negotiated interest
rates on such deposits. Deposit account terms vary according to the minimum
balance required, the period of time during which the funds must remain on
deposit, and the interest rate, among other factors. The Company regularly
evaluates its internal cost of funds, surveys rates offered by competing
institutions, reviews the Company's cash flow requirements for lending and
liquidity, and executes rate changes when deemed appropriate. The Company does
not obtain funds through brokers, nor does it solicit funds outside its market
area. In past years the Company's total deposits had remained relatively stable,
whereas deposit growth this fiscal year increased nearly 13%, primarily
attributable to the expanded banking locations.
DEPOSIT PORTFOLIO. Savings and other deposits in the Company as of
March 31, 2000, comprised the following:
<TABLE>
<CAPTION>
Weighted Percentage
Average Minimum of Total
Interest Rate Minimum Term Checking and Savings Deposits Amount Balances Deposits
------------- ------------ ----------------------------- ------ -------- --------
(In Thousands)
<S> <C> <C> <C> <C> <C>
2.08% None NOW Accounts $ -- $ 31,014 11.71%
3.13 None Passbook -- 53,074 20.03
3.28 None Money Market Investor 2,500 10,827 4.09
Certificates of Deposit
-----------------------
5.00 12 months or less Fixed term, fixed rate 500 41,722 15.74
5.60 12 to 24 months Fixed term, fixed rate 500 54,341 20.51
5.71 25 to 36 months Fixed term, fixed rate 500 24,787 9.36
5.52 36 months or more Fixed term, fixed rate 500 8,888 3.35
6.07 Negotiable Jumbo Certificates 100,000 40,299 15.21
--------- ------
$ 264,952 100.00%
========= ======
</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, %
2000 Deposits (Decrease) 1999 Deposits (Decrease) 1998 Deposits
---- -------- ---------- ---- -------- ---------- ---- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
NOW accounts........................ $ 31,014 11.71% $ 6,135 $24,879 10.57% $ 3,817 $ 21,062 9.68%
Passbook statement accounts......... 53,074 20.03 6,608 46,466 19.75 7,355 39,111 17.97
Money market passbook............... 10,827 4.09 (438) 11,265 4.79 1,817 9,448 4.34
Certificates of deposit(1)
Original maturities of:
12 months or less............... 41,722 15.74 3,909 37,813 16.07 8,463 29,350 13.49
12 to 24 months................. 54,341 20.51 20,340 34,001 14.45 (3,068) 37,069 17.03
25 to 36 months................. 24,787 9.36 (13,909) 38,696 16.44 (2,166) 40,862 18.78
36 months or more............... 8,888 3.35 (2,532) 11,420 4.85 (2,103) 13,523 6.21
Negotiated jumbo................ 40,299 15.21 9,512 30,787 13.08 3,591 27,196 12.50
-------- ------- ------- ------- ------ -------- -------- -------
Total........................... $264,952 100.00% $29,625 $235,327 100.00% $ 17,706 $217,621 100.00%
======== ======= ======= ======== ====== ======== ======== =======
</TABLE>
--------
(1) Certain Individual Retirement Accounts ("IRAs") are included in the
respective certificate balances. IRAs totaled $31.1 million, $31.2 million
and $30.9 million, as of March 31, 2000, 1999 and 1998, respectively.
-17-
<PAGE>
The following table sets forth the certificates of deposit in the
Company classified by rates as of the dates indicated:
At March 31,
------------------------------------------
2000 1999 1998
---- ---- ----
(Dollars in Thousands)
4.01- 6.00% ................. $127,653 $120,446 $105,021
6.01- 8.00% ................. 42,382 29,486 38,148
8.01-10.00% ................. 2 2,785 4,831
-------- -------- --------
Total .................... $170,037 $152,717 $148,000
======== ======== ========
The following table sets forth the amount and maturities of
certificates of deposit at March 31, 2000.
Amount Due
-------------------------------------------------------------
Less Than 1-2 2-3 After
One Year Years Years 3 Years Total
-------- ----- ----- ------- -----
Rate (In Thousands)
----
4.01- 6.00%..... $ 102,627 $ 18,452 $ 2,917 $ 3,657 $127,653
6.01- 8.00%..... 21,241 18,363 2,123 655 42,382
8.01-10.00%..... 2 -- -- -- 2
--------- --------- --------- --------- --------
Total........ $ 123,870 $ 36,815 $ 5,040 $ 4,312 $170,037
========= ========= ========= ========= ========
The following table indicates the amount of the Company's negotiable
certificates of deposit of $100,000 or more by time remaining until maturity as
of March 31, 2000.
Maturity Period Certificates of Deposit
--------------- -----------------------
(In Thousands)
Three months or less............................. $ 12,964
Over three months through six months............. 7,367
Over six months through twelve months............ 10,573
Over twelve months............................... 9,395
---------
Total....................................... $ 40,299
=========
BORROWINGS
Savings deposits are the primary source of funds for the Company's
lending and investment activities and for its general business purposes. The
Company, if the need arises, may rely upon advances from the FHLB and the
Federal Reserve Bank discount window to supplement its supply of lendable funds
and to meet deposit withdrawal requirements. Advances from the FHLB typically
are collateralized by the Company's stock in the FHLB and a portion of the
Company's first mortgage loans. At March 31, 2000, the Company had $12.0 million
in advances outstanding.
The FHLB functions as a central reserve bank providing credit for the
Company and other member savings associations and financial institutions. As a
member, the Company is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities that are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met. Advances are made pursuant to several
different programs. Each credit program has its own interest rate and range of
maturities. Depending on the program, limitations on the amount of advances are
based either on a fixed percentage of a member institution's net worth or on the
FHLB's assessment of the
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institution's creditworthiness. Although advances may be used on a short-term
basis for cash management needs, FHLB advances have not been, nor are they
expected to be, a significant long-term funding source for the Company.
COMPETITION
The Company encounters strong competition both in attracting deposits
and in originating real estate and other loans. Its most direct competition for
deposits has come historically from commercial banks, brokerage houses, other
savings associations, and credit unions in its market area, and the Company
expects continued strong competition from such financial institutions in the
foreseeable future. The Company's market area includes branches of several
commercial banks that are substantially larger than the Company in terms of
state-wide deposits. The Company competes for savings by offering depositors a
high level of personal service and expertise together with a wide range of
financial services.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies, and other savings associations.
This competition for loans has increased substantially in recent years as a
result of the large number of institutions competing in the Company's market
area as well as the increased efforts by commercial banks to expand mortgage
loan originations.
The Company competes for loans primarily through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers, and builders. Factors that affect competition
include general and local economic conditions, current interest rate levels, and
volatility of the mortgage markets.
REGULATION
As a state-chartered, SAIF-insured savings association, the Company is
subject to examination, supervision and extensive regulation by the OTS, the
Ohio Division of Financial Institutions (the "Ohio Division"), and the FDIC. The
Bank and Village are members of and own stock in the FHLB of Cincinnati, which
is one of the twelve regional banks in the Federal Home Loan Bank System. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The Company also is subject to regulation
by the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") governing reserves to be maintained against deposits and certain other
matters. The OTS and Ohio Division regularly examine the Banks and prepare
reports for the consideration of the Company's Board of Directors on any
deficiencies that they may find in the Company's operations. The FDIC also
examines the Bank and Village in its role as the administrator of the SAIF. The
Company's relationship with its depositors and borrowers also is regulated to a
great extent by both federal and state laws especially in such matters as the
ownership of savings accounts and the form and content of the Company's mortgage
documents. Any change in such regulation, whether by the FDIC, OTS, Ohio
Division, or Congress, could have a material adverse impact on the Company, the
Bank, and Village and their operations.
FEDERAL REGULATION OF SAVINGS INSTITUTIONS
BUSINESS ACTIVITIES. The activities of savings institutions are
governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain
respects, the Federal Deposit Insurance Act (the "FDI Act"). The federal banking
statutes, as amended by the Financial Institutions Reform, Recovery and
Enforcement Act of 1989 ("FIRREA") and the Federal Deposit Insurance Corporation
Improvement Act ("FDICIA") (1) restrict the solicitation of brokered deposits by
savings institutions that are troubled or not well-capitalized, (2) prohibit the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories, (3) restrict the aggregate amount of loans secured by
non-residential real estate property to 400% of capital, (4) permit savings and
loan holding companies to acquire up to 5% of the voting shares of
non-subsidiary savings institutions or savings and loan holding companies
without prior approval, and (5) permit bank holding companies to acquire healthy
savings institutions. The
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description of statutory provisions and regulations applicable to savings
associations set forth herein does not purport to be a complete description of
such statutes and regulations and their effect on the Company.
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are
generally subject to the national bank limits on loans to one borrower.
Generally, savings institutions may not make a loan or extend credit to a single
or related group of borrowers in excess of 15% of the institution's unimpaired
capital and surplus. An additional amount may be lent, equal to 10% of
unimpaired capital and surplus, if such loan is secured by readily-marketable
collateral, which is defined to include certain securities and bullion, but
generally does not include real estate. See "--Lending Activities--Loans to One
Borrower."
QUALIFIED THRIFT LENDER TEST. The HOLA requires savings institutions to
meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings
association is required to maintain at least 65% of its "portfolio assets"
(total assets less (i) specified liquid assets up to 20% of total assets, (ii)
intangibles, including goodwill, and (iii) the value of property used to conduct
business) in certain "qualified thrift investments," primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities on a monthly basis in 9 out of every 12 months.
A savings association that fails the QTL test must either convert to a
bank charter or operate under certain restrictions. As of March 31, 2000, the
Company maintained 98.4% of its portfolio assets in qualified thrift investments
and, therefore, met the QTL test.
LIMITATION ON CAPITAL DISTRIBUTIONS. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. A "well capitalized" institution can, after prior notice but
without the approval of the OTS, make capital distributions during a calendar
year in an amount up to 100 percent of its net income during the calendar year,
plus its retained net income for the preceding two years. As of March 31, 2000
the Bank was a "well-capitalized" institution.
In addition, OTS regulations require the Mutual Holding Company to
notify the OTS of any proposed waiver of its right to receive dividends. It is
the OTS' recent practice to review dividend waiver notices on a case-by-case
basis, and, in general, not object to any such waiver if: (i) the mutual holding
company's board of directors determines that such waiver is consistent with such
directors' fiduciary duties to the mutual holding company's members; (ii) for as
long as the savings association subsidiary is controlled by the mutual holding
company, the dollar amount of dividends waived by the mutual holding company are
considered as a restriction on the retained earnings of the savings association,
which restriction, if material, is disclosed in the public financial statements
of the savings association as a note to the financial statements; (iii) the
amount of any dividend waived by the mutual holding company is available for
declaration as a dividend solely to the mutual holding company, and, in
accordance with SFAS 5, where the savings association determines that the
payment of such dividend to the mutual holding company is probable, an
appropriate dollar amount is recorded as a liability; (iv) the amount of any
waived dividend is considered as having been paid by the savings association
(and the savings association's capital ratios adjusted accordingly) in
evaluating any proposed dividend under OTS capital distribution regulations; and
(v) in the event the mutual holding company converts to stock form, the
appraisal submitted to the OTS in connection with the conversion application
takes into account the aggregate amount of the dividends waived by the mutual
holding company.
LIQUIDITY. The Company is required to maintain an average daily balance
of liquid assets (cash, certain time deposits, bankers' acceptances, specified
U.S. Government, state or federal agency obligations, shares of certain mutual
funds and certain corporate debt securities and commercial paper) equal to a
monthly average of not less than a specified percentage of its net withdrawable
deposit accounts plus short-term borrowings. This liquidity requirement which is
currently 4%, may be changed from time to time by the OTS to any amount within
the range of 4% to 10% depending upon economic conditions and the savings flow
of member institutions. Monetary penalties may be imposed for failure to meet
these liquidity requirements. The Company's average liquidity ratio for March
2000 was 19.6%,
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which exceeded the then applicable requirements. The Company has never been
subject to monetary penalties for failure to meet its liquidity requirements.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act (the
"CRA"), as implemented by OTS regulations, a savings institution has a
continuing and affirmative obligation, consistent with its safe and sound
operation, to help meet the credit needs of its entire community, including low
and moderate income neighborhoods. The CRA does not establish specific lending
requirements or programs for financial institutions, nor does it limit an
institution's discretion to develop the types of products and services that it
believes are best suited to its particular community, consistent with the CRA.
The CRA requires the OTS, in connection with its examination of a savings
institution, to assess the institution's record of meeting the credit needs of
its community and to take such record into account in its evaluation of certain
applications by such institution. The CRA also requires all institutions to make
public disclosure of their CRA ratings. The Company received a "satisfactory"
CRA rating under the current CRA regulations in its most recent federal
examination by the OTS.
TRANSACTIONS WITH RELATED PARTIES. The Company's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Holding
Company and any non-savings institution subsidiaries) or to make loans to
certain insiders, is limited by Sections 23A and 23B of the Federal reserve Act
("FRA"). Section 23A limits the aggregate amount of transactions with any
individual affiliate to 10% of the capital and surplus of the savings
institution and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B provides that
certain transactions with affiliates, including loans and asset purchases, must
be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Criminal
penalties for most financial institution crimes include fines of up to $1
million and imprisonment for up to 30 years. Under the FDI Act, the FDIC has the
authority to recommend to the Director of OTS that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances.
STANDARDS FOR SAFETY AND SOUNDNESS. The federal banking agencies have
adopted a final regulation and Interagency Guidelines Prescribing Standards for
Safety and Soundness ("Guidelines") to implement the safety and soundness
standards required under the FDI Act. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The standards set forth in the Guidelines address internal controls
and information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; and compensation, fees
and benefits. The agencies also adopted a proposed rule which proposes asset
quality and earnings standards which, if adopted, would be added to the
Guidelines. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
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CAPITAL REQUIREMENTS. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 4.0% leverage ratio (or core capital ratio) and an 8.0% risk-based capital
standard. Core capital is defined as common stockholders' equity (including
retained earnings), certain non- cumulative perpetual preferred stock and
related surplus, minority interests in equity accounts of consolidated
subsidiaries less intangibles other than certain qualifying supervisory goodwill
and certain mortgage servicing rights ("MSRs"). The OTS regulations also require
that, in meeting the tangible ratio, leverage and risk-based capital standards,
institutions must deduct investments in and loans to subsidiaries engaged in
activities not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 2 (core) and total capital (which is defined as core capital
and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS
believes are inherent in the type of asset. The components of Tier 1 (core)
capital are equivalent to those discussed earlier under the 4.0% leverage ratio
standard. The components of supplementary capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and allowance for
loan and lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25%. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations."
An OTS regulatory capital rule also incorporates an interest rate risk
component. Savings associations with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates,
divided by the estimated economic value of the association's assets. In
calculating its total capital under the risk-based rule, a savings association
whose measured interest rate risk exposure exceeds 2%, must deduct an interest
rate component equal to one-half of the excess change. The OTS has deferred, for
the present time, the date on which the interest rate component is to be
deducted from total capital. The rule also provides that the Director of the OTS
may waive or defer an institution's interest rate risk component on a
case-by-case basis. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS Prompt Corrective Action regulations, the OTS is required
to take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has the total
risk- based capital less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS could also take any
one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and
directors.
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INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
The Bank and Village are members of the SAIF, which is administered by
the FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the U.S. Government. As
insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious risk to the FDIC.
The FDIC also has the authority to initiate enforcement actions against savings
and loan associations, after giving the OTS an opportunity to take such action,
and may terminate the deposit insurance if it determines that the institution
has engaged or is engaging in unsafe or unsound practices, or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, ranging from .23% to .31% of
deposits, based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as well capitalized (i.e., a core capital
ratio of at least 5%, a ratio of core capital to risk-weighted assets of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
would pay the lowest premium while institutions that are less than adequately
capitalized (i.e., a core capital or core capital to risk-based capital ratios
of less than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern would pay the highest premium. Risk
classification of all insured institutions will be made by the FDIC for each
semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
FEDERAL HOME LOAN BANK SYSTEM
The Company and Village are members of the FHLB System, which consists
of 12 regional FHLBs. The FHLB provides a central credit facility primarily for
member institutions. The Company, as a member of the FHLB, is required to
acquire and hold shares of capital stock in that FHLB in an amount at least
equal to 1% of the aggregate principal amount of its unpaid residential mortgage
loans and similar obligations at the beginning of each year, or 1/20 of its
advances (borrowings) from the FHLB, whichever is greater. The Company was in
compliance with this requirement with an investment in FHLB-Cincinnati stock, at
March 31, 2000, of $3.2 million.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. Over the past five years such dividends have averaged
5.75%, and were 7.25% for the fiscal year ended March 31, 2000. If dividends
were reduced, or interest on future FHLB-Cincinnati advances increased, the
Company's net interest income would likely also be reduced.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $54.0 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $54.0 million, the reserve requirement is $1.6
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $54.0
million. The first $4.2 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Company is in compliance with the
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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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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
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managerial resources, future prospects of the company and institution involved,
the effect of the acquisition on the risk to the insurance fund, the convenience
and needs of the community and competitive factors.
The OTS is prohibited from approving any acquisition that would result
in a multiple savings and loan holding company controlling savings institutions
in more than one state, subject to two exceptions: (i) the approval of
interstate supervisory acquisitions by savings and loan holding companies, and
(ii) the acquisition of a savings institution in another state if the laws of
the state of the target savings institution specifically permit such
acquisitions.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. Income taxes are accounted for under the asset and
liability method which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The Federal tax bad debt reserve method available to thrift
institutions was repealed in 1996 for tax years beginning after 1995. As a
result, the Company was required to change from the reserve method to the
specific charge-off method to compute its bad debt deduction. In addition, the
Company is required generally to recapture into income the portion of its bad
debt reserve (other than the supplemental reserve) that exceeds its base year
reserves, approximately $250,000.
The recapture amount resulting from the change in a thrift's method of
accounting for its bad debt reserves generally will be taken into taxable income
ratably (on a straight-line basis) over a six-year period. The Bank began
recapture of the bad debt reserve during fiscal 1999.
Retained earnings as of March 31, 2000 include approximately $2.7
million for which no provision for Federal income tax has been made. This
reserve (base year and supplemental) is frozen/not forgiven as certain events
could trigger a recapture such as stock redemption or distributions to
shareholders in excess of current or accumulated earnings and profits.
The Company's tax returns have been audited or closed without audit
through fiscal year 1996.
OHIO TAXATION. The Company files Ohio franchise tax returns. For Ohio
franchise tax purposes, savings institutions are currently taxed at a rate equal
to 1.3% of taxable net worth. The Company is not currently under audit with
respect to its Ohio franchise tax returns.
ITEM 2. PROPERTIES
The Bank conducts its business through its main office located in
Wooster, Ohio, and seven full service branch offices located in four counties.
The following table sets forth certain information concerning the main office
and each branch office of the Bank at March 31, 2000. The aggregate net book
value of the Company's premises and equipment was $8.2 million at March 31,
2000.
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WAYNE SAVINGS COMMUNITY BANK
Location Year Opened Owned or Leased
-------- ----------- ---------------
151 N. Market St. 1902 Owned
Wooster, Ohio 44691
1908 Cleveland Rd. 1978 Owned
Wooster, Ohio 44691
90 North Clay St. 1964 Owned
Millersburg, Ohio 44654
233 Claremont Ave. 1968 Owned
Ashland, Ohio 44805
237 North Main St. 1972 Owned
Rittman, Ohio 44270
303 Highland Dr. 1980 Owned
Lodi, Ohio 44254
2024 Millersburg Rd. 1999 Owned
Wooster, Ohio 44691
543 Riffle Rd. 1999 Leased
Wooster, Ohio 44691
VILLAGE SAVINGS BANK
Village conducts its business through its office located in Stark
County, Ohio.
Location Year Opened Owned or Leased
1265 South Main Street 1998 Owned
North Canton, Ohio 44720
The Company's accounting and record keeping activities are maintained
through an in-house data processing system.
ITEM 3. LEGAL PROCEEDINGS
A former executive officer and director of Village has filed Harbert v.
Wayne Savings Bankshares, M.H.C. and Finn and Village Savings Bank, alleging
breach of contract and misrepresentation. The plaintiff brought the lawsuit in
the Court of Common Pleas of Stark County, Ohio, on May 19, 1999, and is seeking
wages and compensatory damages of $500,000, punitive damages of $500,000, and
attorney fees and costs. Although there can be no certainty as to the outcome of
this matter, management has retained counsel to vigorously contest the claim.
The Company is not involved in any other pending legal proceedings
other than routine legal proceedings occurring in the ordinary course of
business which, in the aggregate, involved amounts which are believed by
management to be immaterial to the financial condition and operations of the
Company.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the fiscal year covered by this report,
the Registrant did not submit any matters to the vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The "Stockholder Information" and Common Stock and Related Matters
sections of the Company's annual report to stockholders for the fiscal year
ended March 31, 2000 (the "2000 Annual Report to Stockholders") are incorporated
herein by reference. No other sections of the 2000 Annual Report to Stockholders
are incorporated herein by this reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's 2000 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 2000
Annual Report to Stockholders are incorporated herein by this reference.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The material identified in Item 13(a)(1) hereof is incorporated herein
by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE BANK
The "Proposal I--Election of Directors" section of the Company's
definitive proxy statement for its 2000 annual meeting of stockholders (the
"Proxy Statement") is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The "Proposal I--Election of Directors" section of the Company's Proxy
Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The "Proposal I--Election of Directors" section of the Company's Proxy
Statement is incorporated herein by reference.
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ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The "Proposal I--Election of Directors" section of the Company's Proxy
Statement is incorporated herein by reference.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FROM 8-K
(a)(1) Financial Statements
The following documents appear in sections of the Company's 2000 Annual
Report to Stockholders under the same captions, and are incorporated herein by
reference. No other sections of the 2000 Annual Report to Stockholders are
incorporated herein by this reference.
(i) Selected Financial and Other Data;
(ii) Management's Discussion and Analysis of Financial
Condition and Results of Operations;
(iii) Report of Independent Certified Public Accountants;
(iv) Consolidated Statements of Financial Condition;
(v) Consolidated Statements of Earnings;
(vi) Consolidated Statements of Stockholders' Equity;
(vii) Consolidated Statements of Cash Flows; and
viii) Notes to Consolidated Financial Statements.
With the exception of the aforementioned sections, the Company's 2000
Annual Report to Stockholders is not deemed filed as part of this Annual Report
on Form 10-KSB, and no other sections of the 2000 Annual Report to Stockholders
are incorporated herein by this reference.
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to Consolidated
Financial Statements.
(a)(3) Exhibits
Reference to Prior
Filing or Exhibit
Regulation S-B Number Attached
Exhibit Number Document Hereto
-------------- -------- ------
3 Articles of Incorporation *
3 Bylaws *
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4 Instruments defining the *
rights of security holders,
including debentures
9 Voting trust agreement None
10 Material contracts None
11 Statement re: computation Not
of per share earnings Required
13 Annual Report to 13
Security Holders
16 Letter re: change in certifying None
accountants
18 Letter re: change in accounting None
principles
21 Subsidiaries of Registrant None
22 Published report regarding None
matters submitted to vote of
security holders
23 Consent of Grant Thornton LLP 23
27 EDGAR Financial Data Schedule 27
28 Information from reports None
furnished to state
insurance regulatory
authorities
99 Additional Exhibits None
-----------------
* Filed as exhibits to the Registrant's Form 8-K Current Report filed with
the SEC on November 26, 1997.
(b) Reports on Form 8-K:
-------------------
Not Applicable
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WAYNE SAVINGS BANCSHARES, INC.
Date: June 26, 2000 By: /s/ Charles F. Finn
--------------------------------
Charles F. Finn, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Charles F. Finn By: /s/ Todd J. Tappel
--------------------------------- ---------------------------------
Charles F. Finn, President, Chief Todd J. Tappel, Senior Vice
Executive Officer and Director President and Corporate Secretary
(Principal Executive Officer) Secretary (Principal Financial
Officer)
Date: June 26, 2000 Date: June 26, 2000
By: /s/ Anthony Volpe By: /s/ Kenneth G. Rhode
--------------------------------- ----------------------------------
Anthony Volpe, Vice President Kenneth G. Rhode, Director
(Principal Accounting Officer)
Date: June 26, 2000 Date: June 26, 2000
By: By:
----------------------------------- ----------------------------------
Donald E. Massaro, Director James C. Morgan, Director
Date: Date:
By: /s/ Terry A Gardner By: /s/ Russell L. Harpster
----------------------------------- -----------------------------------
Terry A. Gardner, Director Russell L. Harpster, Director
Date: June 26, 2000 Date: June 26, 2000
By: /s/ Joseph L. Retzler
-----------------------------------
Joseph L. Retzler, Director
Date: June 26, 2000
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