-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, NOGHiWViiPRFQxfztRDvnra4m/MdZB7HXxYarQZFSateURzrkQ9pe+eC2BPxfGs/ 7bO7bI/Q8vgld4wS4IQsnQ== 0000914317-03-001840.txt : 20030627 0000914317-03-001840.hdr.sgml : 20030627 20030627161233 ACCESSION NUMBER: 0000914317-03-001840 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 20030331 FILED AS OF DATE: 20030627 FILER: COMPANY DATA: COMPANY CONFORMED NAME: WAYNE SAVINGS BANCSHARES INC /DE/ CENTRAL INDEX KEY: 0001036030 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 311557791 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-23433 FILM NUMBER: 03761523 BUSINESS ADDRESS: STREET 1: 151 N MARKET ST CITY: WOOSTER STATE: OH ZIP: 44691-4809 BUSINESS PHONE: 3302645767 MAIL ADDRESS: STREET 1: 151 N MARKET ST CITY: WOOSTER STATE: OH ZIP: 44691-4809 FORMER COMPANY: FORMER CONFORMED NAME: WAYNE SAVINGS BANKSHARES INC DATE OF NAME CHANGE: 19970319 10-K 1 form10k-52696_wsb.txt SECURITIES AND EXCHANGE COMMISSION 450 Fifth Street, N.W. Washington, D.C. 20549 FORM 10-K |X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Fiscal Year Ended March 31, 2003 OR |_| Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _______________ to _______________ Commission File No. 0-23433 WAYNE SAVINGS BANCSHARES, INC. ------------------------------ (Exact name of registrant as specified in its charter) Delaware 31-1557791 -------- ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 151 North Market Street, Wooster, Ohio 44691 -------------------------------------- ----- (Address of Principal Executive Offices) Zip Code (330) 264-5767 -------------- (Registrant's telephone number) Securities Registered Pursuant to Section 12(b) of the Act: None Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share -------------------------------------- (Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES |X| NO |_|. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. |X|. Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES |_| NO |X|. 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 National Market on June 13, 2003, was approximately $53.0 million. As of June 13, 2003, there were issued and outstanding 3,888,795 shares of the Registrant's Common Stock. DOCUMENTS INCORPORATED BY REFERENCE 1. Proxy Statement for the 2003 Annual Meeting of Stockholders (Parts I and III). 2. Sections of the Annual Report to Stockholders at and for the year ended March 31, 2003 (Part II and Part III) PART I ------ ITEM 1. Business - ---------------- General Wayne Savings Bancshares, Inc. Wayne Savings Bancshares, Inc. (the "Company") is a Delaware corporation which was organized in January 2003. The only significant asset of the Company is its investment in Wayne Savings Community Bank (the "Bank"). The Company is the successor to Wayne Savings Bancshares, Inc., a federal corporation, ("Wayne Federal") which was originated in August 1997. Wayne Federal had been majority-owned by Wayne Savings Bankshares, M.H.C., a federally-chartered mutual holding company (the "Mutual Holding Company" or "M.H.C."), with the remaining shares owned by public stockholders. In fiscal 2002, the Board of Directors of the M.H.C. adopted a plan of conversion and reorganization (the "Plan") to convert the M.H.C. from mutual to stock form and to complete a related stock offering in which shares of common stock representing the M.H.C.'s ownership interest in Wayne Federal was sold to investors. The Plan was approved by the stockholders of Wayne Federal, the depositors of Wayne Savings Community Bank and the Office of Thrift Supervision ("OTS") in fiscal 2003, and the related stock offering was completed on January 8, 2003. As of that date 1,350,699 shares of Wayne Federal owned by the M.H.C. were retired and the Company sold 2,040,816 shares of common stock for $10.00 per share. After consideration of the employee stock ownership plan (ESOP) totaling $1.6 million and related expenses of $1.9 million, net proceeds from the stock offering amounted to $17.1 million. An additional 1,847,820 shares were issued to the former public stockholders of Wayne Federal based on an exchange rate of 1.5109 new shares of common stock for each existing share, resulting in 3,888,795 total new shares outstanding. At March 31, 2003, the Company had total assets of $379.0 million, total deposits of $300.9 million, and stockholders' equity of $44.7 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 nine 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, non-residential real estate and commercial business 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. 2 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, hereinafter collectively referred to as "the Banks." Village's deposits are insured by the FDIC under the SAIF. Village is a member of the FHLB system. Village is a community-oriented savings institution offering traditional financial services to its local community. Village's primary lending and deposit gathering area includes North Canton, Jackson Township and Plain Township, which are all located in Stark County. Village's principal business activity consists of originating one- to four-family residential real estate loans in its market area. Village also originates multi-family residential and non-residential real estate loans, although such loans constitute a small portion of Village's lending activities. Village also 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. In June 2003, the Banks filed regulatory applications to merge Village with and into the Bank. The merger is expected to be completed during calendar year 2003. 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. Since 1892, Wooster has been the headquarters of the Ohio Agricultural Research and Development Center, the agricultural research arm of The Ohio State University. In addition, 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 Rittman Paperboard, Division of Caraustar, 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 four full-service offices in Wooster and one full-service office in Rittman. 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 two 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 3 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. 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. The Company plans to increase its commercial lending portfolio by focusing on high-quality smaller balance commercial loans. 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, 2003, approximately $130.7 million, or 42.9%, of the Company's total loans and mortgage-backed securities 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. 4 Analysis of Loan Portfolio. Set forth below are selected data relating to the composition of the Company's loan portfolio, excluding loans held for sale, by type of loan as of the dates indicated.
At March 31, -------------------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ---------------- ---------------- ---------------- ---------------- ---------------- $ % $ % $ % $ % $ % -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ (Dollars in thousands) Mortgage loans: One-to four-family residential(1)... $200,764 86.41% $220,145 85.36% $217,236 85.70% $212,822 87.37% $189,381 85.62% Residential construction loans........ 3,548 1.53 8,728 3.38 7,078 2.79 4,035 1.66 7,668 3.47 Multi-family residential............ 8,512 3.66 7,368 2.86 9,039 3.56 8,028 3.30 7,086 3.20 Non-residential real estate/land(2). 8,211 3.53 9,725 3.77 7,525 2.97 6,068 2.49 5,610 2.54 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total mortgage loans.............. 221,035 95.13 245,966 95.37 240,878 95.02 230,953 94.82 209,745 94.83 Other loans: Consumer loans(3)................... 3,892 1.67 6,096 2.37 7,858 3.10 7,441 3.06 6,643 3.00 Commercial business loans........... 7,427 3.20 5,832 2.26 4,765 1.88 5,168 2.12 4,810 2.17 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total other loans................. 11,319 4.87 11,928 4.63 12,623 4.98 12,609 5.18 11,453 5.17 -------- ------ -------- ------ -------- ------ -------- ------ -------- ------ Total loans before net items........ 232,354 100.00% 257,894 100.00% 253,501 100.00% 243,562 100.00% 221,198 100.00% ====== ====== ====== ====== ====== Less: Loans in process.................... 2,244 4,616 4,764 4,136 4,600 Deferred loan origination fees...... 1,059 1,376 1,463 1,538 1,855 Allowance for loan losses........... 678 730 655 793 692 -------- -------- -------- -------- -------- Total loans receivable, net....... $228,373 $251,172 $246,619 $237,095 $214,051 ======== ======== ======== ======== ======== Mortgage-backed securities, net(4).. $ 76,002 $ 17,326 $ 8,574 $ 10,459 $ 7,230 ======== ======== ======== ======== ========
- ---------- (1) Includes equity loans collateralized by second mortgages in the aggregate amount of $21.2 million, $18.9 million, $15.7 million, $11.1 million and $8.7 million as of March 31, 2003, 2002, 2001, 2000 and 1999, respectively. Such loans have been underwritten on substantially the same basis as the Company's first mortgage loans. (2) Includes land loans of $813,000, $736,000, $923,000, $949,000 and $951,000 as of March 31, 2003, 2002, 2001, 2000 and 1999, respectively. (3) Includes second mortgage loans of $859,000, $1.2 million, $1.8 million, $1.6 million and $1.8 million as of March 31, 2003, 2002, 2001, 2000 and 1999, respectively. (4) Includes mortgage-backed securities designated as available for sale. 5 Loan and Mortgage-Backed Securities Maturity and Repricing Schedule. The following table sets forth certain information as of March 31, 2003, regarding the dollar amount of loans and mortgage-backed securities maturing in the Company's portfolio based on their contractual terms to maturity. Demand loans, loans having no stated schedule of repayments and no stated maturity, and overdrafts are reported as due in one year or less. Adjustable and floating rate loans are included in the period in which interest rates are next scheduled to adjust rather than in which they mature, and fixed rate loans and mortgage-backed securities are included in the period in which the final contractual repayment is due. Fixed rate mortgage-backed securities are assumed to mature in the period in which the final contractual payment is due on the underlying mortgage.
One Three Five Ten Beyond Within Through Through Through Through Twenty One Year Three Years Five Years Ten Years Twenty Years Years Total -------- ----------- ---------- --------- ------------ -------- -------- (In Thousands) Mortgage loans: One to four family residential: Adjustable ................................... $36,684 $12,002 $ 3,209 $ 651 $ -- $ -- $ 52,546 Fixed ........................................ 1,314 307 2,280 13,132 54,784 76,401 148,218 Construction (1): Adjustable ................................... 339 400 -- -- -- -- 739 Fixed ........................................ 236 -- -- -- 258 675 1,169 Multi-family residential and nonresidential (1): Adjustable ................................... 4,844 6,578 3,120 -- -- -- 14,542 Fixed ........................................ 721 169 528 159 -- -- 1,577 Other Loans: Commercial business loans ...................... 6,466 253 -- 708 -- -- 7,427 Consumer ....................................... 1,749 1,210 892 41 -- -- 3,892 ------- ------- ------- ------- ------- ------- -------- Total loans ...................................... $52,353 $20,919 $10,029 $14,691 $55,042 $77,076 $230,110 ======= ======= ======= ======= ======= ======= ======== Mortgage-backed securities(2) .................... $ 6,525 $43,236 $ 8,678 $ 796 $ 9,895 $ 4,855 $ 73,985 ======= ======= ======= ======= ======= ======= ========
- ---------- (1) Amounts shown are net of loans in process of $1.6 million in construction loans and $604,000 in multi-family residential and nonresidential loans. (2) Includes mortgage-backed securities available for sale. Does not include premiums of $1.8 million, discounts of $9,000 and unrealized gains of $214,000. 6 The following table sets forth at March 31, 2003, the dollar amount of all fixed rate and adjustable rate loans and mortgage-backed securities maturing or repricing after March 31, 2004. Fixed Adjustable -------- ---------- (In Thousands) Mortgage loans: One- to four-family residential ..................... $146,904 $15,862 Construction (1) .................................... 933 400 Multi-family residential and non-residential (1) .... 856 9,698 Consumer ............................................ 2,143 -- Commercial business ................................. 740 221 -------- ------- Total loans ....................................... $151,576 $26,181 ======== ======= Mortgage-backed securities(2) ......................... $ 16,023 $51,437 ======== ======= - ---------- (1) Net of loans in process of $1.6 million construction loans and $604,000 multi-family residential and non-residential loans. (2) Includes mortgage-backed securities available for sale. Does not include premiums of $1.8 million, discounts of $9,000 and unrealized gains of $214,000. 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, 2003, the Company had $200.8 million, or 86.4%, 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 five years have been limited to sales of $4.0 million, $27.3 million, $9.2 million, $6.4 million, and $15.9 million for the fiscal years ended March 31, 2003, 2002, 2001, 2000, and 1999, respectively. Such sales generally constituted current period originations. There were no loans identified as available for sale as of March 31, 2003 and 2002. Mortgage loans held for sale at March 31, 2001, 2000 and 1999 totaled $861,000, $317,000 and $1.6 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, 2003, the Company's ARM portfolio increased by $2.5 million or 5.0%. 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. 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 Funds ARM loans is not discounted. In the past, the Company has used different indices for ARM loans, such as the National Average Contract Rate for Previously Occupied Homes and 7 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 $52.5 million, or 22.6%, of the Company's total loan portfolio at March 31, 2003. 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 Associations 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, 2003, the Company's equity loan portfolio totaled $21.2 million, or 10.6%, of its one- to four-family mortgage loan portfolio. 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, 2003, second mortgage loans totaled $859,000, or .4%, of one-to four-family mortgage loans. 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 ARM loans with loan-to-value ratios of 80.01% to 85%, 85.01% to 90%, 90.01% to 95%, and 95.01% to 97%, the Company requires the first 6%, 12%, 25% and 30%, 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 97%, 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 not emphasized multi-family real estate loans. Loans secured by multi-family real estate constituted approximately $8.5 million, or 3.7%, of the Company's total loan portfolio at March 31, 2003. The Company's multi-family real estate loans are secured by multi-family residences, such as apartment buildings. At March 31, 2003, 86.7% of the Company's multi-family loans were secured by properties located within the Company's market area. At March 31, 2003, the Company's multi-family real estate loans had an average balance of $315,000, and the largest multi-family real estate loan had a principal balance of $2.3 million. Multi-family real estate loans currently are offered with adjustable interest rates or short term balloon maturities, although in the past the Company originated fixed rate long term multi-family real estate loans. The terms of each multi-family loan are negotiated on a case by case basis, although such loans typically have adjustable interest rates tied to a market index, and amortize over 15 to 25 years. The Company 8 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. Loans secured by non-residential real estate constituted approximately $7.4 million, or 3.2%, of the Company's total loan portfolio at March 31, 2003. 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, 2003, 99.8% of the Company's non-residential real estate loans were secured by properties located within the Company's market area. At March 31, 2003, the Company's non-residential loans had an average balance of $190,000 and the largest non-residential real estate loan had a principal balance of $2.1 million. The Company's largest loan is to a partnership in which a director is a partner. 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 $813,000 at March 31, 2003. 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, 2003, the Company had $3.6 million, or 1.5%, of its total loan portfolio invested in interim construction loans. The Company makes construction loans to private individuals and to builders. Loan proceeds are disbursed in increments as construction progresses and as inspections warrant. Construction loans are typically structured as permanent one- to four-family loans originated by the Company with a 12-month construction phase. Accordingly, upon completion of the construction phase, there is no change in interest rate or term to maturity of the original construction loan, nor is a new permanent loan originated. Commercial Business Loans. Commercial business loans totaled $7.4 million, or 3.2% of the Company's total loan portfolio at March 31, 2003. The Company has enhanced its commercial lending program by hiring an experienced commercial lender. The Company underwrites commercial loans to corporations, partnerships and other businesses. The majority of its commercial loan customers are local businesses with revenues of less than $5 million. The Company offers commercial loans for equipment purchases, lines of credit or letters of credit as well as loans where the borrower is the sole occupant of the property. Commercial loans are originated on a fixed and floating rate basis with a maturity of the floating rate extending up to 20 years, while the fixed-rate commercial loans are usually fully amortized within 3-5 years. 9 The underwriting of a commercial loan is based upon a review of the financial statements of the prospective borrower and guarantors. In most cases the Company obtains a general lien on accounts receivable and inventory, along with the specific collateral such as real estate or equipment, as appropriate. Commercial business loans generally bear higher interest rates than residential loans, but they also involve a higher risk of default since their repayment is generally dependent on the cash flow of the borrower's business. As a result, the availability of funds for the repayment of commercial business loans may be substantially dependent on the success of the business itself and the general economic environment. Consumer Loans. Ohio savings associations, like the Bank, are authorized to invest in secured and unsecured consumer loans in an aggregate amount which, when combined with investments in commercial paper and corporate debt securities, does not exceed 20% of an association's assets. In addition, an Ohio association is permitted to invest up to 5% of its assets in loans for educational purposes. As of March 31, 2003, consumer loans totaled $3.9 million, or 1.7%, of the Company's total loan portfolio. The principal types of consumer loans offered by the Company are fixed rate 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. During fiscal 2003, the majority of the education loans were sold because of the high level of administrative costs associated with maintaining this portfolio. 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 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 and Impaired 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 $17.3 million at March 31, 2002 to $76.0 million at March 31, 2003. The Company has elected to reinvest mortgage prepayments into interest rate sensitive mortgage-backed securities with an estimated average life of five years or less. 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. 10 Loan Originations, Solicitation, Processing, and Commitments. Loan originations are derived from a number of sources such as real estate broker referrals, existing customers, borrowers, builders, attorneys, and walk-in customers. Upon receiving a loan application, the Company obtains a credit report and employment verification to verify specific information relating to the applicant's employment, income, and credit standing. In the case of a real estate loan, an appraiser approved by the Company appraises the real estate intended to secure the proposed loan. An underwriter in the Company's loan department checks the loan application file for accuracy and completeness, and verifies the information provided. One-to four-family and multi-family residential, and commercial real estate loans, for up to $150,000, may be approved by the manager of the mortgage loan department, loans between $150,000 and $250,000 must be approved by the Chief Lending Officer. The Chief Executive Officer can approve loans up to $300,000, and loans in excess of $300,000 must be approved by the Board of Directors. The Loan Committee meets once a week to review and verify that management's approvals of loans are made within the scope of management's authority. All approvals subsequently are ratified monthly by the full Board of Directors. Fire and casualty insurance is required at the time the loan is made and throughout the term of the loan. After the loan is approved, a loan commitment letter is promptly issued to the borrower. At March 31, 2003, the Company had commitments to originate $4.0 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, 2003, 0.4% 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, ----------------------------------- 2003 2002 2001 --------- --------- --------- (In Thousands) Total loans receivable, net at beginning of year ....... $ 251,172 $ 246,619 $ 237,095 Loans originated: One- to four-family residential(1) .................. 52,523 89,376 60,192 Multi-family residential(2) ......................... 2,761 -- 2,803 Non-residential real estate/land .................... 1,074 3,712 4,255 Consumer loans ...................................... 1,900 2,534 6,854 Commercial loans .................................... 2,973 886 1,611 --------- --------- --------- Total loans originated ........................... 61,231 96,508 75,715 Loans sold: Whole loans ......................................... (3,998) (27,130) (9,185) --------- --------- --------- Total loans sold ................................. (3,998) (27,130) (9,185) Mortgage loans transferred to REO ...................... -- -- (98) Loan repayments ........................................ (80,362) (66,077) (56,485) Other loan activity, net ............................... 330 1,252 (423) --------- --------- --------- Total loans receivable, net at end of year(3) .... $ 228,373 $ 251,172 $ 246,619 ========= ========= ========= Mortgage-backed securities at beginning of year ........ $ 17,326 $ 8,574 $ 10,459 Mortgage-backed securities purchased ................... 77,442 14,155 2,025 Principal repayments and other activity ................ (18,766) (5,403) (3,910) --------- --------- --------- Mortgage-backed securities at end of year ........ $ 76,002 $ 17,326 $ 8,574 ========= ========= =========
- ---------- (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. (3) Excludes loans held for sale. 11 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 "Accounting for Non-refundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." To the extent that loans are originated or acquired for the Company's portfolio, SFAS No. 91 requires that the Company defer loan origination fees and costs and amortize such amounts as an adjustment of yield over the life of the loan by use of the level yield method. SFAS No. 91 reduces the amount of revenue recognized by many financial institutions at the time such loans are originated or acquired. Fees deferred under SFAS No. 91 are recognized into income immediately upon prepayment or the sale of the related loan. At March 31, 2003, the Company had $1.1 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 $1.4 million, $1.1 million and $891,000, for the fiscal years ended March 31, 2003, 2002 and 2001, 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, 2003, the Company's largest concentration of loans to one borrower totaled $3.3 million. The Company had no loans at March 31, 2003 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 and Impaired 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. Under the provisions of SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," a loan is defined as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due under the contractual terms of the loan agreement. In applying the provisions of SFAS No. 114, the Banks consider investment in one- to four-family residential loans and consumer installment loans to be homogeneous and therefore excluded from separate identification for impairment. With respect to the Banks' investment in multi-family commercial and nonresidential loans, and the evaluation of impairment thereof, such loans are collateral dependent and, as a result, are carried as a practical expedient at the lower of cost or fair value. 12 At March 31, 2003, the Company had non-performing and impaired assets of $2.5 million and a ratio of non-performing and impaired assets to total assets of .65%. At March 31, 2002 and 2001, the Company had non-performing and impaired assets of $3.8 million and $1.2 million, respectively. The increase in nonperforming assets as of March 31, 2002 was attributable primarily to a $1.8 million commercial business and real estate loan concentration to a land developer and a $519,000 loan secured by an office and retail building (which was repaid in May 2002). The $1.8 million loan concentration consists of four loans that are cross-collateralized by non-residential and residential real estate. One loan totaling $430,000 at March 31, 2003, depicted in the following table in the one- to four-family total, was originated in October 1996, two loans totaling $1.4 million were originated in November 1999, and one loan totaling $49,000 was originated in October 2000 which in April 2002 was paid down by $36,000 leaving $13,000 included in the following table in the commercial business loan total. In September 2001, the Company ceased accruing interest on these loans. The Company has entered into a workout and liquidation agreement with the borrower which calls for the sale and disposal of the underlying security of these loans within a specified timeframe. Management anticipates that the asset disposal will commence in the first quarter of fiscal 2004 and should be completed by the third quarter of fiscal 2004. 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. The following table sets forth information regarding our non-accrual and impaired loans and real estate acquired by foreclosure at the dates indicated. For all the dates indicated, the Company did not have any material loans which had been restructured pursuant to SFAS No. 15.
At March 31, --------------------------------------------------- 2003 2002 2001 2000 1999 ------- ------- ------- ------- ------- (Dollars In Thousands) Non-accrual loans: Mortgage loans: Permanent loans secured by one- to four-family dwelling units ... $ 664 $ 616 $ 443 $ 170 $ 224 All other mortgage loans ........................................ 430 1,070 -- -- -- Non-mortgage loans: Commercial business loans ....................................... 1,380 1,416 -- -- Consumer ........................................................ 6 25 72 30 12 ------- ------- ------- ------- ------- Total non-accrual loans .............................................. 2,480 3,127 515 200 236 Accruing loans 90 days or more delinquent ............................ 15 38 -- -- 44 ------- ------- ------- ------- ------- Total non-performing loans ........................................... 2,495 3,165 515 200 280 Loans deemed impaired (1) ............................................ -- 645 645 940 -- ------- ------- ------- ------- ------- Total non-performing and impaired loans .............................. 2,495 3,810 1,160 1,140 280 Total real estate owned (2) .......................................... -- 19 124 90 41 ------- ------- ------- ------- ------- Total non-performing and impaired assets ............................. $ 2,495 $ 3,829 $ 1,284 $ 1,230 $ 321 ======= ======= ======= ======= ======= Total non-performing and impaired loans to net loans receivable ...... 1.09% 1.52% 0.47% 0.48% 0.13% ======= ======= ======= ======= ======= Total non-performing and impaired loans to total assets .............. 0.65% 1.14% 0.37% 0.37% 0.10% ======= ======= ======= ======= ======= Total non-performing and impaired assets to total assets ............. 0.65% 1.14% 0.41% 0.40% 0.12% ======= ======= ======= ======= =======
- ---------- (1) Includes loans deemed impaired that are currently performing. (2) Represents the net book value of property acquired by us 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, 2003, 2002 and 2001, gross interest income of $208,000, $99,000 and $12,000 would have been recorded on loans currently accounted for on a non-accrual basis if the loans had been current throughout the period. Interest income recognized on nonaccrual loans totaled $362,000, $227,000 and $49,000 for the years ended March 31, 2003, 2002 and 2001, respectively. Interest income on impaired loans is recognized using the cash method of accounting and totaled approximately $24,000, $233,000 and $71,000 for the years ended March 31, 2003, 2002 and 2001. 13 The following table sets forth information with respect to loans past due by 60-89 days and 90 days or more in our portfolio at the dates indicated.
At March 31, ----------------------------------------------- 2003 2002 2001 2000 1999 ------- ------- ------- ------- ------- (In Thousands) Loans past due 60-89 days ............ $ 107 $ 431 $ 2,536 $ 1,539 $ 1,710 Loans past due 90 days or more ....... 2,495 3,165 515 200 280 ------- ------- ------- ------- ------- Total past due 60 days or more .... $ 2,602 $ 3,596 $ 3,051 $ 1,739 $ 1,990 ======= ======= ======= ======= =======
Classification of Assets. Federal regulations provide for the classification of loans and other assets such as debt and equity securities considered by the OTS to be of lesser quality as "substandard," "doubtful," or "loss" assets. An asset is considered "substandard" if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. "Substandard" assets include those characterized by the "distinct possibility" that the savings institution will sustain "some loss" if the deficiencies are not corrected. Assets classified as "doubtful" have all of the weaknesses inherent in those classified "substandard," with the added characteristic that the weaknesses present make "collection or liquidation in full," on the basis of currently existing facts, conditions, and values, "highly questionable and improbable." Assets classified as "loss" are those considered "uncollectible" and of such little value that their continuance as assets without the establishment of a specific loss reserve is not warranted. Assets that do not expose the savings institution to risk sufficient to warrant classification in one of the aforementioned categories, but which possess some weaknesses, are required to be designated "special mention" by management. When a savings institution classifies problem assets as either substandard or doubtful, it is required to establish general allowances for loan losses in an amount deemed prudent by management. General allowances represent loss allowances that have been established to recognize the inherent risk associated with lending activities, but which, unlike specific allowances, have not been allocated to particular problem assets. When a savings institution 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, ----------------------------------------------- 2003 2002 2001 2000 1999 ------- ------- ------- ------- ------- (Dollars in Thousands) Substandard assets(1) ......... $ 2,481 $ 3,303 $ 569 $ 290 $ 206 Doubtful assets ............... -- -- -- -- -- Loss assets ................... -- 105 -- -- 8 ------- ------- ------- ------- ------- Total classified assets .... $ 2,481 $ 3,408 $ 569 $ 290 $ 214 ======= ======= ======= ======= ======= - ---------- (1) Includes REO. Allowance for Loan Losses. In determining the amount of the allowance for loan losses at any point in time, management and the Board of Directors apply a systematic process focusing on the risk of loss in the loan portfolio. First, delinquent non-residential, multi-family and commercial loans are evaluated individually for potential impairments in their carrying value. Second, management applies historic loss experience to the individual loan types in the portfolio. In addition to the historic loss percentage, management employs an additional risk percentage tailored to the perception of overall risk in the economy. However, the analysis of the allowance for loan losses requires an element of judgment and is subject to the possibility that the allowance may need to be increased, with the corresponding reduction in earnings. 14 During fiscal years ended March 31, 2003, 2002 and 2001, the Company added $91,000, $134,000, and $96,000, respectively, to the provision for loan losses. The Company's allowance for loan losses totaled $678,000, $730,000, and $655,000, at March 31, 2003, 2002 and 2001, respectively. 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. To the best of management's knowledge, all known losses as of March 31, 2003, 2002 and 2001 have been recorded. 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 or for the Year Ended March 31, ------------------------------------------------------------- 2003 2002 2001 2000 1999 --------- --------- --------- --------- --------- (In Thousands) Loans receivable, net ............................ $ 228,373 $ 251,172 $ 246,619 $ 237,095 $ 214,094 ========= ========= ========= ========= ========= Average loans receivable, net .................... $ 242,120 $ 253,058 $ 245,624 $ 229,845 $ 209,178 ========= ========= ========= ========= ========= Allowance balance (at beginning of period) ....... $ 730 $ 655 $ 793 $ 692 $ 721 Provision for losses ............................. 91 134 96 106 78 Charge-offs: Mortgage loans: One-to-four family .......................... (20) -- (7) -- (8) Residential construction .................... -- -- -- (21) -- Multi-family residential .................... -- -- -- -- -- Non-residential real estate and land ........ (84) -- (172) -- -- Other loans: Consumer .................................... (54) (63) (61) (12) -- Commercial (1) .............................. -- -- -- -- (107) --------- --------- --------- --------- --------- Gross charge-offs ...................... (158) (63) (240) (33) (115) --------- --------- --------- --------- --------- Recoveries: Mortgage loans: One-to-four family .......................... -- -- -- -- 8 Residential construction .................... -- -- -- -- -- Multi-family residential .................... -- -- -- 6 -- Non-residential real estate and land ........ -- -- -- -- -- Other loans: Consumer .................................... 15 4 6 22 -- Commercial .................................. -- -- -- -- -- --------- --------- --------- --------- --------- Gross recoveries ....................... 15 4 6 28 8 --------- --------- --------- --------- --------- Net charge-offs ........................ (143) (59) (234) (5) (107) --------- --------- --------- --------- --------- Allowance for loan losses balance (at end of period) (2) .................................... $ 678 $ 730 $ 655 $ 793 $ 692 ========= ========= ========= ========= ========= Allowance for loan losses as a percent of loans receivable, net at end of period ......... 0.30% 0.29% 0.27% 0.33% 0.32% ========= ========= ========= ========= ========= Net loans charged off as a percent of average loans receivable, net .......................... 0.06% 0.02% 0.10% --% 0.05% ========= ========= ========= ========= ========= Ratio of allowance for loan losses to total non-performing and impaired assets at end of period ...................................... 27.17% 19.07% 51.01% 64.47% 215.58% ========= ========= ========= ========= ========= Ratio of allowance for loan losses to non- performing and impaired loans at end of period ......................................... 27.17% 19.16% 56.47% 69.56% 247.14% ========= ========= ========= ========= =========
- ---------- (1) The fiscal 2001 charge-offs include a $172,000 charge-off related to an impaired loan. This loan was current at March 31, 2002 and March 31, 2001. This loan was paid off in fiscal 2003. (2) At March 31, 2002, a specific allowance of $105,000 was reserved for a nonresidential loan that met the definition of impaired pursuant to SFAS No. 114. This loan was paid off in fiscal 2003. 15 Allocation of Allowance for Loan Losses. The following table sets forth the allocation of allowance for loan losses by loan category for the periods indicated. Management believes that the allowance can be allocated by category only on an approximate basis. The allocation of the allowance by category is not necessarily indicative of future losses and does not restrict the use of the allowance to absorb losses in any category.
At March 31, ------------------------------------------------------------------------------------------ 2003 2002 2001 2000 1999 ---------------- ---------------- ---------------- ---------------- ---------------- % of % of % of % of % of Loans in Loans in Loans in Loans in Loans in Each Each Each Each Each Category Category Category Category Category to Total to Total to Total to Total to Total Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans ------ -------- ------ -------- ------ -------- ------ -------- ------ -------- (Dollars in Thousands) Mortgage loans: One- to four-family ................... $ 162 86.4% $ 126 85.3% $ 551 85.7% $ 414 87.4% $ 370 85.6% Residential construction .............. -- 1.5 -- 3.4 23 2.8 9 1.7 16 3.5 Multi-family residential .............. 7 3.7 47 2.8 24 3.5 37 3.3 38 3.2 Non-residential real estate and land .. 55 3.5 207 3.8 20 3.0 -- 2.5 2 2.5 Other loans: Consumer .............................. 119 1.7 28 2.4 6 3.1 52 3.0 45 3.0 Commercial ............................ 335 3.2 322 2.3 31 1.9 281 2.1 221 2.2 ----- ------ ----- ------ ----- ------ ----- ------ ----- ------ Total allowance for loan losses ........ $ 678 100.0% $ 730 100.0% $ 655 100.0% $ 793 100.0% $ 692 100.0% ===== ====== ===== ====== ===== ====== ===== ====== ===== ======
16 Investment Activities The Company's investment portfolio is comprised of investment securities, corporate bonds and notes and state and local obligations. The carrying value of the Company's investment securities totaled $35.9 million at March 31, 2003, compared to $22.3 million at March 31, 2002, an increase of $13.6 million, or 60.9%. The Company's cash and cash equivalents, consisting of cash and due from banks, federal funds sold, interest bearing deposits due from other financial institutions with original maturities of three months or less, and mutual funds totaled $17.5 million at March 31, 2003 compared to $27.9 million at March 31, 2002, a decrease of $10.4 million, or 37.3%. The Company is required under federal regulations to maintain liquid assets that may be invested in specified short-term securities and certain other investments. See "Regulation--Liquidity" below. Liquidity levels may be increased or decreased depending upon the yields on investment alternatives and upon management's judgment as to the attractiveness of the yields then available in relation to other opportunities and its expectation of the level of yield that will be available in the future, as well as management's projections as to the short term demand for funds to be used in the Company's loan origination and other activities. Investment Portfolio. The following table sets forth the carrying value of the Company's investment securities portfolio, short-term investments and FHLB stock, at the dates indicated.
At March 31, --------------------------------------------------------------- 2003 2002 2001 ------------------- ------------------- ------------------- Carrying Market Carrying Market Carrying Market Value Value Value Value Value Value -------- -------- -------- -------- -------- -------- (In Thousands) Investment securities: Mutual funds ....................................... $ 10,009 $ 10,009 $ -- $ -- $ -- $ -- Corporate bonds and notes .......................... 12,118 12,314 2,998 3,051 3,994 4,061 U.S. Government and agency securities .............. 10,112 10,309 19,152 18,904 9,501 9,567 Obligations of state and political subdivisions .... 3,602 3,615 136 143 146 146 -------- -------- -------- -------- -------- -------- Total investment securities ........................ 35,841 36,247 22,286 22,098 13,641 13,774 Other Investments: Interest-bearing deposits in other financial institutions ...................................... 6,529 6,529 10,633 10,633 12,891 12,891 Federal funds sold ................................. 8,000 8,000 15,000 15,000 6,000 6,000 Federal Home Loan Bank stock ....................... 4,041 4,041 3,767 3,767 3,510 3,510 -------- -------- -------- -------- -------- -------- Total investments .................................. $ 54,411 $ 54,817 $ 51,686 $ 51,498 $ 36,042 $ 36,175 ======== ======== ======== ======== ======== ========
17 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, 2003. The Company does not hold any investment securities with maturities in excess of 30 years.
At March 31, 2003 ----------------------------------------------------------------------------- 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: Mutual funds ..................................... $10,009 2.22% $ -- --% $ -- --% $ -- --% Corporate bonds and notes ........................ 1,520 4.03 $10,598 5.87 -- -- -- -- U.S. Government and agency ....................... 2,015 3.55 7,004 4.27 -- -- 1,093 1.71 Obligations of state and political subdivisions .. -- -- -- -- 125 7.97 3,447 6.69 ------- ---- ------- ---- ---- ---- ------ ---- Total investment securities .................. $13,544 2.62% $17,602 5.23% $125 7.97% $4,540 5.51% ======= ==== ======= ==== ==== ==== ====== ==== At March 31, 2003 --------------------------------------- Total Investment Securities --------------------------------------- Average Weighted Life Carrying Market Average In Years Value Value Yield -------- -------- ------- -------- (Dollars in Thousands) Investment Securities: Mutual funds ..................................... .00 $10,009 $10,009 2.22% Corporate bonds and notes ........................ 2.80 12,118 $12,314 5.64 U.S. Government and agency ....................... 4.39 10,112 10,309 3.85 Obligations of state and political subdivisions .. 20.23 3,602 3,615 6.73 ----- ------- ------- ---- Total investment securities .................... 4.22 $35,841 $36,247 4.29% ===== ======= ======= ====
18 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 $30.0 million of advances from the FHLB at March 31, 2003. 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. Deposit Portfolio. Savings and other deposits in the Company as of March 31, 2003, comprised the following:
Weighted Percentage Average Minimum of Total Interest Rate Minimum Term Checking and Savings Deposits Amount Balances Deposits - ------------- ------------ ----------------------------- ------- -------- ---------- (In Thousands) 0.56% None NOW Accounts $ -- $ 39,982 13.29% 1.05 None Passbook -- 84,478 28.07 1.20 None Money Market Investor 2,500 13,647 4.54 Certificates of Deposit ----------------------- 1.66 12 months or less Fixed term, fixed rate 500 19,400 6.45 2.44 12 to 24 months Fixed term, fixed rate 500 53,755 17.86 3.92 25 to 36 months Fixed term, fixed rate 500 15,870 5.27 4.75 36 months or more Fixed term, fixed rate 500 35,184 11.69 4.04 Negotiable Jumbo Certificates 100,000 38,615 12.83 --------- ------- $ 300,931 100.00% ========= =======
19 The following table sets forth the change in dollar amount of savings deposits in the various types of savings accounts offered by the Company between the dates indicated.
Balance at Balance at Balance at March 31, % Increase March 31, % Increase March 31, % 2003 Deposits (Decrease) 2002 Deposits (Decrease) 2001 Deposits --------- -------- ---------- ---------- -------- ---------- ---------- -------- (Dollars in Thousands) NOW accounts ................... $ 39,982 13.29% $ 1,586 $ 38,396 12.76 $ 4,754 $ 33,642 12.11% Passbook statement accounts .... 84,478 28.07 6,993 77,485 25.75 22,911 54,574 19.65 Money market passbook .......... 13,647 4.54 1,838 11,809 3.92 2,904 8,905 3.21 Certificates of deposit(1) Original maturities of: 12 months or less .......... 19,400 6.45 (9,097) 28,497 9.47 3,003 25,494 9.18 12 to 24 months ............ 53,755 17.86 (27,250) 81,005 26.92 (20,100) 101,105 36.41 25 to 36 months ............ 15,870 5.27 6,242 9,628 3.20 (408) 10,036 3.61 36 months or more .......... 35,184 11.69 23,341 11,843 3.93 5,668 6,175 2.22 Negotiated jumbo ........... 38,615 12.83 (3,679) 42,294 14.05 4,519 37,775 13.61 -------- ------ -------- -------- ------ -------- -------- ------ Total ...................... $300,931 100.00% $ (26) $300,957 100.00% $ 23,251 $277,706 100.00% ======== ====== ======== ======== ====== ======== ======== ======
- ---------- (1) Certain Individual Retirement Accounts ("IRAs") are included in the respective certificate balances. IRAs totaled $33.7 million, $33.1 million and $31.8 million, as of March 31, 2003, 2002 and 2001, respectively. The following table sets forth the average dollar amount and weighted average rate of savings deposits in the various types of savings accounts offered by the Company.
Years Ended March 31, ---------------------------------------------------------------------------------------- 2003 2002 2001 ---------------------------- ---------------------------- ---------------------------- Percent Weighted Percent Weighted Percent Weighted Average of Average Average of Average Average of Average Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate -------- -------- -------- -------- -------- -------- -------- -------- -------- (Dollars in Thousands) Noninterest-bearing demand deposits .. $ 8,830 2.94% 0.00% $ 8,735 3.02% 0.00% $ 5,684 2.19% 0.00% NOW accounts ......................... 39,344 13.10 .77 27,569 9.54 1.78 25,527 9.82 1.73 Passbook statement accounts .......... 73,486 24.47 1.05 63,091 21.84 2.65 45,800 17.62 3.16 Money market passbook ................ 13,682 4.56 1.20 10,395 3.60 2.69 9,637 3.71 3.23 Certificates of deposit .............. 164,984 54.93 3.89 179,092 62.00 5.37 173,266 66.66 6.03 -------- ------ ---- -------- ------ ---- -------- ------ ---- Total deposits .................. $300,326 100.00% 2.81% $288,882 100.00% 4.17% $259,914 100.00% 4.87% ======== ====== ==== ======== ====== ==== ======== ====== ====
20 The following table sets forth the certificates of deposit in the Company classified by rates as of the dates indicated: At March 31, ---------------------------------- 2003 2002 2001 -------- -------- -------- (Dollars in Thousands) 1.00- 2.00% ................. $ 29,681 $ -- $ -- 2.01- 4.00% ................. 70,834 61,208 -- 4.01- 6.00% ................. 61,425 73,408 73,177 6.01- 6.75% ................. 884 38,651 107,408 -------- -------- -------- Total .................... $162,824 $173,267 $180,585 ======== ======== ======== The following table sets forth the amount and maturities of certificates of deposit at March 31, 2003. Amount Due ---------------------------------------------------- Less Than 1-2 2-3 After One Year Years Years 3 Years Total --------- -------- -------- -------- -------- Rate (In Thousands) - ---- 1.00- 2.00% ........ $ 26,143 $ 3,537 $ 1 $ -- $ 29,681 2.01- 4.00% ........ 51,445 11,365 3,266 4,752 70,828 4.01- 6.00% ........ 17,527 10,778 5,075 28,051 61,431 6.01- 6.75% ........ 510 245 129 -- 884 -------- -------- -------- -------- -------- Total ........... $ 95,625 $ 25,925 $ 8,471 $ 32,803 $162,824 ======== ======== ======== ======== ======== The following table indicates the amount of the Company's certificates of deposit of $100,000 or more by time remaining until maturity as of March 31, 2003. Maturity Period Certificates of Deposit --------------- ----------------------- (In Thousands) Three months or less....................... $ 13,617 Over three months through six months....... 7,320 Over six months through twelve months...... 11,808 Over twelve months......................... 15,999 -------- Total................................. $ 48,744 ======== Borrowings Savings deposits are the primary source of funds for the Company's lending and investment activities and for its general business purposes. The Bank may rely upon advances from the FHLB and the Federal Reserve Bank discount window to supplement their supply of lendable funds and to meet deposit withdrawal requirements. Advances from the FHLB typically are collateralized by stock in the FHLB and a portion of first mortgage loans held by the Bank. At March 31, 2003 the Company had $30.0 million in advances outstanding. The FHLB functions as a central reserve bank providing credit for member savings associations and financial institutions. As members, the Banks are required to own capital stock in the FHLB and are authorized to apply for advances on the security of such stock and certain 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 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. 21 Year Ended March 31, 2003 2002 2001 -------- -------- -------- (Dollars in thousands) Federal Home Loan Bank advances: Maximum month-end balance ............ $ 30,000 $ 6,000 $ 10,000 Balance at end of period ............. 30,000 5,000 6,000 Average balance ...................... 17,204 5,505 7,877 Weighted average interest rate on: Balance at end of period ............. 4.15% 5.24% 5.54% Average balance for period ........... 4.28 5.32 5.69 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. Personnel As of March 31, 2003, we had 115 full-time equivalent employees. None of our employees are represented by collective bargaining group. We believe we have good relations with our employees. Regulation As a state-chartered, SAIF-insured savings association, the Bank is subject to examination, supervision and extensive regulation by the OTS, the Ohio Division of Financial Institutions (the "Ohio Division"), and the FDIC. The Bank 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 Bank also is subject to regulation by the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") governing reserves to be maintained against deposits and certain other matters. The OTS and Ohio Division regularly examine the Banks and prepare reports for the consideration of the Company's Board of Directors on any deficiencies that they may find in the Banks' operations. The FDIC also examines the Bank and Village in its role as the administrator of the SAIF. The Bank's relationship with its depositors and borrowers also is regulated to a great extent by both federal and state laws especially in such matters as the ownership of savings accounts and the form and content of the 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 associations are governed by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the Federal Deposit Insurance Act (the "FDI Act"). These federal statutes among other things, (1) limit the types of loans a savings association may make, (2) prohibit the acquisition of any corporate debt security that is not rated in one of the four highest rating categories, and (3) restrict 22 the aggregate amount of loans secured by non-residential real estate property to 400% of capital. The description of statutory provisions and regulations applicable to savings associations set forth herein does not purport to be a complete description of such statutes and regulations and their effect on the Company. Loans to One Borrower. Under the HOLA, savings institutions are generally subject to the national bank limits on loans to one borrower. Generally, savings institutions may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of the institution's unimpaired capital and surplus. An additional amount may be lent, equal to 10% of unimpaired capital and surplus, if such loan is secured by readily-marketable collateral, which is defined to include certain securities and bullion, but generally does not include real estate. See "--Lending Activities--Loans to One Borrower." Qualified Thrift Lender Test. The HOLA requires savings associations 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, 2003, the Banks maintained 97.9% 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% of its net income during the calendar year, plus its retained net income for the preceding two years. As of March 31, 2003 the Banks were "well-capitalized" institutions. Liquidity. The Bank is required to maintain an average daily balance of liquid assets (cash, certain time deposits, bankers' acceptances, specified U.S. Government, state or federal agency obligations, shares of certain mutual funds and certain corporate debt securities and commercial paper) in order to operate in a safe and sound manner. The Bank's average liquidity ratio for March 2003 was 36.8%. 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 Banks received a "satisfactory" CRA rating under the current CRA regulations in their most recent respective federal examinations by the OTS. Transactions with Related Parties. The Banks' 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 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 23 to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary. Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility over savings institutions and has the authority to bring enforcement action against all "institution-related parties," including stockholders, and any attorneys, appraisers and accountants who knowingly or recklessly participate in wrongful action likely to have an adverse effect on an insured institution. Formal enforcement action may range from the issuance of a capital directive or cease and desist order to removal of officers and/or directors of the institutions, receivership, conservatorship or the termination of deposit insurance. Civil penalties cover a wide range of violations and actions, and range up to $25,000 per day, unless a finding of reckless disregard is made, in which case penalties may be as high as $1 million per day. Criminal penalties for most financial institution crimes include fines of up to $1 million and imprisonment for up to 30 years. Under the FDI Act, the FDIC has the authority to recommend to the Director of OTS that enforcement action be taken with respect to a particular savings institution. If action is not taken by the Director, the FDIC has authority to take such action under certain circumstances. Standards for Safety and Soundness. The federal banking agencies have adopted a final regulation and Interagency Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") to implement the safety and soundness standards required under the FDI Act. The Guidelines set forth the safety and soundness standards that the federal banking agencies use to identify and address problems at insured depository institutions before capital becomes impaired. The standards set forth in the Guidelines address internal controls and information systems; internal audit system; credit underwriting; loan documentation; interest rate risk exposure; asset growth; and compensation, fees and benefits. The agencies also adopted a proposed rule which proposes asset quality and earnings standards which, if adopted, would be added to the Guidelines. If the appropriate federal banking agency determines that an institution fails to meet any standard prescribed by the Guidelines, the agency may require the institution to submit to the agency an acceptable plan to achieve compliance with the standard, as required by the FDI Act. The final regulations establish deadlines for the submission and review of such safety and soundness compliance plans. Capital Requirements. The OTS capital regulations require savings institutions to meet three capital standards: a 1.5% tangible capital standard, a 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. 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. 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 24 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. Prompt Corrective Regulatory Action Under the OTS Prompt Corrective Action regulations, the OTS is required to take certain supervisory actions against undercapitalized institutions, the severity of which depends upon the institution's degree of capitalization. Generally, a savings institution that has total risk-based capital of less than 8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0% is considered to be undercapitalized. A savings institution that has the total risk-based capital less than 6.0%, a Tier 1 core risk-based capital ratio of less than 3.0% or a leverage ratio that is less than 3.0% is considered to be "significantly undercapitalized" and a savings institution that has a tangible capital to assets ratio equal to or less than 2.0% is deemed to be "critically undercapitalized." Subject to a narrow exception, the banking regulator is required to appoint a receiver or conservator for an institution that is "critically undercapitalized." The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date an institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." In addition, numerous mandatory supervisory actions become immediately applicable to the institution, including, but not limited to, restrictions on growth, investment activities, capital distributions, and affiliate transactions. The OTS could also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors. Insurance of Accounts and Regulation by the FDIC 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 Banks are members of the FHLB System, which consists of 12 regional FHLBs. The FHLB provides a central credit facility primarily for member institutions. The Banks, as members of the FHLB, are 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 Banks were in compliance with this requirement with an aggregate investment in FHLB-Cincinnati stock, at March 31, 2003, of $4.0 million. 25 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. FHLB dividends were 4.4% for the fiscal year ended March 31, 2003. If dividends were reduced, or interest on future FHLB-Cincinnati advances increased, the Company's net interest income would likely also be reduced. 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 15% 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 26 before the acquisition and more than 25% control after the acquisition, or when the total amount of control held by the acquiror was less than 50% before the acquisition and more than 50% after the acquisition. Ohio law also prescribes other situations in which the Ohio Division must be notified of the acquisition even though prior approval is not required. Any person or company, which would include a director, will not be deemed to be in control by virtue of an annual solicitation of proxies voted as directed by a majority of the board of directors. Under certain circumstances, interstate mergers and acquisitions involving associations incorporated under Ohio law are permitted by Ohio law. A savings and loan association or savings and loan holding company with its principal place of business in another state may acquire a savings and loan association or savings and loan holding company incorporated under Ohio law if the laws of such other state permit an Ohio savings and loan association or an Ohio holding company reciprocal rights. Additionally, recently enacted legislation permits interstate branching by savings and loan associations incorporated under Ohio law. Ohio law requires prior written approval of the Ohio Superintendent of Savings and Loans of a merger of an Ohio association with another savings and loan association or a holding company affiliate. Holding Company Regulation The Company is a non-diversified savings and loan holding company within the meaning of the HOLA, as amended. As such, the Company is registered with the OTS and is subject to OTS regulations, examinations, supervision and reporting requirements. In addition, the OTS has enforcement authority over the Company and its 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 is required to notify the OTS 30 days before declaring any dividend to the Company. As a unitary savings and loan holding company, the Company generally is not restricted under existing laws as to the types of business activities in which it may engage, provided that the Bank continues to be a QTL. Upon any nonsupervisory acquisition by the Company of another savings association or savings bank that meets the QTL test and is deemed to be a savings institution by the OTS, the Company would become a multiple savings and loan holding company (if the acquired institution is held as a separate subsidiary) and would be subject to extensive limitations on the types of business activities in which it could engage. The HOLA limits the activities of a multiple savings and loan holding company and its non-insured institution subsidiaries primarily to activities permissible for bank holding companies under Section 4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the OTS, and activities authorized by OTS regulation. 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. The HOLA prohibits a savings and loan holding company, directly or indirectly, or through one or more subsidiaries, from acquiring other 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 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 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. Federal Securities Laws The Company's common stock is registered with the SEC under the Securities Exchange Act of 1934. The Company is subject to the information, proxy solicitation, insider trading restrictions and other requirements under the Exchange Act. 27 Shares of the common stock purchased by persons who are not affiliates of the Company may be resold without registration. Shares purchased by an affiliate of the Company are subject to the resale restrictions of Rule 144 under the Securities Act. If the Company meets the current public information requirements of Rule 144 under the Securities Act, each affiliate of the Company who complies with the other conditions of Rule 144 (including those that require the affiliate's sale to be aggregated with those of certain other persons) is able to sell in the public market, without registration, a number of shares not to exceed, in any three-month period, the greater of (i) 1% of the outstanding shares of the Company or (ii) the average weekly volume of trading in such shares during the preceding four calendar weeks. Provision may be made in the future by the Company to permit affiliates to have their shares registered for sale under the Securities Act under certain circumstances. The USA PATRIOT Act In response to the events of September 11, 2001, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on October 26, 2001. The USA PATRIOT Act gives the federal government new powers to address terrorist threats through enhanced domestic security measures, expanded surveillance powers, increased information sharing, and broadened anti-money laundering requirements. By way of amendments to the Bank Secrecy Act, Title III of the USA PATRIOT Act takes measures intended to encourage information sharing among bank regulatory agencies and law enforcement bodies. Further, certain provisions of Title III impose affirmative obligations on a broad range of financial institutions, including banks, thrifts, brokers, dealers, credit unions, money transfer agents and parties registered under the Commodity Exchange Act. Among other requirements, Title III of the USA PATRIOT Act imposes the following requirements with respect to financial institutions: o Pursuant to Section 352, all financial institutions must establish anti-money laundering programs that include, at minimum: (i) internal policies, procedures, and controls; (ii) specific designation of an anti-money laundering compliance officer; (iii) ongoing employee training programs; and (iv) an independent audit function to test the anti-money laundering program. o Section 326 of the Act authorizes the Secretary of the Department of Treasury, in conjunction with other bank regulators, to issue regulations that provide for minimum standards with respect to customer identification at the time new accounts are opened. o Section 312 of the Act requires financial institutions that establish, maintain, administer, or manage private banking accounts or correspondence accounts in the United States for non-United States persons or their representatives (including foreign individuals visiting the United States) to establish appropriate, specific, and, where necessary, enhanced due diligence policies, procedures, and controls designed to detect and report money laundering. o Effective December 25, 2001, financial institutions are prohibited from establishing, maintaining, administering or managing correspondent accounts for foreign shell banks (foreign banks that do not have a physical presence in any country), and will be subject to certain record keeping obligations with respect to correspondent accounts of foreign banks. o Bank regulators are directed to consider a holding company's effectiveness in combating money laundering when ruling on Federal Reserve Act and Bank Merger Act applications. The federal banking agencies have begun to propose and implement regulations pursuant to the USA PATRIOT Act. These proposed and interim regulations would require financial institutions to adopt the policies and procedures contemplated by the USA PATRIOT Act. 28 Sarbanes-Oxley Act of 2002 On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of 2002 implementing legislative reforms intended to address corporate and accounting irregularities. In addition to the establishment of a new accounting oversight board which will enforce auditing, quality control and independence standards and will be funded by fees from all publicly traded companies, the Act restricts accounting companies from providing both auditing and consulting services to an audit client. To ensure auditor independence, any non-audit services being provided to an audit client will require pre-approval by the company's audit committee members. In addition, the audit partners must be rotated. The Act requires chief executive officers and chief financial officers, or their equivalent, to certify to the accuracy of periodic reports filed with the SEC, subject to civil and criminal penalties if they knowingly or willfully violate this certification requirement. In addition, under the Act, counsel will be required to report evidence of a material violation of the securities laws or a breach of fiduciary duty by a company to its chief executive officer or its chief legal officer, and, if such officer does not appropriately respond, to report such evidence to the audit committee or other similar committee of the board of directors or the board itself. The legislation accelerates the time frame for disclosures by public companies, as they must immediately disclose any material changes in their financial condition or operations. Directors and executive officers must also provide information for most changes in ownership in a company's securities within two business days of the change. The period during which certain types of law suits can be instituted against a company or its officers has been extended, and bonuses issued to top executives prior to restatement of a company's financial statements are now subject to disgorgement if such restatement was due to corporate misconduct. Executives are also prohibited from insider trading during retirement plan "blackout" periods, and loans to company executives are restricted. In addition, civil and criminal penalties have been enhanced. The Act also increases the oversight of, and codifies certain requirements relating to, audit committees of public companies and how they interact with the company's "registered public accounting firm" ("RPAF"). Audit Committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer. In addition, companies must disclose whether at least one member of the committee is a "financial expert" (as such term will be defined by the SEC) and if not, why not. Under the Act, a RPAF is prohibited from performing statutorily mandated audit services for a company if such company's chief executive officer, chief financial officer, comptroller, chief accounting officer or any person serving in equivalent positions has been employed by such firm and participated in the audit of such company during the one-year period preceding the audit initiation date. The Act also prohibits any officer or director of a company or any other person acting under their direction from taking any action to fraudulently influence, coerce, manipulate or mislead any independent public or certified accountant engaged in the audit of the company's financial statements for the purpose of rendering the financial statement's materially misleading. In accordance with the Act, the SEC proposed rules requiring inclusion of an internal control report and assessment by management in the annual report to shareholders. The Act requires the RPAF that issues the audit report to attest to and report on management's assessment of the company's internal controls. In addition, the Act requires that each financial report required to be prepared in accordance with (or reconciled to) generally accepted accounting principles and filed with the SEC reflect all material correcting adjustments that are identified by an RPAF in accordance with generally accepted accounting principles and the rules and regulations of the SEC. 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, or approximately $200,000. 29 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, 2003 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 1999 federal income tax return is under examination by the IRS. Management does not anticipate any material effects on results of operations or financial position as a result of the examination. 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. 30 ITEM 2. Properties - ------------------ The Company conducts its business through its main banking office located in Wooster, Ohio, its eight additional full service branch offices located in its market area, and the full service office of Village Savings Bank. The following table sets forth information about its offices as of March 31, 2003. Original Year Leased or Leased or Year of Lease Location Owned Acquired Expiration - -------- --------- ------------- ------------- North Market Street Office 151 N. Market Street Wooster, Ohio Owned 1902 N/A Cleveland Point Financial Center 1908 Cleveland Road Wooster, Ohio Owned 1978 N/A Madison South Office 2024 Millersburg Road Wooster, Ohio Owned 1999 N/A Northside Office 543 Riffel Road Wooster, Ohio Leased 1999 2019 Millersburg Office 90 N. Clay Street Millersburg, Ohio Owned 1964 N/A Claremont Avenue Office 233 Claremont Avenue Ashland, Ohio Owned 1968 N/A Buehlers-Sugarbush Office 1055 Sugarbush Drive Ashland, Ohio Leased 2001 2021 Rittman Office 237 North Main Street Rittman, Ohio Owned 1972 N/A Lodi Office 303 Highland Drive Lodi, Ohio Owned 1980 N/A Village Savings Bank 1265 S. Main Street North Canton, Ohio Owned 1998 N/A The Company's accounting and record keeping activities are maintained through an in-house data processing system. 31 ITEM 3. Legal Proceedings - ------------------------- The Company is not involved in any pending legal proceedings other than routine legal proceedings occurring in the ordinary course of business which, in the aggregate, involve amounts which are believed by management to be immaterial to the financial condition and operations of the Company. ITEM 4. Submission of Matters to a Vote of Security Holders - ----------------------------------------------------------- During the fourth quarter of the fiscal year covered by this report, the Registrant did not submit any matters to the vote of security holders. 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, 2003 (the "2003 Annual Report to Stockholders") are incorporated herein by reference. No other sections of the 2003 Annual Report to Stockholders are incorporated herein by this reference. ITEM 6. Selected Financial Data - ------------------------------- The "Selected Consolidated Financial and Other Data" section of the Company's 2003 Annual Report to Stockholders is incorporated herein by reference. No other sections of the 2003 Annual Report to Stockholders are incorporated herein by this reference. ITEM 7. 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 2003 Annual Report to Stockholders is incorporated herein by reference. No other sections of the 2003 Annual report to Stockholders are incorporated herein by this reference. ITEM 7a. Quantitive and Qualitative Disclosures about Market Risk - ----------------------------------------------------------------- The "Management's Discussion and Analysis of Financial Condition and Results of Operations" section of the Company's 2003 Annual Report to Stockholders is incorporated herein by reference. No other sections of the 2003 Annual Report to Stockholders are incorporated herein by this reference. 32 ITEM 8. Financial Statements and Supplementary Data - --------------------------------------------------- The material identified in Item 16(a)(1) hereof is incorporated herein by reference. ITEM 9. Changes in and Disagreements With Accountants on Accounting and - ----------------------------------------------------------------------- Financial Disclosure - -------------------- Not Applicable PART III -------- ITEM 10. Directors and Executive Officers of the Company - -------------------------------------------------------- The "Proposal I--Election of Directors" section of the Company's definitive proxy statement for its 2003 annual meeting of stockholders (the "Proxy Statement") is incorporated herein by reference. ITEM 11. Executive Compensation - ------------------------------- The "Proposal I--Election of Directors" section of the Company's Proxy Statement is incorporated herein by reference. ITEM 12. Security Ownership of Certain Beneficial Owners and Management and - --------------------------------------------------------------------------- Related Stockholder Matters - --------------------------- The "Proposal I--Election of Directors" section of the Company's Proxy Statement is incorporated herein by reference. ITEM 13. Certain Relationships and Related Transactions - ------------------------------------------------------- The "Proposal I - Election of Directors" section of the Company's Proxy Statement is incorporated herein by reference. ITEM 14. Controls and Procedures. - --------------------------------- (a)The Company's Chief Executive Officer and Chief Financial Officer evaluated the disclosure controls and procedures (as defined under Rules 13a-14 (c) and 15d-14 (c) of the Securities Exchange Act of 1934, as amended) as of a date within ninety days of the filing date of this annual report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that the Company's disclosure controls and procedures are effective. (b) There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. ITEM 15. Principal Accountant Fees and Services - ----------------------------------------------- The "Proposal IV - Ratification of Appointment of Auditors" section of the Company's proxy statement dated June 20, 2003 is incorporated herein by reference. 33 ITEM 16. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a)(1) Financial Statements The following documents appear in sections of the Company's 2003 Annual Report to Stockholders under the same captions, and are incorporated herein by reference. No other sections of the 2003 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 2003 Annual Report to Stockholders is not deemed filed as part of this Annual Report on Form 10-K, and no other sections of the 2003 Annual Report to Stockholders are incorporated herein by this reference. (a)(2) Financial Statements Schedules All financial statements schedules have been outlined as the required information inapplicable or has been included in the Notes to Consolidated Financial Statements. 34 (a)(3) Exhibits -------- Reference to Prior Filing or Exhibit Number Attached Exhibit Number Document Hereto - -------------- ----------------- ----------------- 3(i) Certificate of Incorporation * 3(ii) Bylaws * 4 Instruments defining the * rights of security holders, including debentures 9 Voting trust agreement None 10(i) Employment agreement with 10.1 Charles F. Finn 10(ii) Employment agreement with 10.2 Wanda Christopher-Finn 10(iii) Employment agreement with 10.3 Michael C. Anderson 11 Statement re: computation ** of per share earnings 12 Statement re: computation Not of ratios 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 21 22 Published report regarding None matters submitted to vote of security holders 23 Consent of Grant Thornton LLP 23 99(i) Statement furnished pursuant to Section 906 by 99.1 Charles F. Finn 99(ii) Statement furnished pursuant to Section 906 by 99.2 Michael C. Anderson * Filed as exhibits to the Registrant's Registration statement on Form SB-2, initially filed on September 18, 2001, as amended (Registration No. 333-69600). ** Incorporated by reference to Note A.8. of "Notes to Consolidated Financial Statements" of the 2003 Annual Report to Stockholders. (b) Reports on Form 8-K: Not Required 35 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 27, 2003 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/Michael C. Anderson ------------------------------------ ----------------------------------- Charles F. Finn, President, Chief Michael C. Anderson, Senior Vice President and Executive Officer and Director Corporate Secretary (Principal Executive Officer) (Principal Financial Officer) Date: June 27, 2003 Date: June 27, 2003 By: /s/Myron Swartzentruber By: /s/Kenneth G. Rhode ------------------------------------ ----------------------------------- Myron Swartzentruber, Vice President Kenneth G. Rhode, Director (Principal Accounting Officer) Date: June 27, 2003 Date: June 27, 2003 By: /s/Donald E. Massaro By: /s/James C. Morgan ----------------------------------- ----------------------------------- Donald E. Massaro, Director James C. Morgan, Director Date: June 27, 2003 Date: June 27, 2003 By: /s/Terry A. Gardner By: /s/Russell L. Harpster ----------------------------------- ----------------------------------- Terry A. Gardner, Director Russell L. Harpster, Director Date: June 27, 2003 Date: June 27, 2003 By: /s/Joseph L. Retzler By: /s/Kenneth R. Lehman ----------------------------------- ----------------------------- Joseph L. Retzler, Director Kenneth R. Lehman Date: June 27, 2003 Date: June 27, 2003
36 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Charles F. Finn, President and Chief Executive Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Wayne Savings Bancshares, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements and other financial information included in this annual report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. June 27, 2003 /s/Charles F. Finn - ------------- ------------------------------------- Date Charles F. Finn President and Chief Executive Officer 37 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 I, Michael C. Anderson, Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Wayne Savings Bancshares, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements and other financial information included in this annual report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. June 27, 2003 /s/Michael C. Anderson - ------------- ------------------------------------- Date Michael C. Anderson Chief Financial Officer 38 EX-10.1 3 exhibit10-1.txt EXHIBIT 10.1 EMPLOYMENT AGREEMENT This Agreement is made effective as of March 31, 2003 by and between Wayne Savings Community Bank (the "Bank"), an Ohio savings and loan association, with its principal administrative office at 151 North Market Street, Wooster, Ohio and Charles F. Finn (the "Executive"). Any reference to "Company" herein shall mean Wayne Savings Bancshares, Inc. the stock holding company parent of the Bank or any successor thereto. WHEREAS, the Bank wishes to assure itself of the continued services of Executive for the period provided in this Agreement; and WHEREAS, Executive is willing to continue to serve in the employ of the Bank on a full-time basis for said period. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. POSITION AND RESPONSIBILITIES During the period of his employment hereunder, Executive agrees to serve as President and Chief Executive Officer of the Bank (the "Executive Position"). During said period, Executive also agrees to serve, if elected, as an officer of any subsidiary or affiliate of the Bank. Failure to reelect Executive to the Executive Position without the consent of the Executive during the term of this Agreement (except for any termination for Cause, as defined herein) shall constitute a breach of this Agreement. 2. TERMS AND DUTIES (a) The period of Executive's employment under this Agreement shall begin as of the date first above written and shall continue for a period of thirty-six full calendar months thereafter. Within thirty days prior to the first anniversary date of this Agreement, and within thirty days prior to each anniversary date thereafter, the Board of Directors of the Bank ("Board") will conduct a performance evaluation and review of the Executive for purposes of determining whether to extend the Agreement, and the results thereof shall be included in the minutes of the Board's meeting and communicated to Executive. Upon a favorable performance evaluation, the Board shall renew the term of the Agreement for an additional year from the anniversary date such that the remaining term shall be three years; provided, however, if written notice of nonrenewal is provided to Executive at least ten days and not more than thirty days prior to any anniversary date, the Agreement shall expire at the end of thirty-six months following such anniversary date. (b) During the period of his employment hereunder, except for periods of absence occasioned by illness, reasonable vacation periods, and reasonable leaves of absence, Executive shall devote substantially all his business time, attention, skill, and efforts to the faithful performance of his duties hereunder including activities and services related to the organization, operation and management of the Bank; provided, however, that, with the approval of the Board, as evidenced by a resolution of such Board, from time to time, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, business companies or business organizations, which, in such Board's judgment, will not present any conflict of interest with the Bank, or materially affect the performance of Executive's duties pursuant to this Agreement (for purposes of this Section 2(b), Board approval shall be deemed provided as to service with any such business companies or organizations that Executive was serving as of the date of this Agreement). See Attached Exhibit. 3. COMPENSATION AND REIMBURSEMENT. (a) The compensation specified under this Agreement shall constitute the salary and benefits paid for the duties described in Section 2(b). The Bank shall pay Executive as compensation a salary of not less than $159,600 per year ("Base Salary"). Such Base Salary shall be payable biweekly. During the period of this Agreement, Executive's Base Salary shall be reviewed at least annually. Such review shall be conducted by a Committee designated by the Board, and the Board may increase, but not decrease (except a decrease that is generally applicable to all employees), Executive's Base Salary (any increase in Base Salary shall become the "Base Salary" for purposes of this Agreement). In addition to the Base Salary provided in this Section 3(a), the Bank shall provide Executive at no cost to Executive with all such other benefits as are provided uniformly to permanent full-time employees of the Bank. Base Salary shall include any amounts of compensation deferred by Executive under qualified and nonqualified plans maintained by the Bank. (b) The Bank will provide Executive with employee benefit plans, arrangements and perquisites substantially equivalent to those in which Executive was participating or otherwise deriving benefit from immediately prior to the beginning of the term of this Agreement, and the Bank will not, without Executive's prior written consent, make any changes in such plans, arrangements or perquisites which would adversely affect Executive's rights or benefits thereunder, except as to any changes that are applicable to all employees or as reasonably or customarily available. Without limiting the generality of the foregoing provisions of this Subsection (b), Executive will be entitled to participate in or receive benefits under any employee benefit plans including but not limited to, retirement plans, supplemental retirement plans, pension plans, profit-sharing plans, health-and-accident plans, medical coverage or any other employee benefit plan or arrangement made available by the Bank in the future to its senior executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Executive will be entitled to incentive compensation and bonuses as provided in any plan of the Bank in which Executive is eligible to participate (and he shall be entitled to a pro rata distribution under any incentive compensation or bonus plan as to any year in which a termination of employment occurs, other than termination for Cause). Nothing paid to the Executive under any such plan or arrangement will be deemed to be in lieu of other compensation to which the Executive is entitled under this Agreement. (c) In addition to the Base Salary provided for by paragraph (a) of this Section 3, the Bank shall pay or reimburse Executive for all reasonable travel and other reasonable expenses incurred by Executive performing his obligations under this Agreement and may provide such additional compensation in such form and such amounts as the Board may from time to time determine. 4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION. (a) Upon the occurrence of an Event of Termination (as herein defined) during the Executive's term of employment under this Agreement, the provisions of this Section shall apply. As used in this Agreement, an "Event of Termination" shall mean and include any one or more of the following: (i) the termination by the Bank or the Company of Executive's full-time employment hereunder for any reason other than (A) termination for Cause (as defined in Section 7 hereof), (B) upon Retirement (as defined in Section 6 hereof), or (C) for Disability (as set forth in Section 5 hereof); and (ii) Executive's resignation from the Bank's employ following (A) any failure to elect or reelect or to appoint or reappoint Executive to the Executive Position, (B) a material change in Executive's function, duties, or responsibilities, which change would cause Executive's position to become one of lesser responsibility, importance, or scope from the position and attributes thereof described in Section 1 above, to which Executive has not agreed in writing (and any such material change shall be deemed a continuing breach of this Agreement), (C) a relocation of Executive's principal place of employment to a location more than 30 miles outside the City of Wooster, or a material reduction in the benefits and perquisites, including Base Salary, to the Executive from those being provided as of the effective date of this Agreement (except for any reduction that is part of an employee-wide reduction in pay or benefits), (D) a liquidation or dissolution of the Bank or the Company, or (E) material breach of this Agreement by the Bank. Upon the occurrence of any event described in clauses (ii) (A), (B), (C), (D) or (E) above, Executive shall have the right to elect to terminate his employment under this Agreement by resignation upon not less than thirty (30) days prior written notice given within a reasonable period of time (not to exceed, except in case of a continuing breach, four calendar months) after the event giving rise to said right to elect, which termination by Executive shall be an Event of Termination. No payments or benefits shall be due to Executive under this Agreement upon the termination of Executive's employment except as provided in Sections 3, 4 or 5 hereof. (b) Upon the occurrence of an Event of Termination, the Bank shall pay Executive, or, in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a cash amount equal to the greater of the payments due for the remaining term of the Agreement, or three (3) times the sum of: (i) the highest annual rate of Base Salary paid to Executive at any time under this Agreement, and (ii) the greater of (x) the average annual cash bonus paid to Executive with respect to the three completed fiscal years prior to the Event of Termination, or (y) the cash bonus paid to Executive with respect to the fiscal year ended prior to the Event of Termination; provided however, that if the Bank is not in compliance with its minimum capital requirements or if such payments would cause the Bank's capital to be reduced below its minimum capital requirements, such payments shall be deferred until such time as the Bank is in capital compliance. At the election of the Executive, which election may be made annually by January 31 of each year and is irrevocable for the year in which made (and once payments commence), such payments shall be made in a lump sum or paid quarterly during the remaining term of the agreement following the Executive's termination. In the event that no election is made, payment to the Executive will be made on a quarterly basis during the remaining term of the Agreement. Such payments shall not be reduced in the event the Executive obtains other employment following termination of employment. (c) Upon the occurrence of an Event of Termination, the Bank will cause to be continued life, medical and dental coverage substantially comparable, as reasonably or customarily available, to the coverage maintained by the Bank for Executive prior to his termination, except to the extent such coverage may be changed in its application to all Bank employees or is not available on an individual basis to a terminated employee. Such coverage shall cease thirty-six (36) months following the Event of Termination. (d) Notwithstanding anything to the contrary in this Agreement, in the event that: (i) the aggregate payments or benefits to be made or afforded to Executive (the "Termination Benefits") would be deemed to include an "excess parachute payment" under Section 280G of the Code or any successor thereto, and (ii) if such Termination Benefits were reduced to an amount (the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an amount equal to the total amount of payments permissible under Section 280G of the Code or any successor thereto, then the Termination Benefits to be paid to Executive shall be so reduced so as to be a Non-Triggering Amount. The allocation of the reduction required hereby among Termination Benefits provided by the preceding paragraphs of this Section 4 shall be determined by the Executive. 5. TERMINATION FOR DISABILITY. (a) If, as a result of Executive's incapacity due to physical or mental illness, he shall have been absent from his duties with the Bank or the Company on a full-time basis for six (6) consecutive months, and within thirty (30) days after written notice of potential termination is given he shall not have returned to the full-time performance of his duties, the Bank may terminate Executive's employment for "Disability." (b) The Bank will pay Executive, as disability pay, a bi-weekly payment equal to 75% of the Executive's bi-weekly rate of Base Salary on the effective date of such termination. These disability payments shall commence on the effective date of Executive's termination and will end on the earlier of (i) the date Executive returns to the full-time employment of the Bank in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Bank; (ii) Executive's full-time employment by another employer; (iii) Executive attaining a Retirement age as identified in Section 6; or (iv) Executive's death. The disability pay shall be reduced by the amount, if any, paid to the Executive under any plan of the Bank or the Company providing disability benefits to the Executive. (c) The Bank will cause to be continued life, medical, and dental coverage substantially comparable, as reasonable or customarily available, to the coverage maintained by the Bank for Executive prior to his termination for Disability, except to the extent such coverage may be changed in its application to all Bank employees. This coverage shall cease upon the earlier of (i) the date Executive returns to the full-time employment of the Bank in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Bank; (ii) Executive's full-time employment by another employer; (iii) Executive attaining the Retirement age as identified in Section 6; or (iv) Executive's death. (d) Notwithstanding the foregoing, there will be no reduction in the compensation otherwise payable to Executive during any period during which Executive is incapable of performing his duties hereunder by reason of temporary disability. 6. TERMINATION UPON RETIREMENT. Termination by the Bank of the Executive based on "Retirement" shall mean termination of executive in accordance with any retirement policy established with Executive's consent with respect to him. Upon termination of Executive upon Retirement, no amounts or benefits shall be due Executive under this Agreement and the Executive shall be entitled to all benefits under any retirement plan of the Bank and other plans to which Executive is a party. 7. TERMINATION FOR CAUSE. The term "Termination for Cause" shall mean termination because of the Executive's personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. Notwithstanding the foregoing, Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. The Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause. Any non-vested stock options or restricted stock granted to Executive under any stock option plan or restricted stock plan of the Bank, the Company or any subsidiary or affiliate thereof, shall become null and void effective upon Executive's receipt of Notice of Termination for Cause pursuant to Section 8 hereof, and any non-vested stock options shall not be exercisable by Executive at any time subsequent to such Termination for Cause, (unless it is determined in arbitration that grounds for termination of Executive for Cause did not exist, in which event all terms of the options or restricted stock as of the date of termination shall apply, and any time periods for exercising such options shall commence from the date of resolution in arbitration). 8. NOTICE. (a) Any purported termination by the Bank for Cause shall be communicated by Notice of Termination to the Executive. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. If, within thirty (30) days after any Notice of Termination for Cause is given, the Executive notifies the Bank or the Company that a dispute exists concerning the termination, the parties shall promptly proceed to arbitration. Notwithstanding the pendency of any such dispute, the Bank and the Company may discontinue to pay Executive compensation until the dispute is finally resolved in accordance with this Agreement. If it is determined that Executive is entitled to compensation and benefits under Section 4 of this Agreement, the payment of such compensation and benefits by the Bank and Company shall commence immediately following the date of resolution by arbitration, with interest due Executive on the cash amount that would have been paid pending arbitration (at the prime rate as published in the Wall Street Journal from time to time). (b) Any other purported termination by the Bank or by Executive shall be communicated by a Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. "Date of Termination" shall mean the date of the Notice of Termination. If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the parties shall promptly proceed to arbitration as provided in Section 18 of this Agreement. Notwithstanding the pendency of any such dispute, the Bank shall continue to pay the Executive his Base Salary, and other compensation and benefits in effect when the notice giving rise to the dispute was given (except as to termination of Executive for Cause). In the event of the voluntary termination by the Executive of his employment, which is disputed by the Bank, and if it is determined in arbitration that Executive is not entitled to termination benefits pursuant to this Agreement, he shall return all cash payments made to him pending resolution by arbitration, with interest thereon at the prime rate as published in the Wall Street Journal from time to time if it is determined in arbitration that Executive's voluntary termination of employment was not taken in good faith and not in the reasonable belief that grounds existed for his voluntary termination. 9. POST-TERMINATION OBLIGATIONS. (a) All payments and benefits to Executive under this Agreement shall be subject to Executive's compliance with paragraph (b) of this Section 9 during the term of this Agreement and for one (1) full year after the expiration or termination hereof. (b) Executive shall, upon reasonable notice, furnish such information and assistance to the Bank as may reasonably be required by the Bank in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party. (c) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Bank and affiliates thereof, as it may exist from time to time, is a valuable, special and unique asset of the business of the Bank. Executive will not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business activities of the Bank or affiliates thereof to any person, firm, corporation, or other entity for any reason or purpose whatsoever (except for such disclosure as may be required to be provided to the Office of Thrift Supervision ("OTS"), the Federal Deposit Insurance Corporation (the "FDIC"), or other federal banking agency with jurisdiction over the Bank or Executive). Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Bank, and Executive may disclose any information regarding the Bank or the Company which is otherwise publicly available. In the event of a breach or threatened breach by the Executive of the provisions of this Section 9, the Bank will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Bank or affiliates thereof, or from rendering any services to any person, firm, corporation, other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Bank from pursuing any other remedies available to the Bank for such breach or threatened breach, including the recovery of damages from Executive. 10. SOURCE OF PAYMENTS. All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Bank. The Company, however, guarantees payment and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Bank are not timely paid or provided by the Bank, such amounts and benefits shall be paid or provided by the Company. 11. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Bank or any predecessor of the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. 12. NO ATTACHMENT. (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive and the Bank and their respective successors and assigns. 13. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived. 14. REQUIRED REGULATORY PROVISIONS. (a) The Bank's Board of Directors may terminate the Executive's employment at any time, but any termination by the Bank's Board of Directors, other than Termination for Cause, shall not prejudice Executive's right to compensation or other benefits under this Agreement. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause as defined in Section 8 hereinabove. (b) If the Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) (12 U.S.C. ss.ss. 1818(e)(3)) or 8(g) (12 U.S.C. ss. 1818(g)) of the Federal Deposit Insurance Act (the "FDI Act"), as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, the Bank's obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Executive all or part of the compensation withheld while their contract obligations were suspended and (ii) reinstate (in whole or in part) any of the obligations which were suspended. (c) If the Executive is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e) (12 U.S.C. ss.ss. 1818(e)) or 8(g) (12 U.S.C. ss. 1818(g)) of the FDI Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of the Bank under this contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (d) If the Bank is in default as defined in Section 3(x) (12 U.S.C. ss. 1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of the Bank under this contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. (e) All obligations of the Bank under this contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the institution, (i) by the Director, at the time FDIC or the Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Bank; or (ii) by the OTS at the time the OTS or its District Director approves a supervisory merger to resolve problems related to the operations of the Bank or when the Bank is determined by the OTS or FDIC to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. (f) Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 USC Section 1828(k) and any regulations promulgated thereunder. 15. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 16. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 17. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Ohio but only to the extent not superseded by federal law. 18. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by the employee within the Cleveland metropolitan area, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 19. PAYMENT OF LEGAL FEES. All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank, provided that the dispute or interpretation has been settled by Executive and the Bank or resolved in the Executive's favor. 20. INDEMNIFICATION. The Bank and the Company shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense, and shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted under federal law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Bank or the Company (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements (such settlements must be approved by the Board of Directors of the Bank or the Company, as appropriate), provided, however, neither the Bank nor Company shall be required to indemnify or reimburse the Executive for legal expenses or liabilities incurred in connection with an action, suit or proceeding arising from any illegal or fraudulent act committed by the Executive. 21. SUCCESSOR TO THE BANK. The Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank or the Company, expressly and unconditionally to assume and agree to perform the Bank's obligations under this Agreement, in the same manner and to the same extent that the Bank would be required to perform if no such succession or assignment had taken place. SIGNATURES IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement to be executed and their seals to be affixed hereunto by their duly authorized officers, and Executives have signed this Agreement, on the day and date first above written. ATTEST: WAYNE SAVINGS COMMUNITY BANK /s/ Michael C. Anderson By:/s/ Wanda Christopher-Finn - ------------------------------------ --------------------------------- Secretary WITNESS: EXECUTIVE: /s/ Wanda Christopher-Finn /s/ Charles F. Finn - ------------------------------------ ------------------------------------ Charles F. Finn CONSENT OF GUARANTOR (PURSUANT TO SECTION TEN HEREOF) WAYNE SAVINGS BANCSHARES, INC. By:/s/ Michael C. Anderson ---------------------------------- EX-10.2 4 exhibit10-2.txt EXHIBIT 10.2 EMPLOYMENT AGREEMENT This Agreement is made effective as of March 31, 2003 by and between Wayne Savings Community Bank (the "Bank"), an Ohio savings and loan association, with its principal administrative office at 151 North Market Street, Wooster, Ohio and Wanda Christopher-Finn (the "Executive"). Any reference to "Company" herein shall mean Wayne Savings Bancshares, Inc. the stock holding company parent of the Bank or any successor thereto. WHEREAS, the Bank wishes to assure itself of the continued services of Executive for the period provided in this Agreement; and WHEREAS, Executive is willing to continue to serve in the employ of the Bank on a full-time basis for said period. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. POSITION AND RESPONSIBILITIES During the period of his employment hereunder, Executive agrees to serve as Executive Vice President of the Bank (the "Executive Position"). Under the general direction of the President and Chief Executive Officer, the Executive Vice President shall serve as the senior administrative officer and supervise assistant officers who have responsibility for the general day-to-day operations of the Bank, including branch administration, teller operations, deposit account administration, human resources, marketing, data processing, and property management. During said period, Executive also agrees to serve, if elected, as an officer of any subsidiary or affiliate of the Bank. Failure to reelect Executive to the Executive Position without the consent of the Executive during the term of this Agreement (except for any termination for Cause, as defined herein) shall constitute a breach of this Agreement. 2. TERMS AND DUTIES (a) The period of Executive's employment under this Agreement shall begin as of the date first above written and shall continue for a period of twenty-four full calendar months thereafter. Within thirty days prior to the first anniversary date of this Agreement, and within thirty days prior to each anniversary date thereafter, the Board of Directors of the Bank ("Board") will conduct a performance evaluation and review of the Executive for purposes of determining whether to extend the Agreement, and the results thereof shall be included in the minutes of the Board's meeting and communicated to Executive. Upon a favorable performance evaluation, the Board shall renew the term of the Agreement for an additional year from the anniversary date such that the remaining term shall be two years; provided, however, if written notice of nonrenewal is provided to Executive at least ten days and not more than thirty days prior to any anniversary date, the Agreement shall expire at the end of twenty-four months following such anniversary date. (b) During the period of his employment hereunder, except for periods of absence occasioned by illness, reasonable vacation periods, and reasonable leaves of absence, Executive shall devote substantially all his business time, attention, skill, and efforts to the faithful performance of his duties hereunder including activities and services related to the organization, operation and management of the Bank; provided, however, that, with the approval of the Board, as evidenced by a resolution of such Board, from time to time, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, business companies or business organizations, which, in such Board's judgment, will not present any conflict of interest with the Bank, or materially affect the performance of Executive's duties pursuant to this Agreement (for purposes of this Section 2(b), Board approval shall be deemed provided as to service with any such business companies or organizations that Executive was serving as of the date of this Agreement). See Attached Exhibit. 3. COMPENSATION AND REIMBURSEMENT. (a) The compensation specified under this Agreement shall constitute the salary and benefits paid for the duties described in Section 2(b). The Bank shall pay Executive as compensation a salary of not less than $102,300 per year ("Base Salary"). Such Base Salary shall be payable biweekly. During the period of this Agreement, Executive's Base Salary shall be reviewed at least annually. Such review shall be conducted by a Committee designated by the Board, and the Board may increase, but not decrease (except a decrease that is generally applicable to all employees), Executive's Base Salary (any increase in Base Salary shall become the "Base Salary" for purposes of this Agreement). In addition to the Base Salary provided in this Section 3(a), the Bank shall provide Executive at no cost to Executive with all such other benefits as are provided uniformly to permanent full-time employees of the Bank. Base Salary shall include any amounts of compensation deferred by Executive under qualified and nonqualified plans maintained by the Bank. (b) The Bank will provide Executive with employee benefit plans, arrangements and perquisites substantially equivalent to those in which Executive was participating or otherwise deriving benefit from immediately prior to the beginning of the term of this Agreement, and the Bank will not, without Executive's prior written consent, make any changes in such plans, arrangements or perquisites which would adversely affect Executive's rights or benefits thereunder, except as to any changes that are applicable to all employees or as reasonably or customarily available. Without limiting the generality of the foregoing provisions of this Subsection (b), Executive will be entitled to participate in or receive benefits under any employee benefit plans including but not limited to, retirement plans, supplemental retirement plans, pension plans, profit-sharing plans, health-and-accident plans, medical coverage or any other employee benefit plan or arrangement made available by the Bank in the future to its senior executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Executive will be entitled to incentive compensation and bonuses as provided in any plan of the Bank in which Executive is eligible to participate (and he shall be entitled to a pro rata distribution under any incentive compensation or bonus plan as to any year in which a termination of employment occurs, other than termination for Cause). Nothing paid to the Executive under any such plan or arrangement will be deemed to be in lieu of other compensation to which the Executive is entitled under this Agreement. (c) In addition to the Base Salary provided for by paragraph (a) of this Section 3, the Bank shall pay or reimburse Executive for all reasonable travel and other reasonable expenses incurred by Executive performing his obligations under this Agreement and may provide such additional compensation in such form and such amounts as the Board may from time to time determine. 4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION. (a) Upon the occurrence of an Event of Termination (as herein defined) during the Executive's term of employment under this Agreement, the provisions of this Section shall apply. As used in this Agreement, an "Event of Termination" shall mean and include any one or more of the following: (i) the termination by the Bank or the Company of Executive's full-time employment hereunder for any reason other than (A) termination for Cause (as defined in Section 7 hereof), (B) upon Retirement (as defined in Section 6 hereof), or (C) for Disability (as set forth in Section 5 hereof); and (ii) Executive's resignation from the Bank's employ following (A) any failure to elect or reelect or to appoint or reappoint Executive to the Executive Position, (B) a material change in Executive's function, duties, or responsibilities, which change would cause Executive's position to become one of lesser responsibility, importance, or scope from the position and attributes thereof described in Section 1 above, to which Executive has not agreed in writing (and any such material change shall be deemed a continuing breach of this Agreement), (C) a relocation of Executive's principal place of employment to a location more than 30 miles outside the City of Wooster, or a material reduction in the benefits and perquisites, including Base Salary, to the Executive from those being provided as of the effective date of this Agreement (except for any reduction that is part of an employee-wide reduction in pay or benefits), (D) a liquidation or dissolution of the Bank or the Company, or (E) material breach of this Agreement by the Bank. Upon the occurrence of any event described in clauses (ii) (A), (B), (C), (D) or (E) above, Executive shall have the right to elect to terminate his employment under this Agreement by resignation upon not less than thirty (30) days prior written notice given within a reasonable period of time (not to exceed, except in case of a continuing breach, four calendar months) after the event giving rise to said right to elect, which termination by Executive shall be an Event of Termination. No payments or benefits shall be due to Executive under this Agreement upon the termination of Executive's employment except as provided in Sections 3, 4 or 5 hereof. (b) Upon the occurrence of an Event of Termination, the Bank shall pay Executive, or, in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a cash amount equal to the greater of the payments due for the remaining term of the Agreement, or two (2) times the sum of: (i) the highest annual rate of Base Salary paid to Executive at any time under this Agreement, and (ii) the greater of (x) the average annual cash bonus paid to Executive with respect to the two completed fiscal years prior to the Event of Termination, or (y) the cash bonus paid to Executive with respect to the fiscal year ended prior to the Event of Termination; provided however, that if the Bank is not in compliance with its minimum capital requirements or if such payments would cause the Bank's capital to be reduced below its minimum capital requirements, such payments shall be deferred until such time as the Bank is in capital compliance. At the election of the Executive, which election may be made annually by January 31 of each year and is irrevocable for the year in which made (and once payments commence), such payments shall be made in a lump sum or paid quarterly during the remaining term of the agreement following the Executive's termination. In the event that no election is made, payment to the Executive will be made on a quarterly basis during the remaining term of the Agreement. Such payments shall not be reduced in the event the Executive obtains other employment following termination of employment. (c) Upon the occurrence of an Event of Termination, the Bank will cause to be continued life, medical and dental coverage substantially comparable, as reasonably or customarily available, to the coverage maintained by the Bank for Executive prior to his termination, except to the extent such coverage may be changed in its application to all Bank employees or is not available on an individual basis to a terminated employee. Such coverage shall cease twenty-four (24) months following the Event of Termination. (d) Notwithstanding anything to the contrary in this Agreement, in the event that: (i) the aggregate payments or benefits to be made or afforded to Executive (the "Termination Benefits") would be deemed to include an "excess parachute payment" under Section 280G of the Code or any successor thereto, and (ii) if such Termination Benefits were reduced to an amount (the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an amount equal to the total amount of payments permissible under Section 280G of the Code or any successor thereto, then the Termination Benefits to be paid to Executive shall be so reduced so as to be a Non-Triggering Amount. The allocation of the reduction required hereby among Termination Benefits provided by the preceding paragraphs of this Section 4 shall be determined by the Executive. 5. TERMINATION FOR DISABILITY. (a) If, as a result of Executive's incapacity due to physical or mental illness, he shall have been absent from his duties with the Bank or the Company on a full-time basis for six (6) consecutive months, and within thirty (30) days after written notice of potential termination is given he shall not have returned to the full-time performance of his duties, the Bank may terminate Executive's employment for "Disability." (b) The Bank will pay Executive, as disability pay, a bi-weekly payment equal to 75% of the Executive's bi-weekly rate of Base Salary on the effective date of such termination. These disability payments shall commence on the effective date of Executive's termination and will end on the earlier of (i) the date Executive returns to the full-time employment of the Bank in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Bank; (ii) Executive's full-time employment by another employer; (iii) Executive attaining a Retirement age as identified in Section 6; or (iv) Executive's death. The disability pay shall be reduced by the amount, if any, paid to the Executive under any plan of the Bank or the Company providing disability benefits to the Executive. (c) The Bank will cause to be continued life, medical, and dental coverage substantially comparable, as reasonable or customarily available, to the coverage maintained by the Bank for Executive prior to his termination for Disability, except to the extent such coverage may be changed in its application to all Bank employees. This coverage shall cease upon the earlier of (i) the date Executive returns to the full-time employment of the Bank in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Bank; (ii) Executive's full-time employment by another employer; (iii) Executive attaining the Retirement age as identified in Section 6; or (iv) Executive's death. (d) Notwithstanding the foregoing, there will be no reduction in the compensation otherwise payable to Executive during any period during which Executive is incapable of performing his duties hereunder by reason of temporary disability. 6. TERMINATION UPON RETIREMENT. Termination by the Bank of the Executive based on "Retirement" shall mean termination of executive in accordance with any retirement policy established with Executive's consent with respect to him. Upon termination of Executive upon Retirement, no amounts or benefits shall be due Executive under this Agreement and the Executive shall be entitled to all benefits under any retirement plan of the Bank and other plans to which Executive is a party. 7. TERMINATION FOR CAUSE. The term "Termination for Cause" shall mean termination because of the Executive's personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. Notwithstanding the foregoing, Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. The Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause. Any non-vested stock options or restricted stock granted to Executive under any stock option plan or restricted stock plan of the Bank, the Company or any subsidiary or affiliate thereof, shall become null and void effective upon Executive's receipt of Notice of Termination for Cause pursuant to Section 8 hereof, and any non-vested stock options shall not be exercisable by Executive at any time subsequent to such Termination for Cause, (unless it is determined in arbitration that grounds for termination of Executive for Cause did not exist, in which event all terms of the options or restricted stock as of the date of termination shall apply, and any time periods for exercising such options shall commence from the date of resolution in arbitration). 8. NOTICE. (a) Any purported termination by the Bank for Cause shall be communicated by Notice of Termination to the Executive. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. If, within thirty (30) days after any Notice of Termination for Cause is given, the Executive notifies the Bank or the Company that a dispute exists concerning the termination, the parties shall promptly proceed to arbitration. Notwithstanding the pendency of any such dispute, the Bank and the Company may discontinue to pay Executive compensation until the dispute is finally resolved in accordance with this Agreement. If it is determined that Executive is entitled to compensation and benefits under Section 4 of this Agreement, the payment of such compensation and benefits by the Bank and Company shall commence immediately following the date of resolution by arbitration, with interest due Executive on the cash amount that would have been paid pending arbitration (at the prime rate as published in the Wall Street Journal from time to time). (b) Any other purported termination by the Bank or by Executive shall be communicated by a Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. "Date of Termination" shall mean the date of the Notice of Termination. If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the parties shall promptly proceed to arbitration as provided in Section 18 of this Agreement. Notwithstanding the pendency of any such dispute, the Bank shall continue to pay the Executive his Base Salary, and other compensation and benefits in effect when the notice giving rise to the dispute was given (except as to termination of Executive for Cause). In the event of the voluntary termination by the Executive of his employment, which is disputed by the Bank, and if it is determined in arbitration that Executive is not entitled to termination benefits pursuant to this Agreement, he shall return all cash payments made to him pending resolution by arbitration, with interest thereon at the prime rate as published in the Wall Street Journal from time to time if it is determined in arbitration that Executive's voluntary termination of employment was not taken in good faith and not in the reasonable belief that grounds existed for his voluntary termination. 9. POST-TERMINATION OBLIGATIONS. (a) All payments and benefits to Executive under this Agreement shall be subject to Executive's compliance with paragraph (b) of this Section 9 during the term of this Agreement and for one (1) full year after the expiration or termination hereof. (b) Executive shall, upon reasonable notice, furnish such information and assistance to the Bank as may reasonably be required by the Bank in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party. (c) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Bank and affiliates thereof, as it may exist from time to time, is a valuable, special and unique asset of the business of the Bank. Executive will not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business activities of the Bank or affiliates thereof to any person, firm, corporation, or other entity for any reason or purpose whatsoever (except for such disclosure as may be required to be provided to the Office of Thrift Supervision ("OTS"), the Federal Deposit Insurance Corporation (the "FDIC"), or other federal banking agency with jurisdiction over the Bank or Executive). Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Bank, and Executive may disclose any information regarding the Bank or the Company which is otherwise publicly available. In the event of a breach or threatened breach by the Executive of the provisions of this Section 9, the Bank will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Bank or affiliates thereof, or from rendering any services to any person, firm, corporation, other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Bank from pursuing any other remedies available to the Bank for such breach or threatened breach, including the recovery of damages from Executive. 10. SOURCE OF PAYMENTS. All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Bank. The Company, however, guarantees payment and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Bank are not timely paid or provided by the Bank, such amounts and benefits shall be paid or provided by the Company. 11. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Bank or any predecessor of the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. 12. NO ATTACHMENT. (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive and the Bank and their respective successors and assigns. 13. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived. 14. REQUIRED REGULATORY PROVISIONS. (a) The Bank's Board of Directors may terminate the Executive's employment at any time, but any termination by the Bank's Board of Directors, other than Termination for Cause, shall not prejudice Executive's right to compensation or other benefits under this Agreement. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause as defined in Section 8 hereinabove. (b) If the Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) (12 U.S.C. ss.ss. 1818(e)(3)) or 8(g) (12 U.S.C. ss. 1818(g)) of the Federal Deposit Insurance Act (the "FDI Act"), as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, the Bank's obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Executive all or part of the compensation withheld while their contract obligations were suspended and (ii) reinstate (in whole or in part) any of the obligations which were suspended. (c) If the Executive is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e) (12 U.S.C. ss.ss. 1818(e)) or 8(g) (12 U.S.C. ss. 1818(g)) of the FDI Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of the Bank under this contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (d) If the Bank is in default as defined in Section 3(x) (12 U.S.C. ss. 1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of the Bank under this contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. (e) All obligations of the Bank under this contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the institution, (i) by the Director, at the time FDIC or the Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Bank; or (ii) by the OTS at the time the OTS or its District Director approves a supervisory merger to resolve problems related to the operations of the Bank or when the Bank is determined by the OTS or FDIC to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. (f) Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 USC Section 1828(k) and any regulations promulgated thereunder. 15. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 16. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 17. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Ohio but only to the extent not superseded by federal law. 18. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by the employee within the Cleveland metropolitan area, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 19. PAYMENT OF LEGAL FEES. All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank, provided that the dispute or interpretation has been settled by Executive and the Bank or resolved in the Executive's favor. 20. INDEMNIFICATION. The Bank and the Company shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense, and shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted under federal law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Bank or the Company (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements (such settlements must be approved by the Board of Directors of the Bank or the Company, as appropriate), provided, however, neither the Bank nor Company shall be required to indemnify or reimburse the Executive for legal expenses or liabilities incurred in connection with an action, suit or proceeding arising from any illegal or fraudulent act committed by the Executive. 21. SUCCESSOR TO THE BANK. The Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank or the Company, expressly and unconditionally to assume and agree to perform the Bank's obligations under this Agreement, in the same manner and to the same extent that the Bank would be required to perform if no such succession or assignment had taken place. SIGNATURES IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement to be executed and their seals to be affixed hereunto by their duly authorized officers, and Executives have signed this Agreement, on the day and date first above written. ATTEST: WAYNE SAVINGS COMMUNITY BANK /s/ Michael C. Anderson By: /s/ Charles Finn - ------------------------------------ ---------------------------------- Secretary WITNESS: EXECUTIVE: /s/ Michael C. Anderson /s/ Wanda Christopher-Finn - ------------------------------------ ------------------------------------ Wanda Christopher-Finn CONSENT OF GUARANTOR (PURSUANT TO SECTION TEN HEREOF) WAYNE SAVINGS BANCSHARES, INC. By: Charles Finn ---------------------------------- EX-10.3 5 exhibit10-3.txt EXHIBIT 10.3 EMPLOYMENT AGREEMENT This Agreement is made effective as of March 31, 2003 by and between Wayne Savings Community Bank (the "Bank"), an Ohio savings and loan association, with its principal administrative office at 151 North Market Street, Wooster, Ohio and Michael C. Anderson (the "Executive"). Any reference to "Company" herein shall mean Wayne Savings Bancshares, Inc. the stock holding company parent of the Bank or any successor thereto. WHEREAS, the Bank wishes to assure itself of the continued services of Executive for the period provided in this Agreement; and WHEREAS, Executive is willing to continue to serve in the employ of the Bank on a full-time basis for said period. NOW, THEREFORE, in consideration of the mutual covenants herein contained, and upon the other terms and conditions hereinafter provided, the parties hereby agree as follows: 1. POSITION AND RESPONSIBILITIES During the period of his employment hereunder, Executive agrees to serve as Executive Vice President of the Bank (the "Executive Position"). As Executive Vice President, the Executive shall be the principal financial and accounting officer of the Bank, and shall be responsible for the financial and accounting function at the Bank, including financial reporting, preparation of periodic securities reports filed with the Securities and Exchange Commission, and preparation of financial reports filed with the Bank's banking regulators. During said period, Executive also agrees to serve, if elected, as an officer of any subsidiary or affiliate of the Bank. Failure to reelect Executive to the Executive Position without the consent of the Executive during the term of this Agreement (except for any termination for Cause, as defined herein) shall constitute a breach of this Agreement. 2. TERMS AND DUTIES (a) The period of Executive's employment under this Agreement shall begin as of the date first above written and shall continue for a period of twenty-four full calendar months thereafter. Within thirty days prior to the first anniversary date of this Agreement, and within thirty days prior to each anniversary date thereafter, the Board of Directors of the Bank ("Board") will conduct a performance evaluation and review of the Executive for purposes of determining whether to extend the Agreement, and the results thereof shall be included in the minutes of the Board's meeting and communicated to Executive. Upon a favorable performance evaluation, the Board shall renew the term of the Agreement for an additional year from the anniversary date such that the remaining term shall be two years; provided, however, if written notice of nonrenewal is provided to Executive at least ten days and not more than thirty days prior to any anniversary date, the Agreement shall expire at the end of twenty-four months following such anniversary date. (b) During the period of his employment hereunder, except for periods of absence occasioned by illness, reasonable vacation periods, and reasonable leaves of absence, Executive shall devote substantially all his business time, attention, skill, and efforts to the faithful performance of his duties hereunder including activities and services related to the organization, operation and management of the Bank; provided, however, that, with the approval of the Board, as evidenced by a resolution of such Board, from time to time, Executive may serve, or continue to serve, on the boards of directors of, and hold any other offices or positions in, business companies or business organizations, which, in such Board's judgment, will not present any conflict of interest with the Bank, or materially affect the performance of Executive's duties pursuant to this Agreement (for purposes of this Section 2(b), Board approval shall be deemed provided as to service with any such business companies or organizations that Executive was serving as of the date of this Agreement). See Attached Exhibit. 3. COMPENSATION AND REIMBURSEMENT. (a) The compensation specified under this Agreement shall constitute the salary and benefits paid for the duties described in Section 2(b). The Bank shall pay Executive as compensation a salary of not less than $100,000 per year ("Base Salary"). Such Base Salary shall be payable biweekly. During the period of this Agreement, Executive's Base Salary shall be reviewed at least annually. Such review shall be conducted by a Committee designated by the Board, and the Board may increase, but not decrease (except a decrease that is generally applicable to all employees), Executive's Base Salary (any increase in Base Salary shall become the "Base Salary" for purposes of this Agreement). In addition to the Base Salary provided in this Section 3(a), the Bank shall provide Executive at no cost to Executive with all such other benefits as are provided uniformly to permanent full-time employees of the Bank. Base Salary shall include any amounts of compensation deferred by Executive under qualified and nonqualified plans maintained by the Bank. (b) The Bank will provide Executive with employee benefit plans, arrangements and perquisites substantially equivalent to those in which Executive was participating or otherwise deriving benefit from immediately prior to the beginning of the term of this Agreement, and the Bank will not, without Executive's prior written consent, make any changes in such plans, arrangements or perquisites which would adversely affect Executive's rights or benefits thereunder, except as to any changes that are applicable to all employees or as reasonably or customarily available. Without limiting the generality of the foregoing provisions of this Subsection (b), Executive will be entitled to participate in or receive benefits under any employee benefit plans including but not limited to, retirement plans, supplemental retirement plans, pension plans, profit-sharing plans, health-and-accident plans, medical coverage or any other employee benefit plan or arrangement made available by the Bank in the future to its senior executives and key management employees, subject to and on a basis consistent with the terms, conditions and overall administration of such plans and arrangements. Executive will be entitled to incentive compensation and bonuses as provided in any plan of the Bank in which Executive is eligible to participate (and he shall be entitled to a pro rata distribution under any incentive compensation or bonus plan as to any year in which a termination of employment occurs, other than termination for Cause). Nothing paid to the Executive under any such plan or arrangement will be deemed to be in lieu of other compensation to which the Executive is entitled under this Agreement. (c) In addition to the Base Salary provided for by paragraph (a) of this Section 3, the Bank shall pay or reimburse Executive for all reasonable travel and other reasonable expenses incurred by Executive performing his obligations under this Agreement and may provide such additional compensation in such form and such amounts as the Board may from time to time determine. 4. PAYMENTS TO EXECUTIVE UPON AN EVENT OF TERMINATION. (a) Upon the occurrence of an Event of Termination (as herein defined) during the Executive's term of employment under this Agreement, the provisions of this Section shall apply. As used in this Agreement, an "Event of Termination" shall mean and include any one or more of the following: (i) the termination by the Bank or the Company of Executive's full-time employment hereunder for any reason other than (A) termination for Cause (as defined in Section 7 hereof), (B) upon Retirement (as defined in Section 6 hereof), or (C) for Disability (as set forth in Section 5 hereof); and (ii) Executive's resignation from the Bank's employ following (A) any failure to elect or reelect or to appoint or reappoint Executive to the Executive Position, (B) a material change in Executive's function, duties, or responsibilities, which change would cause Executive's position to become one of lesser responsibility, importance, or scope from the position and attributes thereof described in Section 1 above, to which Executive has not agreed in writing (and any such material change shall be deemed a continuing breach of this Agreement), (C) a relocation of Executive's principal place of employment to a location more than 30 miles outside the City of Wooster, or a material reduction in the benefits and perquisites, including Base Salary, to the Executive from those being provided as of the effective date of this Agreement (except for any reduction that is part of an employee-wide reduction in pay or benefits), (D) a liquidation or dissolution of the Bank or the Company, or (E) material breach of this Agreement by the Bank. Upon the occurrence of any event described in clauses (ii) (A), (B), (C), (D) or (E) above, Executive shall have the right to elect to terminate his employment under this Agreement by resignation upon not less than thirty (30) days prior written notice given within a reasonable period of time (not to exceed, except in case of a continuing breach, four calendar months) after the event giving rise to said right to elect, which termination by Executive shall be an Event of Termination. No payments or benefits shall be due to Executive under this Agreement upon the termination of Executive's employment except as provided in Sections 3, 4 or 5 hereof. (b) Upon the occurrence of an Event of Termination, the Bank shall pay Executive, or, in the event of his subsequent death, his beneficiary or beneficiaries, or his estate, as the case may be, as severance pay or liquidated damages, or both, a cash amount equal to the greater of the payments due for the remaining term of the Agreement, or two (2) times the sum of: (i) the highest annual rate of Base Salary paid to Executive at any time under this Agreement, and (ii) the greater of (x) the average annual cash bonus paid to Executive with respect to the two completed fiscal years prior to the Event of Termination, or (y) the cash bonus paid to Executive with respect to the fiscal year ended prior to the Event of Termination; provided however, that if the Bank is not in compliance with its minimum capital requirements or if such payments would cause the Bank's capital to be reduced below its minimum capital requirements, such payments shall be deferred until such time as the Bank is in capital compliance. At the election of the Executive, which election may be made annually by January 31 of each year and is irrevocable for the year in which made (and once payments commence), such payments shall be made in a lump sum or paid quarterly during the remaining term of the agreement following the Executive's termination. In the event that no election is made, payment to the Executive will be made on a quarterly basis during the remaining term of the Agreement. Such payments shall not be reduced in the event the Executive obtains other employment following termination of employment. (c) Upon the occurrence of an Event of Termination, the Bank will cause to be continued life, medical and dental coverage substantially comparable, as reasonably or customarily available, to the coverage maintained by the Bank for Executive prior to his termination, except to the extent such coverage may be changed in its application to all Bank employees or is not available on an individual basis to a terminated employee. Such coverage shall cease twenty-four (24) months following the Event of Termination. (d) Notwithstanding anything to the contrary in this Agreement, in the event that: (i) the aggregate payments or benefits to be made or afforded to Executive (the "Termination Benefits") would be deemed to include an "excess parachute payment" under Section 280G of the Code or any successor thereto, and (ii) if such Termination Benefits were reduced to an amount (the "Non-Triggering Amount"), the value of which is one dollar ($1.00) less than an amount equal to the total amount of payments permissible under Section 280G of the Code or any successor thereto, then the Termination Benefits to be paid to Executive shall be so reduced so as to be a Non-Triggering Amount. The allocation of the reduction required hereby among Termination Benefits provided by the preceding paragraphs of this Section 4 shall be determined by the Executive. 5. TERMINATION FOR DISABILITY. (a) If, as a result of Executive's incapacity due to physical or mental illness, he shall have been absent from his duties with the Bank or the Company on a full-time basis for six (6) consecutive months, and within thirty (30) days after written notice of potential termination is given he shall not have returned to the full-time performance of his duties, the Bank may terminate Executive's employment for "Disability." (b) The Bank will pay Executive, as disability pay, a bi-weekly payment equal to 75% of the Executive's bi-weekly rate of Base Salary on the effective date of such termination. These disability payments shall commence on the effective date of Executive's termination and will end on the earlier of (i) the date Executive returns to the full-time employment of the Bank in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Bank; (ii) Executive's full-time employment by another employer; (iii) Executive attaining a Retirement age as identified in Section 6; or (iv) Executive's death. The disability pay shall be reduced by the amount, if any, paid to the Executive under any plan of the Bank or the Company providing disability benefits to the Executive. (c) The Bank will cause to be continued life, medical, and dental coverage substantially comparable, as reasonable or customarily available, to the coverage maintained by the Bank for Executive prior to his termination for Disability, except to the extent such coverage may be changed in its application to all Bank employees. This coverage shall cease upon the earlier of (i) the date Executive returns to the full-time employment of the Bank in the same capacity as he was employed prior to his termination for Disability and pursuant to an employment agreement between Executive and the Bank; (ii) Executive's full-time employment by another employer; (iii) Executive attaining the Retirement age as identified in Section 6; or (iv) Executive's death. (d) Notwithstanding the foregoing, there will be no reduction in the compensation otherwise payable to Executive during any period during which Executive is incapable of performing his duties hereunder by reason of temporary disability. 6. TERMINATION UPON RETIREMENT. Termination by the Bank of the Executive based on "Retirement" shall mean termination of executive in accordance with any retirement policy established with Executive's consent with respect to him. Upon termination of Executive upon Retirement, no amounts or benefits shall be due Executive under this Agreement and the Executive shall be entitled to all benefits under any retirement plan of the Bank and other plans to which Executive is a party. 7. TERMINATION FOR CAUSE. The term "Termination for Cause" shall mean termination because of the Executive's personal dishonesty, incompetence, willful misconduct, any breach of fiduciary duty involving personal profit, intentional failure to perform stated duties, willful violation of any law, rule, or regulation (other than traffic violations or similar offenses) or final cease-and-desist order, or material breach of any provision of this Agreement. Notwithstanding the foregoing, Executive shall not be deemed to have been Terminated for Cause unless and until there shall have been delivered to him a copy of a resolution duly adopted by the affirmative vote of not less than a majority of the members of the Board at a meeting of the Board called and held for that purpose (after reasonable notice to Executive and an opportunity for him, together with counsel, to be heard before the Board), finding that in the good faith opinion of the Board, Executive was guilty of conduct justifying Termination for Cause and specifying the particulars thereof in detail. The Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause. Any non-vested stock options or restricted stock granted to Executive under any stock option plan or restricted stock plan of the Bank, the Company or any subsidiary or affiliate thereof, shall become null and void effective upon Executive's receipt of Notice of Termination for Cause pursuant to Section 8 hereof, and any non-vested stock options shall not be exercisable by Executive at any time subsequent to such Termination for Cause, (unless it is determined in arbitration that grounds for termination of Executive for Cause did not exist, in which event all terms of the options or restricted stock as of the date of termination shall apply, and any time periods for exercising such options shall commence from the date of resolution in arbitration). 8. NOTICE. (a) Any purported termination by the Bank for Cause shall be communicated by Notice of Termination to the Executive. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of Executive's employment under the provision so indicated. If, within thirty (30) days after any Notice of Termination for Cause is given, the Executive notifies the Bank or the Company that a dispute exists concerning the termination, the parties shall promptly proceed to arbitration. Notwithstanding the pendency of any such dispute, the Bank and the Company may discontinue to pay Executive compensation until the dispute is finally resolved in accordance with this Agreement. If it is determined that Executive is entitled to compensation and benefits under Section 4 of this Agreement, the payment of such compensation and benefits by the Bank and Company shall commence immediately following the date of resolution by arbitration, with interest due Executive on the cash amount that would have been paid pending arbitration (at the prime rate as published in the Wall Street Journal from time to time). (b) Any other purported termination by the Bank or by Executive shall be communicated by a Notice of Termination to the other party. For purposes of this Agreement, a "Notice of Termination" shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and shall set forth in detail the facts and circumstances claimed to provide a basis for termination of employment under the provision so indicated. "Date of Termination" shall mean the date of the Notice of Termination. If, within thirty (30) days after any Notice of Termination is given, the party receiving such Notice of Termination notifies the other party that a dispute exists concerning the termination, the parties shall promptly proceed to arbitration as provided in Section 18 of this Agreement. Notwithstanding the pendency of any such dispute, the Bank shall continue to pay the Executive his Base Salary, and other compensation and benefits in effect when the notice giving rise to the dispute was given (except as to termination of Executive for Cause). In the event of the voluntary termination by the Executive of his employment, which is disputed by the Bank, and if it is determined in arbitration that Executive is not entitled to termination benefits pursuant to this Agreement, he shall return all cash payments made to him pending resolution by arbitration, with interest thereon at the prime rate as published in the Wall Street Journal from time to time if it is determined in arbitration that Executive's voluntary termination of employment was not taken in good faith and not in the reasonable belief that grounds existed for his voluntary termination. 9. POST-TERMINATION OBLIGATIONS. (a) All payments and benefits to Executive under this Agreement shall be subject to Executive's compliance with paragraph (b) of this Section 9 during the term of this Agreement and for one (1) full year after the expiration or termination hereof. (b) Executive shall, upon reasonable notice, furnish such information and assistance to the Bank as may reasonably be required by the Bank in connection with any litigation in which it or any of its subsidiaries or affiliates is, or may become, a party. (c) Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Bank and affiliates thereof, as it may exist from time to time, is a valuable, special and unique asset of the business of the Bank. Executive will not, during or after the term of his employment, disclose any knowledge of the past, present, planned or considered business activities of the Bank or affiliates thereof to any person, firm, corporation, or other entity for any reason or purpose whatsoever (except for such disclosure as may be required to be provided to the Office of Thrift Supervision ("OTS"), the Federal Deposit Insurance Corporation (the "FDIC"), or other federal banking agency with jurisdiction over the Bank or Executive). Notwithstanding the foregoing, Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Bank, and Executive may disclose any information regarding the Bank or the Company which is otherwise publicly available. In the event of a breach or threatened breach by the Executive of the provisions of this Section 9, the Bank will be entitled to an injunction restraining Executive from disclosing, in whole or in part, the knowledge of the past, present, planned or considered business activities of the Bank or affiliates thereof, or from rendering any services to any person, firm, corporation, other entity to whom such knowledge, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Bank from pursuing any other remedies available to the Bank for such breach or threatened breach, including the recovery of damages from Executive. 10. SOURCE OF PAYMENTS. All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Bank. The Company, however, guarantees payment and provision of all amounts and benefits due hereunder to Executive and, if such amounts and benefits due from the Bank are not timely paid or provided by the Bank, such amounts and benefits shall be paid or provided by the Company. 11. EFFECT ON PRIOR AGREEMENTS AND EXISTING BENEFITS PLANS. This Agreement contains the entire understanding between the parties hereto and supersedes any prior employment agreement between the Bank or any predecessor of the Bank and Executive, except that this Agreement shall not affect or operate to reduce any benefit or compensation inuring to the Executive of a kind elsewhere provided. No provision of this Agreement shall be interpreted to mean that Executive is subject to receiving fewer benefits than those available to him without reference to this Agreement. 12. NO ATTACHMENT. (a) Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to affect any such action shall be null, void, and of no effect. (b) This Agreement shall be binding upon, and inure to the benefit of, Executive and the Bank and their respective successors and assigns. 13. MODIFICATION AND WAIVER. (a) This Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto. (b) No term or condition of this Agreement shall be deemed to have been waived, nor shall there be any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived. 14. REQUIRED REGULATORY PROVISIONS. (a) The Bank's Board of Directors may terminate the Executive's employment at any time, but any termination by the Bank's Board of Directors, other than Termination for Cause, shall not prejudice Executive's right to compensation or other benefits under this Agreement. Executive shall not have the right to receive compensation or other benefits for any period after Termination for Cause as defined in Section 8 hereinabove. (b) If the Executive is suspended from office and/or temporarily prohibited from participating in the conduct of the Bank's affairs by a notice served under Section 8(e)(3) (12 U.S.C. ss.ss. 1818(e)(3)) or 8(g) (12 U.S.C. ss. 1818(g)) of the Federal Deposit Insurance Act (the "FDI Act"), as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, the Bank's obligations under this contract shall be suspended as of the date of service, unless stayed by appropriate proceedings. If the charges in the notice are dismissed, the Bank may in its discretion (i) pay the Executive all or part of the compensation withheld while their contract obligations were suspended and (ii) reinstate (in whole or in part) any of the obligations which were suspended. (c) If the Executive is removed and/or permanently prohibited from participating in the conduct of the Bank's affairs by an order issued under Section 8(e) (12 U.S.C. ss.ss. 1818(e)) or 8(g) (12 U.S.C. ss. 1818(g)) of the FDI Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of the Bank under this contract shall terminate as of the effective date of the order, but vested rights of the contracting parties shall not be affected. (d) If the Bank is in default as defined in Section 3(x) (12 U.S.C. ss. 1813(x)(1)) of the Federal Deposit Insurance Act, as amended by the Financial Institutions Reform, Recovery and Enforcement Act of 1989, all obligations of the Bank under this contract shall terminate as of the date of default, but this paragraph shall not affect any vested rights of the contracting parties. (e) All obligations of the Bank under this contract shall be terminated, except to the extent determined that continuation of the contract is necessary for the continued operation of the institution, (i) by the Director, at the time FDIC or the Resolution Trust Corporation enters into an agreement to provide assistance to or on behalf of the Bank; or (ii) by the OTS at the time the OTS or its District Director approves a supervisory merger to resolve problems related to the operations of the Bank or when the Bank is determined by the OTS or FDIC to be in an unsafe or unsound condition. Any rights of the parties that have already vested, however, shall not be affected by such action. (f) Any payments made to Executive pursuant to this Agreement, or otherwise, are subject to and conditioned upon their compliance with 12 USC Section 1828(k) and any regulations promulgated thereunder. 15. SEVERABILITY. If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part thereof shall to the full extent consistent with law continue in full force and effect. 16. HEADINGS FOR REFERENCE ONLY. The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement. 17. GOVERNING LAW. This Agreement shall be governed by the laws of the State of Ohio but only to the extent not superseded by federal law. 18. ARBITRATION. Any dispute or controversy arising under or in connection with this Agreement shall be settled exclusively by arbitration, conducted before a panel of three arbitrators sitting in a location selected by the employee within the Cleveland metropolitan area, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the arbitrator's award in any court having jurisdiction; provided, however, that Executive shall be entitled to seek specific performance of his right to be paid until the Date of Termination during the pendency of any dispute or controversy arising under or in connection with this Agreement. 19. PAYMENT OF LEGAL FEES. All reasonable legal fees paid or incurred by Executive pursuant to any dispute or question of interpretation relating to this Agreement shall be paid or reimbursed by the Bank, provided that the dispute or interpretation has been settled by Executive and the Bank or resolved in the Executive's favor. 20. INDEMNIFICATION. The Bank and the Company shall provide Executive (including his heirs, executors and administrators) with coverage under a standard directors' and officers' liability insurance policy at its expense, and shall indemnify Executive (and his heirs, executors and administrators) to the fullest extent permitted under federal law against all expenses and liabilities reasonably incurred by him in connection with or arising out of any action, suit or proceeding in which he may be involved by reason of his having been a director or officer of the Bank or the Company (whether or not he continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgments, court costs and attorneys' fees and the cost of reasonable settlements (such settlements must be approved by the Board of Directors of the Bank or the Company, as appropriate), provided, however, neither the Bank nor Company shall be required to indemnify or reimburse the Executive for legal expenses or liabilities incurred in connection with an action, suit or proceeding arising from any illegal or fraudulent act committed by the Executive. 21. SUCCESSOR TO THE BANK. The Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Bank or the Company, expressly and unconditionally to assume and agree to perform the Bank's obligations under this Agreement, in the same manner and to the same extent that the Bank would be required to perform if no such succession or assignment had taken place. SIGNATURES IN WITNESS WHEREOF, the Bank and the Company have caused this Agreement to be executed and their seals to be affixed hereunto by their duly authorized officers, and Executives have signed this Agreement, on the day and date first above written. ATTEST: WAYNE SAVINGS COMMUNITY BANK /s/ Michael C. Anderson By:/s/ Charles Finn - ------------------------------------ ---------------------------------- Secretary WITNESS: EXECUTIVE: /s/ Wanda Christopher-Finn /s/ Michael C. Anderson - ------------------------------------ ------------------------------------ Michael C. Anderson CONSENT OF GUARANTOR (PURSUANT TO SECTION TEN HEREOF) WAYNE SAVINGS BANCSHARES, INC. By:/s/ Charles Finn ---------------------------------- EX-13 6 exhibit13.txt 2003 ANNUAL REPORT __________________ TO STOCKHOLDERS [PICTURE OF WAYNE SAVINGS COMMUNITY BUILDING APPEARS HERE] WAYNE SAVINGS BANCSHARES, INC. MEMBER FDIC CORPORATE PROFILE ______________________________________________________________________________WS Wayne Savings Bancshares, Inc. (hereinafter, the "Company") is the stock holding company parent of Wayne Savings Community Bank (the "Bank" or "Wayne Savings"), which was established in 1899. During the fiscal year ended March 31, 2003, the mutual holding company Wayne Savings Bankshares M.H.C. (the "M.H.C."), which previously owned a majority of the Company's outstanding shares of common stock, converted from the M.H.C. form of ownership to full stock form and merged with and into the Bank. The Company, which owned 100% of the Bank, was succeeded by a Delaware corporation of the same name. As part of the conversion, shares of the Company's common stock representing the M.H.C.'s ownership interest were sold in the offering. The existing publicly-held shares of the Company, which represented the remaining ownership interest in the Company, were exchanged for new shares of the Delaware corporation at a share exchange ratio of 1.5109 to 1.0. The offering of the Company's common stock culminated in the receipt of gross sale proceeds of $20.6 million which, after consideration of an employee stock plan of $1.6 million and applicable offering expenses of $1.9 million, resulted in net proceeds of $17.1 million. As a result of the conversion, all financial information that is based on or derived from the actual or outstanding shares of common stock during any period prior to fiscal 2003 has been appropriately adjusted for the aforementioned exchange ratio. The conversion was accounted for as a change in corporate form with no change in the historical basis of assets, liabilities or stockholders' equity. The Company's common stock is traded on the NASDAQ stock market under the symbol "WAYN." The Bank has been serving the financial needs of the residents of Wayne, Holmes, Ashland and Medina counties in Ohio for 104 years. Headquartered in downtown Wooster, Ohio, the Bank also operates 10 full-service banking locations in Wooster, Millersburg, Ashland, Rittman and Lodi, including its Village Savings Bank F.S.B. ("Village") subsidiary in North Canton. Throughout its long history and many economic cycles, Wayne Savings has enjoyed a fine reputation for stability, safety and soundness, and community service. The Bank has been noted for its sound management, consistent profitability and quality personal service to customers. The mission of Wayne Savings is to excel in customer service as a sound, independent, profitable, and progressive community bank dedicated to providing an array of services responsive to the financial needs of people in our communities, with an emphasis on home financing and household savings, and to provide for the security and development of our employees. ________________________________________________________________________________ BOARD OF DIRECTORS [PICTURE OF BOARD MEMBERS APPEARS HERE] Seated: KENNETH G. RHODE, CHAIRMAN OF WAYNE SAVINGS COMMUNITY BANK; CHARLES F. FINN, CHAIRMAN OF WAYNE SAVINGS BANCSHARES, INC.; RUSSELL L. HARPSTER. Standing: KENNETH R. LEHMAN, JAMES C. MORGAN, TERRY A. GARDNER, DONALD E. MASSARO. Not pictured: JOSEPH L. RETZLER ______________________________________ 3 _______________________________________ DIRECTORS AND OFFICERS WS______________________________________________________________________________ IN RECOGNITION AND APPRECIATION ... KENNETH G. RHODE Following 45 years of loyal, dedicated service on the Board of Directors of Wayne Savings Community Bank, Kenneth G. Rhode announced he would not seek re-election as a director when his current term ends in July 2003. Mr. Rhode will continue to serve the Company in the role of Director Emeritus. A highly respected businessman and citizen, Mr. Rhode brought outstanding credentials to his directorship when he joined the Board of Wayne Savings in 1958. Having served as a Naval Officer in the South Pacific in World War II, he was President and Chief Executive Officer of Western Reserve and Lightning Rod Mutual Insurance companies for 50 years. Mr. Rhode also held numerous leadership posts in state and national insurance trade organizations, and he has been actively involved in many community and civic organizations. Mr. Rhode has served a Chairman of the Board of Wayne Savings Community Bank since 1972. During his tenure, he made notable contributions to the Company's progress and success. He has earned the deepest admiration and respect from all those who have been associated with him. [Picture of Kenneth G. Rhode appears to the right of this paragraph] ________________________________________________________________________________ WAYNE SAVINGS BANCSHARES, INC. BOARD OF DIRECTORS EXECUTIVE OFFICERS Charles Finn Charles F. Finn CHAIRMAN PRESIDENT AND CHIEF EXECUTIVE OFFICER Kenneth Rhode Wanda Christopher-Finn Russell Harpster EXECUTIVE VICE Joseph Retzler AND CHIEF ADMINISTRATIVE OFFICER Donald Massaro Terry Gardner Michael C. Anderson James Morgan EXECUTIVE VICE PRESIDENT AND CHIEF FINANCIAL Kenneth Lehman OFFICER CORPORATE SECRETARY AND TREASURER ________________________________________________________________________________ TABLE OF CONTENTS Page Stockholder Information 5 Chairman's Letter 6 Selected Consolidated Financial and Other Data 8 Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Consolidated Statements of Financial Condition 18 Consolidated Statements of Earnings 19 Consolidated Statements of Comprehensive Income 20 Consolidated Statements of Stockholders' Equity 21 Consolidated Statements of Cash Flows 22 Notes to Consolidated Financial Statements 24 Report of Independent Certified Public Accountants 40 ______________________________________ 4 _______________________________________ STOCKHOLDER INFORMATION ______________________________________________________________________________WS ANNUAL MEETING TRANSFER AGENT The Annual Meeting of Stockholders Mellon Investor Services, LLC will be held at 10:00 a.m. on July 24, P.O. Box 3315 2003, at The Greenbriar Conference Centre, South Hackensack, NJ 07606-1915 50 Riffel Road, www.melloninvestor.com Wooster, Ohio 44691 ANNUAL REPORT ON FORM 10-K SPECIAL COUNSEL A copy of the Company's Form 10-K Luse Gorman Pomerenk & Schick for the fiscal year ended March 31, 5335 Wisconsin Avenue NW 2003, will be furnished upon Suite 400 request without charge to Washington, D.C. 20015 stockholders. INVESTOR INFORMATION INDEPENDENT AUDITORS Executive Offices Wayne Saving Bancshares, Inc. Grant Thornton LLP 151 N. Market Street . P.O. Box 858 625 Eden Park Drive . Suite 900 Wooster, Ohio 44691 Cincinnati, Ohio 45202 (330) 264-5767 ________________________________________________________________________________ WAYNE SAVINGS COMMUNITY BANK BANK LOCATIONS WOOSTER LOCATIONS ASHLAND LOCATIONS NORTH MARKET STREET OFFICE CLAREMONT AVENUE OFFICE 151 N. Market Street o Wooster, Ohio 233 Claremont Avenue o Ashland, Ohio CLEVELAND POINT FINANCIAL CENTER BUEHLERS-SUGARBUSH OFFICE 1908 Cleveland Road o Wooster, Ohio 1055 Sugarbush Drive o Ashland, Ohio MADISON SOUTH OFFICE 2024 Millersburg Road o Wooster, Ohio RITTMAN OFFICE 237 North Main Street o Rittman, Ohio NORTHSIDE OFFICE 543 Riffel Road o Wooster, Ohio LODI OFFICE 303 Highland Drive o Lodi, Ohio MILLERSBURG OFFICE 90 N. Clay Street o Millersburg, Ohio VILLAGE SAVINGS BANK, F.S.B. 1265 S. Main Street o North Canton, Ohio ______________________________________ 5 _______________________________________ CHAIRMAN'S LETTER WS______________________________________________________________________________ TO OUR STOCKHOLDERS AND CUSTOMERS: Bringing down the curtain on fiscal 2003, it is a great pleasure to report that we enjoyed a most momentous year as well as marking the beginning of a new era for your Company, Wayne Savings Bancshares, Inc. The fiscal year ended March 31, 2003 was particularly momentous because Wayne Savings Bancshares, Inc., the stock holding company parent of 104-year-old Wayne Savings Community Bank, achieved record earnings. Net earnings amounted to $2.8 million, or $.71 per diluted share, an increase of $949,000 or 52%, over net earnings of $1.8 million, or $.47 per diluted share, reported in the prior fiscal year. The increase in net earnings was due primarily to an increase in net interest income of $1.9 million, or 21%, which was partially offset by a $695,000 increase in general, administrative, and other expense and a $278,000 increase in federal income taxes. We are particularly pleased the Company achieved record operating results through a solid increase in core earnings and not through gains from the sale of loans or securities. It is also most gratifying and humbling that the Company was able to achieve record earnings in a less-than-favorable business climate. We can too easily recall the past year was filled with uncertainty and bad news -- dominated by the global war on terrorism, a sluggish economy, a volatile stock market and concerns over corporate governance. However, we are optimistic the storm clouds are lifting and the business and economic climate will be improving in the year ahead. A new era of opportunities for Wayne Savings Bancshares, Inc. began with the Company's conversion from partial to full public stock ownership, which resulted from the completion of a second-step stock offering on January 8, 2003. Since the initial stock offering in 1993, and prior to the second-step offering, a mutual holding company held 52.5% ownership interest in the stock holding company. In the recent second-step offering, the mutual holding company's ownership interest was sold to the public, and the mutual holding company ceased to exist. Now, Wayne Savings Bancshares, Inc., the new Delaware holding company for Wayne Savings Community Bank, is 100% owned by public stockholders. [PICTURE OF CHARLES FINN, CHAIRMAN AND CHIEF EXECUTIVE OFFICER APPEARS HERE] CHARLES F. FINN Chairman and Chief Executive Officer ______________________________________ 6 _______________________________________ ______________________________________________________________________________WS We are extremely gratified by the tremendous support of our customers and the investment community. Their participation in the offering demonstrates confidence in our organization. In the subscription and community offering, the Company sold 2,040,816 shares, approximately the midpoint of the offering range, at a purchase price of $10.00 per share. As part of the conversion, prior stockholders received 1.5109 new shares in exchange for each of their existing shares of stock. The Company's common stock now trades on the Nasdaq National Market under the symbol "WAYN." We expect the additional capital raised in the offering to facilitate new business and growth opportunities. At this time, I want to take the opportunity to honor Kenneth G. Rhode, who is stepping down after 45 years of service on the Board of Directors of Wayne Savings Community Bank. In my 20 years as chief executive officer, I have benefited greatly from Kenneth Rhode's wise counsel, solid business acumen, sound judgment, and friendship. I still plan to seek his counsel as he serves the Company as Director Emeritus. Through the actions and accomplishments of the past year, we believe Wayne Savings Bancshares, Inc. is well-positioned to expand its market share, to provide outstanding service to customers, and to build the value of our stockholders' investment. On behalf of the Officers, Directors, and Staff, we thank you deeply for your continued confidence and support. Sincerely, /s/ CHARLES F. FINN Charles F. Finn Chairman and Chief Executive Officer ______________________________________ 7 _______________________________________ SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA WS______________________________________________________________________________ The following table sets forth certain consolidated financial and other data of Wayne Savings Bancshares, Inc., at the dates and for the years indicated. The consolidated financial statements as of and for the years ended March 31, 1999 through March 31, 2003, inclusive, are those of Wayne Savings Bancshares, Inc. prior to the reorganization and change in corporate form discussed in the Notes to the Consolidated Financial Statements and elsewhere herein. For additional information about the Company, reference is made to "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the Consolidated Financial Statements of the Company.
At March 31, ___________________________________________________________________________ 2003 2002 2001 2000 1999 ___________________________________________________________________________ (In thousands) SELECTED FINANCIAL CONDITION DATA Total assets $378,991 $334,843 $311,640 $304,030 $270,954 Loans receivable, net(1) 228,373 251,172 247,480 237,418 215,636 Mortgage-backed securities(2) 76,002 17,326 8,574 10,459 7,230 Investment securities 35,841 22,286 13,641 23,199 11,830 Cash and cash equivalents(3) 17,496 27,883 20,902 14,296 16,245 Deposits 300,931 300,957 277,706 264,952 235,327 Stockholders' equity 44,663 26,047 25,255 24,962 24,900 (1) Includes loans held for sale. (2) Includes mortgage-backed securities available for sale. (3) Includes cash and due from banks, interest-bearing deposits in other financial institutions, and federal funds sold.
Year Ended March 31, ___________________________________________________________________________ 2003 2002 2001 2000 1999 ___________________________________________________________________________ (In thousands, except share data) SELECTED OPERATING DATA: Interest income $20,023 $21,309 $21,506 $20,700 $19,234 Interest expense 9,169 12,348 13,100 12,014 11,187 ________ ________ ________ ________ ________ Net interest income 10,854 8,961 8,406 8,686 8,047 Provision for losses on loans 91 134 96 106 78 ________ ________ ________ ________ ________ Net interest income after provision for losses on loans 10,763 8,827 8,310 8,580 7,969 Other income 1,643 1,657 1,045 748 985 General, administrative and other expense 8,417 7,722 7,348 7,434 6,488 ________ ________ ________ ________ ________ Earnings before income taxes 3,989 2,762 2,007 1,894 2,466 Federal income taxes 1,217 939 675 624 838 ________ ________ ________ ________ ________ Net earnings before change in accounting principle 2,772 1,823 1,332 1,270 1,628 ======== ======== ======== ======== ======== Change in accounting principle related to allocated organization costs - net of tax of $63,000 -- -- -- (122) -- ======== ======== ======== ======== ======== NET EARNINGS $ 2,772 $ 1,823 $ 1,332 $ 1,148 $ 1,628 ======== ======== ======== ======== ======== Basic earnings per share(1) $ .71 $ .47 $ .34 $ .29 $ .41 ======== ======== ======== ======== ======== Diluted earnings per share(1) $ .71 $ .47 $ .34 $ .29 $ .41 ======== ======== ======== ======== ======== Cash dividends declared per common share(2) $ .45 $ .45 $ .42 $ .42 $ .39 ======== ======== ======== ======== ======== (1)Basic and diluted earnings per share for the fiscal year ended March 31, 2000 reflects a $.03 per share reduction for the cumulative effect of change in accounting principle. All per share amounts have been restated to give effect to the 1.5109 to 1.00 share exchange ratio provided for in the Company's conversion offering. (2)During fiscal years ended March 31, 2003 and 1999, the M.H.C. waived its right to receive all dividends. During fiscal 2001 and 2000, the M.H.C. waived approximately $.44 and $.40 of the $.45 and $.42 per share dividends paid on common stock in each respective year. During fiscal 2002, the M.H.C. waived approximately $.43 of the $.45 per share dividend paid on common stock.
______________________________________ 8 _______________________________________ SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA (CON'T.) ______________________________________________________________________________WS
At or For the Year Ended March 31, __________________________________________________________________ 2003 2002 2001 2000 1999 __________________________________________________________________ KEY OPERATING RATIOS AND OTHER DATA: Return on average assets (net earnings divided by average total assets) .78% .56% .45% .39% .62% Return on average equity (net earnings divided by average equity) 8.80 7.12 5.28 4.57 6.85 Average equity to average assets 8.92 7.93 8.44 8.57 9.07 Equity to assets at period end 11.78 7.78 8.10 8.21 9.19 Interest rate spread (difference between average yield on interest-earning assets and average cost of interest-bearing liabilities) 3.09 2.77 2.57 2.88 2.93 Net interest margin (net interest income as a percentage of average interest- earning assets) 3.24 2.93 2.92 3.14 3.23 General, administrative and other expense to average assets1 2.38 2.39 2.46 2.54 2.50 Non-performing and impaired loans to loans receivable, net 1.09 1.52 .47 .48 .13 Non-performing and impaired assets to total assets .65 1.14 .41 .40 .12 Average interest-earning assets to average interest-bearing liabilities 105.40 103.98 107.62 106.05 106.99 Allowance for loan losses to non-performing and impaired loans 27.17 19.16 56.47 69.56 247.14 Allowance for loan losses to non-performing and impaired assets 27.17 19.07 51.01 64.47 215.58 Net interest income after provision for losses on loans, to general, administrative and other expense1 127.87 114.31 113.31 115.51 122.56 Number of full-service offices2 10 10 10 9 7 Dividend payout ratio 38.35 46.74 60.06 76.83 46.20 (1) In calculating this ratio, general, administrative and other expense does not include provisions for losses or gains on the sale of real estate acquired through foreclosure. (2) Consolidated with Village Savings Bank.
______________________________________ 9 _______________________________________ MANAGEMENT'S DISCUSSION AND ANALYSIS WS______________________________________________________________________________ OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The consolidated financial statements include Wayne Savings Bancshares, Inc. (the "Company") and its wholly-owned subsidiaries. Wayne Savings Community Bank ("Wayne Savings" or the "Bank") is the parent of a federal savings bank subsidiary in North Canton, Ohio, named Village Savings Bank, F.S.B. ("Village"), together referred to as the "Banks." Intercompany transactions and balances are eliminated in the consolidated financial statements. The Company's net earnings are primarily dependent on its net interest income, which is the difference between interest income earned on its loan, mortgage-backed securities and investment portfolios, and its cost of funds consisting of interest paid on deposits and borrowings. The Company's net earnings also are affected by its provision for losses on loans, as well as the amount of other income, including fees and service charges, and general, administrative and other expense, such as salaries and employee benefits, deposit insurance premiums, occupancy and equipment costs, and income taxes. Earnings of the Company also are affected significantly by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities. BUSINESS STRATEGY The Company's current business strategy is to operate a well-capitalized, profitable and independent community-oriented savings association dedicated to financing home ownership and providing quality service to its customers. The Company has sought to implement this strategy in recent years by: (1) closely monitoring the needs of customers and providing personal, quality customer service; (2) emphasizing the origination of one-to-four family residential mortgage loans and consumer loans in the Company's market area; (3) managing interest rate risk exposure by better matching asset and liability maturities and rates; (4) increasing fee income; (5) managing asset quality; (6) maintaining a strong retail deposit base; and (7) maintaining capital in excess of regulatory requirements. DISCUSSION OF FINANCIAL CONDITION CHANGES FROM MARCH 31, 2002 TO MARCH 31, 2003 In addition to the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. Economic circumstances, the Company's operations, and actual results could differ significantly from those discussed in forward-looking statements. Some of the factors that could cause or contribute to such differences are discussed herein but also include changes in the economy and interest rates in the nation and the Company's general market area. The forward- looking statements contained herein include, but are not limited to, those with respect to the following matters: (1) management's determination of the amount and adequacy of the allowance for loan losses; (2) the effect of changes in interest rates; (3) management's opinion as to the effects of recent accounting pronouncements on the Company's consolidated financial statements; and (4) management's opinion as to the Banks' ability to maintain regulatory capital at current levels. At March 31, 2003, the Company had total assets of $379.0 million, an increase of $44.2 million, or 13.2%, over total assets of $334.8 million at March 31, 2002. Cash and cash equivalents and investment securities totaled $53.3 million, an increase of approximately $3.2 million, or 6.3%, from March 31, 2002 levels. During the fiscal year ended March 31, 2003, investment securities totaling $26.0 million matured or were called while $39.6 million of investment securities were purchased. Cash and cash equivalents decreased by $10.4 million, or 37.3%, to a total of $17.5 million at March 31, 2003. Mortgage-backed securities totaled $76.0 million at March 31, 2003, an increase of $58.7 million, or 338.7%, from the total at March 31, 2002. The Company has experienced high levels of mortgage prepayments as a result of borrowers refinancing at the near record low level of mortgage interest rates that existed throughout the year. The Company has elected to reinvest these funds into interest rate sensitive mortgage-backed securities with an estimated average life of five years or less. The Company purchased $77.4 million of these securities which were partially offset by principal repayments and sales of $18.5 million for fiscal 2003. Loans receivable totaled $228.4 million at March 31, 2003, a decrease of $22.8 million, or 9.1%, from the March 31, 2002 balance. This decrease resulted mainly from principal repayments of $80.4 million as borrowers took the opportunity to refinance during a period of low mortgage interest rates. In addition, the Company chose to sell $4.0 million of loans in the secondary market. New loan originations amounted to $61.2 million for the year ended March 31, 2003. The majority of loan disbursements consisted of loans [PICTURE OF CHARLES FINN, WANDA CHRISTOPHER-FINN, MICHAEL C. ANDERSON APPEARS HERE] CHARLES F. FINN WANDA CHRISTOPHER-FINN MICHAEL C. ANDERSON Chairman Executive Vice President Executive Vice President Chief Executive Officer Chief Administrative Officer Chief Financial Officer ______________________________________10 _______________________________________ ______________________________________________________________________________WS secured by one-to-four-family residential real estate loans. The Company has enhanced its commercial lending program by hiring an experienced commercial lending officer. The Company plans to increase its commercial lending portfolio by focusing on high quality, smaller balance commercial loans. At March 31, 2003, the allowance for loan losses totaled $678,000, or .30% of loans, compared to $730,000 or .29% of loans at March 31, 2002. In determining the amount of loan loss allowance at any point in time, management and the Board apply a systematic process focusing on the risk of loss in the portfolio. First delinquent nonresidential, multi-family and commercial loans are evaluated for potential impairments in carrying value. At March 31, 2003 the delinquent nonresidential multi-family and commercial loans were viewed as well-secured , with no loss anticipated. The second step in determining the allowance for loan loss entails the application of historic loss experience to the individual loan types in the portfolio. In addition to the historic loss percentage, management employs an additional risk percentage tailored to the perception of the overall risk in the economy. This segment of the loss analysis accounts for nearly the entire balance of the allowance at March 31, 2003. The analysis of the allowance for loan losses is a critical accounting estimate which requires an element of judgment and is subject to the possibility that the allowance may need to be increased, with a corresponding reduction in earnings. To the best of management's knowledge all known losses as of March 31, 2003, have been recorded. Nonperforming loans totaled $2.5 million at March 31, 2003, compared to $3.1 million at March 31, 2002. Nonperforming loans consisted of $430,000 of nonresidential real estate loans, $1.4 million of commercial loans and approximately $663,000 in one-to four-family residential mortgage loans. The allowance for loan losses totaled 27.4% and 19.4% of nonperforming and impaired loans at March 31, 2003 and 2002, respectively. Included in nonperforming loans is a loan concentration of approximately $1.8 million. The Company has entered into a workout and liquidation agreement with the borrower which calls for the sale and disposal of the underlying security of these loans within a specified time frame. Management anticipates that the asset disposal will commence in the first quarter of fiscal 2004 and should be completed by the third quarter of the fiscal year. Although management believes that its allowance for loan losses is adequate based upon the available facts and circumstances, there can be no assurance that additions to the allowance will not be necessary in future periods, which would adversely affect the Company's results of operations. The Company purchased $5.0 million in Bank owned life insurance (BOLI) during fiscal 2003 to help offset the rising costs of employee benefit programs. Under this program the Company is the owner of single premium life insurance policies on key executives and officers. Deposits decreased by approximately $26,000 to a total of $300.9 million at March 31, 2003. The decline in deposits during 2003 generally reflects management's conservative pricing strategy in the current low-rate environment. Advances from Federal Home Loan Bank increased by $25.0 million due to an arbitrage with corporate bonds and mortgage -backed securities. This will enhance earnings and future cash flows due to the low cost of the advances. Stockholders' equity totaled $44.7 million at March 31, 2003, an increase of $18.6 million, or 71.5%, over March 31, 2002. The increase was primarily due to the reorganization and related stock offering totaling $17.1 million and earnings of $2.8 million, which were partially offset by dividends declared of $1.1 million. The Banks are subject to capital standards, which generally require the maintenance of regulatory capital sufficient to meet each of the three tests; i.e., the tangible capital requirement, the core capital requirement and the risk-based capital requirement. At March 31, 2003, the Banks met all regulatory capital requirements to which they were subject. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 2003 AND MARCH 31, 2002 GENERAL. Net earnings totaled $2.8 million for the fiscal year ended March 31, 2003, an increase of $949,000, or 52.1% over the net earnings of $1.8 million for the fiscal year ended March 31, 2002. The increase in net earnings was due primarily to an increase in net interest income of $1.9 million, or 21.1%, partially offset by an increase of $695,000, or 9.0%, in general, administrative and other expense and with a $278,000, or 29.6%, increase in federal income taxes. INTEREST INCOME. Interest income on loans totaled $16.9 million for the fiscal year ended March 31, 2003, a decrease of $2.2 million, or 11.6%, from the $19.1 million recorded for fiscal 2002. The decrease in interest income on loans was primarily due to an average yield reduction of 57 basis points to 6.96% coupled with a decrease in the average loan balances of $10.9 million, or 4.3%, for the fiscal year ended March 31, 2003. Interest income on mortgage-backed securities totaled $1.5 million for the fiscal year ended March 31, 2003, an increase of $935,000, or 163.7%, from $571,000 for fiscal 2002. The increase was primarily attributed to an increase in average outstanding balance of $29.3 million, or 283.5%, partially offset by a decrease in average yield of 172 basis points to 3.80% for fiscal 2003. Interest income on investments and interest-bearing deposits decreased $8,000, or .5%, primarily due to a decrease in average yield of 77 basis points to 3.16%, offset by an increase in average balances of $10.2 million, or 23.9%, to $52.9 million for the fiscal year ended March 31, 2003. _____________________________________ 11________________________________________ MANAGEMENT'S DISCUSSION AND ANALYSIS (CON'T.) WS______________________________________________________________________________ INTEREST EXPENSE. Interest expense on deposits totaled $8.4 million for the fiscal year ended March 31, 2003, a decrease of $3.6 million , or 30.1%, from the fiscal 2002 expense. The decrease in interest expense on deposits was primarily attributable to a decrease in the average cost of deposits of 136 basis points to 2.81% for fiscal 2003, which was partially offset by an increase in the average outstanding balance of $11.4 million, or 4.0%, to $300.3 million in fiscal 2003. Interest expense on borrowings totaled $737,000 for the fiscal year ended March 31, 2003, an increase of $444,000, or 151.6%, from the $293,000 for fiscal 2002. The increase was attributable to an increase in the average outstanding balance of $11.7 million, or 212.5%, partially offset by a decrease in the average yield of 104 basis points to 4.28% for the fiscal year ended March 31, 2003, from 5.32% for the fiscal year ended March 31, 2002. NET INTEREST INCOME. Net interest income totaled $10.9 million for the fiscal year ended March 31, 2003, an increase of $1.9 million, or 21.1%, over the $9.0 million recorded in fiscal 2002. The increase in net interest income was primarily attributed to a 136 basis point decrease in average cost of deposits to 2.81%, coupled with an increase in average interest-earning assets of $28.6 million, or 9.3%, for fiscal 2003. The aforementioned increase in net interest income was partially offset by a decrease in the average yield on interest-earning assets of 98 basis points to 5.98% for fiscal 2003, from 6.96% for fiscal 2002 and an increase of $ 11.7 million, or 212.5%, in average borrowings to $17.2 million for fiscal 2003. The interest rate spread increased 32 basis points to 3.09% in fiscal 2003, from 2.77% in fiscal 2002. The net interest margin increased to 3.24% for the fiscal year ended March 31, 2003, from 2.93% in fiscal 2002. PROVISION FOR LOSSES ON LOANS. The Company's provision for losses on loans totaled $91,000 and $134,000 for the fiscal years ended March 31, 2003 and 2002, respectively. To the best of management's knowledge, all known losses as of March 31, 2003 and 2002, have been recorded. OTHER INCOME. Other income, consisting primarily of gain on sale of loans, gain on sale of mortgage backed securities, increase in the cash surrender value of life insurance, and service fees and service charges on deposit accounts, decreased by $14,000, or .9%, to $1.6 million for the fiscal year ended March 31, 2003. The decrease was a result of a reduction in gain on sale of loans of $433,000, or 84.2%, to $81,000 for fiscal 2003 from $514,000 for fiscal 2002, which was partially offset by an increase in service fees, charges and other operating income of $272,000, or 23.8%, and an increase of $121,000 in the cash surrender value of life insurance. The decline in gains on sale of loans generally reflects management's decision to conservatively price originations in the current low-yield environment. This decision reduced the volume of fixed rate loans available for sale. GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other expense consisting primarily of employee compensation and benefits, occupancy and equipment expense, federal deposit and insurance premiums, and other operating expenses, totaled $8.4 million for the year ended March 31, 2003, an increase of $695,000, or 9.0%, compared to fiscal 2002. The increase was primarily due to an increase of $443,000, or 10.3%, in employee compensation and benefits, an increase in other operating expense, including operating expenses previously paid for or allocated to the M.H.C., of $124,000, or 7.3%, and an increase in occupancy and equipment of $89,000, or 6.4%. The increase in employee compensation and benefits was primarily due to normal merit increases, an increase in employee benefit costs, and the hiring of additional executive staff needed for operating a fully converted, publicly traded stock company. Other operating expense increased mainly due to a reduction in deferred loan origination costs. As stated previously, the Company was strategically positioned to be less aggressive in loan pricing which slowed loan originations from $96.5 million in fiscal 2002 to $61.2 million in fiscal 2003. The increase in occupancy and equipment was mainly due to the several offices which were opened for a part year only in fiscal 2002 and in 2003 have been actively serving customers for the entire year FEDERAL INCOME TAXES. The provision for federal income taxes was $1.2 million for the fiscal year ended March 31, 2003, an increase of $278,000, or 29.6%, compared to fiscal 2002. The increase resulted primarily from a $1.2 million increase in pretax earnings. The effective tax rate for the fiscal year ended March 31, 2003, was 30.5%, as compared to 34.0% in 2002, mainly due to tax-free income arising from various interest-earning assets. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED MARCH 31, 2002 AND MARCH 31, 2001 GENERAL. Net earnings totaled $1.8 million for the fiscal year ended March 31, 2002, an increase of $491,000, or 36.9%, over the net earnings of $1.3 million for the fiscal year ended March 31, 2001. The increase in net earnings was due primarily to a $555,000, or 6.6%, increase in net interest income and a $612,000, or 58.6%, increase in other income, which were partially offset by an increase of $374,000, or 5.1%, in general, administrative and other expense, a $264,000, or 39.1%, increase in federal income taxes, and a $38,000, or 39.6%, increase in the provision for losses on loans. _____________________________________ 12________________________________________ ______________________________________________________________________________WS INTEREST INCOME. Interest income on loans totaled $19.1 million for the fiscal year ended March 31, 2002, an increase of $358,000, or 1.9%, over the $18.7 million recorded for fiscal 2001. The increase in interest income on loans was due primarily to a $7.4 million, or 3.0%, increase in the average outstanding balance to $253.1 million, which was partially offset by a decrease in the average yield of 8 basis points to 7.53% for the fiscal year ended March 31, 2002. Interest income on mortgage-backed securities totaled $571,000 for the fiscal year ended March 31, 2002, a decrease of $12,000, or 2.1%, from $583,000 for fiscal 2001. The decrease was primarily attributable to a decrease in the average yield of 46 basis points to 5.52%, which was partially offset by an increase in the average outstanding balance of $586,000, or 6.0%, year to year. Interest income on investments and interest-bearing deposits amounted to $1.7 million for the fiscal year ended March 31, 2002, a decrease of $543,000, or 24.4%, from the $2.2 million for fiscal 2001. The decrease was primarily attributable to a decrease in the average yield of 284 basis points to 3.93%, which was partially offset by an increase in the average outstanding balance of $9.9 million, or 30.1%, to $42.7 million for the fiscal year ended March 31, 2002. INTEREST EXPENSE. Interest expense on deposits totaled $12.1 million for the fiscal year ended March 31, 2002, a decrease of $597,000, or 4.7%, from the $12.7 million for fiscal 2001. The decrease in interest expense on deposits was primarily attributable to a decrease in the average cost of deposits of 70 basis points to 4.17% for the fiscal year ended March 31, 2002, which was partially offset by an increase in the average outstanding balance of $29.0 million, or 11.1%, to $288.9 million in fiscal 2002. Interest expense on borrowings totaled $293,000 for the fiscal year ended March 31, 2002, a decrease of $155,000, or 34.6%, from the $448,000 for fiscal 2001. The decrease in interest expense on borrowings was attributable to a decrease in the average cost of borrowings of 37 basis points, to 5.32% for the fiscal year ended March 31, 2002, from 5.69% for the fiscal year ended March 31, 2001, coupled with a decrease in the average outstanding balance of $2.4 million, or 30.1%, year to year. NET INTEREST INCOME. Net interest income totaled $9.0 million for the fiscal year ended March 31, 2002, an increase of $555,000, or 6.6%, over the $8.4 million recorded in fiscal 2001. The increase in net interest income was primarily attributable to an increase in average interest-earning assets totaling $17.9 million, or 6.2%, to $306.1 million for the fiscal year ended March 31, 2002, partially offset by a decrease in the average yield of 50 basis points to 6.96% from 7.46%. The interest rate spread increased by 20 basis points to 2.77% in fiscal 2002 from 2.57% in fiscal 2001. The net interest margin increased to 2.93% for the fiscal year ended March 31, 2002, from 2.92% for fiscal 2001. PROVISION FOR LOSSES ON LOANS. The Company's provision for losses on loans totaled $134,000 and $96,000 for the fiscal years ended March 31, 2002 and 2001, respectively. OTHER INCOME. Other income, consisting primarily of gain on sale of loans, service fees and charges on deposit accounts, increased by $612,000, or 58.6%, to $1.7 million for the fiscal year ended March 31, 2002, compared to fiscal 2001. The increase in other income was primarily attributable to an increase of $360,000, or 233.8%, in gain on sale of loans. Service fees, charges and other operating income increased by $252,000, or 28.3%, to $1.1 million for the fiscal year ended March 31, 2002, due primarily to an enhanced service fee structure implemented on deposit accounts in July 2000. GENERAL, ADMINISTRATIVE AND OTHER EXPENSE. General, administrative and other expense totaled $7.7 million for the fiscal year ended March 31, 2002, an increase of $374,000, or 5.1%, over the $7.3 million for fiscal 2001. The increase in general, administrative and other expense was primarily attributable to a $355,000, or 9.0%, increase in employee compensation and benefits, a $53,000, or 4.0%, increase in occupancy and equipment expense, and a $44,000, or 19.1%, increase in franchise taxes, which were partially offset by a $104,000 reduction in legal costs previously paid by Wayne Savings Bankshares, M.H.C. The increase in employee compensation and benefits was primarily attributable to normal merit increases, an increase in employee benefit plan costs and additional staff needed for operating a new full service branch and a new drive-through facility. The increase in occupancy and equipment expense was primarily attributable to costs incurred in the new operating facilities. The increase in franchise taxes was due to refunds received in fiscal 2001 that were not applicable to fiscal 2002. FEDERAL INCOME TAXES. The provision for federal income taxes was $939,000 for the fiscal year ended March 31, 2002, an increase of $264,000, or 39.1%, compared to fiscal 2001. The increase resulted primarily from a $755,000, or 37.6%, increase in pretax earnings. The effective tax rate for the fiscal year ended March 31, 2002, was 34.0%, as compared to 33.6% for fiscal 2001. _____________________________________ 13________________________________________ MANAGEMENT'S DISCUSSION AND ANALYSIS (CON'T.) WS______________________________________________________________________________ AVERAGE BALANCE SHEET The following table sets forth certain information relating to the Company's average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.
Year Ended March 31, ________________________________________________________________________________________________ 2003 2002 2001 ______________________________ ______________________________ ______________________________ Average Average Average Average Average Average Balance Interest Rate Balance Interest Rate Balance Interest Rate _________ ________ _______ _________ ________ _______ _________ ________ _______ (Dollars in thousands) INTEREST-EARNING ASSETS: Loans receivable, net1 $ 242,120 $ 16,846 6.96% $ 253,058 $ 19,059 7.53% $ 245,624 $ 18,701 7.61% Mortgage-backed securities 2 39,652 1,506 3.80 10,340 571 5.52 9,754 583 5.98 Investment securities 24,114 1,159 4.81 15,628 871 5.57 19,342 1,423 7.36 Interest-bearing deposits 3 28,804 512 1.78 27,083 808 2.98 13,481 799 5.93 _________ ________ _______ _________ ________ _______ _________ ________ _______ Total interest-earning assets 334,690 20,023 5.98 306,109 21,309 6.96 288,201 21,506 7.46 Non-interest-earning assets 18,481 17,057 10,727 _________ _________ _________ Total assets $ 353,171 $ 323,166 $ 298,928 ========= ========= ========= INTEREST-BEARING LIABILITIES: Deposits $ 300,326 8,432 2.81 $ 288,882 12,055 4.17 $ 259,914 12,652 4.87 Borrowings 17,204 737 4.28 5,505 293 5.32 7,877 448 5.69 _________ ________ _______ _________ ________ _______ _________ ________ _______ Total interest-bearing liabilities 317,530 9,169 2.89 294,387 12,348 4.19 267,791 13,100 4.89 Non-interest-bearing liabilities 4,153 3,159 5,893 _________ _________ _________ Total liabilities 321,683 297,546 273,684 Stockholders' equity 31,488 25,620 25,244 _________ _________ _________ Total liabilities and stockholders' equity $ 353,171 $ 323,166 $ 298,928 ========= ________ ========= ________ ========= ________ Net interest income $ 10,854 $ 8,961 $ 8,406 ======== _______ ======== _______ ======== _______ Interest rate spread 4 3.09% 2.77% 2.57% ======= ======= ======= Net yield on interest-earning assets5 3.24% 2.93% 2.92% ======= ======= ======= Ratio of average interest-earning assets to average interest- bearing liabilities 105.40% 103.98% 107.62% ======= ======= ======= (1) Includes non-accrual loan balances. (2) Includes mortgage-backed securities designated as available for sale. (3) Includes federal funds sold and interest-bearing deposits in other financial institutions. (4) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities. (5) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.
_____________________________________ 14________________________________________ ______________________________________________________________________________WS RATE/VOLUME ANALYSIS The table below sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in average volume (changes in average volume multiplied by old rate); and (ii) changes in rate (change in rate multiplied by old average volume). Changes in rate-volume (changes in rate multiplied by the change in average volume) have been allocated proportionately between changes in rate and changes in volume and the net change.
Year Ended March 31, _________________________________________________________________________ 2003 vs. 2002 2002 vs. 2001 __________________________________ __________________________________ Increase (Decrease) Increase (Decrease) Due to Total Due to Total ___________________ Increase ___________________ Increase Volume Rate (Decrease) Volume Rate (Decrease) ______ _______ __________ ______ _______ __________ (In thousands) Interest income attributable to: Loans receivable $ (801) $(1,412) $(2,213) $ 534 $ (176) $ 358 Mortgage-backed securities 1,163 (228) 935 34 (46) (12) Other interest-earning assets 358 (366) (8) 552 (1,095) (543) ______ _______ _______ ______ _______ _______ Total interest-earning assets 720 (2,006) (1,286) 1,120 (1,317) (197) Interest expense attributable to: Deposits 461 (4,084) (3,623) 1,328 (1,925) (597) Borrowings 623 (179) 444 (128) (27) (155) ______ _______ _______ ______ _______ _______ Total interest-bearing liabilities 1,084 (4,263) (3,179) 1,200 (1,952) (752) ______ _______ _______ ______ _______ _______ Increase (decrease) in net interest income $ (364) $ 2,257 $ 1,893 $ (80) $ 635 $ 555 ====== ======= ======= ====== ======= =======
________________________________________________________________________________ ASSET AND LIABILITY MANAGEMENT-INTEREST RATE SENSITIVITY ANALYSIS The Banks, like other financial institutions, are subject to interest rate risk to the extent that their interest-earning assets reprice at a different time than their interest-bearing liabilities. As part of their effort to monitor and manage interest rate risk, the Banks use the "net portfolio value" ("NPV") methodology adopted by the OTS as part of its interest rate sensitivity regulations. The application of NPV methodology illustrates certain aspects of the Banks' interest rate risk. Generally, NPV is the discounted present value of the difference between incoming cash flows on interest-earning and other assets and outgoing cash flows on interest-bearing and other liabilities. The application of the methodology attempts to quantify interest rate risk as the change in the NPV, which would result from a theoretical 200 basis point (1 basis point equals .01%) change in market interest rates. Both a 200 basis point increase in market interest rates and a 200 basis point decrease in market interest rates are considered. Presented below, as of March 31, 2003 and 2002, is an analysis of the Banks' interest rate risk as measured by changes in NPV for instantaneous and sustained parallel shifts of 100-300 basis points in market interest rates. As with any method of measuring interest rate risk, certain shortcomings are inherent in the NPV approach. For example, although certain assets and liabilities may have similar maturities or periods of repricing, they may react in different degrees to changes in market interest rates. Also, the interest rates on certain types of assets and liabilities may fluctuate in advance of changes in market interest rates, while interest rates on other types may lag behind changes in market rates. Further, in the event of a change in interest rates, expected rates of prepayment on loans and mortgage-backed securities and early withdrawal levels from certificates of deposit would likely deviate significantly from those assumed in making the risk calculations. The Company's policy in recent years has been to reduce its exposure to interest rate risk generally by better matching the maturities of its interest rate sensitive assets and ______________________________________ 15 ______________________________________ MANAGEMENT'S DISCUSSION AND ANALYSIS (CON'T.) WS______________________________________________________________________________ liabilities and by originating adjustable rate mortgage ("ARM") loans and other adjustable rate or short-term loans, as well as by purchasing short-term investments and mortgage-backed securities. However, particularly in the lower long-term interest rate environment which currently exists, borrowers typically prefer fixed rate loans to ARM loans. Accordingly, ARM loan originations were very limited during the fiscal year ended March 31, 2003. The Company has sought to lengthen the maturities of its deposits by promoting longer-term certificates; however, the Company was not successful in lengthening the maturities of its deposits in the declining interest rate environment that existed throughout fiscal 2003. The Company also negotiates interest rates on certificates of deposit of $100,000 or more. The Company has an Asset-Liability Management Committee, which is responsible for reviewing the Company's asset-liability policies. The Committee meets weekly and reports monthly to the Board of Directors on interest rate risks and trends, as well as liquidity and capital ratios and requirements. The Banks have operated within the framework of their prescribed asset/liability risk ranges for each of the last three years.
As of March 31, 2003 Change in Interest Net Portfolio Value NPV as % of PV of Assets Rates (Basis points) $Amount $ Change % Change NPV Ratio Change ____________________ _______ ________ ________ _________ ______ (In thousands) +300 bp $46,905 $ (9,213) (16)% 12.55% (171 bp) +200 bp 52,575 (3,543) (6) 13.73 (53 bp) +100 bp 56,002 (116) (.2) 14.37 11 bp 0 bp 56,118 -- -- 14.26 -- -100 bp 53,051 (3,067) (6) 13.45 (81 bp) As of March 31, 2002 Change in Interest Net Portfolio Value NPV as % of PV of Assets Rates (Basis points) $Amount $ Change % Change NPV Ratio Change ____________________ _______ ________ ________ _________ ______ (In thousands) +300 bp $25,393 $(19,439) (43)% 7.68% (499 bp) +200 bp 32,181 (12,651) (28) 9.50 (317 bp) +100 bp 39,069 (5,763) (13) 11.26 (141 bp) 0 bp 44,832 -- -- 12.67 -- -100 bp 48,566 3,734 8 13.53 86 bp -200 bp 48,786 3,954 9 13.53 86 bp -300 bp 48,263 3,431 8 13.37 70 bp
________________________________________________________________________________ LIQUIDITY AND CAPITAL RESOURCES The Banks' primary sources of funds are deposits, amortization of loan principal and prepayment of loans and mortgage-backed securities, maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by general interest rates, economic conditions and competition. The Banks manage the pricing of deposits to maintain a desired level of deposits and cost of funds. In addition, the Banks invest excess funds in federal funds and other short-term interest-earning and other assets, which provide liquidity to meet lending requirements. Federal funds sold and other liquid assets outstanding at March 31, 2003, 2002 and 2001, amounted to $129.3 million, $67.5 million and $42.5 million, respectively. For additional information about cash flows from the Company's operating, financing and investing activities, see the Statements of Cash Flows included in the Consolidated Financial Statements. A major portion of the Banks' liquidity consists of cash and cash equivalents, which are a product of their operating, investing and financing activities. The primary sources of cash are net earnings, principal repayments on loans and mortgage-backed securities, proceeds from advances from the ______________________________________ 16 ______________________________________ ______________________________________________________________________________WS Federal Home Loan Bank, and sales of mortgage-backed securities. Liquidity management is both a daily and long-term function of business management. If the Banks require funds beyond their ability to generate them internally, borrowing agreements exist with the Federal Home Loan Bank ("FHLB"), which provide an additional source of funds. At March 31, 2003, the Company had $30.0 million in outstanding advances from the FHLB. At March 31, 2003, the Company had outstanding loan commitments of $32.3 million, including the unfunded portion of loans in process and commitments under unused lines of credit. Certificates of deposit scheduled to mature in less than one year at March 31, 2003, totaled $95.6 million. Based on prior experience, management believes that a significant portion of such deposits will remain with the Company. IMPACT OF INFLATION AND CHANGING PRICES The consolidated financial statements of the Company and notes thereto, presented elsewhere herein, have been prepared in accordance with U.S. GAAP, which requires the measurement of financial position and operating results in terms of historical dollars without considering the change in the relative purchasing power of money over time and due to inflation. The impact of inflation is reflected in the increased cost of the Company's operations. Unlike most industrial companies, nearly all the assets and liabilities of the Company are monetary. As a result, interest rates have a greater impact on the Company's performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods and services. COMMON STOCK AND RELATED MATTERS The Company's common stock trades on the Nasdaq National Market using the symbol "WAYN." The following table sets forth the high and low trading prices of the Company's common stock during the three most recent fiscal years, together with the cash dividends declared. As stated previously, all per share amounts have been restated for the 1.5109 share exchange ratio provided for in the Company's conversion offering. Fiscal Year Ended Cash Dividends March 31, 2003 High Low Declared _________________ ______ ______ ______________ First quarter $14.23 $13.24 $.113 Second quarter 13.51 11.75 .113 Third quarter 15.22 10.25 .113 Fourth quarter 11.55 10.67 .113 Fiscal Year Ended Cash Dividends March 31, 2002 High Low Declared _________________ ______ ______ ______________ First quarter $11.87 $ 7.48 $.113 Second quarter 13.60 9.10 .113 Third quarter 11.79 9.17 .113 Fourth quarter 14.56 10.76 .113 Fiscal Year Ended Cash Dividends March 31, 2001 High Low Declared _________________ ______ ______ ______________ First quarter $10.92 $10.18 $.106 Second quarter 10.42 9.27 .106 Third quarter 10.59 8.94 .106 Fourth quarter 11.91 8.60 .106 As of April 30, 2003, the Company had 1,610 stockholders of record and 3,888,795 shares of common stock outstanding. This does not reflect the number of persons whose stock is in nominee or "street name" accounts through brokers. Payment of dividends on the common stock is subject to determination and declaration by the Board of Directors and will depend upon a number of factors, including capital requirements, regulatory limitations on the payment of dividends, the Company's results of operations and financial condition, tax considerations, and general economic conditions. No assurance can be given that dividends will be declared or, if declared, what the amount of dividends will be, or whether such dividends, once declared, will continue. The Company's primary source of funds with which to pay dividends is cash and cash equivalents held at the holding company level and dividends from the Bank. The Bank's ability to pay dividends to the Company is limited by OTS regulations, and the Bank is required to obtain OTS nonobjection to the payment of dividends to the Company. In determining whether to object to such dividends, the OTS considers whether (i) the Bank would be undercapitalized following the dividend, (ii) the dividend raises safety and soundness concerns, or (iii) the dividend violates any regulatory prohibition or policy. In addition to the foregoing, earnings of the Company appropriated to bad debt reserves and deducted for federal income tax purposes are not available for payment of cash dividends or other distributions to stockholders without payment of taxes at the then-current tax rate by the Company on the amount of earnings removed from the reserves for such distributions. The Company intends to make full use of this favorable tax treatment and does not contemplate any distribution that would create federal tax liability. ______________________________________ 17 ______________________________________
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION WS______________________________________________________________________________ As of March 31, (Dollars in thousands, except share data) 2003 2002 ________ ________ ASSETS Cash and due from banks $ 2,967 $ 2,250 Federal funds sold 8,000 15,000 Interest-bearing deposits in other financial institutions 6,529 10,633 ________ ________ Cash and cash equivalents 17,496 27,883 Investment securities available for sale - at market 17,036 -- Investment securities held to maturity - at amortized cost, approximate market value of $19,211 and $22,098 as of March 31, 2003 and 2002, respectively 18,805 22,286 Mortgage-backed securities available for sale - at market 66,151 3,449 Mortgage-backed securities held to maturity - at amortized cost, approximate market value of $9,927 and $13,835 as of March 31, 2003 and 2002, respectively 9,851 13,877 Loans receivable - net 228,373 251,172 Office premises and equipment - net 8,818 9,208 Real estate acquired through foreclosure -- 19 Federal Home Loan Bank stock - at cost 4,041 3,767 Cash surrender value of life insurance 5,121 -- Accrued interest receivable on loans 948 1,153 Accrued interest receivable on mortgage-backed securities 380 83 Accrued interest receivable on investments and interest bearing deposits 313 250 Prepaid expenses and other assets 1,532 1,688 Prepaid federal income taxes 126 8 ________ ________ Total assets $378,991 $334,843 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits $300,931 $300,957 Advances from the Federal Home Loan Bank 30,000 5,000 Advances by borrowers for taxes and insurance 712 880 Accrued interest payable 235 223 Accounts payable on mortgage loans serviced for others 130 116 Other liabilities 1,638 853 Deferred federal income taxes 682 767 ________ ________ Total liabilities 334,328 308,796 Commitments -- -- Stockholders' equity Common stock (20,000,000 shares of $.10 par value authorized; 3,888,795 shares issued and outstanding at March 31, 2003; 20,000,000 shares of $1.00 par value authorized with 2,640,835 shares issued at March 31, 2002) 389 2,641 Additional paid-in capital 34,208 14,444 Retained earnings - substantially restricted 11,830 10,121 Less required contributions for shares acquired by Employee Stock Ownership Plan (1,612) -- Less 70,014 shares of treasury stock at March 31, 2002 - at cost -- (1,181) Accumulated other comprehensive income (loss) (152) 22 ________ ________ Total stockholders' equity 44,663 26,047 ________ ________ Total liabilities and stockholders' equity $378,991 $334,843 ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. ______________________________________ 18 ______________________________________
CONSOLIDATED STATEMENTS OF EARNINGS ______________________________________________________________________________WS For the year ended March 31, (Dollars in thousands, except share data) 2003 2002 2001 ________ ________ ________ Interest income: Loans $ 16,846 $ 19,059 $ 18,701 Mortgage-backed securities 1,506 571 583 Investment securities 1,159 871 1,423 Interest-bearing deposits and other 512 808 799 ________ ________ ________ Total interest income 20,023 21,309 21,506 Interest expense: Deposits 8,432 12,055 12,652 Borrowings 737 293 448 ________ ________ ________ Total interest expense 9,169 12,348 13,100 ________ ________ ________ Net interest income 10,854 8,961 8,406 Provision for losses on loans 91 134 96 ________ ________ ________ Net interest income after provision for losses on loans 10,763 8,827 8,310 Other income: Gain on sale of mortgage-backed securities 26 -- -- Gain on sale of loans 81 514 154 Increase in cash surrender value of life insurance 121 -- -- Service fees, charges and other operating 1,415 1,143 891 ________ ________ ________ Total other income 1,643 1,657 1,045 General, administrative and other expense: Employee compensation and benefits 4,755 4,312 3,957 Occupancy and equipment 1,477 1,388 1,335 Federal deposit insurance premiums 51 46 86 Franchise taxes 308 274 230 Other operating 1,826 1,667 1,590 Operating expenses previously paid by or allocated to M.H.C. -- 35 150 ________ ________ ________ Total general, administrative and other expense 8,417 7,722 7,348 ________ ________ ________ Earnings before incomes taxes 3,989 2,762 2,007 Federal incomes taxes: Current 1,210 620 640 Deferred 7 319 35 ________ ________ ________ Total federal income taxes 1,217 939 675 ________ ________ ________ NET EARNINGS $ 2,772 $ 1,823 $ 1,332 ======== ======== ======== Basic earnings per share $ .71 $ .47 $ .34 ======== ======== ======== Diluted earnings per share $ .71 $ .47 $ .34 ======== ======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. ______________________________________ 19 ______________________________________
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME WS______________________________________________________________________________ For the year ended March 31, (In thousands) 2003 2002 2001 _______ _______ _______ Net earnings $ 2,772 $ 1,823 $ 1,332 Other comprehensive income (loss), net of tax: Unrealized holding gains (losses) on securities during the year, net of taxes (benefits) of $59, $(6), and $36 118 (11) 69 Reclassification adjustment for realized gains included in earnings, net of taxes of $9 for the year ended March 31, 2003 (17) -- -- Minimum pension liability adjustment, net of taxes of $142 (275) -- -- _______ _______ _______ Comprehensive income $ 2,598 $ 1,812 $ 1,401 ======= ======= ======= Accumulated comprehensive income (loss) $ (152) $ 22 $ 33 ======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. ______________________________________ 20 ______________________________________
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY ______________________________________________________________________________WS For the years ended March 31, 2003, 2002, and 2001 (Dollars in thousands, except share data) Other compre- Total Additional Shares Treasury hensive stock- Common paid-in Retained acquired stock - income holders' stock capital earnings by ESOP at cost (loss) equity ______ __________ ________ ________ ________ _______ ________ Balance at April 1, 2000 $2,632 $14,393 $ 8,618 $ -- $ (645) $ (36) $ 24,962 Stock options exercised 7 43 -- -- -- -- 50 Net earnings for the year ended March 31, 2001 -- -- 1,332 -- -- -- 1,332 Cash dividends of $.42 per share -- -- (800) -- -- -- (800) Purchase of treasury shares - at cost -- -- -- -- (358) -- (358) Unrealized gains on securities designated as available for sale, net of related tax effects -- -- -- -- -- 69 69 ______ __________ ________ ________ ________ _______ ________ Balance at March 31, 2001 2,639 14,436 9,150 -- (1,003) 33 25,255 Stock options exercised 2 8 -- -- -- -- 10 Net earnings for the year ended March 31, 2002 -- -- 1,823 -- -- -- 1,823 Cash dividends of $.45 per share -- -- (852) -- -- -- (852) Purchase of treasury shares - at cost -- -- -- -- (178) -- (178) Unrealized losses on securities designated as available for sale, net of related tax effects -- -- -- -- -- (11) (11) ______ __________ ________ ________ ________ _______ ________ Balance at March 31, 2002 2,641 14,444 10,121 -- (1,181) 22 26,047 Stock options exercised 3 13 -- -- -- -- 16 Reorganization and related common stock offering - net (2,255) 19,751 -- (1,612) 1,181 -- 17,065 Net earnings for the year ended March 31, 2003 -- -- 2,772 -- -- -- 2,772 Dividends declared of $.45 per share -- -- (1,063) -- -- -- (1,063) Minimum pension liability adjustment, net of related tax effects -- -- -- -- -- (275) (275) Unrealized gains on securities designated as available for sale, net of related tax effects -- -- -- -- -- 101 101 ______ __________ ________ ________ ________ _______ ________ Balance at March 31, 2003 $ 389 $34,208 $ 11,830 $ (1,612) $ -- $ (152) $ 44,663 ====== ========== ======== ======== ======== ====== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. ______________________________________ 21 ______________________________________
CONSOLIDATED STATEMENTS OF CASH FLOWS WS______________________________________________________________________________ For the year ended March 31, (In thousands) 2003 2002 2001 ________ ________ _________ Cash flows provided by (used in) operating activities: Net earnings for the year $ 2,772 $ 1,823 $ 1,332 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Amortization of discounts and premiums on loans, investments and mortgage-backed securities-- net 480 (3) (16) Amortization of deferred loan origination fees (460) (432) (161) Depreciation and amortization 555 590 555 Gain on sale of loans (57) (241) (62) Gain on sale of mortgage-backed securities available for sale (26) -- -- Proceeds from sale of loans in the secondary market 4,055 27,371 9,247 Loans originated for sale in the secondary market (2,615) (26,269) (9,729) Provision for losses on loans 91 134 96 Federal Home Loan Bank stock dividends (177) (219) (247) Increase (decrease) in cash due to changes in: Accrued interest receivable on loans 205 175 (73) Accrued interest receivable on mortgage-backed securities (297) (41) 18 Accrued interest receivable on investments and interest-bearing deposits (63) (39) 143 Prepaid expenses and other assets 167 (403) (272) Accrued interest payable 12 (22) 17 Accounts payable on mortgage loans serviced for others 14 (118) 134 Other liabilities 136 (65) 282 Federal income taxes Current (120) 55 217 Deferred 7 319 35 ________ ________ _________ Net cash provided by operating activities 4,679 2,615 1,516 Cash flows provided by (used in) investing activities: Purchase of investment securities held to maturity (13,953) (16,250) (2,477) Purchase of investment securities designated as available for sale (25,649) -- -- Proceeds from maturity of investment securities held to maturity 17,420 7,617 12,069 Proceeds from maturity of investments securities designated as available for sale 8,573 -- -- Purchase of mortgage-backed securities held to maturity (3,545) (12,108) (2,025) Purchase of mortgage-backed securities designated available for sale (73,897) (2,047) -- Principal repayments on mortgage-backed securities held to maturity 7,368 3,894 3,344 Principal repayments on mortgage-backed securities designated as available for sale 6,596 1,482 653 Proceeds from sale of mortgage-backed securities 4,594 -- -- Loan principal repayments 80,362 66,077 56,485 Loan disbursements (58,616) (70,239) (65,986) Purchase of office premises and equipment (165) (1,018) (1,115) Purchase of bank-owned life insurance (5,000) -- -- Increase in cash surrender value of life insurance (121) -- -- Proceeds from sale of land and other real estate 8 12 249 (Increase) decrease in certificates of deposit in other financial institutions -- 5,700 (1,700) Purchase of Federal Home Loan Bank stock (97) (38) (103) ________ ________ _________ Net cash used in investing activities (56,122) (16,918) (606) ________ ________ _________ Net cash provided by (used in) operating and investing activities (balance carried forward) (51,443) (14,303) 910 ________ ________ _________
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. ______________________________________ 22 ______________________________________ ______________________________________________________________________________WS
For the year ended March 31, (In thousands) 2003 2002 2001 ________ ________ _________ Net cash provided by (used in) operating and investing activities (balance brought forward) $(51,443) $(14,303) $ 910 Cash flows provided by (used in) financing activities: Net increase (decrease) in deposit accounts (26) 23,251 12,754 Proceeds from Federal Home Loan Bank advances 25,000 5,000 11,000 Repayments of Federal Home Loan Bank advances -- (6,000) (17,000) Advances by borrowers for taxes and insurance (168) 53 50 Reorganization and cash proceeds from related common stock offering - net 17,065 -- -- Dividends paid on common stock (831) (852) (800) Proceeds from exercise of stock options 16 10 50 Purchase of treasury shares - at cost -- (178) (358) ________ ________ _________ Net cash provided by financing activities 41,056 21,284 5,696 ________ ________ _________ Net increase (decrease) in cash and cash equivalents (10,387) 6,981 6,606 Cash and cash equivalents at beginning of year 27,883 20,902 14,296 ________ ________ _________ Cash and cash equivalents at end of year $ 17,496 $ 27,883 $ 20,902 ======== ======== ========= Supplemental disclosure of cash flow information: Cash paid during the year for: Federal income taxes $ 1,083 $ 637 $ 490 Interest on deposits and borrowings $ 9,157 $ 12,370 $ 13,083 Supplemental disclosure of noncash investing and financing activities: Transfers from loans to real estate acquired through foreclosure -- $ -- $ 98 Issuance of mortgage loan upon sale of impaired loan $ 450 $ 93 $ 50 Unrealized gains (losses) on securities designated as available for sale, net of related tax effects $ 101 $ (11) $ 69 Minimum pension liability adjustment, net of related tax effects $ 275 $ -- $ -- Recognition of mortgage servicing rights in accordance with SFAS No. 140 $ 24 $ 273 $ 92 Dividends payable $ 232 $ 208 $ 200 ======== ======== =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE STATEMENTS. ______________________________________ 23 ______________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS WS______________________________________________________________________________ March 31, 2003, 2002, and 2001 NOTE A -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements include Wayne Savings Bancshares, Inc. (the "Company") and its wholly-owned subsidiary Wayne Savings Community Bank ("Wayne Savings" or the "Bank"). Prior to the fiscal year ended March 31, 2003, a majority (52.5%) of the Company's shares were owned by Wayne Savings Bankshares M.H.C. ("Bankshares," "parent" or "M.H.C."), a mutual holding company, as defined under Office of Thrift Supervision ("OTS") regulations. On January 8, 2003, the Company completed a reorganization and related common stock offering which culminated with the M.H.C. merging with and into the Bank in a manner similar to a pooling-of-interests. In fiscal 1999, Bankshares and Wayne Savings formed a new federal savings bank subsidiary of Wayne Savings in North Canton, Ohio, Village Savings Bank, F. S. B. ("Village"), hereinafter collectively referred to as "the Banks." Intercompany transactions and balances are eliminated in the consolidated financial statements. The Banks conduct a general banking business in north central Ohio, which consists of attracting deposits from the general public and applying those funds to the origination of loans for residential, consumer and nonresidential purposes. The Banks' profitability is significantly dependent on their net interest income, which is the difference between interest income generated from interest-earning assets (i.e. loans and investments) and the interest expense paid on interest-bearing liabilities (i.e. customer deposits and borrowed funds). Net interest income is affected by the relative amount of interest-earning assets and interest-bearing liabilities and the interest received or paid on these balances. The level of interest rates paid or received by the Banks can be significantly influenced by a number of environmental factors, such as governmental monetary policy, that are outside of management's control. The financial information presented herein has been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and general accounting practices within the financial services industry. In preparing financial statements in accordance with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from such estimates. The following is a summary of the Company's significant accounting policies, which have been consistently applied in the preparation of the accompanying financial statements. 1. INVESTMENT SECURITIES AND MORTGAGE-BACKED SECURITIES The Company accounts for investment and mortgage-backed securities in accordance with Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires that investments be categorized as held-to-maturity, trading, or available for sale. Securities classified as held-to-maturity are carried at cost only if the Company has the positive intent and ability to hold these securities to maturity. Trading securities and securities designated as available for sale are carried at fair value with resulting unrealized gains or losses recorded to operations or stockholders' equity, respectively. Realized gains or losses on sales of securities are recognized using the specific identification method. 2. LOANS RECEIVABLE Loans held in portfolio are stated at the principal amount outstanding, adjusted for deferred loan origination fees, the allowance for loan losses, and premiums and discounts on loans purchased and sold. Premiums and discounts on loans purchased and sold are amortized and accreted to operations using the interest method over the average life of the underlying loans. Interest is accrued as earned unless the collectibility of the loan is in doubt. Uncollectible interest on loans that are contractually past due is charged off, or an allowance is established based on management's periodic evaluation. The allowance is established by a charge to interest income equal to all interest previously accrued, and income is subsequently recognized only to the extent that cash payments are received until, in management's judgment, the borrower's ability to make periodic interest and principal payments has returned to normal, in which case the loan is returned to accrual status. The Banks recognize rights to service mortgage loans for others pursuant to SFAS No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." In accordance with SFAS No. 140, an institution that acquires mortgage servicing rights through either the purchase or origination of mortgage loans and sells those loans with servicing rights retained must allocate some of the cost of the loans to the mortgage servicing rights. The Banks recognized $24,000, $273,000 and $92,000 of pre-tax gains on sales of loans related to capitalized mortgage servicing rights during the fiscal years ended March 31, 2003, 2002 and 2001, respectively. SFAS No. 140 requires that capitalized mortgage servicing rights be assessed for impairment. Impairment is measured based on fair value. The mortgage servicing rights recorded by the Banks, calculated in accordance with the provisions of SFAS No. 140, were segregated into pools for valuation purposes, using as pooling criteria the loan term and coupon rate. Once pooled, each grouping of loans was evaluated on a discounted earnings basis to determine the present value of future earnings that a purchaser could expect to realize from each portfolio. Earnings were projected from a variety of sources including loan servicing fees, interest earned on float, ______________________________________ 24 ______________________________________ net interest earned on escrows, miscellaneous income and costs to service the loans. The present value of future earnings is the "economic" value for the pool, i.e., the net realizable present value to an acquirer of the acquired servicing. The Banks recorded amortization related to mortgage servicing rights totaling approximately $164,000, $109,000 and $52,000 for the years ended March 31, 2003, 2002 and 2001, respectively. At March 31, 2003 and 2002, the carrying value of the Banks' mortgage servicing rights, which approximated fair value, totaled $381,000 and $521,000, respectively. Loans held for sale are carried at the lower of cost or market, determined in the aggregate. In computing cost, deferred loan origination fees are deducted from the principal balances of the related loans. There were no loans identified as held for sale at either March 31, 2003, or March 31, 2002. 3. LOAN ORIGINATION FEES The Banks account for loan origination fees in accordance with SFAS No. 91 "Accounting for Nonrefundable Fees and Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases." Pursuant to the provisions of SFAS No. 91, origination fees received from loans, net of certain direct origination costs, are deferred and amortized to interest income using the level-yield method, giving effect to actual loan prepayments. Additionally, SFAS No. 91 generally limits deferred loan origination costs to the direct costs attributable to the origination of a loan, i.e. principally actual personnel costs. Fees received for loan commitments that are expected to be drawn upon, based on the Banks' experience with similar commitments, are deferred and amortized over the life of the loan using the level-yield method. Fees for other loan commitments are deferred and amortized over the loan commitment period on a straight-line basis. 4. ALLOWANCE FOR LOAN LOSSES It is the Banks' policy to provide valuation allowances for losses inherent within the loan portfolio that are both probable and can be reasonably estimated. When the collection of a loan becomes doubtful, or otherwise troubled, the Banks record a charge-off equal to the difference between the fair value of the property securing the loan and the loan's carrying value. In providing valuation allowances, costs of holding real estate, including the cost of capital, are considered. Major loans (including development projects) and major lending areas are reviewed periodically to determine potential problems at an early date. The allowance for loan losses is increased by charges to earnings and decreased by charge-offs (net of recoveries). The Banks account for impaired loans in accordance with SFAS No. 114, "Accounting by Creditors for Impairment of a Loan." This Statement requires that impaired loans be measured based upon the present value of expected future cash flows discounted at the loan's effective interest rate or, as an alternative, at the loan's observable market price or fair value of the collateral. A loan is defined under SFAS No. 114 as impaired when, based on current information and events, it is probable that a creditor will be unable to collect all amounts due according to the contractual terms of the loan agreement. In applying the provisions of SFAS No. 114, the Banks consider investment in one-to-four family residential loans and consumer installment loans to be homogeneous and therefore excluded from separate identification for evaluation of impairment. With respect to the Banks' investment in multi-family, commercial and nonresidential loans, and the evaluation of impairment thereof, such loans are collateral dependent and, as a result, are carried as a practical expedient at the lower of cost or fair value. It is the Banks' policy to charge off unsecured credits that are more than ninety days delinquent. Similarly, collateral dependent loans are evaluated for impairment at the time it becomes possible that the Banks will not collect all contractual amounts due. Generally, this analysis is performed before a loan becomes ninety days delinquent. Information with respect to loans defined as impaired under SFAS No. 114 is summarized below: 2003 2002 2001 ______ ______ ____ (In thousands) Investment in impaired loans $1,811 $3,012 $645 Impaired loans with no measurement of loss 1,811 2,493 645 Impaired loans with measurement of loss -- 519 -- Allocated allowance for loan losses -- 105 -- Average impaired loans 2,412 1,829 793 Charge-off of principal related to impaired loans 84 -- 172 During the time a loan is deemed impaired, the Company records interest income using the cash method of accounting. Interest income on impaired loans totaled approximately $24,000, $233,000 and $71,000 for the fiscal years ended March 31, 2003, 2002 and 2001. 5. OFFICE PREMISES AND EQUIPMENT Office premises and equipment are carried at cost and include expenditures which extend the useful lives of existing assets. Maintenance, repairs and minor renewals are expensed as incurred. For financial reporting, depreciation and amortization are provided on the straight-line method over the remaining useful lives of the assets, estimated to be ______________________________________ 25 ______________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T.) WS______________________________________________________________________________ March 31, 2003, 2002, and 2001 twenty to fifty-five years for buildings and improvements, five to ten years for furniture and equipment, ten to twenty years for leasehold improvements, and forty years for safe deposit boxes. An accelerated method is used for tax reporting purposes. 6. REAL ESTATE ACQUIRED THROUGH FORECLOSURE Real estate acquired through foreclosure is carried at the lower of the loan's unpaid principal balance (cost) or fair value less estimated selling expenses at the date of acquisition. Real estate loss provisions are recorded if the properties' fair value subsequently declines below the value determined at the recording date. In determining the lower of cost or fair value at acquisition, costs relating to development and improvement of property are capitalized. Costs relating to holding real estate acquired through foreclosure, net of rental income, are charged against earnings as incurred. 7. FEDERAL INCOME TAXES The Company accounts for federal income taxes pursuant to SFAS No. 109 "Accounting for Income Taxes." In accordance with SFAS No. 109, a deferred tax liability or deferred tax asset is computed by applying the current statutory tax rates to net taxable or deductible temporary differences between the tax basis of an asset or liability and its reported amount in the financial statements that will result in net taxable or deductible amounts in future periods. Deferred tax assets are recorded only to the extent that the amount of net deductible temporary differences or carryforward attributes may be utilized against current period earnings, carried back against prior years' earnings, offset against taxable temporary differences reversing in future periods, or utilized to the extent of management's estimate of future taxable income. A valuation allowance is provided for deferred tax assets to the extent that the value of net deductible temporary differences and carryforward attributes exceeds management's estimates of taxes payable on future taxable income. Deferred tax liabilities are provided on the total amount of net temporary differences taxable in the future. The Company's principal temporary differences between pretax financial income and taxable income result primarily from the different methods of accounting for deferred loan origination fees, Federal Home Loan Bank stock dividends, certain components of retirement expense, general loan loss allowances, percentage of earnings bad debt deductions and mortgage servicing rights. A temporary difference is also recognized for depreciation expense computed using accelerated methods for federal income tax purposes. 8. EARNINGS PER SHARE Basic earnings per common share is computed based upon the weighted-average number of common shares outstanding during the year, restated for the effects of the Company's reorganization and related stock offering. Diluted earnings per common share include the dilutive effect of additional potential common shares issuable under the Company's stock option plan. For each of the years presented, there were no shares excluded from the diluted earnings per share calculation because the related options were anti-dilutive. The computations are as follows: 2003 2002 2001 _________ _________ _________ Weighted-average common shares outstanding (basic) 3,887,881 3,884,253 3,923,436 Dilutive effect of assumed exercise of stock options 14,196 16,372 17,756 _________ _________ _________ Weighted-average common shares outstanding (diluted) 3,902,077 3,900,625 3,941,192 ========= ========= ========= 9. STOCK OPTION PLANS The Company has an incentive Stock Option Plan that provided for the issuance of 196,390 adjusted shares of authorized, but unissued shares of common stock. The Company also has a non-incentive Stock Option Plan that provided for the issuance of 82,223 shares of authorized, but unissued shares of common stock. The Company accounts for its stock option plans in accordance with SFAS No. 123, "Accounting for Stock-Based Compensation," which provides a fair value-based method for valuing stock-based compensation that entities may use, which measures compensation cost at the grant date based on the fair value of the award. Compensation is then recognized over the service period, which is usually the vesting period. Alternatively, SFAS No. 123 permits entities to continue to account for stock options and similar equity instruments under Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities that continue to account for stock options using APB Opinion No. 25 are required to make pro forma disclosures of net earnings and earnings per share, as if the fair value-based method of accounting defined in SFAS No. 123 had been applied. Management has determined that the Company will continue to account for stock based compensation pursuant to APB Opinion No. 25. In accordance with APB Opinion No. 25, no compensation cost has been recognized for the plans. Had compensation cost for the Company's stock option plans been determined based on the fair value at the grant dates for awards under the plans consistent with the accounting method ______________________________________ 26 ______________________________________ ______________________________________________________________________________WS utilized in SFAS No. 123, the Company's net earnings and earnings per share would have been reported in the manner presented below: 2003 2002 2001 ______ ______ ______ Net earnings $2,772 $1,823 $1,332 Stock-based compensation, net of tax (21) -- -- ______ ______ ______ Pro forma net earnings $2,751 $1,823 $1,332 ====== ====== ====== Earnings per share Basic $ .71 $ .47 $ .34 Stock-based compensation, net of tax -- -- -- ______ ______ ______ Pro forma earnings per share $ .71 $ .47 $ .34 ====== ====== ====== Diluted $ .71 $ .47 $ .34 Stock-based compensation, net of tax (.01) -- -- ______ ______ ______ Pro forma earnings per share $ .70 $ .47 $ .34 ====== ====== ====== The following information applies to options outstanding at March 31, 2003: Number outstanding 18,543 Range of exercise prices $3.31 Number outstanding 10,123 Range of exercise prices $11.67 Weighted-average exercise price $6.26 Weighted-average remaining contractual life 3.52 At March 31, 2003, all of the stock options granted were subject to exercise at the discretion of the grantees and expire in fiscal 2004. A summary of the status of the Company's stock option plans as of March 31, 2003, 2002 and 2001, and changes during the years ending on those dates is presented below:
2003 2002 2001 ___________________ ___________________ ___________________ Exercise Exercise Exercise Shares Price Shares Price Shares Price ______ ________ ______ ________ ______ ________ Outstanding at beginning of year 23,378 $ 3.31 26,400 $3.31 41,787 $3.31 Granted 10,123 11.67 -- -- -- -- Exercised (4,835) 3.31 (3,022) 3.31 (11,936) 3.31 Forfeited -- -- -- -- (3,451) 3.31 ______ ________ ______ ________ ______ ________ Outstanding at end of year 28,666 $ 6.26 23,378 $3.31 26,400 $3.31 ====== ======== ====== ======== ====== ======== Options exercisable at year-end 28,666 $ 6.26 23,378 $3.31 26,400 $3.31 ====== ======== ====== ======== ====== ======== Fair value of options granted $ 3.17 -- -- ======== ======== ========
________________________________________________________________________________ 10. CASH AND CASH EQUIVALENTS For purposes of reporting cash flows, cash and cash equivalents include cash and due from banks, federal funds sold, and interest-bearing deposits due from other financial institutions with original maturities of less than three months. 11. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires disclosure of the fair value of financial instruments, both assets and liabilities whether or not recognized in the consolidated statements of financial condition, for which it is practicable to estimate that value. For financial instruments where quoted market prices are not available, fair values are based on estimates using present value and other valuation methods. The methods used are greatly affected by the assumptions applied, including the discount rate and estimates of future cash flows. Therefore, the fair values presented may not represent amounts that could be realized in an exchange for certain financial instruments. The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments at March 31, 2003 and 2002: CASH AND CASH EQUIVALENTS: The carrying amounts presented in the consolidated statements of financial condition for cash and cash equivalents are deemed to approximate fair value. INTEREST-BEARING DEPOSITS IN OTHER FINANCIAL INSTITUTIONS: The carrying amounts presented in the consolidated statements of financial condition for certificates of deposit in other financial institutions are deemed to approximate fair value. INVESTMENT AND MORTGAGE-BACKED SECURITIES: For investment and mortgage-backed securities, fair value is deemed to equal the quoted market price. ______________________________________ 27 ______________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T.) WS______________________________________________________________________________ March 31, 2003, 2002, and 2001 LOANS RECEIVABLE: The loan portfolio has been segregated into categories with similar characteristics, such as one-to-four family residential, multi-family residential and nonresidential real estate. These loan categories were further delineated into fixed-rate and adjustable-rate loans. The fair values for the resultant loan categories were computed via discounted cash flow analysis, using current interest rates offered for loans with similar terms to borrowers of similar credit quality. For loans on deposit accounts and consumer and other loans, fair values were deemed to equal the historic carrying values. The historical carrying amount of accrued interest on loans is deemed to approximate fair value. FEDERAL HOME LOAN BANK STOCK: The carrying amount presented in the consolidated statements of financial condition is deemed to approximate fair value. DEPOSITS: The fair value of NOW accounts, passbook and club accounts, money market deposits and advances by borrowers is deemed to approximate the amount payable on demand. Fair values for fixed-rate certificates of deposit have been estimated using a discounted cash flow calculation using the interest rates currently offered for deposits of similar remaining maturities. ADVANCES FROM FEDERAL HOME LOAN BANK: The fair value of these advances is estimated using the rates currently offered for similar advances of similar remaining maturities or, when available, quoted market prices. COMMITMENTS TO EXTEND CREDIT: For fixed-rate and adjustable-rate loan commitments, the fair value estimate considers the difference between current levels of interest rates and committed rates. At March 31, 2003 and 2002, the difference between the fair value and notional amount of loan commitments was not material. Based on the foregoing methods and assumptions, the carrying value and fair value of the Company's financial instruments at March 31 are as follows: 2003 2002 __________________ _____________________ Carrying Fair Carrying Fair value value value value ________ ________ ________ ________ (In thousands) Financial assets Cash and cash equivalents and interest-bearing deposits $ 17,496 $ 17,496 $ 27,883 $ 27,883 Investment securities 35,841 36,247 22,286 22,098 Mortgage-backed securities 76,002 76,078 17,326 17,284 Loans receivable 228,373 236,633 251,172 253,233 Federal Home Loan Bank stock 4,041 4,041 3,767 3,767 ________ ________ ________ ________ $361,753 $370,495 $322,434 $324,265 ======== ======== ======== ======== Financial liabilities Deposits $300,931 $303,316 $300,957 $301,292 Advances from the Federal Home Loan Bank 30,000 30,515 5,000 5,025 Advances by borrowers for taxes and insurance 712 712 880 880 ________ ________ ________ ________ $331,643 $334,543 $306,837 $307,197 ======== ======== ======== ======== 12. ADVERTISING Advertising costs are expensed when incurred. The Company's advertising expense totaled $151,000, $136,000 and $106,000 for the fiscal years ended March 31, 2003, 2002 and 2001, respectively. 13. IMPACT OF RECENT ACCOUNTING PRONOUNCEMENTS In June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 provides financial accounting and reporting guidance for costs associated with exit or disposal activities, including one-time termination benefits, contract termination costs other than for a capital lease, and costs to consolidate facilities or relocate employees. SFAS No. 146 is effective for exit or disposal activities initiated after December 31, 2002. SFAS No. 146 is not expected to have a material effect on the Company's financial condition or results of operations. In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123, "Accounting for Stock-Based Compensation," to provide alternative methods of transition for a voluntary change to ______________________________________ 28 ______________________________________ ______________________________________________________________________________WS the fair value based method of accounting for stock-based employee compensation. In addition, SFAS No. 148 amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS No. 148 is effective for fiscal years beginning after December 15, 2002. The expanded annual disclosure requirements and the transition provisions are effective for fiscal years ending after December 15, 2002. The interim disclosure provisions are effective for financial reports containing financial statements for interim periods beginning after December 15, 2002. SFAS No. 148 is not expected to have a material effect on the Company's consolidated financial position or results of operations. In November 2002, the FASB issued Financial Interpretation No. 45 ("FIN 45"), "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others." FIN 45 requires a guarantor entity, at the inception of a guarantee covered by the measurement provisions of the interpretation, to record a liability for the fair value of the obligation undertaken in issuing a guarantee. Financial letters of credit require the Company to make payment in the customer's financial condition deteriorates, as defined in the agreements. FIN 45 requires the Company to record an initial liability generally equal to the fees received for these letters of credit, when guaranteeing obligations unless it became probable that the Company would have to perform under the guarantee. FIN 45 applies prospectively to letters of credit the Company issues or modifies subsequent to December 31, 2002. The Company adopted FIN 45 in fiscal 2003, without material effect on its financial statements. The Company defines the initial fair value of these letters of credit as the fee received from the customer. The maximum potential undiscounted amount of future payments of these letters of credit as of March 31, 2003 totaled $5,000. Amounts due under these letters of credit would be reduced by any proceeds that the Company would be able to obtain in liquidating the collateral for the loans, which varies depending on the customer. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities." FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority of the risk of loss from the variable interest entity's activities or entitled to receive a majority of the entity's residual returns, or both. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. FIN 46 is not expected to have a material effect on the Company's consolidated financial position or results of operations. 14. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the March 31, 2003 consolidated financial statement presentation. NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES Carrying values and estimated fair values of investment securities at March 31 are summarized as follows: March 31, 2003 __________________________________________________ Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value _________ __________ __________ _________ (In thousands) Held-to-maturity Corporate bonds and notes $10,587 $ 218 $ 22 $10,783 U.S. Government and agency obligations 8,093 201 4 8,290 Municipal obligations 125 13 -- 138 _______ _____ _____ _______ $18,805 $ 432 $ 26 $19,211 ======= ===== ===== ======= Available for sale Mutual funds $10,009 $ -- $ -- $10,009 Corporate bonds and notes 1,534 -- 3 1,531 U.S. Government and agency obligations 2,022 -- 3 2,019 Municipal obligations 3,499 10 32 3,477 _______ _____ _____ _______ $17,064 $ 10 $ 38 $17,036 ======= ===== ===== ======= March 31, 2002 __________________________________________________ Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value _________ __________ __________ _________ (In thousands) Held-to-maturity Corporate bonds and notes $ 2,998 $ 53 $ -- $ 3,051 U.S. Government and agency obligations 19,152 56 304 18,904 Municipal obligations 136 7 -- 143 _______ _____ _____ _______ $22,286 $ 116 $ 304 $22,098 ======= ===== ===== ======= ______________________________________ 29 ______________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T.) WS______________________________________________________________________________ March 31, 2003, 2002, and 2001 The amortized cost and estimated fair value of investment securities at March 31, 2003, by term to maturity are shown below. Amortized Estimated cost fair value _________ __________ (In thousands) Held-to-maturity Due in one year or less $ 1,500 $ 1,522 Due within one to three years 9,104 9,467 Due within three to five years 6,983 6,995 Due in over five years 1,218 1,227 _______ _______ $18,805 $19,211 ======= ======= Available for sale Due in one year or less $12,044 $12,038 Due within one to three years 515 515 Due within three to five years 1,006 1,006 Due in over five years 3,499 3,477 _______ _______ $17,064 $17,036 ======= ======= The Company had pledged $3.1 million and $2.3 million in investment securities to secure public deposits at March 31, 2003 and 2002, respectively. The amortized cost, gross unrealized gains, gross unrealized losses and estimated fair values of mortgage-backed securities at March 31, 2003 and 2002, including those designated as available for sale, are summarized as follows: 2003 __________________________________________________ Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value _________ __________ __________ _________ (In thousands) Held-to-maturity Federal Home Loan Mortgage Corporation participation certificates $ 2,976 $ 19 $ 4 $ 2,991 Government National Mortgage Association participation certificates 2,800 32 -- 2,832 Federal National Mortgage Association participation certificates 4,075 29 -- 4,104 _______ _____ ____ _______ $ 9,851 $ 80 $ 4 $ 9,927 ======= ===== ==== ======= Available for sale Federal Home Loan Mortgage Corporation participation certificates $20,403 $ 120 $ -- $20,523 Government National Mortgage Association participation certificates 1,898 23 -- 1,921 Federal National Mortgage Association participation certificates 43,636 150 79 43,707 _______ _____ ____ _______ $65,937 $ 293 $ 79 $66,151 ======= ===== ==== ======= 2002 __________________________________________________ Gross Gross Estimated Amortized unrealized unrealized fair cost gains losses value _________ __________ __________ _________ (In thousands) Held-to-maturity Federal Home Loan Mortgage Corporation participation certificates $ 4,452 $ -- $ 45 $ 4,407 Government National Mortgage Association participation certificates 2,558 16 12 2,562 Federal National Mortgage Association participation certificates 6,867 29 30 6,866 _______ _____ ____ _______ $13,877 $ 45 $ 87 $13,835 ======= ===== ==== ======= Available for sale Federal Home Loan Mortgage Corporation participation certificates $ 1,687 $ 25 $ 5 $ 1,707 Government National Mortgage Association participation certificates 55 9 -- 64 Federal National Mortgage Association participation certificates 1,674 20 16 1,678 _______ _____ ____ _______ $ 3,416 $ 54 $ 21 $ 3,449 ======= ===== ==== ======= The amortized cost of mortgage-backed securities, including those designated as available for sale at March 31, 2003, by contractual term to maturity are shown below. Expected maturities will differ from contractual maturities because borrowers may generally prepay obligations without prepayment penalties. March 31, 2003 Amortized Cost (In thousands) Held-to-maturity Due within three years $ 270 Due after three years 9,581 ________ $ 9,851 ======== Available for sale Due within three years $ 1,301 Due after three years 64,636 ________ $ 65,937 ======== ______________________________________ 30 ______________________________________ ______________________________________________________________________________WS NOTE C -- LOANS RECEIVABLE The composition of the loan portfolio at March 31 is as follows: 2003 2002 -------- -------- (In Thousands) Residential real estate - 1 to 4 family $200,764 $220,145 Residential real estate - multi-family 8,512 7,368 Residential real estate - construction 3,548 8,728 Nonresidential real estate and land 8,211 9,725 Commercial 7,427 5,832 Consumer and other 3,892 6,096 ________ ________ 232,354 257,894 Less: Undisbursed portion of loans in process 2,244 4,616 Deferred loan origination fees 1,059 1,376 Allowance for loan losses 678 730 ________ ________ $228,373 $251,172 ======== ======== As depicted above, the Banks' lending efforts have historically focused on one-to-four family residential and multi-family residential real estate loans, which comprise approximately $210.6 million, or 92%, of the total loan portfolio at March 31, 2003, and $231.6 million, or 92%, of the total loan portfolio at March 31, 2002. Generally, such loans have been underwritten on the basis of no more than an 80% loan-to-value ratio, which has historically provided the Company with adequate collateral coverage in the event of default. Nevertheless, the Banks, as with any lending institution, are subject to the risk that real estate values could deteriorate in their primary lending areas of north central Ohio, thereby impairing collateral values. However, management is of the belief that residential real estate values in the Company's primary lending area are presently stable. As discussed previously, Wayne Savings has sold whole loans and participating interests in loans in the secondary market, retaining servicing on the loans sold. Loans sold and serviced for others totaled approximately $47.9 million, $60.6 million and $47.1 million at March 31, 2003, 2002 and 2001, respectively. In the normal course of business, the Banks have made loans to their directors, officers and their related business interests. Related party loans are made on the same terms that are widely available to other employees, as long as the director or executive officer is not given preferential treatment compared to other participating employees. The aggregate dollar amount of loans outstanding to directors, officers and their related business interests totaled approximately $2.6 million, $2.7 million and $2.5 million at March 31, 2003, 2002 and 2001, respectively. During fiscal 2003, the Company disbursed $190,000 of loans to officers and directors and received principal repayments of $250,000. At March 31, 2003, $2.1 million of the related party loans was a nonresidential real estate loan. NOTE D - ALLOWANCE FOR LOAN LOSSES The activity in the allowance for loan losses is summarized as follows for the years ended March 31: 2003 2002 2001 _____ _____ _____ (In thousands) Balance at beginning of year $ 730 $655 $793 Provision for losses on loans 91 134 96 Charge-offs of loans (158) (63) (240) Recovery of loans previously charged off 15 4 6 _____ ____ ____ Balance at end of year $ 678 $730 $655 ===== ==== ==== As of March 31, 2003, the Banks' allowance for loan losses was comprised solely of a general loan loss allowance, which is includible as a component of regulatory risk-based capital. Nonaccrual, nonperforming and impaired loans totaled approximately $2.5 million, $3.8 million and $1.2 million at March 31, 2003, 2002 and 2001, respectively. During the years ended March 31, 2003, 2002 and 2001, interest income of approximately $208,000, $99,000 and $12,000, respectively, would have been recognized had nonaccrual loans been performing in accordance with contractual terms. NOTE E - OFFICE PREMISES AND EQUIPMENT Office premises and equipment at March 31 are comprised of the following: 2003 2002 _______ _______ (In thousands) Land and improvements $ 1,643 $ 1,617 Office buildings and improvements 6,583 6,439 Furniture, fixtures and equipment 3,112 4,452 Leasehold improvements 356 354 _______ _______ 11,694 12,862 Less accumulated depreciation and amortization 2,876 3,654 _______ _______ $ 8,818 $ 9,208 ======= ======= ______________________________________ 31 ______________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T.) WS______________________________________________________________________________ March 31, 2003, 2002, and 2001 NOTE F - DEPOSITS Deposits consist of the following major classifications at March 31: 2003 2002 ________ ________ DEPOSIT TYPE AND WEIGHTED- (In thousands) AVERAGE INTEREST RATE NOW accounts 2003 - .56% $ 39,982 2002 - .96% $ 38,396 Passbook 2003 - 1.05% 84,478 2002 - 2.25% 77,485 Money Market Investor 2003 - 1.20% 13,647 2002 - 2.13% 11,809 ________ ________ Total demand, transaction and passbook deposits 138,107 127,690 Certificates of deposit Original maturities of: Less than 12 months 2003 - 1.66% 19,400 2002 - 3.09% 28,497 12 months to 24 months 2003 - 2.44% 53,755 2002 - 4.74% 81,005 25 months to 36 months 2003 - 3.92% 15,870 2002 - 4.57% 9,628 More than 36 months 2003 - 4.75% 35,184 2002 - 5.15% 11,843 Jumbo 2003 - 4.04% 38,615 2002 - 5.30% 42,294 ________ ________ Total certificates of deposit 162,824 173,267 ________ ________ Total deposit accounts $300,931 $300,957 ======== ======== At March 31, 2003 and 2002, the Banks had certificates of deposit with balances in excess of $100,000 totaling $48.7 million and $55.5 million, respectively. Interest expense on deposits for the years ended March 31 is summarized as follows: 2003 2002 2001 ______ _______ _______ (In thousands) Passbook $1,474 $ 1,674 $ 1,642 NOW and money market deposit accounts 540 771 875 Certificates of deposit 6,418 9,610 10,135 ______ _______ _______ $8,432 $12,055 $12,652 ====== ======= ======= Maturities of outstanding certificates of deposit at March 31 are summarized as follows: 2003 2002 ________ ________ (In thousands) Less than one year $ 95,625 $142,486 One to three years 34,396 22,282 Over three years 32,803 8,499 ________ ________ $162,824 $173,267 ======== ======== NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK Advances from the Federal Home Loan Bank, collateralized at March 31, 2003 and 2002 by pledges of certain residential mortgage loans totaling $37.5 million and $6.3 million, respectively, and the Banks' investment in Federal Home Loan Bank stock, are summarized as follows: Interest Maturing in year rate ending March 31, 2003 2002 _____________ ________________ _______ _______ (Dollars in thousands) 5.07% - 5.29% 2005 $ 5,000 $ 5,000 3.13% - 3.36% 2007 7,500 -- 3.51% - 3.61% 2008 5,000 -- 4.01% - 4.87% 2009 and thereafter 12,500 -- ------- ----- $30,000 $ 5,000 ====== ===== Weighted-average interest rate 4.15% 5.24% ====== ===== ______________________________________ 32 ______________________________________ ______________________________________________________________________________WS NOTE H - FEDERAL INCOME TAXES The effective tax rates were 30.5%, 34.0% and 33.6% for the fiscal years ended March 31, 2003, 2002 and 2001, respectively. The decrease in the effective tax rate for fiscal 2003 was primarily due to tax-free income arising from various interest-earning assets. The composition of the Company's net deferred tax liability at March 31 is as follows: 2003 2002 _______ _______ (In thousands) Taxes (payable) refundable on temporary differences at statutory rate: Deferred tax assets Deferred loan origination fees $ -- $ 72 General loan loss allowance 231 286 Pension expense 184 20 Reserve for uncollected interest 71 34 Real estate acquired through foreclosure 38 38 Other 69 8 _______ _______ Deferred tax assets 593 458 _______ _______ Deferred tax liabilities Federal Home Loan Bank stock dividends (882) (822) Book/tax depreciation differences (156) (157) Deferred loan origination costs (33) -- Unrealized gains on securities designated as available for sale (63) (11) Tax bad debt reserve (11) (44) Mortgage servicing rights (130) (191) _______ _______ Deferred tax liabilities (1,275) (1,225) _______ _______ Total deferred tax liability $ (682) $ (767) ======= ======= Prior to fiscal 1997, Wayne Savings was allowed a special bad debt deduction based on a percentage of earnings, generally limited to 8% of otherwise taxable income and subject to certain limitations based on aggregate loans and deposit account balances at the end of the year. This cumulative percentage of earnings bad debt deduction totaled approximately $2.7 million as of March 31, 2003. If the amounts that qualified as deductions for federal income taxes are later used for purposes other than bad debt losses, including distributions in liquidation, such distributions will be subject to federal income taxes at the then current corporate income tax rate. The amount of unrecognized deferred tax liability relating to the cumulative bad debt deduction was approximately $918,000 at March 31, 2003. Wayne Savings is required to recapture as taxable income approximately $200,000 of its bad debt reserve, which represents the post-1987 additions to the reserve, and will be unable to utilize the percentage of earnings method to compute the reserve in the future. Wayne Savings has provided deferred taxes for this amount and is amortizing the recapture of the bad debt reserve in taxable income over a six-year period, which commenced in fiscal 1999. At March 31, 2003, the Company's tax return for the year ended March 31, 1999, was under examination. The Company does not expect any material adverse adjustments as a result of the examination. NOTE I - COMMITMENTS The Company is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers, including commitments to extend credit. Such commitments involve, to varying degrees, elements of credit and interest-rate risk in excess of the amount recognized in the consolidated statements of financial condition. The contract or notional amounts of the commitments reflect the extent of the Company's involvement in such financial instruments. The Company's exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making commitments and conditional obligations as those utilized for on-balance-sheet instruments. At March 31, 2003, the Company had total outstanding commitments of approximately $4.0 million to originate loans, of which $2.8 million were comprised of fixed-rate loans at rates ranging from 5.13% to 7.25% and $1.2 million were comprised of adjustable-rate loans at rates ranging from 4.38% to 5.50%. The Company had unused lines of credit outstanding under home equity loans $17.1 million and $13.9 million at March 31, 2003 and 2002. The Company had unused lines of credit outstanding under credit cards of $4.7 million and $4.6 million at March 31, 2003 and 2002, respectively. Additionally, the Company had unused lines of credit under commercial loans of $4.3 million and $4.0 million at March 31, 2003 and 2002. At March 31, 2003 and 2002, the Company had outstanding commitments to purchase $2.0 million and $1.5 million of mortgage-backed securities, respectively. Management believes that all loan and mortgage-backed security commitments at March 31, 2003, are able to be funded through cash flow from operations and existing excess liquidity. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment ______________________________________ 33 ______________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T.) WS______________________________________________________________________________ March 31, 2003, 2002, and 2001 amounts do not necessarily represent future cash requirements. The Company evaluates each customer's creditworthiness on a case-by-case basis. The amount of collateral obtained, if it is deemed necessary by the Company upon extension of credit, is based on management's credit evaluation of the counterparty. Collateral on loans may vary but the preponderance of loans granted generally includes a mortgage interest in real estate as security. The Company leases certain branch banking facilities under operating leases. The minimum annual lease payments over the initial lease term are as follows: Fiscal year ended (In thousands) _________________ ______________ 2004 $ 73 2005 73 2006 73 2007 97 Thereafter 97 --- Total $413 === The Company incurred rental expense under operating leases totaling approximately $68,000, $66,000 and $30,000 for the fiscal years ended March 31, 2003, 2002 and 2001, respectively. There were no material contingent liabilities at March 31, 2003 or 2002. NOTE J - REGULATORY CAPITAL The Banks are subject to minimum regulatory capital standards promulgated by the OTS. Failure to meet minimum capital requirements can initiate certain mandatory -and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Banks must meet specific capital guidelines that involve quantitative measures of the Banks' assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The Banks' capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk-weightings and other factors. The minimum capital standards of the OTS generally require the maintenance of regulatory capital sufficient to meet each of three tests, hereinafter described as the tangible capital requirement, the core capital requirement and the risk-based capital requirement. The tangible capital requirement provides for minimum tangible capital (defined as stockholders' equity less all intangible assets) equal to 1.5% of adjusted total assets. The core capital requirement provides for minimum core capital (tangible capital plus certain forms of supervisory goodwill and other qualifying intangible assets) generally equal to 4.0% of adjusted total assets except for those associations with the highest examination rating and acceptable levels of risk. The risk-based capital requirement provides for the maintenance of core capital plus general loss allowances equal to 8.0% of risk-weighted assets. In computing risk-weighted assets, the Banks multiply the value of each asset on their statement of financial condition by a defined risk-weighting factor, e.g. one- to four-family residential loans carry a risk-weighted factor of 50%. As of March 31, 2003, management believes that the Banks met all capital adequacy requirements to which they were subject. As of the most recent examination date, the Banks were advised by the OTS that they met the definition of "well capitalized" institutions. The Banks' management believes that, under the current regulatory capital regulations, the Banks will continue to meet their minimum capital requirements in the foreseeable future. However, events beyond the control of the Banks, such as increased interest rates or a downturn in the economy in the Banks' market area, could adversely affect future earnings and, consequently, the ability to meet future minimum regulatory capital requirements. The Banks are subject to regulations imposed by the OTS regarding the amount of capital distributions payable to the Company. Generally, the Banks' payment of dividends is limited, without prior OTS approval, to net earnings for the current calendar year, plus the two preceding years, less capital distributions paid over the comparable time period. Insured institutions are required to file an application with the OTS for capital distributions in excess of the limitation. Regulations of the OTS governing mutual holding companies permitted Wayne Savings Bankshares M.H.C. (the "M.H.C.") to waive the receipt by it of any dividend declared by the Company or the Bank on the common stock, provided that the OTS does not object to such waiver. The M.H.C. accepted dividends totalling $25,000, $260,000 (of which $258,000 was treated as an offset to previously allocated M.H.C. costs) and $75,000 during fiscal years 2002, 2001 and 2000, respectively. For the fiscal year ended March 31, 2003, the M.H.C. waived its share of all dividends declared on the common stock. Total dividends waived by the M.H.C. through the date of conversion amounted to $6.2 million. ______________________________________ 34 ______________________________________ ______________________________________________________________________________WS
WAYNE SAVINGS COMMUNITY BANK AS OF MARCH 31, 2003 (Dollars in thousands) Required to be "well- Required for capital capitalized" under prompt Actual adequacy purposes corrective action provisions ___________________ _______________________________ ____________________________ Amount Ratio Amount Ratio Amount Ratio Tangible capital $38,069 10.2% >$ 5,604 >1.5% >$ 18,680 > 5.0% Core capital $38,069 10.2% >$14,944 >4.0% >$ 22,416 > 6.0% Risk-based capital $38,748 20.2% >$15,353 >8.0% >$ 19,191 >10.0% WAYNE SAVINGS COMMUNITY BANK AS OF MARCH 31, 2002 (Dollars in thousands) Required to be "well- Required for capital capitalized" under prompt Actual adequacy purposes corrective action provisions ___________________ _______________________________ ____________________________ Amount Ratio Amount Ratio Amount Ratio Tangible capital $26,063 7.8% >$ 5,021 >1.5% >$ 16,736 > 5.0% Core capital $26,063 7.8% >$13,389 >4.0% >$ 20,083 > 6.0% Risk-based capital $26,793 14.2% >$15,108 >8.0% >$ 18,885 >10.0% ________________________________________________________________________________ VILLAGE SAVINGS BANK, F.S.B. AS OF MARCH 31, 2003 (Dollars in thousands) Required to be "well- Required for capital capitalized" under prompt Actual adequacy purposes corrective action provisions ___________________ _______________________________ ____________________________ Amount Ratio Amount Ratio Amount Ratio Tangible capital $5,311 10.5% >$ 759 >1.5% >$ 2,529 > 5.0% Core capital $5,311 10.5% >$ 2,023 >4.0% >$ 3,034 > 6.0% Risk-based capital $5,358 28.7% >$ 1,471 >8.0% >$ 1,839 >10.0% VILLAGE SAVINGS BANK, F.S.B. AS OF MARCH 31, 2002 (Dollars in thousands) Required to be "well- Required for capital capitalized" under prompt Actual adequacy purposes corrective action provisions ___________________ _______________________________ ____________________________ Amount Ratio Amount Ratio Amount Ratio Tangible capital $2,865 7.0% >$ 614 >1.5% >$ 2,047 > 5.0% Core capital $2,865 7.0% >$ 1,637 >4.0% >$ 2,456 > 6.0% Risk-based capital $2,906 15.8% >$ 1,471 >8.0% >$ 1,838 >10.0%
______________________________________ 35 ______________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T.) WS______________________________________________________________________________ March 31, 2003, 2002, and 2001 NOTE K - PENSION AND BENEFIT PLANS The Company has a non-contributory insured defined benefit pension plan (the "Plan") covering all eligible employees. The Plan benefits are based on years-of-service and other factors. The Company's funding policy is to contribute at least annually amounts sufficient to satisfy legal funding requirements plus such additional tax-deductible amounts deemed advisable under the circumstances. Contributions are intended to provide not only for benefits attributed to service-to-date, but also for those expected to be earned in the future. Information with respect to the Plan for the years ended March 31, 2003, 2002 and 2001 is as follows: The changes in benefit obligations are computed as follows: 2003 2002 2001 ______ ______ ______ (In thousands) Projected benefit obligation at beginning of year $1,592 $1,280 $1,117 Service cost 55 63 58 Interest cost 124 101 83 Actuarial loss 428 203 39 Benefits paid (197) (55) (17) ______ ______ ______ Projected benefit obligation at end of year $2,002 $1,592 $1,280 ====== ====== ====== The changes in the Plan's assets are computed as follows: 2003 2002 2001 ______ ______ ______ (In thousands) Fair value of plan assets at beginning of year $1,508 $1,283 $1,122 Actual return on plan assets (22) 68 3 Employer contributions 210 212 175 Benefits paid (197) (55) (17) ______ ______ ______ Fair value of plan assets at end of year $1,499 $1,508 $1,283 ====== ====== ====== The following table sets forth the Plan's funded status at March 31: 2003 2002 ______ ______ (In thousands) Funded status $ (84) $ (84) Unrecognized net actuarial loss -- (42) Unrecognized net transition liability -- 42 Minimum additional liability (417) -- ______ ______ Accrued pension cost $ (501) $ (84) ====== ====== The weighted-average actuarial assumptions used were: 2003 2002 2001 ______ ______ ______ Weighted-average discount rate 8.00% 7.25% 7.50% Weighted-average rate of compensation increase 1.00% 1.00% 1.00% Weighted-average expected long-term rate of return on plan assets 7.00% 7.00% 7.00% ====== ====== ====== Net periodic pension costs includes the following components: 2003 2002 2001 ______ ______ ______ (In thousands) Service cost $ 55 $ 63 $ 58 Interest cost 124 101 83 Actual return on plan assets 21 (68) (3) Amortization of prior net loss 2 199 141 Amortization of net transition obligation 6 6 6 Unrecognized net actuarial loss (131) (27) (81) ______ ______ ______ Net periodic pension cost $ 77 $ 274 $ 204 ====== ====== ====== Plan assets were invested in life insurance contracts and $1.0 million of deposits at the Bank. As previously stated, the Banks have a savings plan covering substantially all employees who meet certain age and service requirements. Under the plan, the Banks match participant contributions up to 2% of each participant's compensation during the year. This contribution is dependent on availability of sufficient net earnings from current or prior years. Additional contributions may be made as approved by the Board of Directors. Expense under the plan totaled approximately $46,000, $44,000 and $44,000 for the fiscal years ended March 31, 2003, 2002 and 2001, respectively. ______________________________________ 36 ______________________________________ ______________________________________________________________________________WS NOTE L - SERVICE FEES, CHARGES AND OTHER OPERATING INCOME Service fees, charges and other operating income for the year ended March 31 is comprised of the following items: 2003 2002 2001 ______ ______ ______ (In thousands) Deposit fee income $ 719 $ 675 $ 501 Loan servicing fee income 139 133 120 Income from credit cards 287 157 69 Other service fees, charges and other operating income 270 178 201 ______ ______ ______ $1,415 $1,143 $ 891 ====== ====== ====== NOTE M - OTHER OPERATING EXPENSE AND M.H.C. EXPENDITURES Other operating expense for the year ended March 31 is comprised of the following items: 2003 2002 2001 ______ ______ ______ (In thousands) Telephone and postage expense $ 253 $ 273 $ 247 Public relations and advertising expense 211 198 214 Stationery, printing and office supplies expense 172 172 189 Supervisory exam expense 152 137 128 Professional services expense 172 154 96 Other operating expenses 866 733 716 ______ ______ ______ $1,826 $1,667 $1,590 ====== ====== ====== Expenses paid by or previously allocated to the M.H.C. were comprised of the following: 2003 2002 2001 ______ ______ ______ (In thousands) Fees related to M.H.C. and subsidiary legal matters $ -- $ 30 $ 134 Intercompany cost allocations -- 5 7 Officer compensation -- -- 9 ______ ______ ______ $ -- $ 35 $ 150 ====== ====== ====== NOTE N - REORGANIZATION AND CHANGE OF CORPORATE FORM In fiscal 2002, the Board of Directors of Wayne Savings Bankshares, M.H.C. (the "M.H.C.") adopted a plan of conversion and reorganization (the "plan") to convert the M.H.C from mutual to stock form and to complete a related stock offering in which shares of common stock representing the MHC's ownership interest in the Company would be sold to investors. The plan was approved by the stockholders of the Company, the depositors of Wayne Savings Community Bank and the Office of Thrift Supervision ("OTS") in fiscal 2003, and the related stock offering was completed on January 8, 2003. As of that date, 1,350,699 shares owned by the M.H.C. were retired and the Company sold 2,040,816 shares of common stock for $10.00 per share. After consideration of the employee stock ownership plan (ESOP) totaling $1.6 million and related expenses of $1.9 million, net proceeds from the stock offering amounted to $17.1 million. An additional 1,847,820 shares were issued to existing shareholders based on an exchange rate of 1.5109 new shares of common stock for each existing share, resulting in 3,888,795 total new shares outstanding. Upon completion of the conversion and stock offering, Wayne Savings Bancshares, Inc. changed its charter to a Delaware holding company and is wholly owned by public stockholders. In the event of a complete liquidation (and only in such event), each eligible member of Wayne's depositors will be entitled to receive a liquidation distribution from the liquidation account in the amount of the then current adjusted balance of deposit accounts held, before any liquidation distribution may be made with respect to common stock. Except for the repurchase of stock and payment of dividends by the Company, the existence of liquidation account will not restrict the use or application of such retained earnings. The Company may not declare, pay a cash dividend on, or repurchase any of its common stock, if the effect thereof would cause retained earnings to be reduced below either the amount required for the liquidation account or the regulatory capital requirements of SAIF insured institutions. ______________________________________ 37 ______________________________________ NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CON'T.) WS______________________________________________________________________________ March 31, 2003, 2002, and 2001 NOTE O -- CONDENSED FINANCIAL STATEMENTS OF WAYNE SAVINGS BANCSHARES, INC. The following condensed financial statements summarize the financial position of Wayne Savings Bancshares, Inc. as of March 31, 2003 and 2002, and the results of its operations and its cash flows for the years ended March 31, 2003, 2002, and 2001.
STATEMENTS OF FINANCIAL CONDITION March 31, 2003 2002 _______ _______ (In thousands) ASSETS Cash and due from banks $ 263 $ 115 Investment securities available for sale at market 5,039 -- Notes receivable from Wayne Savings 1,612 -- Investment in Wayne Savings 38,233 26,140 Prepaid expenses and other 48 851 _______ _______ Total assets $45,195 $27,106 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Accrued expenses and other liabilities $ 532 $ 1,059 Stockholders' equity Common stock and additional paid-in capital 34,597 17,085 Retained earnings 11,830 10,121 Less required contributions for ESOP shares (1,612) -- Less 70,014 shares held in treasury at March 31, 2002 -- (1,181) Accumulated other comprehensive income (loss) (152) 22 _______ _______ Total stockholders' equity 44,663 26,047 _______ _______ Total liabilities and stockholders' equity $45,195 $27,106 ======= =======
STATEMENTS OF EARNINGS For the years ended March 31, 2003 2002 2001 _______ _______ _______ (In thousands) Income Interest income $ 43 $ 1 $ 18 Equity in earnings of subsidiary 2,800 1,928 1,371 _______ _______ _______ Total revenue 2,843 1,929 1,389 General and administrative expenses 192 160 92 _______ _______ _______ Earnings before income tax credits 2,651 1,769 1,297 Federal income tax credits (121) (54) (35) _______ _______ _______ NET EARNINGS $ 2,772 $ 1,823 $ 1,332 ======= ======= =======
STATEMENTS OF CASH FLOWS For the years ended March 31, 2003 2002 2001 _______ _______ _______ (In thousands) Cash flows from operating activities: Net earnings for the year $ 2,772 $ 1,823 $ 1,332 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Undistributed earnings of consolidated subsidiary (2,121) (773) (807) Increase (decrease) in cash due to changes in: Prepaid expenses and other assets 820 (534) (238) Accrued expenses and other liabilities (821) 534 262 _______ _______ _______ Net cash provided by operating activities 650 1,050 549 Cash flows provided by (used in) investing activities Purchase of investment securities designated as available for sale (5,052) -- -- Investment in Wayne Savings - net (11,700) -- -- _______ _______ _______ Net cash provided by investing activities (16,752) -- -- Cash flows provided by (used in) financing activities: Proceeds from reorganization and related stock offering - net 17,065 -- -- Payment of dividends on common stock (831) (852) (800) Purchase of treasury stock -- (178) (358) Proceeds from exercise of stock options 16 10 50 _______ _______ _______ Net cash provided by (used in) financing activities 16,250 (1,020) (1,108) _______ _______ _______ Net increase (decrease) in cash and cash equivalents 148 30 (559) Cash and cash equivalents at beginning of year 115 85 644 _______ _______ _______ Cash and cash equivalents at end of year $ 263 $ 115 $ 85 ======= ======= =======
______________________________________ 38 ______________________________________ ______________________________________________________________________________WS NOTE P - QUARTERLY RESULTS OF OPERATIONS (UNAUDITED) The following table summarizes the Company's quarterly results for the fiscal years ended March 31, 2003 and 2002.
For the three month periods ended _____________________________________________________________________________ June 30, 2002 September 30, 2002 December 31, 2002 March 31, 2003 _____________ __________________ _________________ ______________ (In thousands, except share data) Total interest income $ 5,049 $ 4,877 $ 5,056 $ 5,041 Total interest expense 2,498 2,300 2,305 2,066 _______ _______ _______ _______ Net interest income 2,551 2,577 2,751 2,975 Provision for losses on loans 17 21 37 16 Other income 344 361 468 476 General, administrative and other expense 2,039 2,009 2,107 2,268 _______ _______ _______ _______ Earnings before income taxes 839 908 1,075 1,167 Federal income taxes 285 301 336 295 _______ _______ _______ _______ Net earnings $ 554 $ 607 $ 739 $ 872 ======= ======= ======= ======= Earnings per share Basic $ .15 $ .16 $ .19 $ .21 ======= ======= ======= ======= Diluted $ .15 $ .16 $ .19 $ .21 ======= ======= ======= ======= For the three month periods ended _____________________________________________________________________________ June 30, 2001 September 30, 2001 December 31, 2001 March 31, 2001 _____________ __________________ _________________ ______________ (In thousands, except share data) Total interest income $ 5,416 $ 5,330 $ 5,270 $ 5,293 Total interest expense 3,344 3,212 3,043 2,749 _______ _______ _______ _______ Net interest income 2,072 2,118 2,227 2,544 Provision for losses on loans 2 95 21 16 Other income 364 433 502 358 General, administrative and other expense 1,874 1,831 1,968 2,049 _______ _______ _______ _______ Earnings before income taxes 560 625 740 837 Federal income taxes 185 213 253 288 _______ _______ _______ _______ Net earnings $ 375 $ 412 $ 487 $ 549 ======= ======= ======= ======= Earnings per share Basic $ .10 $ .11 $ .13 $ .13 ======= ======= ======= ======= Diluted $ .10 $ .11 $ .13 $ .13 ======= ======= ======= =======
______________________________________ 39 ______________________________________ REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS WS______________________________________________________________________________ GRANT THORNTON ACCOUNTANTS AND MANAGEMENT CONSULTANTS REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors Wayne Savings Bancshares, Inc. We have audited the accompanying consolidated statements of financial condition of Wayne Savings Bancshares, Inc. as of March 31, 2003 and 2002, and the related consolidated statements of earnings, stockholders' equity, comprehensive income and cash flows for each of the three years in the period ended March 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Wayne Savings Bancshares, Inc. as of March 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended March 31, 2003, in conformity with accounting principles generally accepted in the United States of America. /s/ GRANT THORNTON LLP Grant Thornton LLP Cincinnati, Ohio May 8, 2003 Suite 900 625 Eden Park Drive Cincinnati, OH 45202-4181 T 513.762.5000 F 513.241.6125 W www.grantthornton.com Grant Thornton LLP US Member of Grant Thornton International ______________________________________ 40 ______________________________________ EX-21 7 exhibit21.txt EXHIBIT 21 SUBSIDIARIES Wayne Savings Community Bank Ohio Village Savings Bank, FSB United States EX-23 8 exhibit23.txt Exhibit 23 ACCOUNTANTS CONSENT We have issued our report dated May 8, 2003 accompanying the consolidated financial statements of Wayne Savings Banchares, Inc. which are included in the Annual Report on Form 10-K fir the year ended March 31, 2003. We hereby consent to the inclusion of said report in the Corporation's Form 10-K. /s/ Grant Thorton LLP - --------------------- Grant Thorton LLP Cincinati, Ohio June 23, 2003 EX-99.I 9 exihibit99-1.txt EXHIBIT 99.1 STATEMENT FURNISHED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 The undersigned, Charles F. Finn, is the President and Chief Executive Officer of Wayne Savings Bancshares, Inc. (the "Company"). This statement is being furnished in connection with the filing by the Company of the Company's Annual Report on Form 10-K for the year ended March 31, 2003 (the "Report"). By execution of this statement, I certify that: A) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and B) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. This statement is authorized to be attached as an exhibit to the Report so that this statement will accompany the Report at such time as the Report is filed with the Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934, as amended. June 27, 2003 /s/ Charles F. Finn - ------------- ------------------------------- Dated Charles F. Finn 39 EX-99.2 10 exihibit99-2.txt EXHIBIT 99.2 STATEMENT FURNISHED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002, 18 U.S.C. SECTION 1350 The undersigned, Michael C. Anderson, is the Chief Financial Officer of Wayne Savings Bancshares, Inc. (the "Company"). This statement is being furnished in connection with the filing by the Company of the Company's Annual Report on Form 10-K for the year ended March 31, 2003 (the "Report"). By execution of this statement, I certify that: C) the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)) and D) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company as of the dates and for the periods covered by the Report. This statement is authorized to be attached as an exhibit to the Report so that this statement will accompany the Report at such time as the Report is filed with the Securities and Exchange Commission pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350. It is not intended that this statement be deemed to be filed for purposes of the Securities Exchange Act of 1934, as amended. June 27, 2003 /s/ Michael C. Anderson - ------------- ------------------------------------- Dated Michael C. Anderson 40 -----END PRIVACY-ENHANCED MESSAGE-----