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 ______________________________________