UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C. 20549
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Fiscal Year Ended March 31, 2004
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to ______________________
Commission File No. 0-23433
WAYNE SAVINGS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)
Delaware 31-1557791
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
151 North Market Street, Wooster, Ohio 44691
(Address of Principal Executive Offices) Zip Code
(330) 264-5767
(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par
value $.10 per share
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days.
YES |X| NO |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). YES |_| NO |X|
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the closing sales price of the
Registrant's stock, as reported on the Nasdaq National Market on June 22, 2004,
was approximately $50.4 million. As of June 22, 2004, there were issued and
outstanding 3,794,818 shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents incorporated by reference and the
Part of the Form 10-K into which the document is incorporated.
(1) Portions of the Annual Report to Stockholders for the year ended March 31,
2004 are incorporated into Part II, Items 5 through 8 of this Form 10-K.
(2) Portions of the definitive proxy statement for the 2004 Annual Meeting of
Stockholders are incorporated into Part III, Items 10 through 14 of this
Form 10-K.
PART I
ITEM 1. Business
General
Wayne Savings Bancshares, Inc.
Wayne Savings Bancshares, Inc. (the "Company") was a federal corporation
which was organized on August 5, 1997. The Company was majority-owned by Wayne
Savings Bankshares, M.H.C., a federally-chartered mutual holding company (the
"Mutual Holding Company" or "M.H.C."). On November 25, 1997, the Company
acquired all of the issued and outstanding common stock of the Bank in
connection with the Bank's reorganization into the "two-tier" form of mutual
holding company ownership. At that time, each share of the Bank's common stock
was automatically converted into one share of Company common stock, par value
$1.00 per share (the "Common Stock"). In fiscal 2002, the Board of Directors of
Wayne Savings Bankshares, M.H.C. adopted a plan of conversion and reorganization
the (the "plan") to convert the M.H.C. from mutual to stock form and to complete
a related stock offering in which shares of common stock representing the
M.H.C.'s ownership interest in the Company would be sold to investors. The only
significant asset of the Company is its investment in Wayne Savings Community
Bank (the "Bank").
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. At March 31, 2004, the Company had total assets of
$369.0 million, total deposits of $291.8 million, and stockholders' equity of
$43.6 million.
On June 1, 2004, Wayne Savings Bancshares acquired Stebbins Bancshares,
Inc., and its national bank subsidiary, Stebbins National Bank of Creston, Ohio.
The acquisition of Stebbins National Bank will increase the Company's assets to
approximately $400 million with eleven full service locations.
The Company's principal office is located at 151 North Market Street,
Wooster, Ohio, and its telephone number at that address is (330) 264-5767.
Wayne Savings Community Bank
The Bank is an Ohio-chartered stock savings and loan association
headquartered in Wooster, Ohio. The Bank's deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC") under the Savings Association Insurance
Fund ("SAIF"). The Bank has been a member of the Federal Home Loan Bank ("FHLB")
System since 1937.
On September 30, 2003, Wayne Savings Bancshares, Inc. merged Village
Savings Bank, F.S.B., into Wayne Savings Community Bank. The Company concluded
that significant cost savings and operating efficiencies could be achieved by
discontinuing the separate corporate existence of Village Savings.
The Bank is a community-oriented savings institution offering traditional
financial services to its local community. The Bank's primary lending and
deposit gathering area includes Wayne, Holmes, Ashland, Medina and Stark
counties, where it operates ten full-service offices. This contiguous
five-county area is located in northeast Ohio, and is an active manufacturing
and agricultural market. The Bank's principal business activity consists of
originating one- to four-family residential real estate loans in its market
area. The Bank also originates multi-family residential and non-residential real
estate loans, although such loans constitute a small portion of the Bank's
lending
2
activities and a small portion of the Bank's loan portfolio. The Bank also
originates consumer loans, and to a lesser extent, construction loans. Recently,
the Bank has hired experienced commercial lenders to help develop a commercial
lending program. The Bank also invests in mortgage-backed securities and
currently maintains a significant portion of its assets in liquid investments,
such as United States Government securities, federal funds, and deposits in
other financial institutions.
The Bank's principal executive office is located at 151 North Market
Street, Wooster, Ohio, and its telephone number at that address is (330)
264-5767.
Market Area/Local Economy
The Bank, headquartered in Wooster, Ohio, operates in Wayne, Ashland,
Medina, Holmes and Stark Counties in northeast Ohio. Wooster, Ohio is located in
Wayne County and is approximately midway between Cleveland and Columbus, Ohio.
Wayne County is characterized by a diverse economic base, which is not
dependent on any particular industry. The manufacturing sector employs 26% of
the county's workforce with services and trade sectors employing 20% and 19%,
respectively. It is one of the leading agricultural counties in the state. Since
1892, Wooster has been the headquarters of the Ohio Agricultural Research and
Development Center, the agricultural research arm of The Ohio State University.
In addition, Wayne County is also the home base of such nationally known
companies like J.M. Smucker Company, Worthington Industries/The Gertsenslager
Company, and the Wooster Brush Company. It is also the home of many industrial
plants, including Packaging Corporation of America, International Paper Company,
Morton Salt, and FritoLay, Inc. Early in 2004, Newell Rubbermaid announced the
closing of its Wooster manufacturing facilities impacting 1,200 locally based
jobs. These jobs will cause displacement and relocation of many local
individuals and the reduction of tax revenues for both the City of Wooster and
Wayne County. The City of Wooster has benefited from the commitment of the world
renowned Cleveland Clinic as they have established new state of the art medical
facilities. Wayne County is also known for its excellence in education. The
College of Wooster was founded in 1866 and serves 1,800 students during the
school season. Other quality educational opportunities are offered by the
Agricultural Technical Institute of Ohio State University, and Wayne College, a
branch of The University of Akron. Wayne Savings operates four full-service
offices in Wooster, one stand-alone drive-thru facility and one full-service
office in Rittman.
Ashland County, which is located due west of Wayne County, also has a
diverse economic base. In addition to its agricultural segment, Ashland County
has manufacturing plants producing rubber and plastics, machinery,
transportation equipment, chemicals, apparel, and other items. Ashland is also
the home of Ashland University. The City of Ashland is the county seat and the
location of two of the Bank's branch offices.
Medina County, located just north of Wayne County, is the center of a
fertile agricultural region. Farming remains the largest industry in the county
in terms of dollar value of goods produced. However, over 100 small
manufacturing firms also operate in the county. The City of Medina is located in
the center of the Cleveland-Akron-Lorain Standard Consolidated Statistical
Marketing Area. Medina is located approximately 30 miles south of Cleveland and
15 miles west of Akron. Due to its proximity to Akron and Cleveland, a majority
of Medina County's labor force is employed in these two cities. The Bank
operates one full-service office in Medina County, which is located in the
Village of Lodi.
Holmes County, located directly south of Wayne County, has a mostly rural
economy. The local economy depends mostly upon agriculture, light manufacturing,
fabrics, and wood products. Because of the scenic beauty and a large Amish
settlement, revenues from tourism are becoming increasingly significant. The
county is also noted for its many fine cheese-making operations. A large number
of Holmes County residents are employed in Wayne County. The City of Millersburg
is the county seat and the location of one of the Bank's branch offices.
Stark County, located directly east of Wayne County, is characterized by a
diverse economy and over 1,500 different products are manufactured in the
county. Stark County also has a strong agricultural base, and ranks fourth in
Ohio in the production of dairy products. The major employers in North Canton
are the Hoover Company, Diebold Incorporated (a major manufacturer of bank
security products and automated teller machines) and the Timken Company (a
world-wide manufacturer of tapered roller bearings and specialty steels). The
Hoover
3
Company is currently relocating to Maytag's headquarters in Iowa. Timken has
also had plants close resulting in job loss in the North Canton Region of
approximately 30%. Jackson Township is the home to the Belden Village Shopping
Center, while Plain Township is a residential and agricultural area with a few
widely scattered light industries.
Lending Activities
General. Historically, the principal lending activity of the Company has
been the origination of fixed and adjustable rate mortgage ("ARM") loans
collateralized by one- to four-family residential properties located in its
market area. The Company originates ARM loans for retention in its portfolio,
and fixed rate loans that are eligible for resale in the secondary mortgage
market. The Company also originates loans collateralized by non-residential and
multi-family residential real estate as well as commercial business loans. The
Company also originates consumer loans to broaden services offered to customers
..
The Company has sought to make its interest-earning assets more interest
rate sensitive by originating adjustable rate loans, such as ARM loans, home
equity loans, and medium-term consumer loans. The Company also purchases
mortgage-backed securities generally with estimated remaining average lives of 5
years or less. At March 31, 2004, approximately $148.2 million, or 49.7%, of the
Company's total loans and mortgage-backed securities consisted of loans or
securities with adjustable interest rates.
The Company continues to actively originate fixed rate mortgage loans,
generally with 15 to 30 year terms to maturity, collateralized by one- to
four-family residential properties. One- to four-family fixed rate residential
mortgage loans generally are originated and underwritten according to standards
that allow the Company to resell such loans in the secondary mortgage market for
purposes of managing interest rate risk and liquidity. The majority of such one-
to four-family fixed rate residential mortgage loans, however, are retained by
the Company. The Company retains servicing on its sold mortgage loans and
realizes monthly service fee income. The Company also originates interim
construction loans on one- to four-family residential properties.
The Company has begun developing a commercial business loan program. The
purpose of this program is to increase the Company's interest rate sensitive
assets, increase interest income and diversify both the loan portfolio and the
Company's customer base. The Company has hired two experienced commercial
lenders to help in this program. The Company targets small local businesses with
loan amounts in the $50,000 - $1,000,000 range with a majority of loans under
$500,000. Commercial business loans increased from $7.4 million or 3.2% of the
total loan portfolio at March 31, 2003 to $18.9 million or 9.0% of the total
loan portfolio at March 31, 2004.
4
Analysis of Loan Portfolio. Set forth below are selected data relating to
the composition of the Company's loan portfolio by type of loan as of the dates
indicated.
At March 31,
------------------------------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
$ % $ % $ %
-------- ------ -------- ------ -------- ------
(Dollars in thousands)
Mortgage loans:
One-to four-family residential(1) .... $171,736 81.97% $200,764 86.41% $220,145 85.36%
Residential construction loans ....... 2,914 1.39 3,548 1.53 8,728 3.38
Multi-family residential ............. 6,800 3.25 8,512 3.66 7,368 2.86
Non-residential real estate/land(2) .. 5,994 2.86 8,211 3.53 9,725 3.77
-------- ------ -------- ------ -------- ------
Total mortgage loans .............. 187,444 89.47 221,035 95.13 245,966 95.37
Other loans:
Consumer loans(3) .................... 3,156 1.50 3,892 1.67 6,096 2.37
Commercial business loans ............ 18,916 9.03 7,427 3.20 5,832 2.26
-------- ------ -------- ------ -------- ------
Total other loans ................. 22,072 10.53 11,319 4.87 11,928 4.63
-------- ------ -------- ------ -------- ------
Total loans before net items ......... 209,516 100.00% 232,354 100.00% 257,894 100.00%
====== ====== ======
Less:
Loans in process ..................... 2,579 2,244 4,616
Deferred loan origination fees ....... 679 1,059 1,376
Allowance for loan losses ............ 815 678 730
-------- -------- --------
Total loans receivable, net ....... $205,443 $228,373 $251,172
======== ======== ========
Mortgage-backed securities, net(4) ... $ 88,428 $ 76,002 $ 17,326
======== ======== ========
At March 31,
--------------------------------------
2001 2000
----------------- -----------------
$ % $ %
-------- ------ -------- ------
(Dollars in thousands)
Mortgage loans:
One-to four-family residential(1) .... $217,236 85.70% $212,822 87.37%
Residential construction loans ....... 7,078 2.79 4,035 1.66
Multi-family residential ............. 9,039 3.56 8,028 3.30
Non-residential real estate/land(2) .. 7,525 2.97 6,068 2.49
-------- ------ -------- ------
Total mortgage loans .............. 240,878 95.02 230,953 94.82
Other loans:
Consumer loans(3) .................... 7,858 3.10 7,441 3.06
Commercial business loans ............ 4,765 1.88 5,168 2.12
-------- ------ -------- ------
Total other loans ................. 12,623 4.98 12,609 5.18
-------- ------ -------- ------
Total loans before net items ......... 253,501 100.00% 243,562 100.00%
====== ======
Less:
Loans in process ..................... 4,764 4,136
Deferred loan origination fees ....... 1,463 1,538
Allowance for loan losses ............ 655 793
-------- --------
Total loans receivable, net ....... $246,619 $237,095
======== ========
Mortgage-backed securities, net(4) ... $ 8,574 $ 10,459
======== ========
- ----------
(1) Includes equity loans collateralized by second mortgages in the aggregate
amount of $20.3 million, $21.2 million, $18.9 million, $15.7 million and
$11.1 million as of March 31, 2004, 2003, 2002, 2001 and 2000,
respectively. Such loans have been underwritten on substantially the same
basis as the Company's first mortgage loans.
(2) Includes land loans of $575,000, $813,000, $736,000, $923,000 and $949,000
as of March 31, 2004, 2003, 2002, 2001, and 2000, respectively.
(3) Includes second mortgage loans of $535,000, $859,000, $1.2 million, $1.8
million and $1.6 million as of March 31, 2004, 2003, 2002, 2001 and 2000,
respectively.
(4) Includes mortgage-backed securities designated as available for sale.
5
Loan and Mortgage-Backed Securities Maturity and Repricing Schedule. The
following table sets forth certain information as of March 31, 2004, regarding
the dollar amount of loans and mortgage-backed securities maturing in the
Company's portfolio based on their contractual terms to maturity. Demand loans,
loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less. Adjustable and floating rate
loans are included in the period in which interest rates are next scheduled to
adjust rather than in which they mature, and fixed rate loans and
mortgage-backed securities are included in the period in which the final
contractual repayment is due. Fixed rate mortgage-backed securities are assumed
to mature in the period in which the final contractual payment is due on the
underlying mortgage.
Ten
One Three Five Through Beyond
Within Through Through Through Twenty Twenty
One Year Three Years Five Years Ten Years Years Years Total
-------- ----------- ---------- --------- -------- -------- --------
(In Thousands)
Mortgage loans:
One- to four-family residential:
Adjustable .................................. $ 32,019 $ 11,877 $ 5,134 $ -- $ -- $ -- $ 49,030
Fixed ....................................... 1,271 453 2,556 16,370 48,667 53,389 122,706
Construction:(1)
Adjustable .................................. 131 -- 164 164 -- -- 459
Fixed ....................................... -- -- -- 73 259 906 1,238
Multi-family residential, nonresidential
and land:(1)
Adjustable .................................. 3,724 5,810 628 414 -- -- 10,576
Fixed ....................................... 319 186 169 182 -- -- 856
Other Loans:
Commercial business loans ..................... 8,680 699 8,693 694 -- 150 18,916
Consumer ...................................... 1,334 1,017 805 -- -- -- 3,156
-------- -------- -------- -------- -------- -------- --------
Total loans ...................................... $ 47,478 $ 20,042 $ 18,149 $ 17,897 $ 48,926 $ 54,445 $206,937
======== ======== ======== ======== ======== ======== ========
Mortgage-backed securities(2) .................... $ 4,738 $ 26,859 $ 1,619 $ 7,169 $ 20,492 $ 25,290 $ 86,167
======== ======== ======== ======== ======== ======== ========
- ----------
(1) Amounts shown are net of loans in process of $1.2 million in construction
loans and $1.4 million in multi-family residential and nonresidential
loans.
(2) Includes mortgage-backed securities available for sale. Does not include
premiums of $2.1 million, discounts of $7,000 and unrealized gains of
$186,000.
6
The following table sets forth at March 31, 2004, the dollar amount of all
fixed rate and adjustable rate loans and mortgage-backed securities maturing or
repricing after March 31, 2005.
Fixed Adjustable
-------- ----------
(In Thousands)
Mortgage loans:
One- to four-family residential ..................... $121,435 $ 17,011
Construction (2) .................................... 1,238 328
Multi-family residential, non-residential and
land (2) .......................................... 537 6,852
Consumer ............................................ 1,821 1
Commercial business ................................. 6,087 4,149
-------- --------
Total loans ...................................... $131,118 $ 28,341
======== ========
Mortgage-backed securities(1) ......................... $ 12,199 $ 69,230
======== ========
- ----------
(1) Includes mortgage-backed securities available for sale, which totaled
$83.8 million as of March 31, 2004. Does not include premiums of $2.1
million, discounts of $7,000 and unrealized gains of $186,000.
(2) Net of loans in process of $1.2 million in construction loans and $1.4
million in multi-family residential and non-residential loans.
One- to Four-Family Residential Real Estate Loans. The Company's primary
lending activity consists of the origination of one- to four-family,
owner-occupied, residential mortgage loans on properties located in the
Company's market area. The Company generally does not originate one- to
four-family residential loans on properties outside of its market area. At March
31, 2004, the Company had $171.7 million, or 82.0%, of its total loan portfolio
invested in one- to four-family residential mortgage loans.
The Company's fixed rate loans generally are originated and underwritten
according to standards that permit resale in the secondary mortgage market.
Whether the Company can or will sell fixed rate loans into the secondary market,
however, depends on a number of factors including the Company's portfolio mix,
gap and liquidity positions, and market conditions. Moreover, the Company is
more likely to retain fixed rate loans if its one-year gap is positive. The
Company's fixed rate mortgage loans are amortized on a monthly basis with
principal and interest due each month. One- to four-family residential real
estate loans often remain outstanding for significantly shorter periods than
their contractual terms because borrowers may refinance or prepay loans at their
option. The Company's one- to four-family residential portfolio has declined
$48.4 million, or 22%, from fiscal 2003 to 2004. This reduction was due mainly
to the extreme low interest rate environment which prompted many mortgage
customers to refinance their loans. The Company chose not to aggressively price
its mortgage loans during this period and, as a result, experienced significant
principal repayments. The Company used the proceeds of the principal reductions
to purchase mortgage-backed securities with a short average life to position the
Company to take advantage of rising rates over the next few years. The Company's
mortgage-backed security portfolio increased significantly as a result of this
activity. The Company's secondary market activities have been limited to sales
of $6.3 million, $4.0 million, $27.4 million, $9.2 million and $6.4 million, for
the fiscal years ended March 31, 2004, 2003, 2002, 2001 and 2000, respectively.
Such sales generally constituted current period originations. There were no
loans identified as available for sale as of March 31, 2004, 2003 or 2002.
Mortgage loans held for sale at March 31, 2001 and 2000 totaled $861,000 and
$317,000, respectively.
The Company currently offers one- to four-family residential mortgage
loans with terms typically ranging from 15 to 30 years, and with adjustable or
fixed interest rates. Originations of fixed rate mortgage loans versus ARM loans
are monitored on an ongoing basis and are affected significantly by the level of
market interest rates, customer preference, the Company's interest rate gap
position, and loan products offered by the Company's competitors. Despite the
Company's emphasis on ARM loans, the low interest rate environment over the last
few years has resulted in customer preference for fixed rate mortgage loans. As
a result, during the year ended March 31, 2004, the Company's ARM portfolio
decreased by $3.5 million or 6.7%.
The Company offers two ARM loan products. The Treasury ARM loan adjusts
annually with interest rate adjustment limitations of 2% per year and with a cap
of 5% on total rate increases or decreases over the life of the loan. The index
on the Treasury ARM loan is the weekly average yield on U.S. Treasury
securities, adjusted to a constant maturity of one year plus a margin. However,
these loans are underwritten at the fully-indexed interest
7
rate. The second ARM product is the Cost of Funds ARM loan which adjusts
annually and has periodic and lifetime interest rate caps of 1% and 3%,
respectively. The index is the Ohio Cost of Funds from SAIF Insured Savings
Associations, which index is published quarterly by the OTS. The initial
interest rate on the Cost of Funds ARM loans is not discounted. One- to
four-family residential ARM loans totaled $49.0 million, or 23.4%, of the
Company's total loan portfolio at March 31, 2004.
The primary purpose of offering ARM loans is to make the Company's loan
portfolio more interest rate sensitive. However, as the interest income earned
on ARM loans varies with prevailing interest rates, such loans do not offer the
Company predictable cash flows as would long-term, fixed rate loans. ARM loans
carry increased credit risk associated with potentially higher monthly payments
by borrowers as general market interest rates increase. It is possible,
therefore, that during periods of rising interest rates, the risk of default on
ARM loans may increase due to the upward adjustment of interest costs to the
borrower. Management believes that the Company's credit risk associated with its
ARM loans is reduced because the Company has either a 3% or 5% cap on interest
rate increases during the life of its ARM loans.
The Company also offers home equity loans and equity lines of credit
collateralized by a second mortgage on the borrower's principal residence. In
underwriting these home equity loans, the Company requires that the maximum
loan-to-value ratios, including the principal balances of both the first and
second mortgage loans, not exceed 85%. The home equity loan portfolio consists
of adjustable rate loans, which use the Ohio Average Cost of Funds for
SAIF-Insured Savings Association and the prime rate as published in The Wall
Street Journal as interest rate indices. Home equity loans include fixed term
adjustable rate loans, as well as lines of credit. As of March 31, 2004, the
Company's equity loan portfolio totaled $20.3 million, or 11.8%, of its one- to
four-family mortgage loan portfolio.
The Company's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the Company
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells or otherwise disposes of the underlying
real property serving as security for the loan. Due-on-sale clauses are an
important means of adjusting the rates on the Company's fixed rate mortgage loan
portfolio.
Regulations limit the amount that a savings association may lend relative
to the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. The Company's lending policies limit
the maximum loan-to-value ratio on both fixed rate and ARM loans without private
mortgage insurance to 80% of the lesser of the appraised value or the purchase
price of the property to serve as collateral for the loan. However, the Company
makes one- to four-family real estate loans with loan-to-value ratios in excess
of 80%. For 15 year fixed rate ARM loans with loan-to-value ratios of 80.01% to
85%, 85.01% to 90%, 90.01% to 95%, and 95.01% to 97%, the Company requires the
first 6%, 12%, 25% and 30%, respectively, of the loan to be covered by private
mortgage insurance. For 30 year fixed rate loans with loan-to-value ratios of
80.01% to 85%, 85.01% to 90%, and 90.01% to 97%, the Company requires the first
12%, 25%, and 30%, respectively, of the loan to be covered by private mortgage
insurance. The Company requires fire and casualty insurance, as well as title
insurance regarding good title, on all properties securing real estate loans
made by the Company and flood insurance, where applicable.
Multi-Family Residential Real Estate Loans. Loans secured by multi-family
real estate constituted approximately $6.8 million, or 3.3%, of the Company's
total loan portfolio at March 31, 2004. The Company's multi-family real estate
loans are secured by multi-family residences, such as apartment buildings. At
March 31, 2004, 95.4% of the Company's multi-family loans were secured by
properties located within the Company's market area. At March 31, 2004, the
Company's multi-family real estate loans had an average balance of $279,000, and
the largest multi-family real estate loan had a principal balance of $3.0
million. Multi-family real estate loans currently are offered with adjustable
interest rates or short term balloon maturities, although in the past the
Company originated fixed rate long term multi-family real estate loans. The
terms of each multi-family loan are negotiated on a case by case basis, although
such loans typically have adjustable interest rates tied to a market index, and
amortize over 15 to 25 years. The Company currently does not emphasize
multi-family real estate construction loans.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one- to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
8
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family real
estate is typically dependent upon the successful operation of the related real
estate property. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired.
Non-Residential Real Estate and Land Loans. Loans secured by
non-residential real estate constituted approximately $5.4 million, or 2.6%, of
the Company's total loan portfolio at March 31, 2004. The Company's
non-residential real estate loans are secured by improved property such as
offices, small business facilities, and other non-residential buildings. At
March 31, 2004, 95.7% of the Company's non-residential real estate loans were
secured by properties located within the Company's market area. At March 31,
2004, the Company's non-residential loans had an average balance of $155,000 and
the largest non-residential real estate loan had a principal balance of
$953,000. The terms of each non-residential real estate loan are negotiated on a
case by case basis. Non-residential real estate loans are currently offered with
adjustable interest rates or short term balloon maturities, although in the past
the Company has originated fixed rate long term non-residential real estate
loans. Non-residential real estate loans originated by the Company generally
amortize over 15 to 25 years. The Company currently does not emphasize
non-residential real estate construction loans.
Loans secured by non-residential real estate generally involve a greater
degree of risk than one- to four-family residential mortgage loans and carry
larger loan balances. This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by non-residential
real estate is typically dependent upon the successful operation of the related
real estate project. If the cash flow from the project is reduced, the
borrower's ability to repay the loan may be impaired.
The Company also originates a limited number of land loans secured by
individual improved and unimproved lots for future residential construction.
Land loans are generally offered with a fixed rate and with terms of up to 5
years. Land loans totaled $575,000 at March 31, 2004.
Residential Construction Loans. To a lesser extent, the Company originates
loans to finance the construction of one- to four-family residential property.
At March 31, 2004, the Company had $2.9 million, or 1.4%, of its total loan
portfolio invested in interim construction loans. The Company makes construction
loans to private individuals and to builders. Loan proceeds are disbursed in
increments as construction progresses and as inspections warrant. Construction
loans are typically structured as permanent one- to four-family loans originated
by the Company with a 12-month construction phase. Accordingly, upon completion
of the construction phase, there is no change in interest rate or term to
maturity of the original construction loan, nor is a new permanent loan
originated.
Commercial Business Loans. Commercial business loans totaled $18.9
million, or 9.0% of the Company's total loan portfolio at March 31, 2004. This
represents net growth of $11.5 million which equates to a 6.8% increase as
percentage of total loans compared to $7.4 million at March 31, 2003. The
Company has hired two experienced commercial lenders and is developing an
additional lender internally. The Company has plans to continue commercial
lending growth as market conditions permit.
Commercial loans carry a higher degree of risk than one- to four-
residential loans. Such lending typically involves large loan balances
concentrated in a single borrower or groups of related borrowers for rental or
business properties. In addition, the payment experience on loans secured by
income-producing properties is typically dependent on the success of the
operation of the related project and thus is typically affected by adverse
conditions in the real estate market and in the economy. The Company makes loans
generally in the $100,000 to $1,000,000 range with the majority of them being
under $500,000. Commercial loans are generally underwritten based on the
borrower's ability to pay and assets such as buildings, land and equipment are
taken as additional loan collateral. Each loan is evaluated for a level of risk
and assigned a rating from "1" (the highest rating) to "7" (the lowest rating).
All loans that are made have been rated 4 or higher.
9
Consumer Loans. Ohio savings associations are authorized to invest in
secured and unsecured consumer loans in an aggregate amount which, when combined
with investments in commercial paper and corporate debt securities, does not
exceed 20% of an association's assets. In addition, an Ohio association is
permitted to invest up to 5% of its assets in loans for educational purposes.
As of March 31, 2004, consumer loans totaled $3.2 million, or 1.5%, of the
Company's total loan portfolio. The principal types of consumer loans offered by
the Company are second mortgage loans, fixed rate auto and truck loans,
education loans, credit card loans, unsecured personal loans, and loans secured
by deposit accounts. Consumer loans are offered primarily on a fixed rate basis
with maturities generally of less than ten years.
The Company's second mortgage consumer loans are secured by the borrower's
principal residence with a maximum loan-to-value ratio, including the principal
balances of both the first and second mortgage loans, of 80% or less. Such loans
are offered on a fixed rate basis with terms of up to ten years. At March 31,
2004, second mortgage loans totaled $535,000, or .3%, of one- to four-family
mortgage.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's credit history and an assessment of
the applicant's ability to meet existing obligations and payments on the
proposed loan. The quality and stability of the applicant's monthly income are
determined by analyzing the gross monthly income from primary employment, and
additionally from any verifiable secondary income. Creditworthiness of the
applicant is of primary consideration. However, where applicable, the
underwriting process also includes a comparison of the value of the collateral
in relation to the proposed loan amount.
Consumer loans entail greater credit risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
assets that depreciate rapidly, such as automobiles, mobile homes, boats, and
recreational vehicles. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly reduced
based upon the condition of the automobiles and the lack of demand for used
automobiles. The Company adds a general provision on a regular basis to its
consumer loan loss allowance, based on, among other factors, general economic
conditions and prior loss experience. See "--Delinquencies and Classified
Assets--Non-Performing Assets," and "--Classification of Assets" for information
regarding the Company's loan loss experience and reserve policy.
Mortgage-Backed Securities. The Company also invests in mortgage-backed
securities generally issued or guaranteed by the United States Government or
agencies thereof. Investments in mortgage-backed securities are made either
directly or by exchanging mortgage loans in the Company's portfolio for such
securities. These securities consist primarily of adjustable rate
mortgage-backed securities issued or guaranteed by the Federal National Mortgage
Association ("FNMA"), Federal Home Loan Mortgage Corporation ("FHLMC"), and the
Government National Mortgage Association ("GNMA"). Total mortgage-backed
securities, including those designated as available for sale, increased from
$76.0 million at March 31, 2003 to $88.4 million at March 31, 2004.
The Company's objectives in investing in mortgage-backed securities vary
from time to time depending upon market interest rates, local mortgage loan
demand, and the Company's level of liquidity. Mortgage-backed securities are
more liquid than whole loans and can be readily sold in response to market
conditions and changes in interest rates. Mortgage-backed securities purchased
by the Company also have lower credit risk because principal and interest are
either insured or guaranteed by the United States Government or agencies
thereof.
Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as real estate broker
referrals, existing customers, borrowers, builders, attorneys, walk-in
customers. The Company has also entered into a number of participation loans
with high quality lead lenders. The participations are outside the Company's
normal lending area and diversify the loan portfolio. Upon receiving a loan
application, the Company obtains a credit report and employment verification to
verify specific information relating to the applicant's employment, income, and
credit standing. In the case of a real estate loan, an appraiser approved by the
Company appraises the real estate intended to secure the proposed loan. An
underwriter in the Company's loan department checks the loan application file
for accuracy and completeness, and verifies the information provided. One- to
four-family and multi-family residential, and commercial real estate loans, for
up to
10
$150,000, may be approved by the manager of the mortgage loan department, loans
between $150,000 and $300,000 must be approved by the Chief Executive Officer
and loans in excess of $300,000 must be approved by the Board of Directors. The
Loan Committee meets once a week to review and verify that loan officer
approvals of loans are made within the scope of management's authority. All
approvals subsequently are ratified monthly by the full Board of Directors. Fire
and casualty insurance is required at the time the loan is made and throughout
the term of the loan. After the loan is approved, a loan commitment letter is
promptly issued to the borrower. At March 31, 2004, the Company had commitments
to originate $3.2 million of loans.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property serving as collateral, which insurance must be
maintained during the full term of the loan. A title search of the property is
required on all loans secured by real property.
Origination, Purchase and Sale of Loans and Mortgage-Backed Securities.
The table below shows the Company's loan origination, purchase and sales
activity for the periods indicated.
At March 31,
-------------------------------------
2004 2003 2002
--------- --------- ---------
(In Thousands)
Total loans receivable, net at beginning of year ..... $ 228,373 $ 251,172 $ 246,619
Loans originated:
One- to four-family residential(1) ............... 53,116 52,523 89,376
Multi-family residential(2) ...................... 421 2,761 --
Non-residential real estate/land ................. 1,147 1,074 3,712
Consumer loans ................................... 1,318 1,900 2,534
Commercial loans ................................. 15,859 2,973 886
--------- --------- ---------
Total loans originated ....................... 71,861 61,231 96,508
Loans sold:
Whole loans ...................................... (6,198) (3,998) (27,130)
--------- --------- ---------
Total loans sold ............................. (6,198) (3,998) (27,130)
Mortgage loans transferred to REO .................... (279) -- --
Loan repayments ...................................... (89,107) (80,362) (66,077)
Other loan activity, net ............................. 793 330 1,252
--------- --------- ---------
Total loans receivable, net at end of year ... $ 205,443 $ 228,373 $ 251,172
========= ========= =========
Mortgage-backed securities at beginning of year ...... $ 76,002 $ 17,326 $ 8,574
Mortgage-backed securities purchased ................. 55,526 77,442 14,155
Principal repayments and other activity .............. (43,100) (18,766) (5,403)
--------- --------- ---------
Mortgage-backed securities at end of year .... $ 88,428 $ 76,002 $ 17,326
========= ========= =========
- ----------
(1) Includes loans to finance the construction of one- to four-family
residential properties, and loans originated for sale in the secondary
market.
(2) Includes loans to finance the sale of real estate acquired through
foreclosure.
Loan Origination Fees and Other Income. In addition to interest earned on
loans, the Company generally receives loan origination fees. The Company
accounts for loan origination fees in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 91 "Accounting for Non-refundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases." To the extent that loans are originated or acquired for the Company's
portfolio, SFAS No. 91 requires that the Company defer loan origination fees and
costs and amortize such amounts as an adjustment of yield over the life of the
loan by use of the level yield method. SFAS No. 91 reduces the amount of revenue
recognized by many financial institutions at the time such loans are originated
or acquired. Fees deferred under SFAS No. 91 are recognized into income
immediately upon prepayment or the sale of the related loan. At March 31, 2004,
the Company had $679,000 of deferred loan origination fees. Loan origination
fees are volatile sources of income. Such fees vary with the volume and type of
loans and commitments made and purchased, principal repayments, and competitive
conditions in the mortgage markets, which in turn respond to the demand for and
availability of money.
11
The Company receives other fees, service charges, and other income that
consist primarily of deposit transaction account service charges, late charges,
credit card fees, and income from REO operations. The Company recognized fees
and service charges of $1.5 million, $1.4 million and $1.1 million, for the
fiscal years ended March 31, 2004, 2003 and 2002, respectively.
Loans to One Borrower. Savings associations are subject to the same limits
as those applicable to national banks, which under current regulations restrict
loans to one borrower to an amount equal to 15% of unimpaired capital and
unimpaired surplus on an unsecured basis, and an additional amount equal to 10%
of unimpaired capital and unimpaired surplus if the loan is secured by readily
marketable collateral (generally, financial instruments and bullion, but not
real estate). At March 31, 2004, the Company's largest concentration of loans to
one borrower totaled $2.6 million. All of such loans were current at March 31,
2004. The Company had no loans at March 31, 2004 that exceeded the loans to one
borrower regulations.
Delinquencies and Classified Assets
Delinquencies. The Company's collection procedures provide that when a
loan is 15 days past due, a computer-generated late charge notice is sent to the
borrower requesting payment, plus a late charge. This notice is followed with a
letter again requesting payment when the payment becomes 20 days past due. If
delinquency continues, at 30 days another collection letter is sent and personal
contact efforts are attempted, either in person or by telephone, to strengthen
the collection process and obtain reasons for the delinquency. Also, plans to
arrange a repayment plan are made. If a loan becomes 60 days past due, the loan
becomes subject to possible legal action if suitable arrangements to repay have
not been made. In addition, the borrower is given information which provides
access to consumer counseling services, to the extent required by HUD
regulations. When a loan continues in a delinquent status for 90 days or more,
and a repayment schedule has not been made or kept by the borrower, a notice of
intent to foreclose is sent to the borrower, giving 30 days to cure the
delinquency. If not cured, foreclosure proceedings are initiated.
Non-Performing and Impaired Assets. Loans are reviewed on a regular basis
and are placed on a non-accrual status when, in the opinion of management, the
collection of additional interest is doubtful. Mortgage loans are placed on
non-accrual status generally when either principal or interest is 90 days or
more past due and management considers the interest uncollectible. Interest
accrued and unpaid at the time a loan is placed on non-accrual status is charged
against interest income.
Under the provisions of SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," a loan is defined as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due under the contractual terms of the loan agreement. In applying
the provisions of SFAS No. 114, the Bank considers investment in one- to
four-family residential loans and consumer installment loans to be homogeneous
and therefore excluded from separate identification for impairment. With respect
to the Bank's 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.
At March 31, 2004, the Company had non-performing and impaired assets of
$847,000 and a ratio of non-performing and impaired assets to total assets of
0.36%. At March 31, 2003, the Company had non-performing and impaired assets of
$2.5 million and a ratio of non-performing and impaired assets to total assets
of .65%. The significant reduction in non-performing assets at March 31, 2003
compared to March 31, 2004 was due to the sale of assets which collateralized a
$1.8 million commercial loan concentration. The Company was able to recover all
principal and interest due on the loan concentration. In the opinion of
management, all non-performing and impaired assets are adequately collateralized
as of March 31, 2004 and no significant loss is presently anticipated.
Real estate acquired by the Company as a result of foreclosure or by deed
in lieu of foreclosure is deemed REO until such time as it is sold. When REO is
acquired, it is recorded at the lower of the unpaid principal balance of the
related loan or its fair value, less estimated selling expenses. Valuations are
periodically performed by management, and any subsequent decline in fair value
is charged to operations.
12
The following table sets forth information regarding our non-accrual and
impaired loans and real estate acquired by foreclosure at the dates indicated.
For all the dates indicated, we did not have any material loans which had been
restructured pursuant to SFAS No. 15.
At March 31,
--------------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(Dollars In Thousands)
Non-accrual loans:
Mortgage loans:
One- to four-family residential.............................. ... $ 714 $ 664 $ 616 $ 443 $ 170
All other mortgage loans ........................................ 24 430 1,070 -- --
Non-mortgage loans:
Commercial business loans ....................................... -- 1,380 1,416 -- --
Consumer ........................................................ 9 6 25 72 30
------ ------ ------ ------ ------
Total non-accrual loans .............................................. 747 2,480 3,127 515 200
Accruing loans 90 days or more delinquent ............................ -- 15 38 -- --
------ ------ ------ ------ ------
Total non-performing loans ........................................... 747 2,495 3,165 515 200
Loans deemed impaired (1) ............................................ -- -- 645 645 940
------ ------ ------ ------ ------
Total non-performing and impaired loans .............................. 747 2,495 3,810 1,160 1,140
Total real estate owned (2) .......................................... 100 -- 19 124 90
------ ------ ------ ------ ------
Total non-performing and impaired assets ............................. $ 847 $2,495 $3,829 $1,284 $1,230
====== ====== ====== ====== ======
Total non-performing and impaired loans to net loans receivable ...... 0.36% 1.09% 1.52% 0.47% 0.48%
====== ====== ====== ====== ======
Total non-performing and impaired loans to total assets .............. 0.20% 0.65% 1.14% 0.37% 0.37%
====== ====== ====== ====== ======
Total non-performing and impaired assets to total assets ............. 0.23% 0.65% 1.14% 0.41% 0.40%
====== ====== ====== ====== ======
- ----------
(1) Includes loans deemed impaired that are currently performing.
(2) Represents the net book value of property acquired by us through
foreclosure or deed in lieu of foreclosure. These properties are recorded
at the lower of the loan's unpaid principal balance or fair value less
estimated selling expenses.
During the year ended March 31, 2004, 2003 and 2002, gross interest income
of $37,000, $208,000 and $99,000 would have been recorded on loans currently
accounted for on a non-accrual basis if the loans had been current throughout
the period. Interest income recognized on nonaccrual loans totaled $23,000,
$362,000 and $227,000 for the years ended March 31, 2004, 2003 and 2002,
respectively. Interest income on impaired loans is recognized using the cash
method of accounting and totaled approximately $249,000, $24,000 and $233,000
for the years ended March 31, 2004, 2003 and 2002.
The following table sets forth information with respect to loans past due
by 60-89 days and 90 days or more in our portfolio at the dates indicated.
At March 31,
----------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(In Thousands)
Loans past due 60-89 days ........... $ 669 $ 723 $ 431 $2,536 $1,539
Loans past due 90 days or more ...... 747 2,495 3,165 515 200
------ ------ ------ ------ ------
Total past due 60 days or more ... $1,416 $3,218 $3,596 $3,051 $1,739
====== ====== ====== ====== ======
Classification of Assets. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the savings institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
that do not expose the savings institution to risk sufficient to warrant
classification
13
in one of the aforementioned categories, but which possess some weaknesses, are
required to be designated "special mention" by management.
When a savings institution classifies problem assets as either substandard
or doubtful, it is required to establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances that have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the assets so classified, or
to charge off such amount. A savings institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS, which can order the establishment of additional
general or specific loss allowances. The Company regularly reviews the problem
loans in its portfolio to determine whether any loans require classification in
accordance with applicable regulations.
The following table sets forth the aggregate amount of the Company's
classified assets at the dates indicated.
At March 31,
----------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(Dollars in Thousands)
Substandard assets(1) ......... $ 839 $2,481 $3,303 $ 569 $ 290
Doubtful assets ............... -- -- -- -- --
Loss assets ................... -- -- 105 -- --
------ ------ ------ ------ ------
Total classified assets ... $ 839 $2,481 $3,408 $ 569 $ 290
====== ====== ====== ====== ======
- ----------
(1) Includes REO.
Allowance for Loan Losses. In determining the amount of the allowance for
loan losses at any point in time, management and the Board of Directors apply a
systematic process focusing on the risk of loss in the loan portfolio. First,
delinquent non-residential, multi-family and commercial loans are evaluated
individually for potential impairments in their carrying value. Second,
management applies historic loss experience to the individual loan types in the
portfolio. In addition to the historic loss percentage, management employs an
additional risk percentage tailored to the perception of overall risk in the
economy. However, the analysis of the allowance for loan losses requires an
element of judgment and is subject to the possibility that the allowance may
need to be increased, with the corresponding reduction in earnings.
During fiscal years ended March 31, 2004, 2003 and 2002, the Company added
$173,000, $91,000 and $134,000, respectively, to the provision for loan losses.
The Company's allowance for loan losses totaled $815,000, $678,000 and $730,000
at March 31, 2004, 2003 and 2002, respectively. Management believes that the
Company's current allowance for loan losses is adequate, however, there can be
no assurance that the allowance for loan losses will be adequate to cover losses
that may in fact be realized in the future or that additional provisions for
loan losses will not be required. To the best of management's knowledge, all
known losses as of March 31, 2004 have been recorded.
14
Analysis of the Allowance For Loan Losses. The following table sets forth
the analysis of the allowance for loan losses for the periods indicated.
At or for the Year Ended March 31,
---------------------------------------------------------------------
2004 2003 2002 2001 2000
--------- --------- --------- --------- ---------
(In Thousands)
Loans receivable, net .................................. $ 205,443 $ 228,373 $ 251,172 $ 246,619 $ 237,095
========= ========= ========= ========= =========
Average loans receivable, net .......................... 214,174 242,120 253,058 245,624 229,845
========= ========= ========= ========= =========
Allowance balance (at beginning of period) ............. 678 730 655 793 678
Provision for losses ................................... 173 91 134 96 120
Charge-offs:
Mortgage loans:
One - to four-family ............................. -- (20) -- (7) --
Residential construction ......................... -- -- -- -- (21)
Multi-family residential ......................... -- -- -- -- --
Non-residential real estate and land(1) .......... -- (84) -- (172) --
Other loans:
Consumer ......................................... (65) (54) (63) (61) (12)
Commercial ....................................... -- -- -- -- --
--------- --------- --------- --------- ---------
Gross charge-offs .......................... (65) (158) (63) (240) (33)
--------- --------- --------- --------- ---------
Recoveries:
Mortgage loans:
One - to four-family ............................. -- -- -- -- --
Residential construction ......................... -- -- -- -- --
Multi-family residential ......................... -- -- -- -- 6
Non-residential real estate and land ............. -- -- -- -- --
Other loans:
Consumer ......................................... 29 15 4 6 22
Commercial ....................................... -- -- -- -- --
--------- --------- --------- --------- ---------
Gross recoveries ........................... 29 15 4 6 28
--------- --------- --------- --------- ---------
Net charge-offs ............................ (36) (143) (59) (234) (5)
--------- --------- --------- --------- ---------
Additions charged to operations ........................ 173 91 134 96 120
--------- --------- --------- --------- ---------
Allowance for loan losses balance (at end of
period) (2) ......................................... $ 815 $ 678 $ 730 $ 655 $ 793
========= ========= ========= ========= =========
Allowance for loan losses as a percent of loans
receivable, net at end of period .................... 0.40% 0.30% 0.29% 0.27% 0.33%
========= ========= ========= ========= =========
Net loans charged off as a percent of average loans
receivable, net ..................................... 0.02% 0.06% 0.02% 0.10% --%
========= ========= ========= ========= =========
Ratio of allowance for loan losses to total
non-performing assets at end of period .............. 96.22% 27.35% 19.07% 51.01% 64.47%
========= ========= ========= ========= =========
Ratio of allowance for loan losses to non-performing
loans at end of period .............................. 109.10% 27.35% 19.16% 56.97% 69.56%
========= ========= ========= ========= =========
- ----------
(1) The fiscal 2001 charge-offs include a $172,000 charge-off related to an
impaired loan. This loan was current at March 31, 2002 and March 31, 2001.
This loan was paid off in fiscal 2003.
(2) At March 31, 2002, a specific allowance of $105,000 was reserved for a
nonresidential loan that met the definition of impaired pursuant to SFAS
No. 114.
15
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of allowance for loan losses by loan category for the periods
indicated. Management believes that the allowance can be allocated by category
only on an approximate basis. The allocation of the allowance by category is not
necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
At March 31,
---------------------------------------------------------
2004 2003 2002
----------------- ----------------- -----------------
% of % of % of
Loans in Loans in Loans in
Each Each Each
Category Category Category
to Total to Total to Total
Amount Loans Amount Loans Amount Loans
------ -------- ------ -------- ------ --------
(Dollars in Thousands)
Mortgage loans:
One- to four-family .................... $100 82.0% $162 86.4% $126 85.3%
Residential construction ............... -- 1.4 -- 1.5 -- 3.4
Multi-family residential ............... -- 3.2 7 3.7 47 2.8
Non-residential real estate and land ... 196 2.9 55 3.5 207 3.8
Other loans:
Consumer ............................... 20 1.5 119 1.7 28 2.4
Commercial ............................. 499 9.0 335 3.2 322 2.3
---- ----- ---- ----- ---- -----
Total allowance for loan losses ......... $815 100.0% $678 100.0% $730 100.0%
==== ===== ==== ===== ==== =====
At March 31,
-------------------------------------
2001 2000
------------------ -----------------
% of % of
Loans in Loans in
Each Each
Category Category
to Total to Total
Amount Loans Amount Loans
------ --------- ------ --------
(Dollars in Thousands)
Mortgage loans:
One- to four-family .................... $551 85.7% $414 87.4%
Residential construction ............... 23 2.8 9 1.7
Multi-family residential ............... 24 3.6 37 3.3
Non-residential real estate and land ... 20 3.0 -- 2.5
Other loans:
Consumer ............................... 6 3.1 52 3.0
Commercial ............................. 31 1.9 281 2.1
---- ----- ---- -----
Total allowance for loan losses ......... $655 100.0% $793 100.0%
==== ===== ==== =====
16
Investment Activities
The Company's investment portfolio is comprised of investment securities,
corporate bonds and notes and state and local obligations. The carrying value of
the Company's investment securities totaled $31.6 million at March 31, 2004,
compared to $35.9 million at March 31, 2003, a decrease of $4.3 million, or
11.9%. The Company's cash and cash equivalents, consisting of cash and due from
banks, federal funds sold and interest bearing deposits due from other financial
institutions with original maturities of three months or less, totaled $19.9
million at March 31, 2004 compared to $17.5 million at March 31, 2003, an
increase of $2.4 million, or 13.7%.
Liquidity levels may be increased or decreased depending upon the yields
on investment alternatives and upon management's judgment as to the
attractiveness of the yields then available in relation to other opportunities
and its expectation of the level of yield that will be available in the future,
as well as management's projections as to the short term demand for funds to be
used in the Company's loan origination and other activities.
Investment Portfolio. The following table sets forth the carrying value of
the Company's investment securities portfolio, short-term investments and FHLB
stock, at the dates indicated.
At March 31,
---------------------------------------------------------------
2004 2003 2002
------------------- ------------------- -------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- ------- -------- ------- -------- -------
(In Thousands)
Investment securities:
Mutual funds ...................................... $ -- $ -- $10,009 $10,009 $ -- $ --
Corporate bonds and notes ......................... 11,714 12,418 12,118 12,314 2,998 3,051
U.S. Government and agency securities ............. 15,189 15,262 10,115 10,309 19,152 18,904
Obligations of state and political subdivisions ... 4,679 4,696 3,599 3,615 136 143
------- ------- ------- ------- ------- -------
Total investment securities .............. 31,582 32,376 35,841 36,247 22,286 22,098
Other Investments:
Interest-bearing deposits in other financial
institutions .................................... 6,721 6,721 6,529 6,529 10,633 10,633
Federal funds sold ................................ 9,875 9,875 8,000 8,000 15,000 15,000
Federal Home Loan Bank stock ...................... 4,205 4,205 4,041 4,041 3,767 3,767
------- ------- ------- ------- ------- -------
Total investments ........................ $52,383 $53,177 $54,411 $54,817 $51,686 $51,498
======= ======= ======= ======= ======= =======
17
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for the
Company's investment securities at March 31, 2004. The Company does not hold any
investment securities with maturities in excess of 30 years.
At March 31, 2004
-----------------------------------------
One Year or Less One to Five Years
------------------- -------------------
Carrying Average Carrying Average
Value Yield Value Yield
-------- ------- -------- -------
(Dollars in Thousands)
Investment Securities:
Corporate bonds and notes ......................... $ 502 2.55% $11,070 4.17%
U.S. Government and agency ........................ 2,000 4.00 12,060 6.17
Obligations of state and political subdivisions ... -- -- -- --
------- ---- ------- ----
Total investment securities .................... $ 2,502 3.17% $23,130 5.07%
======= ==== ======= ====
At March 31, 2004
-----------------------------------------
Five to Ten Years More than Ten Years
----------------- -------------------
Carrying Average Carrying Average
Value Yield Value Yield
-------- ------- -------- -------
(Dollars in Thousands)
Investment Securities:
Corporate bonds and notes ......................... $ -- --% $ -- --%
U.S. Government and agency ........................ -- -- 868 1.64
Obligations of state and political subdivisions ... 114 5.50 4,565 4.46
------- ---- ------- ----
Total investment securities .................... $ 114 5.50% $ 5,433 4.04%
======= ==== ======= ====
At March 31, 2004
-------------------------------------------
Total Investment
Securities
-------------------------------------------
Average Weighted
Life Carrying Market Average
In Years Value Value Yield
-------- -------- ------ --------
(Dollars in Thousands)
Investment Securities:
Corporate bonds and notes ......................... 2.21 $11,714 $12,418 6.01%
U.S. Government and agency ........................ 3.65 15,189 15,262 3.92
Obligations of state and political subdivisions ... 15.09 4,679 4,696 5.02
----- ------- ------- -----
Total investment securities ....................... 4.98 $31,582 $32,376 4.94%
===== ======= ======= =====
18
Sources of Funds
General. Deposits are the major source of the Company's funds for lending
and other investment purposes. In addition to deposits, the Company derives
funds from the amortization, prepayment or sale of loans and mortgage-backed
securities, the sale or maturity of investment securities, operations and, if
needed, advances from the Federal Home Loan Bank ("FHLB"). Scheduled loan
principal repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are influenced significantly by
general interest rates and market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources or on a longer term basis for general business purposes. The
Company had $30.0 million of advances from the FHLB at March 31, 2004.
Deposits. Consumer and commercial deposits are attracted principally from
within the Company's market area through the offering of a broad selection of
deposit instruments including NOW accounts, passbook savings, money market
deposit, term certificate accounts and individual retirement accounts. The
Company accepts deposits of $100,000 or more and offers negotiated interest
rates on such deposits. Deposit account terms vary according to the minimum
balance required, the period of time during which the funds must remain on
deposit, and the interest rate, among other factors. The Company regularly
evaluates its internal cost of funds, surveys rates offered by competing
institutions, reviews the Company's cash flow requirements for lending and
liquidity, and executes rate changes when deemed appropriate. The Company does
not obtain funds through brokers, nor does it solicit funds outside its market
area.
Deposit Portfolio. Savings and other deposits in the Company as of March
31, 2004, comprised the following:
Weighted Percentage
Average Minimum of Total
Interest Rate Minimum Term Checking and Savings Deposits Amount Balances Deposits
- ------------- ------------ ----------------------------- ------ -------- --------
(In Thousands)
0.33% None NOW Accounts $ 100 $ 42,679 14.63%
0.78 None Passbook 25 82,093 28.13
0.84 None Money Market Investor 2,500 11,893 4.08
Certificates of Deposit
-----------------------
1.01 12 months or less Fixed term, fixed rate 500 15,841 5.42
1.59 12 to 24 months Fixed term, fixed rate 500 43,545 14.92
3.49 25 to 36 months Fixed term, fixed rate 500 17,860 6.12
4.49 36 months or more Fixed term, fixed rate 500 42,781 14.66
3.29 Negotiable Jumbo Certificates 100,000 35,138 12.04
-------- ------
$291,830 100.00%
======== ======
19
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Company between
the dates indicated.
Balance at Balance at Balance at
March 31, % Increase March 31, % Increase March 31, %
2004 Deposits (Decrease) 2003 Deposits (Decrease) 2002 Deposits
---------- -------- ---------- ---------- -------- ---------- ---------- --------
(Dollars in Thousands)
NOW accounts .................. $ 42,679 14.63% $ 2,697 $ 39,982 13.29% $ 1,586 $ 38,396 12.76%
Passbook statement accounts ... 82,093 28.13 (2,385) 84,478 28.07 6,993 77,485 25.75
Money market passbook ......... 11,893 4.08 (1,754) 13,647 4.54 1,838 11,809 3.92
Certificates of deposit(1)
Original maturities of:
12 months or less ........... 15,841 5.42 (3,559) 19,400 6.45 (9,097) 28,497 9.47
12 to 24 months ............. 43,545 14.92 (10,210) 53,755 17.86 (27,250) 81,005 26.92
25 to 36 months ............. 17,860 6.12 1,990 15,870 5.27 6,242 9,628 3.20
36 months or more ........... 42,781 14.66 7,597 35,184 11.69 23,341 11,843 3.93
Negotiated jumbo .............. 35,138 12.04 (3,477) 38,615 12.83 (3,679) 42,294 14.05
-------- ------ -------- -------- ------ -------- -------- ------
Total ................... $291,830 100.00% $ (9,101) $300,931 100.00% $ (26) $300,957 100.00%
======== ====== ======== ======== ====== ======== ======== ======
- ----------
(1) Certain Individual Retirement Accounts ("IRAs") are included in the
respective certificate balances. IRAs totaled $32.8 million, $33.7 million
and $33.1 million, as of March 31, 2004, 2003 and 2002, respectively.
The following table sets forth the average dollar amount and weighted
average rate of savings deposits in the various types of savings accounts
offered by the Company.
Years Ended March 31,
------------------------------------------------------------------------------------------
2004 2003 2002
---------------------------- ---------------------------- ----------------------------
Percent Weighted Percent Weighted Percent Weighted
Average of Average Average of Average Average of Average
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
-------- ------ ------ -------- ------ ------ -------- ------ ------
(Dollars in Thousands)
Noninterest-bearing demand deposits .. $ 9,321 3.15% 0.00% $ 8,830 2.94% 0.00% $ 8,735 3.02% 0.00%
NOW accounts ......................... 34,190 11.54 .43 39,344 13.10 .77 27,569 9.54 1.78
Passbook statement accounts .......... 81,034 27.35 .85 73,486 24.47 1.05 63,091 21.84 2.65
Money market passbook ................ 13,217 4.46 .92 13,682 4.56 1.20 10,395 3.60 2.69
Certificates of deposit .............. 158,482 53.50 3.12 164,984 54.93 3.89 179,092 62.00 5.37
-------- ------ ------ -------- ------ ------ -------- ------ ------
Total deposits ................. $296,244 100.00% 1.99% $300,326 100.00% 2.81% $288,882 100.00% 4.17%
======== ====== ====== ======== ====== ====== ======== ====== ======
20
The following table sets forth the certificates of deposit in the Company
classified by rates as of the dates indicated:
At March 31,
----------------------------------
2004 2003 2002
-------- -------- --------
(Dollars in Thousands)
.60- 2.00% ............................. $ 59,687 $ 29,681 $ --
2.01- 4.00% ............................. 48,536 70,834 61,208
4.01- 6.00% ............................. 46,565 61,425 73,408
6.01- 6.75% ............................. 377 884 38,651
-------- -------- --------
Total ............................. $155,165 $162,824 $173,267
======== ======== ========
The following table sets forth the amount and maturities of certificates
of deposit at March 31, 2004.
Amount Due
-------------------------------------------------------------
Less Than 1-2 2-3 After
One Year Years Years 3 Years Total
--------- -------- -------- -------- --------
Rate (In Thousands)
0.60- 2.00% ... $ 49,755 $ 9,204 $ 728 $ -- $ 59,687
2.01- 4.00% ... 25,396 8,392 3,220 11,527 48,535
4.01- 6.00% ... 10,955 6,196 17,135 12,279 46,565
6.01- 6.75% ... 248 130 -- -- 378
-------- -------- -------- -------- --------
Total ... $ 86,354 $ 23,922 $ 21,083 $ 23,806 $155,165
======== ======== ======== ======== ========
The following table indicates the amount of the Company's certificates of
deposit of $100,000 or more by time remaining until maturity as of March 31,
2004.
Maturity Period Certificates of Deposit
--------------- -----------------------
(In Thousands)
Three months or less ............................ $12,858
Over three months through six months ............ 7,979
Over six months through twelve months ........... 11,143
Over twelve months .............................. 13,851
-------
Total ...................................... $45,831
=======
Borrowings
Savings deposits are the primary source of funds for the Company's lending
and investment activities and for its general business purposes. The Bank may
rely upon advances from the FHLB and the Federal Reserve Bank discount window to
supplement their supply of lendable funds and to meet deposit withdrawal
requirements. Advances from the FHLB typically are collateralized by stock in
the FHLB and a portion of first mortgage loans held by the Bank. At March 31,
2004 the Company had $30.0 million in advances outstanding.
The FHLB functions as a central reserve bank providing credit for member
savings associations and financial institutions. As members, the Banks are
required to own capital stock in the FHLB and are authorized to apply for
advances on the security of such stock and certain home mortgages and other
assets (principally, securities that are obligations of, or guaranteed by, the
United States) provided certain standards related to creditworthiness have been
met. Advances are made pursuant to several different programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based either on a fixed
percentage of a member institution's net worth or on the FHLB's assessment of
the institution's creditworthiness. Although advances may be used on a
short-term basis for cash management needs, FHLB advances have not been, nor are
they expected to be, a significant long-term funding source for the Company.
21
Year Ended March 31,
---------------------------------
2004 2003 2002
------- ------- -------
(Dollars in thousands)
Federal Home Loan Bank advances:
Maximum month-end balance ........... $30,000 $30,000 $ 6,000
Balance at end of period ............ 30,000 30,000 5,000
Average balance ..................... 30,000 17,204 5,505
Weighted average interest rate on:
Balance at end of period ............ 4.15% 4.15% 5.24%
Average balance for period .......... 4.16 4.28 5.32
Competition
The Company encounters strong competition both in attracting deposits and
in originating real estate and other loans. Its most direct competition for
deposits has come historically from commercial banks, brokerage houses, other
savings associations, and credit unions in its market area, and the Company
expects continued strong competition from such financial institutions in the
foreseeable future. The Company's market area includes branches of several
commercial banks that are substantially larger than the Company in terms of
state-wide deposits. The Company competes for savings by offering depositors a
high level of personal service and expertise together with a wide range of
financial services.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies, and other savings associations.
This competition for loans has increased substantially in recent years as a
result of the large number of institutions competing in the Company's market
area as well as the increased efforts by commercial banks to expand mortgage
loan originations.
The Company competes for loans primarily through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers, and builders. Factors that affect competition
include general and local economic conditions, current interest rate levels, and
volatility of the mortgage markets.
Subsidiaries
At March 31, 2004, the Company did not have any direct unconsolidated
subsidiaries.
Total Employees
The Company had 97 full-time employees and 34 part-time employees at March
31, 2004. None of these employees are represented by a collective bargaining
agent, and the Company believes that it enjoys good relations with its
personnel.
Regulation
As a state-chartered, SAIF-insured savings association, the Bank is
subject to examination, supervision and extensive regulation by the OTS, the
Ohio Division of Financial Institutions (the "Ohio Division"), and the FDIC. The
Bank is a member of, and owns stock in, the FHLB of Cincinnati, which is one of
the twelve regional banks in the Federal Home Loan Bank System. This regulation
and supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The OTS and Ohio Division regularly examine the
Bank and prepare reports for the consideration of the Company's Board of
Directors on any deficiencies that they may find in the Company's operations.
The FDIC also examines the Bank in its role as the administrator of the SAIF.
The Bank's relationship with its depositors and borrowers also is regulated to a
great extent by both federal and state laws especially in such matters as the
ownership of savings accounts and the form and content of the Bank's mortgage
documents. Any change in such
22
regulation, whether by the FDIC, OTS, Ohio Division, or Congress, could have a
material adverse impact on the Company, the Bank and their operations.
Federal Regulation of Savings Institutions
Business Activities. The activities of savings associations are governed
by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects,
the Federal Deposit Insurance Act (the "FDI Act"). These federal statutes, among
other things, (1) limit the types of loans a savings association may make, (2)
prohibit the acquisition of any corporate debt security that is not rated in one
of the four highest rating categories, and (3) restrict the aggregate amount of
loans secured by non-residential real estate property to 400% of capital. The
description of statutory provisions and regulations applicable to savings
associations set forth herein does not purport to be a complete description of
such statutes and regulations and their effect on the Company or the Bank.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to one borrower. Generally, savings
institutions may not make a loan or extend credit to a single or related group
of borrowers in excess of 15% of the institution's unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain securities and bullion, but generally does not
include real estate. See "--Lending Activities--Loans to One Borrower."
Qualified Thrift Lender Test. The HOLA requires savings associations to
meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings
association is required to maintain at least 65% of its "portfolio assets"
(total assets less (i) specified liquid assets up to 20% of total assets, (ii)
intangibles, including goodwill, and (iii) the value of property used to conduct
business) in certain "qualified thrift investments," primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities on a monthly basis in 9 out of every 12 months.
A savings association that fails the QTL test must either convert to a
bank charter or operate under certain restrictions. As of March 31, 2004, the
Company maintained 95.1% of its portfolio assets in qualified thrift investments
and, therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. A "well capitalized" institution can, after prior notice but
without the approval of the OTS, make capital distributions during a calendar
year in an amount up to 100% of its net income during the calendar year, plus
its retained net income for the preceding two years. As of March 31, 2004 the
Bank was a "well-capitalized" institution.
Community Reinvestment. Under the Community Reinvestment Act (the "CRA"),
as implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation, consistent with its safe and sound operation, to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions, nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Company received a "satisfactory" CRA
rating under the current CRA regulations in its most recent federal examination
by the OTS.
Transactions with Related Parties. The Company's authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Bank and
any non-savings institution subsidiaries) or to make loans to certain insiders,
is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section
23A limits the aggregate amount of transactions with any individual affiliate to
10% of the capital and surplus of the savings institution and also limits the
aggregate amount of transactions with all affiliates to 20% of the savings
institution's capital and surplus. Certain transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
Section 23A and the
23
purchase of low quality assets from affiliates is generally prohibited. Section
23B provides that certain transactions with affiliates, including loans and
asset purchases, must be on terms and under circumstances, including credit
standards, that are substantially the same or at least as favorable to the
institution as those prevailing at the time for comparable transactions with
non-affiliated companies. In addition, savings institutions are prohibited from
lending to any affiliate that is engaged in activities that are not permissible
for bank holding companies and no savings institution may purchase the
securities of any affiliate other than a subsidiary.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Criminal
penalties for most financial institution crimes include fines of up to $1
million and imprisonment for up to 30 years. Under the FDI Act, the FDIC has the
authority to recommend to the Director of OTS that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances.
Standards for Safety and Soundness. The federal banking agencies have
adopted a final regulation and Interagency Guidelines Prescribing Standards for
Safety and Soundness ("Guidelines") to implement the safety and soundness
standards required under the FDI Act. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The standards set forth in the Guidelines address internal controls
and information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; and compensation, fees
and benefits. The agencies also adopted a proposed rule which proposes asset
quality and earnings standards which, if adopted, would be added to the
Guidelines. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 4.0% leverage ratio (or core capital ratio) and an 8.0% risk-based capital
standard. Core capital is defined as common stockholders' equity (including
retained earnings), certain non-cumulative perpetual preferred stock and related
surplus, minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain qualifying supervisory goodwill and certain
mortgage servicing rights. The OTS regulations also require that, in meeting the
tangible ratio, leverage and risk-based capital standards, institutions must
deduct investments in and loans to subsidiaries engaged in activities not
permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 2 (core) and total capital (which is defined as core capital
and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS
believes are inherent in the type of asset. The components of Tier 1 (core)
capital are equivalent to those discussed earlier under the 4.0% leverage ratio
standard. The components of supplementary capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and allowance for
loan and lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25%. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
Prompt Corrective Regulatory Action
Under the OTS Prompt Corrective Action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of
24
capitalization. Generally, a savings institution that has total risk-based
capital of less than 8.0% or a leverage ratio or a Tier 1 core capital ratio
that is less than 4.0% is considered to be undercapitalized. A savings
institution that has the total risk-based capital less than 6.0%, a Tier 1 core
risk-based capital ratio of less than 3.0% or a leverage ratio that is less than
3.0% is considered to be "significantly undercapitalized" and a savings
institution that has a tangible capital to assets ratio equal to or less than
2.0% is deemed to be "critically undercapitalized." Subject to a narrow
exception, the banking regulator is required to appoint a receiver or
conservator for an institution that is "critically undercapitalized." The
regulation also provides that a capital restoration plan must be filed with the
OTS within 45 days of the date an institution receives notice that it is
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized." In addition, numerous mandatory supervisory actions become
immediately applicable to the institution, including, but not limited to,
restrictions on growth, investment activities, capital distributions, and
affiliate transactions. The OTS could also take any one of a number of
discretionary supervisory actions, including the issuance of a capital directive
and the replacement of senior executive officers and directors.
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the U.S. Government. As insurer, the FDIC
imposes deposit insurance premiums and is authorized to conduct examinations of
and to require reporting by FDIC-insured institutions. It also may prohibit any
FDIC-insured institution from engaging in any activity the FDIC determines by
regulation or order to pose a serious risk to the FDIC. The FDIC also has the
authority to initiate enforcement actions against savings and loan associations,
after giving the OTS an opportunity to take such action, and may terminate the
deposit insurance if it determines that the institution has engaged or is
engaging in unsafe or unsound practices, or is in an unsafe or unsound
condition. Currently, FDIC deposit insurance rates generally range from zero
basis points to 27 basis points, depending on the assessment risk classification
assigned to the depository institution.
The FDIC may terminate the deposit insurance of any insured depository
institution, including the Bank, if it determines after a hearing that the
institution has engaged or is engaging in unsafe or unsound practices, is in an
unsafe or unsound condition to continue operations, or has violated any
applicable law, regulation, order or any condition imposed by an agreement with
the FDIC. It also may suspend deposit insurance temporarily during the hearing
process for the permanent termination of insurance, if the institution has no
tangible capital. If insurance of accounts is terminated, the accounts at the
institution at the time of the termination, less subsequent withdrawals, shall
continue to be insured for a period of six months to two years, as determined by
the FDIC. Management is aware of no existing circumstances which would result in
termination of the deposit insurance of the Bank.
Federal Home Loan Bank System
The Banks are members of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Banks, as members of the FHLB, are required to acquire and
hold shares of capital stock in that FHLB in an amount at least equal to 1% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Banks were in compliance
with this requirement with an investment in FHLB-Cincinnati stock, at March 31,
2004, of $4.2 million.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. FHLB dividends were 4.0% for the fiscal year ended
March 31, 2004. If dividends were reduced, or interest on future FHLB-Cincinnati
advances increased, the Company's net interest income would likely also be
reduced.
Ohio Regulation
As a savings and loan association organized under the laws of the State of
Ohio, the Bank is subject to regulation by the Ohio Division. Regulation by the
Ohio Division affects the Bank's internal organization as well as its savings,
mortgage lending, and other investment activities. Periodic examinations by the
Ohio Division are
25
usually conducted on a joint basis with the OTS. Ohio law requires that the Bank
maintain federal deposit insurance as a condition of doing business.
Under Ohio law, an Ohio association may buy any obligation representing a
loan that would be a legal loan if originated by the Bank, subject to various
requirements including: loans secured by liens on income-producing real estate
may not exceed 20% of an association's assets; consumer loans, commercial paper,
and corporate debt securities may not exceed 20% of an association's assets;
loans for commercial, corporate, business, or agricultural purposes may not
exceed 10% of an association's assets unless the Ohio Division increases the
limitation to 30%, provided that an association's required reserve must increase
proportionately; certain other types of loans may be made for lesser percentages
of the association's assets; and, with certain limitations and exceptions,
certain additional loans may be made if not in excess of 3% of the association's
total assets. In addition, no association may make real estate acquisition and
development loans for primarily residential use to one borrower in excess of 2%
of assets. The total investments in commercial paper or corporate debt of any
issuer cannot exceed 1% of an association's assets, with certain exceptions.
Ohio law authorizes Ohio-chartered associations to, among other things:
(i) invest up to 15% of assets in the capital stock, obligations, and other
securities of service corporations organized under the laws of Ohio, and an
additional 20% of net worth may be invested in loans to majority owned service
corporations; (ii) invest up to 10% of assets in corporate equity securities,
bonds, debentures, notes, or other evidence of indebtedness; (iii) exceed limits
otherwise applicable to certain types of investments (other than investments in
service corporations) by and between 3% and 10% of assets, depending upon the
level of the institution's permanent stock, general reserves, surplus, and
undivided profits; and (iv) invest up to 15% of assets in any loans or
investments not otherwise specifically authorized or prohibited, subject to
authorization by the institution's board of directors.
An Ohio association may invest in such real property or interests therein
as its board of directors deems necessary or convenient for the conduct of the
business of the association, but the amount so invested may not exceed the net
worth of the association at the time the investment is made. Additionally, an
association may invest an amount equal to 10% of its assets in any other real
estate. This limitation does not apply, however, to real estate acquired by
foreclosure, conveyance in lieu of foreclosure, or other legal proceedings in
relation to loan security interests.
Notwithstanding the above powers authorized under Ohio law and regulation,
a state-chartered savings association, such as the Bank, is subject to certain
limitations on its permitted activities and investments under federal law, which
may restrict the ability of an Ohio-chartered association to engage in
activities and make investments otherwise authorized under Ohio law.
Ohio has adopted statutory limitations on the acquisition of control of an
Ohio savings and loan association by requiring the written approval of the Ohio
Division prior to the acquisition by any person or company, as defined under the
Ohio Revised Code, of a controlling interest in an Ohio association. Control
exists, for purposes of Ohio law, when any person or company, either directly,
indirectly, or acting in concert with one or more other persons or companies (a)
acquires 15% of any class of voting stock, irrevocable proxies, or any
combination thereof, (b) directs the election of a majority of directors, (c)
becomes the general partner of the savings and loan association, (d) has
influence over the management and policies of the savings and loan association,
(e) has the ability to direct shareholder votes, or (f) anything else deemed to
be control by the Ohio Division. The Ohio Division's written permission is
required when the total amount of control held by the acquiror was less than or
equal to 25% control before the acquisition and more than 25% control after the
acquisition, or when the total amount of control held by the acquiror was less
than 50% before the acquisition and more than 50% after the acquisition. Ohio
law also prescribes other situations in which the Ohio Division must be notified
of the acquisition even though prior approval is not required. Any person or
company, which would include a director, will not be deemed to be in control by
virtue of an annual solicitation of proxies voted as directed by a majority of
the board of directors.
Under certain circumstances, interstate mergers and acquisitions involving
associations incorporated under Ohio law are permitted by Ohio law. A savings
and loan association or savings and loan holding company with its principal
place of business in another state may acquire a savings and loan association or
savings and loan holding company incorporated under Ohio law if the laws of such
other state permit an Ohio savings and loan association or
26
an Ohio holding company reciprocal rights. Additionally, recently enacted
legislation permits interstate branching by savings and loan associations
incorporated under Ohio law.
Ohio law requires prior written approval of the Ohio Superintendent of
Savings and Loans of a merger of an Ohio association with another savings and
loan association or a holding company affiliate.
Holding Company Regulation
Holding Company Acquisitions. The Company is a registered savings and loan
holding company within the meaning of Section 10 of the HOLA, and is subject to
OTS examination and supervision as well as certain reporting requirements.
Federal law generally prohibits a savings and loan holding company, without
prior OTS approval, from acquiring the ownership or control of any other savings
institution or savings and loan holding company, or all, or substantially all,
of the assets or more than 5% of the voting shares thereof. These provisions
also prohibit, among other things, any director or officer of a savings and loan
holding company, or any individual who owns or controls more than 25% of the
voting shares of such holding company, from acquiring control of any savings
institution not a subsidiary of such savings and loan holding company, unless
the acquisition is approved by the OTS.
Holding Company Activities. The Company operates as a unitary savings and
loan holding company. The activities of the Company and its non-savings
institution subsidiaries are restricted to activities traditionally permitted to
multiple savings and loan holding companies and to financial holding companies
under newly added provisions of the Bank Holding Company Act. Multiple savings
and loan holding companies may:
o furnish or perform management services for a savings association
subsidiary of a savings and loan holding company;
o hold, manage or liquidate assets owned or acquired from a savings
association subsidiary of a savings and loan holding company;
o hold or manage properties used or occupied by a savings association
subsidiary of a savings and loan holding company;
o engage in activities determined by the Federal Reserve to be closely
related to banking and a proper incident thereto; and
o engage in services and activities previously determined by the
Federal Home Loan Bank Board by regulation to be permissible for a
multiple savings and loan holding company as of March 5, 1987.
The activities financial holding companies may engage in include:
o lending, exchanging, transferring or investing for others, or
safeguarding money or securities;
o insuring, guaranteeing or indemnifying others, issuing annuities,
and acting as principal, agent or broker for purposes of the
foregoing;
o providing financial, investment or economic advisory services,
including advising an investment company;
o issuing or selling interests in pooled assets that a bank could hold
directly;
o underwriting, dealing in or making a market in securities; and
o merchant banking activities.
27
If the OTS determines that there is reasonable cause to believe that the
continuation by a savings and loan holding company of an activity constitutes a
serious risk to the financial safety, soundness or stability of its subsidiary
savings institution, the OTS may impose such restrictions as deemed necessary to
address such risk. These restrictions include limiting the following:
o the payment of dividends by the savings institution;
o transactions between the savings institution and its affiliates; and
o any activities of the savings institution that might create a
serious risk that the liabilities of the holding company and its
affiliates may be imposed on the savings institution.
Federal Securities Laws. The Company registered its common stock with the
Securities and Exchange Commission under Section 12(g) of the Securities
Exchange Act of 1934. The Company is subject to the proxy and tender offer
rules, insider trading reporting requirements and restrictions, and certain
other requirements under the Exchange Act. Pursuant to OTS regulations, the
Company has agreed to maintain such registration for a minimum of three years
following the conversion in January 2003.
Federal and State Taxation
Federal Taxation. Income taxes are accounted for under the asset and
liability method which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The Federal tax bad debt reserve method available to thrift institutions
was repealed in 1996 for tax years beginning after 1995. As a result, the
Company was required to change from the reserve method to the specific
charge-off method to compute its bad debt deduction. In addition, the Company is
required generally to recapture into income the portion of its bad debt reserve
(other than the supplemental reserve) that exceeds its base year reserves, or
approximately $200,000.
The recapture amount resulting from the change in a thrift's method of
accounting for its bad debt reserves generally will be taken into taxable income
ratably (on a straight-line basis) over a six-year period. The Bank began
recapture of the bad debt reserve during fiscal 1999.
Retained earnings as of March 31, 2004 include approximately $2.7 million
for which no provision for Federal income tax has been made. This reserve (base
year and supplemental) is frozen/not forgiven as certain events could trigger a
recapture such as stock redemption or distributions to shareholders in excess of
current or accumulated earnings and profits.
The Company's 1999 federal income tax return is under examination by the
IRS. Management does not anticipate any material effects on results of
operations or financial position as a result of the examination.
Ohio Taxation. The Bank files Ohio franchise tax returns. For Ohio
franchise tax purposes, savings institutions are currently taxed at a rate equal
to 1.3% of taxable net worth. The Bank is not currently under audit with
respect to its Ohio franchise tax returns.
Delaware Taxation. As a Delaware holding company not earning income in
Delaware, the Company is exempt from Delaware corporate income tax but is
required to file an annual report with and pay an annual franchise tax to the
State of Delaware. The tax is imposed as a percentage of the capital base of the
Company with an annual maximum of $165,000. The Company paid Delaware franchise
taxes of $27,500 in 2004.
28
ITEM 2. Properties
The Company conducts its business through its main banking office located
in Wooster, Ohio, its eight additional full service branch offices located in
its market area, and the full service office of Village Savings Bank. The
following table sets forth information about its offices as of March 31, 2004.
Original Year Year of
Leased or Leased or Lease
Location Owned Acquired Expiration
-------------------------------- --------- ------------- ----------
North Market Street Office
151 N. Market Street Owned 1902 N/A
Wooster, Ohio
Cleveland Point Financial Center
1908 Cleveland Road Owned 1978 N/A
Wooster, Ohio
Madison South Office
2024 Millersburg Road Owned 1999 N/A
Wooster, Ohio
Northside Office
543 Riffel Road Leased 1999 2019
Wooster, Ohio
Millersburg Office
90 N. Clay Street Owned 1964 N/A
Millersburg, Ohio
Claremont Avenue Office
233 Claremont Avenue Owned 1968 N/A
Ashland, Ohio
Buehlers-Sugarbush Office
1055 Sugarbush Drive Leased 2001 2021
Ashland, Ohio
Rittman Office
237 North Main Street Owned 1972 N/A
Rittman, Ohio
Lodi Office
303 Highland Drive Owned 1980 N/A
Lodi, Ohio
Village Office
1265 S. Main Street Owned 1998 N/A
North Canton, Ohio
The Company's accounting and recordkeeping activities are maintained
through an in-house data processing system.
29
ITEM 3. Legal Proceedings
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business which, in
the aggregate, involve amounts which are believed by management to be immaterial
to the financial condition and operations of the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
During the fourth quarter of the fiscal year covered by this report, the
Registrant did not submit any matters to the vote of security holders.
PART II
ITEM 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities
The "Stockholder Information" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Common Stock and Related
Matters" sections of the Company's Annual report to stockholders for the fiscal
year ended March 31, 2004 (the "2004 Annual Report to Stockholders") are
incorporated herein by reference. No other sections of the 2004 Annual Report to
Stockholders are incorporated herein by this reference.
The following table sets forth information with respect to purchases made
by or on behalf of the Company of shares of common stock of the Company during
the indicated periods.
Total Number of
Shares Purchased as Maximum Number of
Total Number Average Part of Publicly Shares that May Yet Be
of Shares Price Paid Announced Plans or Purchased Under the
Period Purchased per Share Programs Plans or Programs(1)
------------ ---------- ------------------- ----------------------
January 1-31, 2004 -- $ -- 195,365 195,365
February 1-29, 2004 90,000 16.00 195,365 105,365
March 1-31, 2004 22,500 16.10 195,365 82,865
------- ------ ------- -------
Total 112,500 $16.02 195,365 82,865
======= ====== ======= =======
- ----------
(1) A repurchase program for 195,365 shares was publicly announced on January
29, 2004. As of March 31, 2004, 112,500 shares had been repurchased under
that program.
See "Management Compensation - Equity Compensation Plan Information" on
page 9 of the Company's definitive proxy statement for its 2004 annual meeting
of stockholders, filed with the Securities and Exchange Commission on June 24,
2004 ("Proxy Statement"), for information regarding the Company's equity plans
required by Item 201(d) of Regulation S-K.
ITEM 6. Selected Financial Data
The information required herein is incorporated by reference from pages 8
to 9 of the 2004 Annual Report to Stockholders.
30
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's 2004 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 2004
Annual report to Stockholders are incorporated herein by this reference.
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk
The information required herein is incorporated by reference from pages 15
to 16 of the 2004 Annual Report to Stockholders.
ITEM 8. Financial Statements and Supplementary Data
The material identified in Item 15(a)(1) hereof is incorporated herein by
reference.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
Not Applicable
ITEM 9A. Controls and Procedures
Our management evaluated, with the participation of our Chief Executive
Officer and Chief Financial Officer, the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a-15(e) or 15d-15(e) under the
Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based on such evaluation, our Chief Executive Officer and Chief
Financial Officer have concluded that our disclosure controls and procedures are
designed to ensure that information required to be disclosed by us in the
reports that we file or submit under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in the SEC's rules and regulations and are operating in an effective manner.
PART III
ITEM 10. Directors and Executive Officers of the Registrant
The information required herein is incorporated herein by reference from
pages 3 to 6 and page 16 of the Proxy Statement.
The Company has adopted a Code of Conduct and Ethics that applies to its
principal executive officer and principal financial officer, as well as other
officers and employees of the Company and the Bank. Upon receipt of a written
request we will furnish without charge to any stockholder a copy of the Code of
Conduct and Ethics. Such written requests should be directed to Mr. Michael C.
Anderson, Secretary, Wayne Savings Bancshares, Inc., 151 North Market Street,
Wooster, Ohio 44691.
ITEM 11. Executive Compensation
The information required herein is incorporated herein by reference from
pages 7 to 12 and page 14 of the Proxy Statement.
31
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The information required herein is incorporated herein by reference from
pages 3 to 5, page 9 and page 15 of the Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions
The information required by Item 13 of Form 10-K is incorporated by
reference from "Management Compensation - Indebtedness of Management and Related
Party Transactions" on page 11 in the Proxy Statement.
ITEM 14. Principal Accounting Fees and Services
The information required herein in incorporated by reference from
"Proposal IV - Ratification of Appointment of Auditors" on page 18 in the Proxy
Statement.
PART IV
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on From 8-K
(a)(1) Financial Statements
The following documents appear in sections of the Company's 2004
Annual Report to Stockholders under the same captions, and are incorporated
herein by reference. No other sections of the 2004 Annual Report to Stockholders
are incorporated herein by this reference:
(i) Selected Consolidated Financial and Other Data;
(ii) Management's Discussion and Analysis of Financial Condition and
Results of Operations;
(iii) Report of Independent Certified Public Accountants;
(iv) Consolidated Statements of Financial Condition
(v) Consolidated Statements of Earnings;
(vi) Consolidated Statements of Stockholders' Equity;
(vii) Consolidated Statements of Cash Flows; and
(viii) Notes to Consolidated Financial Statements.
With the exception of the aforementioned sections, the Company's
2004 Annual Report to Stockholders is not deemed filed as part of this
Annual Report on Form 10-K, and no other sections of the 2004 Annual
Report to Stockholders are incorporated herein by this reference.
(a)(2) Financial Statement Schedules
All financial statement schedules have been omitted as the required
information is inapplicable or has been included in the Notes to
Consolidated Financial Statements.
32
(a)(3) Exhibits
Exhibit Number Document
-------------- --------------------------------------------------------------
3.1* Articles of Incorporation
3.2* Bylaws
4.0** Form of Common Stock Certificate of Wayne Savings Bancshares,
Inc.
10.1 Employment agreement with Charles F. Finn
10.2 Employment agreement with Wanda Christopher-Finn
10.3 Employment agreement with Michael C. Anderson
10.4 Employment agreement with Bryan K. Fehr
11.0*** Statement re: computation of per share earnings
13.0 Annual Report to Security Holders
21.0 Subsidiaries of Registrant-Reference is made to Item 1-
"Business" for the Required Information
23.0 Consent of Grant Thornton LLP
31.1 Certification pursuant to Rule 13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934 of the Chief Executive Officer
31.2 Certification pursuant to Rule 13a-14(a) and 15d-14(a) of the
Securities Exchange Act of 1934 of the Chief Financial Officer
32.0 Certification pursuant to 18 U.S.C. Section 1350
- ----------
* Filed as exhibits to the Plan of Conversion and Reorganization filed as
Exhibit 2 to the Registrant's registration statement on Form SB-2,
initially filed on September 18, 2001, as amended (Registration No.
333-69600).
** Filed as Exhibit 4, to the Registrant's registration statement on Form
SB-2, initially filed on September 18, 2001, as amended (Registration No.
333-69600).
*** Incorporated by reference to Note A.8. of "Notes to Consolidated Financial
Statements" of the 2004 Annual Report to Stockholders.
33
(b) Reports on Form 8-K:
Date Item and Description
---------------- -------------------------------------------------
January 30, 2004 5, 7, 12 - On January 30, 2004, the Company
issued a press release reporting its earnings for
the quarter ended December 31, 2003 and the
authorization of a stock repurchase program.
34
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WAYNE SAVINGS BANCSHARES, INC.
Date: June 28, 2004 By: /s/ Charles F. Finn
------------------------------------
Charles F. Finn
President and Chief Executive
Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/ Charles F. Finn By: /s/ Michael C. Anderson
------------------------------------ ------------------------------------
Charles F. Finn, President, Chief Michael C. Anderson, Senior Vice President and
Executive Officer and Director Corporate Secretary
(Principal Executive Officer) (Principal Financial Officer)
Date: June 28, 2004 Date: June 28, 2004
By: /s/ Myron Swartzentruber By: /s/ Kenneth R. Lehman
------------------------------------ ------------------------------------
Myron Swartzentruber, Vice President Kenneth R. Lehman, Director
(Principal Accounting Officer)
Date: June 28, 2004 Date: June 28, 2004
By: /s/ Donald E. Massaro By: /s/ James C. Morgan
------------------------------------ ------------------------------------
Donald E. Massaro, Director James C. Morgan, Director
Date: June28, 2004 Date: June 28, 2004
By: /s/ Terry A. Gardner By: /s/ Russell L. Harpster
------------------------------------ ------------------------------------
Terry A. Gardner, Director Russell L. Harpster, Director
Date: June 28, 2004 Date: June 28, 2004
By: /s/ Joseph L. Retzler
------------------------------------
Joseph L. Retzler, Director
Date: June 28, 2004
35