EXHIBIT 99.1
OFFICE OF THRIFT SUPERVISION
1700 G STREET, N.W.
WASHINGTON, D.C. 20552
FORM 10-KSB
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 [FEE REQUIRED]
For the Fiscal Year Ended March 31, 1997
OR
[_] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 [NO FEE REQUIRED]
For the transition period from _______________ to ______________________
OTS DOCKET NUMBER 4195
THE WAYNE SAVINGS AND LOAN COMPANY
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(Exact name of registrant as specified in its charter)
OHIO 34-0606020
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
151 NORTH MARKET STREET, WOOSTER, OHIO 44691
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(Address of Principal Executive Offices) Zip Code
(330) 264-5767
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(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: NONE
Securities Registered Pursuant to Section 12(g) of the Act: COMMON STOCK, PAR
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VALUE $1.00 PER SHARE
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(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES X NO ____
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X].
The issuer's revenues for the fiscal year ended March 31, 1997, were $19.3
million.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the closing sales price of the
Registrant's stock, as reported on the Nasdaq SmallCap Market on June 13, 1997,
was approximately $14.8 million. This amount excludes shares held by Wayne
Savings Bankshares, M.H.C., and the Registrant's directors and senior officers.
As of June 13, 1997, there were issued and outstanding 2,247,993 shares of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Sections of Annual Report to Stockholders for the fiscal year ended March
31, 1997 (Parts II and III).
2. Proxy Statement for the 1997 Annual Meeting of Stockholders (Parts I and
III).
PART I
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ITEM 1. BUSINESS
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GENERAL
The Wayne Savings and Loan Company ("Wayne Savings" or the "Association")
is an Ohio-chartered stock savings and loan association headquartered in
Wooster, Ohio. The Association's deposits are insured by the Federal Deposit
Insurance Corporation ("FDIC") under the Savings Association Insurance Fund
("SAIF"). The Association has been a member of the Federal Home Loan Bank
("FHLB") System since 1937. At March 31, 1997, the Association had total assets
of $252.2 million, total deposits of $211.4 million, and stockholders' equity of
$23.1 million.
The Association is a community-oriented savings institution offering
traditional financial services to its local community. The Association's
primary lending and deposit gathering area includes Wayne, Holmes, Ashland, and
Medina counties, where it operates six full-service offices. This contiguous
four-county area is located in north central Ohio, and is an active
manufacturing and agricultural market. The Association's principal business
activity consists of originating one- to four-family residential real estate
loans in its market area. The Association also originates multi-family
residential and non-residential real estate loans, although such loans
constitute a small portion of the Association's lending activities and a
decreasing portion of the Association's loan portfolio. The Association also
originates consumer loans, and to a lesser extent, construction loans. The
Association 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 Association'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 Association, headquartered in Wooster, Ohio, operates in Wayne,
Ashland, Medina and Holmes Counties in north central Ohio. Wooster, Ohio is
located in Wayne County and is approximately midway between Cleveland and
Columbus, Ohio.
Wayne County is characterized by a diverse economic base, which is not
dependent on any particular industry. It is one of the leading agricultural
counties in the state. In addition, since 1892, Wooster has been the
headquarters of the Ohio Agricultural Research and Development Center, the
agricultural research arm of The Ohio State University. Wayne County is also
the home base of such nationally known companies as Rubbermaid Incorporated,
J.M. Smucker Company (located in the City of Orrville) and the Wooster Brush
Company. It is also the home of many industrial plants, including those of
Packaging Corporation of America, Morton Salt, Bell and Howell Micro Photo
Division, FritoLay, Inc., and The Gerstenslager Company. Wayne County is also
known for its excellence in education. The College of Wooster was founded in
1866. Other quality educational opportunities are offered by the Agricultural
Technical Institute of Ohio State University, and Wayne College, a branch of The
University of Akron. Wayne Savings operates two full-service offices in
Wooster.
Ashland County, which is located due west of Wayne County, also has a
diverse economic base. In addition to its agricultural segment, Ashland County
has manufacturing plants producing rubber and plastics, machinery,
transportation equipment, chemicals, apparel, and other items. Ashland is also
the home of Ashland University. The City of Ashland is the county seat and the
location of one of the Association'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 Association 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 Association's branch offices.
LENDING ACTIVITIES
GENERAL. Historically, the principal lending activity of the Association
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 Association originates ARM loans for retention in its
portfolio, and fixed rate loans that are eligible for resale in the secondary
mortgage market. The Association also originates loans collateralized by non-
residential and multi-family residential real estate as well as commercial
business loans; however, such lending has been reduced significantly in recent
years and currently constitutes a relatively small portion of the Association's
lending activities. The Association also originates consumer loans to broaden
services offered to customers and to decrease the Association's interest rate
risk exposure.
The Association 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 Association also
purchases mortgage-backed securities generally with estimated remaining average
lives of 5 years or less. At March 31, 1997, approximately $72.8 million, or
34.3%, of the Association's total loans and mortgage-backed securities, due
after March 31, 1998, consisted of loans or securities with adjustable interest
rates.
The Association continues actively to originate fixed rate mortgage loans,
generally with 15 to 30 year terms to maturity, collateralized by one- to four-
family residential properties. One- to four-family fixed rate residential
mortgage loans generally are originated and underwritten according to standards
that allow the Association to resell such loans in the secondary mortgage market
for purposes of managing interest rate risk and liquidity. The majority of such
one- to four-family fixed rate residential mortgage loans, however, are retained
by the Association. The Association retains servicing on its sold mortgage
loans and realizes monthly service fee income. The Association also originates
interim construction loans on one- to four-family residential properties.
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ANALYSIS OF LOAN PORTFOLIO. Set forth below are selected data relating to
the composition of the Association's loan portfolio by type of loan as of the
dates indicated.
At March 31,
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1997 1996 1995
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$ % $ % $ %
-------- ------- -------- ------- -------- -------
(Dollars in Thousands)
Mortgage loans:
One- to four-family residential(1)... $184,381 85.98% $177,267 83.60% $170,450 81.63%
Residential construction loans....... 5,717 2.67 5,250 2.48 5,680 2.72
Multi-family residential............. 5,491 2.56 10,215 4.82 10,994 5.26
Non-residential real estate/land(2).. 6,519 3.04 6,831 3.22 9,467 4.53
-------- ------ -------- ------ -------- ------
Total mortgage loans............... 202,108 94.25 199,563 94.12 196,591 94.14
Other loans:
Consumer loans....................... 11,568 5.39 11,708 5.52 10,376 4.97
Commercial business loans............ 769 .36 767 .36 1,854 .89
-------- ------ -------- ------ -------- ------
Total other loans.................. 12,337 5.75 12,475 5.88 12,230 5.86
-------- ------ -------- ------ -------- ------
Total loans before net items.......... 214,445 100.00% 212,038 100.00% 208,821 100.00%
====== ====== ======
Less:
Loans in process..................... 2,111 2,540 3,781
Deferred loan origination fees....... 2,016 2,097 2,120
Unearned income...................... -- -- 82
Allowance for loan losses............ 914 888 981
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Total loans receivable, net........ $209,404 $206,513 $201,857
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Mortgage-backed securities, net (3)... $ 873 $ 1,929 $ 2,920
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_________________
(1) Includes equity loans collateralized by second mortgages in the aggregate
amount of $7.3 million, $5.8 million, and $5.5 million, as of March 31,
1997, 1996 and 1995, respectively. Such loans have been underwritten on
substantially the same basis as the Association's first mortgage loans.
(2) Includes land loans of $449,000, $348,000, and $432,000 as of March 31,
1997, 1996, and 1995, respectively.
(3) Includes mortgage-backed securities designated as available for sale.
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LOAN AND MORTGAGE-BACKED SECURITIES MATURITY AND REPRICING SCHEDULE. The
following table sets forth certain information as of March 31, 1997, regarding
the dollar amount of loans and mortgage-backed securities maturing in the
Association's portfolio based on their contractual terms to maturity. Demand
loans, loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less. Adjustable and floating
rate loans are included in the period in which interest rates are next scheduled
to adjust rather than in which they mature, and fixed rate loans and mortgage-
backed securities are included in the period in which the final contractual
repayment is due. Fixed rate mortgage-backed securities are assumed to mature
in the period in which the final contractual payment is due on the underlying
mortgage.
One Three Five Ten Beyond
Within Through Through Through Through Twenty
One Year Three Years Five Years Ten Years Twenty Years Years Total
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(In Thousands)
Mortgage loans (1):
One to four family residential:
Adjustable................................. $58,755 $1,427 $ -- $ -- $ -- $ -- $ 60,182
Fixed...................................... 322 512 1,891 12,670 48,957 61,180 125,532
Multi-family residential and nonresidential:
Adjustable................................. 10,039 1,263 -- -- -- -- 11,302
Fixed...................................... 17 772 85 1,203 679 550 3,306
Second Mortgage Loans......................... 2 46 129 507 -- -- 684
Other Loans:
Commercial................................. 606 363 20 5 -- -- 994
Consumer................................... 2,359 2,583 2,136 3,231 25 -- 10,334
------- ------ ------ ------- ------- ------- --------
Total loans................................... $72,100 $6,966 $4,261 $17,616 $49,661 $61,730 $212,334
======= ====== ====== ======= ======= ======= ========
Mortgage-backed securities (2)................ $ 48 $ 447 $ -- $ -- $ 333 $ -- $ 828
======= ====== ====== ======= ======= ======= ========
__________________________
(1) Amounts shown are net of loans in process of $2.1 million.
(2) Includes mortgage-backed securities available for sale. Does not include
premiums of $5,000, unrealized gains of $47,000, and discounts of $7,000.
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The following table sets forth at March 31, 1997, the dollar amount of all
fixed rate and adjustable rate loans due after March 31, 1998.
Fixed Adjustable Total
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(In Thousands)
Mortgage loans:
One- to four-family residential.. $125,175 $60,181 $185,356
Multi-family residential......... 3,289 11,301 14,590
Other loans:
Commercial business.............. 388 603 991
Consumer......................... 9,484 692 10,176
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Total loans................... $138,336 $72,777 $211,113
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Mortgage-backed securities (1)..... $ 780 $ -- $ 780
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_________________________
(1) Includes mortgage-backed securities available for sale.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LOANS. The Association's
primary lending activity consists of the origination of one- to four-family,
owner-occupied, residential mortgage loans on properties located in the
Association's market area. The Association generally does not originate one- to
four-family residential loans on properties outside of its market area. At
March 31, 1997, the Association had $184.4 million, or 86.0%, of its total loan
portfolio invested in one- to four-family residential mortgage loans.
The Association's fixed rate loans generally are originated and
underwritten according to standards that permit resale in the secondary mortgage
market. Whether the Association can or will sell fixed rate loans into the
secondary market, however, depends on a number of factors including but not
limited to the Association's portfolio mix, gap and liquidity positions, and
market conditions. Moreover, the Association is more likely to retain fixed
rate loans if its one year gap is positive. The Association'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
Association's secondary market activities over the past three years have been
limited to sales of $2.0 million, $3.1 million, and $1.4 million for the fiscal
years ended March 31, 1997, 1996 and 1995, respectively. Such sales generally
constituted current period originations. No mortgage loans were held for sale
as of March 31, 1997, 1996, and 1995.
The Association 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 Association's interest
rate gap position, and loan products offered by the Association's competitors.
Particularly in a relatively low interest rate environment, borrowers typically
prefer fixed rate loans to ARM loans. Therefore, even if management's strategy
is to emphasize ARM loans, market conditions may be such that there is greater
demand for fixed rate mortgage loans. During the year ended March 31, 1997, the
Association's ARM portfolio decreased by $1.3 million, or 2.3%.
The Association's ARM loans adjust annually with interest rate adjustment
limitations of 1% per year and with a cap of 3% on total rate increases or
decreases over the life of the loan. The Association's current index on its ARM
loans is the Ohio Cost of Funds for SAIF-Insured Savings Associations, which
index is published quarterly by the OTS. In the past, the Association has used
different interest indices for ARM loans, such as the National Average Contract
Rate for Previously Occupied Homes and the National Average Cost of Funds.
Consequently, the
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interest rate adjustments on the Association's portfolio of ARM loans do not
reflect changes in a particular interest rate index. The Association does not
originate ARM loans with initially discounted rates. The Association determines
whether a borrower qualifies for an ARM loan based on the contractual rate of
the ARM loan at the time the loan is originated. One- to four-family
residential ARM loans totaled $60.2 million, or 28.3%, of the Association's
total loan portfolio at March 31, 1997.
The primary purpose of offering ARM loans is to make the Association'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
Association 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 Association's credit risk associated
with its ARM loans is reduced because the Association has a 3% cap on interest
rate increases during the life of its ARM loans.
The Association 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 Association requires that the maximum
loan-to-value ratios, including the principal balances of both the first and
second mortgage loans, not exceed 85%. The home equity loan portfolio consists
of adjustable rate loans, which use the Ohio Average Cost of Funds for SAIF-
Insured Savings Associations and the prime rate as published in The Wall Street
Journal as interest rate indices. Home equity loans include fixed term
adjustable rate loans, as well as lines of credit. As of March 31, 1997, the
Association's equity loan portfolio totaled $7.3 million, or 4.0%, of its one-
to four-family mortgage loan portfolio.
The Association's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the
Association 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 Association'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 Association'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
Association makes one- to four-family real estate loans with loan-to-value
ratios in excess of 80%. For 15 year fixed rate and all ARM loans with loan-to-
value ratios of 80.01% to 90%, and 90.01% to 95%, the Association requires the
first 20%, and 25%, respectively, of the loan to be covered by private mortgage
insurance. For 30 year fixed rate loans with loan-to-value ratios of 80.01% to
85%, 85.01% to 90%, and 90.01% to 95%, the Association requires the first 12%,
25%, and 30%, respectively, of the loan to be covered by private mortgage
insurance. The Association requires fire and casualty insurance, as well as
title insurance regarding good title, on all properties securing real estate
loans made by the Association and flood insurance, where applicable.
MULTI-FAMILY RESIDENTIAL REAL ESTATE LOANS. In recent years, the
Association has significantly reduced its originations of multi-family real
estate loans. Loans securing multi-family real estate constituted approximately
$5.5 million, or 2.6%, of the Association's total loan portfolio at March 31,
1997. The Association's multi-family real estate loans are secured by multi-
family residences, such as apartment buildings. At March 31, 1997, 79.0% of the
Association's multi-family loans were secured by properties located within the
Association's market area. At March 31, 1997, the Association's multi-family
real estate loans had an average balance of $138,000, and the largest multi-
family real estate loan had a principal balance of $1.3 million. Multi-family
real estate loans currently are offered with adjustable interest rates or short
term balloon maturities, although in the past the Association 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
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to 25 years. The Association currently does not emphasize multi-family real
estate construction loans; however, the Association's policies do not preclude
such lending.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one- to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family
real estate is typically dependent upon the successful operation of the related
real estate property. If the cash flow from the project is reduced, the
borrower's ability to repay the loan may be impaired.
NON-RESIDENTIAL REAL ESTATE LOANS. The Association also has reduced
significantly its non-residential real estate loan originations in recent years.
Loans secured by non-residential real estate constituted approximately $6.5
million, or 3.0%, of the Association's total loan portfolio at March 31, 1997.
The Association'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, 1997, 70.0% of the Association's non-residential real
estate loans were secured by properties located within the Association's market
area. At March 31, 1997, the Association's non-residential loans had an average
balance of $162,000, and the largest non-residential real estate loan had a
principal balance of $979,000. 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 Association has originated fixed rate long
term non-residential real estate loans. Non-residential real estate loans
originated by the Association generally amortize over 15 to 25 years. The
Association currently does not emphasize non-residential real estate
construction loans; however, the Association's policies do not preclude such
lending.
Loans secured by non-residential real estate generally involve a greater
degree of risk than one- to four-family residential mortgage loans and carry
larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by non-residential
real estate is typically dependent upon the successful operation of the related
real estate project. If the cash flow from the project is reduced, the
borrower's ability to repay the loan may be impaired.
The Association 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 $449,000 at March 31, 1997.
RESIDENTIAL CONSTRUCTION LOANS. To a lesser extent, the Association
originates loans to finance the construction of one- to four-family residential
property. At March 31, 1997, the Association had $5.7 million, or 2.7%, of its
total loan portfolio invested in interim construction loans. The Association
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 Association 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.
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, 1997, consumer loans totaled $11.6 million, or 5.4%, of the
Association's total loan portfolio. The principal types of consumer loans
offered by the Association are fixed rate and fixed term second
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mortgage loans, auto and truck loans, education loans, credit card loans,
unsecured personal loans, and loans secured by deposit accounts. Consumer loans
are offered primarily on a fixed rate basis with maturities generally of less
than ten years. The Association'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, 1997, second mortgage loans totaled $2.9 million, or 28.2%,
of consumer loans.
The underwriting standards employed by the Association for consumer loans
include a determination of the applicant's credit history and an assessment of
ability to meet existing obligations and payments on the proposed loan. The
quality and stability of the applicant's monthly income are determined by
analyzing the gross monthly income from primary employment, and additionally
from any verifiable secondary income. Creditworthiness of the applicant is of
primary consideration; however, the underwriting process also includes a
comparison of the value of the collateral in relation to the proposed loan
amount.
Consumer loans entail greater credit risk than do residential mortgage
loans, particularly in the case of consumer loans that are unsecured or secured
by assets that depreciate rapidly, such as automobiles, mobile homes, boats, and
recreational vehicles. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly reduced
based upon the condition of the automobiles and the lack of demand for used
automobiles. The Association adds a general provision on a regular basis to its
consumer loan loss allowance, based on general economic conditions and prior
loss experience. See "--Delinquencies and Classified Assets--Non-Performing
Assets," and "--Classification of Assets" for information regarding the
Association's loan loss experience and reserve policy.
MORTGAGE-BACKED SECURITIES. The Association also invests in mortgage-
backed securities issued or guaranteed by the United States Government or
agencies thereof. Investments in mortgage-backed securities are made either
directly or by exchanging mortgage loans in the Association's portfolio for such
securities. These securities consist primarily of fixed rate mortgage-backed
securities issued or guaranteed by the Federal National Mortgage Association
("FNMA"), Freddie Mac, and the Government National Mortgage Association
("GNMA"). Total mortgage-backed securities, including those designated as
available for sale, decreased from $1.9 million at March 31, 1996, to $873,000
at March 31, 1997, primarily as a result of prepayments of underlying
collateral.
The Association's objectives in investing in mortgage-backed securities
varies from time to time depending upon market interest rates, local mortgage
loan demand, and the Association's level of liquidity. Mortgage-backed
securities are more liquid than whole loans and can be readily sold in response
to market conditions and interest rates. Mortgage-backed securities purchased by
the Association also have lower credit risk because principal and interest are
either insured or guaranteed by the United States Government or agencies
thereof.
LOAN ORIGINATIONS, SOLICITATION, PROCESSING, AND COMMITMENTS. Loan
originations are derived from a number of sources such as real estate broker
referrals, existing customers, borrowers, builders, attorneys, and walk-in
customers. Upon receiving a loan application, the Association 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 Association appraises the real estate
intended to secure the proposed loan. An underwriter in the Association'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 $100,000, may be
approved by the manager of the mortgage loan department, loans between $100,000
and $200,000 must be approved by the Chief Lending Officer or Chief Executive
Officer, and loans in excess of $200,000 must be approved by the Board of
Directors. The Loan Committee meets once a week to review and verify that
management's approvals of loans are made within the scope of management's
authority. All approvals subsequently are ratified monthly by the full Board of
Directors. Fire and casualty insurance is required at the time the loan is made
and throughout the term of the loan. After the loan is approved, a loan
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commitment letter is promptly issued to the borrower. At March 31, 1997, the
Association had commitments to originate $2.1 million of loans.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property serving as collateral, which insurance must be
maintained during the full term of the loan. A title search of the property is
required on all loans secured by real property.
Although in the past the Association has purchased loans originated by
other lenders, the Association has not purchased any such loans in at least 10
years. At March 31, 1997, less than 2% of all loans in the Association's
portfolio were purchased from others and the majority of such loans were
collateralized by properties located in Ohio.
ORIGINATION, PURCHASE AND SALE OF LOANS AND MORTGAGE-BACKED SECURITIES.
The table below shows the Association's loan origination, purchase and sales
activity for the periods indicated.
At March 31,
-------------
1997 1996 1995
------------- --------- ---------
(In Thousands)
Total loans receivable, net at beginning of period.. $206,513 $201,857 $182,963
Loans originated:
One- to four-family residential (1)................ 37,302 35,868 43,794
Multi-family residential (2)....................... 1,268 1,001 1,313
Non-residential real estate/land................... 1,586 587 1,867
Consumer loans..................................... 6,269 7,620 6,757
Commercial loans................................... 1,344 576 973
-------- -------- --------
Total loans originated............................ 47,769 45,652 54,704
Loans sold:
Whole loans........................................ (1,930) (3,098) (1,399)
-------- -------- --------
Total loans sold.................................. (1,930) (3,098) (1,399)
Mortgage loans transferred to REO................... -- (1,344) (17)
Loan repayments..................................... (43,266) (36,943) (34,823)
Other loan activity, net............................ 318 389 429
-------- -------- --------
Total loans receivable, net at end of period...... $209,404 $206,513 $201,857
======== ======== ========
Mortgage-backed securities at beginning of period... $ 1,929 $ 2,920 $ 4,032
Mortgage-backed securities purchased................ -- -- --
Mortgage-backed securities sold..................... -- -- --
Principal repayments and other activity............. (1,056) (991) (1,112)
-------- -------- --------
Mortgage-backed securities at end of period....... $ 873 $ 1,929 $ 2,920
======== ======== ========
_______________
(1) Includes loans to finance the construction of one- to four-family
residential properties, and loans disbursed for sale in the secondary
market.
(2) Includes loans to finance the sale of real estate acquired through
foreclosure.
LOAN ORIGINATION FEES AND OTHER INCOME. In addition to interest earned on
loans, the Association generally receives loan origination fees. The
Association accounts for loan and origination fees in accordance with Statement
of Financial Accounting Standards No. 91 (SFAS No. 91) on the accounting for
non-refundable fees and costs associated with originating or acquiring loans.
To the extent that loans are originated or acquired for the Association's
portfolio, SFAS No. 91 requires that the Association defer loan origination fees
and costs and amortize such amounts
-9-
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, 1997, the Association had $2.0 million
of deferred loan origination fees. Loan origination fees are volatile sources
of income. Such fees vary with the volume and type of loans and commitments
made and purchased, principal repayments, and competitive conditions in the
mortgage markets, which in turn respond to the demand for and availability of
money.
In addition to loan origination fees, the Association also receives other
fees, service charges, and other income that consist primarily of deposit
transaction account service charges, late charges, credit card fees, and income
from REO operations. The Association recognized fees and service charges of
$519,000, $509,000, and $503,000, for the fiscal years ended March 31, 1997,
1996 and 1995, 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, 1997, the Association's largest real estate related
borrower had an aggregate principal outstanding balance of $1.7 million. The
Association had no loans at March 31, 1997 that exceeded the loans to one
borrower regulations.
DELINQUENCIES AND CLASSIFIED ASSETS
DELINQUENCIES. The Association's collection procedures provide that when a
loan is 15 days past due, a computer-generated late charge notice is sent to the
borrower requesting payment, plus a late charge. This notice is followed with a
letter again requesting payment when the payment becomes 20 days past due. If
delinquency continues, at 30 days another collection letter is sent and personal
contact efforts are attempted, either in person or by telephone, to strengthen
the collection process and obtain reasons for the delinquency. Also, plans to
arrange a repayment plan are made. If a loan becomes 60 days past due, the loan
becomes subject to possible legal action if suitable arrangements to repay have
not been made. In addition, the borrower is given information which provides
access to consumer counseling services, to the extent required by HUD
regulations. When a loan continues in a delinquent status for 90 days or more,
and a repayment schedule has not been made or kept by the borrower, a notice of
intent to foreclose is sent to the borrower, giving 30 days to cure the
delinquency. If not cured, foreclosure proceedings are initiated.
NON-PERFORMING ASSETS. Loans are reviewed on a regular basis and are placed
on a non-accrual status when, in the opinion of management, the collection of
additional interest is doubtful. Mortgage loans are placed on non-accrual status
generally when either principal or interest is 90 days or more past due and
management considers the interest uncollectible. Interest accrued and unpaid at
the time a loan is placed on non-accrual status is charged against interest
income.
At March 31, 1997, the Association had non-performing assets of $1.8
million and a ratio of non-performing assets to total assets of .70%. At March
31, 1997, 1996, and 1995, the Association had non-performing assets of $1.8
million, $3.4 million, and $1.7 million, respectively. The Association's levels
of non-performing assets during the three year period ended March 31, 1997 were
below peer group averages. The increase in nonperforming assets during the year
ended March 31, 1996 was primarily attributable to one borrower.
Real estate acquired by the Association 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. At March 31, 1997, the Association held one
property with a book value of $809,000. The property was acquired during fiscal
1996 as the result of
-10-
foreclosure. A portion of the property was sold during fiscal 1997. At March
31, 1996, the property had a book value of $1.3 million.
The following table sets forth information regarding the Association's non-
accrual loans and real estate acquired by foreclosure at the dates indicated.
For all the dates indicated, the Association did not have any material
restructured loans within the meaning of SFAS 15.
At March 31,
-------------------------------
1997 1996 1995
------------- ------- -------
(Dollars in Thousands)
Non-accrual loans:
Mortgage loans:
Permanent loans secured by one- to
four-family dwelling units............... $ 560 $ 409 $ 298
All other mortgage loans.................. -- 260 1,368
Non-mortgage loans:
Commercial................................ 364 352 --
Consumer.................................. 5 5 3
------ ------ ------
Total non-accrual loans...................... 929 1,026 1,669
Accruing loans 90 days or more delinquent.... 33 1,060 13
------ ------ ------
Total non-performing loans................... 962 2,086 1,682
Total real estate owned (1).................. 809 1,277 17
------ ------ ------
Total non-performing assets.................. $1,771 $3,363 $1,699
====== ====== ======
Total non-performing loans to net loans
receivable.................................. .46% 1.01% .83%
Total non-performing loans to total assets... .38% .84% .70%
Total non-performing assets to total assets.. .70% 1.35% .70%
_____________________
(1) Represents the net book value of property acquired by the Association
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, 1997, gross interest income of $84,000
would have been recorded on loans accounted for on a non-accrual basis if the
loans had been current throughout the period. The amount of interest income on
non-accrual loans actually included in income during the same period amounted to
$22,000.
The following table sets forth information with respect to loans past due
by 60-89 days and 90 days or more in the Association's portfolio at the dates
indicated.
At March 31,
----------------------
1997 1996 1995
------ ------ ------
(In Thousands)
Loans past due 60-89 days......... $ 373 $ 157 $ 155
Loans past due 90 days or more.... 962 2,086 1,682
------ ------ ------
Total past due 60 days or more.. $1,335 $2,243 $1,837
====== ====== ======
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"
-11-
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted. Assets that do not
expose the savings institution to risk sufficient to warrant classification in
one of the aforementioned categories, but which possess some weaknesses, are
required to be designated "special mention" by management.
When a savings institution classifies problem assets as either substandard
or doubtful, it is required to establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances that have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the assets so classified, or
to charge off such amount. A savings institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS, which can order the establishment of additional
general or specific loss allowances. The Association 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 Association's
classified assets at the dates indicated.
At March 31,
----------------------
1997 1996 1995
------ ------ ------
(In Thousands)
Substandard assets (1)...... $1,509 $3,046 $1,688
Doubtful assets............. -- -- --
Loss assets................. 227 10 15
------ ------ ------
Total classified assets.. $1,736 $3,056 $1,703
====== ====== ======
___________________
(1) Includes REO.
As of March 31, 1997, the Association's principal classified asset
consisted of $809,000 on motel property in real estate owned. This asset
accounts for 46.6% of classified assets at March 31, 1997.
ALLOWANCE FOR LOAN LOSSES. Management's policy is to provide for estimated
losses on the Association's loan portfolio based on management's evaluation of
the potential losses that may be incurred. The Association regularly reviews
its loan portfolio, including problem loans, to determine whether any loans
require classification or the establishment of appropriate reserves or
allowances for losses. Such evaluation, which includes a review of all loans of
which full collectibility of interest and principal may not be reasonably
assured, considers, among other matters, the estimated fair value of the
underlying collateral. Other factors considered by management include the size
and risk exposure of each segment of the loan portfolio, present indicators such
as delinquency rates and the borrower's current financial condition, and the
potential for losses in future periods. Management calculates the general
allowance for loan losses in part based on past experience, and in part based on
specified percentages of loan balances. While both general and specific loss
allowances are charged against earnings, general loan loss allowances are added
back to capital in computing risk-based capital under OTS regulations.
During fiscal years ended March 31, 1997, 1996, and 1995, the Association
added $20,000, $20,000, and $25,000, respectively, to the provision for loan
losses. The Association's allowance for loan losses totaled $914,000, $888,000,
and $981,000, at March 31, 1997, 1996 and 1995, respectively. The Association
bases the provision for loan loss on several factors, including loan volume,
portfolio mix, delinquencies, etc. Management believes that the Association's
current allowance for loan losses is adequate, however, there can be no
assurance that the allowance for loan losses will be adequate to cover losses
that may in fact be realized in the future or that additional provisions for
loan losses will not be required.
-12-
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the analysis of the allowance for loan losses for the periods indicated.
At March 31,
----------------------------------
1997 1996 1995
--------- --------- ----------
(Dollars in Thousands)
Loans receivable, net.......................... $209,404 $206,513 $201,857
Average loans receivable, net.................. 209,219 206,775 192,764
Allowance balance (at beginning of period)..... 888 981 959
Provision for losses:
Mortgage..................................... -- 101 (4)
Non-Mortgage 214 7 9
General...................................... (194) (88) 20
(Charge-offs) Recoveries:
Mortgage..................................... (6) (105) --
Non-Mortgage................................. 12 (8) (3)
-------- -------- --------
Allowance balance (at end of period)........... $ 914 $ 888 $ 981
======== ======== ========
Allowance for loan losses as a percent of
loans receivable, net at end of period....... .44% .43% .49%
Net loans charged off as a percent of average..
loans receivable, net....................... 0.0% (1) 0.0% (1) 0.0% (1)
Ratio of allowance for loan losses to total
non-performing assets at end of period...... 51.61% 26.41% 57.74%
Ratio of allowance for loan losses to
non-performing loans at end of period....... 95.01% 42.57% 58.32%
________________________________
(1) Computes to less than .1%.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES. The following table sets forth
the allocation of allowance for loan losses by loan category for the periods
indicated. Management believes that the allowance can be allocated by category
only on an approximate basis. The allocation of the allowance by category is
not necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
At March 31,
----------------------------------------------------------------------------
1997 1996 1995
--------------------- ------------------------- --------------------------
% of Loans % of Loans % of Loans
in Each in Each in Each
Category to Category to Category to
Amount Total Loans Amount Total Loans Amount Total Loans
------- ------------ ----------- ------------ ------------ ------------
(Dollars in Thousands)
Balance at end of period applicable to:
One- to four-family residential loans.... $368 88.7% $386 86.1% $ 346 84.3%
Multi-family residential loans........... 38 2.6 175 4.8 55 5.3
Consumer and commercial.................. 290 5.7 69 5.9 44 5.9
Non-residential real estate.............. 218 3.0 258 3.2 536 4.5
---- ----- ---- ----- ----- -----
Total allowance for loan losses.......... $914 100.0% $888 100.0% $ 981 100.0%
==== ===== ==== ===== ----- =====
INVESTMENT ACTIVITIES
In recent years, the Association has increased the percentage of its assets
held in its investment portfolio as part of its strategy of maintaining higher
levels of liquidity. The Association's investment portfolio is comprised of
investment securities and certificates of deposit in other financial
institutions. The carrying value of the Association's investment securities
totaled $24.5 million at March 31, 1997, compared to $19.7 million at March 31,
1996, an increase of $4.8 million, or 24.4%. The increase in the Association's
investment securities has occurred as a result investing cash and cash
equivalents into various investment securities. The Association's cash and cash
equivalents, consisting of cash and due from banks, federal funds sold, and
interest bearing deposits due from other financial
-13-
institutions with original maturities of three months or less, totaled $7.6
million at March 31, 1997, compared to $10.2 million at March 31, 1996, a
decrease of $2.6 million, or 25.4%. The decrease in cash and cash equivalents
has occurred as the funds were invested into U.S. Government and agency
securities.
The Association is required under federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified short term securities
and certain other investments. See "Regulation--Liquidity Requirements" below
and Item 7. The Association generally has maintained a portfolio of liquid
assets that exceeds regulatory requirements. Liquidity levels may be increased
or decreased depending upon the yields on investment alternatives and upon
management's judgment as to the attractiveness of the yields then available in
relation to other opportunities and its expectation of the level of yield that
will be available in the future, as well as management's projections as to the
short term demand for funds to be used in the Association's loan origination and
other activities.
INVESTMENT PORTFOLIO. The following table sets forth the carrying value of
the Association's investment securities portfolio, short-term investments and
FHLB stock, at the dates indicated.
At March 31,
------------------
1997 1996 1995
----------------- ------------------ ------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- ------- -------- -------- -------- --------
(In Thousands)
Investment securities:
U.S. Government and agency securities.. $16,789 16,723 $14,487 $14,499 $16,521 $16,413
Obligations of state and
political subdivisions............... 181 181 188 188 196 196
Certificates of deposit in other
financial institutions............... 7,500 7,500 5,000 5,000 8,825 8,825
------- ------- ------- ------- ------- -------
Total investment securities.............. 24,470 24,404 19,675 19,687 25,542 25,434
Other Investments:
Interest-bearing deposits in
other financial institutions........... 5,179 5,179 6,495 6,495 1,825 1,825
Federal funds sold....................... 1,125 1,125 2,475 2,475 125 125
Federal Home Loan Bank stock............. 2,531 2,531 2,362 2,362 2,205 2,205
------- ------- ------- ------- ------- -------
Total investments.................. $33,305 $33,239 $31,007 $31,019 $29,697 $29,589
======= ======= ======= ======= ======= =======
-14-
INVESTMENT PORTFOLIO MATURITIES. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for the
Association's investment securities at March 31, 1997. The Association does not
hold any investment securities with maturities in excess of 16 years.
At March 31, 1997
------------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years
------------------ ------------------- -------------------- ---------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- -------- ---------- -------- ----------- -------- ---------- ----------
(Dollars in Thousands)
Investment Securities:
U.S. Government and
agency......................... $1,981 5.52% $14,499 6.31% $ 309 6.25% $ -- --
Obligations of state and
political subdivisions......... -- -- -- -- -- -- 181 5.50%
Certificates of deposit
in other
financial institutions....... 5,000 5.61 2,500 6.07 -- -- -- --
------ ----- ------- ------- -------- ------- ------- -------
Total investment
securities................. $6,981 5.58% $16,999 6.27% $ 309 6.25% $181 5.50%
====== ===== ======= ======= ======== ======= ======= =======
At March 31, 1997
--------------------------------------------------
Total Investment
Securities
--------------------------------------------------
Average Weighted
Life Carrying Market Average
In Years Value Value Yield
---------- ------------- ---------- ----------
(Dollars in Thousands)
Investment Securities:
U.S. Government and agency............................. 2.74 $ 16,789 $16,723 6.22%
Obligations of state and political subdivisions........ 15.18 181 181 5.50
Certificates of deposit in other
financial institutions............................... .84 7,500 7,500 5.76
------ -------- ------- --------
Total investment
securities....................................... 2.25 $ 24,470 $24,404 6.07%
====== ======== ======= ========
-15-
SOURCES OF FUNDS
GENERAL. Deposits are the major source of the Association's funds for
lending and other investment purposes. In addition to deposits, the Association
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
Association had $16.0 million of advances from the FHLB at March 31, 1997.
DEPOSITS. Consumer and commercial deposits are attracted principally from
within the Association'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
Association 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 Association regularly
evaluates its internal cost of funds, surveys rates offered by competing
institutions, reviews the Association's cash flow requirements for lending and
liquidity, and executes rate changes when deemed appropriate. The Association
does not obtain funds through brokers, nor does it solicit funds outside its
market area. In recent years the Association's total deposits have remained
relatively stable.
DEPOSIT PORTFOLIO. Savings and other deposits in the Association as of
March 31, 1997, comprised the following:
Weighted Percentage
Average Minimum of Total
Interest Rate Minimum Term Checking and Savings Deposits Amount Balances Deposits
------------- ------------- ----------------------------- -------- -------- -----------
(In Thousands)
2.21% None NOW Accounts $ -- $ 19,228 9.09%
2.98 None Passbook -- 41,233 19.50
2.99 None Money Market Investor 2,500 9,815 4.64
Certificates of Deposit
-----------------------
5.34 12 months or less Fixed term, fixed rate 500 21,016 9.94
5.38 12 to 24 months Fixed term, fixed rate 500 44,136 20.88
6.07 25 to 36 months Fixed term, fixed rate 500 28,591 13.52
6.61 36 months or more Fixed term, fixed rate 500 16,995 8.04
6.12 Negotiable Jumbo Certificates 100,000 30,428 14.39
-------- ------
$211,442 100.00%
======== ======
-16-
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Association
between the dates indicated.
Balance at Balance at Balance at
March 31, % Increase March 31, % Increase March 31, %
1997 Deposits (Decrease) 1996 Deposits (Decrease) 1995 Deposits
---------- -------- ---------- ----------- -------- ---------- ---------- ---------
NOW Accounts................. $ 19,228 9.09% $ (324) $ 19,552 9.30% $ 1,486 $ 18,066 8.79%
Passbook statement accounts.. 41,233 19.50 (3,254) 44,487 21.17 (3,097) 47,584 23.15
Money market passbook........ 9,815 4.64 (778) 10,593 5.04 (973) 11,566 5.63
Certificates of Deposit (1)
Original maturities of:
12 months or less......... 21,016 9.94 7,807 13,209 6.29 (918) 14,127 6.88
12 to 24 months........... 44,136 20.88 (7,020) 51,156 24.34 5,787 45,369 22.08
25 to 36 months........... 28,591 13.52 3,295 25,296 12.04 1,625 23,671 11.52
36 months or more......... 16,995 8.04 (1,039) 18,034 8.58 (3,027) 21,061 10.25
Negotiated Jumbo 30,428 14.39 2,597 27,831 13.24 3,778 24,053 11.70
-------- ------ ------- --------- ------ ------- -------- ------
$211,442 100.00% $ 1,284 $ 210,158 100.00% $ 4,661 $205,497 100.00%
======== ====== ======= ========= ====== ======= ======== ======
____________________________________
(1) Certain Individual Retirement Accounts ("IRAs") are included in the
respective certificate balances. IRAs totaled $31.9 million, $30.9 million,
and $30.8 million, as of March 31, 1997, 1996, and 1995, respectively.
-17-
The following table sets forth the certificates of deposit in the
Association classified by rates as of the dates indicated:
At March 31,
--------------------------------
1997 1996 1995
-------- ------------ --------
(In Thousands)
3.00% or less...................... $ -- $ 2 $ 3
3.01- 4.00%........................ 17 771 7,538
4.01- 6.00%........................ 100,794 90,914 80,829
6.01- 8.00%........................ 34,482 38,353 30,628
8.01-10.00%....................... 5,873 5,486 9,010
10.01-12.00%....................... -- -- 273
-------- -------- --------
Total........................... $141,166 $135,526 $128,281
======== ======== ========
The following table sets forth the amount and maturities of certificates of
deposit at March 31, 1997.
Amount Due
------------------------------------------------
Less Than 1-2 2-3 After
One Year Years Years 3 Years Total
---------- --------- -------- ------- ------
(In Thousands)
Rate
----
3.00 or less.. $ -- $ -- $ -- $ -- $ --
3.01- 4.00%... -- 17 -- -- 17
4.01- 6.00%... 74,395 17,104 6,357 2,938 100,794
6.01- 8.00%... 24,056 7,746 1,688 992 34,482
8.01-10.00%... 1,233 3,543 1,031 66 5,873
------- ------- ------ ------ --------
Total........ $99,684 $28,410 $9,076 $3,996 $141,166
======= ======= ====== ====== ========
The following table indicates the amount of the Association's negotiable
certificates of deposit of $100,000 or more by time remaining until maturity as
of March 31, 1997.
Maturity Period Certificates of Deposits
--------------- ------------------------
(In Thousands)
Three months or less................... $12,492
Over three months through six months... 6,078
Over six months through twelve months.. 7,091
Over twelve months..................... 4,767
-------
Total.............................. $30,428
=======
BORROWINGS
Savings deposits are the primary source of funds for the Association's
lending and investment activities and for its general business purposes. The
Association, if the need arises, may rely upon advances from the FHLB and the
Federal Reserve Bank discount window to supplement its supply of lendable funds
and to meet deposit withdrawal requirements. Advances from the FHLB typically
are collateralized by the Association's stock in the FHLB and a portion of the
Association's first mortgage loans. At March 31, 1997, the Association had
$16.0 million in advances outstanding.
-18-
The FHLB functions as a central reserve bank providing credit for the
Association and other member savings associations and financial institutions.
As a member, the Association is required to own capital stock in the FHLB and is
authorized to apply for advances on the security of such stock and certain of
its home mortgages and other assets (principally, securities that are
obligations of, or guaranteed by, the United States) provided certain standards
related to creditworthiness have been met. Advances are made pursuant to
several different programs. Each credit program has its own interest rate and
range of maturities. Depending on the program, limitations on the amount of
advances are based either on a fixed percentage of a member institution's net
worth or on the FHLB's assessment of the 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 Association.
ASSET AND LIABILITY MANAGEMENT-INTEREST RATE SENSITIVITY ANALYSIS
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate
sensitivity gap is defined as the difference between the amount of interest-
earning assets maturing or repricing within a specific time period and the
amount of interest-bearing liabilities maturing or repricing within that time
period. A gap is considered positive when the amount of interest rate sensitive
assets exceeds the amount of interest rate sensitive liabilities. A gap is
considered negative when the amount of interest rate sensitive liabilities
exceeds the amount of interest rate sensitive assets. During a period of rising
interest rates, a negative gap would tend to adversely affect net interest
income while a positive gap would tend to positively affect net interest income.
Similarly, during a period of falling interest rates, a negative gap would tend
to positively affect net interest income while a positive gap would tend to
adversely affect net interest income.
The Association's policy in recent years has been to reduce its exposure to
interest rate risk generally by better matching the maturities of its interest
rate sensitive assets and liabilities and by originating ARM loans and other
adjustable rate or short-term loans, as well as by purchasing short-term
investments. However, particularly in a low interest rate environment,
borrowers typically prefer fixed rate loans to ARM loans. Accordingly, ARM loan
originations were limited during the year ended March 31, 1997 as long-term
interest rates remained historically low during the year. The Association seeks
to lengthen the maturities of its deposits by promoting longer-term
certificates; however, the Association has not been successful in lengthening
the maturities of its deposits in the current low interest rate environment.
The Association also negotiates interest rates on certificates of deposit of
$100,000 or more.
The Association has an Asset-Liability Management Committee which is
responsible for reviewing the Association's assets and liability policies. The
Committee meets weekly and reports monthly to the Board of Directors on interest
rate risks and trends, as well as liquidity and capital ratios and requirements.
The Board of Directors has adopted a policy that requires the Association to
maintain a one-year gap between negative 10% and positive 10%. As of March 31,
1997, based on internal calculations, the Association's gap position was within
the approved range as noted on the following table.
-19-
GAP TABLE
The following table sets forth the amounts of interest-earning assets and
interest-bearing liabilities outstanding at March 31, 1997, that are expected to
reprice or mature, based upon certain assumptions, in each of the future time
periods shown. Except as stated below, the amounts of assets and liabilities
shown that reprice or mature during a particular period were determined in
accordance with the earlier of repricing or the contractual terms of the asset
or liability. The Association has assumed that its transaction accounts, which
totaled $70.3 million at March 31, 1997, are withdrawn at the assumed decay
rates set forth below. These withdrawal rates as well as loan prepayment
assumptions were computed internally and are based on recent OTS assumptions for
loan prepayments and deposit withdrawals. Management believes that these
assumptions approximate actual experience and considers them appropriate and
reasonable.
At March 31, 1997
---------------------------------------------------------------------------------
Within Over
1 Year 1-3 Years 3-5 Years 5-10 Years 10-20 Years 20 Years Total
--------- ---------- ---------- ----------- ------------ --------- --------
(Dollars in Thousands)
Interest-earning assets:
Real estate mortgages(1):
Adjustable rate........................ $ 70,501 $ 1,427 $ -- $ -- $ -- $ 70 $ 71,998
Fixed.................................. 17,302 29,001 22,345 38,249 20,181 3,927 131,005
Other Loans............................. 3,872 4,015 672 -- -- 400 8,959
Mortgage-backed securities.............. 53 579 60 88 46 -- 826
Investment securities................... 14,304 11,000 5,000 309 181 -- 30,794
-------- -------- -------- -------- -------- -------- --------
Total interest-earning assets............. 106,032 46,022 28,077 38,646 20,408 4,397 243,582
-------- -------- -------- -------- -------- -------- --------
Rate sensitive liabilities:
Transaction accounts.................... 21,715 19,755 10,254 11,527 5,589 1,010 69,850
Certificate accounts.................... 104,091 32,941 3,948 -- -- -- 140,980
Non-interest bearing deposits........... 157 257 196 309 239 93 1,251
Other borrowings........................ 4,768 9,455 2,000 -- -- -- 16,223
-------- -------- -------- -------- -------- -------- --------
Total rate sensitive liabilities (2).. 130,731 62,408 16,398 11,836 5,828 1,103 228,304
-------- -------- -------- -------- -------- -------- --------
Interest sensitivity gap.................. (24,699) (16,386) 11,679 26,810 14,580 3,294
======== ======== ======== ======== ======== ========
Cumulative interest-sensitivity gap....... $(24,699) $(41,085) $(29,406) $ (2,596) $ 11,984 $ 15,278
======== ======== ======== ======== ======== ========
Cumulative interest-sensitivity gap
to total assets......................... (9.8)% (16.3)% (11.7)% (1.0)% 4.8% 6.2%
======== ======== ======== ======== ======== ========
Ratio of interest-earning assets to
interest-bearing liabilities............ 81.11% 73.74% 171.22% 326.51% 350.17% 431.07%
======== ======== ======== ======== ======== ========
Cumulative ratio of interest sensitive
assets to interest sensitive
liabilities............................. 81.11% 78.73% 85.97% 98.83% 105.28% 106.83%
======== ======== ======== ======== ======== ========
Total assets.............................. $252,175 $252,175 $252,175 $252,175 $252,175 $252,175 $252,175
Cumulative interest sensitive assets...... $106,032 $152,054 $180,131 $218,777 $239,185 $243,875 $243,875
Cumulative interest sensitive
liabilities............................. $130,731 $193,139 $209,537 $221,373 $227,201 $228,289 $228,289
__________________________________
(1) Amounts shown are net of loans-in-process, unearned discounts, allowance
for loan losses, and deferred origination fees.
(2) Includes $701,000 of advances by borrowers for taxes and insurance and
$126,000 of accounts payable on mortgage loans serviced for others.
-20-
In preparing the table above, it has been assumed, consistent with the
assumptions used by the OTS, in assessing the interest rate sensitivity of
savings associations, that: (i) adjustable-rate first mortgage loans will prepay
at a rate of 15.0% per year; (ii) second mortgage loans on one- to- four-family
residences will prepay at a rate of 18.0% per year; (iii) fixed rate first
mortgage loans and mortgage backed securities on one- to-four family residential
properties will prepay annually as follows:
Prepayment Assumptions
-------------------------------------------
30-Years FHA 15-Year Loans
Interest Rate: Loans and MBS and VA and MBS
------------------ -------------- ------------ -------------
Less than 8.00%........... 9.00% 6.00% 8.00%
8.00% to 9.00%............ 10.00% 7.00% 11.00%
9.00% to 10.00%........... 14.00% 10.00% 17.00%
10.00% to 11.00%.......... 18.00% 13.00% 26.00%
11.00% and above.......... 18.00% 13.00% 26.00%
(iv) fixed and adjustable rate first mortgage loans on residential properties of
five or more units and non-residential properties will prepay at a rate of 12%
per year; (v) fixed maturity deposits will not be withdrawn prior to maturity;
and (vi) NOW, deposit accounts, money market deposit accounts and passbook
accounts will decay at a rate of 37.0%, 79.0% and 17.0% annually.
The above assumptions are utilized by OTS. They should not be regarded as
indicative of the actual prepayments and withdrawals that may be experienced by
the Association. Moreover, certain shortcomings are inherent in the analysis
presented by the foregoing table. For example, although certain assets and
liabilities may have similar maturities or periods to repricing, they may react
in different degrees to changes in market interest rates. Also, interest rates
on certain types of assets and liabilities may fluctuate in advance of or lag
behind changes in market interest rates. Additionally, certain assets, such as
ARM loans, have features that restrict changes in interest rates on a short-term
basis and over the life of the asset. Moreover, in the event of a change in
interest rates, prepayment and early withdrawal levels would likely deviate
significantly from those assumed in calculating the table.
COMPETITION
The Association 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 Association
expects continued strong competition from such financial institutions in the
foreseeable future. The Association's market area includes branches of several
commercial banks that are substantially larger than the Association in terms of
state-wide deposits. The Association 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 Association's market
area as well as the increased efforts by commercial banks to expand mortgage
loan originations.
The Association 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.
-21-
As of June 1995, the Association was one of two savings institutions
headquartered in its market area. The Association held approximately 14% of all
financial institution deposits in its market area, competing against 15 other
local and regional institutions.
REGULATION
As a state-chartered, SAIF-insured savings association, the Association is
subject to examination, supervision and extensive regulation by the OTS, the
Ohio Division of Savings and Loans (the "Ohio Division"), and the FDIC. The
Association 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 Association also is subject to
regulation by the Board of Governors of the Federal Reserve System (the "Federal
Reserve Board") governing reserves to be maintained against deposits and certain
other matters. The OTS and Ohio Division regularly examine the Association and
prepare reports for the consideration of the Association's Board of Directors on
any deficiencies that they may find in the Association's operations. The FDIC
also examines the Association in its role as the administrator of the SAIF. The
Association'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 Association's
mortgage documents. Any change in such regulation, whether by the FDIC, OTS,
Ohio Division, or Congress, could have a material adverse impact on the Holding
Company and the Association and their operations.
FEDERAL REGULATION OF SAVINGS INSTITUTIONS
BUSINESS ACTIVITIES. The activities of savings institutions are governed by
the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects, the
Federal Deposit Insurance Act (the "FDI Act"). The federal banking statutes, as
amended by the Financial Institutions Reform, Recovery and Enforcement Act of
1989 ("FIRREA") and the Federal Deposit Insurance Corporation Improvement Act
("FDICIA") (1) restrict the solicitation of brokered deposits by savings
institutions that are troubled or not well-capitalized, (2) prohibit the
acquisition of any corporate debt security that is not rated in one of the four
highest rating categories, (3) restrict the aggregate amount of loans secured by
non-residential real estate property to 400% of capital, (4) permit savings and
loan holding companies to acquire up to 5% of the voting shares of non-
subsidiary savings institutions or savings and loan holding companies without
prior approval, and (5) permit bank holding companies to acquire healthy savings
institutions. The 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
Association.
LOANS TO ONE BORROWER. Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to one borrower. Generally, savings
institutions may not make a loan or extend credit to a single or related group
of borrowers in excess of 15% of the institution's unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain securities and bullion, but generally does not
include real estate. See "--Lending Activities--Loans to One Borrower."
QUALIFIED THRIFT LENDER TEST. The HOLA requires savings institutions to
meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings
association is required to maintain at least 65% of its "portfolio assets"
(total assets less (i) specified liquid assets up to 20% of total assets, (ii)
intangibles, including goodwill, and (iii) the value of property used to conduct
business) in certain "qualified thrift investments," primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities on a monthly basis in 9 out of every 12 months.
A savings association that fails the QTL test must either convert to a
bank charter or operate under certain restrictions. As of March 31, 1997, the
Association maintained 96.5% of its portfolio assets in qualified thrift
investments and, therefore, met the QTL test.
-22-
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. The rule establishes three tiers of institutions, which are
based primarily on an institution's capital level. An institution that exceeds
all fully phased-in capital requirements before and after a proposed capital
distribution ("Tier 1 Association") and has not been advised by the OTS that it
is in need of more than normal supervision, could, after prior notice but
without the approval of the OTS, make capital distributions during a calendar
year equal to the greater of: (i) 100% of its net earnings to date during the
calendar year plus the amount that would reduce by one-half its "surplus capital
ratio" (the excess capital over its fully phased-in capital requirements) at the
beginning of the calendar year; or (ii) 75% of its net earnings for the previous
four quarters; provided that the institution would not be undercapitalized, as
that term is defined in the OTS Prompt Corrective Action regulations, following
the capital distribution. Any additional capital distributions would require
prior regulatory approval. In the event the Association's capital fell below its
fully-phased in requirement or the OTS notified it that it was in need of more
than normal supervision, the Association's ability to make capital distributions
could be restricted. In addition, the OTS could prohibit a proposed capital
distribution by any institution, which would otherwise be permitted by the
regulation, if the OTS determines that such distribution would constitute an
unsafe or unsound practice.
In addition, OTS regulations require Wayne Savings Bankshares, M.H.C.,
(the "Holding Company") the mutual holding company which owns the majority of
the Association's common stock, to notify the OTS of any proposed waiver of its
right to receive dividends. It is the OTS' recent practice to review dividend
waiver notices on a case-by-case basis, and, in general, not object to any such
waiver if: (i) the mutual holding company's board of directors determines that
such waiver is consistent with such directors' fiduciary duties to the mutual
holding company's members; (ii) for as long as the savings association
subsidiary is controlled by the mutual holding company, the dollar amount of
dividends waived by the mutual holding company are considered as a restriction
on the retained earnings of the savings association, which restriction, if
material, is disclosed in the public financial statements of the savings
association as a note to the financial statements; (iii) the amount of any
dividend waived by the mutual holding company is available for declaration as a
dividend solely to the mutual holding company, and, in accordance with SFAS 5,
where the savings association determines that the payment of such dividend to
the mutual holding company is probable, an appropriate dollar amount is recorded
as a liability; (iv) the amount of any waived dividend is considered as having
been paid by the savings association (and the savings association's capital
ratios adjusted accordingly) in evaluating any proposed dividend under OTS
capital distribution regulations; and (v) in the event the mutual holding
company converts to stock form, the appraisal submitted to the OTS in connection
with the conversion application takes into account the aggregate amount of the
dividends waived by the mutual holding company.
The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered structure
and the safe-harbor percentage limitations. Under the proposal a savings
association may make a capital distribution without notice to the OTS (unless it
is a subsidiary of a holding company) provided that it has a CAMEL 1 or 2
rating, is not in troubled condition and would remain adequately capitalized (as
defined by regulation) following the proposed distribution. Savings associations
that would remain adequately capitalized following the proposed distribution but
do not meet the other noted requirements must notify the OTS 30 days prior to
declaring a capital distribution. The OTS stated it will generally regard as
permissible that amount of capital distributions that do not exceed 50% of the
institution's excess regulatory capital plus net income to date during the
calendar year. A savings association may not make a capital distribution
without prior approval of the OTS and the FDIC if it is undercapitalized before,
or as a result of, such a distribution. A savings association will be
considered in troubled condition if it has a CAMEL rating of 4 or 5, is subject
to an enforcement action relating to its safety and soundness or financial
viability or has been informed in writing by the OTS that it is in troubled
condition. As under the current rule, the OTS may object to a capital
distribution if it would constitute an unsafe or unsound practice. No assurance
may be given as to whether or in what form the regulations may be adopted.
LIQUIDITY. The Association is required to maintain an average daily
balance of liquid assets (cash, certain time deposits, bankers' acceptances,
specified U.S. Government, state or federal agency obligations, shares of
certain
-23-
mutual funds and certain corporate debt securities and commercial paper) equal
to a monthly average of not less than a specified percentage of its net
withdrawable deposit accounts plus short-term borrowings. This liquidity
requirement which is currently 5%, may be changed from time to time by the OTS
to any amount within the range of 4% to 10% depending upon economic conditions
and the savings flow of member institutions. OTS regulations also require each
savings institution to maintain an average daily balance of short-term liquid
assets at a specified percentage (currently 1%) of the total of its net
withdrawable deposit accounts and borrowings payable in one year or less.
Monetary penalties may be imposed for failure to meet these liquidity
requirements. The Association's average liquidity ratio for March 1997 was
12.8%, which exceeded the then applicable requirements. The Association has
never been subject to monetary penalties for failure to meet its liquidity
requirements.
COMMUNITY REINVESTMENT. Under the Community Reinvestment Act (the "CRA"),
as implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation, consistent with its safe and sound operation, to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions, nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA rating system identifies four levels of performance
that may describe an institution's record of meeting community needs:
outstanding, satisfactory, needs to improve and substantial non-compliance. The
CRA also requires all institutions to make public disclosure of their CRA
ratings. The CRA regulations were recently revised. Effective July 1, 1996, the
OTS will assess the CRA performance of a savings institution under lending,
service and investment tests, and based on such assessment, will assign an
institution in one of the four above-referenced ratings. The Association
received a "satisfactory" CRA rating under the current CRA regulations in its
most recent federal examination by the OTS.
TRANSACTIONS WITH RELATED PARTIES. The Association's authority to engage
in transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Holding
Company and any non-savings institution subsidiaries) or to make loans to
certain insiders, is limited by Sections 23A and 23B of the Federal reserve Act
("FRA"). Section 23A limits the aggregate amount of transactions with any
individual affiliate to 10% of the capital and surplus of the savings
institution and also limits the aggregate amount of transactions with all
affiliates to 20% of the savings institution's capital and surplus. Certain
transactions with affiliates are required to be secured by collateral in an
amount and of a type described in Section 23A and the purchase of low quality
assets from affiliates is generally prohibited. Section 23B provides that
certain transactions with affiliates, including loans and asset purchases, must
be on terms and under circumstances, including credit standards, that are
substantially the same or at least as favorable to the institution as those
prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
ENFORCEMENT. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Criminal
penalties for most financial institution crimes include fines of up to $1
million and imprisonment for up to 30 years. Under the FDI Act, the FDIC has the
authority to recommend to the Director of OTS that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances.
-24-
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 3.0% leverage ratio (or core capital ratio) and an 8.0% risk-based capital
standard. Core capital is defined as common stockholders' equity (including
retained earnings), certain non-cumulative perpetual preferred stock and related
surplus, minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain qualifying supervisory goodwill and certain
purchased mortgage servicing rights ("PMSRs"). The OTS regulations also require
that, in meeting the tangible ratio, leverage and risk-based capital standards,
institutions must deduct investments in and loans to subsidiaries engaged in
activities not permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 2 (core) and total capital (which is defined as core capital
and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS
believes are inherent in the type of asset. The components of Tier 1 (core)
capital are equivalent to those discussed earlier under the 3.0% leverage ratio
standard. The components of supplementary capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and allowance for
loan and lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25%. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
OTS regulatory capital rules also incorporate an interest rate risk
component. Savings associations with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates,
divided by the estimated economic value of the association's assets. In
calculating its total capital under the risk-based rule, a savings association
whose measured interest rate risk exposure exceeds 2%, must deduct an interest
rate component equal to one-half of the difference between the institution's
measured interest rate risk and 2%, multiplied by the estimated economic value
of the institution's assets. The OTS has deferred for the present time, the
date on which the interest rate component is to be deducted from total capital.
A savings association with assets of less than $300 million and risk-based
capital ratios in excess of 12% (such as the Association) is not subject to the
interest rate risk component, unless the OTS determines otherwise. The rule
also provides that the Director of the OTS may waive or defer an institution's
interest rate risk component on a case-by-case basis.
-25-
At March 31, 1997, the Association exceeded each of the three OTS
capital requirements on a fully phased-in basis. Set forth below is a summary
of the Association's compliance with the OTS capital standards as of March 31,
1997.
At March 31, 1997
-----------------------
Percent of
Amount Assets (1)
----------- ----------
(Dollars in Thousands)
Tangible capital:
Capital level...................... $23,078 9.16%
Requirement........................ 3,782 1.50
------- -----
Excess............................. $19,296 7.66%
======= =====
Core capital:
Capital level..................... $23,078 9.16%
Requirement (2).................... 7,565 3.00
------- -----
Excess............................. $15,513 6.16%
======= =====
Fully phased-in risk-based capital:
Capital level...................... $23,762 17.45%
Requirement........................ 10,894 8.00
------- -----
Excess............................. $12,868 9.45%
======= =====
__________________
(1) Tangible and core capital levels are calculated on the basis of a percentage
of total adjusted assets; risk-based capital levels are calculated on the
basis of a percentage of risk-weighted assets.
(2) The OTS has proposed a core capital requirement for savings associations
comparable to the new requirement for national banks. The OTS proposed core
capital ratio would be at least 3% of total adjusted assets for thrifts that
receive the highest supervisory rating for safety and soundness ("MACRO
rating"), with a 4% to 5% core capital requirement for all other thrifts.
An OTS regulatory capital rule also incorporates an interest rate risk
component. Savings associations with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates,
divided by the estimated economic value of the association's assets. In
calculating its total capital under the risk-based rule, a savings association
whose measured interest rate risk exposure exceeds 2%, must deduct an interest
rate component equal to one-half of the excess change. The OTS has deferred,
for the present time, the date on which the interest rate component is to be
deducted from total capital. The rule also provides that the Director of the
OTS may waive or defer an institution's interest rate risk component on a case-
by-case basis.
The following table presents the Association's NPV as of March 31, 1997, as
calculated by the OTS, based on information provided to the OTS by the
Association.
CHANGE IN CHANGE IN NPV
INTEREST RATES AS A PERCENTAGE OF
IN BASIS POINTS NET PORTFOLIO VALUE ESTIMATED MARKET
-------------------------------------
(RATE SHOCK) AMOUNT $ CHANGE % CHANGE VALUE OF ASSETS
----------------- ------ -------- -------- ---------------
(DOLLARS IN THOUSANDS)
400 $ 9,162 $(19,820) (68)% (8.54)%
200 $19,149 $ (9,832) (34)% (4.02)%
Static $28,982 $ --
(200) $34,147 $ 5,165 18% 1.95%
(400) $36,182 $ 7,200 25% 2.67%
-26-
PROMPT CORRECTIVE REGULATORY ACTION
Under the OTS Prompt Corrective Action regulations, the OTS is required
to take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has the total
risk-based capital less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS could also take any
one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and
directors.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FDIC
Wayne Savings 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.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, ranging from .23% to .31% of
deposits, based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as well capitalized (i.e., a core capital
ratio of at least 5%, a ratio of core capital to risk-weighted assets of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
would pay the lowest premium while institutions that are less than adequately
capitalized (i.e., a core capital or core capital to risk-based capital ratios
of less than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern would pay the highest premium. Risk
classification of all insured institutions will be made by the FDIC for each
semi-annual assessment period.
The FDIC authorized to increase assessment rates, on a semiannual basis,
if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
In September 1996, Congress enacted legislation to recapitalize the SAIF by
a one-time assessment on all SAIF-insured deposits held as of March 31, 1995.
The assessment was 65.7 basis points per $100 in deposits, payable on November
30, 1996. For the Association, the assessment amounted to $1.3 million (or
$887,000 when adjusted for taxes), based on the Association's deposits on March
31, 1995. In addition, beginning January 1, 1997, pursuant to the legislation,
interest payments on FICO bonds issued in the late 1980's by the Financing
Corporation to recapitalize the now defunct Federal Savings and Loan Insurance
Corporation will be paid jointly by BIF-insured institutions and SAIF-insured
institutions. The FICO assessment will be 1.29 basis points per $100 in BIF
deposits
-27-
and 6.44 basis points per $100 in SAIF deposits. Beginning January 1, 2000, the
FICO interest payments will be paid pro rata by banks and thrifts based on
deposits (approximately 2.4 basis points per $100 in deposits).
The legislation further provides that the BIF and SAIF will merge on
January 1, 1999 if there are no more savings associations as of that date.
Several bills have been introduced in the current Congress that would eliminate
the federal thrift charter and OTS. The bills would require that all federal
savings associations convert to national banks or state depository institutions
by no later than January 1, 1998 in one bill and June 30, 1998 in the other and
would treat all state savings associations as state banks for purposes of
federal banking laws. Subject to a narrow grandfathering, all savings and loan
holding companies would become subject to the same regulation as bank holding
companies under the pending legislative proposals. Under such proposals, any
lawful activity in which a savings association participates would be permitted
for up to two years following the effective date of its conversion to the new
charter, with two additional one-year extensions which may be granted as the
discretion of the regulator. The legislative proposals would also abolish the
OTS and transfer its functions to the federal bank regulators with respect to
the institutions and to the Federal Reserve Board with respect to the regulation
of holding companies. The Association is unable to predict whether the
legislation will be enacted or, given such uncertainty, determine the extent to
which the legislation, if enacted, would affect its business. The Association
is also unable to predict whether the SAIF and BIF funds will eventually be
merged.
While the legislation has reduced the disparity between premiums paid on
BIF deposits and SAIF deposits, and has relieved the thrift industry of a
portion of the contingent liability represented by the FICO bonds, the premium
disparity between SAIF-insured institutions, such as the Association, and BIF-
insured institutions will continue until at least January 1, 1999. Under the
legislation, the Association anticipates that its ongoing annual SAIF premiums
will be approximately $132,000.
FEDERAL HOME LOAN BANK SYSTEM
The Association is a member of the FHLB System, which consists of 12
regional FHLBs. The FHLB provides a central credit facility primarily for
member institutions. The Association, as a member of the FHLB, is required to
acquire and hold shares of capital stock in that FHLB in an amount at least
equal to 1% of the aggregate principal amount of its unpaid residential mortgage
loans and similar obligations at the beginning of each year, or 1/20 of its
advances (borrowings) from the FHLB, whichever is greater. The Association was
in compliance with this requirement with an investment in FHLB-Cincinnati stock,
at March 31, 1997, of $2.5 million.
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. Over the past five years such dividends have
averaged 5.75%, and were 7.00% for the fiscal year ended March 31, 1997. If
dividends were reduced, or interest on future FHLB-Cincinnati advances
increased, the Association's net interest income would likely also be reduced.
FEDERAL RESERVE SYSTEM
The Federal Reserve Board regulations require savings institutions to
maintain non-interest-earning reserves against their transaction accounts
(primarily NOW and regular checking accounts). The Federal Reserve Board
regulations generally require that reserves be maintained against aggregate
transaction accounts as follows: for accounts aggregating $54.0 million or less
(subject to adjustment by the Federal Reserve Board) the reserve requirement is
3%; and for accounts greater than $54.0 million, the reserve requirement is $1.6
million plus 10% (subject to adjustment by the Federal Reserve Board between 8%
and 14%) against that portion of total transaction accounts in excess of $54.0
million. The first $4.2 million of otherwise reservable balances (subject to
adjustments by the Federal Reserve Board) are exempted from the reserve
requirements. The Association is in compliance with the foregoing requirements.
The balances maintained to meet the reserve requirements imposed by the FRB may
be used to satisfy liquidity requirements imposed by the OTS.
-28-
OHIO REGULATION
As a savings and loan association organized under the laws of the State
of Ohio, the Association is subject to regulation by the Ohio Division of
Savings and Loans (the "Ohio Division"). Regulation by the Division affects the
Association's internal organization as well as its savings, mortgage lending,
and other investment activities. Periodic examinations by the Ohio Division are
usually conducted on a joint basis with the OTS. Ohio law requires that the
Association 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 Association, 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 Association, is subject to
certain limitations on its permitted activities and investments under federal
law, which may restrict the ability of an Ohio-chartered association to engage
in activities and make investments otherwise authorized under Ohio law.
Ohio has adopted statutory limitations on the acquisition of control of an
Ohio savings and loan association by requiring the written approval of the Ohio
Division prior to the acquisition by any person or company, as defined under the
Ohio Revised Code, of a controlling interest in an Ohio association. Control
exists, for purposes of Ohio law, when any person or company, either directly,
indirectly, or acting in concert with one or more other persons or companies (a)
acquires any class of voting stock, irrevocable proxies, or any combination
thereof, (b) directs the election of a majority of directors, (c) becomes the
general partner of the savings and loan association, (d) has influence over the
management and policies of the savings and loan association, (e) has the ability
to direct shareholder votes, or (f) anything else deemed to be control by the
Ohio Division. The Ohio Division's written permission is required when the total
amount of control held by the acquiror was less than or equal to 25% control
before the acquisition and more than 25% control after the acquisition, or when
the total amount of control held by the acquiror 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.
-29-
Any person or company, which would include a director, will not be deemed to be
in control by virtue of an annual solicitation of proxies voted as directed by a
majority of the board of directors.
Under certain circumstances, interstate mergers and acquisitions involving
associations incorporated under Ohio law are permitted by Ohio law. A savings
and loan association or savings and loan holding company with its principal
place of business in another state may acquire a savings and loan association or
savings and loan holding company incorporated under Ohio law if the laws of such
other state permit an Ohio savings and loan association or an Ohio holding
company reciprocal rights. Additionally, recently enacted legislation permits
interstate branching by savings and loan associations incorporated under Ohio
law.
Ohio law requires prior written approval of the Ohio Superintendent of
Savings and Loans of a merger of an Ohio association with another savings and
loan association or a holding company affiliate.
HOLDING COMPANY REGULATION
GENERAL. The Holding Company is a non-diversified mutual savings and loan
holding company within the meaning of the HOLA. As such, the Holding Company is
registered with the OTS and is subject to OTS regulations, examinations,
supervision and reporting requirements. In addition, the OTS has enforcement
authority over the Holding Company and its non-savings institution subsidiaries.
Among other things, this authority permits the OTS to restrict or prohibit
activities that are determined to be a serious risk to the subsidiary savings
institution. The Association must notify the OTS 30 days before declaring any
dividend to the Company.
RESTRICTIONS APPLICABLE TO MUTUAL HOLDING COMPANIES. Pursuant to Section
10(o) of the HOLA and OTS regulations, a mutual holding company may engage in
the following activities: (i) investing in the stock of a savings association;
(ii) acquiring a mutual association through the merger of such association into
a savings association subsidiary of such holding company or an interim savings
association subsidiary of such holding company; (iii) merging with or acquiring
another holding company; one of whose subsidiaries is a savings association;
(iv) investing in a corporation, the capital stock of which is available for
purchase by a savings association under federal law or under the law of any
state where the subsidiary savings association or associations share their home
offices; (v) furnishing or performing management services for a savings
association subsidiary of such company; (vi) holding, managing or liquidating
assets owned or acquired from a savings subsidiary of such company; (vii)
holding or managing properties used or occupied by a savings association
subsidiary of such company properties used or occupied by a savings association
subsidiary of such company; (viii) acting as trustee under deeds of trust; (ix)
any other activity (A) that the Federal Reserve Board, by regulation, has
determined to be permissible for bank holding companies under Section 4(c) of
the Bank Holding Company Act of 1956, unless the Director, by regulation,
prohibits or limits any such activity for savings and loan holding companies; or
(B) in which multiple savings and loan holding companies were authorized (by
regulation) to directly engage on March 5, 1987; and (x) purchasing, holding, or
disposing of stock acquired in connection with a qualified stock issuance if the
purchase of such stock by such savings and loan holding company is approved by
the Director. If a mutual holding company acquires or merges with another
holding company, the holding company acquired or the holding company resulting
from such merger or acquisition may only invest in assets and engage in
activities listed in (i) through (x) above, and has a period of two years to
cease any non-conforming activities and divest of any non-conforming
investments.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring another savings
institution or holding company thereof, without prior written approval of the
OTS. It also prohibits the acquisition or retention of, with certain exceptions,
more than 5% of a non-subsidiary savings institution, a non-subsidiary holding
company, or a non-subsidiary company engaged in activities other than those
permitted by the HOLA; or acquiring or retaining control of an institution that
is not federally insured. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and managerial
resources, future prospects of the company and institution involved, the effect
of the acquisition on the risk to the insurance fund, the convenience and needs
of the community and competitive factors.
-30-
The OTS is prohibited from approving any acquisition that would result in a
multiple savings and loan holding company controlling savings institutions in
more than one state, subject to two exceptions: (i) the approval of interstate
supervisory acquisitions by savings and loan holding companies, and (ii) the
acquisition of a savings institution in another state if the laws of the state
of the target savings institution specifically permit such acquisitions.
FEDERAL AND STATE TAXATION
FEDERAL TAXATION. Income taxes are accounted for under the asset and
liability method which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The Federal tax bad debt reserve method available to thrift institutions
was repealed in 1996 for tax years beginning after 1995. As a result, the
Association must change from the reserve method to the specific charge-off
method to compute its bad debt deduction. In addition, the Association is
required generally to recapture into income the portion of its bad debt reserve
(other than the supplemental reserve) that exceeds its base year reserves,
approximately $200,000.
The recapture amount resulting from the change in a 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. If the Association
meets a "residential loan requirement" for a tax year beginning in 1996 or 1997,
the recapture of the reserves will be suspended for such tax year. Thus,
recapture can potentially be deferred for up to two years. The residential loan
requirement is met if the principal amount of housing loans made by the
Association during the year at issue (1996 and 1997) is at least as much as the
average of the principal amount of loans made during the six most recent tax
years prior to 1996. Refinancings and home equity loans are excluded.
Retained earnings as of March 31, 1997 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 Association was last audited for tax years through 1993. The
examination was concluded in May 1995, and all matters requiring payment of
taxes were resolved with no material effect on the Association's financial
statements.
OHIO TAXATION. The Association files Ohio franchise tax returns. For Ohio
franchise tax purposes, savings institutions are currently taxed at a rate equal
to 1.5% of taxable net worth. The Association is not currently under audit with
respect to its Ohio franchise tax returns.
ITEM 2. PROPERTIES
- ------------------
The Association conducts its business through its main office located in
Wooster, Ohio, and five full service branch offices located in four counties.
The following table sets forth certain information concerning the main office
and each branch office of the Association at March 31, 1997. The aggregate net
book value of the Association's premises and equipment was $4.0 million at March
31, 1997.
-31-
Location Year Opened Owned or Leased
-------- ----------- ---------------
151 N. Market St. 1902 Owned
Wooster, Ohio 44691
1926 Cleveland Rd. 1978 Owned
Wooster, Ohio 44691
90 North Clay St. 1964 Owned
Millersburg, Ohio 44654
233 Claremont Ave. 1968 Owned
Ashland, Ohio 44805
237 North Main St. 1972 Owned
Rittman, Ohio 44270
303 Highland Dr. 1980 Owned
Lodi, Ohio 44254
The Association's accounting and record keeping activities are maintained
through an in-house data processing system.
ITEM 3. LEGAL PROCEEDINGS
- -------------------------
There are various claims and lawsuits in which the Association is
periodically involved incident to the Association's business. In the opinion of
management, no material loss is expected from any of such pending claims or
lawsuits.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- -----------------------------------------------------------
During the fourth quarter of the fiscal year covered by this report, the
Registrant did not submit any matters to the vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
- ----------------------------------------------------------------------------
The "Stockholder Information" and Common Stock and Related Matters sections
of the Association's annual report to stockholders for the fiscal year ended
March 31, 1997 (the "1997 Annual Report to Stockholders") are incorporated
herein by reference. No other sections of the 1997 Annual Report to
Stockholders are incorporated herein by this reference.
-32-
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------------------------------------------------------------------------
RESULTS OF OPERATIONS
---------------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Association's 1997 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 1997
Annual Report to Stockholders are incorporated herein by this reference.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The material identified in Item 13(a)(1) hereof is incorporated herein by
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------------------------------------------------------------------------
FINANCIAL DISCLOSURE
--------------------
Not Applicable
PART III
--------
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE ASSOCIATION
- ------------------------------------------------------------
The "Proposal I--Election of Directors" section of the Association's
definitive proxy statement for its 1996 annual meeting of stockholders (the
"Proxy Statement") is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
- -------------------------------
The "Proposal I--Election of Directors" section of the Association's Proxy
Statement is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ----------------------------------------------------------------------
The "Proposal I--Election of Directors" section of the Association's Proxy
Statement is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------------------------------------------------------
The "Proposal I--Election of Directors" section of the Association's Proxy
Statement is incorporated herein by reference.
-33-
PART IV
-------
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FROM 8-K
- -------------------------------------------------------------------------
(a)(1) Financial Statements
--------------------
The following documents appear in sections of the Association's 1997 Annual
Report to Stockholders under the same captions, and are incorporated herein by
reference. No other sections of the 1997 Annual Report to Stockholders are
incorporated herein by this reference.
(i) Selected Financial and Other Data;
(ii) Management's Discussion and Analysis of Financial Condition
and Results of Operations;
(iii) Report of Independent Certified Public Accountants;
(iv) Statements of Financial Condition;
(v) Statements of Earnings;
(vi) Statements of Stockholders' Equity;
(vii) Statements of Cash Flows; and
(viii) Notes to Financial Statements.
With the exception of the aforementioned sections, the Association's 1997
Annual Report to Stockholders is not deemed filed as part of this Annual Report
on Form 10-KSB, and no other sections of the 1997 Annual Report to Stockholders
are incorporated herein by this reference.
-34-
(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 Financial
Statements.
(a)(3) Exhibits
Sequential Page
Reference to Prior Number Where
Filing or Exhibit Attached Exhibits
Regulation S-B Number Attached Are Located in This
Exhibit Number Document Hereto Form 10-KSB Report
-------------- -------- ------------------ -------------------
3 Articles of Incorporation * Not Applicable
3 Bylaws * Not Applicable
4 Instruments defining the * Not Applicable
rights of security holders,
including debentures
9 Voting trust agreement None Not Applicable
10 Material contracts None Not Applicable
11 Statement re: computation Not Not Applicable
of per share earnings Required
13 Annual Report to 13 Exhibit 13
Security Holders
16 Letter re: change in certifying None Not Applicable
accountants
18 Letter re: change in accounting None Not Applicable
principles
21 Subsidiary of Registrant None Not Applicable
22 Published report regarding None Not Applicable
matters submitted to vote of
security holders
28 Information from reports None Not Applicable
furnished to state
insurance regulatory
authorities
99 Additional Exhibits None Not Applicable
_____________________________
* Filed as exhibits to the Registrant's Combined Form MHC-1/MHC-2 Application
filed with the OTS on August 3, 1992, as amended on September 15, 1992,
September 23, 1992, February 1, 1993, March 16, 1993 and April 14, 1993.
All such previously filed documents are hereby incorporated by reference in
accordance with Item 601 of Regulation S-B.
(b) Reports on Form 8-K:
-------------------
The Association filed a Current Report on Form 8-K on May 8, 1997
announcing the declaration of a three-for-two stock split, payable on June 13,
1997 to stockholders of record as of May 23, 1997.
-35-
SIGNATURES
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
THE WAYNE SAVINGS AND LOAN COMPANY
Date: June 30, 1997 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/ A. Lee Miller
--------------------------------- ---------------------------------
Charles F. Finn, President, Chief A. Lee Miller, Senior Vice
Executive Officer and Director President, Treasurer and
(Principal Executive Officer) Controller
(Principal Financial/Accounting
Officer)
Date: June 30, 1997 Date: June 30, 1997
By: /s/ Kenneth G. Rhode By: /s/ Donald E. Massaro
--------------------------------- ---------------------------------
Kenneth G. Rhode, Director Donald E. Massaro, Director
Date: June 30, 1997 Date: June 30, 1997
By: /s/ James C. Morgan By: /s/ Terry A. Gardner
--------------------------------- ---------------------------------
James C. Morgan, Director Terry A. Gardner, Director
Date: June 30, 1997 Date: June 30, 1997
By: /s/ Russell L. Harpster By: /s/ Joseph L.Retzler
--------------------------------- ---------------------------------
Russell L. Harpster, Director Joseph L. Retzler, Director
Date: June 30, 1997 Date: June 30, 1997
EXHIBIT 13
1997 ANNUAL REPORT TO STOCKHOLDERS
1997 ANNUAL REPORT
------------------
TO STOCKHOLDERS
[ARTWORK APPEARS HERE]
THE WAYNE SAVINGS AND LOAN COMPANY
[THIS PAGE INTENTIONALLY LEFT BLANK]
CORPORATE PROFILE
Established in 1899, The Wayne Savings and Loan Company has been serving the
financial needs of the residents of Wayne, Holmes, Ashland, and Medina counties
in Ohio for 98 years. Headquartered in downtown Wooster, Ohio, the Company also
operates full-service branch offices in Wooster, Millersburg, Ashland, Rittman,
and Lodi. Throughout its long history and many economic cycles, Wayne Savings
has enjoyed a fine reputation for stability, safety and soundness, and community
service. The Company also has been well known for its sound management,
consistent profitability, and quality, personal service.
Wayne Savings converted to the stock form of ownership in 1993 through the
formation of a mutual holding company named Wayne Savings Bankshares M.H.C. The
Company's common stock is traded on the NASDAQ Stock Market under the symbol
"WAYN."
The mission of Wayne Savings is to excel in customer service as a sound,
independent, profitable, and progressive community bank dedicated to providing
an array of services responsive to the financial needs of people in our
communities, with an emphasis on home financing and household savings, and to
provide for the security and development for our employees.
BOARD OF DIRECTORS
[PHOTOGRAPH OF BOARD OF DIRECTORS APPEARS HERE]
Seated: Charles F. Finn, President, CEO, Kenneth G. Rhode, Chairman, Russell L.
Harpster
Standing: Joseph L. Retzler, Terry A. Gardner, James C. Morgan, Donald E.
Massaro
- -------------------------------------- 3 --------------------------------------
[THIS PAGE INTENTIONALLY LEFT BLANK]
TABLE OF CONTENTS
Page
President's Letter........................................................ 7
Building for Tomorrow..................................................... 9
Selected Financial and Other Data......................................... 13
Management's Discussion and Analysis of Financial Condition and Results
of Operations............................................................ 16
Stockholder Information................................................... 22
Common Stock and Related Matters.......................................... 23
Report of Independent Certified Public Accountants........................ 24
Statements of Financial Condition......................................... 25
Statements of Earnings.................................................... 26
Statements of Stockholders' Equity........................................ 27
Statements of Cash Flows.................................................. 28
Notes to Financial Statements............................................. 30
[MAP APPEARS HERE]
- -----------
Main Office
- -----------
* Wooster
151 N. Market Street
- --------------
Branch Offices
- --------------
. Ashland
233 Claremont Avenue
. Lodi
303 Highland Drive
. Millersburg
90 North Clay Street
. Rittman
237 North Main Street
. Wooster
1926 Cleveland Road
- -------------------------------------- 5 ---------------------------------------
PRESIDENT'S LETTER
[PHOTOGRAPH OF CHARLES F. FINN APPEARS HERE]
Charles F. Finn
President and Chief Executive Officer
TO OUR STOCKHOLDERS
AND CUSTOMERS:
We are very gratified by the accomplishments and events of the fiscal year
ended March 31, 1997, Wayne Savings' 98th year of providing quality financial
services to our community. It was another year of favorable operating results,
and considerable progress was made in implementing our strategic plan to keep
Wayne Savings thriving as a community bank in a changing financial services
environment.
Two non-recurring charges affected net earnings for the year, but both charges
will have a very positive effect going forward. As a result of favorable
legislation on September 30, 1996, all banking institutions in the United States
with deposits insured by the FDIC Savings Association Insurance Fund were
assessed 65.7 cents for every $100 of deposits to bring the fund to the required
level. For Wayne Savings, the one-time assessment amounted to $1.3 million, or
$887,000 after-tax, equal to $.40 per share. We also took a fixed asset write-
off to prepare for the construction of our new Cleveland Point Financial Center
in Wooster, which amounted to $75,000 after-tax, or $.03 per share.
Before the above one-time charges, net earnings totaled $1.7 million, or $.75
per share, an increase of 18.4% over net earnings of $1.4 million, or $.64 per
share, in the prior year. We are pleased with the increase in core earnings,
which resulted primarily from a $322,000 increase in net interest income over
the previous year. After booking the SAIF assessment and fixed asset write-off,
net earnings totaled $709,000 or $.32 per share.
We are relieved the long-standing issue regarding the recapitalization of the
FDIC-SAIF fund was settled and the fund is now at full strength. For Wayne
Savings, we now have competitive equality with all banking institutions, as our
deposit insurance premiums have been reduced from 23 cents to 6.4 cents per $100
of deposits. While the SAIF recapitalization was costly, it sets the stage for
the modernization of the financial services industry, which will be considered
by Congress in the year ahead.
Wayne Savings experienced growth in all key areas in fiscal 1997. Total assets
on March 31, 1997 amounted to $252.2 million, up $3.7 million from $248.5
million at the end of the prior year. Stockholders' equity increased
(continued on next page)
- -------------------------------------- 7 ---------------------------------------
PRESIDENT'S LETTER (con't.)
$263,000 to a new total of $23.1 million, resulting in a tangible capital-to-
assets ratio of 9.17%. Deposit account balances increased from $210.2 million to
$211.4 million, while net loans receivable increased from $206.5 million to
$209.4 million.
Asset quality remains strong and capital levels are well in excess of
regulatory requirements. Wayne Savings again received a Five-Star rating for
safety and soundness in each of the four quarters of fiscal 1997 from Bauer
Financial Reports Inc., a nationally recognized firm that rates financial
institutions. This is the highest rating awarded to banks.
We have been pleased by investors' confidence in Wayne Savings and your
interest in our common stock. During the fiscal year ended March 31, 1997, the
price of our common stock increased 27%. In fiscal 1997, our stockholders
received quarterly dividends totaling $.61 per share. On April 24, 1997, your
Board of Directors declared a three-for-two stock split in the form of a 50%
stock dividend, which was distributed on June 12, 1997. All information in this
report pertaining to stock price, earnings per share, and dividends have been
adjusted to reflect the stock split.
As I touched on earlier, technological and competitive forces are re-shaping
the delivery of financial services. In the past year, we took strategic actions
to position Wayne Savings for continued growth, profitability, and expanded
services in this new world of banking. These actions, which are outlined in more
detail on the following pages, included instilling a marketing and sales culture
throughout the Company, technology advancements, expanded products and services,
office facilities improvements, market area expansion, and corporate
restructuring.
In this era of consolidation and ever larger financial conglomerates, we
believe community banks like Wayne Savings will be the first and best choice of
consumers who prefer more personalized service. We are committed to maintaining
our focus on providing the same friendly, responsive, and accurate service that
generations of customers have come to expect of us.
Our directors, officers, and staff thank you for your continued confidence and
support.
Sincerely,
/s/ Charles F. Finn
Charles F. Finn
President and Chief Executive Officer
- -------------------------------------- 8 ---------------------------------------
BUILDING FOR TOMORROW
[LOGO APPEARS HERE]
REVIEW OF ACCOMPLISHMENTS
INCREASING SHAREHOLDER VALUE
Since Wayne Savings' conversion to the stock form of ownership, Management and
the Board of Directors have remained focused on maximizing investment value for
our stockholders. Since the initial stock offering in June, 1993, charter
stockholders have experienced a 200% price appreciation in Wayne Savings common
stock. At December 31, 1996, stockholders had realized a one year total return
of 29.24% on their investment and a two year total return of 56.86%.
We have also continued our policy of paying a continuing stream of above-
average quarterly dividends. In the past year, our stockholders received a total
of $.61 per share in quarterly dividends, and the divided yield based on the
March 31, 1997 stock price was 3.54%
An Automatic Dividend Reinvestment Plan was introduced last year, which
enables our stockholders to purchase additional shares of Wayne Savings' common
stock at market value without having to pay brokerage commissions and service
charges. This is a convenient and inexpensive way for investors to increase
their holdings of our common stock. There was a very favorable response to the
plan. Of the 852 registered shareholders, there were 307 enrolled as of the end
of the last quarter, a 36% participation rate.
We remain committed to enhancing the franchise value of the Company in the
future by intelligently investing in people, marketing, new business
opportunities, strategic branch locations, and technology.
[PHOTOGRAPH OF SENIOR MANAGEMENT APPEARS HERE]
Left to right: Wanda Christopher-Finn, Executive Vice President, Chief
Administrative Officer; Gary C. Miller, Senior Vice President, Loan Origination
Division; A. Lee Miller, Senior Vice President, Finance/Accounting Division;
Todd J. Tappel, Senior Vice President, Director of Planning, Corporate Secretary
MID-TIER STOCK HOLDING COMPANY
In January, 1997, your Board of Directors approved a plan of corporate
restructuring which will provide for establishing a stock holding company to be
named Wayne Savings Bankshares Inc. Upon completion of the reorganization, Wayne
Savings Bankshares, M.H.C., the present mutual holding company, will own a
majority of the common stock of the new stock holding company, which will own
100% of the common stock of The Wayne Savings and Loan Company. Existing
stockholders will be asked to exchange each share of Wayne Savings' common stock
- ------------------------------------- 9 ----------------------------------------
BUILDING FOR TOMORROW (con't.)
for one share of common stock in the new stock holding company.
Completion of the reorganization is subject to regulatory and stockholder
approval. An application was filed with the Office of Thrift Supervision and
stockholders will be asked to approve the plan of reorganization at the annual
meeting in July, 1997.
The mid-tier holding company structure will provide opportunities that are not
currently available to us in our current form of organization. The
reorganization will permit the stock holding company to make investments,
diversify business activities, or complete acquisitions for the benefit to all
stockholders. The stock holding company will also be able to repurchase shares
of its common stock, if this is deemed a desirable investment of capital
resources.
MARKETING AND SALES CULTURE
We believe building and maintaining valuable customer relationships is vital
to enhancing the franchise value of Wayne Savings. The competition for customer
relationships from banks and non-banks has increased dramatically, prompting us
to place a great deal of emphasis on instilling a marketing and sales culture
that permeates the entire company. The objectives of the program were to improve
product profitability, increase market share, improve customer retention, and
increase the number of products per household through company-wide cross-
selling.
It is our feeling that employees who produce should be rewarded, so a system
of incentive payments was established for the successful cross-selling of new
products. A Retail Sales Support Manager was appointed to train employees in
cross-selling techniques, coordinate and encourage sales efforts, and administer
incentive awards. By utilizing Marketing Customer Information technology (MCIF),
we were able to increase the number of products used by existing customers
through direct mail, cross-selling, and telephone marketing. This also enabled
us to spend our advertising dollars more judiciously through target marketing.
As part of the new marketing emphasis, we also developed a Relationship
Banking program, which included customer incentives for utilizing more than one
product, a School Outreach program to teach financial concepts to students, and
a stepped-up Officer Call program to maintain consistent contacts with community
realtors and builders.
The first-year results of our cross-selling initiative has been quite
encouraging. The cross-sales ratio for the year was 25%, meaning that one new
product was sold for each four contacts. During a spring promotion to increase
the volume of home equity lines of credit, our staff exceeded the total goal by
20%.
We are quite proud of our great team of officers and staff for the
enthusiastic way in which they quickly adapted to our new sales program.
TECHNOLOGY ADVANCEMENTS
In the past year, Wayne Savings successfully completed a full conversion to
our "in-house" data processing system after utilizing an independent service
bureau for 21 years. The software vendor is Data Dimensions Inc., Orlando,
Florida. A wide area network links a Unysis A7 main-frame computer with personal
computers at all offices and departments. This new state-of-the art system
provides faster customer service, greater accessibility of information through
an expanded data base, and improved operating efficiencies.
In connection with the data processing conversion, we also installed a
computerized mortgage loan origination system to eliminate the manual
preparation of documents. The loan origination system is in use at all offices
and is connected to the main-frame computer. This technology has enabled us to
speed-up the time from application to closing, resulting in better customer and
realtor relations, and it has produced efficiencies in our loan processing
department.
With the rapid changes in technology and growing information requirements, we
felt it was important to gain independence and control over our data processing
capabilities. Our new in-house computer systems should enable us to be more
responsive to customer service needs and to utilize the latest advancements in
technology.
Our new technology already has enabled us to introduce a great new, cost-free
service for the added convenience of our customers. A complete on-line telephone
banking system, known as TELEBANKER, now allows customers access to their
accounts 24 hours a day- 7 days a week. With this innovative new service,
customers can transfer funds from one account to another, make loan payments,
obtain balance inquiries, find out whether specific checks have cleared, and
check on the amount of the last deposit. Since its inception, TELEBANKER has
been very popular with our customer base. Besides the customer service benefits,
we expect TELEBANKER to result in improved efficiencies as more staff will be
freed up from handling routine phone calls.
- ------------------------------------- 10 ---------------------------------------
Also, Wayne Savings recently doubled the number of Automatic Teller Machine
locations. By installing ATM's at our Millersburg, Rittman, and Lodi offices,
customers at each Wayne Savings location are now served by a drive-up ATM. As it
has become common for banks to surcharge non-customers for cash withdrawals, the
installation of ATM's at all offices became especially important.
NEW PRODUCTS
In the past year, Wayne Savings took a major step to broaden the range of
financial products available for customers. Through an affiliation with
Lifestyle Financial Investments Inc., a subsidiary of Great American Life
Insurance Company of Cincinnati, Ohio, the sale of tax-deferred fixed annuities
was introduced at all offices of Wayne Savings. The introduction of the fixed
annuity product meets consumer demand within our market areas for alternative
investments in conjunction with insured deposits accounts. This new alternative
investment product is not federally insured, but the safety of principal is
backed by the financial stability of Great American Life Insurance Company,
which is rated "A" (excellent) by A.M. Best Insurance Company rating service.
The fixed annuity product offers a tax-deferred retirement account alternative
to our customers and it provides Wayne Savings with a new source of fee income
and earnings. The availability of the fixed annuity enhances our cross-sell
strategy to develop multiple account customers across all product lines. We are
also now poised to expand into the offering of other types of alternative
investments when we choose.
In implementing the fixed annuity program, Wayne Savings chose not to utilize
outside sales persons. Instead, we decided to train and license some of our
staff members. Following intensive training, nine members of our staff passed
the State of Ohio examination and are now licensed insurance agents. One of
these qualified and licensed representatives is available at each Wayne Savings
location to discuss the suitability of fixed annuities for our customers'
investment portfolios.
On the lending side of the business, Wayne Savings introduced a new bi-weekly
mortgage loan product as an option to the traditional monthly payment mortgage.
Available with an automatic payment transfer from a checking account, the new
product results in an accelerated amortization of the loan balance and reduced
total interest costs over the life of the loan. We also modified and expanded
terms on lot loans to make the purchase of land more affordable for our
customers, and we enhanced the terms on home equity lines of credit to make this
tax-advantaged product more attractive and affordable. In fiscal 1997, we
experienced a 7% increase in mortgage loan volume and a 32% increase in home
equity line of credit balances.
Wayne Savings remains committed to providing affordable housing programs to
low-to-moderate income home buyers. We have participated strongly in the USDA
Guaranteed Rural Housing Loans program, which makes loans available at special
terms for purchase and construction of single family homes in rural areas.
Wayne Savings is currently the leading lender in our market area in the Rural
Housing Loan program.
FACILITIES EXPANSION
[ART WORK APPEARS HERE]
Main Office, 151 North Market, Wooster, Ohio
To position Wayne Savings for future growth and expanded services to
customers, a major renovation of the Company's main office in downtown Wooster
was begun in October 1996. Two separate additions to the existing structure will
provide combined new work space of
- ------------------------------------- 11 ---------------------------------------
BUILDING FOR TOMORROW (cont.)
approximately 2700 square feet. The architecture and materials for the additions
were designed to blend with the original building. The expanded areas will
contain an Operations Center, a Board/Conference room, and a Training center.
[ARTWORK APPEARS HERE]
Cleveland Point Financial Center, Wooster, Ohio
Due to the growth of residential and commercial development occurring in
Wooster, Ohio, it became necessary to consider expansion of our branch facility
at the Cleveland Road site. Through the purchase of two adjacent land parcels,
we were able to recently begin construction of a new Cleveland Point Financial
Center to replace the existing Cleveland Road branch office. The new two-story
financial center will have three drive-in lanes with a drive-up ATM and a walk-
in vault with safe deposit boxes. The parking area will be greatly enlarged and
traffic flow will be improved. A full range of financial services is planned
when the new facility opens for business in late 1997. The existing Cleveland
Road office will remain open until construction is complete. The expansion will
result in improved customer convenience, and it is expected to increase deposit
and loan growth at this location.
MARKET EXPANSION
Wayne Savings has filed an application with the State of Ohio to establish a
presence in the growing community of North Canton, Ohio, which is located in
Stark County. An existing bank building on South Main Street in North Canton was
recently purchased to house the planned new operation. The one-story brick
building, formerly occupied by a large regional bank, is situated in a primarily
residential area, and it has three drive-in lanes and walk-in vault. The office
will be managed and staffed by local personnel. The expansion into Stark County
will provide a new source for growth in retail deposits, home loans, and
consumer loans. We are excited about the opportunity to bring our personalized
banking services to the North Canton community. A fall, 1997 opening is
projected.
One ship drives east, and another west
With the self-same winds that blow
Tis the set of the sails
And not the gales
Which decides the way to go.
--Ella Wheeler Wilcox
- -------------------------------------- 12 --------------------------------------
SELECTED FINANCIAL AND OTHER DATA
The following table sets forth certain financial and other data of The Wayne
Savings and Loan Company ("Wayne Savings" or the "Company") at the dates and for
the periods indicated. For additional information about the Company, reference
is made to "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the Financial Statements of the Company and related
notes included elsewhere herein.
At March 31,
-------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
(In Thousands)
Selected Financial
Condition Data
Total assets............... $252,175 $248,503 $241,359 $239,614 $238,047
Loans receivable, net/1/... 209,404 206,513 201,857 182,963 178,873
Mortgage-backed
securities/2/............. 873 1,929 2,920 4,032 4,714
Investment securities/3/... 24,470 19,675 25,542 33,114 26,605
Cash and cash
equivalents/4/............ 7,606 10,190 3,073 11,389 18,193
Deposits................... 211,442 210,158 205,497 216,873 222,363
Stockholders' equity/5/.... 23,115 22,852 21,860 20,358 13,671
/1/ Includes loans held for sale.
/2/ Includes mortgage-backed securities held as either available for sale or
held for sale.
/3/ Includes certificates of deposit in other financial institutions.
/4/ Includes cash and due from banks, interest-bearing deposits in other
financial institutions, and federal funds sold.
/5/ Consists of only retained earnings as of March 31, 1993.
Year Ended March 31,
-------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
(In Thousands)
Selected Operating Data:
Interest income............ $18,719 $18,328 $17,360 $18,262 $18,734
Interest expense........... 10,610 10,541 9,249 9,844 11,733
------- ------- ------- ------- -------
Net interest income...... 8,109 7,787 8,111 8,418 7,001
Provision for loan losses.. 20 20 25 110 65
------- ------- ------- ------- -------
Net interest income
after provision
for loan losses........ 8,089 7,767 8,086 8,308 6,936
Other income............... 575 607 489 856 1,406
General, administrative
and other expense/1/..... 7,588 6,189 6,051 5,948 6,789
------- ------- ------- ------- -------
Earnings before income
taxes..................... 1,076 2,185 2,524 3,216 1,553
Federal income taxes....... 367 774 882 1,044 505
------- ------- ------- ------- -------
Net earnings/1/.......... $ 709 $ 1,411 $ 1,642 $ 2,172 $ 1,048
======= ======= ======= ======= =======
/1/ The fiscal year ended March 31, 1997 includes a one-time charge of $1.3
million to recapitalize Savings Associations Insurance Fund ("SAIF") and a
$113,000 write-off of certain fixed assets relating to construction of a new
facility at the Cleveland Road location. Without these charges, operating data
would have been as follows:
General, administrative
and other expense......... $ 6,132
Net earnings............... $ 1,671
- -------------------------------------- 13 --------------------------------------
FINANCIAL HIGHLIGHTS
As of and for the years ended March 31, 1997, 1996, 1995, 1994 and 1993
NET EARNINGS
(Millions)
FY 93 1.048
FY 94 2.172
FY 95 1.642
FY 96 1.411
FY 97 .709
NET INTEREST MARGIN
FY 93 3.07
FY 94 3.62
FY 95 3.51
FY 96 3.30
FY 97 3.40
TOTAL ASSETS
(Millions)
FY 93 238.047
FY 94 239.614
FY 95 241.359
FY 96 248.503
FY 97 252.175
STOCKHOLDERS' EQUITY
(Millions)
FY 93 13.671
FY 94 20.358
FY 95 21.860
FY 96 22.852
FY 97 23.115
- ------------------------------------- 14 ---------------------------------------
SELECTED FINANCIAL AND OTHER DATA (cont.)
At or For the Year Ended March 31,
-------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------- -------
Key Operating Ratios and Other
Data:
Return on average assets (net
earnings divided by average
total assets)/1/................. .29% .58% .69% .91% .44%
Return on average equity (net
earnings divided by average
equity)/1/....................... 3.08 6.32 7.74 12.77 7.88
Average equity to average assets
ratio............................ 9.32 9.21 8.92 7.12 5.57
Equity to assets at period end.... 9.17 9.20 9.06 8.50 5.80
Interest rate spread (difference
between average yield on
interest-earning assets and
average cost of interest-
bearing liabilities)............ 3.03 2.92 3.18 3.32 2.92
Net interest margin (net interest
income as a percentage of average
interest-earning assets)....... 3.40 3.30 3.51 3.62 3.07
General, administrative and other
expense to average assets/1,2/.. 3.07 2.57 2.54 2.48 2.38
Non-performing loans to loans
receivable, net................. .46 1.01 .83 .24 .29
Non-performing assets to total
assets........................... .70 1.35 .70 .19 1.11
Average interest-earning assets to
average interest-bearing
liabilities.................... 108.35 108.48 108.16 106.98 102.91
Allowance for loan losses to
non-performing loans............ 95.01 42.57 58.32 214.54 162.81
Allowance for loan losses to
non-performing assets........... 51.61 26.41 57.74 214.54 32.43
Net interest income after
provision for loan losses, to
general, administrative and other
expense/1,2/..................... 106.60 124.77 133.65 140.77 121.98
Number of full-service offices.... 6 6 6 6 6
/1/ The fiscal year ended March 31, 1997 includes a one-time charge of $1.3
million to recapitalize the SAIF and a $113,000 write-off of certain fixed
assets relating to construction of a new facility at the existing Cleveland Road
location. Without these charges, the operating ratios would be as follows:
Return on average assets.......... .67%
Return on average equity.......... 7.26%
General, administrative and other
expense to average assets........ 2.48%
Net interest income after provision
for loan losses, to general,
administrative and other expense.. 131.91%
/2/ In calculating this ratio, general, administrative and other expense does
not include provisions for losses/gains on the sale of real estate acquired
through foreclosure.
- ------------------------------------- 15 ---------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
The Company's net earnings are primarily dependent on its net interest income,
which is the difference between interest income earned on its loan, mortgage-
backed securities, and investment portfolios, and its cost of funds consisting
of interest paid on deposits and borrowings. The Company's net earnings also are
affected by its provision for loan losses, as well as the amount of other
income, including fees and service charges, and general, administrative and
other expense, such as salaries and employee benefits, deposit insurance
premiums, occupancy and equipment costs, and income taxes. Earnings of the
Company also are affected significantly by general economic and competitive
conditions, particularly changes in market interest rates, government policies,
and actions of regulatory authorities.
Business Strategy
The Company's current business strategy is to operate as a well-capitalized,
profitable and independent community-oriented savings association dedicated to
financing home ownership and providing quality service to its customers. The
Company has sought to implement this strategy in recent years by: (1) closely
monitoring the needs of customers and providing personal, quality customer
service; (2) emphasizing the origination of one- to four-family residential
mortgage loans and consumer loans in the Company's market area; (3) reducing
interest rate risk exposure by better matching asset and liability maturities
and rates; (4) maintaining high asset quality; (5) maintaining a strong retail
deposit base; and (6) maintaining capital in excess of regulatory requirements.
Analysis of Financial Condition and Results of Operations
General. The earnings of the Company depend primarily on its level of net
interest income, which is the difference between interest earned on the
Company's interest-earning assets and the interest paid on interest-bearing
liabilities. Net interest income is substantially affected by the Company's
interest rate spread, which is the difference between the average yield earned
on interest-earning assets and the average rate paid on interest-bearing
liabilities, as well as by the average balance of interest-earning assets as
compared to interest-bearing liabilities. The Company reported net earnings of
$709,000, $1.4 million and $1.6 million for fiscal years ended March 31, 1997,
1996 and 1995, respectively.
In addition to the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Economic circumstances, the Company's operations and actual
results could differ significantly from those discussed in the forward-looking
statements. Some of the factors that could cause or contribute to such
differences are discussed herein but also include changes in the economy and
interest rates in the nation and the Company's general market area. The forward-
looking statements contained herein include, but are not limited to, those with
respect to the following matters: (1) management's determination of the amount
of allowance for loan losses; (2) the effect of changes in interest rates; (3)
changes in deposit insurance premiums; (4) management's opinion as to the
effects of recent accounting pronouncements on the Company's consolidated
financial statements.
Interest Income. Interest income totaled $18.7 million for the fiscal year
ended March 31, 1997, an increase of $391,000, or 2.1% over interest income of
$18.3 million for the fiscal year ended March 31, 1996. The increase was
primarily due to an increase in the average yield on interest-earning assets, to
7.85% for the fiscal year ended March 31, 1997, from 7.77% for the fiscal year
ended March 31, 1996, and by a $2.5 million, or 1.1% increase in average
interest-earning assets from $236.0 million to $238.5 million. Interest income
on loans receivable for the year ended March 31, 1997 totaled $17.1 million, an
increase of $419,000, or 2.5% over the previous year. This increase resulted
from an increase in the average loans receivable balance from $206.8 million to
$209.2 million and an increase in the average yield from 8.05% to 8.15%.
Interest income on mortgage-backed securities decreased by $50,000, or 34.0%,
from $147,000 to $97,000. This decrease was caused by a $1.4 million decrease in
the average balance of mortgage-backed securities, which was partially offset by
the yield increasing from 5.36% to 7.15%. Interest income on investment
securities decreased by $45,000, or 5.3%, from $850,000 to $805,000. This
decrease was caused by a $1.3 million, or 9.5%, decrease in the average balance
of investment securities, which was partially offset by an increase in the yield
on those securities from 6.04% to 6.31%. The decrease in the average balance is
a result of using proceeds from maturing securities to fund loan growth. The
increase in yield is due to the increase in short term interest rates over the
past year. Interest income from interest bearing deposits increased by $67,000,
or 9.7%, from $691,000 to $758,000. The increase was caused by an increase of
$2.8 million in the average balance outstanding, which was partially offset by a
decrease in the yield from 5.58% to 5.00%. The increase in the average balance
outstanding is a result of short term investment of deposit growth. The decrease
in the yield is due to the decrease in short term interest rates over the past
year.
Interest income totaled $18.3 million for the fiscal year ended March 31,
1996, an increase of $968,000, or 5.6%, over interest income of $17.4 million
for the fiscal year ended
- ------------------------------------- 16 ---------------------------------------
March 31, 1995. The increase was primarily due to an increase in the average
yield on interest-earning assets to 7.77% for the fiscal year ended March 31,
1996, from 7.50% for the fiscal year ended March 31, 1995, coupled with a $4.6
million, or 2.0%, increase in average interest-earning assets from $231.4
million to $236.0 million. Interest income on loans receivable for the year
ended March 31, 1996 totaled $16.6 million, an increase of $1.3 million, or
8.2%, over the previous year. This increase resulted from an increase in the
average loans receivable balance from $192.8 million in fiscal 1995 to $206.8
million in fiscal 1996 and an increase in the average yield from 7.98% to 8.05%.
Interest income on mortgage-backed securities decreased by $46,000, or 23.8%,
from $193,000 for the fiscal year ended March 31, 1995 to $147,000 for fiscal
1996. This decrease was caused by a decrease in the average balance of $580,000
and the yield decreasing from 5.81% to 5.36%. Interest income on investment
securities decreased by $68,000, or 7.4% from $918,000 in fiscal 1995 to
$850,000 in fiscal 1996. This decrease resulted from a $3.5 million, or 20.1%,
decrease in the average balance of investment securities, which was partially
offset by an increase in the yield on those securities from 5.21% in 1995 to
6.04% in 1996. The decrease in the average balance was a result of using
proceeds from maturing securities to fund loan growth. The increase in yield was
due to the increase in short term interest rates during fiscal 1996. Interest
income from interest bearing deposits decreased by $178,000, or 20.5%, from
$869,000 in 1995 to $691,000 in 1996. The decrease was caused by a decrease of
$5.3 million in the average balance outstanding, which was partially offset by
an increase in the yield from 4.92% to 5.58%. The decrease in the average
balance outstanding was due to using a portion of these deposits to fund loan
growth. The increase in the yield was also due to the increase in short term
interest rates over fiscal 1996.
Interest Expense. Interest expense for the fiscal year ended March 31, 1997
totaled $10.6 million, an increase of $69,000, or .7% over interest expense of
$10.5 million for the fiscal year ended March 31, 1996. The increase was a
result of an increase in the average interest-bearing liabilities to $220.1
million from $217.5 million, which was partially offset by a decrease in the
average cost of funds, to 4.82% in the current year from 4.85% in the previous
fiscal year. Interest expense on deposits increased by $233,000, or 2.4%, to
$10.0 million from $9.8 million in the previous fiscal year. This increase was
caused by a $3.9 million increase in the average deposits outstanding, from
$204.4 million for fiscal 1996 to $208.3 million in fiscal 1997 and an increase
in the average cost of deposits to 4.80% from 4.78%. Interest expense on
borrowings for the fiscal year ended March 31, 1997 was $604,000, a decrease of
$164,000 from the previous fiscal year. The decrease was due to an $1.3 million
decrease in the average balance outstanding and a decrease in the average cost
of borrowings to 5.10% from 5.83%.
Interest expense for the fiscal year ended March 31, 1996 totaled $10.5
million, an increase of $1.3 million, or 14.0% over interest expense of $9.2
million for the fiscal year ended March 31, 1995. The increase was a result of
an increase in the average cost of funds to 4.85% in fiscal 1996 from 4.32% in
the previous fiscal year, and an increase in the average interest-bearing
liabilities to $217.5 million from $213.9 million. Interest expense on deposits
increased by $775,000, or 8.6%, to $9.8 million from $9.0 million in the
previous fiscal year. This increase was caused by an increase in the cost of
deposits to 4.78% from 4.30%, which was partially offset by a decrease in the
average balance of deposits outstanding to $204.4 million from $209.2 million.
Interest expense on borrowings for the fiscal year ended March 31, 1996 totaled
$768,000, an increase of $517,000 over the previous fiscal year. The increase
was due to an $8.4 million increase in the average balance outstanding and an
increase in the average cost of borrowings to 5.83% from 5.26%.
Net Interest Income. Net interest income totaled $8.1 million for the year
ended March 31, 1997, an increase of $322,000, or 4.1%, over net interest income
of $7.8 million for the fiscal year ended March 31, 1996. The increase in net
interest income resulted primarily from the increase in the Company's average
yield on loans to 8.15% for the year ended March 31, 1997 from 8.05% for the
year ended March 31, 1996.
Net interest income totaled $7.8 million for the year ended March 31, 1996, a
decrease of $324,000 or 4.0%, from net interest income of $8.1 million for the
fiscal year ended March 31, 1995. The decrease in net interest income resulted
primarily from the reduction in the Company's net interest rate spread to 2.92%
for the year ended March 31, 1996 from 3.18% for the year ended March 31, 1995,
which was partially offset by an improvement in the Company's ratio of average
interest-earning assets to average interest-bearing liabilities to 108.5% from
108.2%.
Provision for Loan Losses. The Company maintains an allowance for loan losses
based on prior loss experience, the level of non-performing and problem loans in
the portfolio, and the potential effects on the portfolio of general economic
conditions. The Company's allowance for loan losses was $914,000, or .44% of
loans receivable at March 31, 1997, $888,000, or .43% of loans receivable at
March 31, 1996, and $981,000, or .49% of loans receivable at March 31, 1995. The
Company maintained its provision for loan losses at $20,000 for fiscal years
ended March 31, 1997, and 1996, primarily because management has deemed the
level of valuation allowances adequate given the risk inherent in the loan
portfolio and management's assessment of the
- ------------------------------------- 17 ---------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
collateral securing non-performing loans. The Company decreased its provision
for loan losses to $20,000 for the fiscal year ended March 31, 1996, from
$25,000 for the fiscal year ended March 31, 1995, primarily as a result of the
Company's low level of non-performing loans during fiscal 1997.
At March 31, 1997, 1996, and 1995, respectively, the Company's loss allowance
was primarily composed of $684,000, $878,000, and $966,000, of general allowance
as defined by Office of Thrift Supervision ("OTS") regulations. The breakdown of
general loss allowances and specific loss allowances is made for regulatory
accounting only. General loan valuation allowances are added back to capital in
computing risk-based capital. Both general and specific loss allowances are
charged against earnings. The financial statements of the Company are prepared
in accordance with Generally Accepted Accounting Principles ("GAAP") and,
accordingly, provisions for loan losses are based on management's assessment of
the factors set forth above. The Company reviews on a monthly basis its loan
portfolio, including problem loans, to determine whether any loans require
classification and/or the establishment of appropriate allowances.
Other Income. Other income, consisting primarily of gains on the sale of
loans, service fees and charges on deposit accounts decreased by $32,000, or
5.3%, to $575,000 for the year ended March 31, 1997, from $607,000 for the
fiscal year ended March 31, 1996. The decrease was primarily attributed to a
decrease of $33,000 in gain on sale of fixed-rate mortgage loans due to a lower
volume of sales during the fiscal year ended March 31, 1997. Fixed-rate mortgage
loans totaling $1.9 million were sold in the fiscal year ended March 31, 1997 as
compared to $3.1 million in the fiscal year ended March 31, 1996.
Other income increased by $118,000, or 24.1%, to $607,000 for the year ended
March 31, 1996, from $489,000 for the fiscal year ended March 31, 1995. The
increase was primarily attributable to an increase of $103,000 in gain on sale
of fixed-rate mortgage loans due to a higher volume of sales during the fiscal
year ended March 31, 1996, and a more favorable interest rate environment.
General Administrative and Other Expense. General, administrative and other
expense, consisting primarily of employee compensation and benefits, occupancy
and equipment expense, federal deposit insurance premiums, and other operating
expenses, totaled $7.6 million for the year ended March 31, 1997, an increase of
$1.4 million, or 22.6% over fiscal 1996. The increase was primarily attributed
to a $1.2 million, or 230.7%, increase in federal deposit insurance premiums and
a $165,000 increase in loss on disposition of office premises and equipment. The
increase in federal deposit insurance premiums was due to the one-time special
assessment to recapitalize the Savings Association Insurance Fund ("SAIF"). The
assessment was finalized at $.657 per $100 of deposits as of March 31, 1995,
which amounted to $1.3 million, or $887,000 after taxes for the Company. The
increase in loss on disposition of office premises and equipment was due to the
write-off of certain fixed assets relating to the construction of the new
facility at the Cleveland Road branch.
General, administrative and other expense, totaled $6.2 million for the year
ended March 31, 1996, an increase of $138,000, or 2.3%. The increase was
primarily attributed to a $115,000, or 70.6%, increase in franchise taxes and a
$72,000, or 2.2%, increase in employee compensation and benefits, which were
partially offset by a $46,000, or 5.3% decrease in occupancy and equipment
expense and a $36,000, or 100% increase in gain on disposition of office
premises and equipment. The increase in franchise taxes was caused by continued
growth in the Company's equity capital. The increase in employee compensation
and benefits was due primarily to normal merit adjustments coupled with a
reduction in deferred loan origination costs as a result of decreased lending
volume. The decline in occupancy and equipment expense was primarily attributed
to decreased data processing costs resulting from the Company's conversion to an
in-house system. The gain on disposition of office premises is related to the
sale of teller equipment which was replaced when the Company converted to an in-
house data processing system.
Income Taxes. The provision for income taxes totaled $367,000 for the year
ended March 31, 1997, compared to $774,000 for the year ended March 31, 1996.
The decrease in income taxes reflected the lower levels of pre-tax earnings for
the period ended March 31, 1997.
The provision for income taxes totaled $774,000 for the year ended March 31,
1996, compared to $882,000 for the year ended March 31, 1995. The decrease in
income taxes generally reflected the lower levels of pre-tax earnings for the
period ended March 31, 1996.
- ------------------------------------- 18 ---------------------------------------
Average Balance Sheet
The following table sets forth certain information relating to the Company's
average balance sheet and reflects the average yield on assets and average cost
of liabilities for the periods indicated and the average yields earned and rates
paid. Such yields and costs are derived by dividing income or expense by the
average balance of assets or liabilities, respectively, for the periods
presented. Average balances are derived from month-end balances. Management does
not believe that the use of month-end balances instead of daily average balances
has caused any material difference in the information presented.
Year Ended March 31,
----------------------------------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------------------------------
Average Average Average Average Average Average
Balance Interest Yield/Cost Balance Interest Yield/Cost Balance Interest Yield/Cost
-------- --------- ---------- ------- ------- ---------- ------- -------- ----------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net..... $209,219 $17,059 8.15% $206,775 $16,640 8.05% $192,764 $15,380 7.98%
Mortgage-backed
securities/1/............ 1,357 97 7.15 2,740 147 5.36 3,320 193 5.81
Investment securities..... 12,750 805 6.31 14,083 850 6.04 17,632 918 5.21
Interest-bearing
deposits/2/.............. 15,171 758 5.00 12,381 691 5.58 17,663 869 4.92
-------- ------- -------- -------- ------- -------- -------- ------- --------
Total interest-earning
assets................. 238,497 18,719 7.85 235,979 18,328 7.77 231,379 17,360 7.50
------- -------- ------- -------- ------- --------
Non-interest-earning assets 8,553 6,422 6,449
-------- -------- --------
Total assets............. $247,050 $242,401 $237,828
======== ======== ========
Interest-bearing liabilities:
Deposits.................. $208,289 10,006 4.80 $204,353 9,773 4.78 $209,151 8,998 4.30
Borrowings................ 11,835 604 5.10 13,176 768 5.83 4,772 251 5.26
-------- ------- -------- -------- ------- -------- ------- ------- --------
Total interest-bearing
liabilities............. 220,124 10,610 4.82 217,529 10,541 4.85 213,923 9,249 4.32
------- -------- ------- -------- ------- --------
Non-interest-bearing
liabilities............... 3,901 2,559 2,689
-------- ------- --------
Total liabilities........ 224,025 220,088 216,612
Stockholders' equity....... 23,025 22,313 21,216
-------- -------- --------
Total liabilities and
stockholders' equity.... $247,050 $242,401 $237,828
======== ======== ========
Net interest income........ $ 8,109 $ 7,787 $ 8,111
======= ======= =======
Interest rate spread/3/.... 3.03% 2.92% 3.18%
======== ======== ========
Net yield on interest-
earning assets/4/......... 3.40% 3.30% 3.51%
======== ======== ========
Ratio of average interest-
earning assets to average
interest-bearing
liabilities............... 108.35% 108.48% 108.16%
======== ======== ========
/1/ Includes mortgage-backed securities designated as available for sale.
/2/ Includes federal funds sold and interest-bearing deposits in other financial
institutions.
/3/ Interest rate spread represents the difference between the average yield on
interest-earning assets and the average cost of interest-bearing
liabilities.
/4/ Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
- ------------------------------------- 19 ---------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
Rate/Volume Analysis
The table below sets forth certain information regarding changes in interest
income and interest expense of the Company for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average volume multiplied by old rate); (ii) changes in rate (change
in rate multiplied by old average volume); (iii) changes in rate-volume (changes
in rate multiplied by the change in average volume) which have been allocated
proportionately between changes in rate and changes in volume; and (iv) the net
change.
Year Ended March 31,
----------------------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
------------------------------------- -------------------------------------
Increase (Decrease) Total Increase (Decrease) Total
Due to Increase Due to Increase
------------------------ ------------------------
Volume Rate (Decrease) Volume Rate (Decrease)
-------- -------- ---------- -------- -------- --------
(In thousands)
Interest income attributable to:
Loans receivable..................... $ 204 $ 215 $ 419 $ 1,127 $ 133 $ 1,260
Mortgage-backed securities........... (87) 37 (50) (32) (14) (46)
Other interest-earning assets........ 61 (39) 22 (489) 243 (246)
-------- -------- ---------- -------- -------- --------
Total interest-earning assets....... 178 213 391 606 362 968
Interest expense attributable to:
Deposits............................. 190 43 233 (210) 985 775
Borrowings........................... (74) (90) (164) 487 30 517
-------- -------- ---------- -------- -------- --------
Total interest-bearing liabilities.. 116 (47) 69 (277) 1,015 1,292
-------- -------- ---------- -------- -------- --------
Increase (decrease) in
net interest income................ $ 62 $ 260 $ 322 $ 329 $ 653 $ (324)
======== ======== ========== ======== ======== ========
- --------------------------------------------------------------------------------
Asset and Liability Management-Interest Rate Sensitivity Analysis
The matching of assets and liabilities may be analyzed by examining the
extent to which such assets and liabilities are "interest rate sensitive" and by
monitoring an institution's interest rate sensitivity "gap." An asset or
liability is said to be interest rate sensitive within a specific time period if
it will mature or reprice within that time period. The interest rate sensitivity
gap is defined as the difference between the amount of interest-earning assets
maturing or repricing within a specific time period and the amount of interest-
bearing liabilities maturing or repricing within that time period. A gap is
considered positive when the amount of interest rate sensitive assets exceeds
the amount of interest rate sensitive liabilities. A gap is considered negative
when the amount of interest rate sensitive liabilities exceeds the amount of
interest rate sensitive assets. During a period of rising interest rates, a
negative gap would tend to adversely affect net interest income while a positive
gap would tend to positively affect net interest income. Similarly, during a
period of falling interest rates, a negative gap would tend to positively affect
net interest income while a positive gap would tend to adversely affect net
interest income.
The Company's policy in recent years has been to reduce its exposure to
interest rate risk generally by better matching the maturities of its interest
rate sensitive assets and liabilities and by originating adjustable rate
mortgage ("ARM") loans and other adjustable rate or short-term loans, as well as
by purchasing short-term investments. However, particularly in a low interest
rate environment, which currently exists, borrowers typically prefer fixed rate
loans to ARM loans. Accordingly, ARM loan originations were very limited during
the fiscal year ended March 31, 1997. The Company seeks to lengthen the
maturities of its deposits by promoting longer-term certificates; however, the
Company has not been successful in lengthening the maturities of its deposits in
the current low interest rate environment. The Company also negotiates interest
rates on certificates of deposit of $100,000 or more.
The Company has an Asset-Liability Management Committee which is responsible
for reviewing the Company's assets and liability policies. The Committee meets
weekly and reports monthly to the Board of Directors on interest rate risks and
trends, as well as liquidity and capital ratios and requirements. The Board of
Directors has adopted a policy that requires the Company to maintain a gap
between negative 10% and positive 10%. As of March 31, 1997, based on internal
calculations, the Company's gap position was within the approved range.
- -------------------------------------- 20 --------------------------------------
Liquidity and Capital Resources
The Company is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which varies from time to time
depending upon economic conditions and deposit flows, is based upon a percentage
of deposits and short-term borrowings. The required ratio currently is 5%. The
Company's liquidity ratio averaged 15.3% during the month of March 1997 and
13.1% during the fiscal year ended March 31, 1997. The Company adjusts liquidity
as appropriate to meet its asset and liability management objectives.
The Company's primary sources of funds are deposits, amortization and
prepayment of loans and mortgage-backed securities, maturities of investment
securities and other short-term investments, and earnings and funds provided
from operations. While scheduled principal repayments on loans and mortgage-
backed securities are a relatively predictable source of funds, deposit flows
and loan prepayments are greatly influenced by general interest rates, economic
conditions, and competition. The Company manages the pricing of its deposits to
maintain a desired level of deposits and cost of funds. In addition, the Company
invests excess funds in federal funds, and other short-term interest-earning and
other assets, which provide liquidity to meet lending requirements. Federal
funds sold and other assets qualifying for liquidity outstanding at March 31,
1997, 1996, and 1995, amounted to $32.3 million, $30.9 million, and $30.7
million, respectively. For additional information about cash flows from the
Company's operating, financing, and investing activities, see Statements of Cash
Flows included in the Financial Statements.
A major portion of the Company's liquidity consists of cash and cash
equivalents, which are a product of its operating, investing, and financing
activities. The primary sources of cash were net earnings, principal repayments
on loans and mortgage-backed securities, and increases in deposit accounts.
Liquidity management is both a daily and long-term function of business
management. If the Company requires funds beyond its ability to generate them
internally, borrowing agreements exist with the Federal Home Loan Bank ("FHLB")
which provide an additional source of funds. At March 31, 1997, the Company had
$16.0 million in outstanding advances from the FHLB.
At March 31, 1997, the Company had outstanding loan commitments of $2.1
million. This amount does not include the unfunded portion of loans in process.
Certificates of deposit scheduled to mature in less than one year at March 31,
1997, totaled $99.7 million. Based on prior experience, management believes that
a significant portion of such deposits will remain with the Company.
Impact of Inflation and Changing Prices
The financial statements of the Company and notes thereto, presented
elsewhere herein, have been prepared in accordance with GAAP, which requires the
measurement of financial position and operating results in terms of historical
dollars without considering the change in the relative purchasing power of money
over time and due to inflation. The impact of inflation is reflected in the
increased cost of the Company's operations. Unlike most industrial companies,
nearly all the assets and liabilities of the Company are monetary. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
Impact of New Accounting Standards
In October 1995, the Financial Accounting Standard Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," establishing financial accounting and reporting
standards for stock-based employee compensation plans. SFAS No. 123 encourages
all entities to adopt a new method of accounting to measure compensation cost of
all employee stock compensation plans based on the estimated fair value of the
award at the date it is granted. Companies are, however, allowed to continue to
measure compensation cost for those plans using the intrinsic value based method
of accounting, which generally does not result in compensation expense
recognition for most plans.
Companies that elect to remain with the existing accounting are required to
disclose in a footnote to the financial statements pro forma net earnings and,
if presented, earnings per share, as if SFAS No. 123 had been adopted. The
accounting requirements of SFAS No. 123 are effective for transactions entered
into during fiscal years that begin after December 15, 1995; however, companies
are required to disclose information for awards granted in their first fiscal
year beginning after December 15, 1994. Management has determined that the
Company will continue to account for stock-based compensation pursuant to
Accounting Principles Board Opinion No. 25 and, therefore, the disclosure
provision of SFAS No. 123 will have no effect on its financial condition or
results of operations.
In June 1996, the FASB issued SFAS No. 125, "Accounting for Transfers of
Financial Assets, Servicing Rights, and Extinguishment of Liabilities", that
provides accounting guidance on transfers of financial assets, servicing of
financial assets, and extinguishment of liabilities. SFAS No. 125 introduces an
approach to accounting for transfers of financial assets that provides a means
of dealing with more complex transactions in which the seller disposes of only a
partial interest in the assets, retains rights or obligations,
- -------------------------------------- 21 --------------------------------------
MANAGEMENT'S DISCUSSION AND ANALYSIS (cont.)
makes use of special purpose entities in the transaction, or otherwise has
continuing involvement with the transferred assets. The new accounting method,
the financial components approach, provides that the carrying amount of the
financial assets transferred be allocated to components of the transaction based
on their relative fair values. SFAS No. 125 provides criteria for determining
whether control of assets has been relinquished and whether a sale has occurred.
If the transfer does not qualify as a sale, it is accounted for as a secured
borrowing. Transactions subject to the provisions of SFAS No. 125 include, among
others, transfers involving repurchase agreements, securitizations of financial
assets, loan participations, factoring arrangements, and transfers of
receivables with recourse.
An entity that undertakes an obligation to service financial assets
recognizes either a servicing asset or liability or the servicing contract
(unless related to a securitization of assets, and all the securitized assets
are retained and classified as held-to-maturity). A servicing asset or liability
that is purchased or assumed is initially recognized at its fair value.
Servicing assets and liabilities are amortized in proportion to and over the
period of estimated net servicing income or net servicing loss and are subject
to subsequent assessments for impairment based on fair value.
SFAS No. 125 provides that a liability is removed from the balance sheet only
if the debtor either pays the creditor and is relieved of its obligation for the
liability or is legally released from being the primary obligor.
SFAS No. 125 is effective for transfers and servicing of financial assets and
extinguishment of liabilities occurring after December 31, 1997, and is to be
applied prospectively. Earlier or retroactive application is not permitted.
Management does not believe that adoption of SFAS No. 125 will have a material
effect on the Company's financial position or results or operations.
In February 1997, the FASB issued SFAS No. 128, "Earnings Per Share," which
requires companies to present basic earnings per share and, if applicable,
diluted earnings per share, instead of primary and fully diluted earnings per
share, respectively. Basic earnings per share is computed without including
potential common shares, i.e., no dilutive effect. Diluted earnings per share is
computed taking into consideration common shares outstanding and dilutive
potential common shares, including options, warrants, convertible securities and
contingent stock agreements. SFAS No. 128 is effective for periods ending after
December 15, 1997. Early application is not permitted. Based upon the provisions
of SFAS No. 128, the Company's basic and diluted earnings per share for the year
ended March 31, 1997 would have each been $.32.
STOCKHOLDER INFORMATION
- --------------------------------------------------------------------------------
Annual Meeting
The Annual Meeting of Stockholders will be held at
10:00 a.m. on July 24, 1997, at the Black Tie Affair
Conference Center, 50 Riffel Road, Wooster, Ohio.
Special Counsel
Luse Lehman Gorman Pomerenk & Schick
5335 Wisconsin Avenue NW
Washington, D.C. 20015
Independent Auditors
Grant Thornton LLP
625 Eden Park Drive
Suite 900
Cincinnati, Ohio 45202
Transfer Agent
Chase Mellon Shareholder Services
Challenger Road
Overpeck Centre
Ridgefield Park, New Jersey 07660
Annual Report on Form 10-KSB
A copy of the Association's Form 10-KSB for the
fiscal year ended March 31, 1997, will be furnished
without charge to stockholders as of June 13, 1997, upon
written request to the Corporate Secretary, The
Wayne Savings and Loan Company, 151 North Market
Street, Wooster, Ohio 44691 (330) 264-5767.
Investor Information
Executive Offices
The Wayne Savings and Loan Company
151 N. Market Street . P.O. Box 858
Wooster, Ohio 44691
(330) 264-5767
- -------------------------------------- 22 --------------------------------------
COMMON STOCK AND RELATED MATTERS
Effective June 23, 1993, the Company reorganized from mutual to stock form
and established Wayne Savings Bankshares, M.H.C., a mutual holding company (the
"Holding Company"). The Company's initial public offering of Common Stock closed
on June 23, 1993. Shares of Common Stock were issued and sold in that offering
at $5.77 (adjusted) per share. On June 12, 1997 and June 11, 1996, the Company
paid a three-for-two stock split and a 5% stock dividend, respectively.
References herein to an adjusted number of shares or price per share reflect an
adjustment due to these stock distributions.
The Company's Common Stock trades over-the-counter on the Nasdaq SmallCap
Market using the symbol "WAYN." The following table sets forth the high and low
trading prices of the Company's Common Stock (adjusted) during the two most
recent fiscal years, together with the cash dividends declared (adjusted).
Fiscal Year Ended Cash Dividends
March 31, 1996 High Low Declared
- ---------------- ------ ------ --------------
First quarter $12.07 $11.43 $.127
Second quarter 12.70 11.43 .127
Third quarter 14.60 12.70 .140
Fourth quarter 14.60 13.65 .140
Fiscal Year Ended Cash Dividends
March 31, 1997 High Low Declared
- ---------------- ------ ------ --------------
First quarter $14.67 $13.33 $.147
Second quarter 13.33 12.67 .153
Third quarter 16.33 12.83 .153
Fourth quarter 18.17 15.83 .153
As of April 10, 1997, the Company had 852 stockholders of record and
2,247,993 outstanding shares (adjusted) of Common Stock. This does not reflect
the number of persons whose stock is in nominee or "street" name accounts
through brokers.
Payment of dividends on the Common Stock is subject to determination and
declaration by the Board of Directors and will depend upon a number of factors,
including capital requirements, regulatory limitations on the payment of
dividends, the Company's results of operations and financial condition, tax
considerations and general economic conditions. No assurance can be given that
dividends will be declared or, if declared, what the amount of dividends will
be, or whether such dividends, once declared, will continue.
OTS regulations impose limitations upon all "capital distributions" by
savings associations, including cash dividends, payments by a savings
association to repurchase or otherwise acquire its stock, payments to
stockholders of another savings association in a cash-out merger, and other
distributions charged against capital. The regulations establish a three-tiered
system of regulation, with the greatest flexibility being afforded to well-
capitalized or Tier 1 savings associations. As of the date hereof, the Company
was a Tier 1 association. Accordingly, under the OTS capital distribution
regulations, the Company would be permitted to pay dividends during any calendar
year up to 100 percent of its net income during that calendar year, plus the
amount that would reduce by one-half its surplus capital ratio at the beginning
of the calendar year.
In addition to the foregoing, earnings of the Company appropriated to bad
debt reserves and deducted for federal income tax purposes are not available for
payment of cash dividends or other distributions to stockholders without payment
of taxes at the then-current tax rate by the Company on the amount of earnings
removed from the reserves for such distributions. The Company intends to make
full use of this favorable tax treatment and does not contemplate any
distribution by the Company in a manner that would limit the Company's bad debt
deduction or create federal tax liability.
Regulations of the OTS governing mutual holding companies permit the Holding
Company to waive the receipt by it of any dividend declared by the Company on
the Common Stock, provided that OTS does not object to such waiver. The Holding
Company has and currently intends to continue to seek OTS approval in order to
waive its share of dividends declared on the Common Stock.
- -------------------------------------- 23 --------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Suite 900
625 Eden Park Drive
Cincinnati, OH 45202-4181
513 762-5000
FAX 513 241-6125
[GRANT THORNTON LETTERHEAD APPEARS HERE]
Report of Independent Certified Public Accountants
--------------------------------------------------
Board of Directors
The Wayne Savings and Loan Company
We have audited the accompanying statements of financial condition of The Wayne
Savings and Loan Company as of March 31, 1997 and 1996, and the related
statements of earnings, stockholders' equity and cash flows for each of the
three years ended March 31, 1997, 1996 and 1995. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Wayne Savings and Loan
Company as of March 31, 1997 and 1996, and the results of its operations and its
cash flows for each of the three years ended March 31, 1997, 1996 and 1995, in
conformity with generally accepted accounting principles.
/s/ Grant Thornton LLP
Cincinnati, Ohio
May 20, 1997
- -------------------------------------- 24 --------------------------------------
STATEMENTS OF FINANCIAL CONDITION
As of March 31,
(Dollars in thousands, except per share data)
1997 1996
-------- --------
ASSETS
Cash and due from banks.................................. $ 1,302 $ 1,220
Federal funds sold....................................... 1,125 2,475
Interest-bearing deposits in other financial
institutions............................................ 5,179 6,495
-------- --------
Cash and cash equivalents............................ 7,606 10,190
Certificates of deposit in other financial institutions.. 7,500 5,000
Investment securities -- at amortized cost, approximate
market value of $16,904 and $14,687 as of
March 31, 1997 and 1996................................. 16,970 14,675
Mortgage-backed securities designated as available for
sale -- at market....................................... 378 434
Mortgage-backed securities held to maturity -- at cost,
approximate market value of $497 and $1,497 as of
March 31, 1997 and 1996................................. 495 1,495
Loans receivable -- net.................................. 209,404 206,513
Office premises and equipment -- at depreciated cost..... 3,991 3,665
Real estate acquired through foreclosure -- net.......... 809 1,277
Federal Home Loan Bank stock -- at cost.................. 2,531 2,362
Accrued interest receivable on loans..................... 1,139 1,196
Accrued interest receivable on mortgage-backed
securities.............................................. 7 12
Accrued interest receivable on investments and
interest-bearing deposits............................... 226 245
Prepaid expenses and other assets........................ 790 1,299
Prepaid federal income taxes............................. 329 62
Deferred federal income taxes............................ -- 78
-------- --------
Total assets......................................... $252,175 $248,503
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits................................................. $211,442 $210,158
Advances from the Federal Home Loan Bank................. 16,000 14,000
Loan payable to Employee Stock Ownership Plan............ 35 125
Advances by borrowers for taxes and insurance............ 701 582
Accrued interest payable................................. 226 192
Accounts payable on mortgage loans serviced for others... 126 241
Other liabilities........................................ 382 353
Deferred federal income taxes............................ 148 --
-------- --------
Total liabilities.................................... 229,060 225,651
Commitments.............................................. -- --
Stockholders' equity
Common stock (20,000,000 shares of $1.00 par value
authorized; 1,498,889 and 1,423,514 shares issued and
outstanding at March 31, 1997 and 1996, respectively)... 1,499 1,424
Additional paid-in capital............................... 5,844 4,407
Retained earnings -- substantially restricted............ 15,777 17,132
Less required contributions for shares acquired by
Employee Stock Ownership Plan........................... (35) (125)
Shares acquired by Management Recognition Plan........... -- (15)
Unrealized gains on securities designated as available
for sale, net of related tax effects.................... 30 29
-------- --------
Total stockholders' equity........................... 23,115 22,852
-------- --------
Total liabilities and stockholders' equity........... $252,175 $248,503
======== ========
The accompanying notes are an integral part of these statements.
- ------------------------------------- 25 ---------------------------------------
STATEMENTS OF EARNINGS
For the year ended March 31,
(Dollars in thousands, except per share data)
1997 1996 1995
------- ------- -------
Interest income:
Loans........................................ $17,059 $16,640 $15,380
Mortgage-backed securities................... 97 147 193
Investment securities........................ 805 850 918
Interest-bearing deposits and other.......... 758 691 869
------- ------- -------
Total interest income..................... 18,719 18,328 17,360
Interest expense:
Deposits..................................... 10,006 9,773 8,998
Borrowings................................... 604 768 251
------- ------- -------
Total interest expense.................... 10,610 10,541 9,249
------- ------- -------
Net interest income....................... 8,109 7,787 8,111
Provision for losses on loans.................. 20 20 25
------- ------- -------
Net interest income after provision for
losses on loans.......................... 8,089 7,767 8,086
Other income:
Gain (loss) on sale of loans................. 56 89 (14)
Gain on sale of real estate acquired through
foreclosure................................. -- 9 --
Service fees, charges and other operating.... 519 509 503
------- ------- -------
Total other income........................ 575 607 489
General, administrative and other expense:
Employee compensation and benefits........... 3,271 3,284 3,212
Occupancy and equipment...................... 789 828 874
Federal deposit insurance premiums........... 1,779 538 559
Franchise taxes.............................. 291 278 163
(Gain) loss on disposition of office
premises and equipment...................... 129 (36) --
Other operating.............................. 1,329 1,297 1,243
------- ------- -------
Total general, administrative and other
expense.................................. 7,588 6,189 6,051
------- ------- -------
Earnings before income taxes.............. 1,076 2,185 2,524
Federal income taxes:
Current...................................... 142 339 1,039
Deferred..................................... 225 435 (157)
------- ------- -------
Total federal income taxes................. 367 774 882
------- ------- -------
NET EARNINGS.............................. $ 709 $ 1,411 $ 1,642
======= ======= =======
EARNINGS PER SHARE........................ $ .32 $ .64 $ .75
======= ======= =======
The accompanying notes are an integral part of these statements.
- ------------------------------------- 26 ---------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
For the years ended March 31, 1997, 1996 and 1995
(Dollars in thousands, except per share data)
Unrealized gains
(losses) on
securities Total
Additional Shares Shares designated as stock-
Common paid-in Retained acquired acquired available holders'
stock capital earnings by ESOP by MRP for sale equity
------ --------- -------- -------- ------- ---------- --------
Balance at April 1, 1994.................... $1,275 $4,098 $15,443 $(323) $(135) -- $20,358
Stock dividend.............................. 128 -- (128) -- -- -- --
Principal payments on loan to ESOP.......... -- -- -- 103 -- -- 103
Amortization of Management Recognition Plan. -- 70 -- -- 60 -- 130
Stock options exercised..................... 9 75 -- -- -- -- 84
Designation of securities as available for
sale upon adoption of SFAS No. 115, net of
related tax effects........................ -- -- -- -- -- 58 58
Net earnings for the year ended
March 31, 1995............................. -- -- 1,642 -- -- -- 1,642
Cash dividends of $.47 per share............ -- -- (493) -- -- -- (493)
Unrealized losses on securities designated
as available for sale, net of related
tax effects................................ -- -- -- -- -- (22) (22)
------ ------ ------- ------ ----- ------ -------
Balance at March 31, 1995................... 1,412 4,243 16,464 (220) (75) 36 21,860
Principal payments on loan to ESOP.......... -- -- -- 95 -- -- 95
Amortization of Management Recognition Plan. -- 68 -- -- 60 -- 128
Stock options exercised..................... 12 96 -- -- -- -- 108
Net earnings for the year ended
March 31, 1996............................. -- -- 1,411 -- -- -- 1,411
Cash dividends of $.70 per share............ -- -- (743) -- -- -- (743)
Unrealized losses on securities designated
as available for sale, net of related
tax effects................................ -- -- -- -- -- (7) (7)
------ ------ ------- ------ ----- ------ -------
Balance at March 31, 1996................... 1,424 4,407 17,132 (125) (15) 29 22,852
Principal payments on loan to ESOP.......... -- 57 -- 90 -- -- 147
Amortization of Management Recognition Plan. -- -- -- -- 15 -- 15
Stock options exercised..................... 4 35 -- -- -- -- 39
Net earnings for the year ended
March 31, 1997............................. -- -- 709 -- -- -- 709
Stock dividend.............................. 71 1,345 (1,424) -- -- -- (8)
Cash dividends of $.61 per share............ -- -- (640) -- -- -- (640)
Unrealized gains on securities designated
as available for sale, net of related
tax effects................................ -- -- -- -- -- 1 1
------ ------ ------- ------ ----- ------ -------
Balance at March 31, 1997................... $1,499 $5,844 $15,777 $ (35) $ -- $ 30 $23,115
====== ====== ======= ====== ===== ====== =======
The accompanying notes are an integral part of these statements.
- ------------------------------------- 27 ---------------------------------------
STATEMENTS OF CASH FLOWS
For the year ended March 31,
1997 1996 1995
-------- -------- --------
(In thousands)
Cash flows from operating
activities:
Net earnings for the year.............. $ 709 $ 1,411 $ 1,642
Adjustments to reconcile net
earnings to net cash provided by
(used in) operating activities:
Amortization of discounts and
premiums on loans, investments and
mortgage-backed securities -- net.... 2 72 210
Amortization of deferred loan
origination fees..................... (338) (342) (447)
Depreciation and amortization......... 402 213 235
(Gain) loss on disposition of
office premises and equipment........ 129 (36) --
(Gain) loss on sale of loans.......... (27) (43) 14
Proceeds from sale of loans in
the secondary market................. 1,957 3,141 1,385
Loans originated for sale in the
secondary market..................... (1,901) (3,103) (263)
Provision for losses on loans......... 20 20 25
Gain on sale of real estate
acquired through foreclosure......... -- (9) --
Federal Home Loan Bank stock
dividends............................ (169) (157) (131)
Amortization expense of employee
stock benefit plans.................. 64 128 130
Increase (decrease) in cash due
to changes in:
Accrued interest receivable on
loans............................... 57 16 4
Accrued interest receivable on
mortgage-backed securities.......... 5 5 8
Accrued interest receivable on
investments and interest-bearing
deposits............................ 19 175 128
Prepaid expenses and other assets.... 509 (424) (272)
Accrued interest payable............. 34 86 55
Accounts payable on mortgage
loans serviced for others........... (115) (263) (205)
Other liabilities.................... 29 (206) (43)
Federal income taxes
Current............................. (267) (103) 614
Deferred............................ 225 435 (157)
-------- -------- --------
Net cash provided by
operating activities............. 1,344 1,016 2,932
Cash flows provided by (used in)
investing activities:
Purchase of investment securities...... (10,000) (5,032) (6,979)
Proceeds from the maturity of
investment securities................. 7,713 7,030 11,006
Principal repayments on
mortgage-backed securities............ 1,048 952 1,120
Loan principal repayments.............. 43,266 36,943 34,823
Loan disbursements..................... (45,868) (42,549) (54,441)
Purchase of office premises and
equipment............................. (857) (1,185) (241)
Proceeds from sale of office
equipment............................. -- 55 --
Proceeds from sale of real estate
acquired through foreclosure.......... 468 26 --
(Increase) decrease in
certificates of deposit in other
financial institutions -- net......... (2,500) 3,825 3,375
-------- -------- --------
Net cash provided by (used
in) investing activities......... (6,730) 65 (11,337)
-------- -------- --------
Net cash provided by (used
in) operating and investing
activities
(balance carried forward)........ (5,386) 1,081 (8,405)
-------- -------- --------
- -------------------------------------- 28 --------------------------------------
STATEMENTS OF CASH FLOWS (cont.)
For the year ended March 31,
1997 1996 1995
-------- -------- --------
Net cash provided by (In thousands)
(used in) operating and
investing activities (balance
brought forward)............... $ (5,386) $ 1,081 $( 8,405)
Cash flows provided by (used in)
financing activities:
Net increase (decrease) in deposit
accounts............................. 1,284 4,661 (11,376)
Proceeds from Federal Home Loan Bank
advances............................. 26,000 38,500 24,000
Repayments of Federal Home Loan Bank
advances............................. (24,000) (36,500) (12,000)
Advances by borrowers for taxes and
insurance............................ 119 10 (126)
Dividends paid on common stock........ (640) (743) (493)
Proceeds from the exercise of stock
options.............................. 39 108 84
-------- -------- --------
Net cash provided by financing
activities..................... 2,802 6,036 89
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................ (2,584) 7,117 (8,316)
Cash and cash equivalents at beginning
of year................................ 10,190 3,073 11,389
-------- -------- --------
Cash and cash equivalents at end of
year................................... $ 7,606 $ 10,190 $ 3,073
======== ======== ========
Supplemental disclosure of cash flow
information:
Cash paid during the year for:
Federal income taxes................ $ 396 $ 410 $ 460
======== ======== ========
Interest on deposits and borrowings. $ 10,576 $ 10,455 $ 9,194
======== ======== ========
Supplemental disclosure of noncash
investing activities:
Transfers from loans to real estate
acquired through foreclosure......... $ -- $ 1,344 $ 17
======== ======== ========
Transfers of mortgage-backed
securities to an available
for sale classification.............. $ -- $ -- $ 587
======== ======== ========
Unrealized gains (losses) on
securities designated as available
for sale, net of related tax effects. $ 1 $ (7) $ (22)
======== ======== ========
Recognition of gains on sale of loans
in accordance with SFAS No. 122...... $ 29 $ 46 $ --
======== ======== ========
The accompanying notes are an integral part of these statements.
- -------------------------------------- 29 --------------------------------------
NOTES TO FINANCIAL STATEMENTS
March 31, 1997, 1996 and 1995
NOTE A - SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
The Wayne Savings and Loan Company (the "Company") conducts a general banking
business in north central Ohio which consists of attracting deposits from the
general public and applying those funds to the origination of loans for
residential, consumer and nonresidential purposes. The Company's profitability
is significantly dependent on its net interest income, which is the difference
between interest income generated from interest-earning assets (i.e. loans and
investments) and the interest expense paid on interest-bearing liabilities (i.e.
customer deposits and borrowed funds). Net interest income is affected by the
relative amount of interest-earning assets and interest-bearing liabilities and
the interest received or paid on these balances. The level of interest rates
paid or received by the Company can be significantly influenced by a number of
environmental factors, such as governmental monetary policy, that are outside of
management's control.
The financial information presented herein has been prepared in accordance
with generally accepted accounting principles ("GAAP") and general accounting
practices within the financial services industry. In preparing financial
statements in accordance with GAAP, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements and revenues and expenses during the reporting period. Actual results
could differ from such estimates.
The following is a summary of the Company's significant accounting policies
which have been consistently applied in the preparation of the accompanying
financial statements.
1. Investment Securities and
Mortgage-Backed Securities
The Company accounts for investment and mortgage-backed securities in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 115
"Accounting for Certain Investments in Debt and Equity Securities." SFAS No. 115
requires that investments be categorized as held-to-maturity, trading, or
available for sale. Securities classified as held-to-maturity are carried at
cost only if the Company has the positive intent and ability to hold these
securities to maturity. Trading securities and securities designated as
available for sale are carried at fair value with resulting unrealized gains or
losses recorded to operations or stockholders' equity, respectively. At March
31, 1997 and 1996, the Company's equity accounts reflected a net unrealized gain
of $30,000 and $29,000, respectively. Realized gains or losses on sales of
securities are recognized using the specific identification method.
2. Loans Receivable
Loans held in portfolio are stated at the principal amount outstanding,
adjusted for deferred loan origination fees, the allowance for loan losses and
amortization of premiums and accretion of discounts on loans purchased and sold.
Premiums and discounts on loans purchased and sold are amortized and accreted to
operations using the interest method over the average life of the underlying
loans.
Interest is accrued as earned unless the collectability of the loan is in
doubt. Uncollectible interest on loans that are contractually past due is
charged off, or an allowance is established based on management's periodic
evaluation. The allowance is established by a charge to interest income equal to
all interest previously accrued, and income is subsequently recognized only to
the extent that cash payments are received until, in management's judgment, the
borrower's ability to make periodic interest and principal payments has returned
to normal, in which case the loan is returned to accrual status.
The Company retains the servicing on loans sold and agrees to remit to the
investor loan principal and interest at agreed-upon rates. These rates generally
differ from the loan's contractual interest rate resulting in a "yield
differential." In addition to previously deferred loan origination fees and cash
gains, gains on sale of loans can represent the present value of the future
yield differential less a normal servicing fee, capitalized over the estimated
life of the loans sold. Normal servicing fees are determined by reference to the
stipulated servicing fee set forth in the loan sale agreement. Such fees
approximate the Company's normal servicing costs. The resulting capitalized
excess servicing fee is amortized to operations over the estimated life of the
loans using the interest method. If prepayments are higher than expected, an
immediate charge to operations is made. If prepayments are lower, then
adjustments are made prospectively.
In May 1995, the FASB issued SFAS No. 122 "Accounting for Mortgage Servicing
Rights," which requires that the Company recognize as separate assets, rights to
service mortgage loans for others, regardless of how those servicing rights are
acquired. An institution that acquires mortgage servicing rights through either
the purchase or origination of mortgage loans and sells those loans with
servicing rights retained would allocate some of the cost of the loans to the
mortgage servicing rights.
SFAS No. 122 requires that securitization of mortgage loans be accounted for
as sales of mortgage loans and acquisitions of mortgage-backed securities.
Additionally, SFAS No. 122 requires that capitalized mortgage servicing rights
and capitalized excess servicing receivables be assessed for impairment.
Impairment is measured based on fair value.
- -------------------------------------- 30 --------------------------------------
SFAS No. 122 was effective for years beginning after December 15, 1995,
(April 1, 1996, as to the Company) to transactions in which an entity acquires
mortgage servicing rights and to impairment evaluations of all capitalized
mortgage servicing rights and capitalized excess servicing receivables whenever
acquired. Retroactive application was prohibited, and earlier adoption was
encouraged. Management elected early adoption of SFAS No. 122 in fiscal 1996.
The Company recognized $29,000 and $46,000 in pre-tax gains on sales of loans
during the fiscal years ended March 31, 1997 and 1996, respectively.
The mortgage servicing rights recorded by the Company, calculated in
accordance with the provisions of SFAS No. 122, were segregated into pools for
valuation purposes, using as pooling criteria the loan term and coupon rate.
Once pooled, each grouping of loans was evaluated on a discounted earnings basis
to determine the present value of future earnings that a purchaser could expect
to realize from each portfolio. Earnings were projected from a variety of
sources including loan servicing fees, interest earned on float, net interest
earned on escrows, miscellaneous income, and costs to service the loans. The
present value of future earnings is the "economic" value for the pool, i.e., the
net realizable present value to an acquirer of the acquired servicing.
The Company recorded amortization related to mortgage servicing rights
totaling approximately $1,000 for the year ended March 31, 1997. There was no
amortization recognized in fiscal 1996. At March 31, 1997 and 1996, the fair
value of the Company's mortgage servicing rights totaled approximately $74,000
and $46,000, respectively.
Loans held for sale are carried at the lower of cost or market, determined in
the aggregate. In computing cost, deferred loan origination fees are deducted
from the principal balances of the related loans. The Company had not identified
any loans as held for sale at March 31, 1997 and 1996.
3. Loan Origination Fees
The Company accounts for loan origination fees in accordance with SFAS No. 91
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases". Pursuant to the provisions
of SFAS No. 91, origination fees received from loans, net of certain direct
origination costs, are deferred and amortized to interest income using the
level-yield method, giving effect to actual loan prepayments. Additionally, SFAS
No. 91 generally limits deferred loan origination costs to the direct costs
attributable to the origination of a loan, i.e. principally, actual personnel
costs. Fees received for loan commitments that are expected to be drawn upon,
based on the Company's experience with similar commitments, are deferred and
amortized over the life of the loan using the level-yield method. Fees for other
loan commitments will be deferred and amortized over the loan commitment period
on a straight-line basis.
4. Allowance for Losses
It is the Company's policy to provide valuation allowances for estimated
losses on loans based on past loss experience, trends in the level of delinquent
and problem loans, adverse situations that may affect the borrower's ability to
repay, the estimated value of any underlying collateral and current and
anticipated economic conditions in its primary market area. When the collection
of a loan becomes doubtful, or otherwise troubled, the Company records a charge-
off equal to the difference between the fair value of the property securing the
loan and the loan's carrying value. In providing valuation allowances, costs of
holding real estate, including the cost of capital, are considered. Major loans
(including development projects), and major lending areas are reviewed
periodically to determine potential problems at an early date. The allowance for
loan losses is increased by charges to earnings and decreased by charge-offs
(net of recoveries).
In May 1993, the FASB issued SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan". This Statement, which was amended by SFAS No. 118 as to
certain income recognition provisions and financial statement disclosure
requirements, requires that impaired loans be measured based upon the present
value of expected future cash flows discounted at the loan's effective interest
rate or, as an alternative, at the loan's observable market price or fair value
of the collateral. SFAS No. 114 was effective for years beginning after December
15, 1994. The Company adopted SFAS No. 114 effective April 1, 1995, without
material effect on financial condition or results of operations.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
applying the provisions of SFAS No. 114, the Company considers its investment in
one-to-four family residential loans and consumer installment loans to be
homogeneous and therefore excluded from separate identification for evaluation
of impairment. With respect to the Company's investment in multi-family
nonresidential loans, and its evaluation of impairment thereof, such loans are
collateral dependent and, as a result, are carried as a practical expedient at
the lower of cost or fair value.
It is the Company's policy to charge off unsecured credits that are more than
ninety days delinquent. Similarly, collateral dependent loans which are more
than ninety days delinquent are considered to constitute more than a
- -------------------------------------- 31 --------------------------------------
NOTES TO FINANCIAL STATEMENTS (cont.)
March 31, 1997, 1996 and 1995
minimum delay in repayment and are evaluated for impairment under SFAS No. 114
at that time.
At March 31, 1997, the Company's investment in impaired loans, as defined,
totaled approximately $601,000. The allowance for credit losses related to such
impaired loans totaled $225,000.
At March 31, 1996, the Company had no loans that would be defined as impaired
under SFAS No. 114.
5. Office Premises and Equipment
Office premises and equipment are carried at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and minor
renewals are expensed as incurred. For financial reporting, depreciation and
amortization are provided on the straight-line and declining-balance methods
over the useful lives of the assets, estimated to be twenty to forty years for
buildings and improvements, and five to ten years for furniture and equipment.
An accelerated method is used for tax reporting purposes.
6. Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure is carried at the lower of the
loan's unpaid principal balance (cost) or fair value less estimated selling
expenses at the date of acquisition. Real estate loss provisions are recorded if
the properties' fair value subsequently declines below the value determined at
the recording date. In determining the lower of cost or fair value at
acquisition, costs relating to development and improvement of property are
capitalized. Costs relating to holding real estate acquired through foreclosure,
net of rental income, are charged against earnings as incurred.
7. Federal Income Taxes
The Company accounts for federal income taxes pursuant to SFAS No. 109,
"Accounting for Income Taxes". SFAS No. 109 established financial accounting and
reporting standards for the effects of income taxes that result from the
Company's activities within the current and previous years. In accordance with
SFAS No. 109, a deferred tax liability or deferred tax asset is computed by
applying the current statutory tax rates to net taxable or deductible temporary
differences between the tax basis of an asset or liability and its reported
amount in the financial statements that will result in net taxable or deductible
amounts in future periods. Deferred tax assets are recorded only to the extent
that the amount of net deductible temporary differences or carryforward
attributes may be utilized against current period earnings, carried back against
prior years' earnings, offset against taxable temporary differences reversing in
future periods, or utilized to the extent of management's estimate of future
taxable income. A valuation allowance is provided for deferred tax assets to the
extent that the value of net deductible temporary differences and carryforward
attributes exceeds management's estimates of taxes payable on future taxable
income. Deferred tax liabilities are provided on the total amount of net
temporary differences taxable in the future.
The Company's principal temporary differences between pretax financial income
and taxable income result primarily from the different methods of accounting for
deferred loan origination fees, Federal Home Loan Bank stock dividends, certain
components of retirement expense, general loan loss allowances, percentage of
earnings bad debt deductions and mortgage servicing rights. A temporary
difference is also recognized for depreciation expense computed using
accelerated methods for federal income tax purposes.
8. Pension Plan
The Company has a defined benefit pension plan covering all employees who
have attained 21 years of age and have completed one full year of service.
Annual contributions are made to fund current service costs and amortization of
past service costs. The Company's provision for pension expense was $114,000,
$151,000 and $115,000 for the three years ended March 31, 1997, 1996 and 1995,
respectively. These amounts reflect the expense computed by the Company's
actuaries utilizing the modified aggregate funding method and implicitly
assuming a 7.50% rate of return on plan assets. As of November 1, 1995, the most
recent valuation date, the amount of net assets available for benefits was $1.1
million. The Company has not provided disclosures required by SFAS No. 87,
"Accounting for Pension Plans," based upon materiality.
9. Retirement Plans and Stock Option Plans
The Company has an Employee Stock Ownership Plan ("ESOP"), which provides
retirement benefits for substantially all employees who have completed one year
of service and have attained the age of 21. The Company accounts for the ESOP in
accordance with Statement of Position ("SOP") 93-6, "Employers' Accounting for
Employee Stock Ownership Plans." SOP 93-6 requires compensation expense recorded
by employers to be measured based upon the fair value of ESOP shares allocated
to participants during a fiscal year. Expense recognized related to the plan
totaled approximately $174,000, $210,000 and $185,000 for the years ended March
31, 1997, 1996 and 1995, respectively.
The Company also has a Management Recognition Plan ("MRP"). The MRP purchased
20,790 shares (adjusted for the Company's ten percent stock dividend paid during
- -------------------------------------- 32 --------------------------------------
fiscal 1995) of the Company's common stock in the open market. All of the shares
available under the plan were granted to executive officers of the Company
effective upon consummation of the offering. Common stock granted under the MRP
vested ratably over a three year period, commencing in June 1993. A provision of
$28,000, $111,000 and $112,000 was charged to expense for the years ended March
31, 1997, 1996 and 1995, respectively.
10. Earnings Per Share
Earnings per share is calculated based on the weighted-average number of
common and common equivalent shares outstanding during the respective periods,
adjusted to reflect a 5% stock dividend effected during the year ended March 31,
1997 and a three-for-two stock split to be effected on June 12, 1997. Dividends
per share for the years ended March 31, 1997, 1996, and 1995, have also been
adjusted to reflect the effect of such stock dividends and stock splits. There
is no material dilutive effect attendant to the Company's Stock Option Plan.
Earnings per share for the fiscal years ended March 31, 1997, 1996 and 1995,
is based on 2,225,071, 2,211,269 and 2,201,165 weighted average shares
outstanding.
11. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash
and due from banks, federal funds sold, and interest-bearing deposits due from
other financial institutions with original maturities of less than three months.
12. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments",
requires disclosure of the fair value of financial instruments, both assets and
liabilities whether or not recognized in the statement of financial condition,
for which it is practicable to estimate that value. For financial instruments
where quoted market prices are not available, fair values are based on estimates
using present value and other valuation methods.
The methods used are greatly affected by the assumptions applied, including
the discount rate and estimates of future cash flows. Therefore, the fair values
presented may not represent amounts that could be realized in an exchange for
certain financial instruments.
The following methods and assumptions were used by the Company in estimating
its fair value disclosures for financial instruments at March 31, 1997 and 1996:
Cash and cash equivalents: The carrying amounts presented in the statement of
financial condition for cash and cash equivalents are deemed to approximate fair
value.
Certificates of deposit in other financial institutions: The carrying amounts
presented in the statement of financial condition for certificates of deposit in
other financial institutions are deemed to approximate fair value.
Investment and mortgage-backed securities: For investment and mortgage-backed
securities, fair value is deemed to equal the quoted market price.
Loans receivable: The loan portfolio has been segregated into categories with
similar characteristics, such as one-to-four family residential, multi-family
residential and nonresidential real estate. These loan categories were further
delineated into fixed-rate and adjustable-rate loans. The fair values for the
resultant loan categories were computed via discounted cash flow analysis, using
current interest rates offered for loans with similar terms to borrowers of
similar credit quality. For loans on deposit accounts and consumer and other
loans, fair values were deemed to equal the historic carrying values. The
historical carrying amount of accrued interest on loans is deemed to approximate
fair value.
Federal Home Loan Bank stock: The carrying amount presented in the statement of
financial condition is deemed to approximate fair value.
Deposits: The fair value of NOW accounts, passbook and club accounts, money
market deposits and escrow deposits is deemed to approximate the amount payable
on demand. Fair values for fixed-rate certificates of deposit have been
estimated using a discounted cash flow calculation using the interest rates
currently offered for deposits of similar remaining maturities.
Advances from Federal Home Loan Bank: The fair value of these advances is
estimated using the rates currently offered for similar advances of similar
remaining maturities or, when available, quoted market prices.
Commitments to extend credit: For fixed-rate and adjustable-rate loan
commitments, the fair value estimate considers the difference between current
levels of interest rates and committed rates. At March 31, 1997 and 1996 the
difference between the fair value and notional amount of loan commitments was
not material.
- -------------------------------------- 33 --------------------------------------
NOTES TO FINANCIAL STATEMENTS (con't.)
March 31, 1997, 1996 and 1995
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Company's financial instruments at March 31 are as follows:
1997 1996
------------------ ------------------
Carrying Fair Carrying Fair
value value value value
------- -------- ------- --------
(In thousands)
Financial assets
Cash and certificates
of deposits......................... $ 15,106 $ 15,106 $ 15,190 $ 15,190
Investment securities................ 16,970 16,904 14,675 14,687
Mortgage-backed
securities.......................... 873 875 1,929 1,931
Loans receivable..................... 209,404 208,426 206,513 207,859
Stock in Federal
Home Loan Bank...................... 2,531 2,531 2,362 2,362
-------- -------- -------- --------
$244,884 $243,842 $240,669 $242,029
======== ======== ======== ========
Financial liabilities
Deposits............................. $211,442 $205,718 $210,158 $205,920
Advances from the Federal Home
Loan Bank........................... 16,000 15,718 14,000 13,944
Advances by borrowers for taxes
and insurance....................... 701 701 582 582
-------- -------- -------- --------
$228,143 $222,137 $224,740 $220,446
======== ======== ======== ========
13. Reclassifications
Certain prior year amounts have been reclassified to conform to the 1997
financial statement presentation.
NOTE B - INVESTMENT AND
MORTGAGE-BACKED SECURITIES
Carrying values and estimated fair values of investment securities at March
31 are summarized as follows:
1997 1996
------------------- ------------------
Estimated Estimated
Carrying fair Carrying fair
value value value value
-------- --------- -------- ---------
(In thousands)
U. S. Government and agency
obligations......................... $ 16,789 $ 16,723 $ 14,487 $ 14,499
Municipal obligations................. 181 181 188 188
-------- -------- -------- --------
$ 16,970 $ 16,904 $ 14,675 $ 14,687
======== ======== ======== ========
At March 31, 1997, the carrying value of the Company's investment
securities in excess of estimated fair value was $66,000, comprised of $95,000
in gross unrealized gains and $161,000 in gross unrealized losses. At March 31,
1996, the estimated fair value of the Company's investment securities in excess
of carrying value was $12,000, comprised of $67,000 in gross unrealized gains
and $55,000 in gross unrealized losses.
The amortized cost and estimated fair value of U. S. Government and agency
obligations and municipal obligations at March 31, 1997 by term to maturity are
shown below.
Estimated
Amortized fair
cost value
--------- ---------
(In thousands)
Due in one year or less..... $ 1,981 $ 1,982
Due in one to three years... 9,499 9,404
Due in three to five years.. 5,000 4,936
Due in over five years...... 490 582
------- -------
$16,970 $16,904
======= =======
The Company had not pledged any investment or mortgage-backed securities to
secure public deposits at either March 31, 1997 or 1996.
The amortized cost, gross unrealized gains, gross unrealized losses, and
estimated fair values of mortgage-backed securities at March 31, 1997 and 1996,
including those designated as available for sale, are summarized as follows:
1997
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
(In thousands)
Held-to-maturity REMICs... $ 495 $ 2 $ -- $ 497
====== ===== ====== ======
Available for sale
Government National
Mortgage Association
participation
certificates.......... $ 236 $ 31 $ -- $ 267
Federal National
Mortgage Association
participation
certificates.......... 96 15 -- 111
------ ----- ------ ------
$ 332 $ 46 $ -- $ 378
====== ===== ====== ======
- ------------------------------------- 34 ---------------------------------------
1996
--------------------------------------------
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
--------- ---------- ---------- ---------
(In thousands)
Held-to-maturity
REMICs................. $1,495 $ 4 $ 2 $1,497
====== ===== ===== ======
Available for sale
Government National
Mortgage Association
participation
certificates.......... $ 292 $ 29 $ 4 $ 317
Federal National
Mortgage Association
participation
certificates.......... 97 20 -- 117
------ ----- ----- ------
$ 389 $ 49 $ 4 $ 434
====== ===== ===== ======
The amortized cost of mortgage-backed securities, including those
designated as available for sale at March 31, 1997, by contractual term to
maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may generally prepay obligations without prepayment
penalties.
Amortized Cost
--------------
(In thousands)
Due within three years.............................. $ 495
Due after five years................................ 332
--------
$ 827
========
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio at March 31 is as follows:
1997 1996
-------- --------
(In thousands)
Residential real estate - 1 to 4 family.............. $184,381 $177,267
Residential real estate - multi-family............... 5,491 10,215
Residential real estate - construction............... 5,717 5,250
Nonresidential real estate and land.................. 6,519 6,831
Education............................................ 4,355 4,504
Automobile........................................... 1,761 1,869
Consumer and other................................... 6,221 6,102
-------- --------
214,445 212,038
Less:
Undisbursed portion of loans in process............. 2,111 2,540
Deferred loan origination fees...................... 2,016 2,097
Allowance for loan losses........................... 914 888
-------- --------
$209,404 $206,513
======== ========
As depicted above, the Company's lending efforts have historically focused
on residential and multi-family residential real estate loans, which comprise
approximately $190.5 million, or 91%, of the total loan portfolio at March 31,
1997, and $187.2 million, or 91%, of the total loan portfolio at March 31, 1996.
Generally, such loans have been underwritten on the basis of no more than an 80%
loan-to-value ratio, which has historically provided the Company with adequate
collateral coverage in the event of default. Nevertheless, the Company, as with
any lending institution, is subject to the risk that real estate values could
deteriorate in its primary lending area of north central Ohio, thereby impairing
collateral values. However, management is of the belief that residential real
estate values in the Company's primary lending area are presently stable.
As discussed previously, the Company has sold whole loans and participating
interests in loans in the secondary market, retaining servicing on the loans
sold. Loans sold and serviced for others totaled approximately $37.5 million,
$41.5 million and $44.4 million at March 31, 1997, 1996 and 1995, respectively.
In the normal course of business, the Company has made loans to its
directors, officers and their related business interests. Related party loans
must be made on the same terms, including interest rates and collateral, as
those prevailing at the time for comparable transactions with unrelated persons
and do not involve more than the normal risk of collectibility. However, recent
regulations now permit executive officers and directors to receive the same
terms through benefit or compensation plans that are widely available to other
employees, as long as the director or executive officer is not given
preferential treatment compared to other participating employees. The aggregate
dollar amount of loans outstanding to directors, officers and their related
business interests totaled approximately $400,000, $352,000 and $475,000 at
March 31, 1997, 1996 and 1995, respectively.
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows for
the years ended March 31:
1997 1996 1995
------ ------ ------
(In thousands)
Balance at beginning of year..... $ 888 $ 981 $ 959
Provision for loan losses........ 20 20 25
(Charge-offs) recoveries -- net.. 6 (113) (3)
----- ----- -----
Balance at end of year........... $ 914 $ 888 $ 981
===== ===== =====
As of March 31, 1997, the Company's allowance for loan losses was comprised
of a general loan loss allowance of $684,000, which is includible as a component
of regulatory risk-based capital, and a specific loan loss allowance of
$230,000.
Nonaccrual and nonperforming loans totaled approximately $962,000, $2.1
million and $1.7 million at March 31, 1997, 1996 and 1995, respectively.
- ------------------------------------- 35 ---------------------------------------
NOTES TO FINANCIAL STATEMENTS (con't.)
March 31, 1997, 1996 and 1995
During the years ended March 31, 1997, 1996 and 1995 interest income of
approximately $62,000, $135,000 and $80,000, respectively, would have been
recognized had nonaccrual loans been performing in accordance with contractual
terms.
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment at March 31 are comprised of the following:
1997 1996
------ ------
(In thousands)
Land and improvements....................................... $1,355 $1,092
Office buildings and improvements........................... 2,477 2,477
Furniture, fixtures and equipment........................... 3,876 3,415
Automobiles................................................. 84 80
------ ------
7,792 7,064
Less accumulated depreciation and amortization.............. 3,801 3,399
------ ------
$3,991 $3,665
====== ======
NOTE F - DEPOSITS
Deposits consist of the following major classifications at March 31:
1997 1996
-------- --------
Deposit type and weighted- (In thousands)
average interest rate
NOW accounts
1997 - 2.23%................................ $ 19,228
1996 - 2.23%................................ $ 19,552
Passbook
1997 - 2.98%................................ 41,233
1996 - 3.06%................................ 44,487
Money Market Investor
1997 - 2.99%................................ 9,815
1996 - 3.00%................................ 10,593
-------- --------
Total demand, transaction and
passbook deposits........................... 70,276 74,632
Certificates of deposit
Original maturities of:
Less than 12 months
1997 - 5.34%............................... 21,016
1996 - 5.22%............................... 13,209
12 months to 24 months
1997 - 5.38%............................... 44,136
1996 - 5.58%............................... 51,156
25 months to 36 months
1997 - 6.07%............................... 28,591
1996 - 5.75%............................... 25,296
More than 36 months
1997 - 6.61%............................... 16,995
1996 - 6.60%............................... 18,034
Jumbo
1997 - 6.12%............................... 30,428
1996 - 6.30%............................... 27,831
-------- --------
Total certificates of deposit................ 141,166 135,526
-------- --------
Total deposit accounts $211,442 $210,158
======== ========
Interest expense on deposits for the year ended March 31 is summarized as
follows:
1997 1996 1995
------ ------ ------
(In thousands)
Passbook..................................... $1,291 $1,355 $1,565
NOW and money market deposit accounts........ 750 758 819
Certificates of deposit...................... 7,965 7,660 6,614
------ ------- -------
$10,006 $9,773 $8,998
======= ======= =======
Maturities of outstanding certificates of deposit at March 31 are
summarized as follows:
1997 1996
------ ------
(In thousands)
Less than one year............ $ 99,684 $ 87,688
One to three years............ 37,486 42,859
Over three years.............. 3,996 4,979
-------- --------
$141,166 $135,526
======== ========
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at March 31, 1997
and 1996 by pledges of certain residential mortgage loans totaling $24.0 million
and $21.0 million, respectively, and the Company's investment in Federal Home
Loan Bank stock, are summarized as follows:
Interest Maturing in year
Rate ending March 31, 1997 1996
------- ---------------- ------ ------
(In thousands)
5.65% 1997 $ - $5,000
5.55% - 5.85% 1998 7,000 -
5.70% - 6.15% 1999 7,000 7,000
6.20% - 6.35% 2001 2,000 2,000
-------- --------
$16,000 $14,000
======== ========
Weighted-average interest rate 5.91% 5.89%
======== ========
- ------------------------------------- 36 ---------------------------------------
NOTE H - FEDERAL INCOME TAXES
The provision for federal income taxes on earnings differs from that computed
at the statutory corporate tax rate for the years ended March 31 as follows:
1997 1996 1995
------ ------ ------
(In thousands)
Federal income taxes computed
at statutory rate.................................... $366 $743 $858
Increase (decrease) in taxes
resulting from:
Tax exempt interest.................................. (3) (4) (4)
Other................................................ 4 35 28
------- ------- -------
Federal income tax provision per financial statements $367 $774 $882
======= ======= =======
The composition of the Company's net deferred tax asset (liability) at
March 31 is as follows:
1997 1996
------ ------
(In thousands)
Taxes (payable) refundable on temporary
differences at statutory rate:
Deferred tax assets
Deferred loan origination fees..................... $ 238 $ 275
General loan loss allowance........................ 233 299
Other.............................................. 28 27
------- -------
Deferred tax assets.................................. 499 601
Deferred tax liabilities
Federal Home Loan Bank
stock dividends.................................. (460) (402)
Book/tax depreciation differences.................. (104) (39)
Unrealized gains on securities
designated as available for sale................. (16) (15)
Percentage of earnings bad debt
deduction........................................ (67) (67)
------- -------
Deferred tax liabilities............................. (647) (523)
------- -------
Total deferred tax asset (liability)............... $(148) $ 78
======= =======
The Company was allowed a special bad debt deduction based on a percentage of
earnings, generally limited to 8% of otherwise taxable income and subject to
certain limitations based on aggregate loans and deposit account balances at the
end of the year. The percentage of earnings bad debt deduction for additions
prior to fiscal 1988 totaled approximately $2.7 million as of March 31, 1997. If
the amounts that qualify as deductions for federal income taxes are later used
for purposes other than bad debt losses, including distributions in liquidation,
such distributions will be subject to federal income taxes at the then current
corporate income tax rate. The amount of unrecognized deferred tax liability
relating to the cumulative bad debt deduction is approximately $918,000 at March
31, 1997. See Note L for additional information regarding future percentage of
earnings bad debt deductions.
NOTE I - COMMITMENTS
The Company is party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of their customers
including commitments to extend credit. Such commitments involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amount
recognized in the statement of financial condition. The contract or notional
amounts of the commitments reflect the extent of the Company's involvement in
such financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The
Company uses the same credit policies in making commitments and conditional
obligations as those utilized for on-balance-sheet instruments.
At March 31, 1997 and 1996, the Company had outstanding commitments to
originate or purchase fixed rate loans of approximately $1.5 million and $4.3
million, respectively, and adjustable rate loans of approximately $638,000 and
$319,000, respectively. Additionally, the Company had unused lines of credit
under home equity loans of $7.5 million at March 31, 1997. Management believes
that all loan commitments are able to be funded through cash flow from
operations and existing excess liquidity. Fees received in connection with these
commitments have not been recognized in earnings.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if it is deemed necessary
by the Company upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral on loans may vary but the
preponderance of loans granted generally include a mortgage interest in real
estate as security.
- -------------------------------------- 37 --------------------------------------
NOTES TO FINANCIAL STATEMENTS (cont.)
March 31, 1997, 1996 and 1995
NOTE J - STOCKHOLDERS' EQUITY AND
REGULATORY CAPITAL
The Company is subject to minimum regulatory capital standards promulgated by
the Office of Thrift Supervision (the "OTS"). Failure to meet minimum capital
requirements can initiate certain mandatory -- and possibly additional
discretionary -- actions by regulators that, if undertaken, could have a direct
material effect on its financial statements. Under capital adequacy guidelines
and the regulatory framework for prompt corrective action, the Company must meet
specific capital guidelines that involve quantitative measures of the Company's
assets, liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Company's capital amounts and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
The minimum capital standards of the OTS generally require the maintenance of
regulatory capital sufficient to meet each of three tests, hereinafter described
as the tangible capital requirement, the core capital requirement and the risk-
based capital requirement. The tangible capital requirement provides for minimum
tangible capital (defined as stockholders' equity less all intangible assets)
equal to 1.5% of adjusted total assets. The core capital requirement provides
for minimum core capital (tangible capital plus certain forms of supervisory
goodwill and other qualifying intangible assets equal to 3.0% of adjusted total
assets. An OTS proposal, if adopted in present form, would increase the core
capital requirement to a range of 4.0% -5.0% of adjusted total assets for
substantially all savings associations. Management anticipates no material
change to the Company's excess regulatory capital position as a result of this
proposed change in the regulatory capital requirement. The risk-based capital
requirement currently provides for the maintenance of core capital plus general
loss allowances equal to 8.0% of risk-weighted assets. In computing risk-
weighted assets, the Company multiplies the value of each asset on its statement
of financial condition by a defined risk-weighting factor, e.g., one- to four-
family residential loans carry a risk-weighted factor of 50%.
As of March 31, 1997, management believes that the Company met all capital
adequacy requirements to which it is subject.
As of March 31, 1997
For capital
Actual adequacy purposes
-------------- --------------------------------------------------------------------
Amount Ratio Amount Ratio
(In thousands)
Tangible capital $23,078 9.2% (greater than or equal to) $ 3,782 (greater than or equal to) 1.5%
Core Capital $23,078 9.2% (greater than or equal to) $ 7,565 (greater than or equal to) 3.0%
Risk-based capital $23,762 17.4% (greater than or equal to) $10,894 (greater than or equal to) 8.0%
To be "well-
capitalized" under
prompt corrective
action provisions
-------------------------------------------------------------------------
Amount Ratio
--------------------------------- --------------------------------
(In thousands)
Tangible capital (greater than or equal to) $12,608 (greater than or equal to) 5.0%
Core Capital (greater than or equal to) $15,130 (greater than or equal to) 6.0%
Risk-based capital (greater than or equal to) $13,617 (greater than or equal to) 10.0%
================================================================================
The Company's management believes that, under the current regulatory capital
regulations, the Company will continue to meet their minimum capital
requirements in the foreseeable future. However, events beyond the control of
the Company, such as increased interest rates or a downturn in the economy in
the Company's market area, could adversely affect future earnings and,
consequently, the ability to meet future minimum regulatory capital
requirements.
Regulations of the OTS impose limitations on the payment of dividends and
other capital distributions by savings associations. Under such regulations, a
savings association that, immediately prior to, and on a pro forma basis after
giving effect to, a proposed capital distribution, has total capital (as defined
by OTS regulation) that is equal to or greater than the amount of its fully
phased-in capital requirement is generally permitted without OTS approval (but
subsequent to 30 days prior notice to the OTS of the planned dividend) to make
capital distributions during a calendar year in the amount of (i) up to 100% of
its net earnings to date during the year plus an amount equal to one-half of the
amount by which its total capital to assets ratio exceeded its fully phased-in
capital to assets ratio at the beginning of the year (ii) or 75% of its net
earnings for the most recent four quarters. Pursuant to such OTS dividend
regulations, the Company had the ability to pay dividends of approximately $5.4
million at March 31, 1997.
NOTE K - STOCK OPTION PLAN
The Company has an incentive Stock Option Plan that provides for the issuance
of 72,765 shares of authorized, but unissued shares of common stock. The number
of shares under option have been adjusted to reflect the 5% stock dividend
declared and paid during the year ended March 31, 1997, and the three-for-two
stock split declared April 24, 1997.
- -------------------------------------- 38 --------------------------------------
The following summarizes stock option transactions for the years ended March
31, 1997, 1996 and 1995:
Option
Number price
of shares per share Total
--------- --------- ------
Outstanding at April 1, 1994 72,765 $5.772 $420,000
Options exercised 2,780 $5.772 16,046
------ --------
Balance at March 31, 1995 69,985 $5.772 403,954
Options exercised 13,270 $5.772 76,594
------ --------
Balance at March 31, 1996 56,715 $5.772 327,360
Options exercised 6,849 $5.772 39,532
------ --------
Balance at March 31, 1997 49,866 $5.772 $287,828
====== ========
The Company has a non-incentive Stock Option Plan that provides for the
issuance of 31,185 (adjusted) shares of authorized, but unissued shares of
common stock. The number of shares under option have been adjusted to reflect
the 5% stock dividend declared and paid during the year ended March 31, 1997 and
the three-for-two stock split declared April 24, 1997.
The following summarizes stock option transactions for the years ended
March 31, 1997, 1996 and 1995:
Option
Number price
of shares per share Total
--------- --------- ------
Outstanding at April 1, 1994 31,185 $5.772 $180,000
Options exercised 11,172 $5.772 64,485
------ --------
Balance at March 31, 1995 20,013 $5.772 115,515
Options exercised 5,427 $5.772 31,325
------ --------
Balance at March 31, 1996
and 1997 14,586 $5.772 $ 84,190
====== ========
At March 31, 1997, all of the stock options granted were subject to exercise
at the discretion of the grantees and expire in 2003.
On April 1, 1996, the Company adopted SFAS No. 123, "Accounting for Stock-
Based Compensation," which contains a fair value-based method for valuing stock-
based compensation that entities may use, which measures compensation cost at
the grant date based on the fair value of the award. Compensation is then
recognized over the service period, which is usually the vesting period.
Alternatively, SFAS No. 123 permits entities to continue to account for employee
stock options and similar equity instruments under Accounting Principles Board
("APB") Opinion No. 25, "Accounting for Stock Issued to Employees." Entities
that continue to account for stock options using APB Opinion No. 25 are required
to make pro forma disclosures of net earnings and earnings per share, as if the
fair value-based method of accounting defined in SFAS No. 123 had been applied.
Such disclosures are not required for the Company since no stock options were
granted in fiscal 1997. Management has determined that the Company will continue
to account for stock based compensation pursuant to APB Opinion No. 25.
NOTE L - LEGISLATIVE DEVELOPMENTS
The deposit accounts of the Company and of other savings associations are
insured by the FDIC through the Savings Association Insurance Fund ("SAIF").
The reserves of the SAIF were below the level required by law, because a
significant portion of the assessments paid into the fund were used to pay the
cost of prior thrift failures. The deposit accounts of commercial banks are
insured by the FDIC through the Bank Insurance Fund ("BIF"), except to the
extent such banks have acquired SAIF deposits. The reserves of the BIF met the
level required by law in May 1995. As a result of the respective reserve levels
of the funds, deposit insurance assessments paid by healthy savings associations
exceeded those paid by healthy commercial banks by approximately $.19 per $100
in deposits in 1995. In 1996 and 1997, no BIF assessments were required for
healthy commercial banks except for a $2,000 minimum fee.
Legislation was enacted to recapitalize the SAIF that provided for a special
assessment totaling $.657 per $100 of SAIF deposits held at March 31, 1995, in
order to increase SAIF reserves to the level required by law. The Company held
$204.5 million in deposits at March 31, 1995, resulting in an assessment of
approximately $1.3 million, or $887,000 after tax, which was charged to
operations in fiscal 1997.
Under separate legislation related to the recapitalization plan, the Company
is required to recapture as taxable income approximately $197,000 of its bad
debt reserve, which represents the post-1987 additions to the reserve, and will
be unable to utilize the percentage of earnings method to compute the reserve in
the future. The Company has provided deferred taxes for this amount and will be
permitted to amortize the recapture of the bad debt reserve in taxable income
over six years.
NOTE M - PROPOSED REORGANIZATION
During the fiscal year, the Board of Directors of the Company authorized the
formation of a mid-tier holding company. This proposed reorganization is
subject to shareholder and regulatory approval. The Company has deferred costs
totaling approximately $22,000 in conjunction with the proposed reorganization.
- -------------------------------------- 39 --------------------------------------
NOTES TO FINANCIAL STATEMENTS (cont.)
March 31, 1997, 1996 and 1995
NOTE N - QUARTERLY RESULTS OF OPERATIONS (unaudited)
The following table summarizes the Company's quarterly results for the fiscal
years ended March 31, 1997 and 1996. Certain amounts, as previously reported,
have been reclassified to conform to the 1997 presentation.
For the three month periods ended
-----------------------------------------------------------------------
June 30, 1996 September 30, 1996 December 31, 1996 March 31, 1997
------------- ------------------ ----------------- --------------
Total interest income...... $4,730 $4,661 $4,649 $4,679
Total interest expense..... 2,646 2,626 2,640 2,698
------ ------- ------ ------
Net interest income........ 2,084 2,035 2,009 1,981
Provision for losses on
loans..................... 5 5 5 5
Other income............... 139 155 146 134
General, administrative
and other expense......... 1,567 3,018 1,540 1,462
------ ------- ------ ------
Earnings (loss) before
income taxes (benefits)... 651 (833) 610 648
Federal income taxes
(benefits)................ 221 (283) 209 220
------ ------- ------ ------
Net earnings (loss)........ $ 430 $ (550) $ 401 $ 428
====== ======= ====== ======
For the three month periods ended
-----------------------------------------------------------------------
June 30, 1995 September 30, 1995 December 31, 1995 March 31, 1996
------------- ------------------ ----------------- --------------
Total interest income...... $4,492 $4,592 $4,613 $4,631
Total interest expense..... 2,553 2,651 2,679 2,658
------ ------ ------ ------
Net interest income........ 1,939 1,941 1,934 1,973
Provision for losses on
loans..................... 5 5 5 5
Other income............... 116 167 172 152
General, administrative
and other expense......... 1,551 1,553 1,573 1,512
------ ------ ------ ------
Earnings before income
taxes..................... 499 550 528 608
Federal income taxes....... 179 196 192 207
------ ------ ------ ------
Net earnings............... $ 320 $ 354 $ 336 $ 401
====== ====== ====== ======
- -------------------------------------- 40 --------------------------------------