EXHIBIT 99.2
-------------------------------------------------
CONVERSION APPRAISAL UPDATE REPORT
WAYNE SAVINGS BANCSHARES, INC.
PROPOSED HOLDING COMPANY FOR
WAYNE SAVINGS COMMUNITY BANK
WOOSTER, OHIO
DATED AS OF:
APRIL 19, 2002
-------------------------------------------------
PREPARED BY:
RP FINANCIAL, LC.
1700 NORTH MOORE STREET
SUITE 2210
ARLINGTON, VIRGINIA 22209
April 19, 2002
Board of Directors
Wayne Savings Bankshares, MHC
Wayne Savings Bancshares, Inc.
Wayne Savings Community Bank
151 North Market Street
Wooster, Ohio 44691
Members of the Board of Directors:
We have completed and hereby provide an updated appraisal of the estimated
pro forma market value of the common stock which is to be issued by Wayne
Savings Bancshares, Inc., Wooster, Ohio ("Wayne Bancshares" or the "Holding
Company") in connection with the mutual-to-stock conversion of Wayne Savings
Bankshares, MHC (the "MHC"). The MHC currently has a majority ownership interest
in, and its principal asset consists of, approximately 52.58 percent of the
common stock of Wayne Bancshares (the "MHC Shares"), the mid-tier holding
company for Wayne Savings Community Bank, Wooster, Ohio ("Wayne Savings" or the
"Bank"). The remaining 47.42 percent of Wayne Bancshares' common stock is owned
by public stockholders. Wayne Bancshares, organized in August 1997, owns 100
percent of the outstanding common stock of Wayne Savings. It is our
understanding that Wayne Bancshares will offer its stock, representing the
majority ownership interest held by the MHC, to depositors of the Bank, the
Bank's ESOP, members of the local community and the public at large (the
Subscription and Community offerings).
This updated appraisal is furnished pursuant to the requirements of the
Code of Federal Regulations 563b.7 and has been prepared in accordance with the
"Guidelines for Appraisal Reports for the Valuation of Savings and Loan
Associations Converting from Mutual to Stock Form of Organization" of the Office
of Thrift Supervision ("OTS"), which have been adopted in practice by the
Federal Deposit Insurance Corporation ("FDIC"), including the most recent
revisions as of October 21, 1994, and applicable interpretations thereof. Our
original appraisal report, dated September 7, 2001 (the "original appraisal")
and previous appraisal update report, dated November 30, 2001 (the "first
update"), are incorporated herein by reference. As in the preparation of our
original appraisal and first update, we believe the data and information used
herein is reliable; however, we cannot guarantee the accuracy and completeness
of such information.
On July 10, 2001, the Board of Directors of the MHC adopted the plan of
conversion pursuant to which the MHC will convert from the mutual holding
company form of ownership to 100 percent ownership of the Bank's common stock by
Wayne Bancshares. The MHC will be merged into Wayne Savings and the MHC will no
longer exist. As part of the conversion, the Holding Company will sell shares of
common stock in an offering that will represent the ownership interest in Wayne
Bancshares currently owned by the MHC. As of December 31,
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2001 the MHC's ownership interest in Wayne Bancshares approximated 52.58
percent. The Holding Company will also issue shares of its common stock to the
public stockholders of Wayne Bancshares pursuant to an exchange ratio that will
result in the public shareholders owning the same aggregate percentage of the
newly issued Wayne Bancshares common stock as owned immediately prior to the
conversion. As of December 31, 2001, the public stockholders' ownership interest
in Wayne Bancshares was approximately 47.42 percent.
This updated appraisal reflects the following noteworthy items: (1) a
review of recent developments in Wayne Bancshares' financial condition,
including financial data through December 31, 2001; (2) an updated comparison of
Wayne Bancshares' financial condition and operating results versus the Peer
Group companies identified in the original appraisal; and (3) a review of stock
market conditions since the date of the first update.
The estimated pro forma market value is defined as the price at which the
Holding Company's common stock, immediately upon completion of the public stock
offering, would change hands between a willing buyer and a willing seller,
neither being under any compulsion to buy or sell and both having reasonable
knowledge of relevant facts.
Our valuation is not intended, and must not be construed, as a
recommendation of any kind as to the advisability of purchasing shares of the
common stock. Moreover, because such valuation is necessarily based upon
estimates and projections of a number of matters, all of which are subject to
change from time to time, no assurance can be given that persons who purchase
shares of common stock in the conversion will thereafter be able to buy or sell
such shares at prices related to the foregoing valuation of the pro forma market
value thereof. RP Financial is not a seller of securities within the meaning of
any federal and state securities laws and any report prepared by RP Financial
shall not be used as an offer or solicitation with respect to the purchase or
sale of any securities. RP Financial maintains a policy which prohibits the
company, its principals or employees from purchasing stock of its client
institutions.
DISCUSSION OF RELEVANT CONSIDERATIONS
1. FINANCIAL RESULTS
Table 1 presents summary balance sheet and income statement details
for the fiscal year ended March 31, 2001 and updated financial information
through December 31, 2001. The financial data set forth in Table 1 have been
revised to reflect the following accounting adjustments:
In connection with the conversion, the OTS requested, and the
Holding Company agreed, to expense certain operating costs in its
financial statements which were previously paid by, reimbursed or
allocated to the MHC. Consistent with the OTS policy request on this
matter, the amount of dividends recorded as paid to the MHC were
reduced by a similar amount. The inclusion of these intercompany
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Table 1
Wayne Savings Bancshares, Inc.
Recent Financial Data
At March 31, 2001 At Dec. 31, 2001
Amount Assets Amount Assets
------ ------ ------- ------
($000) (%) ($000) (%)
BALANCE SHEET DATA
Total assets $311,609 100.0% $331,972 100.0%
Cash and cash equivalents 20,902 6.7 27,211 8.2
Certificates of deposit 5,700 1.8 --- 0.0
Investment securities 13,641 4.4 16,126 4.9
FHLB stock 3,510 1.1 3,726 1.1
Mortgage-backed securities 8,613 2.8 15,086 4.5
Loans receivable, net 246,619 79.1 257,795 77.7
Loans held for sale 861 0.3 --- 0.0
Deposits 277,706 89.1 298,173 89.8
Borrowings 6,000 1.9 5,000 1.5
Total equity 25,255 8.1 25,683 7.7
12 Months Ended 12 Months Ended
March 31, 2001 Dec. 31, 2001
-------------- -------------
Amount Avg. Assets Amount Avg. Assets
------- ----------- ------- -----------
($000) (%) ($000) (%)
SUMMARY INCOME STATEMENT
Interest income $21,499 6.99% $21,438 6.71%
Interest expense (13,100) (4.26) (12,969) (4.06)
-------- ------ -------- ------
Net interest income 8,399 2.73 8,469 2.65
Provision for losses (96) (0.03) (139) (0.04)
---- ------ ----- ------
Net interest income after provision 8,303 2.70 8,330 2.61
Other operating income 891 0.29 1,101 0.34
Net gain(loss) on sale of loans/sec. 154 0.05 477 0.15
Non-interest operating expense (7,328) (2.38) (7,409) (2.32)
------- ----- ------- ------
Earnings before income taxes 2,020 0.66 2,499 0.78
Income taxes (688) (0.22) (851) (0.27)
----- ------ ----- ------
Net income $1,332 0.43 $1,648 0.51%
Sources: Wayne Bancshares' prospectus, audited and unaudited financial
statements, and RP Financial calculations.
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operating costs in the Holding Company's consolidated statements of
earnings results in an after-tax reduction in previously reported
net earnings for the nine month ended December 31, 2001 and 2000 and
the fiscal years ended March 31, 2001, 2000 and 1999 of $23,000,
$99,000, $99,000, $148,000 (including $122,000 in previously
allocated organization costs) and $11,000.
The $281,000 cumulative downward effect of these intercompany
adjustments on stockholders' equity at December 31, 2001, was
substantially offset by a $258,000 reduction in dividends paid to
the MHC.
Additionally, the OTS requested and the Holding Company has agreed
to reduce the estimated lives assigned to its office premises. The
effect of this adjustment results in a $22,000, $22,000 and $30,000
reduction in previously reported net earnings for the nine months
ended December 31, 2001 and 2000, and the fiscal year ended March
31, 2001, respectively.
The overall composition of Wayne Bancshares' December 31, 2001
balance sheet was comparable to the Holding Company's March 31, 2001 balance
sheet, with the Holding Company posting an increase in assets during the nine
month period. Updated reported earnings for the Holding Company were slightly
higher, which was largely attributable to an increase in gains realized from the
sale of loans. On a core earnings basis, the Holding Company's updated earnings
reflected little change.
Wayne Bancshares' total assets increased by $20.4 million, or 6.5
percent, from March 31, 2001 to December 31, 2001. Net loans receivable
increased $11.2 million during the nine month period, which was primarily
supported by growth of 1-4 family permanent mortgage loans. Most of the Holding
Company's asset growth was realized in cash and investments, with such growth
consisting primarily of an increased investment in mortgage-backed securities
and holding a higher balance of cash and cash equivalents. The higher balance of
cash and cash equivalents was in part realized through reinvestment of CDs held
in other financial institutions into federal funds sold. To a lesser extent, an
increase in the portfolio of other investment securities contributed to growth
of cash and investments. Overall, the level of loans receivable, including loans
held for sale, comprising total assets declined from 79.4 percent to 77.7
percent as of March 31, 2001 and December 31, 2001, respectively. Over the same
time period, the Holding Company's ratio of cash and investments as percent of
assets, including mortgage-backed securities and FHLB stock, increased from 16.8
percent to 18.7 percent.
Updated credit quality measures indicated deterioration in credit
quality during the nine month period, as non-performing assets increased from
0.19 percent of assets at March 31, 2001 to 1.07 percent of assets at December
31, 2001. The significant increase in the non-performing assets balance was
mostly attributable to one lending relationship, consisting of non-accruing
commercial business and commercial real estate loans totaling $1.9 million. The
non-performing loan concentration consists of four loans that are
cross-collateralized by non-
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residential real estate and residential real estate. Subsequent to December 31,
2001, the four delinquent loans were brought current by the borrower.
Asset growth was funded by deposit growth, as the Holding Company's
utilization of borrowings declined slightly during the nine month period.
Overall, the Holding Company's updated funding composition exhibited little
change, as deposits equaled 89.1 percent and 89.8 percent of assets as of March
31, 2001 and December 31, 2001, respectively. Comparatively, the Holding
Company's borrowings declined from 1.9 percent of assets at March 31, 2001 to
1.5 percent of assets at December 31, 2001. Capital growth did not keep pace
with asset growth, as Wayne Bancshares' equity-to-assets ratio declined from 8.1
percent at March 31, 2001 to 7.7 percent at December 31, 2001.
Wayne Bancshares' operating results for the fiscal year ended March
31, 2001 and for the twelve months ended December 31, 2001 are also set forth in
Table 1. Reported earnings for the Holding Company equaled 0.43 percent and 0.51
percent of average assets for the twelve months ended March 31, 2001 and
December 31, 2001, respectively. The Holding Company's higher updated return on
assets ratio was primarily realized through an increase in gains recorded on the
sale of loans. In terms of core earnings, the Holding Company's updated core
earnings reflected little change from 2001 fiscal year core earnings. Net
interest income and operating expenses remain the two dominant components of
Wayne Bancshares' core earnings.
Wayne Bancshares' updated net interest income to average assets
ratio exhibited a slight decline, equaling 2.73 percent and 2.65 percent for the
twelve months ended March 31, 2001 and December 31, 2001, respectively. The
decline in the net interest margin resulted from a steeper decline in the
interest income ratio compared to the interest expense ratio, reflecting the
impact of a narrowing yield-cost spread. The Holding Company's interest rate
spread declined from 2.57 percent for the fiscal year ended March 31, 2001 to
2.53 percent for the twelve months ended December 31, 2001.
Operating expenses as a percent of average assets exhibited a slight
decline in the Holding Company's updated earnings, as leveraging of operating
expenses through asset growth served to more than offset an increase in
operating expenses. Overall, Wayne Bancshares' lower net interest income and
operating expense ratios translated into a nominally lower updated expense
coverage ratio (net interest income divided by operating expenses) of 1.14
times, versus a comparable ratio of 1.15 times recorded for the fiscal year
ended March 31, 2001.
Non-interest operating income increased as a percent of average
assets, equaling 0.29 percent and 0.34 percent of average assets for the twelve
months ended March 31, 2001 and December 31, 2001, respectively. Growth of
non-interest operating income was supported by an increase in fee income earned
on deposits, reflecting implementation of a higher fee structure. When factoring
non-interest operating income into core earnings, the Holding Company's updated
efficiency ratio (operating expenses, net of goodwill amortization, as a percent
of net interest income and non-interest operating income) was slightly improved,
equaling 78.8 percent
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and 77.6 percent for the twelve months ended March 31, 2001 and December 31,
2001, respectively.
Gains realized from the sale of loans increased from 0.05 percent of
average assets for the fiscal year ended March 31, 2001 to 0.15 percent of
average assets for the twelve months ended December 31, 2001. Higher loan sale
gains as the result increased sales of fixed rate loan originations accounted
for the increase in gains, as lower interest rates supported an increase in the
Holding Company's lending volume for fixed rate loans. As noted in the original
appraisal and first update, due to the more volatile and non-recurring
characteristics of the loan sale gains recorded by Wayne Bancshares, such gains
are not considered to be part of the Holding Company's recurring or core
earnings.
Loan loss provisions established by the Holding Company were
slightly higher during the most recent twelve month period, increasing from 0.03
percent to 0.04 percent of average assets for the fiscal year ended March 31,
2001 and the twelve months ended December 31, 2001, respectively. As of December
31, 2001, the Holding Company maintained valuation allowances of $722,000, equal
to 0.28 percent of net loans receivable and 20.3 percent of non-performing
assets.
2. PEER GROUP FINANCIAL COMPARISONS
Tables 2 and 3 present the financial characteristics and operating
results for Wayne Bancshares, the Peer Group and all publicly-traded thrifts.
The Holding Company's and the Peer Group's ratios are based on financial results
through December 31, 2001, unless otherwise indicated for the Peer Group
companies.
In general, the comparative balance sheet ratios for the Holding
Company and the Peer Group did not vary significantly from the ratios exhibited
in the first update. Consistent with the first update, the Holding Company's
updated interest-earning asset composition reflected a higher concentration of
loans and a lower concentration of cash and investments. Overall, the Holding
Company and the Peer Group continued to maintain comparable levels of
interest-earning assets, based on updated interest-earning assets-to-assets
ratios of 96.4 percent and 96.2 percent, respectively.
The updated mix of deposits and borrowings maintained by Wayne
Bancshares and the Peer Group also did not change significantly from the first
update. Wayne Bancshares' funding composition continued to reflect a higher
concentration of deposits and a lower concentration of borrowings, relative to
the comparable Peer Group measures. Updated interest-bearing
liabilities-to-assets ratios equaled 91.3 percent and 87.3 percent for the
Holding Company and the Peer Group, respectively. Wayne Bancshares posted an
updated equity-to-assets ratio of 7.7 percent, which remained below the
comparable ratio of 11.9 percent for the Peer Group. Overall, Wayne Bancshares'
updated interest-earning assets-to-interest-bearing liabilities ("IEA/IBL")
ratio equaled 105.6 percent, which remained below the comparable Peer
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Group ratio of 110.2 percent. As discussed in the original appraisal and first
update, the additional capital realized from stock proceeds should serve to
provide Wayne Bancshares with an IEA/IBL ratio that is more comparable to the
Peer Group's ratio.
Updated growth rates for Wayne Bancshares are based on annualized
growth for the nine months ended December 31, 2001, while the Peer Group's
growth rates are based on growth for the twelve months ended December 31, 2001.
Consistent with the first update, updated growth rates reflected stronger asset
growth for the Holding Company, based on asset growth rates of 8.8 percent and
1.4 percent for the Holding Company and the Peer Group, respectively. Asset
growth for the Holding Company was realized through growth in loans and cash and
investments, with a higher growth rate indicated for cash and investments. The
Peer Group's asset growth was realized through growth of cash and investments,
which was partially offset by a slight decline in loans. Overall, the Holding
Company's updated asset growth measures were considered to be more favorable
than the comparable Peer Group growth rates, with respect to supporting earnings
growth potential.
Growth in deposits and equity continued to fund the Holding
Company's asset growth, as well as a decline in borrowings. The Holding
Company's updated deposit growth rate of 10.0 percent exceeded the comparable
Peer Group growth rate of 0.5 percent. Deposit growth for the Peer Group was
supplemented with a slight increase in borrowings. Consistent with the first
update, the Peer Group posted a stronger capital growth rate than the Holding
Company (positive 3.9 percent versus positive 2.3 percent for the Holding
Company), which continued to be supported by the Peer Group's higher return on
average assets. Following the increase in capital that will be realized from the
conversion proceeds, the Holding Company's capital growth rate can be expected
to remain depressed by its higher pro forma capital position, as well as by
dividend payments on 100 percent of the shares outstanding and possible stock
repurchases.
Table 3 displays comparative operating results for Wayne Bancshares
and the Peer Group, based on their respective earnings for the twelve months
ended December 31, 2001, unless otherwise indicated for the Peer Group
companies. Updated earnings for the Holding Company and the Peer Group equaled
0.51 percent and 0.83 percent of average assets, respectively. The Peer Group's
higher return continued to be attributable to stronger core earnings,
particularly with respect to maintaining a stronger net interest margin than
indicated for Wayne Bancshares.
In terms of core earnings strength, updated expense coverage ratios
posted by Wayne Bancshares and the Peer Group equaled 1.14x and 1.35x,
respectively. The Peer Group's stronger expense coverage ratio continued to be
attributable to maintenance of a higher net interest income to average assets
ratio (3.10 percent versus 2.65 percent for the Holding Company), as operating
expense to average assets ratios for the Peer Group and the Holding Company
remained comparable (2.30 percent versus 2.32 percent for the Holding Company).
A higher interest income ratio continued to account for the Peer Group's higher
net interest income ratio, which was partially offset by Wayne Bancshares' lower
interest expense ratio.
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Non-interest operating income remained a slightly larger source of
earnings for the Peer Group, as such income amounted to 0.48 percent and 0.34
percent of the Peer Group's and the Holding Company's average assets,
respectively. Accordingly, taking non-interest operating income into account in
assessing Wayne Bancshares' core earnings strength relative to the Peer Group's,
the Holding Company's updated efficiency ratio of 77.6 percent remained less
favorable than the Peer Group's updated efficiency ratio of 63.7 percent.
Loss provisions remained a slightly larger factor in the Peer
Group's updated earnings, despite a slight decline in the Peer Group's ratio of
loss provisions established as a percent of average assets. Updated loss
provisions established by the Holding Company and the Peer Group equaled 0.04
percent and 0.16 percent of average assets, respectively.
Net gains were a slightly larger contributor to the Holding
Company's updated earnings, as the result of an increase in the net gains that
were recorded by Wayne Bancshares. Wayne Bancshares' updated earnings reflected
net gains amounting to 0.15 percent of average assets, versus 0.11 percent of
average assets for the Peer Group. As discussed in the original appraisal and
first update, given the less predictable and non-recurring nature of gains and
losses resulting from the sale of loans and investments, the impact of the net
gains on the Holding Company's and the Peer Group's earnings will continue to be
discounted in evaluating the relative strengths and weaknesses of their
respective earnings. Extraordinary items were not a factor in either the Holding
Company's or the Peer Group's updated earnings.
Taxes continued to have a slightly larger impact on the Holding
Company's earnings, as indicated by updated effective tax rates of 34.1 percent
and 32.2 percent for the Holding Company and the Peer Group, respectively.
Consistent with the first update, the Holding Company's updated
credit quality measures were considered to be less favorable than the Peer
Group's. As shown in Table 4, the Holding Company's non-performing loans/loans
and non-performing assets/assets ratios of 1.37 percent and 1.07 percent,
respectively, exceeded the comparable Peer Group ratios of 0.46 percent and 0.51
percent. Updated loss reserve ratios were also stronger for the Peer Group, both
as a percent of non-performing assets (147.9 percent versus 20.3 percent for the
Holding Company) and as a percent of non-performing loans (161.8 percent versus
20.4 percent for the Holding Company). The Peer Group also continued to maintain
higher reserves as percent of loans, based on the Holding Company's and the Peer
Group's updated reserves-to-loans ratios of 0.28 percent and 0.91 percent,
respectively. Net loan charge-offs remained a more significant factor for the
Peer Group, as the Peer Group and the Holding Company posted updated net loan
charge-offs/loan ratios of 0.13 percent and 0.03 percent, respectively.
3. STOCK MARKET CONDITIONS
Since the date of the first update, the performance of the overall
stock market has been mixed. In early-December 2001, technology stocks surged
higher and the DJIA surpassed the 10000 mark, reflecting growing optimism about
an economic recovery. However, the stock
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market rally ended on news of a larger than expected increase in the November
unemployment rate. Fresh concerns about the corporate earnings outlook pushed
stocks lower in mid-December, despite the Federal Reserve's eleventh interest
rate cut of the year. During the second half of December, stocks generally moved
higher on year end buying and favorable economic data that showed surprisingly
strong new home construction. Notwithstanding the year end rally, the Dow Jones
Industrial Average ("DJIA") closed seven percent lower for the year and the
NASDAQ Composite Index ("NASDAQ") declined 21 percent in 2001, providing for the
worst two-year performance in the stock market in 23 years.
The stock market began 2002 with a New Year rally, as investors bet
on a forthcoming economic recovery and an upturn in corporate earnings. The
momentum of the advance faded in mid-January, reflecting concerns that the
markets were pricing in more of a recovery than the economy was showing. The
Federal Reserve's decision to leave interest rates unchanged and indications
that the economic downturn may be ending provided for a brief rebound in the
broader stock market at the end of January. Stock market activity was mixed
throughout most of February, as fears that accounting troubles similar to those
impacting Enron could affect more companies weighed against hopes for an
economic recovery and improved corporate earnings. The DJIA moved back above
10000 in late-February and sustained upward momentum in early-March, as
favorable economic news and the Federal Reserve's cautiously optimistic
assessment of the economy served to rally the broader market. Stocks traded in a
narrow range in mid-March, reflecting uncertainty over the strength of the
economic recovery and the prospect of future rate increases by the Federal
Reserve. The Federal Reserve's decision to leave short-term rates unchanged at
its mid-March meeting, as well as a shift in its policy directive to a neutral
stance from one that favored additional easing, provided for a mixed reaction in
the stock market. Stocks moved lower in late-March, reflecting first quarter
earnings concerns and the prospect of rising interest rates. Concerns about the
Mideast conflict further contributed to the slide in stocks during early-April.
The broader stock market continued to struggle through mid-April, as the result
of disappointing first quarter earnings among some of the blue chip stocks and
weak earnings forecasts for the balance of 2002. On April 19, 2002, the DJIA
closed at 10257.11 or 4.1 percent higher since the date of the first update and
the NASDAQ Composite Index closed at 1796.83 or 6.9 percent lower since the date
of the first update.
Since the date of the first update, the market for thrift issues has
generally been positive. Thrift stocks eased lower at the close of November and
traded in a narrow range in early-December, which was largely attributed to
profit taking in some of the large-cap issues following their strong November
performance. Expectations that thrift earnings would benefit from the additional
interest rate cuts that were implemented by the Federal Reserve during the
fourth quarter supported an upward trend in thrift issues during mid- and
late-December. For the year ended 2001, the SNL Index for all publicly-traded
thrifts posted a gain of 5.0 percent.
Further gains were registered in thrift stocks at the beginning of
2002, with the large companies posting some of the strongest performances.
Expectations of strong fourth quarter earnings and growing sentiment of a slow
economic recovery that would support a
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continuation of the steep yield curve were factors that contributed to the
advance in thrift stocks. Thrift issues stabilized in mid-January and then moved
higher in late-January, as investors were encouraged by fourth quarter earnings.
In early-February, concerns about corporate accounting practices spilled over
into the financial services sector as well, which translated into a general
decline in bank and thrift stocks, particularly the large-cap issues. After
stabilizing in mid-February, thrift issues advanced in late-February and
early-March on strong fundamentals and acquisition speculation. The low
inflation reading indicated by the Producer Price Index for February supported a
continuation of the upward trend in thrift prices through mid-March. Thrift
stocks edged lower following the Federal Reserve's March meeting, reflecting
growing sentiment that the economic recovery would lead to higher interest rates
in the second half of the year. However, as investors became more optimistic
about first and second quarter earnings for the thrift sector, along with
growing sentiment that Federal Reserve was not likely to raise rates in May,
thrift issues strengthened in early-April. The upward momentum in thrift stocks
was sustained through mid-April, with the advance supported by favorable first
quarter earnings, low inflation data and investors dumping technology stocks in
favor of lower risk bank and thrift stocks. On April 19, 2002, the SNL Index for
all publicly-traded thrifts closed at 1107.4, an increase of 25.7 percent since
November 30, 2001.
The updated pricing measures for all publicly-traded thrifts and the
Peer Group reflected more modest increases compared to the 25.7 percent increase
indicated for the SNL Index. The more favorable performance exhibited by the SNL
Index implies that the large-cap issues outperformed the small-cap issues since
the date of the first update. In particular, the pricing measures shown for the
Peer Group and all publicly-traded thrifts are based on absolute averages and,
thus, the market performance of each of the companies comprising the pricing
measure averages have an equal impact on the calculation of the averages.
Comparatively, the SNL Index is a market capitalization weighted index, which
results in the larger market capitalization issues having a more significant
impact on the overall performance of the SNL Index. Overall, since the date of
the first update, the comparative changes in the pricing measures for the Peer
Group and all publicly-traded thrifts indicate a stronger performance by the all
publicly-traded thrifts. The declines reflected in the Peer Group's updated
price/earnings multiples were the result of changes in Security Financial's P/E
multiples. In this update, Security Financial's P/E multiples were shown as not
meaningful, as the result of maintaining P/E multiples that exceeded 30 times,
while in the first update Security Financial's reported and core P/E multiples
equaled 28.6 times and 29.9 times, respectively. As the result of the decline in
the Peer Group's core P/E multiple, the Peer Group's updated pricing
characteristics reflected both a lower P/B ratio and a lower core P/E multiple
than indicated for the comparable averages for all publicly-traded thrifts.
Since the date of the first update, nine out of the ten Peer Group companies
were trading at higher prices as of April 19, 2002. A comparative pricing
analysis of all publicly-traded thrifts, the Peer Group and recent conversions
is shown in the following table, based on market prices as of November 30, 2001
and April 19, 2002.
As set forth in the original appraisal and first update, the "new
issue" market is separate and distinct from the market for seasoned issues like
the Peer Group companies in that the pricing ratios for converting issues are
computed on a pro forma basis, specifically: (1) the
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numerator and denominator are both impacted by the conversion offering amount,
unlike existing stock issues in which price change affects only the numerator;
and (2) the pro forma pricing ratio incorporates assumptions regarding source
and use of proceeds, effective tax rates, stock plan purchases, etc. which
impact pro forma financials, whereas pricing for existing issues are based on
reported financials. The distinction between pricing of converting and existing
issues is perhaps no clearer than in the case of the price/tangible book
("P/TB") ratio in that the P/TB ratio of a converting thrift will typically
result in a discount to tangible book value whereas in the current market for
existing thrifts the P/TB often reflects a premium to tangible book value.
Therefore, it is appropriate to also consider the market for new issues, both at
the time of the conversion and in the aftermarket.
Average Pricing Characteristics
At Nov. 30, At April 19, %
2001 2002 CHANGE
-------- -------- ------
PEER GROUP(1)
Price/Earnings (x) 14.84x 13.71x (7.6)%
Price/Core Earnings (x) 16.50 15.39 (6.7)
Price/Book (%) 91.84% 101.32% 10.3
Price/Tangible Book(%) 93.53 103.22 10.4
Price/Assets (%) 11.04 12.16 10.1
Avg. Mkt. Capitalization ($Mil) $37.56 $41.49 10.5
ALL PUBLICLY-TRADED THRIFTS
Price/Earnings (x) 14.79x 15.75x 6.5%
Price/Core Earnings (x) 15.84 17.16 8.3
Price/Book (%) 113.48% 133.25% 17.4
Price/Tangible Book(%) 120.55 140.72 16.7
Price/Assets (%) 11.75 13.56 15.4
Avg. Mkt. Capitalization ($Mil) $247.18 $316.41 28.0
RECENT CONVERSIONS(1)
Price/Core Earnings (x) 20.96x 26.38x 25.9
Price/Book (%) 82.13% 106.95% 30.2
(1) Ratios based on conversions completed for prior three months.
As shown in Table 5, two standard conversion offerings have been
completed during the past three months. The average closing pro forma
price/tangible book and core price/earnings ratios of the recent standard
conversion offerings equaled 63.7 percent and 26.8 times, respectively. One
second-step conversion offering was also completed during the past
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three months, which is considered to be more relevant for purposes of Wayne
Bancshares' pro forma pricing. The closing pro forma price/tangible book and
core price/earnings ratios of Willow Grove Bancorp ("Willow Grove") equaled 96.6
percent and 24.1 times, respectively. In general, second-step conversions tend
to be priced (and trade in the aftermarket) at a higher P/TB ratio than standard
conversions. We believe investors take into consideration the generally more
leveraged pro forma balance sheets of second-step companies, their track records
as public companies prior to conversion and their generally higher pro forma ROE
measures relative to standard conversions in pricing their common stocks. The
two recent standard conversion offerings exhibited an average price increase of
22.5 percent during their first week of trading, while Willow Grove's stock
price increased 15.5 percent during its first week of trading as a fully
converted company.
Shown in Table 6 are the current pricing characteristics of Willow
Grove, which is the only NASDAQ or Exchange listed full conversion offering that
has been completed during last three months. Relative to the first update, which
reflected pricing ratios of recent conversion offerings as of November 30, 2001,
the updated recent conversion pricing ratios reflected a 30.2 percent increase
on a P/B basis, from 82.13 percent at November 30, 2001 to 106.95 percent at
April 19, 2002 and a 25.9 percent increase in the core P/E multiple, from 20.96
times at November 30, 2001 to 26.38 times at April 19, 2002. It should be noted
that the meaningfulness of the comparative pricing analysis of the recent
conversions is considered to be somewhat diminished, since the pricing ratios
for both dates consisted of only one company and one was a standard conversion
and one was a second-step conversion.
As set forth in the original appraisal, RP Financial's analysis of
stock market conditions also considered recent trading activity in Wayne
Bancshares' stock. From the date of the first update of November 30, 2001 to
April 19, 2002, the Holding Company's stock price increased from $16.50 per
share to $20.00 per share, an increase of 21.2 percent.
SUMMARY OF ADJUSTMENTS
In the first update, we made the following adjustments to Wayne
Bancshares' pro forma value based upon our comparative analysis to the
Peer Group:
PreviousValuation
Key Valuation Parameters: Adjustment
------------------------ ----------
Financial Condition No Adjustment
Profitability, Growth and Viability of Earnings Moderate Downward
Asset Growth No Adjustment
Primary Market Area No Adjustment
Dividends No Adjustment
Liquidity of the Shares No Adjustment
Marketing of the Issue No Adjustment
Management No Adjustment
Effect of Government Regulations and Regulatory Reform No Adjustment
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The factors concerning the valuation parameters of primary market
area, dividends, liquidity of the shares, management and effect of government
regulations and regulatory reform did not change since the first update.
Accordingly, those parameters were not discussed further in this update.
The noteworthy differences in financial condition for the Holding
Company and the Peer Group did not change in this update, as the Holding
Company's more favorable funding composition continue to be negated by its less
favorable credit quality. Therefore, no adjustment continued to be warranted for
the Holding Company's financial condition. The Holding Company's updated asset
growth measures were considered to be more favorable than the Peer Group's
growth measures, particularly in the important area of loan growth. Accordingly,
the valuation adjustment for asset growth was changed from no adjustment to
slight upward adjustment. The Holding Company's pro forma earnings continued to
reflect less favorable core earnings strength compared to the Peer Group's
earnings, as indicated by the Holding Company's less favorable expense coverage
and efficiency ratios. Also consistent with the original appraisal and first
update, the Holding Company's less favorable earnings strength continued to be
indicated by its lower pro forma return on equity. Accordingly, on the basis of
the Peer Group's stronger core earnings, a moderate downward adjustment remained
appropriate for the quality, predictability and growth of the Holding Company's
earnings relative to the Peer Group's.
The general market for thrift stocks was higher since the date of
the first update, as indicated by the notable increase recorded in the SNL Index
for all publicly-traded thrifts. Similarly, the pricing measures for the Peer
Group and for all publicly-traded thrifts were generally higher since the date
of the first update, although the increases reflected in the pricing measures
for the Peer Group and all publicly-traded thrifts were not as significant as
the gain posted in the market-cap weighted SNL Index. Activity in the new issue
market has remained somewhat limited, although the recent offerings that have
been completed have been well received and have traded above their IPO prices in
initial trading activity. The one recent second step conversion offering that
was completed since the first update was closed at the super maximum of the
offering range and is currently trading above its IPO price. We have also
considered the limited trading activity in Wayne Bancshares' stock since the
date of the first update and that the current trading price reflected a notable
increase from its trading price as of November 30, 2001. Accordingly, a slight
upward valuation adjustment was applied for marketing of the issue in this
updated appraisal.
Overall, taking into account the foregoing factors, we believe that
an increase in the Holding Company's estimated pro market value as set forth in
the first update is appropriate.
VALUATION APPROACHES
In applying the accepted valuation methodology promulgated by the
regulatory agencies, i.e., the pro forma market value approach, we considered
the three key pricing ratios in valuing Wayne Bancshares' to-be-issued stock --
price/earnings ("P/E"), price/book ("P/B"), and
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price/assets ("P/A") approaches -- all performed on a pro forma basis including
the effects of the conversion proceeds.
In computing the pro forma impact of the conversion and the related
pricing ratios, the valuation parameters for effective tax rate and stock
benefit plan assumptions utilized in the first update did not change in this
update. The pro forma assumption for reinvestment rate was revised from 2.49
percent to 2.17 percent, which represents the constant maturity yield for U.S.
Treasury securities with a maturity of one-year at December 31, 2001 and is
consistent with the reinvestment rate utilized in the prospectus. Offering
expenses were also revised to be consistent with the offering expenses that are
set forth in the prospectus.
Consistent with the original appraisal and first update, this updated
appraisal continues to be based primarily on fundamental analysis techniques
applied to the Peer Group, including the P/E approach, the P/B approach and the
P/A approach. Also consistent with the original appraisal and first update, this
updated appraisal incorporates a "technical" analysis of recently completed
conversions, including principally the P/B approach which (as discussed in the
original appraisal) is the most meaningful pricing ratio as the pro forma P/E
ratios reflect an assumed reinvestment rate and do not yet reflect the actual
use of proceeds.
RP Financial also considered the trading price of Wayne Bancshares' stock,
which equaled $20.00 per share as of April 19, 2002, a notable increase from the
November 30, 2001 price of $16.50 per share. However, this factor was discounted
somewhat given the different characteristics of the minority shares versus the
shares following the second-step conversion and the absence of a liquid trading
market for Wayne Bancshares' stock.
The Holding Company has adopted Statement of Position ("SOP" 93-6) which
causes earnings per share computations to be based on shares issued and
outstanding excluding shares owned by an ESOP where there is not a commitment to
release such shares. For the purpose of preparing the pro forma pricing tables
and exhibits, we have reflected all shares issued in the offering including
shares purchased by the ESOP as outstanding to capture the full dilutive impact
of such stock to the Holding Company's shareholders. However, we have considered
the impact of the Holding Company's adoption of SOP 93-6 in the determination of
Wayne Bancshares' pro forma market value.
Based on the foregoing, we have concluded that an increase in Wayne
Bancshares value is appropriate. Therefore, as of April 19, 2002, the aggregate
pro forma market value of Wayne Bancshares' conversion stock has been increased
from $34,263,500 at the midpoint to $38,987,840. The midpoint and resulting
valuation range is based on the sale of a 52.58 percent ownership interest to
the public, which provides for a $20.5 million public offering at the midpoint.
In the first update, the public offering at the midpoint equaled $18.0 million.
1. P/E APPROACH. In applying the P/E approach, RP Financial's valuation
conclusions considered both reported earnings and a recurring or "core" earnings
base, that is, earnings adjusted to exclude any one time non-operating and
extraordinary items, plus the estimated after tax earnings benefit from
reinvestment of net stock proceeds. The Holding
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Company's reported earnings, incorporating the reinvestment of $34,000 of MHC
assets at an after-tax reinvestment rate of 1.43 percent, equaled $1.649 million
for the twelve months ended December 31, 2001. In deriving Wayne Bancshares'
core earnings, the only adjustment made to reported earnings was to eliminate
gains on the sale of loans, which equaled $477,000 for the twelve months ended
December 31, 2001. As shown below, on a tax effected basis, assuming application
of an effective marginal tax rate of 34.0 percent to the gains eliminated, the
Holding Company's core earnings were determined to equal $1.334 million for the
twelve months ended December 31, 2001. (Note: see Exhibit 2 for the adjustments
applied to the Peer Group's earnings in the calculation of core earnings).
Amount
-------
($000)
Net income $1,649
Gain on sale of loans(1) (315)
-------
Core earnings estimate $1,334
(1) Tax effected at 34.0 percent.
Based on Wayne Bancshares' reported and estimated core earnings,
incorporating the impact of the pro forma assumptions discussed previously, the
Holding Company's reported and core P/E multiples at the $39.0 million midpoint
value equaled 23.70 times and 29.32 times, respectively. The Holding Company's
updated reported and core P/E multiples provided for premiums of 72.9 percent
and 90.5 percent relative to the Peer Group's average reported and core P/E
multiples of 13.71 times and 15.39 times, respectively (versus premiums of 42.0
percent and 46.1 percent relative to the Peer Group's average reported and core
P/E multiples as indicated in the first update). The implied premiums reflected
in the Holding Company's pro forma reported and core P/E multiples take into
consideration the increase in value warranted by the upward valuation
adjustments applied for asset growth and marketing of the issue in this update,
as well as the discount implied in the Holding Company's pro forma P/B ratio.
The Holding Company's implied conversion pricing ratios relative to the Peer
Group's pricing ratios are indicated in Table 7, and the pro forma calculations
are detailed in Exhibits 3 and 4.
2. P/B APPROACH. P/B ratios have generally served as a useful benchmark
in the valuation of thrift stocks, with the greater determinant of long term
value being earnings. In applying the P/B approach, we considered both reported
book value and tangible book value. The Holding Company's pre-conversion book
value was adjusted to include $34,000 of equity held at the MHC level, which
will be consolidated with the Holding Company's capital as a result of the
conversion. Based on the $39.0 million midpoint value, the Holding Company's P/B
and P/TB ratios equaled 91.67 percent and 92.28 percent, respectively. In
comparison to the average P/B and P/TB ratios indicated for the Peer Group of
101.32 percent and 103.22 percent, respectively, Wayne Bancshares' updated
ratios were discounted by 9.5 percent and 10.6 percent (versus discounts of 7.3
percent and 8.3 percent from the Peer Group's P/B and P/TB ratios as indicated
in the first update). RP Financial considered such discounts to be reasonable in
light of
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the previously referenced valuation adjustments, the nature of the calculation
of the pro forma P/B and P/TB ratios which generally mathematically results in a
discounted ratio to book value and tangible book value, the Holding Company's
comparatively lower pro forma core ROE and the Holding Company's resulting
reported and core P/E multiples.
In addition to the fundamental analysis applied to the Peer Group, RP
Financial utilized a technical analysis of recent standard conversion and
second-step offering pricing characteristics at closing and in the aftermarket.
As indicated in the original appraisal and first update, the pricing
characteristics of recent conversion and second-step offerings are not the
primary determinate of value. Consistent with the original appraisal and first
update, particular focus was placed on the P/TB approach in this analysis, since
the P/E multiples do not reflect the actual impact of reinvestment and the
source of the conversion funds (i.e., external funds versus deposit
withdrawals). The two standard conversion offerings completed within the past
three months closed at an average P/TB ratio 63.7 percent and appreciated 22.5
percent during the first week of trading.
The one recently completed second-step conversion offering closed at a
price/tangible book ratio of 96.6 percent and its trading price increased 15.5
percent during its first week of trading as a fully converted company. In
comparison, the Holding Company's P/TB ratio of 92.3 percent at the midpoint
value reflects an implied discount of 4.5 percent relative to the closing ratio
of the recent second-step conversion offering. In comparison to the current
aftermarket P/TB ratio of the recent second-step conversion (106.95 percent),
the Holding Company's P/TB ratio at the midpoint value reflects an implied
discount of 14.2 percent.
3. P/A APPROACH. P/A ratios are generally not as a reliable indicator
of market value, as investors do not place significant weight on total assets as
a determinant of market value. Investors place significantly greater weight on
book value and earnings -- which have received greater weight in our valuation
analysis. At the $39.0 million midpoint value, Wayne Bancshares' pro forma P/A
ratio equaled 11.18 percent. In comparison to the Peer Group's average P/A ratio
of 12.16 percent, Wayne Bancshares' P/A ratio indicated a discount of 8.1
percent (versus a discount of 9.0 percent at the midpoint valuation in the first
update).
VALUATION CONCLUSION
Based on the foregoing, it is our opinion that, as of April 19, 2002, the
estimated aggregate pro forma market value of the Holding Company, inclusive of
the sale of the MHC's ownership interest to the public shareholders was
$38,987,840 at the midpoint. Based on this valuation and the approximate 52.58
ownership interest to be sold in the public offering, the midpoint value of the
Holding Company's stock offering was $20,500,000, equal to 2,050,000 shares at a
per share value of $10.00. Pursuant to conversion guidelines, the 15 percent
offering range indicates a minimum value of $17,425,000 and a maximum value of
$23,575,000. Based on the $10.00 per share offering price, this valuation range
equates to an offering of 1,742,500 shares at the minimum and 2,357,500 shares
at the maximum. In the event the appraised value is subject to an increase, the
offering range may be increased up to a supermaximum value of
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$27,111,250 without requiring a resolicitation. Based on the $10.00 per share
offering price, the supermaximum value would result in an offering of 2,711,125
shares. The pro forma valuation calculations relative to the Peer Group are
shown in Table 7 and are detailed in Exhibit 3 and Exhibit 4.
ESTABLISHMENT OF THE EXCHANGE RATIO
OTS regulations provide that in a conversion of a mutual holding company,
the minority stockholders are entitled to exchange their shares of the Holding
Company's common stock for newly issued shares of Wayne Bancshares stock as a
fully converted company. The Board of Directors of the MHC has independently
established a formula to determine the exchange ratio. The formula has been
designed to preserve the current aggregate percentage ownership in Wayne
Bancshares equal to 47.42 percent as of December 31, 2001. Pursuant to this
formula, the exchange ratio to be received by the existing minority shareholders
of Wayne Bancshares will be determined at the end of the offering based on the
total number of shares sold in the Subscription and Community offerings. As
shown in Table 7, the exchange ratio for the minority shareholders would be
1.2901 shares, 1.5177 shares, 1.7454 shares and 2.0072 shares at the minimum,
midpoint, maximum and supermaximum of the offering range, respectively. RP
Financial expresses no opinion on the proposed exchange of newly issued Holding
Company shares for the shares held by the minority stockholders or on the
proposed exchange ratio.
Respectfully submitted,
RP FINANCIAL, LC.
/s/ William E. Pommerening
---------------------------
William E. Pommerening
Chief Executive Officer
/s/ Gregory E. Dunn
---------------------------
Gregory E. Dunn
Senior Vice President
RP FINANCIAL, LC.
LIST OF EXHIBITS
Exhibit
Number Description
-------- -----------
1 Stock Prices: As of April 19, 2002
2 Peer Group Core Earnings Analysis
3 Pro Forma Analysis Sheet
4 Pro Forma Effect of Conversion Proceeds
5 Firm Qualification Statement