-------------------------------------
CONVERSION APPRAISAL UPDATE
REPORT
WAYNE SAVINGS BANCSHARES, INC.
PROPOSED HOLDING COMPANY FOR
WAYNE SAVINGS COMMUNITY BANK
WOOSTER, OHIO
DATED AS OF:
JULY 12, 2002
-------------------------------------
PREPARED BY:
RP FINANCIAL, LC.
1700 NORTH MOORE STREET
SUITE 2210
ARLINGTON, VIRGINIA 22209
July 12, 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 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 minority
shares 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 in a Subscription offering to the Bank's Eligible Account Holders,
Tax-Qualified Plans (the "ESOP"), Supplemental Eligible Account Holders and
Other Members. To the extent that shares remain available for purchase after
satisfaction of all subscriptions received in the Subscription offering, the
shares may be offered for sale in a Community offering.
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 reports, dated November 30, 2001 (the "first
update") and April 19, 2002 (the "second update"), are incorporated herein by
reference. As in the preparation of our original appraisal and previous updates,
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 respective Board of Directors of Wayne Bancshares
and the MHC adopted the plan of conversion pursuant to which the MHC will be
merged into the Bank and the MHC will no longer exist. Pursuant to the plan of
conversion, Wayne Bancshares, which owns 100 percent of the Bank, will be
succeeded by a new corporation with the same name. As part of the conversion,
the Holding Company will sell shares of common stock in an offering that will
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PAGE 2
represent the ownership interest in Wayne Bancshares currently owned by the MHC.
As of March 31, 2002 the MHC's ownership interest in Wayne Bancshares
approximated 52.54 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 March 31, 2002, the public
stockholders' ownership interest in Wayne Bancshares was approximately 47.46
percent.
This updated appraisal reflects the following noteworthy items: (1) a
review of recent developments in Wayne Bancshares' financial condition,
including financial data through March 31, 2002; (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 second 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 twelve months ended December 31, 2001 and updated financial information
for the fiscal year ended March 31, 2002. The overall composition of Wayne
Bancshares' March 31, 2002 balance sheet was comparable to the Holding Company's
December 31, 2001 balance sheet, with the Holding Company posting modest asset
growth during the quarter. Updated reported earnings for the Holding Company
were slightly higher, which was largely attributable to an increase in core
earnings. An increase in gains realized from the sale of loans also contributed
to the Holding Company's higher updated earnings.
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Table 1
Wayne Savings Bancshares, Inc.
Recent Financial Data
At Dec. 31, 2001 At March 31, 2002
Amount Assets Amount Assets
------ ------ ------- ------
($000) (%) ($000) (%)
Balance Sheet Data
- ------------------
Total assets $332,152 100.0% $334,823 100.0%
Cash and cash equivalents 27,211 8.2 27,883 8.3
Investment securities 16,126 4.9 22,286 6.7
FHLB stock 3,726 1.1 3,767 1.1
Mortgage-backed securities 15,086 4.5 17,326 5.2
Loans receivable, net 257,795 77.6 251,172 75.0
Deposits 298,173 89.8 300,957 89.9
Borrowings 5,000 1.5 5,000 1.5
Total equity 25,683 7.7 26,047 7.8
12 Months Ended 12 Months Ended
Dec. 31, 2001 March 31, 2002
------------- --------------
Amount Avg. Assets Amount Avg. Assets
------- ----------- ------- -----------
($000) (%) ($000) (%)
Summary Income Statement
- ------------------------
Interest income $21,433 6.72% $21,309 6.54%
Interest expense (12,969) (4.07) (12,348) (3.79)
-------- ------ -------- ------
Net interest income 8,464 2.65 8,961 2.75
Provision for losses (139) (0.04) (134) (0.04)
----- ------ ----- ------
Net interest income after provision 8,325 2.61 8,827 2.71
Other operating income 1,101 0.34 1,143 0.35
Net gain(loss) on sale of loans/sec. 477 0.15 514 0.16
Non-interest operating expense (7,376) (2.31) (7,722) (2.37)
------- ----- ------- ------
Earnings before income taxes 2,527 0.79 2,762 0.85
Income taxes (865) (0.27) (939) (0.29)
----- ------ ----- ------
Net income $1,662 0.52 $1,823 0.56%
Sources: Wayne Bancshares' prospectus, audited and unaudited financial
statements, and RP Financial calculations.
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Sibling rivalry Wayne Bancshares' total assets increased by $2.7
million, or 0.8 percent, from December 31, 2001 to March 31, 2002. Asset growth
was sustained by growth in investment securities and mortgage-backed securities,
which was partially offset by a decline in loans receivable. Most of the decline
in loans consisted of 1-4 family permanent mortgage loans, reflecting the impact
of accelerated loan repayments attributable to refinancing of 1-4 family loans
into lower rate loans and the Holding Company's current philosophy of selling a
higher portion of longer term fixed rate loan originations into the secondary
market for purposes of managing interest rate risk in the current interest rate
environment. Overall, the level of loans receivable comprising total assets
declined from 77.6 percent to 75.0 percent as of December 31, 2001 and March 31,
2002, 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 18.7 percent to 21.3 percent.
Updated credit quality measures indicated a slight improvement in
credit quality during the three month period, as non-performing assets declined
from $3.6 million or 1.07 percent of assets at December 31, 2001 to $3.2 million
or 0.95 percent of assets at March 31, 2002. One lending relationship,
consisting of commercial business and commercial real estate loans totaling $1.9
million continues to represent the largest component of the non-performing
assets balance. The non-performing loan concentration consists of four loans
that are cross-collateralized by non-residential real estate and residential
real estate. As set forth in the second update, the four delinquent loans were
brought current by the borrower. However, as of May 1, 2002 the loans returned
to delinquent status and continue to be classified as non-performing loans.
Asset growth was funded primarily by deposit growth, as the Holding
Company's utilization of borrowings did not change during the quarter. Overall,
the Holding Company's updated funding composition exhibited little change, as
deposits equaled 89.8 percent and 89.9 percent of assets as of December 31, 2001
and March 31, 2002, respectively, and borrowings equaled 1.5 percent of assets
for both periods shown in Table 1. Capital growth slightly outpaced asset
growth, as Wayne Bancshares' equity-to-assets ratio increased from 7.7 percent
at December 31, 2001 to 7.8 percent at March 31, 2002.
Wayne Bancshares' operating results for the twelve months ended
December 31, 2001 and the fiscal year ended March 31, 2002 are also set forth in
Table 1. Reported earnings for the Holding Company equaled 0.52 percent and 0.56
percent of average assets for the twelve months ended December 31, 2001 and
March 31, 2001, respectively. The Holding Company's higher updated return on
assets was primarily realized through an increase in net interest income and, to
a lesser extent, higher income realized from non-interest operating income and
gains recorded on the sale of loans. 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 increased from 2.65 percent to 2.75 percent for the twelve months ended
December 31, 2001 and March 31, 2002, respectively. The increase in the net
interest income ratio resulted from a steeper
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decline in the interest expense ratio compared to the interest income ratio,
reflecting the impact of a widening yield-cost spread. The widening of the
yield-cost spread reflects the more immediate impact that lower short-term
interest rates have had on the Holding Company's interest rate sensitive
liabilities compared to its less interest rate sensitive interest-earning
assets. The Holding Company's interest rate spread increased from 2.53 percent
for the twelve months ended December 31, 2002 to 2.77 percent for the fiscal
year ended March 31, 2002.
Operating expenses increased from 2.31 percent to 2.37 percent of
average assets for the twelve months ended December 31, 2001 and March 31, 2002,
respectively, as operating expenses increased at a faster rate than the Holding
Company's asset growth. Overall, Wayne Bancshares' higher net interest income
and operating expense ratios translated into a nominally higher updated expense
coverage ratio (net interest income divided by operating expenses) of 1.16
times, versus a comparable ratio of 1.15 times recorded for the twelve months
ended December 31, 2001.
Non-interest operating income increased slightly as a percent of
average assets, equaling 0.34 percent and 0.35 percent of average assets for the
twelve months ended December 31, 2001 and March 31, 2002, respectively. 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 77.3 percent and 76.5 percent for the
twelve months ended December 31, 2001 and March 31, 2002, respectively.
Gains realized from the sale of loans increased from 0.15 percent of
average assets for the twelve months ended December 31, 2001 to 0.16 percent of
average assets for the twelve months ended March 31, 2002. The relatively high
level of loan sale gains indicated for both periods shown in Table 1, in
comparison to historic levels, has been supported by the relatively low interest
rate environment that has facilitated increased originations of fixed rate loans
that are sold into the secondary market. As noted in the original appraisal and
previous updates, 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 remained
stable, equaling 0.04 percent of average assets for both twelve month periods
shown in Table 1. As of March 31, 2002, the Holding Company maintained valuation
allowances of $730,000, equal to 0.29 percent of net loans receivable and 22.9
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
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[ Statistical Information Omitted ]
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[ Statistical Information Omitted ]
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the Peer Group's ratios are based on financial results through March 31, 2002,
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 second update update. Consistent with the second update 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 96.3 percent and 96.1 percent, respectively.
The updated mix of deposits and borrowings maintained by Wayne
Bancshares and the Peer Group also did not change significantly from the second
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 91.4 percent and 87.5 percent for the
Holding Company and the Peer Group, respectively. Wayne Bancshares posted an
updated equity-to-assets ratio of 7.8 percent, which remained below the
comparable ratio of 11.6 percent for the Peer Group. Overall, Wayne Bancshares'
updated interest-earning assets-to-interest-bearing liabilities ("IEA/IBL")
ratio equaled 105.4 percent, which remained below the comparable Peer Group
ratio of 109.8 percent. As discussed in the original appraisal and previous
updates, 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 and the Peer Group are
based on annual growth for the twelve months ended March 31, 2002, unless
otherwise indicated for the Peer Group companies. Consistent with the second
update, updated growth rates reflected stronger asset growth for the Holding
Company, based on asset growth rates of 7.4 percent and 0.7 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
substantially offset by a decline in loans. Overall, the Holding Company's
updated asset growth measures continue to be considered 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
posted an updated deposit growth rate of 8.4 percent, versus a slight decline in
deposits posted by the Peer Group. The Peer Group's modest deposit run-off and
asset growth were funded by a slight increase in borrowings and modest capital
growth. In contrast to the second update, the Peer Group's updated capital
growth rate of 0.7 percent was less than the Holding Company's updated capital
growth rate of 3.1 percent. Factors contributing to the Peer Group's lower
capital growth rate include maintenance of a higher level of capital than
maintained by Wayne Bancshares and
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payment of cash dividends on 100 percent of the shares outstanding compared to
Holding Company's dividend policy of paying cash dividends on only the public or
minority shares outstanding. Following the increase in capital that will be
realized from the conversion proceeds, the Holding Company's capital growth rate
will be slowed 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 March 31, 2002, unless otherwise indicated for the Peer Group companies.
Updated earnings for the Holding Company and the Peer Group equaled 0.56 percent
and 0.76 percent of average assets, respectively. The Peer Group's higher return
continued to be attributable to stronger core earnings, most notably with
respect to maintaining a stronger net interest margin and a higher level of
non-interest operating income.
In terms of core earnings strength, updated expense coverage ratios
posted by Wayne Bancshares and the Peer Group equaled 1.16x and 1.31x,
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 (3.09 percent versus 2.75 percent for the Holding Company), as operating
expense to average assets ratios for the Peer Group and the Holding Company
continued to be similar (2.35 percent versus 2.37 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' slightly lower interest expense ratio.
Non-interest operating income remained a slightly larger source of
earnings for the Peer Group, as such income amounted to 0.50 percent and 0.35
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 76.5 percent remained less
favorable than the Peer Group's updated efficiency ratio of 64.9 percent.
Loss provisions remained a larger factor in the Peer Group's updated
earnings, as the Peer Group's ratio of loss provisions established as a percent
of average assets reflected a slight increase compared to the second update.
Updated loss provisions established by the Holding Company and the Peer Group
equaled 0.04 percent and 0.20 percent of average assets, respectively.
Net gains remained a slightly larger contributor to the Holding
Company's updated earnings, equaling 0.16 percent and 0.08 percent of the
Holding Company's and the Peer Group's average assets, respectively. As
discussed in the original appraisal and previous updates, 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
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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 34.0 percent
and 32.7 percent for the Holding Company and the Peer Group, respectively.
Updated credit risk measures for the Holding Company and the Peer
Group reflected increases in the Peer Group's ratios of non-performing assets
and non-performing loans, which served to increase the comparability of those
ratios to Wayne Bancshares' updated ratios. Notwithstanding the higher updated
non-performing ratios indicated for the Peer Group, the Peer Group's reserve
coverage ratios remained stronger than the Holding Company's. As shown in Table
4, the Holding Company's ratios of non-performing loans/loans and non-performing
assets and accruing loans more than 90 days past due/assets of 1.24 percent and
0.95 percent, respectively, were slightly lower than the comparable Peer Group
ratios of 1.36 percent and 1.02 percent. However, the Peer Group's update
reserve ratios of 156.6 percent as a percent of non-performing loans and 98.9
percent as a percent of non-performing assets and accruing loans that are more
than 90 days past due remained well above the comparable Holding Company ratios
of 23.4 percent and 22.9 percent. 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 0.29 percent and 0.94 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 0.37 percent and 0.02 percent, respectively.
3. Stock Market Conditions
-----------------------
Since the date of the second update, the performance of the overall
stock market has been mixed. In late-April 2002, the broader stock market
faltered on the basis of weak first quarter earnings and growing concerns about
the strength of the economic recovery. The sell-off prompted a rebound in
blue-chip stocks at the end of April, but the rally sputtered in early-May on
news of a sharper than expected increase in the April unemployment rate. Stocks
were largely unchanged by the Federal Reserve's widely anticipated decision to
leave rates unchanged at its early-May 2002 meeting, but then rallied sharply
higher the day following the meeting on hints from Cisco about a possible
business rebound. Favorable economic data in the form of stronger than expected
retail sales in April and rising hopes of more upbeat earnings forecast by
technology firms supported further advances in stocks during mid-May. The
rebound was not sustained in late-May, as profit taking and more terrorism
warnings dampened investor enthusiasm for stocks.
Investor pessimism extended the sell-off in stocks in early-June
2002, reflecting political turmoil abroad, concerns over corporate scandals and
more disappointing earnings news from market leaders. Stocks jumped higher on
oversold conditions in mid-June, but the rally was brief. Both the Dow Jones
Industrial Average ("DJIA") and NASDAQ Composite Index
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[ Statistical Information Omitted ]
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established new lows for 2002 during the week ended June 21, 2002, as a fresh
batch of corporate earning warnings and the ongoing conflict in the Middle East
further eroded investor confidence. Discovery of a $3.8 billion accounting error
by WorldCom and nervousness about second quarter earnings heightened the
sell-off the following week and into early-July. Bargain hunters provided a
boost to stocks following the prolonged sell-off, despite news that the nation's
unemployment rate edged up to 5.9 percent in June. The rally was not sustained,
as worries about second quarter earnings and corporate accounting practices
pushed market indices to new lows for the year in mid-July. On July 12, 2002,
the DJIA closed at 8684.53 or 15.3 percent lower since the date of the second
update and the NASDAQ Composite Index closed at 1373.50 or 23.6 percent lower
since the date of the second update.
Since the date of the second update, the market for thrift issues
has been fairly stable. Thrift stocks traded in a narrow range in late-April in
the face of a downturn experienced in broader stock market, as traditional
spread lenders benefited from generally weak economic news. News of the increase
in the April unemployment rate served to boost thrift prices in early-May, as
the weak employment data lessened expectations of a strong economic recovery
that would push interest rates higher. Thrift stocks stabilized in mid- and
late-May, as Citigroup's proposed $5.8 billion acquisition of Golden State
Bancorp had little impact on the broader thrift market. While the broader stock
market experienced extensive selling pressure through most of June, the decline
in thrift issues was relatively mild as investors continued to be attracted to
the generally more stable performance characteristics of thrift stocks. However,
thrifts experienced more extensive selling pressure in mid-July, as the downturn
in broader market weighed on thrift issues as well. On July 12, 2002, the SNL
Index for all publicly-traded thrifts closed at 1035.0, a decline of 6.5 percent
since April 19, 2002.
The updated pricing measures for the Peer Group and all publicly-
traded thrifts generally reflected a more favorable performance compared to the
6.5 percent decline indicated for the SNL Index. The less favorable performance
of the SNL Index implies that the small-cap issues outperformed the large-cap
issues since the date of the second 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. The relatively
high increase indicated for the Peer Group's updated core P/E multiple was the
result of a decline in the Peer Group's core earnings per share. The steep
decline indicated for the average market capitalization of all publicly-traded
thrifts was substantially attributable to the removal of Golden State Bancorp in
the calculation of the updated average, as the result of the announced
acquisition of Golden State Bancorp by Citigroup. As of April 19, 2002, Golden
State Bancorp's market capitalization equaled $4.5 billion. The Peer Group's
updated pricing measures continued to reflect lower P/E multiples and lower P/B
ratios than indicated for the comparable averages for all publicly-traded
thrifts. Since the date of the second update, six out of the ten Peer Group
companies were trading at higher prices as of July 12, 2002. A
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comparative pricing analysis of all publicly-traded thrifts, the Peer Group and
recent conversions is shown in the following table, based on market prices as of
April 19, 2002 and July 12, 2002.
Average Pricing Characteristics
At April 19, At July 12, %
2002 2002 CHANGE
-------- -------- ------
Peer Group(1)
- -------------
Price/Earnings (x) 13.71x 13.72x 0.1%
Price/Core Earnings (x) 15.39 16.69 8.4
Price/Book (%) 101.32% 100.84% (0.5)
Price/Tangible Book(%) 103.22 102.71 (0.5)
Price/Assets (%) 12.16 11.76 (3.3)
Avg. Mkt. Capitalization ($Mil) $41.49 $40.51 (2.4)
All Publicly-traded Thrifts
- ----------------------------
Price/Earnings (x) 15.75x 15.35x (2.5)%
Price/Core Earnings (x) 17.16 16.83 (1.9)
Price/Book (%) 133.25% 132.04% (0.9)
Price/Tangible Book(%) 140.72 140.33 (0.3)
Price/Assets (%) 13.56 13.40 (1.2)
Avg. Mkt. Capitalization ($Mil) $316.41 $262.67 (16.9)
Recent Conversions(1)
- ---------------------
Price/Core Earnings (x) 26.38x 24.19x (8.3)
Price/Book (%) 106.95% 107.87% 0.9
(1) Ratios based on conversions completed for prior three months.
As set forth in the original appraisal and previous updates,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 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.
As shown in Table 5, no standard conversion offerings have been
completed during the past three months. One second-step conversion offering was
completed during the
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past 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 Brookline Bancorp, Inc. ("Brookline Bancorp")
equaled 94.9 percent and 22.1 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
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. Additionally, the higher P/TB ratio is facilitated by the lower
percentage of stock sold in the public offering in comparison to a standard
conversion offering in which 100 percent of the stock is sold. Brookline
Bancorp's stock price increased 13.7 percent during its first week of trading as
a fully converted company.
Shown in Table 6 are the current pricing ratios of Brookline
Bancorp, which is the only NASDAQ or Exchange listed full conversion offering
that has been completed during last three months. Relative to the second update,
which reflected only the pricing ratios of Willow Grove Bancorp as of April 19,
2002, which was also a second-step conversion offering, the current P/B ratio
and core P/E multiple for Brookline Bancorp equaled 107.87 percent and 24.19
times, respectively. Comparatively, Willow Grove Bancorp was trading at a P/B
ratio of 106.95 percent and core P/E multiple of 26.38 times, as of 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.
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 second update of April 19, 2002 to July
12, 2002, the Holding Company's stock price was unchanged at $20.00 per share.
SUMMARY OF ADJUSTMENTS
- ----------------------
In the second 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 Slight Upward
Primary Market Area No Adjustment
Dividends No Adjustment
Liquidity of the Shares No Adjustment
Marketing of the Issue Slight Upward
RP FINANCIAL, LC.
BOARD OF DIRECTORS
JULY 12, 2002
PAGE 15
[ Statistical Information Omitted ]
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BOARD OF DIRECTORS
JULY 12, 2002
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[ Statistical Information Omitted ]
RP FINANCIAL, LC.
BOARD OF DIRECTORS
JULY 12, 2002
PAGE 17
PreviousValuation
Key Valuation Parameters: Adjustment
------------------------ ----------
Management No Adjustment
Effect of Government Regulations No Adjustment
and Regulatory Reform
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 second 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, based on the Peer Group's stronger reserve coverage
ratios. Therefore, no adjustment continued to be warranted for the Holding
Company's financial condition. The Holding Company's updated asset growth
measures remained more favorable than the Peer Group's growth measures,
including the important area of loan growth. Accordingly, a slight upward
valuation adjustment continued to be appropriate for the Holding Company's asset
growth. 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 previous
updates, 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 lower since the date of the
second update, as indicated by the 6.5 percent decline recorded in the SNL Index
for all publicly-traded thrifts. Comparatively, the updated average pricing
measures for the Peer Group and all publicly-traded thrifts generally reflected
a more favorable performance compared to the SNL Index, indicating that the
small-cap issues outperformed the large-cap issues since the date of the second
update. Activity in the new issue market has remained somewhat limited, as there
were no standard conversion offerings completed since the date of the second
update. Brookline Bancorp's second-step conversion offering was completed since
the second update and was closed at the top of the range. Brookline Bancorp's
stock traded slightly above its IPO price in initial trading activity. We have
also considered the limited trading activity in Wayne Bancshares' stock since
the date of the second update and that the current trading price reflected no
change from its trading price as of April 19, 2002. Accordingly, no further
adjustment was applied for marketing of the issue in this updated appraisal.
Overall, taking into account the foregoing factors, we believe that
Holding Company's estimated pro market value as set forth in the second update
continues to be appropriate.
RP FINANCIAL, LC.
BOARD OF DIRECTORS
JULY 12, 2002
PAGE 18
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 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, offering
expenses and stock benefit plan assumptions utilized in the second update did
not change in this update. The pro forma assumption for reinvestment rate was
revised from 2.17 percent to 2.70 percent, which represents the constant
maturity yield for U.S. Treasury securities with a maturity of one-year at March
31, 2002 and is consistent with the reinvestment rate utilized in the
prospectus.
Consistent with the original appraisal and previous updates, 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 previous updates,
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 had a closing price of $20.00 per share as of July 12, 2002, unchanged
from its closing price as of April 19, 2002. 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 the offering range set
forth in the second update continues to be appropriate. Therefore, as of July
12, 2002, the aggregate pro forma market value of Wayne Bancshares' conversion
stock is equal to $39,018,190 at the midpoint. The midpoint and resulting
valuation range is based on the sale of a 52.54 percent ownership interest to
the public. It should be noted that the aggregate market value set forth in this
update changed slightly from the previous update, as the result of a change in
the MHC's ownership interest from 52.58 percent at December 31, 2001 to 52.54
percent at March 31, 2002. As the
RP FINANCIAL, LC.
BOARD OF DIRECTORS
JULY 12, 2002
PAGE 19
result of the change in the MHC ownership interest, the aggregate market value
in this update was approximately $30,000 higher than in the previous update,
which was considered to be immaterial for purposes of our valuation conclusion.
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 Company's reported earnings,
incorporating the reinvestment of $170,000 of MHC assets at an after-tax
reinvestment rate of 1.78 percent, equaled $1.826 million for the twelve months
ended March 31, 2002. In deriving Wayne Bancshares' core earnings, the only
adjustment made to reported earnings was to eliminate gains on the sale of
loans, which equaled $514,000 for the twelve months ended March 31, 2002. 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 $1.487 million for the twelve months
ended March 31, 2002. (Note: see Exhibit 2 for the adjustments applied to the
Peer Group's earnings in the calculation of core earnings).
Amount
------
($000)
Net income $1,826
Gain on sale of loans(1) (339)
-----
Core earnings estimate $1,487
(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 20.75 times and 25.32 times, respectively. The Holding Company's
updated reported and core P/E multiples provided for premiums of 51.2 percent
and 51.7 percent relative to the Peer Group's average reported and core P/E
multiples of 13.72 times and 16.69 times, respectively (versus premiums of 72.9
percent and 90.5 percent relative to the Peer Group's average reported and core
P/E multiples as indicated in the second update). The implied premiums reflected
in the Holding Company's pro forma reported and core P/E multiples take into
consideration the Holding Company's resulting 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 $170,000 of equity
RP FINANCIAL, LC.
BOARD OF DIRECTORS
JULY 12, 2002
PAGE 20
[ Statistical Information Omitted ]
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[ Statistical Information Omitted ]
RP FINANCIAL, LC.
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JULY 12, 2002
PAGE 22
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 both equaled 90.68 percent. In
comparison to the average P/B and P/TB ratios indicated for the Peer Group of
100.84 percent and 102.71 percent, respectively, Wayne Bancshares' updated
ratios were discounted by 10.1 percent and 11.7 percent (versus discounts of 9.5
percent and 10.6 percent from the Peer Group's P/B and P/TB ratios as indicated
in the second update). RP Financial considered such discounts to be reasonable
in light of 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 the recent second-step offering
pricing characteristics at closing and in the aftermarket. As indicated in the
original appraisal and previous updates, the pricing characteristics of recent
conversion and second-step offerings are not the primary determinate of value.
Consistent with the original appraisal and previous updates, 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 one recently completed
second-step conversion offering closed at a price/tangible book ratio of 94.9
percent and its trading price increased 13.7 percent during its first week of
trading as a fully converted company. In comparison, the Holding Company's P/TB
ratio of 90.7 percent at the midpoint value reflects an implied discount of 4.4
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 offering (107.87 percent), the Holding Company's P/TB
ratio at the midpoint value reflects an implied discount of 15.9 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 11.09 percent. In comparison to the Peer Group's average P/A ratio
of 11.76 percent, Wayne Bancshares' P/A ratio indicated a discount of 5.7
percent (versus a discount of 8.1 percent at the midpoint valuation in the
second update).
VALUATION CONCLUSION
- --------------------
Based on the foregoing, it is our opinion that, as of July 12, 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
$39,018,190 at the midpoint. Based on this valuation and the approximate 52.54
ownership interest to be sold in the public offering, the midpoint value of the
Holding Company's stock offering range was $20,500,000, equal to 2,050,000
shares at a per
RP FINANCIAL, LC.
BOARD OF DIRECTORS
JULY 12, 2002
PAGE 23
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 $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 minority shareholders' current aggregate ownership
interest in Wayne Bancshares, which equaled 47.46 percent as of March 31, 2002.
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