PROSPECTUS
WAYNE SAVINGS BANCSHARES, INC.
(Holding Company for Wayne Savings Community Bank)
Up to 2,357,500 Shares of Common Stock
Wayne Savings Bancshares, Inc. is offering common stock for sale in
connection with the conversion of Wayne Savings Bankshares, MHC from the mutual
to the stock form of organization. The shares we are offering represent the
52.5% interest in Wayne Savings Bancshares, Inc. now owned by Wayne Savings
Bankshares, MHC. The existing publicly held shares of Wayne Savings Bancshares,
Inc., which represent the remaining 47.5% interest in Wayne Savings Bancshares,
Inc., will be exchanged for new shares of common stock in Wayne Savings
Bancshares, Inc. All shares offered for sale are offered at a price of $10.00
per share. You will not have to pay any sales commissions on shares of common
stock that you purchase in the offering.
o If you are a current or former customer of Wayne Savings Community Bank
you may have priority rights to purchase shares.
o If you are a current stockholder of Wayne Savings Bancshares, Inc., each
of your shares will be automatically exchanged for between 1.2901 and
2.0072 new shares of Wayne Savings Bancshares, Inc. Your percentage
ownership will remain essentially equivalent to your current percentage
ownership in Wayne Savings Bancshares, Inc. You also may purchase
additional shares in the offering after priority orders are filled.
o If you fit none of the above categories, but are interested in purchasing
shares of common stock, you may purchase shares after priority orders are
filled.
================================================================================
OFFERING SUMMARY
Price: $10.00 per Share
MINIMUM MAXIMUM
------- -------
Number of shares: 1,742,500 2,357,500
Gross offering proceeds: $17,425,000 $23,575,000
Estimated offering expenses: $1,449,000 $1,534,000
Estimated net proceeds: $15,976,000 $22,041,000
Estimated net proceeds per share: $9.17 $9.35
================================================================================
Without resoliciting subscribers, the maximum number of shares offered may
be increased up to 2,711,125 shares because of demand for the shares, changes in
market conditions or changes in the independent appraisal of the estimated pro
forma market value of Wayne Savings Bancshares, Inc. Any changes in the range of
shares offered requires the approval of the Office of Thrift Supervision. We
will terminate the offering of new stock and the exchange of existing shares if
we do not sell the minimum number of shares. If we terminate the offering, we
will return all subscriptions received, together with accrued interest. Ryan
Beck & Co., Inc. will assist Wayne Savings Bancshares, Inc. in the sale of the
common stock on a best efforts basis. In a best efforts offering, Ryan Beck &
Co., Inc. is not required to purchase any of the common stock that is being
offered for sale. Subscriptions received prior to completion of the offering
will be held in an escrow account at Wayne Savings Community Bank and will bear
interest at Wayne Savings Community Bank's passbook rate. Our common stock will
trade on the Nasdaq National Market under the symbol "WAYN." The offering will
end at 10:00 a.m., Eastern time, on December 19, 2002, unless we extend it.
For a discussion of the risks that you should consider before making an
investment decision, see "Risk Factors" beginning on page 16.
These securities are not deposits or accounts and are not insured or
guaranteed by the Federal Deposit Insurance Corporation or any other government
agency.
Neither the Securities and Exchange Commission, the Office of Thrift
Supervision, nor any state securities regulator has approved or disapproved of
these securities or determined if this prospectus is accurate or complete. Any
representation to the contrary is a criminal offense.
RYAN BECK & CO.
The date of this prospectus is November 14, 2002
[INSERT MAP SHOWING WAYNE SAVINGS' MARKET AREA]
1
TABLE OF CONTENTS
Page
----
QUESTIONS AND ANSWERS.........................................................3
SUMMARY.......................................................................7
RISK FACTORS.................................................................16
FORWARD-LOOKING STATEMENTS...................................................20
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA OF WAYNE SAVINGS
BANCSHARES, INC.............................................................21
RECENT DEVELOPMENTS..........................................................25
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE..................................30
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING..........................31
OUR DIVIDEND POLICY..........................................................32
MARKET FOR OUR COMMON STOCK..................................................33
CAPITALIZATION...............................................................35
PRO FORMA DATA...............................................................36
WAYNE SAVINGS BANCSHARES, INC. CONSOLIDATED STATEMENTS OF EARNINGS AND
COMPREHENSIVE INCOME.......................................................40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...............................................................41
BUSINESS OF WAYNE SAVINGS BANCSHARES, INC. AND WAYNE SAVINGS
COMMUNITY BANK..............................................................56
REGULATION...................................................................79
TAXATION.....................................................................86
MANAGEMENT OF WAYNE SAVINGS BANCSHARES, INC..................................87
BENEFICIAL OWNERSHIP OF COMMON STOCK.........................................94
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS............................94
THE CONVERSION...............................................................95
RESTRICTIONS ON ACQUISITION OF WAYNE SAVINGS BANCSHARES, INC................119
DESCRIPTION OF CAPITAL STOCK OF WAYNE SAVINGS BANCSHARES, INC.
FOLLOWING THE CONVERSION...................................................120
TRANSFER AGENT..............................................................121
EXPERTS.....................................................................122
LEGAL MATTERS...............................................................122
ADDITIONAL INFORMATION......................................................122
INDEX TO CONSOLIDATED FINANCIAL SATEMENTS...................................F-1
2
QUESTIONS AND ANSWERS
Q: How many shares of common stock are being offered, and at what price per
share?
A: Wayne Savings Bancshares, Inc. is offering between 1,742,500 and 2,357,500
shares of common stock at a subscription price of $10.00 per share. We may
increase the number of shares offered up to 2,711,125 shares because of
demand for the shares, changes in market conditions or changes in the
independent appraisal of the estimated pro forma market value of Wayne
Savings Bancshares, Inc. Any change in the range of shares offered
requires the approval of the Office of Thrift Supervision. The amount of
common stock being offered is based upon an independent appraisal of the
market value of Wayne Savings Bancshares, Inc., assuming completion of the
mutual-to-stock conversion and offering described in this document.
Q: Who may purchase common stock in the subscription offering?
A: Rights to subscribe for common stock have been granted under the plan of
conversion and reorganization to the following persons in the following
descending order of priority:
(1) Wayne Savings Community Bank depositors with $50.00 or more on
deposit as of June 30, 2000;
(2) Wayne Savings Community Bank's tax-qualified employee stock benefit
plans, including its employee stock ownership plan;
(3) Wayne Savings Community Bank depositors with $50.00 or more on
deposit as of September 30, 2002; and
(4) Wayne Savings Community Bank depositors as of November 6, 2002 and
borrowers as of June 23, 1993 who continue as borrowers as of
November 6, 2002.
Q: Will depositors or borrowers of Village Savings Bank, F.S.B. have priority
rights to purchase shares in the offering?
A. No. Applicable federal regulations limit priority rights to purchase
shares in the offering to certain depositors and borrowers of Wayne
Savings Community Bank, as described immediately above.
Q: Who may purchase common stock in the community offering?
A. Any shares that are not purchased in the subscription offering may be
available for purchase by the public in a community offering. The
community offering is expected to be conducted at the same time as the
subscription offering. In the community offering we will give a preference
first to stockholders of Wayne Savings Bancshares, Inc. as of November 11,
2002, and second to residents of Wayne, Holmes, Ashland, Medina and Stark
Counties, Ohio.
Q: Will any commission be charged for common stock I purchase in the stock
offering?
A: No.
Q: How do I purchase common stock?
A: First, you should read this document. Then, complete and return the
enclosed stock order form, together with your payment. You may submit
stock order forms in three ways: you may send the stock order form by
regular mail, using the reply envelope provided; you may send the stock
order form by overnight delivery to the address indicated on the back of
the stock order form; or you may hand-deliver the stock order form to our
stock information center, located at Wayne Savings Community Bank's main
office at 151 North Market Street, Wooster, Ohio. Stock order forms may
not be delivered to the branch offices of Wayne Savings Community Bank.
3
Q: How can I pay for the common stock?
A: Full payment for the common stock must accompany your stock order form at
the time it is submitted. You may pay for your shares by check or money
order payable to Wayne Savings Bancshares, Inc., or by authorizing a
withdrawal from the types of Wayne Savings Community Bank deposit accounts
designated on the stock order form (we will waive any penalty for early
withdrawal from certificate of deposit accounts for the purchase of
stock). Authorized withdrawals will not be made until the completion of
the stock offering, but the designated funds will not be available to you
in the interim. If you wish to use IRA funds, see the discussion below.
Funds authorized to be withdrawn from Wayne Savings Community Bank deposit
account(s) must be available in your account at the time you submit your
stock order form. Checks and money orders will be cashed upon receipt, so
funds must be available in your account.
Q. May I obtain a loan or line of credit from Wayne Savings Community Bank or
Village Savings Bank to pay for my common stock?
A. No. Federal law prohibits Wayne Savings Community Bank or Village Savings
Bank from loaning funds to purchase common stock in the stock offering.
However, other financial institutions may make such a loan.
Q: May I subscribe for shares using funds in my Individual Retirement Account
at Wayne Savings Community Bank or elsewhere?
A: Yes. However, common stock must be held in a self-directed retirement
account. By regulation, Wayne Savings Community Bank's IRAs are not
self-directed, so they cannot be invested in stock. If you wish to use
some or all of the funds in your Wayne Savings Community Bank IRA, the
applicable funds must be transferred to a self-directed account maintained
by an independent trustee, such as a brokerage firm. If you do not have
such an account, you will need to establish one before placing your stock
order. An annual administrative fee may be payable to the independent
trustee. Because individual circumstances differ and processing of
retirement fund orders takes additional time, we recommend that you
contact the stock information center promptly, preferably at least two
weeks before the end of the offering period, for assistance with purchases
using your IRA or other retirement account that you may have. Whether you
may use such funds for the purchase of shares in the stock offering may
depend on timing constraints and, possibly, limitations imposed by the
institution where the funds are held.
Q: May I change my mind after I place an order to subscribe for common stock?
A: No. After your stock order form and payment are received, you may not
cancel or modify your order.
Q: Will I receive interest on my subscription payment?
A: Yes. Payments by check or money order received with the stock order form
will be cashed and placed in an interest-bearing escrow account at Wayne
Savings Community Bank, and will earn interest at our passbook savings
rate until the conclusion of the stock offering. At that time, a check for
the accrued interest will be mailed to you. Subscribers who elect to pay
by deposit account withdrawal will continue to accrue interest in the
account at its contractual rate until the funds are withdrawn, at the
conclusion of the offering.
Q: How many shares may I buy?
A: The minimum order is 25 shares, or $250. There are maximum purchase
limitations, and there is a stock ownership limitation that applies to
current Wayne Savings Bancshares, Inc. stockholders. These limitations are
described on the stock order form and in the section of this document
entitled "The Conversion."
4
Q: What is the deadline for placing an order?
A: Orders in the subscription offering and community offering must be
received (not postmarked) by no later than 10:00 a.m. Eastern time, on
December 19, 2002.
Q: How can I buy or sell Wayne Savings Bancshares, Inc. common stock in the
future?
A: Existing publicly held shares of Wayne Savings Bancshares, Inc. common
stock trade on the Nasdaq Small Cap Market under the symbol "WAYN." Upon
completion of the conversion and offering, the new shares of common stock
of Wayne Savings Bancshares, Inc. will replace existing shares and will be
traded on the Nasdaq National Market. For a period of 20 trading days
following completion of our offering, our symbol will be "WAYND."
Thereafter the symbol will be "WAYN." You will be able to buy or sell
shares through a stockbroker or discount broker. As soon as possible after
the completion of the offering, investors will be mailed stock
certificates. Although the common stock will have begun trading, brokerage
firms may require that you have received your stock certificate prior to
selling shares that you purchased in the offering.
Q: Will dividends be paid on the common stock?
A: Wayne Savings Bancshares, Inc. intends to pay quarterly dividends
following the offering, reflecting an annual amount of between $0.528 and
$0.340 per share, depending on how many shares are sold in the offering.
The amount of dividends that we intend to pay will preserve the per share
dividend amount, adjusted to reflect the exchange ratio, that Wayne
Savings Bancshares, Inc. stockholders currently receive. At the midpoint
of the offering range, the annual dividend is expected to be $0.448 per
share. There can be no assurance that dividends will be paid or that they
will not be subsequently reduced or eliminated.
Q: As an eligible depositor or borrower of Wayne Savings Community Bank
placing an order in the subscription offering, may I register the shares
in someone else's name?
A: No. To preserve your purchase priority in the subscription offering, you
must register the shares only in the name or names of eligible purchasers
at the applicable date of eligibility. You may not add the names of others
who were not eligible to purchase common stock in the subscription
offering on the applicable date of eligibility.
Q: I am eligible to purchase shares in the subscription offering, but I do
not want to become a stockholder. May I allow someone else to use my stock
order form to take advantage of my priority?
A: No. Transferring your subscription rights to someone else is illegal under
federal law. Wayne Savings Bancshares, Inc. intends to take legal action
against anyone who attempts to transfer subscription rights. If anyone
offers to give you money to buy common stock in your name in exchange for
later transferring the common stock, or requests to share in cash proceeds
upon your future sale of Wayne Savings Bancshares, Inc. stock, please
inform our stock information center at the number below.
Q: Will the conversion and offering have any effect on my Wayne Savings
Community Bank deposit or loan accounts?
A: No. The amount, interest rate and other terms of deposit accounts will not
change as a result of the conversion or offering. Deposit accounts will
continue to be insured by the FDIC. Likewise, the loan accounts and rights
of borrowers will not be affected.
Q: Will the common stock be insured by the FDIC?
A: No. Unlike deposit accounts at Wayne Savings Community Bank, common stock
cannot be insured or guaranteed by the FDIC or any other government
agency. The trading price of common stock may fluctuate, so an investment
in the common stock is subject to investment risk, including loss of
principal invested. There can be no assurance that you will be able to
sell your Wayne Savings Bancshares, Inc. shares at or above the $10.00 per
share purchase price in the offering.
5
Q: By placing an order, am I guaranteed to receive all the shares I
requested?
A: No. If there is an oversubscription, shares will be allocated as described
in the prospectus section entitled "The Conversion." If we do not fill an
order (either wholly or in part), funds submitted but not used will be
refunded, with interest, and deposit account withdrawal authorizations
will be canceled to the extent not used.
Q: Can my Wayne Savings Community Bank local branch assist me with purchasing
shares or completing the stock order form?
A: No. Our branch personnel may not, by law, assist with investment-related
questions about the stock offering. We have established a stock
information center staffed by registered representatives who can assist
you. You may call the stock information center at the number below.
ADDITIONAL QUESTIONS?
Please call our Stock Information Center
(800) 804-8479
from 9:00 a.m. to 4:00 p.m., Eastern time, Monday through Friday.
The Stock Information Center is located at
Wayne Savings Community Bank's main office
at 151 North Market Street, Wooster, Ohio
TO ENSURE THAT EACH PERSON RECEIVES A PROSPECTUS AT LEAST 48 HOURS PRIOR TO THE
EXPIRATION DATE OF DECEMBER 19, 2002 IN ACCORDANCE WITH FEDERAL LAW, NO
PROSPECTUS WILL BE MAILED ANY LATER THAN FIVE DAYS PRIOR TO DECEMBER 19, 2002 OR
HAND-DELIVERED ANY LATER THAN TWO DAYS PRIOR TO DECEMBER 19, 2002.
6
SUMMARY
The following summary explains the significant aspects of the conversion,
the offering and the exchange of existing shares of Wayne Savings Bancshares,
Inc. common stock for new shares of Wayne Savings Bancshares, Inc. common stock.
It may not contain all the information that is important to you. For additional
information, you should read this entire document carefully, including the
consolidated financial statements and the notes to the consolidated financial
statements.
When used in this summary and elsewhere in this prospectus, terms such as
"we," "our" and similar terms refer to Wayne Savings Bancshares, Inc., a
Delaware corporation, or, as indicated by the context, Wayne Savings Bancshares,
Inc., a federal corporation, Wayne Savings Bankshares, MHC, Wayne Savings
Community Bank or Village Savings Bank.
The Companies
Wayne Savings Bankshares, MHC
151 North Market Street, Wooster, Ohio 44691
(330) 264-5767
Wayne Savings Bankshares, MHC is currently the federally-chartered mutual
holding company parent of Wayne Savings Bancshares, Inc. As of June 30, 2002,
Wayne Savings Bankshares, MHC's principal business activity was the ownership of
1,350,699 shares, or 52.5%, of the outstanding common stock of Wayne Savings
Bancshares, Inc. Wayne Savings Bankshares, MHC will cease to exist at the
conclusion of the conversion and offering and its net equity accounts will be
merged with Wayne Savings Bancshares, Inc.
Wayne Savings Bancshares, Inc.
151 North Market Street, Wooster, Ohio 44691
(330) 264-5767
Wayne Savings Bancshares, Inc. is currently a federally-chartered stock
holding company that owns all of the outstanding common stock of Wayne Savings
Community Bank. As of June 30, 2002, Wayne Savings Bancshares, Inc. had
2,572,021 issued and outstanding shares of common stock. Wayne Savings
Bankshares, MHC owns 1,350,699 shares of Wayne Savings Bancshares, Inc.'s
outstanding common stock. The remaining 1,221,322 shares are held by the public.
At June 30, 2002, Wayne Savings Bancshares, Inc. had consolidated assets of
$334.6 million, deposits of $300.7 million and consolidated stockholders' equity
of $26.4 million. Following the conversion, this federal corporation will cease
to exist, but will be succeeded by a new Delaware corporation with the same
name.
Wayne Savings Community Bank
151 North Market Street, Wooster, Ohio 44691
(330) 264-5767
Wayne Savings Community Bank is an Ohio-chartered community bank
headquartered in Wooster, Ohio. Wayne Savings Community Bank offers a broad
range of financial products and services. Wayne Savings Community Bank operates
through its main office in Wooster, Ohio, nine branch offices located in Wayne,
Holmes, Ashland, and Medina Counties, Ohio, and its Village Savings Bank
subsidiary in Stark County, Ohio. This contiguous five-county area is located in
north central Ohio, and is an active manufacturing and agricultural market.
Village Savings Bank is a federally-chartered stock savings bank that
operates from a single office in North Canton, Ohio. Village Savings Bank was
chartered as a wholly-owned subsidiary of Wayne Savings Community Bank in July
1998. Village Savings Bank is a community-oriented financial institution that
offers a broad range of financial services in its primary lending and deposit
taking area, which includes North Canton, Jackson Township and Plain Township,
in Stark County, Ohio.
7
Our Organizational Structure
Wayne Savings Community Bank's predecessor was formed as a mutual
institution in 1899. In 1993, Wayne Savings Community Bank converted to a stock
charter and reorganized into the mutual holding company form of organization. As
part of the mutual holding company reorganization, Wayne Savings Community Bank
sold a minority of its common stock to customers in a stock offering and the
majority of its outstanding shares was retained by Wayne Savings Bankshares,
MHC. Wayne Savings Bankshares, MHC is a federally-chartered mutual holding
company that has no stockholders. In 1997, we formed Wayne Savings Bancshares,
Inc. as a federally-chartered mid-tier stock holding company and all
stockholders of Wayne Savings Community Bank exchanged their shares for an equal
number of shares of common stock of Wayne Savings Bancshares, Inc. Wayne Savings
Bancshares, Inc. owns 100% of the outstanding shares of Wayne Savings Community
Bank. Wayne Savings Community Bank owns 100% of the outstanding shares of
Village Savings Bank. A majority of the outstanding shares of common stock of
Wayne Savings Bancshares, Inc. is held by Wayne Savings Bankshares, MHC, and a
minority is held by other public stockholders.
Pursuant to the terms of our plan of conversion and reorganization, we are
now converting from the mutual holding company form to the fully public form of
corporate structure. As part of the conversion, we are now offering for sale in
a subscription offering and a community offering the majority ownership interest
of Wayne Savings Bancshares, Inc. that is currently held by Wayne Savings
Bankshares, MHC.
Upon the completion of the conversion and offering, Wayne Savings
Bankshares, MHC will cease to exist, and we will complete the transition from
partial to full public ownership. At the conclusion of the conversion, all
public stockholders of Wayne Savings Bancshares, Inc. will receive new shares of
common stock of Wayne Savings Bancshares, Inc. (our newly formed Delaware
corporation) in exchange for their existing shares of Wayne Savings Bancshares,
Inc., a federal corporation. Additional shares of common stock will be offered
for sale in the offering.
The following chart shows our current ownership structure, which is
commonly referred to as the "two-tier" mutual holding company structure:
--------------
Public
Stockholders
--------------
------------------------------- |
Wayne Savings Bankshares, MHC | 47.5% of
------------------------------- | Common Stock
52.5% of | |
Common Stock | |
--------------------------------------------------
Wayne Savings Bancshares, Inc.
(a federal corporation)
------------------------------
|
| 100% of Common Stock
|
------------------------------
Wayne Savings Community Bank
------------------------------
|
| 100% of Common Stock
|
------------------------------
Village Savings Bank, F.S.B.
------------------------------
8
Following our conversion and offering, our ownership structure will be as
follows:
------------------------------
Public Stockholders
------------------------------
|
| 100% of Common Stock
|
------------------------------
Wayne Savings Bancshares, Inc.
(a Delaware corporation)
------------------------------
|
| 100% of Common Stock
|
------------------------------
Wayne Savings Community Bank
------------------------------
|
| 100% of Common Stock
|
------------------------------
Village Savings Bank, F.S.B.
------------------------------
Business Strategies
We have several business strategies that are designed to improve our
profitability and enhance our franchise in our market area. These strategies
include:
o Closely monitoring the needs of customers and providing personal
banking service;
o Emphasizing the origination of one- to four-family residential
mortgage loans in our market area;
o Managing interest rate risk;
o Increasing fee income;
o Controlling expenses;
o Managing asset quality;
o Maintaining a strong retail deposit base; and
o Maintaining capital in excess of regulatory requirements.
These strategies are discussed in detail beginning on page 41 of this
prospectus.
The Conversion
The Conversion
Pursuant to our plan of conversion, we will convert our organization from
the partially public mutual holding company form to the fully public stock
holding company structure.
The Offering
In connection with the conversion, we are offering common stock
representing the 52.5% ownership interest in Wayne Savings Bancshares, Inc. now
owned by Wayne Savings Bankshares, MHC. Under the plan of conversion, eligible
customers of Wayne Savings Community Bank and Wayne Savings Bancshares, Inc.'s
employee stock ownership plan have priority rights to subscribe for shares in
Wayne Savings Bancshares, Inc. The priorities in this subscription offering are
as follows:
(1) First, depositors with $50 or more on deposit as of June 30, 2000.
9
(2) Second, Wayne Savings Bancshares, Inc.'s tax-qualified employee
stock benefit plans, including the employee stock ownership plan.
The employee stock ownership plan expects to purchase between
139,400 and 188,600 shares of common stock.
(3) Third, depositors with $50 or more on deposit as of September 30,
2002.
(4) Fourth, depositors of Wayne Savings Community Bank as of November 6,
2002 and borrowers as of June 23, 1993 who continue as borrowers as
of November 6, 2002.
Village Savings Bank depositors and borrowers will not have priority
rights to purchase shares in the offering, but may purchase shares in our
community offering (described below) to the extent shares remain available.
We are offering between 1,742,500 and 2,357,500 shares of common stock,
all at a price of $10.00 per share. The number of shares we sell may be
increased up to 2,711,125 shares because of demand for the shares, changes in
market conditions or changes in the independent appraisal of the estimated pro
forma market value of Wayne Savings Bancshares, Inc. Any change in the range of
shares offered requires the approval of the Office of Thrift Supervision. The
number of shares offered is based on an independent appraisal of Wayne Savings
Bankshares, MHC and Wayne Savings Bancshares, Inc. performed by RP Financial,
LC, an independent appraisal firm, and the purchase price per share. RP
Financial, LC will receive a fee of $50,000 for preparing the appraisal. The
factors considered in the appraisal are discussed under "The Conversion--Stock
Pricing and Number of Shares to be Issued."
The subscription offering expires at 10:00 a.m., Eastern time, on December
19, 2002, unless extended by Wayne Savings Bancshares, Inc. You cannot transfer
your subscription rights. If you attempt to transfer your rights, you may lose
the right to purchase shares and you may be subject to criminal prosecution
and/or other sanctions.
We also may offer shares of common stock to the general public in a
community offering. In this part of the offering, stockholders of Wayne Savings
Bancshares, Inc. as of November 11, 2002 will have first preference. People who
reside in the Ohio Counties of Wayne, Holmes, Ashland, Medina and Stark will
have second preference. The community offering will end on December 19, 2002,
unless extended with the approval of the Office of Thrift Supervision, if
necessary.
You will not pay a commission to buy any shares in the offering.
Ryan Beck & Co., Inc. is managing the offering on a "best efforts" basis
and will not purchase any shares of common stock in our offering. Ryan Beck &
Co., Inc. is a registered broker dealer and a member of the National Association
of Securities Dealers, Inc.
Shares not sold in the subscription offering and community offering may be
offered for sale in a syndicated community offering to the general public on a
best efforts basis by a selling group of broker-dealers managed by Ryan Beck &
Co., Inc.
We have described the offering in greater detail beginning on page 95 of
this prospectus.
The Exchange of Existing Shares of Wayne Savings Bancshares, Inc. Common
Stock
If you are now a stockholder of Wayne Savings Bancshares, Inc., your
existing shares will be cancelled and exchanged for shares in Wayne Savings
Bancshares, Inc. (our newly formed Delaware corporation). The number of shares
you will get will be based on an exchange ratio determined as of the closing of
the conversion. The actual number of shares you receive will depend upon the
number of shares we sell in our offering, which in turn will depend upon the
final appraised value of Wayne Savings Bancshares, Inc. and Wayne Savings
Bankshares, MHC. The following table shows how the exchange ratio will adjust,
based on the number of shares sold in our offering. The table also shows how
many shares a hypothetical owner of Wayne Savings Bancshares, Inc. common stock
would receive in the exchange, based on the number of shares sold in the
offering.
10
New shares
New shares to be exchanged to be
New shares to be sold for existing shares of Total shares received
in the offering Wayne Savings Bancshares, Inc. of common for 100
---------------------- ------------------------------ stock to be Exchange existing
Amount Percent Amount Percent outstanding Ratio shares
--------- --------- --------- --------- ----------- -------- ----------
Minimum............... 1,742,500 52.5% 1,575,594 47.5% 3,318,094 1.2901 129
Midpoint.............. 2,050,000 52.5 1,853,640 47.5 3,903,640 1.5177 151
Maximum............... 2,357,500 52.5 2,131,686 47.5 4,489,186 1.7454 174
15% above Maximum..... 2,711,125 52.5 2,451,439 47.5 5,162,564 2.0072 200
If you hold shares of Wayne Savings Bancshares, Inc. in "street name," you
do not need to take any action to exchange the shares. Stockholders who hold
stock certificates will receive, after the conversion and offering are
completed, a transmittal form with instructions to surrender stock certificates.
New certificates of Wayne Savings Bancshares, Inc. common stock will be mailed
within five business days after the exchange agent receives properly executed
transmittal forms and certificates.
No fractional shares of Wayne Savings Bancshares, Inc. common stock will
be issued to any public stockholder of Wayne Savings Bancshares, Inc. upon
consummation of the conversion. For each fractional share that would otherwise
be issued, Wayne Savings Bancshares, Inc. will pay an amount equal to the
product obtained by multiplying the fractional share interest to which the
holder would otherwise be entitled by the $10.00 per share subscription price.
In addition, if options to purchase shares of Wayne Savings Bancshares, Inc. are
exercised between November 11, 2002 and the consummation of the conversion, then
there will be an increase in the percentage of shares of Wayne Savings
Bancshares, Inc. held by public stockholders, an increase in the number of
shares issued to public stockholders in the share exchange, and a decrease in
the exchange ratio and the offering range. See "The Conversion - Share Exchange
Ratio."
Under federal regulations, current public stockholders of Wayne Savings
Bancshares, Inc. do not have dissenters' rights or appraisal rights.
Reasons for the Conversion
We are pursuing the conversion for the following reasons:
o The offering will increase our capital which will enable us to
continue to be a well-capitalized institution.
o The additional funds resulting from the offering will support
increased lending, continued growth and new financial products and
services.
Conditions to Completion of the Conversion
We cannot complete our conversion and related offering unless:
o The plan of conversion is approved by at least a majority of votes
eligible to be cast by members of Wayne Savings Bankshares, MHC;
o The plan of conversion is approved by at least two-thirds of the
outstanding shares of Wayne Savings Bancshares, Inc. common stock;
o The plan of conversion is approved by at least a majority of the
votes cast by stockholders of Wayne Savings Bancshares, Inc. common
stock, not including those shares held by Wayne Savings Bankshares,
MHC;
o We sell at least the minimum number of shares offered;
o We receive the final approval of the Office of Thrift Supervision to
complete the conversion and offering; and
11
o We receive the approval of the Ohio Division of Financial
Institutions of certain interim merger transactions involving Wayne
Savings Community Bank that will facilitate the completion of the
conversion.
Wayne Savings Bankshares, MHC intends to vote its 52.5% ownership interest
in favor of the conversion. In addition, as of September 30, 2002, directors and
executive officers of Wayne Savings Bancshares, Inc. and their associates
beneficially owned 233,544 shares of Wayne Savings Bancshares, Inc., or 9.1% of
the outstanding shares. They intend to vote those shares in favor of the plan of
conversion.
$10.00 Per Share Stock Pricing and Number of Shares to be Issued in the
Conversion and Offering
We are offering each share of stock at a price of $10.00 per share. The
amount of common stock we are offering is based on an independent appraisal of
the estimated market value of Wayne Savings Bancshares, Inc., assuming the
conversion and offering are completed. RP Financial, LC, the independent
appraiser, has estimated that, as of August 16, 2002, this market value was
between $33.2 million and $44.9 million, with a midpoint of $39.0 million. The
appraisal was based in part on Wayne Savings Bancshares, Inc.'s financial
condition and results of operations, and the effect of the additional capital
raised by the sale of common stock in the offering. Based on this valuation and
the approximate 52.5% ownership interest of Wayne Savings Bankshares, MHC being
sold in the offering, the Boards of Directors of Wayne Savings Bankshares, MHC
and Wayne Savings Bancshares, Inc. established an offering range of between
1,742,500 and 2,357,500 shares.
The independent appraisal will be updated prior to the completion of the
conversion. If the market value changes to either below $33.2 million or above
$51.6 million, subscribers will be notified and provided with the opportunity to
modify or cancel their orders. See "The Conversion--Stock Pricing and Number of
Shares to be Issued" on page 100 for additional details.
Reduced Stockholders' Rights
As a result of the conversion, existing stockholders of Wayne Savings
Bancshares, Inc., a federal corporation, will become stockholders of Wayne
Savings Bancshares, Inc., a Delaware corporation. The rights of stockholders of
the new Delaware corporation will be less than the rights stockholders currently
have. The decrease in stockholder rights results from differences in the
Delaware certificate of incorporation and bylaws, and from distinctions between
Delaware and federal law. The differences in stockholder rights under the
Delaware certificate of incorporation and bylaws are not mandated by Delaware
law (which generally does not establish specific terms and requirements for the
certificate of incorporation or bylaws of a Delaware corporation) but have been
chosen by management as being in the best interests of the corporation and all
of its stockholders. The differences in stockholder rights include the
following: (i) approval by at least 80% of outstanding shares required to remove
a director for cause; (ii) the inability of stockholders to call special
meetings; (iii) greater lead time required for stockholders to submit
stockholder proposals; (iv) approval by at least 80% of outstanding shares
required to amend the certificate of incorporation and bylaws; and (v) approval
by at least 80% of outstanding shares required to approve business combinations
involving an interested stockholder. See "Comparison of Stockholders' Rights" on
page 113 for a discussion of these differences.
Limits on How Much Common Stock You May Purchase
The minimum number of shares that you may purchase is 25.
If you are not now a Wayne Savings Bancshares, Inc. stockholder -
You, together with associates or persons acting in concert with you, may
not purchase more than 25,000 shares.
If you are now a Wayne Savings Bancshares, Inc. stockholder -
In addition to the above limitations, shares that you purchase in the
offering individually and together with associates or persons acting in concert
with you, plus shares you and they receive in exchange for existing Wayne
12
Savings Bancshares, Inc. common stock, may not exceed 5% of the shares of common
stock outstanding immediately following the offering.
For further discussion of the purchase limits and definitions of
"associate" and "acting in concert," including the final authority of our Board
of Directors to apply these definitions to particular circumstances, see "The
Conversion--Limitations on Common Stock Purchases" on page 108.
How You May Purchase Common Stock
You can subscribe for shares of common stock in the offering by delivering
a signed and completed original stock order form, together with full payment,
provided that we receive the stock order form before the end of the offering.
Following the instructions on the stock order form, you may use the mail or
overnight courier or hand deliver your subscription to the stock information
center. Payment for shares may be made by check, money order or bank draft which
will be immediately cashed, so the funds must be available in your account. We
will pay interest at Wayne Savings Community Bank's passbook rate, from the date
funds are received until completion or termination of the conversion.
Alternatively, subscribers may authorize withdrawal from the types of deposit
accounts with Wayne Savings Community Bank designated on the order form.
Withdrawals from certificates of deposit may be made without incurring an early
withdrawal penalty. All funds authorized for withdrawal from deposit accounts
with Wayne Savings Community Bank must be in the accounts at the time the stock
order is received. However, funds will not be withdrawn from the accounts until
the completion of the offering and will earn interest at the applicable deposit
account rate until the completion of the offering. A hold will be placed on
those funds when your stock order is received, making the designated funds
unavailable to you. After we receive an order, the order cannot be withdrawn or
changed, except with our consent.
Unless you have subscription rights to purchase shares, we have the
discretion to accept or reject your order. If we reject your order in part, you
will not have the right to cancel the remainder of your order.
For further information on how to purchase stock, see "The
Conversion--Procedure for Purchasing Shares" on page 106.
How We Intend to Use the Proceeds From the Offering
We will use the proceeds of the offering as follows:
o We estimate net proceeds will be between $16.0 million and $22.0
million. Approximately $8.0 million to $11.0 million of the net
proceeds will be invested in Wayne Savings Community Bank. Funds
invested in Wayne Savings Community Bank will be used to support
increased lending and to offer new products and banking services.
Wayne Savings Community Bank also may use such funds to expand its
branch network, though it has no immediate plans to do so.
Initially, the net proceeds received by Wayne Savings Community Bank
will be invested in federal funds, short-term investment-grade
securities and mortgage-backed securities. Wayne Savings Community
Bank expects to invest approximately $2.0 million in Village Savings
Bank, its savings bank subsidiary. Such funds will be used by
Village Savings Bank for general corporate purposes, including the
origination of loans and investment in federal funds, short-term
investment-grade securities and mortgage-backed securities.
o Wayne Savings Bancshares, Inc. intends to retain the balance of the
net proceeds (between $8.0 million and $11.0 million). A portion
(between $1.4 million and $1.9 million) will be used to provide a
loan to the employee stock ownership plan to fund the purchase of
common stock in the offering. The balance of the net proceeds
(between $6.6 million and $9.1 million) retained by Wayne Savings
Bancshares, Inc. will be used for general corporate purposes. These
purposes may include paying cash dividends, repurchasing shares of
common stock, or funding a recognition and retention plan. The net
proceeds may be used for future business diversification, branching
or acquisitions, although we do not have plans to do so now.
For further discussion, see "How We Intend to Use the Proceeds of the
Offering."
13
Purchases by Officers and Directors
We expect our directors and executive officers, together with their
families, to subscribe for 45,500 shares, which equals approximately 2.2% of the
shares sold at the midpoint of the offering range. The purchase price paid by
them will be the same $10.00 per share price paid by all other persons who
purchase shares in the offering. See "Subscriptions by Executive Officers and
Directors."
Benefits to Management and Potential Dilution to Stockholders Resulting from the
Conversion
Our employee stock ownership plan expects to purchase up to 8.0% of the
shares we sell in the offering, or 188,600 shares, assuming we sell the maximum
number of shares proposed to be sold. If we sell more than 2,357,500 shares in
the offering, the employee stock ownership plan will have first priority to
purchase shares over this maximum, up to a total of 8.0% of the shares sold.
This plan is a tax-qualified retirement plan for all eligible employees.
Assuming the employee stock ownership plan purchases 188,600 shares in the
offering, Wayne Savings Bancshares, Inc. will recognize additional compensation
expense of $1.9 million over a period of 20 years from the consummation of the
conversion, or approximately $94,300 per year, assuming the shares have a fair
market value of $10.00 per share for the full 20-year period. If, in the future,
the shares have a fair market value greater or less than $10.00, compensation
expense will increase or decrease accordingly.
We also intend to implement two additional stock-based incentive plans.
Neither plan will be implemented earlier than six months after the conversion,
and stockholder approval will be required. The stock recognition and retention
plan is a restricted stock plan that would reserve an amount equal to 4% of the
shares sold in the offering (assuming Wayne Savings Community Bank and Village
Savings Bank have a tangible capital-to-assets ratio in excess of 10%, on a
consolidated basis), or 94,300 shares at the maximum of the offering range, for
awards to key employees and directors, at no cost to the recipients. More than
4% of the shares sold in the offering may be reserved under the stock
recognition and retention plan if the plan is implemented more than one year
after the conversion. If the shares awarded under the stock recognition plan
come from authorized but unissued shares, stockholders would experience dilution
of approximately 2.1% in their ownership interest in Wayne Savings Bancshares,
Inc. The second plan would be a stock option plan, and would reserve an amount
equal to 10% of the shares sold in the offering, or up to 235,750 shares at the
maximum of the offering range, for key employees and directors upon their
exercise. If the shares issued upon the exercise of options come from authorized
but unissued shares, stockholders' ownership interest in Wayne Savings
Bancshares, Inc. would be diluted by approximately 5.0%. Awards made under these
plans would be subject to vesting over a period of years.
We will also convert options previously awarded under the Wayne Savings
Community Bank stock option plan into options to purchase our common stock, with
the number and exercise price to be adjusted, based on the exchange ratio. The
term and vesting period of the previously awarded options will remain unchanged.
The following table summarizes the number of shares and aggregate dollar
value of grants that are expected under the new stock recognition and retention
plan, the new stock option plan and the employee stock ownership plan as a
result of the conversion. A portion of the stock grants shown in the table below
would be made to non-management employees. The value of shares shown in the
table assumes a value of $10.00 per share, the price at which shares in the
offering will be sold.
14
Number of Shares to be Granted
---------------------------------------- Dilution
As a Resulting Value of Grants(1)
Percentage from --------------------------
At At of Common Issuance of At At
Minimum Maximum Stock to be Shares for Minimum Minimum
of Offering of Offering Sold in the Stock Benefits of Offering of Offering
Range Range Offering Plans Range Range
----------- ----------- ----------- ----------- ----------- -----------
Employee stock ownership plan... 139,400 188,600 8.0% N/A $1,394,000 $1,886,000
Recognition and retention plan.. 69,700 94,300 4.0% 2.1% 697,000 943,000
Stock option plan............... 174,250 235,750 10.0% 5.0% -- --
-------- -------- ----- ---------- ----------
Total........................ 383,350 518,650 22.0% 6.9% $2,091,000 $2,829,000
======== ======== ===== ========== ==========
- ----------
(1) The actual value of restricted stock grants will be determined based on
their fair value as of the date grants are made. For purposes of this
table, fair value is assumed to be the same as the offering price of
$10.00 per share. No value is given for options because their exercise
price will be equal to the fair market value of the common stock on the
day the options are granted. As a result, value can be received under an
option only if the market price of the common stock increases after the
option grant.
Market for Our Common Stock
Existing publicly held shares of our common stock trade on the Nasdaq
SmallCap Market under the symbol "WAYN." Upon completion of the conversion and
offering, the new shares of common stock of Wayne Savings Bancshares, Inc. will
replace existing shares and will be traded on the Nasdaq National Market. For a
period of 20 trading days following completion of our offering our symbol will
be "WAYND." Thereafter it will be "WAYN." Although it is expected that Wayne
Savings Bancshares, Inc. common stock will be more easily tradable after the
offering because there will be significantly more outstanding shares, there can
be no assurance of this.
Ryan Beck & Co., Inc. has advised us that it intends to remain a market
maker in the common stock and will assist us in obtaining additional market
makers.
Our Dividend Policy
Wayne Savings Bancshares, Inc. currently pays a cash dividend of $0.17 per
share per quarter, or $0.68 per share per year. See the computation of our
dividend payments at footnote 3 of "Selected Consolidated Financial and Other
Data of Wayne Savings Bancshares, Inc." at page 22. After the conversion, we
intend to pay a dividend of $0.132, $0.112, $0.097 and $0.085 per share per
quarter at the minimum, midpoint, maximum and adjusted maximum of the offering
range, respectively, which represents a dividend yield of 5.3%, 4.5%, 3.9% and
3.4%, at the minimum, midpoint, maximum and adjusted maximum of the offering
range, respectively, based upon a price of $10.00 per share. The amount of
dividends that we intend to pay after the conversion will preserve the current
aggregate dividend that Wayne Savings Bancshares, Inc. stockholders currently
receive. The dividend rate and the continued payment of dividends will depend on
a number of factors, including our capital requirements, our financial condition
and results of operations, tax considerations, statutory and regulatory
limitations, and general economic conditions. No assurance can be given that we
will continue to pay dividends or that they will not be reduced in the future.
Tax Consequences
The conversion will not be taxable under federal and Ohio income tax law
to Wayne Savings Bankshares, MHC, Wayne Savings Bancshares, Inc., Wayne Savings
Community Bank, or persons eligible to subscribe in the offering. A more
detailed description of the federal tax opinion that we received from our legal
counsel is set forth at page 111. The federal and state tax opinions are filed
as exhibits to our registration statement.
15
RISK FACTORS
You should consider carefully the following risk factors before deciding whether
to invest in our common stock.
If our actual loan losses exceed our allowance for loan losses, our earnings
could decrease.
Our loan customers may not repay their loans according to their terms, and
the value of the collateral securing the payment of these loans may be less than
the unpaid loan amount. Therefore, we may experience significant credit losses
that could have a material adverse effect on our operating earnings. Our ratio
of non-performing and impaired loans to total loans was 1.36% at June 30, 2002,
and exceeded that of our peer group of financial institutions. Non-performing
and impaired loans of $3.4 million consisted, in large part, of a $1.8 million
commercial business and real estate loan relationship and a $637,000
non-residential real estate loan. The latter loan has been considered impaired
since fiscal 2001, but was current at June 30, 2002 and at March 31, 2002 and
2001, and allocations to the allowance for loan losses were not considered
necessary at these dates. The $1.8 million loan relationship became delinquent
and was considered impaired during fiscal year 2002. There is a current
appraisal of more than $3.0 million supporting the loans' collateral, and no
allocation to the allowance has been made for these loans.
In determining the amount of the allowance for loan losses, we review
individual delinquent non-residential, multi-family and commercial business
loans for potential impairments in their carrying value. Additionally, we apply
a factor to the loan portfolio based on historical loss experience, the
composition of the loan portfolio and our perception of risk in the economy.
Because we must use assumptions regarding individual loans and the economy, our
current allowance for loan losses may not be sufficient to cover actual loan
losses, and increases in the allowance may be necessary. Consequently, we may
need to significantly increase our provision for loan losses, particularly if
one or more of our larger loans or credit relationships becomes delinquent of if
we expand our non-residential, multi-family or commercial business lending. In
addition, federal and state regulators periodically review our allowance for
loan losses and may require us to increase our provision for loan losses or
recognize loan charge-offs. Our allowance, calculated as described above,
represents 18.96% of our non-performing and impaired assets at June 30, 2002, a
level below that of our peer group of financial institutions. At June 30, 2002,
we believe that all known losses in the portfolio had been recorded; however,
material additions to our allowance would materially decrease our net income.
The growth of our branch network has increased our expenses and may continue to
reduce our profitability in the near term.
At March 31, 1998, Wayne Savings Community Bank had six branches. In July
1998, Village Savings Bank began operations through one office. In each of May
and July 1999 and May 2001, Wayne Savings Community Bank opened a new branch
and, in August 2001, a drive-through facility. As a result of this growth, our
general and administrative expenses have increased. New branches incur start-up
costs before they open for business. Thereafter, it takes time for a new branch
to generate sufficient loans and deposits to produce enough income to offset its
ongoing expenses, some of which, like compensation and occupancy costs, are
substantially fixed. At March 31, 1998, we employed 101 fulltime-equivalent
employees. We had 118 fulltime-equivalent employees at March 31, 2002. As a
result of the expenses associated with our new offices, our efficiency ratio,
which is the ratio of non-interest expense to net interest income and other
income, has been high. It was 68.2% for fiscal year 1998, prior to our
expansion. It climbed to 71.8% for the 1999 fiscal year, and 78.8% for the 2000
fiscal year, and has since improved to 77.8% for the 2001 fiscal year, 72.7% for
the 2002 fiscal year and 70.4% for the three months ended June 30, 2002.
Although Village Savings Bank became profitable during fiscal year 2001, there
can be no assurance whether or when our newer facilities will be accretive to
earnings. Numerous factors contribute to the performance of a new branch, such
as economic conditions, suitable location, qualified personnel and an efficient
marketing strategy.
Changing interest rates may cause earnings to decline.
To be profitable, we have to earn more interest income and other income
than we pay as interest on deposits and for other expenses, such as facilities
and personnel. Our loan portfolio consists primarily of fixed-rate loans that
generally either mature or reprice over a longer period of time than our
deposits. When interest rates fall,
16
many borrowers refinance their loans at lower rates and mortgage-backed
securities prepay. Under such circumstances, we are subject to reinvestment risk
to the extent that we are unable to reinvest the cash received from prepayments
at rates as high as those on existing loans and investments. This could cause
our net interest income to decrease. Due to the generally short-term nature of
our deposits, however, if interest rates rise, the amount of interest we pay on
deposits is likely to increase faster than the amount of interest we receive on
our loans, mortgage-backed securities and investment securities. This also could
cause our net interest income to decrease. Additionally, higher rates could make
it more difficult for borrowers to repay loans and could reduce loan demand.
Finally, the market value of our fixed-rate assets, including investment
securities, would decline if interest rates increase. For additional information
on our exposure to interest rates, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
Strong competition within our market area makes it difficult to achieve a
desired level of profitability.
Competition in the banking and financial services industry in Ohio is
intense. We compete for customers by offering quality service and competitive
rates on our loans and deposit products. In our market, we compete with
commercial banks, savings institutions, mortgage banking firms, credit unions,
finance companies, mutual funds, insurance companies, securities brokerage firms
and investment banking firms. Many of these competitors, such as regional banks,
have greater resources than we have, and offer services that we do not provide.
Moreover, many of our local competitors offer services through the Internet,
which we do not, and many larger institutions that do not have a physical
presence in our market area compete with us through the use of the Internet. Our
profitability depends upon our continued ability to successfully compete in our
market area.
In addition, the Gramm-Leach-Bliley Financial Services Modernization Act
of 1999 further deregulated the financial services industry by permitting
affiliations among commercial banks, insurance companies, securities firms and
other financial service providers. This legislation is likely to result in
further consolidation of the financial services industry. This could result in a
greater number of larger financial institutions that offer a broader range of
financial services than we currently offer and that can aggressively compete in
the markets we currently serve. This could adversely affect our profitability.
Future economic growth in our area may remain moderate.
Our loans and deposits are concentrated in our market area. Management
believes that economic growth in our market area may remain moderate in the
future. In the event that the growth of our local economy significantly slows
due to the general slowdown in the national economy or other factors, our
profitability will be affected adversely. We cannot assure you that in the
future there will be no business closings among the manufacturing and service
companies in our market area. An economic downturn may reduce loan demand and
the amount of funds customers keep on deposit with us, and may result in
increased nonperforming loans.
Our continuing concentration of loans in our primary market area may increase
our risk.
Our success depends primarily on the general economic conditions in north
central Ohio. Unlike larger banks that are more geographically diversified, we
provide banking and financial services to customers primarily in north central
Ohio. Local economic conditions there have a significant impact on our loans,
the ability of the borrowers to repay these loans and the value of the
collateral securing these loans. A significant decline in general economic
conditions caused by inflation, recession, unemployment or other factors beyond
our control would impact these local economic conditions and could negatively
affect the financial results of our banking operations if they negatively impact
timely repayment of loans by our borrowers. Additionally, because we have a
significant amount of loans secured by real estate, decreases in real estate
values also may have a negative effect on the collateral securing our loans.
Our low return on equity after the offering may cause our common stock price to
decline.
Our return on equity, or the amount we earn in relation to the amount of
equity we have, has been lower than that of many financial institutions. Our
return on average equity for the three months ended June 30, 2002 and the fiscal
years ended March 31, 2002, 2001 and 2000 was 8.4%, 7.1%, 5.3%, and 4.6%,
respectively. We cannot reinvest immediately in new loans all of the capital
raised in our offering, which will cause our return on equity to decrease
further. Our ability to profitably leverage our new capital will be affected
significantly by competition for
17
loans and deposits. Initially, we intend to invest the net proceeds in
short-term investments, which have lower yields than mortgage loans and other
loans. Until we can leverage our additional capital by increasing
interest-earning assets and interest-bearing liabilities, and until our
investment in new staff, branches and products is fully leveraged, we expect our
return on equity to continue to be below the industry average. This will
negatively impact the value of our common stock.
You may not be able to sell your shares when you desire, or for $10.00 or more
per share, and the trading price may be volatile.
Our common stock will trade on the Nasdaq National Market. We cannot
predict whether a liquid trading market in shares of our common stock will
develop or how liquid that market will be. Persons purchasing shares may not be
able to sell their shares when they desire if a liquid trading market does not
develop, or may not be able to sell them at a price equal to or above the
initial offering price of $10.00 per share, even if a liquid trading market
develops. In several cases, common stock issued by newly converted savings
institutions has traded below the price at which such shares were sold in the
initial public offerings of those companies. The purchase price of our common
stock in the offering is based on the independent appraisal by RP Financial, LC.
The appraisal is based on projections, and it is not intended as a
recommendation to purchase shares of stock. After our shares begin trading, the
trading price of our common stock will be determined by the marketplace, and may
be influenced by many factors, including prevailing interest rates, investor
perceptions and general industry and economic conditions. An investor should
understand that the value of any investment in common stock is subject to
fluctuation, including loss, due to volatility in stock markets generally or for
other reasons. Moreover, the price volatility of our stock may be unrelated to
our operating performance.
Our employee stock benefit plans will increase our costs, which will reduce our
income and stockholders' equity and may cause dilution to the ownership interest
of our stockholders.
We anticipate that our employee stock ownership plan will purchase 8.0% of
the common stock sold in the offering, with funds borrowed from Wayne Savings
Bancshares, Inc. The cost of acquiring the employee stock ownership plan shares
will be between $1,394,000 at the minimum of the offering range and $2,168,900
at the adjusted maximum of the offering range. We will record annual employee
stock ownership plan compensation expenses in an amount equal to the fair value
of shares committed to be released to employees. If shares of common stock
appreciate in value over time, compensation expense relating to the employee
stock ownership plan would increase. We also intend to implement a stock
recognition and retention plan. If the recognition and retention plan is
implemented within 12 months after the conversion, our officers and directors
could be awarded, at no cost to them, up to an aggregate of 4% of the shares
sold in the offering. In the event we implement the recognition and retention
plan more than 12 months after the conversion, the recognition and retention
plan would not be subject to an Office of Thrift Supervision regulation limiting
the plan to no more than 4% of the shares sold in the offering. Assuming the
shares of common stock to be awarded under the plan are repurchased in the open
market and cost $10.00 per share, the purchase price in the offering, the
reduction to stockholders' equity would be between $697,000 at the minimum of
the offering range and $1,084,450 at the adjusted maximum of the offering range,
if 4% of the shares sold in the offering were awarded. See "Pro Forma Data" for
a discussion of the increased benefit costs we will incur after the offering and
how these costs will decrease our return on equity. If a portion of the shares
used to (i) award stock under the recognition and retention plan or (ii) satisfy
the exercise of options from our stock option plan, is obtained from authorized
but unissued shares, stockholders' equity will not be reduced, but the increase
in outstanding shares will decrease our net income per share and book value per
share. Further, if the shares awarded under the recognition plan come from
authorized but unissued shares, the ownership interest of our stockholders would
be diluted by approximately 2.1%. If the shares issued upon the exercise of
options come from authorized but unissued shares, the interest of our
stockholders would be diluted by approximately 5.0%.
The expected voting control by management and employees may prevent stockholders
from taking actions opposed by management.
The shares of common stock that our directors and executive officers
intend to purchase in the offering, when combined with the shares already owned
and that may be awarded to participants under our benefit plans, could result in
management and employees controlling a significant percentage of our common
stock. If these individuals were to act together, they could have significant
influence over the outcome of any stockholder vote. In addition, the total
voting power of management and employees is likely to exceed 20% of our
outstanding stock.
18
That level would enable management and employees as a group to defeat any
stockholder matter that requires an 80% vote, such as certain proposed merger
transactions and certain amendments to our certificate of incorporation and
bylaws.
Various factors could make takeover attempts more difficult to achieve.
Our Board of Directors has no current intention to sell control of Wayne
Savings Bancshares, Inc. Provisions of our certificate of incorporation and
bylaws, federal and state regulations and various other factors may make it more
difficult for companies or persons to acquire control of Wayne Savings
Bancshares, Inc. without the consent of our Board of Directors. It is possible,
however, that you would want a takeover attempt to succeed because, for example,
a potential acquiror offers a premium over the then prevailing price of our
common stock. The factors that may discourage takeover attempts or make them
more difficult include:
o Anti-takeover provisions and statutory provisions. Provisions in the
certificate of incorporation and bylaws of Wayne Savings Bancshares,
Inc., the corporate law of the State of Delaware, and federal
regulations may make it difficult and expensive to pursue a takeover
attempt that management opposes. These provisions also will make the
removal of our current Board of Directors or management, or the
appointment of new directors, more difficult. These provisions
include: limitations on voting rights of beneficial owners of more
than 10% of our common stock; no cumulative voting; supermajority
voting requirements for certain business combinations; and the
election of directors to staggered terms of three years. Our bylaws
also contain provisions regarding the timing and content of
stockholder proposals and nominations and qualification for service
on the Board of Directors.
o Required change in control payments. We intend to enter into
employment agreements and change of control agreements with certain
executive officers that will require payments to be made to them in
the event their employment is terminated following a change in
control of Wayne Savings Bancshares, Inc. or Wayne Savings Community
Bank. These payments may have the effect of increasing the costs of
acquiring Wayne Savings Bancshares, Inc., thereby discouraging
future attempts.
o Office of Thrift Supervision regulations. Office of Thrift
Supervision regulations prohibit, for three years following the
completion of a mutual-to-stock conversion, the acquisition of more
than 10% of any class of equity security of a converted institution
without prior approval of the Office of Thrift Supervision. The
charter of Wayne Savings Community Bank also will include a
provision for a period of five years after the conversion, that
prohibits any person from acquiring or offering to acquire, directly
or indirectly, more than 10% of any class of equity security of
Wayne Savings Community Bank.
There is a decrease in the rights of stockholders under our Delaware certificate
of incorporation and bylaws.
As a result of the conversion, existing stockholders of Wayne Savings
Bancshares, Inc., a federal corporation, will become stockholders of Wayne
Savings Bancshares, Inc., a Delaware corporation. Stockholders of the new
Delaware corporation will have fewer rights than they currently have as
stockholders of the federal corporation. The differences in stockholder rights
under the Delaware certificate of incorporation and bylaws are not mandated by
Delaware law but have been chosen by management as being in the best interests
of the corporation and all of its stockholders.
For example, Wayne Savings Bancshares, Inc.'s current stockholders must
submit nominations for election of directors at an annual meeting of
stockholders and any new business to be taken up at such a meeting by filing the
proposal in writing with Wayne Savings Bancshares, Inc. at least five days
before the date of any such meeting. Wayne Savings Bancshares, Inc.'s Delaware
bylaws generally provide, however, that any stockholder desiring to make a
nomination for the election of directors or a proposal for new business at a
meeting of stockholders must submit written notice to Wayne Savings Bancshares,
Inc. at least 90 days prior to the anniversary date of the mailing of proxy
materials in connection with the immediately preceding annual meeting of
stockholders. Similarly, special meetings of Wayne Savings Bancshares, Inc.'s
current stockholders may be called by the holders of not less than one-tenth of
the outstanding capital stock entitled to vote at the meeting. Wayne Savings
Bancshares, Inc.'s
19
Delaware certificate of incorporation provides that special meetings of the
stockholders of Wayne Savings Bancshares, Inc. may be called only by a majority
vote of the total authorized directors. See "Comparison Of Stockholders' Rights"
on page 113 for a discussion of these differences.
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements, which can be
identified by the use of such words as estimate, project, believe, intend,
anticipate, plan, seek, expect and similar expressions. These forward-looking
statements include:
o statements of our goals, intentions and expectations;
o statements regarding our business plans, prospects, growth and
operating strategies;
o statements regarding the asset quality of our loan and investment
portfolios; and
o estimates of our risks and future costs and benefits.
These forward-looking statements are subject to significant risks,
assumptions and uncertainties, including, among other things, the following
important factors that could affect the actual outcome of future events:
o general economic conditions, either nationally or in our market
areas, that are worse than expected;
o significantly increased competition among depository and other
financial institutions;
o inflation and changes in the interest rate environment that reduce
our margins or reduce the fair value of financial instruments;
o adverse changes in the securities markets;
o legislative or regulatory changes that adversely affect our
business;
o our ability to enter new markets successfully and capitalize on
growth opportunities;
o changes in consumer spending, borrowing and savings habits;
o changes in accounting policies and practices, as may be adopted by
the bank regulatory agencies and the Financial Accounting Standards
Board; and
o changes in our organization, compensation and benefit plans.
Because of these and other uncertainties, our actual future results may be
materially different from the results indicated by these forward-looking
statements. We discuss some of these uncertainties and others in "Risk Factors"
beginning on page 16.
20
SELECTED CONSOLIDATED FINANCIAL AND OTHER DATA
OF WAYNE SAVINGS BANCSHARES, INC.
The following tables set forth selected consolidated historical financial
and other data of Wayne Savings Bancshares, Inc. for the periods and at the
dates indicated. The information at June 30, 2002, and for the three months
ended June 30, 2002 and 2001 is unaudited. However, in the opinion of
management, all adjustments (consisting only of normal recurring accruals)
necessary for a fair presentation of financial position and results of
operations have been made. The financial information for the years ended March
31, 2002, 2001 and 2000 (restated as to fiscal 2001 and 2000, as further
discussed in footnote (1) on the following page, which references reports
previously filed with the Securities and Exchange Commission discussing the
restatements), is derived in part from, and should be read together with, the
audited Consolidated Financial Statements and Notes thereto of Wayne Savings
Bancshares, Inc. beginning at page F-1 of this prospectus. The information at
March 31, 2000, 1999 and 1998 and for the years ended March 31, 1999 and 1998
was derived in part from audited consolidated financial statements that are not
included in this prospectus.
At March 31,
At June 30, --------------------------------------------------------
2002 2002 2001 2000 1999 1998
-------- -------- -------- -------- -------- --------
(In thousands, except per share amounts)
Selected Financial Condition Data:
Total assets ........................... $334,606 $334,843 $311,640 $304,030 $270,954 $259,711
Loans receivable, net(1) ............... 247,230 251,172 247,480 237,418 215,636 207,879
Mortgage-backed securities(2) .......... 17,783 17,326 8,574 10,459 7,230 4,275
Investment securities .................. 20,500 22,286 13,641 23,199 11,830 13,401
Cash and cash equivalents(3) ........... 32,957 27,883 20,902 14,296 16,245 13,169
Deposits ............................... 300,737 300,957 277,706 264,952 235,327 217,621
Stockholders' equity ................... 26,427 26,047 25,255 24,962 24,900 24,385
Book value per common share(4) ......... $ 10.27 $ 10.13 $ 9.78 $ 9.60 $ 9.55 $ 10.29
- ----------
(1) Includes loans held for sale.
(2) Includes mortgage-backed securities available for sale.
(3) Includes cash due from banks, interest-bearing deposits in other financial
institutions and federal funds sold.
(4) Adjusted to reflect all stock splits and stock dividends effected during
the relevant periods.
21
Three Months Ended
June 30, For the Years Ended March 31,
------------------- -----------------------------------------------------
2002 2001 2002 2001 2000 1999 1998
-------- -------- -------- -------- -------- -------- --------
(In thousands, except per share amounts)
Selected Operating Data:(1)
Interest income .............................. $ 5,049 $ 5,416 $ 21,309 $ 21,506 $ 20,700 $ 19,234 $ 19,236
Interest expense ............................. 2,498 3,344 12,348 13,100 12,014 11,187 11,084
-------- -------- -------- -------- -------- -------- --------
Net interest income .......................... 2,551 2,072 8,961 8,406 8,686 8,047 8,152
Provision for losses on loans ................ 17 2 134 96 106 78 60
-------- -------- -------- -------- -------- -------- --------
Net interest income after provision for
losses on loans ............................. 2,534 2,070 8,827 8,310 8,580 7,969 8,092
Other income ................................. 344 364 1,657 1,045 748 985 854
General, administrative and other expense .... 2,039 1,874 7,722 7,348 7,434 6,488 6,144
-------- -------- -------- -------- -------- -------- --------
Earnings before income taxes ................. 839 560 2,762 2,007 1,894 2,466 2,802
Federal income taxes ......................... 285 185 939 675 624 838 953
-------- -------- -------- -------- -------- -------- --------
Net earnings before change in accounting
principle ................................... 554 375 1,823 1,332 1,270 1,628 1,849
Change in accounting principle related
to allocated organizational costs, net
of taxes of $63,000 ......................... -- -- -- -- (122) -- --
-------- -------- -------- -------- -------- -------- --------
Net earnings ................................. $ 554 $ 375 $ 1,823 $ 1,332 $ 1,148 $ 1,628 $ 1,849
======== ======== ======== ======== ======== ======== ========
Earnings per share:
Basic (2)
Earnings before cumulative change in
accounting principle ........................ $ .22 $ .15 $ .71 $ .51 $ .49 $ .62 $ .71
Cumulative change in accounting principle .... -- -- -- -- (.05) -- --
-------- -------- -------- -------- -------- -------- --------
Basic earnings per share ..................... $ .22 $ .15 $ .71 $ .51 $ .44 $ .62 $ .71
======== ======== ======== ======== ======== ======== ========
Diluted earnings per share (2)
Earnings before cumulative change in
accounting principle ........................ $ .21 $ .15 $ .71 $ .51 $ .49 $ .62 $ .70
Cumulative change in accounting principle .... -- -- -- -- (.05) -- --
-------- -------- -------- -------- -------- -------- --------
Diluted earnings per share ................... $ .21 $ .15 $ .71 $ .51 $ .44 $ .62 $ .70
======== ======== ======== ======== ======== ======== ========
Cash dividends declared per common share
(2)(3) ...................................... $ .17 $ .17 $ .68 $ .64 $ .64 $ .59 $ .54
======== ======== ======== ======== ======== ======== ========
- ----------
(1) In connection with the offering, during fiscal 2002 management reviewed
and restated the consolidated financial statements for the years ended
March 31, 2001, 2000 and 1999 to present certain matters in accordance
with generally accepted accounting principles. First, management restated
the consolidated financial statements to include as expenses certain
operating costs that were previously paid or reimbursed by Wayne Savings
Bankshares, MHC. The adjustment related to the reimbursements resulted in
a reduction of net earnings of $90,000, or $.03 per diluted share,
$157,000, or $.06 per diluted share (including $185,000 in previously
reimbursed organization costs, which are reflected net of $63,000 in
federal income taxes), and $11,000, or $.00 per diluted share, for each of
the three years ended March 31, 2001, 2000 and 1999, respectively, which
were substantially offset by a $258,000 increase to stockholders' equity
as a result of a reduction in cash dividends paid to Wayne Savings
Bankshares, MHC. Additionally, management restated Wayne Savings
Bancshares, Inc.'s 2001, 2000 and 1999 consolidated financial statements
for various adjustments related to depreciation expense and other
adjustments. These adjustments resulted in a decrease in net earnings of
$39,000, or $.02 per diluted share in fiscal 2001, an increase in net
earnings of $54,000, or $.02 per diluted share in fiscal 2000, and a
decrease of $4,000, or $.00 per diluted share in fiscal 1999. The combined
effect of all adjustments resulted in a reduction in net earnings of
$129,000, or $.05 per diluted share in fiscal 2001, $103,000, or $.04 per
diluted share in fiscal 2000, and $15,000, or $.00 per diluted share in
fiscal 1999. The cumulative effect of these adjustments on stockholders'
equity at March 31, 2001, was a decrease of $30,000, or $.01 per diluted
share. For additional information regarding the restatement, we refer you
to Note R to the restated consolidated financial statements contained in
our Annual Report on Form 10-KSB, as amended, for the fiscal year ended
March 31, 2001, which was filed with the Securities and Exchange
Commission on October 15, 2002, and the note entitled "Restatement of
Consolidated Financial Statements" in our Quarterly Report on Form 10-QSB,
as amended, for the three and nine months ended December 31, 2001, which
was filed with the Securities and Exchange Commission on October 1, 2002.
We also refer you to the Management's Discussion and Analysis of Financial
Condition and Results of Operations, beginning on page 41 of this
prospectus, for a discussion of the restatement.
(2) Adjusted to reflect all stock splits and stock dividends during the
relevant periods.
(3) During the three months ended June 30, 2002 and 2001, and the fiscal years
ended March 31, 1998 and March 31, 1999, Wayne Savings Bankshares, MHC
waived its right to receive all dividends paid by Wayne Savings
Bancshares, Inc. During fiscal years ended March 31, 2001 and 2000, Wayne
Savings Bankshares, MHC waived $.63 and $.59 per share, respectively, of
the $.64 dividend paid per share in each respective year. During fiscal
2002, Wayne Savings Bankshares, MHC waived the receipt of $.65 per share
of the $.68 dividend paid per share of common stock.
(footnotes continued on following page)
22
Total dividends paid for each of the three month periods ended June 30,
2002 and 2001, and years ended March 31, 2002, 2001 and 2000 are computed as
follows:
For the three months ended June 30,
------------------------------------------------------------------------------------------
2002 2001
------------------------------------------- ---------------------------------------------
Dividend Dividend Number of Percentage Dividend Dividend Number of Percentage
Amount Percentage Shares Ownership Amount Percentage Shares Ownership
-------- -------- --------- ---------- -------- -------- --------- ----------
(Dollars in thousands)
Dividends/shares held by public (1).. $ 207 100.00% 1,221,322 47.48% $ 205 100.00% 1,220,394 47.47%
Dividends/shares held by MHC ........ -- 0.00% 1,350,699 52.52% -- 0.00% 1,350,699 52.53%
------- ------- --------- ------- ------- ------- --------- -------
$ 207 100.00% 2,572,021 100.00% $ 205 100.00% 2,571,093 100.00%
======= ======= ========= ======= ======= ======= ========= =======
For the year ended March 31, 2002,
-------------------------------------------
Dividend Dividend Number of Percentage
Amount Percentage Shares Ownership
-------- -------- --------- ----------
(Dollars in Thousands)
Dividends/shares held by public (1).. $ 827 97.07% 1,220,122 47.46%
Dividends/shares held by MHC ........ 25 2.93% 1,350,699 52.54%
--------- ------ --------- ------
$ 852 100.00% 2,570,821 100.00%
========= ====== ========= ======
For the year ended March 31,
------------------------------------------------------------------------------------------
2001 2000
------------------------------------------- ---------------------------------------------
Dividend Dividend Number of Percentage Dividend Dividend Number of Percentage
Amount Percentage Shares Ownership Amount Percentage Shares Ownership
-------- -------- --------- ---------- -------- -------- --------- ----------
(Dollars in thousands)
Dividends/shares held by public (1).. $ 798 99.75% 1,231,094 47.68% $ 807 91.50% 1,248,316 48.03%
Dividends/shares held by MHC ........ 2 0.25% 1,350,699 52.32% 75 8.50% 1,350,699 51.97%
--------- ------ --------- ------ --------- ------ --------- ------
$ 800 100.00% 2,581,793 100.00% $ 882 100.00% 2,599,015 100.00%
========= ====== ========= ====== ========= ====== ========= ======
- ----------
(1) The shares held by the public are net of treasury shares.
23
At or For the Three
Months Ended June 30, At or For the Years Ended March 31,
--------------------- --------------------------------------------------
2002 2001 2002 2001 2000 1999 1998
------ ------ ------ ------ ------ ------ ------
Key Operating Ratios and Other Data (1):
Return on average assets (net earnings
divided by average total assets) (2) .66% .48% .56% .45% .39% .62% .73%
Return on average equity (net earnings
divided by average stockholders'
equity) (2) ........................ 8.43 5.94 7.12 5.28 4.57 6.85 7.72
Interest rate spread (difference
between average yield on
interest-earning assets and average
cost of interest-bearing
liabilities) ....................... 3.13 2.55 2.77 2.57 2.88 2.93 2.98
Net interest margin (net interest
income as a percentage of average
interest-earning assets) ........... 3.25 2.78 2.93 2.92 3.14 3.23 3.34
Average interest-earning assets to
average interest-bearing liabilities 103.65 105.00 103.98 107.62 106.05 106.99 108.02
Net interest income after provision
for losses on loans, to general,
administrative and other expense (3) 124.28 110.46 114.31 113.31 115.51 124.95 131.71
General, administrative and other
expense to average assets (2)(3) ... 2.43 2.40 2.39 2.46 2.54 2.50 2.42
Efficiency ratio (4) .................. 70.43 76.93 72.73 77.75 78.80 71.83 68.22
Dividend payout ratio ................. 37.36 54.67 46.74 60.06 76.83 46.20 36.45
Asset Quality Ratios:
Non-performing and impaired loans to
loans receivable, net .............. 1.36 .39 1.52 .47 .48 .13 .15
Non-performing and impaired assets to
total assets ....................... 1.00 .93 1.14 .41 .40 .12 .48
Allowance for loan losses to
non-performing and impaired loans .. 18.96 22.33 19.16 56.47 69.56 247.14 234.09
Allowance for loan losses to
non-performing and impaired assets . 18.96 22.18 19.07 51.01 64.47 215.58 57.50
Allowance for loan losses to total
loans .............................. .26 .26 .29 .27 .33 .32 .35
Capital Ratios:
Average stockholders' equity to
average assets ..................... 7.84 8.07 7.93 8.44 8.57 9.07 9.42
Stockholders' equity to assets at
period end ............................ 7.90 7.97 7.78 8.10 8.21 9.19 9.39
Regulatory Capital of Wayne Savings
Community Bank (5):
Tangible capital ...................... 7.89 7.89 7.79 8.12 8.07 8.59 9.13
Core capital .......................... 7.89 7.89 7.79 8.12 8.07 8.59 9.13
Risk-based capital .................... 15.57 15.14 14.13 15.65 15.81 16.39 17.37
Other Data:
Number of full-service offices (5) .... 10 10 10 9 9 7 6
- ----------
(1) Annualized where appropriate.
(2) Calculated using monthly averages from consolidated statements of financial
condition.
(3) In calculating this ratio, general, administrative and other expense does
not include provisions for losses or gains on the sale of real estate
acquired through foreclosure.
(4) Represents the ratio of non-interest expense divided by the sum of net
interest income and other income.
(5) Consolidated with Village Savings Bank.
24
RECENT DEVELOPMENTS
The following tables set forth selected consolidated financial and other
data of Wayne Savings Bancshares, Inc. for the periods and at the dates
indicated. The selected data presented below under the captions "Selected
Financial Condition Data" and "Selected Operating Data" at and for the three and
six month periods ended September 30, 2002 and 2001 are unaudited but in the
opinion of management of Wayne Savings Bancshares, Inc., contain all adjustments
(none of which were other than normal recurring accruals) necessary for a fair
presentation of financial position and results of operations. The selected
operating data presented below for the three and six months ended September 30,
2002 are not necessarily indicative of the results that may be expected for
future periods. This information should be read in conjunction with the
Consolidated Financial Statements and Notes thereto presented elsewhere in this
prospectus.
At September 30, At March 31,
2002 2002
-------- -----------
(In thousands)
Selected Financial Condition Data:
Total assets .................................... $337,012 $334,843
Loans receivable, net (1) ....................... 244,593 251,172
Mortgage-backed securities (2) .................. 30,923 17,326
Investment securities (3) ....................... 21,344 22,286
Cash and cash equivalents (4) ................... 24,234 27,883
Deposits ........................................ 302,358 300,957
Stockholders' equity - net ...................... 26,873 26,047
Book value per common share ..................... $ 10.44 $ 10.13
For the Six Months For the Three Months
Ended September 30, Ended September 30,
----------------- --------------------
2002 2001 2002 2001
------- ------- ------- -------
(In thousands)
Selected Operating Data:
Interest income .................................. $9,926 $10,746 $4,877 $5,330
Interest expense ................................. 4,798 6,556 2,300 3,212
------- ------- ------- -------
Net interest income .............................. 5,128 4,190 2,577 2,118
Provision for losses on loans .................... 38 97 21 95
------- ------- ------- -------
Net interest income after
provision for losses on loans .................. 5,090 4,093 2,556 2,023
Other income ..................................... 705 797 361 433
General, administrative and other expense ........ 4,048 3,705 2,009 1,831
------- ------- ------- -------
Earnings before income taxes ..................... 1,747 1,185 908 625
Federal income taxes ............................. 586 398 301 213
------- ------- ------- -------
Net earnings ..................................... $1,161 $787 $607 $412
======= ======= ======= =======
Basic and diluted earnings per share (5) ......... $.45 $.31 $.24 $.16
==== ==== ==== ====
Cash dividends declared per common share (6) ..... $.34 $.33 $.17 $.17
- ----------
(1) Includes loans held for sale.
(2) Includes mortgage-backed securities available for sale.
(3) Includes certificates of deposit in other financial institutions.
(4) Includes cash and due from banks, interest-bearing deposits in other
financial institutions, and federal funds sold.
(5) Basic earnings per share is based on 2,572,515, 2,572,595, 2,573,800, and
2,571,093 weighted shares outstanding for the six months ended September
30, 2002 and 2001 and the three months ended September 30, 2002 and 2001,
respectively. Diluted earnings per share is based on 2,581,714, 2,584,168,
2,582,903, and 2,583,232 weighted shares outstanding for the six months
ended September 30, 2002 and 2001 and the three months ended September 30,
2002 and 2001, respectively.
(6) During the six months ended September 30, 2002 and 2001 and the three
months ended September 30, 2002 and 2001, Wayne Savings Bankshares, MHC
waived its right to receive all dividends paid by Wayne Savings Bancshares,
Inc.
25
At or For the At or For the
Six Months Ended Three Months Ended
September 30, September 30,
-------------------- -------------------
2002(1) 2001(1) 2002(1) 2001(1)
------- ------- ------- -------
Key Operating Ratios and Other Data (2) (3):
Return on average assets (net earnings
divided by average total assets) ............................... .69% .50% .72% .52%
Return on average equity (net earnings
divided by average stockholders' equity) ....................... 8.75 6.19 9.06 6.53
Interest rate spread (difference between average yield on interest-
earning assets and average cost of interest-bearing liabilities) 3.10 2.61 3.08 2.58
Net interest margin (net interest income
as a percentage of average interest-earning assets) ............ 3.23 2.80 3.22 2.79
Average interest-earning assets to average
interest-bearing liabilities ................................... 104.34 104.36 105.03 104.78
Net interest income after provision for losses on
loans, to general, administrative and other expenses ........... 125.47 110.47 126.68 110.49
General, administrative and other expense
to average assets .............................................. 2.41 2.35 2.38 2.30
Efficiency ratio .................................................. 69.40 74.29 68.38 71.78
Dividend payout ratio ............................................. 35.75 51.39 34.21 50.36
Asset Quality Ratios:
Non-performing and impaired loans to total loans
receivable, net ................................................ 1.22% 1.59% 1.22% 1.59%
Non-performing and impaired assets to total assets ................ .89 1.26 .89 1.26
Allowance for loan losses to non-performing
and impaired loans ............................................. 21.73 18.15 21.73 18.15
Allowance for loan losses to non-performing
and impaired assets ............................................ 21.73 18.07 21.73 18.07
Allowance for loan losses to total loans .......................... .27 .28 .27 .28
Capital Ratios:
Average stockholders' equity to average assets .................... 7.87% 8.06% 7.89% 8.20%
Stockholders' equity to assets at period end ...................... 7.97 7.82 7.97 7.82
Regulatory Capital of Wayne Savings Community Bank(4):
Tangible capital .................................................. 7.88 7.75 7.88 7.75
Core capital ...................................................... 7.88 7.75 7.88 7.75
Risk-based capital ................................................ 15.50 14.38 15.50 14.38
- ----------
(1) Ratios for three and six month periods have been annualized where
appropriate.
(2) Averages presented are monthly averages.
(3) Annualized where appropriate.
(4) Consolidated with Village Savings Bank.
Comparison of Financial Condition at September 30, 2002 and March 31, 2002
At September 30, 2002, we had total assets of $337.0 million, an increase
of $2.2 million, or .6%, from March 31, 2002 levels.
Liquid assets consisting of cash, interest-bearing deposits, and
investment securities decreased by $4.6 million, or 9.2%, to $45.6 million at
September 30, 2002. Mortgage-backed securities increased by $13.6 million, or
78.5%, to $30.9 million as management redeployed excess liquid assets into
higher-yielding assets. The increase was also funded through a reduction in our
loan portfolio totaling $6.6 million, or 2.6%, to $244.6 million, which
generally resulted from higher loan prepayments as borrowers chose to refinance
their loans in the declining interest rate environment. In view of the low
interest rate environment, we chose not to be among the market leaders in loan
pricing.
Non-performing and impaired loans of $2.4 million consisted in large part
of a $1.8 million commercial business and real estate loan relationship which
became delinquent and was considered impaired during fiscal year 2002. There is
a current appraisal of more than $3.0 million supporting the loans' collateral
and no allocation to the allowance has been made for these loans.
26
Deposits at September 30, 2002, totaled $302.4 million, an increase of
$1.4 million from $301.0 million at March 31, 2002. The growth in the deposit
base largely reflected depositors' preference for federally insured deposits
compared to investing in equity securities.
Stockholders' equity increased by $826,000 during the six months ended
September 30, 2002, as $1.2 million in net earnings for the six months ended
September 30, 2002 was partially offset by dividends paid totaling $416,000.
Comparison of Operating Results for the Six Months Ended September 30, 2002 and
2001
General. Net earnings totaled $1.2 million for the six months ended
September 30, 2002, an increase of $374,000, or 47.5%, over $787,000 of net
earnings for the six months ended September 30, 2001. The growth in net earnings
was primarily attributable to an increase in net interest income of $938,000, or
22.4%, coupled with a decrease in the provision for losses on loans of $59,000,
or 60.8%, which were partially offset by a $92,000, or 11.5%, reduction in other
income, a $343,000, or 9.3%, increase in general, administrative and other
expense and a $188,000, or 47.2%, increase in federal income tax expense.
Interest Income. Interest income on loans declined $839,000, or 8.8%, for
the six months ended September 30, 2002, due primarily to a 55 basis-point
decrease in the weighted average yield on loans to 7.07%, as well as a $4.3
million, or 1.7%, reduction in weighted average loans outstanding from the
comparable 2001 period.
Interest income on mortgage-backed securities increased $156,000, or
62.7%, during the six months ended September 30, 2002, due primarily to a $12.9
million, or 167.2%, increase in the weighted average balance outstanding from
the comparable 2001 period, which was partially offset by a decrease in the
average yield of 253 basis points to 3.94%.
Interest income on investments and interest-bearing deposits decreased by
$137,000, or 15.1%, generally reflecting the downward trend in the level of
market interest rates.
Interest expense. Interest expense for the six months ended September 30,
2002 totaled $4.8 million, a decrease of $1.8 million, or 26.8%, from interest
expense of $6.6 million for the six months ended September 30, 2001. The
decrease resulted from a 141 basis point decrease in the average cost of funds
to 3.16% for the 2002 period, which was partially offset by an increase in the
average balance of deposits and borrowings outstanding of $17.2 million, or
6.0%, to $303.9 million for the period ended September 30, 2002.
Interest expense on deposits totaled $4.7 million for the six months ended
September 30, 2002, a decrease of $1.7 million, or 27.0%, from the six months
ended September 30, 2001, as a result of a 144 basis point decrease in the
average cost of deposits to 3.12% for the 2002 period, which was partially
offset by an increase in the average balance outstanding of $18.2 million, or
6.5%, to $298.9 million for the 2002 period.
Interest expense on borrowings totaled $131,000 for the six months ended
September 30, 2002, a decrease of $29,000, or 18.1%, from the 2001 period, as a
result of a decrease in the average cost of borrowings to 5.24%, coupled with a
decrease in the average balance of borrowings to $5.0 million for the six months
ended September 30, 2002 from $6.0 million for the six months ended September
30, 2001.
Net Interest Income. Net interest income totaled $5.1 million for the six
months ended September 30, 2002, an increase of $938,000, or 22.4%, from the six
month period ended September 30, 2001. The average interest rate spread
increased to 3.10% for the six months ended September 30, 2002 from 2.61% for
the six months ended September 30, 2001. The net interest margin increased to
3.23% for the six months ended September 30, 2002 from 2.80% for the six months
ended September 30, 2001.
Provision for Losses on Loans. We recorded provisions for losses on loans
totaling $38,000 and $97,000 for the six-month periods ended September 30, 2002
and 2001, respectively. To the best of management's knowledge, all known and
inherent losses that are probable and can be reasonably estimated have been
recorded as of September 30, 2002 and 2001.
27
Other Income. Other income, consisting primarily of gains on sale of
loans, service fees, and charges on deposit accounts, decreased by $92,000, or
11.5%, to $705,000 for the six months ended September 20, 2002, from $797,000
for the six months ended September 30, 2001. The decline resulted primarily from
a reduction of $195,000, or 92.4%, in gains on sale of loans. Management chose
to retain rather then sell higher-yielding current loans in view of rapid loan
prepayments. Service fees, charges, and other operating income increased by
$103,000, or 17.6%, to $689,000, for the six months ended September 30, 2002,
due primarily to an enhanced service fee structure implemented on deposit
accounts and credit cards, and to increased debit card fees.
General, Administrative, and Other Expense. General, administrative and
other expense increased by $343,000, or 9.3%, to $4.0 million for the six months
ended September 30, 2002 compared to the six months ended September 30, 2001.
The increase resulted primarily from a $195,000, or 9.3%, increase in employee
compensation and benefits, a $65,000, or 9.6%, increase in occupancy and
equipment expense, a $66,000, or 8.6%, increase in other operating expense, and
a $18,000, or 13.2%, increase in state franchise taxes. The increase in employee
compensation and benefits was primarily attributable to normal merit increases,
an increase in employee benefit plan costs and additional staff needed for
operating a new full service branch opened in May 2001 and a new drive-through
facility opened in August 2001. The increase in occupancy and equipment expense
was primarily attributable to costs incurred in connection with the new
operating facilities. The increase in other operating expense was primarily
attributable to increased professional fees coupled with increased costs related
to credit cards. The increase in franchise taxes reflected increased capital
period-to-period.
Management is considering, but the Board of Directors has not yet
authorized, an investment by Wayne Savings Community Bank of up to $5.0 million
in Bank Owned Life Insurance (commonly referred to as BOLI), a tax-advantaged
financing transaction that is commonly used to offset employee benefit plan
costs. Wayne Savings Community Bank would be the owner and beneficiary of life
insurance policies on certain officers and the bank would record tax-free income
through cash surrender value accumulation.
Federal Income Taxes. The provision for federal income taxes was $586,000
for the six months ended September 30, 2002, an increase of $188,000, or 47.2%,
compared to the same period in 2001. The increase resulted primarily from a
$562,000, or 47.4%, increase in pretax earnings. The effective tax rate for the
six months ended September 30, 2002 was 33.5% as compared to 33.6% for the same
period in 2001.
Comparison of Operating Results for the Three Months Ended September 30, 2002
and 2001
General. Net earnings totaled $607,000 for the three months ended
September 30, 2002, an increase of $195,000, or 47.3%, over $412,000 of net
earnings for the three months ended September 30, 2001. The growth in net
earnings was primarily attributable to an increase in net interest income of
$459,000, or 21.7%, coupled with a decrease in the provision for losses on loans
totaling $74,000, or 77.9%, which were partially offset by a $72,000, or 16.6%,
reduction in other income, a $178,000, or 9.7%, increase in general,
administrative and other expense and a $88,000, or 41.3%, increase in federal
income tax expense.
Interest Income. Interest income on loans declined $478,000, or 10.0%, for
the three months ended September 30, 2002, due primarily to a 41 basis-point
decrease in the weighted average yield on loans to 7.01%, as well as a $12.2
million, or 4.7%, reduction in weighted average loans outstanding from the
comparable 2001 period.
Interest income on mortgage-backed securities increased during the three
months ended September 30, 2002 by $65,000, or 55.1%, due primarily to a $15.7
million, or 211.6%, increase in the weighted average balance outstanding from
the comparable 2001 period, which was partially offset by a decrease in the
average yield of 320 basis points to 3.17%.
Interest income on investments and interest-bearing deposits decreased by
$40,000, or 9.6%, due to a decrease of 139 basis points in the weighted average
yield to 2.99%, which was partially offset by an increase in the weighted
average outstanding balance of $12.3 million, or 32.3%, to $50.4 million.
Interest expense. Interest expense for the quarter ended September 30,
2002 totaled $2.3 million, a decrease of $912,000, or 28.4%, from interest
expense of $3.2 million for the three months ended September 30, 2001. The
decrease
28
resulted from a 141 basis point decrease in the average cost of funds to 3.02%
in the 2002 quarter, which was partially offset by an increase in the average
balance of deposits and borrowings outstanding of $14.3 million, or 4.9%, to
$304.5 million for the quarter ended September 30, 2002.
Interest expense on deposits totaled $2.2 million for the three months
ended September 30, 2002, a decrease of $900,000, or 28.7%, from the three
months ended September 30, 2001, as a result of a 143 basis point decrease in
the average cost of deposits to 2.98% for the 2002 period, which was partially
offset by a $15.3 million, or 5.4%, increase in the average balance outstanding
to $299.5 million for the 2002 period.
Interest expense on borrowings totaled $66,000 for the quarter ended
September 30, 2002, a decrease of $12,000, or 15.4%, from the 2001 period, as a
result of a decrease in the average balance of borrowings to $5.0 million for
the three months ended September 30, 2002 from $6.0 million for the three months
ended September 30, 2001, which was partially offset by an eight basis point
increase in the average cost of borrowings to 5.28% for the quarter ended
September 30, 2002.
Net Interest Income. Net interest income totaled $2.6 million for the
three months ended September 30, 2002, an increase of $459,000, or 21.7%, over
the three month period ended September 30, 2001. The average interest rate
spread increased to 3.08% for the three months ended September 30, 2002 from
2.58% for the three months ended September 30, 2001. The net interest margin
increased to 3.22% for the three months ended September 30, 2002 from 2.79% for
the three months ended September 30, 2001.
Provision for Losses on Loans. We recorded provisions for losses on loans
totaling $21,000 and $95,000 for the three-month periods ended September 30,
2002 and 2001, respectively. To the best of management's knowledge, all known
and inherent losses that are probable and can be reasonably estimated have been
recorded as of September 30, 2002 and 2001.
Other Income. Other income, consisting primarily of gains on sale of
loans, service fees, and charges on deposit accounts, decreased by $72,000, or
16.6%, to $361,000 for the three months ended September 20, 2002, from $433,000
for the three months ended September 30, 2001. The decline resulted primarily
from a reduction of $135,000 in gains on sale of loans. Management chose to
retain rather than sell higher-yielding current loans in view of rapid loan
prepayments. Service fees, charges, and other operating income increased by
$63,000, or 21.1%, to $361,000, for the three months ended September 30, 2002,
due primarily to an enhanced service fee structure implemented on deposit
accounts and credit cards, and to increased debit card fees.
General, Administrative, and Other Expense. General, administrative and
other expense increased by $178,000, or 9.7%, to $2.0 million for the three
months ended September 30, 2002 compared to the three months ended September 30,
2001. The increase resulted primarily from a $104,000, or 10.0%, increase in
employee compensation and benefits, a $16,000, or 4.6%, increase in occupancy
and equipment expense, a $48,000, or 13.3%, increase in other operating expense,
and a $12,000, or 17.4%, increase in state franchise taxes. The increase in
employee compensation and benefits was primarily attributable to normal merit
increases, an increase in employee benefit plan costs and additional staff
needed for operating a new drive-through facility which opened in August 2001.
The increase in occupancy and equipment expense was primarily attributable to
costs incurred in connection with the new operating facility. The increase in
other operating expense is primarily attributable to increased professional
fees. The increase in franchise taxes reflected increased capital
period-to-period.
Federal Income Taxes. The provision for federal income taxes was $301,000
for the three months ended September 30, 2002, an increase of $88,000, or 41.3%,
compared to the same period in 2001. The increase resulted primarily from a
$283,000, or 45.3%, increase in pretax earnings. The effective tax rate for the
three months ended September 30, 2002 was 33.1% as compared to 34.1% for the
same period in 2001.
29
HISTORICAL AND PRO FORMA CAPITAL COMPLIANCE
At June 30, 2002, Wayne Savings Community Bank exceeded all of the
applicable regulatory capital requirements. The table below sets forth the
historical regulatory capital of Wayne Savings Community Bank (consolidated with
Village Savings Bank) at June 30, 2002, and the pro forma regulatory capital of
Wayne Savings Community Bank after giving effect to the conversion, based upon
the sale at $10.00 per share of the number of shares shown in the table. The pro
forma regulatory capital amounts reflect the receipt by Wayne Savings Community
Bank of 50% of the net conversion proceeds, and the retention of approximately
50% of the net proceeds by Wayne Savings Bancshares, Inc. However, Wayne Savings
Community Bank will receive greater than 50% of the net conversion proceeds to
the extent necessary to ensure its tangible capital ratio exceeds 10% following
the offering. The pro forma risk-based capital amounts assume the investment of
the net proceeds received by Wayne Savings Community Bank in assets that have a
risk-weight of 20% under applicable regulations, as if the net proceeds had been
received and so applied at June 30, 2002. See "Pro Forma Data" for the
assumptions used to determine the net proceeds of the offering. For purposes of
the table below, the entire amount expected to be borrowed by the employee stock
ownership plan and the entire cost of the shares expected to be acquired by the
stock recognition plan are deducted from pro forma regulatory capital.
Wayne Savings Community Pro Forma at June 30, 2002
Bank Historical at --------------------------------------------------------------------------------------
June 30, 2002 Minimum Midpoint Maximum Maximum as Adjusted(1)
---------------------- ------------------- ------------------- -------------------- ---------------------
Percent of Percent of Percent of Percent of Percent of
Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2) Amount Assets(2)
------- --------- ------- --------- ------- ---------- ------- --------- ------- ---------
GAAP Capital ......... $26,511 7.92% $34,224 10.03% $34,544 10.08% $35,814 10.41% $37,284 10.79%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Tangible Capital ..... $26,411 7.89% $34,224 10.01% $34,444 10.05% $35,714 10.38% $37,184 10.76%
Tangible Requirement . 5,020 1.50% 5,138 1.50% 5,140 1.50% 5,159 1.50% 5,181 1.50%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess ............... $21,391 6.39% $29,086 8.51% $29,304 8.55% $30,555 8.88% $32,003 9.26%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Core Capital ......... $26,411 7.89% $34,142 10.01% $34,444 10.05% $35,714 10.38% $37,184 10.76%
Core Requirement(3) .. 13,386 4.00% 13,703 4.00% 13,709 4.00% 13,760 4.00% 13,819 4.00%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess ............... $13,025 3.89% $20,439 6.01% $20,735 6.05% $21,954 6.38% $23,365 6.76%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
Total Capital(4) ..... $27,038 15.57% $34,769 19.92% $35,071 20.01% $36,341 20.71% $37,811 21.51%
Risk-based Requirement 13,891 8.00% 14,017 8.00% 14,019 8.00% 14,040 8.00% 14,063 8.00%
------- ----- ------- ----- ------- ----- ------- ----- ------- -----
Excess ............... $13,147 7.57% $20,752 11.92% $21,052 12.01% $22,301 12.71% $23,748 13.51%
======= ===== ======= ===== ======= ===== ======= ===== ======= =====
- ----------
(1) As adjusted to give effect to an increase in the number of shares that
could occur due to a 15% increase in the offering range to reflect changes
in market or general financial conditions following the commencement of the
offering.
(2) Tangible and core capital levels are shown as a percentage of total
adjusted assets. Risk-based capital levels are shown as a percentage of
risk-weighted assets.
(3) The current Office of Thrift Supervision core capital requirement for
savings banks is 3% of total adjusted assets for savings banks that receive
the highest supervisory rating for safety and soundness, and 4% to 5% of
total adjusted assets for all other savings banks.
(4) Pro forma amounts and percentages assume net proceeds are invested in
assets that carry a 20% risk-weighting.
30
HOW WE INTEND TO USE THE PROCEEDS FROM THE OFFERING
Although we cannot determine what the actual net proceeds from the sale of
the common stock in the offering will be until the offering is completed, we
anticipate that the net proceeds will be between $16.0 million and $22.0
million, or $25.5 million if the offering range is increased by 15%. See "Pro
Forma Data" and "--Stock Pricing and Number of Shares to be Issued" as to the
assumptions we used to arrive at these amounts. We will be unable to use any of
the net proceeds of the offering until the conversion is completed.
Wayne Savings Bancshares, Inc. estimates that it will invest between $8.0
million and $11.0 million, or $12.8 million if the offering range is increased
by 15%, in Wayne Savings Community Bank. Wayne Savings Community Bank expects to
invest approximately $2.0 million in Village Savings Bank, its savings bank
subsidiary. Wayne Savings Bancshares, Inc. intends to retain approximately 50%
of the net proceeds, a portion of which is expected to be used to fund the loan
to the employee stock ownership plan. The loan to the employee stock ownership
plan will enable it to purchase up to 8.0% of the shares of Wayne Savings
Bancshares, Inc. common stock issued in the offering. We may elect to fund the
employee stock ownership plan's stock purchases by borrowing from a third-party
financial institution. See "Management of Wayne Savings Bancshares,
Inc.--Employee Stock Ownership Plan and Trust." The balance of funds retained by
Wayne Savings Bancshares, Inc. will be used for general corporate purposes,
including acquiring other financial institutions, diversifying into other
banking related businesses, funding our stock recognition and retention plan or
paying cash dividends. We do not have any current specific plans, arrangements
or understandings regarding any acquisitions, nor have we established criteria
to identify potential acquisitions. We currently have no commitments to use any
of the net proceeds for branch expansion.
Wayne Savings Bancshares, Inc. intends to use the net proceeds as follows:
Minimum Maximum
-------- --------
(In thousands)
Net proceeds ....................................... $15,976 $22,041
Investment in Wayne Savings Community Bank ......... (7,988) (11,021)
Funds loaned to ESOP ............................... (1,394) (1,886)
-------- --------
Funds retained for general corporate purposes ...... $ 6,594 $ 9,134
======== ========
After the conversion is completed, we will be authorized to repurchase our
common stock, subject to certain regulatory restrictions during the first year
following the conversion. Office of Thrift Supervision regulations do not permit
a converted institution or its holding company to repurchase its common stock
for the first year following the conversion unless "compelling and valid
business purposes" exist for the repurchase, in which case up to 5% of the stock
may be repurchased. We may repurchase our common stock without obtaining
regulatory approval beginning one year after the completion of the conversion.
Based upon facts and circumstances following the completion of the
conversion and subject to applicable regulatory requirements, our board of
directors may determine to repurchase our stock in the future. These facts and
circumstances may include, but are not limited to the following:
(1) market and economic conditions such as the price at which our stock is
trading, the volume of trading, the attractiveness of other investment
alternatives in terms of the rate of return and risk involved in the investment,
the ability to increase the book value and/or earnings per share of our
remaining outstanding shares, and the opportunity to improve our return on
equity;
(2) the avoidance of dilution to stockholders by not having to issue
additional shares to cover the exercise of stock options or to fund our employee
stock benefit plans; and
(3) any other circumstances in which repurchases would be in the best
interests of Wayne Savings Bancshares, Inc. and our stockholders.
31
In the event we determine to repurchase our stock, repurchases may be made
at market prices that may be in excess of the $10.00 subscription price in the
offering. To the extent that we repurchase stock at market prices in excess of
the per-share book value, such repurchases may dilute the book value per share
of existing stockholders.
The portion of the net proceeds not retained by Wayne Savings Bancshares,
Inc. will be invested in Wayne Savings Community Bank. These funds will be used
for general corporate purposes and to support the expansion of new products and
banking services. The funds also will be used to originate loans and to invest
in federal funds, short-term investment grade marketable securities and
mortgage-backed securities. Wayne Savings Community Bank also may use such funds
to expand its branch network, although it has no immediate plans to do so. Wayne
Savings Community Bank and Wayne Savings Bancshares, Inc. have not determined
the approximate amount of net proceeds to be used for each of the purposes
mentioned above.
Wayne Savings Community Bank expects to invest approximately $2.0 million
in Village Savings Bank, its savings bank subsidiary. These funds will be used
by Village Savings Bank for general corporate purposes, including the
origination of loans and investment in federal funds, short-term
investment-grade marketable securities and mortgage-backed securities. Village
Savings Bank also may use such funds to expand its branch network, although it
has no immediate plans to do so.
OUR DIVIDEND POLICY
Wayne Savings Bancshares, Inc. currently pays a cash dividend of $0.17 per
share per quarter, or $0.68 per share per year. See the computation of our
dividend payments at footnote 3 of "Selected Consolidated Financial and Other
Data of Wayne Savings Bancshares, Inc." at page 22. After the conversion, we
intend to pay a dividend of $0.132, $0.112, $0.097 and $0.085 per share per
quarter at the minimum, midpoint, maximum and adjusted maximum of the offering
range, respectively, which represents a dividend yield of 5.3%, 4.5%, 3.9% and
3.4% at the minimum, midpoint, maximum and adjusted maximum of the offering
range, respectively, based upon a stock price of $10.00 per share. The amount of
dividends that we intend to pay to our stockholders following the conversion is
intended to preserve the aggregate amount of dividends that our stockholders
currently receive on their Wayne Savings Bancshares, Inc. common stock. The
dividend rate and the continued payment of dividends will depend on a number of
factors including our capital requirements, our financial condition and results
of operations, tax considerations, statutory and regulatory limitations, and
general economic conditions. We cannot assure you that we will not reduce or
eliminate dividends in the future. Assuming the offering is completed in
December 2002 and closes in January 2002, we expect to declare the first
dividend for the quarter ending March 31, 2003. At that time, we intend to pay a
pro-rated dividend to the holders of shares purchased in the offering.
Under the rules of the Office of Thrift Supervision, Wayne Savings
Community Bank will not be permitted to pay dividends on its capital stock to
Wayne Savings Bancshares, Inc. if Wayne Savings Community Bank's stockholder's
equity would be reduced below the amount of the liquidation account. See "The
Conversion--Liquidation Rights." For information concerning federal and state
law and regulations regarding the ability of Wayne Savings Community Bank to
make capital distributions, including the payment of dividends, to Wayne Savings
Bancshares, Inc., see "Taxation--Federal Taxation" and "Regulation--Federal
Regulation of Savings Institutions."
Unlike Wayne Savings Community Bank, Wayne Savings Bancshares, Inc. is not
restricted by Office of Thrift Supervision regulations in its ability to pay
dividends to its stockholders, although the source of dividends will depend on
the net proceeds retained by Wayne Savings Bancshares, Inc. and earnings
thereon, and upon dividends from Wayne Savings Community Bank. Wayne Savings
Bancshares, Inc., however, is subject to the requirements of Delaware law, which
generally limit dividends to an amount equal to the excess of its stockholders'
equity over its statutory capital or, if there is no excess, to its net earnings
for the current and/or immediately preceding fiscal year.
Additionally, we have committed to the Office of Thrift Supervision that
during the one-year period following the completion of the conversion, Wayne
Savings Bancshares, Inc. will not take any action to declare an extraordinary
dividend to our stockholders without prior approval of the Office of Thrift
Supervision.
32
MARKET FOR OUR COMMON STOCK
Our common stock is currently listed on the Nasdaq SmallCap Market under
the symbol "WAYN," and there is an established market for such common stock. At
November 14, 2002, we had four market makers, including Ryan Beck & Co., Inc.
Upon completion of the conversion and offering, the new shares of common stock
of Wayne Savings Bancshares, Inc. will replace existing shares and will be
traded on the Nasdaq National Market. Ryan Beck & Co., Inc. intends to remain a
market maker in Wayne Savings Bancshares, Inc. common stock following the
conversion. Ryan Beck & Co., Inc. also will assist us in obtaining other market
makers after the conversion. We cannot assure you that Ryan Beck & Co., Inc.
will continue to make a market in our common stock indefinitely, or that other
market makers will be obtained or that an active and liquid trading market for
the common stock will develop or, if developed, will be maintained. For a period
of 20 trading days following completion of our offering, our symbol will be
"WAYND," after which it will be "WAYN."
The development of a public market having the desirable characteristics of
depth, liquidity and orderliness depends on the existence of willing buyers and
sellers, the presence of which is not within our control or that of any market
maker. The number of active buyers and sellers of our common stock at any
particular time may be limited, which may have an adverse effect on the price at
which our common stock can be sold. There can be no assurance that if you
purchase our common stock you will be able to sell your shares at or above the
subscription price of $10.00 per share. Purchasers of our common stock should
have a long-term investment intent and should recognize that there may be a
limited trading market in the common stock.
The following table sets forth the high and low bid quotations for our
common stock and cash dividends per share declared for the periods indicated.
These quotations represent prices between dealers and do not include retail
markups, markdowns, or commissions and do not reflect actual transactions. This
information has been obtained from monthly statistical summaries provided by the
Nasdaq Stock Market. As of June 30, 2002, there were 1,221,322 publicly held
shares of Wayne Savings Bancshares, Inc. common stock issued and outstanding. In
connection with the conversion, each existing share of common stock of Wayne
Savings Bancshares, Inc. will be converted into a number of new shares of common
stock, based upon the exchange ratio that is described in other parts of this
prospectus.
Cash Dividend
High Bid Low Bid Declared
-------- ------- -------------
Fiscal Year 2003
Quarter Ended December 31, 2002
(through November 14, 2002) ........ $22.99 $16.99 $0.17(1)
Quarter Ended September 30, 2002 ... $20.41 $17.76 $0.17
Quarter Ended June 30, 2002 ........ $21.50 $20.00 $0.17
Fiscal Year 2002
Quarter Ended March 31, 2002 ....... $22.00 $16.25 $0.17
Quarter Ended December 31, 2001 .... $17.82 $13.86 $0.17
Quarter Ended September 30, 2001 ... $20.55 $13.75 $0.17
Quarter Ended June 30, 2001 ........ $17.94 $11.30 $0.17
Fiscal Year 2001
Quarter Ended March 31, 2001 ....... $18.00 $13.00 $0.16
Quarter Ended December 31, 2000 .... $16.00 $13.50 $0.16
Quarter Ended September 30, 2000 ... $15.75 $14.00 $0.16
Quarter Ended June 30, 2000 ........ $16.50 $15.38 $0.16
- ----------
(1) Presently anticipated to total $0.17 per share.
33
At July 10, 2001, the business day immediately preceding the public
announcement of the conversion, and at November 14, 2002, the closing prices of
Wayne Savings Bancshares, Inc. common stock as reported on the Nasdaq Small Cap
Market were $13.75 per share and $19.16 per share, respectively. At November 14,
2002, Wayne Savings Bancshares, Inc. had approximately 780 stockholders of
record. On the effective date of the conversion, all publicly held shares of
Wayne Savings Bancshares, Inc. common stock, including shares held by our
officers and directors, will be converted automatically into and become the
right to receive a number of shares of Wayne Savings Bancshares, Inc. common
stock determined pursuant to the exchange ratio, and options to purchase shares
of Wayne Savings Bancshares, Inc. common stock will be converted into options to
purchase a number of shares of Wayne Savings Bancshares, Inc. common stock
determined pursuant to the exchange ratio, for the same aggregate exercise
price. See "Beneficial Ownership of Common Stock."
34
CAPITALIZATION
The following table presents the historical consolidated capitalization of
Wayne Savings Bancshares, Inc. at June 30, 2002, and the pro forma consolidated
capitalization of Wayne Savings Bancshares, Inc. after giving effect to the
conversion, based upon the assumptions set forth in the "Pro Forma Data"
section.
Pro Forma at June 30, 2002
-----------------------------------------------------------
5,162,564
3,318,094 3,903,640 4,489,186 Maximum as
Minimum Midpoint Maximum Adjusted
Wayne Shares Shares Shares Shares
Savings Outstanding, Outstanding, Outstanding, Outstanding,
Bancshares, 1,742,500 2,050,000 2,357,500 2,711,125
Inc. shares sold shares sold shares sold shares sold
Historical at at $10.00 per at $10.00 at $10.00 at $10.00 per
June 30, 2002 share per share per share share(1)
------------- ------------- --------- --------- -------------
(Dollars in thousands)
Deposits(2) .......................... $ 300,737 $ 300,737 $ 300,737 $ 300,737 $ 300,737
Borrowed funds ....................... 5,000 5,000 5,000 5,000 5,000
--------- --------- --------- --------- ---------
Total deposits and borrowed funds .... $ 305,737 $ 305,737 $ 305,737 $ 305,737 $ 305,737
========= ========= ========= ========= =========
Stockholders' equity:
Preferred stock, $0.10 par value
(post-conversion), 500,000 shares
authorized(3) ...................... $ -- $ -- $ -- $ -- $ --
Common stock $0.10 par value (post-
conversion) 9,000,000 shares
authorized; shares to be issued as
reflected(3)(4) ...................... 2,642 332 390 449 516
Additional paid-in capital ........... 14,449 31,723 34,698 37,671 41,109
Retained earnings(5) ................. 10,468 10,468 10,468 10,468 10,468
Accumulated other comprehensive income 49 49 49 49 49
Less:
Treasury stock ...................... (1,181) -- -- -- --
Common stock to be acquired by
ESOP(6) .......................... -- (1,394) (1,640) (1,886) (2,169)
Common stock to be acquired by
recognition plan(7) .............. -- (697) (820) (943) (1,084)
--------- --------- --------- --------- ---------
Total stockholders' equity ........... $ 26,427 $ 40,481 $ 43,145 $ 45,808 $ 48,889
========= ========= ========= ========= =========
Total stockholders' equity as a
percentage of total assets ......... 7.90% 11.61% 12.28% 12.94% 13.69%
========= ========= ========= ========= =========
- ----------
(1) As adjusted to give effect to an increase in the number of shares that
could occur due to a 15% increase in the offering range to reflect changes
in market or general financial conditions following the commencement of
the subscription and community offerings.
(2) Does not reflect withdrawals from deposit accounts for the purchase of
common stock in the conversion. These withdrawals would reduce pro forma
deposits by the amount of the withdrawals.
(3) Wayne Savings Bancshares, Inc., a federal corporation, has 10,000,000
authorized shares of preferred stock and 20,000,000 authorized shares of
common stock, par value $1.00 per share. Pro forma Wayne Savings
Bancshares, Inc. common stock and additional paid-in capital have been
increased to reflect the number of shares of Wayne Savings Bancshares,
Inc. common stock to be outstanding, which includes the exchange of the
47.5% currently outstanding shares of common stock pursuant to the
exchange ratio. Pro forma additional paid-in capital reflects
consolidation of $169,000 of capital from Wayne Savings Bankshares, MHC.
(4) No effect has been given to the issuance of additional shares of Wayne
Savings Bancshares, Inc. common stock pursuant to an additional stock
option plan that may be adopted by Wayne Savings Bancshares, Inc. If this
plan is implemented, an amount equal to 10% of the shares of Wayne Savings
Bancshares, Inc. common stock sold in the offering will be reserved for
issuance upon the exercise of options under the stock option plan. No
effect has been given to the exercise of options currently outstanding.
See "Management of Wayne Savings Bancshares, Inc.--Benefits to be
Considered Following Completion of the Conversion."
(5) The retained earnings of Wayne Savings Community Bank will be
substantially restricted after the conversion. See "The
Conversion--Liquidation Rights" and "Regulation --Federal Regulation of
Savings Banks."
(6) Assumes that 8% of the shares sold in the offering will be acquired by the
employee stock ownership plan financed by a loan from Wayne Savings
Bancshares, Inc. The loan will be repaid principally from Wayne Savings
Community Bank's contributions to the employee stock ownership plan. Since
Wayne Savings Bancshares, Inc. will finance the employee stock ownership
plan debt, this debt will be eliminated through consolidation and no
liability will be reflected on Wayne Savings Bancshares, Inc.'s
consolidated financial statements. Accordingly, the amount of stock
acquired by the employee stock ownership plan is shown in this table as a
reduction of total stockholders' equity.
(Footnotes continued on next page)
35
- ----------
(7) Assumes a number of shares of common stock equal to 4% of the common stock
to be sold in the offering will be purchased by the stock recognition plan
in open market purchases. The dollar amount of common stock to be purchased
is based on the $10.00 per share subscription price in the offering and
represents unearned compensation and is reflected as a reduction of
capital. This amount does not reflect possible increases or decreases in
the value of stock relative to the subscription price in the offering. As
Wayne Savings Bancshares, Inc. accrues compensation expense to reflect the
vesting of shares pursuant to the stock recognition plan, the deferred
charge against capital will be reduced through a charge to operations.
Implementation of the stock recognition plan will require stockholder
approval. If the shares to fund the plan are assumed to come from
authorized but unissued shares purchased by the stock recognition plan from
Wayne Savings Bancshares, Inc. at $10.00 per share, at the minimum,
midpoint, maximum and the maximum, as adjusted, of the offering range, the
number of outstanding shares would be 3,387,794, 3,985,640, 4,583,486 and
5,271,009, respectively, and total stockholders' equity would be $41.2
million, $44.0 million, $46.8 million, and $50.0 million, respectively, at
June 30, 2002. If the stock recognition plan acquires authorized but
unissued shares of Wayne Savings Bancshares, Inc., stockholders' ownership
in Wayne Savings Bancshares, Inc. would be diluted by approximately 2.1%.
PRO FORMA DATA
The following tables summarize historical data of Wayne Savings
Bancshares, Inc. and pro forma data of Wayne Savings Bancshares, Inc. at or for
the three months ended June 30, 2002 and the year ended March 31, 2002, based on
assumptions set forth below and in the table, and should not be used as a basis
for projections of market value of the common stock following the conversion. No
effect has been given in the tables to the possible issuance of additional
shares reserved for future issuance pursuant to currently outstanding stock
options or for the possible issuance of additional shares pursuant to any stock
option plan or stock recognition and retention plan that may be adopted by our
stockholders no earlier than six months after the conversion. Moreover, book
value does not give effect to the liquidation account to be established in the
conversion or, in the event of a liquidation of Wayne Savings Community Bank, to
the tax effect of the recapture of the bad debt reserve. See "The
Conversion--Liquidation Rights."
Pro forma consolidated net earnings of Wayne Savings Bancshares, Inc. for
the three months ended June 30, 2002 and the fiscal year ended March 31, 2002,
have been calculated as if the estimated net proceeds received by Wayne Savings
Bancshares, Inc. and Wayne Savings Community Bank were invested at an assumed
interest rate of 2.06% and 2.70%, respectively. The reinvestment rate was
calculated based on the equivalent yield of the one-year United States Treasury
bill rate (which we believe more accurately reflects the pro forma reinvestment
rate than the arithmetic average method, in view of changes in market interest
rates in recent periods). The effect of withdrawals from deposit accounts for
the purchase of common stock has not been reflected. The pro forma after-tax
yield on the estimated net proceeds is assumed to be 1.36% and 1.78% for the
three months ended June 30, 2002 and the fiscal year ended March 31, 2002,
respectively. Historical and pro forma per share amounts have been calculated by
dividing historical and pro forma amounts by the indicated number of shares of
common stock. No effect has been given in the pro forma stockholders' equity
calculations for the assumed earnings on the net proceeds. It is assumed that
Wayne Savings Bancshares, Inc. will retain 50% of the estimated net conversion
proceeds. The actual net proceeds from the sale of common stock will not be
determined until the conversion is completed. However, we currently estimate net
proceeds will be between $16.0 million and $22.0 million. We have assumed that
all shares will be sold in the subscription offering and community offering.
The following pro forma information may not be representative of the
financial effects of the foregoing transactions at the dates on which such
transactions actually occur, and should not be taken as indicative of future
results of operations. Pro forma consolidated stockholders' equity represents
the difference between the stated amounts of assets and liabilities of Wayne
Savings Bancshares, Inc. The pro forma stockholders' equity is not intended to
represent the fair market value of the common stock, and may be greater than
amounts that would be available for distribution to stockholders in the event of
liquidation.
36
At or for the Three Months Ended June 30, 2002
Based upon the Sale for $10.00 of
--------------------------------------------------------------
1,742,500 2,050,000 2,357,500 2,711,125
Shares Shares Shares Shares(1)
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Price Price Price Estimated
Range Range Range Price Range
----------- ----------- ----------- -----------
(Dollars in thousands, except per share data)
Gross proceeds ..................................................... $ 17,425 $ 20,500 $ 23,575 $ 27,111
Expenses .......................................................... 1,449 1,491 1,534 1,565
----------- ----------- ----------- -----------
Estimated net proceeds ............................................ 15,976 19,009 22,041 25,546
Common stock purchased by employee stock ownership plan (2) ....... (1,394) (1,640) (1,886) (2,169)
Common stock purchased by recognition plan (3) .................... (697) (820) (943) (1,084)
Assets reinvested from the MHC .................................... 169 169 169 169
----------- ----------- ----------- -----------
Estimated net proceeds, as adjusted ............................... $ 14,054 $ 16,718 $ 19,381 $ 22,462
=========== =========== =========== ===========
For the three months ended June 30, 2002:
Consolidated net earnings:
Historical ........................................................ $ 554 $ 554 $ 554 $ 554
Pro forma adjustments:
Income on adjusted net proceeds ................................... 48 57 66 76
Pro forma state franchise taxes ................................... (16) (17) (20) (23)
Employee stock ownership plan (2) ................................. (12) (14) (16) (18)
Recognition plan (3) .............................................. (23) (27) (31) (36)
----------- ----------- ----------- -----------
Pro forma net earnings ......................................... $ 551 $ 553 $ 553 $ 553
=========== =========== =========== ===========
Earnings per share (4):
Historical ........................................................ $ 0.17 $ 0.15 $ 0.13 $ 0.11
Pro forma adjustments:
Income on net proceeds ............................................ 0.02 0.01 0.01 0.01
Pro forma state franchise taxes ................................... (0.01) -- -- --
Employee stock ownership plan (2) ................................. -- -- -- --
Recognition plan (3) .............................................. (0.01) (0.01) (0.01) (0.01)
----------- ----------- ----------- -----------
Pro forma earnings per share (4)(5)(8) ......................... $ 0.17 $ 0.15 $ 0.13 $ 0.11
----------- =========== =========== ===========
Pro forma price to earnings per share (8) .......................... 14.71x 16.67x 19.23x 22.73x
=========== =========== =========== ===========
Number of shares used in price-to-earnings ratio calculations ...... 3,180,437 3,741,690 4,302,944 4,948,385
At June 30, 2002:
Stockholders' equity:
Historical ........................................................ $ 26,427 $ 26,427 $ 26,427 $ 26,427
Estimated net proceeds ............................................ 15,976 19,009 22,041 25,546
MHC capital consolidation ......................................... 169 169 169 169
Less: Common stock acquired by employee stock ownership plan (2).. (1,394) (1,640) (1,886) (2,169)
Common stock acquired by recognition plan (3) .............. (697) (820) (943) (1,084)
----------- ----------- ----------- -----------
Pro forma stockholders' equity (6) ................................. $ 40,481 $ 43,145 $ 45,808 $ 48,889
=========== =========== =========== ===========
Stockholders' equity per share (7):
Historical ........................................................ $ 7.96 $ 6.77 $ 5.89 $ 5.12
Estimated net proceeds ............................................ 4.82 4.87 4.90 4.95
MHC capital consolidation ......................................... 0.05 0.04 0.04 0.03
Less: Common stock acquired by employee stock
ownership plan (2) ....................................... (0.42) (0.42) (0.42) (0.42)
Common stock acquired by recognition plan (3) .............. (0.21) (0.21) (0.21) (0.21)
----------- ----------- ----------- -----------
Pro forma stockholders' equity per share (6)(7) .................... $ 12.20 $ 11.05 $ 10.20 $ 9.47
=========== =========== =========== ===========
Offering price as a percentage of pro forma stockholders'
equity per share .................................................. 81.97% 90.50% 98.04% 105.60%
=========== =========== =========== ===========
Number of shares used in book value per share calculations ......... 3,318,094 3,903,640 4,489,186 5,162,564
(footnotes following next page)
37
At or for the Year Ended March 31, 2002
Based upon the Sale for $10.00 of
--------------------------------------------------------------
1,742,500 2,050,000 2,357,500 2,711,125
Shares Shares Shares Shares(1)
Minimum of Midpoint of Maximum of 15% Above
Estimated Estimated Estimated Maximum of
Price Price Price Estimated
Range Range Range Price Range
----------- ----------- ----------- -----------
(Dollars in thousands, except per share data)
Gross proceeds ................................................... $ 17,425 $ 20,500 $ 23,575 $ 27,111
Expenses ........................................................ 1,449 1,491 1,534 1,565
----------- ----------- ----------- -----------
Estimated net proceeds .......................................... 15,976 19,009 22,041 25,546
Common stock purchased by employee stock ownership plan (2) ..... (1,394) (1,640) (1,886) (2,169)
Common stock purchased by recognition plan (3) .................. (697) (820) (943) (1,084)
Assets reinvested from the MHC .................................. 169 169 169 169
----------- ----------- ----------- -----------
Estimated net proceeds, as adjusted .............................. $ 14,054 $ 16,718 $ 19,381 $ 22,462
=========== =========== =========== ===========
For the fiscal year ended March 31, 2002:
Consolidated net earnings:
Historical ...................................................... $ 1,823 $ 1,823 $ 1,823 $ 1,823
Pro forma adjustments:
Income on adjusted net proceeds ................................. 250 298 345 400
Pro forma state franchise taxes ................................. (65) (67) (78) (91)
Employee stock ownership plan (2) ............................... (46) (54) (62) (72)
Recognition plan (3) ............................................ (92) (108) (124) (143)
----------- ----------- ----------- -----------
Pro forma net earnings ....................................... $ 1,870 $ 1,892 $ 1,904 $ 1,917
=========== =========== =========== ===========
Earnings per share (4):
Historical ...................................................... $ 0.57 $ 0.49 $ 0.42 $ 0.37
Pro forma adjustments:
Income on net proceeds .......................................... 0.08 0.07 0.08 0.08
Pro forma state franchise taxes ................................. (0.02) (0.02) (0.02) (0.02)
Employee stock ownership plan (2) ............................... (0.01) (0.01) (0.01) (0.01)
Recognition plan (3) ............................................ (0.03) (0.03) (0.03) (0.03)
----------- ----------- ----------- -----------
Pro forma earnings per share (4)(5)(8) ....................... $ 0.59 $ 0.50 $ 0.44 $ 0.39
----------- =========== =========== ===========
Pro forma price to earnings per share (8) ........................ 16.95x 20.00x 22.73x 25.64x
=========== =========== =========== ===========
Number of shares used in price-to-earnings ratio calculations .... 3,185,664 3,747,840 4,310,016 4,956,519
At March 31, 2002:
Stockholders' equity:
Historical ...................................................... $ 26,047 $ 26,047 $ 26,047 $ 26,047
Estimated net proceeds .......................................... 15,976 19,009 22,041 25,546
MHC capital consolidation ....................................... 169 169 169 169
Less: Common stock acquired by employee stock ownership plan (2) (1,394) (1,640) (1,886) (2,169)
Common stock acquired by recognition plan (3) ............ (697) (820) (943) (1,084)
----------- ----------- ----------- -----------
Pro forma stockholders' equity (6) ............................... $ 40,101 $ 42,765 $ 45,428 $ 48,509
=========== =========== =========== ===========
Stockholders' equity per share (7):
Historical ...................................................... $ 7.85 $ 6.67 $ 5.80 $ 5.05
Estimated net proceeds .......................................... 4.82 4.88 4.91 4.95
MHC capital consolidation ....................................... 0.05 0.04 0.04 0.03
Less: Common stock acquired by employee stock ownership plan (2) (0.42) (0.42) (0.42) (0.42)
Common stock acquired by recognition plan (3) ............ (0.21) (0.21) (0.21) (0.21)
----------- ----------- ----------- -----------
Pro forma stockholders' equity per share (6)(7) ................. $ 12.09 $ 10.96 $ 10.12 $ 9.40
=========== =========== =========== ===========
Offering price as a percentage of pro forma stockholders'
equity per share ................................................ 82.71% 91.24% 98.81% 106.38%
=========== =========== =========== ===========
Number of shares used in book value per share calculations ....... 3,318,094 3,903,640 4,489,186 5,162,564
(footnotes on next page)
38
- ----------
(1) As adjusted to give effect to an increase in the number of shares that
could occur due to a 15% increase in the offering range to reflect changes
in market and financial conditions following the commencement of the
offering.
(2) Assumes that 8.0% of the shares of common stock sold in the offering will
be purchased by the employee stock ownership plan. For purposes of this
table, the funds used to acquire these shares are assumed to be borrowed
by the employee stock ownership plan from the net proceeds of the offering
retained by Wayne Savings Bancshares, Inc. Wayne Savings Community Bank
intends to make annual contributions to the employee stock ownership plan
in an amount at least equal to the principal and interest of the debt.
Wayne Savings Community Bank's total annual payments on the employee stock
ownership plan debt are based upon 20 equal annual installments of
principal. Statement of Position 93-6 requires that an employer record
compensation expense in an amount equal to the fair value of the shares
committed to be released. The pro forma adjustments assume that the
employee stock ownership plan shares are allocated in equal annual
installments based on the number of loan repayment installments assumed to
be paid by Wayne Savings Community Bank, the fair value of the common
stock remains at $10.00 per share, and the employee stock ownership plan
expense reflects an effective combined federal and state tax rate of 34%.
The unallocated employee stock ownership plan shares are reflected as a
reduction of stockholders' equity. No reinvestment is assumed on proceeds
contributed to fund the employee stock ownership plan. The pro forma net
income further assumes that (i) 1,743, 2,050, 2,358 and 2,711 shares were
committed to be released for the three months ended June 30, 2002 at the
minimum, midpoint, maximum and adjusted maximum of the offering range,
respectively, (ii) that 6,970, 8,200, 9,430, and 10,845 shares were
committed to be released during the fiscal year ended March 31, 2002 at
the minimum, midpoint, maximum, and adjusted maximum of the offering
range, respectively, and (iii) in accordance with Statement of Position
93-6, only the employee stock ownership plan shares committed to be
released during the periods were considered outstanding for purposes of
net income per share calculations.
(3) If approved by Wayne Savings Bancshares, Inc.'s stockholders, the stock
recognition plan intends to purchase an aggregate number of shares of
common stock equal to 4% of the shares to be sold in the offering.
Stockholder approval of the stock recognition plan and purchases by the
plan may not occur earlier than six months after the completion of the
conversion. The shares may be acquired directly from Wayne Savings
Bancshares, Inc. or through open market purchases. The funds to be used by
the stock recognition plan to purchase the shares will be provided by
Wayne Savings Bancshares, Inc. or Wayne Savings Community Bank. The table
assumes that (i) the stock recognition plan acquires the shares through
open market purchases at $10.00 per share with funds contributed by Wayne
Savings Bancshares, Inc., (ii) 20% and 5% of the amount contributed to the
stock recognition plan is amortized as an expense during the fiscal year
ended March 31, 2002 and the three months ended June 30, 2002,
respectively, and (iii) the stock recognition plan expense reflects an
effective combined federal and state tax rate of 34%. Assuming stockholder
approval of the plan and that the plan shares are awarded through the use
of authorized but unissued shares of common stock, stockholders would have
their voting interests diluted by approximately 2.1%.
(4) Per share figures include publicly held shares of Wayne Savings
Bancshares, Inc. common stock that will be exchanged for new shares of
Wayne Savings Bancshares, Inc. common stock in the conversion. Net income
per share computations are determined by taking the number of shares
assumed to be sold in the offering and the number of new shares assumed to
be issued in exchange for publicly held shares and, in accordance with
Statement of Position 93-6, subtracting the employee stock ownership plan
shares that have not been committed for release during the respective
periods. See Note 2 above. The number of shares of common stock actually
sold and the corresponding number of exchange shares may be more or less
than the assumed amounts.
(5) No effect has been given to the issuance of additional shares of common
stock pursuant to the stock option plan, which is expected to be adopted
by Wayne Savings Bancshares, Inc. following the offering and presented to
stockholders for approval not earlier than six months after the completion
of the conversion. If the stock option plan is approved by stockholders, a
number of shares equal to 10% of the shares sold in the offering will be
reserved for future issuance upon the exercise of options to be granted
under the stock option plan. The issuance of authorized but previously
unissued shares of common stock pursuant to the exercise of options under
such plan would dilute existing stockholders' interests by approximately
5.0%.
(6) The retained earnings of Wayne Savings Community Bank will be
substantially restricted after the conversion. See "Dividend Policy," "The
Conversion--Liquidation Rights" and "Regulation--Federal Regulation of
Savings Banks--Limitations on Capital Distributions."
(7) Per share figures include publicly held shares of Wayne Savings
Bancshares, Inc. common stock that will be exchanged for new shares of
Wayne Savings Bancshares, Inc. common stock in the conversion.
Stockholders' equity per share calculations are based upon the sum of (i)
the number of subscription shares assumed to be sold in the offering, and
(ii) new shares to be issued in exchange for publicly held shares at the
minimum, midpoint, maximum and adjusted maximum of the offering range,
respectively. The exchange shares reflect an exchange ratio of 1.2901,
1.5177, 1.7454 and 2.0072, respectively, at the minimum, midpoint,
maximum, and adjusted maximum of the offering range. The number of
subscription shares actually sold and the corresponding number of exchange
shares may be more or less than the assumed amounts.
(8) As noted above, pro forma consolidated net earnings has been calculated as
if the estimated net proceeds had been invested based on the equivalent
yield on the one-year United States Treasury bill rate. If the
reinvestment rate was calculated based on the arithmetic average method,
the pro forma yield on the estimated net proceeds would be 4.84% and 5.57%
for the three months ended June 30, 2002 and the fiscal year ended March
31, 2002, respectively. The pro forma after-tax yield on the estimated net
proceeds would be 3.19% and 3.68% for the three months ended June 30, 2002
and the fiscal year ended March 31, 2002, respectively. Based on the
arithmetic average reinvestment rate, (i) pro forma earnings per share for
the fiscal year ended March 31, 2002 would be equal to $0.67, $0.59, $0.53
and $0.47 and the pro forma price-to-earnings multiple would be 14.93x,
16.95x, 18.87x and 21.28x at the minimum, midpoint, maximum and adjusted
maximum of the offering range, respectively and (ii) pro forma earnings
per share for the three months ended June 30, 2002 would be equal to
$0.19, $0.17, $0.15 and $0.13 and the pro forma price-to-earnings multiple
would be 13.16x, 14.71x, 16.67x and 19.23x at the minimum, midpoint,
maximum and adjusted maximum of the offering range, respectively.
39
WAYNE SAVINGS BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF EARNINGS AND COMPREHENSIVE INCOME
The following Consolidated Statements of Earnings and Comprehensive
Income of Wayne Savings Bancshares, Inc. for the years ended March 31, 2002,
2001 and 2000, have been audited by Grant Thornton LLP, independent certified
public accountants, whose report thereon appears elsewhere in this prospectus.
These statements should be read in conjunction with the consolidated financial
statements of Wayne Savings Bancshares, Inc. and related notes thereto included
elsewhere in this prospectus. The Consolidated Statements of Earnings and
Comprehensive Income for the three months ended June 30, 2002 and 2001 are
unaudited. However, in the opinion of management, all adjustments (consisting
only of normal recurring accruals) necessary for a fair presentation of
financial position and results of operations have been made.
June 30, For the Year Ended March 31,
--------------------- -----------------------------------
2002 2001 2002 2001 2000
-------- -------- -------- -------- --------
(Dollars in thousands, except per share data)
Interest income:
Loans ...................................................... $ 4,432 $ 4,793 $ 19,059 $ 18,701 $ 17,927
Mortgage-backed securities ................................. 222 131 571 583 602
Investment securities ...................................... 255 207 871 1,423 1,033
Interest-bearing deposits and other ........................ 140 285 808 799 1,138
-------- -------- -------- -------- --------
Total interest income ................................... 5,049 5,416 21,309 21,506 20,700
Interest expense:
Deposits ................................................... 2,433 3,262 12,055 12,652 11,530
Borrowings ................................................. 65 82 293 448 484
-------- -------- -------- -------- --------
Total interest expense .................................. 2,498 3,344 12,348 13,100 12,014
-------- -------- -------- -------- --------
Net interest income ..................................... 2,551 2,072 8,961 8,406 8,686
Provision for losses on loans ............................... 17 2 134 96 106
-------- -------- -------- -------- --------
Net interest income after provision for losses
on loans .............................................. 2,534 2,070 8,827 8,310 8,580
Other income:
Gain on sale of loans ...................................... 16 76 514 154 28
Service fees, charges and other operating income ........... 328 288 1,143 891 720
-------- -------- -------- -------- --------
Total other income ...................................... 344 364 1,657 1,045 748
General, administrative and other expense:
Employee compensation and benefits ......................... 1,146 1,055 4,312 3,957 3,817
Occupancy and equipment .................................... 379 330 1,388 1,335 1,394
Federal deposit insurance premiums ......................... 13 12 46 86 173
Franchise taxes ............................................ 73 67 274 230 329
Loss on disposal of real estate acquired through
foreclosure .............................................. -- -- -- -- 6
Other operating expenses ................................... 428 410 1,667 1,590 1,631
Operating expenses previously reimbursed or
allocated to MHC ......................................... -- -- 35 150 84
-------- -------- -------- -------- --------
Total general, administrative and other expense ......... 2,039 1,874 7,722 7,348 7,434
-------- -------- -------- -------- --------
Earnings before income taxes ............................ 839 560 2,762 2,007 1,894
Federal income taxes:
Current .................................................... 219 155 620 640 580
Deferred ................................................... 66 30 319 35 44
-------- -------- -------- -------- --------
Total federal income taxes .............................. 285 185 939 675 624
-------- -------- -------- -------- --------
Net earnings before change in accounting
principle ............................................. 554 375 1,823 1,332 1,270
Change in accounting principle related to
allocated organization costs, net of taxes of
$63,000 .................................................... -- -- -- -- (122)
-------- -------- -------- -------- --------
NET EARNINGS ............................................ $ 554 $ 375 $ 1,823 $ 1,332 $ 1,148
======== ======== ======== ======== ========
Basic earnings per share:
Earnings before cumulative change in accounting
principle ............................................... $ 0.22 $ 0.15 $ 0.71 $ 0.51 $ 0.49
Cumulative change in accounting principle .................. -- -- -- -- (0.05)
-------- -------- -------- -------- --------
Basic earnings per share ................................ $ 0.22 $ 0.15 $ 0.71 $ 0.51 $ 0.44
======== ======== ======== ======== ========
Diluted earnings per share:
Earnings before cumulative change in accounting
principle ................................................ $ 0.21 $ 0.15 $ 0.71 $ 0.51 $ 0.49
Cumulative change in accounting principle .................. -- -- -- -- (0.05)
-------- -------- -------- -------- --------
Diluted earnings per share .............................. $ 0.21 $ 0.15 $ 0.71 $ 0.51 $ 0.44
======== ======== ======== ======== ========
Net earnings ................................................ $ 554 $ 375 $ 1,823 $ 1,332 $ 1,148
Other comprehensive income (loss), net of tax:
Unrealized holding gains (losses) on securities
during the period, net of taxes (benefits) of $14,
$3, $(6), $36 and $(20) ................................ 27 5 (11) 69 (38)
-------- -------- -------- -------- --------
Comprehensive income ........................................ $ 581 $ 380 $ 1,812 $ 1,401 $ 1,110
======== ======== ======== ======== ========
Accumulated comprehensive income (loss) ..................... $ 49 $ 38 $ 22 $ 33 $ (36)
======== ======== ======== ======== ========
40
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
This discussion and analysis reflects Wayne Savings Bancshares, Inc.'s
consolidated financial statements and other relevant statistical data and is
intended to enhance your understanding of our financial condition and results of
operations. You should read the information in this section in conjunction with
Wayne Savings Bancshares, Inc.'s consolidated financial statements and their
notes beginning on page F-1 of this prospectus, and the other statistical data
provided in this prospectus. The preparation of consolidated financial
statements involves the application of accounting policies relevant to the
business of our corporation and its subsidiaries. Application of certain
accounting policies requires management to make estimates and assumptions about
the effect of matters that are inherently uncertain. These estimates and
assumptions affect the reported amounts of certain assets, liabilities, revenues
and expenses. Different amounts could be reported under different conditions, or
if different assumptions were used in the application of certain accounting
policies. In this respect, the accounting policy considered by us to be critical
relates to the determination of the allowance for loan losses. This accounting
policy is discussed in the "--Allowance for Loan Losses" section of this
prospectus and in the notes to consolidated financial statements appearing
elsewhere in this prospectus.
General
We conduct no business other than owning all of the common stock of Wayne
Savings Community Bank. Consequently, our net earnings depend on the net
earnings of Wayne Savings Community Bank and its wholly-owned subsidiary,
Village Savings Bank. Our financial information is presented on a consolidated
basis to include Wayne Savings Community Bank and Village Savings Bank. The net
earnings of Wayne Savings Community Bank are derived primarily from its net
interest income, which is the difference between interest income earned on
investments in loans, mortgage-backed securities and other investment
securities, and its cost of funds consisting of interest paid on deposits and
borrowings. Wayne Savings Community Bank's net earnings also are affected by its
provision for loan losses, as well as by the amount of other income, including
income from fees and service charges, and net gains and losses on sales of loans
and investments, and operating expenses, such as employee compensation and
benefits, deposit insurance premiums, occupancy and equipment costs, and income
taxes. In addition, net earnings are affected significantly by general economic
and competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities, which events are
beyond our control.
Business Strategy
Our current business strategy is to operate as a well-capitalized,
profitable and independent community bank dedicated to providing quality
customer service. We emphasize retail deposits as our primary source of funds.
We maintain a substantial part of our assets in residential first mortgage loans
secured by properties located in our market area, and, to a substantially lesser
extent, other types of loans, mortgage-backed securities and other liquid
investment securities. Since 1998, we have increased our presence in our market
area by opening three new Wayne Savings Community Bank branch offices and a
drive-through facility and by establishing Village Savings Bank as a
separately-chartered federal savings bank.
Specifically, our business strategy incorporates the following elements:
(1) emphasizing community banking by closely monitoring the needs of our
customers and providing convenient, personal and quality customer service; (2)
emphasizing the origination of one- to four-family residential mortgage loans in
our market area; (3) managing interest rate risk; (4) increasing fee income; (5)
maintaining a strong retail deposit base; (6) controlling expenses; (7) managing
asset quality; and (8) maintaining capital in excess of regulatory requirements.
Highlights of our business strategy are as follows:
Community banking and customer service. Wayne Savings Community Bank was
established in 1899 and has been operating continuously since that time.
Throughout our history, we have been committed to meeting the financial needs of
the communities in which we operate, and to providing quality service to our
customers. We believe that our community-oriented approach gives us an advantage
over many of our larger competitors head-quartered outside of our market area,
because our customers have direct access to senior management.
41
We believe that a well-positioned branch network is important to
increasing market share and customer convenience. Since March 1998, we have
expanded our market presence by opening offices in locations that provide access
to potential new customers. Since the end of 1998, Wayne Savings Community Bank
has increased its number of branches from six to nine. We opened two
full-service branches, in May and July 1999, and, in May 2001, we opened a
full-service branch in a newly constructed supermarket. In fiscal 1999, we
expanded into Stark County by establishing Village Savings Bank, which has one
office. None of our new offices was acquired from other financial institutions.
Emphasizing one- to four-family residential mortgage lending in our market
area. We focus on originating one- to four-family residential mortgage loans and
home equity loans secured by properties in our market area. At both June 30,
2002 and March 31, 2002, these loans constituted 84.9% of our total loan
portfolio. We also originate loans secured by commercial and multi-family
residential real estate, as well as commercial business loans and consumer
loans. Such loans constitute a relatively small part of our lending activities,
but help to create strong ties to our customers by increasing relationships and
providing cross-marketing opportunities. Although we have no specific plans now,
we are considering expanding such lending in the future.
Managing interest rate risk exposure. We have implemented the following
strategies that are intended to reduce the potential volatility of our earnings
due to changes in market interest rates. First, we have attempted to better
match the maturities or repricing of our interest rate sensitive assets and
liabilities. Second, we continue to emphasize the origination of adjustable rate
mortgage ("ARM") loans, home equity loans and other adjustable rate or
short-term loans, such as consumer loans. We also purchase mortgage-backed
securities generally with estimated remaining average lives of 5 years or less.
At June 30, 2002, $77.7 million, or 28.5%, of our total loans and
mortgage-backed securities consisted of loans or securities maturing or
repricing within one year. However, particularly in the current low interest
rate environment, mortgage loan borrowers typically prefer fixed-rate loans to
ARM loans. During the three months ended June 30, 2002 and the year ended March
31, 2002, our ARM portfolio increased by $751,000, or 1.2%, and $390,000, or
0.6%, respectively. Third, our fixed rate mortgage loans generally are
underwritten according to standards that permit their resale in the secondary
mortgage market. Fourth, we attempt to lengthen the maturities of certificates
of deposit as market conditions permit. However, in the current low interest
rate environment, depositors typically prefer shorter-term deposits. Finally, we
maintain a significant percentage of our assets in cash and cash equivalents,
which totaled $33.0 million and $27.9 million, or 9.9% and 8.3% of total assets,
at June 30, 2002 and March 31, 2002, respectively.
Increasing fee income. We have tried to increase our non-interest income
as a means of decreasing our reliance on net interest income. In this regard, we
restructured our service fees several times since July 2000 by increasing the
type and amount of fees on our deposit accounts. In addition, in 1997 we began
to offer a line of investment products through a third party. The product line
now includes fixed and variable annuities, and mutual funds were added during
fiscal year 2002. We also began offering debit cards in fiscal year 2001. We are
currently considering additional fee-based products to offer our customers.
Service fees and charges increased by $252,000, or 28.3%, for the fiscal year
ended March 31, 2002 compared to the fiscal year ended March 31, 2001 and
increased by $171,000, or 23.8%, for the fiscal year ended March 31, 2001
compared to the prior fiscal year. This trend has continued for the three months
ended June 30, 2002, in which service fees and charges increased by $40,000, or
13.9%, over the comparable period in fiscal 2001.
Maintaining a strong retail deposit base. We historically have had a
relatively strong and stable retail deposit base drawn from our market area. Our
deposit-generating strength has been enhanced by the sales culture in our
branches and by our expanded branch franchise. Since March 31, 1999, deposits
have increased 27.8%. At June 30, 2002, our "core deposits," which includes
checking, money market, passbook and statement savings accounts, totaled $136.9
million, or 45.5% of our total deposits, an increase from 35.1% of total
deposits at March 31, 1999. Core deposits are a more stable and lower cost
source of funds than certificates of deposit, and typically generate fee income.
Controlling expenses. Our general and administrative expenses have grown
in recent years, largely due to the increase in the number of our banking
offices. We opened Village Savings Bank early in fiscal year 1999. Wayne Savings
Community Bank had six offices at March 31, 1998 and had ten offices at March
31, 2002. In August 2001, we opened a drive-through facility. We recognize the
importance of monitoring and controlling our operating expenses as our franchise
grows. Our efficiency ratio is a measure of the success of our cost-control
42
efforts. Our efficiency ratio was 68.2% for fiscal year 1998 and increased to
71.8% and 78.8% for fiscal years 1999 and 2000, respectively. For fiscal years
2001, 2002 and the three months ended June 30, 2002, the ratio improved to
77.8%, 72.7% and 70.4%, respectively, as new branches matured toward
profitability. We will continue to monitor and refine our cost control efforts.
Managing asset quality. As a result of our primary emphasis on residential
lending and investment in U.S. Government and agency securities and our
commitment to conservative loan underwriting and credit review, we historically
have had low levels of delinquencies and credit losses. During fiscal 2002,
however, our non-performing loans increased, from $515,000 at March 31, 2001 to
$3.2 million at March 31, 2002. Non-performing loans totaled $2.7 million at
June 30, 2002, and consisted in large part of a $1.8 million commercial business
and real estate loan concentration. The collateral supporting the loan
concentration has been currently appraised at over $3.0 million. We believe the
concentration is adequately collateralized, and there was no specific allowance
for loss on it at June 30, 2002.
Maintaining capital in excess of regulatory requirements. Our policy is to
maintain financial strength through conservative risk-management and consistent
earnings. At June 30, 2002 and March 31, 2002, Wayne Savings Community Bank had
core capital of $26.4 million and $26.1 million, or 7.89% and 7.79% of total
assets, respectively, which substantially exceeded the regulatory core capital
requirement of 4.0% of total assets. We intend to maintain capital in excess of
regulatory requirements following the offering.
Comparison of Financial Condition at June 30, 2002 and March 31, 2002
Assets. At June 30, 2002, we had total assets of $334.6 million,
reflecting a slight decrease of $237,000 from March 31, 2002 levels.
Cash and cash equivalents and investment securities totaled $53.5 million
at June 30, 2002, an increase of $3.3 million, or 6.6%, over March 31, 2002
levels. During the first quarter of the fiscal year, investment securities
decreased by $1.8 million, or 8.0%, mainly due to repayment of agency securities
that were called by the issuer. Cash and cash equivalents increased by $5.1
million, or 18.2%, to a total of $33.0 million.
Mortgage-backed securities (including mortgage-backed securities available
for sale) totaled $17.8 million at June 30, 2002, a $457,000, or 2.6%, increase
from the $17.3 million total at March 31, 2002. The increase resulted primarily
from purchases of $2.0 million, which were partially offset by principal
repayments totaling $1.5 million.
Loans receivable totaled $247.2 million at June 30, 2002, a decrease of
$3.9 million, or 1.6%, from the March 31, 2002 total. This decrease resulted
mainly from principal repayments on loans totaling $16.4 million and the sale of
loans totaling $3.3 million, which were partially offset by loan originations of
$15.8 million. In view of the low interest rate environment, we chose not to be
among the market leaders in loan pricing.
Allowance for loan losses. At June 30, 2002, the allowance for loan losses
totaled $637,000, or .26% of total loans, compared to $730,000, or .29% of total
loans at March 31, 2002. The decrease in our allowance for loan losses resulted
primarily from a sale of collateral securing a $519,000 nonresidential loan that
was nonperforming at March 31, 2002. The sale of this property was the primary
contributor to a decline in our nonperforming and impaired loans from $3.8
million at March 31, 2002 to $3.4 million at June 30, 2002. In determining the
allowance for loan losses at any point in time, management and the Board apply a
systematic process focusing on the risk of loss in the portfolio. First,
delinquent nonresidential, multi-family and commercial business loans are
evaluated individually for potential impairments in their carrying value. This
analysis resulted in no allocation to the allowance for impaired loans at June
30, 2002.
The second step in determining the allowance for loan losses entails the
application of historic loss experience by applying a historic loss percentage
to the individual loan types in the portfolio. This segment of the loss analysis
resulted in assigning $637,000 to the allowance at June 30, 2002. The analysis
of the allowance for loan losses requires an element of judgment and is subject
to the possibility that the allowance may need to be increased, with a
corresponding reduction in earnings. To the best of management's knowledge, all
known and
43
inherent losses that are probable and that can be reasonably estimated have been
recorded at June 30, 2002 and March 31, 2002.
Nonperforming and impaired loans totaled $3.4 million at June 30, 2002,
compared to $3.8 million at March 31, 2002. At June 30, 2002 these loans
consisted of $1.2 million of nonresidential real estate and consumer loans, $1.4
million of commercial business loans and $764,000 of one- to four-family
residential mortgage loans. The allowance for loan losses totaled 19.0% and
19.2% of nonperforming and impaired loans at June 30, 2002 and March 31, 2002,
respectively. Although management believes that its allowance for loan losses
conforms with generally accepted accounting principles based upon the available
facts and circumstances, there can be no assurance that additions to the
allowance will not be necessary in future periods, which would adversely affect
our results of operations.
Liabilities. Deposits decreased to $300.7 million at June 30, 2002, from
$301.0 million at March 31, 2002. We chose not to be a market leader in jumbo
deposit pricing, allowing existing jumbo deposits to mature and be withdrawn or
retained at lower rates. At June 30, 2002, advances from the Federal Home Loan
Bank remained unchanged from the $5.0 million total at March 31, 2002.
Equity. Stockholders' equity increased 1.5% to $26.4 million at June 30,
2002, due primarily to quarterly earnings of $554,000 which was partially offset
by dividend payments of $207,000.
Comparison of Financial Condition at March 31, 2002 and March 31, 2001
Assets. At March 31, 2002, we had total assets of $334.8 million, an
increase of $23.2 million, or 7.4%, over total assets of $311.6 million at March
31, 2001.
Cash and cash equivalents, certificates of deposit, and investment
securities totaled $50.2 million, an increase of $9.9 million, or 24.7%, from
March 31, 2001 levels. During the fiscal year ended March 31, 2002, investment
securities totaling $7.6 million matured, while $16.3 million of securities were
purchased. Cash and cash equivalents increased by $7.0 million, or 33.4%, to a
total of $27.9 million at March 31, 2002.
Mortgage-backed securities totaled $17.3 million at March 31, 2002, an
$8.8 million, or 102.1%, increase from the total at March 31, 2001. The increase
resulted primarily from purchases of $14.2 million, which were partially offset
by repayments totaling $5.4 million.
Loans receivable, including loans held for sale, totaled $251.2 million at
March 31, 2002, an increase of $3.7 million, or 1.5%, over the March 31, 2001
total. This increase resulted from loan disbursements of $96.5 million, which
were partially offset by principal repayments of $66.1 million and sales of
$27.1 million. The majority of loan disbursements during the 2002 period
consisted of loans secured by one- to four-family residential real estate, which
increased by $3.5 million.
Allowance for Loan Losses. At March 31, 2002, the allowance for loan
losses totaled $730,000, or 0.29% of loans, compared to $655,000, or 0.27% of
loans, at March 31, 2001. After delinquent nonresidential, multi-family and
commercial business loans were evaluated individually for potential impairments
in their carrying value, we specifically considered $105,000 of the allowance as
being related to an impaired nonresidential loan with a principal balance of
$519,000. This loan was repaid in May 2002 without additional loss. The
remainder of the impaired nonresidential, multi-family and commercial business
loans were viewed as well-secured, with no measured loss under SFAS No. 114. As
a result of this detailed loss analysis, the increase in nonperforming loans and
impaired loans to $3.8 million at March 31, 2002, did not result in a
proportional increase in the allowance for loan losses.
After the application of historic loss experience to the individual loan
types in the portfolio, we assigned $625,000 to the allowance for loan losses at
March 31, 2002. To the best of management's knowledge, all known and inherent
losses that are both probable and reasonably estimable as of March 31, 2002,
have been recorded.
Nonperforming loans and impaired loans totaled $3.8 million at March 31,
2002, compared to $1.2 million at March 31, 2001. Nonperforming and impaired
loans at March 31, 2002, consisted of $1.1 million of
44
nonresidential real estate loans and consumer loans, $1.4 million of commercial
business loans and $616,000 of one- to four-family residential mortgage loans.
The allowance for loan losses totaled 19.2% and 56.5% of nonperforming and
impaired loans at March 31, 2002 and 2001, respectively.
Although management believes that its allowance for loan losses conforms
with generally accepted accounting principles based upon the available facts and
circumstances, there can be no assurance that additions to the allowance will
not be necessary in future periods, which would adversely affect our results of
operations.
Liabilities. Deposits increased by approximately $23.3 million, or 8.4%,
to $301.0 million at March 31, 2002. The increase in deposits was attributable
primarily to management's continuing efforts to achieve a moderate rate of
growth through branch expansion, marketing and business strategies. Our deferred
tax liability grew from $455,000 at March 31, 2001 to $767,000 at March 31,
2002. The majority of this $312,000 increase resulted from a $179,000 shift in
our temporary difference related to depreciation expense, a $70,000 increase in
the deferred tax liability related to mortgage servicing rights, and a $74,000
increase in the deferred tax liability related to Federal Home Loan Bank
dividends.
Advances from the Federal Home Loan Bank decreased by $1.0 million, or
16.7%, from $6.0 million outstanding at March 31, 2001, to $5.0 million
outstanding at March 31, 2002.
Equity. Stockholders' equity totaled $26.0 million at March 31, 2002, a
$792,000, or 3.1%, increase over March 31, 2001. The increase was due primarily
to net earnings of $1.8 million, which were partially offset by dividends paid
of $852,000, or $.68 per share, and repurchases of common stock totaling
$178,000.
Comparison of Operating Results for the Three Months Ended June 30, 2002 and
2001
General. Our earnings depend primarily on our net interest income, which
is the difference between interest earned on our interest-earning assets and
interest paid on our interest-bearing liabilities. Net interest income is
substantially affected by our interest rate spread, which is the difference
between the average yield earned on our interest-earning assets and the average
rate paid on our interest-bearing liabilities, as well as by the average balance
of interest-earning assets as compared to interest-bearing liabilities.
Net earnings totaled $554,000 for the three months ended June 30, 2002, an
increase of $179,000, or 47.7%, from net earnings of $375,000 for the same
period in 2001. The increase was primarily attributable to an increase in net
interest income of $479,000, or 23.1%, which was partially offset by a $20,000,
or 5.5%, reduction in other income, a $165,000, or 8.8%, increase in general,
administrative and other expense and a $100,000, or 54.1%, increase in federal
income tax expense.
Interest Income. Interest income on loans declined $361,000, or 7.5%, for
the three months ended June 30, 2002, due primarily to a 56 basis-point decrease
in the average yield on loans generally reflecting the decrease in interest
rates year to year, as well as a $636,000, or 0.3%, reduction in average balance
of loans outstanding from the comparable 2001 quarter.
Interest income on mortgage-backed securities increased $91,000, or 69.5%,
during the quarter ended June 30, 2002, due primarily to a $10.0 million
increase in the average balance outstanding from the comparable 2001 quarter,
which was partially offset by a 164 basis-point decrease in the average yield on
such securities.
Interest income on investments and interest-bearing deposits decreased by
$97,000, or 19.7%, generally reflecting the downward trend in the general level
of interest rates year to year.
Interest Expense. Interest expense for the three months ended June 30,
2002, totaled $2.5 million, a decrease of $846,000, or 25.3%, from interest
expense of $3.3 million for the three months ended June 30, 2001. The decrease
resulted from a 141 basis point decrease in the average cost of funds to 3.29%
in the 2002 quarter, which was partially offset by an increase in the average
balance of deposits and borrowings outstanding of $18.9 million, or 6.6%, to
$303.3 million for the quarter ended June 30, 2002.
45
Interest expense on deposits totaled $2.4 million for the three months
ended June 30, 2002, a decrease of $829,000, or 25.4%, from the three months
ended June 30, 2001, due to a 143 basis point decrease in the average cost of
deposits to 3.26% in the 2002 quarter, which was partially offset by a $19.9
million, or 7.1%, increase in the average balance outstanding to $298.3 million
for the 2002 quarter.
Interest expense on borrowings totaled $65,000 for the three months ended
June 30, 2002, a decrease of $17,000, or 20.7%, from the 2001 quarter, as a
result of a decrease in the average cost of borrowings to 5.20%, coupled with a
decrease in the average balance of borrowings to $5.0 million for the three
months ended June 30, 2002, from $6.0 million for the three months ended June
30, 2001.
Net Interest Income. Net interest income totaled $2.6 million for the
three months ended June 30, 2002, an increase of $479,000, or 23.1%, over the
three-month period ended June 30, 2001. The increase in net interest income was
due primarily to an improvement in our average interest rate spread to 3.13% for
the three months ended June 30, 2002 from 2.55% for the three months ended June
30, 2001. This improvement was due primarily to rates on deposits repricing
downward faster than yields on interest-earning assets. The net interest margin
improved to 3.25% for the three months ended June 30, 2002 from 2.78% for the
three months ended June 30, 2001.
Provision for Losses on Loans. We record a provision for losses on loans
in an amount to cover known losses and losses in the portfolio that are both
probable and reasonable to estimate. Such estimates were based on the facts and
circumstances in existence as of June 30, 2002, and include a consideration of
the factors discussed elsewhere herein relating to the change in nonperforming
loans at June 30, 2002. We recorded a provision for losses on loans of $17,000
and $2,000 for the three-month periods ended June 30, 2002 and 2001,
respectively. To the best of management's knowledge, all known and inherent
losses that are both probable and reasonably estimable as of June 30, 2002 and
2001 have been recorded.
Other Income. Other income, consisting primarily of gains on sale of
loans, service fees, and charges on deposit accounts, decreased by $20,000, or
5.5%, to $344,000 for the three months ended June 30, 2002, from $364,000 for
the three months ended June 30, 2001. The decline resulted primarily from a
reduction of $60,000, or 78.9%, in gains on sale of loans, which reflected our
decision to retain more loans in our portfolio rather than sell higher-yielding
current loan production in view of our high liquidity position. Service fees,
charges and other operating income increased by $40,000, or 13.9%, to $328,000,
for the three months ended June 30, 2002, due primarily to enhanced service fees
on deposit accounts and credit cards and to increased debit card fees.
General, Administrative and Other Expense. General, administrative and
other expense increased by $165,000, or 8.8%, to $2.0 million for the three
months ended June 30, 2002, compared to the three months ended June 30, 2001.
The increase resulted primarily from a $91,000, or 8.6%, increase in employee
compensation and benefits and a $49,000, or 14.8%, increase in occupancy and
equipment. The increase in employee compensation and benefits was attributable
primarily to normal merit pay increases, an increase in employee benefit plan
costs, and additional staff needed for operating a full service branch that
opened in May 2001 and a drive-through facility that opened in August 2001. The
increase in occupancy and equipment expense resulted primarily from costs
incurred in the new operating facilities.
Federal Income Taxes. The provision for federal income taxes was $285,000
for the three months ended June 30, 2002, an increase of $100,000, or 54.1%,
compared to the same period in 2001. The increase resulted primarily from a
$279,000, or 49.8%, increase in pretax earnings year to year. The effective tax
rates for the three months ended June 30, 2002 and 2001 were 34.0% and 33.0%,
respectively.
Comparison of Operating Results for the Years Ended March 31, 2002 and 2001
Net earnings totaled $1.8 million for the fiscal year ended March 31,
2002, an increase of $491,000, or 36.9%, from net earnings of $1.3 million for
the fiscal year ended March 31, 2001. The increase was due primarily to a
$555,000, or 6.6%, increase in net interest income and a $612,000, or 58.6%,
increase in other income, which were partially offset by a $374,000, or 5.1%,
increase in general, administrative and other expense, a $264,000, or 39.1%,
increase in federal income taxes, and a $38,000, or 39.6%, increase in the
provision for losses on loans.
46
Interest Income. Interest income on loans totaled $19.1 million for the
fiscal year ended March 31, 2002, an increase of $358,000, or 1.9%, from
interest income of $18.7 million for fiscal 2001. The increase in interest
income on loans was due primarily to a $7.4 million, or 3.0%, increase in the
average balance of loans to $253.1 million, which was partially offset by a
decrease in the average yield of 8 basis points to 7.53% for the fiscal year
ended March 31, 2002.
Interest income on mortgage-backed securities decreased $12,000, or 2.1%,
to $571,000 for fiscal year 2002 from $583,000 for fiscal year 2001. The
decrease was primarily attributable to a 46 basis point decrease in the average
yield to 5.52%, which was partially offset by a $586,000, or 6.0%, increase in
the average balance of mortgage-backed securities.
Interest income on investments and interest-bearing deposits decreased
$543,000, or 24.4%, to $1.7 million for the fiscal year ended March 31, 2002
from $2.2 million for fiscal year 2001. The decrease was primarily attributable
to a decrease in the average yield of 284 basis points to 3.93%, which was
partially offset by a $9.9 million, or 30.1%, increase in the average
outstanding balance to $42.7 million for the fiscal year ended March 31, 2002.
Interest Expense. Interest expense on deposits decreased $597,000, or
4.7%, to $12.1 million for the fiscal year ended March 31, 2002 from $12.7
million for fiscal year 2001. The decrease in interest expense on deposits was
attributable primarily to a 70 basis point decrease in the average cost of
deposits to 4.17% for the fiscal year ended March 31, 2002, which was partially
offset by a $29.0 million, or 11.1%, increase in the average outstanding balance
of deposits to $288.9 million in fiscal 2002.
Interest expense on borrowings decreased $155,000, or 34.6%, to $293,000
for the fiscal year ended March 31, 2002, from $448,000 for fiscal year 2001.
The decrease in interest expense on borrowings was attributable to a 37 basis
point decrease in the average cost of borrowings to 5.32% for the fiscal year
ended March 31, 2002, from 5.69% for the fiscal year ended March 31, 2001,
coupled with a $2.4 million, or 30.1%, decrease in the average outstanding
balance of borrowings.
Net Interest Income. Net interest income totaled $9.0 million for the
fiscal year ended March 31, 2002, an increase of $555,000, or 6.6%, over the
$8.4 million of net interest income in fiscal year 2001. The increase in net
interest income was primarily attributable to interest rate spread which
increased by 20 basis points to 2.77% in fiscal 2002 from 2.57% in fiscal 2001.
The improvement in our interest rate spread resulted primarily from interest
rates on our deposits repricing downward more quickly than the interest rates on
our loans. The net interest margin increased to 2.93% for the fiscal year ended
March 31, 2002 from 2.92% for fiscal 2001.
Provision for Losses on Loans. Based on the facts and circumstances in
existence as of March 31, 2002, and after a consideration of the factors
discussed elsewhere herein relating to the increase in nonperforming loans at
March 31, 2002, we recorded a provision for losses on loans of $134,000 and
$96,000 for the fiscal years ended March 31, 2002 and 2001, respectively. To the
best of management's knowledge, all known and inherent losses that are both
probable and reasonably estimable as of March 31, 2002 and 2001 have been
recorded.
Other Income. Other income, consisting primarily of gain on sale of loans,
service fees, and charges on deposit accounts, increased by $612,000, or 58.6%,
to $1.7 million for the fiscal year ended March 31, 2002, compared to fiscal
year 2001. The increase in other income was attributable primarily to an
increase of $360,000, or 233.8%, in gain on sale of loans. Service fees, charges
and other operating income increased by $252,000, or 28.3%, to $1.1 million for
the fiscal year ended March 31, 2002, due primarily to increased income from
credit cards and an enhanced service fee structure implemented on deposit
accounts in July 2000.
General, Administrative and Other Expense. General, administrative and
other expense totaled $7.7 million for the fiscal year ended March 31, 2002, an
increase of $374,000, or 5.1%, over the $7.3 million for fiscal 2001. The
increase in general, administrative and other expense was attributable primarily
to a $355,000, or 9.0%, increase in employee compensation and benefits, a
$53,000, or 4.0%, increase in occupancy and equipment expense, and a $44,000, or
19.1%, increase in franchise taxes, which were partially offset by a $115,000
reduction in operating expenses previously paid by Wayne Savings Bankshares,
MHC. We replaced our data processing equipment in February 2002 at the
approximate cost of $500,000, which will be depreciated over a five-year period.
47
The increase in employee compensation and benefits was primarily
attributable to normal merit pay increases, an increase in employee benefit plan
costs and additional staff needed for operating a new full service branch and a
new drive-through facility. The increase in occupancy and equipment expense was
attributable primarily to costs incurred in the new operating facilities. The
increase in franchise taxes was due to refunds received in fiscal year 2001 that
were not applicable for fiscal year 2002.
In connection with the offering, during fiscal year 2002 management
reviewed and restated the consolidated financial statements for the years ended
March 31, 2001, 2000 and 1999 to present certain matters in accordance with
generally accepted accounting principles. First, management restated the
consolidated financial statements to include as expenses certain operating costs
that were previously paid or reimbursed by Wayne Savings Bankshares, MHC. The
adjustment related to Wayne Savings Bankshares, MHC's reimbursements resulted in
a reduction of net earnings of $90,000, or $.03 per diluted share, $157,000, or
$.06 per diluted share (including $122,000 in previously reimbursed
organizational costs, net of tax), and $11,000, or $.00 per diluted share, for
each of the three years ended March 31, 2001, 2000 and 1999, respectively, which
were substantially offset by an increase to stockholders' equity as a result of
a reduction in cash dividends paid to Wayne Savings Bankshares, MHC totaling
$258,000. See Notes A-12 and O to the Consolidated Financial Statements.
Additionally, management restated Wayne Savings Bancshares, Inc.'s fiscal years
2001, 2000 and 1999 consolidated financial statements for various adjustments
related to depreciation expense and other adjustments. These adjustments
resulted in a decrease in net earnings of $39,000, or $.02 per diluted share in
fiscal year 2001, an increase in net earnings of $54,000, or $.02 per diluted
share in fiscal year 2000, and a decrease of $4,000, or $.00 per diluted share
in fiscal year 1999. The combined effect of all adjustments resulted in a
reduction in net earnings of $129,000, or $.05 per diluted share in fiscal year
2001, $103,000, or $.04 per diluted share in fiscal year 2000, and $15,000, or
$.00 per diluted share in fiscal year 1999. The cumulative effect of these
adjustments on stockholders' equity at March 31, 2001, was a decrease of
$30,000, or $.01 per diluted share. For additional information regarding the
restatement, we refer you to Note R to the restated consolidated financial
statements contained in our Annual Report on Form 10-KSB, as amended, for the
fiscal year ended March 31, 2001, which was filed with the Securities and
Exchange Commission on October 15, 2002 and the note entitled "Restatement of
Consolidated Financial Statements" in our Quarterly Report on Form 10-QSB, as
amended, for the three and nine months ended December 31, 2001, which was filed
with the Securities and Exchange Commission on October 1, 2002.
Federal Income Taxes. The provision for federal income taxes was $939,000
for the fiscal year ended March 31, 2002, an increase of $264,000, or 39.1%,
compared to fiscal year 2001. The increase resulted primarily from a $755,000,
or 37.6%, increase in pretax earnings. The effective tax rate for the fiscal
year ended March 31, 2002, was 34.0%, as compared to 33.6% for fiscal year 2001.
Comparison of Operating Results for the Years Ended March 31, 2001 and March 31,
2000
General. Net earnings totaled $1.3 million for the fiscal year ended March
31, 2001, a 16.0% increase over net earnings of $1.1 million in the prior fiscal
year. The increase in earnings in fiscal 2001 was due primarily to an $86,000
decrease in general, administrative and other expense, coupled with a $126,000
increase in gain on sale of loans and an increase in service fees, charges and
other operating income of $171,000, which were partially offset by a $51,000
increase in the provision for federal income taxes and a $280,000, or 3.2%,
decrease in net interest income. Our net earnings in fiscal year 2000 were also
negatively impacted by the change in accounting principle related to
organizational costs of $122,000, net of tax, that were previously reimbursed by
Wayne Savings Bankshares, MHC. For additional information, see Note A-12 of the
Notes to Consolidated Financial Statements.
Interest Income. Interest income totaled $21.5 million for the fiscal year
ended March 31, 2001, an increase of $806,000, or 3.9%, from interest income of
$20.7 million for the fiscal year ended March 31, 2000. Interest income
increased due to an increase in the average balance of interest-earning assets
of $11.5 million, or 4.1%, to $288.2 million, which was partially offset by a
decrease in the average yield on interest-earning assets to 7.46% from 7.48% for
the prior year.
Interest income on loans increased by $774,000, or 4.3%, due to a $15.8
million, or 6.9%, increase in the average balance of loans outstanding, which
was partially offset by a decrease in the average yield on loans to 7.61% from
7.80%.
48
Interest income on mortgage-backed securities decreased by $19,000, or
3.2%, primarily due to a $398,000, or 3.9%, decrease in the average balance of
mortgage-backed securities to $9.8 million for the year ended March 31, 2001.
The yield on these assets increased to 5.98%, from 5.93% for the previous year.
Interest income on investment securities and interest-bearing deposits
increased by $51,000, or 2.3%, primarily as a result of an increase in average
yield. The average yield on investment securities increased to 7.36% from 6.86%
for the prior year, while the yield on interest-bearing deposits rose to 5.93%
from 5.25% for the prior fiscal year. The average balance of these assets
decreased by approximately $3.9 million, as we funded loan growth.
Interest Expense. Interest expense for the fiscal year ended March 31,
2001, totaled $13.1 million, an increase of $1.1 million, or 9.0%, from interest
expense of $12.0 million for the previous year. The increase resulted from an
increase in the average balance of interest-bearing liabilities of $6.8 million,
or 2.6%, to $267.8 million, coupled with an increase in the average cost of
funds to 4.89% for the fiscal year ended March 31, 2001, from 4.60% for the
previous fiscal year.
Interest expense on deposits increased $1.1 million, or 9.7%, to $12.7
million as a result of an increase in the cost of deposits from 4.57% to 4.87%
in fiscal 2001 due to generally rising market interest rates, coupled with an
increase in average deposits outstanding from $252.3 million for fiscal year
2000 to $259.9 million in fiscal year 2001.
Interest expense on borrowings for the fiscal year ended March 31, 2001
decreased $36,000, or 7.4%, to $448,000. The decrease was the result of a
decrease in the average balance of borrowings outstanding of $719,000, or 8.4%,
which was partially offset by an increase in the average cost of borrowings from
5.63% to 5.69%, in fiscal 2001.
Net Interest Income. Net interest income decreased to $8.4 million for the
fiscal year ended March 31, 2001 from $8.7 million for the previous fiscal year,
as our interest rate spread decreased to 2.57% in fiscal year 2001 from 2.88% in
fiscal year 2000. This was partially offset by growth of $11.5 million in
average interest-earning assets and an increase in the ratio of average
interest-earning assets to average interest-bearing liabilities to 107.62% in
fiscal year 2001 from 106.05% in fiscal year 2000.
Provision for Losses on Loans. We recorded a provision for losses on loans
of $96,000 for the fiscal year ended March 31, 2001, primarily due to the
application of historic loss percentages to the loan portfolio balance, coupled
with our assessment of the collateral securing non-performing loans.
Other Income. Other income, consisting primarily of gain on sale of loans,
service fees and charges on deposit accounts, increased by $297,000, or 39.7%,
to $1.0 million for fiscal year 2001. The increase was primarily a result of an
increase of $126,000, or 450.0%, in gain on sale of fixed-rate mortgage loans.
Fixed-rate mortgage loans sold totaled $9.2 million compared to $6.4 million
sold in the previous fiscal year. Service fees, charges and other operating
income increased by $171,000, or 23.8%, to $891,000 in fiscal year 2001,
partially because fees relating to deposit accounts increased due to an enhanced
fee structure implemented in July 2000.
General, Administrative and Other Expense. General, administrative and
other expense, consisting primarily of employee compensation and benefits,
occupancy and equipment expense, federal deposit insurance premiums, and other
operating expenses, totaled $7.3 million for the year ended March 31, 2001, a
decrease of $86,000, or 1.2%, compared to fiscal year 2000. The decrease was
primarily a result of a decrease in federal deposit insurance premiums of
$87,000, or 50.3%, a decrease in occupancy and equipment expense of $59,000, or
4.2%, and a decrease in state franchise taxes of $99,000, or 30.1%, which were
partially offset by an increase of $140,000, or 3.7%, in employee compensation
and benefits. The decrease in federal deposit insurance premiums was due to a
reduction in premium rates. The decrease in state franchise taxes (which are
calculated based on equity capital) reflected refunds received in fiscal year
2001, as well as a decline in the rate of tax year to year. The decrease in
occupancy and equipment expense generally reflected a reduction in depreciation
expense due to assets becoming fully depreciated in fiscal year 2001. The
increase in employee compensation and benefits was due primarily to normal merit
pay increases and a reduction in the level of deferred loan origination costs
year to year.
49
Income Taxes. The provision for income taxes totaled $675,000 for the year
ended March 31, 2001, an increase of $51,000, or 8.2%, compared to the $624,000
provision recorded for the previous fiscal year. The increase in income taxes
generally reflected the higher pre-tax earnings for the fiscal year ended March
31, 2001. The effective tax rates were 33.6% and 32.9% for the years ended March
31, 2001 and 2000, respectively.
Average Balances, Net Interest Income and Yields Earned and Rates Paid
The following tables set forth certain information relating to our average
balance sheet and reflects the average yield on assets and average cost of
liabilities for the periods indicated and the average yields earned and rates
paid. The average balances have been derived using daily average balances. Such
yields and costs are derived by dividing income or expense by the average
balance of assets or liabilities, respectively, for the periods presented.
Three Months Ended June 30,
-----------------------------------------------------------------------
2002 2001
--------------------------------- ---------------------------------
Average Average Average Average
Balance Interest Rate Balance Interest Rate
-------- -------- ------ ------- -------- ------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1) ......... $248,688 $ 4,432 7.13% $249,324 $ 4,793 7.69%
Mortgage-backed securities(2) .... 18,028 222 4.93 7,981 131 6.57
Investment securities ............ 21,688 255 4.70 12,625 207 6.56
Interest-bearing deposits(3) ..... 25,992 140 2.15 28,725 285 3.97
-------- -------- -------- --------
Total interest-earning assets .... 314,396 5,049 6.42 298,655 5,416 7.25
Non-interest-earning assets ...... 20,739 13,944
-------- --------
Total assets ..................... $335,135 $312,599
======== ========
Interest-bearing liabilities:
Deposits ......................... $298,323 2,433 3.26 $278,441 3,262 4.69
Borrowings ....................... 5,000 65 5.20 6,000 82 5.47
-------- -------- -------- --------
Total interest-bearing liabilities 303,323 2,498 3.29 284,441 3,344 4.70
Non-interest-bearing liabilities . 5,527 2,923
-------- --------
Total liabilities ................ 308,850 287,364
Stockholders' equity ............. 26,285 25,235
-------- --------
Total liabilities and
stockholders' equity ............ $335,135 $312,599
======== ========
Net interest income .............. $ 2,551 $ 2,072
======== ========
Interest rate spread(4) .......... 3.13% 2.55%
====== ======
Net yield on interest-earning
assets(5) ....................... 3.25% 2.78%
====== ======
Ratio of average interest-earning
assets to average
interest-bearing liabilities .... 103.65% 105.00%
====== ======
- ----------
(1) Includes non-accrual loan balances.
(2) Includes mortgage-backed securities designated as available for sale.
(3) Includes federal funds sold and interest-bearing deposits in other
financial institutions.
(4) Interest rate spread represents the difference between the average yield on
average interest-earning assets and the average cost of average
interest-bearing liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
50
Year Ended March 31,
-------------------------------------------------------------------------------------------------
2002 2001 2000
---------------------------------- ------------------------------ -----------------------------
Average Average Average Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
---------- ---------- ---------- -------- -------- --------- --------- -------- ------
(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1) ......... $253,058 $ 19,059 7.53% $245,624 $ 18,701 7.61% $229,845 $17,927 7.80%
Mortgage-backed securities(2) .... 10,340 571 5.52 9,754 583 5.98 10,152 602 5.93
Investment securities ............ 15,628 871 5.57 19,342 1,423 7.36 15,053 1,033 6.86
Interest-bearing deposits(3) ..... 27,083 808 2.98 13,481 799 5.93 21,669 1,138 5.25
-------- -------- -------- -------- -------- ------- ----
Total interest-earning assets .... 306,109 21,309 6.96 288,201 21,506 7.46 276,719 20,700 7.48
Non-interest-earning assets ...... 17,057 10,727 16,165
-------- -------- --------
Total assets ..................... $323,166 $298,928 $292,884
======== ======== ========
Interest-bearing liabilities:
Deposits ......................... $288,882 12,055 4.17 $259,914 12,652 4.87 $252,346 11,530 4.57
Borrowings ....................... 5,505 293 5.32 7,877 448 5.69 8,596 484 5.63
-------- -------- -------- -------- -------- -------
Total interest-bearing liabilities 294,387 12,348 4.19 267,791 13,100 4.89 260,942 12,014 4.60
Non-interest-bearing liabilities . 3,159 5,893 6,844
-------- -------- --------
Total liabilities ................ 297,546 273,684 267,786
Stockholders' equity ............. 25,620 25,244 25,098
-------- -------- --------
Total liabilities and
stockholders' equity ............ $323,166 $298,928 $292,884
======== ======== ========
Net interest income .............. $ 8,961 $ 8,406 $ 8,686
======== ======== =======
Interest rate spread(4) .......... 2.77% 2.57% 2.88%
======== ======== ========
Net yield on interest-earning
assets(5) ....................... 2.93% 2.92% 3.14%
======== ======== ========
Ratio of average interest-earning
assets to average
interest-bearing liabilities .... 103.98% 107.62% 106.05%
======== ======== ========
- ----------
(1) Includes non-accrual loan balances.
(2) Includes mortgage-backed securities designated as available for sale.
(3) Includes federal funds sold and interest-bearing deposits in other
financial institutions.
(4) Interest rate spread represents the difference between the average yield on
average interest-earning assets and the average cost of average
interest-bearing liabilities.
(5) Net yield on interest-earning assets represents net interest income as a
percentage of average interest-earning assets.
51
Rate/Volume Analysis
The table below sets forth certain information regarding changes in our
interest income and interest expense for the periods indicated. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in average volume
(changes in average volume multiplied by old rate); and (ii) changes in rate
(changes in rate multiplied by old average volume). Changes in rate-volume
(changes in rate multiplied by the changes in average volume) has been allocated
proportionately between changes in rate and changes in volume, and the net
change.
Three Months Ended June 30, Year Ended March 31,
------------------------------ ----------------------------------------------------------------
2002 vs. 2001 2002 vs. 2001 2001 vs. 2000
------------------------------ ------------------------------ --------------------------------
Increase (Decrease) Increase (Decrease) Increase (Decrease)
Due to Total Due to Total Due to Total
------------------- Increase ------------------- Increase ------------------- Increase
Volume Rate (Decrease) Volume Rate (Decrease) Volume Rate (Decrease)
------- ------- ---------- ------- ------- ---------- -------- ------- ---------
(In thousands)
Interest income attributable to:
Loans receivable ................ $ (12) $ (349) $ (361) $ 534 $ (176) $ 358 $ 1,218 $ (444) $ 774
Mortgage-backed securities ...... 131 (40) 91 34 (46) (12) (24) 5 (19)
Other interest-earning assets ... 68 (165) (97) 552 (1,095) (543) (245) 296 51
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-earning assets ... 187 (554) (367) 1,120 (1,317) (197) 949 (143) 806
Interest expense attributable to:
Deposits ........................ 219 (1,048) (829) 1,328 (1,925) (597) 352 770 1,122
Borrowings ...................... (14) (3) (17) (128) (27) (155) (41) 5 (36)
------- ------- ------- ------- ------- ------- ------- ------- -------
Total interest-bearing
liabilities ................... 205 (1,051) (846) 1,200 (1,952) (752) 311 775 1,086
------- ------- ------- ------- ------- ------- ------- ------- -------
Increase (decrease) in net
interest income ................ $ (18) $ 497 $ 479 $ (80) $ 635 $ 555 $ 638 $ (918) $ (280)
======= ======= ======= ======= ======= ======= ======= ======= =======
Asset and Liability Management-Interest Rate Sensitivity Analysis
Like other financial institutions, we are subject to interest rate risk to
the extent that our interest-earning assets reprice or mature at a different
time than our interest-bearing liabilities. As part of our effort to monitor and
manage interest rate risk, we use the "net portfolio value" ("NPV") methodology
adopted by the Office of Thrift Supervision as part of its interest rate
sensitivity regulations. The application of NPV methodology illustrates certain
aspects of our interest rate risk.
Generally, NPV is the discounted present value of the difference between
incoming cash flows on interest-earning and other assets and outgoing cash flows
on interest-bearing and other liabilities. The application of the methodology
attempts to quantify interest rate risk as the change in the NPV that would
result from a theoretical 300 basis point (1 basis point equals .01%) change in
market interest rates. Both a 300 basis point increase in market interest rates
and a 300 basis point decrease in market interest rates are considered.
Presented below as of June 30, 2002, is an analysis of our interest rate
risk as measured by changes in NPV for instantaneous and sustained parallel
shifts of 100-300 basis points in market interest rates.
As of June 30, 2002
- ----------------------------------------------------------------------------------------
Change in Interest Net Portfolio Value NPV as % of PV of Assets
- -------------------- ----------------------------------- ------------------------
Rates (Basis points) $ Amount $ Change % Change NPV Ratio Change
- -------------------- -------- -------- -------- ---------- ---------
(Dollars in thousands)
+300 bp $26,072 $(18,500) (42)% 7.88% (472 bp)
+200 bp 32,845 (11,727) (26) 9.69 (291 bp)
+100 bp 39,063 (5,509) (12) 11.26 (133 bp)
0 bp 44,572 -- -- 12.60 --
-100 bp 46,530 1,958 4 13.02 42 bp
-200 bp 45,893 1,321 3 12.81 21 bp
-300 bp 45,017 445 1 12.56 (4 bp)
As with any method of measuring interest rate risk, certain shortcomings
are inherent in the NPV approach. For example, although certain assets and
liabilities may have similar maturities or periods of repricing, they may
52
react differently to changes in market interest rates. Also, the interest rates
on certain types of assets and liabilities may fluctuate in advance of changes
in market interest rates, while interest rates on other types may lag behind
changes in market rates. Further, in the event of a change in interest rates,
expected rates of prepayment on loans and mortgage-backed securities and early
withdrawal levels from certificates of deposit would likely deviate
significantly from those assumed in making the risk calculations.
Our policy in recent years has been to attempt to reduce our exposure to
interest rate risk generally by better matching the maturities of our interest
rate sensitive assets and liabilities and by originating adjustable rate
mortgage ("ARM") loans and other adjustable rate or short-term loans, as well as
by purchasing short-term investments. However, particularly in the lower
long-term interest rate environment that currently exists, borrowers typically
prefer fixed rate loans to ARM loans. Accordingly, ARM loan originations were
very limited during the three months ended June 30, 2002 and the fiscal year
ended March 31, 2002. During the three months ended June 30, 2002 and the fiscal
year ended March 31, 2002, $1.9 million and $27.1 million, respectively, of
long-term fixed rate loans were sold as part of our strategy to reduce interest
rate risk. We have tried to lengthen the maturities of our deposits by promoting
longer-term certificates; however, we have not been successful in lengthening
the maturities of our deposits in the generally low interest rate environment
that has existed during the periods.
We have an Asset-Liability Management Committee that is responsible for
reviewing our asset-liability policies. The Committee meets weekly and reports
monthly to the Board of Directors on interest rate risks and trends, as well as
liquidity and capital ratios and requirements. We have operated within the
framework of its prescribed asset/liability risk ranges for each of the last
three fiscal years.
Liquidity and Capital Resources
Wayne Savings Community Bank is required to maintain minimum levels of
liquid assets as defined by Office of Thrift Supervision regulations, in order
to operate in a safe and sound manner. Liquidity is calculated as a percentage
of deposits and short-term borrowings. We adjust our liquidity levels to fund
deposit outflows, pay real estate taxes on mortgage loans, repay our borrowings
and fund loan commitments. We also adjust liquidity as appropriate to meet asset
and liability management objectives.
Our primary sources of funds are deposits, amortization and prepayment of
loans and mortgage-backed securities, maturing investment securities and other
short-term investments, and earnings and funds provided from operations. While
scheduled principal repayments on loans and mortgage-backed securities are a
relatively predictable source of funds, deposit flows and loan prepayments are
influenced greatly by market interest rates, economic conditions, and
competition. We set the interest rates on our deposits to maintain a desired
amount of total deposits. In addition, we invest excess funds in short-term
interest-earning and other assets, which provide liquidity to meet our lending
requirements. Cash and cash equivalents (including interest bearing deposits in
other financial institutions and federal funds sold) totaled $33.0 million,
$27.9 million, $20.9 million, and $14.3 million at June 30, 2002 and at March
31, 2002, 2001, and 2000, respectively. For additional information about cash
flows from our operating, financing, and investing activities, see Consolidated
Statements of Cash Flows included in the Consolidated Financial Statements.
Liquidity management is both a daily and long-term function of management.
If we require funds beyond our ability to generate them internally, we can
borrow from the Federal Home Loan Bank of Cincinnati pursuant to existing
borrowing agreements. At June 30, 2002 and March 31, 2002, we had $5.0 million
of advances from the Federal Home Loan Bank of Cincinnati. We borrow from the
Federal Home Loan Bank of Cincinnati in order to reduce interest rate risk and
for liquidity purposes.
At June 30, 2002 and March 31, 2002, we had $2.8 million and $5.4 million
of commitments to originate loans, respectively. These amounts did not include
the unfunded portion of loans in process. Certificates of deposit scheduled to
mature in less than one year totaled $123.5 million and $142.5 million at June
30, 2002 and March 31, 2002, respectively. Based on prior experience, we believe
that a significant portion of such deposits will remain with Wayne Savings
Community Bank, although there can be no assurance that this will be the case.
53
Regulatory Capital
The table below sets forth Wayne Savings Community Bank's capital position
(consolidated with Village Savings Bank) relative to its regulatory capital
requirements at June 30, 2002 and March 31, 2002. The definitions of the terms
used in the table are those provided in the capital regulations issued by the
Office of Thrift Supervision. See "Regulation - Federal Regulation of Savings
Banks - Capital Requirements."
At June 30, 2002 At March 31, 2002
------------------ ------------------
Percent of Percent of
Amount Assets Amount Assets
------- ---------- ------- ----------
(Dollars in thousands)
Tangible Capital:
Capital level ..................... $26,411 7.89% $26,063 7.79%
Requirement ....................... 5,020 1.50 5,021 1.50
------- ----- ------- -----
Excess .......................... $21,391 6.39% $21,042 6.29%
======= ===== ======= =====
Core Capital:
Capital level ..................... $26,411 7.89% $26,063 7.79%
Requirement ....................... 13,386 4.00 13,389 4.00
------- ----- ------- -----
Excess .......................... $13,025 3.89% $12,674 3.79%
======= ===== ======= =====
Risk-Based Capital:
Capital level ..................... $27,038 15.57% $26,688 14.13%
Requirement ....................... 13,891 8.00 15,108 8.00
------- ----- ------- -----
Excess .......................... $13,147 7.57% $11,580 6.13%
======= ===== ======= =====
Impact of Inflation and Changing Prices
The consolidated financial statements of Wayne Savings Bancshares, Inc.
and notes thereto, presented elsewhere herein, have been prepared in accordance
with accounting principles generally accepted in the United States of America,
which require the measurement of financial position and operating results in
terms of historical dollars without considering the change in the relative
purchasing power of money over time and due to inflation. The impact of
inflation is reflected in the increased cost of Wayne Savings Community Bank's
operations. Unlike most industrial companies, nearly all the assets and
liabilities of Wayne Savings Community Bank are monetary. As a result, interest
rates have a greater impact on Wayne Savings Community Bank's performance than
the effects of inflation generally. Interest rates do not necessarily move in
the same direction or to the same extent as changes in the price of goods and
services.
Impact of Recent Accounting Pronouncements
In September 2000, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") No. 140 "Accounting
for Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities," which revises the standards for accounting for securitizations and
other transfers of financial assets and collateral and requires certain
disclosures, but carries over most of the provisions of SFAS No. 125 without
reconsideration. SFAS No. 140 is effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after March 31,
2001. The Statement is effective for recognition and reclassification of
collateral and for disclosures relating to securitization transactions and
collateral for fiscal years ending after December 15, 2000. Management adopted
SFAS No. 140 effective April 1, 2001, as required, without material effect on
our consolidated financial position or results of operations.
In June 2001, the FASB issued SFAS No. 141 "Business Combinations," which
requires that all business combinations initiated after June 30, 2001 be
accounted for using the purchase method. The pooling-of-interests method of
accounting is prohibited except for combinations initiated before June 30, 2001.
The remaining provisions of SFAS No. 141 relating to business combinations
accounted for by the purchase method, including identification of intangible
assets, accounting for negative goodwill, and financial statement presentation
and disclosure, are effective for combinations completed after June 30, 2001.
Management will follow the provisions of SFAS No. 141 for any acquisitions.
54
In June 2001, the FASB issued SFAS No. 142 "Goodwill and Intangible
Assets," which prescribed accounting for all purchased goodwill and intangible
assets. Pursuant to SFAS No. 142, acquired goodwill is not amortized, but is
tested for impairment at the reporting unit level annually and whenever an
impairment indicator arises.
SFAS No. 142 is effective for fiscal years beginning after December 15,
2001. SFAS No. 142 will have no current effect on our financial position or
results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 carries over the
recognition and measurement provisions in SFAS No. 121. Accordingly, an entity
should recognize an impairment loss if the carrying value of a long-lived asset
or asset group (a) is not recoverable and (b) exceeds its fair value. Similar to
SFAS No. 121, SFAS No. 144 requires an entity to test an asset or asset group
for impairment whenever events or changes in circumstances indicate that its
carrying amount may not be recoverable. SFAS No. 144 differs from SFAS No. 121
in that it provides guidance on estimating future cash flows to test
recoverability. An entity may use either a probability-weighted approach or
best-estimate approach in developing estimates of cash flow to test
recoverability. SFAS No. 144 is effective for financial statements issued for
fiscal years beginning after December 15, 2001 and interim periods within those
fiscal years. Management adopted SFAS No. 144 effective April 1, 2002, without
material effect on our financial condition or results of operations.
55
BUSINESS OF WAYNE SAVINGS BANCSHARES, INC.
AND WAYNE SAVINGS COMMUNITY BANK
Wayne Savings Bancshares, Inc.
Wayne Savings Bancshares, Inc. is a federal corporation that was organized
in August 1997. Its only significant asset is its investment in Wayne Savings
Community Bank. Wayne Savings Bancshares, Inc. is majority-owned by Wayne
Savings Bankshares, MHC, a federally-chartered mutual holding company. In
November 1997, Wayne Savings Bancshares, Inc. acquired all of the issued and
outstanding common stock of Wayne Savings Community Bank in connection with the
reorganization into the "two-tier" form of mutual holding company ownership. At
that time, each share of Wayne Savings Community Bank's common stock was
automatically converted into one share of Wayne Savings Bancshares, Inc. common
stock.
Wayne Savings Community Bank
Wayne Savings Community Bank is an Ohio-chartered community bank
headquartered in Wooster, Ohio. Its deposits are insured by the Federal Deposit
Insurance Corporation under the Savings Association Insurance Fund. The Bank has
been a member of the Federal Home Loan Bank System since 1937.
Wayne Savings Community Bank offers a broad range of financial products
and services to its local community. The Bank's primary lending and
deposit-taking area includes Wayne, Holmes, Ashland, and Medina counties, where
it operates nine full-service offices. This contiguous four-county area is
located in north central Ohio, and is an active manufacturing and agricultural
market. The Bank's principal business activity consists of originating one- to
four-family residential mortgage loans in its market area. The Bank also
originates multi-family residential and non-residential real estate loans,
although such loans constitute a small portion of the Bank's lending activities
and loan portfolio. The Bank also originates consumer loans, and to a lesser
extent, construction loans and commercial business loans. The Bank also invests
in mortgage-backed securities and currently maintains a significant portion of
its assets in liquid investments, such as United States Government securities,
federal funds, and deposits in other financial institutions.
Wayne Savings Community Bank owns Village Savings Bank as a
federally-chartered stock savings bank subsidiary. Village Savings Bank is
headquartered in North Canton, Ohio. Village Savings Bank's deposits are insured
by the Federal Deposit Insurance Corporation under the Savings Association
Insurance Fund. Village Savings Bank is a member of the Federal Home Loan Bank
system.
Village Savings Bank is a community-oriented financial institution that
offers a broad range of financial products and services to its local community.
Its primary lending and deposit-taking area includes North Canton, Jackson
Township and Plain Township, which are all located in Stark County. Its
principal business activity consists of originating one- to four-family
residential mortgage loans in its market area. Village Savings Bank also
originates multi-family residential and non-residential real estate loans,
although such loans constitute a small portion of its lending activities.
Village Savings Bank also originates consumer loans and, to a lesser extent,
construction loans. It also invests in mortgage-backed securities and currently
maintains a significant portion of its assets in liquid investments, such as
United States Government securities, federal funds, and deposits in other
financial institutions.
Market Area/Local Economy
Wayne County has a diverse economic base, which is not dependent on any
particular industry or employer. It is one of the leading agricultural counties
in the state. Since 1892, Wooster has been the headquarters of the Ohio
Agricultural Research and Development Center, the agricultural research arm of
The Ohio State University. In addition, Wayne County is the home base of such
nationally known companies as Rubbermaid Incorporated, J.M. Smucker Company
(located in the City of Orrville) and the Wooster Brush Company. It is also the
home of many industrial plants, including those of Carauster Composite
Container, Morton Salt, Bell and Howell Micro Photo Division, FritoLay, Inc.,
and The Gerstenslager Company. Wayne County is also known for the excellence of
its educational institutions. The College of Wooster was founded in 1866. Other
educational centers include the Agricultural Technical Institute of Ohio State
University, and Wayne College, a branch of The
56
University of Akron. Wayne Savings Community Bank operates four full-service
offices in Wooster and one full-service office in Rittman.
Ashland County, which is located due west of Wayne County, also has a
diverse economic base. In addition to its agricultural segment, Ashland County
has manufacturing plants producing rubber and plastics, machinery,
transportation equipment, chemicals, apparel, and other items. Ashland is also
the home of Ashland University. The City of Ashland is the county seat and the
location of two of Wayne Savings Community Bank's branch offices.
Medina County, located just north of Wayne County, is the center of a
fertile agricultural region. Farming remains the largest industry in the county
in terms of dollar value of goods produced. However, over 100 small
manufacturing firms also operate in the county. The City of Medina is located in
the center of the Cleveland-Akron-Lorain Standard Consolidated Statistical
Metropolitan Area. Medina is located approximately 30 miles south of Cleveland
and 15 miles west of Akron. Due to its proximity to Akron and Cleveland, a
majority of Medina County's labor force is employed in these two cities. Wayne
Savings Community Bank operates one full-service office in Medina County, which
is located in the Village of Lodi.
Holmes County, located directly south of Wayne County, has a primarily
rural economy. The local economy depends mostly upon agriculture, light
manufacturing, fabrics, and wood products. Because of the scenic beauty and a
large Amish settlement, revenues from tourism are becoming increasingly
significant. The county is also noted for its many fine cheese-making
operations. A large number of Holmes County residents are employed in Wayne
County. The City of Millersburg is the county seat and the location of one of
Wayne Savings Community Bank's branch offices.
Stark County, located directly east of Wayne County, has a diverse economy
and over 1,500 different products are manufactured in the county. Stark County
also has a strong agricultural base, and ranks fourth in Ohio in the production
of dairy products. The major employers in North Canton are the Hoover Company,
Diebold Incorporated (a major manufacturer of bank security products and
automated teller machines) and the Timken Company (a world-wide manufacturer of
tapered roller bearings and specialty steels). Jackson Township is the home to
the Belden Village Shopping Center, while Plain Township is a residential and
agricultural area with a few widely scattered light industries. Village Savings
Bank is located in Stark County.
Competition
Our market area in north central Ohio has a large number of financial
institutions. All of these financial institutions compete with us to varying
degrees, and many of them are significantly larger and have greater financial
resources than we have. As a result, we encounter strong competition both in
attracting deposits and in originating real estate and other loans. Our most
direct competition for deposits historically has come from commercial banks,
securities brokerage firms, other savings associations, and credit unions, and
we expect continued strong competition from these financial institutions in the
foreseeable future. Our market area includes branches of several commercial
banks that are substantially larger than Wayne Savings Community Bank in terms
of state-wide deposits. We compete for deposits by offering customers a high
level of personal service and expertise, and a wide range of financial services.
Our competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies, credit unions and other savings
associations. This competition for loans has increased substantially in recent
years as a result of the number of institutions competing in our market area, as
well as the increased efforts by commercial banks to expand mortgage loan
originations.
We compete for loans primarily through the interest rates and loan fees we
charge, and the efficiency and quality of services we provide to borrowers, real
estate brokers, and builders. Factors that also affect competition include
general and local economic conditions, current interest rate levels, and the
volatility of the mortgage markets.
57
Lending Activities
General. Historically, our principal lending activity has been the
origination of fixed and adjustable rate mortgage ("ARM") loans secured by one-
to four-family residential properties located in our market area. We originate
ARM loans for retention in our portfolio, and fixed rate loans that are eligible
for resale in the secondary mortgage market. We also originate loans secured by
non-residential and multi-family residential real estate, as well as commercial
business loans. However, such lending currently constitutes a relatively small
portion of our lending activities. We also originate consumer loans to broaden
services offered to customers and to decrease our interest rate risk exposure.
We try to make our interest-earning assets more interest rate sensitive by
originating adjustable rate loans, such as ARM loans, home equity loans, and
medium-term consumer loans. We also purchase mortgage-backed securities
generally with estimated remaining average maturities of five years or less. At
June 30, 2002, approximately $61.7 million, or 24.8%, of our total loans
consisted of loans with adjustable interest rates.
We actively originate fixed rate mortgage loans, generally with 15 to 30
year terms to maturity, secured by one- to four-family residential properties.
One- to four-family fixed rate residential mortgage loans generally are
originated and underwritten according to standards that allow us to resell such
loans in the secondary mortgage market for purposes of managing interest rate
risk and liquidity. While we retain the majority of such one- to four-family
fixed rate residential mortgage loans in our portfolio, we have increased the
number of loans we sell in the secondary market in the current low market
interest rate environment. We retain the servicing on the mortgage loans that we
sell, thereby realizing monthly service fee income. We also originate interim
construction loans on one- to four-family residential properties.
58
Analysis of Loan Portfolio. Set forth below are selected data relating to the
composition of our loan portfolio by type of loan as of the dates indicated.
At June 30, At March 31,
--------------------- -------------------------------------------
2002 2002 2001
--------------------- -------------------- --------------------
Amount Percentage Amount Percentage Amount Percentage
-------- ---------- -------- ---------- -------- ----------
(Dollars in thousands)
Mortgage loans:
One- to four-family
residential(1) ........... $216,348 84.85% $218,981 84.91% $215,464 85.00%
Residential construction .. 11,920 4.68 8,728 3.38 7,078 2.79
Multi-family residential .. 8,015 3.14 7,368 2.86 9,039 3.56
Non-residential real
estate/land(2) ........... 7,616 2.99 9,725 3.77 7,525 2.97
-------- ------ -------- ------ -------- ------
Total mortgage loans ..... 243,899 95.66 244,802 94.92 239,106 94.32
Other loans:
Consumer (3) ............. 4,474 1.75 7,260 2.82 9,630 3.80
Commercial business ...... 6,595 2.59 5,832 2.26 4,765 1.88
-------- ------ -------- ------ -------- ------
Total other loans ........ 11,069 4.34 13,092 5.08 14,395 5.68
-------- ------ -------- ------ -------- ------
Total loans before net
items .................. 254,968 100.00% 257,894 100.00% 253,501 100.00%
====== ====== ======
Less:
Loans in process ......... 5,769 4,616 4,764
Deferred loan origination
fees ................... 1,332 1,376 1,463
Allowance for loan losses 637 730 655
-------- -------- --------
Total loans
receivable, net ..... $247,230 $251,172 $246,619
======== ======== ========
Mortgage-backed
securities, net(4) ....... $ 17,783 $ 17,326 $ 8,574
======== ======== ========
At March 31,
------------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- --------------------
Amount Percentage Amount Percentage Amount Percentage
-------- ---------- -------- ---------- -------- ----------
(Dollars in thousands)
Mortgage loans:
One- to four-family
residential(1) ........... $211,222 86.72% $187,638 84.82% $180,895 85.58%
Residential construction .. 4,035 1.66 7,668 3.47 3,963 1.87
Multi-family residential .. 8,028 3.30 7,086 3.20 7,091 3.36
Non-residential real
estate/land(2) ........... 6,068 2.49 5,610 2.53 5,838 2.76
-------- ------ -------- ------ -------- ------
Total mortgage loans ..... 229,353 94.17 208,002 94.02 197,787 93.57
Other loans:
Consumer (3) ............. 9,041 3.71 8,415 3.80 10,477 4.96
Commercial business ...... 5,168 2.12 4,810 2.18 3,112 1.47
-------- ------ -------- ------ -------- ------
Total other loans ........ 14,209 5.83 13,225 5.98 13,589 6.43
-------- ------ -------- ------ -------- ------
Total loans before net
items .................. 243,562 100.00% 221,227 100.00% 211,376 100.00%
====== ====== ======
Less:
Loans in process ......... 4,136 4,600 2,088
Deferred loan origination
fees ................... 1,538 1,855 1,882
Allowance for loan losses 793 678 721
-------- -------- --------
Total loans
receivable, net ..... $237,095 $214,094 $206,685
======== ======== ========
Mortgage-backed
securities, net(4) ....... $ 10,459 $ 7,230 $ 4,275
======== ======== ========
- ----------
(1) Includes home equity loans secured by second mortgages in the aggregate
amount of $20.1 million as of June 30, 2002, and $18.9 million, $15.7
million, $11.1 million, $8.7 million and $7.9 million as of March 31,
2002, 2001, 2000, 1999 and 1998, respectively. Such loans have been
underwritten on substantially the same basis as our first mortgage loans
and are therefore included in the total.
(2) Includes land loans of $661,000 as of June 30, 2002, and $736,000,
$923,000, $949,000, $951,000 and $584,000, as of March 31, 2002, 2001,
2000, 1999 and 1998, respectively.
(3) Includes second mortgage loans of $1.0 million as of June 30, 2002, and
$1.2 million, $1.8 million, $1.6 million, $1.7 million and $2.5 million,
as of March 31, 2002, 2001, 2000, 1999 and 1998, respectively.
(4) Includes mortgage-backed securities designated as available for sale,
which were $3.1 million, $3.4 million, $2.9 million, $3.5 million, $3.8
million and $4.0 million at June 30, 2002 and March 31, 2002, 2001, 2000,
1999 and 1998, respectively.
59
Loan and Mortgage-Backed Securities Maturity and Repricing Schedule. The
following table sets forth certain information as of June 30, 2002, regarding
the dollar amount of loans and mortgage-backed securities maturing in our
portfolio based on their contractual terms to maturity. Demand loans, loans
having no stated schedule of repayments and no stated maturity, are reported as
due in one year or less. Adjustable and floating rate loans are included in the
period in which interest rates are next scheduled to adjust rather than in which
they mature, and fixed rate loans and mortgage-backed securities are included in
the period in which the final contractual repayment is due. Fixed rate
mortgage-backed securities are assumed to mature in the period in which the
final contractual payment is due on the underlying mortgage.
One Three Five Ten Beyond
Within Through Through Through Through Twenty
One Year Three Years Five Years Ten Years Twenty Years Years Total
-------- ----------- ---------- --------- ------------ ------- ---------
(In thousands)
Mortgage loans:
One- to four-family residential:
Adjustable ............................. $ 49,076 $ 1,196 $ 293 $ 221 $ -- $ -- $ 50,786
Fixed .................................. 99 507 1,733 13,899 59,688 89,636 165,562
Construction(1):
Adjustable ............................. 792 -- -- -- -- -- 792
Fixed .................................. 3,202 19 8 -- -- 2,130 5,359
Multi-family residential and nonresidential:
Adjustable ............................. 10,007 112 -- -- -- -- 10,119
Fixed .................................. 201 1,332 3,405 184 390 -- 5,512
Other loans:
Consumer loans ......................... 1,711 1,528 1,163 72 -- -- 4,474
Commercial business loans .............. 4,861 329 362 723 320 -- 6,595
-------- -------- -------- -------- -------- -------- --------
Total loans ................................ $ 69,949 $ 5,023 $ 6,964 $ 15,099 $ 60,398 $ 91,766 $249,199
======== ======== ======== ======== ======== ======== ========
Mortgage-backed securities(2) .............. $ 7,735 $ 6,470 $ -- $ 1,404 $ 1,769 $ -- $ 17,378
======== ======== ======== ======== ======== ======== ========
- ----------
(1) Amounts shown are net of loans in process of $5.8 million.
(2) Includes mortgage-backed securities available for sale. Does not include
premiums of $347,000, discounts of $17,000 and unrealized gains of
$75,000.
60
The following table sets forth at June 30, 2002 the dollar amount of all
fixed rate and adjustable rate loans and mortgage-backed securities maturing or
repricing after June 2003.
Fixed Adjustable
-------- ----------
(In thousands)
Mortgage loans:
One- to four-family residential ................... $165,463 $ 1,710
Construction(1) ................................... 2,157 --
Multi-family residential and non-residential ...... 5,311 112
Consumer .......................................... 2,763 --
Commercial business ............................... 1,090 644
-------- --------
Total loans .................................... $176,784 $ 2,466
======== ========
Mortgage-backed securities(2) ...................... $ 3,773 $ 5,870
======== ========
- ----------
(1) Net of loans-in-process of $5.8 million.
(2) Includes mortgage-backed securities available for sale which totaled $3.1
million as of June 30, 2002. Does not include premiums of $347,000,
discounts of $75,000 and unrealized gains of $75,000.
One- to Four-Family Residential Real Estate Loans. Our primary lending
activity consists of originating one- to four-family, owner-occupied,
residential mortgage loans on properties located in our market area. We
generally do not originate one- to four-family residential loans on properties
located outside of our market area. At June 30, 2002, $216.3 million, or 84.9%,
of our total loan portfolio, was invested in one- to four-family residential
mortgage loans.
Our fixed rate loans generally are originated and underwritten according
to standards that permit their resale in the secondary mortgage market. Whether
we can or will sell fixed rate loans in the secondary market, however, depends
on a number of factors, including our portfolio mix, interest rate sensitivity
and liquidity positions, and market conditions. Our fixed rate mortgage loans
are amortized on a monthly basis with principal and interest due each month.
One- to four-family residential mortgage loans often remain outstanding for
significantly shorter periods than their contractual terms because borrowers may
refinance or prepay loans at their option. Our recent secondary market
activities have been limited to sales of $1.9 million (the remaining $1.4
million of loan sales related to student loans) and $6.4 million and $27.1
million, $9.2 million, and $6.4 million for the three months ended June 30, 2002
and 2001 and the fiscal years ended March 31, 2002, 2001 and 2000, respectively.
At June 30, 2002 and March 31, 2002, there were no loans identified as held for
sale. Mortgage loans held for sale at March 31, 2001 totaled $861,000.
We currently offer one- to four-family residential mortgage loans with
terms typically ranging from 15 to 30 years, and with adjustable or fixed
interest rates. Our ability to originate fixed-rate mortgage loans versus ARM
loans is affected significantly by the level of market interest rates, customer
preference, our interest rate sensitivity position, and loan products offered by
our competitors. Particularly in a relatively low interest rate environment,
borrowers typically prefer fixed rate loans to ARM loans. Therefore, even if
management's strategy is to emphasize ARM loans, market conditions may be such
that there is greater demand for fixed rate mortgage loans. During the three
months ended June 30, 2002, our ARM portfolio increased by $751,000, or 1.2%,
and for the year ended March 31, 2002, our ARM portfolio increased by $390,000,
or 0.6%.
We offer two types of ARM loans. Our "Treasury" ARM loan adjusts annually
with interest rate adjustment limitations of 2% per year and with a cap of 5% on
total interest rate increases or decreases over the life of the loan. The index
on the Treasury ARM loan is the weekly average yield on U.S. Treasury
securities, adjusted to a constant maturity of one year. Our "Cost of Funds" ARM
loan adjusts annually and has periodic and lifetime interest rate caps of 1% and
3%, respectively. The index is the Ohio Cost of Funds for SAIF Insured Savings
Associations, which index is published quarterly by the OTS. The initial
interest rate on Cost of Funds ARM loans is not discounted. In the past, we have
used different indices for ARM loans, such as the National Average Contract Rate
for Previously Occupied Homes and the National Average Cost of Funds.
Consequently, the interest rate adjustments on our portfolio of ARM loans do not
reflect changes in a particular interest rate index. One- to four-family
residential ARM loans totaled $50.8 million, or 19.9% of our total loan
portfolio at June 30, 2002.
61
The primary purpose of offering ARM loans is to make our loan portfolio
more interest rate sensitive. However, because the interest income earned on ARM
loans changes as market interest rates change, such loans do not offer us the
predictable cash flows offered by long-term, fixed rate loans. ARM loans carry
increased credit risk associated with potentially higher monthly payments by
borrowers if market interest rates increase. It is possible, therefore, that
during periods of rising interest rates, the risk of default on ARM loans may
increase due to the upward adjustment of interest costs to the borrower.
Management believes that the credit risk associated with our ARM loans is
reduced because we have either a 3% or 5% cap on interest rate increases during
the life of our ARM loans.
We also offer home equity loans and home equity lines of credit secured by
a second mortgage on the borrower's principal residence. In underwriting these
home equity loans, we require that the maximum loan-to-value ratios, including
the principal balances of both the first and second mortgage loans, not exceed
85%. Our home equity loan portfolio consists of adjustable rate loans, which use
the Ohio Average Cost of Funds for SAIF-Insured Savings Associations and the
prime rate as published in The Wall Street Journal, as interest rate indices.
Home equity loans include fixed term adjustable rate loans, as well as lines of
credit. As of June 30, 2002, our home equity loan portfolio totaled $20.1
million, or 9.3% of our one- to four-family mortgage loan portfolio.
Our one- to four-family residential first mortgage loans customarily
include due-on-sale clauses, which give us the right to declare a loan
immediately due and payable in the event, among other things, that the borrower
sells or otherwise disposes of the underlying real property serving as security
for the loan. Due-on-sale clauses are an important means of adjusting the rates
on our fixed rate mortgage loan portfolio.
Regulations limit the amount that a savings association may lend relative
to the appraised value of the real estate securing the loan, as determined by an
appraisal at the time the loan is originated. Our lending policies limit the
maximum loan-to-value ratio on both fixed rate and ARM loans without private
mortgage insurance to 80% of the lesser of the appraised value or the purchase
price of the property used as collateral for the loan. However, we make one- to
four-family real estate loans with loan-to-value ratios in excess of 80%. For
15-year ARM loans with loan-to-value ratios of 80.01% to 85%, 85.01% to 90%,
90.01% to 95%, and 95.01% to 97%, we require the first 6%, 12%, 25% and 30%,
respectively, of the loan to be covered by private mortgage insurance. For
30-year fixed rate loans with loan-to-value ratios of 80.01% to 85%, 85.01% to
90%, and 90.01% to 97%, we require the first 12%, 25%, and 30%, respectively, of
the loan to be covered by private mortgage insurance. We require fire and
casualty insurance, as well as title insurance regarding good title, on all
properties securing real estate loans and flood insurance, where applicable.
Multi-Family Residential Real Estate Loans. Loans secured by multi-family
real estate totaled $8.0 million, or 3.1% of our total loan portfolio, at June
30, 2002. Our multi-family real estate loans are secured by multi-family
residences, such as apartment buildings. At June 30, 2002, 91.3% of our
multi-family loans were secured by properties located within our market area. At
June 30, 2002, our multi-family real estate loans had an average balance of
$246,000, and the largest multi-family real estate loan had a principal balance
of $1.1 million. Multi-family real estate loans currently are offered with
adjustable interest rates or short-term balloon maturities, although in the past
we originated fixed rate long term multi-family real estate loans. The terms of
each multi-family loan are negotiated on a case-by-case basis, although such
loans typically have adjustable interest rates tied to a market index, and
amortize over 15 to 25 years. We currently do not emphasize multi-family real
estate construction loans; however, our policies do not preclude such lending.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one- to four-family residential mortgage loans, and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family real
estate typically depends upon the successful operation of the related real
estate property. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired.
Non-Residential Real Estate and Land Loans. Loans secured by
non-residential real estate totaled $7.0 million, or 2.7% of our total loan
portfolio, at June 30, 2002. Our non-residential real estate loans are secured
by improved property such as offices, small business facilities, and other
non-residential buildings. Our loan
62
portfolio includes a limited number of non-residential construction loans. At
June 30, 2002, 90.4% of our non-residential real estate loans were secured by
properties located within our market area. At June 30, 2002, our non-residential
loans had an average balance of $110,000, and the largest non-residential real
estate loan had a principal balance of $2.1 million and was current at June 30,
2002. This $2.1 million loan was made to a partnership in which one of our Board
members is a partner. The terms of each non-residential real estate loan are
negotiated on a case-by-case basis. Non-residential real estate loans are
currently offered with adjustable interest rates or short-term balloon
maturities, although in the past we have originated fixed rate long term
non-residential real estate loans. Our non-residential real estate loans
generally amortize over 15 to 25 years.
Loans secured by non-residential real estate generally involve a greater
degree of risk than one- to four-family residential mortgage loans and carry
larger loan balances. This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by non-residential
real estate typically depends upon the successful operation of the related real
estate project. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired.
We have also originated a limited number of land loans secured by
individual improved and unimproved lots for future residential construction.
Land loans are generally offered with a fixed rate and with terms of up to five
years. Land loans totaled $661,000, or .3% of our total loan portfolio at June
30, 2002.
Residential Construction Loans. To a lesser extent, we originate loans to
finance the construction of one- to four-family residential property. At June
30, 2002, we had $11.9 million, or 4.7% of our total loan portfolio, invested in
interim construction loans. We make construction loans to private individuals
for construction of their homes and, to a lesser extent, to builders who do not
have a contract for resale to individuals. Loan proceeds are disbursed in
increments as construction progresses and as inspections warrant. Construction
loans are typically structured as permanent one- to four-family loans originated
by us with a 12-month construction phase. Accordingly, upon completion of the
construction phase, there is no change in interest rate or term to maturity of
the original construction loan, nor is a new permanent loan originated.
Commercial Business Loans. Commercial loans totaled $6.6 million, or 2.6%
of our total loan portfolio at June 30, 2002. We do not emphasize commercial
lending, but evaluate and meet the needs of our customer base. Commercial
business loans are frequently secured by real estate, although the decision to
grant a commercial business loan depends primarily on the creditworthiness and
cash flow of the borrower (and any guarantors) and secondarily on the value of
and ability to liquidate the collateral. We generally require annual financial
statements from our corporate borrowers and personal guarantees from the
corporate principals. We also generally require an appraisal of any real estate
that secures the loan.
Commercial business lending generally involves greater risk than
residential mortgage lending, and involves risks that are different from those
associated with residential and commercial real estate lending. Real estate
lending is generally considered to be collateral based, with loan amounts based
on predetermined loan to collateral values and liquidation of the underlying
real estate collateral is viewed as the primary source of repayment in the event
of a borrower's default. Although commercial business loans may be
collateralized by equipment or other business assets, the liquidation of
collateral in the event of a borrower's default is often an insufficient source
of repayment because, among other things, equipment and other business assets
may be obsolete or of limited use. Accordingly, the repayment of a commercial
business loan depends primarily on the creditworthiness of the borrower (and any
guarantors), while liquidation of collateral is a secondary and often
insufficient source of repayment.
Consumer Loans. Consumer loans totaled $4.5 million, or 1.8% of our total
loan portfolio at June 30, 2002. The principal types of consumer loans that we
have historically offered are fixed rate, fixed term second mortgage loans, auto
and truck loans, education loans, credit card loans, unsecured personal loans,
and loans secured by deposit accounts. During the three months ended June 30,
2002, we sold all but $50,000 of our education loans. Consumer loans are offered
primarily on a fixed rate basis with maturities generally of less than ten
years. Our second mortgage consumer loans are secured by the borrower's
principal residence with a maximum loan-to-value ratio, including the principal
balances of both the first and second mortgage loans, of 80% or less. Such loans
are
63
offered on a fixed rate basis with terms of up to ten years. At June 30, 2002,
automobile loans totaled $2.6 million, or 57.3% of consumer loans, and second
mortgage loans totaled $1.0 million, or 22.4% of consumer loans.
The underwriting standards that we use for consumer loans include a
determination of the applicant's credit history and an assessment of ability to
meet existing obligations and payments on the proposed loan. The quality and
stability of the applicant's monthly income are determined by analyzing the
gross monthly income from primary employment, and additionally from any
verifiable secondary income. Creditworthiness of the applicant is a primary
consideration. However, the underwriting process also includes a comparison of
the value of the collateral in relation to the proposed loan amount.
Consumer loans entail greater credit risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
assets that depreciate rapidly, such as automobiles, mobile homes, boats, and
recreational vehicles. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly reduced
based upon the condition of the automobiles and the lack of demand for used
automobiles. We regularly add a general provision to our consumer loan loss
allowance based on general economic conditions and prior loss experience.
Mortgage-Backed Securities. We also invest in mortgage-backed securities
issued or guaranteed by the United States Government or agencies thereof.
Investments in mortgage-backed securities are made either directly or by
exchanging mortgage loans in our portfolio for such securities. These securities
consist primarily of adjustable rate mortgage-backed securities issued or
guaranteed by the Freddie Mac, Ginnie Mae or Fannie Mae, each of which is an
agency of the federal government or a government-sponsored corporation. Total
mortgage-backed securities, including those designated as available for sale,
increased from $8.6 million at March 31, 2001 to $17.3 million at March 31,
2002. Mortgage-backed securities increased to $17.8 million at June 30, 2002.
Our objectives in investing in mortgage-backed securities vary from time
to time depending upon market interest rates, local mortgage loan demand, and
our level of liquidity. Mortgage-backed securities are more liquid than whole
loans and can be sold readily in response to market conditions and changes in
interest rates. Mortgage-backed securities purchased by us also have lower
credit risk than loans we originate because principal and interest are either
insured or guaranteed by the United States Government or agencies thereof.
Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as real estate broker
referrals, existing customers, borrowers, builders, attorneys, and walk-in
customers. Upon receiving a loan application, we obtain a credit report and
employment verification to verify specific information relating to the
applicant's employment, income, and credit standing. In the case of a real
estate loan, an appraiser approved by us appraises the real estate intended to
secure the proposed loan. An underwriter in our loan department checks the loan
application file for accuracy and completeness, and verifies the information
provided. One- to four-family, and multi-family residential and non-residential
real estate loans up to $150,000 may be approved by the manager of the mortgage
loan department. Loans between $150,000 and $250,000 must be approved by the
Chief Lending Officer. The Chief Executive Officer may approve loans up to
$300,000, and loans in excess of $300,000 must be approved by the Board of
Directors. The Loan Committee meets once a week to review and verify that
management's loan approvals are within the scope of management's authority. All
approvals are subsequently ratified monthly by the full Board of Directors. Fire
and casualty insurance is required at the time the loan is made and throughout
the term of the loan. After the loan is approved, a loan commitment letter is
promptly issued to the borrower. At June 30, 2002, we had commitments to
originate $2.8 million of loans.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property serving as collateral, which insurance must be
maintained during the full term of the loan. A title search of the property is
required on all loans secured by real property.
64
Although in the past we have purchased loans originated by other lenders,
we have not purchased any such loans in at least ten years. At June 30, 2002,
less than 0.5% of the loans in our portfolio were purchased from other lenders,
and the majority of such loans were secured by properties located in Ohio.
Origination, Purchase and Sale of Loans and Mortgage-Backed Securities.
The table below shows our loan origination, purchase and sales activity for the
periods indicated.
Three Months Ended June 30, For the Year Ended March 31,
--------------------------- -------------------------------------
2002 2001 2002 2001 2000
--------- --------- --------- --------- ---------
(In thousands)
Total loans receivable, net
at beginning of period ............. $ 251,172 $ 246,619 $ 246,619 $ 237,095 $ 214,094
Loans originated:
One-to four-family
residential(1) .................... 14,317 25,757 89,376 60,192 52,485
Multi-family residential(2) ....... -- 746 -- 2,803 549
Non-residential real
estate/land ....................... 899 2,772 3,712 4,255 223
Consumer loans .................... 487 599 2,534 6,854 7,498
Commercial business loans ......... 55 214 886 1,611 4,194
--------- --------- --------- --------- ---------
Total loans originated ......... 15,758 30,088 96,508 75,715 64,949
Loans sold:
Whole loans ....................... (3,323) (6,383) (27,130) (9,185) (6,425)
--------- --------- --------- --------- ---------
Total loans sold .................. (3,323) (6,383) (27,130) (9,185) (6,425)
Mortgage loans transferred to
REO ................................ -- -- -- (98) (64)
Loan repayments .................... (17,143) (16,533) (66,077) (56,485) (37,105)
Other loan activity, net (3) ....... 766 1,046 1,252 (423) 1,646
--------- --------- --------- --------- ---------
Total loans receivable,
net at end of period ........... $ 247,230 $ 254,837 $ 251,172 $ 246,619 $ 237,095
========= ========= ========= ========= =========
Mortgage-backed securities at
beginning of year .................. $ 17,326 $ 8,574 $ 8,574 $ 10,459 $ 7,230
Mortgage-backed securities
purchased .......................... 1,952 -- 14,155 2,025 8,030
Principal repayments and
other activities ................... (1,495) (1,419) (5,403) (3,910) (4,801)
--------- --------- --------- --------- ---------
Mortgage-backed
securities at end of
period ......................... $ 17,783 $ 7,155 $ 17,326 $ 8,574 $ 10,459
========= ========= ========= ========= =========
- ----------
(1) Includes loans to finance the construction of one- to four-family
residential properties, and loans disbursed for sale in the secondary
market.
(2) Includes loans to finance the sale of real estate acquired through
foreclosure.
(3) Includes draws on existing commercial lines of credit.
Loan Origination Fees and Other Income. In addition to interest earned on
loans, we generally charge and receive fees for originating loans. We account
for loan origination fees in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 91 "Accounting for Non-refundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases." To the extent that loans are originated or acquired for our portfolio,
SFAS No. 91 requires that we defer loan origination fees and costs and amortize
such amounts as an adjustment of yield over the life of the loan by use of the
level yield method. SFAS No. 91 reduces the amount of revenue recognized by many
financial institutions at the time such loans are originated or acquired. Fees
deferred under SFAS No. 91 are recognized into income immediately upon
prepayment or the sale of the related loan. At June 30, 2002, we had $1.3
million of deferred loan origination fees. Loan origination fees are volatile
sources of income. Such fees vary with the volume and type of loans and
commitments made and purchased, principal repayments, and competitive conditions
in the mortgage markets, which in turn respond to the demand for and
availability of money.
We receive other fees, service charges, and other income that consist
primarily of deposit transaction account service charges, late charges, and
credit and debit card fees, and loan servicing fees. Income from fees, service
charges and other income totaled $328,000, $288,000, $1.1 million, $891,000, and
$720,000, for the three months ended June 30, 2002 and 2001 and the fiscal years
ended March 31, 2002, 2001 and 2000, respectively.
65
Loans to One Borrower. Savings banks are subject to the same limits as
those applicable to national banks, which under current regulations restrict
loans to one borrower to an amount equal to 15% of unimpaired capital and
unimpaired surplus on an unsecured basis, and an additional amount equal to 10%
of unimpaired capital and unimpaired surplus if the loan is secured by readily
marketable collateral (generally, financial instruments and bullion, but not
real estate). At June 30, 2002, our largest potential borrower had an aggregate
principal balance available under outstanding lines of credit totaling $3.4
million. Our largest concentration of loans to one borrower outstanding at June
30, 2002 totaled $2.4 million. These credit facilities were current at June 30,
2002. We had no loans at June 30, 2002 that exceeded the loans-to-one-borrower
regulations.
Delinquencies and Classified Assets
Delinquencies. Our collection procedures provide that when a loan is 15
days past due, a computer-generated late charge notice is sent to the borrower
requesting payment, plus a late charge. This notice is followed with a letter
again requesting payment when the payment becomes 20 days past due. If the loan
becomes 30 days past due, another collection letter is sent and we try to
contact the borrower, either in person or by telephone, to obtain reasons for
the delinquency and to arrange a repayment plan. If a loan becomes 60 days past
due, the loan becomes subject to possible legal action if suitable arrangements
to repay have not been made. In addition, the borrower is given information
which provides access to consumer counseling services, to the extent required by
HUD regulations. If a loan remains delinquent for 90 days or more, and a
repayment schedule has not been made or kept by the borrower, a notice of intent
to foreclose is sent to the borrower, giving 30 days to cure the delinquency. If
not cured, foreclosure proceedings are initiated.
Non-Performing and Impaired Assets. Loans are reviewed on a regular basis
and are placed on non-accrual status when, in the opinion of management, the
collection of additional interest is doubtful. Mortgage loans are placed on
non-accrual status generally when either principal or interest is 90 days or
more past due and management considers the interest uncollectible. Interest
accrued and unpaid at the time a loan is placed on non-accrual status is charged
against interest income.
Under the provisions of SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," a loan is defined as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due under the contractual terms of the loan agreement. In applying
the provisions of SFAS No. 114, we consider investment in one-to four-family
residential loans and consumer installment loans to be homogeneous and therefore
excluded from separate identification for impairment. With respect to our
investment in multi-family, commercial business and nonresidential loans, and
the evaluation of impairment thereof, such loans are collateral dependent and,
as a result are carried as a practical expedient at the lower of cost or fair
value.
At June 30, 2002, we had non-performing and impaired assets of $3.4
million and a ratio of non-performing and impaired assets to total assets of
1.00%. At March 31, 2002 and 2001, we had non-performing and impaired assets of
$3.8 million and $1.3 million, respectively. The increase in nonperforming
assets from March 31, 2001 to March 31, 2002 was attributable primarily to a
$1.8 million commercial business and real estate loan concentration to a land
developer and a $519,000 loan secured by an office and retail building (which is
included in the following table in the "all other mortgage loans" total). The
$1.8 million impaired loan concentration at June 30, 2002 and March 31, 2002
consisted of four loans that were cross-collateralized by non-residential and
residential real estate. One loan totaling $475,000, depicted in the following
table in the one- to four-family total at June 30, 2002 and March 31, 2002, was
originated in October 1996, two loans totaling $1.3 million were originated in
November 1999, and one loan totaling $49,000 was originated in October 2000,
which are included in the following table in the "commercial business loan"
totals. In September 2001, we ceased accruing interest on these loans. The loan
concentration reflects a current appraisal of more than $3.0 million. There is
no specific allowance for loan losses on this loan concentration. In the opinion
of management, these loans are adequately collateralized and no loss on them is
anticipated. The $519,000 loan was repaid in May 2002 and represented the major
reason for the net decrease of $450,000 in impaired loans from March 31, 2002 to
June 30, 2002.
Real estate acquired by us as a result of foreclosure or by deed in lieu
of foreclosure is deemed real estate owned until the real estate is sold. When
real estate owned is acquired, it is recorded at the lower of the unpaid
66
principal balance of the related loan or its fair value, less estimated selling
expenses. Valuations are periodically performed by management, and any
subsequent decline in fair value is charged to operations.
The following table sets forth information regarding our non-accrual and
impaired loans and real estate acquired by foreclosure at the dates indicated.
For all the dates indicated, we did not have any material loans which had been
restructured pursuant to SFAS No. 15.
At June 30, At March 31,
----------- --------------------------------------------------
2002 2002 2001 2000 1999 1998
------ ------ ------ ------ ------ ------
(Dollars in thousands)
Non-accrual loans:
Mortgage loans:
Permanent loans secured by one- to
four-family dwelling units ................... $ 764 $ 616 $ 443 $ 170 $ 224 $ 299
All other mortgage loans ....................... 549 1,070 -- -- -- 1
Non-mortgage loans:
Commercial business loans ...................... 1,380 1,416 -- --
Consumer ....................................... 30 25 72 30 12 --
------ ------ ------ ------ ------ ------
Total non-accrual loans (1) ........................ 2,723 3,127 515 200 236 300
Accruing loans 90 days or more delinquent .......... -- 38 -- -- 44 8
------ ------ ------ ------ ------ ------
Total non-performing loans (2) ..................... 2,723 3,165 515 200 280 308
Loans deemed impaired which are performing ......... 637 645 645 940 -- --
------ ------ ------ ------ ------ ------
Total non-performing and impaired loans ............ 3,360 3,810 1,160 1,140 280 308
Total real estate owned (3) ........................ -- 19 124 90 41 946
------ ------ ------ ------ ------ ------
Total non-performing and impaired assets ........... $3,360 $3,829 $1,284 $1,230 $ 321 $1,254
====== ====== ====== ====== ====== ======
Total non-performing and impaired loans to
net loans receivable ............................. 1.36% 1.52% 0.47% 0.48% 0.13% 0.15%
====== ====== ====== ====== ====== ======
Total non-performing and impaired loans to
total assets ..................................... 1.00% 1.14% 0.37% 0.37% 0.10% 0.12%
====== ====== ====== ====== ====== ======
Total non-performing and impaired assets
to total assets .................................. 1.00% 1.14% 0.41% 0.40% 0.12% 0.48%
====== ====== ====== ====== ====== ======
- ----------
(1) Includes a loan concentration of $1.8 million that was brought current in
January 2002 for which interest is not being accrued.
(2) May include loans also deemed impaired.
(3) Represents the net book value of property acquired by us through
foreclosure or deed in lieu of foreclosure. These properties are recorded
at the lower of the loan's unpaid principal balance or fair value less
estimated selling expenses.
During the three months ended June 30, 2002 and 2001, and the fiscal years
ended March 31, 2002, 2001 and 2000, gross interest income of $49,000, $8,000,
and $99,000, $12,000, and $8,000, respectively, would have been recorded on
loans accounted for on a non-accrual basis if the loans had been current
throughout the period. Interest recognized on nonaccrual loans totaled $31,000,
$22,000, and $227,000, $49,000 and $8,000, respectively, for the three months
ended June 30, 2002 and 2001, and the fiscal years ended March 31, 2002, 2001
and 2000. Interest income on impaired loans is recognized using the cash method
of accounting and totaled approximately $31,000, $17,000, and $233,000, $71,000
and $85,000 for the three months ended June 30, 2002 and 2001 and the fiscal
years ended March 31, 2002, 2001 and 2000, respectively.
The following table sets forth information with respect to loans past due
by 60-89 days and 90 days or more in our portfolio at the dates indicated.
At June 30, At March 31,
------ ----------------------------------------------
2002 2002 2001 2000 1999 1998
------ ------ ------ ------ ------ ------
(In thousands)
Loans past due 60-89 days ............ $ 604 $ 431 $2,536 $1,539 $1,710 $1,136
Loans past due 90 days or more ....... 2,723 3,165 515 200 280 308
------ ------ ------ ------ ------ ------
Total past due 60 days or more .... $3,327 $3,596 $3,051 $1,739 $1,990 $1,444
====== ====== ====== ====== ====== ======
Classification of Assets. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the savings institution will sustain "some loss"
if the deficiencies are not corrected. Assets
67
classified as "doubtful" have all of the weaknesses inherent in those classified
"substandard," with the added characteristic that the weaknesses present make
"collection or liquidation in full," on the basis of currently existing facts,
conditions, and values, "highly questionable and improbable." Assets classified
as "loss" are those considered "uncollectible" and of such little value that
their continuance as assets without the establishment of a specific loss reserve
is not warranted. Assets that do not expose the savings institution to risk
sufficient to warrant classification in one of the aforementioned categories,
but which possess some weaknesses, are required to be designated "special
mention" by management.
When a savings institution classifies problem assets as either substandard
or doubtful, it is required to establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances that have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the assets so classified, or
to charge off such amount. A savings institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS, which can order the establishment of additional
general or specific loss allowances. As of our most recent examination in
February 2002, the OTS did not take exception to the amount of our loan loss
allowance. We regularly review the problem loans in the portfolio to determine
whether any loans require classification in accordance with applicable
regulations.
The following table sets forth the aggregate amount of our classified
assets at the dates indicated.
At June 30, At March 31,
----------- -------------------------
2002 2002 2001 2000
------ ------ ------ ------
(In thousands)
Substandard assets(1) ................ $2,874 $3,303 $ 569 $ 290
Doubtful assets ...................... -- -- -- --
Loss assets .......................... 10 105 -- --
------ ------ ------ ------
Total classified assets ........... $2,884 $3,408 $ 569 $ 290
====== ====== ====== ======
- ----------
(1) Includes REO.
At June 30, 2002, classified assets had declined by $524,000 due primarily
to the receipt of sale proceeds from a $519,000 impaired nonresidential real
estate loan for which management had allocated $105,000 of our loan allowance.
At June 30, 2002, classified assets consisted primarily of $550,000 of
nonresidential real estate loans, $1.4 million of commercial loans and $934,000
of one- to four-family residential loans.
At March 31, 2002, classified assets consisted primarily of $616,000 of
residential one-to four-family loans, $2.5 million of nonresidential real estate
and commercial business loans, $260,000 of multi-family residential loans and
$27,000 of well-secured consumer loans. Of the $2.5 million classified
nonresidential real estate and commercial business loan total, management had
classified a $519,000 loan as impaired at March 31, 2002 and considered $105,000
of the loss allowance as been specifically related to this impairment. The
remaining $1.8 million classified nonresidential loan total, consisting of a
loan concentration to one borrower, was also classified as impaired with no
measurement of loss requiring allocation to the allowance. At March 31, 2001,
classified assets consisted of $566,000 of residential one- to four-family loans
and $3,000 of consumer loans. All classified assets at March 31, 2000 were loans
secured by one- to four-family residential real estate. At March 31, 2001, and
March 31, 2000, all loans classified as substandard were also either nonaccrual
loans or real estate owned.
Allowance for Loan Losses. We record a provision for losses on loans in an
amount to cover all known losses in the portfolio and losses that are both
probable and reasonable to estimate. Such estimates are based on the facts and
circumstances in existence as of the date of the financial statements. Based
upon this methodology, for the three months ended June 30, 2002 and 2001 and for
the fiscal years ended March 31, 2002, 2001, and 2000, we added $17,000 and
$2,000, and $134,000, $96,000 and $106,000, respectively, to our provision for
loan losses. Our allowance for loan losses totaled $637,000 and $656,000, and
$730,000, $655,000 and $793,000, at June 30, 2002 and 2001 and at March 31,
2002, 2001 and 2000, respectively. To the best of our knowledge, all known and
inherent losses that are both probable and reasonably estimable at June 30, 2002
and 2001, and at March 31, 2002, 2001 and 2000, have been recorded.
68
Analysis of the Allowance For Loan Losses. The following table sets
forth the analysis of the allowance for loan losses for the periods indicated.
At or For the Three Months
Ended June 30,
--------------------------
2002 2001
--------- ---------
Loans receivable, net ............................... $ 247,230 $ 254,837
========= =========
Average loans receivable, net ....................... 248,688 249,324
========= =========
Allowance balance (at beginning of period) .......... 730 655
Provision for losses ................................ 17 2
Charge-offs:
Mortgage loans:
One- to four-family ............................ (20) --
Residential construction ....................... -- --
Multi-family residential ....................... -- --
Non-residential real estate and land ........... (84) --
Other loans:
Consumer ....................................... (7) (2)
Commercial (1) ................................. -- --
--------- ---------
Gross charge-offs .......................... (111) (2)
--------- ---------
Recoveries:
Mortgage loans:
One- to four-family ............................ -- --
Residential construction ....................... -- --
Multi-family residential ....................... -- --
Non-residential real estate and land ........... -- --
Other loans: ..................................... --
Consumer ....................................... 1 --
Commercial ..................................... -- 1
--------- ---------
Gross recoveries ........................... 1 1
--------- ---------
Net (charge-offs)/recoveries ............... (110) (1)
--------- ---------
Allowance for loan losses balance (at end of
period) (2) ...................................... $ 637 $ 656
========= =========
Allowance for loan losses as a percent of
loans receivable, net at end of period ........... 0.26% 0.26%
========= =========
Net loans charged off as a percent of average
loans receivable, net ............................ 0.04% 0.00%
========= =========
Ratio of allowance for loan losses to total
non-performing and impaired assets at end
of period ........................................ 18.96% 26.46%
========= =========
Ratio of allowance for loan losses to
non-performing and impaired loans at end of
period ........................................... 18.96% 26.68%
========= =========
At or For the Year Ended March 31,
---------------------------------------------------------------------
2002 2001 2000 1999 1998
--------- --------- --------- --------- ---------
(Dollars in thousands)
Loans receivable, net ............................... $ 251,172 $ 246,619 $ 237,095 $ 214,094 $ 206,685
========= ========= ========= ========= =========
Average loans receivable, net ....................... 253,058 245,624 229,845 209,178 207,377
========= ========= ========= ========= =========
Allowance balance (at beginning of period) .......... 655 793 692 721 914
Provision for losses ................................ 134 96 106 78 60
Charge-offs:
Mortgage loans:
One- to four-family ............................ -- (7) -- (8) --
Residential construction ....................... -- -- (21) -- --
Multi-family residential ....................... -- -- -- -- --
Non-residential real estate and land ........... -- -- -- -- (253)
Other loans:
Consumer ....................................... (63) (61) (12) -- --
Commercial (1) ................................. -- (172) -- (107) --
--------- --------- --------- --------- ---------
Gross charge-offs .......................... (63) (240) (33) (115) (253)
--------- --------- --------- --------- ---------
Recoveries:
Mortgage loans:
One- to four-family ............................ -- -- -- 8 --
Residential construction ....................... -- -- -- -- --
Multi-family residential ....................... -- -- 6 -- --
Non-residential real estate and land ........... -- -- -- -- --
Other loans: .....................................
Consumer ....................................... 4 6 22 -- --
Commercial ..................................... -- -- -- -- --
--------- --------- --------- --------- ---------
Gross recoveries ........................... 4 6 28 8 --
--------- --------- --------- --------- ---------
Net (charge-offs)/recoveries ............... (59) (234) (5) (107) (253)
--------- --------- --------- --------- ---------
Allowance for loan losses balance (at end of
period) (2) ...................................... $ 730 $ 655 $ 793 $ 692 $ 721
========= ========= ========= ========= =========
Allowance for loan losses as a percent of
loans receivable, net at end of period ........... 0.29% 0.27% 0.33% 0.32% 0.35%
========= ========= ========= ========= =========
Net loans charged off as a percent of average
loans receivable, net ............................ 0.02% 0.10% 0.00% 0.05% 0.12%
========= ========= ========= ========= =========
Ratio of allowance for loan losses to total
non-performing and impaired assets at end
of period ........................................ 19.07% 51.01% 64.47% 215.58% 57.50%
========= ========= ========= ========= =========
Ratio of allowance for loan losses to
non-performing and impaired loans at end of
period ........................................... 19.16% 56.47% 69.56% 247.14% 234.09%
========= ========= ========= ========= =========
- ----------
(1) The fiscal year 2001 charge-offs include a $172,000 charge-off related to
an impaired loan. This loan was current at June 30, 2002, March 31, 2002
and March 31, 2001.
(2) At June 30, 2002, non-performing and impaired loans of $3.4 million
consisted, in large part, of a $1.8 million commercial business and real
estate loan concentration and a $637,000 non-residential real estate loan.
The latter loan has been considered impaired since fiscal 2001, but was
current at June 30, 2002 and at March 31, 2002 and 2001, and allocations
to the allowance for loan losses were not considered necessary at these
dates. The loan concentration became delinquent and was considered
impaired during fiscal year 2002. There is a current appraisal of more
than $3.0 million supporting the loans' collateral, and no allocation to
the allowance has been made for this concentration. At March 31, 2002, in
addition to the loans described above, a large component of non-performing
and impaired loans was a $519,000 non-residential real estate loan that
became delinquent and was considered impaired during 2002. For this loan,
$105,000 was allocated to the allowance for loan losses at March 31, 2002.
The loan was paid off in May 2002.
69
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of allowance for loan losses by loan category for the periods
indicated. Management believes that the allowance can be allocated by category
only on an approximate basis. The allocation of the allowance by category is not
necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
At June 30,
-----------------------------------
2002 2001
----------------- ----------------
% of % of
Loans in Loans in
Each Each
Category Category
to Total to Total
Amount Loans Amount Loans
------ ----- ------ -----
Mortgage loans:
One- to four-family .... $128 84.8% $572 84.4%
Residential construction -- 4.7 -- 2.7
Multi-family residential -- 3.1 23 3.5
Non-residential real
estate and land ...... 167 3.0 24 3.7
Other loans:
Consumer ............... 130 1.8 37 3.4
Commercial ............. 212 2.6 -- 2.3
---- ----- ---- -----
Total allowance for loan
losses ................ $637 100.0% $656 100.0%
==== ===== ==== =====
At March 31,
---------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
--------------- ----------------- --------------- ---------------- ----------------
% of % of % of % of % of
Loans in Loans in Loans in Loans in Loans in
Each Each Each Each Each
Category Category Category Category Category
to Total to Total to Total to Total to Total
Amount Loans Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
Mortgage loans:
One- to four-family .... $126 84.9% $551 85.0% $414 86.7% $384 84.8% $446 85.6%
Residential construction -- 3.4 23 2.8 9 1.7 16 3.5 -- 1.9
Multi-family residential 47 2.8 24 3.5 37 3.3 38 3.2 36 3.3
Non-residential real
estate and land ...... 207 3.8 20 3.0 -- 2.5 2 2.5 185 2.8
Other loans:
Consumer ............... 28 2.8 6 3.8 52 3.7 45 3.8 42 4.9
Commercial ............. 322 2.3 31 1.9 281 2.1 207 2.2 12 1.5
---- ----- ---- ----- ---- ----- ---- ----- ---- -----
Total allowance for loan
losses ................ $730 100.0% $655 100.0% $793 100.0% $692 100.0% $721 100.0%
==== ===== ==== ===== ==== ===== ==== ===== ==== =====
70
Investment Activities
Our investment portfolio consists of investment securities, corporate
bonds and notes, and state and local obligations. The carrying value of our
investment securities was $20.5 million at June 30, 2002 and $22.3 million at
March 31, 2002, which compares to $13.6 million at March 31, 2001 and $23.2
million at March 31, 2000. Our cash and cash equivalents, consisting of cash and
due from banks, federal funds sold, and interest bearing deposits due from other
financial institutions with original maturities of three months or less, totaled
$33.0 million at June 30, 2002 and $27.9 million at March 31, 2002, compared to
$20.9 million at March 31, 2001.
We are required under federal regulations to maintain liquid assets that
may be invested in specified short-term securities and certain other
investments. Liquidity levels may be increased or decreased depending upon the
yields on investment alternatives and upon management's judgment as to the
attractiveness of yields available in relation to other investment opportunities
and its expectation of what yields may be available in the future, as well as
management's projections as to the short term demand for funds to be used in our
lending activities.
Investment Portfolio. The following table sets forth the carrying value of
our investment securities portfolio, short-term investments and FHLB stock, at
the dates indicated.
At June 30, At March 31,
------------------ --------------------------------------------------------------
2002 2002 2001 2000
------------------ ------------------ ------------------ ------------------
Carrying Market Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value Value Value
-------- ------ -------- ------ -------- ------ -------- ------
(In thousands)
Investment Securities:
Corporate bonds and notes ............. $ 2,999 $ 3,041 $ 2,998 $ 3,051 $ 3,994 $ 4,061 $ 2,987 $ 2,951
U.S. Government and agency securities . 17,370 17,519 19,152 18,904 9,501 9,567 20,057 19,528
Obligations of state and political
subdivisions ........................ 131 142 136 143 146 146 155 155
------- ------- ------- ------- ------- ------- ------- -------
Total investment securities ........... 20,500 20,702 22,286 22,098 13,641 13,774 23,199 22,634
Other Investments:
Interest-bearing deposits in other
financial institutions .............. 10,037 10,037 10,633 10,633 12,891 12,891 8,332 8,332
Federal funds sold .................... 20,000 20,000 15,000 15,000 6,000 6,000 3,475 3,475
Federal Home Loan Bank stock .......... 3,910 3,910 3,767 3,767 3,510 3,510 3,160 3,160
------- ------- ------- ------- ------- ------- ------- -------
Total investments ..................... $54,447 $54,649 $51,686 $51,498 $36,042 $36,175 $38,166 $37,601
======= ======= ======= ======= ======= ======= ======= =======
71
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for our
investment securities at June 30, 2002. We do not hold any investment securities
with maturities in excess of 16 years.
At June 30, 2002
------------------------------------------------------------------------------
One Year or Less One to Five Years Five to Ten Years More than Ten Years
----------------- ----------------- ----------------- -------------------
Carrying Average Carrying Average Carrying Average Carrying Average
Value Yield Value Yield Value Yield Value Yield
-------- ------- -------- ------- -------- ------- -------- -------
(Dollars in thousands)
Investment Securities:
Corporate bonds and notes ................ $2,999 6.46% $ -- --% $ -- --% $ -- --%
U.S. Government and agency ............... 1,500 3.68 13,515 4.58 -- -- 2,355 6.26
Obligations of state and political
subdivisions ............................. -- -- -- -- 131 5.50 -- --
------ ---- ------- ---- ---- ---- ------ ----
Total investment securities ............ $4,499 5.53% $13,515 4.58% $131 5.50% $2,355 6.26%
====== ==== ======= ==== ==== ==== ====== ====
At June 30, 2002
--------------------------------------
Total Investment Securities
--------------------------------------
Average Weighted
Life in Carrying Market Average
Years Value Value Yield
------- -------- ------ -------
(Dollars in thousands)
Investment Securities:
Corporate bonds and notes ............ 0.44 $ 2,999 $ 3,041 6.46%
U.S. Government and agency obligations 5.39 17,370 17,519 4.73
Obligations of state and political
subdivisions ......................... 10.00 131 142 5.50
----- ------- ------- -----
Total investment securities ........ 4.60 $20,500 $20,702 4.99%
===== ======= ======= =====
72
Sources of Funds
General. Deposits are the major source of our funds for lending and other
investment purposes. In addition to deposits, we derive funds from the
amortization, prepayment or sale of loans and mortgage-backed securities, the
sale or maturity of investment securities, operations and, if needed, advances
from the Federal Home Loan Bank of Cincinnati. Scheduled loan principal
repayments are a relatively stable source of funds, while deposit inflows and
outflows and loan prepayments are influenced significantly by general interest
rates and market conditions. Borrowings may be used on a short-term basis to
compensate for reductions in the availability of funds from other sources or on
a longer term basis for general business purposes. We had $5.0 million of
advances from the Federal Home Loan Bank of Cincinnati at June 30, 2002.
Deposits. We generate consumer and commercial deposits principally from
our market area by offering a broad selection of deposit instruments, including
NOW accounts, passbook savings, money market deposits and term certificate
accounts, including individual retirement accounts. We accept deposits of
$100,000 or more and we may offer negotiated interest rates on such deposits.
Deposit account terms vary according to the minimum balance required, the period
of time during which the funds must remain on deposit, and the interest rate,
among other factors. We regularly evaluate our internal cost of funds, survey
rates offered by competing institutions, review our cash flow requirements for
lending and liquidity, and execute rate changes when we consider it appropriate.
We do not obtain funds through brokers, nor do we solicit funds outside our
market area.
Our savings and other deposits consisted of the following at June 30,
2002:
Weighted Average Checking and Savings Minimum Percentage of
Interest Rate Minimum Term Deposits Amount Balances Total Deposits
- ---------------- --------------- ----------------------- -------- ---------- ----------------
(Dollars in thousands)
0.91% None NOW accounts $ -- $ 41,280 13.73%
2.17 None Passbook/Statement -- 81,903 27.24
savings
1.86 None Money market investor 2,500 13,673 4.55
Certificates of Deposit
-----------------------
2.48 12 months or Fixed term, fixed rate 500 23,614 7.85
less
4.13 12 to 24 months Fixed term, fixed rate 500 71,462 23.76
4.62 25 to 36 months Fixed term, fixed rate 500 11,590 3.85
5.08 36 months or Fixed term, fixed rate 500 16,338 5.43
more
4.96 Negotiable Jumbo certificates 100,000 40,877 13.59
--------- ------
$ 300,737 100.00%
========= ======
73
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by us at the dates
indicated.
Balance at Balance
June 30, % of Increase March 31, % of Increase
2002 Deposits (Decrease) 2002 Deposits (Decrease)
---------- -------- ---------- --------- -------- ----------
(Dollars in thousands)
NOW accounts ............. $ 41,280 13.73% $ 2,884 $ 38,396 12.76% $ 4,754
Passbook/Statement savings 81,903 27.24 4,418 77,485 25.75 22,911
Money market investor .... 13,673 4.55 1,864 11,809 3.92 2,904
Certificates of deposit(1)
Original maturities of:
12 months or less .... 23,614 7.85 (4,883) 28,497 9.47 3,003
12 to 24 months ...... 71,462 23.76 (9,543) 81,005 26.92 (20,100)
25 to 36 months ...... 11,590 3.85 1,962 9,628 3.20 (408)
36 months or more .... 16,338 5.43 4,495 11,843 3.93 5,668
Negotiated jumbo ..... 40,877 13.59 (1,417) 42,294 14.05 4,519
-------- ------ ------- -------- ------ --------
Total ................ $300,737 100.00% $ (220) $300,957 100.00% $ 23,251
======== ====== ======= ======== ====== ========
Balance at Balance at
March 31, % of Increase March 31, % of
2001 Deposits (Decrease) 2000 Deposits
---------- -------- ---------- --------- --------
(Dollars in thousands)
NOW accounts ............. $ 33,642 12.11% $ 2,628 $ 31,014 11.71%
Passbook/Statement savings 54,574 19.65 1,500 53,074 20.03
Money market investor .... 8,905 3.21 (1,922) 10,827 4.09
Certificates of deposit(1)
Original maturities of:
12 months or less .... 25,494 9.18 (16,228) 41,722 15.74
12 to 24 months ...... 101,105 36.41 46,764 54,341 20.51
25 to 36 months ...... 10,036 3.61 (14,751) 24,787 9.36
36 months or more .... 6,175 2.22 (2,713) 8,888 3.35
Negotiated jumbo ..... 37,775 13.61 (2,524) 40,299 15.21
-------- ------ -------- -------- ------
Total ................ $277,706 100.00% $ 12,754 $264,952 100.00%
======== ====== ======== ======== ======
- ----------
(1) Individual Retirement Accounts ("IRAs") are included in the respective
certificate and savings balances. IRAs totaled $ 31.7 million, $33.1
million, $31.8 million and $31.1 million, as of June 30, 2002 and as of
March 31, 2002, 2001 and 2000, respectively.
74
The following table sets forth the average dollar amount of savings
deposits in the various types of savings accounts offered by us for the dates
indicated.
Three Months Ended June 30,
------------------------------
2002
------------------------------
Percent Weighted
Average of Average
Balance Deposits Rate
--------- -------- --------
Noninterest-bearing
demand deposits .... $ 9,233 3.09% 0.00%
NOW accounts ......... 38,563 12.93 0.97
Passbook/Statement
savings ............ 71,746 24.05 2.44
Money market investor 11,934 4.00 2.13
Certificates of
deposit .............. 166,847 55.93 4.41
-------- ------ ----
Total deposits ... $298,323 100.00% 3.26%
======== ====== ====
Years Ended March 31,
----------------------------------------------------------------------------------------
2002 2001 2000
---------------------------- -------------------------- -----------------------------
Percent Weighted Percent Weighted Percent Weighted
Average of Average Average of Average Average of Average
Balance Deposits Rate Balance Deposits Rate Balance Deposits Rate
------- -------- -------- ------- -------- ------- ------- -------- --------
(Dollars in thousands)
Noninterest-bearing
demand deposits .... $ 8,735 3.02% 0.00% $ 5,684 2.19% 0.00% $ 4,652 1.84% 0.00%
NOW accounts ......... 27,569 9.54 1.78 25,527 9.82 1.73 23,912 9.48 2.08
Passbook/Statement
savings ............ 63,091 21.84 2.65 45,800 17.62 3.16 45,790 18.15 3.13
Money market investor 10,395 3.60 2.69 9,637 3.71 3.23 11,411 4.52 3.28
Certificates of
deposit .............. 179,092 62.00 5.37 173,266 66.66 6.03 166,581 66.01 5.54
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total deposits ... $288,882 100.00% 4.17% $259,914 100.00% 4.87% $252,346 100.00% 4.57%
======== ====== ==== ======== ====== ==== ======== ====== ====
75
The following table sets forth our certificates of deposit classified by
rates as of the dates indicated:
At March 31,
At June 30, --------------------------------------
2002 2002 2001 2000
-------- -------- -------- --------
(In thousands)
1.49-2.00% ......... $ 613 $ -- $ -- $ --
2.01-4.00% ......... 75,301 61,208 -- --
4.01-6.00% ......... 60,423 73,408 73,177 127,653
6.01-8.00% ......... 27,544 38,651 107,408 42,382
8.01-10.00% ........ -- -- -- 2
-------- -------- -------- --------
Total .......... $163,881 $173,267 $180,585 $170,037
======== ======== ======== ========
The following table sets forth the amount and maturities of our
certificates of deposit at June 30, 2002.
Amount Due
--------------------------------------------------------
Less Than 1-2 2-3 After
Rate One Year Years Years 3 Years Total
- ------- -------- ------- ------ ------- --------
(In thousands)
1.49-2.00% ........ $ 613 $ -- $ -- $ -- $ 613
2.01-4.00% ........ 62,701 10,580 1,868 153 75,302
4.01-6.00% ........ 33,138 10,678 3,541 13,066 60,423
6.01-8.00% ........ 27,004 151 265 123 27,543
-------- ------- ------ ------- --------
Total ......... $123,456 $21,409 $5,674 $13,342 $163,881
======== ======= ====== ======= ========
The following table indicates the amount of our certificates of deposit of
$100,000 or more by time remaining until maturity as of June 30, 2002.
Maturity Period Certificates of Deposit
--------------- -----------------------
(In thousands)
Three months or less.......................................... $ 16,420
Over three months through six months.......................... 10,841
Over six months through twelve months......................... 8,205
Over twelve months............................................ 10,841
---------
Total.................................................... $ 46,307
=========
Borrowings
Savings deposits are the primary source of funds for our lending and
investment activities and for our general business purposes. We may borrow from
the Federal Home Loan Bank of Cincinnati and the Federal Reserve Bank discount
window to supplement our supply of lendable funds and to meet deposit withdrawal
requirements. Borrowings or "advances" from the Federal Home Loan Bank of
Cincinnati typically are collateralized by stock in the Federal Home Loan Bank
of Cincinnati and a portion of first mortgage loans held by us. At June 30,
2002, we had $5.0 million in advances outstanding.
The Federal Home Loan Bank functions as a central reserve bank providing
credit for member banks and savings institutions. As a member, we are required
to own capital stock in the Federal Home Loan Bank and are authorized to apply
for advances on the security of such stock and certain home mortgages and other
assets (principally, securities that are obligations of, or guaranteed by, the
United States) provided certain standards related to creditworthiness have been
met. Advances are made pursuant to several different programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based either on a fixed
percentage of a member institution's net worth or on the Federal Home Loan
Bank's assessment of the institution's creditworthiness. Although advances may
be used on a short-term basis for cash management needs, Federal Home Loan Bank
advances have not been, nor are they expected to be, a significant long-term
funding source for us.
76
Three Months Ended
June 30, Year Ended March 31,
------------------- ------------------------------
2002 2001 2002 2001 2000
------ ------ ------ ------- -------
(Dollars in thousands)
Federal Home Loan Bank advances:
Maximum month-end balance ............ $5,000 $6,000 $6,000 $10,000 $12,000
Balance at end of period ............. 5,000 6,000 5,000 6,000 12,000
Average balance ...................... 5,000 6,000 5,505 7,877 8,596
Weighted average interest rate on:
Balance at end of period .......... 5.24% 5.21% 5.24% 5.54% 5.98%
Average balance for period ........ 5.20% 5.47% 5.32% 5.69% 5.63%
Personnel
As of June 30, 2002, we had 118 full-time equivalent employees. None of
our employees is represented by a collective bargaining group. We believe that
we have good relations with our employees.
Legal Proceedings
We are periodically involved in various claims and lawsuits that arise
incident to our financial services business. We believe that these routine legal
proceedings, in the aggregate, are not material to our consolidated financial
position and results of operations.
Expense Allocation
Village Savings Bank has entered into, and Wayne Savings Bancshares, Inc.
will enter into, agreements with Wayne Savings Community Bank in which Wayne
Savings Community Bank will provide each entity with certain administrative
support services for compensation not less than the fair market value of the
services provided.
77
Property
We conduct our business through our main banking office located in
Wooster, Ohio, our nine additional offices located in our market area, and the
full service office of Village Savings Bank. The following table sets forth
information about our offices as of June 30, 2002.
Original Year Leased Year of Lease
Location Leased or Owned or Acquired Expiration
- -------------------------------- --------------- -------------------- -------------
North Market Street Office
151 N. Market Street Owned 1902 N/A
Wooster, Ohio
Cleveland Point Financial Center
1908 Cleveland Road Owned 1978 N/A
Wooster, Ohio
Madison South Office
2024 Millersburg Road Owned 1999 N/A
Wooster, Ohio
Northside Office
543 Riffel Road Leased 1999 2019
Wooster, Ohio
Millersburg Office
90 N. Clay Street Owned 1964 N/A
Millersburg, Ohio
Claremont Avenue Office
233 Claremont Avenue Owned 1968 N/A
Ashland, Ohio
Buehlers-Sugarbush Office
1055 Sugarbush Drive Leased 2001 2021
Ashland, Ohio
Rittman Office
237 North Main Street Owned 1972 N/A
Rittman, Ohio
Lodi Office
303 Highland Drive Owned 1980 N/A
Lodi, Ohio
South Market Street
329 South Market Street Leased 2001 2021
Wooster, Ohio
Village Savings Bank
1265 S. Main Street Owned 1998 N/A
North Canton, Ohio
The aggregate net book value of our premises and equipment was $9.1 million
at June 30, 2002.
78
REGULATION
Wayne Savings Community Bank is chartered as an Ohio savings association
and its deposits are insured by the Savings Association Insurance Fund. As a
result, Wayne Savings Community Bank is subject to examination, supervision and
extensive regulation by the Office of Thrift Supervision, the Ohio Division of
Financial Institutions, and the Federal Deposit Insurance Corporation. As a
federally chartered savings bank insured by the Savings Association Insurance
Fund, Village Savings Bank is subject to examination, supervision and extensive
regulation by the Office of Thrift Supervision and the Federal Deposit Insurance
Corporation. Wayne Savings Community Bank and Village Savings Bank are members
of, and own stock in, the Federal Home Loan Bank of Cincinnati, which is one of
the twelve regional banks in the Federal Home Loan Bank System. This regulation
and supervision establishes a comprehensive framework of activities in which an
institution can engage and is intended primarily for the protection of the
insurance fund and depositors. The banks also are subject to regulation by the
Board of Governors of the Federal Reserve System governing reserves to be
maintained against deposits and certain other matters. The Office of Thrift
Supervision and Ohio Division of Financial Institutions regularly examine us and
prepare reports for consideration by our Boards of Directors on any deficiencies
that they may find in our operations. The Federal Deposit Insurance Corporation
also examines the banks in its role as the administrator of the Savings
Association Insurance Fund. Our relationship with depositors and borrowers also
is regulated to a great extent by both federal and state laws, especially in
such matters as the ownership of savings accounts and the form and content of
our mortgage documents. Any change in such regulations could have a material
adverse impact on our operations. The description of the various statutes,
regulations and policies applicable to savings associations described below is
not a complete description of such statutes, regulations and policies, and their
effect on us, and we recommend that you refer directly to such statutes,
regulations and policies.
Federal Regulation of Savings Banks
Business Activities. The activities of state-chartered savings
associations and federal savings banks are governed by the Home Owners' Loan Act
and, in certain respects, the Federal Deposit Insurance Act. These federal
statutes, among other things, (i) limit the types of loans a savings association
may make, (ii) prohibit the acquisition of any corporate debt security that is
not rated in one of the four highest rating categories, and (iii) restrict the
aggregate amount of loans secured by non-residential real estate property to
400% of capital.
Capital Requirements. The Office of Thrift Supervision capital regulations
require savings associations to meet three minimum capital standards: a 1.5%
tangible capital ratio; a 4% leverage ratio (3% for institutions receiving the
highest rating on the CAMELS rating system); and an 8% risk-based capital ratio.
In addition, the prompt corrective action regulations discussed below also
establish, in effect, a minimum 2% tangible capital standard, a 4% leverage
ratio (3% for institutions receiving the highest CAMELS rating), and together
with the risk-based capital standard itself, a 4% Tier 1 risk-based capital
standard. Institutions must generally deduct from capital investments in and
loans to subsidiaries engaged in activities as principal that are not
permissible for a national bank.
The risk-based capital standards for savings associations require the
maintenance of Tier 1 (core) and total capital (which is defined as core capital
and supplementary capital) to risk-weighted assets of at least 4% and 8%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weighted
factor of 0% to 100%, assigned by the Office of Thrift Supervision capital
regulation, based on the risks believed inherent in the type of asset. Core
(Tier 1) capital is defined as common stockholders' equity (including retained
earnings), certain noncumulative perpetual preferred stock and related surplus
and minority interests in equity accounts of consolidated subsidiaries, less
intangible assets other than certain mortgage servicing rights and credit card
relationships. The components of supplementary capital currently include
cumulative preferred stock, long-term perpetual preferred stock, mandatory
convertible securities, subordinated debt and intermediate preferred stock, the
allowance for loan and lease losses limited to a maximum of 1.25% of
risk-weighted assets, and up to 45% of unrealized gains on available-for-sale
equity securities with readily determinable fair market values. Overall, the
amount of supplementary capital included as part of total capital may not exceed
100% of core capital.
The capital regulations also incorporate an interest rate risk component.
Savings institutions with "above normal" interest rate risk exposure are subject
to a deduction from total capital for purposes of calculating their risk-based
capital requirements. For the present time, the Office of Thrift Supervision has
deferred implementation of
79
the interest rate risk capital charge. At June 30, 2002, Wayne Savings Community
Bank and Village Savings Bank met each of the capital requirements.
Loans to One Borrower. Savings associations generally may not make a loan
or extend credit to a single or related group of borrowers in excess of 15% of
the association's unimpaired capital and surplus on an unsecured basis. An
additional amount may be loaned, equal to 10% of the association's unimpaired
capital and surplus, if the loan is secured by readily-marketable collateral,
which is defined to include certain securities and bullion, but generally does
not include real estate. At June 30, 2002, Wayne Savings Community Bank and
Village Savings Bank were in compliance with the loans-to-one-borrower
limitation.
Qualified Thrift Lender Test. Each savings association must satisfy a
"qualified thrift lender" test whereby it is required to maintain at least 65%
of its "portfolio assets" (total assets less (i) specified liquid assets up to
20% of total assets, (ii) intangibles, including goodwill, and (iii) the value
of property used to conduct business) in certain "qualified thrift investments,"
primarily residential mortgages and related investments, including certain
mortgage-backed and related securities on a monthly basis in 9 out of every 12
months. A savings association that fails this test must either convert to a bank
charter or operate under specified restrictions. As of June 30, 2002, Wayne
Savings Community Bank and Village Savings Bank maintained 94.9% and 93.2%,
respectively, of their portfolio assets in qualified thrift investments and,
therefore, met the qualified thrift lender test.
Limitations on Capital Distributions. Federal regulations impose
limitations upon all capital distributions by a savings association, such as
cash dividends, payments to repurchase shares and other distributions charged
against the association's capital account. A savings association must file an
application for Office of Thrift Supervision approval of a capital distribution
if either (i) the total capital distributions for the applicable calendar year
exceed the sum of the savings association's net income for that year to date
plus the savings association's retained net income for the preceding two years,
(ii) the savings association would not be at least adequately capitalized
following the distribution, (iii) the distribution would violate any applicable
statute, regulation, agreement or Office of Thrift Supervision-imposed
condition, or (iv) the savings association is not eligible for expedited
treatment of its filings. If an application is not required to be filed, a
savings association must file a notice with the Office of Thrift Supervision at
least 30 days before the Board of Directors declares a dividend or approves a
capital distribution. Any additional capital distributions will require prior
Office of Thrift Supervision approval. If the capital of Wayne Savings Community
Bank or Village Savings Bank falls below its required levels or the Office of
Thrift Supervision notifies either institution that it is in need of more than
normal supervision, our ability to make capital distributions could be
restricted. In addition, the Office of Thrift Supervision may prohibit a
proposed capital distribution by any association that would otherwise be
permitted by regulation, if the Office of Thrift Supervision determines that the
distribution would constitute an unsafe or unsound practice.
Community Reinvestment Act and Fair Lending Laws. Wayne Savings Community
Bank and Village Savings Bank have a responsibility under the Community
Reinvestment Act and related regulations of the Office of Thrift Supervision to
help meet the credit needs of their communities, including low- and
moderate-income neighborhoods. In addition, the Equal Credit Opportunity Act and
the Fair Housing Act prohibit lenders from discriminating in their lending
practices on the basis of characteristics specified in those statutes. An
institution's failure to comply with the provisions of the Community
Reinvestment Act could, at a minimum, result in regulatory restrictions on its
activities, and failure to comply with the Equal Credit Opportunity Act and the
Fair Housing Act could result in enforcement actions by the Office of Thrift
Supervision, as well as other federal regulatory agencies and the Department of
Justice. Wayne Savings Community Bank and Village Savings Bank received
satisfactory Community Reinvestment Act ratings under the current Community
Reinvestment Act regulations in their most recent federal examinations.
Transactions with Related Parties. The authority of Wayne Savings
Community Bank or Village Savings Bank to engage in transactions with related
parties or "affiliates" or to make loans to specified insiders is limited by
Sections 23A and 23B of the Federal Reserve Act. The term "affiliates" for these
purposes generally means any company that controls or is under common control
with an institution, including Wayne Savings Bancshares, Inc. and its
non-savings institution subsidiaries. Section 23A limits the aggregate amount of
certain "covered" transactions with any individual affiliate to 10% of the
capital and surplus of the savings institution and also limits the aggregate
amount of covered transactions with all affiliates to 20% of the savings
institution's capital and surplus. Covered transactions with affiliates are
required to be secured by collateral in an amount and of a type described in
Section 23A, and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B
80
provides that covered transactions with affiliates, including loans and asset
purchases, must be on terms and under circumstances, including credit standards,
that are substantially the same or at least as favorable to the institution as
those prevailing at the time for comparable transactions with non-affiliated
companies. In addition, savings institutions are prohibited from lending to any
affiliate that is engaged in activities that are not permissible for bank
holding companies, and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
The authority of Wayne Savings Community Bank and Village Savings Bank to
extend credit to executive officers, directors and 10% stockholders, as well as
entities controlled by these persons, is governed by Sections 22(g) and 22(h) of
the Federal Reserve Act, and also by Federal Reserve Board Regulation O. Among
other things, these regulations generally require that these loans be made on
terms substantially the same as those offered to unaffiliated individuals and do
not involve more than the normal risk of repayment. However, recent regulations
now permit executive officers and directors to receive the same terms through
benefit or compensation plans that are widely available to other employees, as
long as the director or executive officer is not given preferential treatment
compared to other participating employees. Regulation O also places individual
and aggregate limits on the amount of loans Wayne Savings Community Bank and
Village Savings Bank may make to these persons based, in part, on their
respective capital positions, and requires approval procedures to be followed.
At June 30, 2002 we were in compliance with these regulations.
Enforcement. The Office of Thrift Supervision has primary enforcement
responsibility over savings associations, and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, attorneys, appraisers and accountants who knowingly or recklessly
participate in wrongful action likely to have an adverse effect on an insured
institution. Formal enforcement action may range from the issuance of a capital
directive or cease and desist order to removal of officers and/or directors of
the institution, receivership, conservatorship or the termination of deposit
insurance. Civil penalties cover a wide range of violations and actions, and
range up to $25,000 per day, unless a finding of reckless disregard is made, in
which case penalties may be as high as $1 million per day. The Federal Deposit
Insurance Corporation also has the authority to recommend to the Director of the
Office of Thrift Supervision that enforcement action be taken with respect to a
particular savings institution. If action is not taken by the Director, the
Federal Deposit Insurance Corporation has authority to take such action under
specified circumstances.
Standards for Safety and Soundness. Federal law requires each federal
banking agency to prescribe for all insured depository institutions standards
relating to, among other things, internal controls, information systems and
audit systems, loan documentation, credit underwriting, interest rate risk
exposure, asset growth, compensation, and such other operational and managerial
standards as the agency deems appropriate. The federal banking agencies adopted
Interagency Guidelines Prescribing Standards for Safety and Soundness to
implement the safety and soundness standards required under federal law. The
guidelines set forth the safety and soundness standards that the federal banking
agencies use to identify and address problems at insured depository institutions
before capital becomes impaired. The guidelines address internal controls and
information systems; internal audit systems; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; and compensation, fees
and benefits. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard. If an institution fails to meet these
standards, the appropriate federal banking agency may require the institution to
submit a compliance plan.
Mutual-to-Stock Conversion Regulations
On October 1, 2002, the Office of Thrift Supervision promulgated
amendments to its mutual-to-stock conversion regulations. The new regulations
eliminate all restrictions on stock repurchases after one year from a
mutual-to-stock conversion or a "second step" conversion by a mutual holding
company. Stock repurchases of up to 5% of the outstanding common stock may be
made within the first year following conversion if extraordinary circumstances
exist. Open market stock purchases for tax-qualified or non-tax-qualified
employee stock benefit plans are not subject to the repurchase limits. Further,
stock repurchases for management recognition plans that have been approved by
stockholders in the first year after a conversion also do not count toward the
5% repurchase limitation. However, prior notice must be given to the Office of
Thrift Supervision of such repurchases within the first year after conversion.
81
The new regulations provide for accelerated vesting of stock option and
stock award benefits in the case of disability, death or a change in control,
for stock benefit plans that are adopted within one year after a conversion
transaction. The new regulations do not permit accelerated vesting of stock
benefit plan benefits in the event of normal retirement. However, these
restrictions do not apply to stock benefit plans adopted more than one year
after a conversion transaction.
Finally, the new regulations require a converting association to retain at
least 50% of the net conversion proceeds; on a case-by-case basis, the Office of
Thrift Supervision may require a converting association to retain more than 50%
of the net proceeds.
Prompt Corrective Regulatory Action
Under federal prompt corrective action regulations, the Office of Thrift
Supervision is required to take supervisory actions against undercapitalized
institutions, the severity of which depends upon the institution's level of
capital. Generally, a savings institution that has total risk-based capital of
less than 8.0% or a leverage ratio or a Tier 1 core capital ratio that is less
than 4.0% is considered to be undercapitalized. A savings institution that has
total risk-based capital of less than 6.0%, a Tier 1 core risk-based capital
ratio of less than 3.0%, or a leverage ratio that is less than 3.0%, is
considered to be "significantly undercapitalized," and a savings institution
that has a tangible capital to assets ratio equal to or less than 2.0% is deemed
to be "critically undercapitalized." Generally, the applicable banking regulator
is required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the Office of Thrift Supervision within 45
days of the date an institution receives notice that it is "undercapitalized,"
"significantly undercapitalized" or "critically undercapitalized." In addition,
numerous mandatory supervisory actions become immediately applicable to the
institution, including, but not limited to, restrictions on growth, investment
activities, capital distributions, and affiliate transactions. The Office of
Thrift Supervision could also take any one of a number of discretionary
supervisory actions against undercapitalized institutions, including the
issuance of a capital directive and the replacement of senior executive officers
and directors.
Insurance of Deposit Accounts
The Federal Deposit Insurance Corporation has adopted a risk-based deposit
insurance assessment system. The Federal Deposit Insurance Corporation assigns
an institution to one of three capital categories, based on the institution's
financial information, as of the reporting period ending seven months before the
assessment period, and one of three supervisory subcategories within each
capital group. The three capital categories are well capitalized, adequately
capitalized and undercapitalized. The supervisory subgroup to which an
institution is assigned is based on a supervisory evaluation provided to the
Federal Deposit Insurance Corporation by the institution's primary federal
regulator and information which the Federal Deposit Insurance Corporation
determines to be relevant to the institution's financial condition and the risk
posed to the deposit insurance funds. An institution's assessment rate depends
on the capital category and supervisory category to which it is assigned. The
Federal Deposit Insurance Corporation is authorized to raise the assessment
rates. The Federal Deposit Insurance Corporation has exercised this authority
several times in the past and may raise insurance premiums in the future. If
this type of action is taken by the Federal Deposit Insurance Corporation, it
could have an adverse effect on the earnings of Wayne Savings Community Bank and
Village Savings Bank.
Federal Home Loan Bank System
The Federal Home Loan Bank System provides a central credit facility
primarily for member institutions. Wayne Savings Community Bank and Village
Savings Bank, as members of the Federal Home Loan Bank of Cincinnati, are
required to acquire and hold shares of capital stock in that Federal Home Loan
Bank in an amount at least equal to 1% of the aggregate principal amount of
their unpaid residential mortgage loans and similar obligations at the beginning
of each year, or 1/20 of their borrowings from the Federal Home Loan Bank,
whichever is greater. As of June 30, 2002, the Banks were in compliance with
this requirement. The Federal Home Loan Banks are required to provide funds for
the resolution of insolvent thrifts and to contribute funds for affordable
housing programs. These requirements could reduce the amount of dividends that
the Federal Home Loan Banks pay to their members and could also result in the
Federal Home Loan Banks imposing a higher rate of interest on loans to their
members.
82
Federal Reserve System
Federal Reserve Board regulations require savings institutions to maintain
non-interest-earning reserves against their transaction accounts, such as
negotiable order of withdrawal and regular checking accounts. At June 30, 2002,
Wayne Savings Community Bank and Village Savings Bank were in compliance with
these reserve requirements.
Ohio Regulation
As a savings association organized under the laws of the State of Ohio,
Wayne Savings Community Bank is subject to regulation by the Ohio Division of
Financial Institutions. Regulation by the Ohio Division of Financial
Institutions affects Wayne Savings Community Bank's internal organization as
well as its savings, mortgage lending, and other investment activities. Periodic
examinations by the Ohio Division of Financial Institutions are usually
conducted on a joint basis with the Office of Thrift Supervision. Ohio law
requires that Wayne Savings Community Bank maintain federal deposit insurance as
a condition of doing business.
Under Ohio law, an Ohio association may buy any obligation representing a
loan that would be a legal loan if originated by the association, subject to
various requirements including: loans secured by liens on income-producing real
estate may not exceed 20% of an association's assets; consumer loans, commercial
paper, and corporate debt securities may not exceed 20% of an association's
assets; loans for commercial, corporate, business, or agricultural purposes may
not exceed 10% of an association's assets unless the Ohio Division of Financial
Institutions increases the limitation to 30%, provided that an association's
required reserve increases proportionately; certain other types of loans may be
made for lesser percentages of the association's assets; and, with certain
limitations and exceptions, certain additional loans may be made if not in
excess of 3% of the association's total assets. In addition, no association may
make real estate acquisition and development loans for primarily residential use
to one borrower in excess of 2% of assets. The total investments in commercial
paper or corporate debt of any issuer cannot exceed 1% of an association's
assets, with certain exceptions.
Ohio law authorizes Ohio-chartered associations to, among other things:
(i) invest up to 15% of assets in the capital stock, obligations, and other
securities of service corporations organized under the laws of Ohio, and an
additional 20% of net worth may be invested in loans to majority owned service
corporations; (ii) invest up to 10% of assets in corporate equity securities,
bonds, debentures, notes, or other evidence of indebtedness; (iii) exceed limits
otherwise applicable to certain types of investments (other than investments in
service corporations) by and between 3% and 10% of assets, depending upon the
level of the institution's permanent stock, general reserves, surplus, and
undivided profits; and (iv) invest up to 15% of assets in any loans or
investments not otherwise specifically authorized or prohibited, subject to
authorization by the institution's board of directors.
An Ohio association may invest in such real property or interests therein
as its board of directors deems necessary or convenient for the conduct of the
business of the association, but the amount so invested may not exceed the net
worth of the association at the time the investment is made. Additionally, an
association may invest an amount equal to 10% of its assets in any other real
estate. This limitation does not apply, however, to real estate acquired by
foreclosure, conveyance in lieu of foreclosure, or other legal proceedings in
relation to loan security interests.
Notwithstanding the above powers authorized under Ohio law and regulation,
a state-chartered savings association, such as Wayne Savings Community Bank, is
subject to certain limitations on its permitted activities and investments under
federal law, which may restrict the ability of an Ohio-chartered association to
engage in activities and make investments otherwise authorized under Ohio law.
Ohio has adopted statutory limitations on the acquisition of control of an
Ohio savings and loan association by requiring the written approval of the Ohio
Division of Financial Institutions prior to the acquisition by any person or
company, as defined under the Ohio Revised Code, of a controlling interest in an
Ohio association. Control exists, for purposes of Ohio law, when any person or
company, either directly, indirectly, or acting in concert with one or more
other persons or companies (a) acquires any class of voting stock, irrevocable
proxies, or any combination thereof, of the savings and loan association, (b)
directs the election of a majority of directors of the savings and loan
association, (c) becomes the general partner of the savings and loan
association, (d) has influence over the management or policies of the savings
and loan association, (e) has the ability, other than through the
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holding of irrevocable proxies, to direct shareholder votes, or (f) anything
else deemed to be control by the Ohio Division of Financial Institutions. The
Ohio Division of Financial Institution's written permission is required when the
total amount of control held by the acquirer was less than 25% control before
the acquisition and more than 25% control after the acquisition, or when the
total amount of control held by the acquirer was less than 50% before the
acquisition and more than 50% after the acquisition. Notice to the Ohio Division
of Financial Institutions is required when the total amount of control held by
the acquirer was more than 25% control before the acquisition and 50% or less
after the acquisition, or when the acquirer holds 51% or more of the control
before the acquisition and proposes to acquire control of the savings and loan
association.
Under certain circumstances, interstate mergers and acquisitions involving
associations incorporated under Ohio law are permitted by Ohio law. A savings
and loan association or savings and loan holding company with its principal
place of business in another state may acquire a savings and loan association or
savings and loan holding company incorporated under Ohio law if the laws of such
other state grant an Ohio savings association or an Ohio holding company
reciprocal rights. Additionally, recently enacted legislation permits interstate
branching by savings and loan associations incorporated under Ohio law.
Ohio law requires prior written approval of the Ohio Superintendent of
Savings and Loans of a merger of an Ohio association with another savings
association or a holding company affiliate.
Holding Company Regulation
Upon completion of the conversion, Wayne Savings Bancshares, Inc. will be
a non-diversified unitary savings and loan holding company, subject to
regulation and supervision by the Office of Thrift Supervision. A
non-diversified unitary savings and loan holding company is a savings and loan
holding company that controls only one subsidiary savings association which,
together with all related activities, represents more than 50% of the holding
company's consolidated net worth. In addition, the Office of Thrift Supervision
has enforcement authority over Wayne Savings Bancshares, Inc. and its
non-savings institution subsidiaries. Among other things, this authority permits
the Office of Thrift Supervision to restrict or prohibit activities that are
determined to be a risk to Wayne Savings Community Bank.
Under prior law, a unitary savings and loan holding company generally was
not restricted as to the types of business activities in which it may engage,
provided that its subsidiary savings bank was a qualified thrift lender. The
Gramm-Leach-Bliley Act of 1999, however, restricts unitary savings and loan
holding companies not existing or applied for before May 4, 1999 to those
activities permissible for financial holding companies or for multiple savings
and loan holding companies. Wayne Savings Bancshares, Inc. will not be a
"grandfathered" unitary savings and loan holding company and, therefore, will be
limited to the activities permissible for financial holding companies or for
multiple savings and loan holding companies. A financial holding company may
engage in activities that are financial in nature, including underwriting equity
securities and insurance, incidental to financial activities or complementary to
a financial activity. A multiple savings and loan holding company is generally
limited to activities permissible for bank holding companies under Section
4(c)(8) of the Bank Holding Company Act, subject to the prior approval of the
Office of Thrift Supervision, and certain additional activities authorized by
Office of Thrift Supervision regulations.
Federal law prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring control of
another savings institution or holding company thereof, without the prior
written approval of the Office of Thrift Supervision. It also prohibits the
acquisition or retention of, with specified exceptions, more than 5% of the
equity securities of a company engaged in activities that are not closely
related to banking or financial in nature; or acquiring or retaining control of
an institution that is not federally insured. In evaluating applications by
holding companies to acquire savings institutions, the Office of Thrift
Supervision must consider the financial and managerial resources, future
prospects of the savings institution involved, the effect of the acquisition on
the risk to the insurance fund, the convenience and needs of the community and
competitive factors.
Prospective Regulation and Legislation
Statutes and regulations that affect Wayne Savings Community Bank, Village
Savings Bank and Wayne Savings Bancshares, Inc. on a daily basis are subject to
change, and the interpretation of the relevant laws and regulations also may
change because of new interpretations by the authorities who administer those
laws and
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regulations. Any change in the regulatory structure or the applicable statutes
or regulations, whether by the Office of Thrift Supervision, the Federal Deposit
Insurance Corporation, the Ohio Division of Financial Institutions or the United
States Congress, could have a material impact on the business and operations of
Wayne Savings Community Bank, Village Savings Bank and Wayne Savings Bancshares,
Inc.
Sarbanes-Oxley Act of 2002
On July 30, 2002, the President signed into law the Sarbanes-Oxley Act of
2002 implementing legislative reforms intended to address corporate and
accounting fraud. In addition to the establishment of a new accounting oversight
board that will enforce auditing, quality control and independence standards and
will be funded by fees from all publicly traded companies, the Act restricts
provision of both auditing and consulting services by accounting firms. To
ensure auditor independence, any non-audit services being provided to an audit
client will require preapproval by the company's audit committee members. In
addition, the audit partners must be rotated. The Act requires chief executive
officers and chief financial officers, or their equivalent, to certify to the
accuracy of periodic reports filed with the Securities and Exchange Commission,
subject to civil and criminal penalties if they knowingly or willingly violate
this certification requirement. In addition, under the Act, counsel will be
required to report evidence of a material violations of the securities laws or a
breach of fiduciary duty by a company to its chief executive officer or its
chief legal officer and, if such officer does not appropriately respond, to
report such evidence to the audit committee or other similar committee of the
board of directors or the board itself.
Longer prison terms also will be applied to corporate executives who
violate federal securities laws, the period during which certain types of suits
can be brought against a company or its officers has been extended, and bonuses
issued to top executives prior to restatement of a company's financial
statements are now subject to disgorgement if such restatement was due to
corporate misconduct. Executives are also prohibited from insider trading during
retirement plan "blackout" periods, and loans to company executives are
restricted. In addition, a provision directs that civil penalties levied by the
Securities and Exchange Commission as a result of any judicial or administrative
action under the Act be deposited to a fund for the benefit of harmed investors.
The Federal Accounts for Investor Restitution provision also requires the
Securities and Exchange Commission to develop methods of improving collection
rates. The legislation accelerates the time frame for disclosures by public
companies, as they must immediately disclose any material changes in their
financial condition or operations. Directors and executive officers must also
provide information for most changes in ownership in a company's securities
within two business days of the change.
The Act also increases the oversight of, and codifies certain requirements
relating to audit committees of public companies and how they interact with the
company's "registered public accounting firm" ("RPAF"). Audit committee members
must be independent and are absolutely barred from accepting consulting,
advisory or other compensatory fees from the issuer. In addition, companies must
disclose whether at least one member of the committee is a "financial expert"
(as such term will be defined by the Securities and Exchange Commission) and if
not, why not. Under the Act, a RPAF is prohibited from performing statutorily
mandated audit services for a company if such company's chief executive officer,
chief financial officer, comptroller, chief accounting officer or any person
serving in equivalent positions has been employed by such firm and participated
in the audit of such company during the one-year period preceding the audit
initiation date. The Act also prohibits any officer or director of a company or
any other person acting under their direction from taking any action to
fraudulently influence, coerce, manipulate or mislead any independent public or
certified accountant engaged in the audit of the company's financial statements
for the purpose of rendering the financial statements materially misleading. The
Act also requires the Securities and Exchange Commission to prescribe rules
requiring inclusion of any internal control report and assessment by management
in the annual report to shareholders. The Act requires the RPAF that issues the
audit report to attest to and report on management's assessment of the company's
internal controls.
Although we anticipate that we will incur additional expense in complying
with the provisions of the Sarbanes-Oxley Act and the resulting regulations,
management does not expect that such compliance will have a material impact on
our results of operations or financial condition.
85
Federal Securities Laws
Wayne Savings Bancshares, Inc. has filed with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933 for the
registration of the issuance of the common stock in the conversion. Upon
completion of the conversion, Wayne Savings Bancshares, Inc. common stock will
be registered with the Securities and Exchange Commission under the Securities
Exchange Act of 1934. Wayne Savings Bancshares, Inc. will be subject to the
information, proxy solicitation, insider trading restrictions and other
requirements under the Securities Exchange Act of 1934.
The registration under the Securities Act of 1933 of the issuance of
shares of common stock in the conversion does not cover the resale of those
shares. Shares of the common stock purchased by persons who are not affiliates
of Wayne Savings Bancshares, Inc. may be resold without registration. Shares
purchased by an affiliate of Wayne Savings Bancshares, Inc. will be subject to
the resale restrictions of Rule 144 under the Securities Act of 1933. If Wayne
Savings Bancshares, Inc. meets the current public information requirements of
Rule 144 under the Securities Act of 1933, each affiliate of Wayne Savings
Bancshares, Inc. who complies with the other conditions of Rule 144, including
those that require the affiliate's sale to be aggregated with those of other
persons, would be able to sell in the public market, without registration, a
number of shares not to exceed, in any three-month period, the greater of 1% of
the outstanding shares of Wayne Savings Bancshares, Inc. or the average weekly
volume of trading in the shares during the preceding four calendar weeks.
Provision may be made in the future by Wayne Savings Bancshares, Inc. to permit
affiliates to have their shares registered for sale under the Securities Act of
1933.
TAXATION
Federal Taxation. Income taxes are accounted for under the asset and
liability method that requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method, deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The federal tax bad debt reserve method available to thrift institutions
was repealed in 1996 for tax years beginning after 1995. As a result, Wayne
Savings Bancshares, Inc. was required to change from the reserve method to the
specific charge-off method to compute its bad debt deduction. In addition, Wayne
Savings Bancshares, Inc. is required generally to recapture into income the
portion of its bad debt reserve (other than the supplemental reserve) that
exceeds its base year reserves, or approximately $200,000.
The recapture amount resulting from the change in a thrift's method of
accounting for its bad debt reserves generally will be taken into taxable income
ratably (on a straight-line basis) over a six-year period. Wayne Savings
Community Bank began recapture of the bad debt reserve during fiscal 1999.
Retained earnings as of June 30, 2002 includes approximately $2.7 million
for which no provision for federal income tax has been made. This reserve (base
year and supplemental) is not recaptured at this time but may be recaptured in
the future as certain events, such as stock redemption or distributions to
shareholders in excess of current or accumulated earnings and profits, could
trigger a recapture.
Wayne Savings Bancshares, Inc.'s tax returns have been audited or closed
without audit through fiscal year 1997. At June 30, 2002, our 1999 federal
income tax return was under examination. Management does not expect any material
adverse consequences as a result of this examination.
Ohio Taxation. Wayne Savings Bancshares, Inc. and its subsidiary file Ohio
franchise tax returns. For Ohio franchise tax purposes, savings institutions are
currently taxed at a rate equal to 1.3% of taxable net worth. Wayne Savings
Bancshares, Inc. is not currently under audit with respect to its Ohio franchise
tax returns.
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MANAGEMENT OF WAYNE SAVINGS BANCSHARES, INC.
Directors
The Board of Directors of Wayne Savings Bancshares, Inc. currently
consists of seven members. Approximately one-third of the directors are elected
annually. Directors are generally elected to serve for three-year periods.
The table below sets forth certain information regarding the composition
of the Board of Directors as of June 30, 2002, including the terms of office of
Board members.
Current Term to
Name Age Positions Held in the Company Director Since(1) Expire
- ----------------------- ------ ------------------------------- ----------------- --------------
Charles F. Finn 64 Chairman of the Board, 1976 2005
President and Chief Executive
Officer
Joseph L. Retzler 74 Director 1985 2005
Kenneth G. Rhode 93 Director 1958 2003
James C. Morgan 64 Director 1995 2003
Donald E. Massaro 73 Director 1990 2004
Russell L. Harpster 67 Director 1979 2004
Terry A. Gardner 55 Director 1994 2004
(1) Reflects initial appointment to the Board of Directors of Wayne Savings
Community Bank.
The principal occupation during the past five years of each director and
executive officer of Wayne Savings Bancshares, Inc. is set forth below. All
directors and executive officers have held their present positions for five
years unless otherwise stated.
Charles F. Finn has been President and Chief Executive Officer of Wayne
Savings Community Bank since 1983. He has been employed by Wayne Savings
Community Bank for 38 years. Mr. Finn is the spouse of Wanda Christopher-Finn,
Executive Vice President of Wayne Savings Bancshares, Inc. He was appointed
Chairman of the Board of Directors of Wayne Savings Bancshares, Inc. on
September 25, 1997.
Joseph L. Retzler is President of Retzler Hardware in Wooster, Ohio.
Kenneth G. Rhode has been Chairman of the Board of Wayne Savings Community
Bank since 1972. He was Chief Executive Officer of Lightning Rod Mutual and
Western Reserve Mutual Insurance Companies of Wooster, Ohio, prior to his
retirement in 1988.
James C. Morgan is President of Franklin Oil & Gas, Inc. in Wooster, Ohio.
He was elected director on February 28, 1995 to fill the unexpired term of a
retiring director.
Donald E. Massaro has been affiliated with Wayne Savings Community Bank
for 35 years. He previously was 1st Senior Vice President of Lending of Wayne
Savings Community Bank and retired in December 1992.
Russell L. Harpster is an attorney and a partner in the law firm of
Henderson, Harpster & Vanosdall in Ashland, Ohio.
Terry A. Gardner is Executive Vice President and owner of Greenbriar
Conference Center, Wooster, Ohio. He was elected director on October 25, 1994 to
fill the unexpired term of a retiring director.
Executive Officers Who are Not Directors
Wanda Christopher-Finn is Executive Vice President, Chief Administrative
Officer and has been affiliated with Wayne Savings Community Bank since 1972.
Ms. Christopher-Finn is the spouse of Charles F. Finn.
Michael C. Anderson is Executive Vice President, Chief Financial Officer
and joined Wayne Savings Community Bank in October 2001. He has most recently
been a member of senior management in the health care field responsible for
accounting and financial operations. Mr. Anderson was Senior Vice President,
Chief Financial Officer of Wayne Savings Community Bank between 1984-1986.
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Gary C. Miller became Senior Vice President, Manager of the Loan
Origination Division in February 1996 and was promoted to Chief Lending Officer
in August 1997. He was previously Vice President, Manager of Mortgage Loans. He
has been affiliated with Wayne Savings Community Bank since 1971.
Directors and Executive Officers of Wayne Savings Bancshares, Inc., a Delaware
Corporation
The Board of Directors of Wayne Savings Bancshares, Inc., the Delaware
corporation, is comprised of the same individuals currently serving on the Board
of Directors of Wayne Savings Bancshares, Inc., the federal corporation. The
executive officers of Wayne Savings Bancshares, Inc., the Delaware corporation,
are Charles F. Finn, Chairman, President and Chief Executive Officer, Wanda
Christopher-Finn, Executive Vice President and Chief Administrative Officer, and
Michael C. Anderson, Executive Vice President and Chief Financial Officer.
Meetings and Committees of the Board of Directors
The business of Wayne Savings Bancshares, Inc.'s Board of Directors is
conducted through meetings and activities of the Board and its committees.
During the year ended March 31, 2002, the Board of Directors held 12 regular
meetings and four special meetings. During the year ended March 31, 2002, no
director attended fewer than 75 percent of the total meetings of the Board of
Directors of Wayne Savings Bancshares, Inc. and committees on which such
director served.
The Executive Committee of the Board of Directors, consisting of Directors
Kenneth G. Rhode, Charles F. Finn, Russell L. Harpster and Joseph L. Retzler,
also serves as the Compensation Committee of Wayne Savings Bancshares, Inc., and
meets periodically to review the performance of officers and employees and to
determine compensation programs and adjustments. The Executive Committee met two
times in its capacity as the Compensation Committee during the year ended March
31, 2002.
The Audit Committee consists of Directors Kenneth G. Rhode, Donald E.
Massaro, Terry A. Gardner and James C. Morgan. This Committee meets on a
quarterly basis with the internal auditor to review audit programs and the
results of audits of specific areas as well as other regulatory compliance
issues. Wayne Savings Bancshares, Inc.'s Audit Committee met four times during
the year ended March 31, 2002.
The Nominating Committee consists of the full Board of Directors. While
the Nominating Committee will consider nominees recommended by stockholders, it
has not actively solicited recommendations from stockholders for nominees, nor
established any procedures for this purpose. Any nominations must, however, be
made pursuant to applicable provisions of the Bylaws of Wayne Savings
Bancshares, Inc. The Board of Directors met one time in its capacity as the
Nominating Committee during the fiscal year ended March 31, 2002.
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Executive Compensation
Summary Compensation Table. The following table sets forth for the fiscal
years ended March 31, 2002, 2001 and 2000 certain information as to the total
remuneration paid to Wayne Savings Bancshares, Inc.'s Chief Executive Officer
and to its Executive Vice President. During the fiscal year ended March 31,
2002, no other officer of Wayne Savings Bancshares, Inc. earned salary and bonus
which exceeded $100,000.
==============================================================================================================================
Long-Term Compensation
- ------------------------------------------------------------------------------------------------------------------------------
Annual Compensation (1) Awards Payout
- ------------------------------------------------------------------------------------------------------------------------------
Fiscal
years
ended Other Annual Restricted Securities
Name and principal March Salary Bonus Compensation Stock Underlying LTIP All other
position 31, ($) ($) (2) Award(s) Options/SARs Payouts compensation
==============================================================================================================================
Charles F. Finn 2002 $159,600 $20,000 $ -- -- -- -- $ --
Chairman, 2001 152,800 16,000 -- -- -- -- --
President and 2000 147,800 15,000 -- -- -- -- --
Chief Executive
Officer
- ------------------------------------------------------------------------------------------------------------------------------
Wanda 2002 $102,300 $15,000 $ -- -- -- -- $ --
Christopher-Finn, 2001 97,500 13,000 -- -- -- -- --
Executive Vice 2000 94,500 10,500 -- -- -- -- --
President
==============================================================================================================================
(1) No compensation has been deferred at the election of the executive. Does
not include benefits pursuant to Wayne Savings Bancshares, Inc.'s Pension
Plan.
(2) Wayne Savings Bancshares, Inc. also provides certain members of senior
management with the use of an automobile, membership dues and other
personal benefits. The aggregate amount of such other benefits provided
did not exceed the lesser of $50,000 or 10% of total annual salary.
Stock Option Plan. The Board of Directors of Wayne Savings Community Bank
adopted the 1993 Incentive Stock Option Plan in connection with the mutual
holding company reorganization and stock offering in 1993. The plan was ratified
by the stockholders at the 1993 annual meeting. Set forth below is information
concerning exercised and unexercisable options held by the named executive
officers at March 31, 2002.
====================================================================================================================
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION VALUES
====================================================================================================================
Number of Unexercised Value of Unexercised
Options at In-the-Money Options at
Fiscal Year End Fiscal Year End (1)
Shares Acquired Value ----------------------------------------------------
Name Upon Exercise Realized Exercisable/Unexercisable Exercisable/Unexercisable
- --------------------------------------------------------------------------------------------------------------------
Charles F. Finn -- $ -- 3,200/-- $44,800/--
Wanda Christopher-Finn -- $ -- 2,041/-- $28,514/--
====================================================================================================================
(1) Equals the difference between the aggregate exercise price of such options
and the aggregate fair market value of the shares of common stock that
would be received upon exercise, assuming such exercise occurred on March
31, 2002 (based on the price of the last sale reported on the Nasdaq
SmallCap Market on March 31, 2002).
Employment and Severance Agreements
Employment Agreements. Wayne Savings Community Bank intends to enter into
employment agreements with Chairman, President and Chief Executive Officer
Charles F. Finn, and Executive Vice Presidents Wanda Christopher-Finn and
Michael C. Anderson. Under the agreements, the base salaries of Mr. Finn, Ms.
Christopher-Finn and Mr. Anderson will be $159,600, $102,300 and $100,000,
respectively. Mr. Finn's agreement will provide for a term of 36 months, and Ms.
Christopher-Finn's and Mr. Anderson's will provide for terms of 24 months. On
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each anniversary date, the agreements may be extended for an additional 12
months, so that the remaining term shall be 36 months and 24 months,
respectively. If the agreement is not renewed, the agreements will expire 36
months, or 24 months, respectively, following the anniversary date. The base
salaries under the agreements may be increased but not decreased. In addition to
the base salaries, the agreements provide for, among other things, insurance
benefits and participation in other employee and fringe benefits applicable to
executive personnel. The agreements provide for termination of the employment of
the executive by Wayne Savings Community Bank for cause at any time. In the
event Wayne Savings Community Bank terminates the executive's employment during
the term of the agreement for reasons other than cause, or in the event of the
executive's resignation from Wayne Savings Community Bank upon (i) failure to
re-elect the executive to his or her current offices, (ii) a material change in
the executive's functions, duties or responsibilities, or relocation of his or
her principal place of employment by more than a specified number of miles,
(iii) liquidation or dissolution of Wayne Savings Community Bank, or (iv) a
breach of the agreement by Wayne Savings Community Bank, Mr. Finn, Ms.
Christopher-Finn, or Mr. Anderson, or in the event of death, his or her
beneficiary, would be entitled to severance pay in an amount equal to three
times, or two times, as applicable, his or her highest annual Base Salary and
bonus. Wayne Savings Community Bank would also continue the executive's life
and, if applicable, dental coverage for the remaining unexpired term of the
agreement. In the event the payments to the executive would include an "excess
parachute payment" as defined in the Internal Revenue Code, the payments would
be reduced in order to avoid having an excess parachute payment. The agreements
may be revised based upon comments of the Office of Thrift Supervision.
An executive's employment may be terminated upon his or her attainment of
retirement age. Upon an executive's retirement, he or she will be entitled to
all benefits available to him or her under any retirement or other benefit plan
maintained by Wayne Savings Community Bank. In the event of an executive's
disability for a period of six months, Wayne Savings Community Bank may
terminate the agreement provided that Wayne Savings Community Bank will be
obligated to pay the executive a bi-weekly payment equal to three quarters of
the executive's bi-weekly rate of base salary, reduced by any benefits paid to
the executive pursuant to any disability insurance policy or similar arrangement
maintained by Wayne Savings Community Bank. The disability payments shall end on
the earlier of (i) the date the executive returns to full-time employment with
Wayne Savings Community Bank or another employer, (ii) his or her attainment of
retirement age, or (iii) his or her death.
Change of Control Agreements. Wayne Savings Community Bank intends to
enter into a change of control agreement with Gary C. Miller that will provide
certain benefits in the event of a change of control of Wayne Savings
Bancshares, Inc. or Wayne Savings Community Bank. Upon a change in control of
Wayne Savings Community Bank followed by the involuntary or, in certain
instances, voluntary, termination of employment, other than termination for
cause, Mr. Miller would be entitled to severance pay in an amount equal to two
times his base salary. In the event the payments to the executive would include
an "excess parachute payment" as defined in the Internal Revenue Code, the
payments would be reduced in order to avoid having an excess parachute payment.
The agreement may be revised based upon comments of the Office of Thrift
Supervision.
Directors' Compensation
Fees. Our directors receive no fees for serving on the Board of Directors
or committees of Wayne Savings Bancshares, Inc. Each non-employee director who
served on the Board of Directors of Wayne Savings Community Bank during the
fiscal year ended March 31, 2002 received a monthly meeting fee of $825 and a
monthly retainer of $550. The monthly meeting fee is paid to the director only
if the director attends the meeting or has an excused absence. No additional
fees were paid for special meetings of the Board of Directors. During the fiscal
year ended March 31, 2002, the members of the Executive Committee received an
annual fee of $2,000; however, Kenneth G. Rhode, Chairman of the Board of
Directors of Wayne Savings Community Bank, received a "grandfathered" executive
committee fee of $4,000. Members of the Loan Committee and Audit Committee
received an annual fee of $1,800. Directors who attend the quarterly meetings of
Wayne Savings Bancshares, Inc.'s Asset Review Committee received a fee of $100
for each meeting attended. The Chairman of the Board of Directors of Wayne
Savings Community Bank and Chairman of the Executive Committee received $12,850
in additional fees during the fiscal year ended March 31, 2002. Mr. Finn did not
receive any fees as Chairman of the Board of Wayne Savings Bancshares, Inc.
Director Emeritus Plan. Wayne Savings Community Bank has adopted a
director emeritus plan pursuant to which retiring directors who have completed
at least eight years of continuous service on the Board may be
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designated as "Director Emeritus" by a majority vote of the Board of Directors.
The annual compensation for a Director Emeritus is fixed by the Board but cannot
exceed two-thirds of annual board meeting fees. Wayne Savings Community Bank
currently has no individuals serving as Director Emeritus. For the fiscal year
ended March 31, 2002, the fee paid to the then Director Emeritus was $9,000.
Stock Option Plan for Outside Directors. The Board of Directors of Wayne
Savings Community Bank adopted the 1993 Stock Option Plan for Outside Directors
in connection with its stock offering in 1993. The plan was ratified by Wayne
Savings Community Bank's stockholders at the 1993 annual meeting. The plan
authorizes the grant of non-statutory stock options for 36,018 shares (adjusted
for stock-splits and stock dividends) of common stock to non-employee directors
of Wayne Savings Bancshares, Inc. The plan is a self administering plan that
granted to Messrs. Rhode, Harpster, Retzler, and Massaro non-statutory options
to purchase 7,204, 5,467, 5,467 and 5,336 shares of common stock (as adjusted),
respectively. The exercise price of the options was originally $10.00 per share,
the fair market value of the shares of common stock underlying such option on
the date the option was granted. As of June 30, 2002, the exercise price of all
such options was $5.00 due to stock-splits and stock dividends. All options
granted under the plan may be exercised from time to time in whole or in part,
and expire upon the earlier of 10 years following the date of grant or one year
following the date the optionee ceases to be a director.
Employee Stock Ownership Plan and Trust
Wayne Savings Community Bank implemented an employee stock ownership plan
in connection with its initial stock offering in 1993. The employee stock
ownership plan purchased 7% of the shares sold in the 1993 offering, all of
which have been allocated. As part of the conversion, the employee stock
ownership plan intends to borrow funds from Wayne Savings Bancshares, Inc. and
use those funds to purchase 8% of the common stock to be sold in the offering.
Employees with at least one year of service with Wayne Savings Community
Bank and who have attained age 18 are eligible to participate. Collateral for
the loan will be the common stock purchased by the employee stock ownership
plan. The loan will be repaid principally from Wayne Savings Community Bank's
discretionary contributions to the employee stock ownership plan over a period
of up to 20 years, provided that the loan documents will permit repayment over a
shorter period, without penalty for prepayments. It is anticipated that the
interest rate for the loan will be a floating rate equal to the prime rate.
Shares purchased by the employee stock ownership plan will be held in a suspense
account for allocation among participants as the loan is repaid.
Contributions to the employee stock ownership plan and shares released
from the suspense account in an amount proportional to the repayment of the
employee stock ownership plan loan will be allocated among employee stock
ownership plan participants on the basis of compensation in the year of
allocation. A participant who terminates employment for reasons other than
death, retirement, or disability prior to five years of credited service under
the employee stock ownership plan will forfeit his benefits. Nonvested benefits
will become fully vested upon five years of credited service, or prior to five
years of credited service in connection with a participant's death or disability
or termination of the plan. Vested benefits will be payable in the form of
common stock and/or cash. Wayne Savings Community Bank's contributions to the
employee stock ownership plan are discretionary, subject to the loan terms and
tax law limits. Therefore, benefits payable under the employee stock ownership
plan cannot be estimated. Pursuant to SOP 93-6, Wayne Savings Community Bank is
required to record compensation expense in an amount equal to the fair market
value of the shares released from the suspense account. In the event of a change
in control (as defined in the plan) the employee stock ownership plan will
terminate.
A committee of nonemployee directors will administer the employee stock
ownership plan. Wayne Savings Community Bank will appoint an independent
financial institution or its outside directors to serve as trustee of the
employee stock ownership plan. The employee stock ownership plan trustee,
subject to its fiduciary duty, must vote all allocated shares held in the
employee stock ownership plan in accordance with the instructions of
participating employees. Under the employee stock ownership plan, nondirected
shares and shares held in the suspense account will be voted in a manner
calculated to most accurately reflect the instructions it has received from
participants regarding the allocated stock, so long as the vote is in accordance
with the provisions of ERISA.
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Pension Plan
Wayne Savings Community Bank makes available to all full-time employees
who have attained the age of 21 and completed one year of service with the bank
a defined benefit pension plan. The pension plan provides for monthly payments
to or on behalf of each covered employee upon the employee's normal retirement
date (i.e., the first day of the month coincident with or next following the
later of age 65 or five years of participation). These payments are calculated
in accordance with a formula based on the employee's "average monthly
compensation," which is defined as the highest average of total compensation for
five consecutive calendar years of employment. The normal retirement benefit is
equal to 29% of the "average monthly compensation" up to the integration level,
plus 51% of the "average monthly compensation" in excess of the integration
level, reduced for less than 35 years of service. The normal form of benefit is
a monthly income payable for life. Optional forms of benefit are available.
Under the pension plan, we make an annual contribution for the benefit of
eligible employees computed on an actuarial basis. Employee benefits under the
plan vest as designated in the schedule below:
Completed Years Vested
of Employment Percentages
--------------- -----------
Fewer than 3 ............................................... 0
3 but fewer than 4 ......................................... 20%
4 but fewer than 5 ......................................... 40%
5 but fewer than 6 ......................................... 60%
6 but fewer than 7 ......................................... 80%
7 or more .................................................. 100%
The following table illustrates regular annual allowance amounts at age 65
under the regular retirement benefit plan provisions available at various levels
of compensation and years of benefit service (based on the formula described
above):
Years of Benefit Service
Average Salary 10 15 20 25 30 35
- -------------- ---------- ---------- ---------- ---------- ---------- --------
$ 20,000 $ 1,811 $ 2,717 $ 3,622 $ 4,528 $ 5,433 $ 6,339
$ 30,000 $ 3,268 $ 4,902 $ 6,537 $ 8,171 $ 9,805 $ 11,439
$ 50,000 $ 6,183 $ 9,274 $ 12,365 $ 15,456 $ 18,548 $ 21,639
$ 80,000 $10,554 $ 15,831 $ 21,108 $ 26,385 $ 31,662 $ 37,939
$ 100,000 $13,468 $ 20,202 $ 27,937 $ 33,671 $ 40,405 $ 47,139
At June 30, 2002, Mr. Finn and Ms. Christopher-Finn had 38 years and 30
years of credited service under the pension plan, respectively.
Certain Transactions with Wayne Savings Bancshares, Inc.
Federal law and regulations generally require that all loans or extensions
of credit to executive officers and directors be made on substantially the same
terms, including interest rates and collateral, as those prevailing at the time
for comparable transactions with the general public, and must not involve more
than the normal risk of repayment or present other unfavorable features.
However, regulations also permit executive officers and directors to receive the
same plan benefits that are widely available to other employees, as long as the
director or executive officer is not given preferential treatment compared to
the other participating employees. All loans made to a director or executive
officer in excess of the greater of $25,000 or 5% of Wayne Savings Bancshares,
Inc.'s capital and surplus, must be approved in advance by a majority of the
disinterested members of the Board of Directors. As of June 30, 2002, loans to
officers, directors and their related business interests totaled $2.5 million,
including a $2.1 million loan to a partnership in which one of our directors is
a partner. All loans outstanding made by Wayne Savings Bancshares, Inc. to
executive officers, directors, immediate family members of executive officers
and directors, or organizations with which executive officers and directors are
affiliated, were made in the ordinary course of business, on substantially the
same terms including interest rates and collateral, as those prevailing at the
time for comparable transactions with other persons.
Director Russell L. Harpster is a partner in the law firm of Henderson,
Harpster & Vanosdall of Ashland, Ohio, which has represented Wayne Savings
Bancshares, Inc. in certain legal matters since 1979. During the fiscal
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year ending March 31, 2002, Wayne Savings Bancshares, Inc. paid $8,808 in legal
fees to the law firm. No retainer was paid, and Wayne Savings Bancshares, Inc.
was billed for services performed at the firm's hourly rates.
Benefits to Be Considered Following Completion of the Conversion
Stock Option Plan. We intend to submit for stockholder approval, no
earlier than six months after the completion of the conversion, a new stock
option plan for directors and officers of Wayne Savings Community Bank and Wayne
Savings Bancshares, Inc. If approved by the stockholders, the new stock option
plan would reserve 10% of the shares sold in the offering for issuance when
options granted to officers and directors are exercised. Ten percent of the
shares issued in the offering would amount to 174,250 shares, 205,000 shares,
235,750 shares or 271,112 shares at the minimum, mid-point, maximum and adjusted
maximum of the offering range, respectively. No options would be granted under
the new stock option plan until stockholder approval of the plan is received. In
the event that shares underlying options come from authorized but unissued
shares, stockholders would experience dilution of approximately 5.0% in their
ownership interest in Wayne Savings Bancshares, Inc. at the mid-point of the
offering range.
The exercise price of the options granted under the new stock option plan
will be equal to the fair market value of Wayne Savings Bancshares, Inc. common
stock on the date of grant of the stock options. If the stock option plan is
adopted within one year following the conversion, options will vest at a rate of
20% at the end of each 12 months of service with Wayne Savings Community Bank
after the date of grant. Options granted under the stock option plan would be
adjusted for capital changes such as stock splits and stock dividends. Awards
will be 100% vested upon termination of employment due to death or disability,
and if the stock option plan is adopted more than one year after the conversion,
awards would be 100% vested upon normal retirement or a change in control of
Wayne Savings Community Bank or Wayne Savings Bancshares, Inc. Under Office of
Thrift Supervision rules, if the stock option plan is adopted within one year of
the conversion, no individual officer may receive more than 25% of the awards
under the plan, no non-employee director may receive more than 5% of the awards
under the plan, and all non-employee directors as a group may receive no more
than 30% of the awards under the plan.
The stock option plan would be administered by a committee of non-employee
members of Wayne Savings Bancshares, Inc.'s Board of Directors. Options granted
under the stock option plan to employees may be "incentive" stock options,
designed to result in a beneficial tax treatment to the employee but no tax
deduction to Wayne Savings Bancshares, Inc. Non-qualified stock options also may
be granted to employees under the stock option plan, and will be granted to the
non-employee directors who receive stock options. In the event an option
recipient terminates his employment or service as an employee or director, the
options would terminate during certain specified periods.
Stock Recognition Plan. We also intend to request stockholder approval of
a new stock recognition plan, no earlier than six months after the completion of
the conversion. If implemented within one year of conversion, the new stock
recognition plan would reserve 4% of the shares sold in the offering (assuming
Wayne Savings Community Bank has a tangible capital to assets ratio in excess of
10%) or 69,700 shares, 82,000 shares, 94,300 or 108,445 shares at the minimum,
mid-point, maximum and adjusted maximum of the offering range, respectively. The
officers and directors would be awarded common stock under the stock recognition
plan without having to pay cash for the shares. No awards would be made under
the stock recognition plan until the plan is approved by stockholders. If the
shares awarded under the stock recognition plan come from authorized but
unissued shares totaling 4% of the shares sold in the offering, stockholders
would experience dilution of approximately 2.1% in their ownership interest in
Wayne Savings Bancshares, Inc. at the mid-point of the offering range.
Awards under the stock recognition plan would be nontransferable and
nonassignable. Under Office of Thrift Supervision rules, if the stock
recognition plan is adopted within one year following the conversion, the shares
that are subject to an award would vest at a rate of 20% at the end of each full
12 months of service with Wayne Savings Community Bank after the date of grant
of the award. Awards would be adjusted for capital changes such as stock
dividends and stock splits. Awards would be 100% vested upon termination of
employment or service due to death or disability, and if the stock recognition
plan is adopted more than one year after the conversion, awards would be 100%
vested upon normal retirement or a change in control of Wayne Savings Community
Bank or Wayne Savings Bancshares, Inc. If employment or service were to
terminate for other reasons, the award recipient would forfeit any nonvested
award. If employment or service is terminated for cause (as defined), shares not
already delivered would be forfeited. Under Office of Thrift Supervision rules,
if the stock recognition plan is adopted
93
within one year of the conversion, no individual officer may receive more than
25% of the awards under the plan, no non-employee director may receive more than
5% of the awards under the plan, and all non-employee directors as a group may
receive no more than 30% of the awards under the plan in the aggregate.
The recipient of an award would recognize income equal to the fair market
value of the stock earned, determined as of the date of vesting, unless the
recipient makes an election under Section 83(b) of the Internal Revenue Code to
be taxed earlier. The amount of income recognized by the recipient would be a
deductible expense for tax purposes for Wayne Savings Bancshares, Inc. If the
stock recognition plan is adopted within one year following the conversion,
dividends and other earnings would accrue and be payable to the award recipient
when the shares vest, and unvested shares would be voted by the trustee of the
stock recognition plan, taking into account the best interests of the award
recipients. If the stock recognition plan is adopted more than one year
following the conversion, dividends declared on unvested shares will be
distributed to the recipient when paid, and the recipient will be entitled to
vote the unvested shares.
BENEFICIAL OWNERSHIP OF COMMON STOCK
The following table provides the beneficial ownership of our common stock
held by our directors and executive officers, individually and as a group as of
June 30, 2002. The business address of each director and executive officer is
151 North Market Street, Wooster, Ohio.
Percent of
Number of Shares of Common All Common Stock
Name of Beneficial Owner Stock Beneficially Owned(1) Outstanding
------------------------ --------------------------- ----------------
Charles F. Finn 34,664(2) 1.3%
Terry A. Gardner 31,492 1.2
Russell L. Harpster 38,482(3) 1.5
Donald E. Massaro 10,230 *
James C. Morgan 11,412 *
Joseph L. Retzler 15,471(4) *
Kenneth G. Rhode 60,220 2.3
Wanda Christopher-Finn 21,677(5) *
Gary C. Miller 9,896 *
All directors and executive officers as a group (9 persons) 233,544 9.1
- ----------
(1) In accordance with Rule 13d-3 under the Securities Exchange Act of 1934, a
person is deemed to be the beneficial owner for purposes of this table, of
any shares of common stock if he has sole or shared voting or investment
power with respect to such security, or has a right to acquire beneficial
ownership at any time within 60 days from the date as of which beneficial
ownership is being determined. As used herein, "voting power" is the power
to vote or direct the voting of shares and "investment power" is the power
to dispose or direct the disposition of shares. Includes all shares held
directly as well as by spouses and minor children, in trust and other
indirect ownership, over which shares the named individuals effectively
exercise sole or shared voting and investment power.
(2) Includes options to purchase 3,200 shares.
(3) Includes options to purchase 842 shares.
(4) Includes options to purchase 4,467 shares.
(5) Includes options to purchase 2,041 shares.
SUBSCRIPTIONS BY EXECUTIVE OFFICERS AND DIRECTORS
The table below sets forth, for each of Wayne Savings Bancshares, Inc.'s
directors and executive officers and for all of the directors and executive
officers as a group, the following information:
(1) the number of exchange shares to be held upon consummation of the
conversion, based upon their beneficial ownership of Wayne Savings
Bancshares, Inc. common stock as of November 14, 2002;
(2) the proposed purchases of subscription shares, assuming sufficient
shares are available to satisfy their subscriptions; and
(3) the total amount of Wayne Savings Bancshares, Inc. common stock to
be held upon consummation of the conversion.
In each case, it is assumed that subscription shares are sold at the
midpoint of the offering range. See "The Conversion--Limitations on Common Stock
Purchases."
94
Proposed Purchases
of Stock in Total Common Stock to be Held
the Offering(1) -------------------------------
Number of ----------------------- Percentage of
Exchange Shares Number of Total
Name of Beneficial Owner to be Held(2) Shares Amount Number of Shares Outstanding
- --------------------------- --------------- --------- ---------- ---------------- -------------
Charles F. Finn 47,753 7,000 $ 70,000 54,753 1.4%
Terry A. Gardner 47,795 500 5,000 48,295 1.2%
Russell L. Harpster 57,126 10,000 100,000 67,126 1.7%
Donald E. Massaro 15,526 2,000 20,000 17,526 *
James C. Morgan 17,320 2,500 25,000 19,820 *
Joseph L. Retzler 16,701 500 5,000 17,201 *
Kenneth G. Rhode 91,396 10,000 100,000 101,396 2.6%
Wanda Christopher-Finn 29,802 5,000 50,000 34,802 *
Michael C. Anderson -- 5,000 50,000 5,000 *
Gary C. Miller 15,019 3,000 30,000 18,019 *
------- ------ -------- ------- ---
All directors and executive
officers as a group (9
persons) 338,438 45,500 $455,000 383,938 9.8%
======= ====== ======== ======= ===
- ----------
* Less than 1%.
(1) Includes proposed subscriptions, if any, by associates.
(2) Based on information presented in "Beneficial Ownership of Common Stock."
THE CONVERSION
The Boards of Directors of Wayne Savings Bancshares, Inc. and Wayne
Savings Bankshares, MHC have approved the plan of conversion. The plan of
conversion also must be approved by the members of Wayne Savings Bankshares,
MHC, and the stockholders of Wayne Savings Bancshares, Inc. A special meeting of
members and a special meeting of stockholders have been called for this purpose.
The Office of Thrift Supervision has also conditionally approved the plan;
however, such approval does not constitute a recommendation or endorsement of
the plan of conversion by that agency.
General
The respective Boards of Directors of Wayne Savings Bankshares, MHC and
Wayne Savings Bancshares, Inc. adopted the plan of conversion on July 10, 2001.
Pursuant to the plan of conversion, our organization will convert from the
mutual holding company form of organization to the fully public form. Wayne
Savings Bankshares, MHC, the mutual holding company parent of Wayne Savings
Bancshares, Inc., will be merged into Wayne Savings Community Bank, and Wayne
Savings Bankshares, MHC will no longer exist. Pursuant to the plan, Wayne
Savings Bancshares, Inc., which owns 100% of Wayne Savings Community Bank, will
be succeeded by a new Delaware corporation with the same name. As part of the
conversion, shares of common stock of Wayne Savings Bancshares, Inc.
representing the ownership interest of Wayne Savings Bankshares, MHC, will be
offered for sale in the subscription offering and community offering. Following
the completion of the conversion, all of the capital stock of Wayne Savings
Community Bank will be held by Wayne Savings Bancshares, Inc. A diagram of our
corporate structure before and after the conversion is set forth in the Summary
of this prospectus.
Under the plan of conversion, at the conclusion of the conversion and
related offering, each share of Wayne Savings Bancshares, Inc. common stock held
by persons other than Wayne Savings Bankshares, MHC will be converted
automatically into and become a right to receive new shares of Wayne Savings
Bancshares, Inc. common stock determined pursuant to the exchange ratio. The
exchange ratio will ensure that immediately after the conversion and exchange of
existing shares of Wayne Savings Bancshares, Inc. for new shares, excluding any
shares purchased in the offering, the public stockholders of Wayne Savings
Bancshares, Inc. common stock will own the same aggregate percentage of new
Wayne Savings Bancshares, Inc. common stock that they owned immediately prior to
the conversion.
We intend to retain between $8.0 million (at the minimum of the offering
range) and $11.0 million (at the maximum of the offering range) of the net
proceeds of the offering and contribute the balance of the net proceeds to Wayne
Savings Community Bank. The conversion will be effected only upon completion of
the sale of at least the minimum number of shares of our common stock to be
offered pursuant to the plan of conversion.
95
The plan of conversion provides generally that we will offer shares of
common stock for sale in the subscription offering to eligible account holders,
our tax-qualified benefit plans, including the employee stock ownership plan,
supplemental eligible account holders and other members. Subject to the prior
rights of these holders of subscription rights, we will offer common stock for
sale in a community offering to members of the general public, with a preference
given to the public stockholders of Wayne Savings Bancshares, Inc. common stock
as of November 11, 2002, and then to natural persons residing in Wayne, Holmes,
Ashland, Medina and Stark Counties, Ohio. We have the right to accept or reject,
in whole or in part, any orders to purchase shares of the common stock received
in the community offering. The community offering may begin at the same time as
the subscription offering and must be completed within 45 days after the
completion of the subscription offering unless otherwise extended by the Office
of Thrift Supervision. See "--Community Offering."
We determined the range of the number of shares of common stock to be
offered in the offering based upon an independent appraisal of the estimated pro
forma market value of Wayne Savings Bancshares, Inc. All shares of common stock
to be sold in the offering will be sold at $10.00 per share. The independent
valuation will be updated and the final number of the shares to be issued in the
offering will be determined at the completion of the offering. See "--Stock
Pricing and Number of Shares to be Issued" for more information as to the
determination of the estimated pro forma market value of the common stock.
The appraisal was prepared pursuant to written guidelines promulgated by
the Office of Thrift Supervision. RP Financial, LC made its appraisal in
reliance upon the information contained in this document, including the
financial statements. RP Financial, LC also considered the following factors,
among others:
o the present and projected operating results and financial condition
of Wayne Savings Bancshares, Inc. and the economic and demographic
conditions in Wayne Savings Bancshares, Inc.'s existing market area;
o certain historical, financial and other information relating to
Wayne Savings Bancshares, Inc.;
o a comparative evaluation of the operating and financial
characteristics of Wayne Savings Bancshares, Inc. with those of
other similarly situated publicly traded savings institutions
located in Ohio and other regions of the United States;
o the aggregate size of the offering of the common stock;
o the impact of the conversion on Wayne Savings Bancshares, Inc.'s
stockholders' equity and earnings potential;
o the proposed dividend policy of Wayne Savings Bancshares, Inc.; and
o the trading market for securities of comparable institutions and
general conditions in the market for such securities.
The appraisal considered the pro forma impact of the offering. Consistent
with the Office of Thrift Supervision appraisal guidelines, the appraisal
applied three primary methodologies: the pro forma price-to-book-value approach
applied to both reported book value and tangible book value; the pro forma
price-to-earnings approach applied to reported and core earnings; and the pro
forma price-to-assets approach. The market value ratios applied in the three
methodologies were based upon the current market valuations of the peer group
companies, subject to valuation adjustments applied by RP Financial, LC to
account for differences between Wayne Savings Bancshares, Inc. and the peer
group. RP Financial, LC placed the greatest emphasis on the price-to-earnings
and price-to-book approaches in estimating pro forma market value. RP Financial,
LC's analysis provides an approximation of the pro forma market value of Wayne
Savings Bancshares, Inc. as converted based on the valuation approaches applied
and the assumptions outlined in its report. Included in its report were certain
assumptions as to the pro forma earnings of Wayne Savings Bancshares, Inc. after
the conversion that were utilized in determining the appraised value. These
assumptions included estimated expenses and an assumed after-tax rate of return
on the net conversion proceeds as described under "Pro Forma Data," purchases of
8% of the common stock issued in the offering by our employee stock ownership
plan, and purchases in the open market of 4% of the
96
common stock issued in the offering by the recognition plan at the $10.00
purchase price. See "Pro Forma Data" for additional information concerning
theses assumptions. The use of different assumptions may yield different
results.
The following is a brief summary of the conversion and is qualified in its
entirety by reference to the provisions of the plan of conversion. A copy of the
plan of conversion is available for inspection at each branch of Wayne Savings
Community Bank and at the Northeast Regional and Washington, D.C. offices of the
Office of Thrift Supervision. The plan of conversion is also filed as an exhibit
to the application to convert from mutual to stock form of which this prospectus
is a part, copies of which may be obtained from the Office of Thrift
Supervision. See "Additional Information."
Purposes of Conversion
Wayne Savings Community Bank reorganized into the mutual holding company
corporate structure in 1993 and sold only a minority interest in the common
stock based on its capital needs at that time. If Wayne Savings Community Bank
had undertaken a full conversion to public ownership in 1993, it would have
offered 100% of its common stock for sale, and it would have raised more capital
than management believed could have been effectively reinvested in its market
area. Wayne Savings Bancshares, Inc. now has uses for additional capital, and it
will offer the portion of its shares now owned by Wayne Savings Bankshares, MHC
to the public. This will complete the transition to full public ownership.
The potential impact of the conversion upon Wayne Savings Community Bank's
capital base is significant. Wayne Savings Community Bank had stockholders'
equity in accordance with generally accepted accounting principles of $26.5
million, or 7.9% of assets, at June 30, 2002. Assuming that the offering raises
$20.5 million in gross proceeds at the midpoint of the offering range, and
assuming $9.5 million of the net proceeds are contributed to Wayne Savings
Community Bank as additional capital, Wayne Savings Community Bank's ratio of
capital to pro forma assets, calculated under generally accepted accounting
principles, will increase to 10.1%. The investment of the net proceeds from the
sale of the common stock will provide Wayne Savings Community Bank with
additional income to grow and further increase its capital position. The
additional capital may also assist Wayne Savings Community Bank in offering new
programs and expanded services to its customers. Additionally, the proceeds
retained by Wayne Savings Bancshares, Inc. may be used for branching and for the
acquisition of financial institutions or banking related businesses, although we
have no current plans to make any acquisitions.
After we complete the conversion and depending on market conditions, the
unissued common and preferred stock authorized by the certificate of
incorporation of Wayne Savings Bancshares, Inc. will permit us to raise
additional equity capital through further sales of securities, and to issue
securities in connection with possible acquisitions. At the present time, we
have no plans with respect to additional offerings of securities, other than the
issuance of additional shares upon exercise of stock options or the possible
issuance of authorized but unissued shares to our stock benefit plans.
Approvals Required and Regulatory Applications Filed
The affirmative vote of a majority of the total eligible votes of the
members of Wayne Savings Bankshares, MHC, at the special meeting of members is
required to approve the plan of conversion. By their approval of the plan of
conversion, the members of Wayne Savings Bankshares, MHC will also be deemed to
approve the merger of Wayne Savings Bankshares, MHC into Wayne Savings Community
Bank. The affirmative vote of the holders of at least two-thirds of the
outstanding common stock of Wayne Savings Bancshares, Inc. and a majority of the
votes cast by the public stockholders of Wayne Savings Bancshares, Inc. common
stock also are required to approve the plan of conversion.
On September 24, 2001, we filed applications with the Office of Thrift
Supervision for approval of the plan of conversion as well as certain interim
merger transactions involving Wayne Savings Community Bank to effect the
conversion. The Office of Thrift Supervision has granted conditional approval of
these applications. On September 25, 2001, we filed an application with the Ohio
Division of Financial Institutions for approval of the interim merger
transactions. On June 7, 2002, the Division granted conditional approval of this
application. On October 17, 2001, we applied to the NASDAQ Stock Market for
approval to list our shares on the NASDAQ National Market System, and the
application was approved on November 15, 2001.
97
Share Exchange Ratio
Office of Thrift Supervision regulations provide that in a conversion of a
mutual holding company to fully stock form, the public stockholders will be
entitled to exchange their shares of common stock for common stock of the new
stock holding company, provided that the mutual holding company demonstrates to
the satisfaction of the Office of Thrift Supervision that the basis for the
exchange is fair and reasonable. The Board of Directors of Wayne Savings
Bancshares, Inc. has determined that each publicly held share of Wayne Savings
Bancshares, Inc. common stock will, on the effective date of the conversion, be
converted automatically into and become the right to receive a number of new
shares of Wayne Savings Bancshares, Inc. common stock determined pursuant to the
exchange ratio whereby the public stockholders of Wayne Savings Bancshares, Inc.
common stock will own the same percentage of common stock in Wayne Savings
Bancshares, Inc. after the conversion as they held in Wayne Savings Bancshares,
Inc. immediately prior to the conversion, exclusive of their purchases of
additional shares and the receipt of cash in lieu of fractional shares. At June
30, 2002, there were 2,572,021 shares of Wayne Savings Bancshares, Inc. common
stock outstanding (net of treasury stock), and 1,221,594 shares, or 47.5% of the
total, were publicly held. The exchange ratio is not dependent on the market
value of Wayne Savings Bancshares, Inc. common stock. It is calculated based on
the percentage of Wayne Savings Bancshares, Inc. common stock held by the
public, the independent appraisal of Wayne Savings Bancshares, Inc. prepared by
RP Financial, LC and the number of shares sold in the offering. The exchange
ratio is expected to range from approximately 1.2901 exchange shares for each
publicly held share of Wayne Savings Bancshares, Inc. at the minimum of the
offering range to 2.0072 exchange shares for each publicly held share of Wayne
Savings Bancshares, Inc. at the adjusted maximum of the offering range.
If you are now a stockholder of Wayne Savings Bancshares, Inc., your
existing shares will be cancelled and exchanged for new shares in Wayne Savings
Bancshares, Inc. The number of shares you will get will be based on an exchange
ratio determined as of the closing of the conversion. The actual number of
shares you receive will depend upon the number of shares we sell in our
offering, which in turn will depend upon the final appraised value of Wayne
Savings Bancshares, Inc. The following table shows how the exchange ratio will
adjust, based on the number of shares sold in our offering. The table also shows
how many shares a hypothetical owner of Wayne Savings Bancshares, Inc. common
stock would receive in the exchange, adjusted for the number of shares sold in
the offering.
New shares
New shares to be exchanged
to be sold for existing shares of Wayne Total shares New shares to
in this offering Savings Bancshares, Inc. of common be received for
-------------------------- --------------------------- stock to be Exchange 100 existing
Amount Percent Amount Percent outstanding Ratio shares
------------ ------------ ------------ ------------- --------------- ----------- -------------------
Minimum............... 1,742,500 52.5% 1,575,594 47.5% 3,318,094 1.2901 129
Midpoint.............. 2,050,000 52.5 1,853,640 47.5 3,903,640 1.5177 151
Maximum............... 2,357,500 52.5 2,131,686 47.5 4,489,186 1.7454 174
15% above Maximum..... 2,711,125 52.5 2,451,439 47.5 5,162,564 2.0072 200
Outstanding options to purchase shares of Wayne Savings Bancshares, Inc.
common stock also will be converted into and become options to purchase Wayne
Savings Bancshares, Inc. common stock. The number of shares of common stock to
be received upon exercise of these options will be determined pursuant to the
exchange ratio. The aggregate exercise price, duration, and vesting schedule of
these options will not be affected. At June 30, 2002, all the options to
purchase common stock were vested. At June 30, 2002, there were outstanding
options to purchase 14,273 shares of Wayne Savings Bancshares, Inc. common
stock. Executive officers and directors of Wayne Savings Bancshares, Inc. do not
intend to exercise options prior to the consummation of the conversion. If
options to purchase shares of Wayne Savings Bancshares, Inc. are exercised
between November 11, 2002 and the consummation of the conversion, then there
will be an increase in the percentage of Wayne Savings Bancshares, Inc. shares
held by public stockholders, an increase in the number of shares issued to
public stockholders in the share exchange, and a decrease in the exchange ratio
and the offering range.
Effects of Conversion on Depositors, Borrowers and Members
General. Each depositor in Wayne Savings Community Bank has both a deposit
account in Wayne Savings Community Bank and a pro rata ownership interest in the
net worth of Wayne Savings Bankshares, MHC based upon the balance in his or her
account. This interest may only be realized in the event of a complete
liquidation of Wayne Savings Bankshares, MHC and Wayne Savings Community Bank.
However, this ownership
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interest is tied to the depositor's account and has no tangible market value
separate from the deposit account. Any depositor who opens a deposit account
obtains a pro rata ownership interest in Wayne Savings Bankshares, MHC without
any additional payment beyond the amount of the deposit. A depositor who reduces
or closes his account receives a portion or all of the balance in the account
but nothing for his ownership interest in the net worth of Wayne Savings
Bankshares, MHC, which is lost to the extent that the balance in the account is
reduced or closed.
Consequently, depositors in a stock subsidiary of a mutual holding company
normally have no way of realizing the value of their ownership interest, which
has realizable value only in the unlikely event that Wayne Savings Bankshares,
MHC and Wayne Savings Community Bank are liquidated. If this occurs, the
depositors of record at that time, as owners, would share pro rata in any
residual surplus and reserves of Wayne Savings Bankshares, MHC after other
claims, including claims of depositors to the amounts of their deposits, are
paid.
Continuity. While the conversion is being accomplished, the normal
business of Wayne Savings Community Bank of accepting deposits and making loans
will continue without interruption. Wayne Savings Community Bank will continue
to be an Ohio savings association and will continue to be regulated by the
Office of Thrift Supervision, the Ohio Division of Financial Institutions and
the Federal Deposit Insurance Corporation. After the conversion, Wayne Savings
Community Bank will continue to provide services for depositors and borrowers
under current policies by its present management and staff. The directors
serving Wayne Savings Bancshares, Inc. at the time of the conversion will serve
as directors of Wayne Savings Bancshares, Inc. after the conversion.
Effect on Deposit Accounts. Under the plan of conversion, each depositor
in Wayne Savings Community Bank at the time of the conversion will automatically
continue as a depositor after the conversion, and the deposit balance, interest
rate and other terms of such deposit accounts will not change as a result of the
conversion. Each such account will be insured by the Federal Deposit Insurance
Corporation to the same extent as before the conversion. Depositors will
continue to hold their existing certificates, passbooks and other evidences of
their accounts.
Effect on Loans. No loan outstanding from Wayne Savings Community Bank
will be affected by the conversion, and the amount, interest rate, maturity and
security for each loan will remain as they were contractually fixed prior to the
conversion.
Effect on Voting Rights of Members. At present, all depositors, and
borrowers as of June 23, 1993 who continue as borrowers of Wayne Savings
Community Bank, are members of, and have voting rights in, Wayne Savings
Bankshares, MHC as to all matters requiring membership action. Upon completion
of the conversion, depositors and borrowers will cease to be members of Wayne
Savings Bankshares, MHC and will no longer be entitled to vote at meetings of
Wayne Savings Bankshares, MHC. Upon completion of the conversion, all voting
rights in Wayne Savings Community Bank will be vested in Wayne Savings
Bancshares, Inc. as the sole stockholder of Wayne Savings Community Bank.
Exclusive voting rights with respect to Wayne Savings Bancshares, Inc. will be
vested in the holders of its common stock. Depositors and borrowers of Wayne
Savings Community Bank will not have voting rights after the conversion, except
to the extent that they become stockholders of Wayne Savings Bancshares, Inc.
through the purchase of common stock.
Tax Effects. Wayne Savings Bancshares, Inc. has received an opinion of
counsel or its tax advisor with regard to federal and state income taxation to
the effect that the adoption and implementation of the plan of conversion will
not be taxable for federal or state income tax purposes to Wayne Savings
Bankshares, MHC, Wayne Savings Bancshares, Inc., the public stockholders of
Wayne Savings Bancshares, Inc., members of Wayne Savings Bankshares, MHC,
eligible account holders, supplemental eligible account holders, or Wayne
Savings Community Bank. See "--Tax Aspects."
Effect on Liquidation Rights. In the unlikely event that Wayne Savings
Community Bank and Wayne Savings Bancshares, Inc. liquidated prior to the
conversion, all claims of creditors of Wayne Savings Community Bank and Wayne
Savings Bancshares, Inc., including those of depositors to the extent of their
deposit balances, would be paid first. Thereafter, if there were any assets of
Wayne Savings Community Bank or Wayne Savings Bancshares, Inc. remaining, these
assets would be distributed to the public stockholders and to Wayne Savings
Bankshares, MHC, to the extent of their stock ownership interest in Wayne
Savings Bancshares, Inc. If Wayne Savings Bankshares, MHC liquidated, all claims
of creditors would be paid first. Thereafter, if there were any assets of Wayne
Savings Bankshares, MHC remaining, members of Wayne Savings Bankshares, MHC
would receive the
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remaining assets, pro rata, based upon the balances in their deposit accounts in
Wayne Savings Community Bank immediately prior to liquidation. There has never
been a liquidation of a mutual holding company with public stockholders, and
management believes that it is unlikely that such a liquidation would ever
occur.
In the unlikely event that Wayne Savings Community Bank were to liquidate
after the conversion, all claims of creditors, including those of depositors,
also would be paid first, followed by distribution of the "liquidation account"
to depositors as of June 30, 2000 and September 30, 2002, with any assets
remaining thereafter distributed to Wayne Savings Bancshares, Inc. as the holder
of Wayne Savings Community Bank's capital stock. Pursuant to the rules and
regulations of the Office of Thrift Supervision, a post-conversion merger,
consolidation, sale of bulk assets or similar combination or transaction with
another insured savings institution would not be considered a liquidation and,
in such a transaction, the liquidation account would be assumed by the surviving
institution.
Stock Pricing and Number of Shares to be Issued
The plan of conversion and federal regulations require that the aggregate
purchase price of the common stock in the offering must be based on the
appraised pro forma market value of the common stock, as determined by an
independent valuation. Wayne Savings Community Bank and Wayne Savings
Bancshares, Inc. have retained RP Financial, LC to make the valuation. For its
services in preparing the initial valuation, RP Financial, LC will receive a fee
of $50,000. This amount does not include a fee of $12,000 to be paid to RP
Financial, LC for assistance in the preparation of a business plan. Wayne
Savings Community Bank and Wayne Savings Bancshares, Inc. have agreed to
indemnify RP Financial, LC and its employees and affiliates against specified
losses, including any losses in connection with claims under the federal
securities laws, arising out of its services as appraiser, except where RP
Financial, LC's liability results from its negligence or bad faith.
The independent valuation was prepared by RP Financial, LC in reliance
upon the information contained in this prospectus, including the consolidated
financial statements. RP Financial, LC also considered the following factors,
among others: the present and projected operating results and financial
condition of Wayne Savings Bancshares, Inc. and Wayne Savings Community Bank
(including its subsidiary, Village Savings Bank); the economic and demographic
conditions in Wayne Savings Community Bank's existing marketing area; certain
historical, financial and other information relating to Wayne Savings Community
Bank; a comparative evaluation of the operating and financial statistics of
Wayne Savings Community Bank with those of other publicly traded savings
institutions located in Wayne Savings Community Bank's region and on a national
basis; the aggregate size of the offering of the common stock; the impact of the
conversion on Wayne Savings Community Bank's stockholders' equity and earnings
potential; the proposed dividend policy of Wayne Savings Bancshares, Inc. and
Wayne Savings Community Bank; and the trading market for securities of
comparable institutions and general conditions in the market for the securities.
The independent valuation was prepared based on the assumption that the
aggregate amount of common stock sold in the offering would be equal to the
estimated pro forma market value of Wayne Savings Bancshares, Inc., assuming
completion of the conversion and offering, multiplied by the percentage of Wayne
Savings Bancshares, Inc. common stock owned by Wayne Savings Bankshares, MHC.
The independent valuation states that as of August 16, 2002, the estimated pro
forma market value, or valuation range, of Wayne Savings Bancshares, Inc. ranged
from a minimum of $33.2 million to a maximum of $44.9 million, with a midpoint
of $39.0 million. The Board of Directors determined to offer the shares for a
price of $10.00 per share. The aggregate offering price of the shares will be
equal to the valuation range multiplied by the percentage of Wayne Savings
Bancshares, Inc. common stock owned by Wayne Savings Bankshares, MHC. The number
of shares offered will be equal to the aggregate offering price of the shares
divided by the price per share. Based on the valuation range, the percentage of
Wayne Savings Bancshares, Inc. common stock owned by Wayne Savings Bankshares,
MHC, and the $10.00 price per share, the minimum of the offering range will be
1,742,500 subscription shares, the midpoint of the offering range will be
2,050,000 subscription shares, and the maximum of the offering range will be
2,357,500 subscription shares.
The Board of Directors reviewed the independent valuation and, in
particular, considered the following:
o Wayne Savings Bancshares, Inc.'s financial condition and results of
operations;
o financial comparisons of Wayne Savings Bancshares, Inc. in relation
to institutions of similar size and asset quality;
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o stock market conditions generally and in particular for financial
institutions; and
o the historical trading price of the publicly held shares of Wayne
Savings Bancshares, Inc. common stock.
All of these factors are set forth in the independent valuation. The Board
also reviewed the methodology and the assumptions used by RP Financial, LC in
preparing the independent valuation and the Board believes that such assumptions
were reasonable. The offering range may be amended with the approval of the
Office of Thrift Supervision, if required, as a result of subsequent
developments in the financial condition of Wayne Savings Bancshares, Inc. or
Wayne Savings Community Bank or market conditions generally. In the event the
independent valuation is updated to amend the pro forma market value of Wayne
Savings Bancshares, Inc. to less than $33.2 million or more than $51.6 million,
the appraisal will be filed with the Securities and Exchange Commission by
post-effective amendment.
The independent valuation, however, is not intended, and must not be
construed, as a recommendation of any kind as to the advisability of purchasing
our common stock. RP Financial, LC did not independently verify our consolidated
financial statements and other information that we provided to them, nor did RP
Financial, LC independently value our assets or liabilities. The independent
valuation considers Wayne Savings Community Bank as a going concern and should
not be considered as an indication of the liquidation value of Wayne Savings
Community Bank. Moreover, because the valuation is necessarily based upon
estimates and projections of a number of matters, all of which may change from
time to time, no assurance can be given that persons purchasing our common stock
in the offering will thereafter be able to sell their shares at prices at or
above the $10.00 price.
Following commencement of the subscription offering, the maximum of the
valuation range may be increased by up to 15% to $51.6 million, which will
result in a corresponding increase of up to 15% in the maximum of the offering
range to up to 2,711,125 shares because of demand for the shares, changes in
market conditions or changes in the independent appraisal of the estimated pro
forma market value of Wayne Savings Bancshares, Inc., without resoliciting
subscribers. We will not decrease the minimum of the valuation range or the
minimum of the offering range without a resolicitation of subscribers. The
subscription price of $10.00 per share will remain fixed. See "--Limitations on
Common Stock Purchases" as to the method of distribution and allocation of
additional shares that may be issued in the event of an increase in the offering
range to fill unfilled orders in the subscription and community offerings.
If the update to the independent valuation at the conclusion of the
offering results in an increase in the maximum of the valuation range to more
than $51.6 million and a corresponding increase in the offering range to more
than 2,711,125 shares, or a decrease in the minimum of the valuation range to
less than $33.2 million and a corresponding decrease in the offering range to
fewer than 1,742,500 shares, then, after consulting with the Office of Thrift
Supervision, we may terminate the plan of conversion and return by check all
funds promptly with interest at Wayne Savings Community Bank's passbook rate of
interest on payments made by check, bank draft or money order and cancel
withdrawal authorizations. Alternatively, we may hold a new offering, establish
a new offering range, extend the offering period and commence a resolicitation
of subscribers or take other actions as permitted by the Office of Thrift
Supervision in order to complete the conversion. In the event that a
resolicitation is commenced, unless an affirmative response is received within a
reasonable period of time, we will return all funds promptly to investors as
described above. A resolicitation, if any, following the conclusion of the
subscription and community offerings would not exceed 45 days unless further
extended by the Office of Thrift Supervision for periods of up to 90 days.
An increase in the number of shares to be issued in the offering would
decrease both a subscriber's ownership interest and Wayne Savings Bancshares,
Inc.'s pro forma earnings and stockholders' equity on a per share basis while
increasing pro forma earnings and stockholders' equity on an aggregate basis. A
decrease in the number of shares to be issued in the offering would increase
both a subscriber's ownership interest and Wayne Savings Bancshares, Inc.'s pro
forma earnings and stockholders' equity on a per share basis while decreasing
pro forma earnings and stockholders' equity on an aggregate basis. For a
presentation of the effects of these changes, see "Pro Forma Data."
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Copies of the appraisal report of RP Financial, LC and the detailed
memorandum of the appraiser setting forth the method and assumptions for the
appraisal are available for inspection at the main office of Wayne Savings
Community Bank and as specified under "Additional Information."
Exchange of Stock Certificates
The conversion of existing outstanding shares of Wayne Savings Bancshares,
Inc. common stock into the right to receive new shares of Wayne Savings
Bancshares, Inc. common stock will occur automatically on the effective date of
the conversion. As soon as practicable after the effective date of the
conversion, we or a bank or trust company designated by us in the capacity of
exchange agent, will send a transmittal form to each public stockholder of Wayne
Savings Bancshares, Inc. who holds stock certificates. The transmittal forms are
expected to be mailed within five business days after the effective date of the
conversion and will contain instructions with respect to the surrender of
certificates representing Wayne Savings Bancshares, Inc. (a federal corporation)
common stock to be exchanged for new shares of Wayne Savings Bancshares, Inc. (a
Delaware corporation) common stock. It is expected that stock certificates for
new shares of Wayne Savings Bancshares, Inc. common stock will be distributed
within five business days after the receipt of properly executed transmittal
forms and other required documents. Shares held by public stockholders in street
name will be exchanged automatically; no transmittal forms will be mailed
relating to these shares.
No fractional shares of Wayne Savings Bancshares, Inc. common stock will
be issued to any public stockholder of Wayne Savings Bancshares, Inc. upon
consummation of the conversion. For each fractional share that would otherwise
be issued to stockholders who hold certificates, we will pay by check an amount
equal to the product obtained by multiplying the fractional share interest to
which the holder would otherwise be entitled to by $10.00. Payment for
fractional shares will be made as soon as practicable after the receipt by the
exchange agent of surrendered Wayne Savings Bancshares, Inc. stock certificates.
Stockholders whose shares are held in street name will automatically receive
cash in lieu of fractional shares.
You should not forward your stock certificates until you have received
transmittal forms, which will include forwarding instructions.
Until your existing certificates representing Wayne Savings Bancshares,
Inc. common stock are surrendered for exchange after the conversion in
compliance with the terms of the transmittal form, you will not receive new
shares of Wayne Savings Bancshares, Inc. common stock and you will not be paid
dividends on the new Wayne Savings Bancshares, Inc. common stock. When you
surrender your certificates, any unpaid dividends will be paid without interest.
For all other purposes, however, each certificate which represents shares of
Wayne Savings Bancshares, Inc. common stock outstanding at the effective date of
the conversion will be considered to evidence ownership of new shares of Wayne
Savings Bancshares, Inc. common stock into which those shares have been
converted by virtue of the conversion.
All new shares of Wayne Savings Bancshares, Inc. common stock that we
issue to you in exchange for existing shares of Wayne Savings Bancshares, Inc.
common stock will be considered to have been issued in full satisfaction of all
rights pertaining to such shares, subject, however, to our obligation to pay any
dividends or make any other distributions with a record date prior to the
effective date of the conversion which may have been declared by us on or prior
to the effective date and which remain unpaid at the effective date.
If a certificate for Wayne Savings Bancshares, Inc. common stock has been
lost, stolen or destroyed, the exchange agent will issue the new stock
certificates upon receipt of appropriate evidence as to the loss, theft or
destruction, appropriate evidence as to the ownership of the certificate by the
claimant, and appropriate and customary indemnification.
Subscription Offering and Subscription Rights
In accordance with the plan of conversion, rights to subscribe for the
purchase of common stock in the subscription offering have been granted under
the plan of conversion in the following order of descending priority. All
subscriptions that we receive will depend on the availability of common stock
after satisfaction of all subscriptions of all persons having prior rights in
the subscription offering and to the maximum, minimum, and
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overall purchase limitations set forth in the plan of conversion and as
described below under "--Limitations on Common Stock Purchases."
Priority 1: Eligible Account Holders. Each Wayne Savings Community Bank
depositor with aggregate deposit account balances, including demand deposit
accounts, of $50 or more (a "Qualifying Deposit") on June 30, 2000 ("Eligible
Account Holders"), will receive, without payment therefor, nontransferable
subscription rights to purchase up to 25,000 shares of common stock, subject to
the overall purchase limitations and exclusive of shares purchased by the
employee stock ownership plan from any increase in the shares offered pursuant
to an increase in the maximum of the offering range. See "--Limitations on
Common Stock Purchases." If there are not sufficient shares available to satisfy
all subscriptions, shares will first be allocated so as to permit each
subscribing Eligible Account Holder to purchase a number of shares sufficient to
make his total allocation equal to the lesser of 100 shares or the number of
shares for which he subscribed. Thereafter, unallocated shares, except for
additional shares issued to the employee stock ownership plan upon an increase
in the maximum of the offering range, will be allocated to each subscribing
Eligible Account Holder whose subscription remains unfilled in the proportion
that the amount of his aggregate Qualifying Deposit bears to the total amount of
Qualifying Deposits of all subscribing Eligible Account Holders whose
subscriptions remain unfilled. If an amount so allocated exceeds the amount
subscribed for by any one or more Eligible Account Holders, the excess shall be
reallocated among those Eligible Account Holders whose subscriptions are not
fully satisfied until all available shares have been allocated.
To ensure proper allocation of stock, each Eligible Account Holder must
list on his stock order form all deposit accounts in which he has an ownership
interest on June 30, 2000. Failure to list an account could result in fewer
shares being allocated than if all accounts had been disclosed. The subscription
rights of Eligible Account Holders who are also directors or officers of Wayne
Savings Bancshares, Inc. or their associates will be subordinated to the
subscription rights of other Eligible Account Holders to the extent attributable
to increased deposits in the twelve months preceding June 30, 2000.
Priority 2: Tax-Qualified Plans. Our tax-qualified employee stock benefit
plans will receive, without payment therefor, nontransferable subscription
rights to purchase in the aggregate up to 8% of the common stock sold in the
offering, and our employee stock ownership plan intends to purchase 8% of the
shares sold in the offering.
Priority 3: Supplemental Eligible Account Holders. To the extent that
there are sufficient shares remaining after satisfaction of subscriptions by
Eligible Account Holders and our tax-qualified employee stock benefit plans,
each Wayne Savings Community Bank depositor with a Qualifying Deposit on
September 30, 2002 who is not an Eligible Account Holder ("Supplemental Eligible
Account Holder") will receive, without payment therefor, nontransferable
subscription rights to purchase up to 25,000 shares of common stock, subject to
the overall purchase limitations. See "--Limitations on Common Stock Purchases."
If there are not sufficient shares available to satisfy all subscriptions,
shares will be allocated so as to permit each subscribing Supplemental Eligible
Account Holder to purchase a number of shares sufficient to make his total
allocation equal to the lesser of 100 shares or the number of shares for which
he subscribed. Thereafter, unallocated shares will be allocated to each
subscribing Supplemental Eligible Account Holder whose subscription remains
unfilled in the proportion that the amount of his Qualifying Deposit bears to
the total amount of Qualifying Deposits of all subscribing Supplemental Eligible
Account Holders whose subscriptions remain unfilled.
To ensure proper allocation of stock, each Supplemental Eligible Account
Holder must list on his stock order form all deposit accounts in which he has an
ownership interest at September 30, 2002. Failure to list an account could
result in less shares being allocated than if all accounts had been disclosed.
Priority 4: Other Members. To the extent that there are shares remaining
after satisfaction of subscriptions by Eligible Account Holders, our
tax-qualified employee stock benefit plans, and Supplemental Eligible Account
Holders, each member of Wayne Savings Bankshares, MHC on the voting record date
of November 6, 2002 (i.e., Wayne Savings Community Bank depositors and its
borrowers as of June 23, 1993 whose borrowings remain outstanding) who is not an
Eligible Account Holder or Supplemental Eligible Account Holder ("Other
Members") will receive, without payment therefor, nontransferable subscription
rights to purchase up to 25,000 shares of common stock, subject to the overall
purchase limitations. See "--Limitations on Common Stock Purchases." If there
are not sufficient shares available to satisfy all subscriptions, available
shares will be allocated on a pro rata basis based on the size of the order of
each Other Member.
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In accordance with federal regulations, Village Savings Bank depositors
and borrowers will not have priority subscription rights to purchase common
stock in the subscription offering.
Expiration Date for the Subscription Offering. The Subscription Offering
will expire on December 19, 2002, unless extended by us for up to 45 days or
such additional periods with the approval of the Office of Thrift Supervision,
if necessary. We may determine to extend the subscription offering and/or the
community offering for any reason, whether or not subscriptions have been
received for shares at the minimum, midpoint, or maximum of the offering range.
Subscription rights which have not been exercised prior to the expiration date
will become void.
We will not execute orders until at least the minimum number of shares of
common stock have been subscribed for or otherwise sold. If 1,742,500 shares
have not been subscribed for or sold within 45 days after the expiration date,
unless the period is extended with the consent of the Office of Thrift
Supervision, all funds delivered to us pursuant to the offering will be returned
promptly to the subscribers with interest and all withdrawal authorizations will
be cancelled. If an extension beyond the 45 day period following the expiration
date is granted, we will notify subscribers of the extension of time and of the
rights of subscribers to modify or rescind their subscriptions. Extensions may
not go beyond December 30, 2004 which is two years after the special meeting of
members of Wayne Savings Bankshares, MHC to approve the conversion.
Community Offering
To the extent that shares remain available for purchase after satisfaction
of all subscriptions of Eligible Account Holders, our tax-qualified employee
stock benefit plans, Supplemental Eligible Account Holders, and Other Members,
we may offer shares pursuant to the plan of conversion to members of the general
public in a community offering, with preference given first to our public
stockholders as of November 11, 2002, and then to natural persons residing in
the Ohio counties of Wayne, Holmes, Ashland, Medina and Stark. These persons may
purchase up to 25,000 shares of common stock, subject to the overall purchase
limitations. See "--Limitations on Common Stock Purchases." The minimum purchase
is 25 shares. The opportunity to purchase shares of common stock in the
community offering category is subject to our right, in our sole discretion, to
accept or reject any such orders in whole or in part either at the time of
receipt of an order or as soon as practicable following the expiration date.
If we do not have sufficient shares available to fill the orders of common
stockholders of Wayne Savings Bancshares, Inc. as of November 11, 2002, we will
allocate the remaining available stock among those persons in a manner that
permits each of them, to the extent possible, to purchase the lesser of 100
shares or the number of shares subscribed for by each such person. However, if
there are insufficient shares available for this allocation, then we will
allocate shares among persons whose orders remain unsatisfied in the proportion
that the unfilled subscription of each bears to the total unfilled subscriptions
of all those persons whose subscriptions remain unsatisfied. Similar allocation
procedures will be used for orders of persons residing in the Ohio counties of
Wayne, Holmes, Ashland, Medina and Stark. If all orders of persons residing in
these counties are filled, any shares remaining will be allocated to other
persons who purchase in the community offering applying the same method of
allocation described above.
The term "resided" or "residing" as used in this prospectus means any
person who occupies a dwelling within Wayne Savings Community Bank's community,
has a present intent to remain within the community for a period of time, and
manifests the genuineness of that intent by establishing an ongoing physical
presence within the community, together with an indication that this presence
within Wayne Savings Community Bank's community is something other than merely
transitory in nature. To the extent the person is a corporation or other
business entity, the principal place of business or headquarters shall be in
Wayne Savings Community Bank's community. To the extent a person is a personal
benefit plan, the circumstances of the beneficiary shall apply with respect to
this definition. In the case of all other benefit plans, circumstances of the
trustee shall be examined for purposes of this definition. We may utilize
deposit or loan records or other evidence provided to us to make a determination
as to whether a person is a resident. In all cases, however, the determination
shall be in our sole discretion.
The community offering may begin during the subscription offering, and is
expected to terminate at the same time as the subscription offering, and must
terminate no more than 45 days following the subscription offering.
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Wayne Savings Bancshares, Inc. may determine to extend the community offering
for any reason, and is not required to give purchasers notice of any such
extension. If 1,742,500 shares have not been subscribed for or sold within 45
days after the expiration date, unless this period is extended with the consent
of the Office of Thrift Supervision, all funds delivered to us will be returned
promptly to the purchasers with interest and all withdrawal authorizations will
be cancelled. If an extension beyond the 45 day period following the expiration
date is granted, we will notify purchasers of the extension of time and of the
rights of purchasers to modify or rescind their orders. These extensions may not
go beyond December 30, 2004, which is two years after the special meeting of
members of Wayne Savings Bankshares, MHC to approve the conversion.
We have the right to reject any order submitted in the offering by a
person who we believe is making false representations or who we otherwise
believe, either alone or acting in concert with others, is violating, evading,
circumventing, or intends to violate, evade or circumvent the terms and
conditions of the plan of conversion.
Syndicated Community Offering
If feasible, our Board of Directors may determine to offer for sale all
shares of common stock not subscribed for or purchased in the subscription and
community offerings in a syndicated community offering, subject to such terms,
conditions and procedures as we may determine, in a manner that will achieve the
widest distribution of the common stock. However, we retain the right to accept
or reject in whole or in part any orders in the syndicated community offering.
In the syndicated community offering, any person may purchase up to 25,000
shares of common stock, subject to the overall maximum purchase limitations.
Unless the syndicated community offering begins during the community offering,
the syndicated community offering will begin as soon as possible after the
completion of the subscription and community offerings.
If for any reason we cannot effect a syndicated community offering of
shares not sold in the subscription and community offerings, or in the event
that there is an insignificant number of unsold shares remaining after the
subscription and community offerings or in the syndicated community offering, we
will make other arrangements for the sale of unsubscribed shares, if possible.
The Office of Thrift Supervision must approve these other purchase arrangements.
Plan of Distribution; Selling Agent Compensation
Offering materials have been distributed by mail to those with
subscription rights at the last known address on our records. Subscription
rights expire whether or not eligible subscribers can be located.
To assist in the marketing of the common stock, we have retained Ryan Beck
& Co., Inc., which is a broker/dealer registered with the National Association
of Securities Dealers, Inc. Ryan Beck & Co., Inc. will assist us in the offering
by:
o acting as our financial advisor;
o providing administrative services and stock information center
management; and
o providing securities marketing services.
For these services, Ryan Beck & Co., Inc., will receive an advisory and
management fee of $50,000 and a marketing fee equal to 1.5% of the dollar amount
of common stock sold in the subscription and community offerings other than
shares purchased by officers, directors and employees or their immediate
families and common stock purchased by our tax-qualified and non-qualified
employee benefit plans, for which no fee need be paid. The management fee and
marketing fee, together, shall not exceed $350,000. In the event that Ryan Beck
& Co., Inc. sells common stock through a group of broker-dealers in a syndicated
community offering, it will be paid a fee of 1.5% of the dollar amount of total
shares sold in the syndicated community offering. The fees payable directly to
the selected broker-dealers, which may include Ryan Beck & Co., Inc., for their
sales will not exceed 7% of the value of the common stock sold by them in the
syndicated community offering. Ryan Beck & Co., Inc. will also be reimbursed for
allocable expenses in an amount not to exceed $25,000, without the approval of
Wayne Savings Bancshares, Inc., and for attorney's fees and expenses in an
amount not to exceed $75,000, without the approval of Wayne Savings Bancshares,
Inc.
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We have made an advance payment to Ryan Beck & Co., Inc. in the amount of
$50,000. We will indemnify Ryan Beck & Co., Inc. against liabilities and
expenses, including legal fees, incurred in connection with certain claims or
litigation arising out of or based upon untrue statements or omissions contained
in the offering materials for the common stock, including liabilities under the
Securities Act of 1933.
Some of our directors and executive officers may participate in the
solicitation of offers to purchase common stock. These persons will be
reimbursed for their reasonable out-of-pocket expenses incurred in connection
with the solicitation. Other regular, full-time employees of Wayne Savings
Community Bank may participate in the offering but only in ministerial
capacities, providing clerical work in effecting a sales transaction, and no
offers or sales may be made by tellers at teller counters. All sales activity
will be conducted in a segregated or separately identifiable area of Wayne
Savings Community Bank's main offices apart from the area accessible to the
general public for the purpose of making deposits or withdrawals. Other
questions of prospective purchasers will be directed to executive officers or
registered representatives of Ryan Beck & Co., Inc. Other employees have been
instructed not to solicit offers to purchase common stock or provide advice
regarding the purchase of common stock. We will rely on Rule 3a4-1 under the
Securities Exchange Act of 1934, and sales of common stock will be conducted
within the requirements of Rule 3a4-1, so as to permit officers, directors and
employees to participate in the sale of common stock. None of our officers,
directors or employees will be compensated in connection with their
participation in the offering.
Procedure for Purchasing Shares
Expiration Date. The offering will terminate at 10:00 a.m., Eastern time,
on December 19, 2002, unless we extend it, with the approval of the Office of
Thrift Supervision, if required. This extension may be approved by us, in our
sole discretion, without further approval or additional notice to purchasers in
the offering. Any extension of the offering beyond 45 days after the expiration
date of the offering would require the Office of Thrift Supervision's approval
and potential purchasers would be given the right to increase, decrease, or
rescind their orders for common stock. If we have not sold the minimum number of
shares offered in the offering by the expiration date or any extension thereof,
we may terminate the offering and promptly refund all orders for common stock.
If the number of shares offered is reduced below the minimum of the offering
range, purchasers will be given an opportunity to increase, decrease, or rescind
their orders.
To ensure that each purchaser receives a prospectus at least 48 hours
before the expiration date of the offering in accordance with Rule 15c2-8 of the
Securities Exchange Act of 1934, no prospectus will be mailed any later than
five days prior to this date or hand delivered any later than two days prior to
this date. Execution of an order form will confirm receipt of delivery in
accordance with Rule 15c2-8. Order forms will be distributed only with a
prospectus. Subscription funds will be maintained in a special account at Wayne
Savings Community Bank.
We reserve the right in our sole discretion to terminate the offering at
any time and for any reason, in which case we will cancel any withdrawal orders,
and return all funds submitted, plus interest at Wayne Savings Community Bank's
current passbook rate from the date of receipt.
Use of Order Forms. In order to purchase shares of the common stock in the
subscription offering and community offering, you must complete an order form
and remit payment. Incomplete order forms, or order forms that are not signed
are not required to be accepted. We will not be required to accept orders
submitted on photocopied or facsimiled stock order forms. All order forms must
be received prior to 10:00 a.m., Eastern time on December 19, 2002. We are not
required to accept order forms that are not received by that time, are executed
defectively or are received without full payment or without appropriate
withdrawal instructions. We are not required to notify subscribers of incomplete
or improperly executed order forms, and we have the right to waive or permit the
correction of incomplete or improperly executed order forms, but do not
represent that we will do so and we have no affirmative duty to notify any
prospective subscriber of any such defects. You may submit your order form and
payment by mail using the return envelope provided, by bringing your order form
to our stock information center, or by overnight delivery to the indicated
address on the back of the order form. Order forms may not be delivered to Wayne
Savings Community Bank branches. Once tendered, an order form cannot be modified
or revoked without our consent. We reserve the absolute right, in our sole
discretion, to reject orders received in the community offering, in whole or in
part, at the time of receipt or at any time prior to completion of the offering.
If you are ordering shares you must represent that you are purchasing shares for
your own account and that you have
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no agreement or understanding with any person for the sale or transfer of the
shares. Our interpretation of the terms and conditions of the plan of conversion
and of the acceptability of the order forms will be final.
By signing the order form you will be acknowledging that the common stock
is not a deposit or savings account that is federally insured or otherwise
guaranteed by Wayne Savings Community Bank or the federal government, and that
you received a copy of this prospectus. However, signing the order form will not
result in you waiving your rights under the Securities Act of 1933 or the
Securities Exchange Act of 1934.
Payment for Shares. Payment for all shares will be required to accompany
all completed order forms for the purchase to be valid. Payment for shares may
be made by:
(1) check, money order, or bank draft made payable to Wayne Savings
Bancshares, Inc.; or
(2) authorization of withdrawal from Wayne Savings Community Bank
deposit accounts (without check-writing privileges) designated on
the stock order form.
Appropriate means for designating withdrawals from deposit accounts at
Wayne Savings Community Bank are provided in the order forms. The funds
designated must be available in the account(s) at the time the order form is
received. A hold will be placed on these funds, making them unavailable to the
depositor. Funds authorized for withdrawal will continue to earn interest within
the account at the contract rate until the offering is completed, at which time
the designated withdrawal will be made. Interest penalties for early withdrawal
applicable to certificate accounts will not apply to withdrawals authorized for
the purchase of shares of common stock; however, if a withdrawal results in a
certificate account with a balance less than the applicable minimum balance
requirement, the certificate will be cancelled at the time of withdrawal without
penalty, and the remaining balance will earn interest at the current passbook
rate subsequent to the withdrawal. In the case of payments made by check, money
order, or bank draft, these funds must be available in the account(s) and will
be immediately cashed and placed in a segregated escrow account at Wayne Savings
Community Bank and interest will be paid at the current passbook rate from the
date payment is received until the offering is completed or terminated. Once we
receive your executed order form, it may not be modified, amended or rescinded
without our consent, unless the offering is not completed by the expiration
date, in which event purchasers may be given the opportunity to increase,
decrease, or rescind their orders for a specified period of time.
If you are interested in using your individual retirement account funds to
purchase common stock, you must do so through a self-directed individual
retirement account. Wayne Savings Community Bank, by law, cannot maintain
self-directed individual retirement accounts. Therefore, if you wish to use your
funds that are currently in a Wayne Savings Community Bank individual retirement
account you may not designate on the order form that you wish funds to be
withdrawn from the account for the purchase of common stock. The funds you wish
to use for the purchase of common stock will have to be transferred to a
brokerage account. There will be no early withdrawal or Internal Revenue Service
interest penalties for these transfers. Depositors interested in using funds in
an individual retirement account or any other retirement account to purchase
common stock should contact the stock information center as soon as possible,
preferably at least two weeks prior to the end of the offering period, because
processing such transactions takes additional time, and whether such funds can
be used may depend on limitations imposed by the institutions where such funds
are currently held. We cannot guarantee that you will be able to use such funds.
Our employee stock ownership plan will not be required to pay for shares
purchased until consummation of the offering, provided there is a loan
commitment from an unrelated financial institution or Wayne Savings Bancshares,
Inc. to lend to the employee stock ownership plan the necessary amount to fund
the purchase. Regulations prohibit Wayne Savings Community Bank or Village
Savings Bank from lending funds or extending credit to any persons to purchase
common stock in the offering.
Delivery of Stock Certificates. Certificates representing common stock
issued in the offering and Wayne Savings Community Bank checks representing any
applicable refund and/or interest paid on subscriptions made by check, money
order, or bank draft will be mailed to the persons entitled thereto at the
certificate registration address noted on the order form, as soon as practicable
following consummation of the offering and receipt of all necessary regulatory
approvals. Any certificates returned as undeliverable will be held by the
transfer agent until claimed by persons legally entitled thereto or otherwise
disposed of in accordance with applicable law. Until certificates for
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the common stock are available and delivered to purchasers, purchasers may not
be able to sell the shares of stock which they ordered, even though the common
stock will have begun trading.
Other Restrictions. Notwithstanding any other provision of the plan of
conversion, no person is entitled to purchase any common stock to the extent the
purchase would be illegal under any federal or state law or regulation,
including state "blue sky" regulations, or would violate regulations or policies
of the National Association of Securities Dealers, Inc., particularly those
regarding free riding and withholding. We may ask for an acceptable legal
opinion from any purchaser as to the legality of their purchase and we may
refuse to honor any purchase order if an opinion is not timely furnished.
Restrictions on Transfer of Subscription Rights and Shares
Office of Thrift Supervision conversion regulations prohibit any person
with subscription rights, including Eligible Account Holders, Supplemental
Eligible Account Holders and Other Members of Wayne Savings Community Bank, from
transferring or entering into any agreement or understanding to transfer the
legal or beneficial ownership of the subscription rights issued under the plan
of conversion or the shares of common stock to be issued upon their exercise.
These rights may be exercised only by the person to whom they are granted and
only for his account. Each person exercising subscription rights will be
required to certify that he is purchasing shares solely for his own account and
that he has no agreement or understanding regarding the sale or transfer of such
shares. The regulations also prohibit any person from offering or making an
announcement of an offer or intent to make an offer to purchase subscription
rights or shares of common stock to be issued upon their exercise prior to
completion of the offering.
We will pursue any and all legal and equitable remedies in the event we
become aware of the transfer of subscription rights and we will not honor orders
that we believe involve the transfer of subscription rights.
Stock Information Center
If you have any questions regarding the offering, please call the Stock
Information Center toll free, at (800) 804-8479, from 9:00 a.m. to 4:00 p.m.
Eastern time, Monday through Friday. The Stock Information Center is located at
151 North Market Street, Wooster, Ohio.
Limitations on Common Stock Purchases
The plan of conversion includes the following limitations on the number of
shares of common stock that may be purchased during the conversion:
(1) No person may purchase fewer than 25 shares of common stock or more
than 25,000 shares;
(2) Our tax-qualified employee stock benefit plans, including our employee
stock ownership plan, may purchase in the aggregate up to 8% of the shares
issued in the offering, including shares issued in the event of an increase in
the offering range of up to 15%. The employee stock ownership plan expects to
subscribe for 8% of the shares sold, or 139,400 shares at the minimum of the
offering range and 188,600 shares at the maximum of the offering range;
(3) Except for the employee stock ownership plan, as described above, no
person or entity, together with associates or persons acting in concert with
such person or entity, may purchase more than 25,000 shares in all categories of
the offering;
(4) Current stockholders of Wayne Savings Bancshares, Inc. are subject to
an additional limitation upon the number of shares that may be purchased in the
offering. As previously described, current stockholders of Wayne Savings
Bancshares, Inc. will receive new shares of Wayne Savings Bancshares, Inc.
common stock in exchange for their existing shares of Wayne Savings Bankshares,
Inc. common stock. The number of shares that a stockholder may purchase in the
offering, together with associates or persons acting in concert with such
purchaser, when combined with the shares that the stockholder and his associates
will receive in exchange for existing Wayne Savings Bancshares, Inc. common
stock, may not exceed 5% of the outstanding shares of common stock of Wayne
Savings Bancshares, Inc. at the completion of the offering; and
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(5) The maximum number of shares of common stock that may be purchased in
all categories of the offering by officers and directors of Wayne Savings
Community Bank and their associates, in the aggregate, when combined with new
shares of common stock issued in exchange for existing shares, may not exceed
29% of the shares issued in the offering.
Depending upon market or financial conditions, our Board of Directors,
with the approval of the Office of Thrift Supervision and without further
approval of members of Wayne Savings Bankshares, MHC, may decrease or increase
the purchase and ownership limitations. We may need regulatory approval to
increase the purchase limitations. If a purchase limitation is increased,
subscribers in the subscription offering who ordered the maximum amount will be,
and some other large subscribers who through their subscriptions evidence a
desire to purchase the maximum allowable number of shares, in our sole
discretion may be, given the opportunity to increase their subscriptions up to
the then applicable limit. The effect of this type of resolicitation will be an
increase in the number of shares owned by subscribers who choose to increase
their subscriptions. Our Board of Directors may, in its sole discretion,
increase the maximum purchase limitations up to 9.99% of the shares issued in
the conversion, provided that orders for shares exceeding 5% of the shares being
issued shall not exceed, in the aggregate, 10% of the total issued. Requests to
purchase additional shares under this provision will be determined by our Board
of Directors in its sole discretion.
In the event of an increase in the total number of shares offered in the
offering due to an increase in the offering range of up to 15%, shares will be
allocated in the following order of priority in accordance with the plan of
conversion:
(1) to fill our employee stock ownership plan's subscription for 8% of
the total number of shares sold;
(2) in the event that there is an oversubscription at the Eligible
Account Holder, Supplemental Eligible Account Holder or Other Member
levels, to fill unfulfilled subscriptions of these subscribers
according to their respective priorities; and
(3) to fill unfulfilled subscriptions in the community offering, with
preference given first to Wayne Savings Bancshares, Inc.
stockholders as of November 11, 2002, and then to natural persons
residing in the Ohio counties of Wayne, Holmes, Ashland, Medina and
Stark.
The term "associate" of a person is defined to mean:
(1) any corporation or organization, other than Wayne Savings
Bancshares, Inc., Wayne Savings Community Bank, or a majority-owned
subsidiary of Wayne Savings Community Bank, of which the person is
an officer, partner or 10% stockholder;
(2) any trust or other estate in which the person has a substantial
beneficial interest or serves as a director or in a similar
fiduciary capacity; provided, however, that this term shall not
include any employee stock benefit plan in which the person has a
substantial beneficial interest or serves as director or in a
similar fiduciary capacity; and
(3) any relative or spouse of the persons, or any relative of the
spouse, who either has the same home as the person or who is a
director or officer of Wayne Savings Bancshares, Inc., or Wayne
Savings Community Bank.
The term "acting in concert" means:
(1) knowing participation in a joint activity or interdependent
conscious parallel action towards a common goal whether or not
pursuant to an express agreement; or
(2) a combination or pooling of voting or other interests in the
securities of an issuer for a common purpose pursuant to any
contract, understanding, relationship, agreement or other
arrangement, whether written or otherwise.
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A person or company which acts in concert with another person or company
("other party") shall also be deemed to be acting in concert with any person or
company who is also acting in concert with that other party, except that any
tax-qualified employee stock benefit plan will not be deemed to be acting in
concert with its trustee or a person who serves in a similar capacity solely for
the purpose of determining whether stock held by the trustee and stock held by
the plan will be aggregated.
Our directors are not treated as associates of each other solely because
of their membership on our Board of Directors. As stated in the plan of
conversion, all interpretations of the plan of conversion and application of its
provisions to particular circumstances, including whether prospective purchasers
are associates or acting in concert, will be made by a majority of our Board of
Directors and will be final, subject to the authority of the Office of Thrift
Supervision. Final allocations of shares to prospective purchasers, including
allocations affected by determinations on whether the prospective purchasers are
associates or acting in concert, will generally not be communicated to
prospective purchasers until the closing of the conversion. For a further
discussion of limitations on purchases of a converting institution's stock at
the time of conversion and subsequent to conversion, see "--Certain Restrictions
on Purchase or Transfer of Shares after Conversion" and "Restrictions on
Acquisition of Wayne Savings Bancshares, Inc."
Liquidation Rights
In the unlikely event of a complete liquidation of Wayne Savings
Bancshares, Inc. prior to the conversion, all claims of creditors of Wayne
Savings Bancshares, Inc., including those of depositors to the extent of their
deposit balances, would be paid first. Thereafter, if there were any assets of
Wayne Savings Bancshares, Inc. remaining, these assets would be distributed to
stockholders, including Wayne Savings Bankshares, MHC. In the unlikely event
that Wayne Savings Bankshares, MHC and Wayne Savings Bancshares, Inc. liquidated
prior to the conversion, all claims of creditors would be paid first. Then, if
there were any assets of Wayne Savings Bankshares, MHC remaining, members of
Wayne Savings Bankshares, MHC would receive these remaining assets, pro rata,
based upon the deposit balances in their deposit account in Wayne Savings
Community Bank immediately prior to liquidation. In the unlikely event that
Wayne Savings Community Bank were to liquidate after the conversion, all claims
of creditors, including those of depositors, would be paid first, followed by
distribution of the "liquidation account" to certain depositors, with any assets
remaining thereafter distributed to Wayne Savings Bancshares, Inc. as the holder
of Wayne Savings Community Bank capital stock. Pursuant to the rules and
regulations of the Office of Thrift Supervision, a post-conversion merger,
consolidation, sale of bulk assets or similar combination or transaction with
another insured savings institution would not be considered a liquidation and,
in these types of transactions, the liquidation account would be assumed by the
surviving institution.
The plan of conversion provides for the establishment, upon the completion
of the conversion, of a special "liquidation account" for the benefit of
Eligible Account Holders and Supplemental Eligible Account Holders in an amount
equal to the greater of:
(1) Wayne Savings Bankshares, MHC's ownership interest in the surplus
and reserves of Wayne Savings Bancshares, Inc. as of the date of its
latest balance sheet contained in this prospectus; or
(2) the retained earnings of Wayne Savings Community Bank at the time
that Wayne Savings Community Bank reorganized into Wayne Savings
Bankshares, MHC in 1993.
The purpose of the liquidation account is to provide Eligible Account
Holders and Supplemental Eligible Account Holders who maintain their deposit
accounts with Wayne Savings Community Bank after the conversion with an interest
in the unlikely event of the complete liquidation of Wayne Savings Community
Bank after the conversion. Each Eligible Account Holder and Supplemental
Eligible Account Holder that continues to maintain his deposit account at Wayne
Savings Community Bank, would be entitled, on a complete liquidation of Wayne
Savings Community Bank after the conversion, to an interest in the liquidation
account prior to any payment to the stockholders of Wayne Savings Bancshares,
Inc. Each Eligible Account Holder and each Supplemental Eligible Account Holder
would have an initial interest in the liquidation account for each deposit
account, including savings accounts, transaction accounts such as negotiable
order of withdrawal accounts, money market deposit accounts, and certificates of
deposit, with a balance of $50 or more held in Wayne Savings Community Bank on
June 30, 2000, or September 30, 2002, respectively. Each Eligible Account Holder
and Supplemental Eligible Account Holder would have a pro rata interest in the
total liquidation account for each such deposit account, based on the proportion
that
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the balance of each such deposit account on June 30, 2000, or September 30,
2002, respectively, bears to the balance of all deposit accounts in Wayne
Savings Bancshares, Inc. on such dates.
If, however, on any December 31 annual closing date commencing after the
effective date of the conversion, the amount in any such deposit account is less
than the amount in the deposit account on June 30, 2000, or September 30, 2002,
respectively, or any other annual closing date, then the interest in the
liquidation account relating to such deposit account would be reduced from time
to time by the proportion of any such reduction, and such interest will cease to
exist if such deposit account is closed. In addition, no interest in the
liquidation account would ever be increased despite any subsequent increase in
the related deposit account. Payment pursuant to liquidation rights of Eligible
Account Holders and Supplemental Eligible Account Holders would be separate and
apart from any insured deposit accounts to such depositor. Any assets remaining
after the above liquidation rights of Eligible Account Holders and Supplemental
Eligible Account Holders are satisfied would be distributed to Wayne Savings
Bancshares, Inc. as the sole stockholder of Wayne Savings Community Bank.
Tax Aspects
Consummation of the conversion is expressly conditioned upon the prior
receipt of an opinion of counsel or tax advisor with respect to federal and
state income taxation that indicates that the conversion will not be a taxable
transaction to Wayne Savings Bankshares, MHC, Wayne Savings Bancshares, Inc.,
Wayne Savings Community Bank, Eligible Account Holders, Supplemental Eligible
Account Holders, and/or other members of Wayne Savings Bankshares, MHC. Unlike
private letter rulings, opinions of counsel or tax advisors are not binding on
the IRS or any state taxing authority, and such authorities could disagree with
such opinions. In the event of such disagreement, there can be no assurance that
Wayne Savings Bancshares, Inc. or Wayne Savings Community Bank would prevail in
a judicial proceeding.
Wayne Savings Bankshares, MHC and Wayne Savings Bancshares, Inc. have
received an opinion of counsel, Luse Gorman Pomerenk & Schick, A Professional
Corporation, regarding the federal income tax consequences of the conversion
which includes, but is not limited to, the following opinions:
1. The merger of Wayne Savings Bancshares, Inc. with and into Wayne
Savings Community Bank qualifies as a tax-free reorganization within the meaning
of Section 368(a)(1)(A) of the Internal Revenue Code.
2. The merger of Wayne Savings Bankshares, MHC with and into Wayne Savings
Community Bank qualifies as a tax-free reorganization within the meaning of
Section 368(a)(1)(A) of the Code.
3. The exchange of the members' equity interests in Wayne Savings
Bankshares, MHC for interests in a liquidation account established in Wayne
Savings Community Bank will satisfy the continuity of interest requirement of
Section 1.368-1(b) of the federal income tax regulations.
4. Wayne Savings Bankshares, MHC will not recognize any gain or loss on
the transfer of its assets to Wayne Savings Community Bank in exchange for an
interest in a liquidation account established in Wayne Savings Community Bank
for the benefit of Wayne Savings Bankshares, MHC members who remain depositors
of Wayne Savings Community Bank.
5. No gain or loss will be recognized by Wayne Savings Community Bank upon
the receipt of the assets of Wayne Savings Bankshares, MHC in exchange for the
transfer to the members of Wayne Savings Bankshares, MHC of an interest in the
liquidation account in Wayne Savings Community Bank.
6. Members of Wayne Savings Bankshares, MHC will recognize no gain or loss
upon the receipt of an interest in the liquidation account in Wayne Savings
Community Bank in exchange for their interests in Wayne Savings Bankshares, MHC.
7. Current stockholders of Wayne Savings Bancshares, Inc. will not
recognize any gain or loss upon their exchange of Wayne Savings Bancshares, Inc.
common stock solely for new shares of Wayne Savings Bancshares, Inc. common
stock.
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8. Cash received by any current stockholder of Wayne Savings Bancshares,
Inc. in lieu of a fractional share interest in new shares of Wayne Savings
Bancshares, Inc. common stock will be treated as having been received as a
distribution in full payment in exchange for a fractional share interest of new
Wayne Savings Bancshares, Inc. common stock, which such stockholder would
otherwise be entitled to receive, and will qualify as capital gain or loss,
assuming common stock of Wayne Savings Bancshares, Inc. surrendered in exchange
therefor was held as a capital asset by such stockholder at the effective time
of the conversion.
9. Each stockholder's aggregate basis in new shares of Wayne Savings
Bancshares, Inc. common stock received in the exchange will be the same as the
aggregate basis of Wayne Savings Bancshares, Inc. common stock surrendered in
exchange therefor.
10. Each stockholder's holding period in his or her Wayne Savings
Bancshares, Inc. common stock received in the exchange will include the period
during which Wayne Savings Bancshares, Inc. common stock surrendered was held,
provided that the Wayne Savings Bancshares, Inc. common stock surrendered is a
capital asset in the hands of the stockholder on the date of the exchange.
11. No gain or loss will be recognized by Eligible Account Holders,
Supplemental Eligible Account Holders or other members upon distribution to them
of subscription rights to purchase shares of Wayne Savings Bancshares, Inc.
common stock, provided that the amount to be paid for Wayne Savings Bancshares,
Inc. common stock is equal to the fair market value of Wayne Savings Bancshares,
Inc. common stock.
12. No gain or loss will be recognized by Wayne Savings Bancshares, Inc.
on the receipt of money in exchange for Wayne Savings Bancshares, Inc. common
stock sold in the offering.
In the view of RP Financial, LC, which view is not binding on the Internal
Revenue Service, the subscription rights do not have any value, based on the
fact that these rights are acquired by the recipients without cost, are
nontransferable and of short duration, and afford the recipients the right only
to purchase the common stock at a price equal to its estimated fair market
value, which will be the same price as the subscription price for the
unsubscribed shares of common stock. If the subscription rights granted to
Eligible Account Holders and Supplemental Eligible Account Holders are deemed to
have an ascertainable value, receipt of these rights could result in taxable
gain to those Eligible Account Holders and Supplemental Eligible Account Holders
who exercise the subscription rights in an amount equal to such value, and Wayne
Savings Bancshares, Inc. could recognize gain on the distribution of such
subscription rights. Eligible Account Holders and Supplemental Eligible Account
Holders are encouraged to consult with their own tax advisors as to the tax
consequences in the event that subscription rights are deemed to have an
ascertainable value. Unlike private rulings, an opinion of RP Financial, LC is
not binding on the Internal Revenue Service and the Internal Revenue Service
could disagree with the conclusions reached therein.
The federal tax opinion has been filed with the Securities and Exchange
Commission as an exhibit to Wayne Savings Bancshares, Inc.'s registration
statement. An opinion on the Ohio state income tax consequences consistent with
the federal tax opinion has been issued by Grant Thornton, LLP, tax advisors to
Wayne Savings Bankshares, MHC and Wayne Savings Bancshares, Inc.
Certain Restrictions on Purchase or Transfer of Our Shares after Conversion
All shares purchased in the offering by a director or an executive officer
of Wayne Savings Community Bank generally may not be sold for a period of one
year following the conversion, except in the event of the death of the director
or executive officer. Each certificate for restricted shares will bear a legend
giving notice of this restriction on transfer, and instructions will be issued
to the effect that any transfer within this time period of any certificate or
record ownership of the shares other than as provided above is a violation of
the restriction. Any shares of common stock issued at a later date as a stock
dividend, stock split, or otherwise, with respect to the restricted stock will
be similarly restricted. The directors and executive officers of Wayne Savings
Community Bank also will be restricted by the insider trading rules promulgated
pursuant to the Securities Exchange Act of 1934.
Purchases of shares of our common stock by any of our directors, executive
officers, or any person who was an executive officer after adoption of the plan
of conversion, and their associates, during the three-year period
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following the conversion may be made only through a broker or dealer registered
with the Securities and Exchange Commission, except with the prior written
approval of the Office of Thrift Supervision. This restriction does not apply,
however, to negotiated transactions involving more than 1% of our outstanding
common stock or to purchases of our common stock by our stock option plan or any
of our tax-qualified employee stock benefit plans or nontax-qualified employee
stock benefit plans, including any employee plans, recognition plans or
restricted stock plans.
Office of Thrift Supervision regulations prohibit us from repurchasing
more than 5% of our outstanding shares of common stock during the first year
following conversion. After one year the OTS does not impose any repurchase
restrictions.
COMPARISON OF STOCKHOLDERS' RIGHTS
General. As a result of the conversion, current stockholders of Wayne
Savings Bancshares, Inc., a federal corporation, will become stockholders of
Wayne Savings Bancshares, Inc., a Delaware corporation. There are certain
differences in stockholder rights arising from distinctions between Wayne
Savings Bancshares, Inc.'s federal stock charter and bylaws and Wayne Savings
Bancshares, Inc.'s Delaware certificate of incorporation and bylaws and from
distinctions between laws applicable to Delaware and federal corporations.
This discussion is not intended to be a complete statement of the
differences affecting the rights of stockholders, but rather summarizes the
material differences and similarities affecting the rights of stockholders. This
discussion is qualified in its entirety by reference to the certificate of
incorporation and bylaws of Wayne Savings Bancshares, Inc. and the Delaware
General Corporation Law. See "Additional Information" for procedures for
obtaining a copy of Wayne Savings Bancshares, Inc.'s certificate of
incorporation and bylaws.
Authorized Capital Stock. Our authorized capital stock currently consists
of 20,000,000 shares of common stock, par value $1.00 per share, and 10,000,000
shares of preferred stock, par value $1.00 per share. After the conversion our
authorized capital stock as a Delaware corporation will consist of 9,000,000
shares of common stock, $0.10 par value per share, and 500,000 shares of
preferred stock, par value $0.10 per share. We authorized more capital stock
than that which will be issued in the conversion to provide our Board of
Directors with flexibility to effect, among other transactions, financings,
acquisitions, stock dividends, stock splits and stock option grants. However,
these additional authorized shares may also be used by our Board of Directors
consistent with its fiduciary duty to deter future attempts to gain control of
Wayne Savings Bancshares, Inc. Our Board of Directors also has sole authority to
determine the terms of any one or more series of preferred stock, including
voting rights, conversion rates, and liquidation preferences. As a result of the
ability to fix voting rights for a series of preferred stock, our Board has the
power, to the extent consistent with its fiduciary duty, to issue a series of
preferred stock to persons friendly to management in order to attempt to block a
post-tender offer merger or other transaction by which a third party seeks
control, and thereby assist management to retain its position. We currently have
no plans for the issuance of additional shares, other than the issuance of
additional shares to our stock benefit plans.
Issuance of Capital Stock. Pursuant to applicable laws and regulations,
Wayne Savings Bankshares, MHC is required to own not less than a majority of the
outstanding Wayne Savings Bancshares, Inc. common stock. There will be no such
restriction applicable to Wayne Savings Bancshares, Inc. following consummation
of the conversion.
Wayne Savings Bancshares, Inc.'s Delaware certificate of incorporation
does not contain restrictions on the issuance of shares of capital stock to
directors, officers or controlling persons, whereas Wayne Savings Bancshares,
Inc.'s federal stock charter restricts such issuances to general public
offerings, or if qualifying shares, to directors, unless the share issuance or
the plan under which they would be issued has been approved by a majority of the
total votes eligible to be cast at a legal stockholders' meeting. Thus, stock
related compensation plans, such as stock option plans, may be adopted by Wayne
Savings Bancshares, Inc. without stockholder approval and shares of Wayne
Savings Bancshares, Inc. capital stock may be issued directly to directors or
officers without stockholder approval. The bylaws of the National Association of
Securities Dealers, Inc., however, generally require corporations with
securities that are quoted on the Nasdaq National Market System to obtain
stockholder approval of most stock compensation plans for directors, officers
and key employees of the corporation. Moreover, although generally not required,
stockholder approval of stock-related compensation plans may be sought in
certain instances
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in order to qualify such plans for favorable federal income tax and securities
law treatment under current laws and regulations.
Voting Rights. Neither Wayne Savings Bancshares, Inc.'s federal stock
charter or bylaws nor Wayne Savings Bancshares, Inc.'s Delaware certificate of
incorporation or bylaws currently provide for cumulative voting in elections of
directors. For additional information regarding voting rights, see
"--Limitations on Acquisitions of Voting Stock and Voting Rights" below.
Payment of Dividends. The ability of Wayne Savings Bancshares, Inc. to pay
dividends on its capital stock is restricted by Office of Thrift Supervision
regulations and by federal income tax considerations related to savings
associations such as Wayne Savings Community Bank. See "Regulation--Limitations
on Capital Distributions." Although Wayne Savings Bancshares, Inc. is not
subject to these restrictions as a Delaware corporation, such restrictions will
indirectly affect Wayne Savings Bancshares, Inc. because dividends from Wayne
Savings Community Bank will be a primary source of funds of Wayne Savings
Bancshares, Inc. for the payment of dividends to stockholders of Wayne Savings
Bancshares, Inc.
Certain restrictions generally imposed on Delaware corporations also may
have an impact on Wayne Savings Bancshares, Inc.'s ability to pay dividends.
Delaware law generally provides that Wayne Savings Bancshares, Inc. is limited
to paying dividends in an amount equal to the excess of its net assets (total
assets minus total liabilities) over its statutory capital or, if no such excess
exists, equal to its net profits for the current year and/or the immediately
preceding fiscal year.
Board of Directors. Wayne Savings Bancshares, Inc.'s federal stock charter
and bylaws and Wayne Savings Bancshares, Inc.'s Delaware certificate of
incorporation and bylaws each require the Board of Directors to be divided into
three classes as nearly equal in number as possible and that the members of each
class shall be elected for a term of three years and until their successors are
elected and qualified, with one class being elected annually.
Under Wayne Savings Bancshares, Inc.'s federal bylaws, any vacancies in
the Board of Directors of Wayne Savings Bancshares, Inc. may be filled by the
affirmative vote of a majority of the remaining directors although less than a
quorum of the Board of Directors. Persons elected by the directors of Wayne
Savings Bancshares, Inc. to fill vacancies may only serve until the next annual
meeting of stockholders. Under Wayne Savings Bancshares, Inc.'s Delaware
certificate of incorporation, any vacancy occurring in the Board of Directors of
Wayne Savings Bancshares, Inc., including any vacancy created by reason of an
increase in the number of directors, may be filled by the remaining directors,
and any director so chosen shall hold office for the remainder of the term to
which the director has been elected and until his or her successor is elected
and qualified.
Under Wayne Savings Bancshares, Inc.'s federal bylaws, any director may be
removed for cause by the holders of a majority of the outstanding voting shares.
Wayne Savings Bancshares, Inc.'s Delaware certificate of incorporation provides
that any director may be removed for cause by the holders of at least 80% of the
outstanding voting shares of Wayne Savings Bancshares, Inc.
Limitations on Liability. The federal stock charter and bylaws of Wayne
Savings Bancshares, Inc. do not limit the personal liability of directors in the
manner provided by the Delaware law and the laws of many other states.
Wayne Savings Bancshares, Inc.'s Delaware certificate of incorporation
provides that the directors of Wayne Savings Bancshares, Inc. will not be
personally liable for monetary damages to Wayne Savings Bancshares, Inc. for
certain actions as directors, except for actions or omissions not in good faith
or that involve intentional misconduct or a knowing violation of law by the
director, the authorization of illegal distributions or receipt of an improper
personal benefit from their positions as directors. This provision might, in
certain instances, discourage or deter shareholders or management from bringing
a lawsuit against directors for a breach of their duties even though such an
action, if successful, might have benefited Wayne Savings Bancshares, Inc.
Indemnification of Directors, Officers, Employees and Agents. Wayne
Savings Bancshares, Inc.'s federal stock charter and bylaws do not contain any
provision relating to indemnification of directors and officers of Wayne Savings
Bancshares, Inc. Under current Office of Thrift Supervision regulations,
however, Wayne Savings
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Bancshares, Inc. shall indemnify its directors, officers and employees for any
costs incurred in connection with any litigation involving such person's
activities as a director, officer or employee if such person obtains a final
judgment on the merits in his or her favor. In addition, indemnification is
permitted in the case of a settlement, a final judgment against such person or
final judgment other than on the merits, if a majority of disinterested
directors determines that such person was acting in good faith within the scope
of his or her employment as he or she could reasonably have perceived it under
the circumstances and for a purpose he or she could reasonably have believed
under the circumstances was in the best interest of Wayne Savings Bancshares,
Inc. or its stockholders. Wayne Savings Bancshares, Inc. also is permitted to
pay ongoing expenses incurred by a director, officer or employee if a majority
of disinterested directors concludes that such person may ultimately be entitled
to indemnification. Before making any indemnification payment, Wayne Savings
Bancshares, Inc. is required to notify the Office of Thrift Supervision of its
intention and such payment cannot be made if the Office of Thrift Supervision
objects to such payment.
The officers, directors, agents and employees of Wayne Savings Bancshares,
Inc. are entitled to indemnification, consistent with Delaware law, with respect
to certain actions pursuant to Wayne Savings Bancshares, Inc.'s Delaware
certificate of incorporation, which complies with Delaware law regarding
indemnification. Delaware law allows Wayne Savings Bancshares, Inc. to indemnify
the aforementioned persons for expenses, liabilities, settlements, judgments and
fines in suits in which such person has been made a party by reason of the fact
that he or she is or was a director or officer of Wayne Savings Bancshares, Inc.
No such indemnification may be given if the acts or omissions of the person are
adjudged to be in violation of law, if such person is liable to the corporation
for an unlawful distribution, or if such person personally received a benefit to
which he or she was not entitled. The right to indemnification includes the
right to be paid the expenses incurred in advance of final disposition of a
proceeding.
Special Meetings of Stockholders. Wayne Savings Bancshares, Inc.'s federal
stock charter provides that special meetings of Wayne Savings Bancshares, Inc.'s
stockholders generally may be called by the chairman, the president, a majority
of the Board of Directors or the holders of not less than a majority of the
outstanding capital stock of Wayne Savings Bancshares, Inc. entitled to vote at
the meeting. Wayne Savings Bancshares, Inc.'s Delaware certificate of
incorporation provides that special meetings of the stockholders of Wayne
Savings Bancshares, Inc. may be called only by a majority vote of the total
authorized directors.
Stockholder Nominations and Proposals. Wayne Savings Bancshares, Inc.'s
federal bylaws generally provide that stockholders may submit nominations for
election of directors at an annual meeting of stockholders and proposals for any
new business to be taken up at such a meeting by filing such in writing with the
secretary of Wayne Savings Bancshares, Inc. at least two weeks and at least five
days, respectively, before the date of any such meeting.
Wayne Savings Bancshares, Inc.'s Delaware bylaws generally provide that
any stockholder desiring to make a nomination for the election of directors or a
proposal for new business at a meeting of stockholders must submit written
notice to Wayne Savings Bancshares, Inc. not less than 90 days prior to the
anniversary date of the mailing of proxy materials by Wayne Savings Bancshares,
Inc. in connection with the immediately preceding annual meeting of
stockholders. Failure to comply with these advance notice requirements will
preclude such nominations or new business from being considered at the meeting.
Management believes that it is in the best interests of Wayne Savings
Bancshares, Inc. and its stockholders to provide sufficient time to enable
management to disclose to stockholders information about a dissident slate of
nominations for directors. This advance notice requirement may also give
management time to solicit its own proxies in an attempt to defeat any dissident
slate of nominations, should management determine that doing so is in the best
interest of stockholders generally. Similarly, adequate advance notice of
stockholder proposals will give management time to study such proposals and to
determine whether to recommend to the stockholders that such proposals be
adopted. In certain instances, such provisions could make it more difficult to
oppose management's nominees or proposals, even if stockholders believe such
nominees or proposals are in their best interests.
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Stockholder Action Without a Meeting. The federal bylaws of Wayne Savings
Bancshares, Inc. provide that any action to be taken or which may be taken at
any annual or special meeting of stockholders may be taken if a consent in
writing, setting forth the actions so taken, is given by the holders of all
outstanding shares entitled to vote. Wayne Savings Bancshares, Inc.'s Delaware
certificate of incorporation specifically denies the authority of stockholders
to act without a meeting.
Stockholder's Right to Examine Books and Records. A federal regulation
which is applicable to Wayne Savings Bancshares, Inc. provides that stockholders
may inspect and copy specified books and records of a federally chartered
savings institution after proper written notice for a proper purpose. Delaware
law similarly provides that a stockholder may inspect books and records upon
written demand stating the purpose of the inspection, if such purpose is
reasonably related to such person's interest as a stockholder.
Limitations on Acquisitions of Voting Stock and Voting Rights. Wayne
Savings Bancshares, Inc.'s Delaware certificate of incorporation provides that
in no event shall any record owner of any outstanding common stock which is
beneficially owned, directly or indirectly, by a person who beneficially owns in
excess of 10% of the then outstanding shares of common stock be entitled or
permitted to any vote in respect of the shares held in excess of such limit.
Mergers, Consolidations and Sales of Assets. A federal regulation requires
the approval of two-thirds of the Board of Directors of Wayne Savings
Bancshares, Inc. and the holders of two-thirds of the outstanding stock of Wayne
Savings Bancshares, Inc. entitled to vote thereon for mergers, consolidations
and sales of all or substantially all of Wayne Savings Bancshares, Inc.'s
assets. Such regulation permits Wayne Savings Bancshares, Inc. to merge with
another corporation without obtaining the approval of its stockholders if:
(1) it does not involve an interim savings institution;
(2) Wayne Savings Bancshares, Inc.'s federal stock charter is not
changed;
(3) each share of Wayne Savings Bancshares, Inc.'s stock outstanding
immediately prior to the effective date of the transaction will be
an identical outstanding share or a treasury share of Wayne Savings
Bancshares, Inc. after such effective date; and
(4) either:
(a) no shares of voting stock of Wayne Savings Bancshares, Inc. and
no securities convertible into such stock are to be issued or
delivered under the plan of combination, or
(b) the authorized but unissued shares or the treasury shares of
voting stock of Wayne Savings Bancshares, Inc. to be issued or
delivered under the plan of combination, plus those initially
issuable upon conversion of any securities to be issued or delivered
under such plan, do not exceed 15% of the total shares of voting
stock of Wayne Savings Bancshares, Inc. outstanding immediately
prior to the effective date of the transaction.
Wayne Savings Bancshares, Inc.'s Delaware certificate of
incorporation requires the approval of the holders of at least 80%
of Wayne Savings Bancshares, Inc.'s outstanding shares of voting
stock to approve certain "Business Combinations" involving an
"Interested Stockholder" except where (i) the proposed transaction
has been approved by two-thirds of those members of Wayne Savings
Bancshares, Inc.'s Board of Directors who are unaffiliated with the
Interested Stockholder and were directors prior to the time when the
Interested Stockholder became an Interested Stockholder, or (ii)
certain "fair price" provisions are complied with. The term
"Interested Stockholder" includes any individual, corporation,
partnership or other entity, other than Wayne Savings Bancshares,
Inc. or its subsidiary, which owns beneficially or controls,
directly or indirectly, 10% or more of the outstanding shares of
voting stock of Wayne Savings Bancshares, Inc. or an affiliate of
such person or entity. This provision of the certificate of
incorporation applies to any "Business Combination," which is
defined to include, among other things:
(1) any merger or consolidation of Wayne Savings Bancshares, Inc.
with or into any Interested Stockholder;
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(2) any sale, lease, exchange, mortgage, transfer, or other
disposition of 25% or more of the assets of Wayne Savings
Bancshares, Inc. and its subsidiaries to an Interested
Stockholder;
(3) the issuance or transfer of any securities of Wayne Savings
Bancshares, Inc. or a subsidiary of Wayne Savings Bancshares,
Inc. to an Interested Stockholder having a value exceeding 25% of
the combined fair market value of the outstanding securities of
Wayne Savings Bancshares, Inc.;
(4) the adoption of any plan or proposal for the liquidation or
dissolution of Wayne Savings Bancshares, Inc. proposed by or on
behalf of an Interested Stockholder or any affiliate of an
Interested Stockholder; or
(5) any reclassification of securities, any recapitalization, or
any merger with a subsidiary or other transaction that has the
effect of increasing an Interested Stockholder's proportional
share of any class of securities of Wayne Savings Bancshares,
Inc.
Under Delaware law, absent this provision, business combinations,
including mergers, consolidations and sales of substantially all of the assets
of a corporation must, subject to certain exceptions, be approved by the vote of
the holders of a majority of the outstanding shares of common stock of Wayne
Savings Bancshares, Inc. and any other affected class of stock. One exception
under Delaware law to the majority approval requirement applies to stockholders
owning 15% or more of the common stock of a corporation for a period of less
than three years. Such 15% stockholder, in order to obtain approval of a
business combination, must obtain the approval of two-thirds of the outstanding
stock, excluding the stock owned by such 15% stockholder, or satisfy other
requirements under Delaware law relating to board of director approval of his or
her acquisition of the shares of Wayne Savings Bancshares, Inc. The increased
stockholder vote required to approve a business combination may have the effect
of preventing mergers and other business combinations which a majority of
stockholders deem desirable and placing the power to prevent such a merger or
combination in the hands of a minority of stockholders.
Wayne Savings Bancshares, Inc.'s Delaware certificate of incorporation
provides that the Wayne Savings Bancshares, Inc.'s Board of Directors may
consider certain factors in addition to the amount of consideration to be paid
when evaluating certain business combinations or a tender or exchange offer.
These additional factors include the social and economic effects of the
transaction on its customers and employees and the communities served by Wayne
Savings Bancshares, Inc.
Dissenters' Rights of Appraisal. Office of Thrift Supervision regulations
generally provide that a stockholder of a federally chartered savings
institution that engages in a merger, consolidation or sale of all or
substantially all of its assets shall have the right to demand from such
institution payment of the fair or appraised value of his or her stock in the
institution, subject to specified procedural requirements. However, if the
federally chartered savings institution's stock is listed on a national
securities exchange or quoted on the Nasdaq Stock Market, stockholders are not
entitled to dissenters' rights in connection with a merger if stockholders are
required to accept only "qualified consideration" for their stock, which is
defined to include cash, shares of stock of any institution or corporation that
at the effective date of the merger will be listed on a national securities
exchange or quoted on the Nasdaq Stock Market or any combination thereof.
Under Delaware law, except for cash merger transactions, shareholders of
Wayne Savings Bancshares, Inc. generally will not have dissenters' appraisal
rights in connection with a plan of merger or consolidation to which Wayne
Savings Bancshares, Inc. is a party because the common stock is expected to be
listed on the Nasdaq National Market.
Amendment of Governing Instruments. No amendment of Wayne Savings
Bancshares, Inc.'s federal stock charter may be made unless it is first proposed
by the Board of Directors, then preliminarily approved by the Office of Thrift
Supervision, and thereafter approved by the holders of a majority of the total
votes eligible to be cast at a legal meeting. Wayne Savings Bancshares, Inc.'s
Delaware certificate of incorporation may be amended by the vote of the holders
of a majority of the outstanding shares of Wayne Savings Bancshares, Inc. common
stock, except that the provisions of the certificate of incorporation governing
the calling of meetings of stockholders and the prohibition of action by written
consent of stockholders, stockholder nominations and proposals, limitations on
voting rights of 10% stockholders, denial of preemptive rights, the number and
staggered terms of directors, removal
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of directors, approval of certain business combinations, the evaluation of
certain business combinations, elimination of directors' liability,
indemnification of officers and directors, and the manner of amending the
certificate of incorporation and bylaws, each may not be repealed, altered,
amended or rescinded except by the vote of the holders of at least 80% of the
outstanding shares of Wayne Savings Bancshares, Inc. This provision is intended
to prevent the holders of a lesser percentage of the outstanding stock of Wayne
Savings Bancshares, Inc. from circumventing any of the foregoing provisions by
amending the certificate of incorporation to delete or modify one or more of
such provisions.
The federal bylaws of Wayne Savings Bancshares, Inc. may be amended by a
majority vote of the full Board of Directors of Wayne Savings Bancshares, Inc.
or by a majority vote of the votes cast by the stockholders of Wayne Savings
Bancshares, Inc. at any legal meeting. Wayne Savings Bancshares, Inc.'s Delaware
bylaws may only be amended by a two-thirds vote of the Board of Directors of
Wayne Savings Bancshares, Inc. or by the holders of at least 80% of the
outstanding stock of Wayne Savings Bancshares, Inc.
Purpose and Anti-Takeover Effects of Wayne Savings Bancshares, Inc.'s
Delaware Certificate of Incorporation and Bylaws. Our Board of Directors
believes that the provisions described above are prudent and will reduce our
vulnerability to takeover attempts and certain other transactions that have not
been negotiated with and approved by our Board of Directors. These provisions
will also assist us in the orderly deployment of the conversion proceeds into
productive assets during the initial period after the conversion. Our Board of
Directors believes these provisions are in the best interest of Wayne Savings
Bancshares, Inc. and its stockholders. Our Board of Directors believes that it
will be in the best position to determine the true value of Wayne Savings
Bancshares, Inc. and to negotiate more effectively for what may be in the best
interests of its stockholders. Accordingly, our Board of Directors believes that
it is in the best interest of Wayne Savings Bancshares, Inc. and its
stockholders to encourage potential acquirors to negotiate directly with the
Board of Directors of Wayne Savings Bancshares, Inc. and that these provisions
will encourage such negotiations and discourage hostile takeover attempts. It is
also the view of our Board of Directors that these provisions should not
discourage persons from proposing a merger or other transaction at a price
reflective of the true value of Wayne Savings Bancshares, Inc. and that is in
the best interest of all stockholders.
In addition to the anti-takeover provisions described above, the amended
charter of Wayne Savings Community Bank will prohibit for five years after the
completion of the conversion, directly or indirectly, any offer to acquire or
acquisition of more than 10% of the common stock of Wayne Savings Community
Bank. Further, Office of Thrift Supervision regulations prohibit, without prior
Office of Thrift Supervision approval, the acquisition of more than 10% of any
class of equity security of a converted savings association or its holding
company for three years after completion of the conversion. This provision in
the amended charter and these regulations will further reduce our vulnerability
to takeover attempts during the first five years after the conversion. However,
the Board of Directors believes the anti-takeover provisions described above are
still necessary because the Office of Thrift Supervision could waive the
three-year prohibition against a change in control. Moreover, even if a
potential acquiror is limited to owning no more than 10% of our outstanding
shares for five years after the conversion, the acquiror could still attempt to
effect a change in control of or exercise a controlling influence over Wayne
Savings Bancshares, Inc. and the Board of Directors.
Attempts to acquire control of financial institutions and their holding
companies have become increasingly common. Takeover attempts that have not been
negotiated with and approved by our Board of Directors present the risk of a
takeover on terms that may be less favorable than might otherwise be available.
A transaction that is negotiated and approved by our Board of Directors, on the
other hand, can be carefully planned and undertaken at an opportune time in
order to obtain maximum value of Wayne Savings Bancshares, Inc. for our
stockholders, with due consideration given to matters such as the management and
business of the acquiring corporation and maximum strategic development of Wayne
Savings Bancshares, Inc.'s assets.
An unsolicited takeover proposal can seriously disrupt the business and
management of a corporation and cause it great expense. Although a tender offer
or other takeover attempt may be made at a price substantially above the current
market price, such offers are sometimes made for less than all of the
outstanding shares of a target company. As a result, stockholders may be
presented with the alternative of partially liquidating their investment at a
time that may be disadvantageous, or retaining their investment in an enterprise
that is under different management and whose objectives may not be similar to
those of the remaining stockholders. The concentration of control, which could
result from a tender offer or other takeover attempt, could also deprive our
remaining stockholders of benefits
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of certain protective provisions of the Securities Exchange Act of 1934, if the
number of beneficial owners became less than 300, thereby allowing for
deregistration under the Securities Exchange Act of 1934.
Despite our belief as to the benefits to stockholders of these provisions
of Wayne Savings Bancshares, Inc.'s Delaware certificate of incorporation and
bylaws, these provisions may also have the effect of discouraging a future
takeover attempt that would not be approved by our Board, but pursuant to which
stockholders may receive a substantial premium for their shares over then
current market prices. As a result, stockholders who might desire to participate
in such a transaction may not have any opportunity to do so. Such provisions
will also make it more difficult to remove our Board of Directors and
management. Our Board of Directors, however, has concluded that the potential
benefits outweigh the possible disadvantages.
Following the conversion, pursuant to applicable law and, if required,
following the approval by stockholders, we may adopt additional anti-takeover
charter provisions or other devices regarding the acquisition of our equity
securities that would be permitted for a Delaware business corporation.
The cumulative effect of the restriction on acquisition of Wayne Savings
Bancshares, Inc. contained in the Delaware certificate of incorporation and
bylaws of Wayne Savings Bancshares, Inc. and in Delaware law may be to
discourage potential takeover attempts and perpetuate incumbent management, even
though certain stockholders of Wayne Savings Bancshares, Inc. may deem a
potential acquisition to be in their best interests, or deem existing management
not to be acting in their best interests.
RESTRICTIONS ON ACQUISITION OF WAYNE SAVINGS BANCSHARES, INC.
The following discussion is a summary of certain provisions of federal law
and regulations and corporate law relating to stock ownership and transfers, the
Board of Directors and business combinations, all of which may be deemed to have
"anti-takeover" effects. The description of these provisions is necessarily
general and reference should be made to the actual law and regulations.
Conversion Regulations
Office of Thrift Supervision regulations prohibit any person from making
an offer, announcing an intent to make an offer or participating in any other
arrangement to purchase stock or acquiring stock or subscription rights in a
converting institution or its holding company from another person prior to
completion of its conversion. Further, without the prior written approval of the
Office of Thrift Supervision, no person may make such an offer or announcement
of an offer to purchase shares or actually acquire shares in the converting
institution or its holding company, for a period of three years from the date of
the completion of the conversion if, upon the completion of such offer,
announcement or acquisition, that person would become the beneficial owner of
more than 10% of the outstanding stock of the institution or its holding
company. The Office of Thrift Supervision has defined "person" to include any
individual, group acting in concert, corporation, partnership, association,
joint stock company, trust, unincorporated organization or similar company, a
syndicate or any other group formed for the purpose of acquiring, holding or
disposing of securities of an insured institution. However, offers made
exclusively to an association or its holding company, or an underwriter or
member of a selling group acting on the converting institution's or its holding
company's behalf for resale to the general public are excepted. The regulation
also provides civil penalties for willful violation or assistance in any such
violation of the regulation by any person connected with the management of the
converting institution or its holding company or who controls more than 10% of
the outstanding shares or voting rights of a converted institution or its
holding company.
Amendment to Articles of Incorporation of Wayne Savings Community Bank
In connection with the conversion, the Articles of Incorporation of Wayne
Savings Community Bank will be amended to prohibit for a period of five years
from consummation of the conversion any person from directly or indirectly
offering to acquire or acquiring beneficial ownership of more than 10% of the
common stock of Wayne Savings Community Bank. Shares beneficially owned in
excess of the limit will not be counted as shares entitled to vote and will not
be counted as voting shares in connection with any matter submitted to
stockholders for a vote.
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Change of Control Regulations
Under the Change in Bank Control Act, no person may acquire control of an
insured federal savings association or its parent holding company unless the
Office of Thrift Supervision has been given 60 days' prior written notice and
has not issued a notice disapproving the proposed acquisition. In addition,
Office of Thrift Supervision regulations provide that no company may acquire
control of a savings association without the prior approval of the Office of
Thrift Supervision. Any company that acquires such control becomes a "savings
and loan holding company" subject to registration, examination and regulation by
the Office of Thrift Supervision.
Control, as defined under federal law, means ownership, control of or
holding irrevocable proxies representing more than 25% of any class of voting
stock, control in any manner of the election of a majority of the savings
association's directors, or a determination by the Office of Thrift Supervision
that the acquiror has the power to direct, or directly or indirectly to exercise
a controlling influence over, the management or policies of the institution.
Acquisition of more than 10% of any class of a savings association's voting
stock, if the acquiror is also subject to any one of eight "control factors,"
constitutes a rebuttable determination of control under the regulations. Such
control factors include the acquiror being one of the two largest stockholders.
The determination of control may be rebutted by submission to the Office of
Thrift Supervision, prior to the acquisition of stock or the occurrence of any
other circumstances giving rise to such determination, of a statement setting
forth facts and circumstances which would support a finding that no control
relationship will exist and containing certain undertakings. The regulations
provide that persons or companies which acquire beneficial ownership exceeding
10% or more of any class of a savings association's stock who do not intend to
participate in or seek to exercise control over a savings association's
management or policies must qualify for a safe harbor by filing with the Office
of Thrift Supervision a certification form that the holder is not in control of
such institution, is not subject to a rebuttable determination of control and
will take no action which would result in a determination or rebuttable
determination of control without prior notice to or approval of the Office of
Thrift Supervision, as applicable. There are also rebuttable presumptions in the
regulations concerning whether a group "acting in concert" exists, including
presumed action in concert among members of an "immediate family."
The Office of Thrift Supervision may prohibit an acquisition of control if
it finds, among other things, that:
(1) the acquisition would result in a monopoly or substantially lessen
competition;
(2) the financial condition of the acquiring person might jeopardize the
financial stability of the institution; or
(3) the competence, experience or integrity of the acquiring person
indicates that it would not be in the interest of the depositors or
the public to permit the acquisition of control by such person.
DESCRIPTION OF CAPITAL STOCK OF WAYNE SAVINGS BANCSHARES, INC.
FOLLOWING THE CONVERSION
General
At the effective date, Wayne Savings Bancshares, Inc. will be authorized
to issue 9,000,000 shares of common stock having a par value of $0.10 per share
and 500,000 shares of preferred stock. Wayne Savings Bancshares, Inc. currently
expects to issue in the offering up to 2,357,500 shares of common stock, subject
to adjustment, and up to 2,131,686 shares, subject to adjustment, in exchange
for the publicly held shares of Wayne Savings Bancshares, Inc. Wayne Savings
Bancshares, Inc. will not issue shares of preferred stock in the conversion.
Each share of Wayne Savings Bancshares, Inc. common stock will have the same
relative rights as, and will be identical in all respects with, each other share
of common stock. Upon payment of the subscription price for the common stock, in
accordance with the plan of conversion, all of the common stock will be duly
authorized, fully paid and nonassessable.
The common stock of Wayne Savings Bancshares, Inc. will represent
nonwithdrawable capital, will not be an account of an insurable type, and will
not be insured by the Federal Deposit Insurance Corporation or any other
government agency.
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Common Stock
Dividends. Wayne Savings Bancshares, Inc. may pay dividends out of
statutory surplus or from net profits if, as and when declared by its Board of
Directors. The payment of dividends by Wayne Savings Bancshares, Inc. is subject
to limitations that are imposed by law and applicable regulation. The holders of
common stock of Wayne Savings Bancshares, Inc. will be entitled to receive and
share equally in dividends as may be declared by the Board of Directors of Wayne
Savings Bancshares, Inc. out of funds legally available therefor. If Wayne
Savings Bancshares, Inc. issues preferred stock, the holders thereof may have a
priority over the holders of the common stock with respect to dividends.
Voting Rights. When the conversion is completed, the holders of common
stock of Wayne Savings Bancshares, Inc. will have exclusive voting rights in
Wayne Savings Bancshares, Inc. They will elect Wayne Savings Bancshares, Inc.'s
Board of Directors and act on other matters as are required to be presented to
them under Delaware law or as are otherwise presented to them by the Board of
Directors. Generally, each holder of common stock will be entitled to one vote
per share and will not have any right to cumulate votes in the election of
directors. If Wayne Savings Bancshares, Inc. issues preferred stock, holders of
the preferred stock may also possess voting rights. Certain matters require an
80% stockholder vote.
As an Ohio stock savings association, corporate powers and control of
Wayne Savings Community Bank are vested in its Board of Directors, who elect the
officers of Wayne Savings Community Bank and who fill any vacancies on the Board
of Directors. Voting rights of Wayne Savings Community Bank are vested
exclusively in the owners of the shares of capital stock of Wayne Savings
Community Bank, which will be Wayne Savings Bancshares, Inc., and will be voted
at the direction of Wayne Savings Bancshares, Inc.'s Board of Directors.
Consequently, the holders of the common stock of Wayne Savings Bancshares, Inc.
will not have direct control of Wayne Savings Community Bank.
Liquidation. In the event of any liquidation, dissolution or winding up of
Wayne Savings Community Bank, Wayne Savings Bancshares, Inc., as the holder of
100% of Wayne Savings Community Bank's capital stock, would be entitled to
receive, after payment or provision for payment of all debts and liabilities of
Wayne Savings Community Bank, including all deposit accounts and accrued
interest thereon, and after distribution of the balance in the special
liquidation account to Eligible Account Holders and Supplemental Eligible
Account Holders, all assets of Wayne Savings Community Bank available for
distribution. In the event of liquidation, dissolution or winding up of Wayne
Savings Bancshares, Inc., the holders of its common stock would be entitled to
receive, after payment or provision for payment of all its debts and
liabilities, all of the assets of Wayne Savings Bancshares, Inc. available for
distribution. If preferred stock is issued, the holders thereof may have a
priority over the holders of the common stock in the event of liquidation or
dissolution.
Preemptive Rights. Holders of the common stock of Wayne Savings
Bancshares, Inc. will not be entitled to preemptive rights with respect to any
shares that may be issued. The common stock is not subject to redemption.
Preferred Stock
None of the shares of Wayne Savings Bancshares, Inc.'s authorized
preferred stock will be issued in the conversion. Preferred stock may be issued
with preferences and designations as our Board of Directors may from time to
time determine. Our Board of Directors may, without stockholder approval, issue
preferred stock with voting, dividend, liquidation and conversion rights that
could dilute the voting strength of the holders of the common stock and may
assist management in impeding an unfriendly takeover or attempted change in
control.
TRANSFER AGENT
The transfer agent and registrar for Wayne Savings Bancshares, Inc. common
stock is Mellon Investor Services, LLC, South Hackensack, New Jersey.
121
EXPERTS
The consolidated financial statements as of March 31, 2002 and 2001, and
for each of the three years in the period ended March 31, 2002, included in this
prospectus and registration statement have been audited by Grant Thornton LLP,
independent auditors, as stated in their report appearing herein, and have been
so included in reliance upon the report of such firm given their authority as
experts in accounting and auditing.
RP Financial, LC has consented to the publication herein of the summary of
its report to Wayne Savings Bancshares, Inc. setting forth its opinion as to the
estimated pro forma market value of the common stock upon completion of the
stock offering and its letter with respect to subscription rights.
LEGAL MATTERS
The legality of the common stock has been opined upon for Wayne Savings
Bancshares, Inc. by Luse Gorman Pomerenk & Schick, P.C., Washington, D.C.,
counsel to Wayne Savings Bancshares, Inc. Certain legal matters will be passed
upon for Ryan Beck & Co., Inc. by Drinker Biddle & Reath, LLP, Philadelphia,
Pennsylvania.
ADDITIONAL INFORMATION
Wayne Savings Bancshares, Inc. has filed with the Securities and Exchange
Commission a registration statement under the Securities Act of 1933 with
respect to the common stock offered hereby. As permitted by the rules and
regulations of the Securities and Exchange Commission, this prospectus does not
contain all the information set forth in the registration statement. Such
information, including the appraisal report which is an exhibit to the
registration statement, can be examined without charge at the public reference
facilities of the Securities and Exchange Commission located at 450 Fifth
Street, N.W., Washington, D.C. 20549, and copies of such material can be
obtained from the SEC at prescribed rates. The Securities and Exchange
Commission telephone number is 1-800-SEC-0330. In addition, the SEC maintains a
web site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC, including Wayne Savings Bancshares, Inc. The statements contained
in this prospectus as to the contents of any contract or other document filed as
an exhibit to the Registration Statement are, of necessity, brief descriptions
of the material terms of, and should be read in conjunction with, such contract
or document.
Wayne Savings Bankshares, MHC has filed an Application on Form AC with
respect to the conversion. This prospectus omits certain information contained
in the Application. The Application may be examined at the principal office of
the Office of Thrift Supervision, 1700 G Street, N.W., Washington, D.C. 20552,
and at the Northeast Regional Office of the Office of Thrift Supervision, 10
Exchange Place, 18th Floor, Jersey City, New Jersey 07302.
In connection with the stock offering, Wayne Savings Bancshares, Inc. will
register its common stock with the SEC under Section 12 of the Securities
Exchange Act of 1934, and, upon such registration, Wayne Savings Bancshares,
Inc. and the holders of its stock will become subject to the proxy solicitation
rules, reporting requirements and restrictions on stock purchases and sales by
directors, officers and greater than 10% stockholders, the annual and periodic
reporting and certain other requirements of the Securities Exchange Act of 1934.
Under the stock issuance plan, Wayne Savings Bancshares, Inc. has undertaken
that it will not terminate such registration for a period of at least three
years following the stock offering.
122
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands, except share data)
June 30, March 31,
2002 2002 2001
(Unaudited)
ASSETS
Cash and due from banks $ 2,920 $ 2,250 $ 2,011
Federal funds sold 20,000 15,000 6,000
Interest-bearing deposits in other financial institutions 10,037 10,633 12,891
--------- --------- ---------
Cash and cash equivalents 32,957 27,883 20,902
Certificates of deposit in other financial institutions -- -- 5,700
Investment securities held to maturity - at amortized cost, approximate
market value of $20,702, $22,098 and $13,774 as of June 30, 2002 (unaudited),
March 31, 2002 and 2001, respectively 20,500 22,286 13,641
Mortgage-backed securities available for sale - at market 3,149 3,449 2,911
Mortgage-backed securities held to maturity - at amortized cost, approximate
market value of $14,619, $13,835 and $5,694 as of June 30, 2002 (unaudited),
March 31, 2002 and 2001, respectively 14,634 13,877 5,663
Loans receivable - net 247,230 251,172 246,619
Loans held for sale - at lower of cost or market -- -- 861
Office premises and equipment - net 9,133 9,208 8,780
Real estate acquired through foreclosure -- 19 124
Federal Home Loan Bank stock - at cost 3,910 3,767 3,510
Accrued interest receivable on loans 1,136 1,153 1,328
Accrued interest receivable on mortgage-backed securities 83 83 42
Accrued interest receivable on investments and interest bearing deposits 278 250 211
Prepaid expenses and other assets 1,596 1,688 1,285
Prepaid federal income taxes -- 8 63
--------- --------- ---------
Total assets $ 334,606 $ 334,843 $ 311,640
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits $ 300,737 $ 300,957 $ 277,706
Advances from the Federal Home Loan Bank 5,000 5,000 6,000
Advances by borrowers for taxes and insurance 224 880 827
Accrued interest payable 292 223 245
Accounts payable on mortgage loans serviced for others 242 116 234
Other liabilities 636 853 918
Accrued federal income taxes 201 -- --
Deferred federal income taxes 847 767 455
--------- --------- ---------
Total liabilities 308,179 308,796 286,385
Commitments and contingent liabilities -- -- --
Stockholders' equity
Common stock (20,000,000 shares of $1.00 par value authorized; 2,642,035,
2,640,835 and 2,638,835 shares issued at June 30, 2002, March 31, 2002 and
2001,
respectively) 2,642 2,641 2,639
Additional paid-in capital 14,449 14,444 14,436
Retained earnings - substantially restricted 10,468 10,121 9,150
Less 70,014, 70,014 and 57,042 shares of treasury stock, at June 30, 2002, March 31, 2002
and 2001, respectively - at cost (1,181) (1,181) (1,003)
Accumulated other comprehensive income,
unrealized gain on securities designated as available for sale,
net of related tax effects 49 22 33
--------- --------- ---------
Total stockholders' equity 26,427 26,047 25,255
--------- --------- ---------
Total liabilities and stockholders' equity $ 334,606 $ 334,843 $ 311,640
========= ========= =========
The accompanying notes are an integral part of these statements.
F-3
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Three months ended June 30, 2002 (unaudited) and
years ended March 31, 2002, 2001, and 2000
(Dollars in thousands, except share data)
Unrealized gains
(losses) on
securities Total
Additional Treasury designated stock-
Common paid-in Retained stock - as available holders'
stock capital earnings at cost for sale equity
Balance at April 1, 1999 $ 2,505 $ 12,480 $ 10,381 $ (468) $ 2 $ 24,900
Stock options exercised 2 9 -- -- -- 11
Net earnings for the year ended March 31, 2000 -- -- 1,148 -- -- 1,148
Stock dividend 125 1,904 (2,029) -- -- --
Cash dividends -- -- (882) -- -- (882)
Purchase of treasury shares - at cost -- -- -- (177) -- (177)
Unrealized losses on securities
designated as available for sale,
net of related tax effects -- -- -- -- (38) (38)
-------- -------- -------- -------- -------- --------
Balance at March 31, 2000 2,632 14,393 8,618 (645) (36) 24,962
Stock options exercised 7 43 -- -- -- 50
Net earnings for the year ended March 31, 2001 -- -- 1,332 -- -- 1,332
Cash dividends -- -- (800) -- -- (800)
Purchase of treasury shares - at cost -- -- -- (358) -- (358)
Unrealized gains on securities
designated as available for sale,
net of related tax effects -- -- -- -- 69 69
-------- -------- -------- -------- -------- --------
Balance at March 31, 2001 2,639 14,436 9,150 (1,003) 33 25,255
Stock options exercised 2 8 -- -- -- 10
Net earnings for the year ended March 31, 2002 -- -- 1,823 -- -- 1,823
Cash dividends -- -- (852) -- -- (852)
Purchase of treasury shares - at cost -- -- -- (178) -- (178)
Unrealized losses on securities
designated as available for sale,
net of related tax effects -- -- -- -- (11) (11)
-------- -------- -------- -------- -------- --------
Balance at March 31, 2002 2,641 14,444 10,121 (1,181) 22 26,047
Stock options exercised 1 5 -- -- -- 6
Net earnings for the period ended
June 30, 2002 -- -- 554 -- -- 554
Cash dividends -- -- (207) -- -- (207)
Unrealized gains on securities designated
as available for sale, net of related
tax effects -- -- -- -- 27 27
-------- -------- -------- -------- -------- --------
Balance at June 30, 2002 (unaudited) $ 2,642 $ 14,449 $ 10,468 $ (1,181) $ 49 $ 26,427
======== ======== ======== ======== ======== ========
The accompany notes are an integral part of these statements.
F-4
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
(In thousands)
For the three months ended For the year ended
June 30, March 31,
2002 2001 2002 2001 2000
(unaudited)
Cash flows provided by (used in) operating activities:
Net earnings for the period $ 554 $ 375 $ 1,823 $ 1,332 $ 1,148
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Amortization of discounts and premiums on loans,
investments and mortgage-backed securities-- net 38 6 (3) (16) 90
Amortization of deferred loan origination fees (86) (94) (432) (161) (532)
Depreciation and amortization 145 113 590 555 653
(Gain) loss on sale of loans (7) (12) (241) (62) 42
Proceeds from sale of loans in the secondary market 3,330 6,395 27,371 9,247 6,383
Loans originated for sale in the secondary market -- (5,522) (26,269) (9,729) (5,157)
Provision for losses on loans 17 2 134 96 106
Loss on disposal of real estate acquired through foreclosure -- -- -- -- 6
Federal Home Loan Bank stock dividends (45) (64) (219) (247) (241)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans 17 54 175 (73) (127)
Accrued interest receivable on mortgage-backed securities -- 3 (41) 18 (31)
Accrued interest receivable on investments
and interest-bearing deposits (28) 9 (39) 143 (165)
Prepaid expenses and other assets 100 (1,138) (403) (272) 965
Accrued interest payable 69 64 (22) 17 49
Accounts payable on mortgage loans serviced for others 127 12 (118) 134 (8)
Other liabilities (218) (554) (65) 282 70
Federal income taxes
Current 209 203 55 208 63
Deferred 66 30 319 44 9
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities 4,288 (118) 2,615 1,516 3,323
Cash flows provided by (used in) investing activities:
Purchase of investment securities held to maturity -- -- (16,250) (2,477) (13,411)
Proceeds from maturity of investment securities held to maturity 1,786 1,517 7,617 12,069 2,080
Purchase of mortgage-backed securities held to maturity (1,952) -- (12,108) (2,025) (7,008)
Purchase of mortgage-backed securities available for sale -- -- (2,047) -- (1,022)
Principal repayments on mortgage-backed securities held to maturity 1,165 1,209 3,894 3,344 3,311
Principal repayments on mortgage-backed securities
designated as available for sale 339 252 1,482 653 1,289
Loan principal repayments 16,435 16,533 66,077 56,485 37,105
Loan disbursements (15,758) (24,566) (70,239) (65,986) (59,792)
Purchase of office premises and equipment (70) (388) (1,018) (1,115) (1,361)
Proceeds from sale of land -- -- -- 235 --
Proceeds from sale of real estate acquired through foreclosure 16 12 12 14 5
(Increase) decrease in certificates of deposit in other
financial institutions -- 5,700 5,700 (1,700) 2,000
Purchase of Federal Home Loan Bank stock (98) (38) (38) (103) --
-------- -------- -------- -------- --------
Net cash provided by (used in) investing activities 1,863 231 (16,918) (606) (36,804)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating and investing
activities (balance carried forward) 6,151 113 (14,303) 910 (33,481)
-------- -------- -------- -------- --------
F-5
Wayne Savings Bancshares, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
(In thousands)
For the three months ended For the year ended
June 30, March 31,
2002 2001 2002 2001 2000
(unaudited)
Net cash provided by (used in) operating and investing
activities (balance brought forward) $ 6,151 $ 113 $(14,303) $ 910 $(33,481)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts (220) 6,678 23,251 12,754 29,625
Proceeds from Federal Home Loan Bank advances -- 5,000 5,000 11,000 4,000
Repayments of Federal Home Loan Bank advances -- (5,000) (6,000) (17,000) (1,000)
Advances by borrowers for taxes and insurance (656) (505) 53 50 (45)
Dividends paid on common stock (207) (205) (852) (800) (882)
Proceeds from exercise of stock options 6 -- 10 50 11
Purchase of treasury shares - at cost -- (140) (178) (358) (177)
-------- -------- -------- -------- --------
Net cash provided by (used in) financing activities (1,077) 5,828 21,284 5,696 31,532
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents 5,074 5,941 6,981 6,606 (1,949)
Cash and cash equivalents at beginning of period 27,883 20,902 20,902 14,296 16,245
-------- -------- -------- -------- --------
Cash and cash equivalents at end of period $ 32,957 $ 26,843 $ 27,883 $ 20,902 $ 14,296
======== ======== ======== ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes $ 10 $ 20 $ 637 $ 490 $ 516
======== ======== ======== ======== ========
Interest on deposits and borrowings $ 2,429 $ 3,280 $ 12,370 $ 13,083 $ 11,965
======== ======== ======== ======== ========
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure $ -- $ -- $ -- $ 98 $ 64
======== ======== ======== ======== ========
Issuance of mortgage loan upon sale of real estate
acquired through foreclosure $ 450 $ 93 $ 93 $ 50 $ --
======== ======== ======== ======== ========
Unrealized gains (losses) on securities designated as available
for sale, net of related tax effects $ 27 $ 5 $ (11) $ 69 $ (38)
======== ======== ======== ======== ========
Recognition of mortgage servicing rights
in accordance with SFAS No. 140 $ 9 $ 64 $ 273 $ 92 $ 64
======== ======== ======== ======== ========
Supplemental disclosure of noncash financing activities:
Acquisition of treasury stock in exchange for outstanding shares $ -- $ 140 $ -- $ -- $ --
======== ======== ======== ======== ========
The accompanying notes are an integral part of these statements.
F-6
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include Wayne Savings Bancshares, Inc.
(the "Company") and its wholly-owned subsidiary Wayne Savings Community Bank
("Wayne Savings" or the "Bank"). A majority (52.5%) of the Company's shares are
owned by Wayne Savings Bankshares M.H.C. ("Bankshares," "parent" or "M.H.C."), a
mutual holding company, as defined under Office of Thrift Supervision ("OTS")
regulations. In fiscal 1999, Bankshares and Wayne Savings formed a new federal
savings bank subsidiary of Wayne Savings in North Canton, Ohio, Village Savings
Bank, F.S.B. ("Village"), hereinafter collectively referred to as "the Banks."
Intercompany transactions and balances are eliminated in the consolidated
financial statements.
The Banks conduct a general banking business in north central Ohio which
consists of attracting deposits from the general public and applying those funds
to the origination of loans for residential, consumer and nonresidential
purposes. The Banks' profitability is significantly dependent on their net
interest income, which is the difference between interest income generated from
interest-earning assets (i.e. loans and investments) and the interest expense
paid on interest-bearing liabilities (i.e. customer deposits and borrowed
funds). Net interest income is affected by the relative amount of
interest-earning assets and interest-bearing liabilities and the interest
received or paid on these balances. The level of interest rates paid or received
by the Banks can be significantly influenced by a number of environmental
factors, such as governmental monetary policy, that are outside of management's
control.
The financial information presented herein has been prepared in accordance with
accounting principles generally accepted in the United States of America ("U.S.
GAAP") and general accounting practices within the financial services industry.
In preparing financial statements in accordance with U.S. GAAP, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the
reporting period. Actual results could differ from such estimates.
The following is a summary of the Company's significant accounting policies,
which have been consistently applied in the preparation of the accompanying
financial statements.
1. Investment Securities and Mortgage-Backed Securities
The Company accounts for investment and mortgage-backed securities in accordance
with Statement of Financial Accounting Standards ("SFAS") No. 115 "Accounting
for Certain Investments in Debt and Equity Securities." SFAS No. 115 requires
that investments be categorized as held-to-maturity, trading, or available for
sale. Securities classified as held-to-maturity are carried at cost only if the
Company has the positive intent and ability to hold these securities to
maturity. Trading securities and securities designated as available for sale are
carried at fair value with resulting unrealized gains or losses recorded to
operations or stockholders' equity, respectively. Realized gains or losses on
sales of securities are recognized using the specific identification method.
2. Loans Receivable
Loans held in portfolio are stated at the principal amount outstanding, adjusted
for deferred loan origination fees, the allowance for loan losses, and premiums
and discounts on loans purchased and sold. Premiums and discounts on loans
purchased and sold are amortized and accreted to operations using the interest
method over the average life of the underlying loans.
F-7
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
2. Loans Receivable (continued)
Interest is accrued as earned unless the collectibility of the loan is in doubt.
Uncollectible interest on loans that are contractually past due is charged off,
or an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued, and income is subsequently recognized only to the extent
that cash payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments has returned to normal,
in which case the loan is returned to accrual status.
The Banks recognize rights to service mortgage loans for others pursuant to SFAS
No. 140 "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities." In accordance with SFAS No. 140, an institution
that acquires mortgage servicing rights through either the purchase or
origination of mortgage loans and sells those loans with servicing rights
retained must allocate some of the cost of the loans to the mortgage servicing
rights.
The Banks recognized $9,000, $64,000, $273,000, $92,000 and $64,000 of pre-tax
gains on sales of loans related to capitalized mortgage servicing rights during
the three month periods ended June 30, 2002 and 2001 and the fiscal years ended
March 31, 2002, 2001 and 2000, respectively.
SFAS No. 140 requires that capitalized mortgage servicing rights and capitalized
excess servicing receivables be assessed for impairment. Impairment is measured
based on fair value. The mortgage servicing rights recorded by the Banks,
calculated in accordance with the provisions of SFAS No. 140, were segregated
into pools for valuation purposes, using as pooling criteria the loan term and
coupon rate. Once pooled, each grouping of loans was evaluated on a discounted
earnings basis to determine the present value of future earnings that a
purchaser could expect to realize from each portfolio. Earnings were projected
from a variety of sources including loan servicing fees, interest earned on
float, net interest earned on escrows, miscellaneous income and costs to service
the loans. The present value of future earnings is the "economic" value for the
pool, i.e., the net realizable present value to an acquirer of the acquired
servicing.
The Banks recorded amortization related to mortgage servicing rights totaling
approximately $23,000, $15,000, $109,000, $52,000 and $44,000 for the three
month periods ended June 30, 2002 and 2001 and the years ended March 31, 2002,
2001 and 2000, respectively. At June 30, 2002, March 31, 2002 and 2001, the
carrying value of the Banks' mortgage servicing rights, which approximated fair
value, totaled $507,000, $521,000 and $357,000, respectively.
Loans held for sale are carried at the lower of cost or market, determined in
the aggregate. In computing cost, deferred loan origination fees are deducted
from the principal balances of the related loans. There were no loans identified
as held for sale at June 30, 2002, or March 31, 2002. At March 31, 2001, loans
held for sale were carried at cost.
F-8
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
3. Loan Origination Fees
The Banks account for loan origination fees in accordance with SFAS No. 91
"Accounting for Nonrefundable Fees and Costs Associated with Originating or
Acquiring Loans and Initial Direct Costs of Leases." Pursuant to the provisions
of SFAS No. 91, origination fees received from loans, net of certain direct
origination costs, are deferred and amortized to interest income using the
level-yield method, giving effect to actual loan prepayments. Additionally, SFAS
No. 91 generally limits deferred loan origination costs to the direct costs
attributable to the origination of a loan, i.e. principally, actual personnel
costs. Fees received for loan commitments that are expected to be drawn upon,
based on the Banks' experience with similar commitments, are deferred and
amortized over the life of the loan using the level-yield method. Fees for other
loan commitments are deferred and amortized over the loan commitment period on a
straight-line basis.
4. Allowance for Loan Losses
It is the Banks' policy to provide valuation allowances for losses inherent
within the loan portfolio that are both probable and can be reasonably
estimated. When the collection of a loan becomes doubtful, or otherwise
troubled, the Banks record a charge-off equal to the difference between the fair
value of the property securing the loan and the loan's carrying value. In
providing valuation allowances, costs of holding real estate, including the cost
of capital, are considered. Major loans (including development projects) and
major lending areas are reviewed periodically to determine potential problems at
an early date. The allowance for loan losses is increased by charges to earnings
and decreased by charge-offs (net of recoveries).
The Banks account for impaired loans in accordance with SFAS No. 114,
"Accounting by Creditors for Impairment of a Loan." This Statement requires that
impaired loans be measured based upon the present value of expected future cash
flows discounted at the loan's effective interest rate or, as an alternative, at
the loan's observable market price or fair value of the collateral.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
applying the provisions of SFAS No. 114, the Banks consider investment in
one-to-four family residential loans and consumer installment loans to be
homogeneous and therefore excluded from separate identification for evaluation
of impairment. With respect to the Banks' investment in multi-family, commercial
and nonresidential loans, and the evaluation of impairment thereof, such loans
are collateral dependent and, as a result, are carried as a practical expedient
at the lower of cost or fair value.
It is the Banks' policy to charge off unsecured credits that are more than
ninety days delinquent. Similarly, collateral dependent loans are evaluated for
impairment at the time it becomes possible that the Banks will not collect all
contractual amounts due. Generally, this analysis is performed before a loan
becomes ninety days delinquent.
F-9
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
4. Allowance for Loan Losses (continued)
Information with respect to loans defined as impaired under SFAS No. 114 is
summarized below:
As of and for the As of and for the
three months ended year ended
June 30, March 31,
2002 2001 2002 2001 2000
(unaudited)
(In thousands)
Investment in impaired loans $2,448 $1,165 $3,012 $ 645 $ 940
Impaired loans with no measurement of loss 2,448 1,165 2,493 645 940
Impaired loans with measurement of loss -- -- 519 -- --
Allocated allowance for loan losses -- -- 105 -- --
Average impaired loans 2,942 816 1,829 793 947
Charge-off of principal related to impaired loans 84 -- -- 172 --
Recoveries of charged-off principal related to impaired loans -- -- -- -- --
During the time a loan is deemed impaired, the Company records interest income
using the cash method of accounting. Interest income on impaired loans totaled
approximately $31,000, $17,000, $233,000, $71,000 and $85,000 for the three
month periods ended June 30, 2002 and 2001 and the fiscal years ended March 31,
2002, 2001 and 2000, respectively.
5. Office Premises and Equipment
Office premises and equipment are carried at cost and include expenditures,
which extend the useful lives of existing assets. Maintenance, repairs and minor
renewals are expensed as incurred. For financial reporting, depreciation and
amortization are provided on the straight-line method over the remaining useful
lives of the assets, estimated to be twenty to fifty-five years for buildings
and substantial improvements that extend the life of the original building, ten
to twenty years for routine building improvements, five to ten years for
furniture and equipment, ten to twenty years for leasehold improvements (where
the Company has the sole discretion to renew the lease) and forty years for safe
deposit boxes.
6. Real Estate Acquired Through Foreclosure
Real estate acquired through foreclosure is carried at the lower of the loan's
unpaid principal balance (cost) or fair value less estimated selling expenses at
the date of acquisition. Real estate loss provisions are recorded if the
properties' fair value subsequently declines below the value determined at the
recording date. In determining the lower of cost or fair value at acquisition,
costs relating to development and improvement of property are capitalized. Costs
relating to holding real estate acquired through foreclosure, net of rental
income, are charged against earnings as incurred.
F-10
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
7. Federal Income Taxes
The Company accounts for federal income taxes pursuant to SFAS No. 109
"Accounting for Income Taxes." In accordance with SFAS No. 109, a deferred tax
liability or deferred tax asset is computed by applying the current statutory
tax rates to net taxable or deductible temporary differences between the tax
basis of an asset or liability and its reported amount in the financial
statements that will result in net taxable or deductible amounts in future
periods. Deferred tax assets are recorded only to the extent that the amount of
net deductible temporary differences or carryforward attributes may be utilized
against current period earnings, carried back against prior years' earnings,
offset against taxable temporary differences reversing in future periods, or
utilized to the extent of management's estimate of future taxable income. A
valuation allowance is provided for deferred tax assets to the extent that the
value of net deductible temporary differences and carryforward attributes
exceeds management's estimates of taxes payable on future taxable income.
Deferred tax liabilities are provided on the total amount of net temporary
differences taxable in the future.
The Company's principal temporary differences between pretax financial income
and taxable income result primarily from the different methods of accounting for
deferred loan origination fees, Federal Home Loan Bank stock dividends, certain
components of retirement expense, general loan loss allowances, percentage of
earnings bad debt deductions and mortgage servicing rights. A temporary
difference is also recognized for depreciation expense computed using
accelerated methods for federal income tax purposes.
8. Earnings Per Share
Basic earnings per common share is computed based upon the weighted-average
number of common shares outstanding during the period. Diluted earnings per
common share include the dilutive effect of additional potential common shares
issuable under the Company's stock option plan. For each of the periods
presented, there were no shares excluded from the diluted earnings per share
calculation because the related options were anti-dilutive. The computations
were as follows:
June 30, March 31,
2002 2001 2002 2001 2000
(unaudited)
Weighted-average common shares
outstanding (basic) 2,571,230 2,574,113 2,570,980 2,596,754 2,602,141
Dilutive effect of assumed exercise
of stock options 10,803 11,019 10,836 11,752 18,735
--------- --------- --------- --------- ---------
Weighted-average common shares
outstanding (diluted) 2,582,033 2,585,132 2,581,816 2,608,506 2,620,876
========= ========= ========= ========= =========
9. Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents include cash and
due from banks, federal funds sold, and interest-bearing deposits due from other
financial institutions with original maturities of less than three months.
F-11
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
10. Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of the fair value of financial instruments, both assets and
liabilities whether or not recognized in the consolidated statements of
financial condition, for which it is practicable to estimate that value. For
financial instruments where quoted market prices are not available, fair values
are based on estimates using present value and other valuation methods.
The methods used are greatly affected by the assumptions applied, including the
discount rate and estimates of future cash flows. Therefore, the fair values
presented may not represent amounts that could be realized in an exchange for
certain financial instruments.
The following methods and assumptions were used by the Company in estimating its
fair value disclosures for financial instruments at June 30, 2002 and March 31,
2002 and 2001:
Cash and cash equivalents: The carrying amounts presented in the
consolidated statements of financial condition for cash and cash
equivalents are deemed to approximate fair value.
Certificates of deposit in other financial institutions: The carrying
amounts presented in the consolidated statements of financial condition
for certificates of deposit in other financial institutions are deemed to
approximate fair value.
Investment and mortgage-backed securities: For investment and
mortgage-backed securities, fair value is deemed to equal the quoted
market price.
Loans receivable: The loan portfolio has been segregated into categories
with similar characteristics, such as one-to-four family residential,
multi-family residential and nonresidential real estate. These loan
categories were further delineated into fixed-rate and adjustable-rate
loans. The fair values for the resultant loan categories were computed via
discounted cash flow analysis, using current interest rates offered for
loans with similar terms to borrowers of similar credit quality. For loans
on deposit accounts and consumer and other loans, fair values were deemed
to equal the historic carrying values. The historical carrying amount of
accrued interest on loans is deemed to approximate fair value.
Federal Home Loan Bank stock: The carrying amount presented in the
consolidated statements of financial condition is deemed to approximate
fair value.
Deposits: The fair value of NOW accounts, passbook and club accounts,
money market deposits and advances by borrowers is deemed to approximate
the amount payable on demand. Fair values for fixed-rate certificates of
deposit have been estimated using a discounted cash flow calculation using
the interest rates currently offered for deposits of similar remaining
maturities.
Advances from Federal Home Loan Bank: The fair value of these advances is
estimated using the rates currently offered for similar advances of
similar remaining maturities or, when available, quoted market prices.
F-12
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
10. Fair Value of Financial Instruments (continued)
Commitments to extend credit: For fixed-rate and adjustable-rate loan
commitments, the fair value estimate considers the difference between
current levels of interest rates and committed rates. At June 30, 2002,
March 31, 2002 and 2001, the difference between the fair value and
notional amount of loan commitments was not material.
Based on the foregoing methods and assumptions, the carrying value and fair
value of the Company's financial instruments are as follows:
June 30, March 31,
2002 2002 2001
Carrying Fair Carrying Fair Carrying Fair
value value value value value value
(unaudited)
(In thousands)
Financial assets
Cash and cash equivalents and
certificates of deposit $ 32,957 $ 32,957 $ 27,883 $ 27,883 $ 26,602 $ 26,602
Investment securities 20,500 20,702 22,286 22,098 13,641 13,774
Mortgage-backed securities 17,783 17,768 17,326 17,284 8,574 8,605
Loans receivable 247,230 258,385 251,172 253,233 247,480 259,538
Federal Home Loan Bank stock 3,910 3,910 3,767 3,767 3,510 3,510
-------- -------- -------- -------- -------- --------
$322,380 $333,722 $322,434 $324,265 $299,807 $312,029
======== ======== ======== ======== ======== ========
Financial liabilities
Deposits $300,737 $302,102 $300,957 $301,292 $277,706 $278,715
Advances from the Federal Home
Loan Bank 5,000 5,015 5,000 5,025 6,000 6,000
Advances by borrowers for taxes
and insurance 224 224 880 880 827 827
-------- -------- -------- -------- -------- --------
$305,961 $307,341 $306,837 $307,197 $284,533 $285,542
======== ======== ======== ======== ======== ========
11. Advertising
Advertising costs are expensed when incurred. The Company's advertising expense
totaled $41,000, $35,000, $136,000, $106,000 and $148,000 for the three month
periods ended June 30, 2002 and 2001 and the fiscal years ended March 31, 2002,
2001 and 2000, respectively.
12. Organization Costs
The Company's consolidated financial statements for fiscal 2000 reflect the
adoption of Statement of Position 98-5 (SOP 98-5) which requires immediate
recognition of previously deferred expenses related to incorporation costs. The
Company's organization costs were previously reimbursed in a manner similar to
the M.H.C. allocations discussed in Note O. Accordingly, in accordance with SOP
98-5, the effect of the change in accounting principle related to organization
costs, totaling $122,000 after consideration of $63,000 of tax effects, has been
recognized in the consolidated statements of earnings for fiscal 2000.
F-13
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
13. Basis of Presentation
The accompanying unaudited consolidated financial statements for the three
months ended June 30, 2002 and 2001 were prepared in accordance with
instructions for Form 10-QSB and, therefore, do not include information or
footnotes necessary for a complete presentation of financial position, results
of operations and cash flows in conformity with accounting principles generally
accepted in the United States of America.
In the opinion of management, all adjustments (consisting only of normal
recurring accruals) which are necessary for a fair presentation of the unaudited
financial statements have been included. The results of operations for the
three-month period ended June 30, 2002 is not necessarily indicative of the
results which may be expected for the entire fiscal year.
14. Reclassifications
Certain prior year amounts have been reclassified to conform to the 2002
consolidated financial statement presentation.
F-14
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES
Carrying values and estimated fair values of investment securities are
summarized as follows:
June 30, 2002
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(Unaudited)
(In thousands)
Corporate bonds and notes $ 2,999 $ 42 $ -- $ 3,041
U.S. Government and agency obligations 17,370 173 (24) 17,519
Municipal obligations 131 11 -- 142
----------- ----------- ----------- -----------
$ 20,500 $ 226 $ (24) $ 20,702
=========== =========== =========== ===========
March 31, 2002
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Corporate bonds and notes $ 2,998 $ 53 $ -- $ 3,051
U.S. Government and agency obligations 19,152 56 (304) 18,904
Municipal obligations 136 7 -- 143
----------- ----------- ----------- -----------
$ 22,286 $ 116 $ (304) $ 22,098
=========== =========== =========== ===========
March 31, 2001
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Corporate bonds and notes $ 3,994 $ 74 $ (7) $ 4,061
U.S. Government and agency obligations 9,501 66 -- 9,567
Municipal obligations 146 -- -- 146
----------- ----------- ----------- -----------
$ 13,641 $ 140 $ (7) $ 13,774
=========== =========== =========== ===========
F-15
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
The amortized cost and estimated fair value of investment securities by term
to maturity are shown below.
June 30, 2002 March 31, 2002
Amortized Estimated Amortized Estimated
cost fair value cost fair value
(Unaudited)
(In thousands)
Due in one year or less $ 4,499 $ 4,550 $ 2,998 $ 3,049
Due within one to three years 7,015 7,114 3,519 3,544
Due within three to five years 6,500 6,563 12,200 12,081
Due in over five years 2,486 2,475 3,569 3,424
------------ ------------ ------------ ------------
$ 20,500 $ 20,702 $ 22,286 $ 22,098
============ ============ ============ ============
The Company had pledged $3.2 million, $2.3 million and $1.0 million in
investment securities to secure public deposits at June 30, 2002, March 31, 2002
and 2001, respectively.
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values of mortgage-backed securities at June 30, 2002, March 31,
2002 and 2001, including those designated as available for sale, are summarized
as follows:
June 30, 2002
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(Unaudited)
(In thousands)
Held-to-maturity
Federal Home Loan Mortgage Corporation
participation certificates $ 3,494 $ -- $ (32) $ 3,462
Government National Mortgage Association
participation certificates 3,864 23 (8) 3,879
Federal National Mortgage Association
participation certificates 7,276 34 (32) 7,278
----------- ----------- ----------- -----------
$ 14,634 $ 57 $ (72) $ 14,619
=========== =========== =========== ===========
Available for sale
Federal Home Loan Mortgage Corporation
participation certificates $ 1,529 $ 42 $ -- $ 1,571
Government National Mortgage Association
participation certificates 55 8 -- 63
Federal National Mortgage Association
participation certificates 1,490 25 -- 1,515
----------- ----------- ----------- -----------
$ 3,074 $ 75 $ -- $ 3,149
=========== =========== =========== ===========
F-16
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
March 31, 2002
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Held-to-maturity
Federal Home Loan Mortgage Corporation
participation certificates $ 4,452 $ -- $ (45) $ 4,407
Government National Mortgage Association
participation certificates 2,558 16 (12) 2,562
Federal National Mortgage Association
participation certificates 6,867 29 (30) 6,866
----------- ----------- ----------- -----------
$ 13,877 $ 45 $ (87) $ 13,835
=========== =========== =========== ===========
Available for sale
Federal Home Loan Mortgage Corporation
participation certificates $ 1,687 $ 25 $ (5) $ 1,707
Government National Mortgage Association
participation certificates 55 9 -- 64
Federal National Mortgage Association
participation certificates 1,674 20 (16) 1,678
----------- ----------- ----------- -----------
$ 3,416 $ 54 $ (21) $ 3,449
=========== =========== =========== ===========
March 31, 2001
Gross Gross Estimated
Amortized unrealized unrealized fair
cost gains losses value
(In thousands)
Held-to-maturity
Federal Home Loan Mortgage Corporation
participation certificates $ 1,118 $ 7 $ (4) $ 1,121
Government National Mortgage Association
participation certificates 2,013 49 (13) 2,049
Federal National Mortgage Association
participation certificates 2,532 4 (12) 2,524
----------- ----------- ----------- -----------
$ 5,663 $ 60 $ (29) $ 5,694
=========== =========== =========== ===========
Available for sale
Federal Home Loan Mortgage Corporation
participation certificates $ 1,220 $ 35 $ -- $ 1,255
Government National Mortgage Association
participation certificates 86 11 -- 97
Federal National Mortgage Association
participation certificates 1,552 8 (1) 1,559
----------- ----------- ----------- -----------
$ 2,858 $ 54 $ (1) $ 2,911
=========== =========== =========== ===========
The amortized cost of mortgage-backed securities, including those designated as
available for sale at June 30, 2002 and March 31, 2002, by contractual term to
maturity are shown below. Expected maturities will differ from contractual
maturities because borrowers may generally prepay obligations without prepayment
penalties.
F-17
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE B - INVESTMENT AND MORTGAGE-BACKED SECURITIES (continued)
June 30, 2002 March 31, 2002
Amortized Cost Amortized Cost
(Unaudited)
(In thousands)
Held-to-maturity
Due within one to three years $ 19 $ 30
Due after twenty years or thereafter 14,615 13,847
------- -------
$14,634 $13,877
Available for sale
Due within one to three years $ 294 $ 1,016
Due after five years 2,780 2,400
------- -------
$ 3,074 $ 3,416
======= =======
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio is as follows:
June 30, March 31,
2002 2002 2001
(Unaudited)
(In thousands)
Residential real estate - 1 to 4 family $216,348 $218,981 $215,464
Residential real estate - multi-family 8,015 7,368 9,039
Residential real estate - construction 11,920 8,728 7,078
Nonresidential real estate and land 7,616 9,725 7,525
Education 42 1,530 2,143
Commercial 6,595 5,832 4,765
Consumer and other 4,432 5,730 7,487
-------- -------- --------
254,968 257,894 253,501
Less:
Undisbursed portion of loans in
process 5,769 4,616 4,764
Deferred loan origination fees 1,332 1,376 1,463
Allowance for loan losses 637 730 655
-------- -------- --------
$247,230 $251,172 $246,619
======== ======== ========
As depicted above, the Banks' lending efforts have historically focused on
one-to-four family residential and multi-family residential real estate loans,
which comprise approximately $230.5 million, or 93% of the total loan portfolio
at June 30, 2002, $230.5 million, or 92%, of the total loan portfolio at March
31, 2002, and $226.8 million, or 92%, of the total loan portfolio at March 31,
2001. Generally, such loans have been underwritten on the basis of no more than
an 80% loan-to-value ratio, which has historically provided the Company with
adequate collateral coverage in the event of default. Nevertheless, the Banks,
as with any lending institution, are subject to the risk that real estate values
could deteriorate in their primary lending areas of north central Ohio, thereby
impairing collateral values. However, management is of the belief that
residential real estate values in the Company's primary lending area are
presently stable.
As discussed previously, Wayne Savings has sold whole loans and participating
interests in loans in the secondary market, retaining servicing on the loans
sold. Loans sold and serviced for others totaled approximately $58.9 million,
$50.4 million, $60.6 million, $47.1 million and $44.3 million at June 30, 2002
and 2001, and March 31, 2002, 2001 and 2000, respectively.
F-18
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE C - LOANS RECEIVABLE (continued)
In the normal course of business, the Banks have made loans to their directors,
officers and their related business interests. Related party loans are made on
the same terms that are widely available to other employees, as long as the
director or executive officer is not given preferential treatment compared to
other participating employees. The aggregate dollar amount of loans outstanding
to directors, officers and their related business interests totaled
approximately $2.5 million, $2.5 million, $371,000 and $189,000 at June 30, 2002
and at March 31, 2002, 2001 and 2000, respectively. During the three month
period ended June 30, 2002, the Company disbursed $50,000 of loans to officers
and directors and received principal repayments of $24,000. During fiscal 2002,
the Company disbursed $2.4 million of loans to officers and directors and
received principal repayments of $280,000. At June 30, 2002 and at March 31,
2002, $2.1 million of the outstanding loans to officers and directors was a
nonresidential real estate loan with the remainder consisting of residential
real estate and consumer loans.
NOTE D - ALLOWANCE FOR LOAN LOSSES
The activity in the allowance for loan losses is summarized as follows:
For the period ended For the year ended
June 30, March 31,
2002 2001 2002 2001 2000
(Unaudited)
(In thousands)
Balance at beginning of period $ 730 $ 655 $ 655 $ 793 $ 692
Provision for losses on loans 17 2 134 96 106
Charge-offs of loans (111) (2) (63) (240) (33)
Recovery of loans previously
charged off 1 1 4 6 28
----- ----- ----- ----- -----
Balance at end of period $ 637 $ 656 $ 730 $ 655 $ 793
===== ===== ===== ===== =====
As of June 30, 2002 and March 31, 2002, the Banks' allowance for loan losses was
substantially comprised of a general loan loss allowance, which is includible as
a component of regulatory risk-based capital.
Nonaccrual, nonperforming and impaired loans totaled approximately $3.4 million,
$2.9 million, $3.8 million, $1.2 million and $1.1 million at June 30, 2002 and
2001, and at March 31, 2002, 2001 and 2000, respectively.
During the three month periods ended June 30, 2002 and 2001, interest income of
approximately $49,000 and $8,000, respectively, would have been recognized had
nonaccrual loans been performing in accordance with contractual terms.
During the years ended March 31, 2002, 2001 and 2000, interest income of
approximately $99,000, $12,000 and $8,000, respectively, would have been
recognized had nonaccrual loans been performing in accordance with contractual
terms.
F-19
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE E - OFFICE PREMISES AND EQUIPMENT
Office premises and equipment are comprised of the following:
June 30, March 31,
2002 2002 2001
(Unaudited)
(In thousands)
Land and improvements $ 1,617 $ 1,617 $ 1,615
Office buildings and improvements 6,881 6,439 6,469
Furniture, fixtures and equipment 4,148 4,452 3,931
Leasehold improvements 354 354 60
------- ------- -------
13,000 12,862 12,075
Less accumulated depreciation
and amortization 3,867 3,654 3,295
------- ------- -------
$ 9,133 $ 9,208 $ 8,780
======= ======= =======
F-20
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE F - DEPOSITS
Deposits consist of the following major classifications:
June 30, March 31,
2002 2002 2001
(Unaudited)
Deposit type and weighted- (In thousands)
average interest rate
NOW accounts
June 30, 2002 - .91% $ 41,280
March 31, 2002 - .96% $ 38,396
March 31, 2001 - 1.73% $ 33,642
Passbook
June 30, 2002 - 2.17% 81,903
March 31, 2002 - 2.25% 77,485
March 31, 2001 - 3.18% 54,574
Money Market Investor
June 30, 2002 - 1.86% 13,673
March 31, 2002 - 2.13% 11,809
March 31, 2001 - 3.23% 8,905
-------- -------- --------
Total demand, transaction and
passbook deposits 136,856 127,690 97,121
Certificates of deposit
Original maturities of:
Less than 12 months
June 30, 2002 - 2.48% 23,614
March 31, 2002 - 3.09% 28,497
March 31, 2001 - 5.51% 25,494
12 months to 24 months
June 30, 2002 - 4.13% 71,462
March 31, 2002 - 4.74% 81,005
March 31, 2001 - 6.03% 101,105
25 months to 36 months
June 30, 2002 - 4.62% 11,590
March 31, 2002 - 4.57% 9,628
March 31, 2001 - 5.26% 10,036
More than 36 months
June 30, 2002 - 5.08% 16,338
March 31, 2002 - 5.15% 11,843
March 31, 2001 - 5.56% 6,175
Jumbo
June 30, 2002 - 4.96% 40,877
March 31, 2002 - 5.30% 42,294
March 31, 2001 - 6.46% 37,775
-------- -------- --------
Total certificates of deposit 163,881 173,267 180,585
-------- -------- --------
Total deposit accounts $300,737 $300,957 $277,706
======== ======== ========
At June 30, 2002 and at March 31, 2002 and 2001, the Banks had certificates of
deposit with balances in excess of $100,000 totaling $39.1 million, $41.4
million and $37.4 million, respectively. Deposits greater than $100,000 are
generally not federally insured.
F-21
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE F - DEPOSITS (continued)
Interest expense on deposits is summarized as follows:
Three month periods ended Years ended
June 30, March 31,
2002 2001 2002 2001 2000
(Unaudited)
(In thousands)
Passbook $ 444 $ 429 $ 1,674 $ 1,642 $ 1,569
NOW and money market
deposit accounts 157 217 771 875 979
Certificates of deposit 1,832 2,616 9,610 10,135 8,982
------- ------- ------- ------- -------
$ 2,433 $ 3,262 $12,055 $12,652 $11,530
======= ======= ======= ======= =======
Maturities of outstanding certificates of deposit are summarized as follows:
At June 30, At March 31,
2002 2002 2001
(Unaudited)
(In thousands)
Less than one year $123,456 $142,486 $129,044
One to three years 27,083 22,282 48,533
Over three years 13,342 8,499 3,008
-------- -------- --------
$163,881 $173,267 $180,585
======== ======== ========
NOTE G - ADVANCES FROM THE FEDERAL HOME LOAN BANK
Advances from the Federal Home Loan Bank, collateralized at June 30, 2002 and at
March 31, 2002 and 2001 by pledges of certain residential mortgage loans
totaling $6.3 million, $6.3 million and $7.5 million, respectively, and the
Banks' investment in Federal Home Loan Bank stock, are summarized as follows:
Interest Maturing in year June 30, March 31,
rate ending March 31, 2002 2002 2001
(Unaudited)
(Dollars in thousands)
5.04% - 5.98% 2002 $ -- $ -- $6,000
5.07% - 5.29% 2005 5,000 5,000 --
------ ------ ------
$5,000 $5,000 $6,000
====== ====== ======
Weighted-average interest rate 5.24% 5.24% 5.54%
====== ====== ======
F-22
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE H - FEDERAL INCOME TAXES
The provision for federal income taxes on earnings differs from that computed at
the statutory corporate rate as follows:
Three months ended June 30, Year ended March 31,
2002 2001 2002 2001 2000
(Unaudited)
Federal income taxes computed at 34% statutory rate $ 285 $ 190 $ 939 $ 682 $ 644
Tax-exempt interest (4) (4) (16) (16) (10)
Other 4 (1) 16 9 (10)
----- ----- ----- ----- -----
Federal income tax provision per consolidated financial
statements before change in accounting principle $ 285 $ 185 $ 939 $ 675 $ 624
===== ===== ===== ===== =====
Effective tax rate 34.0% 33.0% 34.0% 33.6% 33.0%
===== ===== ===== ===== =====
The composition of the Company's net deferred tax liability is as follows:
June 30, March 31,
2002 2002 2001
(Unaudited)
(In thousands)
Taxes (payable) refundable on
temporary differences at statutory rate:
Deferred tax assets
Deferred loan origination fees $ 55 $ 72 $ 108
General loan loss allowance 251 286 263
Book/tax depreciation differences -- -- 24
Pension expense -- 20 72
Other 99 80 78
------- ------- -------
Deferred tax assets 405 458 545
Deferred tax liabilities
Federal Home Loan Bank
stock dividends (837) (822) (748)
Book/tax depreciation differences (184) (155) --
Unrealized gains on securities
designated as available for sale (26) (13) (20)
Tax bad debt reserve (33) (44) (111)
Mortgage servicing rights (172) (191) (121)
------- ------- -------
Deferred tax liabilities (1,252) (1,225) (1,000)
------- ------- -------
Total deferred tax liability $ (847) $ (767) $ (455)
======= ======= =======
F-23
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE H - FEDERAL INCOME TAXES (continued)
Prior to fiscal 1997, Wayne Savings was allowed a special bad debt deduction
based on a percentage of earnings, generally limited to 8% of otherwise taxable
income and subject to certain limitations based on aggregate loans and deposit
account balances at the end of the year. This cumulative percentage of earnings
bad debt deduction totaled approximately $2.7 million as of June 30, 2002 and
March 31, 2002. If the amounts that qualified as deductions for federal income
taxes are later used for purposes other than bad debt losses, including
distributions in liquidation, such distributions will be subject to federal
income taxes at the then current corporate income tax rate. The amount of
unrecognized deferred tax liability relating to the cumulative bad debt
deduction was approximately $918,000 at June 30, 2002 and March 31, 2002. Wayne
Savings is required to recapture as taxable income approximately $200,000 of its
bad debt reserve, which represents the post-1987 additions to the reserve, and
will be unable to utilize the percentage of earnings method to compute the
reserve in the future. Wayne Savings has provided deferred taxes for this amount
and is amortizing the recapture of the bad debt reserve in taxable income over a
six-year period, which commenced in fiscal 1999.
At June 30, 2002, the Company's 1999 federal income tax return was under audit.
Management does not expect any material adverse consequences as a result of this
examination.
NOTE I - COMMITMENTS AND CONTINGENT LIABILITIES
The Company is a party to financial instruments with off-balance-sheet risk in
the normal course of business to meet the financing needs of its customers,
including commitments to extend credit. Such commitments involve, to varying
degrees, elements of credit and interest-rate risk in excess of the amount
recognized in the consolidated statements of financial condition. The contract
or notional amounts of the commitments reflect the extent of the Company's
involvement in such financial instruments.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Company
uses the same credit policies in making commitments and conditional obligations
as those utilized for on-balance-sheet instruments.
At June 30, 2002 and at March 31, 2002, the Company had total outstanding
commitments of approximately $2.8 million and $5.4 million, respectively, to
originate loans, of which $2.0 million and $5.1 million were comprised of
fixed-rate loans at rates ranging from 6.13% to 8.25% and $739,000 and $292,000
were comprised of adjustable-rate loans at rates ranging from 4.50% to 7.75%.
The Company had unused lines of credit outstanding under home equity loans of
$20.1 million and $18.8 million and $18.8 million at June 30, 2002 and at March
31, 2002 and 2001, respectively. Additionally, the Company had unused lines of
credit under commercial loans of $4.0 million and $2.0 million at June 30, 2002
and at both March 31, 2002 and 2001. Management believes that all loan
commitments are able to be funded through cash flow from operations and existing
excess liquidity. Fees received in connection with these commitments have not
been recognized in earnings.
F-24
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE I - COMMITMENTS AND CONTINGENT LIABILITIES (continued)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since many of the commitments may expire without being
drawn upon, the total commitment amounts do not necessarily represent future
cash requirements. The Company evaluates each customer's creditworthiness on a
case-by-case basis. The amount of collateral obtained, if it is deemed necessary
by the Company upon extension of credit, is based on management's credit
evaluation of the counterparty. Collateral on loans may vary but the
preponderance of loans granted generally includes a mortgage interest in real
estate as security.
The Company leases certain branch banking facilities under operating leases. The
minimum annual lease payments over the initial lease term are as follows:
Fiscal year ended (In thousands)
2003 $ 73
2004 73
2005 73
2006 73
2007 97
Thereafter 97
----
Total $486
====
The Company incurred rental expense under operating leases totaling
approximately $19,000, $11,000, $66,000, $30,000 and $27,000 for the three
months ended June 30, 2002 and 2001 and for the fiscal years ended March 31,
2002, 2001 and 2000, respectively.
There were no material contingent liabilities at June 30, 2002, March 31, 2002
or 2001.
NOTE J - REGULATORY CAPITAL
The Banks are subject to minimum regulatory capital standards promulgated by the
OTS. Failure to meet minimum capital requirements can initiate certain mandatory
- - and possibly additional discretionary - actions by regulators that, if
undertaken, could have a direct material effect on the consolidated financial
statements. Under capital adequacy guidelines and the regulatory framework for
prompt corrective action, the Banks must meet specific capital guidelines that
involve quantitative measures of the Banks' assets, liabilities and certain
off-balance-sheet items as calculated under regulatory accounting practices. The
Banks' capital amounts and classification are also subject to qualitative
judgments by the regulators about components, risk-weightings and other factors.
The minimum capital standards of the OTS generally require the maintenance of
regulatory capital sufficient to meet each of three tests, hereinafter described
as the tangible capital requirement, the core capital requirement and the
risk-based capital requirement. The tangible capital requirement provides for
minimum tangible capital (defined as stockholders' equity less all intangible
assets) equal to 1.5% of adjusted total assets. The core capital requirement
provides for minimum core capital (tangible capital plus certain forms of
supervisory goodwill and other qualifying intangible assets) generally equal to
4.0% of adjusted total assets except for those associations with the highest
examination rating and acceptable levels of
F-25
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE J - REGULATORY CAPITAL (continued)
risk. The risk-based capital requirement provides for the maintenance of core
capital plus general loss allowances equal to 8.0% of risk-weighted assets. In
computing risk-weighted assets, the Banks multiply the value of each asset on
their statement of financial condition by a defined risk-weighting factor, e.g.
one- to four-family residential loans carry a risk-weighted factor of 50%.
As of June 30, 2002, March 31, 2002 and 2001, management believes that the Banks
met all capital adequacy requirements to which they were subject. As of the most
recent examination date, the Banks were advised by the OTS that they met the
definition of "well capitalized" institutions. Nothing has come to management's
attention that would cause a change in the Banks' "well-capitalized"
classification.
The Banks' management believes that, under the current regulatory capital
regulations, the Banks will continue to meet their minimum capital requirements
in the foreseeable future. However, events beyond the control of the Banks, such
as increased interest rates or a downturn in the economy in the Banks' market
area, could adversely affect future earnings and, consequently, the ability to
meet future minimum regulatory capital requirements.
The Banks are subject to regulations imposed by the OTS regarding the amount of
capital distributions payable to the Company. Generally, the Banks' payment of
dividends is limited, without prior OTS approval, to net earnings for the
current calendar year, plus the two preceding years, less capital distributions
paid over the comparable time period. Insured institutions are required to file
an application with the OTS for capital distributions in excess of the
limitation. Wayne Savings has received approval from the OTS to pay $200,000 in
dividends in August 2002 and anticipates filing and receiving approval for an
additional $1.8 million payable to the Company during fiscal 2003.
Regulations of the OTS governing mutual holding companies permit Wayne Savings
Bankshares M.H.C. (the "M.H.C.") to waive the receipt by it of any dividend
declared by the Company or the Bank on the common stock, provided that the OTS
does not object to such waiver. The M.H.C. accepted dividends totaling $25,000,
$260,000 (of which $258,000 was treated as an offset to previously allocated
M.H.C. costs) and $75,000 during fiscal years 2002, 2001 and 2000, respectively.
The M.H.C. did not receive any dividends during the three months ended June 30,
2002. Total dividends waived by the M.H.C. through June 30, 2002 amounted to
$6.4 million.
Wayne Savings Community Bank as of June 30, 2002
(Dollars in thousands)
(Unaudited)
Required to be "well-
Required for capital capitalized" under prompt
Actual adequacy purposes corrective action provisions
------ ----------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
Tangible capital $26,411 7.9% >/=$ 5,020 >/=1.5% >/=$16,732 >/= 5.0%
Core capital $26,411 7.9% >/=$13,386 >/=4.0% >/=$20,079 >/= 6.0%
Risk-based capital $27,038 15.6% >/=$13,891 >/=8.0% >/=$17,364 >/=10.0%
F-26
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE J - REGULATORY CAPITAL (continued)
Wayne Savings Community Bank as of March 31, 2002
(Dollars in thousands)
Required to be "well-
Required for capital capitalized" under prompt
Actual adequacy purposes corrective action provisions
------ ----------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
Tangible capital $26,063 7.8% >/=$ 5,021 >/=1.5% >/=$16,736 >/= 5.0%
Core capital $26,063 7.8% >/=$13,389 >/=4.0% >/=$20,083 >/= 6.0%
Risk-based capital $26,688 14.1% >/=$15,108 >/=8.0% >/=$18,885 >/=10.0%
Wayne Savings Community Bank as of March 31, 2001
(Dollars in thousands)
Required to be "well-
Required for capital capitalized" under prompt
Actual adequacy purposes corrective action provisions
------ ----------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
Tangible capital $25,309 8.1% >/=$ 4,678 >/=1.5% >/=$15,592 >/= 5.0%
Core capital $25,309 8.1% >/=$12,473 >/=4.0% >/=$18,710 >/= 6.0%
Risk-based capital $25,964 15.7% >/=$13,274 >/=8.0% >/=$16,593 >/=10.0%
Wayne Savings Bancshares, Inc
Reconciliation of GAAP to Banks' Regulatory Capital
(Dollars in thousands)
June 30, March 31,
2002 2002 2001
(Unaudited)
(In thousands)
Consolidated GAAP capital $ 26,427 $ 26,047 $ 25,255
Effect of Wayne Savings Bancshares, Inc. in consolidation 84 93 123
Unrealized gains on securities designated as available for sale (49) (22) (33)
Mortgage servicing rights and other deductions (51) (55) (36)
-------- -------- --------
Tangible and core capital 26,411 26,063 25,309
General valuation allowance 627 625 655
-------- -------- --------
Risk-based capital $ 27,038 $ 26,688 $ 25,964
======== ======== ========
F-27
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE J - REGULATORY CAPITAL (continued)
Village Savings Bank, F.S.B. as of June 30, 2002
(Dollars in thousands)
(Unaudited)
Required to be "well-
Required for capital capitalized" under prompt
Actual adequacy purposes corrective action provisions
------ ----------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
Tangible capital $2,947 6.6% >/=$ 667 >/=1.5% >/=$2,222 >/= 5.0%
Core capital $2,947 6.6% >/=$1,778 >/=4.0% >/=$2,667 >/= 6.0%
Risk-based capital $2,990 15.6% >/=$1,535 >/=8.0% >/=$1,918 >/=10.0%
Village Savings Bank, F.S.B. as of March 31, 2002
(Dollars in thousands)
Required to be "well-
Required for capital capitalized" under prompt
Actual adequacy purposes corrective action provisions
------ ----------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
Tangible capital $2,865 7.0% >/=$ 614 >/=1.5% >/=$2,047 >/= 5.0%
Core capital $2,865 7.0% >/=$1,637 >/=4.0% >/=$2,456 >/= 6.0%
Risk-based capital $2,906 15.8% >/=$1,471 >/=8.0% >/=$1,838 >/=10.0%
Village Savings Bank, F.S.B. as of March 31, 2001
(Dollars in thousands)
Required to be "well-
Required for capital capitalized" under prompt
Actual adequacy purposes corrective action provisions
------ ----------------- ----------------------------
Amount Ratio Amount Ratio Amount Ratio
Tangible capital $2,704 9.6% >/=$ 424 >/=1.5% >/=$1,413 >/= 5.0%
Core capital $2,704 9.6% >/=$1,131 >/=4.0% >/=$1,696 >/= 6.0%
Risk-based capital $2,744 18.9% >/=$1,163 >/=8.0% >/=$1,454 >/=10.0%
NOTE K - STOCK OPTION PLANS
The Company has an incentive Stock Option Plan that provides for the issuance of
84,044 shares of authorized, but unissued shares of common stock. The Company
also has a non-incentive Stock Option Plan that provides for the issuance of
36,018 shares of authorized, but unissued shares of common stock.
F-28
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE K - STOCK OPTION PLANS (continued)
The Company accounts for its stock option plans in accordance with SFAS No. 123,
"Accounting for Stock-Based Compensation," which provides a fair value-based
method for valuing stock-based compensation that entities may use, which
measures compensation cost at the grant date based on the fair value of the
award. Compensation is then recognized over the service period, which is usually
the vesting period. Alternatively, SFAS No. 123 permits entities to continue to
account for stock options and similar equity instruments under Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees." Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net earnings and
earnings per share, as if the fair value-based method of accounting defined in
SFAS No. 123 had been applied. Management has determined that the Company will
continue to account for stock based compensation pursuant to APB Opinion No. 25.
The pro-forma disclosures required by SFAS No. 123 are not applicable as no
options were granted by the Company during the three month period ended June 30,
2002 or during the fiscal years ended March 31, 2002, 2001 and 2000.
A summary of the status of the Company's stock option plans and changes during
the periods ending on those dates is presented below:
June 30, March 31,
2002 2002 2001 2000
Exercise Exercise Exercise Exercise
Shares Price Shares Price Shares Price Shares Price
(Unaudited)
Outstanding at beginning of period 15,473 $5.00 17,473 $5.00 27,657 $5.00 34,596 $5.00
Granted -- -- -- -- -- -- -- --
Exercised (1,200) 5.00 (2,000) 5.00 (7,900) 5.00 (2,301) 5.00
Forfeited -- -- -- -- (2,284) 5.00 (4,638) 5.00
------ ----- ------ ----- ------ ----- ------ -----
Outstanding at end of period 14,273 $5.00 15,473 $5.00 17,473 $5.00 27,657 $5.00
====== ===== ====== ===== ====== ===== ====== =====
Options exercisable at period-end 14,273 $5.00 15,473 $5.00 17,473 $5.00 27,657 $5.00
====== ===== ====== ===== ====== ===== ====== =====
The following information applies to options outstanding at March 31, 2002:
Number outstanding 14,273
Range of exercise prices $5.00
Weighted-average exercise price $5.00
Weighted-average remaining contractual life 1.00
At June 30, 2002, all of the stock options granted were subject to exercise at
the discretion of the grantees and expire in 2003.
F-29
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE L - PENSION AND BENEFIT PLANS
The Company has a non-contributory insured defined benefit pension plan (the
"Plan") covering all eligible employees. The Plan benefits are based on
years-of-service and other factors. The Company's funding policy is to
contribute at least annually amounts sufficient to satisfy legal funding
requirements plus such additional tax-deductible amounts deemed advisable under
the circumstances. Contributions are intended to provide not only for benefits
attributed to service-to-date, but also for those expected to be earned in the
future.
Information with respect to the Plan for the years ended March 31, 2002, 2001
and 2000 is as follows (most current available data):
The changes in benefit obligations are computed as follows:
2002 2001 2000
(In thousands)
Projected benefit obligation
at beginning of year $1,280 $1,117 $1,323
Service cost 63 58 59
Interest cost 101 83 77
Actuarial loss 203 39 103
Benefits paid (55) (17) (445)
------ ------ ------
Projected benefit obligation
at end of year $1,592 $1,280 $1,117
====== ====== ======
The changes in the Plan's assets are computed as follows:
2002 2001 2000
(In thousands)
Fair value of plan assets at
beginning of year $1,283 $1,122 $1,331
Actual return on plan assets 68 3 26
Employer contributions 212 175 210
Benefits paid (55) (17) (445)
------ ------ ------
Fair value of plan assets
at end of year $1,508 $1,283 $1,122
====== ====== ======
The following table sets forth the Plan's funded status at March 31:
2002 2001
(In thousands)
Funded status $(84) $ 3
Unrecognized net actuarial (gain) loss (42) 120
Unrecognized net transition liability 42 48
---- ----
Prepaid (accrued) pension cost $(84) $171
==== ====
F-30
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE L - PENSION AND BENEFIT PLANS (continued)
The weighted-average actuarial assumptions used were:
2002 2001 2000
(In thousands)
Weighted-average discount rate 7.25% 7.50% 7.00%
Weighted-average rate of
compensation increase 1.00% 1.00% 1.00%
Weighted-average expected
long-term rate of return on
plan assets 7.00% 7.00% 7.00%
Net periodic pension costs includes the following components:
2002 2001 2000
(In thousands)
Service cost $ 63 $ 58 $ 59
Interest cost 101 83 77
Actual return on plan assets (68) (3) (26)
Amortization of prior net loss 199 141 164
Amortization of net transition obligation 6 6 6
Unrecognized net actuarial loss (27) (81) (59)
---- ---- ----
Net periodic pension cost $274 $204 $221
==== ==== ====
Pension expense for the three months ended June 30, 2002 and 2001, totaled
$51,000 and 48,000, respectively.
Plan assets were invested in certificates of deposit (including a $433,000
certificate of deposit in the Bank) and life insurance contracts.
As previously stated, the Banks have a savings plan covering substantially all
employees who meet certain age and service requirements. Under the plan, the
Banks match participant contributions up to 2% of each participant's
compensation during the year. This contribution is dependent on availability of
sufficient net earnings from current or prior years. Additional contributions
may be made as approved by the Board of Directors. Expense under the plan
totaled approximately $13,000, $10,000, $44,000, $44,000 and $39,000 for the
three months ended June 30, 2002 and 2001, and for the fiscal years ended March
31, 2002, 2001 and 2000, respectively.
F-31
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE M - CONDENSED FINANCIAL STATEMENTS OF WAYNE SAVINGS BANCSHARES, INC.
The following condensed financial statements summarize the financial position of
Wayne Savings Bancshares, Inc. as of June 30, 2002, March 31, 2002 and 2001, and
the results of its operations and its cash flows for the three months ended June
30, 2002 and 2001, and the years ended March 31, 2002, 2001, and 2000.
Wayne Savings Bancshares, Inc.
STATEMENTS OF FINANCIAL CONDITION
June 30, March 31,
2002 2002 2001
(Unaudited)
ASSETS (In thousands)
Cash and due from banks $ 130 $ 115 $ 85
Investment in subsidiary 26,511 26,140 25,378
Prepaid expenses and other 960 851 317
------- ------- -------
Total assets $27,601 $27,106 $25,780
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued expenses and other liabilities $ 1,174 $ 1,059 $ 525
Stockholders' equity
Common stock and additional paid-in capital 17,091 17,085 17,075
Retained earnings 10,468 10,121 9,150
Less shares held in treasury (70,014, 70,014 and 57,042 shares, respectively) (1,181) (1,181) (1,003)
Accumulated other comprehensive income, unrealized gains on securities
designated as available for sale, net 49 22 33
------- ------- -------
Total stockholders' equity 26,427 26,047 25,255
------- ------- -------
Total liabilities and stockholders' equity $27,601 $27,106 $25,780
======= ======= =======
Wayne Savings Bancshares, Inc.
STATEMENTS OF EARNINGS
Three months ended Year ended
June 30 March 31,
2002 2001 2002 2001 2000
(Unaudited)
(In thousands)
Income
Interest income $ 1 $ -- $ 1 $ 18 $ 58
Equity in earnings of subsidiary 568 395 1,928 1,371 1,210
------ ------ ------ ------ ------
Total income 569 395 1,929 1,389 1,268
General and administrative expenses 23 29 160 92 157
------ ------ ------ ------ ------
Earnings before income tax credits 546 366 1,769 1,297 1,111
Federal income tax credits (8) (9) (54) (35) (37)
------ ------ ------ ------ ------
NET EARNINGS $ 554 $ 375 $1,823 $1,332 $1,148
====== ====== ====== ====== ======
F-32
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE M - CONDENSED FINANCIAL STATEMENTS OF WAYNE SAVINGS BANCSHARES, INC.
(continued)
Wayne Savings Bancshares, Inc.
STATEMENTS OF CASH FLOWS
Three months ended Year ended
June 30, March 31,
2002 2001 2002 2001 2000
(Unaudited)
Cash flows from operating activities: (In thousands)
Net earnings for the period $ 554 $ 375 $ 1,823 $ 1,332 $ 1,148
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Undistributed (earnings) loss of consolidated subsidiary (343) 34 (773) (807) (1,219)
Increase (decrease) in cash due to changes in:
Prepaid expenses and other assets (109) (15) (534) (238) 23
Accrued expenses and other liabilities 115 (78) 534 262 29
------- ------- ------- ------- -------
Net cash provided by (used in) operating activities 217 316 1,050 549 (19)
Cash flows provided by (used in) financing activities:
Payment of dividends on common stock (208) (205) (852) (800) (882)
Purchase of treasury stock -- (140) (178) (358) (177)
Proceeds from exercise of stock options 6 -- 10 50 11
------- ------- ------- ------- -------
Net cash used in financing activities (202) (345) (1,020) (1,108) (1,048)
------- ------- ------- ------- -------
Net increase (decrease) in cash and cash equivalents 15 (29) 30 (559) (1,067)
Cash and cash equivalents at beginning of period 115 85 85 644 1,711
------- ------- ------- ------- -------
Cash and cash equivalents at end of period $ 130 $ 56 $ 115 $ 85 $ 644
======= ======= ======= ======= =======
NOTE N - SERVICE FEES, CHARGES AND OTHER OPERATING INCOME
Service fees, charges and other operating income is comprised of the following
items:
June 30, March 31,
2002 2001 2002 2001 2000
(Unaudited)
(In thousands)
Deposit fee income $ 171 $ 157 $ 644 $ 501 $ 430
Loan servicing fee income 37 30 100 120 117
Income from credit cards 38 58 157 69 91
Other service fees, charges
and other operating income 82 43 242 201 82
------ ------ ------ ------ ------
$ 328 $ 288 $1,143 $ 891 $ 720
====== ====== ====== ====== ======
F-33
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE O - OTHER OPERATING EXPENSES AND M.H.C. EXPENDITURES
Other operating expense is comprised of the following items:
Three months ended
June 30, Year ended March 31,
2002 2001 2002 2001 2000
(Unaudited)
(In thousands)
Telephone and postage expense $ 52 $ 62 $ 273 $ 247 $ 286
Public relations and
advertising expense 57 54 198 214 272
Stationery, printing and office
supplies expense 43 42 172 189 244
Supervisory exam expense 36 34 137 128 51
Professional services expense 17 27 154 96 74
Other operating expenses 223 191 733 716 704
------ ------ ------ ------ ------
$ 428 $ 410 $1,667 $1,590 $1,631
====== ====== ====== ====== ======
Expenses paid by or previously allocated to the M.H.C. are comprised of the
following:
Allocated litigation costs of affiliates and subsidiaries $ -- $ -- $ 30 $ 134 $ 77
Allocated other operating costs -- -- 5 16 7
------ ------ ------ ------ ------
$ -- $ -- $ 35 $ 150 $ 84
====== ====== ====== ====== ======
NOTE P - REORGANIZATION AND CHANGE OF CORPORATE FORM
The Board of Directors of Wayne Savings Bankshares, M.H.C. (the "M.H.C.")
adopted a Plan of Conversion (the "Plan") on July 10, 2001. Pursuant to the
Plan, the M.H.C. will convert from the mutual holding company form of
organization to the fully public form. Wayne Savings Bankshares, M.H.C., the
mutual holding company parent of Wayne Savings Bancshares, Inc., will be merged
into Wayne Savings Community Bank, and Wayne Savings Bankshares, M.H.C. will no
longer exist. Pursuant to the Plan, Wayne Savings Bancshares, Inc., which owns
100% of Wayne Savings Community Bank, also will be succeeded by a new Delaware
corporation with the same name. As part of the conversion, Wayne Savings
Bankshares, M.H.C.'s ownership interest as currently evidenced by 1,350,699
shares of Wayne Savings Bancshares, Inc. common stock, will be offered for sale
in the subscription and community offering. Following the completion of the
conversion, all of the capital stock of Wayne Savings Community Bank will be
held by Wayne Savings Bancshares, Inc.
Under the Plan, at the conclusion of the conversion and related offering, each
share of Wayne Savings Bancshares, Inc. common stock held by persons other than
Wayne Savings Bankshares, M.H.C. will be converted automatically into and become
a right to receive new shares of Wayne Savings Bancshares, Inc. common stock
determined pursuant to the exchange ratio. The exchange ratio will ensure that
immediately after the conversion and the share exchange, the public stockholders
of Wayne Savings Bancshares, Inc. common stock will own the same aggregate
percentage of Wayne Savings Bancshares, Inc. common stock that they owned
immediately prior to the conversion.
F-34
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE P - REORGANIZATION AND CHANGE OF CORPORATE FORM (continued)
In the event of a complete liquidation (and only in such event), each eligible
member of Wayne's depositors will be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then current
adjusted balance of deposit accounts held, before any liquidation distribution
may be made with respect to common stock. Except for the repurchase of stock and
payment of dividends by the Company, the existence of liquidation account will
not restrict the use or application of such retained earnings.
The Company may not declare, pay a cash dividend on, or repurchase any or its
common stock, if the effect thereof would cause retained earnings to be reduced
below either the amount required for the liquidation account or the regulatory
capital requirements of SAIF insured institutions.
At June 30, 2002, the Company had incurred costs associated with the Plan
totaling approximately $734,000. The Plan costs will be netted against proceeds
received in the transaction. If, however, the conversion is not completed, the
costs associated with the conversion will be recorded through the consolidated
statement of earnings in the period in which the conversion is terminated.
NOTE Q - QUARTERLY RESULTS OF OPERATIONS (unaudited)
The following table summarizes the Company's quarterly results for the fiscal
years ended March 31, 2002 and 2001. Certain amounts have been reclassified to
conform to the fiscal 2002 presentation, the Company's amended and restated
10-KSB/A for the year ended March 31, 2001, and the Company's amended and
restated Form 10-QSB/A for the nine months ended December 31, 2001.
For the three month periods ended
June 30, 2001 September 30, 2001 December 31, 2001 March 31, 2002
(In thousands, except share data)
Total interest income $5,416 $5,330 $5,270 $5,293
Total interest expense 3,344 3,212 3,043 2,749
------ ------ ------ ------
Net interest income 2,072 2,118 2,227 2,544
Provision for losses on loans 2 95 21 16
Other income 364 433 502 358
General, administrative and other expense 1,874 1,831 1,968 2,049
------ ------ ------ ------
Earnings before income taxes 560 625 740 837
Federal income taxes 185 213 253 288
------ ------ ------ ------
Net earnings $ 375 $ 412 $ 487 $ 549
====== ====== ====== ======
Earnings per share
Basic $ .15 $ .16 $ .19 $ .21
====== ====== ====== ======
Diluted $ .15 $ .16 $ .19 $ .21
====== ====== ====== ======
F-35
Wayne Savings Bancshares, Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Three months ended June 30, 2002 and 2001 (unaudited) and
years ended March 31, 2002, 2001, and 2000
NOTE Q - QUARTERLY RESULTS OF OPERATIONS (unaudited)
For the three month periods ended
June 30, 2000 September 30, 2000 December 31, 2000 March 31, 2001
(In thousands, except share data)
Total interest income $5,341 $5,359 $5,389 $5,417
Total interest expense 3,161 3,248 3,321 3,370
------ ------ ------ ------
Net interest income 2,180 2,111 2,068 2,047
Provision for losses on loans 51 22 2 21
Other income 218 259 289 279
General, administrative and other expense 1,933 1,899 1,813 1,703
------ ------ ------ ------
Earnings before income taxes 414 449 542 602
Federal income taxes 147 142 172 214
------ ------ ------ ------
Net earnings $ 267 $ 307 $ 370 $ 388
====== ====== ====== ======
Earnings per share
Basic $ .10 $ .12 $ .14 $ .15
====== ====== ====== ======
Diluted $ .10 $ .12 $ .14 $ .15
====== ====== ====== ======
F-36
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No person has been authorized to give any information or to make any
representation other than as contained in this prospectus, and, if given or
made, such other information or representation must not be relied upon as having
been authorized by Wayne Savings Bancshares, Inc. or Wayne Savings Community
Bank. This prospectus does not constitute an offer to sell or a solicitation of
an offer to buy any of the securities offered hereby to any person in any
jurisdiction in which such offer or solicitation is not authorized or in which
the person making such offer or solicitation is not qualified to do so, or to
any person to whom it is unlawful to make such offer or solicitation in such
jurisdiction. Neither the delivery of this prospectus nor any sale hereunder
shall under any circumstances create any implication that there has been no
change in the affairs of Wayne Savings Bancshares, Inc. or Wayne Savings
Community Bank since any of the dates as of which information is furnished
herein or since the date hereof.
Up to 2,357,500 Shares
(Anticipated Maximum)
Wayne Savings Bancshares, Inc.
(Holding Company for
Wayne Savings Community Bank)
COMMON STOCK
Par Value $0.10 per share
------------------
PROSPECTUS
------------------
Ryan Beck & Co.
November 14, 2002
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These securities are not deposits or accounts and are not federally
insured or guaranteed.
-----------------
Until December 17, 2002 or 25 days after commencement of the Syndicated
Community Offering, if any, whichever is later, all dealers effecting
transactions in the registered securities, whether or not participating in this
distribution, may be required to deliver a prospectus when acting as
underwriters and with respect to their unsold allotments of subscriptions.
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