Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
450 Fifth Street, N.W.
Washington, D.C. 20549
FORM 10-K
|X| Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the Fiscal Year Ended March 31, 2003
OR
|_| Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from _______________ to _______________
Commission File No. 0-23433
WAYNE SAVINGS BANCSHARES, INC.
------------------------------
(Exact name of registrant as specified in its charter)
Delaware 31-1557791
-------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
151 North Market Street, Wooster, Ohio 44691
-------------------------------------- -----
(Address of Principal Executive Offices) Zip Code
(330) 264-5767
--------------
(Registrant's telephone number)
Securities Registered Pursuant to Section 12(b) of the Act: None
Securities Registered Pursuant to Section 12(g) of the Act: Common Stock, par value $.10 per share
--------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES |X| NO |_|.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. |X|.
Indicate by checkmark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Securities Exchange Act of 1934). YES |_| NO |X|.
The aggregate market value of the voting stock held by non-affiliates of
the Registrant, computed by reference to the closing sales price of the
Registrant's stock, as reported on the Nasdaq National Market on June 13, 2003,
was approximately $53.0 million. As of June 13, 2003, there were issued and
outstanding 3,888,795 shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
1. Proxy Statement for the 2003 Annual Meeting of Stockholders (Parts I and
III).
2. Sections of the Annual Report to Stockholders at and for the year ended
March 31, 2003 (Part II and Part III)
PART I
------
ITEM 1. Business
- ----------------
General
Wayne Savings Bancshares, Inc.
Wayne Savings Bancshares, Inc. (the "Company") is a Delaware corporation
which was organized in January 2003. The only significant asset of the Company
is its investment in Wayne Savings Community Bank (the "Bank"). The Company is
the successor to Wayne Savings Bancshares, Inc., a federal corporation, ("Wayne
Federal") which was originated in August 1997. Wayne Federal had been
majority-owned by Wayne Savings Bankshares, M.H.C., a federally-chartered mutual
holding company (the "Mutual Holding Company" or "M.H.C."), with the remaining
shares owned by public stockholders. In fiscal 2002, the Board of Directors
of the M.H.C. adopted a plan of conversion and reorganization (the "Plan") to
convert the M.H.C. from mutual to stock form and to complete a related stock
offering in which shares of common stock representing the M.H.C.'s ownership
interest in Wayne Federal was sold to investors.
The Plan was approved by the stockholders of Wayne Federal, the depositors
of Wayne Savings Community Bank and the Office of Thrift Supervision ("OTS") in
fiscal 2003, and the related stock offering was completed on January 8, 2003. As
of that date 1,350,699 shares of Wayne Federal owned by the M.H.C. were retired
and the Company sold 2,040,816 shares of common stock for $10.00 per share.
After consideration of the employee stock ownership plan (ESOP) totaling $1.6
million and related expenses of $1.9 million, net proceeds from the stock
offering amounted to $17.1 million. An additional 1,847,820 shares were issued
to the former public stockholders of Wayne Federal based on an exchange rate of
1.5109 new shares of common stock for each existing share, resulting in
3,888,795 total new shares outstanding.
At March 31, 2003, the Company had total assets of $379.0 million, total
deposits of $300.9 million, and stockholders' equity of $44.7 million.
The Company's principal office is located at 151 North Market Street,
Wooster, Ohio, and its telephone number at that address is (330) 264-5767.
Wayne Savings Community Bank
The Bank is an Ohio-chartered stock savings and loan association
headquartered in Wooster, Ohio. The Bank's deposits are insured by the Federal
Deposit Insurance Corporation ("FDIC") under the Savings Association Insurance
Fund ("SAIF"). The Bank has been a member of the Federal Home Loan Bank ("FHLB")
System since 1937.
The Bank is a community-oriented savings institution offering traditional
financial services to its local community. The Bank's primary lending and
deposit gathering area includes Wayne, Holmes, Ashland, 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 real estate loans in its market area. The Bank also
originates multi-family residential, non-residential real estate and commercial
business loans, although such loans constitute a small portion of the Bank's
lending activities and a small portion of the Bank's loan portfolio. The Bank
also originates consumer loans, and to a lesser extent, construction 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.
The Bank's principal executive office is located at 151 North Market
Street, Wooster, Ohio, and its telephone number at that address is (330)
264-5767.
2
Village Savings Bank, F.S.B.
Village Savings Bank, F.S.B. ("Village") is a federally-chartered stock
savings bank headquartered in North Canton, Ohio that was chartered as a
wholly-owned subsidiary of the Bank, hereinafter collectively referred to as
"the Banks." Village's deposits are insured by the FDIC under the SAIF. Village
is a member of the FHLB system.
Village is a community-oriented savings institution offering traditional
financial services to its local community. Village's primary lending and deposit
gathering area includes North Canton, Jackson Township and Plain Township, which
are all located in Stark County. Village's principal business activity consists
of originating one- to four-family residential real estate loans in its market
area. Village also originates multi-family residential and non-residential real
estate loans, although such loans constitute a small portion of Village's
lending activities. Village also originates consumer loans, and to a lesser
extent, construction loans. Village 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.
In June 2003, the Banks filed regulatory applications to merge Village
with and into the Bank. The merger is expected to be completed during calendar
year 2003.
Village's principal executive office is located at 1265 South Main Street,
North Canton, Ohio, and its telephone number at that address is (330) 494-5262.
Market Area/Local Economy
The Bank, headquartered in Wooster, Ohio, operates in Wayne, Ashland,
Medina and Holmes Counties in north central Ohio. Wooster, Ohio is located in
Wayne County and is approximately midway between Cleveland and Columbus, Ohio.
Village, headquartered in North Canton, Ohio, operates in Stark County in north
central Ohio.
Wayne County is characterized by a diverse economic base, which is not
dependent on any particular industry. It is one of the leading agricultural
counties in the state. Since 1892, Wooster has been the headquarters of the Ohio
Agricultural Research and Development Center, the agricultural research arm of
The Ohio State University. In addition, Wayne County is also the home base of
such nationally known companies 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 Rittman Paperboard, Division
of Caraustar, Morton Salt, Bell and Howell Micro Photo Division, FritoLay, Inc.,
and The Gerstenslager Company. Wayne County is also known for its excellence in
education. The College of Wooster was founded in 1866. Other quality educational
opportunities are offered by the Agricultural Technical Institute of Ohio State
University, and Wayne College, a branch of The University of Akron. Wayne
Savings operates 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 the Bank's branch offices.
Medina County, located just north of Wayne County, is the center of a
fertile agricultural region. Farming remains the largest industry in the county
in terms of dollar value of goods produced. However, over 100 small
manufacturing firms also operate in the county. The City of Medina is located in
the center of the Cleveland-Akron-Lorain Standard Consolidated Statistical
Marketing Area. Medina is located approximately 30 miles south of Cleveland and
15 miles west of Akron. Due to its proximity to Akron and Cleveland, a majority
of Medina County's labor force is employed in these two cities. The Bank
operates one full-service office in Medina County, which is located in the
Village of Lodi.
Holmes County, located directly south of Wayne County, has a mostly rural
economy. The local economy depends mostly upon agriculture, light manufacturing,
fabrics, and wood products. Because of the scenic beauty and a large Amish
settlement, revenues from tourism are becoming increasingly significant. The
county is also
3
noted for its many fine cheese-making operations. A large number of Holmes
County residents are employed in Wayne County. The City of Millersburg is the
county seat and the location of one of the Bank's branch offices.
Stark County, located directly east of Wayne County, is characterized by a
diverse economy and over 1,500 different products are manufactured in the
county. Stark County also has a strong agricultural base, and ranks fourth in
Ohio in the production of dairy products. The major employers in North Canton
are the Hoover Company, Diebold Incorporated (a major manufacturer of bank
security products and automated teller machines) and the Timken Company (a
world-wide manufacturer of tapered roller bearings and specialty steels).
Jackson Township is the home to the Belden Village Shopping Center, while Plain
Township is a residential and agricultural area with a few widely scattered
light industries.
Lending Activities
General. Historically, the principal lending activity of the Company has
been the origination of fixed and adjustable rate mortgage ("ARM") loans
collateralized by one- to four-family residential properties located in its
market area. The Company originates ARM loans for retention in its portfolio,
and fixed rate loans that are eligible for resale in the secondary mortgage
market. The Company also originates loans collateralized by non-residential and
multi-family residential real estate as well as commercial business loans. The
Company plans to increase its commercial lending portfolio by focusing on
high-quality smaller balance commercial loans. The Company also originates
consumer loans to broaden services offered to customers and to decrease the
Company's interest rate risk exposure.
The Company has sought to make its interest-earning assets more interest
rate sensitive by originating adjustable rate loans, such as ARM loans, home
equity loans, and medium-term consumer loans. The Company also purchases
mortgage-backed securities generally with estimated remaining average lives of 5
years or less. At March 31, 2003, approximately $130.7 million, or 42.9%, of the
Company's total loans and mortgage-backed securities consisted of loans or
securities with adjustable interest rates.
The Company continues actively to originate fixed rate mortgage loans,
generally with 15 to 30 year terms to maturity, collateralized by one- to
four-family residential properties. One- to four-family fixed rate residential
mortgage loans generally are originated and underwritten according to standards
that allow the Company to resell such loans in the secondary mortgage market for
purposes of managing interest rate risk and liquidity. The majority of such one-
to four-family fixed rate residential mortgage loans, however, are retained by
the Company. The Company retains servicing on its sold mortgage loans and
realizes monthly service fee income. The Company also originates interim
construction loans on one- to four-family residential properties.
4
Analysis of Loan Portfolio. Set forth below are selected data relating to
the composition of the Company's loan portfolio, excluding loans held for sale,
by type of loan as of the dates indicated.
At March 31,
--------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------------- ---------------- ---------------- ---------------- ----------------
$ % $ % $ % $ % $ %
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
(Dollars in thousands)
Mortgage loans:
One-to four-family residential(1)... $200,764 86.41% $220,145 85.36% $217,236 85.70% $212,822 87.37% $189,381 85.62%
Residential construction loans........ 3,548 1.53 8,728 3.38 7,078 2.79 4,035 1.66 7,668 3.47
Multi-family residential............ 8,512 3.66 7,368 2.86 9,039 3.56 8,028 3.30 7,086 3.20
Non-residential real estate/land(2). 8,211 3.53 9,725 3.77 7,525 2.97 6,068 2.49 5,610 2.54
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total mortgage loans.............. 221,035 95.13 245,966 95.37 240,878 95.02 230,953 94.82 209,745 94.83
Other loans:
Consumer loans(3)................... 3,892 1.67 6,096 2.37 7,858 3.10 7,441 3.06 6,643 3.00
Commercial business loans........... 7,427 3.20 5,832 2.26 4,765 1.88 5,168 2.12 4,810 2.17
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total other loans................. 11,319 4.87 11,928 4.63 12,623 4.98 12,609 5.18 11,453 5.17
-------- ------ -------- ------ -------- ------ -------- ------ -------- ------
Total loans before net items........ 232,354 100.00% 257,894 100.00% 253,501 100.00% 243,562 100.00% 221,198 100.00%
====== ====== ====== ====== ======
Less:
Loans in process.................... 2,244 4,616 4,764 4,136 4,600
Deferred loan origination fees...... 1,059 1,376 1,463 1,538 1,855
Allowance for loan losses........... 678 730 655 793 692
-------- -------- -------- -------- --------
Total loans receivable, net....... $228,373 $251,172 $246,619 $237,095 $214,051
======== ======== ======== ======== ========
Mortgage-backed securities, net(4).. $ 76,002 $ 17,326 $ 8,574 $ 10,459 $ 7,230
======== ======== ======== ======== ========
- ----------
(1) Includes equity loans collateralized by second mortgages in the aggregate
amount of $21.2 million, $18.9 million, $15.7 million, $11.1 million and
$8.7 million as of March 31, 2003, 2002, 2001, 2000 and 1999, respectively.
Such loans have been underwritten on substantially the same basis as the
Company's first mortgage loans.
(2) Includes land loans of $813,000, $736,000, $923,000, $949,000 and $951,000
as of March 31, 2003, 2002, 2001, 2000 and 1999, respectively.
(3) Includes second mortgage loans of $859,000, $1.2 million, $1.8 million,
$1.6 million and $1.8 million as of March 31, 2003, 2002, 2001, 2000 and
1999, respectively.
(4) Includes mortgage-backed securities designated as available for sale.
5
Loan and Mortgage-Backed Securities Maturity and Repricing Schedule. The
following table sets forth certain information as of March 31, 2003, regarding
the dollar amount of loans and mortgage-backed securities maturing in the
Company's portfolio based on their contractual terms to maturity. Demand loans,
loans having no stated schedule of repayments and no stated maturity, and
overdrafts are reported as due in one year or less. Adjustable and floating rate
loans are included in the period in which interest rates are next scheduled to
adjust rather than in which they mature, and fixed rate loans and
mortgage-backed securities are included in the period in which the final
contractual repayment is due. Fixed rate mortgage-backed securities are assumed
to mature in the period in which the final contractual payment is due on the
underlying mortgage.
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 ................................... $36,684 $12,002 $ 3,209 $ 651 $ -- $ -- $ 52,546
Fixed ........................................ 1,314 307 2,280 13,132 54,784 76,401 148,218
Construction (1):
Adjustable ................................... 339 400 -- -- -- -- 739
Fixed ........................................ 236 -- -- -- 258 675 1,169
Multi-family residential and nonresidential (1):
Adjustable ................................... 4,844 6,578 3,120 -- -- -- 14,542
Fixed ........................................ 721 169 528 159 -- -- 1,577
Other Loans:
Commercial business loans ...................... 6,466 253 -- 708 -- -- 7,427
Consumer ....................................... 1,749 1,210 892 41 -- -- 3,892
------- ------- ------- ------- ------- ------- --------
Total loans ...................................... $52,353 $20,919 $10,029 $14,691 $55,042 $77,076 $230,110
======= ======= ======= ======= ======= ======= ========
Mortgage-backed securities(2) .................... $ 6,525 $43,236 $ 8,678 $ 796 $ 9,895 $ 4,855 $ 73,985
======= ======= ======= ======= ======= ======= ========
- ----------
(1) Amounts shown are net of loans in process of $1.6 million in construction
loans and $604,000 in multi-family residential and nonresidential loans.
(2) Includes mortgage-backed securities available for sale. Does not include
premiums of $1.8 million, discounts of $9,000 and unrealized gains of
$214,000.
6
The following table sets forth at March 31, 2003, the dollar amount of all
fixed rate and adjustable rate loans and mortgage-backed securities maturing or
repricing after March 31, 2004.
Fixed Adjustable
-------- ----------
(In Thousands)
Mortgage loans:
One- to four-family residential ..................... $146,904 $15,862
Construction (1) .................................... 933 400
Multi-family residential and non-residential (1) .... 856 9,698
Consumer ............................................ 2,143 --
Commercial business ................................. 740 221
-------- -------
Total loans ....................................... $151,576 $26,181
======== =======
Mortgage-backed securities(2) ......................... $ 16,023 $51,437
======== =======
- ----------
(1) Net of loans in process of $1.6 million construction loans and $604,000
multi-family residential and non-residential loans.
(2) Includes mortgage-backed securities available for sale. Does not include
premiums of $1.8 million, discounts of $9,000 and unrealized gains of
$214,000.
One- to Four-Family Residential Real Estate Loans. The Company's primary
lending activity consists of the origination of one- to four-family,
owner-occupied, residential mortgage loans on properties located in the
Company's market area. The Company generally does not originate one- to
four-family residential loans on properties outside of its market area. At March
31, 2003, the Company had $200.8 million, or 86.4%, of its total loan portfolio
invested in one- to four-family residential mortgage loans.
The Company's fixed rate loans generally are originated and underwritten
according to standards that permit resale in the secondary mortgage market.
Whether the Company can or will sell fixed rate loans into the secondary market,
however, depends on a number of factors including, but not limited to, the
Company's portfolio mix, gap and liquidity positions, and market conditions.
Moreover, the Company is more likely to retain fixed rate loans if its one-year
gap is positive. The Company's fixed rate mortgage loans are amortized on a
monthly basis with principal and interest due each month. One- to four-family
residential real estate loans often remain outstanding for significantly shorter
periods than their contractual terms because borrowers may refinance or prepay
loans at their option. The Company's secondary market activities over the past
five years have been limited to sales of $4.0 million, $27.3 million, $9.2
million, $6.4 million, and $15.9 million for the fiscal years ended March 31,
2003, 2002, 2001, 2000, and 1999, respectively. Such sales generally constituted
current period originations. There were no loans identified as available for
sale as of March 31, 2003 and 2002. Mortgage loans held for sale at March 31,
2001, 2000 and 1999 totaled $861,000, $317,000 and $1.6 million, respectively.
The Company currently offers one- to four-family residential mortgage
loans with terms typically ranging from 15 to 30 years, and with adjustable or
fixed interest rates. Originations of fixed rate mortgage loans versus ARM loans
are monitored on an ongoing basis and are affected significantly by the level of
market interest rates, customer preference, the Company's interest rate gap
position, and loan products offered by the Company's competitors. Particularly
in a relatively low interest rate environment, borrowers typically prefer fixed
rate loans to ARM loans. Therefore, even if management's strategy is to
emphasize ARM loans, market conditions may be such that there is greater demand
for fixed rate mortgage loans. During the year ended March 31, 2003, the
Company's ARM portfolio increased by $2.5 million or 5.0%.
The Company offers two ARM loan products. The Treasury ARM loan adjusts
annually with interest rate adjustment limitations of 2% per year and with a cap
of 5% on total rate increases or decreases over the life of the loan. The index
on the Treasury ARM loan is the weekly average yield on U.S. Treasury
securities, adjusted to a constant maturity of one year. However, these loans
are underwritten at the fully-indexed interest rate. The Cost of Fund 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 from 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, the
Company has used different indices for ARM loans, such as the National Average
Contract Rate for Previously Occupied Homes and
7
the National Average Cost of Funds. Consequently, the interest rate adjustments
on the Company's portfolio of ARM loans do not reflect changes in a particular
interest rate index. One- to four-family residential ARM loans totaled $52.5
million, or 22.6%, of the Company's total loan portfolio at March 31, 2003.
The primary purpose of offering ARM loans is to make the Company's loan
portfolio more interest rate sensitive. However, as the interest income earned
on ARM loans varies with prevailing interest rates, such loans do not offer the
Company predictable cash flows as would long-term, fixed rate loans. ARM loans
carry increased credit risk associated with potentially higher monthly payments
by borrowers as general market interest rates increase. It is possible,
therefore, that during periods of rising interest rates, the risk of default on
ARM loans may increase due to the upward adjustment of interest costs to the
borrower. Management believes that the Company's credit risk associated with its
ARM loans is reduced because the Company has either a 3% or 5% cap on interest
rate increases during the life of its ARM loans.
The Company also offers home equity loans and equity lines of credit
collateralized by a second mortgage on the borrower's principal residence. In
underwriting these home equity loans, the Company requires that the maximum
loan-to-value ratios, including the principal balances of both the first and
second mortgage loans, not exceed 85%. The home equity loan portfolio consists
of adjustable rate loans, which use the Ohio Average Cost of Funds for
SAIF-Insured Savings Associations and the prime rate as published in The Wall
Street Journal as interest rate indices. Home equity loans include fixed term
adjustable rate loans, as well as lines of credit. As of March 31, 2003, the
Company's equity loan portfolio totaled $21.2 million, or 10.6%, of its one- to
four-family mortgage loan portfolio.
The Company's second mortgage consumer loans are secured by the borrower's
principal residence with a maximum loan-to-value ratio, including the principal
balances of both the first and second mortgage loans, of 80% or less. Such loans
are offered on a fixed rate basis with terms of up to ten years. At March 31,
2003, second mortgage loans totaled $859,000, or .4%, of one-to four-family
mortgage loans.
The Company's one- to four-family residential first mortgage loans
customarily include due-on-sale clauses, which are provisions giving the Company
the right to declare a loan immediately due and payable in the event, among
other things, that the borrower sells or otherwise disposes of the underlying
real property serving as security for the loan. Due-on-sale clauses are an
important means of adjusting the rates on the Company's fixed rate mortgage loan
portfolio.
Regulations limit the amount that a savings association may lend relative
to the appraised value of the real estate securing the loan, as determined by an
appraisal at the time of loan origination. The Company's lending policies limit
the maximum loan-to-value ratio on both fixed rate and ARM loans without private
mortgage insurance to 80% of the lesser of the appraised value or the purchase
price of the property to serve as collateral for the loan. However, the Company
makes one- to four-family real estate loans with loan-to-value ratios in excess
of 80%. For 15 year fixed rate ARM loans with loan-to-value ratios of 80.01% to
85%, 85.01% to 90%, 90.01% to 95%, and 95.01% to 97%, the Company requires the
first 6%, 12%, 25% and 30%, respectively, of the loan to be covered by private
mortgage insurance. For 30 year fixed rate loans with loan-to-value ratios of
80.01% to 85%, 85.01% to 90%, and 90.01% to 97%, the Company requires the first
12%, 25%, and 30%, respectively, of the loan to be covered by private mortgage
insurance. The Company requires fire and casualty insurance, as well as title
insurance regarding good title, on all properties securing real estate loans
made by the Company and flood insurance, where applicable.
Multi-Family Residential Real Estate Loans. In recent years, the Company
has not emphasized multi-family real estate loans. Loans secured by multi-family
real estate constituted approximately $8.5 million, or 3.7%, of the Company's
total loan portfolio at March 31, 2003. The Company's multi-family real estate
loans are secured by multi-family residences, such as apartment buildings. At
March 31, 2003, 86.7% of the Company's multi-family loans were secured by
properties located within the Company's market area. At March 31, 2003, the
Company's multi-family real estate loans had an average balance of $315,000, and
the largest multi-family real estate loan had a principal balance of $2.3
million. Multi-family real estate loans currently are offered with adjustable
interest rates or short term balloon maturities, although in the past the
Company originated fixed rate long term multi-family real estate loans. The
terms of each multi-family loan are negotiated on a case by case basis, although
such loans typically have adjustable interest rates tied to a market index, and
amortize over 15 to 25 years. The Company
8
currently does not emphasize multi-family real estate construction loans;
however, the Company's policies do not preclude such lending.
Loans secured by multi-family real estate generally involve a greater
degree of credit risk than one- to four-family residential mortgage loans and
carry larger loan balances. This increased credit risk is a result of several
factors, including the concentration of principal in a limited number of loans
and borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by multi-family real
estate is typically dependent upon the successful operation of the related real
estate property. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired.
Non-Residential Real Estate and Land Loans. Loans secured by
non-residential real estate constituted approximately $7.4 million, or 3.2%, of
the Company's total loan portfolio at March 31, 2003. The Company's
non-residential real estate loans are secured by improved property such as
offices, small business facilities, and other non-residential buildings. At
March 31, 2003, 99.8% of the Company's non-residential real estate loans were
secured by properties located within the Company's market area. At March 31,
2003, the Company's non-residential loans had an average balance of $190,000 and
the largest non-residential real estate loan had a principal balance of $2.1
million. The Company's largest loan is to a partnership in which a director 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
the Company has originated fixed rate long term non-residential real estate
loans. Non-residential real estate loans originated by the Company generally
amortize over 15 to 25 years. The Company currently does not emphasize
non-residential real estate construction loans; however, the Company's policies
do not preclude such lending.
Loans secured by non-residential real estate generally involve a greater
degree of risk than one- to four-family residential mortgage loans and carry
larger loan balances. This increased credit risk is a result of several factors,
including the concentration of principal in a limited number of loans and
borrowers, the effects of general economic conditions on income producing
properties, and the increased difficulty of evaluating and monitoring these
types of loans. Furthermore, the repayment of loans secured by non-residential
real estate is typically dependent upon the successful operation of the related
real estate project. If the cash flow from the project is reduced, the
borrower's ability to repay the loan may be impaired.
The Company also originates a limited number of land loans secured by
individual improved and unimproved lots for future residential construction.
Land loans are generally offered with a fixed rate and with terms of up to 5
years. Land loans totaled $813,000 at March 31, 2003.
Residential Construction Loans. To a lesser extent, the Company originates
loans to finance the construction of one- to four-family residential property.
At March 31, 2003, the Company had $3.6 million, or 1.5%, of its total loan
portfolio invested in interim construction loans. The Company makes construction
loans to private individuals and to builders. Loan proceeds are disbursed in
increments as construction progresses and as inspections warrant. Construction
loans are typically structured as permanent one- to four-family loans originated
by the Company with a 12-month construction phase. Accordingly, upon completion
of the construction phase, there is no change in interest rate or term to
maturity of the original construction loan, nor is a new permanent loan
originated.
Commercial Business Loans. Commercial business loans totaled $7.4 million,
or 3.2% of the Company's total loan portfolio at March 31, 2003. The Company has
enhanced its commercial lending program by hiring an experienced commercial
lender.
The Company underwrites commercial loans to corporations, partnerships
and other businesses. The majority of its commercial loan customers are local
businesses with revenues of less than $5 million. The Company offers
commercial loans for equipment purchases, lines of credit or letters of credit
as well as loans where the borrower is the sole occupant of the property.
Commercial loans are originated on a fixed and floating rate basis with a
maturity of the floating rate extending up to 20 years, while the fixed-rate
commercial loans are usually fully amortized within 3-5 years.
9
The underwriting of a commercial loan is based upon a review of the
financial statements of the prospective borrower and guarantors. In most cases
the Company obtains a general lien on accounts receivable and inventory, along
with the specific collateral such as real estate or equipment, as appropriate.
Commercial business loans generally bear higher interest rates than
residential loans, but they also involve a higher risk of default since their
repayment is generally dependent on the cash flow of the borrower's business. As
a result, the availability of funds for the repayment of commercial business
loans may be substantially dependent on the success of the business itself and
the general economic environment.
Consumer Loans. Ohio savings associations, like the Bank, are authorized
to invest in secured and unsecured consumer loans in an aggregate amount which,
when combined with investments in commercial paper and corporate debt
securities, does not exceed 20% of an association's assets. In addition, an Ohio
association is permitted to invest up to 5% of its assets in loans for
educational purposes.
As of March 31, 2003, consumer loans totaled $3.9 million, or 1.7%, of the
Company's total loan portfolio. The principal types of consumer loans offered by
the Company are fixed rate auto and truck loans, education loans, credit card
loans, unsecured personal loans, and loans secured by deposit accounts. Consumer
loans are offered primarily on a fixed rate basis with maturities generally of
less than ten years. During fiscal 2003, the majority of the education loans
were sold because of the high level of administrative costs associated with
maintaining this portfolio.
The underwriting standards employed by the Company for consumer loans
include a determination of the applicant's credit history and an assessment of
ability to meet existing obligations and payments on the proposed loan. The
quality and stability of the applicant's monthly income are determined by
analyzing the gross monthly income from primary employment, and additionally
from any verifiable secondary income. Creditworthiness of the applicant is of
primary consideration; however, the underwriting process also includes a
comparison of the value of the collateral in relation to the proposed loan
amount.
Consumer loans entail greater credit risk than residential mortgage loans,
particularly in the case of consumer loans that are unsecured or secured by
assets that depreciate rapidly, such as automobiles, mobile homes, boats, and
recreational vehicles. In such cases, repossessed collateral for a defaulted
consumer loan may not provide an adequate source of repayment for the
outstanding loan and the remaining deficiency often does not warrant further
substantial collection efforts against the borrower. In particular, amounts
realizable on the sale of repossessed automobiles may be significantly reduced
based upon the condition of the automobiles and the lack of demand for used
automobiles. The Company adds a general provision on a regular basis to its
consumer loan loss allowance, based on general economic conditions and prior
loss experience. See "--Delinquencies and Classified Assets--Non-Performing and
Impaired Assets," and "--Classification of Assets" for information regarding the
Company's loan loss experience and reserve policy.
Mortgage-Backed Securities. The Company also invests in mortgage-backed
securities issued or guaranteed by the United States Government or agencies
thereof. Investments in mortgage-backed securities are made either directly or
by exchanging mortgage loans in the Company's portfolio for such securities.
These securities consist primarily of adjustable rate mortgage-backed securities
issued or guaranteed by the Federal National Mortgage Association ("FNMA"),
Federal Home Loan Mortgage Corporation ("FHLMC"), and the Government National
Mortgage Association ("GNMA"). Total mortgage-backed securities, including those
designated as available for sale, increased from $17.3 million at March 31, 2002
to $76.0 million at March 31, 2003. The Company has elected to reinvest mortgage
prepayments into interest rate sensitive mortgage-backed securities with an
estimated average life of five years or less.
The Company's objectives in investing in mortgage-backed securities varies
from time to time depending upon market interest rates, local mortgage loan
demand, and the Company's level of liquidity. Mortgage-backed securities are
more liquid than whole loans and can be readily sold in response to market
conditions and interest rates. Mortgage-backed securities purchased by the
Company also have lower credit risk because principal and interest are either
insured or guaranteed by the United States Government or agencies thereof.
10
Loan Originations, Solicitation, Processing, and Commitments. Loan
originations are derived from a number of sources such as real estate broker
referrals, existing customers, borrowers, builders, attorneys, and walk-in
customers. Upon receiving a loan application, the Company obtains a credit
report and employment verification to verify specific information relating to
the applicant's employment, income, and credit standing. In the case of a real
estate loan, an appraiser approved by the Company appraises the real estate
intended to secure the proposed loan. An underwriter in the Company's loan
department checks the loan application file for accuracy and completeness, and
verifies the information provided. One-to four-family and multi-family
residential, and commercial real estate loans, for up to $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 can 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 approvals of loans are made within the scope
of management's authority. All approvals subsequently are ratified monthly by
the full Board of Directors. Fire and casualty insurance is required at the time
the loan is made and throughout the term of the loan. After the loan is
approved, a loan commitment letter is promptly issued to the borrower. At March
31, 2003, the Company had commitments to originate $4.0 million of loans.
If the loan is approved, the commitment letter specifies the terms and
conditions of the proposed loan including the amount of the loan, interest rate,
amortization term, a brief description of the required collateral, and required
insurance coverage. The borrower must provide proof of fire and casualty
insurance on the property serving as collateral, which insurance must be
maintained during the full term of the loan. A title search of the property is
required on all loans secured by real property.
Although in the past the Company has purchased loans originated by other
lenders, the Company has not purchased any such loans in at least 10 years. At
March 31, 2003, 0.4% of all loans in the Company's portfolio were purchased from
others and the majority of such loans were collateralized by properties located
in Ohio.
Origination, Purchase and Sale of Loans and Mortgage-Backed Securities.
The table below shows the Company's loan origination, purchase and sales
activity for the periods indicated.
At March 31,
-----------------------------------
2003 2002 2001
--------- --------- ---------
(In Thousands)
Total loans receivable, net at beginning of year ....... $ 251,172 $ 246,619 $ 237,095
Loans originated:
One- to four-family residential(1) .................. 52,523 89,376 60,192
Multi-family residential(2) ......................... 2,761 -- 2,803
Non-residential real estate/land .................... 1,074 3,712 4,255
Consumer loans ...................................... 1,900 2,534 6,854
Commercial loans .................................... 2,973 886 1,611
--------- --------- ---------
Total loans originated ........................... 61,231 96,508 75,715
Loans sold:
Whole loans ......................................... (3,998) (27,130) (9,185)
--------- --------- ---------
Total loans sold ................................. (3,998) (27,130) (9,185)
Mortgage loans transferred to REO ...................... -- -- (98)
Loan repayments ........................................ (80,362) (66,077) (56,485)
Other loan activity, net ............................... 330 1,252 (423)
--------- --------- ---------
Total loans receivable, net at end of year(3) .... $ 228,373 $ 251,172 $ 246,619
========= ========= =========
Mortgage-backed securities at beginning of year ........ $ 17,326 $ 8,574 $ 10,459
Mortgage-backed securities purchased ................... 77,442 14,155 2,025
Principal repayments and other activity ................ (18,766) (5,403) (3,910)
--------- --------- ---------
Mortgage-backed securities at end of year ........ $ 76,002 $ 17,326 $ 8,574
========= ========= =========
- ----------
(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) Excludes loans held for sale.
11
Loan Origination Fees and Other Income. In addition to interest earned on
loans, the Company generally receives loan origination fees. The Company
accounts for loan origination fees in accordance with Statement of Financial
Accounting Standards ("SFAS") No. 91 "Accounting for Non-refundable Fees and
Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases." To the extent that loans are originated or acquired for the Company's
portfolio, SFAS No. 91 requires that the Company defer loan origination fees and
costs and amortize such amounts as an adjustment of yield over the life of the
loan by use of the level yield method. SFAS No. 91 reduces the amount of revenue
recognized by many financial institutions at the time such loans are originated
or acquired. Fees deferred under SFAS No. 91 are recognized into income
immediately upon prepayment or the sale of the related loan. At March 31, 2003,
the Company had $1.1 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.
The Company receives other fees, service charges, and other income that
consist primarily of deposit transaction account service charges, late charges,
credit card fees, and income from REO operations. The Company recognized fees
and service charges of $1.4 million, $1.1 million and $891,000, for the fiscal
years ended March 31, 2003, 2002 and 2001, respectively.
Loans to One Borrower. Savings associations are subject to the same limits
as those applicable to national banks, which under current regulations restrict
loans to one borrower to an amount equal to 15% of unimpaired capital and
unimpaired surplus on an unsecured basis, and an additional amount equal to 10%
of unimpaired capital and unimpaired surplus if the loan is secured by readily
marketable collateral (generally, financial instruments and bullion, but not
real estate). At March 31, 2003, the Company's largest concentration of loans to
one borrower totaled $3.3 million. The Company had no loans at March 31, 2003
that exceeded the loans to one borrower regulations.
Delinquencies and Classified Assets
Delinquencies. The Company's collection procedures provide that when a
loan is 15 days past due, a computer-generated late charge notice is sent to the
borrower requesting payment, plus a late charge. This notice is followed with a
letter again requesting payment when the payment becomes 20 days past due. If
delinquency continues, at 30 days another collection letter is sent and personal
contact efforts are attempted, either in person or by telephone, to strengthen
the collection process and obtain reasons for the delinquency. Also, plans to
arrange a repayment plan are made. If a loan becomes 60 days past due, the loan
becomes subject to possible legal action if suitable arrangements to repay have
not been made. In addition, the borrower is given information which provides
access to consumer counseling services, to the extent required by HUD
regulations. When a loan continues in a delinquent status for 90 days or more,
and a repayment schedule has not been made or kept by the borrower, a notice of
intent to foreclose is sent to the borrower, giving 30 days to cure the
delinquency. If not cured, foreclosure proceedings are initiated.
Non-Performing and Impaired Assets. Loans are reviewed on a regular basis
and are placed on a non-accrual status when, in the opinion of management, the
collection of additional interest is doubtful. Mortgage loans are placed on
non-accrual status generally when either principal or interest is 90 days or
more past due and management considers the interest uncollectible. Interest
accrued and unpaid at the time a loan is placed on non-accrual status is charged
against interest income.
Under the provisions of SFAS No. 114, "Accounting by Creditors for
Impairment of a Loan," a loan is defined as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due under the contractual terms of the loan agreement. In applying
the provisions of SFAS No. 114, the Banks 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 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.
12
At March 31, 2003, the Company had non-performing and impaired assets of
$2.5 million and a ratio of non-performing and impaired assets to total assets
of .65%. At March 31, 2002 and 2001, the Company had non-performing and impaired
assets of $3.8 million and $1.2 million, respectively. The increase in
nonperforming assets as of 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
was repaid in May 2002). The $1.8 million loan concentration consists of four
loans that are cross-collateralized by non-residential and residential real
estate. One loan totaling $430,000 at March 31, 2003, depicted in the following
table in the one- to four-family total, was originated in October 1996, two
loans totaling $1.4 million were originated in November 1999, and one loan
totaling $49,000 was originated in October 2000 which in April 2002 was paid
down by $36,000 leaving $13,000 included in the following table in the
commercial business loan total. In September 2001, the Company ceased accruing
interest on these loans. The Company has entered into a workout and liquidation
agreement with the borrower which calls for the sale and disposal of the
underlying security of these loans within a specified timeframe. Management
anticipates that the asset disposal will commence in the first quarter of fiscal
2004 and should be completed by the third quarter of fiscal 2004.
Real estate acquired by the Company as a result of foreclosure or by deed
in lieu of foreclosure is deemed REO until such time as it is sold. When REO is
acquired, it is recorded at the lower of the unpaid principal balance of the
related loan or its fair value, less estimated selling expenses. Valuations are
periodically performed by management, and any subsequent decline in fair value
is charged to operations.
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, the Company did not have any material loans which
had been restructured pursuant to SFAS No. 15.
At March 31,
---------------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(Dollars In Thousands)
Non-accrual loans:
Mortgage loans:
Permanent loans secured by one- to four-family dwelling units ... $ 664 $ 616 $ 443 $ 170 $ 224
All other mortgage loans ........................................ 430 1,070 -- -- --
Non-mortgage loans:
Commercial business loans ....................................... 1,380 1,416 -- --
Consumer ........................................................ 6 25 72 30 12
------- ------- ------- ------- -------
Total non-accrual loans .............................................. 2,480 3,127 515 200 236
Accruing loans 90 days or more delinquent ............................ 15 38 -- -- 44
------- ------- ------- ------- -------
Total non-performing loans ........................................... 2,495 3,165 515 200 280
Loans deemed impaired (1) ............................................ -- 645 645 940 --
------- ------- ------- ------- -------
Total non-performing and impaired loans .............................. 2,495 3,810 1,160 1,140 280
Total real estate owned (2) .......................................... -- 19 124 90 41
------- ------- ------- ------- -------
Total non-performing and impaired assets ............................. $ 2,495 $ 3,829 $ 1,284 $ 1,230 $ 321
======= ======= ======= ======= =======
Total non-performing and impaired loans to net loans receivable ...... 1.09% 1.52% 0.47% 0.48% 0.13%
======= ======= ======= ======= =======
Total non-performing and impaired loans to total assets .............. 0.65% 1.14% 0.37% 0.37% 0.10%
======= ======= ======= ======= =======
Total non-performing and impaired assets to total assets ............. 0.65% 1.14% 0.41% 0.40% 0.12%
======= ======= ======= ======= =======
- ----------
(1) Includes loans deemed impaired that are currently performing.
(2) Represents the net book value of property acquired by us through
foreclosure or deed in lieu of foreclosure. These properties are recorded
at the lower of the loan's unpaid principal balance or fair value less
estimated selling expenses.
During the year ended March 31, 2003, 2002 and 2001, gross interest income
of $208,000, $99,000 and $12,000 would have been recorded on loans currently
accounted for on a non-accrual basis if the loans had been current throughout
the period. Interest income recognized on nonaccrual loans totaled $362,000,
$227,000 and $49,000 for the years ended March 31, 2003, 2002 and 2001,
respectively. Interest income on impaired loans is recognized using the cash
method of accounting and totaled approximately $24,000, $233,000 and $71,000 for
the years ended March 31, 2003, 2002 and 2001.
13
The following table sets forth information with respect to loans past due
by 60-89 days and 90 days or more in our portfolio at the dates indicated.
At March 31,
-----------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(In Thousands)
Loans past due 60-89 days ............ $ 107 $ 431 $ 2,536 $ 1,539 $ 1,710
Loans past due 90 days or more ....... 2,495 3,165 515 200 280
------- ------- ------- ------- -------
Total past due 60 days or more .... $ 2,602 $ 3,596 $ 3,051 $ 1,739 $ 1,990
======= ======= ======= ======= =======
Classification of Assets. Federal regulations provide for the
classification of loans and other assets such as debt and equity securities
considered by the OTS to be of lesser quality as "substandard," "doubtful," or
"loss" assets. An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the savings institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted. Assets
that do not expose the savings institution to risk sufficient to warrant
classification in one of the aforementioned categories, but which possess some
weaknesses, are required to be designated "special mention" by management.
When a savings institution classifies problem assets as either substandard
or doubtful, it is required to establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances that have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When a savings institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of the amount of the assets so classified, or
to charge off such amount. A savings institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the OTS, which can order the establishment of additional
general or specific loss allowances. The Company regularly reviews the problem
loans in its portfolio to determine whether any loans require classification in
accordance with applicable regulations.
The following table sets forth the aggregate amount of the Company's
classified assets at the dates indicated.
At March 31,
-----------------------------------------------
2003 2002 2001 2000 1999
------- ------- ------- ------- -------
(Dollars in Thousands)
Substandard assets(1) ......... $ 2,481 $ 3,303 $ 569 $ 290 $ 206
Doubtful assets ............... -- -- -- -- --
Loss assets ................... -- 105 -- -- 8
------- ------- ------- ------- -------
Total classified assets .... $ 2,481 $ 3,408 $ 569 $ 290 $ 214
======= ======= ======= ======= =======
- ----------
(1) Includes REO.
Allowance for Loan Losses. In determining the amount of the allowance for
loan losses at any point in time, management and the Board of Directors apply a
systematic process focusing on the risk of loss in the loan portfolio. First,
delinquent non-residential, multi-family and commercial loans are evaluated
individually for potential impairments in their carrying value. Second,
management applies historic loss experience to the individual loan types in the
portfolio. In addition to the historic loss percentage, management employs an
additional risk percentage tailored to the perception of overall risk in the
economy. However, the analysis of the allowance for loan losses requires an
element of judgment and is subject to the possibility that the allowance may
need to be increased, with the corresponding reduction in earnings.
14
During fiscal years ended March 31, 2003, 2002 and 2001, the Company added
$91,000, $134,000, and $96,000, respectively, to the provision for loan losses.
The Company's allowance for loan losses totaled $678,000, $730,000, and
$655,000, at March 31, 2003, 2002 and 2001, respectively. Management believes
that the Company's current allowance for loan losses is adequate, however, there
can be no assurance that the allowance for loan losses will be adequate to cover
losses that may in fact be realized in the future or that additional provisions
for loan losses will not be required. To the best of management's knowledge, all
known losses as of March 31, 2003, 2002 and 2001 have been recorded.
Analysis of the Allowance For Loan Losses. The following table sets forth the
analysis of the allowance for loan losses for the periods indicated.
At or for the Year Ended March 31,
-------------------------------------------------------------
2003 2002 2001 2000 1999
--------- --------- --------- --------- ---------
(In Thousands)
Loans receivable, net ............................ $ 228,373 $ 251,172 $ 246,619 $ 237,095 $ 214,094
========= ========= ========= ========= =========
Average loans receivable, net .................... $ 242,120 $ 253,058 $ 245,624 $ 229,845 $ 209,178
========= ========= ========= ========= =========
Allowance balance (at beginning of period) ....... $ 730 $ 655 $ 793 $ 692 $ 721
Provision for losses ............................. 91 134 96 106 78
Charge-offs:
Mortgage loans:
One-to-four family .......................... (20) -- (7) -- (8)
Residential construction .................... -- -- -- (21) --
Multi-family residential .................... -- -- -- -- --
Non-residential real estate and land ........ (84) -- (172) -- --
Other loans:
Consumer .................................... (54) (63) (61) (12) --
Commercial (1) .............................. -- -- -- -- (107)
--------- --------- --------- --------- ---------
Gross charge-offs ...................... (158) (63) (240) (33) (115)
--------- --------- --------- --------- ---------
Recoveries:
Mortgage loans:
One-to-four family .......................... -- -- -- -- 8
Residential construction .................... -- -- -- -- --
Multi-family residential .................... -- -- -- 6 --
Non-residential real estate and land ........ -- -- -- -- --
Other loans:
Consumer .................................... 15 4 6 22 --
Commercial .................................. -- -- -- -- --
--------- --------- --------- --------- ---------
Gross recoveries ....................... 15 4 6 28 8
--------- --------- --------- --------- ---------
Net charge-offs ........................ (143) (59) (234) (5) (107)
--------- --------- --------- --------- ---------
Allowance for loan losses balance (at end of
period) (2) .................................... $ 678 $ 730 $ 655 $ 793 $ 692
========= ========= ========= ========= =========
Allowance for loan losses as a percent of
loans receivable, net at end of period ......... 0.30% 0.29% 0.27% 0.33% 0.32%
========= ========= ========= ========= =========
Net loans charged off as a percent of average
loans receivable, net .......................... 0.06% 0.02% 0.10% --% 0.05%
========= ========= ========= ========= =========
Ratio of allowance for loan losses to total
non-performing and impaired assets at end
of period ...................................... 27.17% 19.07% 51.01% 64.47% 215.58%
========= ========= ========= ========= =========
Ratio of allowance for loan losses to non-
performing and impaired loans at end of
period ......................................... 27.17% 19.16% 56.47% 69.56% 247.14%
========= ========= ========= ========= =========
- ----------
(1) The fiscal 2001 charge-offs include a $172,000 charge-off related to an
impaired loan. This loan was current at March 31, 2002 and March 31, 2001.
This loan was paid off in fiscal 2003.
(2) At March 31, 2002, a specific allowance of $105,000 was reserved for a
nonresidential loan that met the definition of impaired pursuant to SFAS
No. 114. This loan was paid off in fiscal 2003.
15
Allocation of Allowance for Loan Losses. The following table sets forth
the allocation of allowance for loan losses by loan category for the periods
indicated. Management believes that the allowance can be allocated by category
only on an approximate basis. The allocation of the allowance by category is not
necessarily indicative of future losses and does not restrict the use of the
allowance to absorb losses in any category.
At March 31,
------------------------------------------------------------------------------------------
2003 2002 2001 2000 1999
---------------- ---------------- ---------------- ---------------- ----------------
% 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 ................... $ 162 86.4% $ 126 85.3% $ 551 85.7% $ 414 87.4% $ 370 85.6%
Residential construction .............. -- 1.5 -- 3.4 23 2.8 9 1.7 16 3.5
Multi-family residential .............. 7 3.7 47 2.8 24 3.5 37 3.3 38 3.2
Non-residential real estate and land .. 55 3.5 207 3.8 20 3.0 -- 2.5 2 2.5
Other loans:
Consumer .............................. 119 1.7 28 2.4 6 3.1 52 3.0 45 3.0
Commercial ............................ 335 3.2 322 2.3 31 1.9 281 2.1 221 2.2
----- ------ ----- ------ ----- ------ ----- ------ ----- ------
Total allowance for loan losses ........ $ 678 100.0% $ 730 100.0% $ 655 100.0% $ 793 100.0% $ 692 100.0%
===== ====== ===== ====== ===== ====== ===== ====== ===== ======
16
Investment Activities
The Company's investment portfolio is comprised of investment securities,
corporate bonds and notes and state and local obligations. The carrying value of
the Company's investment securities totaled $35.9 million at March 31, 2003,
compared to $22.3 million at March 31, 2002, an increase of $13.6 million, or
60.9%. The Company's cash and cash equivalents, consisting of cash and due from
banks, federal funds sold, interest bearing deposits due from other financial
institutions with original maturities of three months or less, and mutual funds
totaled $17.5 million at March 31, 2003 compared to $27.9 million at March 31,
2002, a decrease of $10.4 million, or 37.3%.
The Company is required under federal regulations to maintain liquid
assets that may be invested in specified short-term securities and certain other
investments. See "Regulation--Liquidity" below. Liquidity levels may be
increased or decreased depending upon the yields on investment alternatives and
upon management's judgment as to the attractiveness of the yields then available
in relation to other opportunities and its expectation of the level of yield
that will be available in the future, as well as management's projections as to
the short term demand for funds to be used in the Company's loan origination and
other activities.
Investment Portfolio. The following table sets forth the carrying value of
the Company's investment securities portfolio, short-term investments and FHLB
stock, at the dates indicated.
At March 31,
---------------------------------------------------------------
2003 2002 2001
------------------- ------------------- -------------------
Carrying Market Carrying Market Carrying Market
Value Value Value Value Value Value
-------- -------- -------- -------- -------- --------
(In Thousands)
Investment securities:
Mutual funds ....................................... $ 10,009 $ 10,009 $ -- $ -- $ -- $ --
Corporate bonds and notes .......................... 12,118 12,314 2,998 3,051 3,994 4,061
U.S. Government and agency securities .............. 10,112 10,309 19,152 18,904 9,501 9,567
Obligations of state and political subdivisions .... 3,602 3,615 136 143 146 146
-------- -------- -------- -------- -------- --------
Total investment securities ........................ 35,841 36,247 22,286 22,098 13,641 13,774
Other Investments:
Interest-bearing deposits in other financial
institutions ...................................... 6,529 6,529 10,633 10,633 12,891 12,891
Federal funds sold ................................. 8,000 8,000 15,000 15,000 6,000 6,000
Federal Home Loan Bank stock ....................... 4,041 4,041 3,767 3,767 3,510 3,510
-------- -------- -------- -------- -------- --------
Total investments .................................. $ 54,411 $ 54,817 $ 51,686 $ 51,498 $ 36,042 $ 36,175
======== ======== ======== ======== ======== ========
17
Investment Portfolio Maturities. The following table sets forth the
scheduled maturities, carrying values, market values and average yields for the
Company's investment securities at March 31, 2003. The Company does not hold any
investment securities with maturities in excess of 30 years.
At March 31, 2003
-----------------------------------------------------------------------------
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:
Mutual funds ..................................... $10,009 2.22% $ -- --% $ -- --% $ -- --%
Corporate bonds and notes ........................ 1,520 4.03 $10,598 5.87 -- -- -- --
U.S. Government and agency ....................... 2,015 3.55 7,004 4.27 -- -- 1,093 1.71
Obligations of state and political subdivisions .. -- -- -- -- 125 7.97 3,447 6.69
------- ---- ------- ---- ---- ---- ------ ----
Total investment securities .................. $13,544 2.62% $17,602 5.23% $125 7.97% $4,540 5.51%
======= ==== ======= ==== ==== ==== ====== ====
At March 31, 2003
---------------------------------------
Total Investment
Securities
---------------------------------------
Average Weighted
Life Carrying Market Average
In Years Value Value Yield
-------- -------- ------- --------
(Dollars in Thousands)
Investment Securities:
Mutual funds ..................................... .00 $10,009 $10,009 2.22%
Corporate bonds and notes ........................ 2.80 12,118 $12,314 5.64
U.S. Government and agency ....................... 4.39 10,112 10,309 3.85
Obligations of state and political subdivisions .. 20.23 3,602 3,615 6.73
----- ------- ------- ----
Total investment securities .................... 4.22 $35,841 $36,247 4.29%
===== ======= ======= ====
18
Sources of Funds
General. Deposits are the major source of the Company's funds for lending
and other investment purposes. In addition to deposits, the Company derives
funds from the amortization, prepayment or sale of loans and mortgage-backed
securities, the sale or maturity of investment securities, operations and, if
needed, advances from the Federal Home Loan Bank ("FHLB"). Scheduled loan
principal repayments are a relatively stable source of funds, while deposit
inflows and outflows and loan prepayments are influenced significantly by
general interest rates and market conditions. Borrowings may be used on a
short-term basis to compensate for reductions in the availability of funds from
other sources or on a longer term basis for general business purposes. The
Company had $30.0 million of advances from the FHLB at March 31, 2003.
Deposits. Consumer and commercial deposits are attracted principally from
within the Company's market area through the offering of a broad selection of
deposit instruments including NOW accounts, passbook savings, money market
deposit, term certificate accounts and individual retirement accounts. The
Company accepts deposits of $100,000 or more and offers negotiated interest
rates on such deposits. Deposit account terms vary according to the minimum
balance required, the period of time during which the funds must remain on
deposit, and the interest rate, among other factors. The Company regularly
evaluates its internal cost of funds, surveys rates offered by competing
institutions, reviews the Company's cash flow requirements for lending and
liquidity, and executes rate changes when deemed appropriate. The Company does
not obtain funds through brokers, nor does it solicit funds outside its market
area.
Deposit Portfolio. Savings and other deposits in the Company as of March
31, 2003, comprised the following:
Weighted Percentage
Average Minimum of Total
Interest Rate Minimum Term Checking and Savings Deposits Amount Balances Deposits
- ------------- ------------ ----------------------------- ------- -------- ----------
(In Thousands)
0.56% None NOW Accounts $ -- $ 39,982 13.29%
1.05 None Passbook -- 84,478 28.07
1.20 None Money Market Investor 2,500 13,647 4.54
Certificates of Deposit
-----------------------
1.66 12 months or less Fixed term, fixed rate 500 19,400 6.45
2.44 12 to 24 months Fixed term, fixed rate 500 53,755 17.86
3.92 25 to 36 months Fixed term, fixed rate 500 15,870 5.27
4.75 36 months or more Fixed term, fixed rate 500 35,184 11.69
4.04 Negotiable Jumbo Certificates 100,000 38,615 12.83
--------- -------
$ 300,931 100.00%
========= =======
19
The following table sets forth the change in dollar amount of savings
deposits in the various types of savings accounts offered by the Company between
the dates indicated.
Balance at Balance at Balance at
March 31, % Increase March 31, % Increase March 31, %
2003 Deposits (Decrease) 2002 Deposits (Decrease) 2001 Deposits
--------- -------- ---------- ---------- -------- ---------- ---------- --------
(Dollars in Thousands)
NOW accounts ................... $ 39,982 13.29% $ 1,586 $ 38,396 12.76 $ 4,754 $ 33,642 12.11%
Passbook statement accounts .... 84,478 28.07 6,993 77,485 25.75 22,911 54,574 19.65
Money market passbook .......... 13,647 4.54 1,838 11,809 3.92 2,904 8,905 3.21
Certificates of deposit(1)
Original maturities of:
12 months or less .......... 19,400 6.45 (9,097) 28,497 9.47 3,003 25,494 9.18
12 to 24 months ............ 53,755 17.86 (27,250) 81,005 26.92 (20,100) 101,105 36.41
25 to 36 months ............ 15,870 5.27 6,242 9,628 3.20 (408) 10,036 3.61
36 months or more .......... 35,184 11.69 23,341 11,843 3.93 5,668 6,175 2.22
Negotiated jumbo ........... 38,615 12.83 (3,679) 42,294 14.05 4,519 37,775 13.61
-------- ------ -------- -------- ------ -------- -------- ------
Total ...................... $300,931 100.00% $ (26) $300,957 100.00% $ 23,251 $277,706 100.00%
======== ====== ======== ======== ====== ======== ======== ======
- ----------
(1) Certain Individual Retirement Accounts ("IRAs") are included in the
respective certificate balances. IRAs totaled $33.7 million, $33.1 million
and $31.8 million, as of March 31, 2003, 2002 and 2001, respectively.
The following table sets forth the average dollar amount and weighted
average rate of savings deposits in the various types of savings accounts
offered by the Company.
Years Ended March 31,
----------------------------------------------------------------------------------------
2003 2002 2001
---------------------------- ---------------------------- ----------------------------
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 .. $ 8,830 2.94% 0.00% $ 8,735 3.02% 0.00% $ 5,684 2.19% 0.00%
NOW accounts ......................... 39,344 13.10 .77 27,569 9.54 1.78 25,527 9.82 1.73
Passbook statement accounts .......... 73,486 24.47 1.05 63,091 21.84 2.65 45,800 17.62 3.16
Money market passbook ................ 13,682 4.56 1.20 10,395 3.60 2.69 9,637 3.71 3.23
Certificates of deposit .............. 164,984 54.93 3.89 179,092 62.00 5.37 173,266 66.66 6.03
-------- ------ ---- -------- ------ ---- -------- ------ ----
Total deposits .................. $300,326 100.00% 2.81% $288,882 100.00% 4.17% $259,914 100.00% 4.87%
======== ====== ==== ======== ====== ==== ======== ====== ====
20
The following table sets forth the certificates of deposit in the Company
classified by rates as of the dates indicated:
At March 31,
----------------------------------
2003 2002 2001
-------- -------- --------
(Dollars in Thousands)
1.00- 2.00% ................. $ 29,681 $ -- $ --
2.01- 4.00% ................. 70,834 61,208 --
4.01- 6.00% ................. 61,425 73,408 73,177
6.01- 6.75% ................. 884 38,651 107,408
-------- -------- --------
Total .................... $162,824 $173,267 $180,585
======== ======== ========
The following table sets forth the amount and maturities of certificates
of deposit at March 31, 2003.
Amount Due
----------------------------------------------------
Less Than 1-2 2-3 After
One Year Years Years 3 Years Total
--------- -------- -------- -------- --------
Rate (In Thousands)
- ----
1.00- 2.00% ........ $ 26,143 $ 3,537 $ 1 $ -- $ 29,681
2.01- 4.00% ........ 51,445 11,365 3,266 4,752 70,828
4.01- 6.00% ........ 17,527 10,778 5,075 28,051 61,431
6.01- 6.75% ........ 510 245 129 -- 884
-------- -------- -------- -------- --------
Total ........... $ 95,625 $ 25,925 $ 8,471 $ 32,803 $162,824
======== ======== ======== ======== ========
The following table indicates the amount of the Company's certificates of
deposit of $100,000 or more by time remaining until maturity as of March 31,
2003.
Maturity Period Certificates of Deposit
--------------- -----------------------
(In Thousands)
Three months or less....................... $ 13,617
Over three months through six months....... 7,320
Over six months through twelve months...... 11,808
Over twelve months......................... 15,999
--------
Total................................. $ 48,744
========
Borrowings
Savings deposits are the primary source of funds for the Company's lending
and investment activities and for its general business purposes. The Bank may
rely upon advances from the FHLB and the Federal Reserve Bank discount window to
supplement their supply of lendable funds and to meet deposit withdrawal
requirements. Advances from the FHLB typically are collateralized by stock in
the FHLB and a portion of first mortgage loans held by the Bank. At March 31,
2003 the Company had $30.0 million in advances outstanding.
The FHLB functions as a central reserve bank providing credit for member
savings associations and financial institutions. As members, the Banks are
required to own capital stock in the FHLB and are authorized to apply for
advances on the security of such stock and certain home mortgages and other
assets (principally, securities that are obligations of, or guaranteed by, the
United States) provided certain standards related to creditworthiness have been
met. Advances are made pursuant to several different programs. Each credit
program has its own interest rate and range of maturities. Depending on the
program, limitations on the amount of advances are based either on a fixed
percentage of a member institution's net worth or on the FHLB's assessment of
the institution's creditworthiness. Although advances may be used on a
short-term basis for cash management needs, FHLB advances have not been, nor are
they expected to be, a significant long-term funding source for the Company.
21
Year Ended March 31,
2003 2002 2001
-------- -------- --------
(Dollars in thousands)
Federal Home Loan Bank advances:
Maximum month-end balance ............ $ 30,000 $ 6,000 $ 10,000
Balance at end of period ............. 30,000 5,000 6,000
Average balance ...................... 17,204 5,505 7,877
Weighted average interest rate on:
Balance at end of period ............. 4.15% 5.24% 5.54%
Average balance for period ........... 4.28 5.32 5.69
Competition
The Company encounters strong competition both in attracting deposits and
in originating real estate and other loans. Its most direct competition for
deposits has come historically from commercial banks, brokerage houses, other
savings associations, and credit unions in its market area, and the Company
expects continued strong competition from such financial institutions in the
foreseeable future. The Company's market area includes branches of several
commercial banks that are substantially larger than the Company in terms of
state-wide deposits. The Company competes for savings by offering depositors a
high level of personal service and expertise together with a wide range of
financial services.
The competition for real estate and other loans comes principally from
commercial banks, mortgage banking companies, and other savings associations.
This competition for loans has increased substantially in recent years as a
result of the large number of institutions competing in the Company's market
area as well as the increased efforts by commercial banks to expand mortgage
loan originations.
The Company competes for loans primarily through the interest rates and
loan fees it charges and the efficiency and quality of services it provides
borrowers, real estate brokers, and builders. Factors that affect competition
include general and local economic conditions, current interest rate levels, and
volatility of the mortgage markets.
Personnel
As of March 31, 2003, we had 115 full-time equivalent employees. None of
our employees are represented by collective bargaining group. We believe we have
good relations with our employees.
Regulation
As a state-chartered, SAIF-insured savings association, the Bank is
subject to examination, supervision and extensive regulation by the OTS, the
Ohio Division of Financial Institutions (the "Ohio Division"), and the FDIC. The
Bank and Village are members of, and own stock in, the FHLB of Cincinnati, which
is one of the twelve regional banks in the Federal Home Loan Bank System. This
regulation and supervision establishes a comprehensive framework of activities
in which an institution can engage and is intended primarily for the protection
of the insurance fund and depositors. The Bank also is subject to regulation by
the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board") governing reserves to be maintained against deposits and certain other
matters. The OTS and Ohio Division regularly examine the Banks and prepare
reports for the consideration of the Company's Board of Directors on any
deficiencies that they may find in the Banks' operations. The FDIC also examines
the Bank and Village in its role as the administrator of the SAIF. The Bank's
relationship with its depositors and borrowers also is regulated to a great
extent by both federal and state laws especially in such matters as the
ownership of savings accounts and the form and content of the Company's mortgage
documents. Any change in such regulation, whether by the FDIC, OTS, Ohio
Division, or Congress, could have a material adverse impact on the Company, the
Bank, and Village and their operations.
Federal Regulation of Savings Institutions
Business Activities. The activities of savings associations are governed
by the Home Owners' Loan Act, as amended (the "HOLA") and, in certain respects,
the Federal Deposit Insurance Act (the "FDI Act"). These federal statutes among
other things, (1) limit the types of loans a savings association may make, (2)
prohibit the acquisition of any corporate debt security that is not rated in one
of the four highest rating categories, and (3) restrict
22
the aggregate amount of loans secured by non-residential real estate property to
400% of capital. The description of statutory provisions and regulations
applicable to savings associations set forth herein does not purport to be a
complete description of such statutes and regulations and their effect on the
Company.
Loans to One Borrower. Under the HOLA, savings institutions are generally
subject to the national bank limits on loans to one borrower. Generally, savings
institutions may not make a loan or extend credit to a single or related group
of borrowers in excess of 15% of the institution's unimpaired capital and
surplus. An additional amount may be lent, equal to 10% of unimpaired capital
and surplus, if such loan is secured by readily-marketable collateral, which is
defined to include certain securities and bullion, but generally does not
include real estate. See "--Lending Activities--Loans to One Borrower."
Qualified Thrift Lender Test. The HOLA requires savings associations to
meet a qualified thrift lender ("QTL") test. Under the QTL test, a savings
association is required to maintain at least 65% of its "portfolio assets"
(total assets less (i) specified liquid assets up to 20% of total assets, (ii)
intangibles, including goodwill, and (iii) the value of property used to conduct
business) in certain "qualified thrift investments," primarily residential
mortgages and related investments, including certain mortgage-backed and related
securities on a monthly basis in 9 out of every 12 months.
A savings association that fails the QTL test must either convert to a
bank charter or operate under certain restrictions. As of March 31, 2003, the
Banks maintained 97.9% of its portfolio assets in qualified thrift investments
and, therefore, met the QTL test.
Limitation on Capital Distributions. OTS regulations impose limitations
upon all capital distributions by savings institutions, such as cash dividends,
payments to repurchase or otherwise acquire its shares, payments to stockholders
of another institution in a cash-out merger and other distributions charged
against capital. A "well capitalized" institution can, after prior notice but
without the approval of the OTS, make capital distributions during a calendar
year in an amount up to 100% of its net income during the calendar year, plus
its retained net income for the preceding two years. As of March 31, 2003 the
Banks were "well-capitalized" institutions.
Liquidity. The Bank is required to maintain an average daily balance of
liquid assets (cash, certain time deposits, bankers' acceptances, specified U.S.
Government, state or federal agency obligations, shares of certain mutual funds
and certain corporate debt securities and commercial paper) in order to operate
in a safe and sound manner. The Bank's average liquidity ratio for March 2003
was 36.8%.
Community Reinvestment. Under the Community Reinvestment Act (the "CRA"),
as implemented by OTS regulations, a savings institution has a continuing and
affirmative obligation, consistent with its safe and sound operation, to help
meet the credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions, nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with its examination of a savings institution,
to assess the institution's record of meeting the credit needs of its community
and to take such record into account in its evaluation of certain applications
by such institution. The CRA also requires all institutions to make public
disclosure of their CRA ratings. The Banks received a "satisfactory" CRA rating
under the current CRA regulations in their most recent respective federal
examinations by the OTS.
Transactions with Related Parties. The Banks' authority to engage in
transactions with related parties or "affiliates" (i.e., any company that
controls or is under common control with an institution, including the Company
and any non-savings institution subsidiaries) or to make loans to certain
insiders, is limited by Sections 23A and 23B of the Federal reserve Act ("FRA").
Section 23A limits the aggregate amount of transactions with any individual
affiliate to 10% of the capital and surplus of the savings institution and also
limits the aggregate amount of transactions with all affiliates to 20% of the
savings institution's capital and surplus. Certain transactions with affiliates
are required to be secured by collateral in an amount and of a type described in
Section 23A and the purchase of low quality assets from affiliates is generally
prohibited. Section 23B provides that certain transactions with affiliates,
including loans and asset purchases, must be on terms and under circumstances,
including credit standards, that are substantially the same or at least as
favorable to the institution as those prevailing at the time for comparable
transactions with non-affiliated companies. In addition, savings institutions
are prohibited from lending
23
to any affiliate that is engaged in activities that are not permissible for bank
holding companies and no savings institution may purchase the securities of any
affiliate other than a subsidiary.
Enforcement. Under the FDI Act, the OTS has primary enforcement
responsibility over savings institutions and has the authority to bring
enforcement action against all "institution-related parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers and/or
directors of the institutions, receivership, conservatorship or the termination
of deposit insurance. Civil penalties cover a wide range of violations and
actions, and range up to $25,000 per day, unless a finding of reckless disregard
is made, in which case penalties may be as high as $1 million per day. Criminal
penalties for most financial institution crimes include fines of up to $1
million and imprisonment for up to 30 years. Under the FDI Act, the FDIC has the
authority to recommend to the Director of OTS that enforcement action be taken
with respect to a particular savings institution. If action is not taken by the
Director, the FDIC has authority to take such action under certain
circumstances.
Standards for Safety and Soundness. The federal banking agencies have
adopted a final regulation and Interagency Guidelines Prescribing Standards for
Safety and Soundness ("Guidelines") to implement the safety and soundness
standards required under the FDI Act. The Guidelines set forth the safety and
soundness standards that the federal banking agencies use to identify and
address problems at insured depository institutions before capital becomes
impaired. The standards set forth in the Guidelines address internal controls
and information systems; internal audit system; credit underwriting; loan
documentation; interest rate risk exposure; asset growth; and compensation, fees
and benefits. The agencies also adopted a proposed rule which proposes asset
quality and earnings standards which, if adopted, would be added to the
Guidelines. If the appropriate federal banking agency determines that an
institution fails to meet any standard prescribed by the Guidelines, the agency
may require the institution to submit to the agency an acceptable plan to
achieve compliance with the standard, as required by the FDI Act. The final
regulations establish deadlines for the submission and review of such safety and
soundness compliance plans.
Capital Requirements. The OTS capital regulations require savings
institutions to meet three capital standards: a 1.5% tangible capital standard,
a 4.0% leverage ratio (or core capital ratio) and an 8.0% risk-based capital
standard. Core capital is defined as common stockholders' equity (including
retained earnings), certain non-cumulative perpetual preferred stock and related
surplus, minority interests in equity accounts of consolidated subsidiaries less
intangibles other than certain qualifying supervisory goodwill and certain
mortgage servicing rights. The OTS regulations also require that, in meeting the
tangible ratio, leverage and risk-based capital standards, institutions must
deduct investments in and loans to subsidiaries engaged in activities not
permissible for a national bank.
The risk-based capital standard for savings institutions requires the
maintenance of Tier 2 (core) and total capital (which is defined as core capital
and supplementary capital) to risk weighted assets of 4.0% and 8.0%,
respectively. In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet assets, are multiplied by a risk-weight of
0% to 100%, as assigned by the OTS capital regulation based on the risks the OTS
believes are inherent in the type of asset. The components of Tier 1 (core)
capital are equivalent to those discussed earlier under the 4.0% leverage ratio
standard. The components of supplementary capital currently include cumulative
preferred stock, long-term perpetual preferred stock, mandatory convertible
securities, subordinated debt and intermediate preferred stock and allowance for
loan and lease losses. Allowance for loan and lease losses includable in
supplementary capital is limited to a maximum of 1.25%. Overall, the amount of
supplementary capital included as part of total capital cannot exceed 100% of
core capital.
An OTS regulatory capital rule also incorporates an interest rate risk
component. Savings associations with "above normal" interest rate risk exposure
are subject to a deduction from total capital for purposes of calculating their
risk-based capital requirements. A savings association's interest rate risk is
measured by the decline in the net portfolio value of its assets (i.e., the
difference between incoming and outgoing discounted cash flows from assets,
liabilities and off-balance sheet contracts) that would result from a
hypothetical 200-basis point increase or decrease in market interest rates,
divided by the estimated economic value of the association's assets. In
calculating its total capital under the risk-based rule, a savings association
whose measured interest rate risk exposure exceeds 2%, must deduct an interest
rate component equal to one-half of the excess change. The OTS has deferred, for
the present
24
time, the date on which the interest rate component is to be deducted from total
capital. The rule also provides that the Director of the OTS may waive or defer
an institution's interest rate risk component on a case-by-case basis.
Prompt Corrective Regulatory Action
Under the OTS Prompt Corrective Action regulations, the OTS is required to
take certain supervisory actions against undercapitalized institutions, the
severity of which depends upon the institution's degree of capitalization.
Generally, a savings institution that has total risk-based capital of less than
8.0% or a leverage ratio or a Tier 1 core capital ratio that is less than 4.0%
is considered to be undercapitalized. A savings institution that has the total
risk-based capital less than 6.0%, a Tier 1 core risk-based capital ratio of
less than 3.0% or a leverage ratio that is less than 3.0% is considered to be
"significantly undercapitalized" and a savings institution that has a tangible
capital to assets ratio equal to or less than 2.0% is deemed to be "critically
undercapitalized." Subject to a narrow exception, the banking regulator is
required to appoint a receiver or conservator for an institution that is
"critically undercapitalized." The regulation also provides that a capital
restoration plan must be filed with the OTS within 45 days of the date an
institution receives notice that it is "undercapitalized," "significantly
undercapitalized" or "critically undercapitalized." In addition, numerous
mandatory supervisory actions become immediately applicable to the institution,
including, but not limited to, restrictions on growth, investment activities,
capital distributions, and affiliate transactions. The OTS could also take any
one of a number of discretionary supervisory actions, including the issuance of
a capital directive and the replacement of senior executive officers and
directors.
Insurance of Accounts and Regulation by the FDIC
The Bank and Village are members of the SAIF, which is administered by the
FDIC. Deposits are insured up to applicable limits by the FDIC and such
insurance is backed by the full faith and credit of the U.S. Government. As
insurer, the FDIC imposes deposit insurance premiums and is authorized to
conduct examinations of and to require reporting by FDIC-insured institutions.
It also may prohibit any FDIC-insured institution from engaging in any activity
the FDIC determines by regulation or order to pose a serious risk to the FDIC.
The FDIC also has the authority to initiate enforcement actions against savings
and loan associations, after giving the OTS an opportunity to take such action,
and may terminate the deposit insurance if it determines that the institution
has engaged or is engaging in unsafe or unsound practices, or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, ranging from .23% to .31% of
deposits, based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as well capitalized (i.e., a core capital
ratio of at least 5%, a ratio of core capital to risk-weighted assets of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
would pay the lowest premium while institutions that are less than adequately
capitalized (i.e., a core capital or core capital to risk-based capital ratios
of less than 4% or a risk-based capital ratio of less than 8%) and considered of
substantial supervisory concern would pay the highest premium. Risk
classification of all insured institutions will be made by the FDIC for each
semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
Federal Home Loan Bank System
The Banks are members of the FHLB System, which consists of 12 regional
FHLBs. The FHLB provides a central credit facility primarily for member
institutions. The Banks, as members of the FHLB, are required to acquire and
hold shares of capital stock in that FHLB in an amount at least equal to 1% of
the aggregate principal amount of its unpaid residential mortgage loans and
similar obligations at the beginning of each year, or 1/20 of its advances
(borrowings) from the FHLB, whichever is greater. The Banks were in compliance
with this requirement with an aggregate investment in FHLB-Cincinnati stock, at
March 31, 2003, of $4.0 million.
25
The FHLBs are required to provide funds for the resolution of insolvent
thrifts and to contribute funds for affordable housing programs. These
requirements could reduce the amount of dividends that the FHLBs pay to their
members and could also result in the FHLBs imposing a higher rate of interest on
advances to their members. FHLB dividends were 4.4% for the fiscal year ended
March 31, 2003. If dividends were reduced, or interest on future FHLB-Cincinnati
advances increased, the Company's net interest income would likely also be
reduced.
Ohio Regulation
As a savings and loan association organized under the laws of the State of
Ohio, the Bank is subject to regulation by the Ohio Division of Financial
Institutions (the "Ohio Division"). Regulation by the Ohio Division affects the
Bank's internal organization as well as its savings, mortgage lending, and other
investment activities. Periodic examinations by the Ohio Division are usually
conducted on a joint basis with the OTS. Ohio law requires that the Bank
maintain federal deposit insurance as a condition of doing business.
Under Ohio law, an Ohio association may buy any obligation representing a
loan that would be a legal loan if originated by the Bank, subject to various
requirements including: loans secured by liens on income-producing real estate
may not exceed 20% of an association's assets; consumer loans, commercial paper,
and corporate debt securities may not exceed 20% of an association's assets;
loans for commercial, corporate, business, or agricultural purposes may not
exceed 10% of an association's assets unless the Ohio Division increases the
limitation to 30%, provided that an association's required reserve must increase
proportionately; certain other types of loans may be made for lesser percentages
of the association's assets; and, with certain limitations and exceptions,
certain additional loans may be made if not in excess of 3% of the association's
total assets. In addition, no association may make real estate acquisition and
development loans for primarily residential use to one borrower in excess of 2%
of assets. The total investments in commercial paper or corporate debt of any
issuer cannot exceed 1% of an association's assets, with certain exceptions.
Ohio law authorizes Ohio-chartered associations to, among other things:
(i) invest up to 15% of assets in the capital stock, obligations, and other
securities of service corporations organized under the laws of Ohio, and an
additional 20% of net worth may be invested in loans to majority owned service
corporations; (ii) invest up to 10% of assets in corporate equity securities,
bonds, debentures, notes, or other evidence of indebtedness; (iii) exceed limits
otherwise applicable to certain types of investments (other than investments in
service corporations) by and between 3% and 10% of assets, depending upon the
level of the institution's permanent stock, general reserves, surplus, and
undivided profits; and (iv) invest up to 15% of assets in any loans or
investments not otherwise specifically authorized or prohibited, subject to
authorization by the institution's board of directors.
An Ohio association may invest in such real property or interests therein
as its board of directors deems necessary or convenient for the conduct of the
business of the association, but the amount so invested may not exceed the net
worth of the association at the time the investment is made. Additionally, an
association may invest an amount equal to 10% of its assets in any other real
estate. This limitation does not apply, however, to real estate acquired by
foreclosure, conveyance in lieu of foreclosure, or other legal proceedings in
relation to loan security interests.
Notwithstanding the above powers authorized under Ohio law and regulation,
a state-chartered savings association, such as the Company, is subject to
certain limitations on its permitted activities and investments under federal
law, which may restrict the ability of an Ohio-chartered association to engage
in activities and make investments otherwise authorized under Ohio law.
Ohio has adopted statutory limitations on the acquisition of control of an
Ohio savings and loan association by requiring the written approval of the Ohio
Division prior to the acquisition by any person or company, as defined under the
Ohio Revised Code, of a controlling interest in an Ohio association. Control
exists, for purposes of Ohio law, when any person or company, either directly,
indirectly, or acting in concert with one or more other persons or companies (a)
acquires 15% any class of voting stock, irrevocable proxies, or any combination
thereof, (b) directs the election of a majority of directors, (c) becomes the
general partner of the savings and loan association, (d) has influence over the
management and policies of the savings and loan association, (e) has the ability
to direct shareholder votes, or (f) anything else deemed to be control by the
Ohio Division. The Ohio Division's written permission is required when the total
amount of control held by the acquiror was less than or equal to 25% control
26
before the acquisition and more than 25% control after the acquisition, or when
the total amount of control held by the acquiror was less than 50% before the
acquisition and more than 50% after the acquisition. Ohio law also prescribes
other situations in which the Ohio Division must be notified of the acquisition
even though prior approval is not required. Any person or company, which would
include a director, will not be deemed to be in control by virtue of an annual
solicitation of proxies voted as directed by a majority of the board of
directors.
Under certain circumstances, interstate mergers and acquisitions involving
associations incorporated under Ohio law are permitted by Ohio law. A savings
and loan association or savings and loan holding company with its principal
place of business in another state may acquire a savings and loan association or
savings and loan holding company incorporated under Ohio law if the laws of such
other state permit an Ohio savings and loan association or an Ohio holding
company reciprocal rights. Additionally, recently enacted legislation permits
interstate branching by savings and loan associations incorporated under Ohio
law.
Ohio law requires prior written approval of the Ohio Superintendent of
Savings and Loans of a merger of an Ohio association with another savings and
loan association or a holding company affiliate.
Holding Company Regulation
The Company is a non-diversified savings and loan holding company within
the meaning of the HOLA, as amended. As such, the Company is registered with the
OTS and is subject to OTS regulations, examinations, supervision and reporting
requirements. In addition, the OTS has enforcement authority over the Company
and its non-savings institution subsidiaries. Among other things, this authority
permits the OTS to restrict or prohibit activities that are determined to be a
serious risk to the subsidiary savings institution. The Bank is required to
notify the OTS 30 days before declaring any dividend to the Company.
As a unitary savings and loan holding company, the Company generally is not
restricted under existing laws as to the types of business activities in which
it may engage, provided that the Bank continues to be a QTL. Upon any
nonsupervisory acquisition by the Company of another savings association or
savings bank that meets the QTL test and is deemed to be a savings institution
by the OTS, the Company would become a multiple savings and loan holding company
(if the acquired institution is held as a separate subsidiary) and would be
subject to extensive limitations on the types of business activities in which it
could engage. The HOLA limits the activities of a multiple savings and loan
holding company and its non-insured institution subsidiaries primarily 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 OTS, and
activities authorized by OTS regulation. The OTS is prohibited from approving
any acquisition that would result in a multiple savings and loan holding company
controlling savings institutions in more than one state, subject to two
exceptions: (i) the approval of interstate supervisory acquisitions by savings
and loan holding companies, and (ii) the acquisition of a savings institution in
another state if the laws of the state of the target savings institution
specifically permit such acquisitions.
The HOLA prohibits a savings and loan holding company, directly or
indirectly, or through one or more subsidiaries, from acquiring other savings
institution or holding company thereof, without prior written approval of the
OTS. It also prohibits the acquisition or retention of, with certain exceptions,
more than 5% of non-subsidiary savings institution, a non-subsidiary holding
company, or a non-subsidiary company engaged in activities other than those
permitted by the HOLA; or acquiring or retaining control of an institution that
is not federally insured. In evaluating applications by holding companies to
acquire savings institutions, the OTS must consider the financial and managerial
resources, future prospects of the company and institution involved, the effect
of the acquisition on the risk to the insurance fund, the convenience and needs
of the community and competitive factors.
Federal Securities Laws
The Company's common stock is registered with the SEC under the
Securities Exchange Act of 1934. The Company is subject to the information,
proxy solicitation, insider trading restrictions and other requirements under
the Exchange Act.
27
Shares of the common stock purchased by persons who are not affiliates of
the Company may be resold without registration. Shares purchased by an affiliate
of the Company are subject to the resale restrictions of Rule 144 under the
Securities Act. If the Company meets the current public information requirements
of Rule 144 under the Securities Act, each affiliate of the Company who complies
with the other conditions of Rule 144 (including those that require the
affiliate's sale to be aggregated with those of certain other persons) is able
to sell in the public market, without registration, a number of shares not to
exceed, in any three-month period, the greater of (i) 1% of the outstanding
shares of the Company or (ii) the average weekly volume of trading in such
shares during the preceding four calendar weeks. Provision may be made in the
future by the Company to permit affiliates to have their shares registered for
sale under the Securities Act under certain circumstances.
The USA PATRIOT Act
In response to the events of September 11, 2001, the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and
Obstruct Terrorism Act of 2001, or the USA PATRIOT Act, was signed into law on
October 26, 2001. The USA PATRIOT Act gives the federal government new powers to
address terrorist threats through enhanced domestic security measures, expanded
surveillance powers, increased information sharing, and broadened anti-money
laundering requirements. By way of amendments to the Bank Secrecy Act, Title III
of the USA PATRIOT Act takes measures intended to encourage information sharing
among bank regulatory agencies and law enforcement bodies. Further, certain
provisions of Title III impose affirmative obligations on a broad range of
financial institutions, including banks, thrifts, brokers, dealers, credit
unions, money transfer agents and parties registered under the Commodity
Exchange Act.
Among other requirements, Title III of the USA PATRIOT Act imposes the following
requirements with respect to financial institutions:
o Pursuant to Section 352, all financial institutions must establish
anti-money laundering programs that include, at minimum: (i)
internal policies, procedures, and controls; (ii) specific
designation of an anti-money laundering compliance officer; (iii)
ongoing employee training programs; and (iv) an independent audit
function to test the anti-money laundering program.
o Section 326 of the Act authorizes the Secretary of the Department of
Treasury, in conjunction with other bank regulators, to issue
regulations that provide for minimum standards with respect to
customer identification at the time new accounts are opened.
o Section 312 of the Act requires financial institutions that
establish, maintain, administer, or manage private banking accounts
or correspondence accounts in the United States for non-United
States persons or their representatives (including foreign
individuals visiting the United States) to establish appropriate,
specific, and, where necessary, enhanced due diligence policies,
procedures, and controls designed to detect and report money
laundering.
o Effective December 25, 2001, financial institutions are prohibited
from establishing, maintaining, administering or managing
correspondent accounts for foreign shell banks (foreign banks that
do not have a physical presence in any country), and will be subject
to certain record keeping obligations with respect to correspondent
accounts of foreign banks.
o Bank regulators are directed to consider a holding company's
effectiveness in combating money laundering when ruling on Federal
Reserve Act and Bank Merger Act applications.
The federal banking agencies have begun to propose and implement regulations
pursuant to the USA PATRIOT Act. These proposed and interim regulations would
require financial institutions to adopt the policies and procedures contemplated
by the USA PATRIOT Act.
28
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 irregularities. In addition to the establishment of a new accounting
oversight board which will enforce auditing, quality control and independence
standards and will be funded by fees from all publicly traded companies, the Act
restricts accounting companies from providing both auditing and consulting
services to an audit client. To ensure auditor independence, any non-audit
services being provided to an audit client will require pre-approval 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 SEC, subject to civil and criminal penalties if they knowingly or willfully
violate this certification requirement. In addition, under the Act, counsel will
be required to report evidence of a material violation 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.
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 period during which certain types of
law suits can be instituted 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, civil and criminal penalties have been enhanced.
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 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 SEC) 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
statement's materially misleading. In accordance with the Act, the SEC proposed
rules requiring inclusion of an 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. In addition, the Act requires that each
financial report required to be prepared in accordance with (or reconciled to)
generally accepted accounting principles and filed with the SEC reflect all
material correcting adjustments that are identified by an RPAF in accordance
with generally accepted accounting principles and the rules and regulations of
the SEC.
Federal and State Taxation
Federal Taxation. Income taxes are accounted for under the asset and
liability method which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of events that have been
included in the financial statements or tax returns. Under this method deferred
tax liabilities and assets are determined based on the difference between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
The Federal tax bad debt reserve method available to thrift institutions
was repealed in 1996 for tax years beginning after 1995. As a result, the
Company was required to change from the reserve method to the specific
charge-off method to compute its bad debt deduction. In addition, the Company is
required generally to recapture into income the portion of its bad debt reserve
(other than the supplemental reserve) that exceeds its base year reserves, or
approximately $200,000.
29
The recapture amount resulting from the change in a thrift's method of
accounting for its bad debt reserves generally will be taken into taxable income
ratably (on a straight-line basis) over a six-year period. The Bank began
recapture of the bad debt reserve during fiscal 1999.
Retained earnings as of March 31, 2003 include approximately $2.7 million
for which no provision for Federal income tax has been made. This reserve (base
year and supplemental) is frozen/not forgiven as certain events could trigger a
recapture such as stock redemption or distributions to shareholders in excess of
current or accumulated earnings and profits.
The Company's 1999 federal income tax return is under examination by the
IRS. Management does not anticipate any material effects on results of
operations or financial position as a result of the examination.
Ohio Taxation. The Company files Ohio franchise tax returns. For Ohio
franchise tax purposes, savings institutions are currently taxed at a rate equal
to 1.3% of taxable net worth. The Company is not currently under audit with
respect to its Ohio franchise tax returns.
30
ITEM 2. Properties
- ------------------
The Company conducts its business through its main banking office located
in Wooster, Ohio, its eight additional full service branch offices located in
its market area, and the full service office of Village Savings Bank. The
following table sets forth information about its offices as of March 31, 2003.
Original Year
Leased or Leased or Year of Lease
Location Owned Acquired Expiration
- -------- --------- ------------- -------------
North Market Street Office
151 N. Market Street
Wooster, Ohio Owned 1902 N/A
Cleveland Point Financial Center
1908 Cleveland Road
Wooster, Ohio Owned 1978 N/A
Madison South Office
2024 Millersburg Road
Wooster, Ohio Owned 1999 N/A
Northside Office
543 Riffel Road
Wooster, Ohio Leased 1999 2019
Millersburg Office
90 N. Clay Street
Millersburg, Ohio Owned 1964 N/A
Claremont Avenue Office
233 Claremont Avenue
Ashland, Ohio Owned 1968 N/A
Buehlers-Sugarbush Office
1055 Sugarbush Drive
Ashland, Ohio Leased 2001 2021
Rittman Office
237 North Main Street
Rittman, Ohio Owned 1972 N/A
Lodi Office
303 Highland Drive
Lodi, Ohio Owned 1980 N/A
Village Savings Bank
1265 S. Main Street
North Canton, Ohio Owned 1998 N/A
The Company's accounting and record keeping activities are maintained through an
in-house data processing system.
31
ITEM 3. Legal Proceedings
- -------------------------
The Company is not involved in any pending legal proceedings other than
routine legal proceedings occurring in the ordinary course of business which, in
the aggregate, involve amounts which are believed by management to be immaterial
to the financial condition and operations of the Company.
ITEM 4. Submission of Matters to a Vote of Security Holders
- -----------------------------------------------------------
During the fourth quarter of the fiscal year covered by this report, the
Registrant did not submit any matters to the vote of security holders.
PART II
-------
ITEM 5. Market for Registrant's Common Stock and Related Stockholder Matters
- ----------------------------------------------------------------------------
The "Stockholder Information" and Common Stock and Related Matters
sections of the Company's Annual report to stockholders for the fiscal year
ended March 31, 2003 (the "2003 Annual Report to Stockholders") are incorporated
herein by reference. No other sections of the 2003 Annual Report to Stockholders
are incorporated herein by this reference.
ITEM 6. Selected Financial Data
- -------------------------------
The "Selected Consolidated Financial and Other Data" section of the
Company's 2003 Annual Report to Stockholders is incorporated herein by
reference. No other sections of the 2003 Annual Report to Stockholders are
incorporated herein by this reference.
ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
- -------------------------------------------------------------------------------
of Operations
- -------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's 2003 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 2003
Annual report to Stockholders are incorporated herein by this reference.
ITEM 7a. Quantitive and Qualitative Disclosures about Market Risk
- -----------------------------------------------------------------
The "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section of the Company's 2003 Annual Report to
Stockholders is incorporated herein by reference. No other sections of the 2003
Annual Report to Stockholders are incorporated herein by this reference.
32
ITEM 8. Financial Statements and Supplementary Data
- ---------------------------------------------------
The material identified in Item 16(a)(1) hereof is incorporated herein by
reference.
ITEM 9. Changes in and Disagreements With Accountants on Accounting and
- -----------------------------------------------------------------------
Financial Disclosure
- --------------------
Not Applicable
PART III
--------
ITEM 10. Directors and Executive Officers of the Company
- --------------------------------------------------------
The "Proposal I--Election of Directors" section of the Company's
definitive proxy statement for its 2003 annual meeting of stockholders (the
"Proxy Statement") is incorporated herein by reference.
ITEM 11. Executive Compensation
- -------------------------------
The "Proposal I--Election of Directors" section of the Company's Proxy
Statement is incorporated herein by reference.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and
- ---------------------------------------------------------------------------
Related Stockholder Matters
- ---------------------------
The "Proposal I--Election of Directors" section of the Company's Proxy
Statement is incorporated herein by reference.
ITEM 13. Certain Relationships and Related Transactions
- -------------------------------------------------------
The "Proposal I - Election of Directors" section of the Company's Proxy
Statement is incorporated herein by reference.
ITEM 14. Controls and Procedures.
- ---------------------------------
(a)The Company's Chief Executive Officer and Chief Financial Officer
evaluated the disclosure controls and procedures (as defined under Rules 13a-14
(c) and 15d-14 (c) of the Securities Exchange Act of 1934, as amended) as of a
date within ninety days of the filing date of this annual report. Based upon
that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that the Company's disclosure controls and procedures are effective.
(b) There were no significant changes in the Company's internal controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation.
ITEM 15. Principal Accountant Fees and Services
- -----------------------------------------------
The "Proposal IV - Ratification of Appointment of Auditors" section of the
Company's proxy statement dated June 20, 2003 is incorporated herein by
reference.
33
ITEM 16. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a)(1) Financial Statements
The following documents appear in sections of the Company's
2003 Annual Report to Stockholders under the same captions, and are incorporated
herein by reference. No other sections of the 2003 Annual Report to Stockholders
are incorporated herein by this reference:
(i) Selected Financial and Other Data;
(ii) Management's Discussion and Analysis of Financial Condition
and Results of Operations;
(iii) Report of Independent Certified Public Accountants;
(iv) Consolidated Statements of Financial Condition
(v) Consolidated Statements of Earnings;
(vi) Consolidated Statements of Stockholders' Equity;
(vii) Consolidated Statements of Cash Flows; and
(viii) Notes to Consolidated Financial Statements.
With the exception of the aforementioned sections, the
Company's 2003 Annual Report to Stockholders is not deemed filed as part of this
Annual Report on Form 10-K, and no other sections of the 2003 Annual Report to
Stockholders are incorporated herein by this reference.
(a)(2) Financial Statements Schedules
All financial statements schedules have been outlined as the
required information inapplicable or has been included in the Notes to
Consolidated Financial Statements.
34
(a)(3) Exhibits
--------
Reference to Prior
Filing or Exhibit
Number Attached
Exhibit Number Document Hereto
- -------------- ----------------- -----------------
3(i) Certificate of Incorporation *
3(ii) Bylaws *
4 Instruments defining the *
rights of security holders,
including debentures
9 Voting trust agreement None
10(i) Employment agreement with 10.1
Charles F. Finn
10(ii) Employment agreement with 10.2
Wanda Christopher-Finn
10(iii) Employment agreement with 10.3
Michael C. Anderson
11 Statement re: computation **
of per share earnings
12 Statement re: computation Not
of ratios Required
13 Annual Report to 13
Security Holders
16 Letter re: change in certifying None
accountants
18 Letter re: change in accounting None
principles
21 Subsidiaries of Registrant 21
22 Published report regarding None
matters submitted to vote of
security holders
23 Consent of Grant Thornton LLP 23
99(i) Statement furnished pursuant to Section 906 by 99.1
Charles F. Finn
99(ii) Statement furnished pursuant to Section 906 by 99.2
Michael C. Anderson
* Filed as exhibits to the Registrant's Registration statement on Form SB-2,
initially filed on September 18, 2001, as amended (Registration
No. 333-69600).
** Incorporated by reference to Note A.8. of "Notes to Consolidated Financial
Statements" of the 2003 Annual Report to Stockholders.
(b) Reports on Form 8-K:
Not Required
35
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WAYNE SAVINGS BANCSHARES, INC.
Date: June 27, 2003 By: /s/Charles F. Finn
-------------------------------------
Charles F. Finn
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
By: /s/Charles F. Finn By: /s/Michael C. Anderson
------------------------------------ -----------------------------------
Charles F. Finn, President, Chief Michael C. Anderson, Senior Vice President and
Executive Officer and Director Corporate Secretary
(Principal Executive Officer) (Principal Financial Officer)
Date: June 27, 2003 Date: June 27, 2003
By: /s/Myron Swartzentruber By: /s/Kenneth G. Rhode
------------------------------------ -----------------------------------
Myron Swartzentruber, Vice President Kenneth G. Rhode, Director
(Principal Accounting Officer)
Date: June 27, 2003 Date: June 27, 2003
By: /s/Donald E. Massaro By: /s/James C. Morgan
----------------------------------- -----------------------------------
Donald E. Massaro, Director James C. Morgan, Director
Date: June 27, 2003 Date: June 27, 2003
By: /s/Terry A. Gardner By: /s/Russell L. Harpster
----------------------------------- -----------------------------------
Terry A. Gardner, Director Russell L. Harpster, Director
Date: June 27, 2003 Date: June 27, 2003
By: /s/Joseph L. Retzler By: /s/Kenneth R. Lehman
----------------------------------- -----------------------------
Joseph L. Retzler, Director Kenneth R. Lehman
Date: June 27, 2003 Date: June 27, 2003
36
Certification of Chief Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Charles F. Finn, President and Chief Executive Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Wayne Savings
Bancshares, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual report fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
June 27, 2003 /s/Charles F. Finn
- ------------- -------------------------------------
Date Charles F. Finn
President and Chief Executive Officer
37
Certification of Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
I, Michael C. Anderson, Chief Financial Officer, certify that:
1. I have reviewed this annual report on Form 10-K of Wayne Savings
Bancshares, Inc.;
2. Based on my knowledge, this annual report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements and other financial
information included in this annual report fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this annual
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent functions):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data and
have identified for the registrant's auditors any material
weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in
this annual report whether there were significant changes in
internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
June 27, 2003 /s/Michael C. Anderson
- ------------- -------------------------------------
Date Michael C. Anderson
Chief Financial Officer
38