-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DVVEIof58+ZfW1tYl168hFYfc8xg9sLMKGSqKR806V9ZkQtTnH5nuwjKs83djuoC /ETu9Ue2zRblrCwnC3MSBA== 0000950110-98-000336.txt : 19980331 0000950110-98-000336.hdr.sgml : 19980331 ACCESSION NUMBER: 0000950110-98-000336 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980330 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: WAYNE BANCORP INC /DE/ CENTRAL INDEX KEY: 0001011032 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 223424621 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-20691 FILM NUMBER: 98578769 BUSINESS ADDRESS: STREET 1: 1195 HAMBURG TURNPIKE CITY: WAYNE STATE: NJ ZIP: 07474 BUSINESS PHONE: 2013055500 MAIL ADDRESS: STREET 1: 1195 HAMBURG TNPK CITY: WAYNE STATE: NJ ZIP: 07474 10-K 1 FORM 10-K ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ---------- FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934. FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NUMBER 20691 WAYNE BANCORP, INC. (Exact name of registrant as specified in its charter) DELAWARE 22-3424621 --------------------------------- ------------------------------- (State or other jurisdiction of (I.R.S. Employer Identification incorporation or organization) Number) 1195 HAMBURG TURNPIKE, WAYNE, NEW JERSEY 07474 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (973) 305-5500 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 $0.01 PER SHARE (Title of class) ---------- INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL THE REPORTS REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ] INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM 405 OF REGULATIONS S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE BEST OF THE 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] THE REGISTRANT'S VOTING STOCK TRADES ON THE NASDAQ NATIONAL MARKET UNDER THE SYMBOL "WYNE." THE AGGREGATE MARKET VALUE OF THE VOTING STOCK HELD BY NON-AFFILIATES OF THE REGISTRANT, WAS $47,731,817 AND IS BASED ON THE LAST SALES PRICE AS LISTED ON THE NASDAQ STOCK MARKET FOR MARCH 16, 1998 ($24.875 PER SHARE BASED ON 1,918,867 SHARES OF COMMON STOCK. THE REGISTRANT HAD 2,013,124 SHARES OUTSTANDING AS OF MARCH 16, 1998. ---------- DOCUMENTS INCORPORATED BY REFERENCE Portions of the Annual Report to Stockholders for the year ended December 31, 1997 are incorporated by reference in Part II of this Form 10-K. Portions of the Proxy Statement for the 1998 Annual Meeting of Stockholders are incorporated by reference into Part III of this Form 10-K. ================================================================================ INDEX PART I Page ------ ---- Item 1. Description of Business ................................... 1 Additional Item: Executive Officers of the Registrant ................ 18 Item 2. Properties ................................................ 18 Item 3. Legal Proceedings ......................................... 19 Item 4. Submission of Matters to a Vote of Security Holders ....... 19 PART II Item 5. Market for Registrant's Common Equity and Related Stockholders' Matters ..................................... 19 Item 6. Selected Financial Data ................................... 19 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations ............. 19 Item 7a. Quantitative and Qualitative Disclosure Account Market Risk ............................................... 19 Item 8. Financial Statements and Supplementary Data ............... 19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ....................... 19 PART III Item 10. Directors and Executive Officers of the Registrant ........ 19 Item 11. Executive Compensation .................................... 19 Item 12. Security Ownership of Certain Beneficial Owners and Management ............................................ 19 Item 13. Certain Relationships and Related Transactions ............. 20 PART IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K ................................................ 20 SIGNATURES WAYNE BANCORP, INC. ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997 PART I ITEM 1. DESCRIPTION OF BUSINESS. GENERAL Wayne Bancorp, Inc. (also referred to as the "Company" or "Registrant") was incorporated under Delaware law at the direction of the Board of Directors of Wayne Savings Bank, F.S.B. (the "Bank") to acquire all of the capital stock the Company issued in connection with its conversion from the mutual to stock form, which was consummated on June 27, 1996. The Registrant is a unitary savings and loan holding company and is subject to regulation by the Office of Thrift Supervision ("OTS"), the Federal Deposit Insurance Corporation ("FDIC") and the Securities and Exchange Commission ("SEC"). At December 31, 1997, the Registrant does not transact any material business other than through its sole subsidiary, the Bank. The Bank was organized in 1921 as the Pequannock and Wayne Building and Loan Association, a New Jersey mutual building and loan association, and was the first financial institution located in the Township of Wayne, New Jersey. In 1946, the Bank changed its name to Wayne Savings and Loan Association, a New Jersey mutual savings and loan association and converted to a federally chartered mutual savings bank under its current name in 1994. The Bank's primary regulator is the OTS. The Bank's deposits are insured up to the maximum allowable amount by the Savings Association Insurance Fund ("SAIF") of the FDIC. MARKET AREA AND COMPETITION The Company conducts its business through six banking offices, including its administrative office, all of which are located in northern New Jersey. The Company's deposit base is drawn principally from Passaic County, primarily the township of Wayne, a stable, residential community of approximately 50,000 persons located 20 miles west of New York City. The Company's primary market area is a highly competitive market for financial services and the Company faces intense competition both in making loans and in attracting deposits. The Company faces direct competition from a significant number of financial institutions operating in its market area, many with a state-wide or regional presence and in some cases a national presence. Many of these financial institutions are significantly larger and have greater financial resources than the Company. The Company's competition for loans comes principally from savings institutions, mortgage banking companies, commercial banks, credit unions and insurance companies. Its most direct competition for deposits has historically come from savings and loan associations and commercial banks. In addition, the Company faces increasing competition for deposits and other financial products from non-bank institutions such as brokerage firms and insurance companies in such areas as short-term money market funds, mutual funds and annuities. Competition may also increase as a result of the lifting of restrictions on the interstate operations of financial institutions. 1 LENDING ACTIVITIES Loan Portfolio Composition. The following table sets forth the composition of the Company's loan portfolio in dollar amounts and as a percentage of the portfolio at the dates indicated.
AT DECEMBER 31, ------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 ---------------- ------------------ ---------------- ------------------ ------------------ PERCENT PERCENT PERCENT PERCENT PERCENT OF OF OF OF OF AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ (DOLLARS IN THOUSANDS) Real estate: One- to four-family .... $130,865 71.70% $113,701 77.22% $ 87,579 77.10% $ 88,722 77.28% $ 89,602 83.27% Home equity ............ 27,889 15.28 24,394 16.57 20,964 18.46 21,165 18.44 13,326 12.39 Multi-family ........... 2,072 1.14 185 0.13 195 0.17 541 0.47 495 0.46 Commercial ............. 14,042 7.69 7,069 4.80 3,636 3.20 3,076 2.68 2,831 2.63 Construction ........... 3,929 2.15 -- -- -- -- 170 0.15 -- -- Commercial business .... 2,558 1.40 644 0.43 -- -- -- -- -- -- Consumer ............... 1,156 0.64 1,257 0.85 1,216 1.07 1,130 0.98 1,346 1.25 ------- ------ ------- ------ ------- ------ ------- ------ ------- ------ Total loans, gross .... 182,511 100.00% 147,250 100.00% 113,590 100.00% 114,804 100.00% 107,600 100.00% ====== ====== ====== ====== ====== Less: Undisbursed loan funds . 1,353 -- -- 111 -- Deferred loan origination fees ..... 56 36 13 59 30 Allowance for loan losses ................ 2,170 1,789 1,589 1,543 1,237 -------- -------- -------- -------- -------- Total loans, net ..... $178,932 $145,425 $111,988 $113,091 $106,333 ======== ======== ======== ======== ========
Loan Maturity. The following table shows the contractual maturity of the Company's gross loans at December 31, 1997. The table does not include principal repayments or prepayments.
AT DECEMBER 31, 1997 --------------------------------------------------------------------------------------- ONE- TO COMMERCIAL TOTAL FOUR- HOME MULTI- REAL COMMERCIAL LOANS FAMILY EQUITY FAMILY CONSTRUCTION ESTATE BUSINESS CONSUMER RECEIVABLE ------ ------ ------ ------------ ---------- ---------- -------- ---------- (DOLLARS IN THOUSANDS) Amounts due: One year or less ...................... $ 80 $ 64 $ -- $3,929 $ -- $1,609 $ 671 $ 6,359 -------- ------- ------ ------ ------- ------ ------ -------- After one year: More than one year to three years .... 594 477 -- -- -- 131 132 1,325 More than three years to five years .. 2,423 1,675 43 -- 591 718 74 5,524 More than five years to 10 years ..... 7,926 11,272 -- -- 4,007 100 187 23,492 More than 10 years to 20 years ....... 34,358 13,331 132 -- 6,085 -- 101 54,007 More than 20 years ................... 85,478 1,070 1,897 -- 3,359 -- -- 91,804 -------- ------- ------ ------ ------- ------ ------ -------- Total due after December 31, 1998 .... 130,779 27,825 2,072 -- 14,042 949 485 176,152 -------- ------- ------ ------ ------- ------ ------ -------- Total amount due ................... $130,865 $27,889 $2,072 $3,929 $14,042 $2,558 $1,156 $182,511 ======== ======= ====== ====== ======= ====== ====== ======== Less: Undisbursed loan funds ................ 1,353 Deferred loan origination fees ........ 56 Allowance for loan losses ............. 2,170 -------- Total loans, net ....................... $178,932 ========
2 The following table sets forth at December 31, 1997, the dollar amount of total gross loans receivable contractually due after December 31, 1998, and whether such loans have fixed interest rates or adjustable interest rates. The one- to four-family loans reflected as having fixed rates include fixed-rate products and $19.7 million of balloon loans with contractual maturities of 5 to 7 years and amortization schedules of up to 30 years. All of those loans were originated prior to 1992.
DUE AFTER DECEMBER 31, 1998 ------------------------------------------ FIXED ADJUSTABLE TOTAL ------- ------- -------- (DOLLARS IN THOUSANDS) Real estate loans: One-to four-family .................................. $62,145 $68,634 $130,779 Home equity ......................................... 17,224 10,601 27,825 Multi-family ........................................ -- 2,072 2,072 Commercial .......................................... 2,746 11,296 14,042 Commercial business .................................. 132 817 949 Consumer ............................................. 485 -- 485 ------- ------- -------- Total .............................................. $82,732 $93,420 $176,152 ======= ======= ========
Loan Originations and Purchases. All loans originated by the Company are underwritten by the Company pursuant to the Company's policies and procedures. The Company originates both adjustable-rate and fixed-rate mortgage loans. The Company's ability to originate loans is dependent upon the relative customer demand for fixed-rate or adjustable-rate mortgage loans, which is affected by the current and expected future level of interest rates. Loan originations have increased from $57.7 million for the year ended December 31, 1996 to $59.2 million for the year ended December 31, 1997, reflecting the expansion of the Company's lending area for first mortgages as well as the increase in loans originated through a loan origination program. In addition, the Company has increased its marketing efforts to increase the volume of home equity loans. Finally, the Company continues to expand the commercial lending function. It is the general policy of the Company to retain all loans originated in its portfolio. The Company has sought to maintain a more stable level of loan originations by its continuing participation in a loan origination program. For the year ended December 31, 1997, the Company originated $18.4 million in loans through this program. All loans originated through the use of this program are one- to four-family loans and are secured by properties located in New Jersey. Through this program, borrowers are given information from participating lenders quoting their most favorable terms for each loan. The borrower determines which institution provides the best loan for the borrower's financing needs and upon choosing a lender, deals directly with that lender throughout the loan origination process. The Company pays a 37.5 basis point fee to the loan company at the time of the loan closing; if a loan is originated by the Company to a borrower who used the loan program to find the Company. This fee enables the loan company to advertise continuously, giving participating lenders consistent market exposure. 3 The following table sets forth the Company's loan originations, purchases, and principal repayments for the periods indicated. During the periods indicated there were no loan sales.
FOR THE YEARS ENDED DECEMBER 31, ------------------------------------------- 1997 1996 1995 -------- -------- -------- (DOLLARS IN THOUSANDS) Net loans: Beginning balance .................................... $145,425 $111,988 $113,091 Real estate: One-to four-family ................................. 28,019 41,999 10,633 Home equity ........................................ 11,898 11,183 4,685 Commercial real estate ............................. 8,763 3,070 -- Multi-family ....................................... 1,899 -- -- Construction and land .............................. 4,435 -- 100 Commercial business ................................. 3,867 686 -- Consumer ............................................ 299 738 699 -------- -------- -------- Total loans originated ............................ 59,180 57,676 16,117 Loans purchased (1) .................................. 3,247 60 140 -------- -------- -------- Total ............................................. 207,852 169,724 129,348 Less: Principal repayments ................................ (27,086) (23,956) (16,483) Transfer to REO ..................................... (80) (143) (831) Undisbursed loan funds .............................. (1,353) -- -- Net change in deferred fees ......................... (20) -- -- Net change in allowance for loan losses ............. (381) (200) (46) -------- -------- -------- Ending balance loans receivable, net ................ $178,932 $145,425 $111,988 ======== ======== ========
- ---------- (1) All loans purchased consisted of one- to four-family loans. One- to Four-Family Lending. The Company currently offers both fixed-rate and adjustable-rate mortgage loans primarily secured by one- to four-family residences, with maturities up to 30 years, including loans with bi-weekly payment options, for retention in its portfolio. All such loans are secured by properties located in the Company's primary market area, or in other parts of New Jersey if originated through the loan origination program. Loans purchased through brokers are secured by properties located in other states; during 1997, $3.2 million of such loans were purchased. All one- to four-family loans are underwritten in accordance with FHLMC/FNMA standards. Loan originations are obtained from the Company's branch offices, through the loan origination program, existing or past customers, through advertising and, to a lesser extent, from referrals from real estate brokers and attorneys. Of the one-to four- family residential mortgage loans outstanding at that date, 52.4% were adjustable-rate loans. The Company's one-to four-family adjustable-rate mortgage ("ARM") loans are primarily indexed to the U.S.Treasury Bill rates. The Company currently offers one, three, five, seven and ten-year ARM loans, with interest rates based on a spread above the one, three, five, seven and ten-year U.S. Treasury Bill rates, respectively. The Company's ARM loans are subject to limitations of 2% per adjustment on interest rate increases or decreases and life time caps of 5%. The Company originates one- to four-family residential loans in amounts up to 90% of the appraised value of the property securing the loan, although the Company may originate loans in amounts up to 95% of the appraised value for first-time home buyers. Private mortgage insurance is required for all loans with a loan to value ratio over 80%. Residential mortgage loans in the Company's portfolio generally include due on sale clauses, which provide the Company with the contractual right to demand the loan immediately due and payable in the event that the borrower transfers ownership of the property without the Company's consent. The Company generally enforces its rights under these clauses. In recent years, the Company has sought to originate one- to four-family mortgage loans with terms of 15 years or less, although the Company does originate fixed rate loans with terms up to 30 years. Upon receipt of a completed loan application from a prospective borrower for a loan secured by one- to four-family residential real estate, a credit report is ordered and income, financial and employment information is 4 requested and verified. An appraisal of the real estate intended to secure the proposed loan is undertaken by an independent appraiser previously approved by the Company. It is the Company's policy to require title insurance on all mortgage loans. Borrowers also must obtain hazard insurance prior to closing. Potential borrowers are qualified for one-year ARM loans based on the fully indexed rate. Home Equity Loans. The Company originates home equity loans, generally secured by one- to four-family, owner-occupied residential properties on which the Company is the primary lender. The Company's policy is to originate home equity loans in amounts up to 80% of the appraised value of the property, less existing liens. Home equity loans are originated with fixed or adjustable rates. Home equity loans originated with fixed-rates are for terms of 20 years or less and those originated with adjustable-rates may be made for terms up to 20 years. Payments of principal and interest are due monthly. The Company employs similar underwriting standards in making home equity loans as those utilized for residential mortgage loans, except that borrowers applying for an adjustable-rate home equity loan are qualified at the initial interest rate plus 4% and there is a 15% interest rate cap for the life of the loan. Commercial Real Estate and Multi-Family Loans. The Company's policies provide that it may originate multi-family mortgage loans and commercial real estate loans generally secured by property located in its primary market area. The Company expects to continue to increase these types of lending in the future. In reaching its decision on whether to make a commercial real estate or multi-family loan, the Company considers a number of factors, including: market conditions, the net operating income of the mortgaged premises before debt service and depreciation; the debt service ratio (the ratio of net operating income to debt service); and the ratio of loan amount to appraised value. Commercial real estate loans and multi-family loans may be made up to 75% of the appraised value of the property. Properties securing a loan are appraised by an independent appraiser. In most cases, borrowers must personally guarantee the loans. The Company offers 5 or 7 year balloon loans with maximum terms of up to 25 years and three-year and five-year ARM loans that adjust every third or fifth year to the three-year or five-year U.S. Treasury Bill plus a rate up to 3.25%. There are no adjustment caps. The largest loan in this portfolio is a $2.1 million loan secured by a commercial office building in Wayne. This loan was a five-year balloon loan made in 1988 which became due in December 1993 and refinanced in 1994. The loan is currently a three-year adjustable with a twenty year amortization period. This loan is currently performing in accordance with its terms. When evaluating a multi-family or commercial real estate loan, the Company also considers the financial resources and income level of the borrower, the borrower's experience in owning or managing similar properties, and the Company's lending experience with the borrower. The Company's underwriting policies require that the borrower be able to demonstrate strong management skills and the ability to maintain the property from current rental income. The borrower is required to present evidence of the ability to repay the mortgage and a history of making mortgage payments on a timely basis. In making its assessment of the creditworthiness of the borrower, the Company generally reviews the financial statements, employment and credit history of the borrower, as well as other related documentation. Commercial real estate and multi-family loans are generally larger and present a greater degree of risk than loans secured by one- to four-family residences. Because payments on loans secured by commercial real estate and multi-family properties are often dependent on the successful operation or management of the properties, repayment of such loans may be subject to a greater extent to adverse conditions in the real estate market or in the economy. The Company seeks to minimize these risks through its underwriting standards, which require the loans to be qualified on the basis of the property's income and debt service ratio. At December 31, 1997, there were no commercial loans or multi-family loans delinquent 90 days or more. There can be no assurance that delinquencies will not increase in the future, particularly in light of the Company's decision to increase its efforts to originate a higher volume and greater variety of commercial real estate and multi-family loans. Construction Lending. The Company has, on a case by case basis, originated loans for the development of property to existing customers and prospects in its primary market area. At December 31, 1997, $3.9 million, or 2.2% of total gross loans receivable were construction loans. The undisbursed portion of construction loans was $1.4 million as of December 31, 1997. The Company's construction loans primarily have been made to finance the construction of one- to four-family, owner-occupied residential properties as well as commercial offices and retail properties. As part of its business plan, the Company may increase the amount of its construction lending. The Company's policies provide that construction loans may be made in amounts up to 75% of the appraised value of the property for construction. The Company requires an independent appraisal of the property. The Company generally requires personal guarantees and a permanent loan commitment if the Company will not be making the permanent loan. 5 Construction financing is generally considered to involve a higher degree of credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan is dependent largely upon the accuracy of the initial estimate of the property's value at completion of construction or development compared to the estimated cost (including interest) of construction. If the estimate of value proves to be inaccurate, the Company may be confronted with a project, when completed, having a value which is insufficient to ensure full repayment. At December 31, 1997, there were no construction loans delinquent 90 days or more. There can be no assurance that delinquencies will not increase in the future, particularly in light of the Company's decision to increase its efforts to originate a higher volume and greater variety of construction loans. Joint Venture. On February 27, 1998, the Company announced that it entered into a joint venture agreement with a local developer for construction and marketing of 14 single family residential homes in the Township of Wayne, New Jersey with an approximate selling price of $479,900 per home. Consumer Loans. The Company's consumer loans generally consist of student education loans and loans secured by savings accounts. At December 31, 1997, the Company's consumer loan portfolio consisted of $591,000 of passbook loans, $415,000 of student education loans, $125,000 of automobile loans and $25,000 of personal loans. All of the student education loans are underwritten in accordance with, and are guaranteed by, the New Jersey Higher Education Assistance Authority. The Company has recently authorized the origination of automobile loans up to $25,000, unsecured personal loans up to $5,000 and overdraft lines of credit up to $2,500 and intends to continue to pursue opportunities to expand these areas of lending. Consumer loans may entail greater credit risk than do residential mortgage loans, particularly in the case of consumer loans that are unsecured or are secured by rapidly depreciable assets, such as automobiles. In such cases, any repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, consumer loan collections are dependent on the borrower's continuing financial stability, and therefore are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. At December 31, 1997, there were no consumer loans delinquent 90 days or more. There can be no assurance that delinquencies will not increase in the future, particularly in light of the Company's decision to increase its efforts to originate a higher volume and greater variety of consumer loans. Commercial Business Loans. The Company intends to pursue opportunities to offer commercial business loans, primarily to businesses located in the Company's primary market area. Federally chartered savings institutions, such as the Company, are authorized to make secured or unsecured loans and letters of credit for commercial, corporate, business and agricultural purposes and to engage in commercial leasing activities, up to a maximum of 20% of total assets, with amounts in excess of 10% of such total assets may be only for small business loans, as defined by the OTS. The Company's commercial business lending policy includes credit file documentation and analysis of the borrower's character, capacity to repay the loan, the adequacy of the borrower's capital and collateral, as well as an evaluation of conditions affecting the borrower. Analysis of the borrower's past, present and future cash flows will also be an important aspect of the Company's current credit analysis. Unlike residential mortgage loans, which generally are made on the basis of the borrower's ability to make repayment from his or her employment and other income, and which are secured by real property whose value tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower's ability to make repayment from 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. Further, the collateral securing the loans may depreciate over time, may be difficult to appraise and may fluctuate in value based on the success of the business. At December 31, 1997, there were no commercial business loans delinquent 90 days or more. There can be no assurance that delinquencies will not increase in the future, particularly in light of the Company's decision to increase its efforts to originate a higher volume and greater variety of commercial business loans. Delinquencies and Classified Assets. Management and the Board of Directors perform a monthly review of all delinquent loans. The procedures taken by the Company with respect to delinquencies vary depending on the nature of the loan and period of delinquency. The Company generally requires that delinquent mortgage loans be reviewed 6 and that a written late charge notice be mailed no later than the 17th day of delinquency. The Company's policies provide that telephone contact will be attempted to ascertain the reasons for delinquency and the prospects of repayment. When contact is made with the borrower at any time prior to foreclosure, the Company will attempt to obtain full payment or work out a repayment schedule with the borrower to avoid foreclosure. It is the Company's policy to place all loans that are delinquent by three or more payments on nonaccrual status, resulting in the Company no longer accruing interest on such loans and reversing any interest previously accrued but not collected. A non-accrual loan may be restored to accrual status when delinquent principal and interest payments are brought current and future monthly principal and interest payments are expected to be collected. Property acquired by the Company as a result of foreclosure on a mortgage loan is classified as "real estate owned" ("REO") and is recorded at the lower of the unpaid principal balance or fair value less costs to sell at the date of acquisition and thereafter. Upon foreclosure, the Company generally requires an appraisal of the property and, thereafter, appraisals of the property on an annual basis and external inspections on at least a quarterly basis. Federal regulations and the Company's Classification of Assets Policy require that the Company utilize an internal asset classification system as a means of reporting problem and potential problem assets. The Company currently classifies problem and potential problem assets as "Substandard," "Doubtful" or "Loss." 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 insured 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 allowance is not warranted. Assets which do not currently expose the insured institution to sufficient risk to warrant classification in one of the aforementioned categories but posses weaknesses are required to be designated "Special Mention." 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 OTS, in conjunction with the other federal banking agencies, adopted an interagency policy statement on the allowance for loan and lease losses. The policy statement provides guidance for financial institutions on both the responsibilities of management for the assessment and establishment of adequate allowances and guidance for banking agency examiners to use in determining the adequacy of general valuation guidelines. Generally, the policy statement recommends that institutions have effective systems and controls to identify, monitor and address asset quality problems; that management has analyzed all significant factors that affect the collectibility of the portfolio in a reasonable manner; and that management has established acceptable allowance evaluation processes that meet the objectives set forth in the policy statement. While the Company believes that it has established an adequate allowance for loan losses, there can be no assurance that regulators, in reviewing the Company's loan portfolio, will not request the Company to materially increase its allowance for loan losses, thereby negatively affecting the Company's financial condition and earnings. Although management believes that, based on information currently available to it at this time, its allowance for loan losses is adequate, actual losses are dependent upon future events and, as such, further additions to the level of allowances for loan losses may become necessary. When an insured institution classifies one or more assets, or portions thereof, as Substandard or Doubtful, it is required to establish a general valuation allowance for loan losses in an amount deemed prudent by management. General valuation allowances, which is a regulatory term, represent loss allowances which 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 an insured institution classifies one or more assets, or portions thereof, as loss, it is required either to establish a specific allowance for losses equal to 100% of the amount of the asset soclassified or to charge off such amount. The Chief Lending Officer reviews and classifies the Company's loans on a quarterly basis and reports the results of the review to the Board of Directors. The Company classifies loans in accordance with the management guidelines described above. At December 31, 1997, the Company had $80,000 of REO. At December 31, 1997, the Company had $2.1 million of assets classified as Special Mention, $2.6 million of assets classified as Substandard, nothing classified as Doubtful and nothing classified as Loss. 7 The following table sets forth delinquencies in the Company's loan portfolio as of the dates indicated. There were no delinquencies in the multi-family, commercial real estate, construction or commercial business portfolios at the dates indicated.
AT DECEMBER 31, 1997 AT DECEMBER 31, 1996 ---------------------------------------- ----------------------------------------- 60-89 DAYS 90 DAYS OR MORE(1) 60-89 DAYS 90 DAYS OR MORE(1) ------------------- ------------------- -------------------- ------------------- PRINCIPAL PRINCIPAL PRINCIPAL PRINCIPAL NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE NUMBER BALANCE OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS OF LOANS -------- --------- -------- --------- -------- --------- -------- --------- (DOLLARS IN THOUSANDS) One- to four-family ............. 1 $14 24 $2,146 3 $344 22 $1,872 Home equity ..................... -- -- 5 182 -- -- 5 184 Consumer ........................ -- -- -- -- 1 7 4 20 -- --- -- ------ -- ---- -- ------ Total ........................ 1 $14 29 $2,328 4 $351 31 $2,076 == === == ====== == ==== == ====== Delinquent loans to total gross loans .................... .01% 1.30% .24% 1.41% === ==== === ====
AT DECEMBER 31, 1995 -------------------------------------------- 60-89 DAYS 90 DAYS OR MORE(1) -------------------- -------------------- PRINCIPAL PRINCIPAL NUMBER BALANCE NUMBER BALANCE OF LOANS OF LOANS OF LOANS OF LOANS -------- --------- -------- --------- (DOLLARS IN THOUSANDS) One- to four-family ............ 9 $361 26 $2,278 Home equity .................... -- -- 4 162 Consumer ....................... -- -- 1 10 -- ---- -- ------ Total ....................... 9 $361 31 $2,450 == ==== == ====== Delinquent loans to total gross loans ................... .32% 2.16% === ==== - ---------- (1) Loans 90 days or more past due are included in non-accrual loans. See "Lending Activities--Non-Accrual Loans." Non-Accrual Loans. The table below sets forth information regarding non-accrual loans (all loans 90 days or more delinquent) and REO held by the Company at the dates indicated. There were no non-accrual loans in the multi-family, commercial real estate, construction, or commercial business portfolios at the dates indicated.
AT DECEMBER 31, ----------------------------------------------------------------- 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------ (DOLLARS IN THOUSANDS) Non-accrual loans: One- to four-family ....................... $2,146 $1,872 $2,278 $3,395 $3,269 Home equity ............................... 182 184 162 223 234 Consumer .................................. -- 20 10 27 7 ------ ------ ------ ------ ------ Total ..................................... 2,328 2,076 2,450 3,645 3,510 REO, net(1)(2) ............................. 80 116 597 970 1,338 ------ ------ ------ ------ ------ Total non-performing assets .............. $2,408 $2,192 $3,047 $4,615 $4,848 ====== ====== ====== ====== ======
- ---------- (1) REO balances are shown net of related loss allowances. (2) REO, net at December 31, 1994 and 1993 included $0 and $264,000, respectively, of in-substance foreclosed loans. Under Statement of Financial Accounting Standards No. 114 "Accounting by Creditors for Impairment of a Loan", adopted January 1, 1995 by the Company, loans that previously would have been classified as in-substance foreclosures would be classified as impaired loans. There were no loans considered to be impaired as of December 31, 1997, 1996 and 1995. 8 Allowance for Loan Losses. The allowance for loan losses is established through a provision for loan losses based on management's evaluation of the risks inherent in its loan portfolio and changes in the nature and volume of its loan activity. Such evaluation, which includes a review of all loans of which full collectibility may not be reasonably assured, considers among other matters, the estimated market value of the underlying collateral, economic conditions, historical loan loss experience and other factors that warrant recognition in providing for an adequate loan loss allowance. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to make additional provisions for losses on loans based upon information available at the time of the review. The following table sets forth activity in the Company's allowance for loan losses for the periods set forth in the table.
AT DECEMBER 31, --------------------------------------------------------------- 1997 1996 1995 1994 1993 --------- --------- --------- --------- --------- (DOLLARS IN THOUSANDS) Real estate loans: Balance at beginning of year ............ $1,789 $1,589 $1,543 $1,237 $ 974 Provision for loan losses ............... 400 200 152 316 286 Charge-offs: One- to four-family ..................... -- -- (106) (10) (23) Consumer ................................. (19) -- -- -- -- ------ ------ ------ ------ ------ Balance at end of year ................... $2,170 $1,789 $1,589 $1,543 $1,237 ====== ====== ====== ====== ====== Net charge-offs to average gross loans receivable ........................ 0.01% -- 0.09% 0.01% 0.02% Allowance for loan losses as a percent of gross loans receivable ............... 1.19 1.21 1.40 1.34 1.15 Allowance for loan losses as a percent of total non-performing loans ........... 93.21 86.18 64.86 42.33 35.24 Non-performing loans as a percent of gross loans receivable ............... 1.29 1.41 2.16 3.17 3.26 Non-performing assets as a percent of total assets ......................... 0.89 0.90 1.46 2.61 2.65
9 The following tables set forth the amount of the Company's allowance for loan losses, the percent of allowance for loan losses to total allowance and the percent of gross loans to total gross loans in each of the categories listed at the dates indicated.
AT DECEMBER 31, -------------------------------------------------------------------------------------------------------- 1997 1996 1995 --------------------------------- -------------------------------- --------------------------------- PERCENT OF PERCENT OF PERCENT OF GROSS LOANS GROSS LOANS GROSS LOANS PERCENT OF IN EACH PERCENT OF IN EACH PERCENT OF IN EACH ALLOWANCE CATEGORY ALLOWANCE CATEGORY ALLOWANCE CATEGORY TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL TO TOTAL AMOUNT ALLOWANCE GROSS LOANS AMOUNT ALLOWANCE GROSS LOANS AMOUNT ALLOWANCE GROSS LOANS ------ --------- ----------- ------ ---------- ----------- ------ ----------- ----------- (DOLLARS IN THOUSANDS) One- to four-family ....... $1,626 74.95% 71.71% $1,181 66.01% 77.22% $1,030 64.82% 77.10% Home equity ............... 106 4.89 15.28 242 13.53 16.57 210 13.22 18.46 Commercial Real Estate .... 379 17.45 7.69 355 19.84 4.80 342 21.52 3.20 Multi-family .............. 34 1.56 1.14 -- -- .13 -- -- .17 Construction .............. 11 0.53 2.15 -- -- -- -- -- -- Commercial business ....... 13 0.59 1.40 3 .17 .43 -- -- -- Consumer .................. 1 0.03 0.63 8 .45 .85 7 .44 1.07 ------ ------ ------ ------ ------ ------ ------ ------ ------ Total allowance for loan losses ............ $2,170 100.00% 100.00% $1,789 100.00% 100.00% $1,589 100.00% 100.00% ====== ====== ====== ====== ====== ====== ====== ====== ======
AT DECEMBER 31, ------------------------------------------------------------------------------- 1994 1993 ---------------------------------- ------------------------------------ PERCENT OF PERCENT OF GROSS LOANS GROSS LOANS PERCENT OF IN EACH PERCENT OF IN EACH ALLOWANCE CATEGORY ALLOWANCE CATEGORY TO TOTAL TO TOTAL TO TOTAL TO TOTAL AMOUNT ALLOWANCE GROSS LOANS AMOUNT ALLOWANCE GROSS LOANS ------- ----------- ------------ ------ --------- ----------- (DOLLARS IN THOUSANDS) One- to four-family $ 979 63.46% 77.28% $1,084 87.63% 83.28% Home equity 209 13.54 18.44 131 10.59 12.38 Commercial Real Estate 347 22.49 2.68 14 1.13 2.63 Multi-family 1 .06 .47 1 .08 .46 Construction -- -- .15 -- -- -- Consumer 7 .45 .98 7 .57 1.25 ------ ------ ------ ------ ------ ------ Total allowance for loan losses $1,543 100.00% 100.00% $1,237 100.00% 100.00% ====== ====== ====== ====== ====== ======
10 SECURITIES PORTFOLIO Federally chartered savings institutions have the authority to invest in various types of liquid assets, including United States Treasury obligations, securities of various federal agencies, certain certificates of deposit of insured banks and savings institutions, certain bankers' acceptances, repurchase agreements and federal funds. Subject to various restrictions, federally chartered savings institutions may also invest in commercial paper, corporate debt securities and mutual funds whose assets conform to the investments that a federally chartered savings institution is otherwise authorized to make directly. Additionally, the Company must maintain minimum levels of investments that qualify as liquid assets under OTS regulations. As a member of the FHLB, the Bank also is required to maintain liquid assets at minimum levels which change from time to time. The Company's liquid investments primarily include federal agency securities and federal funds. Management of the Company, with the Board of Directors' ratification, sets the investment policy of the Company. This policy dictates that investments will be made based on the safety of the principal, the liquidity requirements of the Company and the return on the investment and capital appreciation. All investment decisions are made by the Investment Committee, comprised of members of Management, and such investment decisions are ratified by the Board of Directors of the Company. The Company's investments include FHLB-NY stock, mortgage-backed securities insured or guaranteed by FHLMC, FNMA, GNMA, equity securities, and U.S. government agency securities. The following table sets forth certain information regarding the amortized cost and estimated market values of the Company's mortgage-backed and investment securities at the dates indicated.
AT DECEMBER 31, ------------------------------------------------------------------- 1997 1996 1995 --------------------- -------------------- -------------------- ESTIMATED ESTIMATED ESTIMATED AMORTIZED MARKET AMORTIZED MARKET AMORTIZED MARKET COST VALUE COST VALUE COST VALUE --------- --------- --------- --------- --------- -------- (DOLLARS IN THOUSANDS) Mortgage-backed and investment securities held to maturity: FHLMC ................................ $ 1,532 $ 1,502 $ 1,608 $ 1,572 $ 1,956 $ 1,879 FNMA ................................. 1,381 1,380 1,621 1,625 1,885 1,890 ------- ------- ------- ------- ------- ------- Total mortgage-backed and investment securities held to maturity .................. $ 2,913 $ 2,882 $ 3,229 $ 3,197 $ 3,841 $ 3,769 ======= ======= ======= ======= ======= ======= Mortgage-backed and investment securities available for sale: Collateralized mortgage obligations ......................... $ 3,311 $ 3,209 $ 3,334 $ 3,204 $ 3,334 $ 3,156 U.S. government and federal agency obligations .................. 37,324 37,890 38,318 38,222 12,501 12,553 Equity securities .................... 753 812 -- -- -- -- FHLMC ................................ 7,165 7,191 12,288 12,282 13,873 13,828 FNMA ................................. 12,752 12,679 13,147 13,054 13,335 13,374 GNMA ................................. 11,607 11,632 14,391 14,105 15,261 15,244 ------- ------- ------- ------- ------- ------- Total mortgage-backed and investment securities available for sale ................ $72,912 $73,413 $81,478 $80,867 $58,304 $58,155 ======= ======= ======= ======= ======= =======
11 SOURCES OF FUNDS General Deposits are the primary source of the Company's funds for use in lending and for other general business purposes. In addition to deposits, the Company obtains funds from advances from the FHLB-NY and other borrowings. Deposits The Company offers a variety of deposit accounts having a wide range of interest rates and terms. The Company's deposits consist of regular savings, checking, and money market and certificate accounts. The Company's deposits are obtained primarily from its market area and it does not currently use brokers to obtain deposits. The Company relies primarily on aggressive marketing campaigns, customer service and long-standing relationships with customers to attract and retain these deposits. The Company pays competitive interest rates on deposits, but generally does not pay the highest interest rate among institutions in its area. The variety of deposit accounts offered by the Company has allowed it to be competitive in its market area in obtaining funds and respond with flexibility to changes in customer demand. As certain customers have become more interest rate conscious, the Company has become more susceptible to short-term fluctuations in deposit flows. The Company has sought to offer various deposit and checking options offering favorable features not offered by the Company's competitors and has marketed those products aggressively. Although the Company's efforts to maintain and increase its volume of deposits enabled it to increase deposits in fiscal 1997, the ability of the Company to attract and maintain those accounts will continue to be affected by market conditions. The following table presents the deposit activity of the Company for the periods indicated: FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 ------- ------- ------ (DOLLARS IN THOUSANDS) Net deposits (withdrawals) ................ $12,407 $(1,649) $ 8,002 Interest credited on deposit accounts ..... 7,125 6,774 6,807 ------- ------- ------- Total increase in deposit accounts ........ $19,532 $ 5,125 $14,809 ======= ======= ======= At December 31, 1997, the Company had $11.7 million in certificate accounts in amounts of $100,000 or more maturing as follows: WEIGHTED MATURITY PERIOD AMOUNT AVERAGE RATE ---------------- ------- ------------- (DOLLARS IN THOUSANDS) Three months or less ........................... $ 5,378 5.39% Over three through six months .................. 2,673 5.54 Over six through 12 months ..................... 2,620 5.55 Over 12 months ................................. 1,051 5.67 ------- Total .......................................... $11,722 ======= 12 The following table presents, by various rate categories, the amount of certificate accounts outstanding at the dates indicated and the periods to maturity of the certificate accounts outstanding at December 31, 1997.
PERIOD TO MATURITY FROM DECEMBER 31, 1997 --------------------------------------------- MORE MORE MORE MORE LESS THAN THAN THAN THAN THAN ONE TO TWO TO THREE TO FOUR TO AT DECEMBER 31, ONE TWO THREE FOUR FIVE ---------------------------- YEAR YEARS YEARS YEARS YEARS 1997 1996 1995 -------- ------ ------ -------- ------ ------ ------ ------ Certificate accounts: 0 to 4.00% ....................... $ 1 $ -- $ -- $ -- $ -- $ 1 $ 331 $ 1,474 4.01 to 5.00% .................... 2,581 163 -- -- -- 2,744 14,310 18,028 5.01 to 6.00% .................... 90,204 11,907 2,673 615 292 105,691 80,829 44,122 6.01 to 7.00% .................... 22 783 1,049 -- -- 1,854 4,053 31,525 7.01 to 8.00% .................... -- -- -- -- -- -- -- 8 ------- ------- ------ ---- ---- -------- ------- ------- Total ........................... $92,808 $12,853 $3,722 $615 $292 $110,290 $99,523 $95,157 ======= ======= ====== ==== ==== ======== ======= =======
BORROWINGS Although deposits are the Company's primary source of funds, the Company's policy has been to utilize borrowings when they are a less costly source of funds. In addition, the Company may borrow to maintain regulatory liquidity. The Company obtains advances from the FHLB-NY on the security of its capital stock of the FHLB-NY and certain of its mortgage loans and mortgage-backed securities. Such advances are made pursuant to several different credit programs, each of which has its own interest rate and range of maturities. Regulations limit the amount of FHLB-NY advances to 30% of total assets without obtaining specific approval from the Board of Directors of the FHLB-NY. As of December 31, 1997, outstanding advances from the FHLB-NY amounted to $32.0 million. The following table sets forth certain information regarding the Company's borrowed funds at or for the years ended December 31, 1997, 1996 and 1995.
AT OR FOR THE YEAR ENDED DECEMBER 31, ------------------------------- 1997 1996 1995 ------- ------ -------- (DOLLARS IN THOUSANDS) FHLB advances: Average balance outstanding .................................... $34,776 $12,417 $ 2,646 Maximum amount outstanding at any month-end during the period ............................................. 41,725 27,000 6,000 Balance outstanding at end of period ........................... 32,000 27,000 2,000 Weighted average interest rate during the period ............... 6.56% 6.52% 6.53%
SUBSIDIARIES The Bank has two wholly-owned subsidiaries, Wayne Savings Financial Services Group, Inc. and Wayne Savings Asset Management Corporation. Financial Services began operation in November 1989 and markets, as a broker, financial products to the customers of the Company and the general public. The products offered include annuities, life insurance, disability insurance, group life insurance, stocks, bonds and mutual funds, financial planning, estate planning, asset management and allocation services. Asset Management has not conducted any activities to date. PERSONNEL As of December 31, 1997, the Company, including Financial Services, had 55 full-time and 8 part-time employees. The employees are not represented by a collective bargaining unit, and the Company considers its relationship with its employees to be good. 13 REGULATION AND SUPERVISION GENERAL The activities of savings institutions, such as the Bank, are governed by the Home Owners' Loan Act, as amended ("HOLA") and the Federal Deposit Insurance Act ("FDI Act"). The Bank is subject to extensive regulation, examination and supervision by the OTS, as its primary federal regulator, and the FDIC, as the deposit insurer. The Bank is a member of the Federal Home Loan Bank ("FHLB") System and its deposit accounts are insured up to applicable limits by the SAIF managed by the FDIC. The Bank must file reports with the OTS concerning its activities and financial condition in addition to obtaining regulatory approvals prior to entering into certain transactions such as mergers with, or acquisitions of, other savings institutions. The OTS and/or the FDIC conduct periodic examinations to test the Bank's safety and soundness and compliance with various regulatory requirements. 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 regulatory structure also gives the regulatory authorities extensive discretion in connection with their supervisory and enforcement activities and examination policies, including policies with respect to the classification of assets and the establishment of adequate loan loss reserves for regulatory purposes. Any change in such regulatory requirements and policies, whether by the OTS, the FDIC or the Congress, could have a material adverse impact on the Company and its operations. Certain of the regulatory requirements applicable to the Company are referred to below or elsewhere herein. The description of statutory provisions and regulations applicable to savings institutions set forth in this Form 10-K does not purport to be a complete description of such statutes and regulations and their effects on the Company. FEDERAL SAVINGS INSTITUTION REGULATION Capital Requirements. The OTS capital regulations require savings institutions to meet three minimum capital standards: a 1.5% tangible capital ratio, a 3% leverage (core) capital ratio and an 8% risk-based capital ratio. In addition, the prompt corrective action standards discussed below also establish, in effect, a minimum 2% tangible capital standard, a 4% leverage (core) capital ratio (3% for institutions receiving the highest rating on the CAMEL financial institution rating system), and, together with the risk-based capital standard itself, a 4% Tier I risk-based capital standard. Core capital is defined as common stockholders' equity (including retained earnings), certain noncumulative perpetual preferred stock and related surplus, and minority interests in equity accounts of consolidated subsidiaries less intangibles other than certain purchased mortgage servicing rights and credit card relationships. The OTS regulations also require that, in meeting the tangible, leverage (core) and risk-based capital standards, institutions must generally 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 I (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of 4% and 8%, respectively. In determining the amount of risk-weighted assets, all assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 100%, as assigned by the OTS capital regulation based on the risks OTS believes are inherent in the type of asset. The components of Tier I (core) capital are equivalent to those discussed earlier. 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 the allowance for loan and lease losses limited to a maximum of 1.25% of risk-weighted assets. Overall, the amount of supplementary capital included as part of total capital cannot exceed 100% of core capital. The OTS regulatory capital requirements also incorporate an interest rate risk component. Savings institutions with "above normal" interest rate risk exposure are subject to a deduction from total capital for purposes of calculating their risk-based capital requirements. A savings institution'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 institution's assets. In calculating its total capital under the risk-based capital rule, a savings institution whose measured interest rate risk exposure exceeds 2% must deduct an amount equal to one-half of the difference between the institution's measured interest rate risk and 2%, multiplied by the estimated economic value of the institution's assets. The Director of the OTS may waive or defer a savings institution's interest rate risk component on a case-by-case basis. A savings institution with assets of 14 less than $300 million and risk-based capital ratios in excess of 12% is not subject to the interest rate risk component, unless the OTS determines otherwise. For the present time, the OTS has deferred implementation of the interest rate risk component. At December 31, 1997, the Bank met each of its capital requirements, in each case on a fully phased-in basis and it is anticipated that the Bank will not be subject to the interest rate risk component. 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 undercapitalization. Generally, a savings institution is considered "well capitalized" if its ratio of total capital to risk-weighted assets is at least 10%, its ratio of Tier I (core) capital to risk-weighted assets is at least 6%, its ratio of core capital to total assets is at least 5%, and it is not subject to any order or directive by the OTS to meet a specific capital level. A savings institution generally is considered "adequately capitalized" if its ratio of total capital to risk-weighted assets is at least 8%, its ratio of Tier I (core) capital to risk-weighted assets is at least 4%, and its ratio of core capital to total assets is at least 4% (3% if the institution receives the highest CAMEL rating). A savings institution that has a ratio of total capital to risk weighted assets of less than 8%, a ratio of Tier I (core) capital to risk-weighted assets of less than 4% or a ratio of core capital to total assets of less than 4% (3% or less for institutions with the highest examination rating) is considered to be "undercapitalized." A savings institution that has a total risk-based capital ratio less than 6%, a Tier 1 capital ratio of less than 3% or a leverage ratio that is less than 3% is considered to be "significantly undercapitalized" and a savings institution that has a tangible capital to assets ratio equal to or less than 2% 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 a savings institution receives notice that it is "undercapitalized," "significantly undercapitalized" or "critically undercapitalized." Compliance with the plan must be guaranteed by any parent holding company. In addition, numerous mandatory supervisory actions become immediately applicable to an undercapitalized institution, including, but not limited to, increased monitoring by regulators and restrictions on growth, capital distributions and expansion. 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 Deposit Accounts. The Bank's deposit accounts are insured by the SAIF to a maximum of $100,000 for each insured member (as defined by law and regulation). The FDIC has the authority, should it initiate proceeding to terminate an institution's deposit insurance, to suspend the insurance of any such institution without tangible capital. However, if a savings institution has positive capital when it includes qualifying intangible assets, the FDIC cannot suspend deposit insurance unless capital declines materially, the institution fails to enter into and remain in compliance with an approved capital plan or the institution is operating in an unsafe manner. Regardless of an institution's capital level, insurance of deposits may be terminated by the FDIC upon finding that the institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC or the institution's primary regulator. The FDIC charges an annual assessment for the insurance of deposits based on the risk a particular institution poses to its deposit insurance fund. Under this system, SAIF insured institutions pay within a range of six cents to 31 cents per $100 of domestic deposits, depending upon the institution's risk classification. This amount includes an annual assessment of six basis points to be paid to the Financing Corp. (FICO Bonds). This risk classification is based on an institution's capital group and supervisory subgroup assignment. In addition, the FDIC is authorized to increase such deposit insurance rates, on a semi-annual basis, if it determines that such action is necessary by the FDIC. The Bank's federal deposit insurance premium expense for the year ended December 31, 1997, amounted to approximately $92,000. Thrift Rechartering Legislation. Various proposals to eliminate the federal thrift charter, create a uniform financial institutions charter and abolish the OTS have been introduced in Congress. The bills would require federal savings institutions to convert to a national bank or some type of state charter by a specified date or they would automatically become national banks. Converted federal thrifts would generally be required to conform their activities to those permitted for the charter selected and divestiture of nonconforming assets would be required over a two year period, subject to two possible one year extensions. State chartered thrifts would become subject to the same federal regulation as applies to state commercial banks. Holding companies for savings institutions would become subject to the same regulation as holding companies that control commercial banks, with a limited grandfather 15 provision for unitary savings and loan holding company activities. The Company is unable to predict whether such legislation would be enacted, the extent to which the legislation would restrict or disrupt its operations or whether the BIF and SAIF funds will eventually merge. Loans to One Borrower. Under the HOLA, savings institutions are generally subject to the limits on loans to one borrower applicable to national banks. Generally, savings institutions may not make a loan or extend credit to a single or related group of borrowers in excess of 15% of its 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 financial instruments and bullion. At December 31, 1997, the Company's limit on loans to one borrower was $4.5 million. At December 31, 1997, the Company's largest aggregate outstanding balance of loans to one borrower was $2.1 million. Qualified Thrift Lender Test ("QTL Test"). The HOLA requires savings institutions to meet a QTL test. Under the QTL test, a savings and loan 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 securities) in at least 9 months out of each 12 month period. A savings institution that fails the QTL test is subject to certain operating restrictions and may be required to convert to a bank charter. As of December 31, 1997, the Bank maintained 77.2% 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 shareholders of another institution in a cash-out merger and other distributions charged against capital. The rule establishes three tiers of institutions, which are based primarily on an institution's capital level. An institution that exceeds all fully phased-in capital requirements before and after a proposed capital distribution ("Tier 1 Bank") and has not been advised by the OTS that it is in need of more than normal supervision, could, after prior notice but without obtaining approval of the OTS, make capital distributions during a calendar year equal to the greater of (i) 100% of its net earnings to date during the calendar year plus the amount that would reduce by one-half its "surplus capital ratio" (the excess capital over its fully phased-in capital requirements) at the beginning of the calendar year or (ii) 75% of its net income for the previous four quarters. Any additional capital distributions would require prior regulatory approval. In the event the Bank's capital fell below its regulatory requirements or the OTS notified it that it was in need of more than normal supervision, the Bank's ability to make capital distributions could be restricted. In addition, the OTS could prohibit a proposed capital distribution by any institution, which would otherwise be permitted by the regulation, if the OTS determines that such distribution would constitute an unsafe or unsound practice. In December 1994, the OTS proposed amendments to its capital distribution regulation that would generally authorize the payment of capital distributions without OTS approval provided that the payment does not cause the institution to be undercapitalized within the meaning of the prompt corrective action regulation. However, institutions in a holding company structure would still have a prior notice requirement. At December 31, 1997, the Bank was a Tier 1 Bank. Liquidity. The Bank is required to maintain an average daily balance of specified liquid assets equal to a quarterly average of not less than a specified percentage of its net withdrawable deposit accounts plus short-term borrowings. This liquidity requirement is currently 4% but may be changed from time to time by the OTS to any amount within the range of 4% to 10% depending upon economic conditions and the savings flows of member institutions. OTS regulations also require each member savings institution to maintain an average daily balance of short-term liquid assets at a specified percentage of the total of its net withdrawable deposit accounts and borrowings payable in one year or less. Monetary penalties may be imposed for failure to meet these liquidity requirements. The Bank's liquidity ratio for December 31, 1997 was 40.2%, which exceeded the applicable requirements. Assessments. Savings institutions are required to pay assessments to the OTS to fund the agency's operations. The general assessments, paid on a semi-annual basis, are computed upon the savings institution's total assets, including consolidated subsidiaries, as reported in the Bank's latest quarterly thrift financial report. The assessments paid by the Company for the calendar year ended December 31, 1997 totalled $68,000. Branching. OTS regulations permit nationwide branching by federally chartered savings institutions to the extent allowed by federal statute. This permits federal savings institutions to establish interstate networks and to 16 geographically diversify their loan portfolios and lines of business. The OTS authority preempts any state law purporting to regulate branching by federal savings institutions. Transactions with Related Parties. The Company's authority to engage in transactions with related parties or "affiliates" (e.g., any company that controls or is under common control with an institution) is limited by Sections 23A and 23B of the Federal Reserve Act ("FRA"). Section 23A limits the aggregate amount of covered transactions with any individual affiliate to 10% of the capital and surplus of the savings institution. The aggregate amount of covered transactions with all affiliates is limited 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 generally provides that certain transactions with affiliates, including loans and asset purchases, must be on terms and under circumstances, including credit standards, that are substantially the same or at least as favorable to the institution as those prevailing at the time for comparable transactions with non-affiliated companies. In addition, savings institutions are prohibited from lending to any affiliate that is engaged in activities that are not permissible for bank holding companies and no savings institution may purchase the securities of any affiliate other than a subsidiary. The Bank's authority to extend credit to executive officers, directors and 10% shareholders ("insiders"), as well as entities such persons control, is governed by Sections 22(g) and 22(h) of the FRA and Regulation O thereunder. Among other things, such loans are required to be made on terms substantially the same as those offered to unaffiliated individuals and to not involve more than the normal risk of repayment. Recent legislation created an exception for loans made pursuant to a benefit or compensation program that is widely available to all employees of the institution and does not give preference to insiders over other employees. Regulation O also places individual and aggregate limits on the amount of loans the Company may make to insiders based, in part, on the Company's capital position and requires certain board approval procedures to be followed. Enforcement. Under the FDI Act, the OTS has primary enforcement responsibility over savings institutions and has the authority to bring actions against the institution and all institution-affiliated 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 to institution of receivership, conservatorship or termination of deposit insurance. Civil penalties cover a wide range of violations and can amount to $25,000 per day, or even $1 million per day in especially egregious cases. Under the FDI Act, the FDIC has the authority to recommend to the Director of the OTS enforcement action to 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. Federal law also establishes criminal penalties for certain violations. Standards for Safety and Soundness. The federal banking agencies have adopted Interagency Guidelines Prescribing Standards for Safety and Soundness ("Guidelines") and a final rule to implement 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. 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 rule establishes deadlines for the submission and review of such safety and soundness compliance plans when such plans are required. Federal Reserve System. The Federal Reserve Board requires all depository institutions to maintain non-interest bearing reserves at specified levels against their transaction accounts (primarily checking, NOW and Super NOW checking accounts) and non-personal time deposits. The balances maintained to meet the reserve requirements imposed by the Federal Reserve Board may be used to satisfy the liquidity requirements that are imposed by the OTS. At December 31, 1997, the Bank's total transaction accounts were in compliance with the Federal Reserve Board requirements. Savings associations have authority to borrow from the Federal Reserve Bank "discount window," but Federal Reserve policy generally requires savings associations to exhaust all OTS sources before borrowing from the Federal Reserve System. The Bank had no such borrowings as of December 31, 1997. 17 ADDITIONAL ITEM: EXECUTIVE OFFICERS OF THE REGISTRANT. The following table sets forth certain information regarding the executive officers of the Company and Bank who are not directors.
NAME AGE(1) POSITION(S) HELD WITH THE BANK ------ -------- ------------------------------- Michael G. DeBenedette 47 Executive Vice President, Chief Operating Officer and Corporate Secretary since March 1988. Robert L. Frega 43 Senior Vice President, Chief Lending Officer since February 1998 and Senior Commercial Loan Officer since March 1997. Prior to that he was Vice President and Commercial Loan Officer with Fleet Bank, NA. Timothy P. Tierney 55 Vice President and Chief Financial Officer since September 1994. Prior to that he was Vice President and Controller of Crestmont Federal Savings and Loan Association. Position(s) Held With Wayne Savings Financial Services Group, Inc. ------------------------------------------------------------------ Gary Len 37 President, Chief Operating Officer since October 1996. Prior to that he was Vice President since November 1989.
- ------------------ (1) As of December 31, 1997. ITEM 2. PROPERTIES. The Company conducts its business through five branch offices and one administrative office, four of which are located in Passaic County, New Jersey and one in Essex County, New Jersey. The following table sets forth information relating to each of the Company's offices and other properties as of December 31, 1997. The total net book value of the Company's premises and equipment at December 31, 1997 was $3.3 million.
ORIGINAL NET BOOK VALUE YEAR OF PROPERTY OR LEASED LEASED DATE OF LEASEHOLD OR OR LEASE IMPROVEMENTS LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1997 -------- ------- -------- ---------- ----------------- ADMINISTRATIVE OFFICE: 1195 Hamburg Turnpike Wayne, New Jersey ............................ Owned 1988 -- $2,716,598 BRANCH OFFICES: 1501 Hamburg Turnpike Wayne, New Jersey ............................ Leased 1992 2001 60,585 1504 Route 23 (Packanack Shopping Center) Wayne, New Jersey ............................ Leased 1959 2002 101,044 Valley Ridge Shopping Center Valley Road at Preakness Avenue Wayne, New Jersey ............................ Leased 1971 2000 98,389 5 Sicomac Avenue North Haledon, New Jersey .................... Leased 1992 2024 32,512 363 Route 46 Fairfield, New Jersey ........................ Leased 1997 2001 137,927 OTHER PROPERTIES: 1255 Hamburg Turnpike Wayne, New Jersey ............................ Owned 1962(1) -- 159,692
- ------------------ (1) This property was acquired by the Bank to serve as the Bank's main office. The Bank began building on the property in 1962 and used that facility until 1992. The property is currently being leased to third parties. 18 ITEM 3. LEGAL PROCEEDINGS. Neither the Company nor its Subsidiary are involved in any pending legal proceedings, other than routine legal proceedings occurring in the ordinary course of business, which involve amounts which, in the aggregate, are believed by Management to be immaterial to the financial condition or results of operations of the Company. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDERS' MATTERS. Information relating to the market for Registrant's common equity and related stockholder matters appear under "Stockholder Information" in the Registrant's 1997 Annual Report to Stockholders on page 40 and is incorporated herein by reference. On February 11, 1998, the Company had 492 registered stockholders. ITEM 6. SELECTED FINANCIAL DATA. The above captioned information appears under "Selected Financial Data" in the Registrant's 1997 Annual Report to Stockholders on page 3 and is incorporated herein by reference. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The above captioned information appears under "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the Registrant's 1997 Annual Report to Stockholders on pages 4 through 8 and is incorporated herein by reference. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK. The above captioned information appears under "Management's Discussion and Analysis of Financial Condition and Results of Operations--Market Risk" in the Registrant's 1997 Annual Report to Stockholders and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The Consolidated Financial Statements of Wayne Bancorp, Inc. and Subsidiary, together with the report thereon by KPMG Peat Marwick LLP appears in the Registrant's 1997 Annual Report to Stockholders on pages 13 through 39 and are incorporated herein by reference ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information relating to Directors and Executive Officers of the Registrant is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on March 24, 1998 at pages 4 through 6. Information concerning Executive Officers who are not directors is contained in Part I of this report pursuant to paragraph (b) of Item 401 of Regulation S-K in reliance on Instruction G. ITEM 11. EXECUTIVE COMPENSATION. The information relating to Director and Executive Compensation is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on March 24, 1998 at pages 9 through 16, (excluding the Compensation Committee Report and the Stock Performance Graph). ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information relating to Security Ownership of Certain Beneficial Owners and Management of the Registrant is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on March 24, 1998 at page 3. 19 ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information relating to Certain Relationships and Related Transactions of the Registrant is incorporated herein by reference to the Registrant's Proxy Statement for the Annual Meeting of Stockholders to be held on March 24, 1998 at page 16. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a) The following documents are filed as a part of this report: (1) Consolidated Financial Statements of the Company are incorporated by reference to the following indicated pages of the 1997 Annual Report to Stockholders:
Page ---- Independent Auditors' Report .......................................................................... 39 Consolidated Statements of Financial Condition as of December 31, 1997 and 1996 ....................... 13 Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 ................ 14 Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 ........................................................................................ 15 Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 ............ 16-17 Notes to Consolidated Financial Statements ............................................................ 18-38
The remaining information appearing in the Annual Report to Stockholders is not deemed to be filed as part of this report, except as expressly provided herein. (2) All schedules are omitted because they are not required or applicable, or the required information is shown in the consolidated financial statements or the notes thereto. (3) Exhibits (a) The following exhibits are filed as part of this report. 3.1 Restated Certificate of Incorporation of Wayne Bancorp, Inc.* 3.2 Bylaws of Wayne Bancorp, Inc.* 4.0 Stock Certificate of Wayne Bancorp, Inc. * 10.1 Employment Agreement between Wayne Bancorp, Inc. and Johanna O'Connell *** 10.2 Employment Agreement between Wayne Savings Bank, F.S.B. and Johanna O'Connell *** 10.3 Form of Change in Control Agreement between Wayne Bancorp, Inc. and Certain Executive Officers 10.4 Employment Agreement between Wayne Savings Financial Services Group, Inc. and Gary Len *** 10.5 Employee Severance Compensation Plan * 10.6 Employee Stock Ownership Plan * 10.7 Incentive Stock Plan** 11.0 Earnings Per Share Computation 13.0 1997 Annual Report 21.0 Subsidiaries-See "Part I--Subsidiaries," which information is incorporated by reference 27.0 Financial Data Schedule (b) Reports on From 8-K None - --------------- * Incorporated herein by reference to the Exhibits to Form S-1 Registration Statement, as amended, filed on March 18, 1996 Registration Number 333-2488 and declared effective May 13, 1996. ** Incorporated herein by reference to the Proxy Statement for the Special Meeting of Stockholders filed on December 9, 1996. *** Incorporated herein by reference to the Exhibits to the Registrant's Annual Report on Form 10-K (File No. 20691) filed on March 11, 1997. 20 Pursuant to the requirements of Section 13 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 BANCORP, INC. By /s/ HAROLD P. COOK, III ---------------------------- Harold P. Cook, III Chairman of the Board And CEO Dated: March 24, 1998 Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ----- /s/ HAROLD P. COOK, III Chairman of the Board, CEO March 24, 1998 - -------------------------------- and Director (Harold P. Cook, III) (Principal Executive Officer) /s/ JOHANNA O'CONNELL President and Director March 24, 1998 - -------------------------------- (Johanna O'Connell) /s/ WILLIAM J. LLOYD Director March 24, 1998 - -------------------------------- (William J. Lloyd) /s/ DAVID M. COLLINS Director March 24, 1998 - -------------------------------- (David M. Collins) /s/ THOMAS D. COLLINS Director March 24, 1998 - -------------------------------- (Thomas D. Collins) /s/ NICHOLAS S. GENTILE, JR. Director March 24, 1998 - -------------------------------- (Nicholas S. Gentile, JR.) /s/ RONALD HIGGINS Director March 24, 1998 - -------------------------------- (Ronald Higgins) /s/ RICHARD LEN Director March 24, 1998 - -------------------------------- (Richard Len) /s/ CHARLES LOTA Director March 24, 1998 - -------------------------------- (Charles Lota) /s/ DENNIS POLLACK Director March 24, 1998 - -------------------------------- (Dennis Pollack) /s/ TIMOTHY P. TIERNEY V. P. and Comptroller March 24, 1998 - -------------------------------- (Principal Financial Officer) (Timothy P. Tierney)
21 EX-13 2 ANNUAL REPORT WAYNE BANCORP, INC. [LOGO] ANNUAL REPORT 1997 Table of Contents Page ----- Letter to Stockholders ............................................. 1 Selected Financial Data ............................................ 3 Management's Discussion and Analysis ............................... 4 Consolidated Financial Statements .................................. 13 Notes to Consolidated Financial Statements ......................... 18 Independent Auditors' Report ....................................... 39 Stockholder Information ............................................ 40 Directors and Officers ............................................. 41 Banking Locations .................................................. 41 Dear Fellow Shareholders: Nineteen Hundred and Ninety Seven marked Wayne Bancorp's first full year as a public Company. It was an exciting, challenging and successful year. I am pleased to report that your Company achieved and, in many cases, exceeded the goals of its business plan. For the period ended December 31, 1997, the Company's gross loans increased $35.3 million to $182.5 million. In addition, deposits increased $19.5 million to $198.5 million. Of particular significance is the increase of $3.9 million, to $10.4 million, in noninterest bearing deposits. Of all of your Company's accomplishments during 1997, the most significant and visible has been the increase in the value of your investment in Wayne Bancorp. For the year, the price of Wayne Bancorp's common stock increased from $15.25 to $26.75, a 43% gain, not including dividends paid to our shareholders. We remain confident that our ongoing efforts to implement our strategic business plan will continue your Company's transformation into a profitable, multifaceted community bank, serving and prospering in our unique local market. And, we remain committed to enhancing the value of your investment in Wayne Bancorp. We have successfully closed over $17.4 million in commercial, multi family, commercial real estate and construction loans. And, through our ongoing team efforts the Bank reported a 60% increase in noninterest bearing deposit accounts. An important part of Wayne Bancorp's strategic business plan includes the expansion of our commercial lending activities. At the close of the first quarter, we took a big step in expanding Wayne Bancorp's commercial lending operations by successfully recruiting Robert L. Frega to join our management team as Senior Vice President responsible for Commercial Lending. Formerly with Fleet Bank, Bob brings to us over twenty years of commercial lending expertise and his efforts are already apparent, by leveraging his existing business relationships and building on referrals from our board of directors and existing management team. This operation will further enhance our ability to increase our cross selling efforts and products per customer while attracting lower cost demand deposits, once the exclusive domain of commercial banks. Another significant part of our business strategy involved branch office expansion to extend your Bank's market area. In July, we opened a retail branch on Route 46, in Fairfield. The branch is unique in that it was a turnkey leasehold that was acquired at a very attractive rental which is expected to assist the branch in its profitability expectations. Significantly, the Fairfield area also provides a multitude of opportunities to grow our commercial customer base and cross-sell various products and services. In August, we successfully obtained municipal and regulatory approvals to open a branch on Franklin Avenue in Wyckoff, New Jersey, a Bergen County municipality with a strong local business community. Wyckoff offers opportunities for above average deposit growth in addition to providing a source of financial service opportunities. We anticipate opening our temporary branch in February with the permanent branch opening in the third quarter of 1998. Both Fairfield and Wyckoff are natural extensions of our market area and should enhance our franchise value. We have successfully developed and continue to market our Home Equity variable rate program. With these loans being tied to our "prime rate" our interest rate risk is significantly reduced. Additionally, our Home Equity fixed rate first lien program affords us an average loan to value ratio of less than 30%. As an added service to our stockholders the Company has instituted a dividend reinvestment plan. Information pertaining to the plan was mailed to all stockholders of record as of January 15, 1998 including an explanation of the plan and an enrollment card. The dividend reinvestment plan allows participating stockholders to reinvest dividends and voluntary contributions for the purchase of additional shares of the Company's common stock without brokerage commissions or service charges. Your management team continues to expand our product line and services to better serve our customers and communities. Some of our expanded products include medical savings accounts, overdraft checking, merchant accounts, telephonic banking and our premier direct mail money market accounts. Additionally, we are very supportive of local charitable and civic organizations that serve our communities. It's simply a matter of good business. During 1997, we successfully implemented and completed two separate five percent stock repurchases as part of our overall strategic plan to manage capital and most significantly, maximize shareholder value. We intend to pursue necessary regulatory approvals during the current year so that we can continue to utilize open market stock repurchases to enhance shareholder value. Our first year as a public Company can be characterized as a successful year of achievement. We are proud to have met or surpassed our goals, particularly when compared to the performance of our peers, other recently converted thrifts. Our board of directors and management look forward to continuing to improve performance by constantly modifying and fine-tuning our strategic plan to adapt to changes in the economy and our market place and to take advantage of long and short term business opportunities that arise. As with any investment, these benefits are not necessarily immediate, but often take time. We begin 1998 with great anticipation and excitement. Our plans include executing and implementing certain business opportunities on the holding Company level which will compliment our traditional community banking activities and have a synergistic effect on the Company's performance. As indicated above, we are committed to managing our capital on all levels with a view to enhancing shareholder value. We believe that our Company is poised to develop its franchise and to benefit from a vibrant local economy, a strong real estate market and business opportunities brought about by the dedication and hard work of our officers, directors and staff. We remain committed to maximizing the value of your investment in Wayne Bancorp and benefiting the communities we serve. Thank you for your confidence and continued support. Sincerely, [Sign. Cut] Harold P. Cook, III Chairman of the Board and Chief Executive Officer 2 SELECTED FINANCIAL DATA
AT DECEMBER 31, ----------------------------------------------------------------- 1997 1996 1995 1994 1993 -------- ------- -------- ------ -------- IN THOUSANDS SELECTED BALANCE SHEET DATA: Total assets .................................. $270,043 $244,081 $207,997 $176,664 $183,228 Securities available for sale ................. 73,413 80,867 58,155 3,360 11,715 Securities held to maturity ................... 2,913 3,229 3,841 50,304 33,774 Loans receivable, net ......................... 178,932 145,425 111,988 113,091 106,333 Deposits ...................................... 198,479 178,947 173,822 159,013 166,821 Total stockholders' equity .................... 33,944 36,911 17,299 16,259 15,005 FOR THE YEAR ENDED DECEMBER 31, --------------------------------------------------------- 1997 1996 1995 1994 1993 ------ ------ ------ ------ ------- IN THOUSANDS SELECTED OPERATING DATA: Interest income ..................................................... $ 18,766 $ 15,458 $ 13,136 $ 11,833 $ 12,633 Interest expense .................................................... 9,908 7,958 6,950 5,172 5,753 -------- -------- -------- -------- -------- Net interest income before provision for loan losses ................ 8,858 7,500 6,186 6,661 6,880 Provision for loan losses ........................................... 400 200 152 316 286 -------- -------- -------- -------- -------- Net interest income after provision for loan losses ................. 8,458 7,300 6,034 6,345 6,594 Other Income: Net gain (loss) from sale of securities available for sale ......... (2) -- (363) 270 (3) Other .............................................................. 699 585 638 450 499 -------- -------- -------- -------- -------- Total other income ................................................. 697 585 275 720 496 Other expenses ...................................................... 5,990 6,816 4,951 4,432 4,155 -------- -------- -------- -------- -------- Income before income tax expense .................................... 3,165 1,069 1,358 2,633 2,935 Income tax expense .................................................. 1,211 403 487 944 745 -------- -------- -------- -------- -------- Net income .......................................................... $ 1,954 $ 666 $ 871 $ 1,689 $ 2,190 ======== ======== ======== ======== ======== AT OR FOR THE YEAR ENDED DECEMBER 31, ----------------------------------------------------- 1997 1996 1995 1994 1993 ----- ------ ------ ------ ------ SELECTED FINANCIAL RATIOS AND OTHER DATA: PERFORMANCE RATIOS: Return on average assets .................................... 0.76% 0.31% 0.46% 0.93% 1.21% Return on average equity .................................... 5.63 2.33 5.12 10.79 15.76 Average equity to average assets ............................ 13.45 13.21 9.03 8.63 7.68 Equity to total assets at end of period ..................... 12.57 15.12 8.32 9.20 8.10 Average interest rate spread ................................ 2.93 3.01 3.13 3.63 3.83 Net interest margin ......................................... 3.50 3.54 3.42 3.82 3.99 Average interest-earning assets to average interest-bearing liabilities ................................ 114.64 113.99 107.63 106.36 104.59 Efficiency Ratio (1) ......................................... 62.69 61.86 72.07 62.33 56.31 General and administrative expense to average assets ......... 2.32 3.07 2.45 2.44 2.30 Non-performing loans as a percent of gross loans ............. 1.29 1.41 2.16 3.17 3.26 Non-performing assets as a percent of total assets ........... 0.89 0.90 1.46 2.61 2.65 Allowance for loan losses as a percent of gross loans receivable ................................... 1.19 1.21 1.40 1.34 1.15 Allowance for loan losses as a percent of non-performing loans ..................................... 93.21 86.18 64.86 42.33 35.24 Dividends declared per common share .......................... $ 0.20 $ -- $ -- $ -- $ -- Number of full-service customer facilities ................... 5 4 4 4 4
- -------------- (1) Total noninterest expense divided by the sum of net interest income before provision for loan losses and noninterest income which excludes the effect in 1996 of a one time FDIC special SAIF assessment and a non-recurring charge for benefits paid to the Company's former President and CEO. 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company's results of operations are primarily dependent on net interest income which is the difference between interest income on loans, investments and other interest-earning assets and interest expense on deposits and borrowings. Interest income on loans, investments and other interest-earning assets is a function of the average balances outstanding during the period and the average rates earned. Interest expense is a function of the average amount of deposits and borrowings outstanding during the period and average rates paid on such deposits and borrowings. The Company's net income is further affected by the level of its other expenses, such as salaries and employee benefits, occupancy and equipment costs, federal deposit insurance premiums and income taxes. This Annual Report includes statements that may constitute forward looking statements, usually containing the words "believe," "estimate", "project", "expect," "intend," or similar expressions. These statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward looking statements inherently involve risks and uncertainties that could cause actual results to differ materially from those reflected in the forward looking statements. Factors that could cause future results to vary from current expectations include, but are not limited to, the following: changes in economic conditions (both generally and more specific in the markets in which the Company operates); changes in interest rates, deposit flows, loan demand, real estate values and competition; changes in accounting principles, policies or guidelines and in government legislation and regulation (which change from time to time and over which the Company has no control), technological changes, changes in consumer spending and saving habits, and success of the Company at managing the risk involved in the foregoing; and other risks detailed in this Annual Report and in the Company's other Securities and Exchange Commission ("SEC") filings. Readers are cautioned not to place undue reliance on these forward looking statements, which reflect management's analysis only as of the date hereof. The Company undertakes no obligation to publicly revise these forward looking statements to reflect events or circumstances that arise after the date hereof. OPERATING STRATEGY Management's strategy has been to operate as a community oriented financial institution by offering a variety of financial services to meet the needs of the communities it serves while maintaining capital in excess of regulatory requirements and monitoring the sensitivity of the Company's assets and liabilities to interest rate fluctuations. The Board of Directors has sought to accomplish these goals by: (i) attracting and maintaining low-cost savings and transaction accounts, as well as money market accounts, which management believes provide the Company with a stable source of funds; (ii) focusing its lending on the origination of one- to four-family, owner occupied residential mortgage loans, including home equity loans; (iii) supplementing its one- to four-family residential lending activities with commercial real estate, commercial business, multi-family, construction and consumer loans originated in the Company's primary market area in accordance with the Company's underwriting guidelines; (iv) purchasing short to intermediate term investment and mortgage-backed securities to complement the Company's lending activities;(v) emphasizing shorter-term loans and investments and adjustable rate assets when market conditions permit; and (vi) controlling growth. COMPARISON OF FINANCIAL CONDITION AT DECEMBER 31, 1997 AND DECEMBER 31, 1996 Total assets increased $25.9 million or 10.6% to $270.0 million at December 31, 1997 from $244.1 million at December 31, 1996. Securities available for sale decreased $7.5 million or 9.2% to $73.4 million at December 31, 1997 from $80.9 million at December 31, 1996. Cash flows from the securities available for sale and held to maturity as well as increases in deposits and borrowings were used to fund loan growth. Loans receivable, net increased $33.5 million or 23.0% to $178.9 million at December 31, 1997 from $145.4 million at December 31, 1996. The increase in loans receivable, net is primarily the result of an increase in conventional one-to-four family loans of $17.2 million or 15.1%, an increase in commercial real estate loans of $7.0 million or 98.6%, an increase in commercial business loans of $1.9 million or 297.2% and an increase in home equity loans of $3.5 million or 14.3%. Also included in the loans receivable, net increase were increases of $1.9 million in multi-family loans, an increase of $1.1 million in residential construction lending and an increase of $1.5 million in commercial construction lending. Loan originations increased from $57.7 million for 1996 to $60.6 million (including $6.6 million of residential one-to-four family purchased 4 loans) for 1997, reflecting the expansion of the Company's lending area for first mortgages as well as the Company's loan origination efforts. In addition, the Company has increased its marketing of home equity loans. Finally, the Company is continuing to expand its commercial lending. The major components of the originations for 1997 were $24.6 million of residential loans, $12.0 million of home equity loans, $8.9 million of commercial real estate loans, $2.6 million of construction loans, $2.0 million of multi-family loans, and $3.9 million of commercial business loans. Deposits increased $19.6 million or 10.9% to $198.5 million at December 31, 1997 from $178.9 million at December 31, 1996. The increase in deposits for the year 1997 is in part the result of interest credited to deposit accounts of $6.1 million. Demand deposits increased to $10.5 million at December 31, 1997 from $6.9 million at December 31, 1996 or 52.2%. Federal Home Loan Bank advances increased $5.0 million to $32.0 million at December 31, 1997 from $27.0 million at December 31, 1996. This increase was due to the additional funding to support the origination and purchase of loans during the year. Other liabilities increased $4.3 million to $4.7 million at December 31, 1997 from $357,000 at December 31, 1996. The increase represents the liability recorded to reflect the purchase of a $4.0 million Federal Farm Credit Banks Note at 6.1%, that will be paid for in January 1998. Stockholders' equity decreased $3.0 million to $33.9 million at December 31, 1997 from $36.9 million at December 31, 1996. The decrease was primarily due to the purchase of 217,560 shares of the Company's common stock related to the Company's stock repurchase programs previously announced, and the purchase of 89,254 shares of common stock for the Company's Stock-Based Incentive Plan. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 1997 AND DECEMBER 31, 1996 AND FOR THE YEARS ENDED DECEMBER 31, 1996 AND DECEMBER 31, 1995 GENERAL Net income for 1997 was $2.0 million, an increase of $1.3 million or 193.4% from $666,000 for 1996. Net income decreased $205,000 or 23.5% in 1996 from $871,000 for 1995. The increase of $1.3 million for 1997 was primarily attributable to a $1.2 million increase in net interest income after provision for loan losses, together with a decrease in total other expenses of $826,000 due to several non-recurring charges in 1996. In 1996, there was a $660,000, net of tax, Savings Association Insurance Fund ("SAIF") recapitalization assessment. In addition, there was a $503,000, net of tax, non-recurring charge for the benefits paid to the Company's former President and CEO upon his resignation from the Company. These were also the major items contributing to the decrease in net income from 1995 to 1996. INTEREST INCOME Interest income for 1997 increased $3.3 million to $18.8 million, from $15.5 million for 1996. The increase in interest income reflected an increase in average interest earning assets of $41.0 million from $211.9 million for 1996, to $252.9 million for 1997, coupled with a increase in the average yield on interest earning assets to 7.42% in 1997 from 7.29% in 1996. Interest income on loans increased by $2.8 million to $12.9 million for 1997 from $10.1 million for 1996, primarily due to a $39.6 million increase in the average balance of loans receivable from $129.2 million for 1996 to $168.8 million for 1997 offset by a 12 basis point decrease in the average yield to 7.66% for 1997 from 7.78% for 1996. Interest income on securities available for sale increased $955,000 to $5.5 million in 1997 from $4.5 million in 1996, reflecting a $9.6 million increase in the average balance of securities available for sale from $67.6 million for 1996 to $77.2 million for 1997 and a 42 basis point increase in the average yield to 7.07%. Interest income on interest earning deposits and short-term investments decreased $503,000 to $199,000 in 1997 from $702,000 in 1996, reflecting a $7.6 million decrease in the average balance of interest earning deposits and short-term investments from $11.5 million for 1996 to $3.9 million for 1997 and a 104 basis point decrease in the average yield to 5.05% as short term rates dropped. Interest income for 1996 increased $2.3 million to $15.1 million during 1995, from $13.1 million during 1995. The increase in interest income reflected an increase in average interest earning assets of $30.8 million from $181.1 million for 1995, to $211.9 million for 1996, coupled with an increase in the average yield on interest earning assets to 7.29% in 1996 from 7.26% in 1995. Interest income on loans increased by $850,000 to $10.1 million for 1996 from $9.2 million for 1995, primarily due to a $14.8 million increase in the average balance of loans receivable from $114.4 million for 1995 to $129.2 million for 1996 offset somewhat by a 27 basis point decrease in the average yield to 7.78% for the year ended December 31, 1996. Interest income on investments increased $1.5 million to $5.4 million in 1996 from $3.9 million in 1995, reflecting a $16.1 million increase in the average balance of investments from $66.6 million for 1995 to $82.7 million for 1996 and a 65 basis point increase in the average yield to 6.53%. 5 INTEREST EXPENSE Interest expense on deposits increased $479,000 or 7.0% to $7.6 million for 1997 from $7.1 million for 1996. This increase reflects an increase in the average balance of interest bearing deposits of $9.2 million in 1997 compared with 1996, and a decrease of 1 basis point in the average rate paid on deposit liabilities during the same period to 4.11% for 1997. The increase in deposits was primarily attributable to the Company's certificate accounts, the average balance of which increased by $7.8 million to $103.6 million in 1997 from an average balance of $95.8 million in 1996 on which the average yield increased three basis points from 5.50% in 1996 to 5.53% in 1997. The increase in deposit balances was also the result of increases in average non-interest bearing demand deposits of $3.1 million to $7.9 million and an increase in average NOW accounts of $2.6 million to $21.0 million for 1997 offset by small decreases in the average balance of money market and savings accounts. Interest expense on FHLB advances increased $1.5 million in 1997 compared with 1996 due to management's decision to use FHLB advances to fund a portion of the Company's asset growth. The increase in interest expense on advances is also the result of higher average outstanding balances of $34.8 million for 1997 compared with $12.4 million for 1996. The rate paid on the advances increased 4 basis points to 6.56% for 1997. Interest expense on deposits increased $368,000 or 5.4% to $7.1 million for 1996 from $6.8 million for 1995. This increase reflects both an increase in the average balance of interest bearing deposits of $7.9 million in 1996 compared to 1995, and a 3 basis point increase in the average rate paid on deposit liabilities over the same period. The increase in deposits and the rate paid thereon was primarily attributable to the Company's certificate accounts, the average balance of which increased by $7.7 million to $95.8 million in 1996 from an average balance of $88.1 million in 1995 and the average yield increased 7 basis points from 5.43% in 1995 to 5.50% in 1996. The increase in the rate paid on certificate accounts was in response to market conditions and was intended to maintain existing accounts rather than attracting new accounts to the Company. Interest expense on borrowings increased $640,000 in 1996 compared with 1995 due to management's decision to use borrowings to fund a portion of the Company'sasset growth. NET INTEREST INCOME Net interest income before provision for loan losses increased $1.4 million or 18.7% to $8.9 million for 1997 from $7.5 million for 1996. The increase is the result of higher outstanding average interest earning assets offset somewhat by higher outstanding average interest bearing liabilities. Average interest earning assets increased $41.0 million to $252.9 million for the year 1997 from $211.9 million for the year 1996. Average interest bearing liabilities increased $34.7 million to $220.6 million for the year 1997 from $185.9 million for the year 1996. The yield earned on average interest earning assets increased by 13 basis points to 7.42% while the rate paid on interest bearing liabilities increased 21 basis points to 4.49% due to increased emphasis on higher costing certificates of deposits and borrowings. The Company's interest rate spread decreased eight basis points to 2.93% for 1997 from 3.01% for 1996. The net interest margin decreased from 3.54% for 1996 to 3.50% for 1997. The percentage of average interest earning assets to average interest bearing liabilities for 1997 was 114.64% compared with 113.99% for the same period in 1996. Net interest income before provision for loan losses increased $1.3 million or 21.2% to $7.5 million for 1996 from $6.2 million for 1995. The increase is the result of higher outstanding average interest earning assets offset by higher outstanding average interest bearing liabilities. Average interest earning assets increased $30.9 million to $211.9 million for the year 1996 from $181.1 million for the year 1995. Average interest bearing liabilities increased $17.7 million to $185.9 million for the year 1996 from $168.2 million for the year 1995. The yield earned on average interest earning assets increased slightly by three basis points to 7.29% while the rate paid on interest bearing liabilities increased 15 basis points to 4.28%. The Company's interest rate spread decreased 12 basis points to 3.01% for 1996 from 3.13% for the year ended 1995. The net interest margin increased from 3.42% for 1995 to 3.54% for 1996. The percentage of average interest earning assets to average interest bearing liabilities for 1996 was 113.99% compared with 107.63% for the same period in 1995. In August 1996 the Company entered into an arbitrage transaction, whereby the Company purchased a $25.0 million Federal Home Loan Mortgage Corporation ("FHLMC"), fixed rate note and simultaneously borrowed $25.0 million from the FHLB. The FHLMC note's term is for a period of ten years, at a rate of 7.783%, and is callable after 6 three years, and continuously thereafter. The FHLB advance is for a three year period, at a fixed rate of 6.86%, which represents a pretax spread of 92 basis points or the difference between the rate earned of 7.783% and the cost of 6.86%. This transaction generates pretax income of $230,750, and on an after tax basis, using an effective tax rate of 36%, results in an increase in net income of $147,689 per year. Had the effects of this transaction been excluded from the calculation of interest rate spread and margin the spread would have been 3.19% or an increase of 26 basis points (3.19% versus 2.93%) and the margin would have been 3.79% or an increase of 29 basis points (3.79% versus 3.50%). In addition, the ratio of interest bearing assets to interest bearing liabilities would have increased by 188 basis points to 116.25% from 114.64%. PROVISION FOR LOAN LOSSES The provision for loan losses is a result of management's periodic analysis of the adequacy of the allowance for loan losses. The provision for loan losses increased $200,000 or 100.0% for 1997, compared with 1996. The Company's provision for loan losses was $400,000 for 1997, compared with $200,000 for 1996. The provision for loan losses increased $48,000 or 31.6% for 1996, compared with 1995. The Company's provision for loan losses was $200,000 for 1996, compared with $152,000 for 1995. The increase in the allowance for loan losses in 1997 is due to management's continuing reassessment of losses inherent in the loan portfolio, primarily in response to loan growth. At December 31, 1997 and 1996, the Company's allowance for loan losses totalled $2.2 million and $1.8 million or 1.2% and 1.2% of gross loans receivable and 93.2% and 86.2% of total non-performing loans, respectively. Management believes that the current allowance for loan losses is adequate to address the risks inherent in the Company's loan portfolio. The Company establishes an allowance for loan losses based on an analysis of risk factors in the loan portfolio. This analysis includes evaluation of concentrations of credit, past loss experience, current economic conditions, amount and composition of the loan portfolio (including loans being specifically monitored by management), estimated fair value of underlying collateral, loan commitments outstanding, delinquencies and other factors, including the loss experience of similar portfolios in comparable lending markets. The Company will continue to monitor its allowance for loan losses and make future additions to the allowance through the provision for loan losses as economic conditions dictate. Although the Company maintains its allowance for loan losses at a level which it considers to be adequate to provide for losses, there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be required in future periods. In addition, the Company's determination as to the amount of its allowance for loan losses is subject to review by the Office of Thrift Supervision ("OTS") and the Federal Deposit Insurance Corporation ("FDIC"), as part of their examination process, which may result in the establishment of an additional allowance based upon their judgment of the information available to them at the time of their examination. OTHER INCOME Other income increased $112,000 or 19.1% to $697,000 for 1997 from $585,000 for 1996. This increase was primarily attributable to the gain on sale of Real Estate Owned of $100,000. Other income increased $310,000 or 112.7% to $585,000 for 1996 from $275,000 for 1995. This increase was primarily attributable to a $363,000 loss on the sale of mortgage-backed securities incurred in December 1995 in connection with the Company's restructuring of the mortgage-backed securities portfolio. Offsetting this loss was a gain on sale of real estate owned of $118,000 for 1995. OTHER EXPENSE Other expense decreased $826,000 or 11.8% to $6.0 million for 1997 compared with $6.8 million for 1996. Other expense increased $1.9 million or 37.7% for 1996 compared with $5.0 million for 1995. Compensation and employee benefits decreased $212,000 or 7.4% to $2.7 million for 1997 from $2.9 million for 1996, due primarily to the non-recurring charge paid in 1996 for benefits paid to the Company's former President and CEO. Excluding this non-recurring charge, compensation and employee benefits expense actually increased $573,000 or 27.4% to $2.7 million. This increase in compensation and employee benefits expense is due to the Company hiring a commercial loan officer and the personnel costs associated with the new branch office that opened in July 1997 and the cost of stock benefit plans adopted in connection with the bank's mutual to stock conversion. Compensation and employee benefits increased $619,000 or 27.4% to $2.9 million for 1996 from $2.3 million in 1995. The increase in 7 compensation and employee benefits expense reflects the non-recurring charge for benefits paid to the Company's former President and CEO upon his resignation. The decrease in Federal insurance premiums of $301,000 to $92,000 for 1997 from $393,000 for 1996 is due to the decline in insurance premiums (required by legislation) from 23 basis points to 6.4 basis points (per $100 of deposits) effective January 1, 1997. The decrease in SAIF assessment expense is the result of the one time assessment of $1.0 million which represented the Company's share of the special assessment required by legislation signed into law on September 30, 1996, requiring all SAIF insured institutions to make a one time payment to recapitalize the SAIF. The increase in the other category of $624,000 or 45.8% to $2.0 million for the year ended December 31, 1997 from $1.4 million for 1996 is the result of expenses incurred for the proxy contest in early 1997 and legal, professional and printing expenses associated with being a public company. The Company expects similar costs in the first quarter of 1998 in connection with the anticipated proxy contest. In 1996, data processing fees increased $40,000 or 19.8% due to the increase in volume of transactions processed, primarily as a result of the increase in the number of loan and deposit accounts as well as the introduction of banking by telephone. In 1996, advertising expenses decreased $91,000 due to the postponement of advertising expenditures for deposits, pending the acquisition or expansion of branch facilities. The increase in SAIF recapitalization assessment expense is the result of the one time assessment of $1.0 million described above. The increase in the other category of $387,000 or 39.6% for 1996 to $1.4 million from $977,000 for 1995 was due to increased accounting, legal and other professional fees incurred as a result of the Company being a public company during the second half of 1996. INCOME TAX EXPENSE Income tax expense increased $808,000 to $1.2 million for 1997 from $403,000 for 1996 primarily due to a $2.1 million increase in pre-tax income. Income tax expense decreased by $84,000 to $403,000 for 1996 from $487,000 for 1995 due to a $289,000 decline in pre-tax income. The effective tax rate for 1997 was 38.3% compared with 37.7% for 1996 and 36.0% for 1995. YEAR 2000 A great deal of information has been disseminated about the global computer year 2000. Many computer programs that can only distinguish the final two digits of the year entered (a common programming practice in earlier years) are expected to read entries for the year 2000 as the year 1900 and compute payment, interest or delinquency. Rapid and accurate data processing is essential to the operation of the Company. Data processing is also essential to most other financial institutions and many other companies. The Company contracts with a service bureau to provide the majority of its data processing and is dependent upon purchased application software. In house applications are limited to word-processing and spreadsheet functions. The Company is in the process of ensuring that external vendors and the servicer are adequately addressing the system and software issues related to the year 2000 by obtaining written system certifications that the systems are fully year 2000 compliant or that the service bureau has a plan to become fully compliant in the very near future. Beginning in the fourth quarter of 1998, the Company will coordinate with the primary servicer end-to-end tests which allow the Company to simulate daily processing on sensitive century dates. In the evaluation, the Company will ensure that critical operations will continue if the servicer or vendors are unable to achieve the year 2000 requirements. Upon the completion of the system inventory and vendor verification, the Company will identify critical applications and develop detailed plans for hardware/system upgrades and system replacements where necessary. Any delays, mistakes or failures could have a significant adverse impact on the financial condition and results of operation of the Company. 8 AVERAGE BALANCE SHEET The following table sets forth certain information relating to the Company for the years ended December 31, 1997, 1996 and 1995. The yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods shown. Average balances are derived from average month-end balances. Management does not believe that the use of average monthly balances instead of average daily balances has caused any material differences in the information presented. The yields and costs include fees which are considered adjustments to yields.
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------------------------------------------ 1997 1996 1995 ---------------------------- ----------------------------- ---------------------------- AVERAGE AVERAGE AVERAGE AVERAGE YIELD/ AVERAGE YIELD/ AVERAGE YIELD/ BALANCE INTEREST COST BALANCE INTEREST COST BALANCE INTEREST COST -------- -------- -------- -------- -------- -------- -------- -------- -------- IN THOUSANDS ASSETS: Interest earning assets: Interest earning deposits and short-term investments .............. $ 3,944 $ 199 5.05% $ 11,536 $ 702 6.09% $ 10,020 $ 539 5.38% Loans receivable, net ................ 168,786 12,936 7.66 129,233 10,059 7.78 114,403 9,209 8.05 Securities held to maturity .......... 2,971 179 6.02 3,523 200 5.68 53,033 3,172 5.98 Securities available for sale (1) .... 77,152 5,452 7.07 67,636 4,497 6.65 3,593 216 6.01 -------- ------- ---- -------- ------- ---- -------- ------- ---- Total interest earning assets ...... 252,853 18,766 7.42 211,928 15,458 7.29 181,049 13,136 7.26 ------- ---- ------- ---- -------- ------- ---- Noninterest earning assets ........... 4,990 4,763 7,325 -------- -------- -------- Total assets ....................... $257,843 $216,691 $188,374 ======== ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY: Interest bearing liabilities: Money market deposit accounts ........ $ 21,164 636 3.01 $ 21,829 647 2.96 $20,615 710 3.44 Savings accounts ..................... 32,118 788 2.45 32,695 811 2.48 35,738 887 2.48 NOW accounts ......................... 20,977 480 2.29 18,382 424 2.31 16,963 401 2.25 Non-interest bearing checking accounts ............................ 7,941 -- -- 4,837 -- -- 4,157 -- -- Certificate accounts ................. 103,580 5,723 5.53 95,755 5,266 5.50 88,096 4,782 5.43 -------- ----- ---- -------- ------- ---- -------- ----- ---- Total .............................. 185,780 7,627 4.11 173,498 7,148 4.12 165,569 6,780 4.09 FHLB advances ......................... 34,776 2,281 6.56 12,417 810 6.52 2,646 170 6.42 -------- ----- ---- -------- ------- ---- -------- ----- ---- Total interest bearing liabilities . 220,556 9,908 4.49 185,915 7,958 4.28 168,215 6,950 4.13 ----- ---- ------- ---- ----- ---- Noninterest bearing liabilities ....... 2,598 2,159 3,152 Stockholders' equity .................. 34,689 28,617 17,007 -------- -------- -------- Total liabilities and stockholders' equity .............. $257,843 $216,691 $188,374 ======== ======== ======== Net interest income before provision for loan losses ............ $ 8,858 $ 7,500 $ 6,186 ======= ======= ======= Net interest rate spread(2) ........... 2.93% 3.01% 3.13% Net interest margin(3) ................ 3.50% 3.54% 3.42% Ratio of interest earning assets to interest bearing liabilities ......... 114.64% 113.99% 107.63% ======= ======= ======= - ---------- (1) Average balances are based on amortized or historical cost. (2) Interest rate spread is the difference between the average yield on interest earning assets and the average rate paid on interest bearing liabilities. (3) Net interest margin is equal to net interest income before provision for loan losses divided by total interest earning assets.
9 RATE/VOLUME ANALYSIS The following table presents the extent to which changes in interest rates and changes in the volume of interest earning assets and interest bearing liabilities have affected the Company's interest income and interest expense during the periods indicated. Information is provided in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate.
YEAR ENDED DECEMBER 31, 1997 YEAR ENDED DECEMBER 31, 1996 COMPARED WITH COMPARED WITH YEAR ENDED DECEMBER 31, 1996 YEAR ENDED DECEMBER 31, 1995 ---------------------------- ---------------------------- INCREASE INCREASE (DECREASE) (DECREASE) DUE TO DUE TO ---------------- ---------------- VOLUME RATE NET VOLUME RATE NET ------ ----- ------ ------ ----- ------ IN THOUSANDS INTEREST EARNING ASSETS: Interest earning deposits and short-term investments ................................ $ (420) $ (83) $ (503) $ 87 $ 76 $ 163 Loans receivable, net ....................... 3,015 (138) 2,877 1,141 (291) 850 Securities held to maturity ................. (33) 12 (21) (2,821) (151) (2,972) Securities available for sale ............... 672 283 955 4,240 41 4,281 ------ ----- ------ ------ ----- ------ Total interest earning assets ............. 3,234 74 3,308 2,647 (325) 2,322 ------ ----- ------ ------ ----- ------ INTEREST BEARING LIABILITIES: Money market deposit accounts ............... (20) 9 (11) 46 (109) (63) Savings accounts ............................ (14) (9) (23) (75) (1) (76) NOW accounts ................................ 59 (3) 56 32 (9) 23 Certificate accounts ........................ 432 25 457 420 64 484 ------ ----- ------ ------ ----- ------ Total ..................................... 457 22 479 423 (55) 368 FHLB advances ............................... 1,467 4 1,471 637 3 640 ------ ----- ------ ------ ----- ------ Total interest bearing liabilities ........ 1,924 26 1,950 1,060 (52) 1,008 ------ ----- ------ ------ ----- ------ Net change in net interest income ............ $1,310 $ 48 $1,358 $1,587 $(273) $1,314 ====== ===== ====== ====== ===== ======
MARKET RISK Market risk is the potential loss from adverse changes in market prices and rates. The Company's market risk arises primarily from interest rate risk inherent in its lending and deposit taking activities. To that end, management actively monitors and manages its inherent interest rate risk exposure. The Company's profitability is affected by fluctuations in interest rates. A sudden and substantial increase in interest rates may adversely impact the Company's earnings to the extent that the interest rates borne by assets and liabilities do not change at the same speed, the same extent, or on the same basis. The Company monitors the impact of changes in interest rates on its net interest income using several tools. OTS regulated institutions are required to measure their exposure to changes in interest rates. These tests measure the impact on net interest income and on net portfolio value ("NPV") of an immediate change in interest rates in 100 basis point increments. Net portfolio value is defined as the net present value of assets, liabilities, and off-balance sheet contracts. Following are the estimated impacts of immediate changes in interest rates at the specified levels at December 31, 1997, calculated in compliance with OTS requirements: 10 CHANGE IN NET PORTFOLIO VALUE INTEREST RATES -------------------------------- IN BASIS POINTS CHANGE(1) CHANGE (RATE SHOCK) AMOUNT $ % NPV RATIO(2) CHANGES(3) - --------------- ------- --------- ------ ------------ ---------- IN THOUSANDS 300 $29,286 $(11,481) (28.16)% 11.60% (340)bp 200 33,276 (7,491) (18.38) 12.84 (216) 100 37,103 (3,664) (8.99) 13.97 (103) -- 40,766 -- -- 15.00 -- (100) 44,267 3,501 8.59 15.93 93 (200) 47,605 6,839 16.78 16.78 178 (300) 50,780 10,014 24.56 17.55 256 - ---------- (1) Represents the increase (decrease) of the estimated NPV at the indicated change in interest rates compared to the NPV assuming no change in interest rates. (2) Calculated as the estimated NPV divided by the portfolio value of total assets ("PV"). The Company's PV is the estimated present value of total assets. The PV of the Company as of December 31, 1997, assuming no changes in interest rates, was $271.8 million. (3) Calculated as the increase (decrease) of the NPV ratio assuming the indicated change in interest rates over the estimated NPV ratio assuming no change in interest rates. Under OTS regulations, an institution's "normal" level of interest rate risk (in the event of an assumed change in interest rates) is a decrease in the institution's NPV in an amount not exceeding 2% of the present value of its assets. Thrift institutions with greater that "normal" interest rate exposure must make a deduction for total capital available to meet risk-based capital requirements. The amount of that deduction is one-half of the difference between (i) the institution's actual calculated exposure to a 200 basis point interest rate increase or decrease (whichever results in the greater pro forma decrease in NPV) and (ii) its "normal" level of exposure which is 2% of the present value of its assets. The rule will not become effective until the OTS evaluates the process by which savings associations may appeal an interest rate reduction determination. It is uncertain as to when this evaluation may be completed. Savings institutions, however, with less that $300 million in assets and total risk based capital ratio in excess if 12%, such as the Company, are generally not subject to this requirement. If the Company had been subject to this requirement as December 31, 1997, its interest rate risk would have been considered "normal" and no adjustment to its risk-based capital would have been required. Certain assumptions utilized by the OTS in assessing the interest rate of thrift institutions were employed in preparing the preceding table. These assumptions relate to interest rates, loan prepayment rates, deposit decay rates, and the market values of certain assets under the various interest rate scenarios. It was also assumed that delinquency rates will not change as a result of changes in interest rates although there can be no assurance that the Company's assets and liabilities would perform as set forth above. In addition, a change in U.S. Treasury rates in the designated amounts accompanied by a change in the shape of the Treasury yield curve would cause significantly different changes to the NPV than indicated above. LIQUIDITY AND CAPITAL RESOURCES The Company's primary sources of funds are deposits, principal and interest payments and prepayments on loans and securities and, to a lesser extent, borrowings and proceeds from the sale of securities. While maturities and scheduled amortization of loans and securities provide an indication of the timing of the receipt of funds, other sources of funds such as loan prepayments and deposit inflows are less predictable due to the effects of changes in interest rates, economic conditions and competition. The primary investing activities of the Company are the origination of real estate and other loans and the purchase of mortgage-backed and other securities which are included in securities held to maturity or securities available for sale. During the years ended December 31, 1997, 1996 and 1995, the Company's disbursements for loan originations and purchases totalled $60.6 million, $57.7 million, and $16.1 million, respectively. For the years ended 11 December 31, 1997, 1996 and 1995, purchases of mortgage-backed securities totalled $4.0 million, $36.4 million and $46.6 million, respectively. These activities were funded primarily by net deposit inflows, borrowings and principal repayments and prepayments on loans and securities. For the years ended December 31, 1997 and 1996, the Company experienced net increases in deposits (including the effect of interest credited) of $19.5 million and $5.1 million respectively. Proceeds from FHLB advances were $5.0 million in 1997 and $25.0 million in 1996. The Bank may borrow funds from the FHLB subject to certain limitations. Based on the level of qualifying collateral available to secure advances at December 31, 1997, the Bank's borrowing limit from the FHLB was approximately $81.0 million, with unused borrowing capacity of $49.0 million at that date. Other sources of liquidity include borrowings under repurchase agreements and proceeds from sales of securities available for sale. The Bank is required by Section 6 of the Home Owner's Loan Act ("HOLA") to hold a prescribed amount of statutorily defined liquid assets. The Director of the OTS may, by regulation, vary the amount of the liquidity requirement, but only within pre-established statutory limits. The requirement must be no less that four percent and no greater than ten percent of the Bank's net withdrawable accounts and borrowings payable on demand or with unexpired maturities of one year or less. On and effective November 24, 1997, the OTS issued a final rule that updated, simplified, and streamlined its liquidity requirements. Specifically, the OTS reduced the liquidity requirement from 5% of net withdrawable accounts and short term borrowings to 4%. The final rule also removed the one percent short-term liquidity requirement, set forth an explicit requirement that thrifts maintain a safe and sound level of liquidity, streamlined the calculations used to measure compliance with the liquidity requirement, expanded the categories of liquid assets that may count toward satisfying the liquidity requirement, and reduced the liquidity base by excluding withdrawable accounts payable in more than one year from the definition of the term "net withdrawable accounts." The OTS also removed its maturity requirement for obligations of the United States and certain agencies of the United States. In order to qualify under prior regulations, such obligations had to be maturing in 5 years or less. The removal of this requirement had the greatest impact on the Bank's liquid assets. The Bank's average liquidity ratio was 40.2% and 7.4% at December 31, 1997 and 1996, respectively. The drastic change between these ratios represents the effect of the final liquidity rule. The Company's most liquid assets are cash and cash equivalents, which include interest-bearing deposits and short-term highly liquid investments (such as federal funds) with original maturities of less than three months that are readily convertible to known amounts of cash. The level of these assets is dependent on the Company's operating, financing and investing activities during any given period. At December 31, 1997 and 1996, cash and cash equivalents totalled $6.8 million and $6.9 million, respectively. At December 31, 1997, the Company had outstanding loan origination commitments of $11.1 million, $1.4 million undisbursed construction loans in process, unfunded commercial business lines of $2.0 million, and unadvanced lines of credit of $16.2 million. The Company anticipates that it will have sufficient funds available to meet its current loan origination and other commitments. Certificates of deposit scheduled to mature in one year or less from December 31, 1997 totalled $92.8 million. Based on the Company's most recent experience and pricing strategy, management believes that a significant portion of such deposits will remain with the Company. 12 WAYNE BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION DECEMBER 31, 1997 AND 1996 ASSETS
1997 1996 -------- -------- IN THOUSANDS (EXCEPT SHARES AND PER SHARE AMOUNTS) Cash and due from banks .................................................. $ 1,577 $ 1,170 Interest-bearing deposits in other banks ................................. 1,868 523 Federal funds sold ....................................................... 3,400 5,250 -------- -------- Total cash and cash equivalents ....................................... 6,845 6,943 Securities held to maturity, estimated market value of $2,882 in 1997 and $3,197 in 1996 (note 3) ............................................. 2,913 3,229 Securities available for sale (note 4) ................................... 73,413 80,867 Loans receivable, net (note 5) ........................................... 178,932 145,425 Premises and equipment, net (note 7) ..................................... 3,318 3,196 Real estate owned, net (note 8) .......................................... 80 116 Federal Home Loan Bank of New York stock, at cost ........................ 2,150 1,568 Interest and dividends receivable (note 6) ............................... 1,897 1,901 Other assets (note 11) ................................................... 495 836 -------- -------- Total assets .......................................................... $270,043 $244,081 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY Deposits (note 9) ........................................................ $198,479 $178,947 Federal Home Loan Bank advances (note 10) ................................ 32,000 27,000 Advance payments by borrowers for taxes and insurance .................... 914 866 Other liabilities (note 11) .............................................. 4,706 357 -------- -------- Total liabilities ..................................................... 236,099 207,170 Stockholders' Equity: Preferred stock, $0.01 par value, 2,000,000 shares authorized, none issued ................................................ -- -- Common stock, $0.01 par value, 8,000,000 shares authorized, 2,231,383 shares issued and 2,013,823 shares outstanding at December 31, 1997 and 2,231,383 shares issued and outstanding at December 31, 1996 .................................................. 22 22 Paid-in capital ......................................................... 21,264 21,004 Retained earnings, substantially restricted (notes 11 and 13) ........... 19,623 18,060 Treasury stock at cost, 217,560 shares at December 31, 1997 and none at December 31, 1996 ......................................... (4,417) -- Unallocated common stock held by the ESOP (note 12) ..................... (1,604) (1,785) Common stock held by MRP (note 12) ...................................... (1,262) -- Net unrealized gain (loss) on securities available for sale (note 4) .... 318 (390) -------- -------- Total stockholders' equity ............................................ 33,944 36,911 -------- -------- Commitments and contingencies (note 14) Total liabilities and stockholders' equity ............................ $270,043 $244,081 ======== ========
See accompanying notes to consolidated financial statements. 13 WAYNE BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 ------- ------- ------- IN THOUSANDS (EXCEPT PER SHARE AMOUNTS) Interest income: Loans ......................................................... $12,936 $10,059 $ 9,209 Securities held to maturity ................................... 179 200 3,172 Securities available for sale ................................. 5,452 4,497 216 Short-term and other investments .............................. 199 702 539 ------- ------- ------- Total interest income ....................................... 18,766 15,458 13,136 ------- ------- ------- Interest expense: Deposits (note 9) ............................................. 7,627 7,148 6,780 Federal Home Loan Bank advances ............................... 2,281 810 170 ------- ------- ------- Total interest expense ...................................... 9,908 7,958 6,950 ------- ------- ------- Net interest income before provision for loan losses ........... 8,858 7,500 6,186 Provision for loan losses (note 5) ............................. 400 200 152 ------- ------- ------- Net interest income after provision for loan losses ............ 8,458 7,300 6,034 ------- ------- ------- Other income (expense): Loan fees and service charges ................................. 277 227 183 Net loss on sale of securities available for sale ............. (2) -- (363) Gain on sale of real estate owned ............................. 100 -- 118 Other ......................................................... 322 358 337 ------- ------- ------- Total other income .......................................... 697 585 275 ------- ------- ------- Other expenses: Compensation and employee benefits (note 12) .................. 2,667 2,879 2,260 Occupancy (note 14) ........................................... 433 376 370 Equipment ..................................................... 198 182 187 Data processing services ...................................... 279 242 202 Advertising ................................................... 327 192 283 Federal insurance premiums (note 17) .......................... 92 393 368 SAIF recapitalization assessment (note 17) .................... -- 1,031 -- Real estate owned operations (note 8) ......................... 6 157 304 Other ......................................................... 1,988 1,364 977 ------- ------- ------- Total other expenses ........................................ 5,990 6,816 4,951 ------- ------- ------- Income before income tax expense ............................... 3,165 1,069 1,358 Income tax expense (note 11) ................................... 1,211 403 487 ------- ------- ------- Net income .................................................. $ 1,954 $ 666 $ 871 ======= ======= ======= Basic earnings per share ....................................... $ 1.04 -- -- Basic weighted average shares .................................. 1,873 -- -- Diluted earnings per share ..................................... $ 1.03 -- -- Diluted weighted average shares ................................ 1,895 -- --
See accompanying notes to consolidated financial statements. 14 WAYNE BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 -------- -------- -------- IN THOUSANDS Cash flows from operating activities: Net income .................................................... $ 1,954 $ 666 $ 871 Adjustments to reconcile net income to net cash provided by operating activities: Provision for losses on loans and real estate owned .... 400 300 300 Depreciation ........................................... 208 167 167 Net accretion of discounts and amortization of premiums ........................................... 55 125 29 Allocation of ESOP shares .............................. 181 -- -- Amortization of MRP .................................... 188 -- -- (Increase) decrease in deferred loan fees .............. (14) 22 46 Decrease (increase) in interest and dividends receivable ............................................ 4 (914) (160) Increase (decrease) in other assets .................... 23 658 (572) Increase (decrease) in other liabilities ............... 4,349 (13,750) 13,606 Net (gain) loss on sale of real estate owned ........... (100) -- 118 Net loss on sale of securities available for sale ...... 2 -- 363 -------- -------- -------- Net cash (used in) provided by operating activities ........... 7,250 (12,726) 14,768 -------- -------- -------- Cash flows from investing activities: Purchase of securities held to maturity ...................... -- -- (16,273) Maturity of securities held to maturity ...................... -- -- 6,000 Purchase of securities available for sale .................... (4,753) (36,438) (30,288) Proceeds from sales of securities available for sale ......... 4,153 -- 25,100 Proceeds from calls of securities available for sale ......... 5,000 5,500 -- Principal repayments on securities held to maturity .......... 312 599 6,908 Principal repayments on securities available for sale ........ 4,044 7,630 82 Net (increase) in loans receivable ........................... (27,360) (33,719) -- Purchase of loans ............................................ (6,571) (60) (140) Purchase of premises and equipment ........................... (330) (92) (30) Purchase of Federal Home Loan Bank stock ..................... (582) -- (201) Proceeds from sale of real estate owned ...................... 236 524 1,151 -------- -------- -------- Net cash used in investing activities ......................... (25,851) (56,056) (7,691) -------- -------- --------
See accompanying notes to consolidated financial statements. 16 WAYNE BANCORP, INC. AND SUBSIDIARY CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
1997 1996 1995 -------- -------- -------- IN THOUSANDS Cash flows from financing activities: Net increase in deposits ..................................... $ 19,532 $ 5,125 $ 14,809 Federal Home Loan Bank advances acquired ..................... 5,000 25,000 2,000 Increase (decrease) in advance payments by borrowers for taxes and insurance ........................... 48 97 (122) Net proceeds from issuance of common stock ................... -- 21,026 -- Purchase of shares by ESOP ................................... -- (1,785) -- Dividends paid ............................................... (391) -- -- Payment of ESOP loan ......................................... 181 -- -- Purchase of treasury stock ................................... (4,417) -- -- Purchase of MRP shares ....................................... (1,450) -- -- -------- -------- -------- Net cash provided by financing activities ..................... 18,503 49,463 16,687 -------- -------- -------- Net increase (decrease) in cash and cash equivalents .......... (98) (19,319) 23,764 Cash and cash equivalents at beginning of year ................ 6,943 26,262 2,498 -------- -------- -------- Cash and cash equivalents at end of year ...................... $ 6,845 $ 6,943 $ 26,262 ======== ======== ======== Supplemental disclosures of cash flow information-cash paid during the year for: Federal and state income taxes .............................. $ 1,097 $ 616 $ 345 ======== ======== ======== Interest .................................................... $ 9,873 $ 7,813 $ 6,956 ======== ======== ======== Supplemental information of noncash investing activities -- Transfer of loans receivable to real estate owned ............................................ $ 80 $ 143 $ 831 ======== ======== ======== Transfer of securities held to maturity to securities available for sale ................................ $ -- $ -- $ 51,380 ======== ======== ========
See accompanying notes to consolidated financial statements. 17 WAYNE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Consolidation The consolidated financial statements include the accounts of Wayne Bancorp, Inc. (the Company) and its wholly-owned subsidiary, Wayne Savings Bank, F.S.B. (the Bank) and the Bank's wholly-owned subsidiary, Wayne Savings Financial Services Group, Inc. (the Subsidiary). All significant intercompany accounts and transactions have been eliminated in consolidation. Business The Company conducts business primarily through the Bank, which is a federally chartered savings bank, that provides a full range of banking services to individual and corporate customers through its branches in northern New Jersey. The Bank is subject to competition from other financial institutions; it is also subject to the regulations of certain regulatory agencies and undergoes periodic examinations by those regulatory authorities. The Subsidiary provides financial and investment planning services and market securities, life and health insurance products. Basis of Financial Statement Presentation As more fully described in Note 2, the Bank converted from a mutual to stock form of ownership on June 27, 1996 and 100% of its outstanding common stock was acquired by the Company. As a stock institution and as a result of the public offering of the stock of the holding company upon completion of its stock offering, the holding company is subject to the reporting requirements of the Securities Exchange Act of 1934. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles. In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the consolidated statements of financial condition for the periods then ended. Actual results could differ significantly from those estimates and assumptions. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses and the valuation of real estate acquired in connection with foreclosures or in settlement of loans. In connection with the determination of the allowances for loan losses and real estate owned (REO), management generally obtains independent appraisals for significant properties. Cash and Cash Equivalents Cash and cash equivalents, for purposes of the consolidated statements of cash flows, consist of cash and due from banks, interest-bearing deposits in other banks and Federal funds sold. Federal Home Loan Bank of New York Stock The Bank, as a member of the Federal Home Loan Bank of New York (FHLB), is required to hold shares of capital stock of the FHLB based on a specified formula. Securities Held to Maturity Securities held to maturity are carried at the outstanding principal balance, adjusted for amortization of premiums and accretion of discounts. Premiums and discounts are recognized using the level yield method over the estimated lives of the securities. Securities held to maturity are carried at outstanding principal balance because it is management's intention, and the Company has the ability, to hold them to maturity. Securities Available for Sale Securities that are held for indefinite periods of time but not intended to be held to maturity are classified as available for sale. Securities held for indefinite periods of time include securities that management intends to use as 18 WAYNE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) part of its asset/liability management strategy, including liquidity management strategy, and may be sold in response to changes in interest rates, liquidity needs, and other factors. Securities available for sale are carried at fair value and unrealized gains and losses, net of related tax effect, on such securities are excluded from earnings, but are included in equity. Upon realization, such gains or losses are included in earnings using the specific identification method. In November 1995, the Financial Accounting Standards Board issued "Special Report-A--Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities" within which there was offered transition guidance permitting an enterprise to reassess the appropriateness of all of its securities before December 31, 1995. The Company reassessed its classifications and in December of 1995, it transferred securities previously classified as held to maturity, with an amortized cost of $51.4 million to the available for sale classification. The related unrealized gain on the securities transferred, net of related tax effect was approximately $19,000 which has been recognized and reported as a separate component of equity. Loans Receivable Loans receivable are stated at unpaid principal balance less undisbursed loan funds, net deferred loan origination and commitment fees and the allowance for loan losses. The accrual of interest income on loans is discontinued when certain factors indicate reasonable doubt as to the timely collectibility of such income (generally when loans are greater than ninety days delinquent). Interest income previously accrued on these loans, but not yet received, is reversed in the current period. Any interest subsequently collected is credited to income in the period of recovery. Loans are returned to accrual status when collectibility is no longer considered doubtful. Loan Origination and Commitment Fees and Related Costs Loan fees and certain direct loan origination costs are deferred and the net fee or cost is recognized in interest income using the level yield method over the contractual lives of the specifically identified loans adjusted for prepayments. Allowance for Loan Losses The adequacy of the allowance for loan losses is based on the Company's past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower's ability to repay, estimated value of any underlying collateral and current economic conditions. Additions to the allowance arise from charges to operations through the provision for loan losses or from the recovery of amounts previously charged off. The allowance is reduced by loan charge-offs. Loans are charged off when management believes there has been permanent impairment of their carrying values. Management believes that the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions in the Company's market area. In addition, various regulatory agencies, as an integral part of their routine examination process, periodically review the Company's allowance for loan losses. Such agencies may require the Company to recognize additions to the allowance based on their judgments about information available to them at the time of their examination. The Company has defined the population of impaired loans to be all nonaccrual commercial real estate and multi-family loans. Impaired loans are individually assessed to determine that the loan's carrying value is not in excess of the fair value of the collateral or the present value of the loan's expected future cash flows. Smaller balance homogeneous loans that are collectively evaluated for impairment, such as residential mortgage loans and consumer loans, are specifically excluded from the impaired loan portfolio. There were no loans classified as impaired by the Company at December 31, 1997 and 1996. Real Estate Owned Real estate owned (REO) acquired through foreclosure on loans secured by real estate is reported at the lower of cost or fair value, as established by a current appraisal, less estimated cost to sell. An allowance for REO has been 19 WAYNE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) established to record subsequent declines in estimated net realizable value. Carrying costs are generally expensed as incurred. Additions to the allowance for REO losses, and carrying costs are included in real estate owned operations, net in the consolidated statements of income. Premises and Equipment Premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and amortization. Depreciation and amortization are computed using the straight-line method over the estimated useful lives of the assets or leases. Repair and maintenance items are expensed and improvements are capitalized. Income Taxes The Company files a consolidated Federal income tax return. State income tax returns are filed on a separate basis. Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect of deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Earnings Per Share Statement of Financial Accounting Standards No. 128 "Earnings Per Share" ("SFAS 128") issued in 1996, establishes standards for computing and presenting earnings per share (EPS) and applies to entities with publicly held common stock or potential common stock. SFAS 128 replaces the presentation of primary EPS with a presentation of basic EPS and requires dual presentation of basic EPS and diluted EPS on the face of the income statement for all entities with complex capital structures. For purposes of calculating basic earnings per share, the weighted average number of common shares, for the year ended December 31, 1997, was 1,873,333. For purposes of calculating diluted earnings per share, the weighted average number of common shares, for the year ended December 31, 1997, was 1,894,826. The Company adopted SFAS 128 as of December 31, 1997. The Company completed its initial public offering on June 27, 1996, and accordingly, per share data is not presented for any periods prior to the year ended December 31, 1996. Stock-Based Compensation In October 1996, the FASB issued Statement 123 "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 encourages recording in current period earnings compensation expense related to the fair value of certain stock-based compensation. Companies may choose to follow the provision of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), where compensation expense is not recorded for certain stock-based compensation plans. However, companies are required to disclose pro forma net income and earnings per share as if they adopted the fair value based method of accounting. The Company has elected to continue to account for stock-based compensation under APB 25 and the pro forma disclosures required by SFAS 123 have been included in Note 12 to the consolidated financial statements. Reclassifications Certain amounts relating to the 1996 and 1995 consolidated financial statements have been reclassified to conform to the 1997 presentation. (2) STOCK CONVERSION On June 27, 1996 the Company completed an initial public offering. The offering resulted in the sale of 2,231,383 shares of common stock including the sale of 178,511 shares to the Company's tax qualified Employee 20 WAYNE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Stock Benefit Plan and Trust (the "ESOP"). Proceeds of the offering, net of expenses, were approximately $21.0 million of which $1.8 million was loaned to the ESOP by the Company to fund the purchase of the shares. At the time of the offering the Company was required to establish a liquidation account in an amount equal to its total equity as of the date of the latest statement of financial condition appearing in the final prospectus used in connection with the conversion. The liquidation account is maintained for the benefit of eligible account holders or supplemental eligible account holders who continue to maintain their accounts at the Company after the conversion. The liquidation account is reduced annually to the extent that eligible account holders or supplemental eligible account holders have reduced their qualifying deposits as of each anniversary date. Subsequent increases will not restore an eligible account holder's or supplemental eligible account holder's interest in the liquidation account. In the unlikely event of a liquidation of the Company (a circumstance not envisioned or expected by management), each eligible account holder or supplemental eligible account holder would be entitled to receive a distribution from the liquidation account in an amount proportionate to the current adjusted qualifying balances of accounts of all eligible account holders or supplemental eligible account holders then holding qualifying deposits in the Company. The balance of the liquidation account at December 31, 1997 was approximately $12.2 million. (3) SECURITIES HELD TO MATURITY A summary of securities held to maturity at December 31, 1997 and 1996 is as follows: 1997 1997 ----------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- --------- IN THOUSANDS Mortgage-backed securities: FHLMC ...................... $1,532 $-- $30 $1,502 FNMA ....................... 1,381 4 5 1,380 ------ --- --- ------ $2,913 $ 4 $35 $2,882 ====== === === ====== 1996 ----------------------------------------------- GROSS GROSS ESTIMATED AMORTIZED UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE --------- ---------- ---------- --------- IN THOUSANDS Mortgage-backed securities: FHLMC ...................... $1,608 $-- $36 $1,572 FNMA ....................... 1,621 4 -- 1,625 ------ --- --- ------ $3,229 $ 4 $36 $3,197 ====== === === ====== The contractual maturities of mortgage-backed securities generally exceed ten years; however, the effective lives are expected to be shorter due to anticipated prepayments. 21 WAYNE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (4) SECURITIES AVAILABLE FOR SALE A summary of securities available for sale at December 31, 1997 and 1996 is as follows:
1997 ------------------------------------------------- ESTIMATED GROSS GROSS MARKET UNREALIZED UNREALIZED AMORTIZED VALUE GAINS LOSSES COST --------- ---------- ---------- --------- IN THOUSANDS Mortgage-backed securities: FHLMC ............................... $ 7,191 $ 64 $ 38 $ 7,165 FNMA ................................ 12,679 21 94 12,752 GNMA ................................ 11,632 25 -- 11,607 Collateralized mortgage obligations ... 3,209 -- 102 3,311 U.S. Government agencies .............. 37,890 566 -- 37,324 Equity Securities ..................... 812 59 -- 753 ------- ---- ---- ------- $73,413 $735 $234 $72,912 ======= ==== ==== ======= 1996 ------------------------------------------------- ESTIMATED GROSS GROSS MARKET UNREALIZED UNREALIZED AMORTIZED VALUE GAINS LOSSES COST --------- ---------- ---------- --------- IN THOUSANDS Mortgage-backed securities: Mortgage-backed securities: FHLMC ............................... $12,282 $ 53 $ 59 $12,288 FNMA ................................ 13,054 40 133 13,147 GNMA ................................ 14,105 8 294 14,391 Collateralized mortgage obligations ... 3,204 -- 130 3,334 U.S. Government agencies .............. 38,222 66 162 38,318 ------- ---- ---- ------- $80,867 $167 $778 $81,478 ======= ==== ==== =======
Proceeds from sales of securities available for sale were $4.2 million in 1997 with gross gains of $14,000 and gross losses of $16,000. There were no sales of securities available for sale for 1996. Proceeds from sales of securities available for sale were $25.1 million for 1995 with gross realized gains of $90,000 and gross realized losses of $453,000. The amortized cost and estimated fair value of debt securities available for sale at December 31, 1997 by contractual maturity, are shown below: AMORTIZED ESTIMATED FAIR COST VALUE --------- -------------- IN THOUSANDS Due in one year through five years ............. $12,324 $12,328 Due in five through ten years .................. 28,311 28,772 ------- ------- $40,635 $41,100 ======= ======= Mortgage-backed securities totalled $31.5 million at December 31, 1997. The contractual maturities of mortgage-backed securities generally exceed ten years; however, the effective lives are expected to be shorter due to anticipated prepayments. 22 WAYNE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (5) LOANS RECEIVABLE, NET A summary of loans receivable at December 31, 1997 and 1996 is as follows: 1997 1996 -------- -------- IN THOUSANDS Real estate mortgage: Conventional one-to-four family .................. $130,865 $113,701 Multi-family ..................................... 2,072 185 Commercial ....................................... 14,042 7,069 Construction ....................................... 3,929 -- Home equity loans .................................. 27,889 24,394 Commercial business loans .......................... 2,558 644 Student loans ...................................... 415 460 Passbook loans ..................................... 591 616 Auto loans ......................................... 125 158 Personal loans ..................................... 25 23 -------- -------- Total loans .................................... 182,511 147,250 ======== ======== Less: Undisbursed loan funds ........................... 1,353 -- Deferred loan fees ............................... 56 36 Allowance for loan losses ........................ 2,170 1,789 -------- -------- $178,932 $145,425 ======== ======== At December 31, 1997 and 1996, loans in the amount of $2.3 million and $2.1 million, respectively, were on a nonaccrual status. If nonaccrual loans had continued to realize interest in accordance with their contractual terms, approximately $243,000, $184,000 and $253,000 of interest income would have been realized for the years ended December 31, 1997, 1996 and 1995, respectively. Interest income realized on nonaccrual loans was $84,000, $61,000 and $160,000, respectively for the years ended December 31, 1997, 1996 and 1995. A summary of loans to directors and officers for the years ended December 31, 1997, 1996 and 1995 is as follows: 1997 1996 1995 ---- ---- ---- IN THOUSANDS Balance at beginning of year ...................... $820 $910 $901 Additions ......................................... 85 130 105 Payments .......................................... 165 220 96 ---- ---- ---- Balance at end of year ............................ $740 $820 $910 ==== ==== ==== The terms and conditions of loans to directors and officers are no less favorable to the Company than they would have been for similar transactions with other borrowers. An analysis of the allowance for loan losses for the years ended December 31, 1997, 1996 and 1995 is as follows: 1997 1996 1995 ------ ------ ------ IN THOUSANDS Balance at beginning of year ................ $1,789 $1,589 $1,543 Provision charged to operations ............. 400 200 152 Loans charged off ........................... (19) -- (106) ------ ------ ------ Balance at end of year ...................... $2,170 $1,789 $1,589 ====== ====== ====== 23 WAYNE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (6) INTEREST AND DIVIDENDS RECEIVABLE A summary of interest and dividends receivable at December 31, 1997 and 1996 is as follows: 1997 1996 ------ ------ IN THOUSANDS Loans, net of reserve for uncollected interest of $595 in 1997 and $456 in 1996 ....................... $ 800 $ 704 Securities held to maturity and securities available for sale ..................................... 1,097 1,197 ------ ------ $1,897 $1,901 ====== ====== (7) PREMISES AND EQUIPMENT, NET Premises and equipment, net at December 31, 1997 and 1996 are summarized as follows: 1997 1996 ------ ------ IN THOUSANDS Land ..................................................... $ 497 $ 497 Buildings and improvements ............................... 2,620 2,796 Leasehold improvements ................................... 582 325 Furnishings and equipment ................................ 937 962 Total ................................................ 4,636 4,580 Accumulated depreciation and amortization ................ 1,318 1,384 ------ ------ $3,318 $3,196 ====== ====== Depreciation of premises and equipment charged to occupancy expense for the years ended December 31, 1997, 1996 and 1995 amounted to $208,000, $167,000 and $167,000, respectively. (8) REAL ESTATE OWNED, NET A summary of REO net, at December 31, 1997 and 1996 is as follows: 1997 1996 ---- ---- IN THOUSANDS Total real estate owned .................................. $80 $ 290 Allowance for losses ..................................... -- (174) --- ----- $80 $ 116 === ===== 24 WAYNE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) An analysis of the allowance for REO losses for the years ended December 31, 1997, 1996 and 1995 is as follows: 1997 1996 1995 ----- ----- ----- IN THOUSANDS Balance, beginning of year ................... $ 174 $ 169 $ 240 Provision charged to income .................. -- 100 148 Charge-offs .................................. (174) (121) (229) Recoveries ................................... -- 26 10 ----- ----- ----- Balance, end of period ....................... $ -- $ 174 $ 169 ===== ===== ===== (9) DEPOSITS Deposit account balances at December 31, 1997 and 1996 are summarized as follows:
CURRENT STATED CURRENT STATED RATE RATE AT AT DECEMBER 31, DECEMBER 31, 1997 1997 1996 1996 -------------- -------- --------------- -------- IN THOUSANDS Noninterest bearing demand accounts ........... -- $ 10,438 -- $ 6,549 NOW accounts .................................. 2.25% 22,729 2.25% 20,063 Money market deposit accounts ................. 2.50 22,830 2.50-3.05 20,633 Savings accounts .............................. 2.50 31,963 2.50 31,955 Club accounts ................................. 2.50 203 2.50 205 -------- -------- 88,163 79,405 -------- -------- Certificates of deposit ....................... 3.01-4.00 1 3.01-4.00 331 4.01-5.00 2,744 4.01-5.00 14,310 5.01-6.00 105,691 5.01-6.00 80,829 6.01-7.00 1,854 6.01-7.00 4,053 -------- -------- Total certificates of deposit ................. 110,290 99,523 Accrued interest payable ...................... 26 19 -------- -------- $198,479 $178,947 ======== ========
The overall weighted average interest rate on deposits at December 31, 1997 and 1996 was 4.02% and 4.12%, respectively. The aggregate amount of certificates of deposit in denominations of $100,000 or more totalled $11.7 million and $7.8 million at December 31, 1997 and 1996, respectively. Deposits over $100,000 are not insured by the Federal Deposit Insurance Corporation. At December 31, 1997 certificates of deposit have scheduled maturities as follows: IN THOUSANDS ------------ One year or less ............................................. $ 92,808 One year to three years ...................................... 16,575 Three years or more .......................................... 907 -------- $110,290 ======== 25 WAYNE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Interest expense on deposits for the years ended December 31, 1997, 1996 and 1995 is summarized as follows: 1997 1996 1995 ------ ------ ------ IN THOUSANDS NOW and money market deposit accounts ............. $1,114 $1,071 $1,111 Savings accounts and certificates of deposit ...... 6,513 6,077 5,669 ------ ------ ------ $7,627 $7,148 $6,780 ====== ====== ====== At December 31, 1997, the Bank had pledged approximately $585,000 of mortgage-backed securities as collateral for municipal deposits. (10) FEDERAL HOME LOAN BANK ADVANCES Federal Home Loan Bank advances at December 31, 1997 and 1996 are summarized as follows: 1997 1996 ------- ------- IN THOUSANDS Maturity: Due in one year or less ............................. $ 2,000 $ 1,000 Due in one year through five years .................. 30,000 2,000 ------- ------- $32,000 $27,000 ======= ======= The interest rates on the above borrowings are fixed and range from 6.33% to 6.86%. The Bank may borrow funds from the FHLB subject to certain limitations. Based on the level of qualifying collateral available to secure advances at December 31, 1997, the Bank's borrowing limit from the FHLB was approximately $81.0 million, with unused borrowing capacity of $49.0 million at that date. The Bank, under an agreement with the FHLB, may receive advances for various terms at prevailing interest rates at the time of the advance. Such advances are collateralized by FHLB stock and securities held in safekeeping at the FHLB. (11) INCOME TAXES Income tax expense for the years ended December 31, 1997, 1996 and 1995 consists of the following: 1997 1996 1995 ------ ----- ---- IN THOUSANDS Current: Federal ........................................ $1,275 $ 421 $422 State .......................................... 113 38 36 ------ ----- ---- 1,388 459 458 Deferred ......................................... (177) (56) 29 ------ ----- ---- $1,211 $ 403 $487 ====== ===== ==== Total income tax expense for the years ended December 31, 1997, 1996 and 1995 was allocated as follows: 1997 1996 1995 ------ ----- ---- IN THOUSANDS Income from operations ........................... $1,211 $ 403 $487 Stockholders' equity: Net unrealized (depreciation) appreciation on securities available for sale, net of taxes ....................... 401 (166) 90 ------ ----- ---- $1,612 $ 237 $577 ====== ===== ==== 26 WAYNE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) The following table presents a reconciliation between the effective income tax expense and the computed "expected" Federal income tax expense which is computed by applying the normal Federal income tax rate of 34% to income before income tax expense for the years ended December 31, 1997, 1996 and 1995, respectively. 1997 1996 1995 ------ ---- ---- IN THOUSANDS Computed "expected" Federal income tax expense .... $1,076 $363 $462 Increase (decrease) in taxes resulting from: New Jersey savings institution tax, net of Federal income tax effect ......................... 67 30 24 Other items, net .................................... 68 10 1 ------ ---- ---- Income tax expense .................................. $1,211 $403 $487 ====== ==== ==== Effective tax rate .................................. 38.3% 37.7% 36.0% Retained earnings at December 31, 1997 includes approximately $4,517,000 of income that has not been subject to tax because of deductions for bad debts allowed for income tax purposes. Deferred income taxes have not been provided on such bad debt deductions since the Company does not intend to use the accumulated bad debt deductions for purposes other than to absorb loan losses. If this portion of retained earnings is used for any purpose other than to absorb bad debt losses, taxes would be imposed on such amounts. If triggered, the tax liability related to the appropriated earnings would have been $1,626,000 at December 31, 1997. Legislation was enacted in 1996, which repealed, for tax purposes, the percentage of taxable income bad debt reserve method. The Company is required to recapture the post 1987 build up to its tax bad debt reserves. This deferred tax liability has been accrued for under SFAS 109. The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1997 and 1996 are as follows: 1997 1996 ---- ---- IN THOUSANDS Deferred tax assets: Allowance for loan losses--book ............................. $728 $620 Nonaccrual loan interest .................................... 27 78 Accrued expenses ............................................ 31 -- Unrealized loss on securities available for sale ............ -- 219 Restricted stock ............................................ 67 -- Other ....................................................... 34 3 ---- ---- Total gross deferred tax assets ........................... 887 920 ---- ---- Deferred tax liabilities: Allowance for loan losses--tax .............................. 300 317 Bank premises, furniture and equipment, principally due to differences in depreciation ........................ 116 123 ESOP ........................................................ 64 -- Other ....................................................... -- 31 Unrealized gains on securities available for sale ........... 182 -- ---- ---- Total gross deferred tax liabilities ...................... 662 471 ---- ---- Net deferred tax asset .................................... $225 $449 ==== ==== Management believes it is more likely than not that the Company will realize the benefit of net deductible temporary differences and that such net deductible temporary differences will reverse during periods in which the Company generates net taxable income. Management has projected that the Company will generate sufficient taxable income to utilize the net deferred tax asset and no valuation allowance is considered necessary. 27 WAYNE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (12) BENEFIT PLANS Defined Benefit Pension Plan Prior to December 1997, the Company maintained a defined benefit pension plan, which covered substantially all employees of the Company who met certain age and length of service requirements. The Company terminated the defined benefit plan as of December 1997. Settlement of the Plan liabilities occurred in December 1997. The following table sets forth the Plan's funded status and amounts recognized in the Company's consolidated financial statements at December 31, 1997 and 1996:
1997 1996 ---- ----- IN THOUSANDS Actuarial present value of benefit obligations at December 31: Accumulated benefit obligation including vested benefits of $398 at December 31 ...................................................... $ -- $ 417 ==== ===== Projected benefit obligation for service rendered to date .................. -- (611) Plan assets at fair value, primarily certificates of deposit held at other banks at December 31 ............................................... -- 595 ---- ----- Plan assets less than projected benefit obligation ........................... -- (16) Unrecognized net obligation .................................................. -- 17 Unrecognized net loss subsequent to transition ............................... -- 7 ---- ----- Prepaid asset (included in other assets) ................................... $ -- $ 8 ==== =====
Net periodic pension cost includes the following components for the years ended December 31, 1997, 1996 and 1995, respectively: 1997 1996 1995 ---- ---- ---- IN THOUSANDS Service cost ..................................... $ 13 $ 78 $ 82 Interest cost .................................... 46 49 59 Return on plan assets ............................ (23) (31) (56) Amortization of net obligation ................... 3 3 4 Deferred asset loss .............................. (19) (23) -- Settlement charge ................................ 5 12 -- ---- ---- ---- Net periodic pension cost ...................... $ 25 $ 88 $ 89 ==== ==== ==== The discount rate and rate of increase in future compensation levels used in computing the actuarial present value of the projected benefit obligation were 7.5% and 5.5% in 1996 and 7.0% and 5.0% in 1995, respectively. The expected long-term rate of return on assets was 7% in both 1996 and 1995. Employee Savings Plan The Company has an employee savings plan (the Savings Plan), pursuant to Section 401(k) of the Internal Revenue Code, for all eligible employees. The Company matches 50% of employee contributions up to the first 6% of an employee's salary. The Company's contribution during the years ended December 31, 1997, 1996 and 1995 amounted to $34,000, $32,000 and $33,000, respectively. Consultation and Retirement Plan for Non-Employee Directors Effective June 27, 1996, Wayne Savings Bank adopted the Wayne Savings Bank, F.S.B. Consultation and Retirement Plan for Non-Employee Directors ("the Plan"). The Plan is intended to promote the interest of Wayne Savings Bank, F.S.B., and its affiliates by providing for the continuing advice of retiring eligible members of its Board 28 WAYNE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) of Directors and the Board of Directors of Wayne Bancorp, Inc., the holding company of Wayne Savings Bank, F.S.B., and to provide such eligible members with retirement income. The following table sets forth the Plan's funded status and amounts recognized in the Company's consolidated financial statement at December 31, 1997 and 1996: DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ IN THOUSANDS Vested benefit obligations .......................... $(126) $ (89) Accumulated benefit obligations ..................... (140) (106) Projected benefit obligations ....................... $(140) $(106) Fair value of plan assets ........................... -- -- ----- ----- Funded status ....................................... (140) (106) Unrecognized prior service costs .................... 80 86 Unrecognized net (gain) loss ........................ 11 (2) ----- ----- (Accrued) prepaid pension cost ...................... $ (49) $ (22) ===== ===== Net periodic pension cost, utilizing a 7.25% discount rate for 1997 and 1996, includes the following components for 1997 and 1996: DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ IN THOUSANDS Service cost ........................................ $13 $16 Interest cost ....................................... 10 3 Amortization of unrecognized prior service costs .... 6 3 --- --- Net periodic pension costs .......................... $29 $22 === === EMPLOYEE STOCK OWNERSHIP PLAN ("ESOP") The Company used a portion of the net proceeds for a loan directly to the Company for the ESOP to enable the ESOP to purchase 8% of the common stock in the conversion. Based upon the issuance of 2,231,383 shares, the amount of the loan to the ESOP was $1.8 million to be repaid over a ten year period at an interest rate of 8.25%. In 1997, 18,057 shares were allocated. Contributions for 1997 were $357,000. MANAGEMENT RECOGNITION PROGRAM ("MRP") The Company established the Company Management Recognition Program on February 25, 1997 as a method of providing officers and directors of the Company with a proprietary interest in the Company. The MRP is designed to encourage the participants to remain with the Company. The MRP purchased a total of 4% or 89,254 common shares of the Company in the open market at cost of $1.5 million. Awards to plan participants vest at a rate of 20% per year commencing one year from the date of the award. As awards vest, the Company recognizes an employee benefit expense in an amount equal to the cost basis of the stock. The expense recognized for vested benefits amounted to $188,000 for the period from March 1, 1997 to December 31, 1997. STOCK OPTION PLAN The Company's Incentive Stock Option Plan was adopted on February 25, 1997 and provides for the granting of options to directors and officers of the Company. Under the terms of the plan, options may be granted at not less than fair market value on the date of the grant. The Plan authorizes the grant of stock options with respect to 223,138 shares of common stock of the Company, equal to 10% of the shares of common stock issued in the Conversion. Options granted under the Plan are exercisable on a cumulative basis in equal installments at a rate of 20% per year commencing one year from date of grant, except that in the event of termination of employment other than as result of death, disability, retirement or a change in 29 WAYNE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) control of the Company or the Bank, options not previously exercisable will automatically expire. Changes in the number of shares outstanding under the Plan and the weighted average exercise price of those shares for the year ended December 31, 1997 are as follows: 1997 -------------------------- WEIGHTED NUMBER AVERAGE OF SHARES EXERCISE PRICE --------- -------------- Outstanding at beginning of period ................ -- -- Granted ........................................... 191,892 $17.26 Exercised ......................................... -- -- ------- ------ Outstanding at end of period ...................... 191,892 $17.26 ======= ====== For options granted in 1997, the exercise price of the options equaled the market value of the stock at grant date. The following table summarizes information about the stock options outstanding at December 31, 1997: OPTIONS OUTSTANDING AND EXERCISABLE WEIGHTED AVERAGE -------------------------------------------------------- NUMBER OF REMAINING WEIGHTED SHARES CONTRACTUAL AVERAGE EXERCISE PRICE OUTSTANDING LIFE IN YEARS EXERCISE PRICE - -------------- ----------- ------------- -------------- $17.00 174,041 10 $17.00 19.75 17,851 10 19.75 ------- -- ------ 191,892 10 $17.26 ======= == ====== The Company applies APB 25 in accounting for the Plan. Consistent with SFAS 123, if compensation cost for the Plan was included as compensation expense, the Company's net income and earnings per share, for the year ended December 31, 1997, would have been reduced to the pro forma amounts indicated below: 1997 ------ Net income As reported ....................................................... $1,954 Pro forma ......................................................... 1,806 Basic earnings per share As reported ....................................................... $ 1.04 Pro forma ......................................................... 0.96 Diluted earnings per share As reported ....................................................... $ 1.03 Pro forma ......................................................... 0.95 The fair value of stock options granted by the Company was estimated through the use of the Black-Scholes option-pricing model that takes into account the following factors as of the grant date: the exercise price and the expected life of the option, the market price of the underlying stock at the grant date and its expected volatility, and the risk-free interest rate for the expected term of the option. In deriving the fair value of the stock options, the stock price at the grant date is reduced by the value of the dividends to be paid during the life of the option. The following assumptions were used for grants in 1997: dividend yield of 3.0%, expected volatility of 20.0% and the risk free interest rate of 5.84%. The effects of applying SFAS 123 on the pro forma net income may not be representative of the effect on pro forma net income for future years or any other period. (13) REGULATORY CAPITAL REQUIREMENTS OTS regulations require savings institutions to maintain minimum levels of regulatory capital. Under the regulations in effect at December 31, 1997, the Bank was required to maintain a minimum ratio of tangible capital to total adjusted assets of 1.5%; a minimum ratio of Tier 1 (core) capital to total adjusted assets of 3.0%; and a minimum ratio of total (core and supplementary) capital to risk-weighted assets of 8.0%. 30 WAYNE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Under its prompt corrective action regulations, the OTS is required to take certain supervisory actions (and may take additional discretionary actions) with respect to an undercapitalized institution. Such actions could have a direct material effect on the Bank's financial statements. The regulations establish a framework for the classification of savings institutions into five categories: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized. Generally, a bank is considered well capitalized if it has a Tier 1 (core) capital ratio of a least 5.0%; a Tier 1 risk-based capital ratio of a least 6.0%; and a total risk-based capital ratio of at least 10.0%. The foregoing capital ratios are based in part on specific quantitative measures of assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by the OTS about capital components, risk weightings and other factors. Management believes that, as of December 31, 1997, the Bank meets all capital adequacy requirements to which it is subject. Further, the most recent OTS notification categorized the Bank as a well capitalized institution under the prompt corrective action regulations. There have been no conditions or events since that notification that management believes have changed the Bank's capital classification. OTS regulations impose limitations on all capital distributions, such as cash dividends, payments to repurchase or otherwise acquire shares, payments to stockholders of another institution in a cash-out merger and other distributions charged against capital. The following is a summary of the Bank's actual capital amounts and ratios as of December 31, 1997 and 1996, compared with the OTS minimum capital adequacy requirements and the OTS requirements for classification as a well capitalized institution.
OTS REQUIREMENTS ------------------------------------------ MINIMUM CAPITAL FOR CLASSIFICATION BANK ACTUAL ADEQUACY AS WELL CAPITALIZED ------------------ ----------------- ------------------- AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------- ----- ------ ----- ------- ------ IN THOUSANDS December 31, 1997 Tangible capital ................ $27,807 10.33% $4,038 1.50% $ 8,076 3.00% Tier 1 (core) capital ........... 27,807 10.33 8,076 3.00 13,461 5.00 Risk-based: Tier 1 ........................ 27,807 22.65 4,911 4.00 7,367 6.00 Total ......................... 29,242 23.82 9,823 8.00 12,278 10.00 December 31, 1996 Tangible capital ................ $26,647 10.89% $3,671 1.50% $ 7,342 3.00% Tier 1 (core) capital ........... 26,647 10.89 7,342 3.00 12,236 5.00 Risk-based: Tier 1 ........................ 26,647 26.75 3,985 4.00 5,977 6.00 Total ......................... 26,951 27.05 7,970 8.00 9,962 10.00
(14) COMMITMENTS, CONTINGENCIES AND CONCENTRATIONS OF CREDIT RISK Commitments The Company is party to financial instruments and commitments with off-balance-sheet credit risk in the normal course of business. These financial instruments and commitments include unused home equity lines of credit, commitments to extend credit, and commitments to purchase securities. These commitments and instruments involve, to varying degrees, elements of risk in excess of the amounts recognized in the consolidated financial statements. The Company's maximum exposure to credit losses in the event of nonperformance by the other party to these financial instruments and commitments is represented by the contractual amount. The Company uses the same credit 31 WAYNE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) policies in granting commitments and conditional obligations as it does for financial instruments recorded in the consolidated statements of financial condition. At December 31, 1997 and 1996 financial instruments and commitments whose contractual amounts represent off-balance-sheet credit risk are as follows: 1997 1996 ------- ------ IN THOUSANDS Unused home equity lines of credit (primarily floating rate) ............................ $16,208 $9,541 Commitments to extend credit: To originate mortgage loans Fixed rate ......................................... 448 2,629 Variable rate ...................................... 10,687 6,333 To purchase mortgage loans: Variable rate ...................................... 706 -- Interest rates on commitments to originate fixed rate mortgage loans ranged from 7.25% to 7.75% and 6.75% to 8.50% at December 31, 1997 and 1996, respectively. Such commitments are generally for a sixty day term. The Company leases certain branch offices under operating leases. At December 31, 1997, the minimum rental commitments for noncancellable leases with initial or remaining terms of more than one year and expiring through 2024 are as follows: IN THOUSANDS ------------ Year ended December 31, 1998 ......................................................... $ 239 1999 ......................................................... 268 2000 ......................................................... 274 2001 ......................................................... 208 2002 ......................................................... 101 Thereafter ................................................... 1,124 ------ $2,214 ====== Rental expense under operating leases, included in occupancy expense in the consolidated statements of income was $290,000, $253,000 and $249,000 for the years ended December 31, 1997, 1996 and 1995, respectively. Contingencies In the normal course of business, there are various outstanding legal proceedings, claims, commitments and contingent liabilities such as commitments to extend credit which are not included in the accompanying consolidated financial statements. In the opinion of management, the financial condition, results of operations and liquidity of the Company and its subsidiary will not be materially affected by the outcome of such legal proceedings and claims or by such commitments and contingent liabilities. Concentrations of Credit Risk A substantial portion of the Company's loans are one- to four-family residential first mortgage loans secured by real estate located primarily in New Jersey. Accordingly, the collectibility of a substantial portion of the Company's loan portfolio and the recovery of a substantial portion of the carrying amount of REO are susceptible to changes in real estate market conditions. (15) FAIR VALUE OF FINANCIAL INSTRUMENTS Fair value estimates, methods and assumptions are set forth below for the Company's financial instruments for which it is practical to estimate those values. 32 WAYNE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Cash and Cash Equivalents For cash and due from banks, interest-bearing deposits in other banks and Federal funds sold, the carrying amount approximates fair value. Securities Held to Maturity and Securities Available for Sale The fair value of securities held to maturity and securities available for sale was based on quoted market prices or dealer quotes, if available. If a quoted market price or dealer quote was not available, fair value was estimated using quoted market prices of similar securities. Federal Home Loan Bank of New York Stock The fair value for FHLB stock is its carrying value, since this is the amount for which it could be redeemed. There is no active market for this stock and the Bank is required to maintain a minimum balance based on the unpaid principal of home mortgage loans. Loans Fair values are estimated for portfolios of loans with similar financial characteristics. Loans were segregated by type. Each loan category was further segmented into fixed and adjustable rate interest terms. Fair value of adjustable rate mortgage loans was determined to approximate their carrying value. The fair value of fixed rate loans was determined by discounting the scheduled cash flows through the contractual maturity, adjusted for estimated prepayments, using estimated market discount rates that reflect the risk inherent in the loan type, taking into account the credit grade and maturity. The fair value of nonperforming loans was determined by discounting the estimated future cash flows after adjusting for collection costs and risk of nonpayment. Deposit Liabilities The fair value of deposits with no stated maturity, such as savings, noninterest bearing demand, NOW and money market deposit accounts, is equal to the amount payable on demand. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. Federal Home Loan Bank Advances The fair value of Federal Home Loan Bank advances approximates the carrying value. The estimated fair values of the Company's financial instruments as of December 31, 1997 and 1996 are presented in the following table. Since the fair value of off-balance-sheet commitments are not material, these disclosures are not included.
1997 1996 ---------------------------- ---------------------------- CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE -------------- ---------- -------------- ---------- IN THOUSANDS Financial assets: Cash and cash equivalents ....................... $ 6,845 $ 6,845 $ 6,943 $ 6,943 Securities held to maturity ..................... 2,913 2,882 3,229 3,197 Securities available for sale ................... 73,413 73,413 80,867 80,867 Federal Home Loan Bank of New York stock ........ 2,150 2,150 1,568 1,568 Loans receivable ................................ 178,932 181,627 145,425 148,240 Financial liabilities : Deposits ........................................ 198,479 198,292 178,947 179,695 Federal Home Loan Bank advances ................. 32,000 32,376 27,000 27,332
33 WAYNE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) Limitations Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. Fair value estimates are based on existing on-balance-sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. The tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in the estimates. (16) PARENT COMPANY FINANCIAL INFORMATION Wayne Bancorp, Inc. (the parent company) was incorporated for the purpose of acquiring the Bank in connection with the Bank's conversion from a mutual form of ownership to a stock form of ownership. The following information on the parent only financial statements as of December 31, 1997 and 1996 and for the year ended December 31, 1997 and for the period June 27, 1996 to December 31, 1996, should be read in conjunction with the notes to the consolidated financial statements. 34 WAYNE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) CONDENSED STATEMENTS OF FINANCIAL CONDITION (PARENT COMPANY ONLY) DECEMBER 31, 1997 AND 1996 ASSETS 1997 1996 ------- ------- IN THOUSANDS Cash and due from banks ................................ $ 321 $ 265 Investment in Wayne Savings Bank, F.S.B ................ 28,090 26,257 Securities available for sale .......................... 812 -- Advance to subsidiary .................................. 3,409 8,615 Loan to subsidiary bank ESOP ........................... 1,428 1,606 Other assets ........................................... 56 264 ------- ------- Total Assets ........................................... $34,116 $37,007 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Dividends payable ...................................... $ 101 $ -- Other liabilities ...................................... 72 96 ------- ------- Total Liabilities ...................................... 173 96 Stockholders' equity: Common stock ........................................... 22 22 Paid-in capital ........................................ 21,264 21,004 Retained Earnings--substantially restricted ............ 19,906 17,670 Treasury shares (at cost) .............................. (4,417) -- Unallocated MRP shares ................................. (1,262) -- Unallocated ESOP shares ................................ (1,604) (1,785) Net unrealized gain on securities available for sale ... 34 -- ------- ------- Total stockholders' equity ............................. 33,943 36,911 ------- ------- Total liabilities and stockholders' equity ............. $34,116 $37,007 ======= ======= CONDENSED STATEMENTS OF INCOME (PARENT COMPANY ONLY) FOR THE PERIOD FOR YEAR JUNE 27, ENDED 1996 TO DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ IN THOUSANDS Income: Interest .......................................... $ 476 $ 337 ------ ----- Total income .................................... 476 337 ------ ----- Expenses: Legal and professional fees ....................... 231 84 Other expenses .................................... 290 19 ------ ----- Total expenses .................................. 521 103 ------ ----- Income (loss) before income taxes and equity in undistributed earnings (loss) of subsidiary .. (45) 234 Income tax expense (benefit) ...................... (17) 94 ------ ----- Income before equity in undistributed earnings (loss) of subsidiary ............................ (28) 140 Undistributed earnings (loss) of subsidiary ....... 1,982 (119) ------ ----- Net Income ........................................ $1,954 $ 21 ====== ===== 35 WAYNE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY) FOR THE PERIOD FOR YEAR JUNE 27, ENDED 1996 TO DECEMBER 31, DECEMBER 31, 1997 1996 ------------ ------------ IN THOUSANDS Cash flows from operating activities: Net income ......................................... $ 1,954 $ 21 Adjustments to reconcile net income to net cash provided by operating activities: Equity in earnings of subsidiary ................... (1,982) 119 Decrease (increase) in other assets ................ 208 (10,485) (Decrease) increase in other liabilities ........... (48) 96 Increase in dividends payable ...................... 101 -- ------- ------- Net cash provided by (used in) operating activities .. 233 (10,249) ------- ------- Cash flows from investing activities: Increase in investment in subsidiary ............... (393) (8,727) Decrease in advance to subsidiary .................... 5,597 -- Payment of ESOP loan ............................... 181 -- ESOP loan to subsidiary ............................ -- (1,785) Purchase of securities available for sale .......... (754) -- ------- ------- Net cash provided by (used in) investing activities. 4,631 (10,512) ------- ------- Cash flows from financing activities: Proceeds from issuance of common stock ............. -- 21,026 Dividends Paid ....................................... (391) -- Purchase of treasury stock ........................... (4,417) -- ------- ------- Net cash provided by (used in) financing activities .. (4,808) 21,026 ------- ------- Net change in cash and cash equivalents .............. 56 265 Cash and cash equivalents at beginning of year ....... 265 -- ------- ------- Cash and cash equivalents at end of year ............. $ 321 $ 265 ======= ======= (17) SAVINGS ASSOCIATION INSURANCE FUND (SAIF) RECAPITALIZATION ASSESSMENT On September 30, 1996, the President signed into law the Deposit Insurance Funds Act of 1996 (the "Funds Act") which, among other things, imposes a special one-time assessment on SAIF member institutions, including the Company, to recapitalize the SAIF. As required by the Funds Act, the FDIC imposed a special assessment of 65.7 basis points on SAIF assessable deposits held as of March 31, 1995, payable November 27, 1996. The special assessment was recognized as an expense in the third quarter of 1996 and was tax deductible. The Company incurred a pre tax charge of $1.0 million as a result of the FDIC special assessment. The Funds Act also spreads the obligations for payment of the Financing Corporation ("FICO") bonds across all SAIF and BIF members. Beginning January 1, 1997, BIF deposits will be assessed for FICO payments at a rate of 20% of the rate assessed on SAIF deposits. BIF deposits are currently assessed a FICO payment of 1.3 basis points, while SAIF deposits pay an estimated 6.5 basis points on the FICO bonds. Full pro rata sharing of the FICO payments between BIF and SAIF members will occur on the earlier of January 1, 2000 or the date the BIF and SAIF are merged. The Funds Act specifies that the BIF and SAIF will be merged on January 1, 1999 provided no savings associations remain as of that time. As a result of the Funds Act, and recently passed legislation, SAIF assessments were lowered to 0 to 27 basis points effective January 1, 1997, a range comparable to that of BIF members. However, SAIF members will continue to make the higher FICO payments described above. Management cannot predict the level of FDIC insurance assessments on an on-going basis, whether the savings association charter will be eliminated, or whether the BIF and SAIF will eventually be merged. The Company paid $92,000, $393,000 and $368,000 in Federal deposit insurance premiums for the years ended December 31, 1997, 1996 and 1995, respectively. 36 WAYNE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) (18) SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED) The results of operations on a quarterly basis are presented in the following tables: 1997 ------------------------------------- FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- IN THOUSANDS, EXCEPT PER SHARE AMOUNTS Interest income ....................... $4,864 $4,850 $4,619 $4,433 Interest expense ...................... 2,646 2,606 2,402 2,254 ------ ------ ------ ------ Net interest income ................... 2,218 2,244 2,217 2,179 Provision for loan losses ............. 75 125 75 125 Noninterest income .................... 174 195 145 183 Noninterest expense ................... 1,587 1,543 1,469 1,391 Income tax expense .................... 288 288 293 342 ------ ------ ------ ------ Net income ............................ $ 442 $ 483 $ 525 $ 504 ====== ====== ====== ====== Basic earnings per share .............. $ 0.25 $ 0.26 $ 0.28 $ 0.25 ====== ====== ====== ====== Basic weighted average shares ......... 1,778 1,840 1,884 1,995 ====== ====== ====== ====== Diluted earnings per share ............ $ 0.23 $ 0.25 $ 0.28 $ 0.27 ====== ====== ====== ====== Diluted weighted average shares ....... 1,899 1,899 1,899 1,882 ====== ====== ====== ====== 1996 ------------------------------------- FOURTH THIRD SECOND FIRST QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- IN THOUSANDS, EXCEPT PER SHARE AMOUNTS Interest income ....................... $4,513 $4,079 $3,457 $3,409 Interest expense ...................... 2,269 2,057 1,800 1,832 ------ ------ ------ ------ Net interest income ................... 2,244 2,022 1,657 1,577 Provision for loan losses ............. 65 50 50 35 Noninterest income .................... 144 171 140 130 Noninterest expense ................... 1,303 3,093 1,259 1,161 Income tax expense (benefit) .......... 385 (336) 168 186 ------ ------ ------ ------ Net income (loss) ..................... $ 635 $ (614) $ 320 $ 325 ====== ====== ====== ====== Basic earnings (loss) per share ....... $ 0.31 $(0.30) $ -- $ -- ====== ====== ====== ====== Basic weighted average shares ......... 2,053 2,053 -- -- ====== ====== ====== ====== Diluted earnings (loss) per share ..... $ 0.31 $(0.30) $ -- $ -- ====== ====== ====== ====== Diluted weighted average shares ....... 2,053 2,053 -- -- ====== ====== ====== ====== (19) RECENT ACCOUNTING PRONOUNCEMENTS In June, 1996 the FASB issued SFAS No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" (SFAS No. 125). SFAS 125 amends portions of SFAS 115, amends and extends to all servicing assets and liabilities the accounting standards for mortgage servicing rights now in SFAS 65, and supersedes SFAS 122. The statement provides consistent standards for distinguishing transfers of financial assets which are sales 37 WAYNE BANCORP, INC. AND SUBSIDIARY NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED) from transfers that are secured borrowings. Those standards are based upon consistent application of a financial components approach that focuses on control. The statement also defines accounting treatment for servicing assets and other retained interest in the assets that are transferred. As issued, SFAS 125 is effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively. In December 1996, the FASB issued SFAS No. 127, "Deferral of the Effective Date of Certain Provision of FASB Statement No. 125; an amendment of FASB Statement No. 125" which defers for one year the effective date (a) of paragraph 15 of SFAS No. 125 and (b) for repurchase agreement, dollar-roll, securities lending and similar transactions, of paragraphs 9-12 and 237(b) of SFAS No. 125. The adoption of SFAS 125 did not have a material effect on the Company's financial condition or results of operations. Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS 130"), establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general-purpose financial statements. SFAS 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. SFAS 130 does not require a specific format for that financial statement but requires that an enterprise display an amount representing total comprehensive income for the period in that financial statement. SFAS 130 requires that an enterprise (a) classify items of other comprehensive income by their nature in a financial statement and (b) display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of a statement of financial position. SFAS 130 is effective for years beginning after December 15, 1997 and is not expected to have a material impact on the Company's consolidated financial statements. 38 [LOGO KPMG Peat Marwick LLP] INDEPENDENT AUDITORS' REPORT The Board of Directors Wayne Bancorp, Inc.: We have audited the accompanying consolidated statements of financial condition of Wayne Bancorp, Inc. and Subsidiary as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 1997. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Wayne Bancorp, Inc. and Subsidiary as of December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1997 in conformity with generally accepted accounting principles. KPMG Peat Marwick LLP Short Hills, New Jersey January 21, 1998 39 STOCKHOLDER INFORMATION STOCK PRICE INFORMATION Shares of the common stock of Wayne Bancorp, Inc. have been traded under the symbol WYNE on the NASDAQ National Market System since June 27, 1996. The following table sets forth the range of high and low closings sale price quotations per share for Wayne Bancorp, Inc. common stock as depicted by NASDAQ. The market price information does not include retail markups, markdowns or commissions, but is based on actual transactions. 1997 HIGH LOW ---- ------- ------- First quarter ....................................... $18 $14-7/8 Second quarter ...................................... 20-1/4 16 Third quarter ....................................... 24-7/8 19 Fourth quarter ...................................... 27-1/2 21 1996 ---- Third quarter ....................................... 13-7/8 10-3/4 Fourth quarter ...................................... 15-1/4 13-11/16 As of February 11, 1998, there were 2,013,823 shares of common stock outstanding and 492 stockholders of record, not including the number of persons or entities whose stock is held in nominee or "street" name through various brokerage firms or banks. The Company's ability to pay dividends to stockholders is dependent upon the earnings from investments and dividends it receives from the Bank. Accordingly, restrictions on the Bank's ability to pay cash dividends directly affect the payment of cash dividends by the Company. The Bank may not declare or pay a dividend if the effect would cause the Bank's regulatory capital to be reduced below the amount required for the liquidation account established in connection with the Bank's conversion from mutual to stock form or the regulatory capital requirements imposed by the OTS. The Company paid quarterly dividends of $0.05 per share for the last three quarters of 1997. ANNUAL REPORT ON FORM 10-K AND INVESTOR INFORMATION A copy of Wayne Bancorp, Inc.'s annual report on Form 10-K, for year ended December 31, 1997 (excluding exhibits) to be filed with the Securities and Exchange Commission, is available without charge by writing: Timothy P. Tierney Vice President and Chief Financial Officer Wayne Bancorp, Inc. 1195 Hamburg Turnpike Wayne, N. J. 07470 Exhibits can be obtained at cost by writing to the Company at the above address. STOCK TRANSFER AGENT AND REGISTRAR Inquiries regarding stock transfer, registration, lost certificates or changes in name and address should be directed to the stock transfer and registrar by writing: Registrar and Transfer Company Attn: Investor Relations 10 Commerce Drive Cranford, N. J. 07016 40 WAYNE BANCORP, INC.
WAYNE BANCORP, INC. WAYNE SAVINGS BANK, F.S.B. BOARD OF DIRECTORS OFFICERS Harold P. Cook, III Johanna O'Connell, President and Chairman and Chief Executive Officer Chief Executive Officer Johanna O'Connell Michael DeBenedette, Executive Vice President President and Chief Operating Officer William J. Lloyd Robert L. Frega, Senior Vice President David M. Collins Timothy P. Tierney, Vice President Thomas D. Collins and Chief Financial Officer Nicholas S. Gentile, Jr. Donna Finck, Vice President Ronald Higgins Thomas A. Maselli, Vice President Richard Len Carolyn May, Vice President Charles Lota Hazel D. Myers, Vice President Dennis Pollack William Poole, Vice President Joseph J. DeLuccia, Director Emeritus David K. Ver Hage, Assistant Vice President Cathy Infantino, Assistant Secretary Treasurer BANKING OFFICES ADMINISTRATIVE OFFICE 1501 Hamburg Turnpike Wayne, N. J. 07470 1195 Hamburg Turnpike 973-694-2300 Wayne, N. J. 07470 973-305-5500 1504 Route 23 Wayne, N. J. 07470 973-694-0029 WEB SITE Valley Road at Preakness Avenue http://members.aol.com/waynesav/wsb.html Wayne, N. J. 07470 973-696-6500 5 Sicomac Road North Haledon, N. J. 07508 973-427-9888 363 Route 46 West Fairfield, N. J. 07004 973-276-0252
41 EX-27 3 ARTICLE 9 FDS FOR 1
9 12-MOS DEC-31-1997 DEC-31-1997 1,577 1,868 3,400 0 73,413 2,913 2,882 181,102 2,170 270,043 198,479 2,000 5,620 30,000 0 0 22 0 270,043 12,936 5,631 199 18,766 7,627 2,281 8,858 400 (2) 5,990 3,165 3,165 0 0 1,954 1.04 1.03 0 2,328 0 0 0 1,789 0 0 2,170 2,170 0 0
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