WAYNE BANCORP INC /DE/, 10-K, 1998-03-30

WAYNE BANCORP INC /DE/
10-K, 1998-03-30
SAVINGS INSTITUTION, FEDERALLY CHARTERED

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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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)

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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.

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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.

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<PAGE>

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
<PAGE>
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
<PAGE>

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.
<TABLE>
<CAPTION>

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:

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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
======== ======== ======== ======== ========
</TABLE>

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.
<TABLE>
<CAPTION>

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)
<S> <C> <C> <C> <C> <C> <C> <C> <C>

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
========
</TABLE>

2
<PAGE>

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.
<TABLE>
<CAPTION>

DUE AFTER DECEMBER 31, 1998
------------------------------------------
FIXED ADJUSTABLE TOTAL
------- ------- --------
(DOLLARS IN THOUSANDS)

<S> <C> <C> <C>
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
======= ======= ========
</TABLE>

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.

<PAGE>

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.
<TABLE>
<CAPTION>

FOR THE YEARS ENDED DECEMBER 31,
-------------------------------------------
1997 1996 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)

<S> <C> <C> <C>
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
======== ======== ========
</TABLE>
- ----------
(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
<PAGE>

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
<PAGE>

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
<PAGE>

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.
<TABLE>
<CAPTION>

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)

<S> <C> <C> <C> <C> <C> <C> <C> <C>
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%
=== ==== === ====
</TABLE>

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.
<TABLE>
<CAPTION>

AT DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
------ ------ ------ ------ ------
(DOLLARS IN THOUSANDS)

<S> <C> <C> <C> <C> <C>
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
====== ====== ====== ====== ======
</TABLE>
- ----------
(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
<PAGE>

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.
<TABLE>
<CAPTION>

AT DECEMBER 31,
---------------------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)

<S> <C> <C> <C> <C> <C>
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
</TABLE>

<PAGE>

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.
<TABLE>
<CAPTION>

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)

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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%
====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>

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)

<S> <C> <C> <C> <C> <C> <C>
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%
====== ====== ====== ====== ====== ======

</TABLE>

<PAGE>

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)
<S> <C> <C> <C> <C> <C> <C>
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
======= ======= ======= ======= ======= =======

</TABLE>

11
<PAGE>

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
=======

<PAGE>

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:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
======= ======= ====== ==== ==== ======== ======= =======

</TABLE>

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.

<TABLE>
<CAPTION>
AT OR FOR THE YEAR
ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
------- ------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
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%

</TABLE>

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.

<PAGE>

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

<PAGE>

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

<PAGE>

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
<PAGE>

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.

<PAGE>

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
------ -------- -------------------------------
<S> <C> <C>
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.

</TABLE>

- ------------------
(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.

<TABLE>
<CAPTION>
ORIGINAL NET BOOK VALUE
YEAR OF PROPERTY OR
LEASED LEASED DATE OF LEASEHOLD
OR OR LEASE IMPROVEMENTS
LOCATION OWNED ACQUIRED EXPIRATION DECEMBER 31, 1997
-------- ------- -------- ---------- -----------------
<S> <C> <C> <C> <C>
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

</TABLE>

- ------------------
(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.

<PAGE>

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.

<PAGE>

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
----
<S> <C>
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

</TABLE>

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.

<PAGE>

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> <C> <C>
/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)

</TABLE>

WAYNE BANCORP, INC.

[LOGO]

ANNUAL REPORT

1997

<PAGE>

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

<PAGE>

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.

<PAGE>

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

<PAGE>

SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------------------------------------------------------
1997 1996 1995 1994 1993
-------- ------- -------- ------ --------
IN THOUSANDS
<S> <C> <C> <C> <C> <C>
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
<S> <C> <C> <C> <C> <C>
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
----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
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

</TABLE>

- --------------

(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.

<PAGE>

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

<PAGE>

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%.

<PAGE>

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

<PAGE>

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

<PAGE>

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
<PAGE>

<TABLE>

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.

<CAPTION>
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

<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
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.

</TABLE>

<PAGE>

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.

<TABLE>
<CAPTION>
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
<S> <C> <C> <C> <C> <C> <C>
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
====== ===== ====== ====== ===== ======
</TABLE>

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:

<PAGE>

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

<PAGE>

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
<PAGE>

<TABLE>
WAYNE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
DECEMBER 31, 1997 AND 1996

ASSETS
<CAPTION>
1997 1996
-------- --------
IN THOUSANDS
(EXCEPT SHARES AND
PER SHARE AMOUNTS)

<S> <C> <C>
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
======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

<TABLE>
WAYNE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<CAPTION>
1997 1996 1995
------- ------- -------
IN THOUSANDS
(EXCEPT PER SHARE AMOUNTS)

<S> <C> <C> <C>
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 -- --

</TABLE>
See accompanying notes to consolidated financial statements.

<PAGE>

<TABLE>
WAYNE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<CAPTION>
1997 1996 1995
-------- -------- --------
IN THOUSANDS

<S> <C> <C> <C>
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)
-------- -------- --------
</TABLE>

See accompanying notes to consolidated financial statements.

<PAGE>

<TABLE>
WAYNE BANCORP, INC. AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS, CONTINUED
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995

<CAPTION>
1997 1996 1995
-------- -------- --------
IN THOUSANDS

<S> <C> <C> <C>
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
======== ======== ========
</TABLE>

See accompanying notes to consolidated financial statements.

17
<PAGE>

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

<PAGE>

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

<PAGE>

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

<PAGE>

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.

<PAGE>

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:

<TABLE>
<CAPTION>
1997
-------------------------------------------------
ESTIMATED GROSS GROSS
MARKET UNREALIZED UNREALIZED AMORTIZED
VALUE GAINS LOSSES COST
--------- ---------- ---------- ---------
IN THOUSANDS

<S> <C> <C> <C> <C>
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
======= ==== ==== =======

<CAPTION>
1996
-------------------------------------------------
ESTIMATED GROSS GROSS
MARKET UNREALIZED UNREALIZED AMORTIZED
VALUE GAINS LOSSES COST
--------- ---------- ---------- ---------
IN THOUSANDS

<S> <C> <C> <C> <C>
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
======= ==== ==== =======
</TABLE>

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.

<PAGE>

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
====== ====== ======

<PAGE>

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
=== =====

<PAGE>

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:

<TABLE>
<CAPTION>
CURRENT STATED CURRENT STATED
RATE RATE
AT AT
DECEMBER 31, DECEMBER 31,
1997 1997 1996 1996
-------------- -------- --------------- --------
IN THOUSANDS

<S> <C> <C> <C> <C>
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
======== ========
</TABLE>

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
========

<PAGE>

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
<PAGE>

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.

<PAGE>

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:

<TABLE>
<CAPTION>
1997 1996
---- -----
IN THOUSANDS
<S> <C> <C>
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
==== =====
</TABLE>

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

<PAGE>

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

<PAGE>

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
<PAGE>

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.

<TABLE>
<CAPTION>
OTS REQUIREMENTS
------------------------------------------
MINIMUM CAPITAL FOR CLASSIFICATION
BANK ACTUAL ADEQUACY AS WELL CAPITALIZED
------------------ ----------------- -------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------- ----- ------ ----- ------- ------
IN THOUSANDS

<S> <C> <C> <C> <C> <C> <C>
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

</TABLE>

(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

<PAGE>

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.

<PAGE>

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.

<TABLE>
<CAPTION>
1997 1996
---------------------------- ----------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------
IN THOUSANDS

<S> <C> <C> <C> <C>
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

</TABLE>

<PAGE>

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
<PAGE>

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
====== =====

<PAGE>

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.

<PAGE>

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

<PAGE>

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
<PAGE>

[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

<PAGE>

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
<PAGE>

<TABLE>
WAYNE BANCORP, INC.
<CAPTION>

<S> <C>
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

</TABLE>

<ARTICLE> 9

<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 1,577
<INT-BEARING-DEPOSITS> 1,868
<FED-FUNDS-SOLD> 3,400
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 73,413
<INVESTMENTS-CARRYING> 2,913
<INVESTMENTS-MARKET> 2,882
<LOANS> 181,102
<ALLOWANCE> 2,170
<TOTAL-ASSETS> 270,043
<DEPOSITS> 198,479
<SHORT-TERM> 2,000
<LIABILITIES-OTHER> 5,620
<LONG-TERM> 30,000
0
0
<COMMON> 22
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 270,043
<INTEREST-LOAN> 12,936
<INTEREST-INVEST> 5,631
<INTEREST-OTHER> 199
<INTEREST-TOTAL> 18,766
<INTEREST-DEPOSIT> 7,627
<INTEREST-EXPENSE> 2,281
<INTEREST-INCOME-NET> 8,858
<LOAN-LOSSES> 400
<SECURITIES-GAINS> (2)
<EXPENSE-OTHER> 5,990
<INCOME-PRETAX> 3,165
<INCOME-PRE-EXTRAORDINARY> 3,165
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,954
<EPS-PRIMARY> 1.04
<EPS-DILUTED> 1.03
<YIELD-ACTUAL> 0
<LOANS-NON> 2,328
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,789
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 2,170
<ALLOWANCE-DOMESTIC> 2,170
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0

</TABLE>