SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K/A
(Mark One)
[X] AMENDMENT TO ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1997
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- or -
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
|_| EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
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Commission Number: 0-20691
WAYNE BANCORP, INC.
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(Exact name of Registrant as specified in its Charter)
DELAWARE 22-3424621
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(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
1195 HAMBURG TURNPIKE, WAYNE, NEW JERSEY 07474
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(Address of principal executive offices) Zip Code
Registrant's telephone number, including area code: (973) 305-5500
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Securities registered pursuant to Section 12(b) of the Act: NONE
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
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(Title of Class)
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 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
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INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO
ITEM 405 OF REGULATION S-K (ss.229.405 OF THIS CHAPTER) IS NOT CONTAINED HEREIN,
AND WILL NOT BE CONTAINED, TO THE BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE
PROXY OR INFORMATION STATEMENTS INCORPORATED BY REFERENCE IN PART III OF THIS
FORM 10-K OR ANY AMENDMENT TO THIS FORM 10-K. [X]
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 OR MARCH 16, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Stockholders for the year ended
December 31, 1997 are incorporated by reference in Part II of this Form 10-K.
Portions of the Proxy Statement for the 1998 Annual Meeting of
Stockholders are incorporated by reference into Part III of this Form 10-K.
<PAGE>
Exhibit 13 to this report is being refiled to include a page
inadvertently omitted during printing of the Form 10-K as filed on March 30,
1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.
WAYNE BANCORP, INC.
By: /s/ Harold P. Cook, III
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Harold P. Cook, III
Chairman of the Board and CEO
(Principal Executive Officer)
Date: July 22, 1998
By: /s/ Timothy P. Tierney
------------------------------------
Timothy P. Tierney
Vice President and Comptroller
(Principal Financial and Accounting
Officer)
Date: July 22, 1998
EXHIBIT 13 1997 Annual Report to Stockholders
<PAGE>
WAYNE BANCORP, INC.
[LOGO]
ANNUAL REPORT
1997
<PAGE>
Table of Contents
Page
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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
2
<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
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<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>
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(1) Total noninterest expense divided by the sum of net interest income before
provision for loan losses and noninterest income which excludes the effect
in 1996 of a one time FDIC special SAIF assessment and a non-recurring
charge for benefits paid to the Company's former President and CEO.
3
<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
4
<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%.
5
<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
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<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
7
<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>
9
<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:
10
<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
11
<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.
13
<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.
14
<PAGE>
WAYNE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
In Thousands
<TABLE>
<CAPTION>
Net
Unrealized
Unallocated Gain
Common Common (Loss) on Total
Stock Stock Securities Stock-
Preferred Common Paid-in Retained Treasury Held by Held by Available holders'
Stock Stock Capital Earnings Stock ESOP MRP for Sale Equity
-------- -------- ------- ------- ------- -------- -------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1994 ..........$ -- $ -- $ -- $ 16,523 $ -- $ -- $ -- $ (264) $ 16,259
Net income ................... -- -- -- 871 -- -- -- -- 871
Unrealized gain on securities
transferred from held to
maturity to available for
sale, net of taxes ......... -- -- -- -- -- -- -- 13 13
Change in net unrealized
gain (loss) on securities
available for sale,
net of taxes ............... -- -- -- -- -- -- -- 156 156
--------- -------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1995 . -- -- -- 17,394 -- -- -- (95) 17,299
Net proceeds from stock
offering, net of expenses
of $1,272 .................. -- 22 21,004 -- -- -- -- -- 21,026
Unallocated common stock
acquired by ESOP ........... -- -- -- -- -- (1,785) -- -- (1,785)
Net income ................... -- -- -- 666 -- -- -- -- 666
Change in net unrealized
gain (loss) on securities
available for sale,
net of taxes ............... -- -- -- -- -- -- -- (295) (295)
--------- -------- -------- -------- -------- -------- -------- -------- --------
Balance at December 31, 1996 . -- 22 21,004 18,060 -- (1,785) -- (390) 36,911
Allocation of ESOP stock ..... -- -- 177 -- -- 181 -- -- 358
Net income ................... -- -- -- 1,954 -- -- -- -- 1,954
Dividends declared
($0.20 per share)........... -- -- -- (391) -- -- -- -- (391)
Purchase of treasury stock ... -- -- -- -- (4,417) -- -- -- (4,417)
Unallocated common stock
acquired by MRP ............ -- -- -- -- -- -- (1,450) -- (1,450)
Amortization of MRP shares ... -- -- -- -- -- -- 188 -- 188
Deferred taxes - MRP ......... -- -- 83 -- -- -- -- -- 83
Change in net unrealized
gain (loss) on securities
available for sale,
net of taxes ............... -- -- -- -- -- -- -- 708 708
--------- -------- -------- -------- -------- -------- -------- -------- --------
Balance at
December 31, 1997 ..........$ -- $ 22 $21,264 $ 19,623 $ (4,417) $ (1,604) $ (1,262) $ 318 $ 33,944
========= ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
15
<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.
16
<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
18
<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
19
<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
20
<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.
21
<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.
22
<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
====== ====== ======
23
<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
=== =====
24
<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
========
25
<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.
27
<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
28
<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
29
<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
31
<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.
32
<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>
33
<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
====== =====
35
<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.
36
<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
37
<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
39
<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>
41