UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
__X___ QUARTERLY REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
_____ TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 014612
For the Quarter Ended March 31, 1999
WAYNE BANCORP, INC
(Exact name of registrant as specified in its charter)
OHIO 34-1516142
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization) Number)
112 West Liberty Street
P.O. Box 757
Wooster, Ohio 44691 44691
(Address of Principal (Zip Code)
Executive Offices)
Registrant's telephone number, including area code: (330) 264-1222
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_____
Number of shares of Common Stock, Stated Value $1.00 per Share, shares
outstanding at April 30, 1999, the latest practicab 4,713,218
INDEX
WAYNE BANCORP, INC.
FORM 10-Q
For the Quarter Ended March 31, 1999
PART I. FINANCIAL INFORMATION PAGE NO.
Item I. Financial Statements (Unaudited)
Consolidated Balance Sheets................. 1
Consolidated Statements of Income
and Comprehensive Income........... 2
Consolidated Statements of Cash Flows....... 3
Notes to Consolidated Financial Statements.. 4,5
Item II. Management's discussion and analysis of financial
condition and results of operations.......... 6,7,8,9
Item III. Quantitative and Qualitative Disclosures about
Market Risk.................................... 10
PART II. OTHER INFORMATION................................... 12
SIGNATURES..................................................... 13
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands of dollars) March 31, December 31,
1999 1998
------------------------
ASSETS
Cash and Due From Banks............................ $17,960 $20,470
Federal Funds Sold................................. 3,730 7,340
------------------------
Total Cash and Cash Equivalents. 21,690 27,810
Securities Available-for-Sale...................... 164,828 175,007
Loans ........................................... 330,860 324,199
Allowance for Loan Losses....... (4,947) (4,916)
------------------------
Net Loans....................... 325,913 319,283
Premises and Equipment............................. 8,390 8,591
Accrued interest receivable and other assets....... 8,530 7,986
------------------------
TOTAL ASSETS....................................... $529,351 $538,677
========================
LIABILITIES
Deposits
Interest Bearing.............................. $370,212 $369,328
Non-Interest Bearing.......................... 62,532 65,815
------------------------
Total Deposits.................. 432,744 435,143
Securities Sold Under Agreements to Repurchase..... 32,798 36,989
Other borrowings................................... 2,705 2,558
ESOP Loan.......................................... 400 600
Other Liabilities.................................. 4,222 4,320
------------------------
Total Liabilities............... 472,869 479,610
SHAREHOLDERS' EQUITY
Common Stock, Stated Value $1...................... 4,917 4,917
Shares authorized - 12,000,000 in 1999 and 1998
Shares issued - 4,917,218 in 1999 and
4,917,218 in 1998
Shares outstanding - 4,752,217 in 1999 and
4,849,974 in 1998
Paid In Capital.................................... 13,299 13,310
Retained Earnings.................................. 43,302 41,989
Unearned ESOP share................................ (350) (400)
Treasury Stock, at cost............................ (5,678) (2,308)
Accumulated other comprehensive income............. 992 1,559
------------------------
Total Shareholders' Equity...... 56,482 59,067
------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......... $529,351 $538,677
========================
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
Three Months Ended
(Unaudited) March 31,
(In thousands of dollars, except per share data) 1999 1998
------------------------
INTEREST INCOME:
Interest and Fees on Loans......................... $6,878 $7,175
Interest and Dividends on Securities:
Taxable....................................... 1,975 1,694
Non-taxable................................... 409 370
Other Interest Income.............................. 43 155
------------------------
Total Interest Income.......... 9,305 9,394
INTEREST EXPENSE:
Interest on Deposits............................... 3,492 3,636
Interest on Repurchase Agreements.................. 339 389
Interest on Other Borrowed Funds................... 39 24
Interest on ESOP Loan.............................. 10 0
------------------------
Total Interest Expense.......... 3,880 4,049
NET INTEREST INCOME................................ 5,425 5,345
Provision for Loan Losses.......................... 54 60
------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES................. 5,371 5,285
OTHER INCOME:
Service Charges on Deposits........................ 409 413
Income from Fiduciary Activities................... 345 300
Other Non-Interest Income.......................... 192 97
------------------------
Total Other Income.............. 946 810
OTHER EXPENSES:
Salaries and Employee Benefits..................... 1,744 1,910
Occupancy and Equipment............................ 476 455
Other Non-Interest Expenses........................ 1,211 1,262
------------------------
Total Other Expenses............ 3,431 3,627
INCOME BEFORE INCOME TAX EXPENSE................... 2,886 2,468
INCOME TAX EXPENSE................................. 856 751
------------------------
NET INCOME......................................... 2,030 1,717
========================
Other Comprehensive Income, net of tax
Unrealized gains (losses) on available-for-sale
securities arising during the period........... (567) 1
Reclassification adjustment for amounts realized
on securities sales included in net income.... 0 0
------------------------
COMPREHENSIVE INCOME............................... $1,463 $1,718
========================
NET INCOME PER SHARE - BASIC $0.43 $0.35
NET INCOME PER SHARE - DILUTED $0.43 $0.35
DIVIDENDS PER SHARE $0.15 $0.09
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Three Months Ended
(In thousands of dollars) March 31,
1999 1998
- ---------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income......................................... $2,030 $1,717
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses................... 54 60
Depreciation and amortization............... 330 328
Amortization of security premiums
and discounts................ ............ 169 20
Increase in interest receivable............. (155) (448)
Decrease in interest payable................ (157) (148)
Other, (net)................................ (377) (340)
------------------------
Net Cash Provided by Operating Activities.......... 1,894 1,189
INVESTING ACTIVITIES
Purchase of securities available-for-sale.......... (8,582) (10,211)
Proceeds from matured securities
available-for-sale............................... 17,732 10,388
Net (increase) decrease in loans and leases........ (6,684) 5,569
Purchase of premises and equipment................. (50) (313)
------------------------
Net cash provided by investing activities.......... 2,416 5,433
FINANCING ACTIVITIES
Net increase (decrease) in deposits................ (2,399) 2,320
Net increase (decrease) in repurchase agreements
and other short term borrowings................. (4,044) (1,197)
Cash dividends..................................... (719) (431)
Cash dividends reinvested.......................... 102 73
(Increase) decrease in treasury stock.............. (3,370) (362)
------------------------
Net cash (used) provided by financing activities.. (10,430) 403
Increase (Decrease) in cash and cash equivalents... (6,120) 7,025
Cash and cash equivalents at beginning of period... 27,810 31,091
------------------------
Cash and cash equivalents at end of period......... $21,690 $38,116
========================
Cash basis payments for federal income taxes....... $0 $0
Cash basis payments for interest expense........... $4,037 $4,197
See notes to consolidated financial statements.
WAYNE BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Basis of Presentation:
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles
for interim financial information and with instructions to Form 10-Q.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting standards for complete financial
statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included and such adjustments
are of a normal recurring nature. Certain prior year amounts have been
reclassified to conform with current financial statement presentation.
The consolidated financial statements include the accounts of
Wayne Bancorp, Inc. (the Company), and its wholly-owned
subsidiaries Wayne County National Bank (Wayne) and Chippewa
Valley Bank (Chippewa). The financial statements of Wayne
include the accounts of its wholly-owned subsidiary, Wayne
National Corporation. All significant intercompany transactions
have been eliminated.
On March 31, 1998, the Company acquired all of the outstanding
shares of Chippewa Valley Bancshares, Inc., parent company of
the Chippewa Valley Bank. Shareholders of Chippewa received
2.1916 shares of the Company's common stock for each share of
Chippewa stock owned. The transaction was accounted for as a
pooling of interests, where the historical carrying values of
Chippewa's assets were carried forward to the consolidated
financial statements, without change. All prior financial
information has been restated to conform to the current
financial statement presentation.
Under a new accounting standard adopted on January 1, 1998,
Statement of Financial Accounting Standards ("SFAS") No. 130,
"Reporting Comprehensive Income," comprehensive income is
reported for all periods. Comprehensive income includes both
net income and other comprehensive income. Other comprehensive
income includes the change in unrealized gains and losses on
securities available-for-sale, as adjusted for realized gains or losses
on securities, available-for-sale, when applicable.
On April 22, 1999, the shareholders of the Company voted to approve
the "1999 Incentive Stock Option Plan." Under this plan, the Board of
Directors granted options to purchase 34,200 common shares
at an exercise price of $34.50 to certain officers of the Company
and its subsidiaries. The options awarded vest and become exercisable
in equal installments on December 15, 1999, 2000 and 2001.
This option period expires ten years from the date of the grant.
Basic earnings per share ("EPS") is based on net income divided by the
weighted average number of shares outstanding during the period. Diluted
EPS includes the dilutive effect of stock options granted using the treasury
stock method.
2. Securities:
Securities are classified as available-for-sale. Available-for-sale
securities are those which may be sold by the Company if needed
for liquidity, asset-liability management, or other reasons. Securities
available-for-sale are reported at fair value, with unrealized gains or
losses included as a separate component of equity, net of tax.
Realized gains or losses are determined based on the amortized cost
of the specific security sold. During the three months ended March 31, 1999
and March 31, 1998, there were no sales of securities.
Summary of Amortized Cost and Fair Values of Securities Available-for-sale:
March 31, 1999
Gross Gross
(In thousands of dollars) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------
U.S. Treasury............... $26,779 $192 $26,971
Federal Agency Obligations.. 49,020 256 49,276
Federal Agency Pools........ 19,269 198 19,467
Obligations of state and
political subdivisions.... 36,994 671 (3) 37,662
Corporate Obligations....... 28,638 80 28,718
Other securities............ 2,626 108 2,734
-----------------------------------------------
$163,326 $1,505 ($3) $164,828
===============================================
December 31, 1998
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------
U.S. Treasury............... $24,132 $362 $24,494
Federal Agency Obligations.. 49,597 546 (5) 50,138
Federal Agency Pools........ 21,104 251 (3) 21,352
Obligations of state and
political subdivisions.... 36,321 878 (13) 37,186
Corporate Obligations....... 38,884 213 (23) 39,074
Other securities............ 2,607 185 (29) 2,763
-----------------------------------------------
$172,645 $2,435 ($73) $175,007
===============================================
3. Loans:
Loans are comprised of the following:
(In thousands of dollars) March 31, December 31,
1999 1998
------------------------
Commercial and Agricultural ........... $133,373 $129,504
Real Estate loans...................... 136,444 131,820
Installment loans...................... 46,984 48,141
Lease Financing........................ 2,637 2,835
Home Equity loans...................... 10,868 11,252
Credit Card............................ 476 543
Other loans............................ 78 104
------------------------
Total............... $330,860 $324,199
========================
4. Employee Stock Ownership Plan:
The Company offers an Employee Stock Ownership Plan (ESOP) for the benefit of
substantially all its employees. The ESOP has received a favorable
determination letter from the Internal Revenue Service on the qualified
status of the ESOP under applicable provisions of the Internal Revenue Code.
In April, 1998, the ESOP borrowed funds from an unrelated financial institution
to acquire common shares of the Company. The loan is secured by the shares
purchased with the proceeds, and will be repaid by the ESOP with funds from
Wayne's discretionary contributions to the ESOP and earnings on the ESOP
assets. All dividends received on unallocated shares by the ESOP are used to
pay debt service. The loan is also guaranteed by Wayne. The shares
purchased with the loan proceeds are held in a suspense account for
allocation among participants as the loan is repaid. As payments are made
and shares are released from the suspense account, such shares will be
validly issued, fully paid and nonassessable. At March 31, 1999, and December
31, 1998, the balance on this loan was $400,000 and $600,000 respectively.
The Company accounts for its ESOP in accordance with Statement of Position (SOP)
93-6. Accordingly, shares which have not yet been committed to be released are
reported as unearned ESOP shares in the consolidated balance sheets. As shares
are committed to be released for allocation, the Company reports compensation
expense equal to the current market price of the shares, and shares become
outstanding for earnings-per-share computations. Dividends on allocated ESOP
shares are recorded as a reduction of retained earnings; dividends on
unallocated ESOP shares are recorded as a reduction of debt and accrued
interest. ESOP compensation expense was $39 thousand for the three months
ended March 31, 1999. There was no related expense for this period in 1998.
The ESOP shares as of March 31, 1999 and December 31, 1998 were as follows:
March 31, December 31,
1999 1998
--------- -----------
Allocated Shares 136,373 136,373
Shares committed to be
released for allocation 5,683 4,546
Unreleased shares 7,954 9,091
-----------------------
Total ESOP shares 150,010 150,010
=======================
Fair value of
unreleased shares $275,447 $320,458
=======================
5. Per Share Data:
Per share data is calculated based on 4,754,794 average common shares for
the three months ended March 31, 1999 and 4,904,862 average common shares for
the same period ending in 1998. All per share data has been adjusted to reflect
stock splits and dividends where applicable.
ITEM II - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS:
The main objectives of asset/liability management are to provide adequate
liquidity and to minimize interest rate risk. Liquidity is the ability to
meet cash flow needs, which in the banking industry, refers to the Company's
ability to fund customer borrowing needs as well as deposit withdrawals. The
Company's primary source of liquidity is from overnight Federal Funds Sold and
Securities available-for-sale. In addition, other assets such as Cash and
Due From Banks and maturing loans also provide additional sources of
liquidity. At March 31, 1999, the amount of Cash and due from banks and
securities and loans with scheduled maturities and or repricing within the
next three months was $110 million. The Company continues to keep a balance
between short and long-term investments and securities that will provide
adequate liquidity and maximize earnings. Based on the Company's capital
position, profitability and reputation, the available liquidity sources are
considered adequate to meet the current and projected needs of the Company.
Capital__
The Company's capital adequacy is a primary concern in our industry, and is
measured by several key ratios. A long standing measure of capital adequacy
is the percentage of shareholders' equity to total assets. At March 31,
1999, the Company's equity-to-asset ratio adjusted by the impact of FAS#115 was
10.5% compared to 10.7% at December 31, 1998. Regulators of the banking
industry focus primarily on two other measurements of capital - the
risk-based capital ratio and the leverage ratio. The risk-based capital
ratio consists of a numerator of allowable capital components and a
denominator of an accumulation of risk-weighted assets. With a significant
portion of the Company's investment securities portfolio in government
related low risk categories and a fair amount of the loan portfolio in
one-to-four family mortgage loans with a 50% risk assessment, the risk-
based capital ratio is 17.7% at March 31, 1999, and 17.6% at December 31, 1998.
The regulators require a minimum leverage capital ratio of 3% They will
expect most banks to maintain leverage ratios in the 4-5% range. The
leverage ratio is calculated as equity capital less certain intangible assets
divided by total assets less the same intangible assets. At March 31, 1999,
and December 31, 1998, the ratios were 10.3% and 10.7% respectively.
The Company's deposit insurance premiums which are paid to the Federal
Deposit Insurance Corporation are based, in part, on these capital ratios.
The FDIC considers a bank "adequately capitalized" if the capital ratios
are: Total equity 8%, Tier 1 risk-based 4% and a leverage ratio of 4% The
FDIC considers a bank "well capitalized" with comparable capital ratios of 10%,
6% and 5%. The Company is considered "well capitalized", and therefore is
subject to the lowest deposit insurance premiums available.
Management is not aware of any matters subsequent to March 31, 1999
that would cause the Company's capital category to change.
Financial_Condition__
The total assets of the Company decreased by $9.3 million or 1.7% from
December 31, 1998 to March 31, 1999. This decrease is primarily due to a
simultaneous decrease in the securities portfolio to fund outflows of deposits
and repay approximately $4.2 million of borrowed funds during the first
quarter of 1999.
The lending area has experienced growth of $6.6 million through the first
three months of 1999. This growth is primarily concentrated in the Commercial
and Real Estate areas with increases of $3.9 million and $4.6 million
respectively. The growth in the Commercial area reverses a trend the we saw
last year at this time where the Company experienced several large loan
payoffs due to the increased competition from the "super-regional" banks
offering rates on these loans that were below the "prime" rate of interest.
This has not been the case thus far this year, as the Company has seen an
easing of competitive pressure from these institutions. The growth in the
Real Estate area is due to the continued strength in the 1-4 family
residential real estate market. This market has remained strong as a result
of the sustained low rates on these types of loans. The strong growth in
these areas is offset by a decline in Installment loans of $1.2 million.
This decline is attributable to several factors relating to the economy and
consumer debt load. The long-running economic expansion has increased
consumer confidence and spending levels to a point that consumer debt is at
an all time high, thus reducing the future borrowing capacity of the average
household.
Management expects interest rates to be somewhat stable or rising over the next
twelve to twenty-four months. Due to this, management may sell mortgage loans
into the secondary market if rates are favorable and conditions within the
balance sheet warrant such a sale. As of March 31, 1999 and December 31,
1998 there were no loans classified as held-for-sale. It is managements
expectations that if loans are to be sold during subsequent quarters during
1999, that those loans would have been originated during those periods.
On March 15, 1999, the Board of Directors of Chippewa, approved the sale of
Chippewa's credit card portfolio. The sale is expected to close during the
second quarter of 1999. The sale of this portfolio is based on the fact that
increased competition is making it difficult to grow the while the costs of
maintaining the portfolio continue to rise. At March 31, 1999, Chippewa's
portfolio comprised less than 1% of their total loans. In addition to the
sale of the credit portfolio, Chippewa has arranged for the sale of its
Merchant Credit Card business, with this also anticipated to close during
the second quarter of 1999. No material gain or loss is expected as a result
of this transaction.
Total securities available-for-sale and fed funds sold decreased by $13.8
million through the first quarter of 1999. This decrease is primarily due to
the maturities relating to short term commercial paper, purchased during the
fourth quarter of 1998, that was scheduled to mature during the first three
months of 1999. This decline in the investment portfolio has been used to
fund loan growth and customer withdrawals.
Total deposits and borrowed funds decreased by $6.6 million for the first
quarter of 1999. This decline in the first quarter is due to withdrawals of
funds placed on deposit at year end that have been used for business and other
purposes during the first quarter. This behavior is expected during the
first quarter of each year, then deposits and borrowed funds tend to
increase during subsequent quarters during the year. In fact, the Company
has seen an inflow of deposits during the second quarter of this year. The
Company has, as an ongoing objective, the growth of core deposits, to
facilitate funding for loan demand and asset growth. To do this, Management
analyzes rates paid on deposits within its market area on a weekly basis to
ensure the Company's rates on similar products are competitive. In addition
to core deposits, the Company also has alternative funding sources through
overnight federal funds and advances from the Federal Home Loan Bank.
Results_of_Operations__
Net income was $2,030,000 for the first three months of 1999 compared
to $1,717,000 for the same period in 1998. Earnings per share for the three
months ended March 31, 1999 and 1998 were $.43 and $.35 per share
respectively. Dividends were $.15 per share in the first three months of
1999 and $.09 per share for the first three months in 1998.
Total interest and fee income for the first three months decreased $89
thousand or 1.0% compared to the prior year. This decrease is primarily
related to the lower interest rates being earned on loans. The rates on
these assets have been driven down due to a 75 basis point reduction in the
prime lending rate, that occurred during the fourth quarter of 1998, as well
as the "below prime" loans that are being offered by the "super-regional" banks
within our lending area.
Total earning assets were $499.4 and $479.1 million at March 31, 1999 and
March 31, 1998. The increase in earning assets is due to the growth in
securities and federal funds sold of $8.2 million and an increase in the loan
portfolio of $12.1 million. The weighted average interest earned on those
assets was 7.52% and 7.99% respectively.
Total interest bearing liabilities at March 31, 1999 and March 31, 1998 were
$406.1 and $391.1 million respectively. The weighted interest rate paid for
these liabilities has decreased from 4.21% at March 31, 1998 to 3.84% at
March 31, 1999.
The net effect of the changes in interest earning assets and interest paying
liabilities, combined with the repricing that has occurred since March 31, 1998
caused an increase in net interest income of $80 thousand, or 1.5%, for the
three months ended March 31, 1999.
The provision for loan losses for the first three months of 1999 was $54
thousand compared to $60 thousand for the same period in 1998. This slight
decrease is due to the ratio of the allowance for loan losses to total loans
being within managements expectations for the first quarter of 1999. This
ratio, being 1.50%, is considered adequate and sufficient given the makeup of
the loan portfolio.
Total other expenses decreased by $196 thousand for the three months ended
March 31, 1999 compared to the same period in 1998. Occupancy and equipment
expense increased by $21 thousand or 4.6% due primarily to repairs and
maintenance on premises and equipment. Salaries and employee benefits
decreased $166 thousand or 8.7% to $1,744,000 for the period ending March 31,
1999 compared to $1,910,000 for the same period in 1998. This decrease is
partially due to Wayne adding a 401(k) feature to its profit sharing plan,
thus reducing expense relating to retirement benefits, as prior to the
401(k), the profit sharing plan was non-contributory, and was solely funded
by the Company. In addition to the changes made by Wayne, Chippewa terminated
its defined benefit pension plan. These changes were made to align the
employee benefit plans of each bank. In addition, savings have been realized
in the area of compensation due to integrating the financial reporting and
marketing functions of the Company, and through employee attrition. The
other non-interest expenses declined $51 thousand for the first three months
of 1999 compared to the same period in 1998. The primary reason for this
decrease is due to cost reduction efforts made during 1998 that have been
realized during the first three months of 1999.
Year 2000 Issue (Y2K)
The Company's subsidiaries, Wayne and Chippewa are almost entirely dependent
on computer systems which process transactions relating to lending and deposit
functions. Wayne employs the services of a nationally recognized data
processing bureau specializing in data processing for financial institutions,
while Chippewa operates an in-house data processing center. In addition to
its core operating activities the Company also relies on off the shelf
hardware and software to conduct business relating to its normal operations.
The Company has inventoried all of its hardware and software relating to
computer operated and computer dependent systems, and the Company has
completed their assessment of the steps they will need to take to address
Y2K problems. The applications have been identified as either Mission
Critical or Non-Mission Critical, and timeframes have been established for
testing these applications. The Company has contacted the vendors that
supply or sercvice the Company's computer operated or computer dependent
systems to obtain confirmation that each system is either currently Y2K
compliant or is expected to be Y2K compliant. The Company has also
performed testing for Y2K compliance. The testing for the Company's
Fedline and Trust accounting systems is substantially complete and the
results of this testing indicates these systems will process information
correctly into the next millennium. The Company's loan and deposit
applications are currently undergoing final testing to ensure compliance.
Proxy testing has indicated that these systems will also process information
correctly in the Year 2000. The Company anticipates that all testing should
be completed by June 30, 1999. With respect to those systems that cannot be
confirmed as Y2K compliant the Company will continue to work with the
appropriate supplier or servicer to ensure all such systems will be rendered
compliant in a timely manner with minimal expense to the Company or
disruption to the Company's operations. A contingency plan has been
approved by the Board of Directors and Senior Management that is currently
being updated to comply with the guidelines issued by the Federal Financial
Institutions Council.
In addition to the possible expense related to its own systems, the Company
could incur losses if loan payments are delayed due to Y2K problems affecting
any of the Company's significant borrowers or impairing the payroll systems
of large employers in the Company's primary market area. Because the
Company's loan portfolio is highly diversified with regard to individual
borrowers and types of businesses, and the Company's primary market area is
not significantly dependent on a single employer or industry, the Company
does not expect any significant or prolonged Y2K related difficulties that
will affect net earnings or cash flow. At this time, the Company has spent
approximately $250 thousand related to the Y2K issue, however additional
unforseen expenses may be incurred in connection with the Y2K issue.
Repurchase of Stock
Under a Stock Repurchase program approved by the Board of Directors, and
announced in February of 1999, the Company has repurchased 100,687 shares of
common stock during the three months ended March 31, 1999 for a total cost of
$3.5 million. Under this program the Board of Directors approved the
purchase of up to 5% of the Company's outstanding common stock, or
approximately 250,000 shares, over a two-year period.
ITEM III - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Asset and Liability Management and Market Risk
The Company's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. The Company does not maintain a trading
account for any class of financial instruments and the Company is not
affected by foreign currency exchange rate risk or commodity price risk.
Because the Company does not hold any equity securities other than stock in
the FHLB of Cincinnati and an insignificant investment in other equity
securities, the Company is not subject to equity price risk.
Interest rate risk is the risk that the Company's financial condition will be
adversely affected due to movements in interest rates. The Company, like
other financial institutions, is subject to interest rate risk to the extent
that its interest-earning assets reprice differently than its
interest-bearing liabilities. The income of financial institutions is
primarily derived from the excess of interest earned on interest-earning
assets over the interest paid on interest-bearing liabilities. One of the
Company's principal financial objectives is to achieve long-term
profitability while reducing its exposure to fluctuations in interest rates.
Accordingly, the Company places great importance on monitoring and
controlling interest rate risk.
There are several methods employed by the Company to monitor and control
interest rate risk. One such method is using a "GAP" analysis. The GAP is
defined as the repricing variance between rate sensitive assets and rate
sensitive liabilities within certain periods. The repricing can occur due to
changes in rates on variable rate products as well as maturities of
interest-earning assets and interest-bearing liabilities. A high ratio of
interest sensitive liabilities, generally referred to as a negative GAP,
tends to benefit net interest income during periods of falling interest rates
as the average rate paid on interest-bearing liabilities declines faster than
the average rate earned on interest-earning assets. The opposite holds true
during periods of rising interest rates. The Company attempts to minimize
the interest rate risk through management of the gap in order to achieve
consistent shareholder return. The Company's Asset and Liability Management
Policy is to maintain a fairly neutral GAP position of -10% to +10% in both
the short- and long-term periods. At March 31, 1999, the Company had a
negative GAP position of -8.2% of total assets for a one year period.
Another strategy used by the Company is to originate variable rate loans tied
to market indices. Such loans reprice on an annual, quarterly, monthly or
daily basis as the underlying market index changes. Currently, approximately
27%, of the Company's loan portfolio reprices on at least an annual basis.
The Company also invests excess funds in liquid federal funds that mature and
reprice on a daily basis. The Company also maintains all of its securities in
the available-for-sale portfolio to take advantage of interest rate
fluctuations and to maintain liquidity for loan funding and deposit
withdrawals.
The Company's 1998 annual report details a table which provides information
about the Company's financial instruments that are sensitive to changes in
interest rates as of December 31, 1998. The table is based on information
and assumptions set forth in the notes. The Company believes the assumptions
utilized are reasonable. For loans, securities and liabilities with
contractual maturities, the table represents principal cash flows and the
weighted-average interest rate. For variable rate loans the contractual
maturity and weighted-average interest rate was used with an explanatory
footnote as to repricing periods. For liabilities without contractual
maturities such as demand and savings deposit accounts, a decay rate was
utilized to match their most likely withdrawal behavior. Management
believes that no events have occurred since December 31, 1998 that would
significantly change the ratio of rate sensitive assets to rate sensitive
liabilities for the given time horizons.
WAYNE BANCORP, INC.
PART II - OTHER INFORMATION
_____________________________________________________________
ITEM 1 - Legal Proceedings:
NONE
ITEM 2 - Changes in securities:
NONE
ITEM 3 - Defaults upon senior securities:
NONE
ITEM 4 - Submission of matters to a vote of securities holders:
(a) Annual Shareholders' Meeting
Date: April 22, 1999
Description: Election of Directors
James O. Basford FOR: 3,400,827 WITHHELD: 25,332
John C. Johnston, III FOR: 3,419,677 WITHHELD: 6,481
Philip S. Swope FOR: 3,416,929 WITHHELD: 9,230
David E. Taylor FOR: 3,420,575 WITHHELD: 5,583
Description: Ratify the engagemend of Crowe, Chizek
& Company LLP as the independed auditor.
FOR: 3,414,988 AGAINST: 634
ABSTAIN: 10,537
Description: To approve the 1999 Incentive Stock Option Plan
FOR: 2,766,477 AGAINST: 260,674
ABSTAIN: 110,871 NON-VOTE: 288,136
(d) None
ITEM 5 - Other information:
NONE
ITEM 6 - Exhibits and reports on Form 8-K:
NONE
______________________SIGNATURES______________________________
Pursuant to the requirements of the Securities and 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.__
(Registrant)
Date ____May_14,_1999____ ____________________________
David L. Christopher,
Chairman & CEO
Date ____May_14,_1999____ ____________________________
David P. Boyle, CPA
Treasurer
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