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 June 30, 1999
WAYNE BANCORP, INC
(Exact name of registrant as specified in its charter)
OHIO 34-1516142
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification 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 require-
ments for the past 90 days:
Yes__X__ No_____
Number of shares of Common Stock, Stated Value $1.00 per Share, shares
outstanding at July 31, 1999, the latest practicable date: 4,595,283
INDEX
WAYNE BANCORP, INC.
FORM 10-Q
For the Quarter Ended June 30, 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 - 6
Item II. Management's discussion and analysis of financial
condition and results of operations.......... 6 - 11
Item III. Quantitative and Qualitative Disclosures about
Market Risk................................. 11 - 12
PART II. OTHER INFORMATION................................... 12 - 20
SIGNATURES..................................................... 21
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands of dollars) June 30, December 31,
1999 1998
------------------------
ASSETS
Cash and Due From Banks............................ $19,875 $20,470
Federal Funds Sold................................. 0 7,340
------------------------
Total Cash and Cash Equivalents. 19,875 27,810
Securities Available-for-Sale...................... 152,839 175,007
Loans ............................................ 340,940 324,199
Allowance for Loan Losses....... (5,008) (4,916)
------------------------
Net Loans....................... 335,932 319,283
Premises and Equipment............................. 8,924 8,591
Accrued interest receivable and other assets....... 8,346 7,986
------------------------
TOTAL ASSETS....................................... $525,916 $538,677
========================
LIABILITIES
Deposits
Interest Bearing.............................. $374,845 $369,328
Non-Interest Bearing.......................... 64,712 65,815
------------------------
Total Deposits.................. 439,557 435,143
Securities Sold Under Agreements to Repurchase..... 26,718 36,989
Other borrowings................................... 3,618 2,558
ESOP Loan.......................................... 400 600
Other Liabilities.................................. 3,790 4,320
------------------------
Total Liabilities............... 474,083 479,610
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 1998
Shares outstanding 4,610,283 in 1999 and
4,849,974 in 1998
Paid In Capital.................................... 13,287 13,310
Retained Earnings.................................. 44,609 41,989
Unearned ESOP shares............................... (300) (400)
Treasury Stock..................................... (10,581) (2,308)
Accumulated other comprehensive income............. (99) 1,559
------------------------
Total Shareholders' Equity...... 51,833 59,067
------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......... $525,916 $538,677
========================
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited) Three Months Ended Six Months Ended
(In thousands of dollars, June 30, June 30,
except per share data) 1999 1998 1999 1998
---------------------------------------------
INTEREST INCOME:
Interest and Fees on Loans......... $7,053 $7,156 $13,931 $14,331
Interest and Dividends on
Securities:
Taxable...................... 1,821 1,789 3,796 3,483
Nontaxable................... 432 379 841 749
Other Interest Income............. 68 195 111 350
---------------------------------------------
Total Interest Income.... 9,374 9,519 18,679 18,913
INTEREST EXPENSE:
Interest on Deposits.............. 3,547 3,735 7,039 7,371
Interest on Repurchase Agreements. 294 393 633 782
Interest on Other Borrowed Funds.. 52 11 91 35
Interest on ESOP Loan............. 8 0 18 0
---------------------------------------------
Total Interest Expense... 3,901 4,139 7,781 8,188
NET INTEREST INCOME............... 5,473 5,380 10,898 10,725
Provision for Loan Losses......... 54 60 108 120
---------------------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES........ 5,419 5,320 10,790 10,605
OTHER INCOME:
Service Charges on Deposits....... 439 426 848 839
Income from Fiduciary Activities.. 345 300 690 600
Other Non-Interest Income......... 194 218 386 315
Gain (Loss) on Security Sales..... 49 0 49 0
---------------------------------------------
Total Other Income........ 1,027 944 1,973 1,754
OTHER EXPENSES:
Salaries and Employee Benefits.... 1,894 1,819 3,638 3,729
Occupancy and Equipment........... 460 443 936 898
Other Non-Interest Expenses....... 1,262 1,349 2,473 2,611
---------------------------------------------
Total Other Expenses...... 3,616 3,611 7,047 7,238
INCOME BEFORE INCOME TAX EXPENSE.. 2,830 2,653 5,716 5,121
INCOME TAX EXPENSE................ 829 730 1,685 1,481
---------------------------------------------
NET INCOME........................ 2,001 1,923 4,031 3,640
=============================================
Other Comprehensive Income,
net of tax
Unrealized gains (losses) on
available-for-sale securities
arising during the period (1,059) 220 (1,626) 221
Reclassification adjustment
for amounts realized on
securities sales included in
net income (32) 0 (32) 0
---------------------------------------------
COMPREHENSIVE INCOME........... .. $910 $2,143 $2,373 $3,861
=============================================
NET INCOME PER SHARE - BASIC $0.43 $0.39 $0.86 $0.74
NET INCOME PER SHARE - DILUTED $0.43 $0.39 $0.86 $0.74
DIVIDENDS PER SHARE $0.15 $0.11 $0.30 $0.20
See notes to consolidated financial statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited) Six Months Ended
(In thousands of dollars) June 30
1999 1998
- ---------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income........................................ $4,031 $3,640
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses.................. 108 120
Depreciation and amortization.............. 656 655
Amortization of security premiums and
discounts................................. 370 116
Decrease (Increase) in interest receivable. 332 (945)
Decrease in interest payable............... (62) (99)
Other, (net)............................... (825) (1,153)
------------------------
Net cash provided by operating activities......... 4,610 2,334
INVESTING ACTIVITIES
Purchase of securities available-for-sale........ (16,919) (37,381)
Proceeds from matured securities available-for-sale 27,453 26,364
Proceeds from sale of securities available-for-sale 8,751
Net (increase) decrease in loans and leases....... (16,757) 2,289
Proceeds from the sale of loans................... 0 11,915
Purchase of premises and equipment................ (587) (488)
------------------------
Net cash provided by investing activities......... 1,941 2,699
FINANCING ACTIVITIES
Net increase (decrease) in deposits............... 4,414 991
Net increase (decrease) in repurchase agreements
and other short term borrowings.................. (9,211) (736)
Cash dividends.................................... (1,416) (971)
(Increase) in treasury stock....................... (8,273) (549)
------------------------
Net cash (used) by financing activities........... (14,486) (1,265)
Increase (Decrease) in cash and cash equivalents... (7,935) 3,768
Cash and cash equivalents at beginning of period... 27,810 31,091
-----------------------
Cash and cash equivalents at end of period......... $19,875 $34,859
========================
Cash basis payments for federal income taxes....... $1,510 $1,605
Cash basis payments for interest expense........... $7,843 $8,287
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), the Chippewa Valley Bank (Chippewa), and MidOhio Data
Incorporated (Mid). 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, net of tax.
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. On May 20, 1999 the Company modified the "1999 Incentive
Stock Option Plan" for some of these officers. The addendums as contained in
this filing call for these options to be fully vested and exercisable
immediatley, by the officer, upon a change of control. This option period
expires ten years from the date of the grant, for those officers included in
the plan.
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 six months ended June 30, 1999 proceeds
from the sale of securities available for sale were $8.8 million, with gross
realized gains of $52 thousand and gross realized losses of $3 thousand
included in earnings. During the six months ended June 30, 1998, there were
no sales of securities.
Summary of Amortized Cost and Fair Values of Securities Available-for-sale:
June 30, 1999
Gross Gross
(In thousands of dollars) Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-----------------------------------------------
U.S. Treasury............... $28,814 $29 ($18) $28,825
Federal Agency Obligations.. 41,713 11 (196) 41,528
Federal Agency Pools........ 16,246 1 (7) 16,240
Obligations of states and
political subdivisions.... 36,259 155 (66) 36,348
Corporate Obligations...... 27,228 10 (164) 27,074
Other securities............ 2,730 135 (41) 2,824
-----------------------------------------------
$152,990 $341 ($492) $152,839
===============================================
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 states 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:
June 30, December 31,
1999 1998
------------------------
Commercial and Agricultural............ $139,576 $129,504
Real Estate loans...................... 141,029 131,820
Installment loans...................... 46,435 48,141
Lease Financing........................ 2,469 2,835
Home Equity loans...................... 11,354 11,252
Credit Card............................ 0 543
Other loans............................ 77 104
------------------------
Total............... $340,940 $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 alloca-
tion 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 June 30, 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 and $78 thousand
for the three and six months ended June 30, 1999. There was no related expense
for the same periods in 1998. The ESOP shares as of June 30, 1999 and
December 31, 1998 were as follows:
June 30, December 31,
1999 1998
---- ----
Allocated Shares 136,373 136,373
Shares committed to be
released for allocation 6,820 4,546
Unreleased shares 6,817 9,091
-----------------------
Total ESOP shares 150,010 150,010
=======================
Fair value of unreleased
shares $230,926 $320,458
=======================
5. Per Share Data:
Basic per share data is calculated based on 4,641,044 average common shares
for the three months ended June 30, 1999 and 4,663,191 average common shares
for the six months ended June 30, 1999. The corresponding numbers for the
same periods in 1998 were 4,904,484 and 4,904,862. The average common shares
outstanding for diluted per share data is the same as that for basic per
share data as the stock options were not dilutive as of June 30, 1999. 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:
Liquidity
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 June 30, 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 $107 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 June 30, 1999,
the Company's equity-to-asset ratio adjusted by the impact of securities
available-for-sale, that are carried at fair market value, was 9.9% 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 accumula-
tion 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 was 16.4% at June 30,
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 June 30, 1999,
and December 31, 1998, the ratios were 9.5% and 10.7% respectively.
The Company's deposit insurance premiums which are paid to the Federal De-
posit 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 capital 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 there-
fore is subject to the lowest deposit insurance premiums available.
Management is not aware of any matters subsequent to June 30, 1999 that would
cause the Company's capital category to change.
Financial Condition
The total assets of the Company decreased by $12.8 million or 2.4% from
December 31, 1998 to June 30, 1999. This decrease is primarily due to a
decrease in the investment portfolio to repay approximately $9.2 million
of borrowed funds.
The lending area has experienced growth of $16.7 million through the first
six months of 1999. This growth is primarily concentrated in the Commercial
and Real Estate areas with increases of $10.1 million and $9.2 million
respectively. The growth in the Commercial area reverses a trend that we saw
last year where the Company experienced several large loan payoffs due to
increased competition from the "super-regaional" 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 strong demand for 1-4 family residential properties, fueled by low
interest rates, a strong economy and a low rate of unemployment. These
increases are offset by a $1.7 million decline in the consumer Installment
loan area. This decline is partially due to the increased level of consumer
debt, as well as strong competition relating to consumer credit, partic-
ularly with respect to dealer concessions.
On March 15, 1999, the Board of Directors of Chippewa, approved the sale of
Chippewa's credit card portfolio. The sale of this portfolio was based on
the fact that increased competition was making it difficult to grow the port-
folio, while the costs of maintaining the portfolio continued to rise. In
addition to the sale of the credit card portfolio, Chippewa arranged for the
sale of its Merchant Credit Card business. The sale of these business lines
occurred during the second quarter of 1999, as anticipated. At the time of
the sale the balance in the credit card portfolio was approximately $465
thousand. As a result of this sale the Company realized a pre-tax gain of
$37 thousand, which is included in other non-interest income. Of this gain,
the credit card portfolio generated a gain of $30 thousand, while the mer-
chant business generated a gain of $7 thousand.
Management expects interest rates to be somewhat stable or rising over the next
twelve to twenty-four months. In fact on June 30, 1999 the Federal Reserve
increased the target Federal Funds rate, the rate banks lend to each other,
by 25 basis points, to 5.0%. This increase will impact rates charged on
various loan types, in particluar Commercial and Residential Real estate
loans. Due to this, management may at some time in the future sell mortgage
loans into the secondary market. A sale is dependent on several factors,
such as a favorable interest rate environment and the loan mix within the
balance sheet. As of June 30, 1999, and December 31, 1998, there were no
loans classified as held-for-sale, as it is managements expectations that if
loans are to be sold during sub-sequent quarters during 1999, that those
loans would have been originated during those periods.
Total securities available-for-sale and fed funds sold decreased by $29.5
million for the first six months of 1999. This decrease is due to the strong
loan demand that has occurred during the first six months of the year,
allowing the Company to convert lower yielding federal funds sold and invest-
ments into higher yielding loans. In addition to re-investing these assets
into higher yielding loans, the Company has repaid approximately $9.2 million
of borrowed funds through June 30, 1999.
Total deposits and borrowed funds decreased by $4.8 million for the first
six months of 1999, as compared to these balances at December 31, 1998. This
decrease is primarily due to the Company repaying $9.2 million of borrowed
funds, offset by deposit inflows of $4.4 million during the period ended
June 30, 1999. The repayment of borrowed funds that has occurred is
primarily a factor of the many alternative investment vehicles that are now
available to businesses and consumers in our expanding economy. To counter
the repayment of borrowed funds, however the Company has began to see an
inflow of deposits during the second quarter. Management feels that as long
as depositors have higher yielding options available, such as the stock
market, money market funds and mutual funds that banks will have continued
problems attracting and retaining deposits. The Company has, as an ongoing
objective the growth of core deposits to facilitate loan demand and fuel asset
growth. To do this, Management analyzes rates paid on deposits within its
market area on a weekly basis to ensure the rates offered on similar products
are competitive. In addition to core deposits, the Company has alternative
funding sources through overnight federal funds and advances from the Federal
Home Loan Bank.
Results of Operations
Net income was $4,031,000 for the first six months of 1999 compared to
$3,640,000 for the same period in 1998. Earnings per share for the six
months ended June 30, 1999 and 1998 were $.86 and $.74 per share respec-
tively. Dividends were $.30 per share in the first six months of 1999
and $.20 per share for the first six months in 1998.
For the three months ended June 30, 1999, net income was $2,001,000 or $.43
per share with dividends paid of $.15 per share. This compares with net income
of $1,923,000 or $.39 per share and dividends of $.11 per share for the same
quarter ended June 30, 1998. All per share numbers have been adjusted for
the issuance of 981,837 shares for the merger of Chippewa Valley Bancshares.
Total interest and fee income for the first six months decreased $234
thousand, or 1.2%, compared to the same period in 1998. This decrease is
partially related to approximately $160 thousand of fees generated in the
second quarter of 1998 for mortgage loans sold into the secondary market to
FHLMC, which was not the case for the six months ended June 30, 1999.
Further, the rates earned on these assets have been driven down due to the 75
basis point reduction in the prime lending rate, that occurred during the
fourth quarter of 1998. Despite increased loan volume the rate reduction has
restricted the Company's ability to increase interest income on loans due to
competitive pressures to keep rates down in our market area.
Total earning assets were $493.8 million and $481.7 million at June 30, 1999
and June 30, 1998. This increase in earning assets is due to the continued
strong loan demand, as the loan portfolio increased $30.9 million, or 10.0%
from $310.0 million at June 30, 1998 to $340.9 million at June 30, 1999.
The weighted average interest earned on these assets has decreased from
7.95% at June 30, 1998 to 7.47% at June 30, 1999.
Total interest bearing liabilities at June 30, 1999 and June 30, 1998 were
$405.6 million and $389.7 million respectively. The primary reason for this
increase is due to a $23.2 million increase in deposits offset by a reduction
of $7.3 million in other borrowed funds. The weighted interest rate paid for
these liabilities has decreased from 4.26% at June 30, 1998 to 3.83% at
June 30, 1999.
The net effect of the changes in interest earning assets and interest paying
liabilities, combined with the repricing that has occurred since June 30, 1998
caused an increase in net interest income of $173 thousand, or 1.6%, for the
six months ended June 30, 1999.
The provision for loan losses for the first six months of 1999 was $108
thousand compared to $120 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 six months ended June 30, 1999.
This ratio being 1.47%, is considered adequate and sufficient given the
makeup of the loan portfolio, which considers past due loans and charge-off
and recovery history, as well as general economic conditions.
Total other expenses decreased by $191 thousand for the six months ended
June 30, 1999 compared with the same period in 1998. Salaries and Employee
Benefits decreased by $91 thousand, or 2.4%, to $3,638,000 for the period ended
June 30, 1999 compared to $3,729,000 for the same period in 1998. This
decrease is primarily due to the Company's integration of subsidiary
benefits. During 1999, Wayne added a 401(k) feature to its profit sharing
plan, thus reducing retirement benefits, as prior to the 401(k), the profit
sharing plan was non-contributory, and was funded solely by the Company. In
addiiton to the changes made by Wayne, Chippewa terminated its defined
benefit pension plan and adopted the Company's ESOP plan. These changes were
made to align the 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
attritution. These reductions have been offset by an increase in insurance
expense due to an increase in medical related claims as compared to this same
period in 1998. Occupancy and Equipment expense increased by $38 thousand, or
4.2% over the comparable period in 1998, due to increased expense relating to
maintenance of the facilities and equipment. Other non-interest expenses
decreased $138 thousand, or 5.3%, for the first six months of 1999 as compared
to the same period in 1998. The primary reason for this decrease is due to
the cost reduction efforts made during 1998 that have been realized during
the first six 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 hard-
ware 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 com-
pleted 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
service 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 have also undergone 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 and results will be finalized in the near future. However, as
new developments or concerns arise the Company will continue its testing to
insure compliance with Y2K issues. 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 disrup-
tion to the Company's operations. A contingency plan has been approved by the
Board of Directors and Senior Management, and has been updated to comply with
the guidelines and timeframes established by the Federal Financial Insti-
tutions Examination Council. As of June 30, 1999, the Company has began testing
its contingency plan to ensure the plan is functional and complete, and based
on these test results the Company may modify the plan, should the need arise,
in the event of any unforseen circumstances.
In addition to the testing related to computer applications the Company has also
taken actions relating to liquidity needs that may arise as a result of the Y2K
issue. The Company has pledged $15.0 million of securities to the Federal
Reserve as collateral against potential borrowing needs from the "discount
window," should the need arise. Further, the Company has in its investment
portfolio, $9.3 million of securities that are subject to call during the
third and fourth quarters of 1999.
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 purchased 245,533 shares of
common stock during the six months ended June 30, 1999, for a total cost of
$8.47 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 June 30, 1999, the Company had a "gap"
position of -10.0% 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 30%, 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 which would
significantly change the ratio of rate sensitive assets to rate sensitive
liabilities for the given time horizons.
To assist with Asset and Liability Management the Company has purchased and
is using a modeling program to help identify areas of interest rate risk.
This program will allow the Company to perform forecasting, "rate shocks" and
budgeting as well as prepare "gap" and other useful management reports.
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) None
(d) None
ITEM 5 - Other information:
Data Processing Subsidiairy
In June of 1999, the Company submitted an application with the Federal Reserve
Bank of Cleveland, Ohio to form a data processing subsidiary under the name
of MidOhio Data, Incorporated (MID). The proposed subsidiary will allow for
cost reductions in the data processing area as well as improve both internal
and external customer service. The physical location of MID is in Smith-
ville, Ohio which is conveniently located between both Wayne and Chippewa.
Branch Applications
On June 3, 1999, Wayne submitted an application with the Office of the Comp-
troller of the Currency (OCC) to establish a full service banking center in
Millersburg, Ohio. The proposed facility will be the Company's second branch
in Holmes County, and will allow Wayne to extend its services into a growing
market area. On June 10, 1999, Chippewa submitted applications with the Ohio
Division of Banks and the Federal Reserve Bank of Cleveland to relocate the
Clinton, Ohio banking center to Canal Fulton, Ohio. The Canal Fulton loca-
tion allows for convenient customer access as well as an opportunity for
Chippewa to move into a growing market area. These applications signal the
Company's committment to expand its customer base and offer high quality
banking services to new markets. Both of these branches are expected to be
operational by the third or fourth quarter of this year.
Addendum to Change of Control Agreements and Stock Option Agreements
On May 20, 1999, the Company made amendments to the Change of Control and
Stock Option agreeements for certain officers of the Company. The following
addendums modify these agreements as originally written. The Change of Control
agreements were originally adopted on October 7, 1998, and were previously
reported in the Company's 10-Q filing dated September 30, 1998. The Stock
Option agreements were originally adopted on January 6, 1999, and were pre-
viously reported in the Company's 1998 "Notice of Annual Stockholder's
Meeting," and approved by the Company's shareholders on April 22, 1999. To view
the original plans please see the source documents referenced above. The
addendums are as follows:
ADDENDUM TO CHANGE OF CONTROL
AND STOCK OPTION AGREEMENT
This Addendum to Change of Control Agreement and Stock Option Agreement is
entered into as of this 20th day of May, 1999 by and between Wayne Bancorp, Inc.
("the Company") and David L. Christopher (the "Employee").
RECITALS
The Company is a bank holding company as defined in the Bank Holding Company Act
of 1956 and owns 100% of the stock of The Wayne County National Bank and The
Chippewa Valley Bank (collectively the "Subsidiaries").
Employee is an employee of the Company and/or the Subsidiaries.
Employee and the Company are parties to a certain change of control agreement
dated October 7, 1998 (the "Change of Control Agreement") that grants certain
rights to the Employee in the event of a "change of control" as defined in
the Change of Control Agreement.
Employee and the Company also are parties to a certain stock option agreement
dated as of January 6, 1999 (the "Stock Option Agreement") pursuant to which
Employee was granted the option to purchase shares pursuant to the terms and
conditions of the Wayne Bancorp Stock Option Plan (the "Plan") which Plan was
adopted as of January 6, 1999 and was approved by the Companys shareholders
at the annual meeting of the Company on April 22, 1999.
The Company and Employee desire to amend both the Change of Control Agreement
and the Stock Option Agreement as set forth herein so as to give to Employee
the full benefits intended under the Change of Control Agreement prior to the
adoption of the Plan and the execution of the Stock Option Agreement and to
accelerate vesting of the options granted under the Stock Option Agreement
in the event of a "change of control" as defined in the Change of Control
Agreement.
AGREEMENT
Now, therefore, the undersigned, in consideration of the mutual promises set
forth herein and other good and valuable consideration, the receipt of which
is hereby acknowledged, hereby agree as follows:
1. Amendment of Vesting under Stock Option Agreement.
The vesting period for the options granted to Employee set forth on Exhibit B of
the Stock Option Agreement shall be deemed amended by including the following
language as a new sentence at the end of Section 2(a)(i) of the Stock Option
Agreement:
"Notwithstanding the vesting schedule set forth on Exhibit B attached hereto,
all of the options to purchase Shares granted pursuant to this Agreement
shall become immediately vested and exercisable by the Optionee upon a "change
of control" as defined in a certain Change of Control Agreement dated as of
October 7, 1998, between the Optionee and the Company."
2. Gross up in Payments under the Change of Control Agreement.
Section 4.D. of the Change of Control Agreement shall be amended by deleting all
of Section 4.D. after the first sentence. In addition, a new Section 4.E.
shall be added to the Change of Control Agreement as follows:
"E. In the event that the Executive becomes entitled to the benefits or pay-
ments set forth under this Section 4 or other benefits whether by reason of
the accelerated vesting of stock options under a certain stock option agree-
ment entered into between the Executive and the Company dated January 6, 1999
(the "Stock Option Agreement"), or otherwise (together, the "Total
Benefits"), and in the event that any of the Total Benefits will be subject
to the Excise Tax as set forth in Section 280G of the Code (herein the
"Excise Tax"), the Company shall pay to the Executive an additional amount
(the "Gross-Up Payment(s)") on a monthly basis in addition to the amounts set
forth in Section 4.D. hereof, such that the net amount retained by the
Executive, after deduction of any Excise Tax on the Total Benefits and any
federal, state and local income tax, Excise Taxes and FICA and Medicare with-
holding taxes upon the payment provided for by this Section 4, shall be equal
to the Total Benefits.
For purposes of determining whether any of the Total Benefits will be subject to
the Excise Tax and the amount of such Excise Tax, (i) any other payments or
benefits received or to be received by the Executive in connection with a
Change in Control or the Executives termination of employment (whether pur-
suant to the terms of this Agreement or any other agreement, the Stock Option
Agreement or other plan or arrangement with the Company, any Person whose
actions result in a Change in Control or any Person affiliated with the
Company or such Person) shall be treated as "parachute payments" within the
meaning of Section 280G(b)(2) of the code, and all "excess parachute
payments" within the meaning of Section 280G(b)(1) shall be treated as sub-
ject to the Excise Tax, unless in the opinion of tax counsel ("Tax Counsel")
selected by the Companys independent auditors and acceptable to the
Executive, such other payments or benefits (in whole or in part) do not
constitute parachute payments, or such excess parachute payments (in whole
or in part) represent reasonable compensation for services actually rendered
within the meaning of Section 280G(b)(4) of the Code in excess(as defined in
Section 280G(b)(3) of the Code), or are otherwise not subject to the Excise
Tax, (ii) the amount of the Total Benefits which shall be treated as subject
to the Excise Tax shall be equal to the lesser of (A) the total amount of the
Total Benefits reduced by the amount of such Total Benefits that in the
opinion of Tax Counsel are not parachute payments, or (B) the amount of
excess parachute payments within the meaning of Section 280G(b)(1) (after
applying clause (i), above), and (iii) the value of any noncash benefits or
any deferred payment or benefit shall be determined by the Companys indepen-
dent auditors in accordance with the principles of sections 280G(d)(3) and
(4) of the Code. For purposes of determining the amount of the Gross-Up
Payments, the Executive shall be deemed to pay federal income taxes at the
highest marginal rate of federal income taxation in the calendar years in
which the Gross-Up Payments are to be made and state and local income taxes
at the highest marginal rate of taxation in the state and locality of the
Executive's residence on the date of termination of employment, net of the
reduction in federal income taxes which could be obtained from deduction of
such state and local taxes (calculated by assuming that any reduction under
Section 68 of the Code in the amount of itemized deductions allowable to the
Executive applies first to reduce the amount of such state and local income
taxes that would otherwise be deductible by the Executive).
In the event that the Excise Tax is subsequently determined to be less than the
amount taken in account hereunder at the time of termination of the Executives
employment, the Executive shall repay to the Company, at the time that the
amount of such reduction in Excise Tax is finally determined, the portion of
the Gross-Up Payments attributable to such reduction (plus that portion of
the Gross-Up Payments attributable to the Excise Tax, federal, state and
local income taxes and FICA and Medicare withholding taxes imposed on the
Gross-Up Payments being repaid by the Executive to the extent that such
repayment results in a reduction in Excise Tax, FICA and Medicare withholding
taxes and/or a federal, state or local income tax deduction) plus interest on
the amount of such repayment the rate provided in Section 1274(b)(2)(B) of
the Code. In the event hereunder at the time of the termination of the
Executives employment (including by reason of any payment the existence or
amount of which cannot be determined at the time of the Gross-Up
Payments), the Company shall make an additional Gross-Up Payment to the
Executive in respect of such excess (plus any interest, penalties or additions
payable by the Executive with respect to such excess) at the time that the
amount of such excess if finally determined."
3. Otherwise Unmodified.
Except as specifically set forth herein, the provisions of the Stock Option
Agreement and the Change of Control Agreement shall remain unmodified and in
full force and effect.
IN WITNESS WHEREOF, the undersigned have set their hands as of the day first
written above.
ATTEST (as to Both Signatures): WAYNE BANCORP, INC.
____________________________ By: _________________________________
Name: _______________________________
Title:_______________________________
____________________________ By: _________________________________
Name: _______________________________
Title: ______________________________
WITNESS:
____________________________ ___________________________________
("Employee")
ADDENDUM TO CHANGE OF CONTROL
AND STOCK OPTION AGREEMENT
This Addendum to Change of Control Agreement and Stock Option Agreement is
entered into as of this 20th day of May, 1999 by and between Wayne Bancorp, Inc.
("the Company") and David P. Boyle (the "Employee").
RECITALS
The Company is a bank holding company as defined in the Bank Holding Company Act
of 1956 and owns 100% of the stock of The Wayne County National Bank and The
Chippewa Valley Bank (collectively the "Subsidiaries").
Employee is an employee of the Company and/or the Subsidiaries.
Employee and the Company are parties to a certain change of control agreement
dated October 7, 1998 (the "Change of Control Agreement") that grants certain
rights to the Employee in the event of a "change of control" as defined in the
Change of Control Agreement.
Employee and the Company also are parties to a certain stock option agreement
dated as of January 6, 1999 (the "Stock Option Agreement") pursuant to which
Employee was granted the option to purchase shares pursuant to the terms and
conditions of the Wayne Bancorp Stock Option Plan (the "Plan") which Plan was
adopted as of January 6, 1999 and was approved by the Companys shareholders
at the annual meeting of the Company on April 22, 1999.
The Company and Employee desire to amend both the Change of Control Agreement
and the Stock Option Agreement as set forth herein so as to give to Employee
the full benefits intended under the Change of Control Agreement prior to the
adoption of the Plan and the execution of the Stock Option Agreement and to
accelerate vesting of the options granted under the Stock Option Agreement in
the event of a "change of control" as defined in the Change of Control
Agreement.
AGREEMENT
Now, therefore, the undersigned, in consideration of the mutual promises set
forth herein and other good and valuable consideration, the receipt of which
is hereby acknowledged, hereby agree as follows:
1. Amendment of Vesting under Stock Option Agreement.
The vesting period for the options granted to Employee set forth on Exhibit B of
the Stock Option Agreement shall be deemed amended by including the following
language as a new sentence at the end of Section 2(a)(i) of the Stock Option
Agreement:
"Notwithstanding the vesting schedule set forth on Exhibit B attached hereto,
all of the options to purchase Shares granted pursuant to this Agreement
shall become immediately vested and exercisable by the Optionee upon a
"change of control" as defined in a certain Change of Control Agreement
dated as of October 7, 1998, between the Optionee and the Company."
2. Gross up in Payments under the Change of Control Agreement.
Section 4.D. of the Change of Control Agreement shall be amended by deleting all
of Section 4.D. after the first sentence. In addition, a new Section 4.E.
shall be added to the Change of Control Agreement as follows:
"E. In the event that the Executive becomes entitled to the benefits or
payments set forth under this Section 4 or other benefits whether by reason
of the accelerated vesting of stock options under a certain stock option
agreement entered into between the Executive and the Company dated January 6,
1999 (the "Stock Option Agreement"), or otherwise (together, the "Total
Benefits"), and in the event that any of the Total Benefits will be subject
to the Excise Tax as set forth in Section 280G of the Code (herein the
"Excise Tax"), the Company shall pay to the Executive an additional amount
(the "Gross-Up Payment(s)") on a monthly basis in addition to the amounts
set forth in Section 4.D. hereof, such that the net amount retained by the
Executive, after deduction of any Excise Tax on the Total Benefits and any
federal, state and local income tax, Excise Taxes and FICA and Medicare with-
holding taxes upon the payment provided for by this Section 4, shall be equal
to the Total Benefits.
For purposes of determining whether any of the Total Benefits will be subject to
the Excise Tax and the amount of such Excise Tax, (i) any other payments or
benefits received or to be received by the Executive in connection with a
Change in Control or the Executives termination of employment (whether pur-
suant to the terms of this Agreement or any other agreement, the Stock Option
Agreement or other plan or arrangement with the Company, any Person whose
actions result in a Change in Control or any Person affiliated with the
Company or such Person) shall be treated as "parachute payments" within the
meaning of Section 280G(b)(2) of the code, and all "excess parachute
payments" within the meaning of Section 280G(b)(1) shall be treated as sub-
ject to the Excise Tax, unless in the opinion of tax counsel ("Tax Counsel")
selected by the Companys independent auditors and acceptable to the
Executive, such other payments or benefits (in whole or in part) do not
constitute parachute payments, or such excess parachute payments (in whole or
in part) represent reasonable compensation for services actually rendered
within the meaning of Section 280G(b)(4) of the Code in excess(as defined in
Section 280G(b)(3) of the Code), or are otherwise not subject to the Excise
Tax, (ii) the amount of the Total Benefits which shall be treated as subject to
the Excise Tax shall be equal to the lesser of (A) the total amount of the Total
Benefits reduced by the amount of such Total Benefits that in the opinion of Tax
Counsel are not parachute payments, or (B) the amount of excess parachute
payments within the meaning of Section 280G(b)(1) (after applying clause (i),
above), and (iii) the value of any noncash benefits or any deferred payment or
benefit shall be determined by the Companys independent auditors in accordance
with the principles of sections 280G(d)(3) and (4) of the Code. For purposes of
determining the amount of the Gross-Up Payments, the Executive shall be deemed
to pay federal income taxes at the highest marginal rate of federal income
taxation in the calendar years in which the Gross-Up Payments are to be made
and state and local income taxes at the highest marginal rate of taxation in
the state and locality of the Executive's residence on the date of term-
ination of employment, net of the reduction in federal income taxes which
could be obtained from deduction of such state and local taxes (calculated
by assuming that any reduction under Section 68 of the Code in the amount of
itemized deductions allowable to the Executive applies first to reduce the
amount of such state and local income taxes that would otherwise be
deductible by the Executive).
In the event that the Excise Tax is subsequently determined to be less than the
amount taken in account hereunder at the time of termination of the Executives
employment, the Executive shall repay to the Company, at the time that the
amount of such reduction in Excise Tax is finally determined, the portion of
the Gross-Up Payments attributable to such reduction (plus that portion of
the Gross-Up Payments attributable to the Excise Tax, federal, state and
local income taxes and FICA and Medicare withholding taxes imposed on the
Gross-Up Payments being repaid by the Executive to the extent that such
repayment results in a reduction in Excise Tax, FICA and Medicare withholding
taxes and/or a federal, state or local income tax deduction) plus interest on
the amount of such repayment the rate provided in Section 1274(b)(2)(B) of
the Code. In the event hereunder at the time of the termination of the
Executives employment (including by reason of any payment the existence or
amount of which cannot be determined at the time of the Gross-Up Payments),
the Company shall make an additional Gross-Up Payment to the Executive in
respect of such excess (plus any interest, penalties or additions payable by
the Executive with respect to such excess) at the time that the amount
of such excess if finally determined."
3. Otherwise Unmodified.
Except as specifically set forth herein, the provisions of the Stock Option
Agreement and the Change of Control Agreement shall remain unmodified and in
full force and effect.
IN WITNESS WHEREOF, the undersigned have set their hands as of the day first
written above.
ATTEST (as to Both Signatures): WAYNE BANCORP, INC.
__________________________ By: ______________________________
Name: _____________________________
Title: ____________________________
__________________________ By: _______________________________
Name: _____________________________
Title: ____________________________
WITNESS:
__________________________ ___________________________________
("Employee")
ADDENDUM TO CHANGE OF CONTROL
AND STOCK OPTION AGREEMENT
This Addendum to Change of Control Agreement and Stock Option Agreement is
entered into as of this 20th day of May, 1999 by and between Wayne Bancorp,
Inc. ("the Company") and F. Bill Damron (the "Employee").
RECITALS
The Company is a bank holding company as defined in the Bank Holding Company Act
of 1956 and owns 100% of the stock of The Wayne County National Bank and The
Chippewa Valley Bank (collectively the "Subsidiaries").
Employee is an employee of the Company and/or the Subsidiaries.
Employee and the Company are parties to a certain change of control agreement
dated October 7, 1998 (the "Change of Control Agreement") that grants certain
rights to the Employee in the event of a "change of control" as defined in the
Change of Control Agreement.
Employee and the Company also are parties to a certain stock option agreement
dated as of January 6, 1999 (the "Stock Option Agreement") pursuant to which
Employee was granted the option to purchase shares pursuant to the terms and
conditions of the Wayne Bancorp Stock Option Plan (the "Plan") which Plan was
adopted as of January 6, 1999 and was approved by the Companys shareholders
at the annual meeting of the Company on April 22, 1999.
The Company and Employee desire to amend both the Change of Control Agreement
and the Stock Option Agreement as set forth herein so as to give to Employee
the full benefits intended under the Change of Control Agreement prior to the
adoption of the Plan and the execution of the Stock Option Agreement and to
accelerate vesting of the options granted under the Stock Option Agreement in
the event of a "change of control" as defined in the Change of Control
Agreement.
AGREEMENT
Now, therefore, the undersigned, in consideration of the mutual promises set
forth herein and other good and valuable consideration, the receipt of which
is hereby acknowledged, hereby agree as follows:
1. Amendment of Vesting under Stock Option Agreement.
The vesting period for the options granted to Employee set forth on Exhibit B of
the Stock Option Agreement shall be deemed amended by including the following
language as a new sentence at the end of Section 2(a)(i) of the Stock Option
Agreement:
"Notwithstanding the vesting schedule set forth on Exhibit B attached hereto,
all of the options to purchase Shares granted pursuant to this Agreement shall
become immediately vested and exercisable by the Optionee upon a "change of
control" as defined in a certain Change of Control Agreement dated as of
October 7, 1998, between the Optionee and the Company."
2. Gross up in Payments under the Change of Control Agreement.
Section 4.D. of the Change of Control Agreement shall be amended by deleting all
of Section 4.D. after the first sentence. In addition, a new Section 4.E. shall
be added to the Change of Control Agreement as follows:
"E. In the event that the Executive becomes entitled to the benefits or
payments set forth under this Section 4 or other benefits whether by reason
of the accelerated vesting of stock options under a certain stock option
agreement entered into between the Executive and the Company dated January 6,
1999 (the "Stock Option Agreement"), or otherwise (together, the "Total
Benefits"), and in the event that any of the Total Benefits will be subject
to the Excise Tax as set forth in Section 280G of the Code (herein the
"Excise Tax"), the Company shall pay to the Executive an additional amount
(the "Gross-Up Payment(s)") on a monthly basis in addition to the amounts
set forth in Section 4.D. hereof, such that the net amount retained by the
Executive, after deduction of any Excise Tax on the Total Benefits and any
federal, state and local income tax, Excise Taxes and FICA and Medicare with-
holding taxes upon the payment provided for by this Section 4, shall be equal
to the Total Benefits.
For purposes of determining whether any of the Total Benefits will be subject to
the Excise Tax and the amount of such Excise Tax, (i) any other payments or
benefits received or to be received by the Executive in connection with a
Change in Control or the Executives termination of employment (whether
pursuant to the terms of this Agreement or any other agreement, the Stock
Option Agreement or other plan or arrangement with the Company, any Person
whose actions result in a Change in Control or any Person affiliated with the
Company or such Person) shall be treated as "parachute payments" within the
meaning of Section 280G(b)(2) of the code, and all "excess parachute
payments" within the meaning of Section 280G(b)(1) shall be treated as
subject to the Excise Tax, unless in the opinion of tax counsel ("Tax
Counsel") selected by the Companys independent auditors and acceptable to the
Executive, such other payments or benefits (in whole or in part) do not
constitute parachute payments, or such excess parachute payments (in whole
or in part) represent reasonable compensation for services actually rendered
within the meaning of Section 280G(b)(4) of the Code in excess(as defined in
Section 280G(b)(3) of the Code), or are otherwise not subject to the
Excise Tax, (ii) the amount of the Total Benefits which shall be treated as
subject to the Excise Tax shall be equal to the lesser of (A) the total
amount of the Total Benefits reduced by the amount of such Total Benefits
that in the opinion of Tax Counsel are not parachute payments, or (B) the
amount of excess parachute payments within the meaning of Section 280G(b)(1)
(after applying clause (i), above), and (iii) the value of any noncash
benefits or any deferred payment or benefit shall be determined by the
Companys independent auditors in accordance with the principles of sections
280G(d)(3) and (4) of the Code. For purposes of determining the amount of
the Gross-Up Payments, the Executive shall be deemed to pay federal income
taxes at the highest marginal rate of federal income taxation in the calendar
years in which the Gross-Up Payments are to be made and state and local
income taxes at the highest marginal rate of taxation in the state and
locality of the Executive's residence on the date of termination of employ-
ment, net of the reduction in federal income taxes which could be obtained
from deduction of such state and local taxes (calculated by assuming that any
reduction under Section 68 of the Code in the amount of itemized deductions
allowable to the Executive applies first to reduce the amount of such state
and local income taxes that would otherwise be deductible by the Executive).
In the event that the Excise Tax is subsequently determined to be less than the
amount taken in account hereunder at the time of termination of the Executives
employment, the Executive shall repay to the Company, at the time that the
amount of such reduction in Excise Tax is finally determined, the portion of
the Gross-Up Payments attributable to such reduction (plus that portion of
the Gross-Up Payments attributable to the Excise Tax, federal, state and
local income taxes and FICA and Medicare withholding taxes imposed on the
Gross-Up Payments being repaid by the Executive to the extent that such
repayment results in a reduction in Excise Tax, FICA and Medicare withholding
taxes and/or a federal, state or local income tax deduction) plus interest on
the amount of such repayment the rate provided in Section 1274(b)(2)(B) of
the Code. In the event hereunder at the time of the termination of the
Executives employment (including by reason of any payment the existence or
amount of which cannot be determined at the time of the Gross-Up Payments),
the Company shall make an additional Gross-Up Payment to the Executive in
respect of such excess (plus any interest, penalties or additions payable by
the Executive with respect to such excess) at the time that the amount
of such excess if finally determined."
3. Otherwise Unmodified.
Except as specifically set forth herein, the provisions of the Stock Option
Agreement and the Change of Control Agreement shall remain unmodified and in
full force and effect.
IN WITNESS WHEREOF, the undersigned have set their hands as of the day first
written above.
ATTEST (as to Both Signatures): WAYNE BANCORP, INC.
_____________________________ By: _______________________________
Name: _____________________________
Title: ____________________________
_____________________________ By: _______________________________
Name: _____________________________
Title: ____________________________
WITNESS:
_____________________________ ___________________________________
("Employee")
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 ____August _11,_1999____ ____________________________
David L. Christopher,
Chairman & CEO
Date ____August _11,_1999____ ____________________________
David P. Boyle, CPA
Treasurer
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<NAME> WAYNE BANCORP, INC. - OHIO
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