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 September 30, 1999
WAYNE BANCORP, INC
(Exact name of registrant as specified in its charter)
OHIO 34-1516142
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
112 West Liberty Street
P.O. Box 757
Wooster, Ohio 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 October 31, 1999, the latest practicable date: 4,598,950
INDEX
WAYNE BANCORP, INC.
FORM 10-Q
For the Quarter Ended September 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 - 7
Item II. Management's discussion and analysis of financial
condition and results of operations........... 7 - 13
Item III. Quantitative and Qualitative Disclosures about
Market Risk.................................. 13 - 14
PART II. OTHER INFORMATION.................................... 14
SIGNATURES...................................................... 15
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(Unaudited) September 30, December 31,
(In thousands of dollars) 1999 1998
------------------------
ASSETS
Cash and Due From Banks............................. $20,313 $20,470
Federal Funds Sold.................................. 11,190 7,340
------------------------
Total Cash and Cash Equivalents.. 31,503 27,810
Securities Available-for-Sale ..................... 144,410 175,007
Loans ............................................ 349,674 324,199
Allowance for Loan Losses........ (5,207) (4,916)
------------------------
Net Loans........................ 344,467 319,283
Premises and Equipment.............................. 9,207 8,591
Accrued interest receivable and other assets........ 8,609 7,986
------------------------
TOTAL ASSETS........................................ $538,196 $538,677
========================
LIABILITIES
Deposits
Interest Bearing............................... $383,776 $369,328
Non-Interest Bearing........................... 64,355 65,815
------------------------
Total Deposits................... 448,131 435,143
Securities Sold Under Agreements to Repurchase...... 24,305 36,989
Other borrowings.................................... 9,066 2,558
ESOP Loan........................................... 400 600
Other Liabilities................................... 3,721 4,320
------------------------
Total Liabilities................ 485,623 479,610
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 4,598,950 in 1999 and
4,866,483 in 1998
Paid In Capital..................................... 13,271 13,310
Retained Earnings................................... 45,867 41,989
Unearned ESOP shares................................ (250) (400)
Treasury Stock...................................... (10,985) (2,308)
Accumulated other comprehensive income.............. (247) 1,559
------------------------
Total Shareholders' Equity....... 52,573 59,067
------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.......... $538,196 $538,677
========================
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited) Three Months Ended Nine Months Ended
(In thousands of dollars, September 30, September 30,
except per share data) 1999 1998 1999 1998
-------------------------------------------
INTEREST INCOME:
Interest and Fees on Loans.......... $7,308 $6,964 $21,239 $21,295
Interest and Dividends on Securities:
Taxable........................ 1,705 1,911 5,501 5,394
Nontaxable..................... 405 358 1,246 1,107
Other Interest Income............... 46 143 157 493
--------------------------------------------
Total Interest Income.......... 9,464 9,376 28,143 28,289
INTEREST EXPENSE:
Interest on Deposits................ 3,641 3,701 10,680 11,072
Interest on Repurchase Agreements... 249 406 882 1,188
Interest on Other Borrowed Funds.... 132 24 223 59
Interest on ESOP Loan............... 9 23 27 23
--------------------------------------------
Total Interest Expense......... 4,031 4,154 11,812 12,342
NET INTEREST INCOME................. 5,433 5,222 16,331 15,947
Provision for Loan Losses........... 27 60 135 180
--------------------------------------------
NET INTEREST INCOME AFTER PROVISION
FOR LOAN LOSSES........ 5,406 5,162 16,196 15,767
OTHER INCOME:
Service Charges on Deposits.......... 450 446 1,298 1,285
Income from Fiduciary Activities..... 345 300 1,035 900
Other Non-Interest Income............ 184 142 570 457
Gain on Security Sales............... 2 8 51 8
--------------------------------------------
Total Other Income............. 981 896 2,954 2,650
OTHER EXPENSES:
Salaries and Employee Benefits...... 2,003 1,825 5,641 5,554
Occupancy and Equipment............. 447 467 1,383 1,365
Other Non-Interest Expenses......... 1,212 1,331 3,685 3,942
-------------------------------------------
Total Other Expenses.......... 3,662 3,623 10,709 10,861
INCOME BEFORE INCOME TAX EXPENSE.... 2,725 2,435 8,441 7,556
INCOME TAX EXPENSE.................. 779 625 2,464 2,106
--------------------------------------------
NET INCOME.......................... 1,946 1,810 5,977 5,450
============================================
Other Comprehensive Income,
net of tax
Unrealized gains (losses) on
available-for-sale securities
arising during the period....... (146) 1,197 (1,772) 1,418
Reclassification adjustment for
amounts realized on securities
sales included in net income.... (1) (5) (34) (5)
-------------------------------------------
COMPREHENSIVE INCOME................ $1,799 $3,002 $4,171 $6,863
============================================
NET INCOME PER SHARE - BASIC $0.42 $0.37 $1.28 $1.11
NET INCOME PER SHARE - DILUTED $0.42 $0.37 $1.28 $1.11
DIVIDENDS PER SHARE $0.15 $0.13 $0.45 $0.33
See notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
(Unaudited) September 30,
(In thousands of dollars) 1999 1998
- ----------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income.................................... $5,977 $5,450
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses.............. 135 180
Depreciation and amortization.......... 987 995
Amortization of security premiums and
discounts............................ (293) (151)
Decrease (Increase) in interest
receivable........................... (169) (331)
Decrease in interest payable........... 41 209
Other, (net)........................... (483) (1,424)
------------------------
Net cash provided by operating activities.... 6,195 4,928
INVESTING ACTIVITIES
Purchase of securities available-for-sale.... (22,284) (50,634)
Proceeds from matured securities
available-for-sale.......................... 40,683 36,548
Proceeds from sale of securities
available-for-sale.......................... 9,754 2,307
Net (increase) in loans and leases........... (25,319) (4,151)
Proceeds from the sale of loans.............. 11,915
Purchase of premises and equipment........... (1,366) (634)
------------------------
Net cash provided (used) by investing
activities.................................. 1,468 (4,649)
FINANCING ACTIVITIES
Net increase (decrease) in deposits.......... 12,988 (2,251)
Net (decrease) in repurchase agreements and
other short term borrowings................ (6,176) (1,911)
Cash dividends............................... (2,105) (1,607)
(Increase) in treasury stock................. (8,677) (1,606)
------------------------
Net cash (used) by financing activities...... (3,970) (7,375)
Increase (decrease) in cash and cash
equivalents................................ 3,693 (7,096)
Cash and cash equivalents at beginning of
period..................................... 27,810 31,091
------------------------
Cash and cash equivalents at end of period... $31,503 $23,995
========================
Cash basis payments for federal income taxes.. $2,325 $2,625
Cash basis payments for interest expense...... $11,853 $12,551
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 Incor-
porated (Mid). The financial statements of Wayne include the accounts of its
wholly-owned subsidiary, Wayne National Corporation. All significant inter-
company 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 compre-
hensive 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 become exercisable based on the vesting schedule. The vesting
period is for three years beginning December 15, 1999, however, in the event
of a change of control, the options vest and become fully exercisable
immediately by the officer. 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 nine months ended September 30, 1999
proceeds from the sale of securities available for sale were $9.8 million,
with gross realized gains of $54 thousand and gross realized losses of $3
thousand included in earnings. During the nine months ended September 30,
1998, proceeds from the sale of securities available for sale was $2.3
million, with gross realized gains of $8 thousand included in earnings.
Summary of Amortized Cost and Fair Values of Securities Available-for-sale:
September 30, 1999
Gross Gross
Amortized Unrealized Unrealized Fair
(In thousands of dollars) Cost Gains Losses Value
------------------------------------------------
U.S. Treasury............... $25,268 $81 ($108) $25,241
Federal Agency Obligations.. 38,037 30 (269) 37,798
Federal Agency Pools........ 14,415 40 (77) 14,378
Obligations of states and
political subdivisions.... 36,797 293 (261) 36,829
Corporate Obligations....... 27,574 20 (162) 27,432
Other securities............ 2,694 91 (53) 2,732
------------------------------------------------
$144,785 $555 ($930) $144,410
================================================
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:
September 30, December 31,
1999 1998
--------------------------
Commercial and Agricultural............. $143,370 $129,504
Real Estate loans....................... 144,569 131,820
Installment loans....................... 47,637 48,141
Lease Financing......................... 2,451 2,835
Home Equity loans....................... 11,555 11,252
Credit Card............................. 0 543
Other loans............................. 92 104
--------------------------
Total................ $349,674 $324,199
==========================
4. Employee Stock Ownership Plan:
The Company offers an Employee Stock Ownership Plan (ESOP) for the benefit of
substantially all of its employees. The ESOP has received a favorable deter-
mination 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 pur-
chased 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 September 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 compen-
sation expense equal to the current market price of the shares, and shares
become outstanding for earnings-per-share computations. Dividends on allo-
cated 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 $34 thousand and $112 thousand for
the three and nine months ended September 30, 1999, while compensation
expense was $112 thousand for the three and nine months ended September 30,
1998. The ESOP shares as of of September 30, 1999 and December 31, 1998 were
as follows:
September 30, December 31,
1999 1998
----------------------------
Allocated Shares......... 136,373 136,373
Shares committed to be
released for
allocation.............. 7,956 4,546
Unreleased shares........ 5,681 9,091
---------------------------
Total ESOP shares..... 150,010 150,010
===========================
Fair value of
unreleased shares...... $169,351 $320,458
============================
5. Per Share Data:
Basic per share data is calculated based on 4,629,248 average common shares
for the three months ended September 30, 1999, and 4,657,942 average common
shares for the nine months ended September 30, 1999. The corresponding num-
bers for the same periods in 1998 were 4,888,255 and 4,895,392. 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 September
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:
Forward-Looking Statements
When used in this document, the words or phrases "will likely result,"
"are expected to," " will continue," "is anticipated," " estimated," "projected"
or similar expressions are intended to identify "forward looking statements"
within the meaning of the Private Securities Litigation Reform Act of 1955.
Such statements are subject to certain risks and uncertainties, including
changes in economic conditions in the Company's market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. Factors listed above could affect the Company's
financial performance and could cause the Company's actual results to differ
materially from any statements expressed with respect to future periods.
The Company does not undertake, and specifically disclaims any obligation,
to publicly revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.
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 September 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 $132 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 September 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 9.8% 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 was 16.3% at September 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 September
30, 1999, and December 31, 1998, the ratios were 9.7% 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 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
therefore is subject to the lowest deposit insurance premiums available.
Management is not aware of any matters subsequent to September 30, 1999
that would cause the Company's capital category to change.
Financial Condition
The total assets of the Company decreased by $481 thousand or .09% from
December 31, 1998 to September 30, 1999. This slight decrease in assets
is due to the Company using $8.9 million of assets for the stock repurchase
plan, as well as declines in investments and borrowed funds, offset by increases
in federal funds sold, loans and deposits.
The lending area has experienced growth of $25.5 million through the first
nine months of 1999. This growth is primarily concentrated in the Commercial
and Real Estate areas with increases of $13.9 million and $12.7 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. However,
this past quarter the Company has seen a decline in loans for 1-4 family
residential properties as rates for these types of loans have been rising
over the past 2 or three months. These increases are offset by a $1.4
million decline in the consumer loan area, which includes consumer install-
ment loans, leasing, and credit card receivables. This decline is partially
due to the increased level of consumer debt, as well as strong competition
relating to consumer credit, particularly particularly 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 merchant
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, based on economic indicators, the direction of
the Federal Reserve and general economic conditions. Rate increases, which
signal signs of an inflationary economy, impact rates charged on various loan
types, primarily 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 favor-
able interest rate environment and the loan mix within the balance sheet.
As of September 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 $26.7
million for the first nine months of 1999. This decrease is due to the strong
loan demand that has occurred during the first nine months of the year,
allowing the Company to convert lower yielding federal funds sold and
investments into higher yielding loans. In addition to using these assets
to fund loan growth the Company also repurchased $8.9 million of its own
stock under its stock repurchase program. Further, the Company has
repaid approximately $6.4 million of borrowed funds through September 30, 1999.
Total deposits and borrowed funds increased by $6.6 million for the first
nine months of 1999, as compared to these balances at December 31, 1998.
This increase is primarily due to a $13.0 million inflow of deposits offset by
the repayment of $6.4 million of borrowed funds for the period ended September
30, 1999. This increase in deposits is viewed as a normal part of the business
cycle within the Company's market area as the Company routinely experiences
an increase in deposits during the third and fourth quarters of the year, and
conversely experiences a decline in deposits during the first and second
quarters of the succeeding year. The repayment of borrowed funds that has
occurred is due to a reduction in repurchase agreements. Although the
Company had not expected this repayment to occur, neither does it expect or
anticipate further declines of a similar nature in this area. 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. As a result of this the Company
increased its rates paid on certain deposit types and added a special
term certificate of deposit that has a high competitive annual percentage
yield. In addition to core deposits, the Company has alternative funding
sources through overnight federal funds purchased and advances from the
Federal Home Loan Bank.
Results of Operations
Net income was $5,977,000 for the first nine months of 1999 compared to
$5,450,000 for the same period in 1998. Earnings per share for the nine
months ended September 30, 1999 and 1998 were $1.28 and $.1.11 per share
respectively. Dividends were $.45 per share in the first nine months of
1999 and $.33 per share for the same period in 1998.
For the three months ended September 30, 1999, net income was $1,946,000 or $.42
per share with dividends paid of $.15 per share. This compares with net income
of $1,810,000 or $.37 per share and dividends of $.13 per share for the same
quarter ended September 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 nine months decreased $146
thousand, or .5%, compared to the same period in 1998. This decrease is
primarily 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 nine months ended September 30, 1999.
Despite the reduction in the prime lending rate that occurred during the
fourth quarter of 1998 the Company has been able to compensate for the
reduction in yield by strong loan growth. With the 50 basis point increase
in the prime lending rate that has occurred this year, 25 each in the second
and third quarters of 1999, combined with the loan growth the Company is
expecting increased income from loans during the fourth quarter.
Total earning assets were $505.3 million and $481.8 million at September 30,
1999 and September 30, 1998. This increase in earning assets is due to the
continued strong loan demand, as the loan portfolio increased $33.4 million,
or 10.6% from $316.3 million at September 30, 1998, to $349.7 million at
September 30, 1999. The weighted average interest earned on these assets has
decreased from 7.90% at September 30, 1998, to 7.49% at September 30, 1999.
The decline in the weighted average interest earned is due to the 75 basis
point reduction in the prime lending rate that occurred during the fourth
quarter of 1998, combined with a reduction in rates in the Residential Real
Estate markets which fueled refinancing in the these types of loans.
Total interest bearing liabilities at September 30, 1999, and September 30,
1998, were $417.5 million and $389.4 million respectively. The primary
reason for this increase is due to a $40.5 million increase in deposits
offset by a reduction of $3.7 million in other borrowed funds. The weighted
average interest rate paid on these liabilities has decreased from 4.24% at
September 30, 1998 to 3.85% at September 30, 1999. The reduction in the
weighted interest paid on these liabilities is due to managements response to
the rate reductions on the asset side of the balance sheet, in order to keep
the intererst rate spread on interest earned and interest paid at a fairly
constant level.
The net effect of the changes in interest earning assets and interest paying
liabilities, combined with the repricing that has occurred since September 30,
1998 caused an increase in net interest income of $384 thousand, or 2.4%, for
the nine months ended September 30, 1999.
The provision for loan losses for the first nine months of 1999 was $135
thousand compared to $180 thousand for the same period in 1998. This de-
crease is due to a large recovery received by Chippewa in the third quarter of
1999, allowing Chippewa to reverse its 1999 year to date provision. As of
September 30, 1999, the allowance for loan losses was 1.49% of total net
loans and leases, which is within managements expectations and is adequate
and sufficient given the make up 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 $152 thousand for the nine months ended
September 30, 1999 compared with the same period in 1998. Salaries and
Employee Benefits increased by $87 thousand, or 1.6%, to $5,641,000 for the
period ended September 30, 1999 compared to $5,554,000 for the same period in
1998. This increase in salaries and employee benefits is due to an increase
in health insurance costs offset by reductions in retirement benefits. The
increase in health insurance is due to an overall increase in medical related
claims as compared to the same period last year. The offsetting reduction in
retirement benefits is due to the Company's integration of subsidiary bene-
fits. 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 mar-
keting functions of the Company, and through employee attrition. Occupancy
and Equipment expense increased by $18 thousand, or 1.3% over the comparable
period in 1998, due to increased expense relating to maintenance of the
facilities and equipment. Other non-interest expenses decreased $257 thou-
sand, or 6.5%, for the nine months ended September 30, 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 through the
nine months ended September 30, 1999. During the fourth quarter of 1999 the
Company may experience an increase in total other expenses due to the opening
of two new branches and a data processing subsidiary. Increases may be seen
in compensation due to staffing these new sites, as well as in occupancy and
equipment expense due to the purchase and installation of new equipment. In
addition increases may occur in other non-interest expenses due to branch
promotions and other expenses related to opening these sites. In fact, on
October 4, 1999, Chippewa opened its new Canal Fulton branch, while on Octo-
ber 6, 1999, the data processing company, MidOhio Data, Inc., officially
opened for operations. Wayne's new Millersburg branch is expected to open
later in the fourth quarter as expected.
Year 2000 Issue (Y2K)
The Company's bank subsidiaries, Wayne and Chippewa are almost entirely
dependent on computer systems which process transactions relating to lending
and deposit functions. Wayne employed the services of a nationally recog-
nized data processing bureau specializing in data processing for financial
institutions,during the third quarter, however, going forward Wayne will
employ the services of the Company's new data processing subsidiary, 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 com-p
leted 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 dis-
ruption 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, (FFIEC). The Company has began testing its contingency plan to
ensure the plan is functional and complete. The Company may modify the
contingency plan if the need should arise based on the testing results.
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, $6.8 million of securities that are subject to call during the
fourth quarter of 1999 with an additional $12.6 million due to mature.
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
over $250 thousand related to the Y2K issue, and at this time no significant
additional costs are planned. However, additional unforseen expenses may be
incurred by the Company in connection with Y2K should circumstances warrant
such expense.
Repurchase of Stock
Under a Stock Repurchase program approved by the Board of Directors, and
announced in February of 1999, the Company has purchased 260,533 shares of
its common stock, thus reaching its goal of 250,000 shares. 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. These shares
were purchased at a total cost of $8.97 million.
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 September 30, 1999, the Company had a
"gap" position of -6.7% 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
24%, 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:
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 ____November _11,_1999____ ____________________________
David L. Christopher,
Chairman & CEO
Date ____November _11,_1999____ ____________________________
David P. Boyle, CPA
Treasurer
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