UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(Mark One)
___X___ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
_______ TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from .............................
............to........................
Commission File No. 014612
WAYNE BANCORP, INC.
(Exact name of registrant as specified in its charter)
OHIO 34-1516142
(State or other jurisdiction of(IRS Employer Identification Number)
incorporation or organization)
112 West Liberty Street
PO Box 757
Wooster, Ohio 44691 44691
(Address of principal executive offices)(Zip Code)
Registrant's telephone number, including area code(330) 264-1222
Securities registered pursuant to section 12(b) ofNone
Securities registered pursuant to section 12(g) of the Act:
Common Stock, $1.00 Stated Value Per Share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or fur such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES__X___ NO______
Indicate by check mark if disclosures of delinquent filers in response to item
405 of Regulation S-K is not contained herein and will not be contained, to
the best of the Registrant's knowledge in definitive proxy or information
statements incorporated by reference in Part III of this form 10-K or any
amendments to this
Form 10-K.
YES__X___ NO______
The aggregate market value of voting stock held by non-affiliates of the
registrant based on the most recent trade prices of such stock on
March 1, 1999:
Common Stock $1.00 stated value $138,936,978
The number of shares outstanding of the issuer's classes of common stock as
of March 1, 1999:
Common Stock $1.00 stated value 4,770,967
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended December 31,
1998 and portions of the Registrant's Proxy Statement for the Annual
Shareholders Meeting to be held April 22, 1999 are incorporated by reference
into Parts I, II and III.
TABLE OF CONTENTS
WAYNE BANCORP, INC.
FORM 10-K
PART I PAGE
Item 1 Business............................... 3
Item 2 Properties............................. 16
Item 3 Legal Proceedings...................... 16
Item 4 Submission of matters to a vote of secu 16
PART II
Item 5 Market for the Registrant's common stock and
related Shareholder matters....... 16
Item 6 Selected Financial Data................ 16
Item 7 Management discussion and analysis of financial
condition and results of operation 16
Item 7A. Quantitative and qualitative disclosures about
market risk 16
Item 8 Financial statements and supplementary 16
Item 9 Changes in and disagreements with accountants on
accounting and financial disclosur 17
PART III
Item 10 Directors and Executive Officers of the 17
Item 11 Executive Compensation................. 17
Item 12 Security ownership of certain beneficial owners
and management 17
Item 13 Certain relationships and related trans 17
PART IV
Item 14 Exhibits, financial statement schedules and
reports on Form 8-K 17
Exhibit Index.......................... 18
Signatures............................. 19
PART I
ITEM I. BUSINESS
General Development of Business:
Wayne Bancorp, Inc., is a multi-bank holding company, its subsidiaries, Wayne
County National Bank (WCNB) and Chippewa Valley Bank (CVB), collectively
referred to as the Cpmpany conduct general commercial and retail banking
business. Wayne Bancorp, Inc., organized in April, 1986.
The Company offers a wide range of commercial and personal banking services
primarily to its customers in Wayne, Holmes, Medina, Stark and Summit
counties in Ohio. These services include a broad range of loan, deposit and
trust products, retail investments and various miscellaneous services. Loan
products include commercial and commercial real estate loans, a variety of
mortgage and construction loan products, installment loans, home equity lines
of credit, lines for overdraft protection, Visa and Masrer Card lines of
credit and lease financings. Deposit products include interest and
non-interest bearing checking accounts various savings accounts, certifi-
cates of deposit, and IRA's. The Trust Department provides services in the
areas of employee benefits, and personal trusts. Included in retail
investments, is the purchasing of mutual funds and annuities, discount
brokerage and alternative investments. Miscellaneous services include
safe deposit boxes, night depository, United States Savings Bonds,
traveler's checks, money orders and cashiers checks, bank-by-mail service,
money transfers, wire services, utility bill payments and collections and
notary public services. In addition the Company has correspondent
relationships with major banks in Cleveland, Cincinnati and Detroit pursuant
to which the Company received various financial services. The Subsidiaries
account for substantially all of the Company's consolidated assets at
December 31, 1998.
The Company's primary lending area comprises the Ohio counties of Wayne,
Holmes, Medina, Stark and Summit. Loans outside this area are considered for
creditworthy applicants. Lending decisions are made in accordance with
written loan policies designed to maintain loan quality.
Retail lending products are comprised of credit card loans, overdraft lines,
personal lines of credit and installment loans. Credit cards are unsecured
credit accounts, on which the credit limits are determined by analysis of two
criteria, the borrowers debt service and gross income. Overdraft lines of
credit are lines attached to checking accounts to cover overdrafts and/or
allow customers to write themselves a loan. Credit limits are based on a
percentage of gross income and average deposits. Personal lines of credit
include lines secured by junior mortgages (home equity) and Private Banking
lines which are generally secured by junior mortgages but may be unsecured or
secured by other collateral. The lines have a 20 year draw period and may
then be renewed or amortized over ten years. Credit limits are determined by
comparing three criteria, appraised value, debt service and gross income.
Installment loans include both direct and indirect loans. The term can range
from three to 180 months, depending upon the collateral which includes new
and used automobiles, boats and recreational vehicles as well as junior
mortgages and unsecured personal loans. Retail lending underwriting guide-
lines include evaluating the entire credit using the "Five C's of Credit,"
character, capacity, capital, condition and collateral. Credit scoring,
analysis of credit bureau ratings and debt to income ratios are the major
tools used by the lenders in the underwriting process.
The Company offers a wide range of mortgage loan programs, including a
variety of fixed and adjustable rate mortgages ranging from 120 to 360
months. The underwriting guidelines include those similar to consumer loans
and those necessary to meet secondary market guidelines. Residential real
estate decisions focus on loan to value limits, debt to income and mortgage
to income ratios, credit history, and in some cases, whether private mortgage
insurance is obtained.
3
Business credit products include commercial loans and commercial real estate
loans and leases. Commercial loans include lines and letters of credit,
fixed and adjustable rate term loans, demand and time notes. Commercial real
estate loans include fixed and adjustable mortgages. Loans are generally to
owner occupied businesses. The portfolio also includes loans to churches,
rental property, shopping plazas and residential development loans. Loans
to businesses often entail greater risk because the primary source of
repayment is typically dependent upon adequate cash flow. Cash flow of a
business can be subject to adverse conditions in the economy or a specific
industry. Should cash flow fail, the lender looks to the assets of the
business and/or the ability of the co-makers to support the debt. Commercial
lenders consider the "Five C's of Credit," character, capacity, capital,
condition and collateral in making commercial credit decisions
The Company provides both direct and indirect leasing on a limited basis. The
direct leases are for specific equipment and may be open- or closed-end
leases. Indirect leases are established by the same methods as an indrect
consumer auto finance. Each vehicle is amortized individually over a five
year period based on Internal Revenue Code guidelines.
In addition to the underwriting guidelines followed for specific loan types,
the Company has underwriting guidelines common to all loan types. With regard
to collateral, the Company follows supervisory limits set forth in Reg-
ulation H for transactions secured by real estate. Loans in excess of
these guidelines are reported to the Board of Directors on a monthly basis.
Loans not secured by real estate are analyzed on a loan by loan basis, based
on collateral type guidelines as set forth in the loan policy. Appraisal
policies follow and comply with provisions outlined under Title XI of
FIRREA. All appraisals are done by outside independent appraisers. The
Company, as a general rule, gets an appraisal on all real estate trans-
actions even when not required by Title XI. Approval procedures include
authorities approved by the Board of Directors for individual lenders and loan
committees. Retail and residential loans are centrally underwritten by
their respective departments. Business credits can be approved by the
individual commercial lender or taken to the Loan Committee if it exceeds
individual approval limits. The Board of Directors approves aggregate loan
committments in excess of $750 thousand up to the respective banks legal
lending limit. Loans to Directors and Executive Officers are approved by
the Board of Directors.
The Officers Loan Review Committee meets on a monthly basis. The Committee
reviews Bank lending trends, the Past Due Report, the Watch List and various
other reports in order to monitor and maintain credit quality. The Committee
also reviews on a relationship basis, customers on the Bank's Watch List and
credits with aggregate commitments in excess of $300 thousand.
Revenues from loans accounted for 68%, 69%, and 65% of consolidated revenues
in 1998, 1997 and 1996, respectively. Revenues from interest and dividends
on investment securities, federal funds sold and mortgage-backed securities
accounted for 23% of consolidated revenues, for each of the three years in
the period ended December 31, 1998.
The business of the Registrant is not seasonal to any material degree, nor is
it dependent upon a single or small group of customers whose loss would result
in a material adverse effect on the Registrant or its subsidiaries.
Regulation and Supervision
Wayne Bancorp, Inc., is a corporation organized under the laws of the State of
Ohio, the Company is required to file certain reports and periodic information
with the United States Securities and Exchange Commission pursuant to the
Securities Exchange Act of 1934, as amended.
As a bank holding company incorporated and doing business within the State of
Ohio, the Company is subject to regulation and supervision under the Bank
Holding Company Act of 1956, as amended (the "Act"). The Company is required
to file with the Federal Reserve Board on a quarterly basis information
pursuant to the Act. The Federal Reserve Board may conduct examinations
or inspections of the Company and its subsidiaries.
4
The Company is required to obtain prior approval from the Federal Reserve
Board for the acquisition of more than five percent of the voting shares or
substantially all of the assets of any bank or bank holding company. In
addition, the Company is prohibited by the Act, except in certain
situations from acquiring direct or indirect ownership or control of more
than five percent of the voting shares of any company which is not a bank
or bank holding company and from engaging directly or indirectly in
activities other than those of banking, managing or controlling banks or
furnishing services to its subsidiaries. The Company may, however, subject
to the prior approval of the Federal Reserve Board, engage in, or acquire
shares of companies engaged in activities which are deemed by; the Federal
Reserve Board by order or by regulation to be so closely related to banking
or managing and controlling a bank as to be a proper activity.
The Company is a legal entity separate and distinct from its subsidiary Banks.
It is anticipated that a significant portion of the Company's revenues,
including funds available for payment of dividends (if any) and for
operating expenses, will be provided by dividends paid by its Bank
subsidiaries. There are statutory limitations on the amount of dividends
which may be paid to the Company by its subsidiaries.
WCNB, a national bank, is subject to supervision, examination and regulation
by the Comptroller of the Currency, and CVB, a state chartered bank, is
subject to supervision, examination and regulation by the Federal Reserve
Board and the Ohio Division of Financial Institutions. Both WCNB and CVB
are members of the Federal Reserve System and, as such, are subject to the
applicable provisions of the Federal Reserve Act and regulations issued
thereunder.
The Company's deposits are insured by the Federal Deposit Insurance
Corporation. Related to that, the Company is subject to provisions of
the Federal Deposit Insurance Corporation Improvement Act of 1991. This
Act is designed to protect the deposit insurance fund, to improve
regulation and supervision of insured depository institutions and to improve
the reporting information related to financial institutions.
Management is not aware of any; current recommendations by regulatory
authorities which, if they were to be implemented, would have a material
effect on the Company.
Regulatory Capital Requirements
The Company is required by the various regulatory authorities to maintain
certain capital levels. The required capital levels and the Company's
capital position at December 31, 1998 are in the table included in Note 14
to the financial statements.
The Federal Deposit Insurance Corporation sets premiums for deposit
insurance based on the Company's capital levels. In the event the Company's
levels fall below the minimum requirement the premiums for deposit insurance
could rise.
Government Monetary Policy
The earnings of the Company are affected primarily by general economic
conditions, and to a lesser extent by the fiscal and monetary policies of the
federal government and its agencies, particularly the Federal Reserve. Its
policies influence the amount of bank loans and deposits and interest
rates charged and paid thereon, and thus have an effect on the earnings of
the Company's subsidiary Banks.
Competition
The banking and financial services industry in the Company's market is highly
competitive. The Company's market area encompasses Wayne, Holmes, Medina,
Stark and Summit Counties in Ohio. The Bank subsidiaries compete for loans
and deposits with other commercial banks, savings and loans, finance
companies and credit unions. The primary competitive factor is interest
rates charged on loans and paid for deposits as well as fees charged for
various other products and service.
Employees
As of December 31, 1998, the Company had 210 full time employees and 47 part
time employees. The Company is not a party to any collective bargaining
agreement and management considers its relationship with their employees to
be good.
5
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
WAYNE BANCORP, INC.
December 31, 1998
Average
Daily Yield/
Balance Interest Rate
(In thousands of dollars)
ASSETS ------------------------------
Interest Earning Assets:
Loans (including fees) (1) $316,743 $28,264 8.92%
Securities: (2)
Taxable 121,914 7,299 6.05%
Tax-Exempt (3) 28,886 2,292 8.10%
Federal Funds Sold 12,938 697 5.39%
--------------------
TOTAL EARNING ASSETS 480,481 38,552 8.02%
Non-earning Assets:
Cash and due from banks 17,264
Premises and Equipment (net) 8,883
Other Assets 7,705
Less Allowance for Loan Losses (4,979)
----------
TOTAL ASSETS $509,354
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Transaction Accounts 97,991 2,799 2.86%
Savings 80,012 2,367 2.96%
Time Deposits 175,335 9,479 5.41%
Borrowed Funds 37,348 1,686 4.51%
--------------------
TOTAL INTEREST BEARING LIABILITIES 390,686 16,331 4.18%
Non-Interest Bearing Liabilities:
Demand Deposits 56,342
Other Liabilities 4,293
----------
TOTAL LIABILITIES 451,321
Shareholders' Equity 58,033
----------
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY $509,354
==========
NET INTEREST INCOME $22,221
==========
NET YIELD ON INTEREST EARNING ASSETS 4.62%
==========
(1) Nonaccrual loans are included in the average loan balance.
(2) Average balance includes unrealized gains and losses while yield is
based on amortized cost.
(3) Interest income on tax exempt securities includes a taxable equivalent
adjustment using a 34% tax rate.
6
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
WAYNE BANCORP, INC.
December 31, 1997
Average
Daily Yield/
Balance Interest Rate
(In thousands of dollars)
ASSETS ------------------------------
Interest Earning Assets:
Loans (including fees) (1) $306,193 $27,529 8.99%
Securities: (2)
Taxable 111,278 6,952 6.26%
Tax-Exempt (3) 28,134 2,298 8.21%
Federal Funds Sold 5,253 291 5.54%
--------------------
TOTAL EARNING ASSETS 450,858 37,070 8.22%
Non-earning Assets:
Cash and due from banks 17,832
Premises and Equipment (net) 8,561
Other Assets 7,670
Less Allowance for Loan Losses (4,354)
----------
TOTAL ASSETS $480,567
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Transaction Accounts 78,810 2,128 2.70%
Savings 81,704 2,458 3.01%
Time Deposits 172,898 9,392 5.43%
Short Term Borrowings 32,476 1,545 4.76%
--------------------
TOTAL INTEREST BEARING LIABILITIES 365,888 15,523 4.24%
Non-Interest Bearing Liabilities:
Demand Deposits 56,920
Other Liabilities 4,247
----------
TOTAL LIABILITIES 427,055
Shareholders' Equity 53,512
----------
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY $480,567
==========
NET INTEREST INCOME $21,547
==========
NET YIELD ON INTEREST EARNING ASSETS 4.78%
==========
(1) Nonaccrual loans are included in the average loan balance.
(2) Average balance includes unrealized gains and losses while yield is
based on amortized cost.
(3) Interest income on tax exempt securities includes a taxable equivalent
adjustment using a 34% tax rate.
7
DISTRIBUTION OF ASSETS, LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST RATES AND INTEREST DIFFERENTIAL
WAYNE BANCORP, INC.
December 31, 1996
Average
Daily Yield/
Balance Interest Rate
(In thousands of dollars)
ASSETS ------------------------------
Interest Earning Assets:
Loans (including fees) (1) $276,872 $25,329 9.15%
Securities: (2)
Taxable 114,939 7,077 6.17%
Tax-Exempt (3) 27,581 2,271 8.28%
Federal Funds Sold 6,402 338 5.28%
--------------------
TOTAL EARNING ASSETS 425,794 35,015 8.22%
Non-earning Assets:
Cash and due from banks 16,498
Premises and Equipment (net) 8,458
Other Assets 7,791
Less Allowance for Loan Losses (4,371)
----------
TOTAL ASSETS $454,170
==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest Bearing Liabilities:
Transaction Accounts 81,656 2,089 2.56%
Savings 78,792 1,933 2.45%
Time Deposits 168,063 9,497 5.65%
Short Term Borrowings 26,092 1,246 4.78%
--------------------
TOTAL INTEREST BEARING LIABILITIES 354,603 14,765 4.16%
Non-Interest Bearing Liabilities:
Demand Deposits 46,777
Other Liabilities 3,991
----------
TOTAL LIABILITIES 405,371
Shareholders' Equity 48,799
----------
TOTAL LIABILITIES AND
SHAREHOLDERS EQUITY $454,170
==========
NET INTEREST INCOME $20,250
==========
NET YIELD ON INTEREST EARNING ASSETS 4.76%
==========
(1) Nonaccrual loans are included in the average loan balance.
(2) Average balance includes unrealized gains and losses while yield is
based on amortized cost.
(3) Interest income on tax exempt securities includes a taxable equivalent
adjustment using a 34% tax rate.
8
SUMMARY OF NET INTEREST INCOME CHANGES
WAYNE BANCORP, INC.
The following table sets forth for the periods indicated a summary of the
changes in interest income and interest expense resulting from changes in
volume and changes in interest rates for the major components of interest
earning assets and interest bearing liabilities. (In thousands of dollars)
1998 vs 1997 1997 vs 1996
----------------------------------------------------------------------
Increase (Decrease)(1) Increase (Decrease)(1)
Volume Rate Net Volume Rate Net
-----------------------------------------------------------------------
Interest Income:
Loans $948 ($213) $735 $2,683 ($483) $2,200
Securities:
Taxable 437 (90) 347 (226) 101 (125)
Non-taxable (2) 62 (68) (6) 46 (19) 27
Federal Funds Sold 426 (20) 406 (61) 14 (47)
--------------------------------------------------------
Total Interest Income 1,873 (391) 1,482 2,442 (387) 2,055
Interest Expense:
Transaction
Accounts 518 153 671 (73) 112 39
Savings (51) (40) (91 71 454 525
Time Deposits 132 (45) 87 273 (378) (105)
Short-term
Borrowings 232 (91) 141 305 (6) 299
-------------------------------------------------------
Total Interest Expense 831 (23) 808 576 182 758
--------------------------------------------------------
Net Interest Income $1,042 ($368) $674 $1,866 ($569) $1,297
========================================================
(1) For purposes of the above table, changes in interest due to volume and
rate were determined as follows:
Volume variance - Change in volume multiplied by the prior year's rate.
Rate Variance - Change in rate multiplied by the prior year's balance.
Rate/Volume Variance - Change in volume multiplied by change in rate.
The rate/volume variance was allocated to volume variance and rate variances
in proportion to the relationship of the absolute dollar amount of change in
each.
(2) Interest income on tax exempt securities includes the effects of taxable
equivalent adjustments using a 34% tax rate for each year.
9
INVESTMENT PORTFOLIO
WAYNE BANCORP, INC.
The following table sets forth the year-end carrying value of securities
available-for-sale for the last three years: (In thousands of dollars)
1998 1997 1996
By type: ------------------------------
U.S. Treasury and Other U.S.
Government Agency Obligations $74,632 $53,929 $64,583
Mortgage-backed Securities 21,352 27,709 21,295
States and Political Subdivisions 37,186 20,080 21,126
Other 41,837 20,709 16,492
------------------------------
Total $175,007 $122,427 $123,496
==============================
The following table sets forth the year-end carrying value of securities
held-to-maturity for the last three years: (In thousands of dollars)
(In thousands of dollars)
1998 1997 1996
By type: ------------------------------
U.S. Treasury and Other U.S.
Government Agency Obligations $0 $5,002 $8,555
Mortgage-backed Securities 0 0 54
States and Political Subdivisions 0 6,823 7,129
Other 0 7,670 6,025
------------------------------
Total $0 $19,495 $21,763
==============================
The following table sets forth the maturity distribution and yields on
securities available-for-sale at December 31, 1998 (In thousands of dollars):
One Year or Less One to Five Years
Carrying Carrying
Value Yield Value Yield
---------------------------------------
U.S. Treasury and Other
U.S. Government Agency
Obligations $25,814 5.84% $48,818 5.82%
Mortgage-backed Securities 2,586 5.48% 11,011 6.39%
States and Political
Subdivisions 5,077 5.54% 23,247 4.98%
Other 18,163 5.78% 20,953 5.93%
---------------------------------------
$51,640 5.77% $104,029 5.71%
=======================================
Five to Ten Years Over Ten Years
Carrying Carrying
Value Yield Value Yield
---------------------------------------
U.S. Treasury and Other
U.S. Government Agency
Obligations $0 0.00% $0 0.00%
Mortgage-backed Securities 6,385 6.40% 1,370 7.43%
States and Political
Subdivisions 7,506 4.89% 1,356 5.65%
Other 0 0.00% 2,721 5.56%
---------------------------------------
$13,891 5.58% $5,447 6.05%
=======================================
Note: Yield represents the weighted average yield to maturity. Yield on
states and political subdivisions are not calculated on a tax
equivalent basis. Mortgage-backed obligations are distributed based
on contractual maturity.
Excluding those holdings of the securities portfolio in U.S. Treasury
securities and other agencies and corporations of the U.S. Government, there
were no securities of any one issuer which exceeded 10% of consolidated
shareholders' equity at December 31, 1998.
10
LOAN PORTFOLIO
WAYNE BANCORP, INC.
The Company's commercial loans are extended primarily to local businesses.
The Company also extends credit to customers through installment loans,
vehicle and equipment leases, and revolving credit arrangements. The remain-
ing portfolio consists primarily of residential mortgage loans (1-4 family
dwellings) and mortgage loans on commercial property. The following tables
set forth the composition of the loan portfolio for the last five years.
(in thousands of dolla 1998 1997 1996 1995 1994
------------------------------------------------
Real Estate $143,072 $135,824 $114,649 $106,997 $99,144
Installment & Credit
Cards 48,684 52,940 54,441 56,406 49,070
Commercial &
Industrial 129,504 131,998 117,016 104,703 96,126
Lease Financings 2,835 3,317 2,774 2,888 2,344
Other Loans 104 191 39 37 30
------------------------------------------------
$324,199 $324,270 $288,919 $271,031 $246,714
================================================
The maturity distribution of the loan portfolio is a key factor in evaluating
the risk characteristics of the loan portfolio and the future profitability
of the portfolio. The maturity distribution and interest rate sensitivity
of the loan portfolio and other balance sheet items at year end 1998 is
included on page 28 of the 1998 Annual Report to Shareholders, and is incor-
porated herein by reference.
The maturity distribution and interest rate sensitivity of Commercial and
Industrial loans at December 31, 1998 are as follows (In thousands of
dollars):
Maturity (1)
---------------------------------------
Within 1 to 5 After 5
1 Year Years Years Total
---------------------------------------
Commercial and Industrial...... $28,368 $40,588 $27,494 $96,450
Commercial real estate......... 19,063 12,326 1,665 33,054
Construction................... 3,642 0 0 3,642
---------------------------------------
Total................ $51,073 $52,914 $29,159 $133,146
Fixed rate loans............... 19,069 46,225 3,193 68,487
Variable rate loans............ 32,004 6,689 25,966 64,659
---------------------------------------
Total................ $51,073 $52,914 $29,159 $133,146
=======================================
(1) Based on scheduled principal repayments.
11
The following table summarizes past due, non-accrual and restructured loans:
(In thousands of dollars)
1998 1997 1996 1995 1994
------------------------------------------------
Accruing loans past
due 90 days or more
as to principle or
interest $288 $285 $188 $455 $164
Non-accrual loans 0 205 1,497 15 22
Restructured loans 271 0 0 0 0
------------------------------------------------
$559 $490 $1,685 $470 $186
================================================
The effect of non-performing loans was as follows:
December 31, 1998
--------------------
Interest income due on non-performing loans in
accordance with the original terms of the loan $16
Less: Interest income on non-performing loans
reflected in income 3
----------
Net reduction in interest income $13
==========
The policy for placing loans on non-accrual status is to stop the accrual of
interest when it is likely that the collection of interest is deemed
doubtful, or when loans are past due as to principle or interest 90 days
or more. In certain cases, interest accruals are continued on loans 90
days past due if they are deemed to be adequately secured and in the process
of collection.
The Company had no impaired loans at December 31, 1998. The Company had
impaired loans with a combined balance of $205 thousand at December 31, 1997.
The impaired loans had $69 thousand of the allowance for loan losses allocated
at December 31, 1997, however, the entire allowance is available for any
losses that may occur. Impaired loans averaged $153 thousand in 1998 and
$1.1 million in 1997. Income recognized during the year ended
December 31, 1998 and 1997 amounted to $16 thousand and $48 thousand.
Interest income recognized on the cash basis for the year ended
December 31, 1998 and 1997 totaled $3 thousand and $12 thousand. The
Company had impaied loans with a combined balance of $1.5 million at
December 31, 1996. These impaired loans had $535 thousand of the allowance
for loan losses allocated at December 31, 1996. Income recognized during
the year ended December 31, 1996 amounted to $100 thousand. Interest
income recognized on the cash basis was $82 thousand.
Impaired loans are comprised of commercial and commercial real estate loans,
and are carried at the present value of expected future cash flows, discounted
at the loan's effective interest rate or at a fair value of collateral, if the
loan is collateral dependent. A portion of the allowance for loan losses
is allocated to impaired loans.
Smaller balance homogeneous loans are evaluated for impairment in total. Such
loans include residential first mortgage and construction loans secured by
1-4 family properties, consumer, credit card and home equity loans. Such
loans are included in non-accrual and past due disclosures above, but not
in impaired loan totals. Commercial loans and mortgage loans secured by
other properties are evaluated individually for impairment. In addition,
loans held-for-sale and leases are excluded from consideration of impairment.
When analysis of borrower operating results and financial condition indicates
that the borrower's underlying cash flows are not adequate to meet its debt
service requirements, the loan is evaluated for impairment. Impaired
loans, or portions thereof, are charged-off when deemed uncollectible.
As of December 31, 1998, there were no potential problem loans for which
management has doubt as to the borrower's ability to comply with the present
repayment terms, which are not disclosed as past due 90 days or more,
non-accrual or restructured. These loans and their potential loss exposure
has been considered in the analysis of the adequacy of the reserve for
loan losses prepared by management and included on page 14 of this filing.
12
In all years presented, there were no material amount of loans excluded from
the amounts disclosed as non-accrual, past due 90 days or more, restructured,
or potential problem loans, which may have been classified by the regula-
tory examiners as loss, doubtful or substandard.
There were no foreign loans outstanding at December 31, 1998, 1997 or 1996.
As of December 31, 1998, there were no concentrations of credit greater than
10% of total loans which are not otherwise disclosed as a category of loans
pursuant to Guide 3, Item III. A.
As of December 31,1998, there are no other interest bearing assets that would
require disclosure under Guide 3, Item III. C. 1. or C. 2., if such assets
were loans.
SUMMARY OF LOAN LOSS EXPERIENCE
WAYNE BANCORP, INC.
In the normal course of business, the Company assumes risk by extending
credit. The Company manages this risk through its lending policy, loan
review procedures and personal contact with the borrower.
In determining the adequacy of the allowance for loan losses, management
evaluates past loan loss experience, present and anticipated economic con-
ditions and credit-worthiness of its borrowers. The allowance for loan
losses is increased by provisions charged to operations and recoveries of
loans previously charged off. The allowance is reduced by loans
charged-off when they are deemed uncollectible by the Bank's management.
The following table containes information relative to the loan loss ex-
perience for the last five years ending December 31: (In thousands of
dollars)
1998 1997 1996 1995 1994
------------------------------------------------
Allowance for loan
losses at the
beginning of the year $4,923 $4,274 $4,283 $3,937 $3,485
Loans charged off:
Real Estate 23 236 0 0 0
Installment &
Credit Card 260 264 342 271 188
Lease Financings 4 10 0 1 0
Commercial &
Industrial 196 41 173 15 31
------------------------------------------------
Total Loans Charged Off 483 551 515 287 219
Recoveries on loans
charged off:
Real Estate 1 0 2 0 0
Installment &
Credit Card 205 187 153 151 168
Lease Financings 3 7 0 139 7
Commercial &
Industrial 27 100 51 113 102
------------------------------------------------
Total Recoveries 236 294 206 403 277
Net Loans Charged Off 247 257 309 (116) (58)
Provision for Loan Losses 240 906 300 230 394
------------------------------------------------
Allowance for Loan
Losses at the End
of the Year $4,916 $4,923 $4,274 $4,283 $3,937
================================================
Ratio of net charge-offs
during the year to average
outstanding loans
during the year. 0.08% 0.08% 0.11% -0.04% -0.02%
13
The following table shows a year-end breakdown of the allowance for loan
losses allocated by loan category. While management's periodic analysis
of the adequacy of the allowance for loan losses may allocate portions of
the allowance for specific identified problem loans, the entire allowance
is available for any loan charge-offs that occur. (In thousands of dollars)
1998 1997 1996 1995 1994
------------------------------------------------
Real Estate $253 $246 $554 $245 $252
Installment & Lease 102 106 85 92 120
Commercial & Industrial 1,796 1,903 1,425 399 483
Credit Card Receivable 9 10 22 22 25
Other Loans 13 1 0 0 0
Unallocated 2,743 3,657 2,188 3,525 3,057
------------------------------------------------
$4,916 $5,923 $4,274 $4,283 $3,937
================================================
Percent of loans in each category to total loans
1998 1997 1996 1995 1994
------------------------------------------------
Real Estate 44% 42% 40% 39% 40%
Installment & Credit
Card 15% 16% 19% 21% 20%
Other Loans 40% 41% 40% 39% 39%
Lease Financings 1% 1% 1% 1% 1%
Other Loans 0% 0% 0% 0% 0%
------------------------------------------------
100% 100% 100% 100% 100%
================================================
Management's allocation of the allowance for loan losses is based on several
factors. First, consideration is given to the current portfolio. Management
has an internal loan review function that is designed to identify problem
and impaired loans and the losses that may be expected if the borrower is
unable to continue servicing the debt. Management will use the amount of
loss that is expected on those loans. The second step is to review the
prior charge-off history of each category of loan. In this step, management
will review the prior three year average charge-offs and compare that to
the expected loss identified in the first step and will adjust the allocation
accordingly. The third step is to review any loans that have been classi-
fied by the regulatory examiners and allocate the specific loss portion that
is determined by the examiners.
At December 31, 1998 the ratio of the reserve for loan losses to total net
loans and leases was 1.51%, and the ratio of loans 30 days or more past due
and still accruing as a percentage of total net loans and leases was .41%.
Based on these ratios, Management believes the current allowance for loan
and lease losses is adequate to absorb probable future losses.
At December 31, 1997, the Company had allocated $69 thousand of the allowance
for loan losses for impaired loan balances. See Footnote 5 to the consol-
idated financial statements for 1998, which is incorporated herein by
reference.
14
DEPOSITS
WAYNE BANCORP, INC.
The following tables present the average deposit amounts and the rates paid on
those deposits for the last three years (in thousands of dollars).
Year End December 31,
1998 1997 1996
Amount: ------------------------------
Non-interest bearing demand $56,342 $56,920 $46,777
NOW and money market accounts 97,991 78,810 81,656
Savings 80,012 81,704 78,792
Time deposits 175,335 172,898 168,063
------------------------------
$409,680 $390,332 $375,288
==============================
Average rate for the year:
Non-interest bearing demand 0% 0% 0%
Interest bearing demand 2.86% 2.70% 2.56%
Savings 2.96% 3.01% 2.45%
Time deposits 5.41% 5.43% 5.65%
The maturity distribution of certificates of deposit of $100,000 or more at
December 31, 1998 are as follows (in thousands of dollars):
Three months or less $5,992
Over three months through six months 2,982
Over six months through twelve months 7,391
Over twelve months 8,946
----------
Total $25,311
==========
RETURN ON EQUITY AND ASSETS
WAYNE BANCORP, INC.
The following table sets for operating and capital ratios of the Company
calculated on average daily balances:
Year End December 31,
1998 1997 1996
------------------------------
Return on Average Assets 1.44% 1.19% 1.43%
Return on Average Equity 12.60% 10.69% 13.34%
Dividend Payout Ratio 31.95% 31.38% 24.50%
Average Equity to Average Asset Ratio 11.39% 11.13% 10.74%
The following table represents information on federal funds purchased and
securities sold under agreements to repurchase for the last three years:
(In thousands of dollars)
Year End December 31,
1998 1997 1996
------------------------------
Amount outstanding at year end $36,945 $37,503 $31,496
Weighted average interest rate 4.00% 4.78% 4.36%
Maximum outstanding at any month-end 39,013 37,665 35,442
Average outstanding during the year 35,835 31,465 25,863
Weighted average rate during the year 4.40% 4.79% 4.65%
15
The Company enters into sales of securities under agreements to repurchase for
periods up to 29 days, which are treated as financings and reflected in the
consolidated balance sheet as a liability. The Company has borrowing lines of
credit, "federal funds purchased," extended by correspondent banks.
At December 31, 1998 the Company had $22.6 million of available credit, of
which none was used.
The Company also obtains funding from the Federal Home Loan Bank (FHLB) of
Cincinnati. The FHLB borrowings consist of both fixed and variable rate notes,
and are secured by a blanket pledge of the Company's one-to-four family
residential real estate loan portfolio and FHLB stock. Principal balances
on these borrowings were $2,558,000 and $824,000 at December 31, 1998 and
1997, and the weighted-average interest rate on these borrowings was 5.58%
and 6.58% respectively.
ITEM 2. PROPERTIES
The principal offices of the Company and WCNB are located at 112 West Liberty
Street, Wooster, Ohio, while the principal offices of CVB are located at 20
South Main Street, Rittman, Ohio. At December 31, 1998, the Company owned
18 of its 21 facilities and leased the remaining three, all of which are
located in the State of Ohio. The Company operates 14 offices in Wayne
County, four in Medina County, and one in each of the counties of Holmes,
Stark and Summit.
ITEM 3. LEGAL PROCEEDINGS
There is no pending litigation of a material nature in which the Company is
involved and no such legal proceedings were terminated during the fourth
quarter of 1998. Furthermore, there are no material proceedings in which
any director, officer or affiliate of the Registrant, or any associate of
such director of officer, is a party, or has a material interest, adverse to
the Company. As a part of its ordinary course of business, the Company may
be a party to lawsuits (such as garnishment proceedings) involving claims to
the ownership of funds in particular accounts and involving the collection
of past due accounts. All such litigation is incidental to the Company's
business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year ended December 31, 1998, there were no
matters submitted to a vote of security holders.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
Reference is made to the section entitled "Dividend and Market Price Data" on
Page 4 of the 1998 Annual Report to Shareholders for information pertaining to
the principal market for the Registant's Common Stock, market prices,
number of shareholders and dividends, which is incorporated herein by
reference. Reference is made to Note 14, "Regulatory Matters" on page 18
of the 1998 Annual Report to Shareholders for information concerning dividend
restrictions, which is incorporated herin by reference.
ITEM 6. SELECTED FINANCIAL DATA
Reference is made to the table entitled "Five Year Financial Summary" on page
3 of the 1998 Annual Report to Shareholders, which is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Reference is made to the section entitled "Management Discussion and Analysis"
on pages 20 through 29 of the 1998 Annual Report to Shareholders which is
incorporated herein by reference.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the section entitled "Asset and Liability Management" on
page 27 and 28 of the 1998 Annual Report to Shareholders which is incor-
porated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements, Management's Responsibility for the
Financial Statements Letter, and Report of Independent Auditors are included
on pages 7 through 19 of the 1998 Annual Report to Shareholders, which is
incorporated herein by reference.
16
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
No changes in or disagreements with the independent accountants or accounting
and financial disclosures have occurred.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Reference is made to the Registrant's Proxy Statement for the Annual Meeting
of Shareholders to be held April 22, 1999 for information as to the directors
and nominees for directorships of the Registrant, including other
directorships held by such director, or persons nominated to become a
director, of the Registrant and executive officers of the Registrant which
information is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
Reference is made to the Registrant's Proxy Statement for the Annual Meeting
of Shareholders to be held April 22, 1999 for information regarding compen-
sation paid in excess of $100,000 to executive officers of the Registrant and
to the Registrant's Proxy Statement with respect to Salaried Employees Profit
Sharing Plan, which is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Reference is made to the Registrant's Proxy Statement for the Annual Meeting
of Shareholders to be held April 22, 1999 for information regarding beneficial
ownership of the Company's stock which information is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Reference is made to the Registrant's Proxy Statement which is incorporated
herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON
FORM 8-K
(a) (1) and (2) Financial Statements and Schedules
The following financial statements and reports of Independent Auditors appear
on pages 8 through 19 of the Company's 1998 Annual Report to Shareholders
which financial statements are incorporated herein by reference and attached
hereto:
Report of Crowe, Chizek and Company LLP, Independent Auditors
Consolidated Balance Sheets, December 31, 1998 and 1997
Consolidated Statements of Income and Comprehensive Income, Years
Ended December 31, 1998, 1997, and 1996
Consolidated Statements of Cash Flows, Years Ended
December 31, 1998, 1997, and 1996
Consolidated Statements of Shareholders' Equity, Years Ended
December 31, 1998, 1997, and 1996
Notes to Consolidated Financial Statements
Schedules to the consolidated financial statements required by Article 9 of
Regulation S-X are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
17
(3) Listing of Exhibits
Exhibit
Number
-----------
3(a) Amended Articles of Incorporation of Wayne Bancorp, Inc., were
filed with the Company's Annual Report on Form 10-K for the year
ended December 31, 1994 and are incorporated herein by reference.
3(b) Wayne Bancorp, Inc., Amended Code of Regulations (Bylaws) were
filed with the Company's Annual Report on Form 10-K for the year
ended December 31, 1992 and is incorporated herein by reference.
9(a) Trust Division Policy - voting own Bank stock was filed with the
Company's Annual Report on Form 10-K for the year ended
December 31, 1987 and is incorporated herein by reference.
9(b) Trust Division Policy - proxy voting policy was filed with the
Company's Annual Report on Form 10-K for the year ended
December 31, 1987 and is incorporated herein by reference.
10 Wayne County National Bank Salaried Employee Profit Sharing
Trust was filed with the Company's Annual Report on Form 10-K
for the year ended December 31, 1986 and is incorporated herein
by reference.
10(a) Salaried Employee Profit Sharing Plan Amended effective
January 1, 1987 was filed with the Company's Annual Report on
Form 10-K for the year ended December 31, 1987 and is incor-
porated herein by reference.
10(b) Employee Stock Ownership Plan effective on January 1, 1987 was
filed with the Company's Annual Report on Form 10-K for the year
ended December 31, 1987 and is incorporated herein by reference.
10(c) Change in Control Agreements were filed with the Company's Form
10-Q dated September 30, 1998 and is incorporated herein by
reference.
10(d) The 1999 Incentive Stock Option Plan as recommended by the Board
of Directors is filed with the Company's, 1998, Notice of Annual
Shareholders' Meeting and is incorporated herein by reference.
13 Annual Report to Shareholders for the year ended
December 31, 1998.
21 Subsidiaries of the Registrant
27 Financial Data Schedule
28 Notice of Annual Shareholders' Meeting
(b) Reports on Form 8-K
There were no Form 8-K's filed during the last quarter of the period covered
by this report.
18
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Wayne Bancorp, Inc.
Date: March 24, 1999 By:_____________________________
Secretary/Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report on Form 10-K has been signed below by the following persons on behalf
of the Registrant in the Capacities and on dates as indicated.
Signature Capacity with Registrant Date
David L. Christopher March 30, 1999
______________________ ____________________
David L. Christopher Director, Chairman of the
Board, and CEO
Philip S. Swope March 30, 1999
______________________ ____________________
Philip S. Swope Chairman, President and CEO,
Chippewa Valley Bank
James O. Basford March 30, 1999
______________________ ____________________
James O. Basford Director
David P. Boyle March 30, 1999
______________________ ____________________
David P. Boyle, CPA President and Chief
Operating Officer, Wayne
County National Bank
Gwenn E. Bull March 30, 1999
______________________ ____________________
Gwenn E. Bull Director
Dennis B. Donahue March 30, 1999
______________________ ____________________
Dennis B. Donahue Director
B. Diane Gordon March 30, 1999
______________________ ____________________
B. Diane Gordon Director
John C. Johnston March 30, 1999
______________________ ____________________
John C. Johnston, III Director
Darcy B. Pajak March 30, 1999
______________________ ____________________
Darcy B. Pajak Director
Stephen L. Shapiro March 30, 1999
______________________ ____________________
Stephen L. Shapiro Director
Jeffrey E. Smith March 30, 1999
______________________ ____________________
Jeffrey E. Smith Director
David E. Taylor March 30, 1999
______________________ ____________________
David E. Taylor Director
Bala Venkataraman March 30, 1999
______________________ ____________________
Bala Venkataraman Director
19
EXHIBIT (21)
SUBSIDIARIES OF THE REGISTRANT
NAME STATE OF INCORPORATION
Wayne County National Bank Ohio
Chippewa Valley Bank Ohio
Wayne National Corporation Ohio
FIVE YEAR FINANCIAL SUMMARY (1)
(In thousands of dollars except per share data)
For the Years Ended December 31,
1998 1997 1996 1995 1994
----------------------------------------------------------------------
Statement of Income Summary:
Total Operating Income $41,497 $39,866 $38,684 $34,283 $29,781
Total Operating Expense 31,374 31,225 29,426 26,739 23,000
Total Interest Income 37,773 36,289 34,243 31,067 26,781
Total Interest Expense 16,331 15,523 14,765 13,050 10,184
Net Interest Income 21,442 20,766 19,478 18,017 16,597
Provision for Loan 240 906 300 230 346
Income Before Income
Tax Exense 10,123 8,641 9,258 7,544 6,781
Income Tax Expense 2,811 2,921 2,748 2,147 1,853
Net Income 7,312 5,720 6,510 5,397 4,928
Per Share Data:
Net Income $1.50 $1.16 $1.32 $1.09 $1.01
Cash Dividends 0.48 0.42 0.37 0.34 0.29
Book Value 12.18 11.36 10.50 9.59 8.68
Balance Sheet Data:
Total Loans and
Leases $324,663 $324,833 $289,391 $271,578 $247,111
Allowance for
Loan losses 4,916 4,923 4,274 4,283 3,937
Securities 175,007 141,922 154,229 126,306 124,775
Total Deposits 435,143 409,891 396,639 360,707 342,846
Shareholders'
Equity 59,067 55,810 51,592 47,195 42,519
Total Assets 538,677 508,378 484,032 432,300 404,902
Other Data:
Employees 257 262 251 252 240
Shareholders 1,452 1,484 1,434 1,391 1,375
Cash Dividends $2,336 $1,795 $1,595 $1,470 $1,273
Cash Dividends
as a Percent
of Net Income 31.95% 31.38% 24.50% 27.24% 25.83%
Financial Ratios:
Return on Average
Assets 1.44% 1.19% 1.43% 1.32% 1.27%
Return on Beginning
Equity 13.10% 11.09% 13.79% 12.69% 12.63%
Equity to Assets 10.97% 10.98% 10.66% 10.92% 10.50%
Loans to Deposits 74.61% 79.25% 72.96% 75.29% 72.08%
Loans to Total
Assets 60.27% 63.90% 59.79% 62.82% 61.03%
Allowance for Loan
Losses to Total
Loans and Leases 1.51% 1.52% 1.48% 1.58% 1.59%
1. This summary should be read in conjunction with the related Consolidated
Financial Statements and Notes to the Financial Statements. Per share
data has been retroactively adjusted for stock dividends, stock splits
and the acquisition of Chippewa Valley Bancshares, Inc.
2. Operating income for 1996 includes a gain on the sale of the WCNB's credit
card portfolio of $824,000. The after tax effect on net income was
$544,000, or $.11 per share.
SHAREHOLDER INFORMATION
Executive Offices Transfer Agent
112 West Liberty Street Registrar & Transfer Company
P.O. Box 757 10 Commerce Drive, Cranford NJ 07016
Wooster, Ohio 44691 Attn: Transfer Department
(330) 264-1222 800-368-5948 * Fax: 908-272-1006
All common shares of Wayne Bancorp, Inc. are voting shares and are traded on
NASDAQ, under the symbol "WNNB," as a Small Cap Issue. At December 31, 1998
there are 4,849,974 shares outstanding and 1,452 shareholders of record.
The range of market prices are compiled from data provided by the national
market system.
DIVIDEND AND MARKET PRICE DATA
Cash
Dividends
Quarter Ended High Low Paid
-----------------------------------------------------------
1998 March 31............ $47.75 $38.50 $0.09
June 30............. 40.25 34.38 0.11
September 30........ 37.00 28.50 0.13
December 31......... 35.75 29.00 0.15
1997 March 31............ $38.50 $30.38 $0.10
June 30............. 40.25 36.50 0.10
September 30........ 42.00 37.75 0.11
December 31......... 48.50 40.25 0.11
FORM 10-K
A copy of the Company's 1998 Annual Report on Form 10-K filed with the
Securities and Exchange Commission is available to shareholders without
charge. To obtain a copy, direct your request to David P. Boyle, Treasurer
P.O. Box 757, Wooster, OH 44691.
To Our Shareholders
We are delighted to report to you that 1998 was another very successful year
for your company. Rather than review all of the year's financial data, which
you can get in detail throughout this annual report, we would like to use our
allotted space to discuss other highlights of 1998.
Since the merger of Chippewa Valley Bank into Wayne Bancorp, Inc., which
occurred in the first quarter of 1998, we have spent many days in meetings
to ensure that all of the numerous changes occurring within both organizations
would be as invisible and nondisruptive as possible to our customers,
associates and communities we serve. We still have some things to accom-
plish, such as fully integrating our systems, so that our customers can use
any of our combined 21 locations for any or all of their financial needs.
Chippewa Valley Bank, for example, is in the final phase of implementing a
major technology upgrade that was initiated in the fourth quarter of 1997.
This project involves internal computer, document processing, communications
and telephone banking systems.
In march 1998, Wayne County National Bank completed a bank-wide conversion
to new Information Technology, Inc. financial software through its data
processor, EDS. This conversion places Wayne County National Bank onto the
same software as Chippewa Valley Bank's in-house system, which is believed
to be year 2000 (Y2K) compliant. Complete testing for Y2K compliance will
be completed by April 1999.
Both banks have been testing various software applications and hardware in
use throughout 1998, and we have found very few Y2K concerns, all of which
have been addressed and fixed. We do not anticipate any internal or
external surprises that will cause problems when we reach the year 2000.
Also, we have surveyed our major customers about the progress they are
making regarding the Y2K issue, and have found that most are confident their
own systems are compliant or soom will be. For those few customers who are
a little behind on Y2K testing, we are reviewing them on a quarterly basis.
During 1998, Wayne County National Bank established its own web site,
www.wcnbwooster.com and Chippewa Valley Bank is updating its web site,
www.chipbank.com, to complement Wayne County's. We have found that customer
usage of these web sites is growing, both in terms of number of hitsas well
as duration of time spent on the site by the users.
In its first full year of service, Wayne County National Bank's new North
Towne Banking Center handled more than 106,000 financial transactions. In
addition, the ATM at that location has already become one of our most popular
and profitable sites. We are pleased with the customer response of this new
location.
The Company's Trust and Investments Division experienced another outstanding
year with total assets under management growing by $29 million, resulting
in an all time record of $314 million. The division also generated $1.4
million in gross fee income for the company, which is another record.
Also during 1998, Wayne County National Bank introduced an alternative invest-
ment program through Primevest Financial Services, Inc. This full-service
brokerage offers stocks, bonds, mutual funds and annuities. Chippewa
Valley Bank offers the same line of products through its Specialized Invest-
ment Division.
The Company also began a full service debit card program by issuing a new
debit/ATM card under the Wayne Bancorp, Inc. name. This is a new product
for Wayne County National Bank and replaces the debit card that already
existed at Chippewa Valley Bank.
The management of your company also has continued to concentrate on the issue
of management succession, because we recognize the inevitable fact that somw
of our members of senior management are gettin closer to retirement as each
year passes. We have been assigning more and more areas of responsibility
to our younger staff to prepare them for management positions in the future.
Along with that, title changes and promotions have been occurring more
frequently. Of particular note, Mr. David P. Boyle was appointed to
President of Wayne County National Bank, effective Janaury 1999.
On a more somber note, we were saddened by the death of one of our company's
directors during 1998. Mr. Carl H. Bradford, Jr., who served as a director
of Chippewa Valley Bank for 22 years, and was appointed a director of
Wayne Bancorp, Inc. upon the bank's merger, died in November. Although the
company had the benefit of Carl's guidance for only a few months, he
served Chippewa Valley Bank well, and was instrumental in bringing the two
banks together.
As we begin another year, we do so with the excitement and confidence that
1999 will be another year of opportunities for us to grow and prosper. Your
company has been among the leaders in the financial services industry in
every measurement of performance, and we intend to maintain that distinction.
David L Christopher
Chariman
Philip S. Swope
President
January 29, 1999
The management of Wayne Bancorp, Inc. has prepared and is responsible
for the financial statements and for the integrity and consistency of other
related information contained in the Annual Report. In the opinion of
management, the financial statements, which necessarily include amounts
that are based on management estimates and judgments, have been prepared
in conformity with generally accepted accounting principles appropriate to the
circumstances.
The Company maintains a system of internal accounting controls
that is designed to provide reasonable assurance that assets are safeguarded,
that transactions are executed in accordance with Company authorizations and
policies, and that transactions are properly recorded so as to permit pre-
paration of financial statements that will fairly present the financial
position and results of operations in conformity with generally accepted
accounting principles. Internal controls are augmented by written policies
covering standards of personal and business conduct and an organizational
structure providing for division of responsibility and authority.
The effectiveness of and compliance with established control systems
is monitored through a continuous program of internal audit and credit
examinations. In recognition of cost-benefit relationships and inherent
control limitations, some features of the control system are designed
to detect rather than prevent errors, irregularities and departures
from approved policies and practices. Management believes that the system
of controls is adequate to prevent or detect errors or irregularities that
would be material to the financial statements and that timely corrective
actions have been initiated when appropriate.
The Company engaged Crowe, Chizek and Company LLP, independent
certified public accountants, to render an opinion on the financial state-
ments. The accountants have advised management that they were provided
with access to all information and records deemed necessary to render
their opinion.
The Board of Directors exercises its responsibility for the financial
statements and related information through the Audit Committee, which is
comprised entirely of outside directors. The Audit Committee meets on a reg-
ular basis with mangement, the Internal Auditor of the Company, and Crowe,
Chizek and Company LLP to assess the scope of the annual audit plan, to review
the status and results of audits, to review the Annual Report and Form 10-K,
including major changes in accounting policy and reporting practices, and
to approve non-audit related services rendered by the independent auditors.
Crowe, Chizek and Company LLP also meets with the Audit Committee,
without management being present, to afford them the opportunity to express
their opinion on the adequacy of management's compliance with the established
policies and procedures and the quality of the financial reporting.
David L. Christopher David P. Boyle, CPA
Chairman of the Board Treasurer
& Chief Executive Officer Wayne Bancorp, Inc.
Wayne Bancorp, Inc.
Report of
Crowe, Chizek and Company LLP
Independent Auditors
Board of Directors and Shareholders
Wayne Bancorp, Inc. - Wooster, Ohio
We have audited the accompanying consolidated balance sheets of Wayne
Bancorp, Inc. as of December 31, 1998 and 1997 and the related consolidated
statements of income and comprehensive income, cash flows and changes in
shareholders' equity for each of the three years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform our audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Wayne
Bancorp, Inc. as of December 31, 1998 and 1997 and the results of opera-
tions and cash flows for each of the three years in the period ended
December 31, 1998 in conformity with generally accepted accounting principles.
Columbus, Ohio
January 29, 1999
CONSOLIDATED BALANCE SHEETS
December 31,
(In thousands of dollars except share data) 1998 1997
----------------------------------------------------------------------
ASSETS
Cash and due from banks .......................... $20,470 $23,306
Federal funds sold................................ 7,340 7,785
--------------------
Total cash and cash equivalents........ 27,810 31,091
Securities
Available-for-sale........................... 175,007 122,427
Held-to-maturity (approximate market
value $19,753)............................. 19,495
Loans and leases ................................. 324,199 324,270
Less:
Allowance for loan losses ............. 4,916 4,923
--------------------
Net loans and leases................... 319,283 319,347
Premises and equipment ........................... 8,591 8,923
Accrued income receivable and other assets ....... 7,986 7,095
--------------------
TOTAL ASSETS...................................... $538,677 $508,378
====================
LIABILITIES
Deposits
Interest bearing ............................ $369,328 $347,904
Noninterest bearing.......................... 65,815 61,987
--------------------
Total deposits.................................... 435,143 409,891
Short-term borrowings............................. 36,989 37,949
Federal Home Loan Bank advances................... 2,558 824
ESOP loan......................................... 600
Other liabilities................................. 4,320 3,904
--------------------
Total liabilities................................. 479,610 452,568
SHAREHOLDERS' EQUITY
Common stock, stated value $1.00.................. 4,917 4,917
Shares authorized - 12,000,000 in 1998
and 5,400,000 in 1997
Shares issued - 4,917,218 in 1998
and 4,917,221 in 1997
Shares outstanding - 4,849,974 in 1998
and 4,912,443 in 1997
Paid in capital................................... 13,310 13,356
Retained earnings ................................ 41,989 37,013
Unearned ESOP shares - 9,091 shares............... (400)
Treasury stock, at cost - 67,244 shares........... (2,308) (173)
Accumulated other comprehensive income............ 1,559 697
--------------------
Total shareholders' equity........................ 59,067 55,810
--------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY........ $538,677 $508,378
====================
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(In thousands of dollars except per share data)
Years ended December 31,
1998 1997 1996
----------------------------------------------------------------------
INTEREST INCOME:
Interest and fees on loans.............. $28,264 $27,529 $25,329
Interest on securities
Taxable.............................. 7,299 6,952 7,077
Nontaxable........................... 1,513 1,517 1,499
Other interest income................... 697 291 338
------------------------------
Total interest income................... 37,773 36,289 34,243
INTEREST EXPENSE:
Interest on deposits ................... 14,645 13,978 13,519
Interest on repurchase agreements and
other borrowed funds 1,686 1,545 1,246
------------------------------
Total interest expense.................. 16,331 15,523 14,765
------------------------------
NET INTEREST INCOME..................... 21,442 20,766 19,478
Provision for loan losses .............. 240 906 300
------------------------------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES........... 21,202 19,860 19,178
OTHER INCOME:
Service charges and fees................ 1,724 1,695 1,729
Income from fiduciary activities........ 1,414 1,343 1,075
Gains (losses) on sale of loans......... (32) 824
Securities gains (losses), net.......... 8 (8) 4
Other noninterest income................ 610 547 809
------------------------------
Total other income...................... 3,724 3,577 4,441
OTHER EXPENSES:
Salaries and employee benefits ......... 7,520 7,486 6,991
Occupancy and equipment................. 1,805 1,735 1,602
Other operating expenses ............... 5,478 5,575 5,768
------------------------------
Total other expenses.................... 14,803 14,796 14,361
INCOME BEFORE INCOME TAX EXPENSE........ 10,123 8,641 9,258
INCOME TAX EXPENSE...................... 2,811 2,921 2,748
------------------------------
NET INCOME.............................. $7,312 $5,720 $6,510
Other comprehensive income, net of tax
unrealized gain(loss) on available
for sale securities arising during
the period......................... 867 373 (578)
Reclassification adjustment for amounts
realized on securities included
in net income...................... (5) 5 (3)
-----------------------------------
Total other comprehensive income... 862 378 (581)
-----------------------------------
COMPREHENSIVE INCOME.................... $8,174 $6,098 $5,929
PER SHARE DATA:
NET INCOME.............................. $1.50 $1.16 $1.32
==============================
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands of dollars)
Years ended December 31,
1998 1997 1996
-----------------------------------------------------------------------------
OPERATING ACTIVITIES
Net Income........................... $7,312 $5,720 $6,510
Adjustments to reconcile net cash
provided by operating activities:
Provision for loan losses......... 240 906 300
Depreciation and amortization..... 1,328 1,647 1,192
Federal Home Loan Bank stock
dividends....................... (124) (94) (74)
Amortization of investment security
premiums and accretion of
discounts, net.................. 117 204 359
Compensation expense on ESOP shares 154
Deferred income taxes.............. (21) (582) 153
Change in interest receivable..... (710) (33) (158)
Change in interest payable......... (90) (34) (75)
Other, net......................... (412) 955 (1,601)
---------------------------------
Net cash provided by operating
activities......................... 7,794 8,689 6,606
INVESTING ACTIVITIES
Securities available-for-sale
Purchases.......................... (82,255) (42,792) (69,033)
Proceeds from maturities and
repayments....................... 46,503 44,844 40,457
Proceeds from sales................ 2,467 8,554 2,740
Securities held-to-maturity
Purchases.......................... (990) (1,900) (13,676)
Proceeds from maturities and
repayments....................... 2,500 4,066 10,425
Net increase in loans and leases..... (12,090) (35,774) (29,967)
Proceeds from sales of loans......... 11,914 13,116
Purchase of loans.................... (1,384)
Purchase of premises and equipment
(net).............................. (679) (1,224) (1,239)
---------------------------------------
Net cash used by investing activities (32,630) (24,226) (48,561)
FINANCING ACTIVITIES
Net increase in deposits............ 25,252 13,252 35,932
Net increase (decrease) in short-
term borrowings................... (960) 6,063 10,771
Proceeds from long-term debt........ 1,800 838
Repayment of long-term debt......... (66) (14)
Cash dividends paid................. (1,997) (1,505) (1,362)
Treasury stock purchased, net....... (2,474) (375) (170)
-------------------------------------------
Net cash provided by financing
activities........................ 21,555 18,259 45,171
Increase (decrease) in cash and
cash equivalents.................. (3,281) 2,722 3,216
Cash and cash equivalents at
beginning of year................ 31,091 28,369 25,153
--------------------------------------
Cash and cash equivalents at
end of year...................... $27,810 $31,091 $28,369
========================================
Significant non-cash transactions:
Transfer of held-to-maturity
securities to available-for-sale $17,681
Transfer of loans from portfolio
to held for sale............... $11,915
See Notes to Consolidated Financial Statements
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the Three Years Ended December 31, 1998
(In thousands of dollars except per share data)
Common Paid-In Retained Treasury
Stock Capital Earnings Stock
----------------------------------------------------------------------------
Balance,
January 1, 1996........... $2,856 $7,999 $35,574 ($134)
Net income................ 6,510
Cash dividends
($.37 per share)........ (1,461)
Cash dividends of
pooled affiliates
($.60 per share)......... (134)
Purchase of treasury stock (365)
Dividends reinvested...... 248
Sale of treasury stock.... 32 163
2 for 1 stock split....... 1,874 (1,874)
5% common stock dividend at
fair market value....... 187 5,325 (5,512)
Fractional shares of stock
dividend paid in cash... (15)
Change in estimated fair
value of securities
available-for-sale......
-----------------------------------------------
Balance, December 31, 1996 4,917 13,356 33,088 (88)
Net income................ 5,720
Cash dividends
($.42 per share)........ (1,652)
Cash dividends of
pooled affiliates
($.32 per share)........ (143)
Purchase of treasury
stock................... (674)
Dividends reinvested...... 290
Sale of treasury stock.... 299
Change in estimated fair
value of securities
available-for-sale.......
---------------------------------------------------
Balance, December 31, 1997 4,917 13,356 37,013 (173)
Net income............... 7,312
Cash dividends
($.48 per share)........ (2,336)
Purchase of treasury
stock.................. (2,907)
Dividends reinvested..... 339
Sale of treasury stock... 433
Common stock acquired
pursuant to ESOP ......
Shares earned under
ESOP.................. (46)
Change in estimated fair
value of securities
available-for-sale.....
------------------------------------------------
Balance, December 31, 1998 $4,917 $13,310 $41,989 ($2,308)
================================================
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(continued)
Accumulated
Unearned Other
ESOP Comprehensive
Shares Income Total
--------------------------------------------------------------------------
Balance, January 1, 1996 $900 $47,195
Net Income............. 6,110
Cash Dividends
($.37 per share)..... (1,461)
Cash Dividends of
pooled affiliates
($.60 per share)..... (134)
Purchase of treasury
stock............... (365)
Dividends reinvested.. 248
Sale of treasury
stock.............. 195
2 for 1 stock split..
5% common stock
dividend at fair
market value.......
Fractional shares of
stock dividend
paid in cash..... (15)
Change in estimated fair
value of securities
available-for-sale (581) (581)
---------------------------------------------------
Balance, December 31, 1996 319 51,592
Net income........... 5,720
Cash dividends
($.42 per share).. (1,652)
Cash dividends of
pooled affiliates
($.32 per share).. (143)
Purchase of treasury
stock............. (674)
Dividends reinvested 290
Sale of treasury
stock............ 299
Change in estimated fair
value of securities
available-for-sale. 378 378
-----------------------------------------------
Balance, December 31, 1997 697 55,810
Net income............. 7,312
Cash dividends
($.48 per share).... (2,336)
Purchase of treasury
stock.............. (2,907)
Dividends reinvested. 339
Sale of treasury
stock.............. 433
Common stock acquired
pursuant to ESOP... (600) (600)
Share earned under
ESOP............... 200 154
Change in estimated fair
value of securities
available-for-sale.. 862 862
------------------------------------------------
Balance, December 31, 1998 $400 $1,559 $59,067
=================================================
See Notes to Consolidated Financial Statements
N O T E S T O C O N S O L I D A T E D F I N A N C I A L
S T A T E M E N T S
(In thousands of dollars except per share data)
1. NATURE OF OPERATIONS
Wayne Bancorp, Inc., is a multi-bank holding company, its subsidiaries,
Wayne County National Bank (WCNB) and Chippewa Valley Bank (CVB), conduct
general commercial banking business. Wayne National Corporation, a
wholly-owned subsidiary of WCNB, is a partner in a leasing company which is
no longer active.
The Company operates in the single industry of commercial banking.
While the Company offers a wide range of services, they are all deemed to be
part of commercial banking.
The Company has 21 banking locations in Wayne, Holmes, Medina, Stark and
Summit counties in Ohio. A wide variety of services are provided to bus-
inesses, individuals, and institutional and governmental customers. These
services include commercial and personal checking accounts, savings and
time deposits, business and personal loans, real estate loans, leases, safe
deposit facilities and electronic banking.
The Company operates a Trust Department which offers comprehensive trust
administrative services, and agency, trust and investment services to
individuals, corporations, partnerships, institutions and municipalities.
In addition, the Company provides retail investment services, including
mutual funds and annuities as well as discount brokerage services which offer
stock trading services to customers.
2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Wayne
Bancorp, Inc. and its wholly owned subsidiaries, WCNB and CVB as well as
WCNB's wholly owned subsidiary Wayne National Corporation, collectively
referred to as the Company. All significant intercompany transactions have
been eliminated.
Use of Estimates in the Preparation of Financial Statements
To prepare financial statements in conformity with generally accepted
accounting principles, management makes estimates and assumptions based on
available information. These estimates and assumptions affect amounts
reported in the financial statements and disclosures provided; future results
could differ. The collectibility of loans, fair value of financial instru-
ments and the status of contingencies are particularly subject to change.
Cash Flows
Cash and cash equivalents includes cash, deposits with other financial
institutions and federal funds sold. Net cash flows are reported for loan
and deposit transactions. For the years ended December 31, 1998, 1997 and
1996, income taxes paid totaled $3.32 million, $3.09 million, and $2.81
million and interest paid totaled $16.42 million, $15.56 million and $14.84
million respectively.
Securities
Securities are classified as held-to-maturity and carried at amortized
cost when management has the positive intent and ability to hold them to
maturity. Securities are classified as available-for-sale when they might
be sold before maturity. Securities available-for-sale may be sold by the
Company if needed for liquidity, asset-liability management, or other reasons.
Securities available-for-sale are carried at fair value, with unrealized
holding gains and losses reported separately as part of accumulated other
comprehensive income in shareholders' equity, net of tax. Other securities,
such as the Federal Reserve Bank stock and Federal Home Loan Bank stock,
are carried at cost. Interest income includes amortization of purchase
premiums and discounts. Realized gains or losses are calculated based on
the amortized cost
of the specific security sold.
Loans
Loans and leases are reported at principal balances outstanding, net of
deferred loan fees and costs. Loans held for sale are reported at the
lower of cost or market on an aggregate basis. Interest income on leases
is recognized under a method which provides for a level return on the net
investment outstanding. Interest income on loans is reported on the
interest method and includes amortization of net deferred loan fees and
costs over the term of the loan. Interest income is not recorded when
management believes the collection of interest is doubtful, typically when
payments are past due over 90 days. Payments received on such loans are
reported as principal reductions.
Allowance for Loan Losses
The allowance for loan losses is a valuation allowance established
through a provision for loan losses charged to expense. The allowance is
the amount which, in the opinion of management, is necessary to provide for
probable losses in the loan portfolio. Management's determination of the
adequacy of the allowance is based on evaluations of the collectibility of
loans outstanding, taking into consideration prior loan loss experience,
loan quality, current economic conditions and other pertinent factors.
Loans which are deemed uncollectible are charged-off and deducted from the
allowance and recoveries on loans previously charged-off are restored to
the allowance.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller balance loans of
similar nature, such as residential mortgage and consumer loans, and on an
individual loan basis for other loans. In addition, loans held for sale and
leases are excluded from consideration of impairment. If a loan is impaired,
a portion of the allowance is allocated so that the loan is reported, net,
at the present value of future cash flows using the loan's existing rate
or at the fair value of collateral if repayment is expected exclusively from
the collateral. Loans are evaluated for impairment when payments are
delayed, typically 60 days or more, or when it is probable that all prin-
cipal and interest amounts will not be collected according to the original
terms of the loan.
Other Real Estate
Other real estate is recorded at the lower of cost or fair value, less
estimated costs to sell. Any reduction from the carrying value of the
related loan to fair value at the time the property is acquired is
accounted for as a loan charge-off. Any subsequent reductions in the fair
value are reflected in a valuation allowance through a charge to other
real estate expense. Expenses incurred to carry other real estate are
charged to operations as incurred. There was no other real estate held at
December 31, 1998 and 1997.
Premises and Equipment
Premises and equipment are stated at cost less accumulated depreciation.
Depreciation is computed on a straight-line method over the estimated
useful life of the asset. Assets are reviewed for impairment when events
indicate the carrying amount may not be recoverable. Maintenance and repairs
are charged to expense as incurred and major improvements are capitalized.
Intangibles
Purchases of intangibles, primarily Goodwill and Core Deposit Intangible,
is the excess of purchase price over identified net assets in a business
acquisition. Intangibles are included in Other Assets and are recorded at
cost, less accumulated amortization, and amortized over their useful lives.
Goodwill consists of two components arising from separate acquisitions
made by the Company's subsidiaries. In July of 1991, WCNB acquired four
branches of the former First Savings and Loan Company of Massillon, Ohio,
and in March of 1996, CVB purchased two branches from the First National
Bank of Ohio. The amortization period for Goodwill is ten years for WCNB and
CVB, and their balances at December 31, 1998 were $379,000 and $990,000. Core
Deposit Intangible which arose from WCNB's acquisition, is being amortized
over a ten year period and has a balance of $111,000 at December 31, 1998.
Amortization of these intangibles totaled $317,000 for 1998, $789,000 for
1997 and $440,000 for 1996.
Trust Department Assets and Income
Assets held by the Company in a fiduciary or other capacity for its trust
customers is not included in the accompanying consolidated financial state-
ments since such items are not assets of the Company. Fee income on
fiduciary activities is accrued based on expected fees to be collected from
various fidiciary accounts. These fees are primarily based on, among other
things, a fixed regular fee, a percentage of assets managed fee, and a per-
centage of the earnings on trust assets.
Repurchase Agreements
Substantially all repurchase agreement liabilities represent amounts
advanced by various customers. Securities are pledged to cover these
liabilities, which are not covered by federal deposit insurance.
Income Taxes
The Company records income tax expense based on the amount of taxes due on
its tax return plus the change in deferred taxes. Deferred tax assets and
liabilities are the expected future tax consequences of temporary diff-
erences between the carrying amounts and tax bases of assets and
liabilities, computed by using enacted tax rates. A valuation allowance, if
needed, reduces deferred tax assets to the amount expected to be realized.
Per Share Amounts and Acquisition
Net income per share is computed by dividing net income by the weighted-
average number of shares outstanding during the period, as restated for
shares issued in business combinations accounted for as poolings-of-
interest, stock splits and stock dividends. Weighted-average shares out-
standing for 1998, 1997 and 1996 were 4,879,649, 4,913,784 and 4,914,364.
Unreleased ESOP shares are not considered to be outstanding for the purpose
of determining weighted-average shares.
In June 1996, the Company declared a 2-for-1 stock split effective June
15, 1996 and payable to shareholders on June 30, 1996. In November 1996,
the Company declared a 5% stock dividend payable on December 31, 1996 to
shareholders of record as of November 29, 1996.
Effective March 31, 1998, Chippewa Valley Bancshares, Inc., Rittman,
Ohio, merged into the Company. The transaction was affected through the
exchange of 2.1916 common shares of the Company's stock for each of
Chippewa's outstanding common shares, with cash paid in lieu of
fractional shares. There were 981,837 shares issued in this transaction.
Chippewa had assets of $140.2 million and deposits of $121.3 million with
branches in Wayne, Medina and Summit counties, Ohio. Chippewa will operate
as a wholly-owned subsidiary of the Company.
The acquisition of Chippewa was accounted for as a pooling-of-interests.
The consolidated financial statements give retroactive effect to the trans-
actions. The following is a summary of the separate results
of operations of the Company and Chippewa for the three months ended March
31, 1998 and the years ended December 31, 1997 and 1996
Three months
ended Year ended
March 31, December 31,
(In thousands of dollars) 1998 1997 1996
--------------------------------
Net interest income
Company $4,026 $15,699 $14,956
Chippewa 1,319 5,067 4,522
---------------------------------
Combined $5,345 $20,766 $19,478
=================================
Net income
Company $1,349 $5,621 $5,512
Chippewa 368 99 998
---------------------------------
Combined $1,717 $5,720 $6,510
=================================
Comprehensive Income
Comprehensive income is calculated using Statement of Financial Account-
ing Standards (SFAS) No. 130, "Reporting Comprehensive Income." This
statement was issued June of 1997, and is effective for fiscal years begin-
ning after December 15, 1997, and requires restatement of prior periods infor-
mation for comparative purposes. Comprehensive income consists of net income
and other comprehensive income. Other comprehensive income includes un-
realized gains and losses on securities available-for-sale which are also
recognized as separate components of equity.
Dividend Reinvestment Plan
The Company maintains a dividend reinvestment plan whereby the Company's
shareholders are eligible to acquire new common shares of stock at 100% of the
current estimated fair market value in lieu of receiving cash dividends.
Shareholders can have all or part of their normal cash dividends reinvested
in the Company's stock. During 1998, 9,495 shares of stock were allocated
under the plan in lieu of cash dividends of $339 thousand. It is generally
the Company's practice to acquire these shares of common stock in the open
market to fund its obligation under the dividend reinvestment plan.
Dividend Restrictions
Banking regulations require maintenance of certain capital levels which
may limit the amount of dividends paid by the subsidiaries to the holding
company or the holding company to shareholders. See Note #14 for regula-
tory capital requirements and dividend restrictions.
Fair Values of Financial Instruments
Fair values of financial instruments are estimated using relevant market
information and other assumptions as more fully disclosed separately. Fair
value estimates involve uncertainties and matters of significant judgement
regarding interest rates, credit risk, prepayments, and other factors,
especially in the absence of broad markets for particular items. Changes
in assumptions or in market conditions could significantly affect these
estimates. The fair value of estimates of existing on- and off-balance
sheet financial instruments does not include the value of anticipated future
business or the values of assets and liabilities not considered financial
instruments.
New Accounting Pronouncement
Beginning January 1, 2000, a new accounting standard will require all
derivatives to be recorded at fair value. Unless designated as hedges,
changes in these fair values will be recorded in the income statement.
Fair value changes involving hedges will generally be recorded by offsetting
gains and losses on the hedge item, even if the fair value of the hedged item
is not otherwise recorded. This is not expected to have a material effect
but will depend on derivative holdings when this standard applies.
Reclassifications
Certain reclassifications have been made to amounts previously reported
to conform with the current financial statement presentation.
3. SECURITIES
The summary of amortized cost and fair values of securities available-
for-sale are as follows at December 31, 1998:
Gross Gross
Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
---------------------- -------- --------- --------- ----------
U.S. Treasury......... $24,132 $362 --- $24,494
Federal Agency
Obligations......... 49,597 546 (5) 50,138
Mortgage-backed
Securities.......... 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
======== ======== ======== ==========
The summary of amortized cost and fair values of securities available-for-sale
are as follows at December 31, 1997:
Gross Gross
Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
---------------------- -------- -------- --------- -----------
U.S. Treasury......... $29,832 $262 ($59) $30,035
Federal Agency
Obligations..... 23,655 209 (20) 23,844
Mortgage-backed
Securities......... 27,533 224 (48) 27,709
Obligations of States
and Political
Subdivisions...... 19,804 286 (10) 20,080
Corporate Obligations 18,218 --- (59) 18,159
Other Securities...... 2,326 226 (2) 2,550
-------- -------- --------- -----------
$121,368 $1,207 ($198) $122,377
======== ======== ======== ===========
The summary of amortized cost and fair values of securities held-to-maturity
are as follows at December 31, 1997:
Gross Gross
Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gains Losses Value
---------------------- -------- --------- --------- -----------
Federal Agency
Obligations........ $5,002 $8 ($11) $4,999
Obligations of States
and Political
Subdivisions........ 6,823 238 --- 7,061
Corporate Obligations. 7,670 38 (15) 7,693
-------- ------- --------- ---------
$19,495 $284 ($26) $19,753
======== ======= ======== =========
During 1998, 1997 and 1996 proceeds from the sales of securities
available-for-sale were $2.5 million, $8.6 million and $2.7 million with gross
gains of $9,000, $2,000 and $9,000 and gross losses of $1,000, $10,000 and
$5,000 included in earnings.
In connection with the merger with the Company in March 1998, CVB trans-
ferred all of its securities classified as held-to-maturity to available-for-
sale. The securities were transferred in order to align the investment
objectives of CVB with those of WCNB. The carrying value of the securities
transferred was $17.7 million. The unrealized gain at the time the secur-
ities were transferred was $263,000. The after-tax effect of the transfer
was to increase equity by approximately $174,000.
The amortized cost and estimated fair value of the securities at December
31, 1998 by contractual maturity, are shown below. Expected maturities
may differ from the contractual maturities because borrowers may have the
right to call or prepay the obligations with or without call or prepayment
penalties.
Securities Available-for-Sale
Amortized Fair
(dollars in thousands) Cost Value
--------- ----------
Due in one year or less....... $48,804 $49,013
Due after one year through
five years................... 91,528 93,017
Due after five years
through ten years............ 7,250 7,507
Due after ten years........... 1,352 1,355
---------- -----------
148,934 150,892
Mortgage Backed Securities.... 21,104 21,352
Equity Securities............. 2,565 2,721
Other Securities.............. 42 42
--------- ------------
$172,645 $175,007
======== ============
Securities were pledged to secure public and trust deposits, securities
sold under agreements to repurchase, and for other purposes required or per-
mitted by law. Such pledged securities at December 31, 1998 and 1997 had
a market value of $64.4 million and $55.8 million, respectively.
4. LOANS AND LEASES
The composition of the loan portfolio at December 31 is as follows:
(dollars in thousands)
1998 1997
-------- --------
Commercial ............. $129,504 $131,998
Real Estate............. 131,820 125,173
Consumer Installment.... 48,141 52,332
Home Equity............. 11,252 10,651
Direct Lease Financing.. 2,835 3,317
Credit Card............. 543 608
Other Loans............. 104 191
---------- ---------
$324,199 $324,270
========== ==========
WCNB leases various types of equipment and automobiles to its customers,
which are classified as direct financing leases. All leases have terms
ranging from two to five years. The composition of the net investment in
direct financing leases included in loans at December 31, is as follows:
(dollars in thousands)
1998 1997
------ ------
Minimum Lease Payments
Receivable.............. $3,222 $3,855
Residual Value of Leased
Property (Unguaranteed). 77 25
-------- ---------
3,299 3,880
Less: Unearned Income..... 464 563
-------- ---------
Net Investment In Direct
Financing Leases......... $2,835 $3,317
======== ========
The following schedule summarizes by year the minimum lease payments
receivable on direct leases at December 31, 1998.
(dollars in thousands)
1999......................... $1,092
2000......................... 1,037
2001......................... 691
2002......................... 292
2003......................... 163
Thereafter................... 24
----------
$3,299
==========
The Banks have granted loans to the officers and directors of the Company
and its subsidiaries and their related business interests. The aggregate
dollar amount of these loans was $5.8 million and $4.7 million at December
31, 1998 and 1997, respectively. During 1998, $2.4 million of new loans and
advancements were made and the repayments on loans to these parties totaled
$1.3 million.
5. ALLOWANCE FOR LOAN LOSSES
A summary of the activity in the allowance for loan losses is as follows:
(dollars in thousands)
1998 1997 1996
------- ------- -------
Balance at Beginning
of Year............... $4,923 $4,274 $4,283
Loans Charged Off....... (483) (551) (515)
Loan Recoveries......... 236 294 206
Provision for Loan
Losses........ 240 906 300
-------- --------- ----------
Balance at End of Year.. $4,916 $4,923 $4,274
======== ========= ==========
The Company had no impaired loans at December 31, 1998. The Company had
impaired loans with a combined balance of $205 thousand at December 31, 1997.
The impaired loans had $69 thousand of the allowance for loan losses allo-
cated at December 31, 1997. Impaired loans averaged $153 thousand in 1998
and $1.1 million in 1997. Income recognized during the year ended December
31, 1998 and 1997 amounted to $16 thousand and $48 thousand respectively.
Interest income recognized on the cash basis for the year ended December
31, 1998 and 1997 totaled $3 thousand and $12 thousand respectively.
6. PREMISES AND EQUIPMENT
A summary of the premises and equipment balances at December 31 is as follows:
(dollars in thousands)
1998 1997
------ ------
Land...................... $1,530 $1,530
Premises and Leasehold
Improvements........... 9,146 9,052
Furniture and Equipment.. 6,783 6,144
-------- --------
17,459 16,726
Less Accumulated
Depreciation............ (8,868) (7,803)
-------- ---------
$8,591 $8,923
======== =========
Depreciation expense was $1.0 million, $858 thousand and $752 thousand in
1998, 1997, and 1996, respectively.
7. DEPOSITS
Time certificates of deposit with a balance of $100,000 or more were
$25.3 million and $24.5 million at December 31, 1998 and 1997 respec-
tively. Interest expense on these deposits was $1.41 million, $1.28
million and $1.29 million for 1998, 1997, and 1996, respectively.
At year-end 1998, stated maturities of time certificates of deposit were
as follows:
(dollars in thousands)
1999........................ $104,846
2000........................ 38,170
2001........................ 8,578
2002........................ 8,093
2003........................ 9,820
Thereafter.................. 327
----------
$169,834
==========
8. BORROWINGS
Federal funds purchased, securities sold under agreements to repurchase
and treasury tax and loan deposits are financing arrangements. Physical
control is maintained for all securities sold under agreements to repurchase.
Securities sold under agreements to repurchase totaled $36,945 and $37,503
while treasury tax and loan deposits totaled $44 and $446 at December 31,
1998 and 1997, respectively. Information concerning securities sold under
agreements to repurchase is as follows:
(dollars in thousands)
1998 1997
-------- -------
Average month-end balance
during the year.................... $35,653 $32,055
Average interest rate during
the year........................... 4.40% 4.56%
Maximum month-end balance during
the year.......................... $38,987 $37,503
Securities underlying these agreements at year-end were as follows:
(dollars in thousands)
1998 1997
------- -------
Amortized cost of securities.......... $42,024 $42,383
Fair value of securities.............. $42,566 $42,579
Federal Home Loan Bank Advances include fixed and variable-rate notes
from the Federal Home Loan Bank (FHLB) of Cincinnati. Principal balances
on these notes at December 31, 1998, and 1997 were $2,558,000 and $824,000,
respectively. Interest expense on these borrowings for the years ending
December 31, 1998, and 1997 was $58,000 and $18,000 respectively. The
weighted average interest rate on these borrowings is 5.58%. These bor-
rowings are secured by a blanket pledge of the Company's one-to-four family
residential real estate loan portfolio and FHLB stock.
The principal repayments on these borrowings are as follows for December
31, 1998:
(dollars in thousands)
1999........................ $1,272
2000........................ 75
2001........................ 680
2002........................ 531
----------
$2,558
==========
9. DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The estimated fair value approximates carrying value for all financial
instruments except those described below:
Securities
Fair values are based on a quoted market price, if available. If a quoted
market price is not available fair value is estimated using quoted market
prices for similar instruments.
Loans and Leases
The fair value of fixed rate loans is estimated by discounting future cash
flows using current rates at which similar loans would be made to borrowers
with similar credit ratings and for the same remaining maturities. Leases
are not considered financial instruments under generally accepted accounting
principles and are, therefore, not included in the following schedules.
Deposits
Fair values for deposit liabilities with defined maturities are based on
the discounted value of future cash flows expected to be paid, using the
current rate offered for similar deposits with the same remaining
maturities.
Long-term Debt
The fair value of long-term debt is estimated by discounting future cash
flows using currently available rates for similar financing.
Commitments to Extend Credit and Standby Letters of Credit
The fair value of off-balance sheet loan commitments is considered
nominal.
The estimated fair values of the Company's financial instruments are as
follows:
(dollars in thousands)
1998 1997
Carrying Fair Carrying Fair
Value Value Value Value
-------- -------- --------- ----------
Financial Assets:
Cash and Short-term
Investments............ $27,810 $27,810 $31,091 $31,091
Securities
Available-for-sale..... 175,007 175,007 122,427 122,427
Held-to-maturity....... 19,495 19,753
Net Loans, excluding
Leases................. 316,447 324,848 316,030 318,843
Accrued Interest......... 4,619 4,619 3,909 3,909
Financial Liabilities:
Deposits................. (435,143) (437,052) (409,891) (410,383)
Short-term borrowings.... (36,989) (36,989) (37,949) (37,949)
Other borrowings......... (2,558) (2,576) (824) (850)
ESOP loan................ (600) (600)
Accrued Interest......... (1,652) (1,652) (1,742) (1,742)
10. EMPLOYEE BENEFIT PLANS
WCNB sponsors a non-contributory Profit Sharing Retirement Plan (PSRP)
and an Employee Stock Ownership Plan (ESOP) in which all salaried employees
with one year or more of service participate. Annual contributions are
made by WCNB to both plans in an amount which is the lesser of 8.5% of the
Banks current profits or 6.375% of the aggregate compensation paid in such
year to all eligible participants. Included in contributions made to the
PSRP is a cash portion paid directly to employees equal to 2.25% of the
aggregate compensation paid during the year to eligible participants. 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. Actual contributions paid to the plans for the
three years ending December 31 were:
(dollars in thousands)
1998 1997 1996
-------- ------- --------
PSRP................ $331 $310 $293
ESOP................ 244 229 217
--------- ------- --------
$575 $539 $510
======== ======== ========
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 WCNB'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 WCNB. The
shares purchased with the loan proceeds are held in a suspense account for
allocation among participants as the loan is repaid. As payments are made
and shares are released from the suspense account, such shares will be validly
issued, fully paid and nonassessable. At December 31, 1998 the loan balance
was $600,000, there were no borrowed funds for the ESOP at December 31, 1997.
Shares pledged as collateral 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 shares are recorded as a reduction
of retained earnings; dividends on unallocated shares are recorded as a
reduction of debt and accrued interest. ESOP compensation expense related
to leveraged shares was $154,000 in 1998. The ESOP shares as of December
31, 1998 and 1997 were as follows.
1998 1997
-------- -------
Allocated Shares.......... 136,373 132,492
Shares committed to be
released for allocation.. 4,546 ---
Unreleased shares......... 9,091 ---
------- --------
150,010 132,492
========= ========
The fair value of unreleased shares was $320,000 at December 31, 1998.
CVB sponsors a Section 401(k) savings plan for substantially all of its
employees and officers of the bank. Employees who work over 1,000 hours
per year are eligible to participate in this plan. The bank may make
matching contributions as approved at the discretion of the Board of
Directors. Employees contributions are fully vested at all times, and bank
contributions are fully vested after five years. The bank made contribu-
tions of $23,000 in 1998 and 1997 and $19,000
in 1996.
CVB sponsored a non-contributory defined benefit pension plan covering
substantially all of its employees. On November 23, 1998, the Board of
Directors of CVB approved a resolution to cease the accrual of benefits
under the plan effective December 31, 1998 and to terminate the pension
plan effective February 28, 1999. The plan assets were frozen and the non-
vested accumulated benefit obligation as of December 31, 1998 became vested.
The vested benefit obligation will be settled by a lump-sum payment to each
covered employee. Plan assets of $1.0 million at December 31, 1998 are
expected to be sufficient to fund payment of the vested benefit obligation.
The pension expense recognized by CVB was $33,000, $126,000 and $18,000 in
1998, 1997 and 1996,
respectively.
The Company evaluated the above benefit plans during 1998, and has revised
the benefit package to align the plans between the subsidiaries beginning in
1999. The Company will retain the ESOP and the Section 401(k) plans and
will terminate the profit sharing plan in addition to the defined benefit
plan.
11. OTHER OPERATING EXPENSES
Other operating expenses include the following major categories of
expense:
(dollars in thousands)
1998 1997 1996
------- ------- --------
Data Processing.......... $1,246 $1,089 $1,155
Franchise Taxes.......... 710 600 676
Intangible Amortization.. 317 789 440
Other Operating.......... 3,205 3,097 3,497
-------- -------- --------
$5,478 $5,575 $5,768
======== ======== ========
12. INCOME TAXES
Income tax expense and related balance sheet accounts are as follows:
(dollars in thousands)
1998 1997 1996
------- ------- -------
Federal Current............ $2,832 $3,503 $2,595
Federal Deferred (Benefit). (21) (582) 153
-------- ------- --------
$2,811 $2,921 $2,748
======== ======= ========
The sources of gross deferred tax assets and gross deferred tax liabilities
at December 31, are as follows:
(dollars in thousands)
1998 1997 1996
------ ------ ------
Items giving rise to deferred
tax assets:
Allowance for loan losses
in excess of tax reserves...... $1,263 $1,265 $997
Employee benefits................ 375 265 174
Intangible assets................ 172 181 30
Other............................ 69 32 54
Items giving rise to deferred
tax liabilities:
Depreciation..................... (191) (205) (218)
Leases........................... (437) (358) (438)
Unrealized gain on securities
available-for-sale............ (803) (359) (165)
Other............................ (212) (162) (163)
-------- ------- --------
Net deferred tax assets.......... $236 $659 $271
======== ======= ========
The Company has sufficient taxes paid in prior years to support recording
these deferred tax assets without a valuation allowance.
The reasons for the differences between income tax expense and the
amount computed by applying the statutory federal income tax rate of 34% for
the three years presented are as follows:
(dollars in thousands)
1998 1997 1996
------ ------- ------
Tax at Federal Statutory
Rate..................... $3,442 $2,938 $3,148
Effect of Tax-Exempt
Income................... (416) (430) (463)
Effect of Non-deductible
Goodwill Amortization.... 61 61 61
Other...................... (276) 352 2
-------- --------- --------
$2,811 $2,921 $2,748
======== ========= ========
Effective Tax Rate......... 27.80% 33.80% 29.70%
======== ========= ========
13. COMMITMENTS AND CONTINGENCIES
Various contingent liabilities are not reflected in the financial state-
ments, including claims and legal actions arising in the ordinary course of
business. In the opinion of management, after consultation with legal
counsel, the ultimate disposition of these matters is not expected to have a
material effect on financial conditions or results of operations.
Some financial instruments are used in the normal course of business to
meet financing needs of customers. These financial instruments include
commitments to extend credit, standby letters of credit and financial
guarantees. These involve, to varying degrees, credit risk more than the
amount reported in the financial statements.
As of December 31, 1998, the Company had outstanding standby letters of
credit of $1.9 million compared to $2.2 million at December 31, 1997. These
letters of credit are backed by notes signed by the customer. These notes
are primarily variable-rate. In addition to these letters of credit, the
Company had committments outstanding to extend credit and unfunded lines of
credit for customers totaling approximately $47.2 million and $45.2 million at
December 31, 1998 and 1997. All of these unfunded commitments are variable
rate and mature within one year. These committments generally require the
customer to maintain certain credit standards. Management does not anticipate
any material losses as a result of these commitments.
At December 31, 1998, the Company was required to maintain $6.1 million
either in cash or in balances with the Federal Reserve Bank. These balances
do not earn interest.
The Company and WCNB have entered into employment agreements with certain
officers of the Bank. The term of the agreements are ten years. The em-
ployment agreements provide that in the event of a "change in control" of
Wayne Bancorp, Inc., or WCNB, the officers would be entitled to benefits
under the agreement. These benefits for some officers are 36 monthly cash
payments, each equal to 8% of the sum of their respective compensation,
including bonuses, paid to the officer in the last whole calender year pre-
ceding their termination of employment, and for other officers these
benefits are 24 monthly cash payments, each equal to 8% of the sum of their
respective compensation, including bonuses, paid to them in the last whole
calender year preceding their termination of employment.
The President of the Company, who also serves as the President of CVB, is
party to an employment agreement with CVB which is substantially the same
as those described above. The agreement provides for three years of salary
and benefits in the event his employment is terminated. This agreement is
valid for 36 months from the date of the change in control. This agreement
will expire on April 1, 2001.
14. REGULATORY MATTERS
Dividends are paid by the Company from its assets which are mainly pro-
vided by dividends from its subsidiaries. However, certain restrictions
exist in regard to the ability to transfer funds to the Company in the form
of dividends. The approval of the Comptroller of the Currency, for WCNB,
and the Federal Reserve Board, for CVB, is required in order to pay divi-
dends in excess of earnings retained in the current year plus retained
earnings from the preceding two years. The amount of retained earnings
available for dividends without this approval is $1.8 million for CVB.
On August 24, 1998, WCNB received approval from the Comptroller of the
Currency to pay a special dividend to the Company in the amount of $8.5
million, this approval expired December 31, 1998. During the year
ending December 31, 1998, WCNB exercised this approval and paid special
dividends of $1.3 million to the Company. Based on the level of prior
dividends for WCNB, future dividends in excess of earnings will require
approval from the Comptroller of the Currency. On Janaury 6, 1999, WCNB
received approval from the Comptroller of the Currency to pay a special
dividend to the Company in the amount of $7.0 million. This approval expires
on December 31, 1999.
The Company and its subsidiaries are subject to regulatory capital re-
quirements administered by federal banking agencies. Capital adequacy
guidelines and prompt corrective action regulations involve quantitative
measures of assets, liabilities and certain off-balance sheet items calcu-
lated under regulatory accounting practices. Capital amounts and classi-
fications are also subject to qualitative judgements by regulators about
components risk weightings, and other factors, and the regulators can lower
classifications in certain cases. Failure to meet various capital require-
ments can initiate regulatory action that could have a direct material effect
on the financial statements.
The prompt corrective action regulations provide five classifications,
including well captialized, adequately capitalized, undercapitalized,
significantly undercapitalized, and critically undercapitalized, although
these terms are not used to represent overall financial condition. If
adequately capitalized, regulatory approval is required to accept brokered
deposits. If undercapitalized, capital distributions are limited, as is
asset growth and expansion, and plans for capital restoration is required.
The minimum requirements are:
Capital to
Risk-Weighted Assets Tier 1 Capital to
Total Tier 1 Average Assets
----------- -------- -----------------
Well Capitalized....... 10% 6% 5%
Adequately Capitalized. 8% 4% 4%
Undercapitalized....... 6% 3% 3%
At year-end, consolidated and Bank only actual capital levels (in thousands)
and minimum required levels were as follows:
To Be Well
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
-------------------------------------------------------
Amount Ratio Amount Ratio Amount Ratio
---------------------------------------------------------
As of December
31, 1998:
Total Capital
(to Risk Weighted
Assets)
Consolidated $60,308 17.6% $27,443 8.0% $34,304 10.0%
WCNB 48,157 18.5% 20,858 8.0% 26,072 10.0%
CVB 11,386 14.2% 6,418 8.0% 8,023 10.0%
Tier I Capital
(to Risk Weighted
Assets)
Consolidated $56,028 16.3% $13,722 4.0% $20,583 6.0%
WCNB 34,892 13.4% 10,429 4.0% 15,643 6.0%
CVB 10,381 12.9% 3,209 4.0% 4,814 6.0%
Tier I Capital
(to Average
Assets)
Consolidated $56,028 10.7% $20,881 4.0% $26,101 5.0%
WCNB 34,892 9.2% 15,220 4.0% 19,025 5.0%
CVB 10,381 7.4% 5,610 4.0% 7,013 5.0%
As of December 31, 1997:
Total Capital
(to Risk Weighted
Assets)
Consolidated $57,389 17.6% $26,135 8.0% $32,668 10.0%
WCNB 46,271 19.1% 19,384 8.0% 24,230 10.0%
CVB 10,162 12.4% 6,574 8.0% 8,718 10.0%
Tier I Capital
(to Risk Weighted
Assets)
Consolidated $53,316 16.3% $13,067 4.0% $19,601 6.0%
WCNB 33,235 13.7% 9,692 4.0% 14,538 6.0%
CVB 8,870 10.8% 3,287 4.0% 4,931 6.0%
Tier I Capital
(to Average
Assets)
Consolidated $53,316 10.8% $19,723 4.0% $24,653 5.0%
WCNB 33,235 9.4% 13,867 4.0% 17,334 5.0%
CVB 8,870 6.5% 5,489 4.0% 6,862 5.0%
At year end 1998 and 1997, the Company and subsidiaries were categorized as
well capitalized. Management is not aware of any conditions subsequent to
year end that would change the Company's or the Bank's capital category.
In January 1999, the Board of Directors of the Company authorized the
purchase of up to 5% of the Corporation's outstanding common shares over a
two year period. The shares will be purchased in the over-the-counter mar-
ket. The number of shares to be purchased and the price to be paid will
depend upon the availability of shares, the prevailing market prices and any
other considerations which may, in the opinion of the Company's Board of
Directors or management, affect the advisability of purchasing shares.
15. WAYNE BANCORP, INC. (PARENT COMPANY ONLY) FINANCIAL
INFORMATION
(dollars in thousands)
BALANCE SHEETS Years ended December 31,
1998 1997
ASSETS ----- ------
Cash........................... $24 $52
Securities Available-for-sale.. 1,182 1,655
Subordinated Note from
Subsidiaries.................. 10,000 10,000
Investment in Bank Subsidiaries 48,206 44,482
------- -------
TOTAL ASSETS................... $59,412 $56,189
======= =======
LIABILITIES.................... $345 $379
SHAREHOLDERS' EQUITY........... 59,067 55,810
------ -------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY....... $59,412 $56,189
======== ========
STATEMENTS OF INCOME
Years Ended December 31,
1998 1997 1996
----- ----- -----
Dividends from Subsidiaries.... $3,679 $1,994 $11,809
Other Income................... 657 662 33
-------- -------- --------
4,336 2,656 11,842
Other Expenses................. 445 407 61
-------- -------- --------
Income Before Income Taxes
and Equity in Undistributed
Earnings of Bank Subsidiaries 3,891 2,249 11,781
Federal Income Tax Benefit..... (130) (109) (12)
-------- --------- --------------
4,021 2,358 11,793
Equity in Undistributed
Earnings (Distributions in
Excess of Earnings) of
Bank Subsidiaries............. 3,291 3,362 (5,283)
-------- -------- --------
Net Income..................... $7,312 $5,720 $6,510
======== ======== ========
STATEMENT OF CASH FLOWS
Years Ended December 31,
1998 1997 1996
----- ----- -----
OPERATING ACTIVITIES
Net Income..................... $7,312 $5,720 $6,510
Adjustments to Reconcile Net
Income to Net Cash Provided
by Operating Activities:
Depreciation................ 4
(Equity in Undistributed
Earnings) Distributions in
Excess of Earnings of Bank
Subsidiaries.................. (3,291) (3,362) 5,283
Other, Net...................... (26) 299 10
-------- --------- --------
Net Cash Provided by
Operating Activities.......... 3,995 2,657 11,807
INVESTING ACTIVITIES
Purchase of Securities
Available-for-sale............ (460) (981) (852)
Purchase Subordinated Note
from Subsidiary............... (10,000)
Proceeds from Sales and
Maturities of Securities
Available-for-sale............ 914 456 445
Proceeds from the Sale of
Premises...................... 283
-------- --------- ---------
Net Cash Provided (Used) by
Investing Activities......... 454 (525) (10,124)
FINANCING ACTIVITIES
Repayment of Long-term debt.... (213) (213)
Cash Dividends................. (1,997) (1,505) (1,362)
Dividends on Unallocated ESOP
Shares........................ (6)
Treasury Stock Purchased, Net.. (2,474) (375) (170)
-------- --------- ---------
Net Cash Used by Financing
Activities................ (4,477) (2,093) (1,745)
-------- --------- ---------
Increase (Decrease) in Cash.... (28) 39 (62)
Cash at Beginning of Year...... 52 13 75
-------- --------- ---------
Cash at End of Year............ $24 $52 $13
======== ========= =========
16. SUBSEQUENT EVENT
On Janaury 6, 1999, subject to shareholder approval, 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, WCNB and CVB. The options
awarded vest and become exercisable in equal installments on December 15,
1999, 2000 and 2001. This option period expires ten years from the date of
grant. In addition, 465,800 shares of authorized but unissued common stock
are reserved for which no options have been granted.
17. QUARTERLY FINANCIAL DATA
(Unaudited)
March 31 June 30 September December 31
1998 ---------------------------------------------------
Interest Income....... $9,393 $9,584 $9,311 $9,484
Net Interest Income... 5,345 5,445 5,157 5,495
Provision for Loan
Losses............... 60 60 60 60
Net Income............ 1,717 1,923 1,810 1,862
Earnings Per Share.... 0.35 0.39 0.37 0.39
1997
Interest Income....... $8,711 $9,039 $9,099 $9,440
Net Interest Income... 4,981 5,223 5,207 5,355
Provision for Loan
Losses............... 227 226 227 226
Net Income............ 1,309 1,468 1,446 1,497
Earnings Per Share.... 0.27 0.30 0.29 0.30
MANAGEMENT DISCUSSION AND ANALYSIS
Introduction
The following commentary represents managements discussion and analysis of
the Company's financial condition and results of operations. This review
highlights the principal factors affecting earnings during 1998, 1997 and
1996 and significant changes in the consolidated balance sheets for the
years ending December 31, 1998 and 1997. Financial information for prior
years is presented when appropriate. The objective of this financial re-
view is to enhance the readers understanding of the accompanying financial
statements and related information of the Company. This review should be
read in conjunction with the audited consolidated financial statements,
footnotes, financial ratios and statistics and other information contained
in this report, and the Companys 10-K. Where applicable, management's
insights of known events and trends are discussed that have or may reason-
ably be expected to have a material effect on the Companys operations and
financial condition.
Wayne Bancorp, Inc. is a locally owned and operated multi-bank holding
company whose subsidiaries include Wayne County National Bank (WCNB) and
Chippewa Valley Bank (CVB) collectively referred to as the "Company." The
Company provides banking and financial related services to individual and
commercial customers in Wayne, Holmes, Medina, Stark and Summit counties.
The Companys deposits are insured by Federal Deposit Insurance Corporation
and both subsidiaries are members of the Federal Reserve System. WCNB is
is subject to supervision, examination and regulation by the Comptroller of
the Currency, and CVB is subject to supervision, examination and regulation
by the Federal Reserve Board and the Ohio Division of Financial Institutions.
Bank Acquisition
On March 31, 1998, Wayne Bancorp, Inc., (Wayne) acquired 100% of the common
stock of Chippewa Valley Bancshares, Inc. (Chippewa). The acquisition was
accounted for as a pooling-of-interests. Under the pooling-of-interests
method of accounting, the historical basis of the assets and liabilities
are carried forward at their recorded amounts, and the shareholder's equity
is consolidated on the balance sheet. In addition, a pooling-of-interests
requires all financial statements to be retroactively restated as if the
acquisition had taken place prior to the periods presented.
Pursuant to the merger, Wayne exchanged 2.1916 shares of the Companys
Common stock for each share of Chippewas outstanding common shares, which re-
sulted in 981,837 shares being issued in the transaction. At the effective
date of the merger, Chippewa had total assets of $140.2 million, total
shareholders equity of $10.1 million and net income of $368 thousand.
Chippewa's net income was $99 thousand and $998 thousand for the years
ending December 31, 1997 and 1996, respectively.
The merger of Chippewa into Wayne has enhanced the overall ability of the
Company to grow and generate earnings. This merger expanded the Companys
market area into Medina and Summit counties through the addition of nine
banking centers and 83 employees. As a result of this acquisition the bank
subsidiaries have had the opportunity to share skills and resources as well
as align product offerings and standardize fees. In addition, the Company
has been able to centralize the marketing and financial reporting functions
while reducing reliance on outside vendors.
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 1995.
Such statements are subject to certain risks and uncertainties, including
changes in economic conditions in the Companys market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand
for loans in the Companys 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
Companys financial performance and could cause the Companys actual results
for future periods 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 cir-
cumstances after the date of such statements or to reflect the occurrence
of anticipated or unanticipated events.
TABLE I: Financial Ratios for Five Years
__________________________1998_____1997_____1996______1995______1994___
Rate of return on:
Average Assets...... 1.44% 1.19% 1.43% 1.32% 1.27%
Average Equity...... 12.60% 10.69% 13.34% 12.11% 12.17%
Beginning Equity.... 13.10% 11.09% 13.79% 12.69% 12.63%
As a Percent of
Average Assets:
Net-Interest Income. 4.21% 4.32% 4.29% 4.42% 4.28%
Non-Interest Income. 0.74% 0.75% 0.98% 0.79% 0.77%
Provision for Loan
and Lease Losses.. 0.05% 0.19% 0.07% 0.06% 0.10%
Non-Interest Expense 2.91% 3.08% 3.16% 3.30% 3.31%
Dividends as a Percent
of Net Income....... 31.95% 31.38% 24.50% 27.24% 25.80%
Other
Average Loans & Leases
to Average Deposits.. 77.31% 78.71% 74.04% 75.94% 70.80%
Net Loan & Lease
Charge-offs (Recoveries)
to Average Loans
& Leases......... 0.08% 0.08% 0.11% -0.04% -0.02%
Allowance to Year End
Net Loans & Leases... 1.51% 1.52% 1.48% 1.58% 1.59%
Average Shareholders'
Equity to Average
Assets............... 11.39% 11.13% 10.74% 10.92% 10.45%
Changes in Average
Balances:
Total Assets......... 5.91% 5.81% 11.45% 5.24% 4.33%
Shareholders' Equity. 8.45% 9.66% 9.54% 10.03% 8.31%
Loans and Leases.... 3.30% 10.58% 6.32% 11.62% 8.94%
Deposits............ 5.18% 4.01% 9.10% 4.02% 2.92%
RESULTS OF OPERATIONS
The Companys Net income for 1998 was $7.31 million, which represents an in-
crease of 27.8% over 1997 net income of $5.72 million, which decreased $790
thousand, or 12.1% from net income of $6.51 million in 1996. Net income
per share was $1.50 in 1998, compared to $1.16 in 1997 and $1.32 in 1996.
Net income in 1997 was impacted primarily by an increase in the loan loss
provision on $600 thousand which was necessary to cover identified losses
within the loan portfolio, and bring the reserve to a level commensurate with
the outstanding loan balances. Net income in 1996 includes a one-time gain on
the sale of WCNBs credit card business of $544 thousand net of tax, as well as
an additional gain of $33 thousand net of tax, from the sale of WCNBs merchant
credit card business.
Return on average assets for 1998 was 1.44%, compared to 1.19% in 1997 and
1.43% in 1996. Excluding the events mentioned above, the return on average
assets was 1.44%, 1.27% and 1.31% respectively for the three years ending
December 31, 1998. Return on average equity was 12.60% in 1998, compared
to 10.69% in 1997 and 13.34% in 1996. Excluding the events mentioned
above, the return on average equity was 12.60%, 11.43% and 12.23% respec-
tively for the three years ending December 31, 1998.
The allowance for loan and lease losses as a percentage of total net loans
and leases at December 31, 1998 was 1.51%, compared to 1.52% and 1.48% for
December 31, 1997 and 1996 respectively. As indicated earlier, the allow-
ance for CVB was increased by $600 thousand. Had this adjustment not been
made, the allowance as a percentage of total net loans and leases would have
been 1.33% at December 31, 1997.
Net Interest Income
Net interest income, the primary source of earnings for the Company, is the
difference between interest and loan fee income generated on earning assets
and the interest expense on deposits and borrowed funds. Net interest
income is effected by changes in interest rates, the volume and composition
of earning assets and paying liabilities, as well as the balances in non-
interest bearing deposit accounts.
Total interest and fee income for 1998 was $37.8 million, which is an in-
crease of $1.5 million, or 4.1% over the $36.3 million earned in 1997,
which increased $2.1 million, or 6.2% over the $34.2 million earned in
1996. The most significant impact on the Companys interest income has been
the growth in interest earning assets, which for 1998 was $32.6 million,
while interest earning assets increased by $23.2 million in 1997. In 1998
this growth was concentrated in the securities portfolio, whereas in 1997
growth was primarily in the loan portfolio. The change in the composition
of earning assets is largely impacted by loan demand and market conditions.
The tax equivalent yield on average earning assets for 1998 was 7.80%
compared to 8.21% for both 1997 and 1996. The decrease in yield is due to
a shift in the overall make up of earning assets, as well as a reduction in
the prime lending rate during the fourth quarter of 1998 from 8.50% to
7.75%. The decrease in "prime" affected the Companys variable rate commer-
cial, agricultural and home equity loans as the rates charged to borrowers on
these types of loans are tied to prime. The rates on these loans "float"
with prime, which protects the Company's earnings, or net interest income,
in volatile interest rate environments. These loans represented $76.6
million, or 24.0%, of total net loans and leases at December 31, 1998.
Total interest expense for 1998 was $16.3 million, which increased $807
thousand, or 5.2% over interest expense of $15.5 million in 1997, which
increased $760 thousand, or 5.1% over interest expense of $14.8 million in
1996. The yield or cost of funds, on average interest bearing deposits and
borrowed funds, was 4.12% at December 31, 1998, compared to 4.19% for both
1997 and 1996. Total interest bearing liabilities at December 31, 1998 were
$409.5 million, which increased $22.8 million from $386.7 million in 1997,
which increased $11.8 million from $374.9 million in 1996. The slight
decline in the cost of funds in 1998 is a result of the Company lowering
rates on deposits simultaneously as rates were adjusted downward on
interest earning assets. The decrease in rates paid on deposits is a fac-
tor of the Companys interest rate management to preserve the net interest
income of the Company.
The Companys Asset/Liability committee monitors the maturity structure and
rates of all interest earning assets and interest bearing liabilities on a
monthly basis to maintain stability in the net interest income. During
1998, the Company was in a slightly negative GAP position. This negative
position is favorable during a falling rate environment, which was the case in
1998. Although the net interest spread which is the difference between
average rates earned on assets and the average rates paid on deposits and
borrowed funds, decreased from 4.01% in 1997, to 3.68% in 1998, the
Company was able to increase net interest income as growth in earning assets
exceeded growth in paying liabilities.
Provision and Allowance for Loan and Lease Losses
The provision for loan and lease losses is an expense item charged to
operations of the Company. The provision is recorded to maintain the
balance in the related balance sheet account, allowance for loan and lease
losses, at a level which management considers adequate to absorb reasonably
probable credit losses within the loan portfolio. The adequacy of the
allowance is determined by management based on several factors. These factors
include estimates of probable losses within the current portfolio, prior his-
torical losses, the mix and size of the current portfolio, as well as ex-
pected economic conditions. In addition to these factors, the Company also
monitors the amount of unsecured credit that has been extended at the eval-
uation date that remains unfunded. While the analysis identifies and al-
locates portions of the allowance to specific problem loans, the entire
amount is available for for any losses that may occur.
At December 31, 1998, the allowance for loan losses was $4.92 million, or
1.51% of total net loans and leases compared to $4.92 million, or 1.52% at
December 31, 1997. This ratio will change periodically based on the growth
and composition within the loan portfolio as well as the changes in the
quality of the portfolio. The stability in this ratio for the two years pre-
sented is attributable to the balance of total loans and leases remaining rel-
atively unchanged as well as similar charge-off and recovery activity.
During 1998, the Company experienced net charge-offs of $246 thousand com-
pared to $258 thousand during 1997.
Past due and non-performing loans are one of the primary factors that man-
agement uses to determine the adequacy of the allowance for loan and lease
losses. At December 31, 1998, the Company had loans that were past due
ninety days or more and still accruing interest of $288 thousand, or .09%
of total loans and leases compared to $285 thousand, or .09% at December
31, 1997. At December 31, 1998 the Company had no loans on a non-accrual
status, compared to $205 thousand, or .06% of total loans at December 31,
1997. Based on this activity and the quality of the current portfolio,
management feels the current allowance for loan and lease losses is ade-
quate to cover probable future loses.
The provision for loan and lease losses charged to operations was $240
thousand for 1998 compared to $906 thousand for 1997, and $300 thousand for
1996. The increase in 1997 is primarily due to a $600 thousand adjustment
made to CVBs allowance to bring the allowance to a level consistent with
loan volume, and to absorb identified problem loans within the portfolio.
Of these identified problem loans, $275 thousand was charged off during
1998. Management anticipates that the provision charged to operations in 1999
will be similar to the provision in 1998.
Other Income
Other income of the Company consists of fees generated for providing banking
related services to our customers. This income is derived from several com-
ponents, including service charges and fees on deposits, income for Trust
and Investment Services, and other non-interest income, which includes fees
for safety deposit box rental, check cashing, brokerage services and ser-
vicing mortgage loans that have been sold into the secondary market, other
miscellaneous income, and gains or losses on the sale of loans and
securities. In 1998, total other income was $3.72 million compared to
$3.58 million in 1997, and $4.44 million in 1996.
Service charges and fees on deposits in 1998 were $1.72 million compared
to $1.70 million in 1997, and $1.73 million on 1996. The increase in these
fees for 1998 over 1997 is due to the implementation of standard service
charges and fees among the subsidiary banks. The Company's management mon-
itors our market area to ensure that the fees charged on these deposit
accounts are competitive within our market. In addition, management also
reviews the costs associated with offering these accounts when determining
the fee to charge the customer.
Trust and Investment Services income for 1998 was $1.41 million, which is an
increase of $71 thousand, or 5.3% over 1997 income of $1.34 million, which
increased $268 thousand, or 24.9% over income of $1.08 million in 1996.
The increase in Trust income is primarily based on the steady increase in
assets under management, as this income is based on a fixed regular fee as
well as a percentage of assets managed fee and a percentage of earnings fee.
The fair-market value of Trust assets at December 31, 1998 was $314 million
compared to $285 million and $242 million for December 31, 1997 and 1996
respectively.
Other non-interest income was $586 thousand in 1998, which increased $47
thousand, or 8.7% from the $539 thousand earned in 1997, which decreased
$1.10 million or 67.1% from the $1.64 million earned in 1996. The increase
in 1998 over 1997 was due to increases in several areas, including addi-
tional income of $17 thousand from mortgage loan servicing fees, $17
thousand on fees from brokerage service activities, $22 thousand in "other
fees" and $36 thousand in other miscellaneous income. These increases
were offset by a loss of $32 thousand relating to the sale of $11.9 million
of residential real estate loans into the secondary market. The $17 thou-
sand increase in mortgage loan servicing fees is a result of this sale as
the Company retains the servicing on loans sold. The decrease in 1997
from 1996 is due to WCNB'S sale of its entire credit card portfolio in the
fourth quarter of 1996. The sale was approved by the Company's board of
directors based on the fact that the increased competition in the credit
card market made it difficult to grow the portfolio, yet the costs asso-
ciated with managing the portfolio continued to rise. The gain on this sale
was $824 thousand on a pre-tax basis. In addition, WCNB also sold its
merchant credit card business at a pre-tax gain of $50 thousand during the
same quarter in 1996. In 1996, merchant income generated was $238 thou-
sand, which is reported in non-interest income, and in 1997 and 1998,
WCNB had no merchant income. Securities gains and losses are not significant
for any period presented.
Non-Interest Expenses
Non-interest expenses are comprised of expenses relating to salaries and
employee benefits occupancy and equipment, and other operating expenses.
Total non-interest expenses were $14.80 million in 1998, which increased
$7 thousand, or 0.05% from $14.79 million in 1997 which increased $435
thousand, or 3.0% from $14.36 million in 1996.
Total salaries and employee benefits were $7.52 million in 1998, which
increased $34 thousand or 0.45% over $7.49 million in 1997, which increased
$495 thousand, or 7.1% from $6.99 million in 1996. The primary reason for
the increase in 1998 is due to annual salary adjustments to maintain com-
pensation at a level competitive within our employment market. In addition
to the annual adjustments, the Company increased wages of certain positions
in the second half of the year in order to retain trained staff and make
the starting salaries more attractive to new employees. The salary expense
component increased $430 thousand from $5.90 million in 1997 to $6.33
million in 1998. The increase in salaries was largely offset by a reduc-
tion in expenses relating to retirement benefits, which decreased $288 thou-
sand from $863 thousand in 1997 to $575 thousand in 1998. The decrease in
retirement benefits is primarily related to the Company fully funding the
retirement plans offered by CVB. The increase in 1997 over 1996 is
primarily related to the annual salary adjustments and retirement benefits.
The salary increases accounted for $267 thousand of the increase while the
retirement benefits increased by $151 thousand.
Occupancy and equipment expense was $1.81 million in 1998, which in-
creased $70 thousand or 4.03% from $1.74 million in 1997, which increased
$133 thousand, or 8.3% from $1.60 million in 1996. The primary reason for
these increases from year to year is related to depreciation on new equip-
ment purchased to maintain operating efficiency. During 1998, the
Company completed installation of a wide area network and up graded its
phone system. In addition, to enhance customer convenience, the Company
installed two Automated Teller Machines (ATMs) and three "traveling" news
signs at drive-thru locations. Beyond these, the Company also incurs on-
going expenses to maintain the condition and appearance of its facilities
and renovate as needed for staffing requirements and other reasons.
Other operating expenses were $5.48 million in 1998, which decreased $97
thousand, or 1.7% from $5.56 million in 1997, which decreased $193 thou-
sand, or 3.3% from $5.79 million in 1996. Other operating expenses include
the general and administrative expenses of the Company, such as franchise
taxes, stationary and supplies, phone expense, advertising and computer
expense to name a few. The decrease in 1998 from 1997 is primarily attri-
butable to the Company's on-going committment to control costs where pos-
sible. The Company experienced declines in directors fees of $157 thou-
sand, $472 thousand in amortization expense and $36 thousand in advertising
expense. The decreases were offset by increases of $110 thousand in fran-
chise taxes, $58 thousand in donations, primarily to fund the Wayne County
National Charitable Foundation, $157 thousand in data processing and computer
related expenses mainly for Year 2000 compliance and testing, $87 thousand in
professional fees and $22 thousand for the Companys operation of Automated
Teller Machines (ATMs). The decrease in these expenses in 1997 from 1996
is primarily due to the creation and funding of the Wayne County National
Charitable Foundation, where WCNB made a $300 thousand contribution upon
inception in 1996. In addition, in 1996 the Company also paid assessments
to the Federal Deposit Insurance Corporation of $218 thousand. These
increases were offset by reductions in the Companys credit card processing
costs of $191 thousand due to the sale of WCNBs credit card portfolio and
merchant credit card business.
Income Taxes
Federal Income taxes were $2.81 million, which decreased $110 thousand or
3.8% from $2.92 million in 1997, which increased $173 thousand or 6.3% from
$2.75 million in 1996. The changes in federal income taxes is due to the
changes in pre-tax earnings of the Company as well as adjustments of de-
ferred tax assets and liabilities as a result of the acquisition of CVB
during 1998. The income tax expense represents an effective tax rate of
27.8% for 1998, 33.8% for 1997, and 29.7% for 1996. The effective tax rate
paid by the Company is impacted by the amount of tax-free income that is
generated through tax-exempt securities and loans to tax-exempt customers.
FINANCIAL CONDITION
Total assets at December 31, 1998 were $538.7 million, which is an increase
of $30.3 million, or 5.96 %over total assets of $508.4 million at December
31, 1997. The Company's earning assets increased $32.6 million from $474.0
million in 1997 to $506.5 million in 1998. At December 31, 1998 earning
assets as a percentage of total assets were 94.1% compared to 93.4% at
December 31, 1997. The growth in the Company's balance sheet was was pri-
marily in the securities portfolio, which represented 32.5% of the total
assets at December 31, 1998 compared to 27.9% at December 31, 1997. The
loan portfolio was relatively unchanged from December 31, 1997 in total
volume, however as a percentage of total assets, loans represented 60.2%
and 63.8% at December 31, 1998 and 1997, respectively. The growth in
earning assets was primarily funded through growth in deposits of $25.3
million from $409.9 million at December 31, 1997 to $435.1 million at
December 31, 1998.
Securities
The securities portfolio serves a primary role in the overall context of
asset and liability management through liquidity, earnings, and diversifi-
cation. The securities portfolio is used to fund loans and deposit out-
flows, enhance Company earnings through purchases of high quality invest-
ments, and manage the credit and interest rate risk inherent in the balance
sheet.
To maintain sufficient liquidity, the Company invests in primarily shorter-
term securities, less than three years, with lower risk. These include US
Treasury and Agency securities, which are direct obligations of the US
government and agencies of the US government. These types of investments
are considered "risk-free" and offer a lower yield than other securities.
To increase the overall yield of the securities portfolio, the Company also
purchases shorter-term government guaranteed mortgage backed securities and
high quality corporate bonds. To reduce overall tax-liability, the Company
invests in obligations of state and political subdivisions, which are
generally exempt from federal income tax.
The Companys investment portfolio is classified as available-for-sale.
Securities, available-for-sale, are carried at fair value on the balance
sheet with unrealized holding gains or losses reported as a separate com-
ponent of equity, net of tax. Available-for-sale securities are those
which may be sold prior to maturity for liquidity, asset liability management
or other reasons. The Company currently does not have any securities clas-
sified as held-to-maturity, those which management has the ability and
intent to hold to maturity, however the Company may use this classification
in the future if conditions warrant. During 1998, as a result of the
acquisition, the Company transferred securities held by CVB with an amor-
tized cost of $17.7 million from held-to-maturity to available-for-sale;
to conform to the classification method historically followed by the Company.
The securities portfolio was $175.0 million at December 31, 1998, which rep-
resented 32.5% of total assets compared to $141.9 million, and 27.9% of
total assets at December 31, 1997. This increase is due to deposit growth
exceeding loan demand during 1998. The securities portfolio has net un-
realized gains of $2.36 million at December 31, 1998 compared to $1.06 million
at December 31, 1997. This increase is attributable to the growth in the
securities portfolio as well as the falling rates in the Treasury market,
as bond prices move in the opposite direction of bond yields.
Loans and Leases
The Companys loan portfolio consists of a variety of loans to include: com-
mercial, agricultural, residential and commercial real estate, consumer,
credit card, and direct lease financing. The Company's market area in-
cludes Wayne, Holmes, Medina, Stark and Summit counties.
Total loans and leases at December 31, 1998 were $324.2 million, or 60.3% of
total assets compared to $324.3 million, or 63.8% of total assets at December
31, 1997. This represents a decrease of $171 thousand, or 0.05% from 1997 to
1998. While total loans remained substantially the same, the composition
of the loans varied between the two years presented. The three major loan
categories are commercial, real estate and consumer which represented 40%,
41% and 15% of total loans and leases at December 31, 1998, compared to
41%, 39% and 16% respectively at December 31, 1997.
Commercial loans at December 31, 1998 were $129.5 million, which
decreased $2.5 million, or 1.9% from $132.0 million at December 31, 1997.
During 1998, the Company experienced increased competition from much larger
Commercial banks going outside their traditional geographic lending areas
to attract new business. These banks concentrated mainly on large commer-
cial credits by offeringrates below prime. It is the Companys intent to main-
tain its current lending practice with regard to loan pricing and avoid
making loans to customers that offer rates below prime. This practice will
maintain consistency and uniformity within the lending function and not
violate the integrity of our underwriting standards. Management does
not anticipate negative growth or material reductions in profitability as
a result of not offering or originating loans with rates below prime. As a
result the Company is very conscious of making loans to credit worthy
customers and will not sacrifice earnings for the sake of growth.
Real estate loans at December 31, 1998 were $131.8 million compared to
$125.2 million at December 31, 1997. This represents an increase of $6.6
million, or 5.3% net of sales into the secondary market of $11.9 million
during the second quarter of 1998. Due to the lower interest rates for single
family housing, the Company experienced record production in terms of the
number of loans closed and dollar volume. The Company expects this activ-
ity to continue as mortgage loan rates remain at historically low levels
which allows borrowers to refinance their existing mortgages and makes housing
more affordable to first time home buyers. As this activity continues and
the percentage of residential real estate loans within the total loan
portfolio increases, management may consider the sale of additional loans
into the secondary market as market conditions warrant, to realign the
portfolio and provide liquidity for future loan demand.
Consumer loans at December 31, 1998, were $48.1 million, which decreased
$4.2 million, or 8.0% from $52.3 million at December 31, 1997. This de-
crease is due to several factors relating to the overall economy and con-
sumer debt loads. Due to the economic expansion that has occurred in the
1990s, bolstering consumer confidence and spending, average consumer debt is
at an all time high. This increased consumer spending has caused the
average household to be highly leveraged, thus reducing borrowing capacity.
The Company continues to seek out ways to increase the consumer portfolio, and
during 1998 the Company increased its incentives offered to auto dealers to
match those in place within our market area. Despite the continued efforts
to grow this portion of the loan portfolio, the Company will maintain its
philosophy of granting loans based on sound fundamental banking principles
and will not forego quality for growth. This conservative approach main-
tains the quality of the portfolio and potentially minimizes future losses
in economic down cycles.
Sources of Funds
The Company has made a commitment to provide a full range of banking pro-
ducts and services to its customers. The deposit products offered by the
Company provide a means for customers to safely invest their money while
earning a competitive rate of return on their funds.
The Companys primary sources of funds are core deposits originated from
within its market area. At December 31, 1998, total deposits were $435.1
million, which increased $25.3 million, or 6.2% over total deposits of
$409.9 million at December 31, 1997. The primary reason for this increase is
due to the introduction of the Platinum Money Market Investment account.
This account offers a higher yield that is tied to the 90-day treasury
auction rate, when the minimum balance is maintained. In addition to these
deposits, the Company holds securities sold under agreements to repurchase
(repurchase agreements). These repurchase agreements offer additional
funding sources for the Company and attractive yields for corporate cus-
tomers. Repurchase agreements at December 31, 1998 were $36.9 million,
which is a decrease of $558 thousand, or 1.5% from $37.5 million at Decem-
ber 31, 1997.
During 1998, the deposit mix, percentage-wise, remained relatively unchanged
from the prior year. However, due to the declining rate environment, to
maintain liquidity, customers have shifted their deposits into shorter-term
certificates of deposit, and increased balances in interest bearing savings
and transaction accounts.
In addition to core deposits and repurchase agreements, the Company has
alternative funding sources for loan demand, primarily from overnight
federal funds borrowings and advances from the Federal Home Loan Bank. The
Company currently has approximately $22.6 million available in overnight
federal funds that may be drawn from correspondent banks, none of which had
been used as of December 31, 1998. In addition, the subsidiaries are mem-
bers of the Federal Home Loan Bank system, which provides funding based on
a percentage of balances in one-to-four family residential loans. At
December 31, 1998, the Company had outstanding advances from the Federal Home
Loan Bank of $2.6 million. These alternative funding sources generally cost
more than core deposits and increase the overall cost of funds to the
Company.
Core deposit growth is an ongoing objective of Management to facilitate
funding for loan demand and asset growth. However, as consumers become
more mobile through direct deposit, on-line banking and other means, grow-
ing these core deposits with traditional accounts and services is becoming
more difficult. As a result of this, the Company introduced several new
products during 1998 for customer convenience and deposit growth. One such
product, as mentioned above, is the Platinum Money Market Investment
account. In addition to offering a higher rate of return for customers,
this account also offers free checks, a MAC Automated Teller Machine (ATM)
card, discounts on brokerage service and a free portfolio review by the
Companys Trust Department. Also, in December of 1998, WCNB introduced and
mailed out over five-thousand debit cards to qualified customers, thus making
this card a company-wide product as CVB has had its card in place since
1996. The debit card is becoming increasingly popular and allows the cus-
tomer to make purchases at a variety of locations as well as access, transfer
funds and perform account inquiries via an ATM. Further, WCNB adopted CVBs,
MVP savings account. This account is a tiered product where the rate in-
creases as your balance increases. In addition, the Company added retail
investments to its list of product offerings. The Companys retail invest-
ments include purchasing of mutual funds and annuities and is available
through both subsidiaries. Beyond these, the Company is researching
various versions of electronic banking to include touch-tone phone and
on-line banking. The Company is approaching these products in a conserva-
tive manner to ensure questions relating to customer risk are addressed and
thoroughly answered. Also during 1998, the Company introduced an employee
sales program which will allow the Customer Service Representatives to better
respond to the needs of the customer through increased product and sales
training.
Capital Management
The Company is committed to managing capital for maximum shareholder benefit
and maintaining strong protection for depositors and creditors. Capital con-
sists primarily of four components including common stock, surplus, or
additional paid in capital, undivided profits and net unrealized gains or
losses on available-for-sale securities. Bank regulators monitor capital
adequacy very closely and consider it a very important factor in ensuring
the safety of depositors accounts. As a result of this bank regulators
established risk based capital standards, which measures the amount of a
banks required capital in relation to the degree of risk contained in the
balance sheet, as well as off-balance sheet items. When calculating
ratios for capital adequacy, net unrealized gains or losses on available-
for-sale securities are excluded from the capital base.
There are several key ratios used to monitor capital adequacy. One such
ratio is the percent of stockholders equity to total assets. At December
31, 1998 this ratio was 10.97% compared to 10.98% at December 31, 1997.
The primary reason for this decline is the Companys increased activity in
purchasing treasury stock to fund the ESOP and dividend reinvestment plans
as well as enhance shareholder value through increasing return on equity.
Return on average equity was 12.6% at December 31, 1998, compared to 10.7%
at December 31, 1997. Return on equity is one measure of efficiency, which
reflects the Companys ability to generate net income as a percentage of its
capital base.
Other key ratios used in determining capital adequacy include the risk
based capital ratio and the leverage capital ratio. These ratios are pri-
marily used by bank regulators, where the regulators have set minimum capi-
tal standards. The risk based capital ratio is based on the risk-adjusted
assets of the Company as a percentage of the Companys adjusted capital.
The Companys assets are assigned risk weightings based on the risk inherent
in those assets, and then these risk weighted assets are compared to the
Companys adjusted capital, which includes the Companys capital accounts
less intangibles, plus a portion of the allowance for loan and lease
losses. Regulatory agencies require a minimum ratio of 8%, with at least
half of that being in core capital. Core capital, or Tier 1 capital, consists
of shareholders equity less general intangibles and Tier 2 capital includes
Tier 1 capital plus a portion of the allowance for loan and lease losses.
The leverage ratio compares Tier 1 capital to the Companys average assets,
adjusted for general intangibles.
The Companys total risk based capital ratio at December 31, 1998 and 1997
was 17.6%. The Companys Tier 1 capital ratio was 16.3% at December 31,
1998 and 1997. The Company's leverage ratio was 10.7% at December 31, 1998
compared to 10.8% at December 31, 1997.
The Company has set minimum internal capital adequacy ratios to comply
with banking regulations as well as maintain capital at levels that will
provide long-term strength and performance to the Company. These levels
as set by the Companys Board of Directors and management are; primary capital
of 8.5%, risk based capital of 10.0%, and the leverage ratio at 7.0%.
The Companys source of capital primarily comes from subsidiary earnings
as well as sales of treasury stock. During 1998, the earnings from these
subsidiaries were $6.97 million, compared to $5.36 million at December 31,
1997, and proceeds from the sale of Treasury stock were $433 thousand during
1998 compared to $299 thousand during 1997. The outflows of capital in-
clude cash dividends paid to shareholders as well as purchases of treasury
stock. On a combined basis, restated for the acquisition of CVB, the Com-
pany paid dividends of $2.34 million, or $.48 per share in 1998, compared to
$1.79 million, or $.37 per share for 1997. During 1998, the Company pur-
chased $2.91million in Treasury stock compared to $674 thousand during
1997. Of the cash dividends paid, $339 thousand and $299 thousand was
reinvested by shareholders under the Companys dividend reinvestment plan for
the years ending December 31, 1998 and 1997 respectively.
Asset and Liability Management
The Companys primary market risk exposure is interest rate risk, and to
lesser extents liquidity and prepayment risk. Interest rate risk is the
risk that the Companys financial condition could be adversely affected by
movements in interest rates, which is inherent in banking as a result of
repricing that may occur in interest earning assets and interest bearing
liabilities. The income of financial institutions is primarily derived
from the excess interest earned on assets over the interest paid on liabil-
ities. This fundamental premise places extreme 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 through the use of a GAP analysis.
The GAP is defined as the difference between the repricing of assets and
liabilities within certain time periods. Therefore, the objective of GAP
management is to match maturities and repricing of loans and deposits to
reduce interest rate risk and maintain liquidity. The repricing can occur
due to changes in rates on variable rate products, maturities, and accel-
erated payments. A positive GAP, where there are more assets repricing
than liabilities, is beneficial in a rising rate environment and a negative
GAP, where there are more liabilities repricing than assets is favorable
in a falling rate environment. It is the Companys policy to maintain a
fairly neutral GAP position of 10% or +10% in the one year period. During
1998, the Company maintained an average GAP of -5.35%, and at December 31,
1998, the GAP was -4.41%. This negative GAP position was beneficial, as in
1998 the industry experienced a falling rate environment. A second strategy
used by the bank to reduce exposure to interest rate risk is to originate
variable rate loans that reprice with prime and other indices. Currently,
the Company has $95.7 million, or 30.0%, of total loans and leases written as
variable rate loans. A third strategy is to invest excess funds in highly
liquid federal funds that mature and reprice on a daily basis. At December
31, 1998, the Company had $7.3 million in federal funds sold. In addition,
the Company classifies its investment portfolio as available-for-sale,
which allows the Company to sell these investments if needed to manage
risk, provide liquidity and take advantage of interest rate swings.
Finally, the Company has the ability to obtain funding from the Federal Home
Loan Bank, where advances are tailored to match loan rates and terms.
Also, to enhance the Companys asset liability management, a modeling pro-
gram was purchased which will allow the Company to shock the balance sheet
with different interest rate scenarios. This program will provide additional
information on an ad-hoc basis and assist with pricing of loans and
deposits under certain conditions.
The following table provides information about the Companys financial
instruments that are sensitive to changes in interest rates as of December
31, 1998. Based on the information and assumptions set forth in the tables
and notes, the Company believes that these assumptions are reasonable. For
loans, securities and deposit liabilities with contractual maturities, the
table represents principal cash flows and the weighted interest rate. For
variable rate loans, the contractual maturity and weighted interest rate was
used with an explanatory footnote as to repricing periods. For liabilities
without contractual maturities, such as savings, NOWs and Money Market
accounts, a decay rate was used to match their most likely withdrawal
behavior.
(dollars in thousands)
Principal/Notional Amount Maturing in:
1999 2000 2001 2002 2003
Rate-sensitive Assets -------------------------------------------
Fixed-interest rate
loans(1) 64,337 37,860 27,195 14,717 10,025
Average interest rate 8.72% 8.69% 8.45% 8.24% 7.81%
Variable-interest
rate loans(1)(2) 45,195 8,605 5,930 4,485 3,523
Average interest rate 8.37% 8.53% 8.48% 8.48% 8.53%
Fixed-interest rate
securities(1)(7) 38,141 33,703 35,442 15,381 9,989
Average interest rate 6.03% 6.13% 6.11% 6.15% 6.36%
Other intererest earning
assets(3) 7,340 --- --- --- ---
Average interest rate 5.44% --- --- --- ---
Rate-sensitive liabilities:
Non-interest bearing
checking(4) 16,454 13,163 9,872 8,227 8,227
Savings & interest
bearing checking(5) 39,899 39,899 29,924 29,924 19,949
Average interest rate(5) 2.96% 2.96% 2.96% 2.96% 2.96%
Certificates of
deposit(1) 104,846 38,170 8,578 8,093 9,820
Average interest rate(5) 5.01% 5.70% 5.59% 5.88% 5.69%
Fixed-interest rate
borrowings(1) 270 275 879 534 ---
Average interest rate(5) 7.98% 7.95% 6.02% 6.64% ---
Variable interest rate
borrowing(1)(6) 28,954 1,847 1,847 1,847 1,847
Average interest rate(5) 4.26% 4.22% 4.22 4.22% 4.22%
Principal/Notional Amount Maturing In:
(continued)
Fair Value
Thereafter Total 12/31/98
----------------------------------
Rate-sensitive Assets
Fixed-interest rate
loans(1) $75,855 $229,989 $233,473
Average interest rate 7.41% 8.18%
Variable-interest rate
loans(1)(2) 26,472 94,210 94,210
Average interest rate 8.55% 8.45%
Fixed-interest rate
securities(1)(7) 39,989 172,645 175,007
Average interest rate 6.42% 6.19%
Other interest bearing
assets(3) --- 7,340 7,340
Average interest rate --- 5.44%
Rate-sensitive Liabilities
Non-interest bearing
checking(4) $9,872 $65,815 $65,815
Savings and interest-
bearing checking(5) 39,899 199,494 199,494
Average interest rate(5) 2.96% 2.96%
Certificates of deposit(1) 327 169,834 171,143
Average interest rate(5) 5.18% 5.26%
Fixed-interest rate
borrowings(1) --- 1,958 1,976
Average interest rate(5) --- 6.73%
Variable-interest rate
borrowings(1)(6) 1,847 38,189 38,189
Average interest rate(5) 4.22% 4.25%
(1) Assumes normal amortization based on contractual maturity and repayment.
(2) The Company's adjustable rate commercial loans and home equity loans are
based on the prime rate of interest as stated in The Wall Street Journal
and are subject to repricing when the prime rate is adjusted. The
adjustable rate mortgage loans are based on the one-year constant
maturity treasury index, and are subject to annual repricing.
(3) The federal funds rate is subject to daily repricing and is that which is
currently offered by the correspondent bank buying these short term over-
night funds.
(4) Non interest bearing checking accounts assume a decay rate of 25%, 20%,
and 15%, for the first three years respectively, 12.5% for each of
years four and five with the remaining 15% being more than five years.
(5) Savings, NOW, and Money Market accounts assume a decay rate of 20% for
years one and two, 15% for years three and four, 10% for year five
with the remaining 20% being more than five years.
(6) Repurchase agreements are subject to monthly repricing and are based on
the prior months average discount rate for the 3-month treasury bill.
Decay is assumed to be 75% in year one with 5% for the remaining years
and thereafter.
(7) Reported at amortized cost. Includes a nominal amount of variable rate
securities.
Liquidity
Liquidity management is the ability of the Company to meet the credit needs
and cash demands of its borrowers and depositors. Through the Company's
Asset/Liability Committee, management analyzes and manages liquidity. The
Company's primary source of liquidity is cash, federal funds sold and cash
flows provided by maturities and amortization's in the loan and investment
portfolios.
At December 31, 1998, cash and cash equivalents were $27.8 million, or 5.2%
of total assets. The change in cash and cash equivalents is shown in the
Consolidated Statement of Cash Flows and summarizes activity for the three
years ending December 31, 1998. During 1998,the Company generated net cash
flows from operating activities of $7.19 million, including net income of
$7.31 million. During 1998, the Company had a net use of cash in investing
activities of $32.63 million. The use of this cash was primarily to fund
the growth in the securities portfolio, which represented a net cash out-
flow of $31.78 million. During 1998, the Company generated net cash flows
of $22.16 million in financing activities. The primary source of cash was
from the net growth in the Companys deposits of $25.25 million, which was
offset by dividends paid of $2.34 million and $2.14 million paid to pur-
chase Treasury stock, net of sales.
The liquidity needs of the Company, primarily cash dividends, are met
through dividends from the subsidiaries. Management is not aware of any
trend or event which would result in the Company not being able to meet its
current and future cash needs.
Year 2000 Issue
The Year 2000 (Y2K) issue relates to the ability of computers to operate in,
and recognize, the year 2000 as a valid date. The Company is almost entirely
dependent on computer systems to process transactions relating to lending and
deposit functions. WCNB employs the services of a nationally recognized
data processing service bureau specializing in data processing for finan-
cial institutions, while CVB operates an in-house data processing center.
In addition to these core operating systems, the Company also relies on
off-the-shelf hardware and software to conduct business relating to 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 Companys 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 Companys computer-operated or computer-dependent
systems to obtain confirmation that each system is either currently Y2K com-
pliant or that it is expected to be Y2K compliant. With respect to systems
that have not been confirmed as Y2K compliant, the Company will continue to
work with the appropriate supplier or service provider to ensure all such
systems will be compliant in a timely manner. The Company has developed a
contingency plan that was approved by the Board of Directors and senior
management that is currently being updated to comply with the guidelines
issued by the Federal Financial Institutions Council.
In addition to the expenses incurred for Y2K compliance and testing, the
Company could incur losses if loan payments are delayed due to Y2K problems
affecting any of the Companys significant borrowers or impairing the pay-
roll systems of large employers within the Companys primary market area.
As the Company's loan portfolio is highly diversified with regard to indi-
vidual borrowers and business types, and the Company's market area is not
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 relating to the Y2K issue, however additional unforeseen
expenses may be incurred.
Effects of Inflation
The financial statements and related data included in this report has been
prepared in accordance with generally accepted accounting principles (GAAP)
which measures financial position and results of operations in historical
dollars, except for securities classified as available-for-sale which are
recorded at fair market value. Changes in the relative value of money
during periods of inflation or recession are generally not recognized under
GAAP.
In managements opinion, changes in interest rates affect the financial
condition and results of operations to a far greater degree than changes
in the inflation rate. While interest rates are greatly influenced by
changes in the inflation rate, they do not change at the same rate or mag-
nitude as the inflation 'rate. Rather, changes in interest rates are based on
monetary policies. The Company protects earnings from interest rate vola-
tility through offering variable rate loan and deposit products and
asset/liability management.
New Accounting Pronouncements
Beginning January 1, 2000, a new accounting standard will require all
derivatives to be recorded at fair value. Unless designated as hedges,
changes in these fair values will be recorded in the income statement.
Fair value changes involving hedges will generally be recorded by off-
setting gains and losses on the hedge and on the hedged item, even if the
fair value of the hedged item is not otherwise recorded. This is not expected
to have a material effect but the effect will depend on derivative holdings
when this standard applies.
NOTICE OF ANNUAL STOCKHOLDERS MEETING
TO BE HELD APRIL 22, 1999
TO THE HOLDERS OF COMMON SHARES:
Notice is hereby given that pursuant to the call of its Directors, the
annual meeting of Wayne Bancorp, Inc. will be held at Memories Party & Con-
ference Center, 2437-B Back Orrville Road, Wooster, Ohio on April 22, 1999
at 2:00 p.m., for the purpose of considering and voting upon the following
matters as more fully described in the attached Proxy Statement dated
March 15, 1999:
1. Election of Directors: To elect the four (4) directors named in the
attached Proxy Statement
2. To Ratify the engagement of Crowe, Chizek & Company LLP as the
independent auditors of the company.
3. To approve the 1999 Incentive Stock Option Plan.
4. Taking action on any other matter which may be brought before said
meeting or any adjournment thereof.
Stockholders of record at the close of business on February 15, 1999 will
be entitled to vote the number of shares held of record in their names on that
date. The transfer books will not be closed. The date of this notice is
March 15, 1999.
By Order of the Board of Directors
Jimmy D. Vaughn, Secretary
IMPORTANT
All Stockholders are cordially invited to attend the meeting. Whether or not
you plan to attend in in person, you are urged to sign the enclosed Proxy and
return it promptly in the envelope provided. This will assure your repre-
sentation and a quorum for the transaction of business at the meeting If
you do attend the meeting in person, the Proxy will not be used if so re-
quested by you.
PROXY STATEMENT
March 15, 1999
GENERAL
This statement is furnished in connection with the solicitation of proxies
to be used at the Annual Stockholders Meeting of Wayne Bancorp, Inc., an
Ohio Corporation (the "Company"), to be held on April 22, 1999 at 2:00 p.m.
at Memories Party and Conference Center, 2437-B Back Orrville Road,
Wooster, Ohio, or any adjournment thereof. A stockholder, without affect-
ing any vote previously taken, may revoke his/her Proxy by giving notice to
the Secretary of the Company (Jimmy D. Vaughn) in writing prior to 1:00
p.m., on April 22, 1999; by a subsequently dated proxy; or by request for
the return of the Proxy in person at the Annual Meeting. The presence at
the meeting of the person appointing a Proxy, does not in and of itself revoke
the appointment.
The solicitation of proxies in the enclosed form is made on behalf of the
Board of Directors of the Company.
The cost of preparing, assembling and mailing the Proxy materials and of
reimbursing brokers, nominees, and fiduciaries for the out-of-pocket and
clerical expenses of transmitting copies of the Proxy materials to the
beneficial owners of shares held of record by such persons will be borne by
the Company. The Company does not intend to solicit proxies otherwise than
by use of mail, but certain officers and regular employees of the Company
or its subsidiaries, without additional compensation, may use their per-
sonal efforts by telephone or otherwise to obtain proxies. The Proxy ma-
terial is first being mailed to stockholders on or about March 15, 1999.
VOTING SECURITIES
As of February 15, 1999, the number of shares of common stock (there being
no other class of stock) outstanding and entitled to vote at the Annual
Stockholders Meeting is 4,792,866 including 37,108 shares held by the Wayne
County National Bank Trust Department as sole trustee which will be voted
in the election of Directors. Only those stockholders of record at the
close of business on February 15, 1999 shall be entitled to vote. At that
date there were 1,452 stockholders of record including individuals and cor-
porations. There were 7,084,782 shares authorized but unissued and 122,352
shares held in Treasury at that date. Each share of stock is entitled to
one vote on each matter being considered at the meeting.
In regard to voting for Proposal 1, Election of Directors, stockholders may
vote in favor of all nominees or withhold their votes as to all nominees or
withhold their votes as to specific nominees. With respect to the other
proposals to be voted upon, stockholders may vote in favor of a proposal,
against a proposal, or may abstain from voting. Stockholders should spec-
ify their choices on the enclosed form of proxy. If no specific instructions
are given with respect to the matters to be acted upon, the shares represented
by a signed proxy will be voted for the election of the nominees and for
each of the proposals presented. The four Directors receiving the greatest
number of votes will be elected. The ratification of independent auditors
will require the majority vote of the shares of Common Stock represented at
the meeting. Approval of the 1999 Incentive Stock Option Plan will require
the approval of at least 50% of the outstanding shares.
PROPOSAL 1
ELECTION OF DIRECTORS
The Code of Regulations of Wayne Bancorp, Inc. provides that the number of
Directors of the Company shall be twelve (12) (divided into three classes)
unless changed by a two-thirds majority vote of the Continuing Directors
(as defined in the Companys Code of Regulations), however, in no event
shall the number of Directors elected be increased by greater than two
positions in any one year. The Board of Directors has set the number of
Directors to be elected at this Annual Meeting at four (4), with the four
Directors serving until the 2002 Annual Meeting of Stockholders.
The following persons named have been nominated for election to serve as
indicated or until their successors have been elected and have qualified.
It is the intention of the persons named in the Proxy to vote for the elec-
tion of the following four nominees to the Class of Directors serving until
the 2002 Annual Meeting of Stockholders.
Principal Occupation Year First
Name of Director for the Past Five Years Became Director Age
---------------- ----------------------- --------------- ---
James O. Basford Retired Chairman, Buckeye 1990 67
Corrugated Inc. since 1958;
corrugated container manu-
facturing: Director United
Telephone of Ohio and Indiana.
John C. Johnston, III Partner, with the law firm of 1996 (1) 49
Critchfield and Johnston,
since 1987.
Philip S. Swope President of Wayne Bancorp, 1998 (2) 56
Inc., since 1998; Chairman,
President and CEO of Chippewa
Vally Bank since 1997; President
and CEO of Chippewa Valley
Bank since 1987.
David E. Taylor President, Taylor Agency Inc. 1992 47
since 1987; Independent
Insurance Agency.
DIRECTORS CONTINUING IN OFFICE
The persons named below are now serving as Directors of the Company for terms
expiring at the Annual Meeting of Stockholders in 2000 and 2001.
Principal Occupation Year First
Name of Director for the Past Five Years Became Director Age
--------------- ----------------------- -------------- ---
Terms Expiring at the Annual Meeting in 2000
--------------------------------------------
Bala Venkataraman President and CEO, Magni-Power 1995 54
Company, Since 1990; metal
fabrication and manufacturing.
B. Diane Gordon Executive Director, Greater 1996 50
Wayne County Foundation,
Charitable Foundation; Vice
President of Finance, Buckeye
Corrugated, Inc. 1990 to 1998;
corrugated container manufacturing.
Darcy B. Pajak President, F.J. Design since 1996 47
1995; Vice President of Marketing,
F.J. Design 1993-1995; speciality
manufacturer of gift items.
Stephen L. Shapiro Chairman of the Board, Wooster 1996 52
Iron & Metal Co. Since 1995;
metal recycling company.
President and CEO, Metalics
Recycling Co. since 1990.
Principal Occupation Year First
Name of Director for the Past Five Years Became Director Age
--------------- ----------------------- -------------- ---
Terms Expiring at the Annual Meeting in 2001
--------------------------------------------
Gwenn E. Bull Controller, Legend Micro, Inc 1995 50
since 1997; Builders of custom
computers. Certified Public
Accountant, General Manager,
Croskey Hostetler & Mapes,
CPA Firm 1985-1997.
David L.
Christopher Chairman of the Board and CEO 1987 58
Wayne Bancorp, Inc., Chairman
of the Board, and CEO Wayne
County National Bank since 1990.
President, Wayne National
Corporation since 1987.
Dennis B. Donahue President and CEO, The Will-Burt 1993 59
Company, Inc. Since 1995,
President, The Will-Burt Company,
Inc., since 1991, machine
fabrication and assembly.
Jeffrey E. Smith President Smith Management 1993 48
Inc., a personal holding
company, since 1995.
President COFSCO
Manufacturing 1977-1995;
oil and gas supplier.
The business experience of each of the above listed nominees and Directors
continuing in office during the past five years was that typical of a per-
son engaged in the principal occupation listed. Unless otherwise indi-
cated, each of the nominees has had the same position or another executive
position with the same employer during the past five years.
(1) Appointed to the Board of Directors on September 18, 1996 upon vote of
the Board of Directors as provided in the Code of Regulations of the
Company.
(2) Appointed to the Board of Directors on March 31, 1998 upon vote of the
Board of Directors as provided in the Code of Regulations of the Company.
PROPOSAL 2
RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The audit committee of the Board of Directors of Wayne Bancorp, Inc. engaged
Crowe, Chizek and Company LLP to serve as the independent auditors for the
Company and their subsidiaries for 1998.
It is the intention of the Audit Committee and Board of Directors of Wayne
Bancorp, Inc. to engage Crowe, Chizek and Company LLP as the independent
auditors to audit the financial statements of the Company for 1999 (subject
to ratification by the stockholders of Wayne Bancorp, Inc.). The Audit
Committee and the Board of Directors recommend that the Stockholders vote
"FOR" ratification of the employment of the independent auditors.
Representatives of Crowe, Chizek and Company LLP are expected to be present
at the Annual Stockholders Meeting and will have an opportunity to make a
statement if they so desire and will be available to respond to appropriate
questions.
PROPOSAL 3
ADOPTION OF THE 1999 INCENTIVE STOCK OPTION PLAN
The shareholders of the Company are being asked to approve the 1999 Wayne
Bancorp, Inc. Stock Option Plan (the "Plan"). The following summary of the
material features of the Plan is qualified in its entirety by 'reference to
the full text of the Plan, which is included as appendix A hereto. Each
shareholder is urged to review the Plan in its entirety.
General Information
Neither the Company nor either of its subsidiary banks (collectively the
"Banks") currently has a stock option plan. The Board of Directors of the
Company believes that a stock option plan will be useful in motivating em-
ployees, directors and others, aligning their interests with those of the
shareholders and will constitute an important part of the Companys executive
officer compensation program. The plan will be registered with the Secur-
ities and Exchange Commission upon approval by the shareholders.
The Board of Directors approved the Plan on January 6, 1999. On that date,
the Board of Directors recommended the issuance of options to purchase Common
Stock by certain officers. The options to be issued are subject to approval
of the plan by the shareholders. The following table outlines the options
granted to those officers:
Current
Market
Options Option Value of Expiration
Name and Title Granted Price (1) Shares Date Vesting
-------------- ------- --------- ------- ---------- ----------
David L. Christopher 8,400 $34.50 $287,700 1-6-09 2,800 per year
Chairman & CEO beginning 12-15-99
Philip S. Swope 8,400 $34.50 $287,700 1-6-09 2,800 per year
President beginning 12-15-99
David P. Boyle 8,400 $34.50 $287,700 1-6-09 2,800 per year
Treasurer beginning 12-15-99
F. Bill Damron 3,000 $34.50 $102,750 1-6-09 1,000 per year,
Vice President beginning 12-15-99
Jimmy D. Vaughn 3,000 $34.50 $102,750 1-6-09 1,000 per year,
Secretary beginning 12-15-99
Stephen E. Kitchen 1,500 $34.50 $51,375 1-6-09 500 per year
Executive Vice President beginning 12-15-99
Wayne County National Bank
Richard L. Holcombe 1,500 $34.50 $51,375 1-6-09 500 per year
Executive Vice President beginning 12-15-99
Chippewa Valley Bank
Executive Group 34,200
(1) Value on date of recommendation. Determination of actual value will be
based on the effective date as approved by shareholders.
Description of the Plan
Purpose of the Plan. The Plan is intended to assist the Company and the
Banks in attracting and retaining employees of outstanding ability and to
promote the identification of their interests with those of the share-
holders of the Company.
Types of Awards and Eligibility. The Plan authorizes the Board to grant
stock options to employees and directors of the Company and the Banks and
additional persons. Both incentive stock options and nonstatutory stock
options may be granted or awarded to employees under the Plan and nonstatu-
tory options may be granted to directors and other persons under the Plan.
Incentive stock options are stock options that satisfy the requirements of
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code").
Nonstatutory stock options are stock options that do not satisfy the
requirements of Section 422 of the Code. Options granted under the Plan
would intitle the optionee, upon exercise, to purchase a specified number of
shares of the Company's Common Stock from the Company at a specified exercise
price per share. The per share exercise price of an incentive stock
option may not be less than the fair market value of a share of the Com-
panys Common Stock as of the date of grant, determined in the manner speci-
fied by the Plan. However, in the case of an optionee who owns or is
treated as owning (under Section 424(d) of the Code) more than 10 percent
of the total combined voting power of all classes of stock of the Company
(a "Ten-Percent Shareholder"), the per share exercise price of an incentive
stock option may not be less than 110 percent of the fair market value of a
share of the Companys Common Stock on the date of the grant.
Administration. Subject to the provisions of the Plan, a committee to be
established by the Board of Directors (the "Committee") would have authority
and discretion to determine the terms of all awards under the Plan, inclu-
ding the exercise price of options, the time or times at which awards are
made, the number of shares of the Companys Common Stock covered by awards,
whether an option shall be an incentive stock option or a nonstatutory
stock option, any exceptions to non-transferability, any provisions rela-
ting to vesting, any circumstances in which options would terminate, the
period during which options may be exercised, the period during which
options are subject to restrictions, and the manner of exercising options.
These terms need not be identical for all awards. In determining the terms of
awards under the Plan, the Committee may take into account the nature of the
services rendered by the award recipients, their present and potential
contributions to the success of the Company and the Banks, and such other
factors as the Committee in its discretion may deem relevant. Subject to
the provisions of the Plan, the Committee also would have authority to
interpret the Plan, prescribe, amend and rescind rules and regulations
relating to it, and make all other determinations deemed necessary or ad-
visable for the administration of the Plan. Any director who is also an
employee, and who therefore may be granted options under the Plan, may not
participate in the administration of the Plan. For the purpose of this
Plan, the Board of Directors has named the Compensation Committee as the
Stock Option Committee.
Shares Subject to Grant and Adjustment. A maximum of 500,000 shares of the
Companys Common Stock in the aggregate would be authorized for issuance under
the Plan. The number of shares of the Companys Common Stock that may be
covered by options awarded to any one individual under the Plan is limited
to 250,000 shares. The number of shares subject to the Plan (and the num-
ber of shares and terms of any award) may be adjusted by the Committee in
the event of any change in the shares outstanding of the Companys Common
Stock by reason of any stock dividend, split-up, recapitalization, reclas-
sification, combination or exchange of shares, merger, consolidation or
liquidation or similar event.
Exercise Period and Transferability. Options granted under the Plan may be
exercised for a period of no more than ten years from the date of grant (five
years in the case of incentive stock options granted to a Ten-Percent
Shareholder). Awards under the Plan are not transferable other than by will
or the laws of descent and distribution, or as provided by the Board.
Payment of Exercise Price. An option may, subject to the terms of the
applicable agreement under which it is granted, be exercised in whole or in
part by the delivery to the Company of written notice of the exercise, in
such form as the Committee may prescribe, accompanied by full payment for the
shares with respect to which the option is exercised. To the extent provided
in the applicable option agreement, payment may be made in whole or in part
by delivery (including constructive delivery) of shares valued at fair
market value on the date of exercise.
Amendment and Termination. The Board of Directors may amend, alter or
terminate the Plan in any respect at any time, provided that, once the Plan
has been approved by the Companys shareholders, the Board may not amend,
alter or terminate the Plan without the approval of the Companys share-
holders if such amendment or alteration would (a) increase the maximum
number of shares of common stock which may be issued under the Plan except
as provided in Section 4.09 of the Plan; (b) extend the period during which
any award may be granted or exercised; or (c) extend the term of the Plan.
In addition, any such amendment or alteration of the Plan would not apply to
an adversely affected optionee unless each such affected optionee consents.
Unless sooner terminated by the Board of Directors, the Plan will terminate
on January 6, 2009 and no additional awards may be made under the Plan after
that date. The termination of the Plan would not affect the validity of
any award outstanding on the date of termination. In the event a Plan par-
ticipant is terminated for cause, all unexercised options are forfeited.
Summary of Certain Federal Income Tax Consequences
Incentive Stock Options. An optionee will not recognize income on the grant
or exercise of an incentive stock option. However, the difference between the
exercise price and the fair market value of the stock on the date of exer-
cise is an adjustment item for purposes of the alternative minimum tax. If an
optionee does not exercise an incentive stock option within certain specified
periods after termination of employment, the optionee will recognize ordin-
ary income on the exercise of an incentive stock option in the same manner
as on the exercise of a nonstatutory stock option, as described below.
The general rule is that gain or loss from the sale or exchange of shares
acquired on the exercise of an incentive stock option will be treated as
capital gain or loss. If certain holding period requirements are not
satisfied, however, the optionee generally will recognize ordinary income at
the time of the disposition. If an optionee recognized ordinary income on
exercise of an incentive stock option or as a result of a disposition of
the shares acquired on exercise, the Company will be entitled to a deduc-
tion in the same amount.
Nonstatutory Stock Options. An optionee will not recognize income at the
time of grant of a nonstatutory stock option. At the time of exercise of a
nonstatutory stock option, an optionee will recognize ordinary income equal
to the excess of the fair market value of the shares at the time of exercise
over the aggregate exercise price paid for the shares, regardless of
whether the exercise price is paid in cash or stock. The Company will be
entitled to a deduction in the amount of ordinary income so recognized.
Parachute Payments. Where payments to certain employees that are contingent
on a change in control exceed limits specified in the Code, the employee
generally is liable for a 20 percent excise tax on, and the corporation or
other entity making the payment generally is not entitled to any deduction
for, a specified portion of such payments. If the Board, in its discre-
tion, awards options, the vesting of which is accelerated by a change in
control of the Company, such accelerated vesting would be relevant in
determining whether the excise tax and deduction disallowance rules would
be triggered with respect to certain Company employees.
Performance Based Compensation. Subject to certain exceptions, Section
162(m) of the Code, disallows federal income tax deductions for compensa-
tion paid by a publicly-held corporation to certain executives to the
extent the amount paid to an executive exceeds $1 million for the taxable
year. The Plan has been designed to allow the Board to make awards under
the Plan that qualify under an exception to the deduction limit of Section
162(m) for "performance based compensation."
General. The rules governing the tax treatment of options and the receipt
of shares in connection with such grants or awards are quite technical, so
that the above description of tax consequences is necessarily general in
nature and does not purport to be complete. Moreover, statutory provisions
are subject to change, as are their interpretations, and their application
may vary in individual circumstances. Finally, the tax consequences under
applicable state law may not be the same as under the federal income tax laws.
Accounting Treatment
In October 1995, the Financial Accounting Standards Board issued Statement
No. 123 "Accounting for Stock-Based Compensation" ("FAS No. 123"). This
statement defines a fair value based method of measuring and recording
compensation cost associated with employee stock compensation plans. Under
the fair value based method, compensation cost is measured at the grant
date based on the value of the award and is recognized in income over the
service period. FAS No. 123 encourages adoption of this method of account-
ing; however, it also allows an entity to continue to measure compensation
cost using the method of accounting prescribed by APB Opinion No. 25,
Accounting for Stock Issued to Employees ("APB No. 25"). Entities electing
to continue using the accounting method in APB No. 25, as the Company has
elected, must make pro forma disclosure of net income and earnings per
share as if the fair value based method prescribed under FAS No. 123 had been
applied.
Under APB No. 25, as applied by the Company, neither the grant nor the
exercise of an incentive stock option or a nonstatutory stock option under
the Plan with an exercise price not less than the fair market value of the
Companys Common Stock as the date of grant requires a charge against earnings.
The affirmative vote of the holders of at least a majority of the out-
standing stock of the Company is required to adopt Proposal 3. THE BOARD
OF DIRECTORS UNANIMOUSLY APPROVES AND RECOMMENDS THE ADOPTION OF PROPOSAL 3
ADOPTING THE WAYNE BANCORP, INC. INCENTIVE STOCK OPTION PLAN.
THE FOLLOWING IS A SUMMARY OF
COMMON STOCK OWNERSHIP OF SENIOR MANAGEMENT
AND THE BOARD OF DIRECTORS
Name of Amount and Nature of Percent of Common
Beneficial Owner Beneficial Ownership Stock Ownership (1)
--------------- --------------------- -------------------
James O. Basford 1,413 shares 0.03%
Gwenn E. Bull 755 shares 0.02%
David L. Christopher 62,299 shares (2) 1.30%
Dennis B. Donahue 1,667 shares 0.03%
B. Diane Gordon 11,467 shares (3) 0.24%
John C. Johnston, III 3,192 shares (4) 0.07%
Darcy B. Pajak 1,018 shares 0.02%
Stephen L. Shapiro 2,005 shares (5) 0.04%
Jeffrey E. Smith 5,733 shares (6) 0.12%
Philip S. Swope 5,704 shares (7) 0.12%
David E. Taylor 2,594 shares 0.05%
Bala Venkataraman 7,719 shares (8) 0.16%
David P. Boyle 2,466 shares (9) 0.05%
F. Bill Damron 7,496 shares (10) 0.16%
Richard L. Holcombe 60 shares (11) 0.00%
Stephen E. Kitchen 10,224 shares (12) 0.21%
Jimmy D. Vaughn 9,154 shares (13) 0.19%
Directors and Executive
Officers as a Group
(16 persons ) 136,010 shares (14) 2.83%
(1) The calculation of percent of common stock ownership is based on total
outstanding shares of 4,807,667, calculated as of January 31, 1999.
(2) 55,243 shares are held in trust for Mr. Christopher and 7,056 shares
are owned by his spouse.
(3) 10,600 shares are held in trust for Mrs. Gordon in "street name."
(4) 1,737 shares are held in trust for Mr. Johnston in "street name."
(5) 2,000 shares are held for Mr. Shapiro in "street name."
(6) 1,100 shares are held in "street name" and 914 shares are owned for
Mr. Smiths minor children.
(7) 883 shares are owned by Mr. Swopes spouse.
(8) 7,067 shares are held in trust for Mr. Venkataraman in "street name."
(9) 1,716 shares are held in trust for Mr. Boyle, Treasurer of the Company
and President of the Wayne County National Bank.
(10) 4,520 shares are held in trust for Mr. Damron, Vice President of the
Company and Executive Vice President and Chief Loan Officer of the
Wayne County National Bank.
(11) 43 shares are owned by Mr. Holcombes spouse.
(12) 4,277 shares are held in trust for Mr. Kitchen, Executive Vice President
and Senior Trust Officer of the Wayne County National Bank.
(13) 5,663 shares are held in trust for Mr. Vaughn, Secretary of the Company
and Executive Vice President of the Wayne County National Bank.
(14) Includes shares held in the Company ESOP plan not allocated to par-
ticipants.
* Denotes participation in the Wayne Bancorp, Inc. Deferred Compensation
Plan.
SECURITY OWNERSHIP OF COMMON STOCK IN EXCESS OF
FIVE PERCENT OF OUTSTANDING SHARES
Listed in the following table are the beneficial owners as of January 31,
1999 of more than five percent of the Companys outstanding common stock who
are known to the Company.
Title of Name & Address of Amount and Nature of Percent of Common
Class Beneficial Owner Beneficial Ownership Stock Ownership (1)
-------- ---------------- -------------------- -------------------
Common Wayco & Company 593,154 12.34%
(1) The calculation of percent of common stock ownership is based on total
outstanding shares of 4,807,667, as of January 31, 1999.
(2) Wayco & Company is a partnership formed for the purpose of holding
legal title, as nominee, to securities designated by the Wayne County
National Bank with respect to the business of its Trust Department.
It holds 37,108 shares (.77 percent of the total number of shares out-
standing) as sole trustee and 364,975 shares (7.59 percent of the
total number of shares outstanding) as trustee subject to revocable
trusts.
MEETINGS OF THE BOARD OF DIRECTORS AND COMMITTEES OF THE
BOARD AND DIRECTOR COMPENSATION
During the last fiscal year, the Board of Directors held five regularly
scheduled meetings and one special meeting. All of the incumbent directors
and each nominee standing for re-election attended 75% or more of those
meetings, and the meetings held during the fiscal year by all board com-
mittees on which they served. Mr. Swope was eligible for four regular
meetings, of which he attended at least 75% of those meetings.
Each director received $900 per month as a fee for serving on the Board of
Directors of the Company. Each Director of the Company, with the exception
of Mr. Swope, served on the Board of Directors of the Wayne County National
Bank. This Board meets monthly and there are no additional fees paid to them
for those meetings. Mr. Swope serves on the Board of Directors of the
Chippewa Valley Bank and he receives no fees for that Board position.
The Audit Committee makes recommendations to the Board of Directors concer-
ning the selection and engagement of the Companys independent auditors and
reviews with them the scope and status of the audit, the fees for services
performed by them, and the results of the completed audit. The Committee
also reviews and discusses with the internal audit department, management
and the Board of Directors, such matters as audit procedures, scope of the
audits and results of the examinations by regulatory authorities. The Audit
Committee was composed of Mrs. Bull and Messrs. Basford, Donahue, Pajak and
Venkataraman. The audit Committee met 11 times in 1998.
The Nominating Committee is comprised of members of the Board of Directors
who are not being considered for re-election. This Committee met once in
1998 to nominate stockholders to serve on the Board of Directors until the
Annual Meeting in 2002. The Committee will consider nominees recommended
by stockholders. Any stockholder desiring to submit any such recommendation
should send the name, age, biographical information, and additional infor-
mation required pursuant to the Code of Regulations of the Company (a copy
of which may be obtained from the Secretary of the Company) concerning a
proposed nominee to the Chairman of the Board of the Company at 112 West
Liberty Street, P.O. Box 757, Wooster, Ohio 44691.
The Compensation/Employee Benefits Committee was composed of Mrs. Gordon
and Messrs. Donahue, Johnston, Smith, Taylor and Venkataraman. This Committee
met twice in 1998. The function of this Committee is to review and recom-
mend personnel policies, general wage policies and fringe benefits. Please
see the portion of this Proxy Statement entitled EXECUTIVE COMPENSATION AND
OTHER INFORMATION for a discussion of the Committees report on compensation
issues.
THE FOLLOWING PERSONS ARE EXECUTIVE OFFICERS OF THE CORPORATION
Name Age
-------------------- ---
David L. Christopher 58 Chairman of the Board and Chief Executive
Officer, Wayne Bancorp, Inc., and Chairman of
the Board and Chief Executive Officer of Wayne
County National Bank since 1990; President
Wayne National Corporation since 1987.
David P. Boyle 35 Treasurer, Wayne Bancorp, Inc., since 1998,
President and Chief Operating Officer, Wayne
County National Bank, effective January 6, 1999
Executive Vice President and Chief Financial
Officer Wayne County National Bank since 1997;
Senior Vice President and Chief Financial
Officer 1996-1997; Vice President and Chief
Financial Officer 1993-1996. Vice President
and Treasurer, Wayne National Corporation
since 1991.
F. Bill Damron 60 Vice President, Wayne Bancorp, Inc., since 1995,
Senior Executive Vice President and Chief Loan
Officer, Wayne County National Bank since 1987.
Richard L. Holcombe 50 Executive Vice President, Operations, Chippewa
Valley Bank, effective January 1, 1999, Senior
Vice President, Operations, Chippewa Valley
Bank since 1997, Vice President, Operations,
Chippewa Valley Bank since 1983.
Stephen E. Kitchen 47 Executive Vice President and Senior Trust
Officer, Wayne County National Bank since 1988.
Philip S. Swope 56 President, Wayne Bancorp, Inc., since 1998.
Chairman, President and Chief Executive Officer,
Chippewa Valley Bank since 1997; President and
Chief Executive Officer, Chippewa Valley Bank
Since 1987.
Jimmy D. Vaughn 57 Secretary, Wayne Bancorp, Inc., since 1990.
Executive Vice President, Operations and Data
Processing, Wayne County National Bank since
1987.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
Summary of Cash and Certain Compensation
The following table provides certain summary information concerning compen-
sation paid or accrued by the Company and its subsidiaries to or on behalf
of the Companys Chief Executive Officer and other Executive Officers whose
compensation exceeded $100,000 in 1998, for the fiscal years ended
December 31, 1998, 1997 and 1996:
SUMMARY COMPENSATION TABLE
Name and Other
Principal Annual All Other
Position Year Salary Bonus(1) Compensation(2) Compensation(3)
----------------- ---- ------- -------- --------------- ---------------
David L. Christopher 1998 $200,391 $81,519 $4,775 $20,255
Chairman and Chief
Executive Officer,
Wayne Bancorp, Inc., 1997 190,215 95,545 4,522 18,823
Chairman President
and CEO, Wayne 1996 180,750 82,129 3,608 18,752
County National Bank
F. Bill Damron 1998 $109,781 $47,195 $559 $19,381
Vice President, Wayne
Bancorp, Inc.,
Executive Vice 1997 104,663 56,580 335 17,064
President and Chief
Loan Officer, Wayne 1996 95,866 49,058 $0 15,930
County National Bank
David P. Boyle 1998 $96,354 $41,618 $3,563 $14,800
Treasurer, Wayne
Bancorp, Inc., 1997 80,667 43,841 1,976 11,389
President and
Chief Operating, 1996 70,375 34,429 0 9,026
Officer, Wayne County
National Bank effective
January 6, 1999
Philip S. Swope (4) 1998 $113,667 $20,000 0 $2,619
President, Wayne
Bancorp Inc., Chairman,
President and Chief
Executive Officer,
Chippewa Valley Bank
Jimmy D. Vaughn 1998 $84,838 $36,469 $3,975 $15,634
Secretary, Wayne
Bancorp, Inc.,
Executive Vice 1997 81,092 43,917 3,313 13,724
Vice President,
Wayne County 1996 78,000 38,114 2,276 12,986
National Bank
(1) Includes cash portion of Profit Sharing bonus paid and incentive com-
pensation as explained herein.
(2) Comprised of reimbursement of 20 percent of the cost to purchase up to
500 shares of Company stock and incentives under the Trust Referral
Program.
(3) Represents equal annual contributions to the Profit Sharing and ESOP
Plans of the Company.
(4) Mr. Swopes salary for 1998 includes his salary as the Chairman, Pres-
ident and CEO of the Chippewa Valley Bank, and President of the Company
since April of 1998.
REPORT OF THE COMPENSATION COMMITTEE
Under rules established by the Securities and Exchange Commission (the
"SEC"), the Company is required to provide certain data and information in
regard to the compensation and benefits provided to the Companys Chairman
and Chief Executive Officer, and if applicable, the four other most highly
compensated executive officers, whose aggregate compensation exceeded
$100,000 during the Companys fiscal year. The disclosure requirements, as
applied to the Company, include the Companys Chairman and CEO, the Pres-
ident, Vice President, Treasurer and Secretary and include the use of
tables and a report explaining the rationale and considerations that led to
fundamental executive compensation decisions affecting these individuals.
The Company is a holding company and owns two significant operating
subsidiaries, the Wayne County National Bank and the Chippewa Valley Bank.
The Company has no direct employees. All disclosures contained in this
Proxy Statement regarding executive compensation relate to the compensation
paid by the subsidiary banks. The Compensation Committee of the Corporation
has the responsibility of determining the compensation policy and practices
and making recommendations to the full Board with respect to specific com-
pensation of the CEO and other executive officers. At the direction of the
Board of Directors, the Committee has prepared this report for inclusion in
this Proxy Statement.
Compensation Philosophy
This report reflects the Companys compensation philosophy as endorsed by the
Board of Directors and the Committee and resulting actions taken by the Cor-
poration for the reporting periods shown in the various compensation tables
supporting this report. The Committee approves and recommends to the Board
of Directors payment amounts and award levels for executive officers of the
Company and its subsidiaries.
The executive compensation program of the Company has been designed to:
- Support a pay-for-performance policy that awards executive officers for
Company performance.
- Motivate key senior officers to achieve strategic business initiatives and
reward them for their achievement, and
- Provide compensation opportunities which are comparable to those offered
by other financial institutions, thus allowing the Company to compete for
and retain talented executives who are critical to the Companys long term
success.
At present, the executive compensation program is comprised of base salary
and annual cash and stock incentive opportunities.
Other than base salary and participation in the Companys Senior Officer
Incentive Compensation Plan for Messrs. Christopher, Boyle, Damron,
Kitchen, Swope and Vaughn discussed below, additional benefits available to
this group of officers are equivalent to that for all other employees and are
determined at the discretion of the Board of Directors.
Base Salaries
On January 7, 1998 the Committee met to review and approve amendments to the
compensation for all employees. David L. Christopher, Chairman, President and
CEO of the Company was present at the meeting to present his views in re-
gard to management and other salaried and hourly employees, but was not
present at the point in time that his compensation was discussed by the
Committee. Compensation decisions are made after a review is performed of
the performance of executive officers in relation to the goals of the Com-
pany. At this meeting, the Committee proposed a base salary commencing on
January 15, 1998 for Mr. Christopher of $190,000, for Mr. Boyle of
$97,000, for Mr. Damron of $110,000, for Mr. Kitchen $86,000 and for Mr.
Vaughn of $85,000. These salaries were subsequently approved by the Board
of Directors. Their salaries were a result of a review of the three speci-
fic surveys regarding peers of the Company and the Wayne County National
Bank including the following:
(1) Ohio Bankers Association survey reviewing all Ohio Banks with assets in
the range of $200 to $500 million.
(2) A study prepared by Crowe, Chizek & Company LLP (the Companys external
auditors) reviewing banks with assets in the range of $200 to $500
million.
(3) Bank Administration Institute survey regarding all Ohio banks in Region 5
(the region of Wayne County National Bank) with assets in the range of
$200 to $500 million.
The Committee reviewed all three of these surveys and blended the results to
determine the average compensation for various positions including that of
the President and Chief Executive Officer, Chief Financial Officer, Chief
Loan Officer, Senior Trust Officer, and Head of Operations. The committee
then set a range between 75 percent and 125 percent of the average in order
to determine the base salary for Messrs. Christopher, Boyle, Damron,
Kitchen and Vaughn. In each case, the base compensation falls within this
range. The Compensation committee believes that the salaries paid to these
executive officers is justified based on the performance of the Company and
the Bank relative to its peers.
The five named executive officers of the Company and five additional senior
management persons participate in the "Senior Officer Incentive Compensation
Plan." Under this plan, which was adopted in 1994, payments are made to
such officers only if the net operating profit of the Bank exceeds 14% of
total operating income. In determining the bonus to be paid, a sliding
scale is used to determine the total bonus pool available and individual
bonuses are calculated based upon the participants salary relative to the
total salaries of those participating in the plan. The aggregate amount
paid under this plan in 1998 was approximately $340,000. The amounts
received under the plan by the listed executive officers are included
in the compensation table set forth above.
The Company has entered into Change in Control Agreements with the five
named executive officers. The agreements provide for payment (in lieu of
salary) to Messrs. Christopher, Boyle, Damron, Kitchen and Vaughn an amount
equal to 96% of the sum of the individuals compensation, including bonus, paid
in the last whole calendar year prior to termination of employment due to a
change in control. Messrs. Christopher, Boyle and Damrons agreements call
for these payments for 3 years and Messrs. Kitchens and Vaughns agreements
call for these payments for 2 years.
If the employment of Messrs. Christopher, Boyle and Damron had been ter-
minated as of December 31, 1998 under circumstances entitling them to
severance pay as described above, they would have received 36 payments of
approximately $23,600 for Mr. Christopher, $11,500 for Mr. Boyle and
$13,700 for Mr. Damron. Messrs. Kitchen and Vaughn would be entitled to
24 payments of $10,000 and $9,800 respectively.
Mr. Swope has a Change in Control Agreement with the Chippewa Valley Bank.
This agreement states that if Mr. Swopes employment is terminated within 36
months of a change in control, he would be entitled to the equivalent of
three years salary and bonus. Had Mr. Swopes employment been terminated
at December 31, 1998, he would be entitled to a benefit of approximately
$384,000.
In addition, the Company has proposed a stock option plan that will benefit
certain officers of the Company. The discussion regarding the Plan is set
forth under Proposal 3 above and the complete Plan is attached hereto as
appendix A.
Submitted by the Compensation Committee
Dennis B. Donahue B. Diane Gordon John C. Johnston, III
Jeffrey E. Smith Bala Venkataraman
The following represents a comparison of the return on an investment in the
Company, Standard & Poors 500 index and a peer group composed of major reg-
ional banks and bank holding companies.
COMPARISON OF FIVE YEAR CUMULATIVE TOTAL RETURN* AMONG WAYNE
BANCORP, INC., S&P 500 INDEX AND S&P MAJOR REGIONAL BANK INDEX
FOR FISCAL YEAR ENDING DECEMBER 31
1993 1994 1995 1996 1997 1998
----- ----- ----- ----- ----- ------
Wayne Bancorp, Inc. $100.00 $113.14 $138.43 $201.27 $325.72 $246.43
S&P 500 Index $100.00 $101.32 $139.40 $171.40 $228.59 $293.91
S&P Major
Regional Bank
Index $100.00 $94.65 $149.03 $203.63 $306.20 $338.30
Assumes $100 invested on January 1, 1993 in Wayne Bancorp, Inc., Common
Stock S&P 500 Index and S&P Major Regional Bank Index
* Total Return Assumes Reinvestment of Dividends.
COMPLIANCE WITH SECTION 16(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the Companys
officers and directors, and persons who own more than ten percent of a
registered class of the Companys securities, to file reports of ownership
and changes in ownership with the Securities and Exchange Commission. Officer
and directors and greater than ten percent shareholders are required by SEC
regulation to furnish the Company with copies of all Section 16(a) forms
they file.
Based solely on a review of the copies of forms 3,4 and 5, and amendments
thereto furnished to the Company, or representations that no Form 5s were
required, the Company believes that during 1998 all Section 16(a) filing
requirements applicable to its officers, directors and greater than ten
percent shareholders were complied with.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The following affiliations exist between the Company and Executive Officers,
Nominees or Directors;
Mr. Christopher is one of several partners in Wayco and Company, a partnership
formed for the purpose of holding legal title, as a nominee, to securities
designated by the Wayne County National Bank with respect to the business
of its Trust Department.
Mr. Christopher is President and Mr. Boyle is Vice President and Treasurer of
Wayne National Corporation. Wayne National Corporation is a wholly owned
subsidiary of the Wayne County National Bank. Wayne National Corporation
is a 20 percent general partner in NB5 Financial Services. NB5 Financial
Services is engaged in leverage lease financing, direct leasing and other
financial products. As of December 31, 1998, NB5 Financial Services is no
longer actively engaged in any leasing activities.
Mr. Johnston is a partner with the law firm of Critchfield, Critchfield and
Johnston. The Company believes the terms of all payments were as favorable
as could have been obtained from unaffiliated parties.
Some of the Directors, Officers and greater than 5% shareholders of Wayne
Bancorp, Inc., their immediate families and companies with which they are
associated were customers of and had banking relationships with either the
Wayne County National Bank or the Chippewa Valley Bank in the ordinary course
of those Banks businesses from the beginning of the fiscal year 1998 to
present. All loans and commitments to loans included interest rates and
collateral, as those prevailing at the time for comparable transactions with
other persons, and in the opinion of management of the Banks do not involve
more than a normal risk of collectibility or present other unfavorable
features.
OTHER BUSINESS
If any other business is brought before the meeting, your vote will be made
by your Proxy or may be revoked by you prior to its exercise. Management at
present knows of no other business to be presented.
PROPOSALS FOR 2000 MEETING
A stockholder who desires to have a proposal printed in the 2000 Proxy
Statement must submit that proposal no later than November 16, 1999. The
proposal should be mailed to the Chairman of the Board, Wayne Bancorp,
Inc., P.O. Box 757, Wooster, Ohio 44691. To introduce an item of business
at the Companys Annual Meeting in 2000, even if such item is not to be
included in the Companys Proxy Statement, a shareholder must send notice of
such proposal item of business to the Companys Chairman at the address set
forth above including a description of such proposal, the reason for its
inclusion, and materials in support of such proposal. Such items must be
received not later than January 28, 2000.
By Order of the Board of Directors
Jimmy D. Vaughn, Secretary
Dated March 15, 1999
WAYNE BANCORP
STOCK OPTION PLAN
ARTICLE I
GENERAL
1.01. Plan Name.
This Plan shall be known as the Wayne Bancorp Stock Option Plan (the "Plan").
1.02. Effective Date.
The Effective Date of the Plan shall be January 6, 1999; provided, however,
that if the shareholders of Wayne Bancorp do not approve the Plan by
January 6, 2000, no Options (as defined in section 1.03) granted under the
Plan shall constitute Incentive Stock Options (as defined in clause (i) of
paragraph 1.04(c)(2)). Further, no grants of Options shall be made to
employees with an employment status under clause (i), (ii) or (iii) of
paragraph 1.04(a)(2).
1.03. Purpose.
The purposes of this Plan are to provide a means whereby Wayne Bancorp may,
through the award of options ("Options") to purchase Common Stock, no par
value, ("Common Stock") of Wayne Bancorp:
closely associate the interests of designated employees of Wayne Bancorp
and any subsidiary (collectively referred to as the "Bank") and of
selected nonemployees with the stockholders of the Bank by reinforcing
the relationship between participants' rewards and stockholder gains;
provide designated employees and selected non-employees with an equity
ownership in the Bank commensurate with Bank performance, as reflected
in increased stockholder value; maintain competitive compensation
levels; and provide an incentive to designated employees and selected
non-employees to attract, retain and motivate those persons to exert
their best efforts on behalf of the Bank.
1.04. Administration.
The Plan shall be administered under the terms of this Section 1.04.
(a) STOCK OPTION COMMITTEE. Except as further provided in this
paragraph 1.04(a), the Plan shall be administered by the Stock Option
Committee ("Committee") consisting of at least two members of the Board of
Directors of the Bank who shall be appointed by, and serve at the pleasure
of, the Board of Directors. The composition of the Committee shall
be controlled by the following provisions of this paragraph 1.04(a).
(1) Each member of the Committee must be a "non-employee director" within
the meaning of Rule 16b-3, as that Rule may be amended from time to
time ("Rule 16b-3"), under the Securities Exchange Act of 1934, as
amended, when the Committee is acting to grant Options to those
employees who are also directors or officers. Those actions which
require a Committee of non-employee directors include:
(i) selecting the directors or officers to whom Options may be
granted;
(ii) determining the timing, price, number or other terms and
conditions of, or shares subject to, each Option made to an employee
who is also a director or officer; and
(iii) interpreting the Plan or Option agreements with regard to
Options granted to a director or officer.
An officer or director who also has an employment status described in clause
(i), (ii) or (iii) of paragraph 1.04(a)(2), shall also be limited to a maximum
number of Options under the Plan as provided under paragraph 1.04(a)(3).
(2) Each member of the Committee must be an "outside director" within the
meaning of Regulation 1.162-27(e)(3), as that Regulation may be
amended from time to time (the "Regulation"), under the Internal Revenue
Code of 1986, as amended (the "Code"), when the Committee is acting to
grant Options to those employees who have the following employment status
with the Bank:
(i) the chief executive officer of the Bank or the individual acting in that
capacity;
(ii) one of the four highest compensated officers (other than the chief
executive officer) of the Bank; or
(iii) in the judgement of the Board of Directors or the Committee, is deemed
reasonably likely to become an employee described in clause (i) or
(ii) of this paragraph 1.04(a)(2) within the exercise period of any
contemplated option. Those actions which require a Committee of outside
directors include the same actions as is described in paragraph
1.04(a)(1) except that the employment relationships described in clauses
(i), (ii) and (iii) of this paragraph 1.04(a)(2) shall be substituted
for the references to director or officer. In addition, the provi-
sions of paragraph 1.04(a)(3) shall apply.
If an individual who is being considered for a grant of Options is an officer
or director and also has an employment status described in clause (i), (ii) or
(iii) of this paragraph 1.04(a)(2), the members of the Committee shall
consist of whichever of the following director categories is the more
restrictive, non-employee directors as defined in paragraph 1.04(a)(1), or
of outside directors as defined in this paragraph 1.04(a)(2).
(3) In addition to any other limitation, the Committee shall not award to
any employee described in clause (i), (ii) or (iii) of paragraph 1.04
(a)(2) Options for more than an aggregate of 250,000 shares of Common
Stock under this Plan. Further, the number of shares of the Common
Stock under any Options awarded to such an employee which are there-
after canceled shall continue to count against the maximum number of
shares of Common Stock which may be awarded to that employee, and any
shares of Common Stock under an Option of such an employee which are
later repriced shall be deemed to be the cancellation of the original
Option for shares of Common Stock and the grant of a new Option for
additional shares of Common Stock for purposes of determining the
number of shares of Common Stock awarded to that employee.
(b) COMMITTEE ACTION. A majority of the members of the Committee shall
constitute a quorum, and the action of a majority of the members present at
a meeting at which a quorum is present, or which is authorized in writing
by all members, shall be the action of the Committee. A member partici-
pating in a meeting by telephone or similar communications equipment shall
be deemed present for this purpose if the member or members who are present
can hear him and he can hear them.
(c) AUTHORITY OF THE COMMITTEE. The Committee shall have the power:
(1) to determine and designate in its sole and absolute discretion from
time to time those employees of the Bank and non-employees who are eligible
to participate in the Plan and to whom Options are to be granted pursuant
to section 1.05; provided, however, no Option shall be granted after
January 6, 2009, the tenth (10th) anniversary of the original adoption date
of the Plan as provided by section 1.08; (2) to authorize the granting of
(i) Options provided by Article 3 which qualify as Incentive Stock Options
within the meaning of Code Section 422 (each an "Incentive Stock Option"),
provided that only employees of the Bank may be granted Incentive Stock
Options, and (ii) Options provided in Article 2 which do not qualify under
Code Section 422 (each a "Nonqualified Stock Option"); (3) to determine the
number of shares awarded with each Option, subject to limitations provided
under sections 1.07 and 3.05 and subsection 1.04(c);(4) to determine the
time or times and the manner when each Option shall be exercisable and the
duration of the exercise period, subject to limits provided under sections
2.04 and 3.04; and (5) impose limitations, restrictions and conditions upon
any Option as the Committee shall deem appropriate.
The Committee may interpret the Plan, prescribe, amend and rescind any
rules and regulations necessary or appropriate for the administration of the
Plan and make other determinations and take other action as it deems
necessary or advisable. Without limiting the generality of the foregoing
sentence the Committee may, in its discretion, treat all or any portion of
any period during which an Optionee is on military or an approved leave of
absence from the Bank as a period of employment of the Optionee by the
Bank, as the case may be, for the purpose of accrual of rights under an
Option. An interpretation, determination or other action made or taken by
the Committee shall be final, binding and conclusive.
(d) INDEMNIFICATION OF COMMITTEE. In addition to other rights that they
may have as Directors or as members of the Committee, the members of the
Committee shall be indemnified by the Bank against the reasonable expenses,
including attorney's fees actually and reasonably incurred in connection
with the defense of any action, suit or proceeding, or in connection with
any appeal therein, to which they or any of them may be a party by reason of
any action taken or failure to act under or in connection with the Plan or
any Option granted thereunder, and against all amounts paid by them in set-
tlement thereof or paid by them in satisfaction of a judgment in any such
action, suit or proceeding, except in relation to matters as to which it
shall be adjudged in the action, suit or proceeding that the Committee
member's action or failure to act constituted self-dealing, willful mis-
conduct or recklessness; provided that within sixty (60) days after insti-
tution of any action, suit or proceeding a Committee member shall in wri-
ting offer the Bank the opportunity, at its own expense, to handle and defend
the same.
1.05. Eligibility for Participation.
The Committee may select participants in the Plan from the employees
(including executive officers and directors) of the Bank. In addition,
non-employee consultants and agents (including directors who are not
employees of the Bank), who have the capability of making a substantial
contribution to the success of the Bank may also be designated as participants
in the Plan. In making this selection and in determining the form and the
number of shares awarded with an Option, the Committee shall consider any
factors deemed relevant, including the individual's functions, responsi-
bilities, value of services to the Bank and past and potential contribu-
tions to the Bank's profitability and sound growth.
1.06. Types of Awards Under Plan.
Awards under the Plan may be in the form of any one or more of the following:
(i) Nonqualified Stock Options, as described in Article 2; or
(ii) Incentive Stock Options, as described in Article 3.
1.07. Aggregate Limitation on Awards.
(a) Shares of stock which may be issued under the Plan shall be authorized
and unissued or treasury shares of Common Stock. The maximum number of
shares of Common Stock for which Options may be issued under the Plan
shall be 500,000, subject to adjustment as provided in section 4.09.
If any Option granted under the Plan shall terminate, expire or be
canceled as to any shares, new Options may thereafter be granted under
the Plan covering those shares, subject to the limitations imposed
under paragraph 1.04(a)(3).
1.08. Term of Plan.
No Options shall be granted under the Plan after January 6, 2009; provided,
however, that the Plan and all Options under the Plan granted prior to that
date shall remain in effect until the Options have been satisfied or termi-
nated in accordance with the Plan and the terms of the Options.
ARTICLE 2
NONQUALIFIED STOCK OPTIONS
2.01. Award of Nonqualified Stock Options.
The Committee may from time to time, and subject to the provisions of the Plan
and the other terms and conditions as the Committee may prescribe, grant to
any participant in the Plan one or more Options to purchase for cash or
shares the number of shares of Common Stock allotted by the Committee. The
date a Nonqualified Stock Option is granted shall mean the date selected
by the Committee as of which the Committee allots a specific number of
shares to a participant pursuant to the Plan.
2.02. Nonqualified Stock Option Agreements.
The grant of a Nonqualified Stock Option shall be evidenced by a written
Nonqualified Stock Option Agreement, executed by the Bank and the holder of
a Nonqualified Stock Option, stating the number of shares of Common Stock
subject to the Nonqualified Stock Option evidenced thereby, and in the form
as the Committee may from time to time determine.
2.03. Nonqualified Stock Option Price.
Except as otherwise provided herein in the case of an exchange, the option
price per share of Common Stock deliverable upon the exercise of a Nonqual-
ified Stock Option shall be 100% of the fair market value of a share of
Common Stock on the date the Option is granted. As used in this Plan, the
"fair market value of a share of Common Stock on the date the Option is
granted" shall mean the closing price of the Common Stock as reported on
the primary public market on which the Common Stock is then traded on the
trading day last ended prior to the time the Nonqualified Stock Option is
granted, or if the Common Stock ceases to be traded on a public market,
the last determinable market price or value as reasonably determined by the
Committee in accordance with customarily accepted practices for determining
the price or value of stock traded in a like manner as the Common Stock is
then traded. Notwithstanding the foregoing, if a Nonqualified Stock Option
is granted under this Plan in exchange for a stock option granted outside
this Plan, the per share exercise price of the Nonqualified Stock Option
issued under this Plan may, at the election of the Committee, be the same
price as that of the stock option granted outside this Plan which is being
exchanged.
2.04. Term and Exercise.
Each Nonqualified Stock Option shall first be exercisable and/or become
exercisable according to the vesting schedule as is determined by the
Committee and provided in the Nonqualified Stock Option Agreement. Each
Nonqualified Stock Option shall be for a term of 10 years, subject to
earlier termination as provided in section 2.07, 2.08 or 2.09, unless the
Nonqualified Stock Option Agreement expressly provides for a different
term, not in excess of 10 years, and/or expressly provides that the provi-
sions of any or all of section 2.07, 2.08 or 2.09 shall not apply to cause
the Nonqualified Stock Option to earlier terminate. No Nonqualified Stock
Option shall be exercisable after the expiration of its term.
2.05. Manner of Payment.
Each Nonqualified Stock Option Agreement shall set forth the procedure
governing the exercise of the Nonqualified Stock Option granted thereunder,
and shall provide that, upon the exercise in respect of any shares of
Common Stock subject thereto, the optionee shall pay to the Bank, in full,
the option price for the shares with cash or with previously owned Common
Stock.
2.06. Certificates.
As soon as practicable after receipt of payment for shares of Common Stock
purchased upon the exercise of a Nonqualified Stock Option or Options, the
Bank shall deliver to the Optionee a certificate or certificates for those
shares of Common Stock. The optionee shall become a stockholder of the
Bank with respect to Common Stock represented by share certificates so
issued and shall be fully entitled to receive dividends, to vote and to
exercise all other rights of a stockholder.
2.07. Death of Optionee.
(a) Upon the death of the optionee, any rights to the extent exercisable
on the date of death may be exercised by the optionee's estate, or by a
person who acquires the right to exercise the Nonqualified Stock
Option by bequest or inheritance or by reason of the death of the
optionee, provided that the exercise occurs within both the remain-
ing effective term of the Nonqualified Stock Option and one year
after the Optionee's death.
(b) If the optionee is an employee, the provisions of this Section shall
apply notwithstanding the fact that the optionee's employment may have
terminated prior to death, but only to the extent of any rights
exercisable on the date of death.
2.08. Retirement or Disability.
If an optionee is an employee, upon termination of the optionee's employment
by reason of retirement or permanent disability (as each is determined by
the Committee), the optionee may, within 36 months from the date of ter-
mination, exercise any Nonqualified Stock Options to the extent the Options
are exercisable during that 36-month period.
2.09. Termination for Other Reasons.
If the optionee is an employee, except as provided in sections 2.07 and 2.08,
or except as otherwise determined by the Committee, the employees Nonquali-
fied Stock Options shall terminate three months after the termination of the
optionee's employment.
ARTICLE 3
INCENTIVE STOCK OPTIONS
3.01. Award of Incentive Stock Options.
The Committee may, from time to time and subject to the provisions of the Plan
and the other terms and conditions as the Committee may prescribe, grant to
any participant in the Plan who is an employee of the Bank one or more
"incentive stock options" (intended to qualify under the provisions of Code
Section 422) to purchase for cash or shares the number of shares of Common
Stock allotted by the Committee. The date an Incentive Stock Option is
granted shall mean the date selected by the Committee as of which the
Committee allots a specific number of shares to a participant pursuant to
the Plan. Notwithstanding the foregoing, Incentive Stock Options shall not
be granted to any owner of 10% or more of the total combined voting
power of the Bank and its parent or subsidiaries unless the option price
per share complies with the requirements set forth in section 3.03.
3.02. Incentive Stock Option Agreements.
The grant of an Incentive Stock Option shall be evidenced by a written
Incentive Stock Option Agreement, executed by the Bank and the holder of
an Incentive Stock Option, stating the number of shares of Common Stock
subject to the Incentive Stock Option evidenced thereby, and in the form
as the Committee may from time to time determine.
3.03. Incentive Stock Option Price.
The option price per share of Common Stock deliverable upon the exercise of an
Incentive Stock Option shall be 100% of the fair market value of a share of
Common Stock on the date the Option is granted, unless the option has been
granted to an owner of 10% or more of the total combined voting power of
the Bank and its subsidiaries. In that case, the option price shall be
110 % of the fair market value of a share of Common Stock on the date the
Incentive Stock Option is granted.
3.04. Term and Exercise.
Each Incentive Stock Option shall first be exercisable and/or become exer-
cisable according to the vesting schedule as is determined by the Committee
and provided in the Incentive Stock Option Agreement. Each Incentive Stock
Option shall be for a term of 10 years, subject to earlier termination as
provided in section 3.06, 3.07 or 3.08, unless the Incentive Stock Option
Agreement expressly provides for a different term, not in excess of 10
years, and/or expressly provides that the provisions of any or all of
section 3.06, 3.07 or 3.08 shall not apply to cause the Incentive Stock
Option to earlier terminate, so long as the modifications shall not cause the
Incentive Stock Option granted thereby to cease to qualify as an "incentive
stock option" under Code Section 422. No Incentive Stock Option shall be
exercisable after the expiration of its term.
3.05. Maximum Amount of Incentive Stock Option Grant.
The aggregate fair market value (determined on the date the option is granted)
of Common Stock subject to all Incentive Stock Options granted to an optionee
which are exercisable for the first time by the optionee in any calendar
year shall not exceed $100,000.
3.06. Death of Optionee.
(a) Upon the death of the optionee, any Incentive Stock Option exercisable
on the date of death may be exercised by the optionee's estate or by
a person who acquires the right to exercise the Incentive Stock
Option by bequest or inheritance or by reason of the death of the
optionee, provided that the exercise occurs within both the remain-
ing option term of the Incentive Stock Option and one year after
the optionee's death.
(b) The provisions of this Section shall apply notwithstanding the fact that
the optionee's employment may have terminated prior to death, but only
to the extent of any Incentive Stock Options exercisable on the date
of death.
3.07. Retirement or Disability.
Upon the termination of the optionee's employment by reason of permanent
disability or retirement (as each is determined by the Committee), the
optionee may, within 36 months from the date of termination of employment,
exercise any Incentive Stock Options to the extent the Incentive Stock
Options were exercisable at the date of termination of employment. Notwith-
standing the foregoing, the tax treatment available pursuant to Code Sec-
tion 422 upon the exercise of an Incentive Stock Option will not be
available to an optionee who exercises any Incentive Stock Options more
than (i) 12 months after the date of termination of employment due to
permanent disability or (ii) three months after the date of termination of
employment due to retirement.
3.08. Termination for Other Reasons.
Except as provided in sections 3.06 and 3.07 or except as otherwise determined
by the Committee, all Incentive Stock Options shall terminate three months
after the termination of the optionee's employment.
3.09. Applicability of Nonqualified Stock Options Sections.
Sections 2.05 and 2.06 hereof shall apply equally to Incentive Stock Options.
Those sections are incorporated by reference in this Article 3 as though
fully set forth herein.
ARTICLE 4
MISCELLANEOUS
4.01. General Restriction.
Each Option under the Plan shall be subject to the requirement that, if at
any time the Committee shall determine that (i) the listing, registration or
qualification of the shares of Common Stock subject or related thereto upon
any securities exchange or under any state or Federal law, or (ii) the
consent or approval of any government regulatory body, or (iii) an agree-
ment by the grantee of an Option with respect to the disposition of shares
of Common Stock is necessary or desirable as a condition of, or in con-
nection with, the granting of the Option or the issue or purchase of shares
of Common Stock thereunder, the Option may not be consummated in whole or
in part unless the listing, registration, qualification, consent, approval
or agreement shall have been effected or obtained free of any conditions not
acceptable to the Committee.
4.02. Non-Assignability.
No Option under the Plan shall be assignable or transferable by the recipient
thereof, except by will or by the laws of descent and distribution. During
the life of the recipient, the Option shall be exercisable only by that
person or by that person's guardian or legal representative.
4.03. Withholding Taxes.
Whenever the Bank proposes or is required to issue or transfer shares of
Common Stock under the Plan, the Bank shall have the right to require the
grantee to remit to the Bank an amount sufficient to satisfy any Federal,
state and/or local withholding tax requirements prior to the delivery of
any certificate or certificates for the shares. Alternatively, the Bank
may issue or transfer the shares of Common Stock net of the number of
shares sufficient to satisfy the withholding tax requirements. For with-
holding tax purposes, the shares of Common stock shall be valued on the
date the withholding obligation is incurred.
4.04. Right to Terminate Employment.
Nothing in the Plan or in any agreement entered into pursuant to the Plan
shall confer upon any participant the right to continue in the employment
of the Bank or affect any right which the Bank may have to terminate the
employment of the participant.
4.05. Non-Uniform Determinations.
The Committee's determinations under the Plan (including without limitation
determinations of the persons to receive Options, the form, number of
shares awarded with, and timing of Options, the terms and provisions of
Options and the agreements evidencing Options) need not be uniform and may
be made by it selectively among persons who receive, or are eligible
to receive, Options under the Plan, whether or not the persons are
similarly situated.
4.06. Rights as a Stockholder.
The recipient of any Option under the Plan shall have no rights as a stock-
holder with respect thereto unless and until certificates for shares of Common
Stock are issued to that person.
4.07. Leaves of Absence.
The Committee shall be entitled to make rules, regulations and determinations
as it deems appropriate under the Plan in respect of any leave of absence
taken by the recipient of any Option. Without limiting the generality of
the foregoing, the Committee shall be entitled to determine (i) whether or
not any leave of absence shall constitute a termination of employment
within the meaning of the Plan and (ii) the impact, if any, of any leave of
absence on Options under the Plan previously made to any recipient who takes a
leave of absence.
4.08. Newly Eligible Employees.
The Committee shall be entitled to make rules, regulations, determinations and
awards as it deems appropriate in respect of any employee who becomes eligible
to participate in the Plan or any portion thereof after the commencement of
any Option or incentive period.
4.09. Adjustments.
In the event of any change in the outstanding Common Stock by reason of a
stock dividend or distribution, recapitalization, merger, consolidation,
split-up, combination, exchange of shares or the like, the Committee may
appropriately adjust the number of shares of Common Stock which may be
issued under the Plan, the number of shares of Common Stock subject to
Options previously granted under the Plan, the option price of Options
previously granted under the Plan and any and all other matters deemed
appropriate by the Committee.
4.10. Amendment of the Plan.
(a) The Board of Directors of the Bank may, without further action by the
stockholders and without receiving further consideration from the
participants, amend this Plan or condition or modify Options under
this Plan in response to changes in securities or other laws or
rules, regulations or regulatory interpretations thereof applicable to
this Plan or to comply with stock exchange rules or requirements.
(b) The Board of Directors of the Bank may at any time and from time to
time terminate or modify or amend the Plan in any respect, except
that without stockholder approval the Board may not (i) increase
the maximum number of shares of Common Stock which may be issued
under the Plan (other than increases pursuant to section 4.09 hereof),
(ii) extend the period during which any award may be granted or
exercised, or (iii) extend the term of the Plan. The termination
or any modification or amendment of the Plan, except as provided in
subsection (a), shall not affect any participants rights under an
Option previously granted to the participant unless the participant
consents.
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