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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
--- EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 1997
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to _________
Commission file number: 33-31093-A
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WAYNE BANCORP, INC.
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(Name of small business issuer as specified in its charter)
GEORGIA 58-1858246
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
818 South First Street
Jesup, Georgia 31545
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(Address of principal executive offices) (ZIP Code)
Issuer's telephone number, including area code: (912) 427-2265
Securities registered under Section 12(b) of the Exchange Act:
Name of each exchange
Title of each class on which registered
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None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock
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(Title of Class)
Check whether the small business issuer: (1) filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the small business issuer was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO
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Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the small business issuer's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB. [X]
State the small business issuer's revenues for its most recent fiscal year:
$4,251,000.
The aggregate market value of the Common Stock held by non-affiliates of the
small business issuer on March 12, 1998, was $3,521,355. This calculation is
based upon an estimation of fair market value of the Common Stock by the small
business issuer's Board of Directors of $15 per share. There is not an active
trading market for the Common Stock and it is not possible to identify precisely
the market value of the Common Stock.
On March 12, 1998, 458,888 shares of the small business issuer's Common Stock
were issued and outstanding.
Transitional Small Business Disclosure Format: YES NO X
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DOCUMENTS INCORPORATED BY REFERENCE
The small business issuer's Annual Report to Shareholders for the year ended
December 31, 1997, is incorporated by reference in this Form 10-KSB in Part II
Item 5, Item 6 and Item 7. The small business issuer's Proxy Statement for the
Annual Meeting of Shareholders to be held on April 14, 1998, is incorporated by
reference in this Form 10-KSB in Part III Item 9, Item 10, Item 11 and Item 12.
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This Report contains statements which constitute forward-looking
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. These statements appear in a
number of places in this Report and include all statements regarding the intent,
belief or current expectations of the Company, its directors or its officers
with respect to, among other things: (i) the Company's financing plans; (ii)
trends affecting the Company's financial condition or results of operations;
(iii) the Company's growth strategy and operating strategy; and (iv) the
declaration and payment of dividends. Investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
risks and uncertainties, and that actual results may differ materially from
those projected in the forward-looking statements as a result of various factors
discussed herein and those factors discussed in detail in the Company's filings
with the Securities and Exchange Commission.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
OVERVIEW
Wayne Bancorp, Inc. (the "Company") was organized under the Georgia
Business Corporation Code on September 5, 1989, to become a one-bank holding
company by acquiring all the capital stock of Wayne National Bank (the "Bank")
upon its formation. On October 26, 1990, the Company completed the initial
public offering (the "Offering") of its Common Stock, par value $1.00 per share
(the "Common Stock"), in which it sold 370,230 shares of Common Stock at a price
of $10.00 per share. Out of the proceeds of this sale, the Company paid $3.3
million to the Bank in exchange for all of its outstanding capital stock and
retained approximately $475,000 to cover expenses of the Company and to provide
additional capital to the Bank if required. The Bank commenced business on
September 26, 1990, and the only activity of the Company since then has been the
ownership and operation of the Bank.
The Bank was organized as a banking association under the laws of the
United States. The Bank is engaged in a general commercial and retail banking
business from its main office in Jesup, Georgia.
The Company's holding company structure can assist the Bank in
maintaining its required capital ratios because the Company may, subject to
compliance with debt guidelines implemented by the Board of Governors of the
Federal Reserve System (the "Board of Governors" or the "Federal Reserve"),
borrow money and contribute the proceeds to the Bank as primary capital. The
holding company structure also permits greater flexibility in issuing stock for
cash, property or services and in reorganization transactions. Moreover, subject
to certain regulatory limitations, a holding company can purchase shares of its
own stock, which the Bank may not do. A holding company may also engage in
certain non-banking activities which the Board of Governors has deemed to be
closely related to banking and proper incidents to the business of a bank
holding company. These activities include making or servicing loans and certain
types of leases; performing certain data processing services; acting in certain
circumstances as a fiduciary or investment or financial adviser; performing
trust company or fiduciary activities; acting as a management consultant for
other depository institutions; providing courier, appraisal and consumer
financial counseling services; providing tax planning and preparation services;
providing check guaranty and collection agency services; operating a credit
bureau; engaging in limited real estate investment activities; underwriting,
brokering and selling credit life and disability insurance; engaging in certain
other limited insurance activities; providing discount brokerage services;
underwriting and dealing in certain government obligations and money market
instruments and providing portfolio investment advice; acting as a futures
commission merchant with respect to certain financial instrument transactions;
providing foreign exchange advisory and transactional services; making
investments in certain corporations or projects designed primarily to promote
community welfare; and owning and operating certain healthy savings and loan
associations. In this regard, the Company has recently applied for and received
approval to make loans, which loans will be participations with the Bank. Other
than making loans, the Company has no present intention of engaging in any of
the activities listed above. If circumstances should lead the Company's
management to believe that there is a need for any of the other services listed
above in the Bank's marketing area and that such activities could be
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profitably conducted, the management of the Company would have the flexibility
of commencing these activities upon filing notice thereof with the Board of
Governors.
BANKING SERVICES
The Bank conducts a general commercial and retail banking business,
emphasizing in its marketing the Bank's local management and ownership. The
products offered include commercial and retail checking accounts, NOW accounts,
money market accounts and certificates of deposit. The Bank offers commercial
loans, agricultural loans, real estate loans and installment loans. It also acts
as an issuing agent for U.S. savings bonds, traveler's checks, money orders and
cashier's checks, and it offers collection teller services, including wire
transfer services. The Bank also offers a night depository facility, safe
deposit boxes and ATM service. All of the services which the Bank offers are
generally offered by other full service banks located in its market area.
FACILITIES
The Bank's main office is located at 818 South First Street, Jesup,
Georgia, on approximately 2.29 acres located at the intersection of South First
Street (U.S. Highway 84) and South Fourth Street, Jesup, Georgia. This site is
approximately three-quarters of a mile west of the intersection of U.S. Highways
84, 341 and 301, which is the center of downtown Jesup, Georgia, and is
immediately across the street from Wayne Memorial Hospital. The Bank acquired
this site for $186,825 and spent approximately $910,000 for construction of the
building, landscaping and the purchase of security devices, including the main
vault, furniture and fixtures. The Bank moved into these facilities when they
were completed in July 1992. The Bank had previously occupied temporary
facilities at 967 South First Street in Jesup, Georgia.
THE BANK'S PRIMARY MARKET
Wayne County is the Bank's primary service area ("PSA"), which
encompasses the cities of Jesup, Screven and Odum. From its county seat location
in Jesup, the Bank is centrally located in Wayne County and convenient to other
smaller communities like Odum, Screven, Broadhurst and Gardi. Wayne County is
located in the southeastern section of Georgia; approximately 240 miles
southeast of Atlanta and 100 miles north of Jacksonville, Florida.
Over the last decade, Wayne County has experienced an economic
transformation as the area has shifted from agriculture into a non-agrarian
related employment structure. Wayne County has a diversified economy. Service
and manufacturing represent the first and second largest segments of the
economy, respectively. The largest employer in the area is Rayonier, Inc., a
pulp and paper plant. The next largest manufacturers in order of employment are
apparel, food and lumber. Agriculture is also significant.
The community is experiencing growth in commercial sectors offering
services to residents and visitors. Management expects the recent growth
experienced in Wayne County to continue, providing a favorable environment for
operating the Bank. However, there is no assurance that population growth and
ongoing economic development will continue, or that the Bank will be able to
exploit the growth and development profitably even if they continue.
The Bank competes in the Wayne County market with three commercial
banks and two credit unions. Barnett Bank of Southeast Georgia, N.A., which was
recently acquired by NationsBank, Heritage Bank, headquartered in Hinesville,
Georgia, and Sun Trust Bank, Southeast Georgia, N.A., are branch banks of larger
holding companies and constitute the major commercial bank competition in the
Bank's PSA. In addition, Patterson Bank, headquartered in Patterson, Georgia,
has received approval to open a branch bank in Jesup; however, no date has been
announced for the opening of the branch. As of June 1997, the Bank, which is the
only locally owned commercial bank in the county, held 22% of all bank deposits
in Wayne County.
The credit unions have gained a considerable share of the market in
part because of their close relationship with several significant employers. The
two major credit unions, Altamaha Federal and Interstate
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Unlimited, have a presence in Jesup due to the existence of the paper plant and
county government. These institutions cater primarily to specific industry
groups. They do not extend commercial loans and are not a factor in the Bank's
commercial business. However, these institutions do compete for the retail
deposit and consumer loan business in the PSA.
Offices affiliated with out-of-state financial institutions have
entered Georgia in recent years to offer limited financial services, including
lending and deposit gathering activities. Also, the State of Georgia has adopted
a reciprocal regional interstate banking law which took effect in June 1985,
permitting bank holding companies headquartered in certain states outside of
Georgia to acquire Georgia banks, provided Georgia banks may likewise make bank
acquisitions in the reciprocal state. See "Supervision and Regulation--The
Company."
Competition for deposit and loan opportunities in the Bank's PSA is
intense because of existing competitors, the accelerating pace of deregulation
and the geographic likelihood of expansion into the PSA by other institutions.
As of March 12, 1998, the Bank had twenty-four employees, seventeen of
which were full-time. The Company's operations are conducted through the Bank.
Consequently, the Company does not have any separate employees. None of the
employees of the Bank are represented by any collective bargaining unit. The
Bank considers its relations with its employees to be good.
SUPERVISION AND REGULATION
The Company and the Bank are subject to state and federal banking laws
and regulations which impose specific requirements or restrictions on, and
provide for general regulatory oversight with respect to, virtually all aspects
of operations. These laws and regulations are generally intended to protect
depositors, not shareholders. To the extent that the following summary describes
statutory or regulatory provisions, it is qualified in its entirety by reference
to the particular statutory and regulatory provisions. Any change in applicable
laws or regulations may have a material effect on the business and prospects of
the Company. Beginning with the enactment of the Financial Institutions Reform,
Recovery and Enforcement Act of 1989 ("FIRREA") and following with the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA"), numerous
additional regulatory requirements have been placed on the banking industry in
the past five years, and additional changes have been proposed. The banking
industry is also likely to change significantly as a result of the passage of
the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 (the
"Interstate Banking Act"). The operations of the Company and the Bank may be
affected by legislative changes and the policies of various regulatory
authorities. The Company is unable to predict the nature or the extent of the
effect on its business and earnings that fiscal or monetary policies, economic
control or new federal or state legislation may have in the future.
THE COMPANY
Because it owns the outstanding common stock of the Bank, the Company
is a bank holding company within the meaning of the federal Bank Holding Company
Act of 1956 (the "BHCA"). Under the BHCA, the Company is subject to periodic
examination by the Federal Reserve and is required to file periodic reports of
its operations and such additional information as the Federal Reserve may
require. The Company's and the Bank's activities are limited to banking,
managing or controlling banks, furnishing services to or performing services for
its subsidiaries or engaging in any other activity that the Federal Reserve
determines to be so closely related to banking or managing or controlling banks
as to be a proper incident thereto.
Investments, Control and Activities. With certain limited exceptions,
the BHCA requires every bank holding company to obtain the prior approval of the
Federal Reserve before (i) acquiring substantially all the assets of any bank,
(ii) acquiring direct or indirect ownership or control of any voting shares of
any bank if after such acquisition it would own or control more than 5% of the
voting shares of such bank (unless it already owns or controls the majority of
such shares), or (iii) merging or consolidating with another bank holding
company.
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In addition, and subject to certain exceptions, the BHCA and the Change
in Bank Control Act, together with regulations thereunder, require Federal
Reserve approval (or, depending on the circumstances, no notice of disapproval)
prior to any person or company acquiring "control" of a bank holding company,
such as the Company. Control is conclusively presumed to exist if an individual
or company acquires 25% or more of any class of voting securities of the bank
holding company. Because the Company's Common Stock is registered under the
Securities Exchange Act of 1934, under Federal Reserve regulations control will
be rebuttably presumed to exist if a person acquires at least 10% of the
outstanding shares of any class of voting securities of the Company. The
regulations provide a procedure for challenge of the rebuttable control
presumption.
Under the BHCA, the Company is generally prohibited from engaging in,
or acquiring direct or indirect control of more than 5% of the voting shares of
any company engaged in, nonbanking activities, unless the Federal Reserve, by
order or regulation, has found those activities to be so closely related to
banking or managing or controlling banks as to be a proper incident thereto.
Some of the activities that the Federal Reserve has determined by regulation to
be proper incidents to the business of banking include making or servicing loans
and certain types of leases, engaging in certain insurance and discount
brokerage activities, performing certain data processing services, acting in
certain circumstances as a fiduciary or investment or financial advisor, owning
savings associations and making investments in certain corporations or projects
designed primarily to promote community welfare.
Source of Strength; Cross-Guarantee. In accordance with Federal Reserve
policy, the Company is expected to act as a source of financial strength to the
Bank and to commit resources to support the Bank in circumstances in which the
Company might not otherwise do so. Under the BHCA, the Federal Reserve may
require a bank holding company to terminate any activity or relinquish control
of a nonbank subsidiary (other than a nonbank subsidiary of a bank) upon the
Federal Reserve's determination that such activity or control constitutes a
serious risk to the financial soundness or stability of any subsidiary
depository institution of the bank holding company. Further, federal bank
regulatory authorities have additional discretion to require a bank holding
company to divest itself of any bank or nonbank subsidiary if the agency
determines that divestiture may aid the depository institution's financial
condition. The Bank may be required to indemnify, or cross-guarantee, the FDIC
against losses it incurs with respect to any other Bank controlled by the
Company, which in effect makes the Company's equity investments in healthy bank
subsidiaries available to the FDIC to assist any failing or failed bank
subsidiary of the Company.
THE BANK
General. The Bank operates as a national banking association
incorporated under the laws of the United States and is subject to examination
by the Office of the Comptroller of the Currency (the "OCC"). Deposits in the
Bank are insured by the Federal Deposit Insurance Corporation (the "FDIC") up to
a maximum amount (generally $100,000 per depositor, subject to aggregation
rules). The OCC and the FDIC regulate or monitor all areas of the Bank's
operations, including security devices and procedures, adequacy of
capitalization and loss reserves, loans, investments, borrowings, deposits,
mergers, issuances of securities, payment of dividends, interest rates payable
on deposits, interest rates or fees chargeable on loans, establishment of
branches, corporate reorganizations, maintenance of books and records and
adequacy of staff training to carry on safe lending and deposit gathering
practices. The OCC requires the Bank to maintain certain capital ratios and
imposes limitations on the Bank's aggregate investment in real estate, bank
premises and furniture and fixtures. The Bank is currently required by the OCC
to prepare quarterly reports on the Bank's financial condition and to conduct an
annual audit of its financial affairs in compliance with minimum standards and
procedures prescribed by the OCC.
Under FDICIA, all insured institutions must undergo periodic on-site
examination by their appropriate banking agency. The cost of examinations of
insured depository institutions and any affiliates may be assessed by the
appropriate agency against each institution or affiliate as it deems necessary
or appropriate. Insured institutions are required to submit annual reports to
the FDIC and the appropriate agency (and state supervisor when applicable).
FDICIA also directs the FDIC to develop with other appropriate agencies a method
for insured depository institutions to provide supplemental disclosure of the
estimated fair market value of assets and
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liabilities, to the extent feasible and practicable, in any balance sheet,
financial statement, report of condition or other report of any insured
depository institution. FDICIA also requires the federal banking regulatory
agencies to prescribe, by regulation, standards for all insured depository
institutions and depository institution holding companies relating, among other
things, to: (i) internal controls, information systems and audit systems; (ii)
loan documentation; (iii) credit underwriting; (iv) interest rate risk exposure;
and (v) asset quality.
Transactions With Affiliates and Insiders. The Bank is subject to
Section 23A of the Federal Reserve Act, which places limits on the amount of
loans or extensions of credit to, or investments in, or certain other
transactions with, affiliates and on the amount of advances to third parties
collateralized by the securities or obligations of affiliates. In addition, most
of these loans and certain other transactions must be secured in prescribed
amounts. The Bank is also subject to Section 23B of the Federal Reserve Act
which, among other things, prohibits an institution from engaging in certain
transactions with certain affiliates unless the transactions are on terms
substantially the same, or at least as favorable to such institution or its
subsidiaries, as those prevailing at the time for comparable transactions with
non-affiliated companies. The Bank is subject to certain restrictions on
extensions of credit to executive officers, directors, certain principal
shareholders and their related interests. Such extensions of credit (i) must be
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with third parties
and (ii) must not involve more than the normal risk of repayment or present
other unfavorable features.
Community Reinvestment Act. The Community Reinvestment Act requires
that each insured depository institution shall be evaluated by its primary
federal regulator with respect to its record in meeting the credit needs of its
local community, including low and moderate income neighborhoods, consistent
with the safe and sound operation of those institutions. These factors are also
considered in evaluating mergers, acquisitions and applications to open a branch
or facility. The Bank received a satisfactory rating in its most recent
evaluation.
Other Regulations. Interest and certain other charges collected or
contracted for by the Bank are subject to state usury laws and certain federal
laws concerning interest rates. The Bank's loan operations are also subject to
certain federal laws applicable to credit transactions, such as the federal
Truth-In-Lending Act governing disclosures of credit terms to consumer
borrowers, the Home Mortgage Disclosure Act of 1975 requiring financial
institutions to provide information to enable the public and public officials to
determine whether a financial institution is fulfilling its obligation to help
meet the housing needs of the community it serves, the Equal Credit Opportunity
Act prohibiting discrimination on the basis of race, creed or other prohibited
factors in extending credit, the Fair Credit Reporting Act of 1978 governing the
use and provision of information to credit reporting agencies, the Fair Debt
Collection Act governing the manner in which consumer debts may be collected by
collection agencies, and the rules and regulations of the various federal
agencies charged with the responsibility of implementing such federal laws. The
deposit operations of the Bank also are subject to the Right to Financial
Privacy Act, which imposes a duty to maintain confidentiality of consumer
financial records and prescribes procedures for complying with administrative
subpoenas of financial records, and the Electronic Funds Transfer Act and
Regulation E issued by the Federal Reserve Board to implement that act, which
governs automatic deposits to and withdrawals from deposit accounts and
customers' rights and liabilities arising from the use of automated teller
machines and other electronic banking services.
DEPOSIT INSURANCE
The FDIC establishes rates for the payment of premiums by federally
insured banks and thrifts for deposit insurance. A separate Bank Insurance Fund
("BIF") and Savings Association Insurance Fund ("SAIF") are maintained for
commercial banks and thrifts, respectively, with insurance premiums from the
industry used to offset losses from insurance payouts when banks and thrifts
fail. Since 1993, insured depository institutions like the Bank have paid for
deposit insurance under a risk-based premium system. Under this system, until
mid-1995 depository institutions paid to BIF or SAIF from $0.23 to $0.31 per
$100 of insured deposits depending on its capital levels and risk profile, as
determined by its primary federal regulator on a semi-annual basis. Once the BIF
reached its legally mandated reserve ratio in mid-1995, the FDIC lowered
premiums for well-capitalized banks, eventually to $.00 per $100, with a minimum
semiannual assessment of $1,000. However, in 1996
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Congress enacted the Deposit Insurance Funds Act of 1996, which eliminated this
minimum assessment. It also separated the Financial Corporation (FICO)
assessment to service the interest on its bond obligations. The amount assessed
on individual institutions, including the Bank, by FICO is in addition to the
amount paid for deposit insurance according to the risk-related assessment rate
schedule. Increases in deposit insurance premiums or changes in risk
classification will increase the Bank's cost of funds, and there can be no
assurance that such cost can be passed on to the Bank's customers.
DIVIDENDS
The principal source of the Company's cash revenues comes from
dividends and interest income on its investments. In addition, the Company may
receive cash revenues from dividends paid by the Bank. The amount of dividends
that may be paid by the Bank to the Company depends on the Bank's earnings and
capital position and is limited by federal and state law, regulations and
policies. In addition, the Board of Governors has stated that bank holding
companies should refrain from or limit dividend increases or reduce or eliminate
dividends under circumstances in which the bank holding company fails to meet
minimum capital requirements or in which its earnings are impaired.
As a national bank, the Bank may not pay dividends from its
paid-in-capital. All dividends must be paid out of undivided profits then on
hand, after deducting expenses, including reserves for losses and bad debts. In
addition, a national bank is prohibited from declaring a dividend on its shares
of common stock until its surplus equals its stated capital, unless there has
been transferred to surplus no less than one-tenth of the bank's net profits of
the preceding two consecutive half-year periods (in the case of an annual
dividend). The approval of the OCC is required if the total of all dividends
declared by a national bank in any calendar year exceeds the total of its net
profits for that year combined with its retained net profits for the preceding
two years, less any required transfers to surplus. Under FDICIA, the Bank may
not pay a dividend if, after paying the dividend, the Bank would be
undercapitalized. See "Capital Regulations" below.
On December 16, 1997, the Board of Directors declared a $.25 per share
dividend totaling $114,722 payable to shareholders of record as of January 10,
1998. The dividend is scheduled to be paid near the end of the first quarter of
1998. This represents the first dividend in the Company's history. The
declaration and payment of future dividends is uncertain. In addition to the
availability of funds from the Bank, the future dividend policy of the Company
is subject to the discretion of the Board of Directors and will depend upon a
number of factors, including future earnings, financial condition, cash needs
and general business conditions. If dividends should be declared in the future,
the amount of such dividends presently cannot be estimated and it cannot be
known whether such dividends would continue for future periods.
CAPITAL REGULATIONS
The federal bank regulatory authorities have adopted risk-based capital
guidelines for banks and bank holding companies that are designed to make
regulatory capital requirements more sensitive to differences in risk profile
among banks and bank holding companies, account for off-balance sheet exposure
and minimize disincentives for holding liquid assets. The resulting capital
ratios represent qualifying capital as a percentage of total risk-weighted
assets and off-balance sheet items. The guidelines are minimums, and the federal
regulators have noted that banks and bank holding companies contemplating
significant expansion programs should not allow expansion to diminish their
capital ratios and should maintain ratios well in excess of the minimums. The
current guidelines require all bank holding companies and federally-regulated
banks to maintain a minimum risk-based total capital ratio equal to 8%, of which
at least 4% must be Tier 1 capital. Tier 1 capital includes common shareholders'
equity, qualifying perpetual preferred stock and minority interests in equity
accounts of consolidated subsidiaries, but excludes goodwill and most other
intangibles and excludes the allowance for loan and lease losses. Tier 2 capital
includes the excess of any preferred stock not included in Tier 1 capital,
mandatory convertible securities, hybrid capital instruments, subordinated debt
and intermediate term-preferred stock and general reserves for loan and lease
losses up to 1.25% of risk-weighted assets.
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Under the guidelines, banks' and bank holding companies' assets are
given risk-weights of 0%, 20%, 50% and 100%. In addition, certain off-balance
sheet items are given credit conversion factors to convert them to asset
equivalent amounts to which an appropriate risk-weight will apply. These
computations result in the total risk-weighted assets. Most loans are assigned
to the 100% risk category, except for first mortgage loans fully secured by
residential property and, under certain circumstances, residential construction
loans, both of which carry a 50% rating. Most investment securities are assigned
to the 20% category, except for municipal or state revenue bonds, which have a
50% rating, and direct obligations of or obligations guaranteed by the United
States Treasury or United States Government agencies, which have a 0% rating.
The federal bank regulatory authorities have also implemented a
leverage ratio, which is Tier 1 capital as a percentage of average total assets
less intangibles, to be used as a supplement to the risk-based guidelines. The
principal objective of the leverage ratio is to place a constraint on the
maximum degree to which a bank holding company may leverage its equity capital
base. The minimum required leverage ratio for top-rated institutions is 3%, but
most institutions are required to maintain an additional cushion of at least 100
to 200 basis points.
FDICIA established a new capital-based regulatory scheme designed to
promote early intervention for troubled banks and requires the FDIC to choose
the least expensive resolution of bank failures. The new capital-based
regulatory framework contains five categories of compliance with regulatory
capital requirements, including "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized," and "critically
undercapitalized." To qualify as a "well capitalized" institution, a bank must
have a leverage ratio of no less than 5%, a Tier 1 risk-based ratio of no less
than 6%, and a total risk-based capital ratio of no less than 10%, and the bank
must not be under any order or directive from the appropriate regulatory agency
to meet and maintain a specific capital level. As of December 31, 1997, the
Company and the Bank were qualified as "well capitalized." See "Management's
Discussion and Analysis or Plan of Operation -- Capital."
Under the FDICIA regulations, the applicable agency can treat an
institution as if it were in the next lower category if the agency determines
(after notice and an opportunity for hearing) that the institution is in an
unsafe or unsound condition or is engaging in an unsafe or unsound practice. The
degree of regulatory scrutiny of a financial institution will increase, and the
permissible activities of the institution will decrease, as it moves downward
through the capital categories. Institutions that fall into one of the three
undercapitalized categories may be required to (i) submit a capital restoration
plan; (ii) raise additional capital; (iii) restrict their growth, deposit
interest rates and other activities; (iv) improve their management; (v)
eliminate management fees; or (vi) divest themselves of all or part of their
operations. Bank holding companies controlling financial institutions can be
called upon to boost the institutions' capital and to partially guarantee the
institutions' performance under their capital restoration plans.
These capital guidelines can affect the Company in several ways. If the
Bank begins to grow at a rapid pace, a premature "squeeze" on capital could
occur making a capital infusion necessary. The requirements could impact the
Company's ability to pay dividends. The Company's present capital levels are
more than adequate; however, rapid growth, poor loan portfolio performance or
poor earnings performance or a combination of these factors could change the
Bank's capital position in a relatively short period of time.
Effective January 1, 1997, the OCC amended the risk-based capital
standards to incorporate a measure for market risk to cover all positions
located in an institution's trading account, and foreign exchange and commodity
positions wherever located. The effect of the rule is that it requires any bank
or bank holding company with significant exposure to market risk to measure the
risk and hold capital commensurate with that risk. Since the Bank does not
currently engage, nor has any plans to engage, in trading, foreign exchange or
commodity position activities, the rule does not have an effect on the Bank's
required capital levels.
Both the Company and the Bank exceeded their respective regulatory
capital requirements at December 31, 1997. See "Management's Discussion and
Analysis or Plan of Operation -- Capital."
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INTERSTATE BANKING AND BRANCHING RESTRICTIONS
On September 29, 1994, the federal government enacted the Riegle-Neal
Interstate Banking and Branching Efficiency Act of 1994 (the "Interstate Banking
Act"). This Act became effective on September 29, 1995, and permits eligible
bank holding companies in any state, with regulatory approval, to acquire
banking organizations in any other state. Effective June 1, 1997, the Interstate
Banking Act allowed banks with different home states to merge, unless a
particular state opts out of the statute. Consistent with the Interstate Banking
Act, Georgia adopted legislation in 1996 which permitted interstate bank mergers
beginning June 1, 1997.
In addition, beginning June 1, 1997, the Interstate Banking Act
permitted national and state banks to establish de novo branches in another
state if there is a law in that state which applies equally to all banks and
expressly permits all out-of-state banks to establish de novo branches. However,
in 1996, Georgia adopted legislation which opts out of this provision. The
Georgia legislation provides that, with the prior approval of the Department of
Banking and Finance, after July 1, 1996, a bank may establish three new or
additional de novo branch banks anywhere in Georgia and, beginning July 1, 1998,
a bank may establish new or additional branch banks anywhere in the state with
prior regulatory approval.
RECENT LEGISLATIVE DEVELOPMENTS
From time to time, various bills are introduced in the United States
Congress and at the state legislative level with respect to the regulation of
financial institutions. Certain of these proposals, if adopted, could
significantly change the regulation of banks and the financial services
industry. The Company cannot predict whether any of these proposals will be
adopted or, if adopted, how these proposals would affect the Company.
ITEM 2. DESCRIPTION OF PROPERTY
The Bank's main office is located at 818 South First Street, Jesup,
Georgia, on approximately 2.29 acres located at the intersection of South First
Street (U.S. Highway 84) and South Fourth Street, Jesup, Georgia. This site is
approximately three-quarters of a mile west of the intersection of U.S. Highways
84, 341 and 301, which is the center of downtown Jesup, Georgia, and is
immediately across the street from Wayne Memorial Hospital. The Bank acquired
this site for $186,825 and spent approximately $910,000 for construction of the
building, landscaping and the purchase of security devices, including the main
vault, furniture and fixtures. The Bank moved into these facilities when they
were completed in July 1992. The Bank had previously occupied temporary
facilities at 967 South First Street in Jesup, Georgia.
The Bank owns both the land and the building for its main office. The
Bank's office has 7,000 square feet, 6,000 of which it is currently using. The
balance of the building is currently being used for storage and is available to
accommodate future expansion of the Bank. The Bank's offices contain
drive-through facilities, a night depository facility, safe deposit boxes and an
automated teller machine. The Company believes that its physical facilities are
adequate for its current operations.
ITEM 3. LEGAL PROCEEDINGS
Neither the Company nor the Bank is a party to, nor is any of their
property the subject of, any material pending legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of shareholders of the
Company during the fourth quarter of the year ended December 31, 1997.
8
<PAGE> 10
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
In response to this Item, the information included on pages 17 through
18 of the Company's Annual Report to Shareholders for the year ended December
31, 1997, is incorporated herein by reference.
On December 31, 1997, a director of the Company exercised warrants for
the Company's Common Stock, resulting in the issuance of 20,500 shares of the
Common Stock. The warrants had an exercise price of $10 per share and thus the
Company received $205,000. The Common Stock issued pursuant to the exercise of
the warrants represents unregistered securities, which issuance was considered
to be exempt from registration under the Securities Act of 1933 pursuant to
Section 4(2) as a transaction by an issuer not involving any public offering.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
In response to this Item, the information included on pages 3 through
17 of the Company's Annual Report to Shareholders for the year ended December
31, 1997, is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
In response to this Item, the information included on pages 19 through
41 of the Company's Annual Report to Shareholders for the year ended December
31, 1997, is incorporated herein by reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS; COMPLIANCE WITH SECTION 16(A) OF THE
EXCHANGE ACT
In response to this Item, the information included on pages 2 through 5
and page 7 of the Company's Proxy Statement for the Annual Meeting of
Shareholders to be held on April 14, 1998, is incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
In response to this Item, the information included on pages 6 through 7
of the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on April 14, 1998, is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
In response to this Item, the information included on pages 7 through 8
of the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on April 14, 1998, is incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In response to this Item, the information included on pages 8 through 9
of the Company's Proxy Statement for the Annual Meeting of Shareholders to be
held on April 14, 1998, is incorporated herein by reference.
9
<PAGE> 11
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
3(a) Articles of Incorporation and Articles of Amendment of Company
(incorporated by reference to Exhibit 3(a) of Registration
Statement on Form S-18, File No. 33-31093-A).
3(b) Bylaws of Company (incorporated by reference to Exhibit 3(b)
of Registration Statement on Form S-18, File No. 33-31093-A).
10(a) Form of Stock Warrant Agreement (incorporated by reference to
Exhibit 10(c) of Registration Statement on Form S-18, File No.
33-31093-A).
10(b) 1990 Employee Incentive Stock Option Plan (incorporated by
reference to Exhibit 10(d) of the Annual Report on Form 10-K
filed by the Company for the fiscal year ended December 31,
1990).
10(c) Form of Employment Agreement for Executive Officers
(incorporated by reference to Exhibit 10(f) of the Annual
Report on Form 10-KSB filed by the Company for the fiscal year
ended December 31, 1992).
13 Annual Report to Shareholders for the year ended December 31,
1997.
21 Subsidiaries of the Company.
23 Consent of McNair, McLemore, Middlebrooks & Co., LLP
27(a) Financial Data Schedule (for SEC use only).
27(b) Restated Financial Data Schedule for period ending
December 31, 1996 (for SEC use only).
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the fourth quarter of the year
ended December 31, 1997.
10
<PAGE> 12
SIGNATURES
In accordance with 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.
---------------------------------------------
(Registrant)
BY: /s/ Douglas R. Harper
-----------------------------------------
Douglas R. Harper
President and Principal Executive Officer
Date: March 25, 1998
---------------------
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and in
the capacities and on the dates indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
/s/ Patricia B. Armstrong Director March 25, 1998
- ------------------------------------ -----------------------------
Patricia B. Armstrong
/s/ Leonard D. Brannen Director March 25, 1998
- ------------------------------------ -----------------------------
Leonard D. Brannen
Director
- ------------------------------------ -----------------------------
C. Revis Clary
/s/ J. Ashley Dukes Director March 25, 1998
- ------------------------------------ -----------------------------
J. Ashley Dukes
/s/ Tommie C. Fuller, Sr. Director March 25, 1998
- ------------------------------------ -----------------------------
Tommie C. Fuller, Sr.
/s/ Douglas R. Harper Director, President, Principal March 25, 1998
- ------------------------------------ Executive Officer, Principal -----------------------------
Douglas R. Harper Financial Officer
/s/ J. Lex Kenerly, III, M.D. Director March 25, 1998
- ------------------------------------ -----------------------------
J. Lex Kenerly, III, M.D.
Director
- ------------------------------------ -----------------------------
James L. Lott
/s/ Jerry D. McDaniel Director March 25, 1998
- ------------------------------------ -----------------------------
Jerry D. McDaniel
Director
- ------------------------------------ -----------------------------
Ferrell L. O'Quinn
Director
- ------------------------------------ -----------------------------
Bernon W. Sapp
Director
- ------------------------------------ -----------------------------
W. Donald Whitaker
</TABLE>
11
<PAGE> 13
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit Sequential
Number Description Page Number
- ------ ----------- -----------
<S> <C> <C>
3(a) Articles of Incorporation and Articles of Amendment of Company
(incorporated by reference to Exhibit 3(a) of Registration
Statement on Form S-18, File No. 33-31093-A).
3(b) Bylaws of Company (incorporated by reference to Exhibit 3(b)
of Registration Statement on Form S-18, File No. 33-31093-A).
10(a) Form of Stock Warrant Agreement (incorporated by reference to
Exhibit 10(c) of Registration Statement on Form S-18, File No.
33-31093-A).
10(b) 1990 Employee Incentive Stock Option Plan (incorporated by
reference to Exhibit 10(d) of the Annual Report on Form 10-K
filed by the Company for the fiscal year ended December 31,
1990).
10(c) Form of Employment Agreement for Executive Officers
(incorporated by reference to Exhibit 10(f) of the Annual
Report on Form 10-KSB filed by the Company for the fiscal year
ended December 31, 1992).
13 Annual Report to Shareholders for the year ended December 31,
1997. 14
21 Subsidiaries of the Company. 59
23 Consent of McNair, McLemore, Middlebrooks & Co., LLP 60
27(a) Financial Data Schedule (for SEC use only). 61
27(b) Restated Financial Data Schedule for period ending December 31,
1996 (for SEC use only). 62
</TABLE>
<PAGE> 1
EXHIBIT 13
ANNUAL REPORT TO SHAREHOLDERS
FOR THE YEAR ENDED DECEMBER 31, 1997
<PAGE> 2
WAYNE BANCORP, INC.
1997 ANNUAL REPORT
WAYNE NATIONAL BANK
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<S> <C>
Letter to Shareholders.......................................................1
Selected Consolidated Financial Highlights...................................2
Business of the Company......................................................3
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................................3-17
Market for Company's Common Equity and Related
Shareholder Matters.......................................................17-18
Report of Independent Accountants............................................19
Consolidated Financial Statements.........................................20-41
Directors and Officers and Shareholder Information...........................42
</TABLE>
<PAGE> 4
LETTER TO SHAREHOLDERS
I am proud to report the completion of another outstanding year for
Wayne Bancorp. Inc. (the "Company") and its subsidiary, Wayne National Bank
(the "Bank"). The earnings achieved by the Bank in 1997 have placed it in the
top 3% of its peer group nationwide. The tremendous success experienced by the
Company over the last few years has enabled your Board of Directors to declare
the first dividend in the Company's history. On December 16, 1997, the Board
declared a $.25 per share dividend payable to shareholders of record as of
January 10, 1998.
The Company had record net income of $1,025,330 in 1997, up 24% from
$828,148 in 1996. Earnings per share, on a fully diluted basis, were $2.35 in
1997, compared to $1.99 in 1996. The Company's earnings in 1997 resulted in a
return on average assets and return on average equity of 2.55% and 19.03%,
respectively, compared to 2.41% and 19.65%, respectively, in 1996.
The improvement in earnings during 1997 can be attributed primarily to
a 17% increase in net interest income which grew to $2.3 million, compared to
$2.0 million in 1996. Net interest margin was up slightly in 1997 to 6.48%,
compared to 6.45% in 1996. The improvement in net interest income can be
attributed primarily to a 30% increase in average loans outstanding.
Noninterest income grew 11% to $629,921 in 1997, primarily as a result
of higher fee income on deposits. Noninterest expense grew 7% to $1.4 million
in 1997, as the result of a 6% increase in occupancy expense and a 15% increase
in operating expenses.
The Company had nonperforming assets of $41,064 at year end 1997,
compared to none at year end 1996. Net charge-offs amounted to .35% of average
loans in 1997, unchanged from .35% in 1996. During 1997, $154,000 was added to
the Bank's loan loss reserve, up 71% from $90,000 in 1996. The allowance for
loan losses was $273,405 at year end 1997, which represents .95% of net year
end loans.
At year end 1997, shareholders' equity totaled $6.0 million, up 31%
from 1996, bringing book value to $14.23 per share, compared to $12.25 per
share at the end of 1996. The Company's leverage position stood at 14.84% at
year end 1997, compared to 12.33% at year end 1996.
Please refer to "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Financial Statements included
within this report which disclose the results of the year in greater detail. I
would like to take this opportunity to thank you for your support and I look
forward to seeing each of you at our annual shareholders meeting.
Sincerely,
/s/ Douglas R. Harper
Douglas R. Harper
President & CEO
<PAGE> 5
WAYNE BANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL HIGHLIGHTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
1997 1996 % CHANGE
------ ------ --------
<S> <C> <C> <C>
Earnings:
Net interest income $2,320 $1,988 17%
Provision for possible loan losses 154 90 71%
Noninterest income 630 569 11%
Noninterest expense 1,358 1,273 7%
Profit from operations 1,438 1,195 20%
Income taxes 413 367 13%
Net income 1,025 828 24%
Per Share Data:
Basic earnings per share $2.58 $2.19 18%
Net income (on a fully diluted basis) 2.35 1.99 18%
Book value 14.23 12.25 16%
Selected Average Balances:
Total assets $40,272 $34,396 17%
Loans (net of unearned income) 27,040 20,768 30%
Deposits 34,491 29,767 16%
Shareholders' equity 5,389 4,214 28%
Selected Year-End Balances:
Total assets $51,059 $43,235 18%
Loans (net of unearned income) 28,671 23,382 23%
Deposits 44,554 38,017 17%
Shareholders' equity 6,044 4,628 31%
Selected Ratios:
Net interest margin 6.48% 6.45%
Return on average assets 2.55% 2.41%
Return on average equity 19.03% 19.65%
Net charge-offs to average loans (net of unearned income) 0.35% 0.35%
Average equity to average assets 13.38% 12.25%
Risk-based capital:
Tier 1 capital to risk-adjusted assets 19.36% 18.70%
Total capital to risk-adjusted assets 20.24% 19.57%
Leverage 14.84% 12.33%
</TABLE>
2
<PAGE> 6
This Annual Report contains statements which constitute
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These
statements appear in a number of places in this Annual Report and include all
statements regarding the intent, belief or current expectations of the Company,
its directors or its officers with respect to, among other things: (i) the
Company's financing plans; (ii) trends affecting the Company's financial
condition or results of operations; (iii) the Company's growth strategy and
operating strategy; and (iv) the declaration and payment of dividends.
Investors are cautioned that any such forward-looking statements are not
guarantees of future performance and involve risks and uncertainties, and that
actual results may differ materially from those projected in the
forward-looking statements as a result of various factors discussed herein and
those factors discussed in detail in the Company's filings with the Securities
and Exchange Commission.
BUSINESS OF THE COMPANY
Wayne Bancorp, Inc. (the "Company") was organized under the Georgia
Business Corporation Code on September 5, 1989, to become a one-bank holding
company by acquiring all the capital stock of Wayne National Bank (the "Bank")
upon its formation. The Bank commenced business on September 26, 1990, and the
only activity of the Company since then has been the ownership and operation of
the Bank. The Bank was organized as a banking association under the laws of the
United States. The Bank is engaged in a general commercial and retail banking
business, emphasizing in its marketing the Bank's local management and
ownership, from its main office in Jesup, Georgia. The products offered include
commercial and retail checking accounts, NOW accounts, money market accounts
and certificates of deposit. The Bank offers commercial loans, agricultural
loans, real estate loans and installment loans. It also acts as an issuing
agent for U.S. savings bonds, traveler's checks, money orders and cashier's
checks, and it offers collection teller services, including wire transfer
services. The Bank also offers a night depository facility, safe deposit boxes,
and ATM service.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the Company's financial condition and
results of operation should be read in conjunction with the Company's
Consolidated Financial Statements and related notes and the statistical
information included elsewhere herein.
OVERVIEW
During 1997, management's attention continued to be focused on
earnings. A relatively stable interest rate environment, together with steady
loan growth throughout the year, combined to bring about a significant increase
in earnings for 1997.
RESULTS OF OPERATIONS
The Company had net income of $1.0 million in 1997, compared to
$828,148 in 1996, an increase of 24%. Earnings per share, on a fully diluted
basis, were $2.35 in 1997, compared to $1.99 in 1996. The Company's earnings in
1997 resulted in a return on average assets and return on average equity of
2.55% and 19.03%, respectively, compared to 2.41% and 19.65%, respectively, in
1996.
The improvements in earnings in 1997 can be attributed primarily to
higher net interest income, which grew 17% to $2.3 million in 1997 on net
interest margin of 6.48% and an interest spread of 5.30%. This improvement in
net interest income can be attributed primarily to a 19% increase in average
earning assets brought about by the 16% increase in average deposits. Deposits
grew $6.5 million, or 17%, between December 31, 1996, and December 31, 1997.
3
<PAGE> 7
The Company had $41,064 in nonperforming assets at year end 1997,
compared to no nonperforming assets at year end 1996. Net charge-offs amounted
to .35% of average loans in 1997, unchanged from 1996. During 1997, the Bank
provided $154,000 to the allowance for loan losses, compared to $90,000 in
1996. The allowance for loan losses totaled $273,405 at year end 1997, which
represents .95% of net year end loans.
Noninterest income grew $61,020, or 11%, to $629,921 in 1997, from
$568,901 in 1996. This increase resulted primarily from a $65,036, or 16%,
increase in service charges on deposits. Other operating income declined
$2,715, or 2%, while securities gains declined $1,301, or 9%.
Noninterest expense grew $85,403, or 7%, to $1.4 million in 1997.
Occupancy expenses were up $11,064, or 6%, in 1997 compared to 1996, while
other expenses were up $73,835, or 15%, compared to 1996, primarily as a result
of a $13,000 increase in advertising and a $19,000 increase in professional
fees. The Company's efficiency ratio, which is noninterest expense as a
percentage of net interest income after the provision for loan losses plus
noninterest income, net of gains and losses on the sale of assets, improved to
48.8% in 1997, compared to 51.9% in 1996.
NET INTEREST INCOME/MARGINS
The primary source of revenue for the Company is net interest income,
which is the difference between income on interest-earning assets, such as
investment securities and loans, and interest incurred on interest-bearing
sources of funds, such as deposits and borrowings. The level of net interest
income is determined primarily by the average balances ("volume") of
interest-earning assets and the various rate spreads between the
interest-earning assets and the Company's funding sources. The table "Average
Balances, Income and Expenses, and Rates" below indicates the Company's average
volume of interest-earning assets and interest-bearing liabilities for 1997 and
1996 and average yields and rates. Changes in net interest income from period
to period result from increases or decreases in the volume of interest-earning
assets and interest-bearing liabilities, increases or decreases in the average
rates earned and paid on such assets and liabilities, the ability to manage the
earning asset portfolio (which includes loans), and the availability of
particular sources of funds, such as noninterest bearing deposits. The table
"Analysis of Changes in Net Interest Income" below indicates the changes in the
Company's net interest income as a result of changes in volume and rate from
1996 to 1997 and from 1995 to 1996.
Net interest income was $2.3 million for 1997, a 17% increase from
1996. Net interest income increased primarily as a result of an increase in
average earning assets, as earning assets averaged $37.6 million in 1997, up
19% from $31.7 million in 1996. The Bank increased the amount of loans
outstanding during 1997, however, there was a slight decline in the yield
earned on loans. Loans averaged $27.0 million in 1997, up 30% from $20.8
million in 1996, and the average yield decreased to 11.23% in 1997, from 11.72%
in 1996. The combination of this increase in loans and the decline in loan
yield served to increase loan interest income 25% to $3.0 million in 1997, from
$2.4 million in 1996. The Company's net interest spread, the difference between
the taxable equivalent yield on earning assets and the cost of interest-bearing
liabilities, grew slightly in 1997 to 5.30%, from 5.28% in 1996, primarily as a
result of the increased lending activity.
The key performance measure for net interest income is the "net
interest margin," or net interest income divided by average interest-earning
assets. Unlike net interest spread, net interest margin is affected by the
level of interest-free funding used to support earning assets. The Company's
net interest margin on a taxable equivalent basis rose slightly to 6.48% for
1997, from 6.45% for 1996. Net interest margin is expected to decline slightly
during 1997, reflecting increased competition for loans, resulting in a decline
in the yield on loans. Although such expectations are based on management's
judgment, actual results will depend on a number of factors that cannot be
predicted with certainty, and fulfillment of management's expectations cannot
be assured.
4
<PAGE> 8
The following table depicts interest income on earning assets and
related average yields as well as interest expense on interest-bearing
liabilities and related average rates paid for the periods indicated.
AVERAGE BALANCES, INCOME AND EXPENSES, AND RATES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1997 1996
---------------------------- -----------------------------
AVERAGE INCOME/ YIELD/ AVERAGE INCOME/ YIELD/
BALANCE EXPENSE RATE BALANCE EXPENSE RATE
------- ------- ----- ------- ------- ----
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets
Loans(1) ....................................... $27,040 $3,036 11.23% $20,768 $2,433 11.72%
Securities:
Taxable...................................... 1,751 108 6.17% 5,978 355 5.94%
Tax exempt(2)................................ 4,507 363 8.05% 2,189 180 8.22%
Interest-bearing deposits....................... 137 7 5.11% 60 3 5.00%
Funds sold...................................... 3,642 201 5.52% 2,326 124 5.33%
Other earning assets(2)......................... 562 25 4.45% 440 20 4.55%
------- ------- ----- ------- ------ ----
Total earning assets ........................ 37,639 3,740 9.94% 31,761 3,115 9.81%
------- ----- ------ ----
Cash and due from banks........................... 1,481 1,401
Premises and equipment............................ 957 1,019
Other assets...................................... 430 422
Allowance for loan losses......................... (234) (207)
------- -------
Total assets................................. $40,273 $34,396
======= =======
LIABILITIES
Interest-Bearing Liabilities
Interest-bearing transaction accounts (1)........ $ 4,628 90 1.94% $ 4,446 109 2.45%
Savings deposits (1)............................. 4,125 117 2.84% 3,851 97 2.52%
Time deposits (1)................................ 19,306 1,094 5.67% 15,227 859 5.64%
Other short-term borrowings...................... 2 0 0% 18 1 5.50%
Long-term debt................................... 0 0 0% 0 0 0.00%
------- -------- ------- ------- ------- ----
Total interest-bearing liabilities............ 28,061 1,301 4.64% 23,542 1,066 4.53%
-------- ------- ------- ----
Demand deposits (1)................................ 6,430 6,241
Accrued interest and other liabilities............. 393 399
Shareholders' equity............................... 5,389 4,214
------- -------
Total liabilities and shareholders' equity.... $40,273 $34,396
======= =======
Net interest spread................................ 5.30% 5.28%
==== ====
Net interest income/margin on a taxable
equivalent basis................................. $2,439 $2,049
====== ======
Net interest income/margin......................... 6.48% 6.45%
==== ====
</TABLE>
- -----------------------------------
(1) Average loans include nonaccrual loans. All loans and deposits are
domestic.
(2) Tax exempt income converted to taxable equivalent.
5
<PAGE> 9
Analysis of Changes in Net Interest Income. The following tables set
forth, on a taxable equivalent basis, the effect which the varying levels of
earning assets and interest-bearing liabilities and the applicable rates have
had on changes in net interest income from 1995 to 1996 and 1996 to 1997.
ANALYSIS OF CHANGES IN NET INTEREST INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------
1997 COMPARED WITH 1996 1996 COMPARED WITH 1995
VARIANCE DUE TO VARIANCE DUE TO
------------------------------------------------------
VOLUME RATE TOTAL VOLUME RATE TOTAL
-------- ---- ----- ------ ---- -----
<S> <C> <C> <C> <C> <C> <C>
EARNING ASSETS
Loans ............................................ $ 704 ($101) $ 603 $ 646 $ 33 $ 679
Securities:
Taxable ........................................ (261) 14 (247) (87) (3) (90)
Tax exempt ..................................... 187 (4) 183 78 14 92
Funds sold ....................................... 73 4 77 (33) (12) (45)
Interest-bearing deposits with banks ............. 4 0 4 (11) (1) (12)
Other earning assets ............................. 5 0 5 2 2 4
----- ----- ----- ----- ----- -----
Total interest income ........................ 712 (87) 625 595 33 628
----- ----- ----- ----- ----- -----
INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest-bearing transaction accounts .......... 4 (23) (19) 26 (27) (1)
Savings and market rate investments ............ 8 12 20 5 (24) (19)
Certificates and other time deposits ........... 231 4 235 78 (21) 57
----- ----- ----- ----- ----- -----
Total interest-bearing deposits .............. 243 (7) 236 109 (72) 37
Other short-term borrowings ...................... (1) 0 (1) 1 0 1
Long-term debt ................................... 0 0 0 0 0 0
----- ----- ----- ----- ----- -----
Total interest expense ....................... 242 (7) 235 110 (72) 38
----- ----- ----- ----- ----- -----
Net interest income on a taxable
equivalent basis .......................... 470 (80) 390 485 105 590
Less taxable equivalent adjustment ........... 58 0 58 32 0 32
----- ----- ----- ----- ----- -----
Net interest income .......................... $ 412 ($ 80) $ 332 $ 453 $ 105 $ 558
===== ===== ===== ===== ===== =====
</TABLE>
Interest Sensitivity. The Company monitors and manages the pricing and
maturity of its assets and liabilities in order to diminish the potential
adverse impact that changes in interest rates could have on its net interest
income. The principal monitoring technique employed by the Company is the
measurement of the Company's interest sensitivity "gap," which is the positive
or negative dollar difference between assets and liabilities that are subject
to interest rate repricing within a given period of time. Interest rate
sensitivity can be managed by repricing assets or liabilities, selling
securities available-for-sale, replacing an asset or liability at maturity or
by adjusting the interest rate during the life of an asset or liability.
Managing the amount of assets and liabilities repricing in this same time
interval helps to hedge the risk and minimize the impact on net interest income
of rising or falling interest rates.
The Company evaluates interest sensitivity risk and then formulates
guidelines regarding asset generation and repricing, funding sources and
pricing, and off-balance sheet commitments in order to decrease interest
sensitivity risk.
6
<PAGE> 10
The following table illustrates the Company's interest rate
sensitivity at December 31, 1997.
INTEREST SENSITIVITY ANALYSIS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------------------------------------------
GREATER
AFTER ONE AFTER THREE THAN
WITHIN THROUGH THROUGH WITHIN ONE YEAR OR
ONE MONTH THREE MONTHS TWELVE MONTHS ONE YEAR NONSENSITIVE TOTAL
--------- ------------ ------------- -------- ------------ ------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Earning Assets (1)
Loans ................................. $ 8,146 $ 2,817 $ 5,379 $16,342 $12,289 $28,631
Securities (2) ........................ 0 0 100 100 5,414 5,514
Interest-bearing deposits with
banks ............................... 124 0 0 124 0 124
Funds sold ............................ 11,970 0 0 11,970 0 11,970
------- ------- -------- ------- ------- -------
Total earning assets ............. $20,240 $ 2,817 $ 5,479 $28,536 $17,703 $46,239
======= ======= ======== ======= ======= =======
LIABILITIES
Interest-bearing liabilities
Interest-bearing deposits
Demand deposits ..................... $ 5,086 $ 0 $ 0 $ 5,086 $ 0 $ 5,086
Savings deposits .................... 4,073 0 0 4,073 0 4,073
Time deposits (3) ................... 2,004 5,223 11,620 18,847 2,769 21,616
------- ------- -------- ------- ------- -------
Total interest-bearing deposits ..... 11,163 5,223 11,620 28,006 2,769 30,775
Other short-term borrowings ........... 0 0 0 0 0 0
Long-term debt
0 0 0 0 0 0
-------- ------ -------- ------- ------- ------
Total interest-bearing liabilities $11,163 $ 5,223 $ 11,620 $28,006 $ 2,769 $30,775
======== ======= ======== ======= ======= =======
Period gap ............................... $ 9,077 $(2,406) $( 6,141) $ 530 $14,934 $15,464
Cumulative gap ........................... $ 9,077 $ 6,671 $ 530 $ 530 $15,464 $15,464
Ratio of cumulative gap to total
earning assets ........................ 19.6% 14.4% 1.1% 1.1% 33.4% 33.4%
</TABLE>
- ------------------------------------------------------------
(1) Excludes nonaccrual loans and securities.
(2) Excludes investment equity securities of $535,451.
(3) Excludes matured certificates which have not been redeemed by the
customer and on which no interest is accruing.
The Company generally would benefit from increasing market rates of
interest when it has an asset-sensitive gap and generally would benefit from
decreasing market rates of interest when it is liability sensitive. The Company
is asset sensitive over the one month and one year time frames and liability
sensitive over the one through three months and three through twelve months
time frames. However, the Company's gap analysis is not a precise indicator of
its interest sensitivity position. The analysis presents only a static view of
the timing of maturities and repricing opportunities, without taking into
consideration that changes in interest rates do not affect all assets and
liabilities equally. For example, rates paid on a substantial portion of core
deposits may change contractually within a relatively short time frame, but
those rates are viewed by management as significantly less interest-sensitive
than market-based rates such as those paid on non-core deposits. Accordingly,
management believes a liability-sensitive gap position is not as indicative of
the Company's true interest sensitivity as it would be for an organization
which depends to a greater extent on purchased funds to support earning assets.
Net interest income may be impacted by other significant factors in a given
interest rate environment, including changes in the volume and mix of earning
assets and interest-bearing liabilities.
PROVISION AND ALLOWANCE FOR LOAN LOSSES
General. The Bank has developed policies and procedures for evaluating
the overall quality of its credit portfolio and for the timely identification
of potential problem credits. On a quarterly basis, management of the
7
<PAGE> 11
Bank recommends, and the Board of Directors of the Bank approves, the
appropriate level for the allowance for loan losses based on the results of the
internal monitoring and reporting system, analysis of economic conditions in
its market, and a review of historical statistical data for both the Bank and
other financial institutions. Management's judgment as to the adequacy of the
allowance is based upon a number of assumptions about future events which it
believes to be reasonable, but which may or may not be valid. Thus, there can
be no assurance that charge-offs in future periods will not exceed the
allowance for loan losses or that additional increases in the loan loss
allowance will not be required. The adequacy of the allowance for loan losses
and the effectiveness of the Bank's monitoring and analysis system are also
reviewed periodically by the banking regulators and the Bank's independent
auditors and independent loan review firm.
Additions to the allowance for loan losses, which are expensed as the
provision for loan losses on the Company's income statement, are made
periodically to maintain the allowance at an appropriate level based on
management's analysis of the potential risk in the loan portfolio. Loan losses
and recoveries are charged or credited directly to the allowance. The amount of
the provision is a function of the level of loans outstanding, the level of
nonperforming loans, historical loan loss experience, the amount of loan losses
actually charged against the reserve during a given period, and current and
anticipated economic conditions.
The table below summarizes certain information with respect to the
Bank's allowance for loan losses and the composition of charge-offs and
recoveries for each of the last two years.
ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1997 1996
---- ----
<S> <C> <C>
Total loans outstanding at end of period,
net of unearned income..... $28,671 $23,382
Average amount of loans outstanding,
net of unearned income............. $27,040 $20,768
Balance of allowance for loan losses at
beginning of period................ $ 214 $ 197
Loan losses:
Commercial, financial and
agricultural..................... 18 0
Real estate - mortgage............. 20 7
Consumer........................... 97 81
----- ----
Total loan losses............... 135 88
----- ----
Recoveries of previous loan losses:
Commercial, financial and
agricultural..................... 0 0
Real estate - mortgage............. 4 3
Consumer........................... 36 12
---- ----
Total recoveries................ 40 15
---- ----
Net loan losses....................... 95 73
Provision for loan losses............. 154 90
---- ----
Balance of allowance for loan losses at
end of period...................... $ 273 $ 214
======= =======
Allowance for loan losses to period end
loans.............................. .95% .92%
Net charge-offs to average loans...... .35% .35%
</TABLE>
8
<PAGE> 12
The provision for loan losses charged to earnings for the year ended
December 31, 1997, amounted to $154,000, compared to $90,000 in 1996. Net
charge-offs amounted to .35% of average loans in 1997, unchanged from 1996. The
provision set aside for loan losses during 1997 was primarily the result of
management's assessment that, even though asset quality remains at a desirable
level, the allowance for loan losses should be increased to reflect the growth
experienced in the loan portfolio. Management feels the allowance is adequate
at this time; however, there can be no assurance that charge-offs in future
periods will not exceed the allowance for loan losses or that additional
increases in the loan loss allowance will not be required.
Allocation of Allowance. The table below sets forth the amount of the
allowance for loan losses allocated by the Company by loan categories.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------------------
1997 1996
---- ----
AMOUNT PERCENT AMOUNT PERCENT
------ ------- ------ -------
<S> <C> <C> <C> <C>
Commercial, financial and
agricultural $ 56 20.5% $ 23 10.7%
Real estate 93 34.1% 67 31.3%
Consumer 68 24.9% 41 19.2%
Unallocated 56 20.5% 83 38.8%
---- ----- ---- -----
TOTAL $273 100.0% $214 100.0%
==== ===== ==== =====
</TABLE>
Nonperforming Assets. The following table presents the Company's
nonperforming assets for the dates indicated.
NONPERFORMING ASSETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1997 1996
---- ----
<S> <C> <C>
Nonaccrual loans ....................... $41 $0
Restructured loans ..................... 0 0
--- --
Total nonperforming loans ......... 41 0
Nonaccruing securities ................. 0 0
Other real estate owned ................ 0 0
--- --
Total nonperforming assets ........ $41 $0
=== ==
Loans past due 90 days or more ......... $13 $0
Allowance for loan losses to period end
loans ............................... .95% .92%
Allowance for loan losses to period end
nonperforming loans ................. 665.9% N/A
Allowance for loan losses to period end
nonperforming assets ................ 665.9% N/A
Net charge-offs to average loans ....... .35% .35%
Nonperforming assets to period end loans
and foreclosed property ............. .14% N/A
</TABLE>
9
<PAGE> 13
Accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions and collection
efforts, that the borrower's financial condition is such that the collection of
interest is doubtful. A delinquent loan is generally placed in nonaccrual
status when it becomes 90 days or more past due. When a loan is placed in
nonaccrual status, all interest which has been accrued on the loan but remains
unpaid is reversed and deducted from earnings as a reduction of reported
interest income. No additional interest is accrued on the loan balance until
the collection of both principal and interest becomes reasonably certain. When
a problem loan is finally resolved, there may ultimately be an actual writedown
or charge-off of the principal balance of the loan which would necessitate
additional charges to earnings. Nonperforming assets totaled $41,064 at
year-end 1997, or .14% of period end loans.
Potential Problem Loans. A potential problem loan is one in which
management has serious doubts about the borrower's future performance under the
terms of the loan contract. These loans are current as to principal and
interest and, accordingly, they are not included in the nonperforming assets
categories. Management monitors these loans closely in order to ensure that the
Company's interests are protected. At December 31, 1997, the Company held
fifteen loans considered by management to be potential problem loans totaling
approximately $413,352. The level of potential problem loans is factored into
the determination of the adequacy of the allowance for loan losses.
NONINTEREST INCOME AND EXPENSE
Noninterest income. The largest component of noninterest income is
service charges on deposit accounts, which totaled $461,931 in 1997, a 16%
increase over the 1996 level of $396,895. There was very little change in the
other components of noninterest income during 1997 as compared to 1996.
The following table sets forth, for the periods indicated, the
principal components of noninterest income:
NONINTEREST INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
------ ------
<S> <C> <C>
Service charges on deposit
accounts.......................... $462 $397
Securities gains..................... 14 15
Other................................ 154 157
---- ----
Total noninterest income........ $630 $569
==== ====
</TABLE>
10
<PAGE> 14
Noninterest Expense. The following table sets forth, for the periods
indicated, the primary components of noninterest expense:
NONINTEREST EXPENSE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1996
------- ------
<S> <C> <C>
Salaries and employee benefits................ $ 605 $ 604
Net occupancy expense......................... 79 73
Furniture and equipment expense............... 121 116
Director and committee fees................... 42 42
Data processing............................... 23 21
Insurance..................................... 18 16
Advertising................................... 35 22
Banking assessments........................... 24 21
Professional fees............................. 70 51
Postage and freight and couriers.............. 53 50
Supplies...................................... 74 74
Travel, meetings, seminars, entertainment..... 19 20
Other......................................... 194 163
------ ------
Total noninterest expense............ $1,357 $1,273
====== ======
Efficiency ratio.............................. 48.8% 51.9%
</TABLE>
Noninterest expense increased 7% to $1.4 million in 1997 primarily as
a result of increases in advertising expenses, professional fees, and other
expenses. Advertising expense increased $12,838, or 59%, to $34,655 in 1997,
from $21,817 in 1996, as the Bank increased its advertising efforts in response
to increased competition. Professional fees increased $18,768, or 36%, to
$70,278 in 1997, from $51,510 in 1996, primarily as a result of increased legal
fees at both the Company and the Bank.
EARNING ASSETS
Loans. Loans are the largest category of earning assets and typically
provide higher yields than the other types of earning assets. Associated with
the higher loan yields are the inherent credit and liquidity risks which
management attempts to control and counterbalance. Loans averaged $27.0 million
in 1997, compared to $20.8 million in 1996, an increase of $6.2 million, or
30%. At December 31, 1997, total loans were $28.7 million, compared to $23.4
million at the end of 1996.
11
<PAGE> 15
In 1997, growth in the Company's loan portfolio accelerated as the
local economy remained strong. The following table shows the composition of the
loan portfolio by category at the dates indicated.
COMPOSITION OF LOAN PORTFOLIO
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------------------------
1997 1996
---------------------------------------------------
PERCENT PERCENT
AMOUNT OF TOTAL AMOUNT OF TOTAL
------- -------- -------- ---------
<S> <C> <C> <C> <C>
Commercial, financial
and agricultural........... $ 5,267 18.4% $ 3,361 14.4%
Real estate
Construction............... 1,421 4.9% 2,066 8.8%
Mortgage - residential..... 7,343 25.6% 6,044 25.8%
Mortgage - commercial...... 5,248 18.3% 3,341 14.3%
Consumer...................... 9,390 32.7% 8,261 35.3%
Other......................... 29 .1% 337 1.4%
------- ----- ------- -----
Total gross loans.......... 28,698 100.0% 23,410 100.0%
===== =====
Unearned income............... 27 28
------- -------
Total loans net of
unearned income.......... 28,671 23,382
Allowance for loan losses..... 273 214
------- -------
Total net loans............ $28,398 $23,168
======= =======
</TABLE>
The principal component of the Company's loan portfolio is consumer
loans. At year end 1997, this category totaled $9.4 million and represented 33%
of the total loan portfolio, compared to $8.3 million, or 35%, at the end of
1996. Consumer loans increased $1.1 million, or 14%, at December 31, 1997,
compared to December 31, 1996. The growth in 1997 was primarily a result of the
strong local economy.
Residential mortgage loans increased $1.3 million, or 21%, to $7.3
million at December 31, 1997, from $6.0 million at year end 1996. This increase
is the result of management's decision to allocate more funds to residential
mortgage loans, primarily to low and moderate income borrowers. Nonresidential
mortgage loans, which include commercial loans and other loans secured by
multi-family properties and farmland, increased $1.9 million, or 57%, to $5.2
million at December 31, 1997, from $3.3 million at year end 1996. This increase
is due primarily to management's ability to attract several new commercial
borrowers. Construction loans declined $644,188, or 31%, due to a slow down in
new home building.
Commercial, financial and agriculture loans grew by $1.9 million, or
57%, to $5.3 million at December 31, 1997, from $3.4 million at December 31,
1996. This increase is due primarily to management's efforts to increase the
Bank's commercial customer base and to increase lending to farmers.
12
<PAGE> 16
The repayment of loans in the loan portfolio as they mature is also a
source of liquidity for the Company. The following table sets forth the
Company's loans maturing within specified intervals at December 31, 1997.
LOAN MATURITY SCHEDULE AND SENSITIVITY TO CHANGES IN INTEREST RATES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
----------------------------------------------------------
OVER ONE YEAR
ONE YEAR THROUGH OVER FIVE
OR LESS FIVE YEARS YEARS TOTAL
------- ---------- ----- -------
<S> <C> <C> <C> <C>
Commercial, financial and
agricultural..................... $ 3,673 $ 1,351 $ 243 $ 5,267
Real estate ........................ 6,388 3,607 4,017 14,012
Consumer............................ 2,786 5,477 1,127 9,390
Other............................... 29 0 0 29
------- ------- ------ -------
Total ......................... $12,876 $10,435 $5,387 $28,698
======= ======= ====== =======
Fixed interest rate ................ $6,004 $10,435 $5,387 $21,826
Variable interest rate ............. 6,872 0 0 6,872
------- ------- ------ -------
Total ......................... $12,876 $10,435 $5,387 $28,698
======= ======= ====== =======
</TABLE>
The information presented in the above table is based on the
contractual maturities of the individual loans, including loans which may be
subject to renewal at their contractual maturity. Renewal of such loans is
subject to review and credit approval, as well as modification of terms upon
their maturity. Consequently, management believes this treatment presents
fairly the maturity and repricing structure of the loan portfolio shown on the
above table.
Investment Securities. The investment securities portfolio is a
significant component of the Company's total earning assets. Total investment
securities averaged $6.3 million in 1997, compared to $8.2 million in 1996. At
December 31, 1997, the total securities portfolio was $6.0 million, compared to
$8.7 million at December 31, 1996. The decrease in the portfolio during 1997
was primarily due to management's decision to increase the Bank's liquidity
position to enable it to respond more quickly to a change in interest rates and
to partially offset the investment in long term tax exempt municipal bonds. The
decrease in the portfolio also reflects the increased lending activity
experienced in 1997.
The following table sets forth the book value of the securities held
by the Company at the dates indicated.
BOOK VALUE OF SECURITIES
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1997 1996
---- ----
<S> <C> <C>
U.S. Treasury............................... $ 0 $4,273
U.S. government agencies.................... 0 500
State, county and municipal securities...... 5,514 3,623
Other....................................... 485 331
------ ------
Total securities................... $5,999 $8,727
====== ======
</TABLE>
13
<PAGE> 17
The following table shows the scheduled maturities and average yields
of securities held at December 31, 1997.
INVESTMENT SECURITIES MATURITY DISTRIBUTION AND YIELDS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------------------------
AFTER ONE BUT AFTER FIVE BUT
WITHIN ONE YEAR WITHIN FIVE YEARS WITHIN TEN YEARS AFTER TEN YEARS
---------------- ----------------- ----------------- ------------------
AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD AMOUNT YIELD
------ ----- ------ ----- ------ ----- ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
State and political subdivisions (1)... $100 6.00% $399 6.23% $0 0% $5,015 8.12%
---- ---- ---- --- -- - ------ ----
Total (2)............ $100 6.00% $399 6.23% $0 0% $5,015 8.12%
==== ==== ==== === == = ====== ====
</TABLE>
- ----------------------------------------------
(1) Yields based on taxable equivalent.
(2) Excludes $535,451 in investment equity securities.
In accordance with the Financial Accounting Standards Board (the
"FASB") Statement of Financial Accounting Standards ("SFAS") 115, the Company
classifies its investment securities into the following three categories:
trading, available-for-sale and held-to-maturity. Debt securities that the
Company has the intent and ability to hold until maturity are classified as
held-to-maturity and reported at amortized cost. Trading securities and
available-for-sale securities are reported at market value with unrealized
gains and losses on trading securities reported in income and unrealized gains
and losses on available-for-sale securities reported as a net amount in a
separate component of shareholders' equity until realized. At December 31,
1997, the Company held $535,451 in securities classified available-for-sale and
$5.5 million in securities classified held-to-maturity and reflected an
unrealized gain after tax of $33,377 as a separate component in shareholders'
equity. There can be no assurance that as interest rates change in the future
the amount of unrealized gain will not decrease, but if these securities are
held until they mature and are repaid in accordance with their terms, these
gains will not be realized. Other attributes of the securities portfolio,
including yields and maturities, are discussed elsewhere in "-- Net Interest
Income/Margins -- Interest Sensitivity."
Short-Term Investments. Short-term investments, which consist
primarily of federal funds sold, equities, and interest-bearing deposits with
other banks, averaged $4.2 million in 1997, compared to $2.8 million in 1996.
At December 31, 1997, short-term investments totaled $12.5 million. These funds
are a primary source of the Bank's liquidity and are generally invested in an
earning capacity on an overnight basis.
DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES
Average interest-bearing deposits increased $4.5 million, or 19%, to
$28.1 million in 1997, from $23.5 million in 1996. This increase resulted from
increases in all categories of interest-bearing deposits, primarily as a result
of normal deposit growth similar to growth experienced in prior years. The
Company rarely utilizes interest-bearing liabilities other than deposits.
Deposits. Average total deposits increased $4.7 million, or 16%, to
$34.5 million during 1997, from $29.8 million during 1996. At December 31,
1997, total deposits were $44.6 million, compared to $38.0 million a year
earlier, an increase of 17%. Seasonal local government deposits amounted to
$7.8 million at December 31, 1997, compared to $7.4 million at December 31,
1996. In both years these seasonal deposits are reflected as noninterest
bearing deposits, and were temporarily invested in federal funds sold until
withdrawn in mid-January of the following year.
14
<PAGE> 18
The following table sets forth the deposits of the Company by category
at the dates indicated.
DEPOSITS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------------------------------------------------------
1997 1996
-------------------------------------------------------------------------------
PERCENT OF PERCENT OF
AMOUNT DEPOSITS AMOUNT DEPOSITS
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Demand deposit accounts......... $13,779 30.9% $12,971 34.1%
NOW accounts ................... 5,086 11.4% 4,508 11.9%
Money market accounts........... 1,924 4.3% 1,613 4.2%
Savings accounts ............... 2,148 4.8% 2,228 5.9%
Time deposits less than $100,000 15,633 35.1% 12,263 32.3%
Time deposits of $100,000 or
over............................ 5,984 13.5% 4,434 11.6%
------- ---- ------- -----
Total deposits......... $44,554 100.0% $38,017 100.0%
======= ===== ======= =====
</TABLE>
Core deposits, which exclude certificates of deposit of $100,000 or
more and seasonal government deposits, provide a relatively stable funding
source for the Company's loan portfolio and other earning assets. The Company's
core deposits increased $4.6 million in 1997, primarily as a result of normally
recurring deposit growth.
Deposits, and particularly core deposits, have historically been the
Company's primary source of funding and have enabled the Company to meet
successfully both its short-term and long-term liquidity needs. Management
anticipates that such deposits will continue to be the Company's primary source
of funding in the future. The Company's loan-to-deposit ratio was 64% at
December 31, 1997, and 61% at the end of 1996, and the ratio averaged 78%
during 1997. The Company's loan-to-core deposits ratio was 92% at December 31,
1997, and 88% at December 31, 1996, and the ratio averaged 90% during 1997. The
maturity distribution of the Company's time deposits of $100,000 or more at
December 31, 1997, is shown in the following table.
MATURITIES OF CERTIFICATES OF DEPOSIT
AND OTHER TIME DEPOSITS OF $100,000 OR MORE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------------------------------
AFTER AFTER SIX
THREE THROUGH
WITHIN THREE THROUGH TWELVE AFTER TWELVE
MONTHS SXI MONTHS MONTHS MONTHS TOTAL
------ ---------- ------ ------ ------
<S> <C> <C> <C> <C> <C>
Certificates of deposit of $100,000 or more... $2,251 $900 $1,642 $1,191 $5,984
Other time deposits of $100,000 or more....... 0 0 0 0 0
------ ---- ------ ------ ------
Total.................................... $2,251 $900 $1,642 $1,191 $5,984
====== ==== ====== ====== ======
</TABLE>
More than a third, 38%, of the Company's time deposits of $100,000 or
more had scheduled maturities within three months. Large certificate of deposit
customers tend to be extremely sensitive to interest rate levels, making these
deposits less reliable sources of funding for liquidity planning purposes than
core deposits. Some
15
<PAGE> 19
financial institutions partially fund their balance sheets using large
certificates of deposit obtained through brokers. These brokered deposits are
generally expensive and are unreliable as long-term funding sources.
Accordingly, the Company does not actively solicit brokered deposits.
Borrowed funds. Borrowed funds consist primarily of short-term
borrowings in the form of federal funds purchased from correspondent banks. The
Company strives to fund its loan growth and other investments from deposits.
Accordingly, the Company has relied only occasionally upon borrowed funds to
fund its operations. Borrowed funds, in the form of federal funds purchased,
averaged $2,082 during 1997.
CAPITAL
Under the capital guidelines of the Federal Reserve Board and the
Office of the Comptroller of the Currency (the "OCC"), the Company and the Bank
are currently required to maintain a minimum risk-based total capital ratio of
8%, with at least 4% being Tier 1 capital. Tier 1 capital consists of common
shareholders' equity, qualifying perpetual preferred stock, and minority
interests in equity accounts of consolidated subsidiaries, less goodwill. In
addition, the Company and the Bank must maintain a minimum Tier 1 leverage
ratio (Tier 1 capital to total assets) of at least 3%, but this minimum ratio
is increased by 100 to 200 basis points for other than the highest-rated
institutions.
At December 31, 1997, the Company and the Bank exceeded their
regulatory capital ratios, as set forth in the following table.
ANALYSIS OF CAPITAL
<TABLE>
<CAPTION>
Required
Company Bank Minimums
------- ---- --------
<S> <C> <C> <C>
Tier 1 risk-based capital ratio.......... 19.4% 16.2% 4.0%
Total risk-based capital ratio .......... 20.2% 17.1% 8.0%
Tier 1 leverage ratio.................... 14.8% 11.7% 3.0%
</TABLE>
LIQUIDITY MANAGEMENT AND CAPITAL RESOURCES
Liquidity management involves monitoring the Company's sources and
uses of funds in order to meet its day-to-day cash flow requirements while
maximizing profits. Liquidity represents the ability of a company to convert
assets into cash or cash equivalents without significant loss and to raise
additional funds by increasing liabilities. Without proper liquidity
management, the Company will not be able to perform the primary function of a
financial intermediary and would, therefore, not be able to meet the needs of
the communities it serves.
Increased liquidity in typical interest rate environments often
involves decreasing profits by investing in earning assets with shorter
maturities. Liquidity management is made more complex because different balance
sheet components are subject to varying degrees of management control. For
example, the timing of maturities of the investment portfolio is very
predictable and subject to a high degree of control at the time investment
decisions are made. However, net deposit inflows and outflows are far less
predictable and are not subject to nearly the same degree of control.
The Company's funds sold position, its primary source of liquidity,
averaged $3.6 million during the year ended December 31, 1997, and was $11.9
million at December 31, 1997, and averaged $2.3 million during the year ended
December 31, 1996, and was $8.3 million at December 31, 1996. Reflected in the
unusually large funds sold position at December 31, 1997, and December 31,
1996, was approximately $7.8 million and $7.4 million, respectively, of
seasonal government deposits. Within days of each respective year end, the
funds sold position returned to a more normal level. Liquidity can also be
managed using the overnight and short-term borrowed fund markets. The Company
maintains overnight borrowing lines with several financial institutions, and
utilizes these lines on rare occasions.
16
<PAGE> 20
The Company, as a stand alone corporation, has more limited access to
liquidity sources than the Bank and depends on dividends from the Bank as its
primary source of liquidity. The ability of the Bank to pay dividends is
subject to general regulatory restrictions which may, but are not expected to,
have a material negative impact on the liquidity available to the Company. If
circumstances warrant, the Company's liquidity needs can also be met by
borrowings from third parties, subject to the availability of loan funds on
appropriate terms and the Company's ability to service the debt.
IMPACT OF INFLATION
Unlike most industrial companies, the assets and liabilities of
financial institutions such as the Company and the Bank are primarily monetary
in nature. Therefore, interest rates have a more significant effect on the
Company's performance than do the effects of changes in the general rate of
inflation and change in prices. In addition, interest rates do not necessarily
move in the same direction or in the same magnitude as the prices of goods and
services. As discussed previously, management seeks to manage the relationships
between interest sensitive assets and liabilities in order to protect against
wide interest rate fluctuations, including those resulting from inflation. See
"-- Net Interest Income/Margins -- Interest Sensitivity."
INDUSTRY DEVELOPMENTS
Certain recently enacted and proposed legislation could have an effect
on both the costs of doing business and the competitive factors facing the
financial institutions industry. The Company is unable at this time to assess
the impact of this legislation on its financial condition or results of
operations.
YEAR 2000 ISSUES
The Company utilizes an in-house data processing system for most of
its accounting functions. Management is in the process of upgrading the systems
which it has determined are not prepared for the year 2000 ("Year 2000").
Testing should be completed by the end of 1998. The Company also has a number
of personal computers, some of which, due to their age, are not Year 2000
compliant. Management has budgeted approximately $180,000 to get all of its
systems Year 2000 compliant. The largest Year 2000 exposure to most banks is
the preparedness of the customers of the banks. Management is addressing with
its customers the possible consequences of not being prepared for Year 2000.
Should large borrowers not sufficiently address this issue, the Company may
experience an increase in loan defaults. The amount of potential loss from this
issue is not quantifiable. Management is attempting to reduce this exposure by
educating its customers.
MARKET FOR COMPANY'S COMMON EQUITY AND
RELATED SHAREHOLDER MATTERS
As of March 12, 1998, there were approximately 946 holders of record
of the Company's Common Stock and 458,888 shares of Common Stock issued and
outstanding. In addition, there were 99,760 shares of Common Stock subject to
currently outstanding warrants and stock options. There is no established
public trading market in the stock, and there is no likelihood that a trading
market will develop in the near future. The development of a trading market may
be inhibited because a large portion of the Company's shares is held by
insiders. Transactions in the Common Stock are infrequent and are negotiated
privately between the persons involved in those transactions.
All outstanding shares of Common Stock of the Company are entitled to
share equally in dividends from funds legally available, when, as, and if
declared by the Board of Directors. On December 16, 1997, the Board of
Directors declared a $.25 per share dividend totaling $114,722 payable to
shareholders of record as of January 10, 1998. The dividend is scheduled to be
paid near the end of the first quarter of 1998. This represents the first
dividend in the Company's history. The declaration and payment of future
dividends is uncertain as future earnings may be retained to expand the Bank's
capital base to support deposit growth. Furthermore, the payment
17
<PAGE> 21
of dividends by national banks is regulated by the OCC, which in turn could
limit the Company's ability to pay dividends. At the request of the OCC, the
Bank adopted a capital policy which provides that the Bank will not pay
dividends to the Company until the Bank is cumulatively profitable. The Company
currently has no source of income other than dividends and other payments
received from the Bank.
18
<PAGE> 22
MCNAIR, MCLEMORE, MIDDLEBROOKS & CO., LLP
CERTIFIED PUBLIC ACCOUNTANTS
A PARTNERSHIP INCLUDING A PROFESSIONAL CORPORATION
<TABLE>
<S> <C>
RALPH S. McLEMORE, SR., C.P.A. (1963-1977) 389 MULBERRY STREET
SIDNEY B. McNAIR, C.P.A. (1954-1992) POST OFFICE BOX ONE
- ------------------------------------------- MACON, GEORGIA 31202
SIDNEY E. MIDDLEBROOKS, C.P.A., P.C. (912) 746-6277
RAY C. PEARSON, C.P.A. FAX (912) 741-8353
J. RANDOLPH NICHOLS, C.P.A.
WILLIAM H. EPPS, JR., C.P.A. 1117 MORNINGSIDE DRIVE
RAYMOND A. PIPPIN, JR., C.P.A. POST OFFICE BOX 1287
JERRY A. WOLFE, C.P.A. PERRY, GA 31069
W. E. BARFIELD, JR., C.P.A. (912) 987-0947
HOWARD S. HOLLEMAN, C.P.A. FAX (912) 987-0526
F. GAY McMICHAEL, C.P.A.
RICHARD A. WHITTEN, JR., C.P.A.
ELIZABETH WARE HARDIN, C.P.A.
CAROLINE E. GRIFFIN, C.P.A.
RONNIE K. GILBERT, C.P.A.
</TABLE>
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Wayne Bancorp, Inc.
We have audited the accompanying consolidated balance sheets of WAYNE BANCORP,
INC. AND SUBSIDIARY as of December 31, 1997 and 1996 and the related
consolidated statements of income, changes in stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
These 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 the 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 consolidated financial position of Wayne
Bancorp, Inc. and Subsidiary as of December 31, 1997 and 1996 and the
consolidated results of operations and cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ MCNAIR, MCLEMORE, MIDDLEBROOKS & CO., LLP
McNAIR, McLEMORE, MIDDLEBROOKS & CO., LLP
Macon, Georgia
February 20, 1998
19
<PAGE> 23
WAYNE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ -----------
<S> <C> <C>
CASH AND DUE FROM BANKS $ 3,075,396 $ 1,385,896
------------ -----------
FEDERAL FUNDS SOLD 11,970,000 8,280,000
------------ -----------
INTEREST-BEARING DEPOSITS WITH BANKS 124,003 255,152
------------ -----------
INVESTMENT SECURITIES
Available for Sale 535,451 5,102,326
Held to Maturity 5,514,009 3,622,528
------------ -----------
6,049,460 8,724,854
------------ -----------
LOANS 28,698,690 23,410,171
Allowance for Loan Losses (273,405) (213,969)
Unearned Loan Fees (27,380) (27,967)
------------ -----------
28,397,905 23,168,235
------------ -----------
BANK PREMISES AND EQUIPMENT 907,405 997,013
------------ -----------
OTHER ASSETS 534,373 423,600
------------ -----------
TOTAL ASSETS $51,058,542 $43,234,750
============ ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
20
<PAGE> 24
WAYNE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
DECEMBER 31
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
DEPOSITS
Noninterest-Bearing $13,779,191 $12,970,694
Interest-Bearing 30,775,238 25,045,809
----------- -----------
44,554,429 38,016,503
OTHER LIABILITIES 460,057 590,480
----------- -----------
TOTAL LIABILITIES 45,014,486 38,606,983
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock, Par Value $1 Per Share; 10,000,000 Shares
Authorized, 424,888 and 377,786 Shares Issued and
Outstanding as of December 31, 1997 and 1996, Respectively 424,888 377,786
Surplus 3,778,020 3,354,102
Retained Earnings 1,807,771 897,163
Net Unrealized Gain (Loss) on Securities Available for Sale,
Net of Tax (Benefit) of $17,194 in 1997 and $(661) in 1996 33,377 (1,284)
----------- -----------
TOTAL STOCKHOLDERS' EQUITY 6,044,056 4,627,767
----------- -----------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $51,058,542 $43,234,750
=========== ===========
</TABLE>
The accompanying notes are an integral part of these balance sheets.
21
<PAGE> 25
WAYNE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans $3,036,348 $2,433,258 $1,753,619
Interest on Federal Funds Sold 201,089 124,062 169,365
Interest on Investment Securities
U.S. Treasury 86,534 287,587 276,425
U.S. Government Agencies 2,605 48,884 153,802
Municipals 268,928 142,297 80,982
Interest on Deposits in Other Banks 7,463 3,077 14,721
Dividends on Other Investments 18,112 14,788 9,239
---------- ---------- ----------
3,621,079 3,053,953 2,458,153
INTEREST EXPENSE
Interest on Deposits 1,300,994 1,065,545 1,028,414
---------- ---------- ----------
NET INTEREST INCOME 2,320,085 1,988,408 1,429,739
Provision for Loan Losses 154,000 90,000 -
---------- ---------- ----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 2,166,085 1,898,408 1,429,739
---------- ---------- ----------
OTHER INCOME
Service Charges on Deposits 461,931 396,895 342,515
Other Operating Income 154,113 156,827 144,317
Gain on Sale of Securities 13,877 15,179 21,216
---------- ---------- ----------
629,921 568,901 508,048
---------- ---------- ----------
OTHER EXPENSES
Salaries and Employee Benefits 604,599 604,095 536,383
Occupancy and Equipment 200,253 189,189 195,093
Other Operating Expenses 408,760 358,868 383,324
Office Supplies 74,023 68,848 50,539
Professional Fees 70,278 51,510 48,971
---------- ---------- ----------
1,357,913 1,272,510 1,214,310
---------- ---------- ----------
INCOME BEFORE INCOME TAXES 1,438,093 1,194,799 723,477
INCOME TAXES 412,763 366,651 225,668
---------- ---------- ----------
NET INCOME $1,025,330 $ 828,148 $ 497,809
========== ========== ==========
BASIC EARNINGS PER SHARE $ 2.58 $ 2.19 $ 1.33
========== ========== ==========
DILUTED EARNINGS PER SHARE $ 2.35 $ 1.99 $ 1.22
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE> 26
WAYNE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
NET
UNREALIZED
GAIN (LOSS)
RETAINED ON SECURITIES
COMMON EARNINGS AVAILABLE
STOCK SURPLUS (DEFICIT) FOR SALE TOTAL
--------- ----------- ------------- ------------- ------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1994 $ 370,230 $ 3,299,359 $ (428,794) $(95,034) $ 3,145,761
Net Income 497,809 497,809
Net Unrealized Gain on
Securities Available for Sale,
Net of Tax 129,371 129,371
Issuance of 7,556 Shares
of Stock 7,556 54,743 62,299
-------- ---------- ---------- ------- ----------
BALANCE, DECEMBER 31, 1995 377,786 3,354,102 69,015 34,337 3,835,240
Net Income 828,148 828,148
Net Unrealized Loss on
Securities Available for Sale,
Net of Tax (35,621) (35,621)
-------- ---------- ---------- ------- ----------
BALANCE, DECEMBER 31, 1996 377,786 3,354,102 897,163 (1,284) 4,627,767
Exercise of Stock Options 7,556 68,004 75,560
Exercise of Stock Warrants 39,546 355,914 395,460
Net Income 1,025,330 1,025,330
Cash Dividends (114,722) (114,722)
Net Unrealized Gain on
Securities Available for Sale,
Net of Tax 34,661 34,661
-------- ---------- ---------- ------- ----------
BALANCE, DECEMBER 31, 1997 $ 424,888 $ 3,778,020 $ 1,807,771 $ 33,377 $ 6,044,056
========= =========== =========== ======== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
23
<PAGE> 27
WAYNE BANCORP, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1997 1996 1995
------------ ------------ ------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,025,330 $ 828,148 $ 497,809
Adjustments to Reconcile Net Income to Net
Cash Flows from Operating Activities
Depreciation, Amortization and Accretion 100,790 111,372 117,804
Provision for Loan Losses 154,000 90,000 --
Gain on Sale of Securities (13,877) (15,179) (21,216)
Deferred Taxes (32,595) (4,003) 184,897
CHANGE IN
Interest Receivable (56,037) 767 (67,950)
Interest Payable 77,134 (20,217) 88,961
Other (227,987) 314,553 23,879
------------ ------------ ------------
1,026,758 1,305,441 824,184
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Investment Securities
Available for Sale (528,007) (2,697,802) (3,491,633)
Held to Maturity (2,024,055) (1,579,546) (2,761,536)
Proceeds from Maturities of Interest-
Bearing Deposits in Other Banks -- -- 600,000
Proceeds from Maturities of Securities
Held to Maturity 135,000 130,000 250,000
Available for Sale 1,750,000 2,000,000 3,065,000
Proceeds from Sales of Securities
Available for Sale 3,408,950 1,356,155 3,525,446
Held to Maturity -- -- 609,824
Proceeds from Sales of OREO 5,000 33,200 --
Loans, Net (5,404,942) (6,981,865) (2,982,332)
Bank Premises and Equipment (14,577) (93,382) (41,381)
Interest-Bearing Deposits 131,149 (141,867) (113,285)
------------ ------------ ------------
(2,541,482) (7,975,107) (1,339,897)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Demand, Interest-Bearing Demand and
Savings Accounts 1,618,154 2,823,545 1,357,684
Time Deposits 4,919,772 1,706,588 1,975,316
Cash Dividends (114,722)
Issuance of Stock 471,020 -- 62,299
------------ ------------ ------------
6,894,224 4,530,133 3,395,299
------------ ------------ ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 5,379,500 (2,139,533) 2,879,586
CASH AND CASH EQUIVALENTS, BEGINNING 9,665,896 11,805,429 8,925,843
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, ENDING $ 15,045,396 $ 9,665,896 $ 11,805,429
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
24
<PAGE> 28
WAYNE BANCORP, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements include the accounts of Wayne Bancorp,
Inc. and its wholly-owned subsidiary, Wayne National Bank (the Bank) located in
Jesup, Georgia. All significant intercompany accounts have been eliminated.
The accounting and reporting policies of Wayne Bancorp, Inc. are presented on
the basis of generally accepted accounting principles and practices utilized in
the commercial banking industry. The following is a description of the more
significant of those policies.
BASIS OF PRESENTATION
In preparing the financial statements, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities as of
the balance sheet date and revenues and expenses for the period. Actual results
could differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change in
the near-term relate to the determination of the allowance for loan losses, the
valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans and the valuation of deferred tax assets.
INVESTMENT SECURITIES
Investment securities are recorded under the provisions of Statement of
Financial Accounting Standards No. 115 whereby the Bank must classify its
securities as trading, available for sale or held to maturity. Trading
securities are purchased and held for sale in the near term. Securities held to
maturity are those which the Bank has the ability and intent to hold until
maturity. All other securities not classified as trading or held to maturity are
considered available for sale. As of December 31, 1997 and 1996, all investment
securities held by the Bank are classified as available for sale and held to
maturity.
Securities available for sale are measured at fair value with unrealized gains
and losses reported net of deferred taxes as a separate component of
stockholders' equity. Fair value represents an approximation of realizable value
as of December 31, 1997 and 1996. Realized and unrealized gains and losses are
determined using the specific identification method. Premiums and discounts are
recognized in interest income using the straight-line method over the period to
maturity.
LOANS
Loans are generally reported at principal amount less unearned interest and
fees. The Bank records impaired loans under Statement of Financial Accounting
Standards (SFAS) No. 114, Accounting by Creditors for Impairment of a Loan and
SFAS No. 118, Accounting by Creditors for Impairment of a Loan-Income
Recognition and Disclosures. Impaired loans are loans for which principal and
interest are unlikely to be collected in accordance with the original loan terms
and, generally, represent loans delinquent in excess of 90 days which have been
placed on nonaccrual status and for which collateral values are less than
outstanding principal and interest. Small balance, homogeneous loans are
excluded from impaired loans. Generally, interest payments received on impaired
loans are applied to principal. Upon receipt of all loan principal, additional
interest payments are recognized as interest income on the cash basis. As of
December 31, 1997, the Bank had no significant loans classified as impaired
loans.
25
<PAGE> 29
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LOANS (CONTINUED)
Other nonaccrual loans are loans for which payments of principal and interest
are considered doubtful of collection under original terms but collateral values
equal or exceed outstanding principal and interest.
Wayne National Bank's loans consist of commercial, financial and agricultural
loans, real estate mortgage loans and consumer loans primarily to individuals
and entities located throughout coastal and southeast Georgia. Accordingly, the
ultimate collectibility of the loans is largely dependent upon economic
conditions in those Georgia areas.
ALLOWANCE FOR LOAN LOSSES
The allowance method is used in providing for losses on loans. Accordingly, all
loan losses are charged to the allowance and all recoveries are credited to it.
The provision for loan losses is based on factors which, in management's
judgment, deserve current recognition in estimating possible loan losses. Such
factors considered by management include growth and composition of the loan
portfolio, economic conditions and the relationship of the allowance for loan
losses to outstanding loans.
When impaired loans exist, an allowance for impaired loan losses is maintained.
Provisions are made for impaired loans upon changes in expected future cash
flows or estimated net realizable value of collateral. When determination is
made that impaired loans are wholly or partially uncollectible, the
uncollectible portion is charged off.
Management believes the allowance for possible loan losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Bank's allowance for loan
losses. Such agencies may require the Bank to recognize additions to the
allowance based on their judgment about information available to them at the
time of their examination.
BANK PREMISES AND EQUIPMENT
Premises and equipment are recorded at acquisition cost net of accumulated
depreciation.
Depreciation is charged to operations over the estimated useful lives of the
assets. The estimated useful lives and methods of depreciation are as follows:
<TABLE>
<CAPTION>
Description Life in Years Method
- ------------------------- ------------- ---------------
<S> <C> <C>
Banking Premises 25 Straight-Line
Furniture and Equipment 5-20 Straight-Line
</TABLE>
Expenditures for major renewals and betterments are capitalized. Maintenance and
repairs are charged to operations as incurred. When property and equipment are
retired or sold, the cost and accumulated depreciation are removed from the
respective accounts and any gain or loss is reflected in other income or
expense.
26
<PAGE> 30
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due plus deferred taxes.
Deferred taxes are recognized for differences between the basis of assets and
liabilities for financial statement and income tax purposes. The differences
relate primarily to depreciable assets (use of different depreciation methods
for financial statement and income tax purposes) and allowance for loan losses
(use of the allowance method for financial statement purposes and the direct
write-off method for tax purposes). The deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered or
settled.
Wayne Bancorp and its subsidiary file consolidated federal and state income tax
returns. Consolidated current and deferred tax expense (benefit) is allocated to
each of the entities based on the separate return method.
OTHER REAL ESTATE
Other real estate owned includes property acquired through foreclosure. These
properties are carried at the lower of cost or current appraisal values. Losses
from the acquisition of property in full or partial satisfaction of debt are
recorded as loan losses. Subsequent declines in value, routine holding costs and
gains or losses upon disposition are included in other expense.
CASH FLOWS
For purposes of reporting cash flows, cash and cash equivalents include cash on
hand and amounts due from banks and federal funds sold.
Cash payments made during 1997, 1996 and 1995 for interest totaled $1,231,431,
$1,087,710 and $942,201, respectively.
Cash payments for income taxes were $755,956 and $62,481 for the years ended
December 31, 1997 and 1996, respectively. Due to net operating loss
carryforwards, no cash payments for income taxes were made in 1995.
Noncash financing and investing activities for the year ended December 31, 1997
included a real estate sale resulting from a loan foreclosure totaling $5,000 in
recoveries and net unrealized gains (losses) on securities available for sale,
net of tax, totaling $50,571, $(1,945) and $52,026 for the years ended December
31, 1997, 1996 and 1995, respectively.
27
<PAGE> 31
(2) STOCK WARRANTS AND OPTIONS
Organizers purchasing shares of the Company's common stock during the initial
public offering were granted one warrant for each of the original shares
purchased. Each warrant grants the holder the right to acquire one share of
common stock at any time through September 26, 2000 at $10 per share. Except as
specified in the Warrant Agreement, warrants are nontransferable and
nonassignable. As of December 31, 1997 and 1996, warrants outstanding totaled
116,650 and 156,196, respectively.
Stock options have been granted at various times to the Bank's president and
certain vice-presidents pursuant to the "Wayne Bancorp, Inc. 1990 Stock Option
Plan." The maximum number of shares of stock which may be issued or sold shall
not exceed 36,000.
As of December 31, 1997, the status of stock options is as follows:
<TABLE>
<CAPTION>
SHARES
YEAR OPTIONS SUBJECT EXERCISE
GRANTED GRANTED TO OPTION PRICE EXPIRATION DATE
- ------- ------- --------- -------- ------------------
<S> <C> <C> <C> <C>
1991 3,778 3,778 $10.00 September 26, 2000
1992 3,702 3,702 $10.00 September 26, 2000
7,556 7,556 $ 7.25 December 31, 1999
1993 2,074 2,074 $10.00 September 26, 2000
----- -----
17,110 17,110
====== ======
</TABLE>
A summary of warrant and option transactions since issuance follows:
<TABLE>
<CAPTION>
SHARES UNDER
----------------------
INCENTIVE
ORIGINAL STOCK
WARRANTS OPTIONS
-------- ---------
<S> <C> <C>
Granted 156,196 24,666
Canceled -- --
Exercised 39,546 7,556
------- ------
Outstanding, December 31, 1997 116,650 17,110
======= ======
Eligible to be Exercised December 31, 1997 116,650 17,110
======= ======
</TABLE>
28
<PAGE> 32
(2) STOCK WARRANTS AND OPTIONS (CONTINUED)
Statement of Financial Accounting Standards (SFAS) No. 123, Accounting for Stock
Based Compensation, requires new disclosures about employee stock options in
financial statements for fiscal years beginning after December 15, 1994. The
disclosures are required for the proforma effects of options and other awards
granted in fiscal years beginning after December 15, 1994 based upon their fair
value at the date of grant. SFAS 123 is inapplicable to Wayne Bancorp, Inc. for
years presented herein.
(3) INVESTMENT SECURITIES
The carrying amount of investment securities and their approximate fair values
as of December 31 are summarized as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
1997
SECURITIES AVAILABLE FOR SALE
<S> <C> <C> <C> <C>
Equity Securities $ 385,880 $ 51,767 $ (1,196) $ 436,451
U.S. Treasury and U.S.
Government Agencies
Other 99,000 99,000
---------- ---------- ---------- ----------
$ 484,880 $ 51,767 $ (1,196) $ 535,451
========== ========== ========== ==========
SECURITIES HELD TO MATURITY
Municipals $5,514,009 $ 277,087 $ (2) $5,791,094
========== ========== ========== ==========
1996
SECURITIES AVAILABLE FOR SALE
Equity Securities $ 232,525 $ 11,873 $ (4,127) $ 240,271
U.S. Treasury and U.S.
Government Agencies 4,772,744 9,905 (19,594) 4,763,055
Other 99,000 99,000
---------- ---------- ---------- ----------
$5,104,269 $ 21,778 $ (23,721) $5,102,326
========== ========== ========== ==========
SECURITIES HELD TO MATURITY
Municipals $3,622,528 $ 84,150 $ (11,326) $3,695,352
========== ========== ========== ==========
</TABLE>
29
<PAGE> 33
(3) INVESTMENT SECURITIES (CONTINUED)
Gross realized gains and gross realized losses on sales of securities available
for sale were:
<TABLE>
<CAPTION>
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
GROSS REALIZED GAINS
Equity Securities $60,090 $24,778 $24,393
U.S. Treasury and U.S. Government Agencies -- 2,774 20,935
------- ------- -------
$60,090 $27,552 $45,328
======= ======= =======
GROSS REALIZED LOSSES
Equity Securities $ 6,210 $ 9,682 $ 2,912
U.S. Treasury and U.S. Government Agencies 40,003 2,691 21,200
------- ------- -------
$46,213 $12,373 $24,112
======= ======= =======
</TABLE>
The scheduled maturities of securities held to maturity and securities available
for sale as of December 31, 1997 were as follows:
<TABLE>
<CAPTION>
SECURITIES
------------------------------------------------------------------
AVAILABLE FOR SALE HELD TO MATURITY
---------------------------- -----------------------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
--------- -------- ---------- -----------
<S> <C> <C> <C> <C>
Due in One Year or Less $385,880 $436,451 $ 99,647 $ 99,811
Due After One Year Through Five Years 399,904 400,378
Due After Five Years Through Ten Years
Due After Ten Years 5,014,458 5,290,905
-------- -------- ---------- ----------
Federal Reserve Stock 99,000 99,000 -- --
-------- -------- ---------- ----------
$484,880 $535,451 $5,514,009 $5,791,094
======== ======== ========== ==========
</TABLE>
Proceeds from sales of investments in debt securities during 1997, 1996 and 1995
were $2,983,711, $1,356,155 and $4,135,270, respectively.
Investment securities having a carrying value and market value of $1,884,498 and
$2,101,639 as of December 31, 1997 and 1996, respectively, were pledged to
secure public and trust deposits and for other purposes required or permitted by
law.
Interest income on taxable investment securities during 1997, 1996 and 1995 was
$105,177, $353,320 and $444,500, respectively. In 1997, 1996 and 1995 nontaxable
interest income was $252,890, $125,448 and $66,709, respectively.
30
<PAGE> 34
(4) LOANS
Loans by type as of December 31 are:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
Commercial, Financial and Agricultural $ 5,267,114 $ 3,361,241
Real Estate-Construction 1,421,506 2,065,694
Real Estate-Other 12,591,205 9,384,490
Consumer 9,389,510 8,261,451
Other 29,355 337,295
----------- -----------
$28,698,690 $23,410,171
=========== ===========
</TABLE>
As of December 31, 1997, nonaccrual loans totaled $41,064. The related reduction
in interest income for the year ended December 31, 1997 was approximately $800.
For the years ended December 31, 1996 and 1995, there were no nonaccrual loans.
(5) ALLOWANCE FOR LOAN LOSSES
Transactions in the allowance for loan losses for the years ended December 31
are summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Balance, January 1 $ 213,969 $ 196,669 $ 339,719
Provision Charged to Operating Expenses 154,000 90,000 --
Loan Losses (134,959) (88,223) (162,192)
Recoveries 40,395 15,523 19,142
--------- --------- ---------
Balance, December 31 $ 273,405 $ 213,969 $ 196,669
========= ========= =========
</TABLE>
(6) BANK PREMISES AND EQUIPMENT
The detail of bank premises and equipment as of December 31 is as follows:
<TABLE>
<CAPTION>
1997 1996
---------- ----------
<S> <C> <C>
Land $ 186,825 $ 186,825
Bank Buildings and Improvements 682,801 677,919
Furniture, Fixtures and Equipment 681,292 695,598
---------- ----------
1,550,918 1,560,342
Accumulated Depreciation (643,513) (563,329)
---------- ----------
$ 907,405 $ 997,013
========== ==========
</TABLE>
31
<PAGE> 35
(6) BANK PREMISES AND EQUIPMENT (CONTINUED)
Depreciation charged to operations totaled $104,185, $102,061 and $112,874 in
1997, 1996 and 1995, respectively.
(7) INCOME TAXES
The Bank reports income taxes under Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes, which requires an asset and liability
approach to financial accounting and reporting for income taxes. Deferred income
tax assets and liabilities are computed annually for differences between the
financial statement and tax bases of assets and liabilities that will result in
taxable or deductible amounts in the future based on enacted tax laws and rates
applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income tax expense is
the tax payable or refundable for the period plus or minus the change during the
period in deferred tax assets and liabilities.
The components of income tax expense for the years ended December 31 are:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Current Federal $ 443,840 $ 370,654 $ 40,771
Deferred Federal (32,595) (4,003) 184,897
--------- --------- ---------
Federal Income Tax Expense 411,245 366,651 225,668
State Income Tax Expense 1,518 -- --
--------- --------- ---------
$ 412,763 $ 366,651 $ 225,668
========= ========= =========
</TABLE>
The sources of temporary differences and the resulting net deferred income tax
are as follows:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Utilization of Net Operating Loss Carryforward $ -- $ -- $ 139,493
Provision for Loan Losses (20,209) (5,882) 48,637
Depreciation (8,632) (3,221) (454)
Discount Accretion on Investment Securities (4,859) 4,309 (5,345)
Tax in Excess of Book Loss on Sale of Equipment 1,105 791 --
Alternative Minimum Tax -- -- 7,861
Other -- -- (5,295)
-------- ------- ---------
NET DEFERRED TAX $(32,595) $(4,003) $ 184,897
======== ======= =========
</TABLE>
Income tax expense amounted to $412,763, $366,651 and $225,668 in 1997, 1996 and
1995, respectively, which is more than the tax expense computed by applying the
federal statutory tax rate of 34 percent to income before income taxes. The
reasons for the differences are as follows:
32
<PAGE> 36
(7) INCOME TAXES (CONTINUED)
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
STATUTORY FEDERAL TAXES $ 488,952 $ 406,231 $ 245,982
Increase (Reductions) Resulting from
Tax-Free Interest on Municipals (85,319) (42,060) (22,348)
Tefra Interest Disallowance 10,008 4,672 2,758
Officers' Life Insurance 319 298 261
Meals and Entertainment 597 492 484
Other (3,312) (2,982) (1,469)
--------- --------- ---------
ACTUAL FEDERAL TAXES $ 411,245 $ 366,651 $ 225,668
========= ========= =========
</TABLE>
The components of the net deferred tax assets included in other assets in the
accompanying consolidated balance sheets as of December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
-------- --------
<S> <C> <C>
DEFERRED TAX ASSETS
Net Unrealized Loss on Securities Available for Sale $ -- $ 661
Reserve for Loan Losses 92,958 72,749
-------- --------
92,958 73,410
-------- --------
Net Unrealized Gain on Securities Available for Sale (17,194) --
Depreciation and Disposal of Premises and Equipment (22,047) (29,575)
Investment Securities Accretion (2,135) (6,993)
Other (4,333) (4,333)
-------- --------
(45,709) (40,901)
-------- --------
NET DEFERRED TAX ASSETS $ 47,249 $ 32,509
======== ========
</TABLE>
(8) DEPOSITS
Components of interest-bearing deposits as of December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Interest-Bearing Demand $ 7,011,059 $ 6,120,488
Savings 2,147,507 2,228,421
Time $100,000 and Over 5,983,606 4,434,446
Other Time 15,633,066 12,262,454
----------- -----------
$30,775,238 $25,045,809
=========== ===========
</TABLE>
33
<PAGE> 37
(8) DEPOSITS (CONTINUED)
The aggregate amount of short-term jumbo certificates of deposit, each with a
minimum denomination of $100,000, approximated $4,793,000 and $3,816,900 in
1997 and 1996, respectively.
As of December 31, 1997, the scheduled maturities of time deposits are as
follows:
<TABLE>
<CAPTION>
Year Amount
------------------- -----------
<S> <C> <C>
1998 $18,846,577
1999 2,048,213
2000 400,132
2001 66,490
2002 and thereafter 255,260
-----------
$21,616,672
===========
</TABLE>
(9) COMMITMENTS AND CONTINGENCIES
In the normal course of business, certain commitments and contingencies are
incurred which are not reflected in the financial statements. As of December
31, 1997 and 1996, the Company had unfunded loan commitments and commitments
under standby letters of credit totaling $3,141,000 and $2,134,376,
respectively. These commitments were made under normal terms and rates. No
losses are anticipated as a result of these commitments.
The Bank is committed to purchase equipment and software approximating $140,000
during 1998.
(10) RELATED PARTY TRANSACTIONS
The aggregate balance of direct and indirect loans to directors, executive
officers or principal holders of equity securities of the Bank was $570,013 and
$373,953 as of December 31, 1997 and 1996, respectively. All such loans were
made on substantially the same terms, including interest rates and collateral,
as those prevailing at the time for comparable transactions with other persons.
A summary of activity of related party loans is shown below:
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
BALANCE, DECEMBER 31 $ 373,953 $ 60,070
New Loans 238,227 365,410
Repayments (42,167) (51,527)
--------- ---------
BALANCE, DECEMBER 31 $ 570,013 $ 373,953
========= =========
</TABLE>
34
<PAGE> 38
(11) OTHER INCOME
Significant components of other operating income are:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------ -------
<S> <C> <C> <C>
Commissions on Credit Life Insurance $39,795 $43,403 $37,648
Mortgage Origination Fees 60,478 63,967 49,697
</TABLE>
(12) OTHER EXPENSES
Significant components of other operating expenses are:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- --------
<S> <C> <C> <C>
Office Supplies $74,023 $74,195 $55,193
Postage and Freight 46,776 42,857 37,400
Audit, Tax, Accounting and Consulting 39,298 40,858 30,120
ATM Fees and Expense 39,209 36,455 38,122
Amortization and Organizational Cost - - 20,704
Advertising and Public Relations 34,655 21,817 24,520
FDIC Assessment 3,719 2,000 30,280
Clearing House and Federal Reserve Processing Fees 26,021 26,188 29,651
Directors' Fees 41,750 41,900 24,000
Data Processing 22,541 20,944 17,789
Legal Fees 29,980 9,652 17,851
</TABLE>
(13) EARNINGS PER SHARE
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 128 (Statement 128), Earnings per Share. Statement
128 establishes standards for computing and presenting earnings per share
(EPS), and supersedes Accounting Principles Board Opinion No. 15 (APB 15) and
its related interpretations. It replaces the presentation of primary EPS with
basic EPS, which excludes dilution, and requires dual presentation of basic and
diluted EPS for all entities with complex capital structures. Diluted EPS is
computed similarly to fully diluted EPS pursuant to APB 15. Statement 128 is
effective for periods ending after December 15, 1997, including interim
periods, and will require restatement of all prior period EPS data presented;
earlier application is not permitted. The following presents earnings per
share for the years ended December 31, 1997, 1996 and 1995 as if Statement 128
had been in effect.
<TABLE>
<CAPTION>
1997 1996 1995
--------- -------- --------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Net Income Per Common Share $ 2.58 $ 2.19 $ 1.33
Weighted Average Common Shares 397,245 377,786 374,660
DILUTED EARNINGS PER SHARE
Net Income Per Common Share $ 2.35 $ 1.99 $ 1.22
Weighted Average Common Shares 436,947 415,620 406,535
</TABLE>
35
<PAGE> 39
(14) FINANCIAL INFORMATION OF WAYNE BANCORP, INC. (PARENT ONLY)
Wayne Bancorp, Inc.'s (parent only) balance sheets as of December 31, 1997 and
1996 and the related statements of income and cash flows for each of the years
in the three-year period ended December 31, 1997 are as follows:
BALANCE SHEETS
DECEMBER 31
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Cash $ 7,493 $ 37,239
Interest-Bearing Deposits in Bank 565,425 181,612
Investment Securities Available for Sale 436,451 240,271
Investment in Wayne National Bank 5,065,832 4,173,036
Other Assets 114,722 -
---------- ----------
$6,189,923 $4,632,158
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accrued Expenses $ 8,000 -
Deferred Taxes 18,907 4,346
Accrued Income Taxes 4,238 45
Other 114,722 -
---------- ----------
145,867 4,391
---------- ----------
Common Stock 424,888 377,786
Surplus 3,778,020 3,354,102
Retained Earnings 1,807,771 897,163
Net Unrealized Gain (Loss) on Securities Available for Sale,
Net of Tax (Benefit) of $17,194 in 1997 and $(661) in 1996 33,377 (1,284)
---------- ----------
6,044,056 4,627,767
---------- ----------
$6,189,923 $4,632,158
========== ==========
</TABLE>
36
<PAGE> 40
(14) FINANCIAL INFORMATION OF WAYNE BANCORP, INC. (PARENT ONLY) (CONTINUED)
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1997 1996 1995
------------ -------- --------
<S> <C> <C> <C>
Interest Income $ 10,094 $ 4,468 $ 11,184
Dividends 126,894 8,847 3,316
Gain on Sale of Securities 53,881 15,096 21,481
------------ -------- --------
190,869 28,411 35,981
------------ -------- --------
Expenses
Amortization - - 9,835
Printing and Supplies 5,229 5,346 4,655
Postage 1,558 1,730 1,861
Legal and Professional 26,942 10,367 18,401
Taxes 250 250 278
Miscellaneous 8,363 2,961 1,388
------------ -------- --------
42,342 20,654 36,418
------------ -------- --------
Income (Loss) Before Income Tax Benefit and
Equity in Undistributed Earnings of Subsidiary 148,527 7,757 (437)
Income Tax Benefit 9,598 - 938
------------ -------- --------
Income Before Equity in Undistributed
Earnings of Subsidiary 138,929 7,757 501
Equity in Undistributed Earnings of Subsidiary 886,401 820,391 497,308
------------ -------- --------
NET INCOME $1,025,330 $828,148 $497,809
============ ======== ========
</TABLE>
- 37 -
<PAGE> 41
(14) FINANCIAL INFORMATION OF WAYNE BANCORP, INC. (PARENT ONLY) (CONTINUED)
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1997 1996 1995
----------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,025,330 $ 828,148 $ 497,809
Adjustments to Reconcile Net Income to Net
Cash Flows from Operating Activities
Amortization and Accretion -- -- 9,835
Equity in Undistributed Earnings
of Subsidiary (886,401) (820,391) (497,308)
Gain on Sale of Securities (53,881) (15,096) (21,481)
Deferred Taxes -- 52,798 (939)
CHANGE IN
Other 12,195 45 --
----------- --------- ---------
97,243 45,504 (12,084)
----------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Interest-Bearing Deposits in Bank (383,813) 33,683 (131,204)
Purchases of Investment Securities
Available for Sale (528,007) (397,763) (520,510)
Proceeds from Maturities of Securities
Available for Sale -- -- 300,000
Proceeds from Sales of Securities
Available for Sale 428,533 355,764 294,930
----------- --------- ---------
(483,287) (8,316) (56,784)
----------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash Dividends (114,722) -- --
Issuance of Stock 471,020 -- 62,299
----------- --------- ---------
356,298 -- 62,299
----------- --------- ---------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (29,746) 37,188 (6,569)
CASH AND CASH EQUIVALENTS, BEGINNING 37,239 51 6,620
----------- --------- ---------
CASH AND CASH EQUIVALENTS, ENDING $ 7,493 $ 37,239 $ 51
=========== ========= =========
</TABLE>
38
<PAGE> 42
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, Disclosures about Fair Value of Financial Instruments, requires
disclosure of fair value information about financial instruments, whether or
not recognized on the face of the balance sheet, for which it is practicable to
estimate that value. The assumptions used in the estimation of the fair value
of Wayne National Bank's financial instruments are detailed below. Where
quoted prices are not available, fair values are based on estimates using
discounted cash flows and other valuation techniques. The use of discounted
cash flows can be significantly affected by the assumptions used, including the
discount rate and estimates of future cash flows. The following disclosures
should not be considered a surrogate of the liquidation value of the Bank, but
rather a good-faith estimate of the increase or decrease in value of financial
instruments held by the Bank since purchase, origination or issuance.
CASH AND SHORT-TERM INVESTMENTS - For cash, due from banks, federal funds
sold and interest-bearing deposits with other banks, the carrying amount is
a reasonable estimate of fair value.
INVESTMENT SECURITIES - Fair values for investment securities are based on
quoted market prices.
LOANS - The fair value of fixed rate loans is estimated by discounting the
future cash flows using the current rates at which similar loans would be
made to borrowers with similar credit ratings. For variable rate loans, the
carrying amount is a reasonable estimate of fair value.
DEPOSIT LIABILITIES - The fair value of demand deposits, savings accounts
and certain money market deposits is the amount payable on demand at the
reporting date. The fair value of fixed maturity certificates of deposit is
estimated by discounting the future cash flows using the rates currently
offered for deposits of similar remaining maturities.
STANDBY LETTERS OF CREDIT - Because standby letters of credit are made using
variable rates, the contract value is a reasonable estimate of fair value.
The carrying amount and estimated fair values of the Bank's financial
instruments as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Carrying Estimated
Amount Fair Value
-------- ----------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and Short-Term Investments $15,169 $15,169
Investment Securities Available for Sale 535 535
Investment Securities Held to Maturity 5,514 5,791
Loans 28,398 28,623
LIABILITIES
Deposits 44,554 44,558
UNRECOGNIZED FINANCIAL INSTRUMENTS
Unfunded Loan Commitments and Standby Letters of Credit 3,141 3,141
</TABLE>
39
<PAGE> 43
(15) FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates do not reflect any premium or discount that could result from
offering for sale at one time the Bank's entire holdings of a particular
financial instrument. Because no market exists for a significant portion of
the Bank's financial instruments, fair value estimates are based on many
judgments. These estimates are subjective in nature and involve uncertainties
and matters of significant judgment and therefore cannot be determined with
precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on and off-balance sheet financial
instruments without attempting to estimate the value of anticipated future
business and the value of assets and liabilities that are not considered
financial instruments. Significant assets and liabilities that are not
considered financial instruments include the deferred income taxes and premises
and equipment. In addition, the tax ramifications related to the realization
of the unrealized gains and losses can have a significant effect on fair value
estimates and have not been considered in the estimates.
(16) REGULATORY CAPITAL MATTERS
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate certain mandatory and, possibly, additional discretionary actions by
regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's capital amounts and classification are also
subject to qualitative judgments by the regulators about components, risk
weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios of total and Tier I
capital to risk-weighted assets, and of Tier I capital to average assets. The
amounts and ratios as defined in banking regulations are presented hereafter.
Management believes, as of December 31, 1997, the Bank meets all capital
adequacy requirements to which it is subject and is classified as well
capitalized under the regulatory framework for prompt corrective action.
The amount of dividends available to the parent company from the subsidiary
bank is limited by various banking regulatory agencies. The amount of cash
dividends available for payment in 1998, without prior approval from banking
regulatory agencies, approximates $500,000. Upon specific approval, banks may
pay cash dividends in excess of regulatory limitations.
40
<PAGE> 44
(16) REGULATORY CAPITAL MATTERS (CONTINUED)
<TABLE>
<CAPTION>
To Be Well
Capitalized Under
FOR CAPITAL Prompt Corrective
Actual Adequacy Purposes Action Provisions
---------------------------- ---------------------------- -----------------------------
Amount Ratio Amount Ratio Amount Ratio
----------- --------- ---------- ----------- ------------- ----------
<S> <C> <C> <C> <C> <C> <C>
AS OF DECEMBER 31, 1997
Total Capital
(to Risk-Weighted $6,250,708 20.24% $2,470,445 8.00% $30,880,556 10.00%
Assets)
Tier I Capital
(to Risk-Weighted 5,977,302 19.36 1,235,222 4.00 1,852,833 6.00
Assets)
Tier I Capital
(to Average Assets) 5,977,302 14.84 1,611,296 4.00 2,014,120 5.00
AS OF DECEMBER 31, 1996
Total Capital
(to Risk-Weighted 4,843,020 19.57 1,979,879 8.00 2,474,849 10.00
Assets)
Tier I Capital
(to Risk-Weighted 4,629,051 18.70 989,940 4.00 1,484,910 6.00
Assets)
Tier I Capital
(to Average Assets) 4,629,051 12.33 1,502,094 4.00 1,877,617 5.00
</TABLE>
(17) EMPLOYEE BENEFIT PLANS
The Bank established a 401(k) retirement plan during 1996 for which all
employees twenty-one years of age with one year of service are eligible. The
plan is funded with employee and employer contributions. Employees may
contribute up to 15 percent of their annual salaries. The employer's amount of
matching may vary from year to year, but will initially match 25 percent of the
employee's first 6 percent of salary. Retirement plan expense for the years
ended December 31, 1997 and 1996 totaled $5,890 and $5,885, respectively.
(18) RECLASSIFICATIONS
Certain reclassifications have been made within the 1996 and 1995 financial
statements to conform to the 1997 presentation.
41
<PAGE> 45
<TABLE>
<CAPTION>
WAYNE BANCORP, INC. & WAYNE NATIONAL BANK
BOARD OF DIRECTORS
<S> <C>
J. Ashley Dukes J. Lex Kenerly, III, M.D.
Chairman of Wayne Bancorp, Inc. Secretary of Wayne Bancorp, Inc.
and Wayne National Bank and Wayne National Bank
President/Wayne Drug Co., Inc. Orthopedic Surgeon
Patricia B. Armstrong James L. Lott
Owner/Armstrong's Photography Owner/Lott Tobacco Company
Leonard D. Brannen Jerry D. McDaniel
Retired Owner/McDaniel Vending & Food Service
C. Revis Clary Ferrell L. O'Quinn
Owner/Clary Fertilizer Co. Entrepreneur
Tommie C. Fuller, Sr. Bernon W. Sapp
Retired Educator Owner/Sapp Ford Company
Douglas R. Harper W. Donald Whitaker
President and CEO President/Whitaker's Pharmacy, Inc.
Wayne Bancorp, Inc.
and Wayne National Bank
WAYNE BANCORP, INC. & WAYNE NATIONAL BANK
OFFICERS
Douglas R. Harper J. Lex Kenerly, III, M.D.
President and CEO Secretary
Wayne Bancorp, Inc. Wayne Bancorp, Inc.
and Wayne National Bank and Wayne National Bank
Linton F. Lewis J. Randall Teston
Executive Vice President and Vice President
Senior Lending Officer Wayne National Bank
Wayne National Bank
Patti D. Hayes Randall D. Hicks
Assistant Vice President Cashier and Compliance Officer
Wayne National Bank Wayne National Bank
</TABLE>
REGISTRAR AND TRANSFER AGENT
Wayne Bancorp, Inc.
ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders of Wayne Bancorp, Inc. will be held
Tuesday, April 14, 1998, at 6:00 p.m. in the lobby of Wayne National Bank, 818
South First Street, Jesup, Georgia.
COPIES OF THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB FOR THE FISCAL
YEAR ENDED DECEMBER 31, 1997, AS FILED WITH THE SECURITIES AND EXCHANGE
COMMISSION, WILL BE FURNISHED AT NO CHARGE TO SHAREHOLDERS AS OF THE RECORD
DATE UPON WRITTEN REQUEST TO: DOUGLAS R. HARPER, WAYNE BANCORP, INC., 818 SOUTH
FIRST STREET, JESUP, GEORGIA 31545.
42
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
WAYNE NATIONAL BANK, a banking association organized under the laws of the
United States.
<PAGE> 1
EXHIBIT 23
CONSENT OF MCNAIR, MCLEMORE, MIDDLEBROOKS & CO., LLP
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 333-45775) pertaining to the Wayne Bancorp, Inc. 1990 Employee Incentive
Stock Option Plan and in the related prospectus of our report dated February 20,
1998, on our audits of the consolidated financial statements of Wayne Bancorp,
Inc. and subsidiary as of December 31, 1997 and 1996, and for each of the three
years in the period ended December 31, 1997, which report is incorporated by
reference in the Annual Report on Form 10-KSB for the year ended December 31,
1997.
/s/ McNair, McLemore, Middlebrooks & Co., LLP
McNair, McLemore, Middlebrooks & Co., LLP
Macon, Georgia
March 23, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE PERIOD ENDED DECEMBER 31,
1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
INCLUDED AS PART OF EXHIBIT 13 TO THIS FORM 10-KSB.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 3,075,396
<INT-BEARING-DEPOSITS> 124,003
<FED-FUNDS-SOLD> 11,970,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 535,451
<INVESTMENTS-CARRYING> 5,514,009
<INVESTMENTS-MARKET> 5,791,094
<LOANS> 28,671,310
<ALLOWANCE> 273,405
<TOTAL-ASSETS> 51,058,542
<DEPOSITS> 44,554,429
<SHORT-TERM> 0
<LIABILITIES-OTHER> 460,057
<LONG-TERM> 0
0
0
<COMMON> 4,202,908
<OTHER-SE> 1,841,148
<TOTAL-LIABILITIES-AND-EQUITY> 51,058,542
<INTEREST-LOAN> 3,036,348
<INTEREST-INVEST> 376,179
<INTEREST-OTHER> 208,552
<INTEREST-TOTAL> 3,621,079
<INTEREST-DEPOSIT> 1,300,994
<INTEREST-EXPENSE> 1,300,994
<INTEREST-INCOME-NET> 2,320,085
<LOAN-LOSSES> 154,000
<SECURITIES-GAINS> 13,878
<EXPENSE-OTHER> 1,357,913
<INCOME-PRETAX> 1,438,093
<INCOME-PRE-EXTRAORDINARY> 1,438,093
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,025,330
<EPS-PRIMARY> 2.58
<EPS-DILUTED> 2.35
<YIELD-ACTUAL> 6.16
<LOANS-NON> 41,064
<LOANS-PAST> 12,883
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 413,352
<ALLOWANCE-OPEN> 213,969
<CHARGE-OFFS> 134,958
<RECOVERIES> 40,394
<ALLOWANCE-CLOSE> 273,406
<ALLOWANCE-DOMESTIC> 273,406
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED FINANCIAL STATEMENTS OF WAYNE BANCORP INC. FOR THE PERIOD ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS INCLUDED AS PART OF EXHIBIT 13 TO THE FORM 10-KSB FOR THE
PERIOD ENDED DECEMBER 31, 1996.
</LEGEND>
<RESTATED>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 1,385,896
<INT-BEARING-DEPOSITS> 255,152
<FED-FUNDS-SOLD> 8,280,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 5,102,326
<INVESTMENTS-CARRYING> 3,622,528
<INVESTMENTS-MARKET> 3,695,352
<LOANS> 23,382,204
<ALLOWANCE> 213,969
<TOTAL-ASSETS> 43,234,750
<DEPOSITS> 36,016,503
<SHORT-TERM> 0
<LIABILITIES-OTHER> 590,480
<LONG-TERM> 0
0
0
<COMMON> 377,786
<OTHER-SE> 4,249,981
<TOTAL-LIABILITIES-AND-EQUITY> 43,234,750
<INTEREST-LOAN> 2,433,258
<INTEREST-INVEST> 493,556
<INTEREST-OTHER> 127,139
<INTEREST-TOTAL> 3,053,953
<INTEREST-DEPOSIT> 1,065,545
<INTEREST-EXPENSE> 1,065,545
<INTEREST-INCOME-NET> 1,988,408
<LOAN-LOSSES> 90,000
<SECURITIES-GAINS> 15,179
<EXPENSE-OTHER> 1,272,510
<INCOME-PRETAX> 1,194,799
<INCOME-PRE-EXTRAORDINARY> 1,194,799
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 828,148
<EPS-PRIMARY> 2.19
<EPS-DILUTED> 1.99
<YIELD-ACTUAL> 6.45
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 410,000
<ALLOWANCE-OPEN> 196,669
<CHARGE-OFFS> 88,223
<RECOVERIES> 15,523
<ALLOWANCE-CLOSE> 213,969
<ALLOWANCE-DOMESTIC> 130,969
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 83,000
</TABLE>
