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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from to .
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Commission File Number 014612
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WAYNE BANCORP, INC
------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1516142
---- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
112 West Liberty Street, P.O. Box 757, Wooster, Ohio 44691
----------------------------------------------------------
(Address of principal executive offices)
(330) 264-1222
--------------
(Registrant's telephone number, including area code)
Indicate by check whether the registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days.
Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No [ ]
As of July 31, 2003, the latest practicable date, 5,996,720 shares of the
issuer's common shares, $1.00 stated value, were issued and outstanding.
1.
WAYNE BANCORP, INC
INDEX
FORM 10-Q
For the Quarter Ended June 30, 2003
Page
----
PART I - FINANCIAL INFORMATION
Item 1. Condensed Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets.................................... 3
Condensed Consolidated Statements of Income
and Comprehensive Income............................................... 4
Condensed Consolidated Statements of Cash Flows ......................... 5
Notes to Condensed Consolidated Financial Statements .................... 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................... 10
Item 3. Quantitative and Qualitative Disclosures about
Market Risk............................................................ 14
Item 4. Controls and Procedures.................................................. 18
Part II - OTHER INFORMATION......................................................... 20
SIGNATURES ......................................................................... 21
See notes to condensed consolidated financial statements.
2.
WAYNE BANCORP, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
Item 1. Financial Statements
June 30, December 31,
2003 2002
--------- ---------
(In thousands)
ASSETS
Cash and due from banks $ 35,471 $ 24,508
Federal funds sold 13,869 7,130
--------- ---------
Total cash and cash equivalents 49,340 31,638
Securities available-for-sale 245,873 184,908
Loans held-for-sale 33,935 24,761
Loans 474,355 369,794
Allowance for loans (8,129) (6,039)
--------- ---------
Net loans 466,226 363,755
Premises and equipment 14,795 11,288
Goodwill 24,736 748
Other identifiable intangible assets 5,864 771
Accrued interest receivable and other assets 8,300 5,718
--------- ---------
Total assets $ 849,069 $ 623,587
========= =========
LIABILITIES
Deposits
Interest bearing $ 595,191 $ 442,532
Non-interest bearing 93,961 79,001
--------- ---------
Total deposits 689,152 521,533
Short-term borrowings 43,610 29,573
Federal Home Loan Bank advances and other borrowed funds 2,889 1,397
ESOP loan 1,537 1,671
Obligated mandatory redeemable capital securities of subsidiary trust 7,217
Other liabilities 5,751 2,989
--------- ---------
Total liabilities 750,156 557,163
SHAREHOLDERS' EQUITY
Common stock, stated value $1.00 6,246 4,917
Shares authorized - 12,000,000 in 2003 and 2002
Shares issued - 6,245,964 in 2003
and 4,916,911 in 2002
Shares outstanding - 6,025,403 in 2003
and 4,781,565 in 2002
Paid-in capital 43,561 13,174
Retained earnings 52,675 49,897
Unearned ESOP shares (1,278) (1,390)
Treasury stock, at cost - 220,561 shares in 2003
and 135,346 shares in 2002 (6,194) (3,738)
Accumulated other comprehensive income 3,903 3,564
--------- ---------
Total shareholders' equity 98,913 66,424
--------- ---------
Total liabilities and shareholders' equity $ 849,069 $ 623,587
========= =========
See notes to condensed consolidated financial statements.
3.
WAYNE BANCORP, INC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
------- ------- ------- -------
(In thousands)
INTEREST INCOME
Interest and fees on loans $ 7,254 $ 6,871 $13,860 $14,185
Taxable securities 1,418 1,627 2,836 3,213
Non-taxable securities 516 495 1,004 973
Other interest income 57 33 60 72
------- ------- ------- -------
Total interest income 9,245 9,026 17,760 18,443
------- ------- ------- -------
INTEREST EXPENSE
Interest on deposits 2,402 2,971 4,740 5,966
Interest on federal funds purchased and
repurchase agreements 59 84 111 179
Interest on Federal Home Loan Bank
advances and other borrowed funds 61 110 113 228
------- ------- ------- -------
Total interest expense 2,522 3,165 4,964 6,373
------- ------- ------- -------
NET INTEREST INCOME 6,723 5,861 12,796 12,070
Provision for loan losses 71 150 111 300
------- ------- ------- -------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 6,652 5,711 12,685 11,770
Other income
Service charges and fees on deposit accounts 605 526 1,120 1,026
Income from fiduciary activities 482 360 850 720
Net gain on sale of loans 135 6 380 112
Net gain on sale of securities 0 63 0 62
Other non-interest income 295 214 496 479
------- ------- ------- -------
Total other income 1,517 1,169 2,846 2,399
------- ------- ------- -------
Other expenses
Salaries and employee benefits 2,674 2,272 5,051 4,584
Occupancy and equipment 646 508 1,223 1,010
Amortization of intangibles 59 0 59 0
Other operating expenses 1,652 1,301 2,951 2,528
------- ------- ------- -------
Total other expenses 5,031 4,081 9,284 8,122
------- ------- ------- -------
INCOME BEFORE INCOME TAXES 3,138 2,799 6,247 6,047
Income tax expense 907 778 1,788 1,734
------- ------- ------- -------
NET INCOME 2,231 2,021 4,459 4,313
Other comprehensive income 630 1,196 339 431
------- ------- ------- -------
Comprehensive income $ 2,861 $ 3,217 $ 4,798 $ 4,744
======= ======= ======= =======
Earnings per common share - basic $ .44 $ .42 $ .91 $ .89
======= ======= ======= =======
Earnings per common share - diluted $ .43 $ .42 $ .90 $ .89
======= ======= ======= =======
Dividends per share $ .18 $ .17 $ .36 $ .34
======= ======= ======= =======
See notes to condensed consolidated financial statements.
4.
WAYNE BANCORP, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended
June 30,
2003 2002
-------- --------
(In thousands)
Net cash from operating activities $ (4,596) $ 5,539
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale
Purchases (25,430) (50,836)
Proceeds from maturities and repayments 32,021 31,864
Proceeds from sales 7,336
Net change in loans 16,649 7,058
Net cash received in merger 4,243
Purchase of premises and equipment (920) (1,547)
Proceeds from sales of premises 102 67
-------- --------
Net cash from investing activities 26,645 (6,058)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (792) 9,110
Net change in short-term borrowings 725 (8,039)
Repayment of Federal Home Loan Bank advances (1,692)
Repayment of ESOP loan and other borrowed funds (142) (136)
Cash dividends paid (1,484) (1,441)
Treasury stock purchased (2,654) (772)
-------- --------
Net cash from financing activities (4,347) (2,970)
-------- --------
Net change in cash and cash equivalents 17,702 (3,489)
Cash and cash equivalents at beginning of period 31,638 32,713
-------- --------
Cash and cash equivalents at end of period $ 49,340 $ 29,224
======== ========
Supplemental disclosures of cash flow information
Cash basis payments for federal income tax purposes $ 1,845 $ 1,485
Cash basis payments for interest expense 4,752 6,553
Supplemental non-cash disclosure
Merger with BSC through issuance of common stock $ 38,556 $
See notes to condensed consolidated financial statements.
5.
WAYNE BANCORP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of Management, are necessary to present fairly
the financial position of Wayne Bancorp, Inc. (the "Company") at June 30, 2003,
and its results of operations and cash flows for the periods presented. All such
adjustments are normal and recurring in nature. The accompanying condensed
consolidated financial statements have been prepared in accordance with the
instructions of Form 10-Q and therefore, do not purport to contain all the
necessary financial disclosures required by accounting principles generally
accepted in the United States of America that might otherwise be necessary in
the circumstances, and should be read in conjunction with the financial
statements, and notes thereto, of the Company for the year ended December 31,
2002, included in its 2002 annual report. Refer to the accounting policies of
the Company described in the notes to the financial statements contained in the
Company's 2002 annual report. The Company has consistently followed these
policies in preparing this Form 10-Q.
The consolidated financial statements include the accounts of the Company, and
its wholly-owned subsidiaries Wayne County National Bank (Wayne), Chippewa
Valley Bank (Chippewa), Savings Bank & Trust (SBT), Access Financial Corp. (AFC)
and MidOhio Data, Inc. (MID). The financial statements of Wayne include the
accounts of its wholly-owned subsidiary, Chippewa Valley Title Agency, Inc. All
significant intercompany accounts and transactions have been eliminated in the
consolidation.
To prepare financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided, and future results could differ. The allowance for loan losses, fair
values of financial instruments and status of contingencies are particularly
subject to change.
Income tax expense is based on the effective tax rate expected to be applicable
for the entire year. Income tax expense is the sum of current-year income tax
due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are expected future tax amounts for the
temporary differences between carrying amounts and tax basis of assets and
liabilities, computed using enacted tax rates. A valuation allowance, if needed,
reduces deferred tax assets to the amount expected to be realized.
Basic earnings per common share is net income divided by the weighted average
number of common shares outstanding during the period. Employee Stock Option
Plan ("ESOP") shares are considered outstanding for this calculation unless
unearned. Diluted earnings per common share includes the additional potential
common shares issuable under stock options. Earnings and dividends per share are
restated for all stock splits and dividends through the issue of the financial
statements.
6.
WAYNE BANCORP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
Newly Issued But Not Yet Effective Accounting Standards
FASB recently issued two new accounting standards, Statement 149, Amendment to
Statement 133 on Derivative Instruments and Hedging Activities, and Statement
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equities, both of which generally become effective in the
quarter beginning July 1, 2003. The new standards will not materially affect the
Company's operating results or financial condition.
Employee compensation expense under stock options is reported using the
intrinsic value method. No stock-based compensation cost is reflected in net
income, as all options granted had an exercise price equal to or greater than
the market price of the underlying common stock at date of grant. The following
table illustrates the effect on net income and earnings per share if expense was
measured using the fair value recognition provisions of FASB Statement No. 123,
Accounting for Stock-Based Compensation.
Three months ended Six months ended
June 30, June 30,
(dollars in thousands except per share data) 2003 2002 2003 2002
--------- --------- --------- ---------
Net income as reported $ 2,231 $ 2,021 $ 4,459 $ 4,313
Deduct: Stock based compensation expense
determined under fair value based method (22) (56) (43) (113)
--------- --------- --------- ---------
Pro forma net income $ 2,209 $ 1,965 4,416 4,200
Basic earnings per common share as reported 0.44 0.42 0.91 0.89
Pro forma basis earnings per common share 0.43 0.41 0.90 0.88
Diluted earnings per common share as reported 0.43 0.42 0.90 0.89
Proforma diluted earnings per common share 0.43 0.41 0.90 0.88
7.
WAYNE BANCORP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(continued)
NOTE 2 - SECURITIES
Securities available-for-sale were as follows:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
-------- -------- --------
(In thousands)
June 30, 2003
-------------
U.S. Treasury $ 5,157 $ 142 $
Federal agency obligations 92,329 1,488 (5)
Mortgage-backed securities 32,397 596
Obligations of state and
political subdivisions 95,801 3,028 (60)
Corporate obligations 15,984 575
Other securities 4,205 169 (19)
-------- -------- --------
Total $245,873 $ 5,998 $ (84)
======== ======== ========
December 31, 2002
-----------------
U.S. Treasury $ 7,243 $ 227 $
Federal agency obligations 61,843 1,515
Mortgage-backed securities 24,170 783
Obligations of state and
political subdivisions 63,505 2,188
Corporate obligations 24,749 720
Other securities 3,398 72 (101)
-------- -------- --------
Total $184,908 $ 5,505 $ (101)
======== ======== ========
During the three and six months ended June 30, 2003 there were no sales of
securities. During the three months ended June 30, 2002 proceeds from the sale
of securities were $6.8 million, with gross realized gains of $64 thousand and
gross realized losses of $1 thousand included in earnings. During the six months
ended June 30, 2002 proceeds from the sale of securities were $7.3 million, with
gross realized gains of $64 thousand and gross realized losses of $2 thousand
included in earnings.
8.
WAYNE BANCORP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 3 - LOANS
Loans are comprised of the following:
June 30, December 31,
2003 2002
--------- ---------
(In thousands)
Commercial $ 301,710 $ 242,124
Real estate 76,581 75,686
Consumer installment 67,486 34,301
Home equity 27,240 17,397
Direct lease financing 742 787
Credit card and other 1,271 115
--------- ---------
Gross loans 475,030 370,410
Less: Net deferred loan fees (635) (547)
Unearned income on leases (40) (69)
--------- ---------
Total loans $ 474,355 $ 369,794
========= =========
An analysis of activity in the allowance for loan losses is as follows:
June 30, June 30,
2003 2002
------- -------
(In thousands)
Balance at beginning of period $ 6,039 $ 5,821
Acquired allowance for loan losses 2,529
Provision for loan losses 113 300
Loans charged off (661) (352)
Loan recoveries 109 149
------- -------
Balance at end of period $ 8,129 $ 5,918
======= =======
Impaired loans were as follows
June 30, December 31,
2003 2002
------ ------
Period-end loans with no allocated allowance for loan losses $ 0 $ 0
Period-end loans with allocated allowance for loan losses 2,067 1,502
------ ------
Total $2,067 $1,502
------ ------
Amount of the allowance for loan losses allocated $ 400 $ 510
------ ------
Non-performing loans were as follows:
Loans past due over 90 days and accruing interest $ 547 $ 334
Non-accrual loans 1,654 1,042
9.
WAYNE BANCORP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
NOTE 4 - EARNINGS PER COMMON SHARE
The factors used in the earnings per common share are as follows:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
BASIC
Net income $ 2,231,000 $ 2,021,000 $ 4,459,000 $ 4,313,000
Weighted average common shares outstanding 5,181,077 4,864,002 4,974,726 4,870,039
Less: average unallocated ESOP shares (68,075) (80,389) (69,346) (81,363)
----------- ----------- ----------- -----------
Average shares 5,113,002 4,783,613 4,905,380 4,788,676
=========== =========== =========== ===========
Basic earnings per common share $ 0.44 $ 0.42 $ 0.91 $ 0.89
=========== =========== =========== ===========
DILUTED
Net income $ 2,231,000 $ 2,021,000 $ 4,459,000 $ 4,313,000
Weighted average shares outstanding
for basic earnings per common share 5,113,002 4,783,613 4,905,380 4,788,676
Add: diluted effects of assumed
exercise of stock options 29,253 13,823 26,528 10,970
----------- ----------- ----------- -----------
Average shares and dilutive potential
common shares 5,142,255 4,794,436 4,931,908 4,799,646
=========== =========== =========== ===========
Diluted earnings per common share $ 0.43 $ 0.42 $ 0.90 $ 0.89
=========== =========== =========== ===========
For the three and six months ending June 30, 2003 stock options for 154,544
shares of common stock were not considered in computing diluted earnings per
common share because they were non-dilutive. For the three and six months ending
June 30, 2002 stock options for 81,816 shares of common stock, and 101,551
shares of common stock were not considered in computing diluted earnings per
common share because they were non-dilutive.
NOTE 5 - OBLIGATED MANDATORY REDEEMABLE SECURITIES
In connection with the acquisition of Banc Services Corp. (BSC) discussed in
Note 6, the Company assumed mandatory redeemable capital securities with a par
and fair value of $7.0 million at a floating rate of 5.50%. These securities
were issued through a special purpose entity as part of a pooled offering. The
Company may redeem them, in whole but not in part, any time prior to 2007 at a
price of 107.50% of face value. After 2007, the securities may be redeemed at
face. They count as Tier 1 capital for regulatory purposes.
NOTE 6 -MERGER
On May 31, 2003, the Company completed the merger of Banc Services Corp., (BSC)
which was announced December 11, 2002. BSC merged with and into the Company and
BSC's subsidiaries, The Savings Bank and Trust Company and Access Financial
Corp. survived the merger.
The Company issued 1,329,053 shares of common stock valued at approximately
$32.1 million, plus cash of $13.8 million, while cash of $7 thousand was paid
for fractional shares. Total assets of BSC prior to the
10.
WAYNE BANCORP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
merger were $210.0 million, including $123.0 million in loans and $166.8 million
in deposits. The transaction was recorded as a purchase and, accordingly, the
operating results of BSC have been included in the Company's consolidated
financial statements since the date of the merger. The aggregate of the purchase
price over the fair value of the net assets, or goodwill, acquired of
approximately $23.9 million will be evaluated for impairment on an annual basis.
As a result of the merger, management believes that the combination of the
companies is a complimentary strategic fit of the existing businesses and
enables Wayne Bancorp, Inc. to compete more effectively with other financial
institutions in the Company's existing markets. In addition the Company entered
into the merger for the following reasons:
- expands market area and increases assets
- expected to be accretive to per share earnings
- increases liquidity for the sale of common stock
- provides the foundation for further growth and selling opportunities
- provides opportunities to consolidate functions and increase
efficiencies
The following table summarizes the fair value of the assets acquired and
liabilities assumed at the date of acquisition.
(dollars in thousands) May 31, 2003
--------
Cash and federal funds sold $ 18,495
Investment securities 68,431
Loans net 119,231
Goodwill 23,947
Core deposit intangible 4,881
Other assets 5,283
--------
Total assets acquired 240,268
--------
Deposits 168,412
Other borrowed funds 22,203
Other liabilities 3,770
--------
Total liabilities assumed 194,385
--------
Net assets acquired $ 45,883
========
The following summarizes pro forma financial information for the three and six
months ended June 30, 2003 and 2002, assuming the BSC Merger occurred as of
January 1, 2002. Merger related expenses are included in the 2003 results below.
Three months ended Six months ended
June 30, June 30,
(dollars in thousands except per share data) 2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------
Net interest income $ 8,463 $ 9,629 $ 17,187 $ 17,467
Net income 2,754 4,601 4,902 6,327
Basic earnings per share $ .46 $ .75 $ .79 $ 1.03
Diluted earnings per share .46 .75 .78 1.03
11.
WAYNE BANCORP, INC
MANAGEMENTS DISCUSSION & ANALYSIS
Item 2. Management's Discussion and Analysis
INTRODUCTION
The following discusses the financial condition as of June 30, 2003, as compared
to December 31, 2002 and the results of operations for the three and six months
ended June 30, 2003 and the same periods in 2002. This discussion should be read
in conjunction with the interim financial statements and footnotes included
herein.
FORWARD-LOOKING STATEMENTS
When used in this document, the words or phrases "will likely result," "are
expected to," "will continue," "is anticipated," "estimated," "projected" or
similar expressions are intended to identify "forward looking statements" within
the meaning of the Private Securities Litigation Reform Act of 1995. Such
statements are subject to certain risks and uncertainties, including changes in
economic conditions in the Company's market area, changes in policies by
regulatory agencies, fluctuations in interest rates, demand for loans in the
Company's market area and competition that could cause actual results to differ
materially from the historical earnings and those presently anticipated or
projected. Factors listed above could affect the Company's financial performance
and could cause the Company's actual results to differ materially from any
statements expressed with respect to future periods.
The Company does not undertake, and specifically disclaims any obligation, to
publicly revise any forward-looking statements to reflect events or
circumstances after the date of such statements or to reflect the occurrence of
anticipated or unanticipated events.
LIQUIDITY
The main objectives of asset/liability management are to provide adequate
liquidity and to minimize interest rate risk. Liquidity is the ability to meet
cash flow needs, which in the banking industry, refers to the Company's ability
to fund customer borrowing needs as well as deposit withdrawals. The Company's
primary source of liquidity is from overnight federal funds sold and securities
available-for-sale. In addition, other assets such as cash and due from banks
and maturing loans also provide additional sources of liquidity. At June 30,
2003, the amount of cash and due from banks and securities and loans with
scheduled maturities and or repricing within the next three months was $221
million. The Company continues to keep a balance between short and long-term
investments and securities that will provide adequate liquidity and maximize
earnings. Based on the Company's capital position, profitability and reputation,
the available liquidity sources are considered adequate to meet the current and
projected needs of the Company.
CAPITAL
The Company's capital adequacy is a primary concern in our industry, and is
measured by several key ratios. A long-standing measure of capital adequacy is
the percentage of shareholders' equity to total assets. At June 30, 2003, the
Company's equity-to-asset ratio adjusted by the impact of Financial Accounting
Standards (FAS) #115 was 11.2% compared to 10.1% at December 31, 2002.
Regulators of the banking industry focus primarily on two other measurements of
capital - the risk-based capital ratio and the leverage ratio. The risk-based
capital ratio consists of a numerator of allowable capital components and a
denominator of an accumulation of risk-weighted assets. With a significant
portion of the Company's investment securities portfolio in government related
low risk categories and a fair amount of the loan portfolio in one-to-four
family mortgage loans with a 50% risk assessment, the risk- based capital ratio
is 14.0% at June 30, 2003, and 16.5% at December 31, 2002.
The regulators require a minimum leverage capital ratio of 3%. They will expect
most banks to maintain leverage ratios in the 4-5% range. The leverage ratio is
calculated as equity capital less certain intangible
12.
WAYNE BANCORP, INC
MANAGEMENTS DISCUSSION & ANALYSIS
assets divided by total assets less the same intangible assets. At June 30,
2003, and December 31, 2002, the ratios were 10.7% and 10.2% respectively.
The Company's deposit insurance premiums, which are paid to the Federal Deposit
Insurance Corporation (FDIC) are based, in part, on these capital ratios. The
FDIC considers a bank "adequately capitalized" if the capital ratios are: Total
risk-based 8%, Tier 1 risk-based 4% and a leverage ratio of 4%. The FDIC
considers a bank "well capitalized" with comparable capital ratios of 10%, 6%
and 5%. The Company and bank subsidiaries are considered "well capitalized" and
therefore are subject to the lowest deposit insurance premiums available.
Management is not aware of any matters subsequent to June 30, 2003 that would
cause the Company's capital category to change.
FINANCIAL CONDITION
The total assets of the Company increased by $225.5 million or 36.2% from
December 31, 2002 to June 30, 2003. Earning assets increased by $181.4 million,
which includes an increase of $67.7 million in securities and federal funds sold
and an increase in loans of $113.8 million. This asset growth was funded by an
increase of $183.0 million increase in deposits and borrowed funds as well a
$32.5 million increase in shareholders equity. These increases are primarily the
result of the acquisition of Banc Services Corp, (BSC) on May 31, 2003. BSC had
assets of $210.0 million at May 31, 2003, including loans of $123 million,
investments and federal funds sold of $80 million, deposits of $170 million and
shareholders equity of $17 million.
Total loans at June 30, 2003 were $474.4 million, which is an increase of $104.6
million from total loans of $369.8 million at December 31, 2002. This increase
is primarily related to the acquisition of BSC, which added $110.5 million of
loans as of June 30, 2003. This change includes an increase in commercial loans
of $59.6 million, mortgage loans of $895 thousand, consumer installment loans of
$33.2 million, home equity of $9.8 million and an increase in credit card and
other of $1.1 million. The Company's focus continues to be in the commercial
loan area, however due to the weak economic conditions loan demand has slowed in
this area, a trend that management expects to continue throughout the remainder
of the year. Although mortgage loan volume has been strong due to the low rates
on residential mortgage loans, the balance has remained relatively flat due to
the sale of $20.2 million of loans into the secondary market during the first
six months of this year. The increase in consumer installment loans is due to
the addition of $32.4 million of loans from SBT and $6.3 million of loans from
AFC, a consumer finance company. This addition from SBT is due to their strong
presence in the in-direct automobile market, which has allowed SBT to grow their
portfolio despite the low rates and incentives being offered by the auto
manufacturers. Home equity loans continue to grow due to the strong housing
market, low interest rates, and borrowers taking advantage of the equity that is
available in their homes. Management anticipates that overall loan growth will
be hampered during the second half of the year as a result of prolonged weak
economic conditions, uncertainty in the financial markets and the slow pace of
the economic recovery.
As of June 30, 2003, the Company had $33.9 million of one-to-four family
residential mortgage loans classified as held-for-sale, compared to $24.8
million at December 31, 2002. Through June 30, 2003 the Company sold $20.2
million of mortgage loans into the secondary market. Loans classified as held
for sale, are those 15 and 30 year fixed rate mortgage loans, that were
originated within the preceding 12 months. Management considers the sale of
loans into the secondary market based on overall portfolio composition, interest
rate risk and liquidity.
Based on current economic conditions, and trends in the financial markets
management expects interest rates to remain stable during the second half of
2003, with expectations that rates will rise in the next twelve to eighteen
months. Rate increases, which signal signs of a stronger economy and higher
inflation, impact rates offered on various loan and deposit products. Most
susceptible are the variable rate products that change based on various indices,
such as the prime rate of interest and treasury rates.
13.
WAYNE BANCORP, INC
MANAGEMENTS DISCUSSION & ANALYSIS
Total securities available-for-sale increased by $61.0 million through the
second quarter of 2003, while federal funds sold increased by $6.7 million. This
increase in securities is primarily due to investing the proceeds from the
mortgage loan sales into short-term securities, as well as the acquisition of
BSC. As these securities mature it is anticipated that the proceeds will be used
to fund future growth in the loan portfolio, or reinvested into similar
securities.
Total deposits have increased by $167.6 million for the period ended June 30,
2003, including deposits from BSC of $166.7 at June 30, 2003. Although total
deposits, excluding the merger, have remained relatively unchanged from December
31, 2002, the deposit mix and customer preferences have changed. Due to economic
uncertainties and the weak financial markets the Company has experienced an
increase in savings accounts while certificates of deposit have declined.
Management believes that this trend is due to the current rate environment, as
the incentive to invest long-term has diminished due to the low rate
differential between products, and investors' preference to stay liquid to take
advantage of rising interest rates in the future. Management is also aware that
this growth in savings accounts and the shift in the deposit mix may cause
margin and liquidity pressure in the future as expectations are that a portion
of these customers will withdrawal their funds and invest them in the equity
markets, and a portion will shift back into higher yielding certificates. To
monitor these trends management analyzes rates paid on deposits within its
market area on a weekly basis to ensure the Company's rates on similar products
are competitive in order to both grow and retain these deposits. Management
continues its long-term focus on growing its core deposit base to facilitate
asset growth and meet loan demand.
Short-term borrowings, which consists of securities sold under agreements to
repurchase and federal funds purchased, increased by $14.0 million for the six
months ended June 30, 2003, of which substantially all the increase was from the
acquisition of BSC.
Federal Home Loan Bank (FHLB) advances and other borrowed funds increased by
$1.5 million during the first six months of 2003. This increase is primarily due
to line of credit advances from a correspondent bank, which the Company has used
to fund the current share buyback program. The Company did not have any advances
from the FHLB during the first six months of the year. The Company considers
FHLB advances to be an alternative funding source to core deposit growth and
primarily structures these advances to fund loans with similar repayment
characteristics. .
RESULTS OF OPERATIONS
Net income was $4,459,000 for the first six months of 2003 compared to
$4,313,000 for the same period in 2002. Earnings per common share for the six
months ended June 30, 2003 and 2002 were $.91 and $.89 per share respectively.
Dividends were $.36 per share for the first six months of 2003 and $.34 per
share for the first six months in 2002.
For the three months ended June 30, 2003, net income was $2,231,000, or $.44 per
share, with dividends paid of $.18 per share. This compares to net income of
$2,021,000, or $.42 per share, with dividends paid of $.17 per share for the
three months ended June 30, 2002.
Total interest income for the six months ended June 30, 2003 was $17,760,000,
which decreased $683,000, or 3.7%, from the $18,443,000 earned in the comparable
period last year, including interest income from SBT and AFC of $953,000. This
decline in interest income is due to the repricing that has occurred on the
asset side of the balance sheet due to the prolonged low interest rate
environment. During the second quarter the Federal Open Market Committee (FOMC)
continued its easing policy and lowered rates by 25 basis points, dropping the
benchmark federal funds rate to 1.00%. As the prime rate of interest tends to
move in conjunction with the federal funds rate, the prime rate of interest is
now at 4.00%, its lowest level in over 40 years. As the Company prices
commercial and industrial loans as well as home equity loans on the prime rate
of interest, fluctuations in this index will cause an increase or decrease in
total interest income. Total interest income for the three months ended June 30,
2003 was $9,245,000, which increased $219,000, or
14.
WAYNE BANCORP, INC
MANAGEMENTS DISCUSSION & ANALYSIS
2.4%, compared to $9,026,000 for the same three month period one year ago. This
increase is due to the interest income added by SBT and AFC, offset by the
repricing that has occurred since last year.
Total earning assets were $768.0 million and $570.8 million at June 30, 2003 and
June 30, 2002. The increase in earning assets is due to an increase of $81.0
million in securities and federal funds sold and an increase of $116.3 million
in loan balances. The weighted average interest rate earned on these assets has
increased from 6.45% at June 30, 2002 to 6.56% at June 30, 2003. Excluding SBT
and AFC, the yield at June 30, 2003 was 6.14%, or a decline of 31 basis points
from the prior period.
Total interest bearing liabilities at June 30, 2003 and June 30, 2002 were
$650.4 and $465.5 million respectively. The weighted average interest rate paid
for these liabilities has decreased from 2.73% at June 30, 2002 to 2.25% at June
30, 2003.
The net effect of the changes in interest earning assets and interest bearing
liabilities, combined with the repricing that has occurred since June 30, 2002,
caused an increase in net interest income of $726,000, or 6.0%, for the six
months ended June 30, 2003, and an increase in net interest income of $862,000,
or 14.7% for the three months ended June 30, 2003.
The provision for loan losses was $111,000 for the six-month period ending June
30, 2003 compared to $300,000 for the same period in 2002, while the ratio of
the allowance for loan losses to total loans was 1.60% and 1.51% respectively.
Total charge-offs for the six months ended June 30, 2003 were $661,000 compared
to $351,000 in the same period last year. The increase in the actual charge-offs
was primarily due to the Company charging off one commercial loan, for $453,000,
that was previously classified as impaired, as well as charge-offs for SBT and
AFC totaling $71,000. As SBT and AFC are strategically focused to conduct a
larger volume of consumer installment and in-direct dealer loans it is
anticipated that their level of charge-offs will continue at a similar level
throughout the balance of the year. The decrease in the provision is largely due
to a decline in pre-merger loan balances coupled with no significant change in
the amount of non-performing loans. The increase in the allowance ratio is
primarily due to the growth in the allowance over the prior period outpacing
growth in loan balances. The provision for the three months ended June 30, 2003
was $71,000, compared to $150,000 for the same three-month period in 2002. Total
charge-offs for the three months ended June 30, 2003 were $568,000 compared to
$205,000 for the same period last year. The decrease in the provision is
substantially the same as that for the full six months. Given the make-up of the
loan portfolio, and considering past due loans, charge-off and recovery history
as well as economic conditions, Management considers the allowance for loan
losses to be adequate and sufficient to cover probable incurred credit losses.
Total other income increased by $447,000, or 18.6%, for the six months ended
June 30, 2003 compared to the same period one year ago. Service charges and fees
on deposits increased by $94,000, or 9.2% primarily due to fees from SBT during
June. Trust revenues increased $130,000, or 18.1% due to increased fees
generated from the Trust division. Although total loans sold into the secondary
market have declined by $3.6 million, net gains on the sale of loans have
increased by $268,000, or 239.3% primarily due to the Company benefiting from
pricing that was more favorable, as well as a portion due to gains from sales by
SBT. Other non-interest income has increased by $17,000 or 3.6%. Net gains on
the sale of investments declined by $62,000, as there were no sales during the
first six months of the year, compared to sales of $7.3 million in the
comparable period one year ago.
Total other income increased by $348,000, or 30.0% for the three months ended
June 30, 2003 compared to the same period one year ago. Service charges on
deposits increased by $79,000, Trust earnings increased by $122,000, net gains
on the sale of loans increased by $129,000, and other miscellaneous income
increased
15.
WAYNE BANCORP, INC
MANAGEMENTS DISCUSSION & ANALYSIS
by $81,000, while gains from investment sales declined by $63,000. These changes
are substantially the same as those for the six months ended June 30, 2003.
Total other expenses increased by $ 1,162,000, or 14.3%, for the six months
ended June 30, 2003 compared to the same period in 2002. Salaries and employee
benefits increased by $467,000, or 10.2%, from $4,584,000 at June 30, 2002 to
$5,051,000 at June 30, 2003, including expenses from SBT and AFC of $261,000.
This increase is due, in part, to the annual salary adjustments that are made
each year in order to maintain compensation at a level that will attract and
retain employees, as well as an increase in expenses related to retirement
benefits, and health insurance costs. Occupancy and equipment expense increased
$213,000, or 21.1% from $1,010,000 at June 30, 2002 to $1,223,000 at June 30,
2003, including expenses from SBT and AFC of $58,000. These increases were
primarily attributed to increased expenses related to building and equipment
maintenance and repairs as well as depreciation. Other non-interest expenses
increased $482,000, or 19.1%, from $2,528,000 at June 30, 2002 to $3,010,000 at
June 30, 2003, including expenses from SBT and AFC of $150,000. Increases in
this area were noted in expenses related to directors fees, Trust, service
charges, advertising, donations and data processing, while decreases were noted
in expenses related to franchise tax, and expenses related to the Company's
operation of its Automated Teller Machines (ATM's).
Total other expenses for the three months ended June 30, 2003, increased by
$950,000, or 23.3% from $4,081,000 at June 30, 2002 to $5,031,000 at June 30,
2003. Salaries and employee benefits increased by $402,000, occupancy and
equipment expense increased $138,000 and other non-interest expenses increased
$410,000. The increase in these areas is substantially the same as that for the
full six months ended June 30, 2003.
16.
WAYNE BANCORP, INC
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Item 3. Quantitative and qualitative disclosures about market risk.
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
The Company's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. The Company does not maintain a trading account
for any class of financial instruments and the Company is not affected by
foreign currency exchange rate risk or commodity price risk. Because the Company
does not hold any equity securities other than stock in the FHLB of Cincinnati
and an insignificant investment in other equity securities, the Company is not
subject to equity price risk.
Interest rate risk is the risk that the Company's financial condition will be
adversely affected due to movements in interest rates. The Company, like other
financial institutions, is subject to interest rate risk to the extent that its
interest-earning assets reprice differently than its interest-bearing
liabilities. The income of financial institutions is primarily derived from the
excess of interest earned on interest-earning assets over the interest paid on
interest-bearing liabilities. One of the Company's principal financial
objectives is to achieve long-term profitability while reducing its exposure to
fluctuations in interest rates. Accordingly, the Company places great importance
on monitoring and controlling interest rate risk.
There are several methods employed by the Company to monitor and control
interest rate risk. One such method is using a "GAP" analysis. The GAP is
defined as the repricing variance between rate sensitive assets and rate
sensitive liabilities within certain periods. The repricing can occur due to
changes in rates on variable rate products as well as maturities of
interest-earning assets and interest-bearing liabilities. A high ratio of
interest sensitive liabilities, generally referred to as a negative GAP, tends
to benefit net interest income during periods of falling interest rates as the
average rate paid on interest-bearing liabilities declines faster than the
average rate earned on interest-earning assets. The opposite holds true during
periods of rising interest rates. The Company attempts to minimize the interest
rate risk through management of the GAP in order to achieve consistent
shareholder return. Based on loan demand and funding needs, Management attempts
to manage the GAP position by adjusting maturities and rates on deposit products
accordingly. Another strategy used by the Company is to originate variable rate
loans tied to market indices. Such loans reprice on an annual, quarterly,
monthly or daily basis as the underlying market index changes. Currently,
approximately 57% of the Company's loan portfolio is written as variable rate.
The Company also invests excess funds in liquid federal funds that mature and
reprice on a daily basis. The Company also maintains all of its securities in
the available-for-sale portfolio to take advantage of interest rate fluctuations
and to maintain liquidity for loan funding and deposit withdrawals.
The Company's 2002 annual report provides a table which details information
about the Company's financial instruments that are sensitive to changes in
interest rates as of December 31, 2002. The table is based on information and
assumptions set forth in the notes. The Company believes the assumptions
utilized are reasonable. For loans, securities and liabilities with contractual
maturities, the table represents principal cash flows and the weighted-average
interest rate. For variable rate loans, the contractual maturity and
weighted-average interest rate was used with an explanatory footnote as to
repricing periods. For liabilities without contractual maturities such as demand
and savings deposit accounts, a decay rate was utilized to match their most
likely withdrawal behavior. Management believes that no events have occurred
since December 31, 2002 that would significantly change the ratio of rate
sensitive assets to rate sensitive liabilities for the given time horizons.
17.
WAYNE BANCORP, INC
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Item 4. Controls and Procedures
Within the 90-day period prior to the filing date of this report, an evaluation
was carried out under the supervision and with the participation of Wayne
Bancorp, Inc.'s management, including our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(c) under the
Securities Exchange Act of 1934). Our Chief Executive Officer and Chief
Financial Officer have concluded that the Company's disclosure controls and
procedures are, to the best of their knowledge, effective to ensure that
information required to be disclosed by the Company's reports that it files or
submits under the Exchange Act is recorded, processed, summarized and reported
within the time periods specified in Securities and Exchange Commission rules
and forms. Subsequent to the date of their evaluation, our Chief Executive
Officer and Chief Financial Officer have concluded that there were no
significant changes in the Company's internal controls or in other factors that
could significantly affect its internal controls.
18.
WAYNE BANCORP, INC
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
(a) Annual Shareholders' Meeting: Wayne Bancorp, Inc. held its annual
meeting of shareholders' on May 29, 2003, for the purpose of considering
and voting on the following:
1. To approve the Affiliation Agreement dated as of December 9, 2002,
by and between Wayne Bancorp, Inc. and Banc Services Corp. and the
merger contemplated by the agreement whereby Wayne Bancorp will
issue up to 1,329,278 shares of Wayne Bancorp common stock.
2. To elect the four directors named in the joint proxy/statement
prospectus.
3. To approve a deferred share plan.
4. To transact any other business as may properly come before the
annual meeting or any adjournments or postponements of the annual
meeting.
The summary of the voting of the common shares outstanding was as
follows:
Proposal 1:
FOR: 2,976,128 AGAINST: 62,296 ABSTAIN: 712,209
Proposal 2:
David P. Boyle FOR: 3,718,340 WITHHELD: 32,293
B. Diane Gordon FOR: 3,713,973 WITHHELD: 36,660
Stephen L. Shapiro FOR: 3,736,446 WITHHELD: 14,187
Bala Venkataraman FOR: 3,733,435 WITHHELD: 17,197
In addition to the directors that were re-elected above, directors
continuing in office until the annual meeting in 2004 are Gwenn E. Bull,
David L. Christopher, Dennis B. Donahue and Jeffrey E. Smith. Directors
continuing in office until the annual meeting in 2005 are James O.
Basford, John C. Johnston III, Philip S. Swope and David E. Taylor.
Proposal 3:
FOR: 3,257,797 AGAINST: 212,559 ABSTAIN: 280,277
Proposal 4:
No other business
19.
WAYNE BANCORP, INC
PART II - OTHER INFORMATION
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1
31.2
32.1
32.2
(b) Reports on Form 8-K
1. Current Report on Form 8-K dated April 17, 2003, announcing first
quarter financial results of Wayne Bancorp, Inc.
2. Current Report on Form 8-K dated May 31, 2003, announcing the merger of
Banc Services Corp. into Wayne Bancorp, Inc. effective May 31, 2003.
20.
WAYNE BANCORP, INC
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the small
business issuer has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: August 14, 2003 \s\ David P. Boyle
--------------- ------------------
David P. Boyle
President and CEO
Date: August 14, 2003 \s\ John A. Lende
--------------- -----------------
John A. Lende
Secretary/Treasurer
21.