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FORM 10-Q
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(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, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from __________ to ____________.
Commission File Number 014612
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WAYNE BANCORP, INC
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(Exact name of registrant as specified in its charter)
Ohio 34-1516142
---- ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
112 West Liberty Street, P.O. Box 757, Wooster, Ohio 44691
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(Address of principal executive offices)
(330) 264-1222
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(Registrant's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the 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 [ ]
As of July 31, 2002, the latest practicable date, 4,614,821 shares of the
issuer's common shares, $1.00 stated value, were issued and outstanding.
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1.
WAYNE BANCORP, INC
INDEX
FORM 10-Q
For the Quarter Ended June 30, 2002
Page
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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
Part II - Other Information........................................................................... 15
SIGNATURES ........................................................................................... 16
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See notes to condensed consolidated financial statements.
2.
WAYNE BANCORP, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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Item 1. FINANCIAL STATEMENTS
June 30, December 31,
2002 2001
---- ----
(In thousands)
ASSETS
Cash and due from banks $ 27,334 $ 28,738
Federal funds sold 1,890 3,975
----------- -----------
Total cash and cash equivalents 29,224 32,713
Securities available-for-sale 176,875 165,098
Loans held-for-sale 11,778 11,881
Loans 380,223 387,484
Allowance for loans (5,918) (5,821)
------------ ------------
Net loans 374,305 381,663
Premises and equipment 10,805 9,813
Accrued interest receivable and other assets 7,497 7,554
----------- -----------
Total assets $ 610,484 $ 608,722
=========== ===========
LIABILITIES
Deposits
Interest bearing $ 433,050 $ 429,253
Non-interest bearing 77,636 72,323
----------- -----------
Total deposits 510,686 501,576
Short-term borrowings 25,596 33,635
Federal Home Loan Bank advances and other borrowed funds 5,197 6,896
ESOP loan 1,671 1,800
Other liabilities 2,906 3,014
----------- -----------
Total liabilities 546,056 546,921
SHAREHOLDERS' EQUITY
Common stock, stated value $1.00 4,917 4,917
Shares authorized - 12,000,000 in 2002 and 2001
Shares issued - 4,917,218 in 2002 and 2001
Shares outstanding - 4,633,156 in 2002
and 4,657,531 in 2001
Paid-in capital 13,154 13,148
Retained earnings 53,382 50,748
Unearned ESOP shares (1,561) (1,651)
Treasury stock, at cost (8,081) (7,547)
Accumulated other comprehensive income 2,617 2,186
----------- -----------
Total shareholders' equity 64,428 61,801
----------- -----------
Total liabilities and shareholders' equity $ 610,484 $ 608,722
=========== ===========
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See notes to condensed consolidated financial statements.
3.
WAYNE BANCORP, INC
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
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Three Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(In thousands)
INTEREST INCOME
Interest and fees on loans $ 6,871 $ 8,286 $ 14,185 $ 16,551
Taxable securities 1,627 1,479 3,213 3,045
Non-taxable securities 495 453 973 873
Other interest income 33 82 72 219
----------- ----------- ----------- -----------
Total interest income 9,026 10,300 18,443 20,688
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 2,971 3,937 5,966 8,164
Interest on federal funds purchased and
repurchase agreements 84 281 179 643
Interest on Federal Home Loan Bank
advances and other borrowed funds 110 101 228 168
----------- ----------- ----------- -----------
Total interest expense 3,165 4,319 6,373 8,975
----------- ----------- ----------- -----------
NET INTEREST INCOME 5,861 5,981 12,070 11,713
Provision for loan losses 150 69 300 138
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 5,711 5,912 11,770 11,575
Other income
Service charges and fees on deposit accounts 526 557 1,026 1,034
Income from fiduciary activities 360 360 720 720
Net gain on sale of securities 63 0 62 0
Other non-interest income 220 169 591 310
----------- ----------- ----------- -----------
Total other income 1,169 1,086 2,399 2,064
----------- ----------- ----------- -----------
Other expenses
Salaries and employee benefits 2,272 2,215 4,584 4,460
Occupancy and equipment 508 505 1,010 1,007
Other operating expenses 1,301 1,221 2,528 2,389
----------- ----------- ----------- -----------
Total other expenses 4,081 3,941 8,122 7,856
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,799 3,057 6,047 5,783
Income tax expense 778 914 1,734 1,718
----------- ----------- ----------- -----------
NET INCOME 2,021 2,143 4,313 4,065
Other Comprehensive Income, (loss) 1,196 (54) 431 936
----------- ------------ ----------- -----------
Comprehensive Income $ 3,217 $ 2,089 $ 4,744 $ 5,001
=========== =========== =========== ===========
Earnings per common share - basic $ .44 $ .45 $ .94 $ .85
=========== =========== =========== ===========
Earnings per common share - diluted $ .44 $ .45 $ .94 $ .85
=========== =========== =========== ===========
Dividends per share $ .18 $ .16 $ .36 $ .32
========== =========== =========== ===========
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See notes to condensed consolidated financial statements.
4.
WAYNE BANCORP, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Six Months Ended
June 30,
2002 2001
---- ----
(In thousands)
Net cash from operating activities $ 5,539 $ 4,502
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale
Purchases (50,836) (23,817)
Proceeds from maturities and repayments 31,864 29,932
Proceeds from sales 7,336 0
Net change in loans 7,058 (26,402)
Purchase of premises and equipment (1,547) (921)
Proceeds from sales of premises 67 288
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Net cash from investing activities (6,058) (20,920)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 9,110 (613)
Net change in short-term borrowings (8,039) (258)
Proceeds from Federal Home Loan Bank advances 0 3,650
Repayment of Federal Home Loan Bank advances (1,692) (1,789)
Repayment of ESOP loan and other borrowed funds (136) (7)
Cash dividends paid (1,441) (1,341)
Treasury stock purchased (772) (573)
----------- -----------
Net cash from financing activities (2,970) (931)
----------- -----------
Net change in cash and cash equivalents (3,489) (17,349)
Cash and cash equivalents at beginning of period 32,713 43,844
---------- ----------
Cash and cash equivalents at end of period $ 29,224 $ 26,495
========== ==========
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See notes to condensed consolidated financial statements.
5.
WAYNE BANCORP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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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, 2002,
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,
2001, included in its 2001 annual report. Refer to the accounting policies of
the Company described in the notes to the financial statements contained in the
Company's 2001 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), 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.
A new accounting standard dealing with asset retirement obligations will apply
for 2003. The Company does not believe this standard will have a material affect
on its financial condition or results of operations.
Effective January 1, 2002, the Company adopted a new accounting standard issued
by the Financial Accounting Standards Board on impairment and disposal of
long-lived assets. The effect of this standard on the financial position and
results of operations of the Company was not material.
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6.
WAYNE BANCORP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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NOTE 2 - SECURITIES
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. During the six months ended June 30,
2001, 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 three months ended June 30, 2001, there were no sales of
securities.
Securities available-for-sale were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
JUNE 30, 2002
U.S. Treasury $ 10,017 $ 266 $ $ 10,283
Federal agency obligations 47,315 942 48,257
Mortgage-backed securities 27,112 437 27,549
Obligations of state and
political subdivisions 59,124 1,715 (21) 60,818
Corporate obligations 26,094 792 (112) 26,774
Other securities 3,244 53 (103) 3,194
----------- ----------- ------------ -----------
Total $ 172,906 $ 4,205 $ (236) $ 176,875
=========== =========== ============ ===========
DECEMBER 31, 2001
U.S. Treasury $ 17,549 $ 486 $ $ 18,035
Federal agency obligations 44,031 820 (12) 44,839
Mortgage-backed securities 11,966 241 12,207
Obligations of state and
political subdivisions 55,027 1,072 (68) 56,031
Corporate obligations 30,076 919 30,994
Other securities 3,136 28 (173) 2,991
----------- ----------- ------------ -----------
Total $ 161,785 $ 3,566 $ (253) $ 165,098
========== =========== ============ ===========
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7.
WAYNE BANCORP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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NOTE 3 - LOANS
Loans are comprised of the following:
June 30, December 31,
2002 2001
---- ----
(In thousands)
Commercial $ 236,207 $ 224,743
Real estate 91,180 103,896
Consumer installment 38,411 44,544
Home equity 13,958 13,758
Direct lease financing 931 1,175
Other loans 256 201
------------ ------------
Gross loans 380,943 388,317
Less: Net deferred loan fees (624) (672)
Unearned income on leases (96) (161)
------------ ------------
Total loans $ 380,223 $ 387,484
=========== ============
Impaired loans were as follows
June 30, December 31,
2002 2001
---- ----
Period-end loans with no allocated allowance
for loan losses $ 0 $ 0
Period-end loans with allocated allowance
for loan losses 1,260 1,250
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Total $ 1,260 $ 1,250
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Amount of the allowance for loan losses allocated $ 460 $ 452
------------ ------------
Non-performing loans were as follows:
Loans past due over 90 days and accruing interest $ 72 $ 217
Non-accrual loans 800 800
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8.
WAYNE BANCORP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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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,
2002 2001 2002 2001
---- ---- ---- ----
BASIC
Net income $ 2,021 $ 2,143 $ 4,313 $ 4,065
Weighted average common shares outstanding 4,636,422 4,824,180 4,643,549 4,821,350
Less: average unallocated ESOP shares (72,553) (58,066) (73,570) (35,522)
----------- ----------- ----------- -----------
Average shares 4,563,869 4,766,114 4,569,979 4,785,828
=========== =========== =========== ===========
Basic earnings per common share $ 0.44 $ 0.45 $ 0.94 $ 0.85
=========== ========== =========== ===========
DILUTED
Net income $ 2,021 $ 2,143 $ 4,313 $ 4,065
Weighted average shares outstanding
for basic earnings per common share 4,563,869 4,766,114 4,569,979 4,785,828
Add: diluted effects of assumed
exercise of stock options 13,030 11,846 10,164 7,329
----------- ----------- ----------- -----------
Average shares and dilutive potential
common shares 4,576,899 4,777,960 4,580,143 4,793,157
=========== =========== =========== ===========
Diluted earnings per common share $ 0.44 $ 0.45 $ 0.94 $ 0.85
=========== ========== =========== ===========
For the three and six months ending June 30, 2002 stock options for 31,920 and
50,715 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, 2001 stock options for 54,705 shares of common stock were not
considered in computing diluted earnings per common share because they were
non-dilutive.
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9.
WAYNE BANCORP, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
The following discusses the financial condition as of June 30, 2002, as compared
to December 31, 2001 and the results of operations for the three and six months
ended June 30, 2002 and the same periods in 2001. 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,
2002, the amount of cash and due from banks and securities and loans with
scheduled maturities and or repricing within the next three months was $181
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, 2002, the
Company's equity-to-asset ratio adjusted by the impact of FAS#115 was 10.1%
compared to 9.8% at December 31, 2001. 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 16.2% at June 30, 2002, and 15.4%
at December 31, 2001.
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10.
WAYNE BANCORP, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS
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The regulators require a minimum leverage capital ratio of 3%. They will expect
most banks to maintain leverage ratios in the 4-5% range. The leverage ratio is
calculated as equity capital less certain intangible assets divided by total
assets less the same intangible assets. At June 30, 2002, and December 31, 2001,
the ratios were 10.1% and 9.8% 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, 2002 that would
cause the Company's capital category to change.
FINANCIAL CONDITION
The total assets of the Company increased by $1.8 million or .3% from December
31, 2001 to June 30, 2002. Earning assets increased by $2.4 million, which
includes an increase of $11.8 million in securities offset by reductions in
loans and federal funds sold. This asset growth was funded by a $9.1 million
increase in deposits offset by declines in short-term borrowings and Federal
Home Loan Bank (FHLB) advances.
Total loans at June 30, 2002 were $380.2 million, which is a decline of $7.3
million from total loans of $387.5 million at December 31, 2001. This decline is
primarily related to the sale of $23.8 million of mortgage loans into the
secondary market and continued reductions in the consumer installment loan area
due to the low rate incentives offered by the auto manufacturers. Reductions in
these two areas is partially offset by growth of $11.5 million in commercial
loans. Despite the weak economic conditions the Company experienced steady
demand in commercial loans during the first six months of 2002. However, due to
the sustained weakness in the economy, Management anticipates that commercial
loan growth will slow during the second half of 2002 and that total loan growth
will continue to be hampered as a result of weak economic conditions,
uncertainty in the financial markets and the slow pace of the economic recovery.
As of June 30, 2002, the Company had $11.8 million of one-to-four family
residential mortgage loans classified as held-for-sale, compared to $11.9
million at December 31, 2001. Through June 30, 2002 the Company sold $23.8
million of mortgage loans into the secondary market, while during the fourth
quarter of 2001, sales were $32.4 million. 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
2002, with expectations that rates will increase slightly during the first or
second quarter of 2003. 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.
Total securities available-for-sale increased by $11.8 million through the
second quarter of 2002, while federal funds sold declined by $2.1 million. This
increase in securities is primarily due to investing the proceeds from the
mortgage loan sales into short-term securities. 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.
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11.
WAYNE BANCORP, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS
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Total deposits have increased by $9.1 million for the period ended June 30,
2002. This growth in deposits is due to increases in non-interest bearing
accounts as well as savings and certificates, offset by a reduction in interest
bearing checking accounts. Due to the current economic conditions, Management is
aware that some of this deposit growth may be attributed to the weak equity
markets and that when the economy recovers these deposits may be subject to
withdrawal. Despite this recent trend, Management continues its long-term focus
on growing its core deposit base to facilitate asset growth and meet loan
demand. To do this 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 deposits.
Short-term borrowings, which consists of securities sold under agreements to
repurchase and federal funds purchased, decreased $8.0 million for the six
months ended June 30, 2002. This decrease is primarily related to the soft
economic conditions as commercial customers are utilizing these funds to cash
flow current operations.
Federal Home Loan Bank (FHLB) advances and other borrowed funds decreased by
$1.7 million during the first six months of 2002. This decrease is primarily
related to scheduled principal repayments with no new advances or borrowings.
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 $4,313,000 for the first six months of 2002 compared to
$4,065,000 for the same period in 2001. Earnings per common share for the six
months ended June 30, 2002 and 2001 were $.94 and $.85 per share respectively.
Dividends were $.36 per share for the first six months of 2002 and $.32 per
share for the first six months in 2001.
For the three months ended June 30, 2002, net income was $2,021,000, or $.44 per
share, with dividends paid of $.18 per share. This compares to net income of
$2,143,000, or $.45 per share, with dividends paid of $.16 per share for the
three months ended June 30, 2001.
Total interest income for the six months ended June 30, 2002 was $18.4 million,
which decreased $2.2 million, or 10.9%, from the $20.7 million earned in the
comparable period last year. Although the Company has increased earning assets
by over $36 million from one year ago, the Federal Open Market Committee (FOMC)
lowered rates by 475 basis points during 2001, which has negatively impacted the
Company's yield on these assets. Total interest income for the three months
ended June 30, 2002 decreased by $1.3 million from the comparable three month
period one year ago, and is also due to the same rate reductions.
Total earning assets were $570.8 million and $534.7 million at June 30, 2002 and
June 30, 2001. The increase in earning assets is due to growth of $45.3 in
securities and federal funds sold, offset by a $9.2 reduction in loan balances.
The weighted average interest rate earned on these assets has decreased from
7.79% at June 30, 2001 to 6.45% at June 30, 2002.
Total interest bearing liabilities at June 30, 2002 and June 30, 2001 were
$465.5 and $435.3 million respectively. The weighted average interest rate paid
for these liabilities has decreased from 4.11% at June 30, 2001 to 2.73% at June
30, 2002.
As a result of the current economic conditions and prolonged low interest rate
environment, Management anticipates that rates earned on assets and paid on
liabilities will continue to decline during the second half of the year,
although at a slower pace than during the first six months. The continued
decline is expected as a result of the repricing that occurs when assets and
liabilities mature and are replaced with similar products with lower rates.
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12.
WAYNE BANCORP, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS
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The net effect of the changes in interest earning assets and interest bearing
liabilities, combined with the repricing that has occurred since June 30, 2001,
caused an increase in net interest income of $357 thousand, or 3.0%, for the six
months ended June 30, 2002, and a reduction in net interest income of $120
thousand for the three months ended June 30, 2002.
The provision for loan losses was $300,000 for the six-month period ending June
30, 2002 compared to $138,000 for the same period in 2001, while the ratio of
the allowance for loan losses to total loans was 1.51% and 1.35% respectively.
The increase in the provision is due to a corresponding increase in actual
charge-offs. For the six months ended June 30, 2002, the Company recorded
charge-offs of $351 thousand compared to $178 thousand for the same period last
year, which is an increase of $173 thousand, or 97.2%. The increase in the
allowance ratio is primarily due to the growth in the allowance over the prior
period without a corresponding increase in loans. The provision for the three
months ended June 30, 2002 was $150,000, compared to $69,000 for the same three
month period in 2001. The increase in the provision is substantially the same as
that for the full six months, as actual charge-offs for the three month period
ended June 30, 2002 were $205 thousand compared to $76 thousand for the same
period one year ago, which is an increase of $129 thousand, or 169.7%. Given the
make-up of the loan portfolio, and considering past due loans, charge-off and
recovery history as well as general economic conditions, Management considers
the allowance for loan losses to be adequate and sufficient to cover probable
incurred credit losses.
Total other expenses increased by $266,000, or 3.4%, for the six months ended
June 30, 2002 compared to the same period in 2001. Salaries and employee
benefits increased by $124,000, or 2.8%, from $4,460,000 at June 30, 2001 to
$4,584,000 at June 30, 2002. 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, offset by a reduction in health insurance costs.
Occupancy and equipment expense experienced little change and was $1,010,000 at
June 30, 2002, compared to $1,007,000 at June 30, 2001. Other non-interest
expenses increased $139,000, or 5.8%, from $2,389,000 at June 30, 2001 to
$2,528,000 at June 30, 2002. Increases in this area were noted in expenses
related to franchise tax, Trust, service charges, telephone, professional fees
and data processing. These increases were offset by decreases in directors'
fees, stationary and supplies and advertising.
Total other expenses for the three months ended June 30, 2002, increased by
$140,000 from $3,941,000 at June 30, 2001 to $4,081,000 at June 30, 2002.
Salaries and employee benefits increased by $57,000, or 2.6%, from $2,215,000 at
June 30, 2001 to $2,272,000 at June 30, 2002. This increase during the three
month period is substantially the same as that for the full six months.
Occupancy and equipment expense was relatively unchanged and was $508,000 for
the three months ended June 30, 2002 compared to $505,000 for the same period in
2001. Other non-interest expenses increased $80,000, or 6.6%, from $1,221,000 at
June 30, 2001 to $1,301,000 at June 30, 2002. The increase in this area is
substantially the same as that for the full six months.
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13.
WAYNE BANCORP, INC
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
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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 50% 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 2001 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, 2001. 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, 2001 that would significantly change the ratio of rate
sensitive assets to rate sensitive liabilities for the given time horizons.
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14.
WAYNE BANCORP, INC
PART II - OTHER INFORMATION
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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
Date: April 25, 2002
Description: Election of Directors
James O. Basford FOR: 3,877,854 WITHHELD: 78,232
John C. Johnston III FOR: 3,946,222 WITHHELD: 9,864
Philip S. Swope FOR: 3,943,417 WITHHELD: 12,669
David E. Taylor FOR: 3,944,334 WITHHELD: 11,752
In addition to the directors that were re-elected above, directors continuing in
office until the annual meeting in 2003 are David P. Boyle, B. Diane Gordon,
Stephen L. Shapiro and Bala Venkataraman. Directors continuing in office until
the annual meeting in 2004 are Gwenn E. Bull, David L. Christopher, Dennis B.
Donahue and Jeffrey E. Smith.
Description: Ratify the engagement of Crowe, Chizek & Company LLP as the
independent auditor.
FOR: 3,926,550 AGAINST: 3,964 ABSTAIN: 25,572
Item 5. OTHER INFORMATION
None.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit 99.1
Exhibit 99.2
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15.
WAYNE BANCORP, INC
SIGNATURES
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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 9, 2002 \s\ DAVID P. BOYLE
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David P. Boyle
President and CEO
Date: AUGUST 9, 2002 \s\ JOHN A. LENDE
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John A. Lende
Secretary/Treasurer
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16.