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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 September 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
(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 October 31, 2002, the latest practicable date, 4,577,679 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 September 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
Item 4. Controls and procedures.................................. 15
Part II - Other Information............................................ 16
SIGNATURES ............................................................ 17
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2.
WAYNE BANCORP, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
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Item 1. Financial Statements
--------------------
September 30, December 31,
2002 2001
---- ----
(In thousands)
ASSETS
Cash and due from banks $ 26,911 $ 28,738
Federal funds sold 690 3,975
----------- -----------
Total cash and cash equivalents 27,601 32,713
Securities available-for-sale 172,763 165,098
Loans held-for-sale 16,377 11,881
Loans 377,973 387,484
Allowance for loans (6,065) (5,821)
------------ ------------
Net loans 371,908 381,663
Premises and equipment 10,875 9,813
Accrued interest receivable and other assets 7,260 7,554
----------- -----------
Total assets $ 606,784 $ 608,722
=========== ===========
LIABILITIES
Deposits
Interest bearing $ 432,356 $ 429,253
Non-interest bearing 74,635 72,323
----------- -----------
Total deposits 506,991 501,576
Short-term borrowings 25,770 33,635
Federal Home Loan Bank advances and other borrowed funds 3,405 6,896
ESOP Loan 1,671 1,800
Other liabilities 3,238 3,014
----------- -----------
Total liabilities 541,075 546,921
SHAREHOLDERS' EQUITY
Common stock, $1.00 stated value 4,917 4,917
Shares authorized - 12,000,000 in 2002 and 2001
Shares issued - 4,916,911 in 2002
4,917,219 in 2001
Shares outstanding - 4,600,179 in 2002
4,657,531 in 2001
Paid-in capital 13,159 13,148
Retained earnings 54,671 50,748
Unearned ESOP shares (1,516) (1,651)
Treasury stock, at cost (9,010) (7,547)
Accumulated other comprehensive income 3,488 2,186
----------- -----------
Total shareholders' equity 65,709 61,801
----------- -----------
Total liabilities and shareholders' equity $ 606,784 $ 608,722
=========== ===========
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See accompanying 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 Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
(In thousands)
INTEREST INCOME
Interest and fees on loans $ 6,958 $ 8,339 $ 21,143 $ 24,890
Taxable securities 1,516 1,422 4,729 4,467
Non-taxable securities 501 446 1,474 1,319
Other interest income 24 28 96 247
----------- ----------- ----------- -----------
Total interest income 8,999 10,235 27,442 30,923
----------- ----------- ----------- -----------
INTEREST EXPENSE
Interest on deposits 2,844 3,785 8,810 11,949
Interest on federal funds purchased and
repurchase agreements 81 226 260 869
Interest on Federal Home Loan Bank
advances and other borrowed funds 87 129 315 297
----------- ----------- ----------- -----------
Total interest expense 3,012 4,140 9,385 13,115
----------- ----------- ----------- -----------
NET INTEREST INCOME 5,987 6,095 18,057 17,808
Provision for loan losses 150 69 450 207
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 5,837 6,026 17,607 17,601
Other income
Service charges and fees on deposit accounts 572 539 1,598 1,573
Income from fiduciary activities 360 360 1,080 1,080
Net gain on sale of securities 0 33 62 33
Other non-interest income 248 240 839 550
----------- ----------- ----------- -----------
Total other income 1,180 1,172 3,579 3,236
----------- ----------- ----------- -----------
Other expenses
Salaries and employee benefits 2,276 2,315 6,860 6,775
Occupancy and equipment 511 535 1,521 1,542
Other operating expenses 1,280 1,220 3,808 3,609
----------- ----------- ----------- -----------
Total other expenses 4,067 4,070 12,189 11,926
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 2,950 3,128 8,997 8,911
Income tax expense 835 916 2,569 2,634
----------- ----------- ----------- -----------
NET INCOME 2,115 2,212 6,428 6,277
Other Comprehensive Income 871 1,219 1,302 2,155
----------- ----------- ----------- -----------
Comprehensive Income $ 2,986 $ 3,431 $ 7,730 $ 8,432
=========== =========== =========== ===========
Earnings per common share - basic $ 0.47 $ 0.47 $ 1.41 $ 1.32
=========== =========== =========== ===========
Earnings per common share - diluted $ 0.47 $ 0.47 $ 1.41 $ 1.32
=========== =========== =========== ===========
Dividends per share $ 0.18 $ 0.16 $ 0.54 $ 0.49
=========== =========== =========== ===========
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See accompanying notes to condensed consolidated financial statements
4.
WAYNE BANCORP, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
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Nine Months Ended
September 30,
2002 2001
---- ----
(In thousands)
Net cash from operating activities $ 3,437 $ 7,884
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale
Purchases (59,038) (36,181)
Proceeds from maturities and repayments 45,356 40,796
Proceeds from sales 7,336 49
Net change in loans 9,579 (46,544)
Purchase of premises and equipment (1,812) (1,241)
Proceeds from sales of premises 67 351
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Net cash from investing activities 1,488 (42,770)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 5,416 18,547
Net change in short-term borrowings (7,865) (2,111)
Proceeds from Federal Home Loan Bank advances 4,950
Repayment of Federal Home Loan Bank advances (3,480) (2,060)
Repayment of ESOP loan and other borrowed funds (140) (210)
Cash dividends paid (2,157) (2,010)
Treasury stock purchased (1,811) (1,580)
----------- ----------
Net cash from financing activities (10,037) 15,526
----------- ----------
Net change in cash and cash equivalents (5,112) (19,360)
Cash and cash equivalents at beginning of period 32,713 43,844
---------- ----------
Cash and cash equivalents at end of period $ 27,601 $ 24,484
========== ==========
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See accompanying notes to condensed consolidated financial statements
5.
WAYNE BANCORP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
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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 September 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 transactions have been
eliminated.
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.
The Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standard (SFAS) No. 143, "Asset Retirement Obligation." The
provisions of this standard apply to asset retirements beginning in 2003. The
Company does not believe this standard will have a material affect on its
financial position or results of operations.
Effective January 1, 2002, the Company adopted SFAS No, 144, "Impairment or
Disposal of Long-Lived Assets." The effect of this standard on the financial
position and results of operations of the Company was not material.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No.
4, 44, and 64, Amendments of FASB Statement No. 13, and Technical Corrections."
This Statement eliminates inconsistency between the required accounting for
certain lease modifications that have economic effects
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6.
WAYNE BANCORP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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similar to sale-leaseback transactions and sale-leaseback transactions. The
Company does not believe this statement will have a material effect on its
financial position or results of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." This Statement addresses the timing of
recognition of a liability for exit and disposal cost at the time a liability is
incurred, rather than at a plan commitment date, as previously required. Exit or
disposal costs will be measured at fair value, and the recorded liability will
be subsequently adjusted for changes in estimated cash flows. This statement is
required to be effective for exit or disposal activities entered after December
31, 2002, and early adoption is encouraged. The Company does not believe this
statement will have a material effect on its financial position or results of
operations.
SFAS No. 147, "Acquisitions of Certain Financial Institutions" became effective
October 1, 2002. This standard requires any unidentifiable intangible asset
previously recorded as the result of a business combination to be reclassified
as goodwill and the amortization of this asset will cease. The effect of this
standard on the financial position and results of operations of the Company was
not material, as the Company does not have any unidentified intangible assets.
NOTE 2 - SECURITIES
During the nine months ended September 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. There were no sales
of securities during the three months ended September 30, 2002. During the three
and nine months ended September 30, 2001, proceeds from the sale of securities
were $49 thousand, with gross realized gains of $33 thousand included in
earnings.
Securities available-for-sale were as follows:
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
September 30, 2002 Cost Gains Losses Value
------------------ ---- ----- ------ -----
(In thousands)
U.S. Treasury $ 8,016 $ 279 $ $ 8,295
Federal Agency Obligations 45,640 1,300 46,940
Federal Agency Pools 27,829 736 (14) 28,551
Obligations of state and
political subdivisions 56,639 2,316 58,955
Corporate Obligations 26,060 744 (12) 26,792
Other securities 3,294 40 (104) 3,230
----------- ----------- ------------ -----------
Total $ 167,478 $ 5,415 $ (130) $ 172,763
=========== =========== ============ ===========
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7.
WAYNE BANCORP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In thousands)
December 31, 2001
-----------------
U.S. Treasury $ 17,549 $ 486 $ $ 18,035
Federal Agency Obligations 44,031 820 (12) 44,839
Federal Agency Pools 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
========== =========== =========== ===========
NOTE 3 - LOANS
Loans are comprised of the following:
September 30, December 31,
2002 2001
---- ----
(In thousands)
Commercial $ 239,707 $ 224,743
Real estate 85,904 103,896
Consumer installment 36,741 44,544
Home equity 15,424 13,758
Direct lease financing 786 1,175
Other loans 80 201
------------ ------------
Gross loans 378,642 388,317
Less: Net deferred loan fees (592) (627)
Unearned income on leases (77) (161)
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Total loans $ 377,973 $ 387,484
============ ============
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8.
WAYNE BANCORP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
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Impaired loans were as follows:
September 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 460 1,250
------ ------
Total $ 460 $1,250
------ ------
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 $ 849 $ 217
Non-accrual loans 893 800
NOTE 4 - EARNINGS PER COMMON SHARE
The factors used in the earnings per common share are as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Basic
Net income $ 2,115 $ 2,212 $ 6,428 $ 6,277
Weighted average common
shares outstanding 4,608,111 4,791,572 4,631,652 4,811,120
Less: Average unallocated ESOP shares (70,518) (76,533) (72,545) (49,109)
----------- ----------- ----------- -----------
Average shares 4,537,593 4,715,039 4,559,107 4,762,011
=========== =========== =========== ===========
Basic earnings per common share $ 0.47 $ 0.47 $ 1.41 $ 1.32
=========== ========== =========== ===========
Diluted
Net income $ 2,115 $ 2,212 $ 6,428 $ 6,277
Weighted average shares outstanding
for basic earnings per common share 4,537,593 4,715,039 4,559,107 4,762,011
Add: Dilutive effects of assumed
exercise of stock options 11,763 5,702 10,902 4,627
----------- ----------- ----------- -----------
Average shares and dilutive
Potential common shares 4,549,356 4,720,741 4,570,009 4,766,638
=========== =========== =========== ===========
Diluted earnings per common share $ 0.47 $ 0.47 $ 1.41 $ 1.32
=========== ========== =========== ===========
Stock options for 50,715 shares of common stock and 54,705 shares of common
stock were not considered in computing diluted earnings per common share for the
three and nine months ended September 30, 2002 and 2001 respectively because
they were antidilutive.
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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 September 30, 2002, as
compared to December 31, 2001 and the results of operations for the three and
nine months ended September 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 September
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
approximately $188 million. The Company continues to keep a balance between
short and long-term investment securities that will provide adequate liquidity
and maximize earnings. Based on the Company's capital position, profitability
and reputation, the available liquidity sources are considered adequate to meet
the current and projected needs of the Company.
CAPITAL
The Company's capital adequacy is a primary concern in our industry, and is
measured by several key ratios. A long-standing measure of capital adequacy is
the percentage of shareholders' equity to total assets. At September 30, 2002,
the Company's equity-to-asset ratio adjusted by the impact of accumulated other
comprehensive income was 10.3% 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
16.3% at September 30, 2002, and 15.4% at December 31, 2001. This compares to a
required minimum of 10% to be considered well capitalized.
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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 5% to be considered
well capitalized. The leverage ratio is calculated as equity capital less
certain intangible assets divided by total assets less the same intangible
assets. At September 30, 2002, and December 31, 2001, the ratios were 10.2% 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 equity 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 September 30, 2002 that
would cause the Company's capital category to change.
FINANCIAL CONDITION
The total assets of the Company decreased by $1.9 million or .3% from December
31, 2001 to September 30, 2002. This decrease is primarily due to a $5.0 million
reduction in loan balances due to selling $24.9 million of mortgage loans into
the secondary market. Proceeds from these loan sales were used to fund a $4.4
million increase in investments and federal funds sold as well as a $7.9 million
reduction in short-term borrowings, and a $3.5 million reduction on Federal Home
Loan Bank (FHLB) advances and other borrowed funds. Total deposits increased by
$5.4 million, with increases primarily in savings accounts and certificates of
deposits.
Loans, excluding loans held-for-sale, at September 30, 2002 were $378.0 million,
which is a decline of $9.5 million from December 31, 2001. This decline is
primarily related to the sale of $24.9 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 $15.0 million in commercial
loans, and growth of $1.7 million in home equity loans. Despite the weak
economic conditions the Company experienced steady demand in commercial loans
during the first six months of 2002, however growth did slow during the third
quarter due to the sustained weakness in the economy. Management anticipates
that future 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 September 30, 2002, the Company had $16.4 million of one-to-four family
residential mortgage loans classified as held-for-sale, compared to $11.9
million at December 31, 2001. Through September 30, 2002 the Company sold $24.9
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 or flat through the second
quarter of 2003, with expectations that rates will increase slightly during the
second half 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 $7.7 million through the third
quarter of 2002, while federal funds sold declined by $3.9 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 $5.4 million for the period ended September 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 $7.9 million for the nine
months ended September 30, 2002. This decrease is primarily related to the soft
economic conditions as commercial customers are utilizing these funds to cash
flow current operations.
FHLB advances and other borrowed funds decreased by $3.5 million during the
first nine 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 $6,428,000 for the first nine months of 2002 compared to
$6,277,000 for the same period in 2001. Earnings per common share for the nine
months ended September 30, 2002 and 2001 were $1.41 and $1.32 per share
respectively. Dividends were $.54 per share for the first nine months of 2002
and $.49 per share for the same period in 2001.
For the three months ended September 30, 2002, net income was $2,115,000, or
$.47 per share, with dividends paid of $.18 per share. This compares to net
income of $2,212,000, or $.47 per share, with dividends paid of $.16 per share
for the three months ended September 30, 2001.
Total interest income for the nine months ended September 30, 2002 was $27.4
million, which decreased $3.5 million, or 11.3%, from the $30.9 million earned
in the comparable period last year. Although the Company has increased earning
assets by $8.6 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 September 30, 2002 decreased by $1.2 million from the
comparable three month period one year ago, and is also due to the same rate
reductions.
Total earning assets were $567.8 million and $559.2 million at September 30,
2002 and 2001. The increase in earning assets is due to growth in securities and
federal funds sold of $35.5 million, offset by a reduction in total loans of
$26.9 million. The weighted average interest earned on these assets has
decreased from 7.69% at September 30, 2001 to 6.41% at September 30, 2002.
Total interest bearing liabilities at September 30, 2002 and 2001 were $463.2
and $455.1 million respectively. The weighted average interest rate paid for
these liabilities has decreased from 4.05% at September 30, 2001 to 2.69% at
September 30, 2002.
The net effect of the changes in interest earning assets and interest bearing
liabilities, combined with the repricing that has occurred since September 30,
2001, caused an increase in net interest income of $249,000, or 1.4%, for the
nine months ended September 30, 2002.
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12.
WAYNE BANCORP, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS
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The provision for loan losses was $450,000 for the nine-month period ending
September 30, 2002 compared to $207,000 for the same period in 2001, while the
ratio of the allowance for loan losses to total loans was 1.54% and 1.29%
respectively. The increase in the provision is due to a corresponding increase
in actual charge-offs. For the nine months ended September 30, 2002, the Company
recorded charge-offs of $404,000 compared to $267,000 for the same period last
year, which is an increase of $137,000, or 51.3%. 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 September 30, 2002 was $150,000, compared to $69,000 for the same three
month period in 2001. 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. Based on softening loan
demand and a stable level of non-performing loans, Management expects that the
provision during the fourth quarter of 2002 will be less than that in the third
quarter.
Total other expenses increased by $263,000 for the nine months ended September
30, 2002 compared to the same period in 2001. Salaries and employee benefits
increased by $85,000, or 1.3%, from $6,775,000 at September 30, 2001 to
$6,860,000 at September 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 expenses
related to retirement benefits offset by a reduction in employee health
insurance due to a decrease in related claims. The salary component increased by
$201,000 and expenses for retirement benefits increased by $119,000, while
health insurance decreased by $253,000. Occupancy and equipment expense
decreased $21,000, or 1.4%, from $1,542,000 at September 30, 2001 to $1,521,000
at September 30, 2002. Other non-interest expenses increased $199,000, or 5.5%,
from $3,609,000 at September 30, 2001 to $3,808,000 at September 30, 2002.
Increases in this area were noted in, franchise tax, Trust department expenses,
service charges, telephone, advertising, automated teller machine (ATM) expense,
and computer expense. These increases were offset by decreases in director's
fees, insurance, stationary and supplies, donations and losses on deposits.
Total other expenses for the three month period ended September 30, 2002,
decreased by $2,000 from $4,070,000 at September 30, 2001 to $4,068,000 at
September 30, 2002. Salaries and employee benefits decreased by $39,000, or
1.7%, from $2,315,000 at September 30, 2001 to $2,276,000 at September 30, 2002.
This decrease during the three month period is primarily due to a reduction in
health insurance of $137,000 offset by an increase in salaries and retirement
benefits of $65,000 and $32,000 respectively. Occupancy and equipment expense
decreased by $24,000, or 4.5%, from $535,000 at September 30, 2001 to $511,000
at September 30, 2002. This decrease is primarily due to a decrease in expenses
related to building and equipment maintenance and repair compared to the same
period one year ago. Other non-interest expenses increased $60,000, or 4.9%,
from $1,220,000 at September 30, 2001 to $1,280,000 at September 30, 2002. For
the three month period ended September 31, 2002, increases were noted in
telephone expense, service charges, advertising, education and computer expense,
with decreases in stationary and supplies and losses on deposits.
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13.
WAYNE BANCORP, INC
QUANTITATIVE AND QUALITATIVE MEASURES ABOUT MARKET RISK
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Item 3. Quantitative and qualitative disclosures about market risk.
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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 53% 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 and their expected maturity behavior
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. 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 maturing assets to maturing liabilities for the given time
horizons.
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14.
WAYNE BANCORP, INC
CONTROLS AND PROCEDURES
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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). Based on their evaluation, 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 Wayne Bancorp, Inc. in reports 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 Wayne Bancorp Inc.'s internal controls or in other
factors that could significantly affect its internal controls, including any
corrective actions with regard to significant deficiencies and material
weaknesses.
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15.
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
---------------------------------------------------
None
Item 5. Other Information
-----------------
None.
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
Exhibit 99.1 Certification of periodic financial reports Exhibit 99.2
Certification of periodic financial reports Exhibit 99.3
Certification of periodic financial reports Exhibit 99.4
Certification of periodic financial reports
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16.
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: November 12, 2002 \s\ David P. Boyle
----------------- ------------------
David P. Boyle
President and Chief Executive Officer
Date: November 12, 2002 \s\ John A. Lende
----------------- -----------------
John A. Lende
Secretary and Treasurer
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17.