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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 March 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from __________ to ____________.
Commission File Number 014612
------
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
----------------------------------------------------------
(Address of principal executive offices)
(330) 264-1222
(Registrant's telephone number, including area code)
Indicate by checkmark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or 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 checkmark whether the registrant is an accelerated filer (as defined
by Rule 12b-2 of the Act).
Yes [X] No [ ]
As of April 30, 2003, the latest practicable date, 4,749,018 shares of the
issuer's common shares, $1.00 stated value per share, were issued and
outstanding.
WAYNE BANCORP, INC
INDEX
FORM 10-Q
For the Quarter Ended March 31, 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........................... 11
Item 3. Quantitative and Qualitative Disclosures about
Market Risk................................................... 15
Item 4. Controls and procedures......................................... 16
PART II - OTHER INFORMATION.............................................. 16
SIGNATURES .............................................................. 17
WAYNE BANCORP, INC
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
- --------------------------------------------------------------------------------
Item 1. Financial Statements
March 31, December 31,
2003 2002
--------- ------------
(In thousands)
ASSETS
Cash and due from banks $ 26,141 $ 24,508
Federal funds sold 11,075 7,130
----------- -----------
Total cash and cash equivalents 37,216 31,638
Securities available-for-sale 178,008 184,908
Loans held-for-sale 25,259 24,761
Loans 365,413 369,794
Allowance for loans (6,040) (6,039)
----------- -----------
Net loans 359,373 363,755
Premises and equipment 11,330 11,288
Goodwill 748 748
Accrued interest receivable and other assets 7,323 6,489
----------- -----------
Total assets $ 619,257 $ 623,587
=========== ===========
LIABILITIES
Deposits
Interest bearing $ 449,263 $ 442,532
Non-interest bearing 70,772 79,001
----------- -----------
Total deposits 520,035 521,533
Short-term borrowings 25,818 29,573
Federal Home Loan Bank advances and other borrowed funds 1,393 1,397
ESOP loan 1,533 1,671
Other liabilities 3,595 2,989
----------- -----------
Total liabilities 552,374 557,163
SHAREHOLDERS' EQUITY
Common stock, stated value $1.00 4,917 4,917
Shares authorized - 12,000,000 in 2003 and 2002
Shares issued - 4,916,911 in 2003 and 4,916,911 in 2002
Shares outstanding - 4,754,768 in 2003 and 4,781,565 in 2002
Paid-in capital 13,187 13,174
Retained earnings 51,280 49,897
Unearned ESOP shares (1,334) (1,390)
Treasury stock, at cost (4,440) (3,738)
Accumulated other comprehensive income 3,273 3,564
----------- -----------
Total shareholders' equity 66,883 66,424
----------- -----------
Total liabilities and shareholders' equity $ 619,257 $ 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
March 31,
2003 2002
---- ----
(In thousands)
INTEREST INCOME
Interest and fees on loans $ 6,606 $ 7,314
Taxable securities 1,418 1,586
Non-taxable securities 488 478
Other interest income 3 39
----------- -----------
Total interest income 8,515 9,417
----------- -----------
INTEREST EXPENSE
Interest on deposits 2,338 2,995
Interest on federal funds purchased and
repurchase agreements 52 95
Interest on Federal Home Loan Bank
advances and other borrowed funds 52 118
----------- -----------
Total interest expense 2,442 3,208
----------- -----------
NET INTEREST INCOME 6,073 6,209
Provision for loan losses 40 150
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 6,033 6,059
Other income
Service charges and fees on deposit accounts 515 500
Income from fiduciary activities 375 360
Net gain on sale of loans 245 105
Net loss on sale of securities 0 (1)
Other non-interest income 194 266
----------- -----------
Total other income 1,329 1,230
----------- -----------
Other expenses
Salaries and employee benefits 2,377 2,312
Occupancy and equipment 577 502
Other operating expenses 1,299 1,227
----------- -----------
Total other expenses 4,253 4,041
----------- -----------
INCOME BEFORE INCOME TAX EXPENSE 3,109 3,248
Income tax expense 881 956
----------- -----------
NET INCOME 2,228 2,292
Other Comprehensive Income, (loss) (291) (765)
----------- -----------
COMPREHENSIVE INCOME $ 1,937 $ 1,527
=========== ===========
Earnings per common share - basic $ 0.47 $ 0.48
=========== ===========
Earnings per common share - diluted $ 0.47 $ 0.48
=========== ===========
Dividends per share $ 0.18 $ 0.17
=========== ===========
- --------------------------------------------------------------------------------
See notes to condensed consolidated financial statements.
4.
WAYNE BANCORP, INC
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
- --------------------------------------------------------------------------------
Three Months Ended
March 31,
2003 2002
---- ----
(In thousands)
Net cash from operating activities $ 2,358 $ 9,203
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available-for-sale
Purchases (10,777) (31,076)
Proceeds from maturities and repayments 16,914 19,278
Proceeds from sales 533
Net change in loans 4,342 8,706
Purchase of premises and equipment (317) (683)
Proceeds from sale of premises 67
-------- --------
Net cash from investing activities 10,162 (3,175)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits (1,498) (3,730)
Net change in short-term borrowings (3,755) (4,924)
Repayment of Federal Home Loan Bank advances (21)
Repayment of ESOP loan and other borrowed funds (142) (133)
Cash dividends paid (744) (721)
Treasury stock purchased (803) (226)
-------- --------
Net cash from financing activities (6,942) (9,755)
-------- --------
Net change in cash and cash equivalents 5,578 (3,727)
Cash and cash equivalents at beginning of period 31,638 32,713
-------- --------
Cash and cash equivalents at end of period $ 37,216 $ 28,986
======== ========
- --------------------------------------------------------------------------------
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 March 31, 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 internal financial information is
primarily reported and aggregated solely in the line of the banking business.
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.
On December 9, 2002, Wayne Bancorp, Inc. signed a definitive agreement to merge
with Banc Services, Corp., located in Orrville, Ohio. Upon closing of this
transaction, The Savings Bank and Trust Company, a wholly-owned subsidiary of
Banc Services Corp., will become a wholly-owned subsidiary of the Company. Under
the terms of the agreement, subject to certain conditions being met, Banc
Services Corp. shareholders will receive 1.391 shares, as adjusted for the 5%
stock dividend, of stock in Wayne Bancorp, Inc. for each share of Banc Services
Corp. owned plus $14.40 in cash. In connection with the merger, Management
expects to issue up to 1.33 million shares, with the cash portion equaling
approximately $13.8 million. The transaction is subject to shareholder and
regulatory approval and is expected to close in the second quarter of 2003.
- --------------------------------------------------------------------------------
6.
WAYNE BANCORP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
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
adoption of this standard did not have a material affect on the Company's
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
21, 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.
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.
March 31,
(dollars in thousands except per share data) 2003 2002
- -------------------------------------------- ---- ----
Net income as reported $ 2,228 $ 2,292
Deduct: Stock based compensation expense
determined under fair value based method (8) (8)
------- -------
Pro forma net income $ 2,220 $ 2,284
Basic earnings per common share as reported 0.47 0.48
Pro forma basis earnings per common share 0.47 0.48
Diluted earnings per common share as reported 0.47 0.48
Proforma diluted earnings per common share 0.47 0.48
- --------------------------------------------------------------------------------
7.
WAYNE BANCORP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
During the three months ended March 31, 2003 there were no sales of securities.
During the period ended March 31, 2002 proceeds from the sale of securities were
$533,000, with gross losses of $1,000 included in earnings.
Securities available-for-sale were as follows:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
----- ---------- -----------
(In thousands)
March 31, 2003
U.S. Treasury $ 5,185 $ 169 $ 0
Federal agency obligations 62,678 1,265 (16)
Mortgage-backed securities 22,937 669 0
Obligations of state and
political subdivisions 63,039 2,121 (16)
Corporate obligations 20,553 629 0
Other securities 3,616 164 (23)
--------- -------- --------
Total $ 178,008 $ 5,017 $ (55)
========= ======== ========
December 31, 2002
U.S. Treasury $ 7,243 $ 227 $ 0
Federal agency obligations 61,843 1,515 0
Mortgage-backed securities 24,170 783 0
Obligations of state and
political subdivisions 63,505 2,188 0
Corporate obligations 24,749 720 0
Other securities 3,398 72 (101)
--------- -------- --------
Total $ 184,908 $ 5,505 $ (101)
========= ======== ========
- --------------------------------------------------------------------------------
8.
WAYNE BANCORP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 3 - LOANS
Loans are comprised of the following:
March 31, December 31,
2003 2002
---- ----
(In thousands)
Commercial $ 222,145 $ 219,830
Real estate - residential mortgage 69,500 75,686
Real estate - commercial mortgage 21,302 20,081
Real estate - construction 927 2,213
Consumer 32,301 34,301
Home equity 18,984 17,397
Lease financing 681 787
Other loans 104 115
---------- ----------
Gross loans 365,944 370,410
Less: Net deferred loan fees (478) (547)
Unearned income on leases (53) (69)
---------- ----------
Total loans $ 365,413 $ 369,794
========== ==========
Impaired loans were as follows
March 31, 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 1,226 1,502
-------- --------
Total $ 1,226 $ 1,502
======== ========
Amount of the allowance for loan losses allocated $ 510 $ 510
======== ========
Non-performing loans were as follows:
Loans past due over 90 days and accruing interest $ 977 $ 334
Non-accrual loans 766 1,042
Nonperforming loans include both smaller balance homogeneous loans that are
collectively evaluated for impairment and individually classified impaired
loans.
- --------------------------------------------------------------------------------
9.
WAYNE BANCORP, INC
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 4 - EARNINGS PER COMMON SHARE
The factors used in the earnings per common share computations were as follows:
March 31,
----------------------------
2003 2002
---- ----
BASIC
Net income $ 2,228 $ 2,292
Weighted average common shares outstanding 4,768,365 4,878,482
Less: average unallocated ESOP shares (70,616) (78,316)
------------- ------------
Average shares 4,697,759 4,800,166
============ ============
Basic earnings per common share $ .47 $ .48
============ ============
DILUTED
Net income $ 2,228 $ 2,292
Weighted average common shares outstanding
for basic earnings per common share 4,697,759 4,800,166
Add: diluted effects of assumed exercises
of stock options 23,651 7,631
------------ ------------
Average shares and dilutive potential common shares 4,721,410 4,807,797
============ ============
Diluted earnings per common share $ .47 $ .48
============ ============
Stock options for 33,516, shares of common stock and 53,251 shares of
common stock were not considered in computing diluted earnings per common share
for 2003 and 2002 because they were antidilutive.
- --------------------------------------------------------------------------------
10.
WAYNE BANCORP, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis
INTRODUCTION
The following discusses the financial condition as of March 31, 2003, as
compared to December 31, 2002 and the results of operations for the three months
ended March 31, 2003 and the same period 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 March 31,
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 $216
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 March 31, 2003, the
Company's equity-to-asset ratio adjusted by the impact of FAS#115 was 10.3%
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 16.7% at March 31, 2003, and 16.5%
at December 31, 2002.
- --------------------------------------------------------------------------------
11.
WAYNE BANCORP, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The regulators require a minimum leverage capital ratio of 3%. They will expect
most banks to maintain leverage ratios at least in the 4-5% range. The leverage
ratio is calculated as equity capital less certain intangible assets divided by
total assets less those same intangible assets. At March 31, 2003, and December
31, 2002, the ratios were 10.3% and 10.2% respectively.
The Company's deposit insurance premiums which are paid to the Federal Deposit
Insurance Corporation 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 March 31, 2003 that would
cause the Company's capital category to change.
FINANCIAL CONDITION
The total assets of the Company decreased by $4.3 million or .7% from December
31, 2002 to March 31, 2003. This decrease is due to a $4.0 million reduction in
federal funds sold and securities to fund deposit withdrawals of $1.5 million
and a $3.8 million decline in short-term borrowings. Total loans declined by
$3.9 million as a result of selling $14.2 million of residential mortgage loans
into the secondary during the first quarter of this year. Despite the sale of
these mortgage loans, loans classified as held for sale increased by $498
thousand due to the strong volume of loans being refinanced as a result of the
low interest rate environment. As a result of these changes, total earning
assets declined by $6.9 million.
Loans, excluding loans held-for-sale, at March 31, 2003 were $365.4 million,
which is a decline of $4.4 million from $369.8 at December 31, 2002. This
decline is primarily related to the sale of $14.2 million of mortgage loans into
the secondary market and a decline of $1.8 million 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 $2.3 million in
commercial loans, and growth of $1.6 million in home equity loans. Despite the
weak economic conditions the Company did experience growth in commercial loans
during the first three months of 2003, however management expects this growth to
slow 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 March 31, 2003, the Company had $25.3 million of one-to-four family
residential mortgage loans classified as held-for-sale, compared to $24.8
million at December 31, 2002. Through March 31, 2003 the Company sold $14.2
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 or flat through the third
quarter of 2003, with expectations that rates may increase during the fourth
quarter of 2003 or early 2004. 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.
- --------------------------------------------------------------------------------
12.
WAYNE BANCORP, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
Total securities available-for-sale and federal funds sold decreased by $3.0
million through the first quarter of 2003. This decrease was primarily due to
scheduled maturities and calls within the securities portfolio, with the
proceeds used to fund withdrawals of deposits and short-term borrowings.
Total deposits decreased by $1.5 million for the period ended March 31, 2003.
This decline is primarily in non-interest bearing balances and is normal for the
Company, as funds placed on deposit at year-end are withdrawn for business or
other purposes during the first quarter of the year. Deposit growth is an
ongoing objective of management to facilitate funding for loan demand and asset
growth. As consumers have become more "mobile" through direct deposit, online
banking, and other means growing deposits with traditional accounts and services
has become more difficult. Further, management realizes that competition for
deposits includes mutual funds and the equity markets. To facilitate growth in
deposits, management monitors rates and products within the Company's market
area to ensure its products, fees, and rates are competitive. Further, to
enhance customer service and convenience, the Company offers several delivery
channels including the traditional branch and ATM network, online and telephone
banking and debit cards.
Short-term borrowings, which consists of securities sold under agreements to
repurchase, decreased $3.8 million for the three months ended March 31, 2003.
This decrease is primarily related to the soft economic conditions as commercial
customers are utilizing these deposits to cash flow current operations.
Federal Home Loan Bank (FHLB) advances and other borrowed funds decreased by
$4,000 during the first quarter of 2003, due to principal repayments. 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 $2,228,000 for the first three months of 2003 compared to
$2,292,000 for the same period in 2002. Earnings per common share for the three
months ended March 31, 2003 and 2002 was $.48 per share. Dividends were $.18 per
share for the first three months of 2003 and $.17 per share for the first three
months in 2002.
Total interest income for the first three months decreased $902,000 or 9.6%
compared to the prior year. This decrease is a continuation of what the Company
experienced during 2002, and is a result of the prolonged low interest rate
environment as the yields earned on assets continue to receive downward rate
pressure. Despite increasing earning assets by $11.3 million the reduction in
interest income is primarily driven by a .69% reduction in average yield. This
reduction in yield was also impacted as a result of the Federal Open Market
Committee lowering the benchmark federal funds rate by 50 basis points during
the fourth quarter of 2002 which impacted the rates charged on various loan
types, primarily commercial and industrial loans.
Total interest earning assets were $579.8 million and $568.5 million at March
31, 2003, and 2002. The increase in earning assets is due to growth in
securities and federal funds sold of $5.3 million and loans of $5.9 million.
Although the Company sold $29.6 million of mortgage loans into the secondary
market since the same period one year ago, net loans experienced positive
growth. The weighted average interest rate earned on earning assets has
decreased from 6.60% at March 31, 2002 to 5.91% at March 31, 2003.
Total interest bearing liabilities at March 31, 2003 and 2002 were $478.0 and
$466.8 million respectively. The weighted average interest rate paid for these
liabilities has decreased from 2.75% at March 31, 2002 to 2.09% at March 31,
2003.
- --------------------------------------------------------------------------------
13.
WAYNE BANCORP, INC
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
The net effect of the changes in interest earning assets and interest bearing
liabilities, combined with the repricing that has occurred since March 31, 2002,
caused a decrease in net interest income of $136,000 or 2.2%, for the three
months ended March 31, 2003.
The provision for loan losses was $40,000 and $150,000 for the three-month
periods ending March 31, 2003 and 2002, while the ratio of the allowance for
loan losses to total loans was 1.55% and 1.53%. The decrease in the provision is
due to the decrease in total loan balances and a decrease in actual charge-offs.
The slight increase in the allowance ratio is primarily due to the growth in the
allowance over the prior period exceeding loan growth. Given the make-up of the
loan portfolio, which considers past due loans, charge-offs 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 income increased by $99,000 for the three months ended March 31,
2003, compared to the same period in 2002. Service charges and fees on deposits
increased $15,000, or 3.0%, from $500,000 at March 31, 2002, to $515,000 at
March 31, 2003. Net gains on the sale of loans increased $140,000, or 133.3%,
from $105,000 at March 31, 2002 to $245,000 at March 31, 2003. Although total
loans sold in the prior period were $21.9 million compared to $14.2 million
during 2003, the Company benefited from pricing that was more favorable. Other
income, which consists of discount brokerage fees, mortgage loan servicing fees,
subsidiary income, miscellaneous income and gains on sale of premises decreased
by $71,000, or 26.8%, for the three months ended March 31, 2003 compared to the
same period in 2002. The primary reason for this decline is due to the sale of a
branch facility that generated a gain of $49,000 during 2002, as well as a
$32,000 reduction in mortgage servicing assets due to recording a $38,000
impairment during 2003. These decreases were offset by a $19,000 increase in
income from Chippewa Valley Title Agency, Inc. a wholly-owned subsidiary of
WCNB.
Total other expenses increased by $212,000, or 5.3%, for the three months ended
March 31, 2003 compared to the same period in 2002. Salaries and employee
benefits increased by $65,000, or 2.8%, from $2,312,000 at March 31, 2002 to
$2,377,000 at March 31, 2003. This increase is primarily due 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
certain employee health insurance. Occupancy and equipment expenses increased
$75,000, or 14.9%, from $502,000 at March 31, 2002 to $577,000 at March 31,
2003. This increase is primarily related to an increase in expenses related to
building and equipment depreciation due to an increase in fixed assets, as well
as increases in both building maintenance and repairs and utilities due to an
extended winter compared to the prior period. Other non-interest expenses
increased $72,000, or 5.9%, from $1,227,000 at March 31, 2002 to $1,299,000 at
March 31, 2003. Areas that experienced an increase over the prior period
include, director's fees, Investment and Trust Services, bank related service
charges, insurance, postage, advertising, donations, legal and professional
fees, and computer expense. Several reductions were also noted in this area,
including franchise tax, stationary and supplies and automated teller machine
(ATM) expense.
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14.
WAYNE BANCORP, INC
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, based on certain prepayment and account
decay assumptions that management believes are reasonable. The Company had no
derivative financial instruments or trading portfolio as of December 31, 2002.
Management believes that there have been no material changes to these
assumptions since December 31, 2002. From a risk management perspective, the
Company believes that repricing dates for adjustable-rate instruments, as
opposed to expected maturity dates, may be a more relevant measure in analyzing
the value of such instruments. The Company's borrowings were tabulated by
contractual maturity dates and without regard to any conversion or repricing
dates.
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15.
WAYNE BANCORP, INC
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.
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
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
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16.
WAYNE BANCORP, INC
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: May 14, 2003 \s\ David P. Boyle
--------------------
David P. Boyle, CPA
President and CEO
Date: May 14, 2003 \s\ John A. Lende
-----------------
John A. Lende, CPA
Treasurer
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17.
WAYNE BANCORP, INC
Exhibits
I, David P. Boyle, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Wayne Bancorp, Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
\s\ David P. Boyle
- ------------------
David P. Boyle
President and Chief Executive Officer
May 14, 2003
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18.
WAYNE BANCORP, INC
I, John A. Lende, certify that:
1) I have reviewed this quarterly report on Form 10-Q of Wayne Bancorp, Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a. designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a. all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
\s\ John A. Lende
- -----------------
John A. Lende
Secretary and Treasurer
May 14, 2003
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19.