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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, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE EXCHANGE ACT
For the transition period from to .
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Commission File Number 014612
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WAYNE BANCORP, INC
------------------
(Exact name of registrant as specified in its charter)
Ohio 34-1516142
(State or other jurisdiction of (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 Exchange Act).
Yes {X] No [ ]
As of April 30, 2004, the latest practicable date, 6,311,550 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, 2004
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 ........... 13
Item 3. Quantitative and Qualitative Disclosures about
Market Risk ................................... 18
Item 4. Controls and procedures ............................... 20
PART II - OTHER INFORMATION ................................... 20
SIGNATURES .................................................... 22
WAYNE BANCORP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
Item 1. Financial Statements
March 31, December 31,
2004 2003
---- ----
(In thousands)
ASSETS
Cash and due from banks $ 29,214 $ 32,393
Federal funds sold 21,920 3,785
--------- ---------
Total cash and cash equivalents 51,134 36,178
Interest-bearing deposits in other financial institutions 100 100
Securities available for sale 254,646 272,358
Loans held for sale 6,954 21,482
Loans 453,657 449,291
Allowance for loans (7,203) (7,172)
--------- ---------
Net loans 446,454 442,119
Premises and equipment 15,865 16,682
Goodwill 24,695 24,695
Other intangible assets 4,392 4,540
Accrued interest receivable and other assets 9,430 9,129
--------- ---------
Total assets $ 813,670 $ 827,283
--------- ---------
LIABILITIES
Deposits
Interest bearing $ 557,206 $ 563,457
Non-interest bearing 106,866 112,256
--------- ---------
Total deposits 664,072 675,713
Short-term borrowings 34,441 39,451
Other borrowed funds 577 81
ESOP loan 1,390 1,536
Subordinated debentures 7,217 7,217
Other liabilities 5,229 4,182
--------- ---------
Total liabilities 712,926 728,180
SHAREHOLDERS' EQUITY
Common stock, stated value $1.00 6,331 6,322
Shares authorized - 12,000,000 in 2004 and 2003
Shares issued - 6,331,328 in 2004 and 6,321,543 in 2003
Shares outstanding - 6,310,955 in 2004
and 6,321,543 in 2003
Additional paid-in capital 46,933 46,715
Retained earnings 47,167 45,974
Unearned ESOP shares - 61,515 in 2004 and 63,897 in 2003 (1,115) (1,165)
Treasury stock, at cost - 20,373 in 2004 and 0 in 2003 (522)
Shares held in trust for Deferred Share Plan - 30,151 in 2004
and 22,775 in 2003 (868) (806)
Accumulated other comprehensive income 2,818 2,063
--------- ---------
Total shareholders' equity 100,744 99,103
--------- ---------
Total liabilities and shareholders' equity $ 813,670 $ 827,283
========= =========
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,
2004 2003
---- ----
(In thousands)
INTEREST INCOME
Interest and fees on loans $ 7,549 $ 6,606
Taxable securities 1,588 1,418
Non-taxable securities 479 488
Other interest income 19 3
------- -------
Total interest income 9,635 8,515
------- -------
INTEREST EXPENSE
Interest on deposits 2,018 2,338
Interest on federal funds purchased and
repurchase agreements 62 52
Interest on Federal Home Loan Bank
advances and other borrowed funds 29 52
Interest on subordinated debentures 66
------- -------
Total interest expense 2,175 2,442
------- -------
NET INTEREST INCOME 7,460 6,073
Provision for loan losses 120 40
------- -------
NET INTEREST INCOME AFTER PROVISION FOR
LOAN LOSSES 7,340 6,033
Other income
Service charges and fees on deposit accounts 726 515
Income from fiduciary activities 544 375
Net gain on sale of loans 440 245
Net gain on sale of securities 165
Other 114 194
------- -------
Total other income 1,989 1,329
------- -------
Other expenses
Salaries and employee benefits 3,266 2,377
Occupancy and equipment 970 577
Other operating expenses 1,814 1,299
------- -------
Total other expenses 6,050 4,253
------- -------
INCOME BEFORE INCOME TAX EXPENSE 3,279 3,109
Income tax expense 951 881
------- -------
NET INCOME 2,328 2,228
Other Comprehensive Income, (loss) 755 (291)
------- -------
COMPREHENSIVE INCOME $ 3,083 $ 1,937
======= =======
Earnings per common share - basic $ 0.37 $ 0.42
======= =======
Earnings per common share - diluted $ 0.37 $ 0.42
======= =======
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,
2004 2003
-------- --------
(In thousands)
Net cash from operating activities $ 18,415 $ 2,358
CASH FLOWS FROM INVESTING ACTIVITIES
Securities available for sale
Purchases (26,902) (10,777)
Proceeds from maturities and repayments 19,451 16,914
Proceeds from sales 25,698
Net change in loans (4,147) 4,342
Net change in premises and equipment 335 (317)
-------- --------
Net cash from investing activities 14,435 (3,175)
Cash flows from financing activities
Net change in deposits (11,641) (1,498)
Net change in short-term borrowings (5,010) (3,755)
Proceeds from ESOP and other borrowed funds 500
Repayment of ESOP loan and other borrowed funds (150) (142)
Shares issued for stock options and deferred share plan 9
Net change in deferred share plan (62)
Cash dividends paid (1,018) (744)
Shares issued from treasury for dividend reinvestment plan 118
Treasury stock purchased (640) (803)
-------- --------
Net cash from financing activities (17,894) (6,942)
-------- --------
Net change in cash and cash equivalents 14,956 5,578
Cash and cash equivalents at beginning of period 36,178 31,638
-------- --------
Cash and cash equivalents at end of period $ 51,134 $ 37,216
======== ========
Supplemental disclosures of cash flow information
Cash basis payments for interest expense $ 2,206 $ 2,585
Supplemental non-cash disclosure
Transfer of loans from held for sale to portfolio $ 4,777 $
Transfer of fixed assets to held for sale 879
See notes to condensed consolidated financial statements.
5.
WAYNE BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
These interim financial statements are prepared without audit and reflect all
adjustments which, in the opinion of Management, are necessary to present fairly
the financial position of Wayne Bancorp, Inc. (the "Company") at March 31, 2004,
and its results of operations and cash flows for the periods presented. All such
adjustments are normal and recurring in nature.
The accompanying 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, 2003, included in its 2003 annual report. Refer to the
accounting policies of the Company described in the notes to the financial
statements contained in the Company's 2003 annual report. The Company has
consistently followed these policies in preparing this Form 10-Q. The selection
and application of these accounting policies involve judgments, estimates and
uncertainties that are susceptible to change.
The consolidated financial statements include the accounts of the Company, and
its wholly-owned subsidiaries Wayne County National Bank (Wayne), Savings Bank &
Trust (SBT), Access Financial Corp. (AFC) and MidOhio Data, Inc. (MID). The
financial statements of Wayne include the accounts of its wholly-owned
subsidiary, Chippewa Valley Title Agency, Inc. All significant intercompany
accounts and transactions have been eliminated in the consolidation.
To prepare financial statements in conformity with accounting principles
generally accepted in the United States of America, management makes estimates
and assumptions based on available information. These estimates and assumptions
affect the amounts reported in the financial statements and the disclosures
provided, and future results could differ. The allowance for loan losses, fair
values of financial instruments and status of contingencies are particularly
subject to change.
Presented below are discussions of those accounting policies that management
believes are the most important (Critical Accounting Policies) to the portrayal
and understanding of the Company's financial condition and results of
operations. These Critical Accounting Policies require management's most
difficult, subjective and complex judgments about matters that are inherently
uncertain. In the event that different assumptions or conditions were to
prevail, and depending upon the severity of such changes, the possibility of
materially different financial condition or results of operations is a
reasonable likelihood.
Management periodically reviews the loan portfolio in order to establish an
allowance for loan losses (Allowance) that are probable as of the respective
reporting date. Additions to the Allowance are charged against earnings for the
period as a provision for loan losses (Provision). Actual loan losses are
charged against (reduce) the Allowance when management believes that the
collection of principal will not occur. Unpaid interest for the current year for
loans that are placed on Non-Accrual Status is reversed against the interest
income previously recognized. Subsequent recoveries of amounts previously
charged to the Allowance, if any, are credited to (increase) the Allowance.
The Allowance is regularly reviewed by management to determine whether or not
the amount is considered adequate to absorb probable incurred losses. If not, an
additional Provision is made to increase the Allowance. This evaluation includes
specific loss estimates on certain individually reviewed loans, statistical loss
estimates for loan groups or pools that are based on historical loss experience
and general loss estimates that are based upon the size, quality, and
concentration characteristics of the various loan portfolios, adverse situations
that may affect a borrower's ability to repay, and current economic and
6.
WAYNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
industry conditions, among other things. The Allowance is also subject to
periodic examination by regulators whose review includes a determination as to
its adequacy to absorb probable incurred losses.
Those judgments and assumptions that are most critical to the application of
this accounting policy are the initial and on-going credit-worthiness of the
borrower, the amount and timing of future cash flows of the borrower that are
available for repayment of the loan, the sufficiency of underlying collateral,
the enforceability of third-party guarantees, the frequency and subjectivity of
loan reviews and risk gradings, emerging or changing trends that might not be
fully captured in the historical loss experience, and charges against the
Allowance for actual losses that are greater than previously estimated. These
judgments and assumptions are dependent upon or can be influenced by a variety
of factors including the breadth and depth of experience of lending officers,
credit administration and the corporate loan review staff that periodically
review the status of the loan, changing economic and industry conditions,
changes in the financial condition of the borrower and changes in the value and
availability of the underlying collateral and guarantees.
While the Company strives to reflect all known risk factors in its evaluations,
judgment errors may occur. If different assumptions or conditions were to
prevail, the amount and timing of interest income and loan losses could be
materially different. These factors are most pronounced during economic
downturns. Since, as described above, so many factors can affect the amount and
timing of losses on loans it is difficult to predict, with any degree of
certainty, the affect on income if different conditions or assumptions were to
prevail. Nonetheless, if any combination of the above judgments or assumptions
were to adversely affect the adequacy of the Allowance by ten percent, an
additional Provision of approximately $720 thousand would be necessary.
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.
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.
7.
WAYNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Continued)
March 31,
(dollars in thousands except per share data) 2004 2003
- -------------------------------------------- ---- ----
Net income as reported $ 2,328 $ 2,228
Deduct: Stock based compensation expense
determined under fair value based method (17) (21)
--------- ---------
Pro forma net income $ 2,311 $ 2,207
Basic earnings per common share as reported $ 0.37 $ 0.42
Pro forma basis earnings per common share 0.37 0.42
Diluted earnings per common share as reported 0.37 0.42
Proforma diluted earnings per common share 0.37 0.42
8.
WAYNE BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 2 - SECURITIES
During the three months ended March 31, 2004 proceeds from the sale of
securities were $25.7 million, with gross gains of $184 thousand and gross
losses of $19 thousand included in earnings. During the period ended March 31,
2003 there were no sales of securities.
Securities available-for-sale were as follows:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
----- ----- ------
(In thousands)
March 31, 2004
U.S. Treasury $ 8,208 $ 91 $
Federal agency obligations 100,985 994
Mortgage-backed securities 54,062 516 (35)
Obligations of state and
political subdivisions 80,320 2,412 (17)
Corporate obligations 5,965 158
Other securities 5,106 219 (3)
-------- -------- --------
Total $254,646 $ 4,390 $ (55)
======== ======== ========
December 31, 2003
U.S. Treasury $ 10,222 $ 84 $
Federal agency obligations 113,159 891 (169)
Mortgage-backed securities 45,562 362 (180)
Obligations of state and
political subdivisions 84,376 2,122 (483)
Corporate obligations 13,838 262
Other securities 5,201 244 (7)
-------- -------- --------
Total $272,358 $ 3,965 $ (839)
======== ======== ========
9.
WAYNE BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 3 - LOANS
Loans are comprised of the following:
March 31, December 31,
2004 2003
---- ----
(In thousands)
Commercial $ 252,186 $ 254,110
Real estate - residential mortgage 72,817 72,250
Real estate - commercial mortgage 28,312 25,088
Real estate - construction 4,419 3,908
Consumer 63,077 62,349
Home equity 32,793 31,229
Lease financing and other 492 866
--------- ---------
Gross loans 454,096 449,800
Less: Net deferred loan fees (415) (482)
Unearned income on leases (24) (27)
--------- ---------
Total loans $ 453,657 $ 449,291
========= =========
Activity in the allowance for loan losses was as follows
March 31, March 31,
2004 2003
---- ----
Balance at beginning of year $ 7,172 $ 6,039
Loans charged off (265) (92)
Loan recoveries 176 53
Provision for loan losses 120 40
------- -------
Balance at end of period $ 7,203 $ 6,040
======= =======
Impaired loans were as follows
March 31, December 31,
2004 2003
---- ----
Period-end loans with no allocated allowance for loan losses $ 0 $ 0
Period-end loans with allocated allowance for loan losses 5,079 5,302
------ ------
Total $5,079 $5,302
====== ======
Amount of the allowance for loan losses allocated $ 994 $ 821
====== ======
Non-performing loans were as follows:
Loans past due over 90 days and accruing interest $1,938 $1,063
Non-accrual loans 1,217 1,233
10.
WAYNE BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Nonperforming loans include both smaller balance homogeneous loans that are
collectively evaluated for impairment and individually classified impaired
loans. Those loans that are past due 90 days or more and still accruing interest
are well secured and in the process of collection.
NOTE 4 - EARNINGS PER COMMON SHARE
The factors used in the earnings per common share computations were as follows:
March 31,
2004 2003
---- ----
BASIC
Net income $ 2,328,000 $ 2,228,000
Weighted average common shares outstanding 6,314,037 5,294,316
Less: average unallocated ESOP shares (63,872) (74,045)
----------- -----------
Average shares 6,250,165 5,220,272
=========== ===========
Basic earnings per common share $ .37 $ .42
=========== ===========
DILUTED
Net income $ 2,328,000 $ 2,228,000
Weighted average common shares outstanding
for basic earnings per common share 6,250,165 5,220,272
Add: diluted effects of assumed exercises
of stock options 23,272 24,834
----------- -----------
Average shares and dilutive potential common shares 6,273,438 5,245,106
=========== ===========
Diluted earnings per common share $ .37 $ .42
=========== ===========
Stock options for 94,602, shares of common stock and 33,516 shares of common
stock were not considered in computing diluted earnings per common share for
2004 and 2003 because they were antidilutive.
NOTE 5 - SUBORDINATED DEBENTURES
Subordinated debentures consists of junior mandatorily redeemable capital
securities owed to a nonconsolidated subsidiary trust, with a par and fair value
of $7.0 million at a floating rate of 5.50%. These securities were issued
through a special purpose entity as part of a pooled offering. The Company may
redeem them, in whole but not in part, any time prior to 2007 at a price of
107.50% of face value. After 2007, the securities may be redeemed at face. These
securities are treated as Tier 1 capital for regulatory purposes. These
securities were assumed in connection with the acquisition of Banc Services
Corp. (BSC)
Under new accounting guidance, FASB Interpretation No. 46, as revised in
December 2003, the trust is not consolidated with the Company. Accordingly, the
Company does not report the securities issued by the trust as liabilities, and
instead reports as liabilities the subordinated debentures issued by the Company
and held by the trust, as these are no longer eliminated in consolidation.
Accordingly, these balances are reported as "subordinated debentures" and
continue to be presented in liabilities on the balance sheet. The
11.
WAYNE BANCORP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
deconsolidation of the net assets and results of operations of the trusts had no
material impact on the Company's financial statements since the Company
continues to be obligated to repay the debentures held by the trusts and
guarantees repayment of the capital securities issued by the trust. The
consolidated debt obligation related to the trusts increased from $7.0 million
to $7.2 million upon deconsolidation, with the difference representing the
Company's common equity ownership in the trusts.
12.
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, 2004, as
compared to December 31, 2003 and the results of operations for the three months
ended March 31, 2004 and the same period in 2003. 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,
2004, the amount of cash and due from banks, federal funds sold, securities and
loans with scheduled maturities and or repricing within the next three months
was $282 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, 2004, the
Company's equity-to-asset ratio was 12.4% compared to 12.0% at December 31,
2003. 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 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
was 15.7% at March 31, 2004, and 15.2% at December 31, 2003.
13.
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, 2004, and December
31, 2003, the ratios were 9.6% and 9.2% 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%.
Management is not aware of any matters subsequent to March 31, 2004 that would
cause the Company's capital category to change.
FINANCIAL CONDITION
The total assets of the Company decreased by $13.6 million or 1.7% from December
31, 2003 to March 31, 2004. This decrease is due to a $10.2 million decline in
total loan balances driven by the sale of $13.9 million of mortgage loans into
the secondary market during the first quarter, a $3.2 million decrease in cash
and due from banks offset by a $423 thousand increase in securities and federal
funds sold. Total deposits of the Company experienced a decline of $11.6 million
during the first quarter of the year, while short-term borrowings declined by
$5.0 million.
Loans, excluding loans held for sale, at March 31, 2004 were $453.7 million,
which is an increase of $4.4 million from $449.3 at December 31, 2003. This
increase is primarily due to the reclassification of $4.8 million of loans from
held for sale to portfolio, net of $630 thousand in principal reductions. As
one-to-four family residential mortgage loans become seasoned, those originated
more than 12 months ago, they are removed from held for sale and transferred to
portfolio at book value and are no longer considered held for sale. The
Company's focus continues to be in the commercial loan area, however due to the
weak economic conditions loan balances declined by $1.9 million from December
31, 2003. Management expects that as the economy strengthens that this trend
will reverse and commercial loan demand and volume will be stronger during the
second half of the year. Real estate loans increased by $4.3 million during the
three months ended March 31, 2004 primarily due to the reclassification of loans
from held for sale, as well as an increase in commercial mortgage and
construction loans. Total consumer loans increased $728 thousand during the
first quarter of the year as a result of interest rate reductions made early in
the quarter which enabled the affiliate banks to be more competitive in the
indirect automobile market. Home equity loans increased by $1.6 million during
the quarter ended March 31, 2004 as a result of consumers using the equity in
their homes to consolidate debt and finance living expenses. Although total
loans have increased during the first quarter of this year, Management
anticipates that overall loan demand and balances could be impacted by the
closing of Rubbermaid, which is expected to occur during the second quarter of
2004, with projected layoffs of 1,250 employees.
As of March 31, 2004, the Company had $7.0 million of one-to-four family
residential mortgage loans classified as held for sale, compared to $21.5
million at December 31, 2003. Through March 31, 2004 the Company sold $13.9
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 recent improvements in overall economic conditions, trends in the
financial markets and comments made by the Federal Reserve, management expects
interest rates to increase during the second or third quarter of this year. Rate
increases, which signal signs of a stronger economy and higher inflation,
14.
WAYNE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
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 and federal funds sold increased by $423
thousand through the first quarter of 2004, comprised of an increase of $18.1
million in federal funds sold while securities decreased by $17.7 million. The
increase in federal funds sold was primarily due to the sale of $13.9 million of
mortgage loans near the end of the quarter that were reinvested into short-term
federal funds sold on a temporary basis. The decline in securities was primarily
due to the sale of $25.7 million of securities during the first quarter that was
used to fund deposit withdrawals and a reduction in short-term borrowings.
Total deposits decreased by $11.6 million for the period ended March 31, 2004.
This decline in deposits 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. In addition to the normal withdrawals experienced during
the first quarter of the year, Management is also aware that deposits may
experience further declines as the economy shows sustained signs of a recovery
and depositors shift their funds into higher yielding investments such as bonds
or equities. 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, and management also recognizes that
competition for deposits includes mutual funds and the equity markets. Deposit
growth is an ongoing objective of management to facilitate funding for loan
demand and asset growth. To facilitate this 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 $5.0 million for the three months ended March 31, 2004.
This decrease is primarily related to the soft economic conditions as commercial
customers are utilizing these deposits to cash flow current operations.
Other borrowed funds, which consists of line of credit advances and an
assumption of debt due on the purchase of land increased by $496 thousand during
the three months ended March 31, 2004. This increase is due to the Company
taking a $500 thousand advance on its line of credit for short term funding
needs.
RESULTS OF OPERATIONS
Net income was $2.33 million for the first three months of 2004 compared to
$2.23 million for the same period in 2003, which represents an increase of $100
thousand, or 4.5%. Basic and diluted earnings per common share for the three
months ended March 31, 2004 and 2003 were $.37 per share and $.42 per share.
Dividends were $.18 per share for the first three months of 2004 and $.17 per
share for the first three months in 2003.
Total interest income for the first three months increased $1.12 million or
13.2% compared to the prior year. This increase in interest income is primarily
due to the merger with BSC, as the Company continues to experience downward
pressure on asset yields as a result of the prolonged low interest rate
environment. As the Federal Open Market Committee (FOMC) has reduced rates
thirteen times over the past three years, the "benchmark" federal funds rate
remains at historic lows. And as the prime rate of interest tends to move in
conjunction with the federal funds rate, the prime rate of interest of 4.00%
remains at its lowest level in over 40 years. The Company prices commercial and
industrial loans as well as home equity loans on the prime rate of interest,
therefore fluctuations in this index will cause an increase or decrease in total
interest income.
15.
WAYNE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
Total interest earning assets were $737.3 million and $579.8 million at March
31, 2004, and 2003. The increase in earning assets is due to growth in
securities and federal funds sold of $87.5 million and loans of $70.0 million.
The weighted average interest rate earned on earning assets has decreased from
5.91% at March 31, 2003 to 5.27% at March 31, 2004.
Total interest bearing liabilities at March 31, 2004 and 2003 were $600.1 and
$478.0 million respectively. The weighted average interest rate paid for these
liabilities has decreased from 2.09% at March 31, 2003 to 1.45% at March 31,
2004.
The net effect of the changes in interest earning assets and interest bearing
liabilities, combined with the repricing that has occurred since March 31, 2003,
caused an increase in net interest income of $1,387,000 or 22.8%, for the three
months ended March 31, 2004.
The provision for loan losses was $120 thousand and $40 thousand for the
three-month periods ending March 31, 2004 and 2003, while the ratio of the
allowance for loan losses to total loans was 1.59% and 1.60%. The increase in
the provision is due to an increase in the allowance allocated to specific
loans, an increase in loans classified as non-performing and an increase in
charge-offs from the prior period. During the three months ended March 31, 2004
gross charge-offs were $266 thousand, which increased $173 thousand, or 186.0%,
from gross charge-offs of $93 thousand during the same period in 2003. The
increase in the gross charge-offs is primarily in the consumer loan area as SBT
and AFC have a larger concentration in consumer loans. As SBT and AFC are
strategically focused to conduct a larger volume of consumer installment and
in-direct dealer loans it is anticipated that the Company's total charge-offs
will be higher than has been reported in prior periods. 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 $660 thousand for the three months ended March
31, 2004, compared to the same period in 2003. Service charges and fees on
deposits increased $211 thousand, or 41.0%, from $515 thousand at March 31,
2003, to $726 thousand at March 31, 2004, primarily as a result of the increased
fees from SBT. Trust revenues increased $169 thousand, or 45.1%, due to
increased fees generated from the Trust division primarily due to an increase in
assets under management from the SBT trust department. Net gains on the sale of
loans increased $195 thousand, or 80.0%, from $245 thousand at March 31, 2003 to
$440 thousand at March 31, 2004. Although total loans sold in the in the prior
period were $14.2 million compared to $13.9 million during 2004, the Company
benefited from pricing that was more favorable during the current year. Net
gains on the sale of securities were $165 thousand for the current year, while
there were no sales in the prior year. Other income, which consists of discount
brokerage fees, mortgage loan servicing fees, subsidiary income and
miscellaneous income decreased by $80 thousand, or 41.2%, for the three months
ended March 31, 2004 compared to the same period in 2003. The primary reason for
this decline is due to a $32 thousand decrease in income from Chippewa Valley
Title Agency, Inc. a wholly-owned subsidiary of WCNB, as well as a $148 thousand
reduction in mortgage servicing fees as a result of a $161 thousand impairment
recorded during the current year.
Total other expenses increased by $1.80 million, or 42.3%, for the three months
ended March 31, 2004 compared to the same period in 2003. Salaries and employee
benefits increased by $889 thousand, or 37.4%, from $2.38 million at March 31,
2003 to $3.27 million at March 31, 2004. This increase is due, in part, to the
acquisition of BSC, annual salary adjustments that are made each year in order
to maintain compensation at a level that will attract and retain employees, as
well as an increase in expenses related to retirement benefits, and health
insurance costs. Occupancy and equipment expenses increased $393 thousand, or
68.1%, from $577 thousand at March 31, 2003 to $970 thousand at March 31, 2004.
This increase is primarily related to an increase in expenses related to
building and equipment depreciation due
16.
WAYNE BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
to an increase in premises and equipment, as well as increases in both building
maintenance and repairs and utilities. Other non-interest expenses increased
$515 thousand, or 39.7%, from $1.30 million at March 31, 2003 to $1.81 million
at March 31, 2004. Increases in this area were noted in substantially all
expense items as a result of increased costs related to the overall increase in
the asset base of the Company causing a rise in these expenses, which are
primarily volume driven. Expenses related to directors fees and data processing
experienced reductions of $17 thousand and $83 thousand respectively. Directors
fees have declined primarily as a result of making changes to the deferred
compensation plan during 2003, while data processing expense has declined as
WCNB had previously outsourced its data processing and now MID is performing the
data processing for both bank affiliates.
17.
WAYNE BANCORP, INC.
QUANTITATIVE AND QUALITATIVE MEASURES ABOUT MARKET RISK
Item 3. Quantitative and qualitative disclosures about market risk.
ASSET AND LIABILITY MANAGEMENT AND MARKET RISK
The Company's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. The Company does not maintain a trading account
for any class of financial instruments and the Company is not affected by
foreign currency exchange rate risk or commodity price risk. Because the Company
does not hold any equity securities other than stock in the FHLB of Cincinnati
and an insignificant investment in other equity securities, the Company is not
subject to equity price risk.
Interest rate risk is the risk that the Company's financial condition will be
adversely affected due to movements in interest rates. The Company, like other
financial institutions, is subject to interest rate risk to the extent that its
interest-earning assets reprice differently than its interest-bearing
liabilities. The income of financial institutions is primarily derived from the
excess of interest earned on interest-earning assets over the interest paid on
interest-bearing liabilities. One of the Company's principal financial
objectives is to achieve long-term profitability while reducing its exposure to
fluctuations in interest rates. Accordingly, the Company places great importance
on monitoring and controlling interest rate risk.
There are several methods employed by the Company to monitor and control
interest rate risk. One such method is using a "GAP" analysis. The GAP is
defined as the repricing variance between rate sensitive assets and rate
sensitive liabilities within certain periods. The repricing can occur due to
changes in rates on variable rate products as well as maturities of
interest-earning assets and interest-bearing liabilities. A high ratio of
interest sensitive liabilities, generally referred to as a negative GAP, tends
to benefit net interest income during periods of falling interest rates as the
average rate paid on interest-bearing liabilities declines faster than the
average rate earned on interest-earning assets. The opposite holds true during
periods of rising interest rates. The Company attempts to minimize the interest
rate risk through management of the GAP in order to achieve consistent
shareholder return. Based on loan demand and funding needs, Management attempts
to manage the GAP position by adjusting maturities and rates on deposit products
accordingly. Another strategy used by the Company is to originate variable rate
loans tied to market indices. Such loans reprice on an annual, quarterly,
monthly or daily basis as the underlying market index changes. Currently,
approximately 65% 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 table below provides information relating to the net present value (NPV) of
the Company for its most recent year ended December 31, 2003. The NPV is
calculated as of a specific point in time and is defined as the discounted
present value of asset cash flows minus the discounted present value of
liability cash flows. Interest rate risk analysis using NPV involves changing
the interest rates used in determining the cash flows and in discounting those
cash flows. The resulting percentage change in NPV is an indication of the
longer-term repricing risk and options risk embedded in the balance sheet. The
NPV calculation assumes an immediate change in rates at those levels indicated,
that the balance sheet is static with no growth projections and assumes a
long-term horizon. Management believes that no events have occurred since
December 31, 2003 that would significantly change the values reported in the
following NPV table.
18.
WAYNE BANCORP, INC.
QUANTITATIVE AND QUALITATIVE MEASURES ABOUT MARKET RISK
Net Portfolio Value - December 31, 2003
Change in rates $ Amount $ Change % Change
--------------- -------- -------- --------
+200 102,365 (18,725) (15)%
+100 111,935 (8,705) (7)%
Base 120,640
-100 129,087 8,447 7%
-200 139,095 18,455 15%
19.
WAYNE BANCORP, INC.
CONTROLS AND PROCEDURES
Item 4. Controls and Procedures
Within the 90 day period prior to the filing date, 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-15(e) and 15d-15(e) under the Securities Exchange Act of
1934). Our Chief Executive Officer and Chief Financial Officer have concluded
that the Company's disclosure controls and procedures are, to the best of their
knowledge, effective to ensure that information required to be disclosed by the
Company's reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified in
Securities and Exchange Commission rules and forms. Subsequent to the date of
their evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that during the period ended March 31, 2004 that the Company's
internal controls and procedures continue to be strengthened.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None.
Item 2. Changes in Securities
The following table pertains to activity related to the securities of the
Company for the period ended March 31, 2004
Total Number of
Shares Purchased Maximum Number of
Total Number As Part of a Shares That May Yet
of Shares Average Price Publicly Be Purchased
Period Purchased Paid Per Share Announced Plan Under The Plan
------ --------- -------------- -------------- --------------
January 1, 2004 -
January 31, 2004 15,000 $26.57 0 0
February 1, 2004 -
February 29, 2004 10,000 $24.20 0 0
March 1, 2004 -
March 31, 2004 0 $ 0.00 0 0
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None.
20.
OTHER INFORMATION - CONTINUED
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
31.1
31.2
32.1
32.2
(b) Reports on Form 8-K
1. Current Report on Form 8-K dated January 23, 2004, announcing fourth
quarter financial results of Wayne Bancorp, Inc.
2. Current Report on Form 8-K dated April 26, 2004, announcing first quarter
financial results of Wayne Bancorp, Inc.
21.
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 10, 2004 \s\ David P. Boyle
------------ --------------------
David P. Boyle, CPA
Chairman, President and CEO
Date: May 10, 2004 \s\ John A. Lende
------------ -----------------
John A. Lende, CPA
Secretary and Treasurer
22.