UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
[x] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1998
-------------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from ________________ to _______________
Commission file number 20691
-----
WAYNE BANCORP, INC.
(Exact name of registrant as specified in its charter)
Delaware 22-3009651
- -------------------------------------- ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1195 Hamburg Turnpike, Wayne, New Jersey 07474
-------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(973) 305-5500
----------------------------------------------------
(Registrant's telephone number, including area code)
Not Applicable
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Indicate by check mark whether the registrant (1) has filed all the 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. X Yes No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
There were 2,013,392 shares of the Registrant's common stock outstanding as of
August 11, 1998.
<PAGE>
FORM 10-Q
Index
PART 1 -- FINANCIAL INFORMATION
Item 1. Financial Statements Page(s)
-------
<TABLE>
<CAPTION>
<S> <C>
Consolidated Statements of Financial Condition as of
June 30, 1998 and December 31, 1997............................3
Consolidated Statements of Income for the Three Months
and Six Months ended June 30, 1998 and 1997....................4
Consolidated Statements of Cash Flows for the Six Months
ended June 30, 1998 and 1997...................................5
Notes to Consolidated Financial Statements.....................6-7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations......................................8-14
Item 3. Quantitative and Qualitative Disclosures about Market Risk.......15
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings................................................16
Item 2. Changes in Securities............................................16
Item 3. Defaults Upon Senior Securities..................................16
Item 4. Submission of Matters to a Vote of Security Holders..............16
Item 5. Other Information................................................16
Item 6. Exhibits and Reports on Form 8-K.................................16
Signature Page...................................................17
</TABLE>
2
<PAGE>
Item 1. Financial Statements
WAYNE BANCORP, INC.
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
------------- -------------
(Unaudited)
Assets:
<S> <C> <C>
Cash and due from banks $ 1,443 $ 1,577
Interest-bearing deposits in other banks 3,595 1,868
Federal funds sold 5,000 3,400
--------- ---------
Total cash and cash equivalents 10,038 6,845
Securities available for sale 62,036 73,413
Securities held to maturity, (estimated market value $1,902
and $2,882 in 1998 and 1997, respectively) 1,912 2,913
Loans receivable, net 191,739 178,932
Premises and equipment, net 3,457 3,318
Real estate owned, net 331 80
Federal Home Loan Bank of New York stock, at cost 2,150 2,150
Interest and dividends receivable 2,113 1,897
Other assets 1,559 495
--------- ---------
Total assets $ 275,335 $ 270,043
========= =========
Liabilities and Stockholders' Equity:
Deposits $ 207,825 $ 198,479
Federal Home Loan Bank advances 30,000 32,000
Advance payments by borrowers for taxes and insurance 1,000 914
Other liabilities 1,343 4,706
--------- ---------
Total liabilities 240,168 236,099
--------- ---------
Stockholders' Equity:
Preferred stock, $0.01 par value, 2,000,000 shares authorized, none
issued - -
Common stock, $0.01 par value, 8,000,000 shares authorized,
2,231,383 shares issued and 2,013,124 shares outstanding at June
30, 1998 and 2,231,383 issued and 2,013,823 outstanding at
December 31, 1997 22 22
Paid-in capital 21,640 21,264
Retained earnings, substantially restricted 20,370 19,623
Treasury stock at cost, 218,259 shares at June 30, 1998 and 217,560
Shares at December 31, 1997 (4,433) (4,417)
Unallocated common stock held by the ESOP (1,502) (1,604)
Unallocated common stock held by the MRP (1,148) (1,262)
Accumulated other comprehensive income-
Net unrealized gain on securities available for sale 218 318
--------- ---------
Total stockholders' equity 35,167 33,944
--------- ---------
Total liabilities and stockholders'equity $ 275,335 $ 270,043
========= =========
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
WAYNE BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
1998 1997 1998 1997
------- ------- ------ ------
<S> <C> <C> <C> <C>
Interest income:
Loans $3,685 $3,158 $7,201 $6,052
Securities available for sale 1,120 1,377 2,343 2,803
Securities held to maturity 17 46 44 90
Short term and other investments 94 38 155 107
----- ----- ----- -----
Total interest income 4,916 4,619 9,743 9,052
----- ----- ----- -----
Interest expense:
Deposits 2,109 1,855 4,152 3,654
Federal Home Loan Bank advances 526 547 1,066 1,002
----- ----- ----- -----
Total interest expense 2,635 2,402 5,218 4,656
----- ----- ----- -----
Net interest income before provision for Loan losses 2,281 2,217 4,525 4,396
Provision for loan losses 60 75 130 200
----- ----- ----- -----
Net interest income after provision for loan losses 2,221 2,142 4,395 4,196
Other income:
Loan fees and service charges 95 61 172 12
Gain on sale of securities available for sale 95 95
Gain on sale of real estate owned - - - 50
Other 96 84 194 157
----- ----- ----- -----
Total other income 286 145 461 328
Other expenses:
Compensation and employee benefits 767 646 1,615 1,260
Occupancy 133 123 246 219
Equipment 59 46 114 86
Data processing services 82 63 162 133
Advertising 34 51 60 88
Federal insurance premiums 30 29 60 35
Real estate owned expense, net 20 2 35 5
Other 444 509 976 1,034
----- ----- ----- -----
Total other expenses 1,569 1,469 3,268 2,860
----- ----- ----- -----
Income before income tax expense 938 818 1,588 1,664
Income tax expense 385 293 640 635
----- ----- ----- -----
Net income $553 $525 $948 $1,029
===== ===== ===== =====
Basic earnings per share $0.30 $0.28 $0.52 $0.53
===== ===== ===== =====
Basic weighted average shares 1,808 1,884 1,806 1,939
===== ===== ===== =====
Diluted earnings per share $0.30 $0.27 $0.52 $0.52
===== ===== ===== =====
Diluted weighted average shares 1,810 1,909 1,817 1,965
===== ===== ===== =====
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
WAYNE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
----------------------
1998 1997
---------- ---------
(Dollars in thousands)
<S> <C> <C>
Cash flows from operating activities:
Net income $ 948 $ 1,029
Adjustments to reconcile net income to net cash provided by
operating activities:
Provision for losses on loans and real estate owned 150 200
Depreciation and amortization 119 93
Net (accretion) of discounts and amortization of premiums 72 24
Decrease (increase) in deferred loan fees (5) 28
Gain on sale of real estate owned - (50)
Gain on sale of securities available for sale (95) -
Increase in interest and dividends receivable (216) (131)
Increase in other assets (1,009) (1)
Increase (decrease) in other liabilities (3,161) 65
-------- --------
Net cash provided by (used in) operating activities (3,197) 1,257
-------- --------
Cash flows from investing activities:
Calls of securities available for sale 5,000 500
Purchases of securities available for sale (300) (55)
Proceeds from sales of securities available for sale 525 -
Principal repayments on securities held to maturity 979 257
Principal repayments on securities available for sale 6,011 3,637
Net increase in loans receivable (13,172) (24,893)
Additions to premises and equipment (258) (125)
Purchase of Federal Home Loan Bank stock - (458)
-------- --------
Net cash used in investing activities (1,215) (21,137)
-------- --------
Cash flows from financing activities:
Net increase in deposits 9,346 6,013
Federal Home Loan Bank advances (repaid) acquired, net (2,000) 12,805
Increase in advance payments by borrowers for taxes and insurance 86 117
Dividends paid (201) (206)
ESOP shares allocated 276 152
Purchase of MRP shares - (1,361)
Amortization of MRP 114 -
Purchase of treasury stock (16) (1,851)
-------- --------
Net cash provided by financing activities 7,605 15,669
-------- --------
Net increase (decrease) in cash and cash equivalents 3,193 (4,211)
-------- --------
Cash and cash equivalents at beginning of period 6,845 6,943
-------- --------
Cash and cash equivalents at end of period $ 10,038 $ 2,732
======== ========
Supplemental information:
Cash paid during the period for:
Interest $ 5,222 $ 3,566
======== ========
Income taxes $ 529 $ 637
======== ========
Transfer of loans receivable to real estate owned $ 123 $ -
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Wayne Bancorp, Inc.
Notes to Consolidated Financial Statements
June 30, 1998
(Unaudited)
Note 1 - Basis of Presentation
---------------------
The accompanying unaudited consolidated financial statements include the
accounts of Wayne Bancorp, Inc. ("Company") and its wholly-owned subsidiaries,
Wayne Savings Bank, F.S.B. ("Bank"), and its subsidiaries and the Company's
newly formed subsidiaries, Wayne Ventures, Inc. and Wayne Title, Inc. as of June
30, 1998 and December 31, 1997 and for the three and six month periods ended
June 30, 1998 and 1997, respectively. Material intercompany accounts and
transactions have been eliminated in consolidation.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management all necessary adjustments,
consisting only of normal recurring accruals necessary for a fair presentation
have been included. The results of operations for the three and six month
periods ended June 30, 1998 are not necessarily indicative of the results that
may be expected for the entire calendar year. These consolidated financial
statements should be read in conjunction with the consolidated financial
statements for the year ended December 31, 1997, and the notes thereto.
Note 2 - Organization of the Company and conversion to stock form of ownership
---------------------------------------------------------------------
Wayne Bancorp, Inc. was organized for the purpose of acquiring all of the
capital stock of the Bank that was issued in the conversion from a federally
chartered mutual savings bank to a stock savings bank pursuant to a Plan of
Conversion (Conversion) via the issuance of common stock. On June 27, 1997, the
Company completed an initial public offering. The offering resulted in the sale
of 2,231,383 shares of common stock which, after giving effect to offering
expenses of $1.3 million and 178,511 shares issued to the Bank's tax qualified
Employee Stock Ownership Plan (ESOP), resulted in net proceeds of $21.0 million.
Pursuant to the Conversion, the Bank transferred all of its outstanding shares
to the Company. The Bank may not declare or pay cash dividends or repurchase any
of its shares of common stock if the effect of these would cause equity to be
reduced below applicable regulatory capital maintenance requirements or if such
declaration and payment would otherwise violate regulatory requirements.
6
<PAGE>
Note 3 - Earnings per share
------------------
For purposes of calculating basic earnings per share, the weighted average
number of common shares, for the six months ended June 30, 1998 and 1997 was
1,805,746 and 1,939,031 respectively. Diluted weighted average shares included
potential common stock of 11,222 and 25,637 for the six months June 30, 1998 and
1997, respectively. The diluted weighted average number of common shares, for
the six months ended June 30, 1998 and 1997 was 1,816,968 and 1,964,668,
respectively. For purposes of calculating basic earnings per share, the weighted
average number of common shares, for the quarter ended June 30, 1998 and 1997
was 1,807,746 and 1,883,811 respectively. Diluted weighted average shares
included potential common stock of 2,295 and 25,637 for the quarter ended June
30, 1998 and 1997, respectively. The diluted weighted average number of common
shares, for the quarter ended June 30, 1998 and 1997 was 1,810,041 and
1,909,448, respectively.
Note 4 - Comprehensive income
--------------------
During the first quarter of 1998, the Company adopted the provisions of
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" ("SFAS 130"). SFAS 130 establishes standards for reporting and display
of comprehensive income and its components (revenues, expenses, gains and
losses) in a full set of general-purpose financial statements. This Statement
requires that all items that are required to be recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. This Statement requires that an enterprise (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position. In accordance with the provisions of SFAS 130
for interim period reporting, the Company's total comprehensive income for the
six months ended June 30, 1998 and 1997 was $848,000 and $1.2 million,
respectively. For the three months ended June 30, 1998 and 1997 total
comprehensive income was $443,000 and $1.1 million, respectively. The difference
between the Company's net income and total comprehensive income for these
periods relates to the change in the net unrealized gains on securities
available for sale during the applicable period of time.
Note 5 - Reorganization and Merger Agreement with Valley National Bancorp.
----------------------------------------------------------------
On May 29, 1998, the Company entered into an Agreement and Plan of Merger (the
"Agreement") to be acquired by Valley National Bancorp, Wayne, New Jersey
("Valley"). Under the terms of the Agreement, Valley will acquire through a
tax-free reorganization each outstanding share of the Company's common stock in
exchange for 1.1 shares of Valley common stock. In addition, the Bank will be
merged with and into Valley National Bank, Valley's wholly owned subsidiary. The
acquisition is subject to regulatory and Company shareholder approval and other
conditions, and is expected to close in October 1998. Regardless of whether the
proposed acquisition is consummated, the following discussion addresses the
financial condition, results of operation, liquidity and capital resources and
ongoing strategy of the Company.
7
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial condition
- -------------------
Assets
- ------
Total assets increased $5.3 million or 2.0% to $275.3 million at June 30, 1998
from $270.0 million at December 31, 1997 due primarily to an increase in loans
receivable, net of $12.8 million from $178.9 million at December 31, 1997 to
$191.7 million at June 30, 1998.
Loan originations during the quarter ended June 30, 1998 totalled $16.4 million.
These originations consisted of $7.5 million of residential one-to four-family
mortgage loans, $5.8 million of home equity loans, $568,000 of commercial
construction loans, $50,000 of residential construction loans, $2.0 million of
commercial real estate loans, $466,000 of commercial business loans and $57,000
of consumer loans. During the second quarter of 1998, principal repayments
totalled $12.0 million. During the same quarter of 1997, loan originations
totalled $22.6 million and principal repayments totalled $7.5 million.
The decline of $12.4 million in securities held to maturity and securities
available for sale was primarily due to principal repayments and prepayments and
$5.0 million of calls on securities available for sale during the six months
ended June 30, 1998.
Liabilities
- -----------
Deposits increased $9.3 million between December 31, 1997 and June 30, 1998 due
to an excess of deposits over withdrawals of $5.1 million as well as interest
credited of $4.2 million.
Federal Home Loan Bank advances decreased $2.0 million from $32.0 million at
December 31, 1997 to $30.0 million at June 30, 1998 due to the maturity of
higher costing advances.
Other liabilities decreased $3.4 million to $1.3 million at June 30, 1998 from
$4.7 million at December 31, 1997. This decrease represents the liability
recorded, in December 1997, to reflect the purchase of a $4.0 million Federal
Farm Credit Banks Note at 6.1%, that was paid for in January 1998.
8
<PAGE>
Non performing loans and allowance for loan losses
- --------------------------------------------------
Non performing loans at June 30, 1998 and June 30, 1997 were as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------
(Dollars in thousands)
<S> <C> <C>
Loans delinquent 90 days or more and
other non-performing loans $1,874 $2,378
Loans delinquent 90 days or more and
other non-performing loans as a p
percentage of total loans outstanding 0.97% 1.38%
Allowance for loan losses as a percent
of non performing loans 122.36% 83.64%
</TABLE>
The following table sets forth the changes in the allowance for loan losses for
the six months ended June 30, 1998 and 1997:
1998 1997
----------------------------------------
(Dollars in thousands)
Balance at beginning of period $2,170 $1,789
Provision for losses 130 200
Loans charged off 7 -
----- -----
Balance at end of period $2,293 $1,989
===== =====
Asset/liability management
- --------------------------
Management's strategy has been to operate the Bank as a community oriented
financial institution by offering a variety of financial services to meet the
needs of the communities it serves while maintaining capital in excess of
regulatory requirements and monitoring the sensitivity of the Bank's assets and
liabilities to interest rate fluctuations. The Board of Directors has sought to
accomplish these goals by: (i) attracting and maintaining low-cost savings and
transaction accounts, as well as money market accounts, which management
believes provide the Bank with a stable source of funds; (ii) focusing its
lending on the origination of one-to four-family, owner-occupied residential
mortgage loans, including home equity loans; (iii) supplementing its one- to
four-family residential lending activities with commercial business, commercial
real estate, multi-family, construction and consumer loans in accordance with
the Bank's underwriting guidelines; (iv) purchasing short-to-intermediate term
investment and mortgage-backed securities to complement the Bank's lending
activities; (v) emphasizing shorter-term loans and investments and adjustable
rate assets when market conditions permit; and (vi) controlling growth.
9
<PAGE>
As part of management's review of its assets and liabilities, the Bank considers
the interest sensitivity of its assets and liabilities and targets what it
believes to be an acceptable level of risk based on the Bank's business focus,
operating environment, capital and liquidity requirements, and performance
objectives. Management seeks to reduce the vulnerability of the Bank's operating
results to changes in interest rates and to manage the ratio of interest rate
sensitive assets to interest rate sensitive liabilities within specified
maturities or repricing periods. The Bank does not currently engage in trading
activities or use off-balance sheet derivative instruments to control interest
rate risk. Even though trading activities or use of off-balance sheet derivative
instruments may be permitted with the approval of the Board of Directors,
management does not intend to engage in such activities in the immediate future.
In managing the Bank's assets and liabilities, the Bank has taken certain
actions to decrease the sensitivity of its assets and liabilities to
fluctuations in interest rates. A significant component of the Bank's operating
strategy has been to maintain its interest rate spread by maintaining a core
deposit base. The Bank has sought to maintain and attract new deposits by
pricing its deposits competitively, but generally not among the highest interest
rates in its market area, and relying on personalized customer service and
advertising. The Bank maintains a core deposit base while employing this
strategy.
At June 30, 1998, total interest-bearing liabilities maturing or repricing
within one year exceeded total interest-earning assets maturing or repricing
within the same period by $31.8 million, representing a one-year negative
cumulative gap of 11.5%.
Liquidity and capital
- ---------------------
The Bank is required to maintain minimum levels of liquid assets as defined by
the Office of Thrift Supervision ("OTS") regulations. This requirement, which
may be varied by the OTS depending on economic conditions and deposit flows, is
based on a percentage of withdrawable deposits and short-term borrowings. The
minimum required liquidity ratio is currently 4.0%. The Bank's liquidity ratio
was 35.6% at June 30, 1998 compared with 40.2% at December 31, 1997.
The Company's primary sources of funds are deposits, principal and interest
payments on loans and securities and, to a lesser extent, borrowings and
proceeds from the sale of securities available for sale. While maturities and
scheduled amortization of loans and securities provide an indication of the
timing of the receipt of funds, other sources of funds such as loan prepayments
and deposit inflows are less predictable because they are greatly influenced by
general interest rates, economic conditions, competition and regulatory changes.
The Bank's most liquid assets are cash and cash equivalents, which include
interest-bearing deposits and short-term highly liquid investments (such as
federal funds) with original maturities of less than three months that are
readily convertible to known amounts of cash. The level of these assets is
dependent on the Bank's operating, financing and investing activities during any
given period. At June 30, 1998 and December 31, 1997, cash and cash equivalents
totaled $10.0 million and $6.8 million, respectively.
10
<PAGE>
The Company and the Bank have other sources of liquidity that include investment
securities maturing within one year, and securities available for sale. Other
sources of funds include Federal Home Loan Bank of New York ("FHLB-NY")
advances, which at June 30, 1998, totalled $30.0 million. If needed, the Bank
may borrow an additional $52.6 million from the FHLB-NY.
As of June 30, 1998, the Bank exceeded all regulatory capital requirements as
detailed in the following table:
<TABLE>
<CAPTION>
Tangible Capital Core Capital Risk-Based Capital
------------------------------------------------------------------
Amount Percent(1) Amount Percent(1) Amount Percent(1)
-------- ---------- -------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
Capital for regulatory
purposes $29,262 10.7% $29,262 10.7% $30,877 22.5%
Minimum regulatory
requirement 4,086 1.5% 8,173 3.0% 10,979 8.0%
------ ----- ------ ----- ------ -----
Excess $25,176 9.2% $21,089 7.7% $19,898 14.5%
====== ===== ====== ===== ====== =====
(1) Tangible and core capital is shown as a percentage of total adjusted
assets. Risk-based capital levels are shown as a percentage of
risk-weighted assets.
</TABLE>
Comparison of Operating Results for the Three Months Ended June 30, 1998 and
1997
General The Company reported net income of $553,000, or $0.30 diluted earnings
per share, for the three months ended June 30, 1998 compared with net income of
$525,000 or $0.28 diluted earnings per share for the three months ended June 30,
1997. The $28,000 increase was primarily attributable to an increase of $79,000
in net interest income after provision for loan losses and the gain on sale of
securities of $95,000 offset by an increase in compensation and employee
benefits of $121,000.
Interest income Interest income increased $297,000 or 6.5% to $4.9 million for
the three months ended June 30, 1998 from $4.6 million for the three months
ended June 30, 1997. This increase was primarily the result of higher
outstanding average balances of loans offset by a slight decline in the average
yields on earning assets.
Interest income on loans increased $527,000, or 15.6% to $3.7 million for the
three months ended June 30, 1998, from $3.2 million for the comparable three
month period in 1997 primarily as a result of an increase in average balances of
loans of $28.0 million, partially offset by a slight decrease in the average
yield on loans of one basis point. The average yield on loans decreased to 7.62%
for the three months ended June 30, 1998 from 7.63% for the comparable
three-month period in 1997.
Interest income on securities available for sale decreased $257,000 during the
second quarter of 1997 as a result of a decrease in average outstanding balances
of $13.4 million in the available for sale portfolio. The average balance of the
available for sale portfolio for the three months ended June 30, 1998 was $64.7
million compared with $78.1 million for the comparable period in 1997.
11
<PAGE>
In addition, the yield on the available for sale portfolio decreased twelve
basis points to 6.93% for the quarter ended June 30, 1998 from 7.05% for the
comparable period in 1997. The decrease in the average balance is due to the
payments and prepayments received on the portfolio. The cash flows, from the
investment portfolio are being used to fund the higher yielding loan portfolio.
Interest expense Interest expense increased $233,000, or 8.3% to $2.6 million
for the three months ended June 30, 1998 from $2.4 million for the three months
ended June 30, 1997. Interest on deposits increased $254,000, or 10.5% to $2.1
million for the three months ended June 30, 1998 from $1.9 million for the
comparable three-month period in 1997. The increase in interest expense on
deposits was primarily due to an increase of $24.3 million in average deposits.
Net interest income Net interest income before provision for loan losses
increased $64,000 to $2.3 million for the three months ended June 30, 1998 from
$2.2 million for the three months ended June 30, 1997.
Provision for loan losses The adequacy of the allowance for loan losses is
based on the Bank's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and current economic conditions.
The Bank provided $60,000 for loan losses for the three months ended June 30,
1998 compared with $75,000 for the comparable three month period in 1997 which
was due to management's continuing reassessment of losses inherent in the loan
portfolio. Management believes that the allowance for loan losses is adequate.
While management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions in the Bank's market area. In addition, various regulatory agencies,
as an integral part of their routine examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on their judgments about information
available to them at the time of their examination.
Other income Total other income for the three months ended June 30, 1998 was
$286,000 compared with $145,000 for the comparable three month period in 1997.
The increase of $141,000 is primarily due to the gain on sale of securities
available for sale of $95,000 and fee income on checking accounts.
Other expenses Other expenses increased $100,000 or 6.7% for the three months
ended June 30, 1998 to $1.6 million from $1.5 million for the comparable
three-month period in 1997. The increase is primarily due to an increase of
$121,000 in compensation and employee benefits expense, an increase of $19,000
in data processing services, and a decrease of $65,000 in other expenses.
The increase in compensation and employee benefits expense is primarily due to
the higher stock price of Wayne Bancorp, Inc. that is used to calculate the
expense related to the Company's Employee Stock Ownership Plan (ESOP) and normal
annual merit increases. The increase in data processing services is due to the
higher number of loan and deposit accounts being serviced. The decrease in other
expense is the result of lower printing costs during the three months ended June
12
<PAGE>
30, 1998, versus the same quarter in the prior year when high printing costs
were incurred in the proxy contest with a dissident stockholder group and
because a similar proxy contest in 1998 ended in the first quarter of 1998.
Income tax expense Income tax expense was $385,000 which represents an effective
tax rate of 41.0% for the three months ended June 30, 1998 compared with income
tax expense of $293,000 which represents an effective tax rate of 35.8% for the
three months ended June 30, 1997.
Comparison of Operating Results for the Six Months Ended June 30, 1998 and 1997
General The Company reported net income of $948,000, or $0.52 diluted earnings
per share, for the six months ended June 30, 1998 compared with net income of
$1.0 million, or $0.55 diluted earnings per share, for the six months ended June
30, 1997. The $81,000 decrease was primarily attributable to an increase of
$408,000 in total other expenses offset by an increase of $199,000 in net
interest income before provision for loan losses, and the gain on sale of
securities available for sale of $95,000.
Interest income Interest income increased $691,000 or 7.8% to $9.7 million for
the six months ended June 30, 1998 from $9.0 million for the six months ended
June 30, 1997. The increase was primarily the result of an increase in average
interest earning assets (primarily loans receivable) of $21.1 million for the
six months ended June 30, 1998.
Interest income on loans increased $1.1 million, or 18.0% to $7.2 million for
the six months ended June 30, 1998, from $6.1 million for the comparable six
month period in 1997. The increase is primarily a result of an increase in the
average balance of loans outstanding of $30.8 million offset by a decline of
three basis points in the average rate earned on loans.
Interest income on securities available for sale decreased $460,000 to $2.3
million for the six months ended June 30, 1998 from $2.8 million for the
comparable six month period in 1997 primarily due to a decrease in average
balances of $11.4 million together with a decrease in the average yield of 16
basis points.
Interest expense Interest expense increased $562,000, or 13.0% to $5.2 million
for the six months ended June 30, 1998 from $4.6 million for the six months
ended June 30, 1997. Interest expense on deposits increased $498,000, or 13.5%
to $4.2 million for the six months ended June 30, 1998 from $3.7 million for the
comparable six-month period in 1997. The increase in interest on deposits was
primarily due to the increase of $22.8 million in average balances together with
a slight increase of one basis point in the average cost of deposits, to 4.09%.
Interest on FHLB-NY advances increased $64,000, to $1.1 million for the six
months ended June 30, 1998 from $1.0 million for the comparable six-month period
in 1997. FHLB-NY advances on an average basis increased $1.1 million between the
periods and the average rate paid increased 14 basis points to 6.81% for the six
months ended June 30, 1998 from 6.67% for the six months ended June 30, 1997.
13
<PAGE>
Net interest income Net interest income before provision for loan losses
increased $129,000 to $4.5 million for the six months ended June 30, 1998 from
$4.4 million for the six months ended June 30, 1997.
Provision for loan losses The adequacy of the allowance for loan losses is
based on the Bank's past loan loss experience, known and inherent risks in the
portfolio, adverse situations that may affect the borrower's ability to repay,
estimated value of any underlying collateral and current economic conditions.
The Bank provided $130,000 for loan losses for the six months ended June 30,
1998 compared with $200,000 for the comparable six month period in 1997 which
was due to management's continuing reassessment of losses inherent in the loan
portfolio. Management believes that the allowance for losses is adequate. While
management uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in economic
conditions in the Bank's market area. In addition, various regulatory agencies,
as an integral part of their routine examination process, periodically review
the Bank's allowance for loan losses. Such agencies may require the Bank to
recognize additions to the allowance based on their judgments about information
available to them at the time of their examination.
Other income Total other income for the six months ended June 30, 1998 was
$461,000 compared with $328,000 for the comparable six month period in 1997. The
increase of $133,000 in the six months ended June 30, 1998 was primarily
attributable to the gain on sale of securities available for sale of $95,000 and
increased fee income associated with the increased deposit accounts.
Other expenses Other expenses increased $408,000 or 13.8% for the six months
ended June 30, 1998 to $3.3 million from $2.9 million for the comparable
six-month period in 1997. The increase was primarily due to an increase of
$355,000 in compensation and employee benefits expense, together with operating
expenses associated with increased branch activity.
The increase in compensation and employee benefits expense primarily reflects
the higher stock price of Wayne Bancorp, Inc. as explained above in the
comparison of operating results for the three months ended June 30, 1998 and
1997, the opening of a branch office in Fairfield, N. J., in the second quarter
of 1997, and the opening of a temporary branch office in Wyckoff, N. J. at the
end of the first quarter of 1998. Also contributing to the increase were normal
annual merit increases, the final payment of $67,000 related to the one time
non-recurring cost to purchase the rights under a contract entered into in 1989
which established Wayne Savings Financial Services Group, Inc., and costs
related to loan production. The increase in occupancy, equipment, data
processing services and federal insurance premiums are related to the expansion
in the branch network and the commercial lending areas. The increase of $30,000
in REO operations, net is to the increase of REO properties from $80,000 at
December 31, 1997 to $331,000 at June 30, 1998. Finally, the decrease in other
expense is the result of lower legal and professional fees incurred in the proxy
fight with a dissident stockholder group that took place in both periods.
Income tax expense Income tax expense was $640,000 which represents an effective
tax rate of 40.3% for the six months ended June 30, 1998 compared with income
tax expense of $635,000 which represents an effective tax rate of 38.2% for the
six months ended June 30, 1997.
14
<PAGE>
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Asset/liability management
- --------------------------
Management's strategy has been to operate the Bank as a community oriented
financial institution by offering a variety of financial services to meet the
needs of the communities it serves while maintaining capital in excess of
regulatory requirements and monitoring the sensitivity of the Bank's assets and
liabilities to interest rate fluctuations. The Board of Directors has sought to
accomplish these goals by: (i) attracting and maintaining low-cost savings and
transaction accounts, as well as money market accounts, which management
believes provide the Bank with a stable source of funds; (ii) focusing its
lending on the origination of one-to four-family, owner-occupied residential
mortgage loans, including home equity loans; (iii) supplementing its one- to
four-family residential lending activities with commercial business, commercial
real estate, multi-family, construction and consumer loans in accordance with
the Bank's underwriting guidelines; (iv) purchasing short-to-intermediate term
investment and mortgage-backed securities to complement the Bank's lending
activities; (v) emphasizing shorter-term loans and investments and adjustable
rate assets when market conditions permit; and (vi) controlling growth.
As part of management's review of its assets and liabilities, the Bank considers
the interest sensitivity of its assets and liabilities and targets what it
believes to be an acceptable level of risk based on the Bank's business focus,
operating environment, capital and liquidity requirements, and performance
objectives. Management seeks to reduce the vulnerability of the Bank's operating
results to changes in interest rates and to manage the ratio of interest rate
sensitive assets to interest rate sensitive liabilities within specified
maturities or repricing periods. The Bank does not currently engage in trading
activities or use off-balance sheet derivative instruments to control interest
rate risk. Even though trading activities or use of off-balance sheet derivative
instruments may be permitted with the approval of the Board of Directors,
management does not intend to engage in such activities in the immediate future.
In managing the Bank's assets and liabilities, the Bank has taken certain
actions to decrease the sensitivity of its assets and liabilities to
fluctuations in interest rates. A significant component of the Bank's operating
strategy has been to maintain its interest rate spread by maintaining a core
deposit base. The Bank has sought to maintain and attract new deposits by
pricing its deposits competitively, but generally not among the highest interest
rates in its market area, and relying on personalized customer service and
advertising. The Bank maintains a core deposit base while employing this
strategy.
At June 30, 1998, total interest-bearing liabilities maturing or repricing
within one year exceeded total interest-earning assets maturing or repricing
within the same period by $31.8 million, representing a one-year negative
cumulative gap of 11.5%.
15
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
-----------------
None
Item 2. Changes in Securities
---------------------
None
Item 3. Defaults Upon Senior Securities
-------------------------------
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
---------------------------------------------------
None
Item 5. Other Information
-----------------
Not applicable
Item 6. Exhibits and Reports on Form 8-K
--------------------------------
A. Exhibits
(2.1) Agreement and Plan of Merger between Registrant, the Bank,
Valley National Bancorp, and Valley National Bank.*
(2.2) Stock Option Agreement between Valley National Bank and
Registrant.*
(3) (i) Certificate of incorporation * *
(ii) Bylaws * *
(4) Form of Stock certificate * *
(27) Financial Data Schedule (filed herewith)
B. Reports on From 8-K
On June 2, 1998, the Registrant filed a Current Report on
Form 8-K regarding a press release dated May 29, 1998 in which
the Registrant announced that the Registrant had signed an
Agreement and Plan of Merger with Valley National Bancorp,
Wayne, New Jersey (Items 5, 7).
--------------------
* Incorporated herein by reference to the Exhibits to the Registrant's
Current Report on Form 8-K filed with the Commission on June 2, 1998.
* * Incorporated herein by reference to the Exhibits to Form S-1
Registration Statement and all amendments thereto, initially filed with the
Commission on March 18, 1997, Registration Number 333-2488 and declared
effective May 13, 1997.
16
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
WAYNE BANCORP, INC.
-----------------------------------------
Registrant
Date: August 14, 1998 By: /s/ Johanna O'Connell
----------------------
Johanna O'Connell,
President
Date: August 14, 1998 By: /s/ Timothy P. Tierney
-----------------------
Timothy P. Tierney,
Vice President & Controller
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION DERIVED FROM
THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,443
<INT-BEARING-DEPOSITS> 3,595
<FED-FUNDS-SOLD> 5,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 62,036
<INVESTMENTS-CARRYING> 1,912
<INVESTMENTS-MARKET> 1,902
<LOANS> 194,032
<ALLOWANCE> 2,293
<TOTAL-ASSETS> 275,335
<DEPOSITS> 207,825
<SHORT-TERM> 0
<LIABILITIES-OTHER> 2,343
<LONG-TERM> 30,000
0
0
<COMMON> 22
<OTHER-SE> 0
<TOTAL-LIABILITIES-AND-EQUITY> 275,335
<INTEREST-LOAN> 7,201
<INTEREST-INVEST> 2,387
<INTEREST-OTHER> 155
<INTEREST-TOTAL> 9,743
<INTEREST-DEPOSIT> 4,152
<INTEREST-EXPENSE> 1,066
<INTEREST-INCOME-NET> 4,525
<LOAN-LOSSES> 130
<SECURITIES-GAINS> 95
<EXPENSE-OTHER> 3,268
<INCOME-PRETAX> 1,588
<INCOME-PRE-EXTRAORDINARY> 1,588
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 948
<EPS-PRIMARY> 0.52
<EPS-DILUTED> 0.52
<YIELD-ACTUAL> 0
<LOANS-NON> 1,874
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 2,170
<CHARGE-OFFS> 0
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<ALLOWANCE-CLOSE> 2,293
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</TABLE>
