10-Q 1 l02058ae10vq.txt WAYNE BANCORP UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 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 (I.R.S. 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 check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ] As of July 31, 2003, the latest practicable date, 5,996,720 shares of the issuer's common shares, $1.00 stated value, were issued and outstanding. 1. WAYNE BANCORP, INC INDEX FORM 10-Q For the Quarter Ended June 30, 2003

See notes to condensed consolidated financial statements. 2. WAYNE BANCORP, INC CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) Item 1. Financial Statements

See notes to condensed consolidated financial statements. 3. WAYNE BANCORP, INC CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited)

See notes to condensed consolidated financial statements. 4. WAYNE BANCORP, INC CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)

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 June 30, 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 consolidated financial statements include the accounts of the Company, and its wholly-owned subsidiaries Wayne County National Bank (Wayne), Chippewa Valley Bank (Chippewa), 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. 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. 6. WAYNE BANCORP, INC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) Newly Issued But Not Yet Effective Accounting Standards FASB recently issued two new accounting standards, Statement 149, Amendment to Statement 133 on Derivative Instruments and Hedging Activities, and Statement 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equities, both of which generally become effective in the quarter beginning July 1, 2003. The new standards will not materially affect the Company's operating results or financial condition. 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 CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2 - SECURITIES Securities available-for-sale were as follows:

During the three and six months ended June 30, 2003 there were no sales of securities. During the three months ended June 30, 2002 proceeds from the sale of securities were $6.8 million, with gross realized gains of $64 thousand and gross realized losses of $1 thousand included in earnings. During the six months ended June 30, 2002 proceeds from the sale of securities were $7.3 million, with gross realized gains of $64 thousand and gross realized losses of $2 thousand included in earnings. 8. WAYNE BANCORP, INC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 3 - LOANS Loans are comprised of the following:

An analysis of activity in the allowance for loan losses is as follows:

Impaired loans were as follows

9. WAYNE BANCORP, INC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE 4 - EARNINGS PER COMMON SHARE The factors used in the earnings per common share are as follows:

For the three and six months ending June 30, 2003 stock options for 154,544 shares of common stock were not considered in computing diluted earnings per common share because they were non-dilutive. For the three and six months ending June 30, 2002 stock options for 81,816 shares of common stock, and 101,551 shares of common stock were not considered in computing diluted earnings per common share because they were non-dilutive. NOTE 5 - OBLIGATED MANDATORY REDEEMABLE SECURITIES In connection with the acquisition of Banc Services Corp. (BSC) discussed in Note 6, the Company assumed mandatory redeemable capital securities 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. They count as Tier 1 capital for regulatory purposes. NOTE 6 -MERGER On May 31, 2003, the Company completed the merger of Banc Services Corp., (BSC) which was announced December 11, 2002. BSC merged with and into the Company and BSC's subsidiaries, The Savings Bank and Trust Company and Access Financial Corp. survived the merger. The Company issued 1,329,053 shares of common stock valued at approximately $32.1 million, plus cash of $13.8 million, while cash of $7 thousand was paid for fractional shares. Total assets of BSC prior to the 10. WAYNE BANCORP, INC NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued) merger were $210.0 million, including $123.0 million in loans and $166.8 million in deposits. The transaction was recorded as a purchase and, accordingly, the operating results of BSC have been included in the Company's consolidated financial statements since the date of the merger. The aggregate of the purchase price over the fair value of the net assets, or goodwill, acquired of approximately $23.9 million will be evaluated for impairment on an annual basis. As a result of the merger, management believes that the combination of the companies is a complimentary strategic fit of the existing businesses and enables Wayne Bancorp, Inc. to compete more effectively with other financial institutions in the Company's existing markets. In addition the Company entered into the merger for the following reasons: - expands market area and increases assets - expected to be accretive to per share earnings - increases liquidity for the sale of common stock - provides the foundation for further growth and selling opportunities - provides opportunities to consolidate functions and increase efficiencies The following table summarizes the fair value of the assets acquired and liabilities assumed at the date of acquisition.

The following summarizes pro forma financial information for the three and six months ended June 30, 2003 and 2002, assuming the BSC Merger occurred as of January 1, 2002. Merger related expenses are included in the 2003 results below.

11. WAYNE BANCORP, INC MANAGEMENTS DISCUSSION & ANALYSIS Item 2. Management's Discussion and Analysis INTRODUCTION The following discusses the financial condition as of June 30, 2003, as compared to December 31, 2002 and the results of operations for the three and six months ended June 30, 2003 and the same periods 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 June 30, 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 $221 million. The Company continues to keep a balance between short and long-term investments and securities that will provide adequate liquidity and maximize earnings. Based on the Company's capital position, profitability and reputation, the available liquidity sources are considered adequate to meet the current and projected needs of the Company. CAPITAL The Company's capital adequacy is a primary concern in our industry, and is measured by several key ratios. A long-standing measure of capital adequacy is the percentage of shareholders' equity to total assets. At June 30, 2003, the Company's equity-to-asset ratio adjusted by the impact of Financial Accounting Standards (FAS) #115 was 11.2% 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 14.0% at June 30, 2003, and 16.5% at December 31, 2002. The regulators require a minimum leverage capital ratio of 3%. They will expect most banks to maintain leverage ratios in the 4-5% range. The leverage ratio is calculated as equity capital less certain intangible 12. WAYNE BANCORP, INC MANAGEMENTS DISCUSSION & ANALYSIS assets divided by total assets less the same intangible assets. At June 30, 2003, and December 31, 2002, the ratios were 10.7% and 10.2% respectively. The Company's deposit insurance premiums, which are paid to the Federal Deposit Insurance Corporation (FDIC) are based, in part, on these capital ratios. The FDIC considers a bank "adequately capitalized" if the capital ratios are: Total risk-based 8%, Tier 1 risk-based 4% and a leverage ratio of 4%. The FDIC considers a bank "well capitalized" with comparable capital ratios of 10%, 6% and 5%. The Company and bank subsidiaries are considered "well capitalized" and therefore are subject to the lowest deposit insurance premiums available. Management is not aware of any matters subsequent to June 30, 2003 that would cause the Company's capital category to change. FINANCIAL CONDITION The total assets of the Company increased by $225.5 million or 36.2% from December 31, 2002 to June 30, 2003. Earning assets increased by $181.4 million, which includes an increase of $67.7 million in securities and federal funds sold and an increase in loans of $113.8 million. This asset growth was funded by an increase of $183.0 million increase in deposits and borrowed funds as well a $32.5 million increase in shareholders equity. These increases are primarily the result of the acquisition of Banc Services Corp, (BSC) on May 31, 2003. BSC had assets of $210.0 million at May 31, 2003, including loans of $123 million, investments and federal funds sold of $80 million, deposits of $170 million and shareholders equity of $17 million. Total loans at June 30, 2003 were $474.4 million, which is an increase of $104.6 million from total loans of $369.8 million at December 31, 2002. This increase is primarily related to the acquisition of BSC, which added $110.5 million of loans as of June 30, 2003. This change includes an increase in commercial loans of $59.6 million, mortgage loans of $895 thousand, consumer installment loans of $33.2 million, home equity of $9.8 million and an increase in credit card and other of $1.1 million. The Company's focus continues to be in the commercial loan area, however due to the weak economic conditions loan demand has slowed in this area, a trend that management expects to continue throughout the remainder of the year. Although mortgage loan volume has been strong due to the low rates on residential mortgage loans, the balance has remained relatively flat due to the sale of $20.2 million of loans into the secondary market during the first six months of this year. The increase in consumer installment loans is due to the addition of $32.4 million of loans from SBT and $6.3 million of loans from AFC, a consumer finance company. This addition from SBT is due to their strong presence in the in-direct automobile market, which has allowed SBT to grow their portfolio despite the low rates and incentives being offered by the auto manufacturers. Home equity loans continue to grow due to the strong housing market, low interest rates, and borrowers taking advantage of the equity that is available in their homes. Management anticipates that overall loan growth will be hampered during the second half of the year as a result of prolonged weak economic conditions, uncertainty in the financial markets and the slow pace of the economic recovery. As of June 30, 2003, the Company had $33.9 million of one-to-four family residential mortgage loans classified as held-for-sale, compared to $24.8 million at December 31, 2002. Through June 30, 2003 the Company sold $20.2 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 during the second half of 2003, with expectations that rates will rise in the next twelve to eighteen months. 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. 13. WAYNE BANCORP, INC MANAGEMENTS DISCUSSION & ANALYSIS Total securities available-for-sale increased by $61.0 million through the second quarter of 2003, while federal funds sold increased by $6.7 million. This increase in securities is primarily due to investing the proceeds from the mortgage loan sales into short-term securities, as well as the acquisition of BSC. As these securities mature it is anticipated that the proceeds will be used to fund future growth in the loan portfolio, or reinvested into similar securities. Total deposits have increased by $167.6 million for the period ended June 30, 2003, including deposits from BSC of $166.7 at June 30, 2003. Although total deposits, excluding the merger, have remained relatively unchanged from December 31, 2002, the deposit mix and customer preferences have changed. Due to economic uncertainties and the weak financial markets the Company has experienced an increase in savings accounts while certificates of deposit have declined. Management believes that this trend is due to the current rate environment, as the incentive to invest long-term has diminished due to the low rate differential between products, and investors' preference to stay liquid to take advantage of rising interest rates in the future. Management is also aware that this growth in savings accounts and the shift in the deposit mix may cause margin and liquidity pressure in the future as expectations are that a portion of these customers will withdrawal their funds and invest them in the equity markets, and a portion will shift back into higher yielding certificates. To monitor these trends management analyzes rates paid on deposits within its market area on a weekly basis to ensure the Company's rates on similar products are competitive in order to both grow and retain these deposits. Management continues its long-term focus on growing its core deposit base to facilitate asset growth and meet loan demand. Short-term borrowings, which consists of securities sold under agreements to repurchase and federal funds purchased, increased by $14.0 million for the six months ended June 30, 2003, of which substantially all the increase was from the acquisition of BSC. Federal Home Loan Bank (FHLB) advances and other borrowed funds increased by $1.5 million during the first six months of 2003. This increase is primarily due to line of credit advances from a correspondent bank, which the Company has used to fund the current share buyback program. The Company did not have any advances from the FHLB during the first six months of the year. The Company considers FHLB advances to be an alternative funding source to core deposit growth and primarily structures these advances to fund loans with similar repayment characteristics. . RESULTS OF OPERATIONS Net income was $4,459,000 for the first six months of 2003 compared to $4,313,000 for the same period in 2002. Earnings per common share for the six months ended June 30, 2003 and 2002 were $.91 and $.89 per share respectively. Dividends were $.36 per share for the first six months of 2003 and $.34 per share for the first six months in 2002. For the three months ended June 30, 2003, net income was $2,231,000, or $.44 per share, with dividends paid of $.18 per share. This compares to net income of $2,021,000, or $.42 per share, with dividends paid of $.17 per share for the three months ended June 30, 2002. Total interest income for the six months ended June 30, 2003 was $17,760,000, which decreased $683,000, or 3.7%, from the $18,443,000 earned in the comparable period last year, including interest income from SBT and AFC of $953,000. This decline in interest income is due to the repricing that has occurred on the asset side of the balance sheet due to the prolonged low interest rate environment. During the second quarter the Federal Open Market Committee (FOMC) continued its easing policy and lowered rates by 25 basis points, dropping the benchmark federal funds rate to 1.00%. As the prime rate of interest tends to move in conjunction with the federal funds rate, the prime rate of interest is now at 4.00%, its lowest level in over 40 years. As the Company prices commercial and industrial loans as well as home equity loans on the prime rate of interest, fluctuations in this index will cause an increase or decrease in total interest income. Total interest income for the three months ended June 30, 2003 was $9,245,000, which increased $219,000, or 14. WAYNE BANCORP, INC MANAGEMENTS DISCUSSION & ANALYSIS 2.4%, compared to $9,026,000 for the same three month period one year ago. This increase is due to the interest income added by SBT and AFC, offset by the repricing that has occurred since last year. Total earning assets were $768.0 million and $570.8 million at June 30, 2003 and June 30, 2002. The increase in earning assets is due to an increase of $81.0 million in securities and federal funds sold and an increase of $116.3 million in loan balances. The weighted average interest rate earned on these assets has increased from 6.45% at June 30, 2002 to 6.56% at June 30, 2003. Excluding SBT and AFC, the yield at June 30, 2003 was 6.14%, or a decline of 31 basis points from the prior period. Total interest bearing liabilities at June 30, 2003 and June 30, 2002 were $650.4 and $465.5 million respectively. The weighted average interest rate paid for these liabilities has decreased from 2.73% at June 30, 2002 to 2.25% at June 30, 2003. The net effect of the changes in interest earning assets and interest bearing liabilities, combined with the repricing that has occurred since June 30, 2002, caused an increase in net interest income of $726,000, or 6.0%, for the six months ended June 30, 2003, and an increase in net interest income of $862,000, or 14.7% for the three months ended June 30, 2003. The provision for loan losses was $111,000 for the six-month period ending June 30, 2003 compared to $300,000 for the same period in 2002, while the ratio of the allowance for loan losses to total loans was 1.60% and 1.51% respectively. Total charge-offs for the six months ended June 30, 2003 were $661,000 compared to $351,000 in the same period last year. The increase in the actual charge-offs was primarily due to the Company charging off one commercial loan, for $453,000, that was previously classified as impaired, as well as charge-offs for SBT and AFC totaling $71,000. As SBT and AFC are strategically focused to conduct a larger volume of consumer installment and in-direct dealer loans it is anticipated that their level of charge-offs will continue at a similar level throughout the balance of the year. The decrease in the provision is largely due to a decline in pre-merger loan balances coupled with no significant change in the amount of non-performing loans. The increase in the allowance ratio is primarily due to the growth in the allowance over the prior period outpacing growth in loan balances. The provision for the three months ended June 30, 2003 was $71,000, compared to $150,000 for the same three-month period in 2002. Total charge-offs for the three months ended June 30, 2003 were $568,000 compared to $205,000 for the same period last year. The decrease in the provision is substantially the same as that for the full six months. Given the make-up of the loan portfolio, and considering past due loans, charge-off and recovery history as well as 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 $447,000, or 18.6%, for the six months ended June 30, 2003 compared to the same period one year ago. Service charges and fees on deposits increased by $94,000, or 9.2% primarily due to fees from SBT during June. Trust revenues increased $130,000, or 18.1% due to increased fees generated from the Trust division. Although total loans sold into the secondary market have declined by $3.6 million, net gains on the sale of loans have increased by $268,000, or 239.3% primarily due to the Company benefiting from pricing that was more favorable, as well as a portion due to gains from sales by SBT. Other non-interest income has increased by $17,000 or 3.6%. Net gains on the sale of investments declined by $62,000, as there were no sales during the first six months of the year, compared to sales of $7.3 million in the comparable period one year ago. Total other income increased by $348,000, or 30.0% for the three months ended June 30, 2003 compared to the same period one year ago. Service charges on deposits increased by $79,000, Trust earnings increased by $122,000, net gains on the sale of loans increased by $129,000, and other miscellaneous income increased 15. WAYNE BANCORP, INC MANAGEMENTS DISCUSSION & ANALYSIS by $81,000, while gains from investment sales declined by $63,000. These changes are substantially the same as those for the six months ended June 30, 2003. Total other expenses increased by $ 1,162,000, or 14.3%, for the six months ended June 30, 2003 compared to the same period in 2002. Salaries and employee benefits increased by $467,000, or 10.2%, from $4,584,000 at June 30, 2002 to $5,051,000 at June 30, 2003, including expenses from SBT and AFC of $261,000. This increase is due, in part, to the annual salary adjustments that are made each year in order to maintain compensation at a level that will attract and retain employees, as well as an increase in expenses related to retirement benefits, and health insurance costs. Occupancy and equipment expense increased $213,000, or 21.1% from $1,010,000 at June 30, 2002 to $1,223,000 at June 30, 2003, including expenses from SBT and AFC of $58,000. These increases were primarily attributed to increased expenses related to building and equipment maintenance and repairs as well as depreciation. Other non-interest expenses increased $482,000, or 19.1%, from $2,528,000 at June 30, 2002 to $3,010,000 at June 30, 2003, including expenses from SBT and AFC of $150,000. Increases in this area were noted in expenses related to directors fees, Trust, service charges, advertising, donations and data processing, while decreases were noted in expenses related to franchise tax, and expenses related to the Company's operation of its Automated Teller Machines (ATM's). Total other expenses for the three months ended June 30, 2003, increased by $950,000, or 23.3% from $4,081,000 at June 30, 2002 to $5,031,000 at June 30, 2003. Salaries and employee benefits increased by $402,000, occupancy and equipment expense increased $138,000 and other non-interest expenses increased $410,000. The increase in these areas is substantially the same as that for the full six months ended June 30, 2003. 16. WAYNE BANCORP, INC QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 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. The table is based on information and assumptions set forth in the notes. The Company believes the assumptions utilized are reasonable. For loans, securities and liabilities with contractual maturities, the table represents principal cash flows and the weighted-average interest rate. For variable rate loans, the contractual maturity and weighted-average interest rate was used with an explanatory footnote as to repricing periods. For liabilities without contractual maturities such as demand and savings deposit accounts, a decay rate was utilized to match their most likely withdrawal behavior. Management believes that no events have occurred since December 31, 2002 that would significantly change the ratio of rate sensitive assets to rate sensitive liabilities for the given time horizons. 17. WAYNE BANCORP, INC QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. 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). 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 have concluded that there were no significant changes in the Company's internal controls or in other factors that could significantly affect its internal controls. 18. WAYNE BANCORP, INC 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 (a) Annual Shareholders' Meeting: Wayne Bancorp, Inc. held its annual meeting of shareholders' on May 29, 2003, for the purpose of considering and voting on the following: 1. To approve the Affiliation Agreement dated as of December 9, 2002, by and between Wayne Bancorp, Inc. and Banc Services Corp. and the merger contemplated by the agreement whereby Wayne Bancorp will issue up to 1,329,278 shares of Wayne Bancorp common stock. 2. To elect the four directors named in the joint proxy/statement prospectus. 3. To approve a deferred share plan. 4. To transact any other business as may properly come before the annual meeting or any adjournments or postponements of the annual meeting. The summary of the voting of the common shares outstanding was as follows: Proposal 1: FOR: 2,976,128 AGAINST: 62,296 ABSTAIN: 712,209 Proposal 2: David P. Boyle FOR: 3,718,340 WITHHELD: 32,293 B. Diane Gordon FOR: 3,713,973 WITHHELD: 36,660 Stephen L. Shapiro FOR: 3,736,446 WITHHELD: 14,187 Bala Venkataraman FOR: 3,733,435 WITHHELD: 17,197 In addition to the directors that were re-elected above, directors continuing in office until the annual meeting in 2004 are Gwenn E. Bull, David L. Christopher, Dennis B. Donahue and Jeffrey E. Smith. Directors continuing in office until the annual meeting in 2005 are James O. Basford, John C. Johnston III, Philip S. Swope and David E. Taylor. Proposal 3: FOR: 3,257,797 AGAINST: 212,559 ABSTAIN: 280,277 Proposal 4: No other business 19. WAYNE BANCORP, INC PART II - OTHER INFORMATION Item 5. Other Information None. 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 April 17, 2003, announcing first quarter financial results of Wayne Bancorp, Inc. 2. Current Report on Form 8-K dated May 31, 2003, announcing the merger of Banc Services Corp. into Wayne Bancorp, Inc. effective May 31, 2003. 20. WAYNE BANCORP, INC SIGNATURES Pursuant to the requirement of the Securities Exchange Act of 1934, the small business issuer has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Date: August 14, 2003 \s\ David P. Boyle --------------- ------------------ David P. Boyle President and CEO Date: August 14, 2003 \s\ John A. Lende --------------- ----------------- John A. Lende Secretary/Treasurer 21.

WAYNE BANCORP INC /OH/ 10-Q