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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C.
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from to
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Commission File Number 000-24925
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COMBANC, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 34-1853493
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
229 E. Second St., P. O. Box 429, Delphos, Ohio 45833
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(Address of principal executive offices) (Zip Code)
(419) 695-1055
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(Registrant's telephone number, including area code)
Indicate by check mark 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 check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
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Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the last practicable date: 2,211,014 shares of the
ComBanc's common stock (no par value) were outstanding as of August 1, 2003.
Page 1 of 24
COMBANC, INC. AND SUBSIDIARY
June 30, 2003 FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 9
and Results of Operation
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 19
Exhibit 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 -- Principal Financial Officer 21
Exhibit 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 -- Principal Executive Officer 22
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
Principal Financial Officer 23
Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 -
Principal Executive Officer 24
2
COMBANC, INC. AND SUBSIDIARY
DELPHOS, OHIO
--------
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in thousands)
June 30, December 31,
ASSETS 2003 2002
----------------- -----------------
(unaudited)
Cash and Due from Banks $ 7,902 $ 12,301
Federal Funds Sold 5,041 4,624
----------------- -----------------
Cash and Cash Equivalents 12,943 16,925
Investment Securities -
Available for Sale 56,830 54,396
Loans Held for Resale 2,815 728
Loans 132,786 140,091
Allowance for Loan Losses (3,176) (2,050)
----------------- -----------------
Net Loans 129,610 138,041
Premises and Equipment 4,552 4,689
Other Assets 3,629 3,251
----------------- -----------------
Total Assets $ 210,379 $ 218,030
================= =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest Bearing $ 14,795 $ 16,090
Interest Bearing 159,593 162,801
----------------- -----------------
Total Deposits 174,388 178,891
Other Liabilities 878 1,123
Short Term Borrowings 6,068 5,946
Long Term Debt 5,210 7,720
----------------- -----------------
Total Liabilities 186,544 193,680
----------------- -----------------
Commitments and Contingent Liabilities - -
Shareholders' Equity -
Common Stock - No Par Value
5,000,000 shares authorized, 2,376,000 issued
and 2,211,014 outstanding 1,237 1,237
Capital Surplus 1,513 1,513
Retained Earnings 22,730 23,371
Accumulated Other Comprehensive Income 1,072 946
Treasury Stock - 164,986 shares at cost (2,717) (2,717)
----------------- -----------------
Total Shareholders' Equity 23,835 24,350
----------------- -----------------
Total Liabilities and Shareholders' Equity $ 210,379 $ 218,030
================= =================
The accompanying notes are an integral part of the condensed consolidated financial statements
3
COMBANC, INC. AND SUBSIDIARY
DELPHOS, OHIO
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
For the Three Months Ended
June 30,
----------------------------------
(unaudited)
2003 2002
--------------- ---------------
Interest Income:
Interest and Fees on Loans $ 2,218 $ 2,693
Interest and Dividends on Investments -
Taxable 409 399
Tax-Exempt 146 167
Interest on Federal Funds Sold 28 83
--------------- ---------------
Total Interest Income 2,801 3,342
--------------- ---------------
Interest Expense:
Interest on Deposits 778 1,185
Interest on Short-Term Borrowings 16 9
Interest on Long-Term Debt 94 148
--------------- ---------------
Total Interest Expense 888 1,342
--------------- ---------------
Net Interest Income 1,913 2,000
Provision for Loan Losses 180 200
--------------- ---------------
Net Interest Income after Provision for Loan Losses 1,733 1,800
Other Income:
Service Charges on Deposit Accounts 141 120
Gain on Sale of Loans 174 24
Other Operating Income 147 119
--------------- ---------------
Total Other Income 462 263
--------------- ---------------
Other Expenses:
Salaries and Employee Benefits 839 849
Net Occupancy 175 182
Other Operating Expenses 577 473
--------------- ---------------
Total Other Expenses 1,591 1,504
--------------- ---------------
Income - before Income Tax Expense 604 559
Income Tax Expense 133 141
--------------- ---------------
Net Income $ 471 $ 418
=============== ===============
Earnings Per Share $ 0.21 $ 0.19
Cash Dividends Per Share $ 0.12 $ 0.12
The accompanying notes are an integral part of the condensed consolidated financial statements
4
COMBANC, INC. AND SUBSIDIARY
DELPHOS, OHIO
--------
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
For the Six Months Ended
June 30,
----------------------------
(unaudited)
2003 2002
------------ ------------
Interest Income:
Interest and Fees on Loans $ 4,451 $ 5,532
Interest and Dividends on Investments -
Taxable 854 769
Tax-Exempt 293 330
Interest on Federal Funds Sold 48 141
------------ ------------
Total Interest Income 5,646 6,772
------------ ------------
Interest Expense:
Interest on Deposits 1,613 2,489
Interest on Short-Term Borrowings 30 31
Interest on Long-Term Debt 208 290
------------ ------------
Total Interest Expense 1,851 2,810
------------ ------------
Net Interest Income 3,795 3,962
Provision for Loan Losses 1,910 350
------------ ------------
Net Interest Income after Provision for Loan Losses 1,885 3,612
Other Income:
Service Charges on Deposit Accounts 269 233
Gain on Sale of Loans 285 39
Other Operating Income 318 244
------------ ------------
Total Other Income 872 516
------------ ------------
Other Expenses:
Salaries and Employee Benefits 1,654 1,570
Net Occupancy 364 357
Other Operating Expenses 1,088 1,030
------------ ------------
Total Other Expenses 3,106 2,957
------------ ------------
Income/Loss - before Income Tax (Credit)/Expense (349) 1,171
Income Tax (Credit)/Expense (238) 280
------------ ------------
Net Income/(Loss) $ (111) $ 891
Earnings/(Loss) Per Share ============ ============
Cash Dividends Per Share $ (0.05) $ 0.40
$ 0.24 $ 0.24
The accompanying notes are an integral part of the condensed consolidated financial statements
5
COMBANC, INC. AND SUBSIDIARY
DELPHOS, OHIO
--------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
For the Six Months
June 30,
-----------------------------------
2003 2002
---------------- ---------------
(unaudited)
Cash Flows from Operating Activities:
Net Income/(Loss) $ (111) $ 891
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities -
Depreciation and amortization 204 206
Provision for Loan Loss 1,910 350
Federal Home Loan Bank stock Dividends (34) (60)
Investment securities amortization (accretion), Net 189 25
Net Change in Loans Held for Resale (2,086) 1,017
Net Change in
Interest receivable (55) 53
Interest payable (93) (315)
Other assets (290) (164)
Other liabilities (218) (46)
---------------- ---------------
Net Cash Provided/(Used) by Operating Activities (584) 1,957
---------------- ---------------
Cash Flows from Investing Activities:
Purchases of Securities Available for Sale/FHLB Stock (17,877) (8,600)
Proceeds from Maturities of Securities
Available for Sale 15,446 6,550
Net Change in Loans 6,521 10,871
Purchases of Premises and Equipment (68) (114)
---------------- ---------------
Net Cash Provided by Investing Activities 4,022 8,707
---------------- ---------------
Cash Flows from Financing Activities:
Net change in Deposit Accounts (4,502) (163)
Proceeds from Borrowing 122 522
Repayment of Federal Home Loan Bank Advances (2,509) (1,420)
Dividends Paid (531) (537)
Purchase of Stock - (473)
---------------- ---------------
Net Cash Provided/(Used) by Financing Activities (7,420) (2,071)
---------------- ---------------
Net Change in Cash and Cash Equivalents (3,982) 8,593
Cash and Cash Equivalents -
Beginning of Year 16,925 16,389
---------------- ---------------
End of Period $ 12,943 $ 24,982
================ ===============
The accompanying notes are an integral part of the condensed consolidated financial statements
6
COMBANC, INC. AND SUBSIDIARY
June 30, 2003 FORM 10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2003
Note 1, Basis of Presentation
Certain information and note disclosures normally included in the Company's
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K annual report for 2002 filed with the
Securities and Exchange Commission.
The significant accounting policies followed by ComBanc, Inc. (Company) and its
wholly-owned subsidiary, The Commercial Bank (Bank), for interim financial
reporting are consistent with the accounting policies followed for annual
financial reporting. All adjustments which are, in the opinion of management,
necessary for a fair presentation of the results for the periods reported,
consisting only of normal recurring adjustments, have been included in the
accompanying unaudited condensed consolidated financial statements. The results
of operations for the six months ended June 30, 2003, are not necessarily
indicative of those expected for the remainder of the year.
The Condensed Consolidated Balance Sheet at December 31, 2002 has been taken
from audited consolidated financial statements at that date.
Note 2, Earnings Per Share
Earnings per share on the income statement has been computed on the basis of
weighted-average number of shares of common stock outstanding. The
weighted-average shares outstanding for the six months ending June 30, 2003 and
June 30, 2002 were 2,211,014 and 2,237,490 respectively.
Note 3, Commitments to fund loans
Outstanding commitments to originate loans were $25,273,000 and $21,943,000 at
June 30, 2003 and December 31, 2002.
Note 4, Allowance for Loan Losses
Credit risk is the risk of loss from a customer default on a loan. The Bank has
in place a process to identify and manage its credit risk. The process includes
initial credit review and approval, periodic monitoring to measure compliance
with credit agreements and internal credit policies, monitoring changes in the
risk ratings of loans and leases, identification of problem loans and special
procedures for the collection of problem loans. The risk of loss is difficult to
quantify and is subject to fluctuations in values and general economic
conditions and other factors. THE DETERMINATION OF THE ALLOWANCE FOR LOAN LOSSES
IS A CRITICAL ACCOUNTING POLICY WHICH INVOLVES ESTIMATES AND MANAGEMENT'S
JUDGMENT ON A NUMBER OF FACTORS SUCH AS NET CHARGE-OFFS, DELINQUENCIES IN THE
LOAN PORTFOLIO AND GENERAL ECONOMIC CONDITIONS. The Bank considers the allowance
for loan losses of $3,176,000 adequate to cover losses
7
COMBANC, INC. AND SUBSIDIARY
June 30, 2003 FORM 10-Q
inherent in the loan portfolios as of June 30, 2003. However, no assurance can
be given that the Bank will not, in any particular period, sustain loan losses
that are sizeable in relation to the amount reserved, or that subsequent
evaluations of the loan portfolio, in light of factors then prevailing,
including economic conditions and the Bank's on-going credit review process,
will not require significant increases in the allowance for loan losses. Among
other factors, a protracted economic slowdown and/or a decline in commercial or
residential real estate values in the Bank's markets may have an adverse impact
on the adequacy of the allowance for loan losses by increasing credit risk and
the risk of potential loss.
Note 5, Effect of Accounting Changes
On November 25, 2002, the Financial Accounting Standards Board (FASB) issued
Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN No. 45)
which expands on the accounting guidance of Statements No. 5, 57 and 107 and
incorporates without change the provisions of FASB Interpretation No. 34, which
is being superseded.
FIN No. 45, which is applicable to public and non-public entities, will
significantly change current practice in the accounting for, and disclosure of,
guarantees. Each guarantee meeting the characteristics described in FIN No. 45
is to be recognized and initially measured at fair value, which will be a change
from current practice for most entities. In addition, guarantors will be
required to make significant new disclosures, even if the likelihood of the
guarantor making payments under the guarantee is remote, which represents
another change from current general practice.
FIN No. 45's disclosure requirements are effective for financial statements of
interim or annual periods ending after December 15, 2002, while the initial
recognition and initial measurement provisions are applicable on a prospective
basis to guarantees issued or modified after December 31, 2002. The Company has
changed its method of accounting and financial reporting for standby letters of
credit by adopting the provisions of FIN No. 45 effective January 1, 2003. There
was no material impact of the adoption on the financial statements.
8
COMBANC, INC. AND SUBSIDIARY
June 30, 2003 FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 2 - Management's Discussion and Analysis of Financial Condition
and Results of Operation
ENTITY STATUS
On April 13, 1998, The Commercial Bank became a wholly-owned subsidiary of the
newly formed ComBanc, Inc., a one-bank holding company. Since ComBanc's only
significant asset is the investment in The Commercial Bank, the following
discussion will focus on the operations of The Commercial Bank.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company are in accordance with
accounting principles generally accepted in the United States and conform to
general practices within the banking industry. The Company's significant
accounting policies are described in detail in the notes to the Company's
consolidated financial statements for the year ended December 31, 2002. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions. The
financial position and results of operations can be affected by these estimates
and assumptions and are integral to the understanding of reported results.
Critical accounting policies are those policies that management believes are the
most important to the portrayal of the Company's financial condition and
results, and they require management to make estimates that are difficult,
subjective, or complex.
Allowance for Credit Losses- The allowance for credit losses provides coverage
for probable losses inherent in the Company's loan portfolio. Management
evaluates the adequacy of the allowance for credit losses each quarter based on
changes, if any, in underwriting activities, the loan portfolio composition
(including product mix and geographic, industry or customer-specific
concentrations), trends in loan performance, regulatory guidance and economic
factors. This evaluation is inherently subjective, as it requires the use of
significant management estimates. Many factors can affect management's estimates
of specific and expected losses, including volatility of default probabilities,
rating migrations, loss severity and economic and political conditions. The
allowance is increased through provisions charged to operating earnings and
reduced by net charge-offs.
The Company determines the amount of the allowance based on relative risk
characteristics of the loan portfolio. The allowance recorded for commercial
loans is based on reviews of individual credit relationships and an analysis of
the migration of commercial loans and actual loss experience. The allowance
recorded for homogeneous consumer loans is based on an analysis of loan mix,
risk characteristics of the portfolio, fraud loss and bankruptcy experiences,
and historical losses, adjusted for current trends, for each homogeneous
category or group of loans. The allowance for credit losses relating to impaired
loans is based on the loan's observable market price, the collateral for certain
collateral-dependent loans, or the discounted cash flows using the loan's
effective interest rate.
Regardless of the extent of the Company's analysis of customer performance,
portfolio trends or risk management processes, certain inherent but undetected
losses are probable within the loan portfolio.
9
COMBANC, INC. AND SUBSIDIARY
June 30, 2003 FORM 10-Q
This is due to several factors including inherent delays in obtaining
information regarding a customer's financial condition or changes in their
unique business conditions, the judgmental nature of individual loan
evaluations, collateral assessments and the interpretation of economic trends.
Volatility of economic or customer-specific conditions affecting the
identification and estimation of losses for larger non-homogeneous credits and
the sensitivity of assumptions utilized to establish allowances for homogenous
groups of loans are among other factors. The Company estimates a range of
inherent losses related to the existence of these exposures. The estimates are
based upon the Company's evaluation of imprecision risk associated with the
commercial and consumer allowance levels and the estimated impact of the current
economic environment.
Mortgage Servicing Rights- Mortgage servicing rights ("MSRs") associated with
loans originated and sold, where servicing is retained, are capitalized and
included in other intangible assets in the consolidated balance sheet. The value
of the capitalized servicing rights represents the present value of the future
servicing fees arising from the right to service loans in the portfolio.
Critical accounting policies for MSRs relate to the initial valuation and
subsequent impairment tests. The methodology used to determine the valuation of
MSRs requires the development and use of a number of estimates, including
anticipated principal amortization and prepayments of that principal balance.
Events that may significantly affect the estimates used are changes in interest
rates, mortgage loan prepayment speeds and the payment performance of the
underlying loans. The carrying value of the MSRs is periodically reviewed for
impairment based on a determination of fair value. For purposes of measuring
impairment, the servicing rights are compared to a valuation prepared based on a
discounted cash flow methodology, utilizing current prepayment speeds and
discount rates. Impairment, if any, is recognized through a valuation allowance
and is recorded as amortization of intangible assets.
FINANCIAL CONDITION
As an overview of the financial condition and results of operation for the
second quarter of 2003, several improvements have been made. Nonaccrual loans,
as will be discussed in paragraphs to follow, have decreased by 26% during the
quarter and total delinquencies have decreased by 15.1% from $13,071,000 at
March 31, 2003 to $11,100,000 at June 30, 2003. This reduction in nonaccrual
loans accompanied with a decrease in cost of funds has improved net interest
margin by more than $31,000 during the second quarter. As these nonaccrual loans
are converted back to earning assets, interest margin will continue to improve.
Total assets decreased 3.51% from $218,030,000 at December 31, 2002 to
$210,379,000 at June 30, 2003. This is the result of a $7,305,000 decrease in
total loans, a $4,503,000 decrease in total deposits and a $2,510,000 decrease
in long-term debt.
Federal Funds sold increased $417,000 or 9.02% from December 31, 2002 to
$5,041,000 at June 30, 2003 while Cash and Due from Banks decreased $4,399,000
or 35.76% from $12,301,000 at December 31, 2002 to $7,902,000 at June 30, 2003.
Due to a clerical error at a correspondent bank on December 31, 2002, federal
funds should have been $8,973,000 and Cash and Due from Banks were $7,952,000.
10
COMBANC, INC. AND SUBSIDIARY
June 30, 2003 FORM 10-Q
The error was left unadjusted due to the external accountants' confirmation of
the $4,624,000 in Federal Funds Sold. Although the confirmed balance was
$4,624,000, interest was earned on the $8,973,000.
Investment securities increased $2,434,000 from $54,396,000 at December 31, 2002
to $56,830,000 at June 30, 2003. This increase is the result of $17,877,000 in
purchases less the pay downs from the Mortgage-backed securities and an U.S.
Agency Bond being called within the investment portfolio totaling $15,446,000.
Total gross loans decreased 3.71% or $5,218,000 from December 31, 2002 to
$135,601,000 on June 30, 2003. 1 to 4 family residential real estate loans
decreased $2,698,000 or 6.63% from year-end to June 30, 2003 due to a continued
demand for lower interest rate, long-term mortgage loans. As these loans are
refinanced, the bank chooses to sell these mortgages, with servicing retained,
to the Federal Home Loan Mortgage Corporation in order to be able to offer
competitive mortgage rates to consumers and minimize interest rate risk.
Commercial real estate loans increased 3.38% or $1,546,000 from $45,760,000 at
December 31, 2002 to $47,306,000 at June 30, 2003. Commercial loans decreased
12.42% or $2,061,000 from $16,588,000 at December 31, 2002 to $14,527,000 at
June 30, 2003. This decrease is primarily due to the higher risk that these
loans carry in a sluggish economy. As these loans were refinanced, they were
priced above the competition to encourage a controlled amount of runoff.
Consumer installment loans decreased 14.64% or $1,727,000 from $11,795,000 at
December 31, 2002 primarily due to the desire to reduce indirect auto loans
which tend to be riskier in nature.
The Allowance for Loan Losses, at June 30, 2003 was 2.39% of total loans
compared to 1.46% at December 31, 2002. This $1,126,000 increase from December
31, 2002 is the result of a $1,910,000 provision and net charge offs of
$784,000, increasing the Allowance for Loan Loss from $2,050,000 at December 31,
2002 to $3,176,000 at June 30, 2003. Due to a low coverage ratio of Allowance
for Loan Losses (ALLL) to non accrual loans, management increased the provision
by $1,550,000 improving the ratio to 45% from 26% in March of 2003. The addition
of the $1,550,000 was also due to the continued high volume of $6,284,000 in
nonaccrual loans that management continues to pursue legally. Although the
nonaccrual loan balances remain at high levels, these balances have been reduced
by $2,172,000 in the second quarter 2003. Management attributes this significant
decrease to an improvement in the local economy and an increased emphasis on
work-out programs. The economy has begun to show signs of improvement through a
slight decrease in unemployment and increased capacity at some local
manufacturers. Of the $784,000 in net charge offs, $608,000 consisted of
commercial and industrial loans, $47,000 consisted of consumer installment
loans, $75,000 consisted of commercial real estate, and $30,000 consisted of
construction and land development loans which are secured by real estate.
Total deposits decreased $4,503,000 or 2.52% from $178,891,000 on December 31,
2002 to $174,388,000 on June 30, 2003. Noninterest bearing deposits decreased
$1,295,000 from December 31, 2002 to June 30, 2003, while interest-bearing
deposits decreased $3,208,000 during the period. Time deposit balances decreased
$3,477,000, while interest-bearing checking accounts decreased $939,000 and
money market savings and savings accounts increased $1,208,000 during this
period.
Short-term borrowings, which include Federal Home Loan Bank borrowings with
original maturities of less than one year and repurchase agreements, increased
$122,000 from December 31, 2002 to June 30, 2003. Of the $122,000 increase,
Federal Home Loan Bank borrowings were unchanged while
11
COMBANC, INC. AND SUBSIDIARY
June 30, 2003 FORM 10-Q
repurchase agreements increased $122,000. Long-term debt or borrowings with an
original maturity of greater than one year from the Federal Home Loan Bank
decreased $2,510,000 or 32.51% from December 31, 2002 to June 30, 2003. This
decrease is due to the maturity of two advances totaling $1,993,000 with a
weighted average rate of 7.44%. Due to the excessive amount of liquidity,
management chose not to borrow additional funds from FHLB at that time.
Total shareholders equity decreased 2.11% or $515,000 to $23,835,000 from
December 31, 2002 to June 30, 2003. Included in the overall decrease was a
decrease in retained earnings of $641,000, which was the result of a first two
quarters net loss of $111,000 and $530,000 in dividends. No Treasury Stock was
repurchased in the first two quarters of 2003.
RESULTS OF OPERATIONS
Net interest income, the difference between interest earned on interest-earning
assets and interest expense incurred on interest-bearing liabilities, is the
most significant component of The Commercial Bank's earnings. Net interest
income is affected by changes in the volume and rates of interest-earning assets
and interest-bearing liabilities and the volume of interest-earning assets
funded with low cost deposits, noninterest-bearing deposits and shareholders'
equity. Net interest income decreased $167,000 for the six months ended June 30,
2003 from a year ago.
Total interest income decreased $1,126,000 to $5,646,000 from $6,772,000 for the
six months ended June 30, 2003 over June 30, 2002. Interest and fees on loans
decreased $1,081,000 or 19.54% over the same time last year. This decrease is
due to the increased volume of real estate loans sold to FHLMC on the secondary
market, the repricing of portfolio loans and three additional rate cuts by the
Federal Reserve in 2002 and 2003. Taxable investment income increased $85,000 or
11.05% for the first six months of 2003 for a total of $854,000 compared to
$769,000 for the first six months of 2002. This increase is due to the
$21,212,000 increase in Mortgage-backed securities from June 30, 2002 to June
30, 2003. Interest on Federal Funds Sold decreased from $141,000 for the first
two quarters ended June 30, 2002 to $48,000 for the first two quarters ended
June 30, 2003. This decrease is also the result of the three additional interest
rate cuts by the Federal Reserve in 2002 and 2003 and a decrease in average
balance of Federal Funds Sold of $8,909,000.
Non-interest income increased $356,000 or 68.99% for the six months ended June
30, 2003 from June 30, 2002. The increase was due in part to a $246,000 increase
in the gain on the sale of real estate loans to the secondary market, an
increase in Service Charges on Deposit Accounts of $36,000 and an increase in
other operating income of $74,000. Non-interest income increased $199,000 to
$462,000 for the quarter ended June 30, 2003 compared to $263,000 for the
quarter ended June 30, 2002. Gain on sale of loans to FHLMC increased $150,000
while service charges on deposit accounts and other operating income increased
$21,000 and $28,000 respectively for the quarter ended June 30, 2003 compared to
the quarter ended June 30, 2002 due to a continued demand for low interest rate,
long-term 1 to 4 family residential mortgages.
The provision for loan losses increased $1,560,000 for the six months ended June
30, 2003 compared to June 30, 2002. Management increased the provision for loan
losses in the first quarter of 2003 due to continued high volume in loan
delinquencies. Due to local economic conditions, the continued volume
12
COMBANC, INC. AND SUBSIDIARY
June 30, 2003 FORM 10-Q
of non-accrual loan balances of $6,284,000 and the net charge-off of $784,000
management increased the provision by $1,560,000. While the provision for loan
losses has increased $1,560,000 for the first six months ended June 30, 2003, it
decreased $20,000 to $180,000 for the quarter ended June 30, 2003 compared to
$200,000 for the quarter ended June 30, 2002.
Total interest expense decreased 34.13% or $959,000 from $2,810,000 for the six
months ended June 30, 2002 to $1,851,000 for the six months ended June 30, 2003.
Interest on deposits decreased $876,000 or 35.19% compared to the first two
quarters of 2002. This decrease is the result of a decrease in certificate
interest rates during 2001, 2002 and 2003 as well as a $7,042,000 decrease in
the volume of time deposits from a year ago. Interest on short term borrowings
decreased $1,000 and long term borrowings decreased $82,000. The decrease in
long term borrowings is due to the decrease in weighted average interest rates
and the decrease in long-term debt at the Federal Home Loan Bank of $2,510,000.
Non-interest expense increased 5.04% or $149,000 to $3,106,000 for the six
months ended June 30, 2003 compared to $2,957,000 for the six months ended June
30, 2002. Salaries and employee benefits increased $84,000 over the first two
quarters of 2002. This increase is due to an increase of $126,000 in group
insurance costs, a $53,000 increase in employee salaries, and a $95,000 decrease
in employee profit sharing for the first six months of 2003 over the first six
months of 2002. Other operating expenses have increased $58,000 to $1,088,000
for the first six months of 2003 from $1,030,000 for the first six months of
2002. Included in this increase is an increase of $32,000 in advertising
expense, a decrease of $3,000 in data processing fees, a decrease of $17,000 in
printing and office supplies, an increase of $7,000 in state taxes and an
increase of $39,000 in other expense, while there was an increase in net
occupancy expense of $7,000.
Net income decreased $1,002,000 or 112.46% from $891,000 for the six months
ended June 30, 2002 to a net loss of $111,000 for the six months ended June 30,
2003. This net loss for the first two quarters of 2003 is due to the significant
increase in the provision for loan losses in the amount of $1,560,000, where the
provision was $350,000 for the first two quarters of 2002 compared to $1,910,000
for the first two quarters of 2003. The significant increase in the provision
for loan losses was due to the low coverage ratio of the ALLL to nonaccrual
loans as discussed in prior paragraphs. For the quarter ended June 30, 2003, net
income increased $53,000 or 12.68% to $471,000 compared to $418,000 for the
quarter ended June 30, 2002. This increase is the decrease of $20,000 in the
provision for loan losses and the increase in non-interest income of $150,000.
FORWARD-LOOKING STATEMENTS
The Company has made, and may continue to make, various forward-looking
statements with respect to interest rate sensitivity analysis, credit quality
and other financial and business matters for 2003 and, in certain instances,
subsequent periods. The Company cautions that these forward-looking statements
are subject to numerous assumptions, risks and uncertainties, and that
statements for periods subsequent to 2003 are subject to greater uncertainty
because of the increased likelihood of changes in underlying factors and
assumptions. Actual results could differ materially from forward-looking
statements. In addition to those factors previously disclosed by the Company and
those factors identified elsewhere herein, the following factors could cause
actual results to differ materially from such forward looking
13
COMBANC, INC. AND SUBSIDIARY
June 30, 2003 FORM 10-Q
statements: the extent and timing of actions of the Federal Reserve, changes in
economic conditions, continued pricing pressures on loan and deposit products,
actions of competitors, customer's acceptance of the Company's products and
services, the extent and timing of legislative and regulatory actions and
reforms, changes in accounting principals, technological changes and increased
technology costs, downturn in demand for loan and deposit products, and changes
in the interest rate environment that reduce interest margins. The Company's
forward-looking statements speak only as the date on which such statements are
made. By making any forward-looking statements, the Company assumes no duty to
update them to reflect new, changing or unanticipated events or circumstances.
REGULATORY CAPITAL
The Federal Reserve Board's risk-based capital guidelines addressing the capital
adequacy of bank holding companies and banks (collectively, "banking
organizations") include a definition of capital and a framework for calculating
risk-weighted assets and off-balance sheet items to broad risk categories, as
well as minimum ratios to be maintained by banking organizations. A banking
organization's risk-based capital ratios are calculated by dividing its
qualifying capital by its risk-weighted assets.
Under the risk-based capital guidelines, there are two categories of capital:
core capital ("Tier 1") and supplemental capital ("Tier 2"), collectively
referred to as Total Capital. Tier 1 Capital includes common stockholders'
equity, qualifying perpetual preferred stock and minority interest in equity
accounts of consolidated subsidiaries. Tier 2 capital includes perpetual
preferred stock (to the extent ineligible for Tier 1), hybrid capital
instruments (i.e. perpetual debt and mandatory convertible securities) and
limited amounts of subordinated debt, intermediate-term preferred stock and the
allowance for credit losses.
The Federal Reserve Board's leverage constraint guidelines establish a minimum
ratio of Tier 1 Capital to quarterly average total assets ("Leverage Ratio").
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
established five capital tiers for banks. Pursuant to that statute the federal
bank regulatory agencies have defined the five capital tiers for banks. Under
these regulations, a bank is defined to be well capitalized, the highest tier,
if it maintains a Tier 1 Capital ratio of at least 6 percent, a Total Capital
ratio of at least 10 percent and a Leverage ratio of at least 5 percent. At June
30, 2003 ComBanc, Inc. maintained a Tier I Capital ratio of 17.20%, a Total
Capital ratio of 18.46% and a Tier I Leverage ratio of 10.80%.
Based on the respective regulatory capital ratios at June 30, 2003, and based on
the definitions in the regulations issued by the Federal Reserve Board and the
other federal bank regulatory agencies setting forth the general capital
requirements mandated by FDICIA, the Bank is well capitalized.
LIQUIDITY
The liquidity of a banking institution reflects its ability to provide funds to
meet loan requests, to accommodate possible outflows in deposits and to take
advantage of interest rate market opportunities.
14
COMBANC, INC. AND SUBSIDIARY
June 30, 2003 FORM 10-Q
Funding of loan requests, providing for liability outflows, and management of
interest rate fluctuations require continuous analysis in order to match the
maturities of specific categories of short-term loans and investments with
specific types of deposits and borrowings. Bank liquidity is thus normally
considered in terms of the nature and mix of the banking institution's sources
and uses of funds. Liquid assets consist of Cash and Due from Banks, Federal
Funds Sold, and Securities Available for Sale. At June 30, 2003 the Bank's
liquid assets amounted to $69,773,000 or 33.17% of total assets compared with
32.71% at December 31, 2002.
The Bank's residential first mortgage portfolio has been used to collateralize
borrowings from the Federal Home Loan Bank as an additional source of liquidity.
The Federal Home Loan Bank requires the Bank to pledge 135% of the first
mortgage loan portfolio as collateral. The approximate available line of credit
from the Federal Home Loan Bank at June 30, 2003 was $35.0 million with a
balance of $5.2 million leaving $29.8 million left to advance.
At June 30, 2003, management considers its liquidity to be adequate to meet its
normal funding requirements.
15
COMBANC, INC. AND SUBSIDIARY
June 30, 2003 FORM 10-Q
Item 3 - Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the Company's quantitative and
qualitative market risks since December 31, 2002. The following table compares
rate sensitive assets and liabilities as of June 30, 2003 to December 31, 2002.
Principal Amount Maturing or Repricing in:
(Dollars in Thousands)
First Years
Year 1 to 5 Thereafter Total
----- ------ ---------- -----
Comparison of 06/30/03 to 12/31/02
Total rate sensitive assets:
At December 31, 2002 $66,518 $85,289 48,238 $200,045
At June 30, 2003 71,407 78,943 47,424 197,774
Increase (Decrease) 4,889 (6,346) (814) (2,271)
Total rate sensitive liabilities:
At December 31, 2002 $77,208 $72,817 $26,440 $176,465
At June 30, 2003 76,129 70,243 24,499 170,871
Increase (Decrease) (1,079) (2,574) (1,941) (5,594)
Item 4 - Controls and Procedures
An evaluation was carried out under the supervision and with the participation
of the Company's management, including our Chief Executive Officer and principal
financial officer, of the effectiveness of our disclosure controls and
procedures (as defined in Rules 13a -- 15 (e) and 15d -- 15 (e) of the
Securities Exchange Act of 1934) as of the end of the period covered by this
report. Based on their evaluation, our Chief Executive Officer and principal
financial officer have concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in 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. There were no significant
changes in the Company's internal controls over financial reporting that
occurred during the period covered by this report that has materially affected,
or that is reasonably likely to materially affect, our internal control over
financial reporting.
16
COMBANC, INC. AND SUBSIDIARY
June 30, 2003 FORM 10-Q
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
The Commercial Bank, at any given time, is involved in a number of lawsuits
initiated by The Commercial Bank as a plaintiff, intending to collect upon
delinquent accounts, to foreclose upon real property, or to seize and sell
personal property pledged as security for any such account. ComBanc, Inc. is
involved in no legal proceedings.
At June 30, 2003, The Commercial Bank was involved in a number of such cases as
a party-plaintiff, and occasionally, as a party-defendant due to its joinder as
a lien holder, either by mortgage or by judgment lien. In the ordinary case, The
Commercial Bank's security and value of its lien is not threatened, except
through bankruptcy or loss of value of the collateral should sale result in
insufficient proceeds to satisfy the judgment.
Management and the Board are not aware of any additional potential claims
against The Commercial Bank, which have not been disclosed herein.
Item 4 - Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of ComBanc, Inc. was held on April 14, 2003.
Based upon the report of the Inspector of Elections on the matters voted upon at
this meeting the number of Directors for the ensuing year was fixed at six (6).
The following were elected as Directors until the 2004 Annual Meeting of
Shareholders and until their successors are elected and qualified:
Director For Abstain
- --------------------------- --------------------------- -----------------
Mr. Gary A. DeWyer 1,747,659 46,712
Mr. Richard R. Thompson 1,715,683 78,688
Mr. Dwain I. Metzger 1,715,803 78,568
Mr. C. Stanley Strayer 1,715,803 78,568
Mr. Paul G. Wreede 1,695,445 98,926
Mr. Ronald R. Elwer 1,715,803 78,568
17
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibit 11. Statement regarding computation of earnings
per share is contained in Part I, Item 2.
Exhibit 31.1 Certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 - Principal Financial Officer
Exhibit 31.2 Certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 - Principal Executive Officer
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 - Principal Financial Officer
Exhibit 32.2 Certification pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 - Principal Executive Officer
(b) There were no reports on 8-K filed during the quarter ended
June 30, 2003.
18
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.
COMBANC, INC.
Date: August 8, 2003 /s/ Paul G. Wreede
------------------
Paul G. Wreede
President, CEO, and Director
Date: August 8, 2003 /s/ Jason R. Thornell
---------------------
Jason R. Thornell
AVP/Controller
19
EXHIBIT INDEX
Exhibit No. Description
(a) Exhibit 11. Statement regarding computation of earnings
per share is contained in Part I, Item 2.
Exhibit 31.1 Certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 - Principal Financial Officer
Exhibit 31.2 Certification pursuant to Section 302 of
the Sarbanes-Oxley Act of 2002 - Principal Executive Officer
Exhibit 32.1 Certification pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 - Principal Financial Officer
Exhibit 32.2 Certification pursuant to 18 U.S.C. Section
1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 - Principal Executive Officer
20