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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 September 30, 2003
OR
[ ] 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 000-24925
COMBANC, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Delaware 34-1853493
- --------------------------------------------------------------------------------
(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
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(419) 695-1055
- --------------------------------------------------------------------------------
(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]
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 November 1,
2003.
Page 1 of 25
COMBANC, INC. AND SUBSIDIARY
September 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 10
and Results of Operation
Item 3. Quantitative and Qualitative Disclosures about Market Risk 18
Item 4. Controls and Procedures 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 19
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
Exhibit 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 - principal financial officer 22
Exhibit 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 - Principal Executive Officer 23
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 24
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 25
2
COMBANC, INC. AND SUBSIDIARY
September 30, 2003 FORM 10-Q
COMBANC, INC. AND SUBSIDIARY
DELPHOS, OHIO
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in thousands)
September 30, December 31,
ASSETS 2003 2002
--------- ---------
(unaudited)
Cash and Due from Banks $ 9,133 $ 12,301
Federal Funds Sold 6,535 4,624
--------- ---------
Cash and Cash Equivalents 15,668 16,925
Investment Securities -
Available for Sale 52,840 54,396
Loans Held for Resale 335 728
Loans 132,506 140,091
Allowance for Loan Losses (3,357) (2,050)
--------- ---------
Net Loans 129,149 138,041
Premises and Equipment 4,506 4,689
Other Assets 4,423 3,251
--------- ---------
Total Assets $ 206,921 $ 218,030
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest Bearing $ 13,910 $ 16,090
Interest Bearing 155,887 162,801
--------- ---------
Total Deposits 169,797 178,891
Other Liabilities 853 1,123
Short Term Borrowings 7,975 5,946
Long Term Debt 4,958 7,720
--------- ---------
Total Liabilities 183,583 193,680
--------- ---------
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 22,818 23,371
Accumulated Other Comprehensive Income 487 946
Treasury Stock - 164,986 shares at cost (2,717) (2,717)
--------- ---------
Total Shareholders' Equity 23,338 24,350
--------- ---------
Total Liabilities and Shareholders' Equity $ 206,921 $ 218,030
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements
3
COMBANC, INC. AND SUBSIDIARY
September 30, 2003 FORM 10-Q
COMBANC, INC. AND SUBSIDIARY
DELPHOS, OHIO
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
For the Three Months Ended
September 30,
--------------------------
(unaudited)
2003 2002
--------- --------
Interest Income:
Interest and Fees on Loans $ 2,058 $ 2,543
--------- --------
Interest and Dividends on Investments -
Taxable 362 381
Tax-Exempt 139 167
Interest on Federal Funds Sold 22 87
Interest on Deposits with Financial Institutions 1 1
--------- --------
Total Interest Income 2,581 3,178
--------- --------
Interest Expense:
Interest on Deposits 701 1,125
Interest on Short-Term Borrowings 27 23
Interest on Long-Term Debt 70 118
--------- --------
Total Interest Expense 798 1,266
--------- --------
Net Interest Income 1,783 1,912
Provision for Loan Losses 430 150
--------- --------
Net Interest Income after Provision for Loan Losses 1,353 1,762
Other Income:
Service Charges on Deposit Accounts 138 125
Gain on Sale of Loans 173 70
Other Operating Income 200 130
--------- --------
Total Other Income 511 325
--------- --------
Other Expenses:
Salaries and Employee Benefits 710 735
Net Occupancy 183 177
Other Operating Expenses 550 518
--------- --------
Total Other Expenses 1,443 1,430
--------- --------
Income - before Income Tax Expense 421 657
Income Tax Expense 113 198
--------- --------
Net Income $ 308 $ 459
========= ========
Earnings Per Share $ 0.14 $ 0.21
Cash Dividends Per Share $ 0.10 $ 0.12
The accompanying notes are an integral part of the condensed consolidated
financial statements
4
COMBANC, INC. AND SUBSIDIARY
September 30, 2003 FORM 10-Q
COMBANC, INC. AND SUBSIDIARY
DELPHOS, OHIO
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
For the Nine Months Ended
September 30,
-------------------------
(unaudited)
2003 2002
--------- ---------
Interest Income:
Interest and Fees on Loans $ 6,509 $ 8,075
Interest and Dividends on Investments -
Taxable 1,216 1,150
Tax-Exempt 432 497
Interest on Federal Funds Sold 70 228
Interest on Deposits with Financial Institutions 1 1
--------- ---------
Total Interest Income 8,228 9,951
--------- ---------
Interest Expense:
Interest on Deposits 2,314 3,614
Interest on Short-Term Borrowings 57 54
Interest on Long-Term Debt 278 408
--------- ---------
Total Interest Expense 2,649 4,076
--------- ---------
Net Interest Income 5,579 5,875
Provision for Loan Losses 2,340 500
--------- ---------
Net Interest Income after Provision for Loan Losses 3,239 5,375
Other Income:
Service Charges on Deposit Accounts 407 358
Gain on Sale of Loans 458 109
Other Operating Income 518 374
--------- ---------
Total Other Income 1,383 841
--------- ---------
Other Expenses:
Salaries and Employee Benefits 2,364 2,305
Net Occupancy 547 534
Other Operating Expenses 1,638 1,548
--------- ---------
Total Other Expenses 4,549 4,387
--------- ---------
Income - before Income Tax (Credit)/Expense 73 1,829
Income Tax (Credit)/Expense (125) 478
--------- ---------
Net Income $ 198 $ 1,351
========= =========
Earnings Per Share $ 0.09 $ 0.61
Cash Dividends Per Share $ 0.34 $ 0.36
The accompanying notes are an integral part of the condensed consolidated
financial statements
5
COMBANC, INC. AND SUBSIDIARY
September 30, 2003 FORM 10-Q
COMBANC, INC. AND SUBSIDIARY
DELPHOS, OHIO
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
For the Nine Months
September 30,
----------------------
2003 2002
--------- ---------
(unaudited)
Cash Flows from Operating Activities:
Net Income $ 198 $ 1,351
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities -
Depreciation and amortization 297 307
Gain on sale of equipment - 23
Provision for Loan Loss 2,340 500
Federal Home Loan Bank stock Dividends (52) (80)
Investment securities amortization (accretion), Net 334 37
Net Change in Loans Held for Resale 393 1,214
Net Change in
Interest receivable 55 201
Interest payable (68) (218)
Other assets (1,175) (116)
Other liabilities 33 66
-------- --------
Net Cash Provided by Operating Activities 2,355 3,285
-------- --------
Cash Flows from Investing Activities:
Purchases of Securities Available for Sale/FHLB Stock (23,452) (21,149)
Proceeds from Maturities of Securities
Available for Sale 23,980 9,539
Net Change in Loans 6,552 14,133
Purchases of Premises and Equipment (114) (247)
Proceeds from sale of fixed assets - 35
-------- --------
Net Cash Provided by Investing Activities 6,966 2,311
-------- --------
Cash Flows from Financing Activities:
Net change in Deposit Accounts (9,094) (1,184)
Proceeds from Borrowing 2,029 896
Repayment of Federal Home Loan Bank Advances (2,761) (2,574)
Dividends Paid (752) (803)
Purchase of Stock - (632)
-------- --------
Net Cash (Used) by Financing Activities (10,578) (4,297)
-------- --------
Net Change in Cash and Cash Equivalents (1,257) 1,299
Cash and Cash Equivalents -
Beginning of Year 16,925 16,389
-------- --------
End of Period $ 15,668 $ 17,688
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements
6
COMBANC, INC. AND SUBSIDIARY
September 30, 2003 FORM 10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine months ended September 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 nine months ending September 30,
2003 and September 30, 2002 were 2,211,014 and 2,231,726 respectively.
Note 3, Commitments
Outstanding commitments to originate loans were $20,692,000 and $21,943,000 at
September 30, 2003 and December 31, 2002, respectively.
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 $3,357,000 adequate to cover losses inherent in the loan
portfolio as of September 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
7
COMBANC, INC. AND SUBSIDIARY
September 30, 2003 FORM 10-Q
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. FIN
45 is not expected to have a material effect on the Company's consolidated
financial statements.
In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest
Entities". FIN 46 requires a variable interest entity to be consolidated by a
company if that company is subject to a majority for the risk of loss from the
variable interest entity's activities or entitled to receive majority of the
entity's residual returns, or both. FIN 46 also requires disclosures about
variable interest entities that a company is not required to consolidate, but in
which it has a significant variable interest. The consolidation requirements of
FIN 46 apply immediately to variable interest entities created after January 31,
2003. The consolidation requirements apply to existing entities in the first
fiscal year or interim period beginning after June 15, 2003. Certain of the
disclosure requirements apply in all financial statements issued after January
31, 2003, regardless of when the variable interest entity was established. FIN
46 is not expected to have a material effect on the Company's consolidated
financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain embedded derivative, and for hedging activities under SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
Statement amends SFAS No. 133 to reflect the decisions made as part of the
Derivatives Implementation Group (DIG) and in other FASB projects or
deliberations. SFAS No. 149 is effective for contracts entered into
8
COMBANC, INC. AND SUBSIDIARY
September 30, 2003 FORM 10-Q
or modified after June 30, 2003, and for hedging relationships designated after
June 30, 2003. Adoption of this standard is not expected to have a material
effect on the Company's consolidated financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity". This Statement
establishes standards for how an entity classifies and measures certain
financial instruments with characteristics of both liabilities and equity. This
Statement is effective for financial instruments entered into or modified after
May 31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. Adoption of this standard did not have a
material effect on the Company's consolidated financial statements.
9
COMBANC, INC. AND SUBSIDIARY
September 30, 2003 FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operation
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 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.
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),
10
COMBANC, INC. AND SUBSIDIARY
September 30, 2003 FORM 10-Q
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. 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 nonhomogeneous 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 third
quarter of 2003, improvements have been made. Nonaccrual loans, as can be seen
in Table 1, have decreased by 27.2% since December 31, 2002 and total
delinquencies have decreased by 39.6% from December 31, 2002 to September 30,
2003. The reduction in nonaccrual loans can be attributed to $1,162,000 in
charge-offs,
11
COMBANC, INC. AND SUBSIDIARY
September 30, 2003 FORM 10-Q
$682,000 in principal reduction, and $453,000 moved to Other Real Estate Owned.
Total delinquency reduction can be credited to the reduction in nonaccrual loans
and loans being brought current through workout plans.
TABLE 1: Analysis of Delinquencies
9/30/2003 12/31/2002 12/31/2001 12/31/2000 12/31/1999 12/31/1998
Past due 30 to 89 days and still accruing $ 2,353 $ 6,672 $ 9,863 $ 4,502 $ 2,004 $ 1,947
Past due 90 days or more and still accruing 1,106 798 2,810 2,587 2,413 621
Nonaccrual 6,159 8,456 3,455 542 712 805
------------------------------------------------------------------------
Total delinquencies $ 9,618 $15,926 $16,128 $ 7,631 $ 5,129 $ 3,373
========================================================================
Total Delinquencies as a percentage of total loans 7.26% 11.37% 10.31% 4.50% 3.17% 2.37%
Total assets decreased $11,109,000 or 5.1% from $218,030,000 at December 31,
2002 to $206,921,000 at September 30, 2003. This is the result of an $8,892,000
decrease in net loans, a $1,556,000 decrease in investment securities, a
$9,094,000 decrease in total deposits and a $2,762,000 decrease in long-term
debt.
Investment securities decreased $1,556,000 from $54,396,000 at December 31, 2002
to $52,840,000 at September 30, 2003. This decrease is the result of $23,452,000
in purchases less the pay downs from Mortgage-backed securities and a U.S.
Agency Bond being called totaling $23,980,000, premium amortization of $334,000,
and a decrease in the market value of the available-for-sale portfolio of
$694,000. As interest rates begin to rebound from over 40 year lows, the market
value of the portfolio will continue to decrease, but due to the short average
life of 3.38 years and the volatility of -6.74% (in a +300 basis point rate
shock), the portfolio will cash flow quickly.
Total gross loans decreased 5.41% or $7,585,000 from December 31, 2002 to
$132,506,000 at September 30, 2003. The breakdown of the loan portfolio is
detailed in table 2 below. Significant changes in the portfolio include the
decrease in the 1-4 Family residential loans secured by first liens which is the
result of selling these mortgages to FHLMC. As can be seen in Table 2, secondary
market lending to FHLMC continues to grow at a rapid rate. The Bank chose to
sell these loans to maintain a competitive low interest rate and to offer a
long-term product to consumers. Although these loans are no longer an interest
earning asset to the institution, these loans were sold at a gain and will
continue to generate service fee income at .25% per month over the life of the
loan. Another significant change in the portfolio includes a $1,742,000 increase
in the real estate secured by nonfarm, nonresidential properties. This increase
is due to management's desire to increase loans secured by real estate which
tend to be less risky in nature. The commercial loan 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. The consumer installment loan decrease is primarily
due to the desire to reduce indirect auto loans which also tend to be riskier in
nature.
TABLE 2: Analysis of Loan Portfolio Composition
12
COMBANC, INC. AND SUBSIDIARY
September 30, 2003 FORM 10-Q
LOAN TYPE 9/30/2003 12/31/2002 CHANGE %
Construction/Land Development $ 7,780 $ 7,542 $ 238 3.16%
R/E Secured by Farmland 4,862 4,627 235 5.08%
Revol Open-end 1-4 Family LOC 5,553 5,476 77 1.41%
1-4 Secured by first 35,599 39,939 (4,340) -10.87%
1-4 Secured by Junior 699 869 (170) -19.56%
R/E Secured by Multi Family R/E 2,632 3,219 (587) -18.24%
R/E Secured by Nonfarm, Nonres 47,502 45,760 1,742 3.81%
Ag Loans 2,530 2,302 228 9.90%
Commercial Loans 13,966 16,588 (2,622) -15.81%
Municipal Loans 1,109 1,340 (231) -17.24%
Master Card Loans 536 622 (86) -13.83%
Other Consumer 5 1 4 400.00%
Consumer Loans 9,723 11,795 (2,072) -17.57%
Overdrafts 10 11 (1) -9.09%
--------------------------------------------
Total Loans 132,506 140,091 (7,585) -5.41%
Loan Loss Reserve 3,357 2,050 1,307 63.76%
--------------------------------------------
Total Net Loans $129,149 $138,041 $ (8,892) -6.44%
============================================
Serviced FHLMC Mortgages 62,350 45,589 16,761 36.77%
--------------------------------------------
Total Loans Serviced $191,499 $183,630 $ 7,869 4.29%
============================================
The Allowance for Loan Losses, at September 30, 2003 was 2.53% of total loans
compared to 1.46% at December 31, 2002. This $1,307,000 increase from December
31, 2002 is the result of a $2,340,000 provision and net charge offs of
$1,083,000, increasing the Allowance for Loan Loss from $2,050,000 at December
31, 2002 to $3,357,000 at September 30, 2003. In light of a low coverage ratio
of Allowance for Loan and Lease Losses (ALLL) to nonaccrual loans, management
increased the provision by $2,340,000 improving the ratio to 54.51% from 24.24%
at December 31, 2002. The addition of the $2,340,000 was also due to the
continued high volume of $6,159,000 in nonaccrual loans that management
continues to pursue legally. Although the nonaccrual loan balances remain at
high levels, these balances have been reduced by $2,297,000 in the first three
quarters of 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. Table 3 below
illustrates an analysis of the Allowance for Loan and Lease Losses over the past
five years.
TABLE 3: Analysis of Changes in Allowance for Loan and Lease Losses
13
COMBANC, INC. AND SUBSIDIARY
September 30, 2003 FORM 10-Q
Nine Nine
Months Months
Ended Ended
September September
30, 2003 30, 2002 2002 2001 2000 1999 1998
Balance, beginning of year $2,050 $1,815 $1,815 $1,331 $1,832 $1,800 $1,639
Charge-offs:
Real estate loans 251 266 317 - - - 15
Consumer installment loans 187 194 277 460 871 250 177
Credit card and related plans 15 21 30 88 19 8 5
Commercial and other loans 709 697 811 281 96 106 26
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Total charge-offs 1,162 1,178 1,435 829 986 364 223
Recoveries
Real estate loans - - - 11 - - -
Consumer installment loans 61 77 92 17 54 36 20
Credit card and related plans 2 4 4 37 1 - 1
Commercial and other loans 66 599 599 458 10 - 3
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Total recoveries 129 680 695 523 65 36 24
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Net charge-offs 1,033 498 740 306 921 328 199
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Provision for loans losses 2,340 500 975 790 420 360 360
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Balance, end of period $3,357 $1,817 $2,050 $1,815 $1,331 $1,832 $1,800
==============================================================================
Total deposits decreased $9,094,000 or 5.08% from December 31, 2002 to September
30, 2003. Table 4 below shows a breakdown of deposits by type at both December
31, 2002 and September 30, 2003. The reduction in total deposits is the result
of an extremely competitive local market for Time Deposits and the internal
movement of deposit accounts into Repurchase Agreements which offer additional
security for balances over the FDIC insurance limit and a higher rate of
interest.
Table 4: Deposit Balances by Type
DEPOSIT TYPE 9/30/2003 12/31/2002 DIFFERENCE %
Non-interest Bearing DDA $ 13,910 $ 16,090 $ (2,180) -13.55%
NOW Accounts 24,430 25,927 (1,497) -5.77%
MMKT Savings 8,708 9,546 (838) -8.78%
Savings 34,359 30,546 3,813 12.48%
Time Deposits 88,390 96,782 (8,392) -8.67%
--------------------------------------------
Total Deposits $169,797 $178,891 $ (9,094) -5.08%
============================================
Short-term borrowings, which include Federal Home Loan Bank borrowings with
original maturities of less than one year and repurchase agreements, increased
$2,029,000 from December 31, 2002 to September 30, 2003. Of the $2,029,000
increase, Federal Home Loan Bank borrowings were unchanged while repurchase
agreements increased $2,029,000. This increase can be attributed to local
businesses seeking interest-bearing transaction accounts that maintain an added
benefit of collateralization on 14
14
COMBANC, INC. AND SUBSIDIARY
September 30, 2003 FORM 10-Q
seeking interest-bearing transaction accounts that maintain an added benefit of
collateralization on balances over the FDIC insurance limit of $100,000.
Long-term debt or borrowings with an original maturity of greater than one year
from the Federal Home Loan Bank decreased $2,762,000 or 35.78% from December 31,
2002 to September 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 $1,012,000 from December 31, 2002 to
September 30, 2003. Included in the overall decrease was a decrease in retained
earnings of $553,000, which was the result of $198,000 in net income for the
first three quarters of 2003, less $752,000 in dividends, and a decrease of
$459,000 in Accumulated Other Comprehensive Income, which is the unrealized gain
on the available-for-sale securities portfolio net of federal income tax. No
Treasury Stock was repurchased in the first three 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 $296,000 for the nine months ended
September 30, 2003 from a year ago.
Net income for the first three quarters of 2003 was $198,000 or $0.09 per share.
This represents a decrease of 85.25% in net income per share compared to the
nine months ended September 30, 2002. Annualized Return on average assets was
0.13% through the first nine months of 2003, down from 0.83% through the first
nine months of 2002. Annualized return on average equity decreased to 1.11% for
the first nine months of 2003 from 7.37% for the first nine months of 2002.
The most significant income statement changes between the nine months ended
September 30, 2003 and the nine months ended September 30, 2002 were as follows:
- Net interest income decreased $296,000 or 5.04%. Included in the
decrease is a decrease in interest and fees on loans which is the
direct result of a decrease in average loan balances of $10,801,000
over the past year as well as a decrease in interest rates. The
decrease in loan balances is due to the continued high volume of 1
to 4 family residential loans being sold to the secondary market and
management pricing higher risk commercial loans above the
competition and allowing those loans to leave the institution.
Although interest on taxable investment securities has increased by
5.74%, the yield on investment securities has decreased to 3.38% for
the nine months ended September 30, 2003 from 5.54% for the nine
months ended September 30, 2002. The most significant decrease in
yield on taxable securities is attributable to the increase in
premium amortization, which is a direct result of the increase in
prepayment speeds on mortgage-backed securities.
- In light of the low coverage ratio of the ALLL to nonaccrual loans,
there was a significant increase in the provision for loan losses
and increased reserves on specified credits as discussed in prior
paragraphs.
15
COMBANC, INC. AND SUBSIDIARY
September 30, 2003 FORM 10-Q
- Total other income increased $542,000 in 2003 over the same period
in 2002. This increase is the result of the increased volume of real
estate loans that have been sold to the Federal Home Loan Mortgage
Corporation due to a continued high demand for low interest rate,
long-term 1 to 4 family residential mortgages. The increase in
serviced FHLMC loan balances from yearend can be noted in Table 2
above.
The most significant income statement changes between the three months ended
September 30, 2003 and the three months ended September 30, 2002 were as
follows:
- Net interest income has decreased 6.75% or $129,000. This decrease
is also due to the decrease of over $10 million in average loan
balances, which is described above, as well as a decrease in
interest rates. Premium amortization on mortgage-backed securities
has increased by $135,000 in comparison of the two quarters which is
the result of increased prepayment speeds. As interest rates rise,
prepayment speeds will decrease, thus causing premium amortization
expense to decrease.
- In light of the low coverage ratio of the ALLL to nonaccrual loans,
there was a significant increase in the provision for loan losses
and increased reserves on specified credits as discussed in prior
paragraphs.
- Total other income increased by 57.23% due to an increase in the
gain on sale of loans to FHLMC of $103,000. Other operating income
increased $70,000, which is also the result of the sale of l to 4
family residential loans to FHLMC through an increase in service fee
income, mortgage service rights, and an increase in closing costs.
PROSPECTS FOR THE REMAINDER OF 2003
Management believes earnings prospects for the remainder of 2003 will improve.
Management believes the ALLL to be sufficient to cover any losses that the loan
portfolio may incur.
A key element of the Corporation's earnings over the last quarter of 2003 is the
Provision for Loan Losses. As it can be seen in the income statement, the
Provision for Loan Losses has increased $280,000 in the third quarter of 2003
over the third quarter of 2002. Although the Provision for Loan Losses has
increased significantly, net interest margin remains strong at a 4.00%.
Another major variable that could affect 2003 earnings is the gain on sale of
loans. If interest rates drop or remain level, additional 1 to 4 family sales
volume could occur which will create additional non-interest income.
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
16
COMBANC, INC. AND SUBSIDIARY
September 30, 2003 FORM 10-Q
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
September 30, 2003 ComBanc, Inc. maintained a Tier I Capital ratio of 17.42%, a
Total Capital ratio of 18.68% and a Tier I Leverage ratio of 10.83%.
Based on the respective regulatory capital ratios at September 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. 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 September 30, 2003 the Bank's liquid assets amounted to
$68,508,000 or 33.11% 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 165% of the first
mortgage loan portfolio as collateral. The approximate available line of credit
from the Federal Home Loan Bank at September 30, 2003 was $35.0 million with a
balance of $4,958,000 leaving $30,042,000 to advance.
At September 30, 2003, management considers its liquidity to be adequate to meet
its normal funding requirements.
17
COMBANC, INC. AND SUBSIDIARY
September 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 September 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 09/30/03 to 12/31/02
Total rate sensitive assets:
At December 31, 2002 $ 66,518 $ 85,289 $ 48,238 $ 200,045
At September 30, 2003 73,116 78,628 40,679 192,423
Increase (Decrease) 6,598 (6,661) (7,559) (7,622)
Total rate sensitive liabilities:
At December 31, 2002 $ 77,208 $ 72,817 $ 26,440 $ 176,465
At September 30, 2003 71,960 71,975 24,884 168,819
Increase (Decrease) (5,248) (842) (1,556) (7,646)
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 has been no significant change 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.
18
COMBANC, INC. AND SUBSIDIARY
September 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 September 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 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
September 30, 2003.
19
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: November 12, 2003 /s/ Paul G. Wreede
------------------
Paul G. Wreede
President, CEO, and Director
Date: November 12, 2003 /s/ Jason R. Thornell
---------------------
Jason R. Thornell
AVP/Controller
20
EXHIBIT INDEX
Exhibit No. Description
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
21