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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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, 2004
-------------------------------------------------
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
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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 latest practicable date: 2,211,014 shares of the
ComBanc's common stock (no par value) were outstanding as of October 11, 2004.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 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 Operations
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 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibits 31.1 and 31.2 Rule 13a-14(a)/15d-14(a) certifications 20
Exhibits 32.1 and 32.2 Section 1350 certifications 22
2
COMBANC, INC. AND SUBSIDIARY
DELPHOS, OHIO
-------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
($ in thousands)
September 30, December 31,
ASSETS 2004 2003
------
----------------- ----------------
(unaudited)
Cash and Due from Banks $ 8,076 $ 8,297
Federal Funds Sold 12,573 9,708
----------------- ----------------
Cash and Cash Equivalents 20,649 18,005
Investment Securities -
Available for Sale 55,238 55,052
Loans Held for Resale 262 -
Loans 122,816 128,756
Allowance for Loan Losses (3,834) (3,825)
----------------- ----------------
Net Loans 118,982 124,931
Premises and Equipment 4,259 4,432
Federal Reserve and Federal Home Loan Bank Stock 2,067 2,012
Interest Receivable 844 760
Other Assets 2,320 2,541
----------------- ----------------
Total Assets $ 204,621 $ 207,733
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest Bearing $ 16,462 $ 15,758
Interest Bearing 153,497 156,474
----------------- ----------------
Total Deposits 169,959 172,232
Short Term Borrowings 7,124 7,540
Long Term Debt 3,411 4,649
Interest Payable 440 392
Other Liabilities 506 362
----------------- ----------------
Total Liabilities 181,440 185,175
----------------- ----------------
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 22,655 22,034
Accumulated Other Comprehensive Income 493 491
Treasury Stock - 164,986 shares at cost (2,717) (2,717)
----------------- ----------------
Total Shareholders' Equity 23,181 22,558
----------------- ----------------
Total Liabilities and Shareholders' Equity $ 204,621 $ 207,733
================= ================
The accompanying notes are an integral part of the condensed
consolidated financial statements
3
COMBANC, INC. AND SUBSIDIARY
DELPHOS, OHIO
-------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
($ in thousands, except per share data)
For the Three Months Ended
September 30,
-----------------------------------
(unaudited)
2004 2003
---------------- ----------------
Interest Income:
- ----------------
Loans Receivable $ 1,891 $ 2,058
Investments Securities
Taxable 398 362
Tax-Exempt 116 139
Federal Funds Sold 40 22
---------------- ----------------
Total Interest Income 2,446 2,582
---------------- ----------------
Interest Expense:
- -----------------
Deposits 609 701
Short-Term Borrowings 31 27
Long-Term Debt 48 70
---------------- ----------------
Total Interest Expense 688 798
---------------- ----------------
Net Interest Income 1,758 1,784
Provision for Loan Losses - 430
---------------- ----------------
Net Interest Income after Provision for Loan Losses 1,758 1,354
Other Income:
- -------------
Service Charges on Deposit Accounts 143 138
Net Realized Gains on Sales of Available-for-
sale Securities (3) -
Gain on Sale of Loans 33 173
Other Income 79 200
---------------- ----------------
Total Other Income 252 511
---------------- ----------------
Other Expenses:
- ---------------
Salaries and Employee Benefits 1,113 710
Net Occupancy 102 98
Equipment Expenses 90 85
Data Processing Fees 101 97
Advertising 22 28
Printing and Office Supplies 20 25
Legal and Professional Fees 300 79
Dues and Memberships 57 69
State Taxes 74 58
Other Expense 300 194
---------------- ----------------
Total Other Expenses 2,179 1,443
---------------- ----------------
Income/(Loss) - before Income Tax (169) 422
- -------------
Income Tax Expense/(Credit) (81) 113
---------------- ----------------
Net Income/(Loss) $ (88) $ 309
- -----------------
================ ================
Earnings/(Loss) Per Share $ (0.04) $ 0.14
Cash Dividends Per Share $ 0.00 $ 0.10
The accompanying notes are an integral part of the condensed
consolidated financial statements
4
COMBANC, INC. AND SUBSIDIARY
DELPHOS, OHIO
-------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
($ in thousands, except per share data)
For the Nine Months Ended
September 30,
------------------------------------
(unaudited)
2004 2003
---------------- ----------------
Interest Income:
- ----------------
Loans Receivable $ 5,827 $ 6,509
Investments Securities
Taxable 1,234 1,216
Tax-Exempt 350 432
Federal Funds Sold 88 70
Deposits with Financial Institutions 1 1
---------------- ----------------
Total Interest Income 7,500 8,228
---------------- ----------------
Interest Expense:
- -----------------
Deposits 1,834 2,314
Short-Term Borrowings 79 57
Long-Term Debt 162 278
---------------- ----------------
Total Interest Expense 2,075 2,649
---------------- ----------------
Net Interest Income 5,425 5,579
Provision for Loan Losses 60 2,340
---------------- ----------------
Net Interest Income after Provision for Loan Losses 5,365 3,239
Other Income:
- -------------
Service Charges on Deposit Accounts 412 407
Net Realized Gains on Sales of Available-for-
sale Securities 12 -
Gain on Sale of Loans 115 458
Other Income 390 518
---------------- ----------------
Total Other Income 929 1,383
---------------- ----------------
Other Expenses:
- ---------------
Salaries and Employee Benefits 2,834 2,364
Net Occupancy 297 291
Equipment Expenses 259 256
Data Processing Fees 301 276
Advertising 92 131
Printing and Office Supplies 87 97
Legal and Professional Fees 536 199
Dues and Memberships 193 193
State Taxes 207 177
Other Expense 725 565
---------------- ----------------
Total Other Expenses 5,531 4,549
---------------- ----------------
Income - before Income Tax Expense 763 73
- ------
Income Tax Expense/(Credit) 142 (125)
---------------- ----------------
Net Income $ 621 $ 198
- ----------
================ ================
Earnings Per Share $ 0.28 $ 0.09
Cash Dividends Per Share $ 0.00 $ 0.34
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 Nine Months
September 30,
-----------------------------------
2004 2003
--------------- ----------------
(unaudited)
Cash Flows from Operating Activities:
Net Income $ 621 $ 198
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities -
Depreciation and amortization 298 297
Provision for Loan Loss 60 2,340
Investment Securities Gains (12) -
Federal Home Loan Bank stock Dividends (55) (52)
Investment securities amortization (accretion), Net 334 334
Proceeds From Sale of Loans Held For Sale 10,403 38,902
Originations of Loans Held For Sale (10,550) (38,051)
Gain From Sale of Loans (115) (458)
Net Change in
Interest receivable (84) 55
Interest payable 48 (68)
Other assets 220 (1,175)
Other liabilities 143 33
--------------- ----------------
Net Cash Provided by Operating Activities 1,311 2,355
--------------- ----------------
Cash Flows from Investing Activities:
Purchases of Securities Available for Sale/FHLB Stock (20,104) (23,452)
Proceeds from Maturities of Securities
Available for Sale 16,848 23,980
Proceeds from Sales of Securities
Available for Sale 2,752 -
Net Change in Loans 5,889 6,552
Purchases of Premises and Equipment (125) (114)
--------------- ----------------
Net Cash Provided by Investing Activities 5,260 6,966
--------------- ----------------
Cash Flows from Financing Activities:
Net change in
Noninterest-bearing, Interest-bearing Demand and
Savings Deposits (304) (702)
Certificates and Other Time Deposits (1,969) (8,392)
Short-term Borrowings (416) 2,029
Repayment of Long-term Debt (1,238) (2,761)
Dividends Paid - (752)
--------------- ----------------
Net Cash Used in Financing Activities (3,927) (10,578)
--------------- ----------------
Net Change in Cash and Cash Equivalents 2,644 (1,257)
Cash and Cash Equivalents -
Beginning of Year 18,005 16,925
--------------- ----------------
End of Period $ 20,649 $ 15,668
=============== ================
The accompanying notes are an integral part of the condensed
consolidated financial statements
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2004
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 2003 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, 2004 and for the three
months ended September 30, 2004 are not necessarily indicative of those expected
for the remainder of the year.
The Condensed Consolidated Balance Sheet at December 31, 2003 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,
2004 and September 30, 2003 were 2,211,014.
Note 3, Commitments and Contingent Liabilities
Outstanding commitments to originate loans were $20,549,000 and $20,770,000 at
September 30, 2004 and December 31, 2003, 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 $3,834,000 adequate to cover losses inherent in the loan
portfolios as of September 30, 2004. 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,
7
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, Merger Agreement
The Company and the Bank entered into an Agreement and Plan of Merger dated as
of August 4, 2004 by and among First Defiance Financial Corp., First Federal
Bank of the Midwest, the Company and the Bank (the "Agreement and Plan of
Merger"). A copy of the Agreement and Plan of Merger was attached as an exhibit
to the Company's Current Report on Form 8-K, which was filed with the SEC on
August 5, 2004. The agreement and plan have been filed with the Securities and
Exchange Commission and may be viewed on the website maintained by the SEC at
http://www.sec.gov.
8
PART I - FINANCIAL INFORMATION
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 2004 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, 2003. 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,
9
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 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
We are currently subject to the terms of the Written Agreement, dated December
18, 2003, among the Company, the Bank, the Federal Reserve Bank of Cleveland and
the Ohio Division of Financial Institutions. We are also currently subject to
the terms of the Agreement and Plan of Merger dated as of August 4, 2004 by and
among First Defiance Financial Corp., First Federal bank of the Midwest,
ComBanc, Inc. and The Commercial Bank.
Total Delinquent and Nonaccrual Loans as of September 30, 2004 stood at
$3,615,000 as compared to $6,948,000 as of December 31, 2003. This decrease
represents a 48.0% improvement since December 31, 2003. Total delinquency
reduction can be credited to the continued emphasis on workout programs and a
steady improvement in the local economy.
10
TABLE 1: Analysis of Delinquencies
Dollars in Thousands
9/30/2004 12/31/2003 12/31/2002 12/31/2001 12/31/2000
Past due 30 to 89 days and still accruing $ 2,002 $ 2,758 $ 6,672 $ 9,863 $ 4,502
Past due 90 days or more and still accruing 17 680 798 2,810 2,587
Nonaccrual 1,596 3,510 8,456 3,455 542
----------------------------------------------------------------------------
Total delinquencies $ 3,615 $ 6,948 $ 15,926 $ 16,128 $ 7,631
============================================================================
Total Delinquencies as a percentage of total loans 2.94% 5.40% 11.37% 10.31% 4.50%
Total assets decreased $3,112,000 or 1.5% from $207,733,000 at December 31, 2003
to $204,621,000 at September 30, 2004. This change is the result of a $5.9
million decrease in the loan portfolio while there was a $2.6 million increase
in cash and cash equivalents. This reduction was offset through a decrease of
$2.3 million in total deposits, a decrease of $1.2 million in long term debt,
and a $0.4 million decrease in short term borrowings, while there was a $0.6
million increase in total shareholders' equity during the first nine months of
2004.
Total gross loans decreased 4.4% or $5,678,000 from December 31, 2003 to
$123,078,000 at September 30, 2004. The breakdown of the loan portfolio is
detailed in table 2 below. A significant change in the portfolio includes a
decrease in construction and land development loans. This decrease is the result
of the completion of a large construction loan and being converted to an
amortized commercial real estate loan. Another significant change includes 1-4
family secured by first lien mortgages. These loans decreased by $2,002,000 due
to additional refinancing and the Bank selling the loans to the secondary
market. As can be seen in Table 2, secondary market lending to FHLMC has dropped
off significantly to net growth of $136,000 in the first three quarters of 2004.
The decrease in sales to FHLMC is due to the increase of interest rates on the
long end of the yield curve by approximately 50 basis points. These loans will
continue to generate service fee income at .25% per year over the life of the
loan, which currently amounts to approximately $161,000 annually. Another
significant change in the portfolio includes a $1,702,000 decrease in consumer
loans. This decrease is due to management's continued desire to decrease
consumer loans due to the amount of risk that they carry. Commercial loans have
decreased $1,032,000 or 8.2% from December 31, 2003 to September 30, 2004 due to
the management's continued desire to decrease commercial loans not secured by
real estate due to the amount of risk that they carry.
TABLE 2: Analysis of Loan Portfolio Composition
Dollars in Thousands
11
Loan Type
9/30/2004 12/31/2003 Difference %
--------- ---------- ---------- --------
Construction/Land Development $ 6,161 $ 7,305 $ (1,144) -15.66%
R/E Secured by Farmland 5,029 4,598 431 9.37%
Revol Open-end 1-4 Family LOC 4,965 5,294 (329) -6.21%
1-4 Secured by first 33,110 35,112 (2,002) -5.70%
1-4 Secured by Junior 567 550 17 3.09%
R/E Secured by Multi Family R/E 3,068 3,179 (111) -3.49%
R/E Secured by Nonfarm, Nonres 47,903 46,977 926 1.97%
Ag Loans 2,075 2,449 (374) -15.27%
Commercial Loans 11,575 12,607 (1,032) -8.19%
Municipal Loans 746 1,100 (354) -32.18%
Master Card Loans 525 566 (41) -7.24%
Other Consumer 12 7 5 71.43%
Consumer Loans 7,291 8,993 (1,702) -18.93%
Overdrafts 51 19 32 168.42%
-------- -------- -------- ------
Total Loans 123,078 128,756 (5,678) -4.41%
Loan Loss Reserve 3,834 3,825 9 0.24%
-------- -------- -------- ------
Total Net Loans $119,244 $124,931 $ (5,687) -4.55%
======== ======== ======== ======
Serviced FHLMC Mortgages 63,596 63,460 136 0.21%
-------- -------- -------- ------
Total Loans Serviced $182,840 $188,391 $ (5,551) -2.95%
======== ======== ======== ======
The Allowance for Loan Losses at September 30, 2004 was 3.1% of total loans
compared to 3.0% at December 31, 2003. This $9,000 increase from December 31,
2003 is the result of a $60,000 provision and net charge-offs of $51,000,
increasing the Allowance for Loan Loss from $3,825,000 at December 31, 2003 to
$3,834,000 at September 30, 2004. 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
Dollars in Thousands
For the
Nine
Months
Ended For the Years Ended
--------- ---------------------------------------------------------
9/30/2004 12/31/2003 12/31/2002 12/31/2001 12/31/2000
--------- ---------- ---------- ---------- ----------
Balance of Allowance at Beginning of Year $3,825 $2,050 $1,815 $1,331 $1,832
------ ------ ------ ------ ------
Loans Actually Charged Off -
Real Estate - Construction -- 141 -- -- --
Real Estate - Mortgage 218 444 317 -- --
Commercial, Financial and Agricultural 13 1,706 811 281 96
Installment and Credit Card 81 284 307 548 890
------ ------ ------ ------ ------
312 2,575 1,435 829 986
------ ------ ------ ------ ------
Recoveries of Loans Previously Charged Off -
Real Estate - Construction 34 -- -- -- --
Real Estate - Mortgage 34 -- -- 11 --
Commercial, Financial and Agricultural 156 75 599 458 10
Installment and Credit Card 37 95 96 54 55
------ ------ ------ ------ ------
261 170 695 523 65
------ ------ ------ ------ ------
Net Charge-Offs (Recoveries) 51 2,405 740 306 921
------ ------ ------ ------ ------
Addition to Allowance Charged to Expense 60 4,180 975 790 420
------ ------ ------ ------ ------
Balance of Allowance at Period-End $3,834 $3,825 $2,050 $1,815 $1,331
====== ====== ====== ====== ======
Ratio of Net Charge-Offs to Avg. Loans Outstanding 0.04% 1.79% 0.51% 0.18% 0.55%
Ratio of Allowance for Credit Losses to Total Loans 3.12% 2.97% 1.46% 1.15% 0.79%
Total deposits decreased $2,273,000 or 1.3% from December 31, 2003 to September
30, 2004. Table 4 below shows a breakdown of deposits by type at both September
30, 2004 and December 31, 2003.
12
Management attributes the decrease in total deposits to the Bank's slightly less
competitive interest rates being offered on certificates of deposit. Less
competitive interest rates are being offered due to the abundance of liquidity
that the Bank currently maintains.
TABLE 4: Deposit Balances by Type
(Dollars in Thousands)
Deposit Type
9/30/2004 12/31/2003 Difference %
Non-interest Bearing DDA $ 16,462 $ 15,758 $ 704 4.47%
NOW Accounts 25,109 25,017 92 0.37%
MMKT Savings 11,917 12,139 (222) -1.83%
Savings 32,216 33,093 (877) -2.65%
Time Deposits 84,255 86,225 (1,970) -2.28%
--------- --------- -------- -------
Total Deposits $ 169,959 $ 172,232 $ (2,273) -1.32%
========= ========= ======== =======
Short-term borrowings, which are repurchase agreements, decreased $416,000 from
December 31, 2003 to September 30, 2004. Long-term debt or borrowings with an
original maturity of greater than one year from the Federal Home Loan Bank
decreased $1,238,000 or 26.7% from December 31, 2003 to September 30, 2004. This
decrease is due to a maturing advance, the prepayment of an advance with a
prepayment option and regular principal amortization. Due to the excessive
amount of liquidity, management chose not to borrow additional funds from FHLB.
Total shareholders equity increased $623,000 from December 31, 2003 to September
30, 2004. Included in the overall increase was an increase in retained earnings
of $621,000, which was solely comprised of net income and an increase of $2,000
in Accumulated Other Comprehensive Income, which is the unrealized gain/loss on
the available-for-sale securities portfolio net of federal income tax. No
Treasury Stock was repurchased in the first three quarters of 2004.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2004 compared to Nine Months Ended September 30,
2003
Net income for the first three quarters of 2004 was $621,000 or $0.28 per share.
This represents an increase of $0.19 per share compared to the first three
quarters of 2003. Annualized Return on average assets was 0.40% for the first
three quarters of 2004, up from 0.13% for the first three quarters of 2003.
Annualized return on average equity increased to 3.61% for the first three
quarters of 2004 from 1.11% for the first three quarters of 2003.
The most significant income statement changes between the nine months ended
September 30, 2004 and the nine months ended September 30, 2003 were as follows:
- The provision for loan losses has decreased $2,280,000 in the first
three quarters of 2004, from $2,340,000 in the first three quarters
of 2003 to $60,000 in the first three quarters of 2004. At year end
2003, management chose to have a complete loan review of the
portfolio by an external consultant. At that time, all classified
assets were allocated for in the allowance for loan losses charged
to 2003 earnings. At September 30, 2004, management believes the
allowance for loan losses is sufficient to cover all known losses.
As a result, only $60,000 was charged to provision for loan losses
in the first three quarters of 2004.
- Total noninterest income decreased $454,000 in the first three
quarters of 2004 compared to 2003. This decrease is the result of a
$343,000 decrease in gain on sale of loans sold to
13
FHLMCand a $174,000 decrease in the capitalization of mortgage
service rights, while there was a $21,000 increase in service fee
income on FHLMC loans and an $18,000 increase in investment center
revenue. As interest rates rise, sales of loans to FHLMC will
continue to decrease.
- Total noninterest expense increased $982,000 in the first three
quarters of 2004 compared to the first three quarters of 2003. This
is the result of a $337,000 increase in legal and professional fees
which is due to additional expense incurred to address the Written
Agreement, the Definitive Agreement with First Defiance,
shareholder litigation and related matters. There was also an
increase in Salaries and Employee Benefits in the amount of
$470,000, which is the result of a $155,000 increase in employee
health insurance, an increase of $103,000 in post-retirement
benefits, a $95,000 increase in employee salaries and a $98,000
increase in retirement expense. Other expense increased $160,000
due to a $57,000 increase in FDIC assessments, which is a direct
result of the Written Agreement, a $64,000 increase in other
expense, due to the loss on the sale of other real estate owned in
the amount of $70,000, and an $18,000 increase in mortgage service
right impairments.
- Net interest income decreased $154,000 or 2.8% in the first three
quarters of 2004 compared to the first three quarters of 2003.
Included in the decrease is a decrease in loan interest and fees
which is the direct result of a decrease in loan balances of
$9,690,000 since September 30, 2003. The decrease in loan balances
is due to the large volume of 1 to 4 family residential loans sold
to the secondary market in 2003 and management pricing higher risk
commercial and consumer loans above the competition and allowing
those loans to leave the institution.
Three Months Ended September 30, 2004 compared to Three Months Ended September
30, 2003
There was a net operating loss in the amount of $88,000 for the third quarter of
2004 or $(0.04) per share. This represents a decrease of $0.18 per share
compared to the third quarter of 2003. Annualized Return on average assets was
(0.17%) for the third quarter of 2004, down from .58% for the third quarter of
2003. Annualized return on average equity decreased to (1.54%) for the third
quarter of 2004 from 5.21% for the third quarter of 2003.
The most significant income statement changes between the three months ended
September 30, 2004 and the three months ended September 30, 2003 were as
follows:
- The provision for loan losses has decreased $430,000 in the third
quarter of 2004. There was no provision recorded in the third
quarter of 2004. The lower provision was due in part to the
Company's experience in the first three quarters of 2004, which
showed net charge-offs of $51,000. Provisions for loan losses are
charged to earnings to bring the total allowance for loan losses to
the level deemed appropriate by management based on the following
factors: historical experience; the volume and type of lending
conducted by ComBanc, Inc.; the amount of non-performing assets,
including loans which meet the FASB Statement No. 114 definition of
impaired; the amount of assets graded by management as substandard,
doubtful, or loss; industry standards; general economic conditions,
particularly as they relate to ComBanc, Inc's market area; and
other factors related to the collectibility of ComBanc, Inc's loan
portfolio. As of September 30, 2004, management believes the
balance of the allowance for loan losses is appropriate.
- Total noninterest income decreased $259,000 in the third quarter of
2004 as compared to the third quarter of 2003. Included in the
decrease is a $140,000 decrease in gain on sale of loans to FHLMC.
There was also a $121,000 decrease in other income. This decrease
is solely comprised of a $121,000 decrease in the capitalization of
mortgage service rights. 15, 20, and 30 year interest rates
decreased in the third quarter causing prepayment speeds to
increase, therefore, causing the value of mortgage service rights
to decrease.
14
- Total noninterest expense increased $736,000 in the third quarter
of 2004 versus the third quarter of 2003. Included in the increase
is an increase of $403,000 in salaries and employee benefits. Of
the $403,000 increase, there was an $187,000 increase in group
insurance, a $103,000 increase in post-retirement benefits, a
$60,000 increase in employee salaries and a $53,000 increase in
employee retirement benefits. There was a $221,000 increase in
legal and professional fees which is the result of additional
expense incurred to address the Written Agreement, the Definitive
Agreement with First Defiance, shareholder litigation and related
matters. Also included in the$736,000 increase is a $106,000
increase in other expense. Of the $106,000 increase, $60,000 is
attributable to an increase in FDIC assessments, as the result of
the Written Agreement, and $57,000 is the result of the third
quarter 2004 mortgage service right impairment, which is the direct
result of the decrease in long-term interest rates. Management
believes that the $57,000 impairment will be recaptured by December
31, 2004.
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
September 30, 2004 ComBanc, Inc. maintained a Tier I capital ratio of 18.37%, a
total capital ratio of 19.64% and a Tier I leverage ratio of 11.00%.
Based on the respective regulatory capital ratios at September 30, 2004, 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
15
consist of cash and due from banks, federal funds sold, and securities available
for sale. At September 30, 2004 the Bank's liquid assets amounted to $75,887,000
or 37.1% of total assets compared with 35.2% at December 31, 2003. Management
considers its liquidity to be adequate to meet its normal funding requirements.
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, 2003. As discussed in the 2003
Annual Report on Form 10-K, ComBanc, Inc's ability to maximize net income is
dependent on management's ability to plan and control net interest income
through management of the pricing and mix of assets and liabilities. Because a
large portion of assets and liabilities of ComBanc, Inc. are monetary in nature,
changes in interest rates and monetary or fiscal policy affect its financial
condition and can have a significant impact on the net income of the Company.
ComBanc, Inc does not use off balance sheet derivatives to enhance its risk
management, nor does it engage in trading activities beyond the sale of mortgage
loans.
ComBanc, Inc. monitors its exposure to interest rate risk on a monthly basis
through simulation analysis which measures the impact changes in interest rates
can have on net income. The simulation technique analyzes the effect of a
presumed 200 basis point shift in interest rates and takes into account
prepayment speeds on amortizing financial instruments, loan and deposit volumes
and rates, nonmaturity deposit assumptions and capital requirements. The results
of the simulation indicate that in an environment where interest rates rise or
fall 200 basis points over a 12 month period, using September 2004 amounts as a
base case, ComBanc, Inc's net interest income would be impacted by less than the
board mandated guidelines of 15%.
Item 4 -- Controls and Procedures
Under the supervision and with the participation of our management, including
the Chief Executive Officer and principal financial officer, we have evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-15(e) and Exchange Act Rule 15d
- -- 15(e) as of the end of the period covered by this report. Based on that
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 in reports the Company files or
submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms. There were no
changes in our internal control over financial reporting during the period
covered by this report that have materially affected, or that are reasonably
likely to materially affect, our internal control over financial reporting.
16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
As described in the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2004, on June 2, 2004, Paul D. Harter, a shareholder of
ComBanc, Inc., filed an action in the Court of Common Pleas for Allen County,
Ohio (the "Court") against the Board of Directors of ComBanc, Inc. (Paul D.
Harter V. Board of Directors, ComBanc, Inc. et al. Case No. CV20040531). On May
28, 2004, Mr. Harter submitted written consents of shareholders requesting the
Company to call a special shareholders meeting "to determine by shareholder vote
whether current members of the Board should be removed and replaced." Mr. Harter
filed the action seeking to compel the Company to call a special meeting. On
September 1, 2004, ComBanc and Harter entered into a Settlement Agreement and
Release which resolved the dispute, and on September 8, 2004, Harter dismissed
the lawsuit with prejudice.
Additionally, the Bank, at any given time, is involved in a number of lawsuits
initiated by the 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. At September 30, 2004, the
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 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.
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.
Exhibits 31.1 and 31.2 Rule 13a-14(a)/15d-14(a) Certifications
Exhibits 32.1 and 32.2 Section 1350 Certifications
(b)
I. A report on Form 8-K, reported under Items 12 and 7,
was filed with the SEC on July 16, 2004, which
included Condensed Consolidated Balance Sheets as of
June 30, 2004 and December 31, 2003, Condensed
Consolidated Statements of Income For the Three Months
Ended June 30, 2004 and June 30, 2003 and Condensed
Consolidated Statements of Cash Flows For the Six
Months June 30, 2004 and June 30, 2003.
II. A second report on Form 8-K, reported under Items 5
and 7, was filed with the SEC on August 5, 2004,
which included as exhibits, a News Release dated
August 4, 2004 and an Agreement and Plan of Merger
dated as of August 4, 2004 by and among First
Defiance Financial Corp., First Federal Bank of the
Midwest, ComBanc, Inc. and The Commercial Bank.
17
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: October 27, 2004 /s/ Paul G. Wreede
------------------
Paul G. Wreede
President, CEO, and Director
Date: October 27, 2004 /s/ Jason R. Thornell
---------------------
Jason R. Thornell
VP/Controller
18
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
a) Exhibit 11. Statement regarding computation of earnings
per share is contained in Part I, Item 2.
Exhibits 31.1 and 31.2 Rule 13a-14(a)/15d-14(a) Certifications
Exhibits 32.1 and 32.2 Section 1350 Certifications