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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED] For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
------------------ --------------------
COMBANC, INC.
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(Exact name of registrant as specified in its charter)
Ohio 34-1853493
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
230 E. Second St., P. O. Box 429 Delphos, Ohio 45833
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (419) 695-1055
----------------------------
Securities registered pursuant to Section 12(b) of the Act: None
----
Securities registered pursuant to Section 12(g) of the Act:
Common Shares, No Par Value (2,376,000 outstanding at December 31, 1998)
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(Title of Class)
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
----- ------
Based upon the average bid and asked prices of the Common Shares of the
Registrant on February 12, 1999, the aggregate market value of the Common Shares
of the Registrant held by non-affiliates on that date was $58,212,000.
Documents Incorporated by Reference:
Portions of the definitive Proxy Statement for the 1999 Annual Meeting of
Shareholders for the fiscal year ended December 31, 1998, which is to be filed
within 120 days of the end of the Company's fiscal year, are incorporated by
reference into Part III of this Form 10-K. The incorporation by reference of
portions of the Proxy Statement shall not be deemed to incorporate by reference
the information referred to in Item 402 (a) (8) of Regulation S-K.
Page 1 of 60
2
ITEM 1 - BUSINESS
INTRODUCTION
On April 13, 1998, shareholders of The Commercial Bank (the "Bank")
approved a Merger Agreement ("Agreement") pursuant to which ComBanc, Inc. (the
"Company") acquired all of the outstanding stock of the Bank as a result of the
exchange of shares between the shareholders of the Bank and the Company. After
the share exchange which became effective on August 31, 1998, the Bank survived
as a wholly-owned subsidiary of the Company and continues its operations as The
Commercial Bank. Under the terms of the Agreement, each one of the existing
outstanding shares of the Banks common stock was exchanged for two of the
Company's common shares so that each existing shareholder of the Bank became a
shareholder of the Company, owning the same percentage of shares in the Company
as the Bank. The shares of the company issued in connection with the transaction
were not registered under the Securities Act of 1933, as amended (the "Act"), in
reliance upon the exemption from registration set forth in Section 3(a) (12) of
the Act.
As a result of the transaction described above, the Company is the
successor issuer to the Bank pursuant to Rule 12g-3 promulgated under the
Securities Exchange Act of 1934 (the "Exchange Act"). The Bank is subject to the
informational requirements of the Exchange Act and in accordance with Section
12(I) thereof has timely filed reports and other information with the Board of
Governors for the Federal Reserve System ("FRS"). Such reports and other
information filed by the Bank with the FRS may be examined without charge at, or
copies obtained upon payment of prescribed fees from, the Securities Disclosure
Division, Board of Governors of the Federal Reserve System, Stop 153A,
Washington, D.C. 20551.
Since the only asset of ComBanc is the investment in The Commercial Bank,
the 1998 form 10-K will reflect the consolidated activity for 1998 compared with
the Bank only for 1997 and 1996. A reader of these financial statements should
refer to The Commercial Bank 1997 Form 10-K.
The Commercial Bank is a full service bank chartered under the laws of
the State of Ohio in 1877, and is subject to regulation by the Ohio
Superintendent of Banks and the Federal Reserve System. Commercial's principal
executive offices are located at 230 E. Second St., Delphos, Ohio 45833, and its
telephone number is (419) 695-1055. Commercial operates five branch facilities:
the Main Street Branch Office at 246 N. Main St., Delphos, Ohio, the Elida
Branch Office at 105 S. Greenlawn Ave., Elida, Ohio, the Gomer Banking Center at
4310 Lincoln Highway, Gomer, Ohio, the Lima Allentown Branch Office at 2600
Allentown Road, Lima, Ohio, and the newest facility at 2285 N. Cole St., Lima,
Ohio opened in August of 1996.
At December 31, 1998, the Company had 85 full time equivalent employees.
MARKET AREA
The Bank operates primarily in Allen, Putnam and Van Wert Counties in
northwestern Ohio. The Bank's market area is economically diverse, with a base
of manufacturing, service industries, transportation and agriculture, and is not
dependent upon any single industry or employer.
COMPETITION
Bank holding companies and their subsidiaries are subject to competition
from various financial institutions and other "non-bank" or non-regulated
companies or firms that engage in similar activities. The Bank competes for
deposits with other commercial banks, savings banks, saving and loan
associations, insurance companies and credit unions, as well as issuers of
commercial paper and other securities, including shares in mutual funds. In
making loans, the Bank competes with other commercial banks, savings banks,
savings and loan associations, consumer finance companies, credit unions,
insurance companies, leasing companies and other non-bank lenders.
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The Company and the Bank compete not only with financial institutions
based in Ohio, but also with a number of large out-of-state banks, bank holding
companies and other financial and non-bank institutions. Some of the financial
and other institutions operating in the same markets are engaged in national
operations and have more assets and personnel than the Company. Some of the
Company's competitors are not subject to the extensive bank regulatory structure
and restrictive policies which apply to the Company and the Bank.
The principal factors in successfully competing for deposits are
convenient office locations and remote service units, flexible hours,
competitive interest rates and services, while those relating to loans are
competitive interest rates, the range of lending services offered and lending
fees. The Company believes that the local character of the Banks' businesses and
their community bank management philosophy enabled them to compete successfully
in their respective market areas. However, it is anticipated that competition
will continue to increase in the years ahead.
REGULATION
The Company is a registered bank holding company under the Bank Holding
Company Act of 1956 as amended, and is subject to regulation by the Federal
Reserve Board. A bank holding company is required to file with the Federal
Reserve Board annual reports and other information regarding its business
operations and those of its subsidiaries. A bank holding company and its
subsidiary banks are also subject to examination by the Federal Reserve Board.
The Bank is regulated by the Ohio Division of Financial Institutions as
an Ohio state bank. Additionally, the Bank is regulated by the Board of
Governors of the Federal Reserve System ("FRS") as a member of the Federal
Reserve System. The regulatory agencies have the authority to regularly examine
the Bank and the Bank is subject to the regulations promulgated by its
supervisory agencies. In addition, the deposits of the Bank are insured by the
Federal Deposit Insurance Corporation ("FDIC") and, therefore, the Bank is
subject to FDIC regulations.
LENDING ACTIVITIES
The Bank's lending philosophy focuses on developing strong primary
banking relationships with businesses and individuals in its market area.
At December 31, 1998, the Company's loan portfolio was comprised of
approximately 13.3% commercial loans, 69.0% real estate loans, and 17.7%
consumer related installment and credit card loans. The Bank generally does not
lend outside its overall market area and historically has not acquired
significant participation interests from other financial institutions. The Bank
has no foreign loans.
Commercial, installment and real estate loans have accounted for a
significant portion of the growth in the Bank's loan portfolio in recent years.
Such loans are made to a diverse group of customers.
The Bank has historically been a major residential real estate lender in
its market area. Such loans are generally retained by the Bank after
origination; however the Bank is an approved seller/servicer for the Federal
Home Loan Mortgage Corporation (Freddie Mac). Real estate construction loans
totaled 4.7% of total loans at December 31, 1998. All construction loans were
performing.
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CREDIT QUALITY
The Bank seeks to maintain a high level of asset quality through
emphasizing loan originations in its overall market area. The Company focuses
its commercial lending efforts on small and medium-sized companies and its real
estate lending on both development and owner-occupied and one-to-four family
residential properties.
At December 31, 1998, the Bank's percentage of non-performing loans to
total loans was 1.00% as compared to 1.64% of total loans at December 31, 1997.
The Bank's percentage of net charge-offs for the year ended December 31, 1998 to
average loans outstanding was .14%. In accordance with general banking
practices, Commercial maintains an allowance for loan losses. This allowance is
established based upon a review of historical experience and current trends,
"problem" credits and delinquencies and an annual review of all significantly
sized loans. At December 31, 1998, the Bank's allowance for loan losses was
1.26% of total loans, as compared with 1.30% at December 31, 1997.
EXECUTIVE OFFICERS OF REGISTRANT
Name Age Position and Office Held with ComBanc Officer Since
---- --- ------------------------------------- -------------
Elmer J. Helmkamp 70 Chairman of the Board 1980
Paul G. Wreede 48 President and Chief Executive Officer 1975
Ronald R. Elwer 45 Executive Vice President 1976
Rebecca L. Minnig 42 Senior Vice President Operations and 1979
Corporate Secretary
James W. Vincent 40 Senior Vice President, Loans 1986
Kathleen A. Miller 38 Vice President, Chief Financial Officer, and 1990
Systems Manager
Elmer J. Helmkamp has been Chairman of the Board of the Company since its
formation in 1998 has also been Chairman of the Board of the Bank since 1980.
Paul G. Wreede has been President and Chief Executive Officer of the Company
since its formation in 1998 and has also been President and Chief Executive
Officer of the Bank since 1990.
Ronald R. Elwer has been Executive Vice President of the Company since its
formation in 1998, Executive Vice President of the Bank since 1990 and from 1990
to 1995 was Secretary of the Bank.
Rebecca L. Minnig has been Senior Vice President Operations and Secretary of the
Company since its formation in 1998, Senior Vice President Operations of the
bank since 1992, and from 1989 to 1992 was Vice President, Cashier and Security
Officer of the Bank.
James W. Vincent has been Senior Vice President Loans of the Company since its
formation in 1998 and was Senior Vice President Loans of the Bank since 1992.
Kathleen A. Miller has been Vice President, Chief Financial Officer and Systems
Manager of the Company since its formation in 1998 and of the Bank since 1997,
and was Controller of the bank from 1990 to 1997.
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ITEM 2 - PROPERTIES
ComBanc, Inc. owns no property. The Bank's executive offices are located
at The Commercial Bank's main office building in Delphos, Ohio, which is owned
by the Bank. The Bank operates five branch banking facilities, all of which are
owned by the Bank.
ITEM 3 - 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.
At December 31, 1998, 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.
There are no material pending legal proceeding to which the Company or the
Bank is a party, other than ordinary routine litigation incidental to the
business of banking.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not Applicable
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PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The following data has been adjusted to reflect the August 31, 1998,
acquisition of The Commercial Bank by ComBanc, Inc. wherein each one of the
existing 1,188,000 outstanding shares of the Bank's common stock was exchanged
for two of ComBanc, Inc.'s common shares, resulting in 2,376,000 outstanding
shares.
The common stock of the Company, and of the Bank preceding formation of the
Company, trades infrequently and is not traded on any established securities
market. Parties interested in buying or selling the Company's stock are
generally referred to McDonald and Company, Lima, Ohio. For 1998 and 1997, bid
and ask quotations were obtained from McDonald and Company which makes a limited
market in the Company's stock. The quotations reflect the prices at which
purchases and sales of common shares could be made during each period and not
inter-dealer prices.
1997 Low Bid High Bid Low Ask High Ask Dividend Per Share
First Qtr 18.500 19.625 19.500 20.625 .075
Second Qtr 19.500 21.000 20.500 22.000 .075
Third Qtr 20.250 22.250 21.250 23.250 .075
Fourth Qtr 21.000 22.250 22.000 23.250 .115
1998 Low Bid High Bid Low Ask High Ask Dividend Per Share
First Qtr 21.500 23.000 22.500 24.000 .085
Second Qtr 22.125 23.313 23.125 24.313 .085
Third Qtr 22.625 23.500 23.625 24.500 .085
Fourth Qtr 23.500 28.000 24.500 29.000 .140
As of December 31, 1998, the Bank's common stock was held by 879 holders
of record.
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7
ITEM 6 - SELECTED FINANCIAL DATA
As of and for the years ended December 31,
----------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
STATEMENT OF OPERATIONS DATA: (Amounts in 000's, except per share data)
Interest Income $ 14,538 $ 14,359 $ 13,587 $ 12,971 $ 10,831
Interest Expense 6,693 7,021 6,699 6,184 4,671
--------- --------- --------- --------- ---------
Net Interest Income 7,845 7,338 6,888 6,787 6,160
Provision for Loan Losses 360 1,778 180 255 120
--------- --------- --------- --------- ---------
Net Interest Income after
Provision for Loan Losses 7,485 5,560 6,708 6,532 6,040
Other Income 447 385 366 292 266
Operating Expenses 4,618 4,452 4,014 3,782 3,634
--------- --------- --------- --------- ---------
Income before Income Taxes 3,314 1,493 3,060 3,042 2,672
Applicable Income Taxes 930 268 832 876 717
--------- --------- --------- --------- ---------
Net Income $ 2,384 $ 1,225 $ 2,228 $ 2,166 $ 1,955
========= ========= ========= ========= =========
STATEMENT OF CONDITION DATA: (YEAR END)
Total Assets $ 194,661 $ 194,583 $ 183,976 $ 175,083 $ 159,001
Investment Securities 41,965 48,523 49,665 53,570 48,061
Loans Receivable 142,410 126,041 124,148 108,528 98,470
Allowance for Loan Losses 1,800 1,639 1,988 1,880 1,877
Deposits 166,021 172,077 162,216 154,722 141,759
Shareholders' Equity 22,566 21,087 20,497 19,163 16,420
PER SHARE DATA:(1)
Net Income $ 1.00 $ 0.52 $ 0.94 $ 0.91 $ 0.83
Book Value 9.50 8.88 8.63 8.07 6.91
(1) Adjusted to reflect the August, 1998 ComBanc, Inc. formation resulting
in a two for one stock exchange leaving 2,376,000 issued and outstanding shares.
-7-
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
This discussion should be read in conjunction with the consolidated
financial statements, notes and tables included elsewhere in this report.
Throughout the following sections, the "Company" refers to ComBanc Inc. only,
while the "Bank" refers to The Commercial Bank.
On August 31, 1998 the Bank became a wholly owned subsidiary of the
Company, a one bank-holding company. The bank holding company form of
organization will increase the corporate and financial flexibility of the
business operated by the Bank through the combined business of the Bank and the
Company, such as increased structural alternatives in the area of the Company to
redeem its own stock, thereby creating an additional market in which the
shareholders could sell their stock.
A bank holding company can engage in certain bank-related activities in
which the Bank cannot presently engage; thus this reorganization will broaden
the scope of services which could be offered to the public.
Through December 31, 1998 the Company's only substantial asset was the
investment in the Bank. Accordingly, the remainder of this analysis will
concentrate on the Bank.
LINES OF BUSINESS
The Company, through its wholly owned subsidiary, the Bank, operates a
single line of business. The Bank is a full service bank chartered under the
laws of the State of Ohio and offers a broad range of loan and deposit products
to business and individual customers.
NET INTEREST INCOME
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. The following table summarizes net interest
income for each of the two years in the period ended December 31, 1998.
Years Ended Change from Prior Year
--------------------------------------------------------
December 31, 1998 vs. 1997 1997 vs. 1996
------------------------------ -------------------------- --------------------------
1998 1997 Amount Percent Amount Percent
------------- ------------- ---------- ----------- ---------- -----------
(Dollar amounts in thousands)
Interest Income $ 14,538 $ 14,359 $ 179 1.25% $ 772 5.68%
Interest Expense 6,693 7,021 (328) (4.67)% 322 4.81%
------------- ------------- ---------- ----------- ---------- -----------
Net Interest Income $ 7,845 $ 7,338 $ 507 6.91% 450 6.53%
============= ============= ========== =========== ========== ===========
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NET INTEREST INCOME (continued)
The ratio of net interest income to average interest-earning assets
increased to 4.25 percent in 1998 from 4.04 percent in 1997. This slight
increase is primarily attributable to the fact that slight increases in
investment security yields and slight decreases in deposit yields exceeded the
drop in investment yields.
The following table reflects the components of The Commercial Bank's net
interest income, setting forth, for each of the two years in the period ended
December 31, 1998, (i) average assets, liabilities, and shareholders' equity,
(ii) interest income earned on interest-earning assets and interest expense
incurred on interest-bearing liabilities, (iii) average yields earned on
interest-earning assets and average rates incurred on interest-bearing
liabilities, (iv) the net interest margin (i.e., the average yield earned on
interest-earning assets less the liabilities) and (v) the net yield on
interest-earning assets (i.e., net interest income divided by average
interest-earning assets). Rates are computed on a tax-equivalent basis.
Non-accrual loans have been included in the average balances.
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Years Ended December 31,
----------------------------------------------------------------------------------------------
1998 1997
---------------------------------------------- ---------------------------------------------
Interest Average Interest Average
Average Income/ Yields/ Average Income/ Yields/
Balance Expense Rates Balance Expense Rates
--------------- ------------- ----------- -------------- ------------- -----------
(Dollars in Thousands)
ASSETS
Interest-Earning Assets:
Investment Securities
Taxable $ 37,083 $ 2,207 $ 5.95% $ 36,429 $ 2,333 6.41%
Tax Exempt 13,154 1,074 8.16% 12,629 1,037 8.22%
Federal Funds Sold 3,901 219 5.61% 5,622 302 5.38%
Interest on Deposits
with Banks 16 1 6.25% 10 - 0.00%
Loans 130,158 11,402 8.76% 126,844 11,040 8.70%
--------------- ------------- -------------- -------------
Total Interest-Earning
Assets 184,312 14,903 8.09% 181,534 14,712 8.10%
--------------- ------------- -------------- -------------
Noninterest-Earning Assets:
Cash and Due from Banks 4,454 4,773
Premises and Equipment 2,384 2,372
Other Assets 1,766 2,253
Allowance for
Credit Losses (1,701) (1,997)
--------------- --------------
Total Noninterest-Earning
Assets 6,903 7,401
--------------- --------------
Total Assets $ 191,215 $ 188,935
=============== ==============
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Years Ended December 31,
------------------------------------------------------------------------------------------
1998 1997
------------------------------------------- -------------------------------------------
Interest Average Interest Average
Average Income/ Yields/ Average Income/ Yields/
Balance Expense Rates Balance Expense Rates
--------------- ----------- ---------- -------------- ----------- -----------
(Dollars in Thousands)
LIABILITIES AND SHAREHOLDER'S EQUITY
Interest-Bearing Liabilities:
Savings Deposits $ 31,528 $ 806 2.56% $ 28,370 $ 724 2.55%
NOW, Super NOW, and Plus 25,050 504 2.01% 22,347 463 2.07%
Time Deposits 96,884 5,370 5.54% 103,056 5,834 5.66%
--------------- ----------- -------------- -----------
Total Interest-
Bearing Deposits 153,462 6,681 4.35% 153,773 7,021 4.57%
Other Borrowed 576 12 2.08% - -
Fed Funds Purchased 1 - 0.00% 1 -
--------------- ----------- -------------- -----------
Total Interest-
Bearing Liabilities 154,039 6,693 4.34% 153,774 7,021
--------------- ----------- -------------- -----------
Noninterest-Bearing Liabilities:
Demand Deposits 13,974 12,672
Other Liabilities 1,321 1,350
--------------- --------------
Total Noninterest-
Bearing Liabilities 15,295 14,022
--------------- --------------
Shareholders' Equity 21,881 21,139
--------------- --------------
Total Liabilities and
Shareholders' Equity $ 191,215 $ 188,935
=============== ==============
Net Interest Income
(Tax Equivalent Basis) 8,210 7,692
Reversal of Tax
Equivalent Adjustment (365) (353)
--------------- --------------
Net Interest Income $ 7,845 $ 7,339
=============== ==============
Net Interest Rate Spread
(Tax Equivalent Basis) 3.75% 3.53%
========== ===========
Net Interest Margin
(Net Interest Income as a
Percentage of Interest-Earning
Assets, Tax Equivalent Basis) 4.45% 4.24%
========== ===========
Net Interest Margin
(Net Interest Income as a
Percentage of Interest-Earning
Assets) 4.25% 4.04%
========== ===========
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Net interest income may also be analyzed by segregating the volume and
rate components of income and expense. The following table presents an analysis
of increases and decreases in interest income and expense in terms of changes in
volume and interest rates during the two years ended December 31, 1998. Changes
not due solely to either a change in volume or a change in rate have been
allocated based on the respective percentage changes in average balances and
average rates.
1998 vs. 1997 1997 vs. 1996
---------------------------------------- ------------------------------------------
Increase/ Increase/
(Decrease) (Decrease)
Due to Change in Due to Change in
------------------------ -------------------------
Total Total
Average Average Increase/ Average Average Increase/
Volume Rate (Decrease) Volume Rate (Decrease)
---------- ---------- ------------- ----------- ---------- -------------
(Dollars in Thousands)
Investment Income:
Investment Securities:
Taxable .............. $ 39 $(165) $(126) $ (55) $ 22 $ (33)
Tax Exempt ........... 45 (8) 37 (69) 19 (50)
Federal Funds
Sold ............. (96) 13 (83) 73 11 84
Interest on Deposits
with Banks ....... 1 -- 1 -- -- --
Interest and Fees
on Loans ......... 286 76 362 824 (76) 748
----- ----- ----- ----- ----- -----
Total Interest Income .... 275 (84) 191 773 (24) 749
----- ----- ----- ----- ----- -----
Interest Expense:
Interest-Bearing Deposits:
Savings .............. 79 3 82 4 (74) (70)
NOW, Super NOW,
and Plus ......... 54 (13) 41 39 (54) (15)
Time ................. (340) (124) (464) 443 -- 443
----- ----- ----- ----- ----- -----
Total ............ (207) (134) (341) 486 (128) 358
Short-Term
Borrowings ....... 12 -- 12 -- -- --
----- ----- ----- ----- ----- -----
Total Interest Expense ... (195) (134) (329) 486 (128) 358
----- ----- -----
Change in Net
Interest Income ...... $ 470 50 $ 520 $ 287 $ 104 $ 391
===== ===== ===== ===== ===== =====
PROVISION FOR CREDIT LOSSES
The provision for credit losses was $360,000 in 1998. See "Summary of
Credit Loss Experience". At December 31, 1998 the Bank's allowance for credit
losses represented 1.26% of total loans compared to 1.30% at December 31, 1997.
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NON-INTEREST INCOME
Non-interest income is an increasingly important source of revenue to the
Bank, as it continues to expand its offerings of bank-related financial
services. Non-interest income increased $61,500 or 16.0% in 1998 to $447,000.
The primary non-interest income components are set forth below:
There were no securities gains in 1998, versus $13,500 in 1997.
Service charges on deposit accounts increased $59,000 or 22.0% in 1998 to
$327,000, resulting from an increase in the number of accounts, primarily from
the two Lima offices.
Other income increased $16,000 or 15.5% from the 1997 level to $120,000.
This category is comprised of credit card income, credit life and accident and
health premiums, service fees on loans sold, and other charges and fees.
NON-INTEREST EXPENSE
Non-interest expense includes costs, other than interest, that are
incurred in the operation of the Bank's business. Total non-interest expense
increased $167,000 or 3.7% in 1998 to $4,618,000. As a percent of average
assets, the level of non-interest expense has increased from 2.35% in 1997 to
2.42% in 1998. The primary non-interest expense components are set forth below:
Employee expense increased $161,000 or 7.1% in 1998 to $2,407,000.
Net occupancy expense decreased $16,000 during 1998 to $251,000.
Equipment expense decreased $11,000 or 4.5% in 1998.
Other expenses increased $34,000 or 2.0% in 1998 to $1,714,000.
INCOME TAXES
The currently payable provision for income taxes increased to $910,000 in
1998 from $194,000 in 1997 due primarily to a decrease in deductible loan
losses, arising from the decreased 1998 level of charged off loans. The deferred
tax provision decreased to $20,000, from $74,000 in 1997 due primarily to 1998's
deductible loan losses less than the book provision for loan loss. The effective
income tax rates for 1998 and 1997 were 28.1% and 18.0%, respectively.
Income taxes are provided for the tax effects of the transactions reported
in the financial statements and consist of taxes currently due plus deferred
taxes related primarily to differences between the basis of the allowance for
loan losses and accumulated depreciation. The deferred tax assets and
liabilities represent the future tax return consequences of those differences
which will either be taxable or deductible when the assets and liabilities are
recovered or settled. Deferred tax assets and liabilities are reflected at
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes. ComBanc, Inc. files consolidated income tax return
with its subsidiary.
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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.
For the Bank, the primary sources of liquidity have traditionally been
Federal funds sold and government securities. However, with the adoption of
Statement of Financial Accounting Standard No. 115, effective January 1, 1994,
the Bank's Available for Sale Investment Securities are available for liquidity
needs. At December 31, 1998, such securities amounted to $42.0 million, while at
December 31, 1997 such securities amounted to $48.5 million. At December 31,
1998 and 1997, Federal funds sold amounted to $2.7 million and $11.3 million,
respectively.
Management considers its liquidity to be adequate to meet its normal
funding requirements.
ASSET/LIABILITY MANAGEMENT AND MARKET RISK
Closely related to the concept of liquidity is the management of
interest-earning assets and interest-bearing liabilities. Management considers
interest rate risk to be the Bank's most significant market risk. Interest rate
risk is the exposure to adverse changes in the net interest income of the Bank
as a result of changes in interest rates. Consistency in the Bank's earnings is
largely dependent on the effective management of interest rate risk. The Bank
manages its rate sensitivity position to avoid wide swings in net interest
margins and to minimize risk due to changes in interest rates.
The difference between a financial institution's interest-sensitive assets
(i.e., assets which will mature or reprice within a specific time period) and
interest-sensitive liabilities (i.e. liabilities which will mature or reprice
within the same time period) is commonly referred to as its "gap" or "interest
rate sensitivity gap". An institution having more interest rate sensitive assets
than interest rate sensitive liabilities within a given time period is said to
have "positive gap"; an institution having more interest rate sensitive
liabilities than interest rate sensitive assets within a given time period is
said to have a "negative gap."
The following table sets forth the cumulative maturity distributions as of
December 31, 1998 of the Bank's interest-earning assets and interest-bearing
liabilities, its interest rate sensitivity gap, cumulative interest rate
sensitivity gap for such assets and liabilities, and cumulative interest rate
sensitivity gap as a percentage of total interest-earning assets. This table
indicates the time periods in which certain interest-earning assets and certain
interest-bearing liabilities will mature or may reprice in accordance with their
contractual terms. However, this table does not necessarily indicate the impact
of general interest rate movements on the Bank's net interest yield because the
repricing of various categories of assets and liabilities is discretionary and
is subject to competition and other pressures. As a result, various assets and
liabilities indicated as repricing within the same period may in fact reprice at
different times and different rate levels. Subject to these qualifications, the
table reflects a negative gap for assets and liabilities maturing or repricing
in 1999.
-14-
15
Management's Asset/Liability Management Committee monitors the Bank's
interest rate sensitivity position and currently intends to maintain a
plus/minus 10% gap under normal circumstances.
Up to To Up to To After
3 6 1 5 5
Months Months Year Years Years Total
------------ ------------- -------------- ------------- ------------ --------------
Interest Earning Assets:
Loans $ 19,783 $ 10,345 $ 5,676 $ 61,823 $ 44,783 $ 142,410
Investment Securities 3,183 3,624 10,412 13,495 11,251 41,965
Federal Funds Sold 2,708 - - - - 2,708
------------ ------------- -------------- ------------- ------------ --------------
Total $ 25,674 $ 13,969 $ 16,088 $ 75,318 $ 56,034 $ 187,083
============ ============= ============== ============= ============ ==============
Interest Bearing Liabilities:
Interest Bearing
Deposits $ 19,108 $ 19,280 $ 38,586 $ 55,212 $ 17,516 $ 149,702
Other Borrowed 1,500 - - - 2,000 3,500
------------ ------------- -------------- ------------- ------------ --------------
Total $ 20,608 $ 19,280 $ 38,586 $ 55,212 $ 19,516 $ 153,202
============ ============= ============== ============= ============ ==============
Interest Rate
Sensitivity Gap $ 5,066 $ (5,311) $ (22,498) $ 20,106 $ 36,518 $ 33,881
Cumulative Interest Rate
Sensitivity Gap 5,066 (245) (22,743) (2,637) 33,881
Cumulative Interest Rate
Sensitivity Gap as a
Percentage of Total
Interest Earning Assets 2.70% (0.13)% (12.16)% 1.41% 18.11%
CAPITAL RESOURCES
The Company is subject to various regulatory capital requirements
administered by its primary federal regulator, the Federal Reserve Board (FRB).
Failure to meet the minimum regulatory capital requirements can initiate certain
mandatory, and possible additional discretionary, actions by regulators, that if
undertaken, could have a direct material affect on the Company and the
consolidated financial statements. Under the regulatory capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines involving quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amounts and
classification under the prompt corrective action guidelines are also subject to
qualitative judgements by the regulators about components, risk weightings, and
other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios of: total
risk-based capital and Tier I capital to risk-weighted assets (as defined in the
regulations), and Tier I capital to adjusted total assets (as defined).
Management believes, as of December 31, 1998 that the Bank meets all the capital
adequacy requirements to which it is subject.
-15-
16
CAPITAL RESOURCES (continued)
As of December 31, 1998 the most recent notification from the FRB, the
Bank was categorized as well capitalized under the regulatory framework for
prompt corrective action. To remain categorized as well capitalized, the Bank
will have to maintain minimum total risk-based, Tier 1 risk-based, and Tier 1
leverage ratios as disclosed in the notes to the consolidated financial
statements. There are no conditions or events since the most recent notification
that management believes have changed either entity's capital category.
Management's objective is to maintain a capital portion at or above the "well
capitalized" classification under federal banking regulations. The Company's
total risk-adjusted capital ratio, Tier 1 capital ratio and Tier 1 leverage
ratio were, 18.1%, 16.9%, and 11.4%, respectively at December 31, 1998. The
Bank's totals were 17.5%, 10.8%, and 7.3%, respectively, at December 31, 1998.
EFFECTS OF INFLATION
The effect of inflation on banks differs from the impact on non-financial
institutions. Banks, as financial intermediaries, have assets and liabilities
which may move in concert with inflation. This is especially true for banks with
a high percentage of rate-sensitive interest-earning assets and interest-bearing
liabilities. A bank can reduce the impact by managing its rate sensitivity gap.
See "Asset/Liability Management" above.
INVESTMENT PORTFOLIO
The following table sets forth the value of the Bank's investment
securities at the respective year end for each of the last two years.
December 31, 1998
-------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------ -------------- -------------- ------------------
Securities Available for Sale -
U.S. Treasury Securities $ 8,030,244 $ 61,856 $ - $ 8,092,100
Agency Securities 9,518,790 56,370 23,910 9,551,250
Mortgaged Backed Securities 10,625,870 65,689 48,479 10,643,080
State and Municipal Securities 12,431,425 557,689 7,906 12,981,208
Other Securities 697,700 - - 697,700
------------------ -------------- -------------- ------------------
Total $ 41,304,029 $ 741,604 $ 80,295 $ 41,965,338
================== ============== ============== ==================
December 31, 1997
-------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------ -------------- -------------- ------------------
Securities Available for Sale -
U.S. Treasury Securities $ 12,018,258 $ 33,039 $ 4,342 $ 12,046,955
Agency Securities 11,526,105 34,756 6,396 11,554,465
Mortgaged Backed Securities 11,291,605 143,411 19,198 11,415,818
State and Municipal Securities 12,419,796 444,985 14,068 12,850,713
Other Securities 655,200 - - 655,200
------------------ -------------- -------------- ------------------
Total $ 47,910,964 $ 656,191 $ 44,004 $ 48,523,151
================== ============== ============== ==================
-16-
17
INVESTMENT PORTFOLIO(continued)
There are no investment securities of any single issuer where the aggregate
carrying value of such securities exceeded 10% of shareholders' equity, except
those of U. S. Treasury and U. S. Government agencies.
The following table shows the maturities and weighted average yields of
the Bank's investment securities as of December 31, 1998. The weighted average
yields on income from tax exempt obligations of state and political subdivisions
have been adjusted to a tax equivalent basis.
After After
1 Year 5 Years
Within But Within But Within After
1 Year 5 Years 10 Years 10 Years
----------------- ---------------- ---------------- --------------------
Amt Yield Amt Yield Amt Yield Amt Yield
--- ----- --- ----- --- ----- --- -----
(Dollars in Thousands)
U. S. Treasury $ 6,016 5.69% $ 2,014 5.99% $ -- 0.0% $ -- 0.0%
U. S. Government
Agencies 2,513 5.94% 5,006 5.98% 2,000 6.56% -- 0.0%
Mortgage-Backed
Securities 222 3.81% 1,277 6.75% 7,718 6.18% 1,408 5.73%
Obligations of
States and
Political
Subdivisions 1,331 8.18% 4,666 8.09% 4,721 7.45% 1,714 7.07%
Other -- -- -- 698 7.14%
------- -------- ------- ------- ----
Total $10,082 $ 12,963 $14,439 $ 3,820
======= ======== ======= =======
(1) Includes $83 of Federal Reserve and $615 of Federal Home Loan Bank Stock
that has no maturity.
LOAN PORTFOLIO
The amount of loans outstanding and the percent of the total
represented by each type on the dates indicated were as follows:
1998 1997
------------------ ------------------
(Dollars in Thousands)
Real Estate Loans:
Construction $ 6,727 4.7% $ 6,334 5.0%
Mortgage 91,442 64.3% 71,474 56.8%
Commercial, Financial and
Agricultural Loans 17,937 12.6% 19,008 15.1%
Installment and Credit Card Loans 25,192 17.7% 26,392 20.9%
Other Loans 51 0.0% 32 0.0%
Municipal Loans 1,061 0.7% 2,801 2.2%
------- ----- ------ -----
Total 142,410 100.0% 126,041 100.0%
===== =====
Less:
Allowance for Credit Losses 1,800 1,639
-------- -------
Total Net Loans $ 140,610 $ 124,402
======== =======
-17-
18
The following table shows the maturity and repricing schedule of loans
outstanding as of December 31, 1998. Also, the amounts are classified according
to their sensitivity to changes in interest rates:
Within Within After
1 Year 5 Years 5 Years Total
------------- ------------- ------------- ---------------
(In Thousands)
Fixed Rate $ 22,315 $ 58,103 $ 44,783 $ 125,201
Variable Rate 13,489 3,720 - 17,209
The following table presents the aggregate amounts of non-performing
loans on the dates indicated:
December 31,
-------------------------------
1998 1997
------------- -------------
(In Thousands)
Non-Accrual $ 805 $ 982
Contractually Past Due 90 Days or More as
to Principal or Interest 621 1,086
------------- -------------
$ 1,426 $ 2,068
============= =============
Non-Performing Loans to Total Loans 1.00% 1.64%
Non-accrual loans are comprised principally of loans 90 days past due, as
well as certain loans which are current but where serious doubt exist as to the
ability of the borrower to comply with the repayment terms. Interest previously
accrued on non-accrual loans and not yet paid is reversed and charged against
the accrued interest receivable during the period in which the loan is placed in
a non-accrual status, except where the Bank has determined that such loans are
adequately secured as to a principal and interest. Interest earned thereafter is
only included in income to the extent that it is received in cash. The amount of
interest income collected and the amount of interest income that would have been
recorded during 1998 on loans based on non-accrual loans based on their original
terms was determined to be insignificant.
The Bank purchased certain lease receivables and extended loans with an
aggregate outstanding balance at December 31, 1998 and 1997 of $535,000 and
$899,000 to The Bennett Funding Group, Inc. which remain subject to the Bennett
bankruptcy proceedings commenced in March, 1996. During 1997, a total of
$1,959,000 of Bennett loans were charged down. The bankruptcy judge has ruled
that the Bank is a secured creditor but this decision has been appealed by the
bankruptcy trustee. Due to the complexity of the remaining legal issues,
management and the Bank's legal counsel are currently unable to form an opinion
as to the likely outcome of the Bank's position with respect to the remaining
Bennett portfolio.
-18-
19
As of December 31, 1998, in the opinion of management, the Bank did not
have any concentration of loans to similarly situated borrowers exceeding 10% of
total loans. There were no foreseeable losses relating to other interest-earning
assets, except as discussed above.
SUMMARY OF CREDIT LOSS EXPERIENCE
Year Ended December 31,
1998 1997
----------- -----------
(Dollars in Thousands)
Balance of Allowance at Beginning of Year $ 1,639 $ 1,988
----------- -----------
Loans Actually Charged Off -
Real Estate 15 4
Commercial, Financial and Agricultural 26 2,011
Installment and Credit Card 182 142
----------- -----------
223 2,157
----------- -----------
Recoveries of Loans Previously Charged Off -
Real Estate 3 11
Commercial, Financial and Agricultural 21 8
Installment and Credit Card 24 11
----------- -----------
48 30
----------- -----------
Net Charge-Offs (Recoveries) 199 2,127
----------- -----------
Addition to Allowance Charged to Expense 360 1,778
----------- -----------
Balance of Allowance at Year-End $ 1,800 $ 1,639
=========== ===========
Ratio of Net Charge-Offs to Average Loans Outstanding 0.15% 1.69%
Ratio of Allowance for Credit Losses to Total Loans 1.26% 1.30%
The provision for credit losses reflects management's determination
regarding the adequacy of the allowance, based upon its analysis of the loan
portfolio (including the increased size and change in the mix of the loan
portfolio) and general economic conditions. As noted in "Loan Portfolio", during
1997, loans to The Bennett Funding Group and related entities amounting to
$1,959,000 were charged off. In reviewing the adequacy of the year end
allowance, management determined a needed 1998 and 1997 provision in the amount
of $360,000 and $1,778,000, respectively.
-19-
20
The Bank evaluates the adequacy of allowance for credit losses on a
quarterly basis. The adequacy of the allowance is determined by evaluating
potential losses in the loan portfolio. Evaluation of these potential losses
includes a review of the current financial status and credit standing of
borrowers and their prior history, an evaluation of available collateral, a
review of loss experience in relation to outstanding loans, and management's
judgment as to prevailing and anticipated economic conditions, among other
relevant factors.
Mortgage loans, including construction loans, approximate 69.0% of total
loans at December 31, 1998. Collateral evaluations and the historical data of
the Bank's mortgage loan losses are used to determine the amount necessary for
the allowance for credit losses.
A significant portion (17.7%) of the Bank's loan portfolio is installment
and credit card loans. A thorough credit examination is done at the time of the
extension of credit. The historical data of the Bank's consumer loan losses plus
the Bank's ongoing credit evaluations on existing loans are used to determine
the necessary amount for the Bank's allowance for credit losses.
The remaining portion (13.3%) of the loan portfolio is composed of
commercial loans. Personal and business financial status, credit standing, and
available collateral of commercial borrowers are evaluated with great care.
These evaluations plus management's judgment as to prevailing and anticipated
economic conditions and the historical data of the Bank's commercial loan losses
are taken into consideration when determining the amount of the allowance for
credit losses needed for commercial loans.
DEPOSITS
The following table sets forth the average balances of and average rates
paid on deposits for the periods indicated:
Year Ended December 31,
-------------------------------------------------------------------
1998 1997
--------------------------------- ------------------------------
Average Average Average Average
Balance Rate Balance Rate
--------------- -------------- --------------- -----------
(Dollars in Thousands)
Non-Interest-Bearing $ 13,974 0.00% $ 12,672 0.00%
Savings 31,528 2.56% 28,370 2.55%
NOW, Super NOW and Plus 25,050 2.01% 22,347 2.07%
Time 96,884 5.54% 103,056 5.66%
--------------- ---------------
Total $ 167,436 $ 166,445
=============== ===============
-20-
21
The maturity distribution of time deposits as of December 31, 1998
was:
Less than $100,000
$100,000 and Over
-------------- ---------------
(In Thousands)
---------------------------------
Three Months or Less $ 14,172 $ 1,880
Over Three Months to Twelve Months 41,705 12,764
Over One Year to Five Years 18,244 4,943
Over Five Years - -
-------------- ---------------
Total $ 74,121 $ 19,587
============== ===============
YEAR 2000
There are computer programs that process transactions based on using two
digits for the year rather than four digits. Systems that process Year 2000
transactions with the year "00" may encounter processing inaccuracies or
inoperability.
Management has initiated a company-wide program to address the effect of
the year 2000 on the Bank's information systems and application software. The
Company's Year 2000 project contains assessment, renovation, validation and
implementation phases. A substantial majority of the significant application
software utilized by the Company is via the use of third party data processors
and management is working with and actively monitoring the progress of outside
vendors to ensure that the software will operate properly in the year 2000. The
following discussion of the implications of the Year 2000 issue for the Company
contain numerous forward-looking statements based on inherently uncertain
information. The cost of the project and the date on which the Company plans to
complete the internal Year 2000 modifications are based on management's best
estimates, which management derived utilizing a number of assumptions of future
events including the continued availability of internal and external resources,
including employees, third party modifications and other factors. However, there
can be no guarantee that these estimates will be achieved and actual results
could differ. At this time, the estimated cost to remediate the Bank's year 2000
issues is not expected to be material.
The Company completed an assessment and efforts are underway to validate
compliance. In 1998, the Company alerted its business customers of the Year 2000
problem and is now assessing the readiness preparations of its major customers
and suppliers. Resolution of the Year 2000 problem is among the Company's
highest priorities, and the Company established a comprehensive program to
address its many aspects.
The Company has tested critical systems for readiness as part of this
process. In addition, the Company will evaluate customers and vendors who have
significant relationships with the Company to determine whether they are
preparing and will be ready for the Year 2000. The Company considered the
potential failure of those customers to be adequately prepared as part of the
credit and review process. However, there can be no guarantee that the
remediation of the Company's vendors or customers will be completed on a timely
basis.
The Company upgraded personal computer hardware and software during 1998
to meet its strategic plan of enhancing its products and services from a
competitive viewpoint. This upgrade was not related to Year 2000 issues. The
newly installed computers are Year 2000 compliant. The cost of these systems did
not exceed $150,000.00 and was capitalized.
-21-
22
The Company is reliant on suppliers and customers, and is addressing Year
2000 issues with both groups. As of December 31, 1998 the Company has identified
critical vendors and has completed formalized risk assessments of their Year
2000 readiness plans and status. The Company will continue to monitor and
replace vendors or make alternative arrangements when sources are limited or
unavailable.
The Company is also reliant on its customers to make the necessary
preparations for Year 2000 so that their business operations will not be
interrupted, as an interruption could threaten their ability to honor financial
commitments. The Company has identified borrowers, funding sources, and large
depositors as having financial volumes sufficiently large enough to warrant
inquiry as to Year 2000 preparation. The Company has substantially completed a
formal assessment of risk based on these initial reports as of December 31,
1998. Customers found to have a significant risk of not being ready for Year
2000 are encouraged to make the necessary effort. The Company is undertaking
measures to minimize risk with those that appear to pose a significant risk.
Follow up of customers will continue through 1999.
The Company's Year 2000 program includes the active involvement of senior
executives as well as seasoned project managers from throughout the company.
Senior executives and the Board of Directors review the overall status of the
program monthly. The federal and state agencies that regulate the banking
industry also monitor the program. The Company's outside audit firm also
reviewed the Company's project status.
Risks to the Company from the Year 2000 can be grouped into three
categories. The first is the risk that the Company does not successfully ready
its operations for the Year 2000. The Company, like other financial
institutions, is heavily dependent on its computer systems. Year 2000 compliant
systems have already been implemented and management believes it will be able to
make any other minor necessary corrections in a timely manner.
Computer failure of third parties may also impact the Company's
operations. The most serious impact on the Company's operations from suppliers
would result if basic services such as telecommunications, electric power
suppliers, and services provided by other financial institutions and
governmental agencies were disrupted.
Operational failures among the Company's sources of major funding and
larger borrowers could affect their ability to continue to provide funding or
meet obligations when due. It is not possible to accurately estimate the
likelihood, or potential impact of significant disruptions among the Company's
funding sources and obligors at this time.
The Company is developing remediation contingency plans and business
resumption contingency plans specific to the Year 2000. Remediation contingency
plans address the actions to be taken if the current approach to remediating a
system is falling behind schedule or otherwise appears in jeopardy of failing to
deliver a Year 2000 ready system when needed. Business resumption contingency
plans address the actions that would be taken if critical business functions can
not be carried out in the normal manner due to system or supplier failure.
The Company is enhancing its existing business resumption plans to reflect
Year 2000 issues and is developing plans designed to coordinate the efforts of
its personnel and resources in addressing any Year 2000 problems that become
known after December 31, 1999.
Contingency planning is a key component to effective Year 2000 risk
management. It involves efforts by financial institutions and service providers
and software vendors to mitigate operational risks should core business
processes fail, regardless of whether mission-critical systems were remediated
for the Year 2000. The Bank is currently in the process of forming a
company-wide contingency plan and will be validating the plan prior to June 30,
1999.
-22-
23
FORWARD-LOOKING STATEMENTS
The Company has made, and may continue to make, various forward-looking
statements with respect to Year 2000 risks, interest rate sensitivity analysis,
credit quality and other financial and business matters for 1999 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 1999 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:
Continued pricing pressures on loan and deposit products, actions of
competitors, changes in economic conditions, the extent and timing of actions of
the Federal Reserve, customer's acceptance of the Company's products and
services, the extent and timing of legislative and regulatory actions and
reforms, and changes in the interest rate environment that reduce interest
margins. The Company's forward-looking statements speak only as of 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.
-23-
24
CONSOLIDATED QUARTERLY FINANCIAL DATA
(dollars in millions, except per share data)
1997
----
FOURTH THIRD SECOND FIRST
------ ----- ------ -----
CONDENSED INCOME STATEMENT
Total Interest Income $ 14,359 $ 10,638 $ 6,975 $ 3,427
Total Interest Expense 7,021 5,200 3,399 1,665
------------ ------------- ------------- -------------
Net Interest Income 7,338 5,438 3,576 1,762
Provision for Credit Losses 1,778 270 180 90
Noninterest Income 385 273 169 86
Noninterest Expense 4,452 3,295 2,159 1,103
------------ ------------- ------------- -------------
Income Before Income Tax 1,493 2,159 1,406 655
Income Tax Provision 268 578 370 166
------------ ------------- ------------- -------------
Net Income $ 1,225 $ 1,581 $ 1,036 $ 489
============ ============= ============= =============
KEY AVERAGE BALANCES
Total Securities $ 48,875 $ 50,795 $ 50,314 $ 48,786
Total Loans and Leases 129,748 128,933 125,072 123,624
Total Assets 195,176 191,821 189,466 184,924
Total Deposits 157,022 154,695 153,379 149,998
Total Borrowed Funds - - - -
KEY OPERATING RATIOS
Return on Average Assets 0.65% 1.09% 1.09% 1.06%
Return on Equity 5.81% 9.72% 9.77% 9.50%
Tier I Capital Ratio 17.00% 17.28% 17.30% 17.40%
Total Risk Adjusted Capital Ratio 18.30% 18.54% 18.60% 18.70%
COMMON STOCK (1)
Per Common Share Data
Net Income - Basic $ 0.52 $ 0.67 $ 0.44 $ 0.21
Net Income - Diluted 0.52 0.67 0.44 0.21
Market Price 21.75 21.00 20.25 19.63
(1) The 1997 and first two quarters of 1998 data has been adjusted to reflect
the August 31, 1998 acquisition of The Commercial Bank by ComBanc, Inc. wherein
each one of the existing 1,188,000 outstanding shares of the Bank's common stock
was exchanged for two of ComBanc, Inc.'s common shares, resulting in 2,376,000
outstanding shares.
-24-
25
CONSOLIDATED QUARTERLY FINANCIAL DATA
(dollars in millions, except per share data)
1998
----
Fourth Third Second First
------ ----- ------ -----
CONDENSED INCOME STATEMENT
Total Interest Income $ 14,538 $ 10,800 $ 7,135 $ 3,567
Total Interest Expense 6,693 5,063 3,364 1,688
------------- ------------- ------------- ------------
Net Interest Income 7,845 5,737 3,771 1,879
Provision for Credit Losses 360 270 180 90
Noninterest Income 447 334 206 91
Noninterest Expense 4,618 3,465 2,226 1,159
------------- ------------- ------------- ------------
Income Before Income Tax 3,314 2,336 1,571 721
Income Tax Provision 930 638 431 195
------------- ------------- ------------- ------------
Net Income $ 2,384 $ 1,698 $ 1,140 $ 526
============= ============= ============= ============
KEY AVERAGE BALANCES
Total Securities $ 46,579 $ 48,524 $ 50,748 $ 52,615
Total Loans and Leases 137,905 130,336 127,447 124,814
Total Assets 193,395 191,272 188,861 188,713
Total Deposits 150,318 152,075 151,888 153,910
Total Borrowed Funds 2,288 - - -
KEY OPERATING RATIOS
Return on Average Assets 1.25% 1.18% 1.21% 1.12%
Return on Equity 10.56% 10.15% 10.47% 9.82%
Tier I Capital Ratio 16.89% 17.79% 17.69% 17.76%
Total Risk Adjusted Capital Ratio 18.14% 19.04% 18.94% 19.01%
COMMON STOCK
Per Common Share Data
Net Income - Basic $ 1.00 $ 0.72 $ 0.48 $ 0.22
Net Income - Diluted 1.00 0.72 0.48 0.22
Market Price 24.50 23.50 23.00 21.75
-25-
26
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Company's financial statements are listed below and are included
herein on pages 26 through 42.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEPENDENT AUDITORS' REPORT --------------------------------------------------- Page 27
CONSOLIDATED BALANCE SHEETS ---------------------------------------------------- 28
CONSOLIDATED STATEMENTS OF -
INCOME-------------------------------------------------------------------- 29
CHANGES IN SHAREHOLDERS' EQUITY ------------------------------------------ 30
CASH FLOWS --------------------------------------------------------------- 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------- 32
---oo0oo---
-26-
27
[E.S. EVANS AND COMPANY LETTERHEAD]
January 29, 1999
INDEPENDENT AUDITORS' REPORT
To the Shareholders and the Board of Directors
ComBanc, Inc.
Delphos, Ohio
We have audited the accompanying consolidated balance sheets of
ComBanc, Inc. and Subsidiary as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for the years ended December 31, 1998, 1997, and 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
ComBanc, Inc. and Subsidiary at December 31, 1998 and 1997, and the consolidated
results of their operations and their cash flows for 1998, 1997, and 1996 in
conformity with generally accepted accounting principles.
E.S. EVANS and Company
-27-
28
COMBANC, INC.
DELPHOS, OHIO
CONSOLIDATED BALANCE SHEETS
---------------------------
DECEMBER 31,
-----------------------------------------
ASSETS 1998 1997
------ ------------------- -------------------
Cash and Due from Banks $ 5,253,442 $ 5,926,252
Federal Funds Sold 2,708,000 11,325,000
Investment Securities - Note 2
Available for Sale 41,965,338 48,523,151
Loans:
Real Estate 81,607,310 64,301,778
Loans for Resale - 471,193
Home Equity 158,849 297,971
Collateral 26,543,897 26,286,641
Other 3,126,512 3,429,546
Installment 30,973,399 31,253,456
------------------- -------------------
Total Loans 142,409,967 126,040,585
Less:
Allowance for Loan Losses - Note 3 1,800,070 1,638,528
------------------- -------------------
Net Loans 140,609,897 124,402,057
Accrued Interest Receivable 1,306,411 1,516,250
Premises and Equipment - Note 4 2,445,991 2,350,181
Other Assets 371,648 540,184
------------------- -------------------
Total Assets $ 194,660,727 $ 194,583,075
=================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Deposits:
Savings $ 28,876,973 $ 29,677,940
NonInterest Bearing Demand Deposits 16,319,483 15,334,995
Time Deposits - Note 5 74,121,228 85,286,555
Time Deposits of $100,000 or More - Note 5 19,587,243 19,051,742
Interest Bearing Demand Deposits 27,116,085 22,726,042
------------------- -------------------
Total Deposits 166,021,012 172,077,274
Other Borrowed Money - Note 13 3,500,000 -
Accrued Expenses and Other Liabilities 2,573,649 1,418,393
------------------- -------------------
Total Liabilities 172,094,661 173,495,667
------------------- -------------------
Shareholders' Equity:
Common Stock - No Par Value - Note 1
5,000,000 Shares Authorized, 2,376,000 Shares
Issued and Outstanding - Note 1 1,237,500 1,237,500
Capital Surplus 1,512,500 1,512,500
Retained Earnings 19,379,602 17,933,365
Accumulated Other Comprehensive Income 436,464 404,043
------------------- -------------------
Total Shareholders' Equity 22,566,066 21,087,408
------------------- -------------------
Total Liabilities and Shareholders' Equity $ 194,660,727 $ 194,583,075
=================== ===================
The accompanying notes are an integral part of the consolidated financial
statements.
-28-
29
COMBANC, INC.
DELPHOS, OHIO
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
Interest Income:
- ---------------
Interest and Fees on Loans $ 11,402,788 $ 11,040,068 $ 10,282,344
Interest and Dividends on Investment Securities
Taxable 2,207,101 2,332,995 2,367,582
Tax-Exempt 709,251 684,094 718,144
Interest on Federal Funds Sold 218,590 301,606 218,589
Interest on Deposits with Banks 595 493 78
----------------- ----------------- -----------------
Total Interest Income 14,538,325 14,359,256 13,586,737
----------------- ----------------- -----------------
Interest Expense:
- ----------------
Interest on Deposits 6,680,918 7,021,312 6,662,970
Interest on Federal Funds Purchased 37 43 1,912
Other Borrowed Funds 12,182 - 33,597
----------------- ----------------- -----------------
Total Interest Expense 6,693,137 7,021,355 6,698,479
----------------- ----------------- -----------------
Net Interest Income 7,845,188 7,337,901 6,888,258
Provision for Possible Loan Losses - Note 3 360,000 1,778,447 180,000
----------------- ----------------- -----------------
Net Interest Income after Provision
for Loan Loss 7,485,188 5,559,454 6,708,258
-------------------------------------- -----------------
NonInterest Income:
- ------------------
Service Charges on Deposit Accounts 327,081 268,092 210,337
Securities Gains/(Losses) - 13,467 43,549
Other Operating Income 119,975 103,853 111,980
----------------- ----------------- -----------------
447,056 385,412 365,866
----------------- ----------------- -----------------
NonInterest Expenses:
- --------------------
Salaries and Wages 1,730,982 1,633,867 1,471,930
Employee Benefits 676,284 612,776 582,289
Occupancy Expense 251,234 267,657 259,878
Furniture and Equipment 245,595 257,066 213,013
Other Expense 1,714,237 1,680,118 1,486,686
----------------- ----------------- -----------------
4,618,332 4,451,484 4,013,796
----------------- ----------------- -----------------
Income - Before Federal Income Taxes 3,313,912 1,493,382 3,060,328
- ------
Federal Income Tax Expense - Note 6 930,111 268,057 831,950
----------------- ----------------- -----------------
Net Income $ 2,383,801 $ 1,225,325 $ 2,228,378
- ---------- ================= ================= =================
Net Income per Share of Common Stock-Note 1 $ 1.00 $ 0.52 $ 0.94
Average Shares Outstanding-Note 1 2,376,000 2,376,000 2,376,000
The accompanying notes are an integral part of the consolidated financial
statements.
-29-
30
COMBANC, INC.
DEPHOS, OHIO
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
ACCUMULATED TOTAL
OTHER SHARE-
COMMON CAPITAL RETAINED COMPREHENSIVE HOLDERS'
STOCK SURPLUS EARNINGS INCOME EQUITY
--------------- ---------------- ------------------ -------------------- -----------------
Balances, 1-1-96 $ 1,237,500 $ 1,512,500 $ 16,000,302 $ 412,393 $ 19,162,695
Comprehensive Income
Net Income - - 2,228,378 - 2,228,378
Change in Unrealized
Gain(Loss) on
Securities Available
for Sale, Net of Taxes
of $93,217-Note 2 - - - (180,950) (180,950)
-----------------
Total Comprehensive
Income 2,047,428
Cash Dividends - - (712,800) - (712,800)
--------------- ---------------- ------------------ -------------------- -----------------
Balances, 12-31-96 1,237,500 1,512,500 17,515,880 231,443 20,497,323
Comprehensive Income
Net Income - - 1,225,325 - 1,225,325
Change in Unrealized
Gain(Loss) on
Securities Available
for Sale, Net of Taxes
of $88,916-Note 2 - - - 172,600 172,600
-----------------
Total Comprehensive
Income 1,397,925
Cash Dividends - - (807,840) - (807,840)
--------------- ---------------- ------------------ -------------------- -----------------
Balances, 12-31-97 1,237,500 1,512,500 17,933,365 404,043 21,087,408
Comprehensive Income
Net Income - - 2,383,801 - 2,383,801
Change in Unrealized
Gain(Loss) on
Securities Available
for Sale, Net of Taxes
of $16,701-Note 2 - - - 32,421 32,421
-----------------
Total Comprehensive
Income 2,416,222
Cash Dividends - - (937,564) - (937,564)
--------------- ---------------- ------------------ -------------------- -----------------
Balances, 12-31-98 1,237,500 1,512,500 19,379,602 436,464 22,566,066
=============== ================ ================== ==================== =================
The accompanying notes are an integral part of the consolidated financial
statements.
-30-
31
COMBANC, INC.
DELPHOS, OHIO
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
1998 1997 1996
------------------ ------------------ ------------------
Cash Flows from Operating Activities:
- ------------------------------------
Net Income $ 2,383,801 $ 1,225,325 $ 2,228,378
Adjustments to Reconcile Net Income to
Net Cash from Operating Activities:
Depreciation 308,159 276,013 266,642
Provision for Loan Loss 360,000 1,778,447 180,000
(Increase)/Decrease in Other Assets 378,375 (72,261) (119,169)
Increase in Other Liabilities 1,155,256 155,140 64,182
Net Realized (Gains)/Losses on Securities
Available for Sale - (13,467) (43,549)
------------------ ------------------ ------------------
Net Cash Provided by Operating Activities 4,585,591 3,349,197 2,576,484
------------------ ------------------ ------------------
Cash Flows from Investing Activities:
- ------------------------------------
Purchases of Securities Available for Sale (10,095,596) (14,739,458)
Proceeds from Sales of Securities 6,590,234
Available for Sale 2,006,562 6,479,031
Proceeds from Maturities of Securities
Available for Sale 9,416,955 12,027,945
Proceeds from Maturities of Securities
to be Held to Maturity - -
Net (Increase) in Customer Loans (16,369,382) (1,892,606) (15,620,023)
Net Loans Charged Off (198,458) (2,127,431) (72,713)
Capital Expenditures (403,969) (196,712) (658,821)
------------------ ------------------ ------------------
Net Cash Used in Investing Activities (10,381,575) (2,888,828) (12,584,039)
------------------ ------------------ ------------------
Cash Flows from Financing Activities:
- ------------------------------------
Net Increase (Decrease) in Deposit Accounts (6,056,262) 9,861,310 7,494,373
Advances from Federal Home Loan Bank 4,500,000 - -
Payments on Advances from Federal Home (1,000,000)
Loan Bank - -
Dividends Paid (937,564) (807,840) (712,800)
------------------ ------------------ ------------------
Net Cash Provided by Financing Activities (3,493,826) 9,053,470 6,781,573
------------------ ------------------ ------------------
Net Change in Cash and Cash Equivalents (9,289,810) 9,513,839 (3,225,982)
Cash and Cash Equivalents -
Beginning of Year 17,251,252 7,737,413 10,963,395
------------------ ------------------ ------------------
End of Year $ 7,961,442 $ 17,251,252 $ 7,737,413
================== ================== ==================
Cash Paid During the Year For:
Interest $ 6,973,148 $ 6,895,403 $ 6,657,246
Income Taxes 818,500 362,453 828,761
The accompanying notes are an integral part of the consolidated financial
statements.
-31-
32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 1 - Summary of Significant Accounting Policies
Basis of Presentation
On April 13, 1998, shareholders of The Commercial Bank (the "Bank")
approved a Merger Agreement ("Agreement") pursuant to which ComBanc, Inc. (the
"Company") acquired all of the outstanding stock of the Bank as a result of the
exchange which became effective on August 31, 1998, the Bank survived as a
wholly-owned subsidiary of the Company and continues its operations as The
Commercial Bank. Under the terms of the Agreement, each one of the existing
outstanding shares of the Bank's common stock was exchanged for two of the
company's common shares so that each existing shareholder of the Bank became a
shareholder of the Company, owning the same percentage of shares in the company
as the Bank.
Since substantially the only asset of the Company is the investment in the
Bank, these financial statements reflect the consolidated activity for 1998
compared with the Bank only for 1997 and 1996. A reader of these financial
statements should refer to The Commercial Bank 1997 Form 10K.
Nature of Operations
The Commercial Bank operates under a State Bank Charter and
provides full banking services. As a State Bank, the Bank is subject to
regulation of The State of Ohio, The Federal Reserve and The Federal Deposit
Insurance Corporation. The area served by The Commercial Bank is West Central
Ohio and services are provided through offices in Delphos, Gomer, Elida and
Lima, Ohio.
Investment Securities
The Bank's investment securities are generally classified in two
categories: Held to Maturity and Available for Sale. Securities held to maturity
are those for which the Bank has the positive intent and ability to hold to
maturity. These securities are stated at cost, adjusted for amortization of
premiums and accretion of discounts, which are recognized as adjustments to
interest income. Securities available for sale are those securities not
classified as trading securities nor as securities to be held to maturity.
Unrealized holding gains and losses, net of tax, on securities available for
sale are reported as a net amount in a separate component of shareholders'
equity until realized. Gains or losses on dispositions are based on the net
proceeds and the adjusted carrying amount of the securities sold, using the
specific identification method.
Loans and Allowance for Loan Losses
Loans are stated at the amount of unpaid principal, reduced by an
allowance for possible loan losses. Interest on loans is calculated by using the
simple interest method on daily balances of the principal amount outstanding.
The allowance for loan losses is established through a provision for loan losses
charged to expenses. Loans are charged against the allowance for loan losses
when management believes that the collectibility of principal is unlikely. The
allowance is an amount that management believes will be adequate to absorb
possible losses on existing loans that may become uncollectible, based on
evaluation of the collectibility of loans and prior loan loss experience. The
evaluations take into consideration such factors as changes in the nature and
volume of the loan portfolio, overall portfolio quality, review of specific
problem loans and current economic conditions that may affect the borrower's
ability to pay.
-32-
33
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 1 - Summary of Significant Accounting Policies (continued)
Accrual of interest is discontinued on a loan when management
believes, after considering economic and business conditions and collection
efforts, that the borrower's financial condition is such that collection of
interest is doubtful.
Loans are considered impaired if full principal or interest
payments are not anticipated in accordance with the contractual loan terms.
Impaired loans are carried at the present value of expected future cash flows
discounted at the loan's effective interest rate or at the fair value of the
collateral if the loan is collateral dependent. A portion of the allowance for
loan losses is allocated to impaired loans. If these allocations cause the
allowance for loan losses to require increase, such increase is reported as a
component of the provision for loan losses.
Bank Premises and Equipment
Building and equipment are stated at cost, less accumulated
depreciation, computed on the straight line and declining balance methods over
the estimated useful lives. Expenditures, for betterments and renewals, which
extend useful lives, are capitalized. Gains and losses on retirements and
disposals are included in net income.
Income Taxes
Income taxes are provided for the tax effects of the transactions
reported in the financial statements and consist of taxes currently due plus
deferred taxes related primarily to differences between the basis of the
allowance for loan losses and accumulated depreciation. The deferred tax assets
and liabilities represent the future tax return consequences of those
differences which will either be taxable or deductible when the assets and
liabilities are recovered or settled. Deferred tax assets and liabilities are
reflected at income tax rates applicable to the period in which the deferred tax
assets or liabilities are expected to be realized or settled. As changes in tax
laws or rates are enacted, deferred tax assets and liabilities are adjusted
through the provision for income taxes. ComBanc, Inc. files consolidated income
tax return with its subsidiary.
Statement of Cash Flows
For purposes of reporting cash flows, cash and cash equivalents
include cash on hand, amounts due from banks, interest bearing deposits in banks
and Federal Funds Sold, generally for only one day periods. All accounts have
original maturities of three months or less.
Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
-33-
34
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 1 - Summary of Significant Accounting Policies (continued)
Net Income Per Share
Net income per share of common stock has been computed on the basis
of weighted-average number of shares of common stock outstanding. The 1997 and
1996 amounts have been restated to reflect the 2,376,000 shares outstanding as a
result of the formation of ComBanc, Inc.
Note 2 - Investment Securities
Carrying amounts and approximate market value of investment
securities are summarized as follows:
December 31, 1998
-------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------ -------------- -------------- ------------------
Securities Available for Sale -
U.S. Treasury Securities $ 8,030,244 $ 61,856 $ - $ 8,092,100
Agency Securities 9,518,790 56,370 23,910 9,551,250
Mortgaged Backed Securities 10,625,870 65,689 48,479 10,643,080
State and Municipal Securities 12,431,425 557,689 7,906 12,981,208
Other Securities 697,700 - - 697,700
------------------ -------------- -------------- ------------------
Total $ 41,304,029 $ 741,604 $ 80,295 $ 41,965,338
================== ============== ============== ==================
December 31, 1997
--------------------------------------------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------------ -------------- -------------- -------------------
Securities Available for Sale -
U.S. Treasury Securities $ 12,018,258 $ 33,039 $ 4,342 $ 12,046,955
Agency Securities 11,526,105 34,756 6,396 11,554,465
Mortgaged Backed Securities 11,291,605 143,411 19,198 11,415,818
State and Municipal Securities 12,419,796 444,985 14,068 12,850,713
Other Securities 655,200 - - 655,200
------------------ -------------- -------------- -------------------
Total $ 47,910,964 $ 656,191 $ 44,004 $ 48,523,151
================== ============== ============== ===================
Government and agency securities have been pledged to secure public
funds on deposit in the amounts of $22,519,391 and $20,604,580 for 1998 and
1997, respectively. Included in the other securities category is Federal Home
Loan Bank stock in the amount of $614,600 for 1998 and $572,100 for 1997 and
Federal Reserve Bank stock of $82,500 for both years. Although classified as
available for sale, the ownership of these stocks is restricted and lacks a
market. Accordingly, both amortized cost and fair value are considered to be
purchase cost.
-34-
35
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 2 - Investment Securities - (continued)
The scheduled maturities of securities at December 31, 1998 were as
follows:
Securities Available
for Sale
------------------------------------------
Amortized Fair
Cost Value
------------------ -------------------
Due in one year or less $ 10,082,598 $ 10,151,506
Due from 1 - 5 years 12,963,062 13,276,106
Due from 6 - 10 years 14,439,402 14,696,921
Due > 10 years 3,818,967 3,840,805
------------------ -------------------
Total $ 41,304,029 $ 41,965,338
================== ===================
Note 3 - Allowance for Loan Losses
Changes in the allowance for loan losses were as follows:
Years Ended December 31,
-----------------------------------------------------------
1998 1997 1996
----------------- ----------------- -----------------
Balance, Beginning of Year $ 1,638,528 $ 1,987,512 $ 1,880,225
Provision Charged to Operations 360,000 1,778,447 180,000
Loans Charged Off (222,232) (2,157,209) (101,466)
Recoveries 23,774 29,778 28,753
----------------- ----------------- -----------------
Balance, End of Year $ 1,800,070 $ 1,638,528 $ 1,987,512
================= ================= =================
Impairment of loans having recorded investments of $894,347,
$1,243,961, and $2,858,830 at December 31, 1998, 1997, and 1996 has been
recognized in conformity with SFAS No. 114, as amended by SFAS No. 118. No
specific allocation of the allowance for loan losses has been made for these
loans. Interest income on impaired loans of $17,948, $16,277 and $-0- was
recognized for cash payments received in 1998, 1997, and 1996, respectively. The
Bank has no commitments to loan additional funds to borrowers whose loans have
been modified.
Loans on which the accrual of interest at December 31, 1998 and
1997 has been discontinued amounted to $805,155 and $981,730. Interest income on
these loans is recorded only when received.
-35-
36
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 4 - Bank Premises and Equipment
Major classifications of these assets are summarized as follows:
1998 1997
----------------- ----------------
Land and Improvements $ 409,551 $ 290,010
Buildings 2,674,085 2,674,384
Equipment 1,853,389 1,569,076
----------------- ----------------
Total Cost 4,937,025 4,533,470
Accumulated Depreciation (2,491,033) (2,183,289)
----------------- ----------------
Net Premises and Equipment $ 2,445,992 $ 2,350,181
================= ================
Note 5 - Deposits
Time deposits maturing in years ending December 31, as of December
31, 1998:
1999 $ 70,521,227
2000 17,769,374
2001 1,636,717
2002 1,126,693
2003 and thereafter 2,654,460
-------------------
Total $ 93,708,471
===================
Note 6 - Income Taxes
Income taxes in the statement of income are as follows:
1998 1997 1996
----------------- ----------------- -----------------
Federal Income Tax -
Currently Payable $ 910,203 $ 193,639 $ 868,428
Deferred 19,908 74,418 (36,478)
----------------- ----------------- -----------------
Net $ 930,111 $ 268,057 $ 831,950
================= ================= =================
Accumulated deferred income taxes of $262,096 and $282,004 for 1998
and 1997, respectively represent the tax effect of the cumulative excess of
provision for loan losses over the deduction for federal income tax purposes,
and the tax effect of the net change in unrealized appreciation on securities
available for sale. The principal reasons for the difference in the effective
tax rate and the federal statutory rate are as follows:
-36-
37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 6 - Income Taxes (continued)
1998 1997 1996
---------- ---------- ----------
Statutory Federal Income Tax Rate 34.0% 34.0% 34.0%
Effect on Rate of -
Tax Exempt Securities Income (7.9) (18.4) (7.9)
Non-deductible Interest Expense 2.0 2.4 1.1
---------- ---------- ----------
Effective Tax Rate 28.1% 18.0% 27.2%
========== ========== ==========
Note 7- Pension Plan
The Bank has a non-contributory money purchase profit sharing plan
covering substantially all employees who have met certain eligibility
requirements. The amount of the contribution is determined annually by the Board
of Directors. The amount charged to operations was $252,658 in 1998, $216,845 in
1997, and $204,496 in 1996.
Note 8 - Related Party Transactions
The Bank has entered into transactions with its directors and executive
officers (Related Parties). Such transactions were made in the ordinary course
of business on substantially the same terms and conditions, including interest
rates and collateral, as those prevailing at the same time for comparable
transactions with other customers, and did not, in the opinion of management,
involve more than normal credit risk or present other unfavorable features. The
aggregate amount of loans to such related parties at December 31, 1998 and 1997
was $1,505,611 and $1,332,160.
Note 9 - Financial Instruments with Off-Balance-Sheet Risk
The Bank is a party to financial instruments with off-balance-sheet
risk in the normal course of business to meet the financing needs of its
customers. These financial instruments consist primarily of commitments to
extend credit. These instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized in the balance sheets. The contract or
notional amounts of those instruments reflect the extent of involvement the Bank
has in particular classes of financial instruments.
At December 31, 1998, the Bank had commitments to customers for
$630,000 of standby letters of credit and $12,040,975 of loan commitments.
The Bank's exposure to credit loss in the event of nonperformance by
the other party to the financial instrument for commitments to extend credit is
represented by the contractual notional amount of those instruments. The Bank
uses the same credit policies in making commitments and conditional obligations
as it does for on-balance sheet instruments.
-37-
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 9 - Financial Instruments with Off-Balance-Sheet Risk (continued)
Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
be drawn upon, the total commitment amounts generally represent future cash
requirements. The Bank evaluates each customer's credit-worthiness on a
case-by-case basis. The amount of collateral, if deemed necessary by the Bank
upon extension of credit, is based on management's credit evaluation of the
counterparty.
Note 10 - Concentration of Credit
Substantially all of the Bank's loans, commitments, and commercial and
standby letters of credit have been granted to customers in the Bank's market
area. Investments in state and municipal securities also involve governmental
entities within the Bank's market area. The distribution of commitments to
extend credit approximates the distribution of loans outstanding. Commercial and
standby letters of credit were granted primarily to commercial borrowers.
Note 11 - Commitments and Contingent Liabilities
The Bank is party to litigation and claims arising in the normal
course of business. Management, after consultation with legal counsel, believes
that the liabilities, if any, arising from such litigation and claims will not
be material to the Bank's financial position.
Note 12 - Fair Value of Financial Instruments
In December 1991, the Financial Accounting Standards Board issued SFAS
No. 107 "Disclosures about Fair Value of Financial Instruments' which requires
disclosure of fair value information about both on and off-balance-sheet
financial instruments for which it is practicable to estimate that value,
effective for the 1995 financial statements. For many of the Bank's financial
instruments, however, an available trading market does not exist; therefore,
significant estimations and present value calculations were used to determine
fair values as described below. Changes in estimates and assumptions could have
a significant impact on these fair values.
Cash and Cash Equivalents - For cash and due from banks and federal
funds sold, the carrying value is a reasonable estimate of fair value.
Investment Securities - Fair values for investment securities are
based on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans - The fair values for loans are estimated by discounting the
future cash flows using current rates being offered for loans of similar terms
to borrowers of similar credit quality.
-38-
39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 12 - Fair Value of Financial Instruments - (continued)
Deposit Liabilities - The fair values of non-interest bearing deposits,
savings, NOW and money market deposit accounts are, by definition, equal to the
amount payable on demand at the reporting date. The carrying value of variable
rate, fixed-term time deposits and certificates of deposit approximate their
fair values. For fixed-rate certificates of deposit, fair values are estimated
using a discounted cash flow analysis based on rates currently offered for
deposits of similar remaining maturities.
Other Borrowed Money - Rates currently available to the Bank for debt
with similar terms and remaining maturities are used to estimate fair value of
existing debt.
The following table summarizes the estimated fair values of the Bank's
financial instruments at December 31, 1998 and 1997:
1998 1998 1997 1997
Carrying Fair Carrying Fair
Amount Value Amount Value
------------------ ------------------- ------------------- -------------------
Financial Assets -
Cash and Cash Equivalents $ 7,961,442 $ 7,961,442 $ 17,251,252 $ 17,251,252
Investment Securities 41,965,338 41,965,338 48,523,151 48,523,151
Net Loans 140,609,897 147,272,000 124,402,057 114,765,687
Financial Liabilities -
Deposits 166,021,012 167,314,000 172,077,274 172,378,454
Other Borrowed Money 3,500,000 3,500,000 - -
Note 13 - Federal Home Loan Bank Line of Credit
The Bank is a member of the Federal Home Loan Bank (FHLB) and at
December 31, 1998, and December 31, 1997, respectively, had a line of credit in
the amount of $25,000,000 and $8,700,000. Outstanding borrowings at December 31,
1998 amounted to $3,500,000. There were no outstanding borrowings as of December
31, 1997. Any borrowings under this type of line will be secured by FHLB stock
and mortgages owned by the Bank totaling 150% of the outstanding borrowings. The
bank has the option of selecting from both variable and fixed rate loan
products.
Note 14 - Regulatory Matters
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum capital
requirements can initiate certain mandatory-and possibly additional
discretionary-actions by regulators that, if undertaken, could have a direct
material effect on the Bank's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of the
Bank's assets, liabilities, and certain off-balance-sheet items as calculated
under regulatory accounting practices. The Bank's capital amount and
classification are also subject to qualitative judgments by the regulators about
components, risk weightings, and other factors.
-39-
40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 14 - Regulatory Matters - (continued)
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios of total and
Tier I capital (as defined in the regulations) to risk-weighted assets (as
defined), and of Tier I capital (as defined) to average assets (as defined).
Management believes, as of December 31, 1998, that the Bank meets all capital
adequacy requirements to which it is subject.
As of December 31, 1998, the most recent notification from the Federal
Reserve categorized the Bank as well capitalized under the regulatory framework
for prompt corrective action. To be categorized as well capitalized the Bank
must maintain certain minimum total risk-based, Tier I risk-based, and Tier I
leverage ratios. There are no conditions or events since that notification that
management believes have changed the institution's category.
The Bank's actual and required amounts and ratios are as follows
(dollars in thousands):
To Be Well
Capitalized Under
For Capital the Prompt Corrective
Actual Adequacy Purposes Action Provision
-------------------------- ------------------------- -----------------------------
Amount Ratio Amount Ratio Amount Ratio
------------- ---------- -------------- -------- ------------- ------------
As of December 31, 1998
Total Risk-Based Capital
(to Risk-Weighted Assets)
Consolidated $ 23,724 18.1% $ >10,460 >8.0% $ >13,075 >10.0%
- - - -
Commercial Bank 22,717 17.5% >10,407 >8.0% >13,008 >10.0%
- - - -
Tier I Capital
(to Risk-Weighted Assets)
Consolidated 22,088 16.9% >5,230 >4.0% >7,845 > 6.0%
- - - -
Commercial Bank 14,059 10.8% >5,203 >4.0% >7,805 > 6.0%
- - - -
Tier I Capital
(to Averaged Assets)
Consolidated 22,088 11.4% >7,734 >4.0% >9,668 > 5.0%
- - - -
Commercial Bank 14,059 7.3% >7,736 >4.0% >9,670 > 5.0%
- - - -
As of December 31, 1997
Total Risk-Based Capital
(to Risk-Weighted Assets) $ 22,202 18.3% $ >9,710 >8.0% $ >12,138 >10.0%
- - - -
Tier I Capital
(to Risk-Weighted Assets) 20,683 17.0% >4,855 >4.0% > 7,283 > 6.0%
- - - -
Tier I Capital
(to Averaged Assets) 20,683 12.1% >6,861 >4.0% > 8,576 > 5.0%
- - - -
-40-
41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
Note 15-Parent Company Financial Statements
The condensed financial statements of ComBanc, Inc., prepared on a parent
company unconsolidated basis, are presented as follows:
PARENT COMPANY BALANCE SHEET
December 31,
1998
------------
ASSETS
Cash and Due from Banks $ 12,000
Investments In and Receivables Due From Subsidiary 22,512,000
Intangible Assets 42,000
-----------
Total Assets $22,566,000
===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Equity Capital:
Common Stock $ 1,237,000
Capital Surplus 1,513,000
Retained Earnings 19,380,000
Accumulated Other Comprehensive Income 436,000
-----------
Total Equity Capital 22,566,000
-----------
Total Liabilities and Equity Capital $22,566,000
===========
PARENT COMPANY INCOME STATEMENT
For the Year
Ended
December 31,
1998
------------
Operating Expense:
Interest Expense $ 1,000
Other Expense 45,000
-----------
Total Operating Expense 46,000
Income (Loss) - Before Federal Income Taxes (46,000)
Federal Income Tax Expense (16,000)
-----------
Income (Loss) Before Undistributed Income of
Subsidiary (30,000)
Equity in Undistributed Income (Losses) of Bank
Subsidiary 892,000
-----------
Net Income $ 862,000
===========
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998
PARENT COMPANY STATEMENT OF CASH FLOWS
For the Year Ended
December 31,
1998
--------------------
Cash Flows from Operating Activities:
Net Income $ 862,000
Adjustments to Reconcile Net Income to Net Cash from Operating Activities:
Equity in Undistributed (Earnings) Losses of Subsidiaries (892,000)
(Increase) Decrease in Other Assets (8,058,000)
-----------
Total Adjustments (8,950,000)
-----------
Net Cash Provided by Operating Activities (8,088,000)
-----------
Cash Flows from Investing Activities:
Investments In and Advances to Subsidiaries 8,635,000
-----------
Net Cash Used in Investing Activities 8,635,000
-----------
Cash Flows from Financing Activities:
Proceeds from Purchased Funds and Other Short-Term Borrowings 45,000
Repayments of Purchased Funds and Other Short-Term Borrowings (45,000)
Dividends Paid (535,000)
-----------
Net Cash Provided by Financing Activities (535,000)
-----------
Net Change in Cash and Cash Equivalents 12,000
Cash and Cash Equivalents
===========
End of Year $ 12,000
===========
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ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
NONE
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table lists the non-director, executive officers of the Company
and the Bank. The information required by this item with respect to directors is
incorporated herein by reference to the information under the heading "Election
of Directors" in the definitive proxy statement of the Company.
EXECUTIVE OFFICERS
Name Principal
Occupation
Rebecca L. Minnig (42) 1989 - V.P., Cashier, and
Security Officer
1992 - Senior V.P. Operations
1998 - Senior V.P. Operations and
Corporate Secretary
James W. Vincent (40) 1992 - Senior V.P. Loans
1995 - Senior V.P. Loans
and Corporate Secretary
1998 - Senior V.P. Commercial Loans
Kathleen A. Miller (38) 1990 - Controller
1997 - Vice President, CFO and
Systems Manager
ITEM 11 - EXECUTIVE COMPENSATION
Pursuant to Instruction G, the information required by this Item is incorporated
herein by reference from the caption entitled "Executive Compensation and Other
Information" in the Company's definitive Proxy Statement, provided that the
subsections entitled "Personnel Committee Report on Executive Compensation" and
"ComBanc Performance" shall not be deemed to be incorporated herein by
reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Pursuant to Instruction G, the information required by this item is incorporated
by reference herein from the caption "Voting Securities and Ownership Thereof by
Certain Beneficial Owners and Management" contained in the Company's definitive
Proxy Statement.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to Instruction G, the information required by this item is incorporated
by reference from the caption entitled "Additional Information on Management"
contained in the Company's definitive Proxy Statement.
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44
PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) (1) Financial Statements. For a list of all financial
statements included with this Annual Report on Form
10-K, see "Index to Consolidated Financial Statements"
in Item 8. Financial Statements and Supplementary Data
at page 26.
(2) Financial Statement Schedules. All schedules for
which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission
are not required under the related instructions or are
inapplicable and, therefore, have been omitted.
(3) Exhibits. Exhibits filed with this annual Report on Form
10-K are attached hereto. See "Exhibit Index" at page
46.
(b) Reports on Form 8-K There were no reports on Form 8-K
filed during the quarter ended December 31, 1998.
(c) Exhibits. Exhibits filed with this Annual Report on Form
10-K are attached hereto. See. "Exhibit Index" at page
46.
(d) Financial Statement Schedules
None
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
/s/ Paul G. Wreede
Date: February 26, 1999 By: Paul G. Wreede, President
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons on behalf of
the Registrant and in the capacities and on the dates indicated.
Name Date Capacity
Paul G. Wreede President and Director
/s/Paul G. Wreede
Ronald R. Elwer Executive Vice President and Director
/s/Ronald R. Elwer
Elmer J. Helmkamp Chairman and Director
Kathleen A. Miller Vice President and CFO
/s/Kathleen A. Miller
Gary A. DeWyer Director
/s/Gary A. DeWyer
Richard R. Thompson Director
/s/Richard R. Thompson
Dwain I. Metzger Director
/s/Dwain I. Metzger
C. Stanley Strayer Director
Date: February 26, 1999
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46
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 1998
EXHIBIT INDEX
The Exhibits listed below are filed herewith or incorporated by
reference to other filings.
Exhibit No. Description Page No.
- ----------- ----------- --------
3.1 Amended and Restated Certificate of Incorporation 47
of the Company.
3.2 Bylaws of the Company 48
21.1 Subsidiaries of the Company 58
23.1 Consent of Independent Auditors 59
27 Financial Data Schedule 60
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