UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2002 ------------------------------------------------- OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from to ----------------------- ---------------------- COMBANC, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 34-1853493 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 229 E. Second St., P. O. Box 429, Delphos, Ohio 45833 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (419) 695-1055 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date: 2,221,014 shares of ComBanc's common stock (no par value) were outstanding as of July 23, 2002. Page 1 of 16 COMBANC, INC. AND SUBSIDIARY June 30, 2002 FORM 10-Q TABLE OF CONTENTS Page PART I. FINANCIAL INFORMATION Item 1. Financial Statements Condensed Consolidated Balance Sheets 3 Condensed Consolidated Statements of Income 4 Condensed Consolidated Statements of Cash Flows 6 Notes to Condensed Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8 Item 3. Quantitative and Qualitative Disclosures about Market Risk 12 PART II. OTHER INFORMATION Item 1. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 13 Item 6. Exhibits and Reports on Form 8-K 13 Signatures 14 Exhibit 99.1 15 Exhibit 99.2 16 2 COMBANC, INC. AND SUBSIDIARY DELPHOS, OHIO ----------- CONDENSED CONSOLIDATED BALANCE SHEETS ($ in thousands) June 30, December 31, ASSETS 2002 2001 ------ --------- ------------ (unaudited) Cash and Due from Banks $ 5,177 $ 6,712 Federal Funds Sold 19,805 9,677 --------- --------- Cash and Cash Equivalents 24,982 16,389 Investment Securities - Available for Sale 40,190 37,584 Loans Held for Resale 767 1,784 Loans 145,278 156,390 Allowance for Loan Losses (1,925) (1,815) --------- --------- Net Loans 143,353 154,575 Premises and Equipment 4,801 4,893 Other Assets 3,927 3,752 --------- --------- Total Assets $ 218,020 $ 218,977 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Noninterest Bearing $ 14,570 $ 17,285 Interest Bearing 164,923 162,371 --------- --------- Total Deposits 179,493 179,656 Other Liabilities 1,452 1,612 Short Term Borrowings 3,574 3,977 Long Term Debt 9,296 9,792 --------- --------- Total Liabilities 193,815 195,037 --------- --------- Commitments and Contingent Liabilities - - Shareholders' Equity - Common Stock - No Par Value 5,000,000 shares authorized, 2,376,000 issued and 2,221,206 and 2,251,391 outstanding 1,237 1,237 Capital Surplus 1,513 1,513 Retained Earnings 23,212 22,859 Accumulated Other Comprehensive Income 801 416 Treasury Stock - 154,794 and 124,609 shares at cost (2,558) (2,085) --------- --------- Total Shareholders' Equity 24,205 23,940 --------- --------- Total Liabilities and Shareholders' Equity $ 218,020 $ 218,977 ========= ========= The accompanying notes are an integral part of the condensed consolidated financial statements 3 COMBANC, INC. AND SUBSIDIARY DELPHOS, OHIO ----------- CONDENSED CONSOLIDATED STATEMENTS OF INCOME ($ in thousands, except per share data) Three Months Ended June 30, ---------------------- (unaudited) 2002 2001 ------- ------- Interest Income: Interest and Fees on Loans $ 2,693 $ 3,628 Interest and Dividends on Investments - Taxable 399 442 Tax-Exempt 167 144 Interest on Federal Funds Sold 83 112 ------- ------- Total Interest Income 3,342 4,326 ------- ------- Interest Expense: Interest on Deposits 1,185 1,877 Interest on Short-Term Borrowings 9 74 Interest on Long-Term Debt 148 238 ------- ------- Total Interest Expense 1,342 2,189 ------- ------- Net Interest Income 2,000 2,137 Provision for Loan Losses 200 135 ------- ------- Net Interest Income after Provision for Loan Losses 1,800 2,002 Other Income Service Charges on Deposit Accounts 120 118 Other Operating Income 143 67 ------- ------- Total Other Income 263 185 ------- ------- Other Expenses: Salaries and Employee Benefits 849 691 Net Occupancy 182 104 Other Operating Expenses 473 571 ------- ------- Total Other Expenses 1,504 1,366 ------- ------- Income - before Income Tax Expense 559 821 Income Tax Expense 141 238 ------- ------- Net Income $ 418 $ 583 ======= ======= Earnings Per Share $ 0.19 $ 0.26 Cash Dividends Per Share $ 0.12 $ 0.12 The accompanying notes are an integral part of the condensed consolidated financial statements 4 COMBANC, INC. AND SUBSIDIARY DELPHOS, OHIO ----------- CONDENSED CONSOLIDATED STATEMENTS OF INCOME ($ in thousands, except per share data) For the Six Months Ended June 30, ------------------------ (unaudited) 2002 2001 ------- ------- Interest Income: Interest and Fees on Loans $ 5,532 $ 7,304 Interest and Dividends on Investments - Taxable 769 908 Tax-Exempt 330 276 Interest on Federal Funds Sold 141 148 Interest on Balances due from Depository Institutions - 1 ------- ------- Total Interest Income 6,772 8,637 ------- ------- Interest Expense: Interest on Deposits 2,489 3,761 Interest on Short-Term Borrowings 31 245 Interest on Long-Term Debt 290 468 ------- ------- Total Interest Expense 2,810 4,474 ------- ------- Net Interest Income 3,962 4,163 Provision for Loan Losses 350 270 ------- ------- Net Interest Income after Provision for Loan Losses 3,612 3,893 Other Income Service Charges on Deposit Accounts 233 233 Other Operating Income 283 155 ------- ------- Total Other Income 516 388 ------- ------- Other Expenses: Salaries and Employee Benefits 1,570 1,421 Net Occupancy 357 225 Other Operating Expenses 1,030 1,075 ------- ------- Total Other Expenses 2,957 2,721 ------- ------- Income - before Income Tax Expense 1,171 1,560 Income Tax Expense 280 438 ------- ------- Net Income $ 891 $ 1,122 ======= ======= Earnings Per Share $ 0.40 $ 0.49 Cash Dividends Per Share $ 0.24 $ 0.24 The accompanying notes are an integral part of the condensed consolidated financial statements 5 COMBANC, INC. AND SUBSIDIARY DELPHOS, OHIO ----------- CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in thousands) For the Six Months June 30, ------------------------ 2002 2001 -------- --------- (unaudited) Cash Flows from Operating Activities: Net Income $ 891 $ 1,122 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities - Depreciation 206 105 Provision for Loan Loss 350 270 Federal Home Loan Bank stock Dividends (60) (55) Investment Securities Amortization, Net 25 11 Net Change in Loans Held for Resale 1,017 - Change in Other Assets and Other Liabilities (472) 231 -------- --------- Net Cash Provided by Operating Activities 1,957 1,684 -------- --------- Cash Flows from Investing Activities: Purchases of Securities Available for Sale/FHLB Stock (8,600) (12,596) Proceeds from Maturities of Securities Available for Sale 6,550 13,674 Net Change in Loans 10,871 1,119 Purchases of Premises and Equipment (114) (1,414) -------- --------- Net Cash Provided in Investing Activities 8,707 783 -------- --------- Cash Flows from Financing Activities: Net change in Deposit Accounts (163) 1,858 Proceeds from Borrowing 522 4,425 Repayment of Federal Home Loan Bank Advances (1,420) (555) Dividends Paid (537) (551) Purchase of Stock (473) (369) -------- --------- Net Cash Provided/(Used) by Financing Activities (2,071) 4,808 -------- --------- Net Change in Cash and Cash Equivalents 8,593 7,275 Cash and Cash Equivalents - Beginning of Year 16,389 7,957 -------- --------- End of Period $ 24,982 $ 15,232 ======== ========= The accompanying notes are an integral part of the condensed consolidated financial statements 6 COMBANC, INC. AND SUBSIDIARY June 30, 2002 FORM 10-Q NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2002 Note 1, Basis of Presentation Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K annual report for 2001 filed with the Securities and Exchange Commission. The significant accounting policies followed by ComBanc, Inc. (Company) and its wholly-owned subsidiary, The Commercial Bank (Bank), for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported, consisting only of normal recurring adjustments, have been included in the accompanying unaudited condensed consolidated financial statements. The results of operations for the six months ended June 30, 2002, are not necessarily indicative of those expected for the remainder of the year. The Condensed Consolidated Balance Sheet at December 31, 2001 has been taken from audited consolidated financial statements at that date. Note 2, Earnings Per Share Earnings per share on the income statement has been computed on the basis of weighted-average number of shares of common stock outstanding. The weighted-average shares outstanding for the six months ending June 30, 2002 and June 30, 2001 were 2,237,490 and 2,294,765 respectively. Note 3, Commitments to fund loans Outstanding commitments to originate loans were $16,947,000 and $16,276,000 at June 30, 2002 and December 31, 2001. 7 COMBANC, INC. AND SUBSIDIARY June 30, 2002 FORM 10-Q PART I - FINANCIAL INFORMATION Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations ENTITY STATUS On April 13, 1998, The Commercial Bank became a wholly-owned subsidiary of the newly formed ComBanc, Inc., a one-bank holding company. Since ComBanc's only significant asset is the investment in The Commercial Bank, the following discussion will focus on the operations of The Commercial Bank. FINANCIAL CONDITION Total assets decreased .44% from $218,977,000 at December 31, 2001 to $218,020,000 at June 30, 2002. Federal Funds sold increased $10,128,000 or 104.66% from December 31, 2001 to $19,805,000 at June 30, 2002. The majority of this increase is the result of the sale of $11,620,000 in real estate loans to the Federal Home Loan Mortgage Corporation (FHLMC) and a $1,640,000 increase in short-term borrowings. Total gross loans decreased 7.67% or $12,129,000 from December 31, 2001 to $146,045,000 on June 30, 2002. Real estate loans decreased $8,609,000 or 7.26% from year-end to June 30, 2002 due to an increased demand for lower interest rate mortgage loans. As these loans were refinanced, the bank chose to sell these mortgages, with servicing retained, to the Federal Home Loan Mortgage Corporation in order to be able to offer competitive mortgage rates to consumers. Installment loans decreased 11.82% or $1,835,000 from $15,519,000 at December 31, 2001 primarily due to the desire to reduce indirect auto loans. The Allowance for Loan Loss, at June 30, 2002, was 1.33% of total loans. This increase of $110,000 from December 31, 2001 is due to a provision of $350,000 and a net charge-off of $240,000. Total deposits decreased $163,000 or .01% from $179,656,000 on December 31, 2001 to $179,493,000 on June 30, 2002. Noninterest bearing deposits decreased $2,715,000 from December 31, 2001 to June 30, 2002, while interest-bearing deposits increased $2,552,000 during the period. Time deposit balances decreased $4,904,000, while interest-bearing checking accounts increased $2,516,000, and money market and savings accounts increased $4,921,000 during this period. Short-term borrowings, which include Federal Home Loan Bank borrowings with maturities of less than one year and repurchase agreements, decreased $403,000 from December 31, 2001 to June 30, 2002. Of the $403,000 decrease, Federal Home Loan Bank borrowings decreased $925,000 while repurchase agreements increased $522,000. Long-term debt or borrowings with a maturity of greater than one year from the Federal Home Loan Bank decreased $496,000 or 5.07% since December 31, 2001 due to prepayments and pay downs on amortizing loans. 8 COMBANC, INC. AND SUBSIDIARY June 30, 2002 FORM 10-Q Total shareholders equity increased 1.11% or $265,000 to $24,205,000 from December 31, 2001 to June 30, 2002. Included in the overall increase were an increase in retained earnings of $891,000 less $537,000 in dividends and a $385,000 increase in Net Unrealized Gains on available for sale securities. Treasury Stock increased from $2,085,000 at December 31, 2001 to $2,558,000 at June 30, 2002 as the result of the repurchase of an additional 30,185 shares of common stock. RESULTS OF OPERATIONS Net interest income, the difference between interest earned on interest-earning assets and interest expense incurred on interest-bearing liabilities, is the most significant component of The Commercial Bank's earnings. Net interest income is affected by changes in the volume and rates of interest-earning assets and interest-bearing liabilities and the volume of interest-earning assets funded with low cost deposits, noninterest-bearing deposits and shareholders' equity. Net interest income decreased $201,000 for the six months ended June 30, 2002 from a year ago. Total interest income decreased $1,865,000 to $6,772,000 from $8,637,000 for the six months ended June 30, 2002 over June 30, 2001. Interest and fees on loans decreased $1,772,000 or 24.26% over the same time last year. This decrease is due to the increased volume of real estate loans sold to FHLMC on the secondary market and the eleven interest rate cuts by the Federal Reserve in 2001. Taxable investment income decreased $139,000 or 15.31% for the first six months of 2002 for a total of $769,000 compared to $908,000 for the first six months of 2001. This decrease is due to U.S. Agency bonds with call features being called and the proceeds being reinvested into lower interest rate Mortgage Backed Securities and Municipal Bonds. Interest on Federal Funds sold decreased from $148,000 for the first two quarters ended June 30, 2001 to $141,000 for the first two quarters ended June 30, 2002. This decrease is also the result of the eleven interest rate cuts by the Federal Reserve in 2001 Non-interest income increased $128,000 for the six months ending June 30, 2002 from June 30, 2001. The increase was due in part to a $13,000 increase in the gain on the sale of real estate loans to the secondary market and an increase in service fee income on secondary market real estate loans of $131,000. Management increased the provision for loan losses in anticipation of increased loan losses, which typically occur in a slower economy. The provision increased $80,000 in 2002 to $350,000 from $270,000 at June 30, 2001, and increased by $65,000 for the second quarter of 2002 over the second quarter of 2001. Total interest expense decreased 37.19% or $1,664,000 from $4,474,000 for the six months ended June 30, 2001 to $2,810,000 for the six months ended June 30, 2002. Interest on deposits decreased $1,272,000 or 33.82% over the first two quarters of 2001 due to a decrease in certificate interest rates during 2001 as well as a $9,342,000 decrease in the volume of certificates from a year ago. Interest on short term borrowings decreased $214,000 and long term borrowings decreased $178,000. The decrease in short term borrowings is due to the decrease in interest rates on repurchase agreements and the payoff of an advance at the Federal Home Loan Bank and the decrease in long term borrowings is due to the decrease in interest rates and prepayment in full of an advance at the Federal Home Loan Bank. 9 COMBANC, INC. AND SUBSIDIARY June 30, 2002 FORM 10-Q Non-interest expense increased 8.67% or $236,000 to $2,957,000 for the six months ended June 30, 2002 compared to $2,721,000 in 2001. Salaries and benefits increased $149,000 over the first two quarters of 2001. This increase is due to an increase of $73,000 in group insurance costs and a $50,000 increase in employee salaries for the first six months of 2002 over the first six months of 2001. Other operating expenses have increased $87,000 to $1,387,000 in June of 2002 from $1,300,000 in June of 2001. Included in this increase is an increase of $132,000 in net occupancy expense, an increase of $31,000 in data processing fees, and an increase of $10,000 in printing and office supplies. FORWARD-LOOKING STATEMENTS The Company has made, and may continue to make, various forward-looking statements with respect to interest rate sensitivity analysis, credit quality and other financial and business matters for 2002 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 2002 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 the date on which such statements are made. By making any forward-looking statements, the Company assumes no duty to update them to reflect new, changing or unanticipated events or circumstances. REGULATORY CAPITAL The Federal Reserve Board's risk-based capital guidelines addressing the capital adequacy of bank holding companies and banks (collectively, "banking organizations") include a definition of capital and a framework for calculating risk-weighted assets and off-balance sheet items to broad risk categories, as well as minimum ratios to be maintained by banking organizations. A banking organization's risk-based capital ratios are calculated by dividing its qualifying capital by its risk-weighted assets. Under the risk-based capital guidelines, there are two categories of capital: core capital ("Tier 1") and supplemental capital ("Tier 2"), collectively referred to as Total Capital. Tier 1 Capital includes common stockholders' equity, qualifying perpetual preferred stock and minority interest in equity accounts of consolidated subsidiaries. Tier 2 capital includes perpetual preferred stock (to the extent ineligible for Tier 1), hybrid capital instruments (i.e. perpetual debt and mandatory convertible securities) and limited amounts of subordinated debt, intermediate-term preferred stock and the allowance for credit losses. 10 COMBANC, INC. AND SUBSIDIARY June 30, 2002 FORM 10-Q The Federal Reserve Board's leverage constraint guidelines establish a minimum ratio of Tier 1 Capital to quarterly average total assets ("Leverage Ratio"). The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") established five capital tiers for banks. Pursuant to that statute the federal bank regulatory agencies have defined the five capital tiers for banks. Under these regulations, a bank is defined to be well capitalized, the highest tier, if it maintains a Tier 1 Capital ratio of at least 6 percent, a Total Capital ratio of at least 10 percent and a Leverage Ratio of at least 5 percent. At March 31, 2002 ComBanc, Inc. maintained a Tier I capital ratio of 16.50%, a total capital ratio of 17.75% and a Tier I leverage ratio of 10.75%. Based on the respective regulatory capital ratios at June 30, 2002, the Bank is well capitalized, based on the definitions in the regulations issued by the Federal Reserve Board and the other federal bank regulatory agencies setting forth the general capital requirements mandated by FDICIA. LIQUIDITY The liquidity of a banking institution reflects its ability to provide funds to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. Funding of loan requests, providing for liability outflows, and management of interest rate fluctuations require continuous analysis in order to match the maturities of specific categories of short-term loans and investments with specific types of deposits and borrowings. Bank liquidity is thus normally considered in terms of the nature and mix of the banking institution's sources and uses of funds. Liquid assets consist of cash and due from banks, federal funds sold, and securities available for sale. At June 30, 2002 the Bank's liquid assets amounted to $65,172,000 or 29.89% of total assets compared with 24.65% at December 31, 2001. Management considers its liquidity to be adequate to meet its normal funding requirements. 11 COMBANC, INC. AND SUBSIDIARY June 30, 2002 FORM 10-Q Item 3 -- Quantitative and Qualitative Disclosures about Market Risk There have been no material changes in the Company's quantitative and qualitative market risks since December 31, 2001. The following table compares rate sensitive assets and liabilities as of June 30, 2002 to December 31, 2001. Principal Amount Maturing or Repricing in: (Dollars in Thousands) First Years Year 1 to 5 Thereafter Total ----- ------ ---------- ----- Comparison of 6/30/02 to 12/31/01 Total rate sensitive assets: At December 31, 2001 $75,631 $70,440 $59,566 $205,637 At June 30, 2002 76,735 72,920 56,583 206,238 Increase (Decrease) 1,104 2,480 (2,983) 601 Total rate sensitive liabilities: At December 31, 2001 $99,283 $54,330 $22,527 $176,140 At June 30, 2002 90,306 63,483 24,004 177,793 Increase (Decrease) (8,977) 9,153 1,477 1,653 12 COMBANC, INC. AND SUBSIDIARY June 30, 2002 FORM 10-Q PART II - OTHER INFORMATION Item 1 - Legal Proceedings The Commercial Bank, at any given time, is involved in a number of lawsuits initiated by The Commercial Bank as a plaintiff, intending to collect upon delinquent accounts, to foreclose upon real property, or to seize and sell personal property pledged as security for any such account. Combanc, Inc. is involved in no legal proceedings. At June 30, 2002, The Commercial Bank was involved in a number of such cases as a party-plaintiff, and occasionally, as a party-defendant due to its joinder as a lien holder, either by mortgage or by judgment lien. In the ordinary case, The Commercial Bank's security and value of its lien is not threatened, except through bankruptcy or loss of value of the collateral should sale result in insufficient proceeds to satisfy the judgment. Management and the Board are not aware of any additional potential claims against the Bank, which have not been disclosed herein. Item 4 - Submission of Matters to a Vote of Security Holders The annual meeting of stockholders of ComBanc, Inc. was held on April 15, 2002. Based upon the report of the Inspector of Elections on the matters voted upon at this meeting the number of Directors for the ensuing year was fixed at six (6). The following were elected as Directors until the 2003 Annual Meeting of Shareholders and until their successors are elected and qualified: Director For Abstain ------------------ ---------- ------------- Mr. Gary A. DeWyer 1,689,012 46,917 Mr. Richard R. Thompson 1,679,932 55,997 Mr. Dwain I. Metzger 1,689,952 45,977 Mr. C. Stanley Strayer 1,690,052 45,877 Mr. Paul G. Wreede 1,644,296 91,633 Mr. Ronald R. Elwer 1,654,796 81,133 Item 6 - Exhibits and Reports on Form 8-K (a) Exhibit 11. Statement regarding computation of earnings per share is contained in Part I, Item 2. Exhibit 99.1 Certification Pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002. Exhibit 99.2 Certification Pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002. (b) There were no reports on 8-K filed during the quarter ended June 30, 2002. 13 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMBANC, INC. Date: August 12, 2002 /s/ Paul G. Wreede ---------------------------- Paul G. Wreede President, CEO, and Director Date: August, 12, 2002 /s/ Jason R. Thornell ---------------------------- Jason R. Thornell Controller 14 Exhibit Index Exhibit No. Description ----------- ----------- 99.1 Certification of Chief Financial Officer 99.2 Certification of Chief Executive Officer