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
For the fiscal year ended December 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to ___________
Commission File Number: 000-24925
COMBANC, INC.
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(Exact name of registrant as specified in its charter)
Delaware 34-1853493
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
229 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
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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 [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Based on the actual trade price of the Common Shares of the Registrant on
February 1, 2004, the aggregate market value of the Common Shares of the
Registrant held by non-affiliates on that date was $26,532,168.
2,211,014 shares of the registrant's common shares were outstanding on February
1, 2004.
Documents Incorporated by Reference:
Page 1 of 86
Portions of the definitive Proxy Statement for the 2004 Annual Meeting of
Shareholders for the fiscal year ended December 31, 2003, 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.
2
PART I
ITEM 1 - DESCRIPTION OF BUSINESS
GENERAL
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 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. 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 this transaction, 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 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
and financial advisory services to business and individual customers.
At February 1, 2004, the Company had 88 full time equivalent employees.
MARKET AREA AND COMPETITION
The Bank has served the area since its incorporation in 1877 and is
engaged in providing service to the Allen, Putnam and Van Wert Counties in
northwestern Ohio. Business is conducted from its corporate center and main
office in Delphos, Ohio and from three other branches located in Lima and Elida,
Ohio. Lima has a population of approximately 45,000 and is located 15 miles east
of Delphos. 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. 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. The principal factors in successfully
competing for loans are competitive interest rates, the range of lending
services offered, and lending fees. The Bank provides 24 hour service through
its ATM network, telephone banking product, and internet banking product. The
Company believes that the local character of the Bank's businesses and their
community bank management philosophy enable them to compete successfully in
their respective market areas. However, it is anticipated that competition will
continue to increase in the years ahead.
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.
3
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.
SUPERVISION AND 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. Subsidiary banks of a bank holding
company are subject to certain restrictions imposed by the Federal Reserve Act
on transactions with affiliates, including any loans or extensions of credit to
the bank holding company or any of its subsidiaries, investments in the stock or
other securities thereof and the taking of such stock or securities as
collateral for loans or extensions of credit to any borrower; the issuance of
guarantees, acceptances or letters of credit on the behalf of the bank holding
company and its subsidiaries; purchases or sales of securities or other assets;
and the payment of money or furnishing of services to the bank holding company
and other subsidiaries. A bank holding company and its subsidiaries are
prohibited from engaging in certain tying arrangements in connection with
extensions of credit and/or the provision of other property or services to a
customer by the bank holding company or its subsidiaries.
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. A subsidiary of a bank holding company can be
liable to reimburse the FDIC, if the FDIC incurs or anticipates a loss because
of a default of another FDIC insured subsidiary of the bank holding company or
in connection with any insured financial institution that submits a capital plan
under the federal banking agencies' regulations on prompt corrective action
guarantees a portion of the institution's capital shortfall, as indicated below.
Various requirements and restrictions under the laws of the United
States and the State of Ohio affect the operations of the banks including
requirements to maintain reserves against deposits, restrictions on the nature
and amount of loans which may be made and the interest that may be charged
thereon, restrictions relating to investments and other activities, limitations
on credit exposure to correspondent banks, limitations on activities based on
capital and surplus, limitations on payment of dividends, and limitations on
branching.
The Federal Reserve Board has adopted risk-based capital guidelines for
bank holding companies. The risk-based capital guidelines include both a
definition and a framework for calculation of risk-weighted assets by assigning
assets and off-balance sheet items to broad risk categories. The minimum ratio
of total capital to risk weighted assets (including certain off-balance sheet
items, such as standby letters of credit) is 8.0%. At least 4.0% is to be
comprised of common stockholders' equity (including retained earnings but
excluding treasury stock), non-cumulative perpetual preferred stock, a limited
amount cumulative perpetual preferred stock, and minority interests in equity
accounts of consolidated subsidiaries, less goodwill and certain other
intangible assets ("Tier 1 capital"). The remainder ("Tier 2 capital") may
consist, among other things, of mandatory convertible debt securities, a limited
amount of subordinated debt, other preferred stock and a limited amount of
allowance for loan and lease losses. The Federal Reserve Board also imposes a
minimum leverage ratio (Tier 1 to total assets) of 3.0% for bank holding
companies and state member banks that meet certain specified
4
conditions, including holding companies and state member banks based on their
particular circumstances and risk profiles and those experiencing or
anticipating significant growth.
The Company and the Bank currently satisfy all capital requirements.
Failure to meet applicable capital guidelines could subject a banking
institution to a variety of enforcement remedies available to federal and state
regulatory authorities, including the termination of deposit insurance by the
FDIC.
The federal banking regulators have established regulations governing
prompt corrective action to resolve capital deficient banks. Under these
regulations, institutions which become undercapitalized become subject to
mandatory regulatory scrutiny and limitations, which increase as capital
decreases. Such institutions are also required to file capital plans with their
primary federal regulator, and their holding companies must guarantee the
capital shortfall up to 5.0% of the assets of the capital deficient institution
at the time it becomes undercapitalized.
The ability of a bank holding company to obtain funds for the payment
of dividends and for other cash requirements is largely dependent on the amount
of dividends which may be declared by its subsidiary banks and other
subsidiaries. However, the Federal Reserve Board expects the Company to serve as
a source of strength to its subsidiary banks, which may require it to retain
capital for further investment in the subsidiaries, rather than for dividends
for shareholders of the Company. The Bank may not pay dividends to the Company
if, after paying such dividends, it would fail to meet the required minimum
levels under the risk-based capital guidelines and the minimum leverage ratio
requirements. The Bank must have the approval of its regulatory authorities if a
dividend in any year would cause the total dividends for that year to exceed the
sum of the current year's net income and the retained net income for the
preceding two years, less required transfers to surplus. Payment of dividends by
a bank subsidiary may be restricted at any time at the discretion of the
regulatory authorities, if they deem such dividends to constitute an unsafe
and/or unsound banking practice. These provisions could have the effect of
limiting the Company's ability to pay dividends on its outstanding common
shares.
Deposits of the Bank are insured by the FDIC. The FDIC may increase its
rates if necessary to restore the fund's ratio of reserve to insured deposits or
decrease rates if the target level has been met. Assessments are based on the
risk the institution poses to the deposit insurance fund and are determined by
the institution's capital level and the FDIC's level of supervisory concern
about the institution.
LENDING ACTIVITIES
5
LOAN PORTFOLIO
The amount of loans outstanding and the percent of the total represented by each
type on the dates indicated were as follows:
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Dollars in Thousands)
Real Estate Loans:
Construction $ 7,305 5.7% $ 7,542 5.4% $ 9,827 6.3% $ 7,734 4.6% $ 8,701 5.4%
Mortgage 95,710 74.3% 99,890 71.3% 107,006 68.4% 118,488 69.9% 109,086 67.3%
Commercial, Financial and
Agricultural Loans 15,056 11.7% 18,890 13.5% 22,026 14.1% 22,400 13.2% 21,966 13.6%
Installment and
Credit Card Loans 9,566 7.4% 12,418 8.9% 16,192 10.4% 19,298 11.4% 21,192 13.1%
Other Loans 19 0.0% 11 0.0% 67 0.0% 46 0.0% 35 0.0%
Municipal Loans 1,100 0.9% 1,340 1.0% 1,272 0.8% 1,564 0.9% 978 0.6%
-------- ----- -------- ------ -------- ----- -------- ----- -------- -----
Total 128,756 100.0% 140,091 100.0% 156,390 100.0% 169,530 100.0% 161,958 100.0%
===== ====== ===== ===== =====
Less:
Allowance for Credit Losses 3,825 2,050 1,815 1,331 1,832
-------- -------- -------- -------- --------
Total Net Loans $124,931 $138,041 $154,575 $168,199 $160,126
======== ======== ======== ======== ========
6
The following table shows the maturity and repricing schedule of loans
outstanding as of December 31, 2003. The amounts are also classified according
to their sensitivity to changes in interest rates:
(Dollars in Thousands)
After 1
Within But Within After
1 Year Five Years Five Years Total
FIXED RATE LOANS:
Real Estate - Construction $ 4,168 $ 2,675 $ 393 $ 7,236
Commercial 2,273 4,131 504 6,908
ADJUSTABLE RATE LOANS:
Real Estate - Construction 37 32 - 69
Commercial 7,382 766 - 8,148
TOTAL FIXED AND ADJUSTABLE RATE:
Real Estate - Construction $ 4,205 $ 2,707 $ 393 $ 7,305
Commercial 9,655 4,897 504 15,056
General Purpose. Lending of funds provides a principle source of
revenue for the Bank. Since the Bank is a lending institution and is committed
to fulfill the legitimate credit needs of businesses and individuals throughout
the community, the Bank's lending responsibility is (1) to provide a profitable
base of income; (2) to fulfill the credit needs of its community; and (3) to
consider productive lending opportunities in other sectors consistent with
economic conditions and availability of funds.
The Bank provides a range of commercial and consumer banking services.
These services reflect the Bank's strategy of serving small to medium-size
businesses and individual customers. The Bank's lending strategy is focused on
real estate loans, commercial loans and consumer loans.
One-to-Four Family Residential Real Estate Loans. As part of the
lending activity, the Bank originates permanent loans secured by one-to-four
family properties, for owner-occupied and non-owner-occupied, located within the
Bank's primary market area. Each of such loans is for the purpose of purchase,
refinance, or improvement of the property and is secured by a mortgage on the
underlying real estate and improvements thereon. The principal amounts of all
loans secured by first lien on one-to-four family properties totaled $35,112,000
as of December 31, 2003.
Multifamily Residential Real Estate Loans. In addition to loans on
one-to-four family properties, the Bank makes loans secured by multifamily
properties containing over four units. Multifamily lending is generally
considered to involve a higher degree of risk because the borrower typically
depends upon income generated by the project to cover operating expenses and
debt service. The Bank attempts to reduce the risk associated with multifamily
lending by evaluating the creditworthiness of the borrower and the projected
income from the project and by obtaining personal guarantees, when appropriate,
on loans made to corporations, partnerships, and limited liability corporations.
Construction Loans. The Bank offers loans for owner-occupied and
non-owner-occupied construction of one-to-four family properties. The Bank also
originates construction loans for multifamily and nonresidential real estate
projects. Generally, these loans involve greater underwriting and default risks
than do loans secured by mortgages on existing properties.
Nonresidential Real Estate Loans. The Bank also makes loans secured by
nonresidential real estate consisting of nursing homes, churches, office
properties and various retail and other income-producing properties.
Nonresidential real estate lending is generally considered to involve a higher
7
degree of risk than residential lending due to the relatively larger loan
amounts and the effects of general economic conditions on the successful
operation of income-producing properties. The Bank has endeavored to reduce such
risk by carefully evaluating the credit history and past performance of the
borrower, the location of the real estate, the quality of the management
constructing and operating the property, the debt-service ratio, the quality and
characteristics of the income stream generated by the property and appraisals
supporting the property's valuation.
Real estate mortgage loans make up 80.0% of the Bank's portfolio with a
balance of $103,015,000 at December 31, 2003. Real estate construction loans
represent 5.7% or $7,305,000 of the real estate loan portfolio at December 31,
2003.
Commercial Loans. The Bank is active in the commercial loan market by
offering term loans and operating loans. Loans within the commercial loan
portfolio are typically secured by corporate assets and with credit enhancement
through appropriate guarantees, assignments of accounts or life insurance when
needed. Commercial lending entails significant risks. Because such loans are
secured by inventory, accounts receivable and other non-real estate assets, the
collateral may not be sufficient to ensure full payment of the loan in the event
of default. Loan-to-value guidelines in the Bank's lending policy aid in
underwriting and risk assessment of the commercial loans. Although the Bank
seeks a strong collateral position, prudent underwriting practices and cash-flow
analysis help to minimize the Bank's risk.
Commercial Loans, including agricultural loans, represent 11.7% or
$15,056,000 of the Bank's loan portfolio at December 31, 2003. Municipal loans
totaled $1,100,000 or 0.9% of total loans.
Consumer Loans. The Bank makes various types of consumer loans,
automobile loans, secured loans, and unsecured credit card loans. These loans
generally have shorter terms and higher interest rates than real estate loans.
They do involve more credit risk and dictate higher interest rates. Consumer
loans are generally made at fixed rates of interest for terms of up to 66
months.
Consumer loans, whether unsecured or secured by rapidly depreciating
assets such as automobiles, may entail greater risks. Repossessed collateral of
a defaulted consumer loan may not provide an adequate source of repayment of the
outstanding loan balance. The cost of collecting the remaining deficiency is
often disproportionate to the amount of the deficiency. In addition, consumer
loan collections are dependent on the borrower's continuing financial stability
and are therefore more likely to be adversely affected by job loss, personal
family situations, illness or bankruptcy. The risk of default on consumer loans
increases during periods of recession, high unemployment, and other adverse
economic conditions. Despite the increased risk associated with consumer
lending, consumer loans typically provide a higher rate of return and have
shorter terms to maturity which assist the Bank in managing the interest rate
sensitivity of its assets and liabilities.
Consumer loans, including credit card loans, accounted for $9,566,000
or 7.4% of total loans at December 31, 2003.
The Bank does not make loans to any foreign entities.
Non-Accrual, Past Due and Restructured Loans. Management addresses all
loans individually when considering a loan for non-accrual. The general policy
of the Bank requires that commercial and consumer loans be placed on non-accrual
when they become 90 days delinquent. Real estate loans will be subject to
non-accrual status when a past due principal and/or interest payment is
delinquent 90 days. It is within the discretion of management to deviate on a
case-by-case basis from policy after individual review of a credit.
Management will place any loan delinquent more than 90 days past due on
the Bank's watch list, along with previously-classified assets and loans in
bankruptcy. The Bank has adopted for its loan
8
policy the Uniform Retail Credit Classification and Account Management Policy,
as established by the (FFIEC) Interagency Policy Statement, for guidance in
managing the retail (consumer) delinquencies. Foreclosure or liquidation of
collateral is considered and reviewed by management in conjunction with the
approving authority on an individual basis, to determine the Bank's exposure,
course of action and most effective way of avoiding or minimizing a loss. The
allowance for loan and lease loss is monitored for its adequacy and reported in
detail to the Bank's Loan Committee. Interest previously accrued on non-accrual
loans and not yet paid is charged against interest income at the time the loan
is charged-off. Interest earned thereafter is only included in income to the
extent that it is received in cash.
The following table presents the aggregate amounts of non-performing
loans on the dates indicated:
(in thousands)
December 31,
-----------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Non-Accrual $ 3,510 $ 8,446 $ 3,455 $ 542 $ 712
Contractually Past Due 90 Days or More
as to Principal or Interest 680 798 2,810 2,587 2,413
-------- -------- -------- -------- --------
$ 4,190 $ 9,244 $ 6,265 $ 3,129 $ 3,125
======== ======== ======== ======== ========
Non-Performing Loans to Total Loans 3.25% 6.60% 3.96% 1.85% 1.93%
Under its written agreement with its banking regulators ("the
agreement") with its states that the Bank must develop an acceptable written
plan designed to improve the Bank's position on each loan or other asset in
excess of $200,000 that was past due 90 days or that was adversely classified in
the Report of Inspection and Examination. Asset improvement plans have been
prepared for all relationships meeting the above criteria. The plans were
prepared with the assistance of an external consulting firm. The Bank's loan
committee and the board of directors review the asset improvement plans at
inception and monthly thereafter. The Bank also retained an external consultant
to review the Bank's loan portfolio. The review was intended to accomplish the
following six objectives: 1) Evaluate the overall credit quality of the
portfolio, including the borrower's financial strengths, repayment ability and
collateral position; 2) evaluate underwriting standards and loan documentation
with a summary of all exceptions noted; 3) review compliance to the Board
approved loan policies, including lending authority; 4) evaluate the loan
grading system and the actual assignment of loan grades; 5) review the adequacy
of the Watch List procedures; and 6) evaluate the methodology of the ALLL
process for determining adequacy. This review has been completed and the
December 31, 2003 financial statements reflect the credit quality findings of
this review.
As of December 31, 2003, 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.
At December 31, 2003, the Bank's percentage of non-performing loans to
total loans was 3.25% as compared to 6.60% of total loans at December 31, 2002.
9
SUMMARY OF CREDIT LOSS EXPERIENCE
(Dollars in Thousands)
Year Ended December 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Balance of Allowance at Beginning of Year $2,050 $1,815 $1,331 $1,832 $1,800
------ ------ ------ ------ ------
Loans Actually Charged Off -
Real Estate - Construction 141 - - - -
Real Estate - Mortgage 444 317 - - -
Commercial, Financial and Agricultural 1,707 811 281 96 106
Installment and Credit Card 284 307 548 890 258
------ ------ ------ ------ ------
2,576 1,435 829 986 364
------ ------ ------ ------ ------
Recoveries of Loans Previously Charged Off -
Real Estate - Construction - - - - -
Real Estate - Mortgage - - 11 - -
Commercial, Financial and Agricultural 75 599 458 10 -
Installment and Credit Card 96 96 54 55 36
------ ------ ------ ------ ------
171 695 523 65 36
------ ------ ------ ------ ------
Net Charge-Offs (Recoveries) 2,405 740 306 921 328
------ ------ ------ ------ ------
Addition to Allowance Charged to Expense 4,180 975 790 420 360
------ ------ ------ ------ ------
Balance of Allowance at Year-End $3,825 $2,050 $1,815 $1,331 $1,832
====== ====== ====== ====== ======
Ratio of Net Charge-Offs to Avg. Loans Outstanding 1.79% 0.51% 0.18% 0.55% 0.21%
Ratio of Allowance for Credit Losses to Total Loans 2.97% 1.46% 1.15% 0.79% 1.14%
Allowance and Provision for Loan Losses. As noted in the Agreement, the
Bank is required to maintain, through charges to current operating income, an
adequate reserve for loan losses, and it shall be determined in light of the
volume of criticized loans, the current level of past due and nonperforming
loans, past loan loss experience, evaluation of the probable losses in the
Bank's loan portfolio, including the potential for existence of unidentified
losses in loans adversely classified, the imprecision of loss estimates, the
requirements of the Interagency Policy Statements on the Allowance for Loan and
Lease Losses, dated December 21, 1993 and July 2, 2001, and examiners'
criticisms noted in the Report of Inspection and Examination. The Bank's board
of directors hired an outside consultant, to evaluate the allowance for loan
losses adequacy. This review has been completed and the December 31, 2003
financial statements, in particular, the allowance for loan losses, reflect the
credit quality findings of this review.
The Bank maintains an allowance for loan losses that management
considers adequate to provide for probable credit losses in the loan portfolio.
A grading system is utilized for loans on the Bank's watch list. The Executive
Loan Officers review, on a quarterly basis, the status of all credit
relationships of greater than $250,000 or appearing on the Bank's watch list,
and assign or reassign judgmental grades. The grades indicate the risk level of
the loans to the Bank, and loss allowances are established from this analysis.
Management analyzes loans on an individual basis and classifies a loan as
impaired when an analysis of the borrower's operating results and financial
condition indicates that underlying cash flows are not adequate to meet the debt
service requirements. Often this is associated with a delay or shortfall in
payments of 90 days or more. The Bank will specifically allocate an amount that
is deemed appropriate based on the valuation of the collateral for each loan
reviewed.
10
The sum of the specific allocations determined by management is added to the
result of the historical rate of loss in the four categories times the remaining
balances in these categories. The historical rate of loss on consumer balances,
commercial balances and real estate and commercial real estate balances are
determined based on the three-year history.
At year end 2003, the allowance had a balance of $3,825,000, or 2.97%
of total loans, compared to $2,050,000, or 1.46% of total loans, at year end
2002. The provision for loan losses was $4,180,000 for the year ended December
31, 2003 compared to $975,000 for the year ended December 31, 2002. The increase
in the reserve is the result of the addition to the allowance charged to expense
which is the result of the continued high volume of delinquencies in a sluggish
economy. The weak economy will continue to affect delinquencies at least through
the first half of 2004. The Bank will adjust the provision as necessary based on
its quarterly review of the allowance and the lending environment as derived by
many factors including the local, regional and national economy.
All loans charged off during the year ended December 31, 2003 were
either consumer, commercial, or real estate mortgages. Management is actively
monitoring problem loans and has increased collection efforts to reduce
charge-offs in future periods. To assist in reducing charge-offs, the Bank has a
loan collection department and a credit analyst. The Bank's Delinquent and
Nonaccrual Loans showed substantial improvement for the year 2003. Total
Delinquent and Nonaccrual Loans as of December 31, 2002 stood at $15,916,000,
while as of December 31, 2003 they stood at $6,948,000. These represented a
56.35% improvement. Should charge-offs increase, management will increase the
provision for loan losses in order to maintain the allowance for loan losses at
a level adequate to absorb probable losses in the loan portfolio. The Bank's
three-year history of losses is $2,575,000 in 2003, $1,435,000 in 2002 and
$829,000 in 2001. These totals represent a large loss in the commercial area in
2003 and 2002 and in the installment area in 2001.
11
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.
(Dollars in Thousands)
December 31, 2003
-----------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Securities Available for Sale -
Agency Securities $ 4,046 $ 39 $ - $ 4,085
Mortgaged Backed Securities 39,837 237 228 39,846
State and Municipal Securities 10,424 700 3 11,121
--------- ---------- ---------- ---------
Total $ 54,307 $ 976 $ 231 $ 55,052
========= ========== ========== =========
December 31, 2002
-----------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Securities Available for Sale -
Agency Securities $ 5,493 $ 114 $ 2 $ 5,605
Mortgaged Backed Securities 35,575 674 3 36,246
State and Municipal Securities 11,895 650 - 12,545
--------- ---------- ---------- ---------
Total $ 52,963 $ 1,438 $ 5 $ 54,396
========= ========== ========== =========
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. Government agencies.
The following table shows the maturities and weighted average yields of
the Bank's investment securities as of December 31, 2003. Mortgage-Backed
Securities totaling $39,837,000 with a yield of 3.60% are excluded from the
chart due to the uncertainty of prepayment speeds. 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. Government
Agencies $ 1,000 6.30% $ 1,000 3.65% $ 2,046 5.80% $ -
Obligations of
States and Political
Subdivisions 1,181 7.69% 2,441 6.86% 4,856 7.01% 1,947 7.00%
-------- -------- -------- -------
Total $ 2,181 $ 3,441 $ 6,902 $ 1,947
======== ======== ======== =======
12
DEPOSITS
Deposits are principally from within the Bank's market area. Clients
are offered a broad selection of deposit instruments, including regular and
interest-bearing checking accounts, money market accounts, passbook and
statement savings accounts, certificates of deposit and individual retirement
accounts. Interest rates and service fees are established and reviewed by
management to maintain liquidity and growth goals and to be competitive in the
local market. The Bank does not use brokers to attract deposits.
The following table sets forth the average balances of and average
rates paid on deposits for the periods indicated:
(Dollars in Thousands)
Year Ended December 31,
-------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
Noninterest-Bearing $ 14,603 0.00% $ 14,690 0.00% $ 14,791 0.00%
Savings 32,687 0.47% 30,186 1.09% 27,697 1.93%
NOW, Super NOW and Plus 34,356 0.49% 33,188 1.01% 28,360 1.64%
Time 91,485 2.88% 100,797 3.93% 108,079 5.68%
---------- ---------- ----------
Total $ 173,131 $ 178,861 $ 178,927
========== ========== ==========
The maturity distribution of time deposits as of December 31, 2003 was:
Less than $100,000
$100,000 and Over
-------- --------
(Dollars In Thousands)
Three Months or Less $ 11,056 $ 4,363
Over Three Months Through Twelve Months 24,796 3,952
Over One Year Through Three Years 28,522 9,200
Over Three Years 3,523 813
---------- ----------
Total $ 67,897 $ 18,328
========== ==========
13
SHORT-TERM BORROWINGS
The following table sets forth certain information regarding the Bank's
short-term borrowed funds at or for the periods ended on the dates indicated.
(Dollars in Thousands)
2003 2002 2001
---- ---- ----
FEDERAL HOME LOAN BANK SHORT-TERM BORROWINGS
Average Balance Outstanding $ 0 $ 176 $ 6,748
Maximum Amount Outstanding
at any Month-End During the Period 0 600 6,925
Balance Outstanding at End of Period 0 0 925
Weighted Average Interest Rate
During the Period n/a 4.83% 4.43%
Weighted Average Interest Rate at
End of Period n/a n/a 5.06%
REPURCHASE AGREEMENTS
Average Balance Outstanding $ 7,097 $4,311 $ 3,505
Maximum Amount Outstanding
at any Month-End During the Period 9,647 6,318 4,481
Balance Outstanding at End of Period 7,540 5,946 3,052
Weighted Average Interest Rate
During the Period 1.16% 1.46% 3.22%
Weighted Average Interest Rate at
End of Period 1.22% 1.04% 1.51%
14
LONG-TERM DEBT
The following table sets forth certain information regarding the Bank's
long-term debt at or for the periods ended on the dates indicated.
(Dollars in Thousands)
2003 2002 2001
---- ---- ----
FEDERAL HOME LOAN BANK LONG-TERM DEBT
Average Balance Outstanding $ 5,962 $ 8,827 $ 12,219
Maximum Amount Outstanding
at any Month-End During the Period 7,633 9,710 16,676
Balance Outstanding at End of Period 4,648 7,719 9,791
Weighted Average Interest Rate
During the Period 5.77% 6.94% 7.05%
Weighted Average Interest Rate at
End of Period 5.48% 6.03% 5.94%
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 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 three years in the period ended December 31.
Change from Prior Year
Years Ended ----------------------
December 31, 2003 vs. 2002 2002 vs. 2001
------------ ------------- -------------
2003 2002 2001 Amount Percent Amount Percent
---- ---- ---- ------ ------- ------ -------
(Dollar amounts in thousands)
Interest Income $ 10,830 13,023 16,436 $(2,193) -16.84% $(3,413) -20.77%
Interest Expense 3,378 5,219 8,432 (1,841) -35.27% (3,213) -38.10%
--------- ------ ------ ------- -------
Net Interest Income $ 7,452 7,804 8,004 $ (352) -4.51% $ (200) -2.50%
========= ====== ====== ======= =======
The following table sets forth certain information relating to the
Bank's average balance sheet information and reflects the average yield on
interest-earning assets and the average cost of interest-bearing liabilities for
the periods indicated. Such yields and costs are derived by dividing income or
expense by the average monthly balance of interest-earning assets or
interest-bearing liabilities, respectively, for the periods presented. Yields on
tax-exempt assets have been computed on a fully tax-exempt basis assuming a tax
rate of 34%.
15
Years Ended December 31,
------------------------------ --------------------------- ----------------------------
2003 2002 2001
------------------------------ --------------------------- ----------------------------
Interest Average Interest Average Interest Average
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Balance Expense Rates Balance Expense Rates Balance Expense Rates
------- ------- ----- ------- ------- ----- ------- ------- -----
(Dollars in Thousands)
ASSETS
Interest-Earning Assets:
Investment Securities
Taxable $ 44,801 $ 1,635 3.65% $ 28,916 $ 1,619 5.60% $ 28,895 $ 1,729 5.98%
Tax Exempt 11,404 881 7.73% 13,153 996 7.57% 11,715 895 7.64%
Federal Funds Sold 8,944 94 1.05% 17,125 277 1.62% 12,112 357 2.95%
Interest on Deposits
with Banks 165 1 0.61% 86 1 1.16% 79 1 1.27%
Loans 134,731 8,548 6.34% 146,200 10,506 7.19% 166,941 13,794 8.26%
--------- ------- -------- ------- -------- --------
Total Interest-Earning
Assets 200,045 11,159 5.58% 205,480 13,399 6.52% 219,742 16,776 7.63%
--------- ------- -------- ------- -------- --------
Noninterest-Earning Assets:
Cash and Due from Banks 7,111 4,965 4,706
Premises and Equipment 4,569 4,835 4,036
Other Assets 1,634 4,329 1,988
Allowance for
Credit Losses (2,898) (1,938) (1,367)
--------- -------- --------
Total Noninterest-Earning
Assets 10,416 12,191 9,363
--------- -------- --------
Total Assets $ 210,461 $217,671 $229,105
========= ======== ========
16
Years Ended December 31,
------------------------------ --------------------------- ----------------------------
2003 2002 2001
------------------------------ --------------------------- ----------------------------
Interest Average Interest Average Interest Average
Average Income/ Yields/ Average Income/ Yields/ Average Income/ Yields/
Balance Expense Rates Balance Expense Rates Balance Expense Rates
------- ------- ----- ------- ------- ----- ------- ------- -----
(Dollars in Thousands)
LIABILITIES AND SHAREHOLDERS'
EQUITY
Interest-Bearing Liabilities:
Savings Deposits $ 32,687 $ 153 0.47% $ 30,186 $ 328 1.09% $ 27,697 $ 535 1.93%
NOW, Super NOW, Plus 34,356 167 0.49% 33,188 335 1.01% 28,360 465 1.64%
Time Deposits 91,485 2,632 2.88% 100,797 3,957 3.93% 108,496 6,159 5.68%
-------- -------- -------- ------- -------- -------
Total Interest-Bearing
Deposits 158,528 2,952 1.86% 164,171 4,620 2.81% 164,553 7,159 4.35%
Other Borrowed 13,059 426 3.26% 13,314 599 4.50% 22,472 1,273 5.66%
-------- -------- -------- ------- -------- -------
Total Interest-Bearing
Liabilities 171,587 3,378 1.97% 177,485 5,219 2.94% 187,025 8,432 4.51%
-------- -------- -------- ------- -------- -------
Noninterest-Bearing
Liabilities:
Demand Deposits 14,603 14,690 14,791
Other Liabilities 580 1,012 2,904
-------- -------- --------
Total Noninterest-
Bearing Liabilities 15,183 15,702 17,695
-------- -------- --------
Shareholders ' Equity 23,691 24,484 24,385
-------- -------- --------
Total Liabilities and
Shareholders' Equity $210,461 $217,671 $229,105
======== ======== ========
Net Interest Income
(Tax Equivalent Basis) $ 7,781 $ 8,180 $ 8,344
Reversal of Tax
Equivalent Adjustment (329) (376) (340)
-------- ------- -------
Net Interest Income $ 7,452 $ 7,804 $ 8,004
======== ======= =======
Net Interest Spread (Tax
Equivalent Basis) 3.61% 3.58% 3.12%
==== ==== ====
Net Interest Margin
(Net Interest Income as a %
of Interest-Earning Assets,
Tax Equivalent Basis) 3.89% 3.98% 3.80%
==== ==== ====
Net Interest Margin
(Net Interest Income as a %
of Interest-Earning Assets) 3.73% 3.80% 3.64%
==== ==== ====
17
The following table describes the extent to which changes in interest
rates and changes in volume of interest-earning assets and interest-bearing
liabilities have affected the Bank's interest income and expense during the
periods indicated. For each category of interest-earning assets and
interest-bearing liabilities, information is provided on changes attributable to
(i) changes in volume (change in volume multiplied by prior-year rate), (ii)
changes in rate (change in rate multiplied by prior-year volume) and (iii) total
changes in rate and volume. The combined effects of changes in both volume and
rate, which cannot be separately identified, have been allocated proportionately
to the change due to volume and the change due to rate.
2003 vs 2002 2002 vs 2001
------------ ------------
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) (Dollars in Thousands)
Investment Income:
Investment Securities:
Taxable $ 41 $ (26) $ 15 $ 1 $ (111) $ (110)
Tax Exempt (136) 21 (115) 109 (8) 101
Federal Funds
Sold (106) (78) (184) 911 (991) (80)
Interest on Deposits
with Banks 1 - 1 - - -
Interest and Fees
on Loans (785) (1,172) (1,957) (1,605) (1,683) (3,288)
------ ------- -------- ------- -------- --------
Total Interest Income (985) (1,255) (2,240) (584) (2,793) (3,377)
------ ------- -------- ------- -------- --------
Interest Expense:
Interest-Bearing Deposits:
Savings 30 (205) (175) 53 (260) (207)
NOW, Super NOW,
and Plus 12 (180) (168) 103 (233) (130)
Time (341) (984) (1,325) (412) (1,790) (2,202)
Other Borrowed (11) (162) (173) (448) (226) (674)
Federal Funds Purchased - - - - - -
------ ------- -------- ------- -------- --------
Total Interest Expense (310) (1,531) (1,841) (704) (2,509) (3,213)
------ ------- -------- ------- -------- --------
Change in Net
Interest Income $ (675) $ 276 $ (399) $ 120 $ (284) $ (164)
====== ======= ======== ======= ======== ========
18
TAXATION
FEDERAL TAXATION. The Company and the Bank are each subject to the
federal tax laws and regulations which apply to corporations generally.
OHIO TAXATION. The Company is subject to the Ohio corporation franchise
tax. The tax rate is figured at 5.1% on the first $50,000 of computed Ohio
taxable income and 8.5% of computed Ohio taxable income in excess of $50,000.
The Bank is a "financial institution" for State of Ohio tax purposes. As such,
it is subject to the Ohio corporate franchise tax on "financial institutions"
which is imposed annually at a rate of 1.3% of the Bank's book net worth
determined in accordance with generally accepted accounting principles.
DELAWARE TAXATION. Since the Company is incorporated in the state of
Delaware, it is subject to Delaware franchise tax. The Company's tax is computed
on the number of shares authorized, which totals 5,000,000 shares.
ITEM 2 - PROPERTIES
The Company owns no property. The Bank's executive offices are located
at The Commercial Bank's Corporate Center at 229 E. Second St., Delphos, Ohio,
which is owned by the Bank. The Bank operates four branch banking facilities,
all of which are owned by the Bank, at the following locations: the Delphos Main
Office at 230 E. Second St., Delphos, Ohio, the Elida Branch Office at 105 S.
Greenlawn Ave., Elida, Ohio, the Lima Allentown Branch Office at 2600 Allentown
Road, Lima, Ohio, and the Lima Cole Street Branch Office at 2285 N. Cole St.,
Lima, Ohio. All branch offices are full service facilities. All properties are
in good working condition and are adequately insured.
ITEM 3 - LEGAL PROCEEDINGS
The Bank, at any given time, is involved in a number of lawsuits
initiated by the Bank as a plaintiff, intending to collect upon delinquent
accounts, to foreclose upon real property, or to seize and sell personal
property pledged as security for any such account.
At December 31, 2003, the Bank was involved in a number of such cases
as a party-plaintiff, and occasionally, as a party-defendant due to its joinder
as a lien holder, either by mortgage or by judgment lien. In the ordinary case,
the Bank's security and value of its lien is not threatened, except through
bankruptcy or loss of value of the collateral should the sale result in
insufficient proceeds to satisfy the judgment.
There are no material pending legal proceedings 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
None
19
PART II
ITEM 5 - MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
The common stock of the Company trades under the symbol COBI, and is
not traded on any established securities market. Parties interested in buying or
selling the Company's stock are generally referred to Community Banc
Investments, New Concord, Ohio (CBI). For 2003 and 2002, bid and ask quotations
were obtained from Community Bank Investments 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.
2003 Low Bid High Bid Low Ask High Ask Dividend Per Share
First Qtr 16.000 16.250 16.500 17.000 .120
Second Qtr 15.375 16.250 15.500 17.000 .120
Third Qtr 14.250 14.250 14.750 16.250 .100
Fourth Qtr 14.250 14.250 15.250 15.250 .000
2003 Low Bid High Bid Low Ask High Ask Dividend Per Share
First Qtr 15.350 15.600 15.670 22.000 .120
Second Qtr 15.500 16.000 15.750 17.500 .120
Third Qtr 15.500 16.000 16.100 17.000 .120
Fourth Qtr 15.650 16.000 16.000 17.000 .140
As of February 23, 2004, the Company's common stock was held by 1,089
shareholders of record.
As of February 23, 2004, there were no equity securities authorized for
issuance under compensation plans.
20
ITEM 6 - SELECTED FINANCIAL DATA
The following table sets forth certain information concerning the
consolidated financial condition and results of operations for the periods
indicated:
As of and for the years ended December 31,
-----------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
STATEMENT OF OPERATIONS
Interest Income $ 10,830 $ 13,023 $ 16,436 $ 17,007 $ 15,318
Interest Expense 3,378 5,219 8,432 8,587 6,921
---------- ---------- ---------- ---------- ----------
Net Interest Income 7,452 7,804 8,004 8,420 8,397
Provision for Loan Losses 4,180 975 790 420 360
---------- ---------- ---------- ---------- ----------
Net Interest Income after
Provision for Loan Losses 3,272 6,829 7,214 8,000 8,037
Other Income 1,686 1,172 1,106 600 639
Operating Expenses 6,139 5,823 5,662 5,251 5,140
---------- ---------- ---------- ---------- ----------
Income/(Loss) before Income Taxes (1,181) 2,178 2,658 3,349 3,536
Applicable Income Taxes (595) 553 725 1,000 1,017
---------- ---------- ---------- ---------- ----------
Net Income/(Loss) $ (586) $ 1,625 $ 1,933 $ 2,349 $ 2,519
========== ========== ========== ========== ==========
STATEMENT OF CONDITION (YEAR END DATA)
Total Assets $ 207,733 $ 218,030 $ 218,977 $ 223,062 $ 218,548
Investment Securities 55,052 54,396 37,584 40,260 44,796
Loans Receivable 128,756 140,819 158,174 169,530 161,958
Allowance for Loan Losses 3,825 2,050 1,815 1,331 1,832
Deposits 172,232 178,890 179,657 178,082 169,720
Shareholders' Equity 22,558 24,350 23,940 23,764 22,473
SELECTED FINANCIAL RATIOS
Return on Average Assets -0.28% 0.75% 0.84% 1.06% 1.23%
Return on Average Equity -2.47% 6.64% 7.93% 10.15% 11.04%
Tier One Risk-Based Capital 17.24% 16.88% 15.74% 15.47% 15.43%
Total Risk-Based Capital 18.52% 18.13% 16.96% 16.34% 16.66%
Tier One Leverage Ratio 10.49% 10.77% 10.16% 10.61% 10.73%
Dividend Payout Ratio -128.33% 68.47% 58.92% 47.52% 42.45%
PER SHARE DATA (1)
Net Income/(Loss) $ (0.26) $ 0.73 $ 0.85 $ 1.01 $ 1.06
Book Value 10.20 11.01 10.63 10.28 9.57
Cash Dividends Declared 0.34 0.50 0.50 0.48 0.45
21
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXECUTIVE SUMMARY
The following are financial highlights for the year 2003 which are
discussed in more detail in the following sections of this MD&A:
- Total delinquencies have decreased by 56.35% from $15,916,000 at
December 31, 2002 to $6,948,000 at December 31, 2003. Total
delinquency reduction can be credited to the reduction in
nonaccrual loans and loans being brought current through workout
plans.
- Total provision expense increased $3,205,000 or 328.72% in 2003
compared to 2002. This increase is the result of net charge-offs
in the amount of $2,405,000 and the continued high volume of
delinquencies, although the volume of total delinquencies has
decreased by $8,968,000 since yearend 2002. The significant
increase in the provision for loan losses is also due to the low
coverage ratio of the ALLL to nonaccrual loans in prior years,
and the increased reserves required on specified credits.
- Total shareholders equity decreased $1,792,000 from December 31,
2002 to December 31, 2003. This decrease is the result of the net
operating loss of $586,000 or $(0.26) per common share for the
Year Ended December 31, 2003 and total 2003 cash dividends in the
amount of $752,000 or $0.34 per common share.
REGULATORY MATTERS
Following a regulatory examination in September, 2003, the Company and
the Bank entered into The Agreement with the Federal Reserve Bank of Cleveland
and the Ohio Division of Financial Institutions on December 19, 2003. Under the
Agreement, the Bank must adopt and implement certain plans, policies and
strategies, including loan policies and procedures that monitor risk
concentrations and problem credits, a loan review program to assess the Bank's
loan portfolio and monitor and address loan deficiencies, an asset improvement
plan focusing on loans or other assets in excess of $200,000 or that are past
due 90 days or more or adversely qualified, a written plan to monitor and manage
the Bank's market risk exposure and a written compliance program. In addition,
the Company and the Bank are required to have a capital plan and the directors
must submit a written plan to strengthen board oversight. In addition, the Bank
is required to maintain adequate valuation reserves for its loans and leases. As
described more fully in Note 13 to the 2003 Consolidated Financial Statements
included in this Report, the Agreement also prohibits the payment of any
dividends without prior regulatory approval.
In response to the Agreement, the Bank has put an asset improvement
plan in place and has prepared and implemented a revised compliance plan. In
addition, outside consultants have completed a review of the Bank's loan
portfolio, verified the validity of the Bank's market risk models and reviewed
and validated the Bank's valuation reserve methodology. The Bank has also
retained a consulting firm to search for a new Head of Credit Administration and
to assist with the restructuring of the existing loan department. Management is
currently in the process of preparing a capital plan and revisions to certain
loan policies for submission to the Bank's regulators.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company are in accordance
with accounting principles generally accepted in the United States and conform
to general practices within the banking industry. The Company's significant
accounting policies are described in detail in the notes to the
22
Company's consolidated financial statements for the year ended December 31,
2003. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. The financial position and results of operations can be affected by
these estimates and assumptions and are integral to the understanding of
reported results. Critical accounting policies are those policies that
management believes are the most important to the portrayal of the Company's
financial condition and results of operations, and they require management to
make estimates that are difficult, subjective, or complex.
ALLOWANCE FOR CREDIT LOSSES- The allowance for credit losses provides
coverage for probable losses inherent in the Company's loan portfolio.
Management evaluates the adequacy of the allowance for credit losses each
quarter based on changes, if any, in underwriting activities, the loan portfolio
composition (including product mix and geographic, industry or customer-specific
concentrations), trends in loan performance, regulatory guidance and economic
factors. This evaluation is inherently subjective, as it requires the use of
significant management estimates. Many factors can affect management's estimates
of specific and expected losses, including volatility of default probabilities,
rating migrations, loss severity and economic and political conditions. The
allowance is increased through provisions charged to operating earnings and
reduced by net charge-offs.
The Company determines the amount of the allowance based on relative
risk characteristics of the loan portfolio. The allowance recorded for
commercial loans is based on reviews of individual credit relationships and an
analysis of the migration of commercial loans and actual loss experience. The
allowance recorded for homogeneous consumer loans is based on an analysis of
loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy
experiences, and historical losses, adjusted for current trends, for each
homogeneous category or group of loans. The allowance for credit losses relating
to impaired loans is based on the loan's observable market price, the collateral
for certain collateral-dependent loans, or the discounted cash flows using the
loan's effective interest rate. Regardless of the extent of the Company's
analysis of customer performance, portfolio trends or risk management processes,
certain inherent but undetected losses are probable within the loan portfolio.
This is due to several factors including inherent delays in obtaining
information regarding a customer's financial condition or changes in their
unique business conditions, the judgmental nature of individual loan
evaluations, collateral assessments and the interpretation of economic trends.
Volatility of economic or customer-specific conditions affecting the
identification and estimation of losses for larger non-homogeneous credits and
the sensitivity of assumptions utilized to establish allowances for homogenous
groups of loans are among other factors. The Company estimates a range of
inherent losses related to the existence of these exposures. The estimates are
based upon the Company's evaluation of imprecision risk associated with the
commercial and consumer allowance levels and the estimated impact of the current
economic environment.
MORTGAGE SERVICING RIGHTS- Mortgage servicing rights ("MSRs")
associated with loans originated and sold, where servicing is retained, are
capitalized and included in other intangible assets in the consolidated balance
sheet. The value of the capitalized servicing rights represents the present
value of the future servicing fees arising from the right to service loans in
the portfolio. Critical accounting policies for MSRs relate to the initial
valuation and subsequent impairment tests. The methodology used to determine the
valuation of MSRs requires the development and use of a number of estimates,
including anticipated principal amortization and prepayments of that principal
balance. Events that may significantly affect the estimates used are changes in
interest rates, mortgage loan prepayment speeds and the payment performance of
the underlying loans. The carrying value of the MSRs is periodically reviewed
for impairment based on a determination of fair value. For purposes of measuring
impairment, the servicing rights are compared to a valuation prepared based on a
discounted cash flow methodology, utilizing current prepayment speeds and
discount rates. Impairment, if any, is recognized through a valuation allowance
and is recorded as amortization of intangible assets.
23
OFF-BALANCE SHEET ARRANGEMENTS
At December 31, 2003, the Company had certain off-balance sheet
arrangements. 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
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies but may include accounts receivable,
inventory, property and equipment, and income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party.
The Bank committed to purchase two investment securities on a
when-issued basis on October 6, 2003 in the amount of $1,000,000 and on November
20, 2003 in the amount of $500,000. Both trades settled on January 26, 2004.
TABULAR DISCLOSURE OF CONTRACTUAL OBLIGATIONS
The following table shows the payments due by period of long-term debt
obligations payable to the Federal Home Loan Bank.
(Dollars in Thousands)
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------
LESS MORE
THAN 1 THAN 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
----------------------------------------------------------------------------------------------------
Long-Term Debt Obligations 4,649 1,506 1,164 1,214 765
---------------------------------------------------------------------------------------------------
TOTAL 4,649 1,506 1,164 1,214 765
---------------------------------------------------------------------------------------------------
Excluded from the table above is $1,500,000 in investment securities
that were purchased on a when-issued basis. Due to the uncertainty of prepayment
speeds of these types of investment securities, they are intentionally excluded
from the chart totals.
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, 2003 such securities amounted to $55.1 million, at
December 31, 2002 such securities amounted to $54.4 million, and at December 31,
2001 such securities amounted to $37.6 million. At December 31, 2003, 2002 and
2001, Federal Funds Sold amounted to $9.7 million, $4.6 million, and $9.7
million, respectively.
24
The Bank's residential first mortgage portfolio has been used to
collateralize borrowings from the Federal Home Loan Bank as an additional source
of liquidity. The Federal Home Loan Bank requires the Bank to pledge 165% of the
first mortgage loan portfolio as collateral. The approximate available line of
credit from the Federal Home Loan Bank at December 31, 2003 was $35.0 million.
Management considers its liquidity to be adequate to meet its normal
funding requirements and anticipates that it will have sufficient funds
available in 2004 from additional sources such as investment security maturities
and mortgage-backed securities repayments and deposit accounts.
CAPITAL RESOURCES
As of December 31, 2003, there were no commitments for capital
expenditures within the next twelve months.
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 effect 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 also are subject to
qualitative judgment 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, 2003 that the Bank meets all the capital
adequacy requirements to which it is subject.
As of December 31, 2003, 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 Bank's total
risk-adjusted capital ratio, Tier 1 capital ratio and Tier 1 leverage ratio
were, 18.52%, 15.68%, and 9.54%, respectively at December 31, 2003.
As part of the The Agreement, the Bank and the Company were to submit
to the Reserve bank and the Division an acceptable joint written plan to achieve
and maintain sufficient capital at the holding company and subsidiary. To comply
with the Agreement, management of the Bank and the Company has revised the
capital plan and it is currently under review by an external consultant and will
thereafter be submitted to the regulators.
FINANCIAL CONDITION
GENERAL
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.
25
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 increases 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
may sell their stock.
A bank holding company can engage in certain bank-related activities in
which the Bank cannot engage; thus the reorganization broadens the scope of
services which may be offered to the public.
Through December 31, 2003, the Company's only substantial asset was the
investment in the Bank. Accordingly, the remainder of this analysis will
concentrate on the Bank.
There are different factors such as general economic conditions,
monetary and fiscal policies and policies of the regulatory authorities that may
affect the operating results of the Bank.
COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 2003 AND DECEMBER 31, 2002.
As an overview of the financial condition and results of operation for
the Year Ended December 31, 2003, improvements have been made. Nonaccrual loans,
as can be seen in Table 1, have decreased by 58.44% since December 31, 2002 and
total delinquencies have decreased by 56.35% from December 31, 2002 to December
31, 2003. The reduction in nonaccrual loans can be attributed to $1,760,000 in
charge-offs, $2,214,000 in principal reduction, and $953,000 moved to Other Real
Estate Owned. Total delinquency reduction can be credited to the reduction in
nonaccrual loans and loans being brought current through workout plans.
TABLE 1: Analysis of Delinquencies
(Dollars in Thousands)
12/31/2003 12/31/2002 12/31/2001 12/31/2000 12/31/1999
Past due 30 to 89 days and still accruing $ 2,758 $ 6,672 $ 9,863 $ 4,502 $ 2,004
Past due 90 days or more and still accruing 680 798 2,810 2,587 2,413
Nonaccrual 3,510 8,446 3,455 542 712
----------------------------------------------------------------------
Total delinquencies $ 6,948 $ 15,916 $ 16,128 $ 7,631 $ 5,129
======================================================================
Total Delinquencies as a percentage of total loans 5.40% 11.36% 10.31% 4.50% 3.17%
Total assets decreased $10,298,000 or 4.72% from $218,030,000 at
December 31, 2002 to $207,733,000 at December 31, 2003. This is the result of a
$13,110,000 decrease in net loans, a $6,658,000 decrease in total deposits and a
$3,071,000 decrease in long-term debt, and a $1,792,000 decrease in total
shareholders' equity. The decrease in net loans is due to the amount of 1-4
family residential mortgages sold to the secondary mortgage market and the
intentional runoff of higher risk commercial and consumer loans. Due to this
decrease in loans and the decreased need for liquidity, deposits were priced to
allow runoff as well.
Investment securities increased $656,000 from $54,396,000 at December
31, 2002 to $55,052,000 at December 31, 2003. This increase is the result of
$34,261,000 in purchases less the pay downs from Mortgage-backed securities, a
U.S. Agency Bond being called totaling $31,279,000, proceeds from the sale of
securities totaling $1,218,000 (gross of gain on sale), net premium amortization
of $427,000, and a decrease in the market value of the available-for-sale
portfolio of $690,000. As interest rates begin to rebound from over 40 year
lows, the market value of the portfolio will continue to decrease, but due to
the short average life of 3.64 years and a volatility of -6.00% (in a +300 basis
point rate shock), the portfolio will cash flow quickly. The current strategy in
the investment portfolio is to keep the duration of the portfolio as short as
possible without sacrificing a significant
26
amount of yield. This strategy will be employed until interest rates rebound and
the asset quality of the loan portfolio begins to improve.
Total gross loans decreased 8.09% or $11,335,000 from $140,091,000 at
December 31, 2002 to $128,756,000 at December 31, 2003. The breakdown of the
loan portfolio is detailed in table 2 below. Significant changes in the
portfolio include the decrease in the 1-4 family residential loans secured by
first liens which is the result of selling these mortgages to FHLMC. As can be
seen in Table 2, secondary market lending to FHLMC continues to grow at a rapid
rate. The Bank chose to sell these loans to maintain a competitive low interest
rate and to offer a long-term product to consumers. Although these loans are no
longer an interest earning asset to the institution, these loans were sold at a
gain and will continue to generate service fee income at .25% per month over the
life of the loan. Another significant change in the portfolio includes a
$1,217,000 increase in the real estate secured by nonfarm, nonresidential
properties. This increase is due to management's desire to increase loans
secured by real estate which tend to be of less risk in nature. The commercial
loan decrease of $3,981,000 or 24.00% is primarily due to the higher risk that
these loans carry in a sluggish economy. As these loans were refinanced, they
were priced to encourage a controlled amount of runoff. The consumer installment
loan decrease is primarily due to the desire to reduce indirect auto loans which
also tend to be of greater risk in nature.
TABLE 2: Analysis of Loan Portfolio Composition
(Dollars in Thousands)
LOAN TYPE 12/31/2003 12/31/2002 CHANGE %
Construction/Land Development $ 7,305 $ 7,542 $ (237) -3.14%
R/E Secured by Farmland 4,598 4,627 (29) -0.63%
Revol Open-end 1-4 Family LOC 5,294 5,476 (182) -3.32%
1-4 Secured by first 35,112 39,939 (4,827) -12.09%
1-4 Secured by Junior 550 869 (319) -36.71%
R/E Secured by Multi Family R/E 3,179 3,219 (40) -1.24%
R/E Secured by Nonfarm, Nonres 46,977 45,760 1,217 2.66%
Ag Loans 2,449 2,302 147 6.39%
Commercial Loans 12,607 16,588 (3,981) -24.00%
Municipal Loans 1,100 1,340 (240) -17.91%
Master Card Loans 566 622 (56) -9.00%
Other Consumer 7 1 6 600.00%
Consumer Loans 8,993 11,795 (2,802) -23.76%
Overdrafts 19 11 8 72.73%
----------------------------------------------------
Total Loans 128,756 140,091 (11,335) -8.09%
Loan Loss Reserve 3,825 2,050 1,775 86.59%
----------------------------------------------------
Total Net Loans $ 124,931 $ 138,041 $ (13,110) -9.50%
====================================================
Serviced FHLMC Mortgages 63,460 45,589 17,871 39.20%
----------------------------------------------------
Total Loans Serviced $ 188,391 $ 183,630 $ 4,761 2.59%
----------------------------------------------------
The Allowance for Loan Losses, at December 31 2003 was 2.97% of total
loans compared to 1.46% at December 31, 2002. This $1,775,000 increase from
December 31, 2002 is the result of a $4,180,000 provision and net charge offs of
$2,405,000, increasing the Allowance for Loan Loss from $2,050,000 at December
31, 2002 to $3,825,000 at December 31, 2003. In light of a low coverage ratio of
Allowance for Loan and Lease Losses (ALLL) to nonaccrual loans, management
increased the provision by $3,205,000 improving the ratio to 108.97% at December
31, 2003 from 24.27% at December 31, 2002. The addition was also due to the
continued high volume of $4,190,000 in nonperforming loans that management
continues to pursue legally. Although the nonperforming loan balances remain at
high levels, these balances have been reduced by $5,054,000 or 54.67% from
$9,244,000 at December 31, 2002 to $4,190,000 at December 31, 2003. Management
attributes this significant decrease to not only charge-offs of $2,575,000, but
an improvement in the local economy
27
and an increased emphasis on work-out programs. The economy has begun to show
signs of improvement through a slight decrease in unemployment and increased
capacity at some local manufacturers. Table 3 below illustrates an analysis of
the Allowance for Loan and Lease Losses over the past five years.
TABLE 3: Analysis of Changes in Allowance for Loan and Lease Losses
(Dollars in Thousands)
Year Ended December 31,
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Balance of Allowance at Beginning of Year $2,050 $1,815 $1,331 $1,832 $1,800
------ ------ ------ ------ ------
Loans Actually Charged Off -
Real Estate - Construction 141 - - - -
Real Estate - Mortgage 444 317 - - -
Commercial, Financial and Agricultural 1,707 811 281 96 106
Installment and Credit Card 284 307 548 890 258
------ ------ ------ ------ ------
2,576 1,435 829 986 364
------ ------ ------ ------ ------
Recoveries of Loans Previously Charged Off -
Real Estate - Construction - - - - -
Real Estate - Mortgage - - 11 - -
Commercial, Financial and Agricultural 75 599 458 10 -
Installment and Credit Card 96 96 54 55 36
------ ------ ------ ------ ------
171 695 523 65 36
------ ------ ------ ------ ------
Net Charge-Offs (Recoveries) 2,405 740 306 921 328
------ ------ ------ ------ ------
Addition to Allowance Charged to Expense 4,180 975 790 420 360
------ ------ ------ ------ ------
Balance of Allowance at Year-End $3,825 $2,050 $1,815 $1,331 $1,832
====== ====== ====== ====== ======
Ratio of Net Charge-Offs to Avg. Loans Outstanding 1.79% 0.51% 0.18% 0.55% 0.21%
Ratio of Allowance for Credit Losses to Total Loans 2.97% 1.46% 1.15% 0.79% 1.14%
Total deposits decreased $6,658,000 or 3.72% from December 31, 2002 to
December 31, 2003. Table 4 below shows a breakdown of deposits by type at both
December 31, 2002 and December 31, 2003. The reduction in total deposits is the
result of an extremely competitive local market for Time Deposits, the internal
movement of deposit accounts into Repurchase Agreements which offer additional
security for balances over the FDIC insurance limit and a higher rate of
interest, and the decreased need for liquidity.
TABLE 4: Deposit Balances by Type
(Dollars in Thousands)
DEPOSIT TYPE 12/31/2003 12/31/2002 DIFFERENCE %
Non-interest Bearing DDA $ 15,758 $ 16,089 $ (331) -2.06%
NOW Accounts 25,016 25,927 (911) -3.51%
MMKT Savings 12,139 9,546 2,593 27.16%
Savings 33,094 30,546 2,548 8.34%
Time Deposits 86,225 96,782 (10,557) -10.91%
-----------------------------------------------------
Total Deposits $ 172,232 $ 178,890 $ (6,658) -3.72%
=====================================================
28
Short-term borrowings, which include Federal Home Loan Bank borrowings
with original maturities of less than one year and retail repurchase agreements,
increased $1,594,000 from December 31, 2002 to December 31, 2003. Of the
$1,594,000 increase, Federal Home Loan Bank borrowings were unchanged while
repurchase agreements increased $1,594,000. This increase can be attributed to
local businesses seeking interest-bearing transaction accounts that maintain an
added benefit of collateralization on balances over the FDIC insurance limit of
$100,000. Long-term debt or borrowings with an original maturity of greater than
one year from the Federal Home Loan Bank decreased $3,071,000 or 39.78% from
December 31, 2002 to December 31, 2003. This decrease is due to the maturity of
two advances totaling $1,993,000 with a weighted average rate of 7.44% and the
prepayment and principal amortization of other advances. Due to the excessive
amount of liquidity, management chose not to borrow additional funds from FHLB
at that time.
Total shareholders equity decreased $1,792,000 from December 31, 2002
to December 31, 2003. Included in the overall decrease was a decrease in
retained earnings of $1,338,000, which was the result of a net loss of $586,000
for the Year Ended December 31, 2003, the payment of $752,000 in dividends, and
a decrease of $454,000 in Accumulated Other Comprehensive Income, which is the
unrealized gain on the available-for-sale securities portfolio net of tax. No
Treasury Stock was repurchased in 2003.
RESULTS OF OPERATIONS
Net interest income, the difference between interest earned on
interest-earning assets and interest expense incurred on interest-bearing
liabilities, is the most significant component of the 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 $352,000 for
the Year Ended December 31, 2003 from a year ago.
There was a net loss for the Year Ended December 31, 2003 in the amount
of $586,000 or $(0.26) per share. This represents a decrease of 136.06% in net
income per share compared to the Year Ended December 31, 2002. Return on average
assets was -0.28% for the Year Ended December 31, 2003, down from 0.75% for the
Year Ended December 31, 2002. Return on average equity decreased to -2.47% in
2003 from 6.64% in 2002.
The most significant income statement changes between the Year Ended
December 31, 2003 and the Year Ended December 31, 2002 were as follows:
- The Provision for loan losses increased $3,205,000 or 328.72% from
$975,000 for the Year Ended December 31, 2002 to $4,180,000 for the
Year Ended December 31, 2003. This increase is the result of net
charge-offs in the amount of $2,405,000 and the continued high
volume of delinquencies, although the volume of total delinquencies
has decreased by $8,968,000 since year end 2002. The significant
increase in the provision for loan losses is also due to the low
coverage ratio of the ALLL to nonaccrual loans in prior years, and
the increased reserves required on specified credits.
- Net interest income decreased $352,000 or 4.51%. This decline was
largely due to a decrease in the yield on earning assets, which was
not fully offset by the decrease in the Company's cost of funds.
Included in the decrease is a reduction in interest and fees on
loans which is the direct result of a decrease in average loan
balances of $11,469,000 over the past year as well as a drop in
interest rates. The decrease in loan balances is due to the
continued high volume of 1 to 4 family residential loans being sold
to the secondary market and management pricing higher risk
commercial loans to encourage a controlled amount of runoff.
Although interest on taxable investment securities has increased by
$16,000, the yield on investment securities has decreased to 3.65%
for the Year Ended December 31,
29
2003 from 5.60% for the Year Ended December 31, 2002. The most
significant decrease in yield on taxable securities is attributable
to the low interest rate environment and the increase in premium
amortization, which is a direct result of the increase in prepayment
speeds on mortgage-backed securities.
- Total non-interest income increased $514,000 for the Year Ended
December 31, 2003 versus the same period in 2002. Of the $514,000
increase, gain on sale of loans increased $248,000. This increase is
the result of the increased volume of real estate loans that have
been sold to the Federal Home Loan Mortgage Corporation due to a
continued high demand for low interest rate, long-term 1 to 4 family
residential mortgages. The increase in serviced FHLMC loan balances
from year end noted in Table 2 above. Mortgage service rights, net
of impairments also increased $232,000 from 2002 to 2003 as a direct
result of the high volume of mortgage sales to the Federal Home Loan
Mortgage Corporation. Service charges on deposit accounts increased
$51,000 in 2003 as a result of an increase in fees.
- Total non-interest expense increased $315,000 or 5.41% from
$5,824,000 for the Year Ended December 31, 2002 to $6,139,000 for
the Year Ended December 31, 2003. This increase is due to a $101,000
increase in salaries and employee benefits, of which, health
insurance costs increased by $142,000 or 29.89%. The increase is
also due to a $59,000 increase in legal and professional fees, which
is due in part to the additional consultations as required by the
Agreement among the Federal Reserve, the Bank and Company. Other
expense increased by $91,000 or 13.60%. This increase is due to the
loss on sale of other real estate owned in the amount of $34,000, an
increase of $20,000 in repossession expense, an increase of $23,000
in FDIC assessments, and an increase of $14,000 in postage and
freight.
- Income tax expense decreased $1,147,000 for the year ended December
31, 2003. This is a direct result of the decrease in net income
before tax.
COMPARISON OF FINANCIAL CONDITION AND OPERATING RESULTS FOR THE YEARS ENDED
DECEMBER 31, 2002 AND DECEMBER 31, 2001.
The Bank reported net income for the fiscal year 2002 of $1,625,000
compared to $1,933,000 in fiscal year 2001. Significant changes from 2001 to
2002 included a reduction of $200,000 in net interest income which is the result
of a decrease in higher interest rate loan balances of $17,355,000 and
reinvestment of $16,812,000 of the proceeds into lower interest rate investment
securities. Other significant changes included an increase in the provision for
loan losses of $185,000 due to an increase in charge-offs and classified assets.
Non-interest income during the fiscal year 2002 increased $188,000 as the result
of the increased demand for lower interest rate secondary market mortgage loans.
Total assets decreased 0.4% to $218.0 million at December 31, 2002 from
$219.0 million at December 31, 2001.
Cash and cash equivalents increased $.5 million or 3.3% from
$16,388,000 at December 31, 2001 to $16,925,000 at December 31, 2002.
Investment securities have increased $16.8 million or 44.7% from
December 31, 2001 to December 31, 2002. Of the $16.8 million increase, there was
a $21,439,000 increase in Agency Mortgage Pools, while there was a $4,330,000
reduction in U.S. Agency Bonds and a $297,000 reduction in Municipal Bonds from
December 31, 2001 to December 31, 2002. The increase in Agency Mortgage Pools
was the result of funds provided from U.S. Agency Bonds being called and funds
provided from the reduction in the loan portfolio and reinvested into Agency
Mortgage Pools.
The allowance for loan loss has increased $235,000 from $1,815,000 on
December 31, 2001 to $2,050,000 on December 31, 2002. This was due mainly to an
increase to the provision for loan loss for 2002 by $185,000 from $790,000 in
2001 to $975,000 in 2002. Part of the increase in the provision
30
is the result of the increase of $5,001,000 in non-accrual notes. Management
reviews on a quarterly basis the allowance for loan losses as it relates to a
number of factors, including, but not limited to, trends in the level of
non-performing assets and classified loans, current and anticipated economic
conditions in the primary lending area, past loss experience and probable losses
arising from specific problem assets. To a lesser extent, management also
considers loan concentrations to single borrowers and changes in the composition
of the loan portfolio. While management believes that it uses the best
information available to determine the allowance for loan losses, unforeseen
market conditions could result in adjustments, and net earnings could be
significantly affected if circumstances differ substantially from the
assumptions used in making the final determination.
Loans not secured by one-to-four family residential real estate are
generally considered to involve greater risk of loss than loans secured by
one-to-four family residential real estate due, in part, to the effects of
general economic conditions. The repayment of multifamily and nonresidential
real estate loans is dependent on the cash flow of the operations of the
property and economic conditions could negatively affect the operations of a
commercial borrower. Default on consumer loans also increases during periods of
high unemployment and other adverse economic conditions.
Total deposits decreased $0.8 million or .4% from December 31, 2001 to
$178.9 million at December 31, 2002. Demand deposits decreased 6.8% or
$1,176,000 and savings deposits increased $5,742,000 or 16.7% from December 31,
2001 to December 31, 2002. Certificates and other time deposits decreased
$8,469,000 or 8.0%. Long term debt, which is comprised of advances from the
Federal Home Loan Bank with a maturity greater than one year, decreased to $7.7
million at December 31, 2002 from $9.8 million at December 31, 2001. The Bank
matches long term commercial loans with the corresponding advance at the Federal
Home Loan Bank to reduce interest rate risk.
Shareholders' equity was $24.35 million at December 31, 2002 compared
to $23.94 million at December 31, 2001. The $410,000 increase was attributable
to $1,625,000 in net income for the fiscal year, less $1,113,000 in dividends
declared and paid, less $632,000 in Treasury stock purchased, plus an increase
in accumulated other comprehensive income of $530,000. Accumulated other
comprehensive income is comprised of unrealized gains or losses on securities
available for sale.
The Bank reported net income for the fiscal year 2002 of $1,625,000,
compared to $1,933,000 in fiscal year 2001. The most significant changes from
2001 to 2002 were the decrease in interest income of $3,413,000, a decrease in
interest expense of $3,215,000, an increase in the provision for loan losses of
$185,000, an increase in other income of $65,000 and an increase in other
expenses of $162,000.
Net interest income decreased $200,000 in the fiscal year 2002 compared
to fiscal year 2001. Interest income decreased 20.8% or $3,413,000 to
$13,023,000 in fiscal year 2002 compared to $16,436,000 in fiscal year 2001. The
major component of this decrease was interest and fees on loans which decreased
$3,290,000 to $10,469,000 in 2002 compared to $13,759,000 in 2001. This decrease
was the result of a $17.6 million decrease in total net loans, and more
specifically, an 8.8% or $10,457,000 decrease in loans secured by real estate, a
24.0% or $3,724,000 decrease in consumer loans, a 14.8% or $2,885,000 decrease
in commercial loans and an overall decrease in average rates for the fiscal year
2002. The $10,457,000 decrease in loans secured by real estate is due to these
loans being sold on the secondary market to the Federal Home Loan Mortgage
Corporation. As mortgage rates declined, management felt the need to offer a
secondary market product in order to offer long-term rates. Funding these
long-term mortgages internally would have drastically increased the bank's
exposure to interest rate risk. The $3,724,000 decrease in consumer loans is due
to managements desire to reduce indirect automobile loan balances. Taxable
investment income decreased $110,000 or 6.36% in 2002 for a total of $1,619,000
compared to $1,729,000 in 2001. This decrease is due to U.S. Agency bonds with
call features and higher rates of interest being called and the proceeds being
reinvested into lower interest rate Mortgage Backed Securities. Interest expense
decreased $3,213,000 or 38.1% to $5,219,000 in fiscal year 2002 compared to
$8,432,000 in fiscal
31
year 2001. The majority of this decrease can be attributed to the decrease in
deposit interest of 35.5% or $2,540,000. This 35.5% decrease is due to consumers
moving from higher interest bearing certificates into more liquid and lower
interest bearing checking and money market accounts, waiting for interest rates
to rebound before moving back into higher interest bearing certificates. The
remainder of the decrease is attributed to a decrease in interest on short-term
borrowings of $349,000 or 84.7% and a decrease in interest on long-term debt of
$325,000 or 37.7% due to both a decrease in rate as well as balance at the
Federal Home Loan Bank.
The provision for loan losses was $975,000 in fiscal year 2002, an
increase of $185,000 from the 2001 fiscal year. Management increased the
provision for loan losses due to an increase in loan delinquencies and due to
substantial charge-offs in fiscal year 2002. Due to local economic conditions,
the increase in non-accrual loan balances of $5,001,000 and the charge off of
$1,435,000 forced management to put the $975,000 into the allowance for loan and
lease losses in 2002.
Noninterest income increased $65,000 from $1,107,000 in fiscal year
2001 to $1,172,000 in fiscal year 2002. Gain on sale of loans decreased $126,000
from $368,000 in 2001 to $242,000 in 2002. This decrease was attributed to a
$122,000 impairment on mortgage service rights to reduce the intangible asset to
the lower of cost or market. The increase in the gain on sale of loans was due
to the sale of $24.0 million in real estate residential mortgages to the Federal
Home Loan Mortgage Corporation with servicing retained. Other income increased
$184,000 or 72.4% from $254,000 in 2001 to $438,000 in 2002. Net realized gains
on sales of available-for-sale securities increased from $0 in 2001 to $8,000 in
2002 as the result of the sale of $610,000 in GNMA mortgage-backed pools.
Noninterest expense increased 2.9% or $162,000 in fiscal year 2002
compared to the same time frame a year ago. The major increases include an
increase of $170,000 in salaries and employee benefits, of which $110,000 of the
increase is accredited to group health insurance. Net occupancy expense
increased $78,000 from $307,000 in 2001 to $385,000 in 2002 due to the
completion of the Corporate Center located in Delphos. Equipment expenses
increased $78,000 and data processing fees increased $52,000 in 2002, while
legal and professional fees decreased $149,000 in 2002 due to the bankruptcy
discharge of a pending loan matter.
FORWARD-LOOKING STATEMENTS
The Company has made, and may continue to make, various forward-looking
statements with respect to interest rate sensitivity analysis, credit quality
and other financial and business matters for 2004 and, in certain instances,
subsequent periods. These forward-looking statements are not historical facts
and generally can be identified by use of statements that include phrases such
as "believe," "expect," "anticipate," "intend," "plan," "foresee" or other words
or phrases of similar import. Similarly, statements that describe our
objectives, plans or goals also are forward-looking statements. These
forward-looking statements are subject to risks and uncertainties that are
difficult to predict, may be beyond our control and could cause actual results
to differ materially from those currently anticipated. 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, customers'
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. You are urged to consider these
factors carefully in evaluating the forward-looking statements and are cautioned
not to place undue reliance on the forward-looking statements. 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.
32
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles ("GAAP"),
which require the measurement of financial position and results of operations in
terms of historical dollars without considering changes in relative purchasing
power of money over time because of inflation.
Unlike industrial companies, virtually all of the assets and
liabilities of the Bank are monetary in nature. As a result, interest rates have
a more significant impact on the Bank's performance than the effects of general
levels of inflation. Interest rates do not necessarily move in the same
direction or in the same magnitude as the prices of goods and services.
EFFECT OF ACCOUNTING CHANGES
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities". FIN 46 is not expected to have a material effect on the
Company's consolidated financial statements.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement
133 on Derivative Instruments and Hedging Activities". Adoption of this standard
is not expected to have a material effect on the Company's consolidated
financial statements.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of Both Liabilities and Equity".
Adoption of this standard did not have a material effect on the Company's
consolidated financial statements.
ITEM 7A - ASSET/LIABILITY MANAGEMENT AND QUANTITATIVE AND QUALITATIVE
DISCLOSURES ABOUT 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. There are several
the institution can manage interest rate risk including: 1) matching repricing
periods for new assets and liabilities, for example, by shortening terms of new
loans or investments; 2) selling existing assets or repaying certain
liabilities; and 3) hedging existing assets, liabilities, or anticipated
transactions. An institution might also invest in more complex financial
instruments intended to hedge or otherwise change interest rate risk. Interest
rate swaps, futures contacts, options on futures contracts, and other such
derivative financial instruments can be used for this purpose. Because these
instruments are sensitive to interest rate changes, they require management's
expertise to be effective. The Company has not purchased derivative financial
instruments in the past and does not presently intend to purchase such
instruments.
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, 2003 of the Bank's interest-earning assets and interest-bearing
liabilities, its interest rate sensitivity gap, cumulative
33
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.
This table, however, 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 2004. The negative gap does not necessarily indicate that the bank is
experiencing excessive interest rate risk. During periods of decreasing interest
rates, it is appropriate to show a negative gap which indicates that interest
bearing liabilities are repricing at a faster rate than interest bearing assets,
thus improving net interest margin. In times of increasing interest rates, it is
appropriate to show a positive gap so that interest bearing assets are repricing
at a faster rate than interest bearing liabilities, thus improving net interest
margin. One factor that this table does not consider is the loan and investment
security prepayment speeds which have an impact on gap.
As part of the Agreement, the Bank was to devise an acceptable written
program to effectively identify, measure, monitor, and manage the Bank's market
risk exposure (satisfying the requirements of the Joint Policy Statement on
Interest Rate Risk, dated May 23, 1996). In response, the Bank contracted with
an external consultant to validate the Bank's interest rate risk program. In
December 2003, the consultant validated the Bank's interest rate risk models and
all necessary adjustments were made.
Management's Asset/Liability Management Committee monitors the Bank's
interest rate sensitivity position. Asset and liability management seeks to
control the volatility of the Company's performance due to changes in interest
rates. The Company attempts to achieve an appropriate relationship between rate
sensitive assets and rate sensitive liabilities.
34
(Dollars in Thousands)
3 months 3 - 12 1 - 3 3 - 5 over 5
or less months years years years Total
-------- -------- -------- -------- -------- --------
Interest-Earning Assets:
Loans $ 28,490 $ 15,093 $ 36,897 $ 22,383 $ 25,893 $128,756
Investment Securities 2,650 9,049 11,764 16,187 15,402 55,052
Federal Funds Sold 9,708 - - - - 9,708
Interest-Bearing Balances -
in Other Depository Institutions 174 - - - - 174
-------- -------- -------- -------- -------- --------
Total $ 41,022 $ 24,142 $ 48,661 $ 38,570 $ 41,295 $193,690
======== ======== ======== ======== ======== ========
Interest-Bearing Liabilities:
Savings Deposits $ 3,619 $ 11,308 $ 15,153 $ 15,153 $ - $ 45,233
Checking Deposits 4,253 12,508 4,128 4,128 - 25,016
Time Deposits 16,906 27,871 37,112 4,336 - 86,225
Short Term Borrowings 1,282 3,770 1,244 1,244 - 7,540
Long Term Debt - 461 1,935 1,000 1,253 4,649
-------- -------- -------- -------- -------- --------
Total $ 26,059 $ 55,918 $ 59,572 $ 25,861 $ 1,253 $168,663
======== ======== ======== ======== ======== ========
Interest Rate
Sensitivity Gap $ 14,963 $(31,776) $(10,911) $ 12,709 $ 40,042 $ 25,027
Cumulative Interest Rate
Sensitivity Gap 14,963 (16,813) (27,724) (15,015) 25,027
Cumulative Interest Rate
Sensitivity Gap as a
Percentage of Total
Interest-Earning Assets 7.73% -8.68% -14.31% -7.75% 12.92%
35
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
36
COMBANC, INC.
Accountants' Report and Consolidated Financial Statements
December 31, 2003 and 2002
37
COMBANC, INC.
DECEMBER 31, 2003 AND 2002
CONTENTS
INDEPENDENT ACCOUNTANTS' REPORT........................................... 39
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets........................................................ 40
Statements of Operations.............................................. 41
Statements of Shareholders' Equity.................................... 42
Statements of Cash Flows.............................................. 43
Notes to Financial Statements......................................... 44
38
[BKD LLP LOGO]
312 Walnut Street, Suite 3000
Cincinnati, Oh 45202
513 621-8300 Fax 513 621-8345
BKD.COM
INDEPENDENT ACCOUNTANTS' REPORT
To the Stockholders and
Board of Directors
ComBanc, Inc.
Delphos, Ohio
We have audited the accompanying consolidated balance sheets of ComBanc, Inc. as
of December 31, 2003 and 2002, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2003. These consolidated 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 auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
ComBanc, Inc. as of December 31, 2003 and 2002, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America.
BKD.LLP
SOLUTIONS
FOR
SUCCESS
Cincinnati, Ohio
January 30, 2004
[A MEMBER OF MOORES ROWLAND LOGO]
39
COMBANC, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
2003 2002
-------------------------------------
ASSETS
Cash and due from banks $ 8,123,029 $ 12,095,880
Federal funds sold 9,708,000 4,624,000
Interest-bearing demand deposits 173,501 205,261
------------- -------------
Cash and cash equivalents 18,004,530 16,925,141
Investment securities, available for sale 55,052,117 54,396,182
Loans held for sale -- 728,483
Loans, net of allowance for loan losses of $3,824,749 and
$2,049,855 124,931,288 138,040,877
Premises and equipment 4,432,070 4,688,849
Federal Reserve and Federal Home Loan Bank stock 2,011,800 1,790,800
Interest receivable 759,996 949,640
Other assets 2,540,950 510,505
------------- -------------
Total assets $ 207,732,751 $ 218,030,477
============= =============
LIABILITIES
Deposits
Noninterest bearing $ 15,758,386 $ 16,089,113
Interest bearing 156,473,983 162,801,348
------------- -------------
Total deposits 172,232,369 178,890,461
Short-term borrowings 7,539,653 5,946,334
Long-term debt 4,648,873 7,719,384
Interest payable 392,174 571,707
Other liabilities 361,424 552,119
------------- -------------
Total liabilities 185,174,493 193,680,005
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized -- 5,000,000 shares
Issued - 2,376,000 shares
Outstanding -- 2,211,014 shares 1,237,500 1,237,500
Paid-in capital 1,512,500 1,512,500
Retained earnings 22,033,905 23,371,495
Accumulated other comprehensive income 491,193 945,817
Treasury stock, at cost - 164,986 shares (2,716,840) (2,716,840)
------------- -------------
Total shareholders' equity 22,558,258 24,350,472
------------- -------------
Total liabilities and shareholders' equity $ 207,732,751 $ 218,030,477
============= =============
See Notes to Consolidated Financial Statements
40
COMBANC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---------------------------------------------------------
INTEREST INCOME
Loans receivable $ 8,518,698 $ 10,469,007 $ 13,759,074
Investment securities
Taxable 1,635,328 1,619,031 1,728,750
Tax exempt 581,183 656,975 591,066
Federal funds sold 94,101 276,839 356,546
Deposits with financial institutions 1,041 815 1,063
------------ ------------ ------------
Total interest income 10,830,351 13,022,667 16,436,499
------------ ------------ ------------
INTEREST EXPENSE
Deposits 2,952,357 4,619,285 7,159,348
Short-term borrowings 82,393 63,006 412,174
Long-term debt 343,563 536,078 861,200
------------ ------------ ------------
Total interest expense 3,378,313 5,218,369 8,432,722
------------ ------------ ------------
NET INTEREST INCOME 7,452,038 7,804,298 8,003,777
Provision for loan losses 4,180,000 975,000 790,200
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 3,272,038 6,829,298 7,213,577
------------ ------------ ------------
OTHER INCOME
Service charges on deposit accounts 535,367 483,774 484,356
Net realized gains on sales of available-for-
sale securities 7,726 8,416 --
Gain on sale of loans 490,438 242,091 368,049
Other income 652,720 437,876 254,151
------------ ------------ ------------
Total other income 1,686,251 1,172,157 1,106,556
------------ ------------ ------------
OTHER EXPENSES
Salaries and employee benefits 3,149,950 3,049,302 2,879,048
Net occupancy expenses 383,903 384,888 306,709
Equipment expenses 346,837 313,845 235,700
Data processing fees 374,912 369,340 317,226
Advertising 168,766 137,426 168,942
Printing and office supplies 153,711 177,978 174,837
Legal and professional fees 304,267 244,770 393,692
Dues and memberships 263,134 245,064 245,033
State taxes 233,638 231,881 245,622
Other expenses 759,543 669,022 694,979
------------ ------------ ------------
Total other expenses 6,138,661 5,823,516 5,661,788
------------ ------------ ------------
INCOME BEFORE INCOME TAX (1,180,372) 2,177,939 2,658,345
Income tax expense (benefit) (594,527) 552,611 725,155
------------ ------------ ------------
NET INCOME (LOSS) $ (585,845) $ 1,625,328 $ 1,933,190
============ ============ ============
EARNINGS (LOSS) PER SHARE $ (.26) $ .73 $ .85
WEIGHTED-AVERAGE SHARES OUTSTANDING $ 2,211,014 $ 2,226,505 $ 2,280,383
See Notes to Consolidated Financial Statements
41
COMBANC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
ACCUMULATED
OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE TREASURY
STOCK CAPITAL INCOME EARNINGS INCOME STOCK TOTAL
------------------------------------------------------------------------------------------------
BALANCES, JANUARY 1, 2001 $1,237,500 $1,512,500 $22,064,651 $ 132,428 $(1,182,939) $ 23,764,140
Comprehensive income
Net income $ 1,933,190 1,933,190 1,933,190
Other comprehensive
income, net of tax
Unrealized gains
on securities 283,352 283,352 283,352
----------
Comprehensive income $ 2,216,542
==========
Cash dividends ($.50 per (1,138,995) (1,138,995)
share)
Purchase of treasury stock (901,941) (901,941)
---------- ---------- ----------- ------------ ----------- ------------
BALANCES, DECEMBER 31, 2001 1,237,500 1,512,500 22,858,846 415,780 (2,084,880) 23,939,746
Comprehensive income
Net income $ 1,625,328 1,625,328 1,625,328
Other comprehensive
income, net of tax
Unrealized gains
on securities 530,037 530,037 530,037
-----------
Comprehensive income $ 2,155,365
===========
Cash dividends ($.50 per share) (1,112,679) (1,112,679)
Purchase of treasury stock (631,960) (631,960)
---------- ---------- ----------- ------------ ----------- ------------
BALANCES, DECEMBER 31, 2002 1,237,500 1,512,500 23,371,495 945,817 (2,716,840) 24,350,472
Comprehensive loss
Net loss $ (585,845) (585,845) (585,845)
Other comprehensive
income, net of tax
Unrealized
losses on (454,624) (454,624) (454,624)
-----------
securities
Comprehensive loss $(1,040,469)
===========
Cash dividends ($.34 per share) (751,745) (751,745)
---------- ---------- ----------- ------------ ----------- ------------
BALANCES, DECEMBER 31, 2003 $1,237,500 $1,512,500 $22,033,905 $ 491,193 $(2,716,840) $ 22,558,258
========== ========== =========== ============ =========== ============
See Notes to Consolidated Financial Statements
42
COMBANC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
----------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ (585,845) $ 1,625,328 $ 1,933,190
Items not requiring (providing) cash
Provision for loan losses 4,180,000 975,000 790,200
Depreciation and amortization 392,856 408,487 270,804
Deferred income tax (535,265) 38,000 (24,000)
Investment securities amortization (accretion), net 426,946 95,003 23,472
Investment securities gains (7,726) (8,416) --
Loss on sale of equipment -- 23,698 --
FHLB stock dividends (69,200) (97,100) (84,300)
Proceeds from sale of loans held for sale 42,352,520 33,123,405 22,260,795
Originations of loans held for sale (41,133,599) (31,826,122) (23,676,421)
Gain from sale of loans (490,438) (242,091) (368,049)
Interest receivable 189,644 401,253 482,178
Interest payable (179,533) (411,969) (116,693)
Other assets (1,495,183) 197,890 (297,073)
Other liabilities 43,505 (388,090) 157,102
------------ ------------ ------------
Net cash provided by operating activities 3,088,682 3,914,276 1,351,205
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of securities available for sale (34,260,581) (32,775,427) (17,160,699)
Proceeds from maturities of securities available for
sale 31,278,852 16,061,194 20,242,332
Proceeds from sales of securities available for sale 1,217,751 618,535 --
Net change in loans 8,929,589 15,559,035 12,833,442
Proceeds from sale of equipment -- 35,058 --
Purchases of premises and equipment (136,076) (262,624) (2,493,010)
Purchases of Federal Reserve stock (151,800) -- --
------------ ------------ ------------
Net cash provided by (used in) investing
activities 6,877,735 (764,229) 13,422,065
------------ ------------ ------------
FINANCING ACTIVITIES
Net change in
Noninterest-bearing, interest-bearing demand and
savings deposits 3,898,909 7,683,519 2,499,501
Certificates and other time deposits (10,557,001) (8,449,726) (925,143)
Short-term borrowings 1,593,320 1,969,390 (5,281,663)
Proceeds of long-term debt -- 2,894,390 3,500,000
Repayment of long-term debt (3,070,511) (4,966,262) (4,093,419)
Cash dividends (751,745) (1,112,679) (1,138,995)
Purchase of stock -- (631,960) (901,941)
------------ ------------ ------------
Net cash used in financing activities (8,887,028) (2,613,328) (6,341,660)
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,079,389 536,719 8,431,610
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 16,925,141 16,388,422 7,956,812
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 18,004,530 $ 16,925,141 $ 16,388,422
============ ============ ============
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 3,557,846 $ 5,630,338 $ 8,549,415
Income tax paid $ -- $ 445,000 $ 946,000
See Notes to Consolidated Financial Statements
43
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
NOTE 1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of ComBanc, Inc. (Company) and
its wholly owned subsidiary, The Commercial Bank (Bank), conform to
accounting principles generally accepted in the United States of
America and reporting practices followed by the banking industry. The
more significant of the policies are described below.
The Company is a bank holding company whose principal activity is the
ownership and management of the Bank. The Bank operates under a state
bank charter and provides full banking services in a single significant
business segment. As a state bank and member of the Federal Reserve,
the Bank is subject to regulation by the State of Ohio, Division of
Financial Institutions, Federal Reserve, and the Federal Deposit
Insurance Corporation.
The Bank generates commercial, mortgage and consumer loans and receives
deposits from customers located primarily in Allen County, Ohio and
surrounding counties. The Bank's loans are generally secured by
specific items of collateral including real property, consumer assets
and business assets.
CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and Bank after elimination of all material intercompany
transactions.
USE OF ESTIMATES
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America 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.
Material estimates that are particularly susceptible to significant
change relate to the determination of the allowance for loan losses. In
connection with the determination of the allowance for loan losses,
management obtains independent appraisals for significant properties.
44
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002, AND 2001
(Table Dollar Amounts in Thousands)
INVESTMENT SECURITIES
Debt securities are classified as held to maturity when the Company has
the positive intent and ability to hold the securities to maturity.
Securities held to maturity are carried at amortized cost. Debt
securities not classified as held to maturity and marketable equity
securities are classified as available for sale. Securities available
for sale are carried at fair value with unrealized gains and losses
reported separately in accumulated other comprehensive income, net of
tax.
Amortization of premiums and accretion of discounts are recorded as
interest income from securities. Realized gains and losses are recorded
as net security gains (losses). Gains and losses on sales of securities
are determined on the specific-identification method.
LOANS HELD FOR SALE
Loans held for sale are carried at the lower of aggregate cost or
market. Market is determined using the aggregate method. Net unrealized
losses, if any, are recognized through a valuation allowance by charges
to income based on the difference between estimated sales proceeds and
aggregate cost.
LOANS
Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoffs are reported at their
outstanding principal balances adjusted for any charge-offs, the
allowance for loan losses, any deferred fees or costs on originated
loans. Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term.
Generally, loans are placed on non-accrual status at ninety days past
due and interest is considered a loss, unless the loan is well-secured
and in the process of collection.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established as losses are estimated to
have occurred through a provision for loan losses charged to earnings.
Loan losses are charged against the allowance when management believes
the uncollectibility of a loan balance is confirmed. Subsequent
recoveries, if any, are credited to the allowance.
The allowance for loan losses is evaluated on a regular basis by
management and is based upon management's periodic review of the
collectibility of the loans in light of historical experience, the
nature and volume of the loan portfolio, adverse situations that may
affect the borrower's ability to repay, estimated value of any
underlying collateral and prevailing economic conditions. This
evaluation is inherently subjective as it requires estimates that are
susceptible to significant revision as more information becomes
available.
45
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002, AND 2001
(Table Dollar Amounts in Thousands)
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by
management in determining impairment include payment status, collateral
value and the probability of collecting scheduled principal and
interest payments when due. Loans that experience insignificant payment
delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment
shortfalls on a case-by-case basis, taking into consideration all of
the circumstances surrounding the loan and the borrower, including the
length of the delay, the reasons for the delay, the borrower's prior
payment record and the amount of the shortfall in relation to the
principal and interest owed. Impairment is measured on a loan-by-loan
basis for commercial and construction loans by either the present value
of expected future cash flows discounted at the loan's effective
interest rate, the loan's obtainable market price or the fair value of
the collateral if the loan is collateral dependent.
PREMISES AND EQUIPMENT
Premises and equipment are carried at cost net of accumulated
depreciation. Depreciation is computed using the straight-line and
declining balance methods based principally on the estimated useful
lives of the assets. Maintenance and repairs are expensed as incurred
while major additions and improvements are capitalized. Gains and
losses on dispositions are included in current operations.
FEDERAL RESERVE AND FEDERAL HOME LOAN BANK STOCK
Federal Reserve and Federal Home Loan Bank stock are required
investments for institutions that are members of the Federal Reserve
and Federal Home Loan Bank systems. The required investment in the
common stock is based on a predetermined formula.
FORECLOSED ASSETS
Foreclosed assets are carried at the lower of cost or fair value less
estimated selling costs. When foreclosed assets are acquired, any
required adjustment is charged to the allowance for loan losses. All
subsequent activity is included in current operations.
46
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
MORTGAGE SERVICING RIGHTS
Mortgage servicing rights on originated loans that have been sold are
capitalized by allocating the total cost of the mortgage loans between
the mortgage servicing rights and the loans based on their relative
fair values. Capitalized servicing rights are amortized in proportion
to and over the period of estimated servicing revenues. Impairment of
mortgage-servicing rights is assessed based on the fair value of those
rights. Fair values are estimated using discounted cash flows based on
a current market interest rate. For purposes of measuring impairment,
the rights are stratified based on the predominant risk characteristics
of the underlying loans. The predominant characteristic currently used
for stratification is type of loan. The amount of impairment recognized
is the amount by which the capitalized mortgage servicing rights for a
stratum exceed their fair value.
TREASURY STOCK
Treasury stock is stated at cost. Cost is determined by the first-in,
first-out method.
INCOME TAX
Income tax in the consolidated statement of operations includes
deferred income tax provisions or benefits for all significant
temporary differences in recognizing income and expenses for financial
reporting and income tax purposes. The Company files consolidated
income tax returns with its subsidiary.
EARNINGS PER SHARE
Earnings per share have been computed based upon the weighted-average
common shares outstanding during each year. The Company has no common
stock equivalents.
NOTE 2: RESTRICTION ON CASH AND DUE FROM BANKS
The Bank is required to maintain reserve funds in cash and/or on
deposit with the Federal Reserve Bank. The reserve required at December
31, 2003 was $1,043,000.
47
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
NOTE 3: INVESTMENT SECURITIES
2003
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------
Available for sale
Federal agencies $ 4,046 $ 39 $ -- $ 4,085
State and municipal 10,424 700 (3) 11,121
Mortgage-backed
securities 39,837 237 (228) 39,846
------- ------- ------- -------
Total investment
securities $54,307 $ 976 $ (231) $55,052
======= ======= ======= =======
2002
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------------------------------------------------
Available for sale
Federal agencies $ 5,493 $ 114 $ (2) $ 5,605
State and municipal 11,895 650 12,545
Mortgage-backed
securities 35,575 674 (3) 36,246
-------- -------- -------- --------
Total investment
securities $ 52,963 $ 1,438 $ (5) $ 54,396
======== ======== ======== ========
48
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
The amortized cost and fair value of securities available for sale at
December 31, 2003, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because issuers may
have the right to call or prepay obligations with or without call or
prepayment penalties.
AMORTIZED
COST FAIR VALUE
-------------------------------
Within one year $ 2,181 $ 2,200
One to five years 3,441 3,619
Five to ten years 6,902 7,296
After ten years 1,946 2,091
----------- -----------
14,470 15,206
Mortgage-backed securities 39,837 39,846
----------- -----------
Totals $ 54,307 $ 55,052
=========== ===========
Securities with a carrying value of $27,522,000 and $23,925,000, and
fair value of $28,052,000 and $24,770,000, were pledged at December 31,
2003 and 2002 to secure certain deposits and for other purposes as
permitted or required by law.
Gross gains of $22,000 and $8,000 and gross losses of $14,000 and $0
resulting from sales of available-for-sale securities were realized for
2003 and 2002, respectively.
Certain investments in debt securities are reported in the financial
statements at an amount less than their historical cost. Total fair
value of these investments at December 31, 2003, was $25,743,000, which
is approximately 47% of the Company's available-for-sale investment
portfolio. These declines primarily resulted from recent increases in
market interest rates.
Based on evaluation of available evidence, including recent changes in
market interest rates, credit rating information and information
obtained from regulatory filings, management believes the declines in
fair value for these securities are temporary.
Should the impairment of any of these securities become other than
temporary, the cost basis of the investment will be reduced and the
resulting loss recognized in net income in the period the
other-than-temporary impairment is identified.
49
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
Securities with unrealized losses at December 31, 2003 were as follows:
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
---------------------------------------------------------------------------------
UNREALIZED UNREALIZED UNREALIZED
FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
---------------------------------------------------------------------------------
AVAILABLE FOR SALE
SECURITIES:
State and
municipal $ 625 $ (3) $ -- $ -- $ 625 $ (3)
Mortgage-backed
securities 24,245 (216) 873 (12) 25,118 (228)
----------- ---------- ----------- ----------- ----------- -----------
$ 24,870 $ (219) $ 873 $ (12) $ 25,743 $ (231)
=========== ========== =========== =========== =========== ===========
NOTE 4: LOANS AND ALLOWANCE
2003 2002
--------------------------
Commercial and industrial loans $ 12,607 $ 16,588
Real estate loans (includes $4,598,000 and $4,627,000
secured by farmland) 95,710 99,890
Construction loans 7,305 7,542
Agricultural production financing and other loans to farmers 2,449 2,302
Individuals' loans for household and other personal
expenditures 9,566 12,418
Tax-exempt loans 1,100 1,340
Other loans 19 11
--------- ---------
128,756 140,091
Allowance for loan losses (3,825) (2,050)
--------- ---------
Total loans $ 124,931 $ 138,041
========= =========
50
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
2003 2002 2001
-----------------------------------
Allowance for loan losses
Balances, January 1 $ 2,050 $ 1,815 $ 1,331
Provision for losses 4,180 975 790
Recoveries on loans 171 695 523
Loans charged off (2,576) (1,435) (829)
------- ------- -------
Balances, December 31 $ 3,825 $ 2,050 $ 1,815
======= ======= =======
Information on impaired loans is summarized below.
2003 2002 2001
-----------------------------------
Impaired loans with an allowance $ 3,044 $ 2,062 $ 2,046
Impaired loans for which the discounted
cash flows or collateral value exceeds
the carrying value of the loan 1,121 7,496 2,238
------- ------- -------
Total impaired loans $ 4,165 $ 9,558 $ 4,284
======= ======= =======
Allowance for impaired loans (included in
the Company's allowance for loan
losses) $ 871 $ 377 $ 651
======= ======= =======
2003 2002 2001
-----------------------------------
Average balance of impaired loans $ 5,317 $ 9,689 $ 4,352
Interest income recognized on impaired
loans 105 209 102
Cash-basis interest included above 110 219 90
At December 31, 2003 and 2002, accruing loans delinquent 90 days or more totaled
$680,000 and $798,000, respectively. Non-accruing loans at December 31, 2003 and
2002 were $3,510,000 and $8,446,000, respectively.
51
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
NOTE 5: PREMISES AND EQUIPMENT
2003 2002
---------------------
Land and improvements $ 481 $ 481
Buildings 4,782 4,769
Equipment 2,525 2,661
------- -------
Total cost 7,788 7,911
Accumulated depreciation (3,356) (3,222)
------- -------
Net $ 4,432 $ 4,689
======= =======
NOTE 6: LOAN SERVICING
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheets. The unpaid principal balances of mortgage
loans serviced for others was $63,460,000 and $45,589,000 at December
31, 2003 and 2002, respectively.
The aggregate fair value of capitalized mortgage servicing rights at
December 31, 2003 and 2002 totaled $535,096 and $302,657. Comparable
market values and a valuation model that calculates the present value
of future cash flows were used to estimate fair value. For purposes of
measuring impairment, risk characteristics including product type,
investor type, and interest rates, were used to stratify the originated
mortgage servicing rights.
2003 2002
-----------------
Mortgage Servicing Rights
Balances, beginning of year $ 303 $ 240
Servicing rights capitalized 425 257
Amortization of servicing rights (84) (72)
----- -----
644 425
Valuation allowance (109) (122)
----- -----
Balances, end of year $ 535 $ 303
===== =====
52
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
Activity in the valuation allowance for mortgage servicing rights was as
follows:
2003 2002
-------------------------
Balance, beginning of year $ 122,072 $ --
Additions 53,228 122,072
Reductions (65,980) --
Direct write downs -- --
--------- ---------
Balance, end of year $ 109,320 $ 122,072
========= =========
NOTE 7: DEPOSITS
2003 2002
----------------------
Demand deposits $ 40,774 $ 42,017
Savings deposits 45,233 40,091
Certificates and other time deposits of $100,000 or more 18,327 20,788
Other certificates and time deposits 67,898 75,994
-------- --------
Total deposits $172,232 $178,890
======== ========
Certificates and other time deposits maturing in years
ending December 31
2004 $44,167
2005 28,696
2006 9,026
2007 1,142
2008 3,194
-------
$86,225
=======
53
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
NOTE 8: SHORT-TERM BORROWINGS
2003 2002
-----------------
Securities sold under repurchase agreements $7,540 $5,946
====== ======
Securities sold under agreements to repurchase consist of obligations
of the Company to other parties. The obligations are secured by federal
agencies, mortgage-backed securities, and municipal bonds and such
collateral is held by the Federal Reserve Bank and Fifth Third Bank.
The maximum amount of outstanding agreements at any month-end during
2003 and 2002 totaled $9,647,000 and $6,318,000 and the daily average
of such agreements totaled $7,097,000 and $4,311,401. The agreements at
December 31, 2003, mature daily.
NOTE 9: LONG-TERM DEBT
2003 2002
------------------------------
Federal Home Loan Bank advances, fixed rates ranging from 4.56% to
6.90%, due at various dates through July, 2014 $ 4,649 $ 7,719
========= ========
The terms of a security agreement with the FHLB require the Bank to
pledge as collateral qualifying first mortgage loans in an amount equal
to 165 percent of FHLB advances. Advances are subject to restrictions
or penalties in the event of repayment.
Maturities in years ending December 31
2004 $ 1,506
2005 788
2006 376
2007 103
2008 1,110
Thereafter 766
--------
$ 4,649
========
54
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
NOTE 10: INCOME TAX
2003 2002 2001
------------------------------
Income tax expense (benefit)
Currently payable
Federal $ (66) $ 492 $ 724
State 6 23 25
Deferred (535) 38 (24)
----- ----- -----
Total income tax expense
(benefit) $(595) $ 553 $ 725
===== ===== =====
Reconciliation of federal statutory to
actual tax expense
Federal statutory income tax at 34% $(401) $ 740 $ 904
Tax exempt interest (202) (222) (190)
Nondeductible expenses 2 7 3
Effect of state income taxes 4 15 16
Other 2 13 (8)
----- ----- -----
Actual tax expense (benefit) $(595) $ 553 $ 725
===== ===== =====
A cumulative net deferred tax asset (liability) is included in the balance
sheets. The components of the asset are as follows:
2003 2002
---------------------
ASSETS
Allowance for loan losses $ 1,057 $ 435
Alternative minimum tax credit 26 --
Deferred compensation 43 37
------- -------
Total assets 1,126 472
------- -------
LIABILITIES
Depreciation (166) (135)
Mortgage servicing rights (182) (103)
Accretion of investment discounts (5) (20)
FHLB stock dividend basis difference (164) (140)
Unrealized gain on securities (253) (487)
------- -------
Total liabilities (770) (885)
------- -------
$ 356 $ (413)
======= =======
55
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
NOTE 11: OTHER COMPREHENSIVE INCOME
Other comprehensive income (loss) components and related taxes were as
follows:
2003 2002 2001
-----------------------------
Unrealized gains (losses) on securities
available for sale $(681) $ 811 $ 429
Reclassification for realized amount
included in income 8 8 --
----- ----- -----
Other comprehensive income (loss),
before tax effect (689) 803 429
Tax expense (benefit) 234 (273) (146)
----- ----- -----
Other comprehensive income (loss) $(455) $ 530 $ 283
===== ===== =====
NOTE 12: COMMITMENTS AND CONTINGENT LIABILITIES
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit and
standby letters of credit, which are not included in the accompanying
financial statements. The Bank's exposure to credit loss in the event
of nonperformance by the other party to the financial instruments for
commitments to extend credit and standby letters of credit is
represented by the contractual or notional amount of those instruments.
The Bank uses the same credit policies in making such commitments as it
does for instruments that are included in the consolidated balance
sheet.
Financial instruments whose contract amount represents credit risk as
of December 31 were as follows:
2003 2002
--------------------
Commitments to extend credit $20,252 $21,278
Standby letters of credit 518 665
56
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
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 expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
requirements. The Bank evaluates each customer's credit worthiness on a
case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on
management's credit evaluation. Collateral held varies but may include
accounts receivable, inventory, property and equipment, and
income-producing commercial properties.
Standby letters of credit are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party.
The Bank committed to purchase an investment security on a when-issued
basis on November 20, 2003 in the amount of $1,500,000. The settle date
occurred on January 26, 2004.
The Bank had federal funds sold to Great Lakes Bankers Bank in the
amount of $9,708,000 and $8,973,000 at December 31, 2003 and 2002.
The Company and subsidiary are also subject to claims and lawsuits
which arise primarily in the ordinary course of business. It is the
opinion of management that the disposition or ultimate resolution of
such claims and lawsuits will not have a material adverse effect on the
consolidated financial position of the Company.
NOTE 13: DIVIDEND AND CAPITAL RESTRICTIONS
On December 24, 2003, the Company and the Bank announced they entered
into a Written Agreement (Agreement) with the Federal Reserve Bank of
Cleveland and the Ohio Division of Financial Institutions on December
18, 2003. The Agreement was the result of an examination of the Bank
conducted in September 2003.
As part of the Written Agreement between the Company, the Bank, the
Ohio Division of Financial Institutions, and the Federal Reserve Bank
of Cleveland, the Bank is prohibited from paying dividends to the
Company without prior regulatory approval. Also, the Company is
prohibited from paying common stock dividends without prior regulatory
approval.
57
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
NOTE 14: REGULATORY CAPITAL
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies and is assigned to a
capital category. The assigned capital category is largely determined
by three ratios that are calculated according to the regulations: total
risk adjusted capital, Tier 1 capital, and Tier 1 leverage ratios. The
ratios are intended to measure capital relative to assets and credit
risk associated with those assets and off-balance sheet exposures of
the entity. The capital category assigned to an entity can also be
affected by qualitative judgments made by regulatory agencies about the
risk inherent in the entity's activities that are not part of the
calculated ratios.
There are five capital categories defined in the regulations, ranging
from well capitalized to critically undercapitalized. Classification
of a bank in any of the undercapitalized categories can result in
actions by regulators that could have a material effect on a bank's
operations. At December 31, 2003 and 2002, the Bank was categorized as
well capitalized and met all subject capital adequacy requirements.
There are no conditions or events since December 31, 2003 that
management believes have changed the Bank's classification.
The Bank's actual and required capital amounts and ratios are as
follows. The Company's capital amounts and ratios do not differ
significantly from the Bank's.
REQUIRED FOR ADEQUATE TO BE WELL
ACTUAL CAPITAL(1) CAPITALIZED (1)
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------------------------------------------------------------
AS OF DECEMBER 31, 2003
Total capital(1)(to
risk-weighted assets) $ 23,609 18.5% $ 10,213 8.0% $ 12,766 10.0%
Tier I capital(1)(to
risk-weighted assets) 20,014 15.7 5,107 4.0 7,660 6.0
Tier I capital(1)(to
average assets) 20,014 9.5 8,393 4.0 10,491 5.0
AS OF DECEMBER 31, 2002
Total capital(1)(to
risk-weighted assets) $ 24,680 17.8% $ 11,100 8.0% $ 13,875 10.0%
Tier I capital(1)(to
risk-weighted assets) 15,945 11.5 5,550 4.0 8,325 6.0
Tier I capital(1)(to
average assets) 15,945 7.4 8,677 4.0 10,847 5.0
(1)As defined by regulatory
agencies
58
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
NOTE 15: EMPLOYEE BENEFIT PLANS
The Company has a non-contributory money purchase profit-sharing plan
covering substantially all employees. The amount of the contribution is
determined annually by the Board of Directors. The Company also has a
401k retirement plan covering substantially all employees. The Company
matches 100% of each employee's contributions made to the plan up to
4.0% of each employee's gross salary. The Company's expense for the
plans were $70,000, $231,203 and $267,732 for 2003, 2002, and 2001,
respectively.
NOTE 16: RELATED PARTY TRANSACTIONS
The Bank has entered into transactions with certain directors, executive
officers, significant stockholders and their affiliates or associates
(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, as defined, to such related parties were
as follows:
Balances, January 1, 2003 $ 1,775
New loans, including renewals 2,617
Payments, etc., including renewals (940)
----------
Balances, December 31, 2003 $ 3,452
==========
NOTE 17: FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instrument:
CASH AND CASH EQUIVALENTS
The fair value of cash and cash equivalents approximates carrying
value.
SECURITIES AND MORTGAGE-BACKED SECURITIES
Fair values are based on quoted market prices.
59
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
LOANS
For both short-term loans and variable-rate loans that reprice
frequently and with no significant change in credit risk, fair values
are based on carrying values. The fair values for certain mortgage
loans, including one-to-four family residential, are based on quoted
market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. The
fair value for other loans is estimated using discounted cash flow
analyses using interest rates currently being offered for loans with
similar terms to borrowers of similar credit quality.
INTEREST RECEIVABLE/PAYABLE
The fair values of interest receivable/payable approximate carrying
values.
FRB AND FHLB STOCK
Fair value of FRB and FHLB stock is based on the price at which it may
be resold to the FRB and FHLB.
DEPOSITS
The fair values of noninterest-bearing, interest-bearing demand and
savings accounts are equal to the amount payable on demand at the
balance sheet date. The carrying amounts for variable rate, fixed-term
certificates of deposit approximate their fair values at the balance
sheet date. Fair values for fixed-rate certificates of deposit are
estimated using a discounted cash flow calculation that applies
interest rates currently being offered on certificates to a schedule of
aggregated expected monthly maturities on such time deposits.
FEDERAL HOME LOAN BANK ADVANCES
The fair value of these borrowings are estimated using a discounted
cash flow calculation, based on current rates for similar debt.
SECURITIES SOLD UNDER REPURCHASE AGREEMENTS
Securities sold under repurchase agreements are short-term borrowing
arrangements. The rates at December 31, 2003 and 2002, approximate
market rates, thus the fair value approximates carrying value.
60
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
OFF-BALANCE SHEET COMMITMENTS
Commitments include commitments to purchase and originate mortgage
loans, commitments to sell mortgage loans, and standby letters of
credit and are generally of a short-term nature. The fair value of such
commitments are based on fees currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements
and the counterparties' credit standing.
The estimated fair values of the Company's financial instruments are as
follows:
2003 2002
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 18,005 $ 18,005 $ 16,925 $ 16,925
Investment securities available
for sale 55,052 55,052 54,396 54,396
Loans including loans held for
sale, net 124,931 130,185 138,769 144,131
Interest receivable 760 760 950 950
Stock in FRB and FHLB 2,012 2,012 1,791 1,791
LIABILITIES
Deposits 172,232 173,176 178,890 180,426
Short-term borrowings 7,540 7,540 5,946 5,946
Long-term debt 4,649 4,862 7,719 7,916
Interest payable 392 392 572 572
NOTE 18: CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Presented below is condensed financial information as to financial
position, results of operations and cash flows of the Company:
2003 2002
---------- ----------
ASSETS
Cash and due from banks $ 9 $ 467
Investment in common stock of Bank 20,558 16,921
Receivable from Bank 2,000 7,000
--------- ---------
Total assets $ 22,567 $ 24,388
========= =========
LIABILITIES
Other liabilities $ 9 $ 38
SHAREHOLDERS' EQUITY 22,558 24,350
--------- ---------
Total liabilities and shareholders' equity $ 22,567 $ 24,388
========= =========
61
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
CONDENSED STATEMENTS OF OPERATIONS
2003 2002 2001
--------------------------------
INCOME
Dividends from Bank $ 265 $ 1,113 $ 1,701
Interest income 162 385 400
-------- --------- ---------
Total income 427 1,498 2,101
-------- --------- ---------
EXPENSES
Other expenses 69 75 72
-------- --------- ---------
INCOME BEFORE INCOME TAX AND EQUITY IN
UNDISTRIBUTED INCOME (LOSS) OF BANK 358 1,423 2,029
INCOME TAX EXPENSE 36 121 128
-------- --------- ---------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME (LOSS) OF BANK 322 1,302 1,901
EQUITY IN UNDISTRIBUTED INCOME (LOSS) OF
BANK (908) 323 32
-------- --------- ---------
NET INCOME (LOSS) $ (586) $ 1,625 $ 1,933
======== ========= =========
62
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
CONDENSED STATEMENTS OF CASH FLOWS
2003 2002 2001
-----------------------------
OPERATING ACTIVITIES
Net income (loss) $ (586) $ 1,625 $ 1,933
Adjustments to reconcile net income
to net cash provided by operating
activities 880 (418) 80
------- ------- -------
Net cash provided by operating
activities 294 1,207 2,013
------- ------- -------
INVESTING ACTIVITIES
Investment in Bank (5,000) -- --
Proceeds from Bank for receivable 5,000 1,000 --
------- ------- -------
Net cash provided by investing
activities -- 1,000 --
------- ------- -------
FINANCING ACTIVITIES
Purchase of treasury stock -- (632) (902)
Cash dividends (752) (1,113) (1,139)
------- ------- -------
Net cash used in financing
activities (752) (1,745) (2,041)
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (458) 462 (28)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 467 5 33
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9 $ 467 $ 5
======= ======= =======
63
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
NOTE 19: QUARTERLY FINANCIAL DATA (UNAUDITED)
PROVISION EARNINGS
INTEREST INTEREST FOR LOAN SECURITY NET INCOME (LOSS) PER
INCOME EXPENSE LOSSES GAINS (LOSS) SHARE
----------- ----------- ----------- ---------- ---------- ----------
2003
First Quarter $ 2,846 $ 963 $ 1,730 $ -- $ (582) $ (0.26)
Second Quarter 2,801 888 180 -- 471 0.21
Third Quarter 2,581 798 430 -- 308 0.14
Fourth Quarter 2,602 729 1,840 8 (783) (0.35)
2002
First Quarter $ 3,430 $ 1,468 $ 150 $ -- $ 473 $ .21
Second Quarter 3,342 1,342 200 -- 418 .19
Third Quarter 3,179 1,266 150 -- 460 .21
Fourth Quarter 3,072 1,142 475 8 274 .12
During the fourth quarter of 2003, additional provision for loan losses were
recorded due to identification of increased levels of classified loans.
64
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
None
ITEM 9A - CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including the Chief Executive Officer and Principal Financial Officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures as defined in Exchange Act Rule 13a-15(e) and Exchange
Act Rule 15d - 15(e) as of the end of the period covered by this report. Based
on that evaluation, the Chief Executive Officer and Chief Financial Officer have
concluded that these disclosure controls and procedures are effective to ensure
that information required to be disclosed in reports the Company files or
submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms. There were no
changes in our internal control over financial reporting during the year ended
December 31, 2003 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
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," "Committees of the Board," "Section 16(a)
Beneficial Ownership Reporting Compliance" and "Shareholder Proposals and
Director Nominations" in the definitive Proxy Statement of the Company for the
2004 annual meeting of the shareholders.
The Company's Board of Directors has adopted a Code of Ethics,
available on the Company's website at
HTTP://WWW.COMMERCIALBANK.COM/ABOUTUS/CODEOFETHICS.ASP for the Company's
employees, officers and directors. (The provisions of the Code of Ethics will be
included in the Company's employee handbook, which is issued to all new
employees and officers at the time of employment and reissued to existing
employees and officers from time to time.)
65
EXECUTIVE OFFICERS OF REGISTRANT
Name Age Position and Office Held with ComBanc, Inc. Officer Since
---- --- ------------------------------------------- -------------
Paul G. Wreede 53 Chairman of the Board 1975
President and Chief Executive Officer
Ronald R. Elwer 50 Executive Vice President 1976
Rebecca L. Minnig 47 Senior Vice President Operations and 1979
Corporate Secretary
Kathleen A. Miller 43 Senior Vice President, Chief Information Officer, and 1990
Systems Manager
Jason R. Thornell 29 Vice President and Controller 2001
Paul G. Wreede has been President, Chief Executive Officer since 1990
and a Director of The Commercial Bank since 1987, President, Chief Executive
Officer and a Director of ComBanc since its formation in 1998 and Chairman of
ComBanc since January 1, 2000.
Ronald R. Elwer has been Executive Vice President of The Commercial
Bank since 1990 and a Director of The Commercial Bank since 1995, Secretary of
the Bank from 1990 to 1995, and Executive Vice President and a Director of
ComBanc since 1998.
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 was Vice President, Cashier and Security
Officer of the Bank from 1989 to 1992.
Kathleen A. Miller has been Chief Information Officer since 2002, has
been Senior Vice President and Systems Manager of the Company since 1999, Chief
Financial Officer of the Company from 1998 to 2002 and of the Bank from 1997 to
2002, Vice President and Systems Manager of the Company in 1998 and of the Bank
since 1997, and was Controller of the Bank from 1990 to 1997.
Jason R. Thornell has been Vice President and Controller since 2004 and
has been controller of the Company since 2001.
66
ITEM 11 - EXECUTIVE COMPENSATION
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 for the 2004 annual
meeting of shareholders, 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 AND
RELATED STOCKHOLDER MATTERS
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
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 for the 2004 annual meeting of
shareholders.
67
PART IV
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES.
Information concerning principal accountant fees and services, and
audit committee pre-approval policies and procedures for audit and non-audit
services required by this item is incorporated by reference from the caption
entitled ("Audit Committee Report") in the Company's definitive Proxy Statement
for the 2004 annual meeting.
ITEM 15 - 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 Consolidated Financial
Statements and Supplementary Data at page 37.
(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 70.
(b) Reports on Form 8-K.
There was a report on Form 8-K reported under Item 5 filed
during the quarter ended December 31, 2003, filed on December
24, 2003 with the SEC.
(c) Exhibits.
Exhibits filed with this Annual Report on Form 10-K are
attached hereto.
See "Exhibit Index" at page 70.
(d) Financial Statement Schedules.
None
68
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.
Date: February 24, 2004 By: /s/ Paul G. Wreede
---------------------------
Paul G. Wreede,
President & CEO
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
---- ---- --------
/s/ Paul G. Wreede
----------------------------
Paul G. Wreede February 24, 2004 Chairman, President and CEO and Director
/s/ Ronald R. Elwer
----------------------------
Ronald R. Elwer February 24, 2004 Executive Vice President and Director
/s/ Richard R. Thompson
----------------------------
Richard R. Thompson February 24, 2004 Director
/s/ Dwain I. Metzger
----------------------------
Dwain I. Metzger February 24. 2004 Director
/s/ C. Stanley Strayer
----------------------------
C. Stanley Strayer February 24, 2004 Director
/s/ Jason R. Thornell
----------------------------
Jason R. Thornell February 24, 2004 Principal Financial Officer -
Vice President/Controller
69
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2003
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
of the Company 71
3.2 Bylaws of the Company 72
10.1 Merger Agreement by and between ComBanc, Inc. 80
and The Commercial Bank Dated
April 13, 1998
14 Code of Ethics The Code of Ethics is available
through the Company's website
at http://www.commercialbank.com/aboutUs
/codeOfEthics.asp.
21.1 Subsidiaries of the Company 81
31 Rule 13a - 14(B)/15d - 14(a) certifications 82
32 Section 1350 certifications 84
70