UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2004
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from to
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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
incorporation or organization) Identification No.)
229 E. Second St., P. O. Box 429, Delphos, Ohio 45833
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(Address of principal executive offices) (Zip Code)
(419) 695-1055
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
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Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes No X
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Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 2,211,014 shares of
the ComBanc's common stock (no par value) were outstanding as of April 30, 2004.
Page 1 of 22
COMBANC, INC. AND SUBSIDIARY
March 31, 2004 FORM 10-Q
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Income 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition 8
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 15
Item 4. Controls and Procedures 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 17
Exhibits 31.1 and 31.2 Rule 13a-14(a)/15d-14(a) certifications 19
Exhibits 32.1 and 32.2 Section 1350 certifications 21
2
COMBANC, INC. AND SUBSIDIARY
March 31, 2004 FORM 10-Q
COMBANC, INC. AND SUBSIDIARY
DELPHOS, OHIO
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in thousands)
March 31, December 31,
ASSETS 2004 2003
---------- ------------
(unaudited)
Cash and Due from Banks $ 8,836 $ 8,297
Federal Funds Sold 10,767 9,708
---------- -----------
Cash and Cash Equivalents 19,603 18,005
Investment Securities -
Available for Sale 59,604 55,052
Loans Held for Resale 594 -
Loans 125,764 128,756
Allowance for Loan Losses (3,910) (3,825)
---------- -----------
Net Loans 121,854 124,931
Premises and Equipment 4,385 4,432
Federal Reserve and Federal Home Loan Bank Stock 2,030 2,012
Interest Receivable 826 760
Other Assets 2,514 2,541
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Total Assets $ 211,410 $ 207,733
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest Bearing $ 15,834 $ 15,758
Interest Bearing 159,547 156,474
---------- -----------
Total Deposits 175,381 172,232
Short Term Borrowings 7,821 7,540
Long Term Debt 4,389 4,649
Interest Payable 443 392
Other Liabilities 302 362
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Total Liabilities 188,336 185,175
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Commitments and Contingent Liabilities - -
Shareholders' Equity -
Common Stock - No Par Value
5,000,000 shares authorized, 2,376,000 issued
and 2,211,014 outstanding 1,237 1,237
Capital Surplus 1,513 1,513
Retained Earnings 22,342 22,034
Accumulated Other Comprehensive Income 699 491
Treasury Stock - 164,986 shares at cost (2,717) (2,717)
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Total Shareholders' Equity 23,074 22,558
---------- -----------
Total Liabilities and Shareholders' Equity $ 211,410 $ 207,733
========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements
3
COMBANC, INC. AND SUBSIDIARY
March 31, 2004 FORM 10-Q
COMBANC, INC. AND SUBSIDIARY
DELPHOS, OHIO
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
($ in thousands, except per share data)
For the Three Months Ended
March 31,
-------------------------------
(unaudited)
2004 2003
---------- -----------
Interest Income:
Loans Receivable $ 1,950 $ 2,233
Investments Securities
Taxable 424 445
Tax-Exempt 121 147
Federal Funds Sold 24 20
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Total Interest Income 2,519 2,845
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Interest Expense:
Deposits 614 835
Short-Term Borrowings 23 14
Long-Term Debt 61 114
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Total Interest Expense 698 963
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Net Interest Income 1,821 1,882
Provision for Loan Losses 60 1,730
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Net Interest Income after Provision for Loan Losses 1,761 152
Other Income:
Service Charges on Deposit Accounts 127 128
Net Realized Gains on Sales of Available-for-
sale Securities 15 -
Gain on Sale of Loans 41 111
Other Income 93 171
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Total Other Income 276 410
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Other Expenses:
Salaries and Employee Benefits 797 815
Net Occupancy 106 99
Equipment Expenses 87 90
Data Processing Fees 99 93
Advertising 31 52
Printing and Office Supplies 28 35
Legal and Professional Fees 120 56
Dues and Memberships 72 67
State Taxes 60 60
Other Expense 248 148
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Total Other Expenses 1,648 1,515
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Income/Loss - before Income Tax (Credit)/Expense 389 (953)
Income Tax (Credit)/Expense 81 (371)
---------- -----------
Net Income/(Loss) $ 308 $ (582)
========== ===========
Earnings Per Share $ 0.14 $ (0.26)
Cash Dividends Per Share $ 0.00 $ 0.12
The accompanying notes are an integral part of the condensed
consolidated financial statements
4
COMBANC, INC. AND SUBSIDIARY
March 31, 2004 FORM 10-Q
COMBANC, INC. AND SUBSIDIARY
DELPHOS, OHIO
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
For the Three Months
March 31,
-------------------------------
2004 2003
---------- -----------
(unaudited)
Cash Flows From Operating Activities:
Net Income/(Loss) $ 308 $ (582)
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities -
Depreciation and Amortization 97 104
Provision for Loan Loss 60 1,730
Investment Securities Gains (15) -
Federal Home Loan Bank Stock Dividends (18) (17)
Investment Securities Amortization (Accretion), Net 81 77
Proceeds From Sale of Loans Held For Sale 3,856 10,737
Originations of Loans Held For Sale (4,409) (12,589)
Gain From Sale of Loans (41) (111)
Net Change in
Interest Receivable (66) (59)
Interest Payable 51 31
Other Assets 26 (252)
Other Liabilities (166) (308)
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Net Cash (Used) by Operating Activities (236) (1,239)
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Cash Flows From Investing Activities:
Purchases of Securities Available for Sale/FHLB Stock (11,975) (4,054)
Proceeds from Maturities of Securities
Available for Sale 5,068 6,718
Proceeds from Sales of Securities
Available for Sale 2,604 -
Net Change in Loans 3,017 4,745
Purchases of Premises and Equipment (50) (41)
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Net Cash (Used)/Provided by Investing Activities (1,336) 7,368
---------- -----------
Cash Flows from Financing Activities:
Net Change In
Noninterest-Bearing, Interest-Bearing Demand and
Savings Deposits 2,489 (1,915)
Certificates and Other Time Deposits 659 (3,060)
Short-Term Borrowings 282 214
Repayment of Long-term Debt (260) (260)
Dividends Paid - (265)
---------- -----------
Net Cash Provided/(Used) by Financing Activities 3,170 (5,286)
---------- -----------
Net Change in Cash and Cash Equivalents 1,598 843
Cash and Cash Equivalents -
Beginning of Year 18,005 16,925
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End of Period $ 19,603 $ 17,768
========== ===========
The accompanying notes are an integral part of the condensed
consolidated financial statements
5
COMBANC, INC. AND SUBSIDIARY
March 31, 2004 FORM 10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
March 31, 2004
Note 1, Basis of Presentation
Certain information and note disclosures normally included in the Company's
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K annual report for 2003 filed with the
Securities and Exchange Commission.
The significant accounting policies followed by ComBanc, Inc. (Company) and its
wholly-owned subsidiary, The Commercial Bank (Bank), for interim financial
reporting are consistent with the accounting policies followed for annual
financial reporting. All adjustments which are, in the opinion of management,
necessary for a fair presentation of the results for the periods reported,
consisting only of normal recurring adjustments, have been included in the
accompanying unaudited condensed consolidated financial statements. The results
of operations for the three months ended March 31, 2004, are not necessarily
indicative of those expected for the remainder of the year.
The Condensed Consolidated Balance Sheet at December 31, 2003 has been taken
from audited consolidated financial statements at that date.
Note 2, Earnings Per Share
Earnings per share on the income statement has been computed on the basis of
weighted-average number of shares of common stock outstanding. The
weighted-average shares outstanding for the three months ending March 31, 2004
and March 31, 2003 were 2,211,014.
Note 3, Commitments and Contingent Liabilities
Outstanding commitments to originate loans were $19,580,000 and $20,770,000 at
March 31, 2004 and December 31, 2003, respectively.
The Bank committed to purchase an investment security on a when-issued basis on
March 25, 2004 in the amount of $1,000,000. The settlement date will occur on
April 26, 2004.
Note 4, Allowance for Loan Losses
Credit risk is the risk of loss from a customer default on a loan. The Bank has
in place a process to identify and manage its credit risk. The process includes
initial credit review and approval, periodic monitoring to measure compliance
with credit agreements and internal credit policies, monitoring changes in the
risk ratings of loans and leases, identification of problem loans and special
procedures for the collection of problem loans. The risk of loss is difficult to
quantify and is subject to fluctuations in values and general economic
conditions and other factors. THE DETERMINATION OF THE ALLOWANCE FOR LOAN
6
COMBANC, INC. AND SUBSIDIARY
March 31, 2004 FORM 10-Q
LOSSES IS A CRITICAL ACCOUNTING POLICY WHICH INVOLVES ESTIMATES AND MANAGEMENT'S
JUDGMENT ON A NUMBER OF FACTORS SUCH AS NET CHARGE-OFFS, DELINQUENCIES IN THE
LOAN PORTFOLIO AND GENERAL ECONOMIC CONDITIONS. The Bank considers the allowance
for loan losses of $3,910,000 adequate to cover losses inherent in the loan
portfolios as of March 31, 2004. However, no assurance can be given that the
Bank will not, in any particular period, sustain loan losses that are sizeable
in relation to the amount reserved, or that subsequent evaluations of the loan
portfolio, in light of factors then prevailing, including economic conditions
and the Bank's on-going credit review process, will not require significant
increases in the allowance for loan losses. Among other factors, a protracted
economic slowdown and/or a decline in commercial or residential real estate
values in the Bank's markets may have an adverse impact on the adequacy of the
allowance for loan losses by increasing credit risk and the risk of potential
loss.
Note 5, Effect of Accounting Changes
In December 2003, the FASB (Financial Accounting Standards Board) revised SFAS
No. 132, "Employers' Disclosures about Pensions and Other Postretirement
Benefits", which is an amendment of FASB Statements No. 87, 88, and 106. There
was no material impact of the adoption on the financial statements.
7
COMBANC, INC. AND SUBSIDIARY
March 31, 2004 FORM 10-Q
PART I - FINANCIAL INFORMATION
Item 2 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
FORWARD-LOOKING STATEMENTS
The Company has made, and may continue to make, various forward-looking
statements with respect to interest rate sensitivity analysis, credit quality
and other financial and business matters for 2004 and, in certain instances,
subsequent periods. The Company cautions that these forward-looking statements
are subject to numerous assumptions, risks and uncertainties, and that
statements for periods subsequent to 2003 are subject to greater uncertainty
because of the increased likelihood of changes in underlying factors and
assumptions. Actual results could differ materially from forward-looking
statements. In addition to those factors previously disclosed by the Company and
those factors identified elsewhere herein, the following factors could cause
actual results to differ materially from such forward looking statements: the
extent and timing of actions of the Federal Reserve, changes in economic
conditions, continued pricing pressures on loan and deposit products, actions of
competitors, customer's acceptance of the Company's products and services, the
extent and timing of legislative and regulatory actions and reforms, changes in
accounting principals, technological changes and increased technology costs,
downturn in demand for loan and deposit products, and changes in the interest
rate environment that reduce interest margins. The Company's forward-looking
statements speak only as the date on which such statements are made. By making
any forward-looking statements, the Company assumes no duty to update them to
reflect new, changing or unanticipated events or circumstances.
ENTITY STATUS
On April 13, 1998, The Commercial Bank became a wholly-owned subsidiary of the
newly formed ComBanc, Inc., a one-bank holding company. Since ComBanc's only
significant asset is the investment in The Commercial Bank, the following
discussion will focus on the operations of The Commercial Bank.
CRITICAL ACCOUNTING POLICIES
The accounting and reporting policies of the Company are in accordance with
accounting principles generally accepted in the United States and conform to
general practices within the banking industry. The Company's significant
accounting policies are described in detail in the notes to the Company's
consolidated financial statements for the year ended December 31, 2003. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions. The
financial position and results of operations can be affected by these estimates
and assumptions and are integral to the understanding of reported results.
Critical accounting policies are those policies that management believes are the
most important to the portrayal of the Company's financial condition and
results, and they require management to make estimates that are difficult,
subjective, or complex.
Allowance for Credit Losses- The allowance for credit losses provides coverage
for probable losses inherent in the Company's loan portfolio. Management
evaluates the adequacy of the allowance for credit losses each quarter based on
changes, if any, in underwriting activities, the loan portfolio composition
(including product mix and geographic, industry or customer-specific
concentrations),
8
COMBANC, INC. AND SUBSIDIARY
March 31, 2004 FORM 10-Q
trends in loan performance, regulatory guidance and economic factors. This
evaluation is inherently subjective, as it requires the use of significant
management estimates. Many factors can affect management's estimates of specific
and expected losses, including volatility of default probabilities, rating
migrations, loss severity and economic and political conditions. The allowance
is increased through provisions charged to operating earnings and reduced by net
charge-offs.
The Company determines the amount of the allowance based on relative risk
characteristics of the loan portfolio. The allowance recorded for commercial
loans is based on reviews of individual credit relationships and an analysis of
the migration of commercial loans and actual loss experience. The allowance
recorded for homogeneous consumer loans is based on an analysis of loan mix,
risk characteristics of the portfolio, fraud loss and bankruptcy experiences,
and historical losses, adjusted for current trends, for each homogeneous
category or group of loans. The allowance for credit losses relating to impaired
loans is based on the loan's observable market price, the collateral for certain
collateral-dependent loans, or the discounted cash flows using the loan's
effective interest rate. Regardless of the extent of the Company's analysis of
customer performance, portfolio trends or risk management processes, certain
inherent but undetected losses are probable within the loan portfolio. This is
due to several factors including inherent delays in obtaining information
regarding a customer's financial condition or changes in their unique business
conditions, the judgmental nature of individual loan evaluations, collateral
assessments and the interpretation of economic trends. Volatility of economic or
customer-specific conditions affecting the identification and estimation of
losses for larger non-homogeneous credits and the sensitivity of assumptions
utilized to establish allowances for homogenous groups of loans are among other
factors. The Company estimates a range of inherent losses related to the
existence of these exposures. The estimates are based upon the Company's
evaluation of imprecision risk associated with the commercial and consumer
allowance levels and the estimated impact of the current economic environment.
Mortgage Servicing Rights- Mortgage servicing rights ("MSRs") associated with
loans originated and sold, where servicing is retained, are capitalized and
included in other intangible assets in the consolidated balance sheet. The value
of the capitalized servicing rights represents the present value of the future
servicing fees arising from the right to service loans in the portfolio.
Critical accounting policies for MSRs relate to the initial valuation and
subsequent impairment tests. The methodology used to determine the valuation of
MSRs requires the development and use of a number of estimates, including
anticipated principal amortization and prepayments of that principal balance.
Events that may significantly affect the estimates used are changes in interest
rates, mortgage loan prepayment speeds and the payment performance of the
underlying loans. The carrying value of the MSRs is periodically reviewed for
impairment based on a determination of fair value. For purposes of measuring
impairment, the servicing rights are compared to a valuation prepared based on a
discounted cash flow methodology, utilizing current prepayment speeds and
discount rates. Impairment, if any, is recognized through a valuation allowance
and is recorded as amortization of intangible assets.
FINANCIAL CONDITION
We are currently subject to the terms of the Written Agreement, dated December
18, 2003, among the Company, the Bank, the Federal Reserve Bank of Cleveland and
the Ohio Division of Financial Institutions. Total Delinquent and Nonaccrual
Loans as of March 31, 2004 stood at $6,093,000 as compared to $6,948,000 as of
December 31, 2003. This decrease represents a 12.3% improvement since
9
COMBANC, INC. AND SUBSIDIARY
March 31, 2004 FORM 10-Q
December 31, 2003. Total delinquency reduction can be credited to the continued
emphasis on workout programs and a steady improvement in the local economy.
TABLE 1: Analysis of Delinquencies
3/31/2004 12/31/2003 12/31/2002 12/31/2001 12/31/2000
Past due 30 to 89 days and still accruing $ 2,194 $ 2,758 $ 6,672 $ 9,863 $ 4,502
Past due 90 days or more and still accruing 275 680 798 2,810 2,587
Nonaccrual 3,624 3,510 8,456 3,455 542
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Total delinquencies $ 6,093 $ 6,948 $15,926 $16,128 $ 7,631
=============================================================
Total Delinquencies as a percentage of total loans 4.84% 5.40% 11.37% 10.31% 4.50%
Total assets increased $3,677,000 or 1.8% from $207,733,000 at December 31, 2003
to $211,410,000 at March 31, 2004. This is the result of a $1,598,000 increase
in cash and cash equivalents and a $4,552,000 increase in investment securities
combined with a $3,077,000 decrease in net loans. To fund this increase in total
assets, there was a $3,149,000 increase in total deposits, a $281,000 increase
in short-term borrowings, a $260,000 decrease in long-term debt and a $516,000
increase in total shareholders' equity.
Investment securities increased $4,552,000 from $55,052,000 at December 31, 2003
to $59,604,000 at March 31, 2004. This increase is the result of $11,975,000 in
purchases less the pay downs from Mortgage-backed securities and the maturity of
a U.S. Agency Bond totaling $5,068,000, the sale of $2,604,000 of municipal and
mortgage-backed securities, premium amortization of $81,000, and an increase in
the market value of the available-for-sale portfolio of $314,000. There was
$5,945,000 in short-term callable agency bonds with yields of approximately
1.50% purchased in February and March 2004 in order to reduce federal funds with
a yield of approximately 1.00%. The objective was to earn a higher yield until
mid year and reinvest the called proceeds into higher earning participation
loans.
Total gross loans decreased 1.9% or $2,398,000 from December 31, 2003 to
$125,764,000 at March 31, 2004. The breakdown of the loan portfolio is detailed
in table 2 below. Significant changes in the portfolio include a decrease in
construction and land development loans. This decrease is the result of the
completion of a large construction loan and being converted to an amortized real
estate secured by nonfarm, nonresidential loan. As can be seen in Table 2,
secondary market lending to FHLMC has dropped off significantly to net growth of
$136,000 in the first quarter of 2004. The decrease in sales to FHLMC is due to
the increase of interest rates on the long end of the yield curve. These
interest rates rose approximately 50 basis points in the quarter, but towards
the end of the quarter, they dropped back to the historical lows. These loans
will continue to generate service fee income at .25% per year over the life of
the loan, which currently amounts to approximately $159,000. Another significant
change in the portfolio includes a $789,000 increase in the real estate secured
by nonfarm, nonresidential properties. This increase is due to management's
desire to increase loans secured by real estate which tend to be less risky in
nature.
TABLE 2: Analysis of Loan Portfolio Composition
10
COMBANC, INC. AND SUBSIDIARY
March 31, 2004 FORM 10-Q
LOAN TYPE
3/31/2004 12/31/2003 DIFFERENCE %
Construction/Land Development 5,921 7,305 -1,384 -18.95%
R/E Secured by Farmland 4,639 4,598 41 0.89%
Revol Open-end 1-4 Family LOC 5,179 5,294 -115 -2.17%
1-4 Secured by First 34,836 35,112 -276 -0.79%
1-4 Secured by Junior 614 550 64 11.64%
R/E Secured by Multi Family R/E 3,142 3,179 -37 -1.16%
R/E Secured by Nonfarm, Nonres 47,766 46,977 789 1.68%
Ag Loans 1,899 2,449 -550 -22.46%
Commercial Loans 12,391 12,607 -216 -1.71%
Municipal Loans 1,028 1,100 -72 -6.55%
Master Card Loans 520 566 -46 -8.13%
Other Consumer 11 7 4 57.14%
Consumer Loans 8,382 8,993 -611 -6.79%
Overdrafts 30 19 11 57.89%
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Total Loans 126,358 128,756 -2,398 -1.86%
Loan Loss Reserve 3,910 3,825 85 2.22%
---------------------------------------------------------------
Total Net Loans 122,448 124,931 -2,483 -1.99%
===============================================================
Serviced FHLMC Mortgages 63,596 63,460 136 0.21%
----------------------------------------------------------------
Total Loans Serviced 186,044 188,391 -2,347 -1.25%
================================================================
The Allowance for Loan Losses at March 31, 2004 was 3.1% of total loans compared
to 3.0% at December 31, 2003. This $85,000 increase from December 31, 2003 is
the result of a $60,000 provision and net recoveries of $25,000, increasing the
Allowance for Loan Loss from $3,825,000 at December 31, 2003 to $3,910,000 at
March 31, 2004. Table 3 below illustrates an analysis of the Allowance for Loan
and Lease Losses over the past five years.
TABLE 3: Analysis of Changes in Allowance for Loan and Lease Losses
For
the
Period
Ended For the Years Ended
-----------------------------------------------------------------------
3/31/2004 12/31/2003 12/31/2002 12/31/2001 12/31/2000
--------- ---------- ---------- ---------- ----------
Balance of Allowance at Beginning of Year $ 3,825 $ 2,050 $ 1,815 $ 1,331 $ 1,832
------- ------- ------- ------- -------
Loans Actually Charged Off -
Real Estate - Construction 18 141 - - -
Real Estate - Mortgage - 444 317 - -
Commercial, Financial and Agricultural - 1,706 811 281 96
Installment and Credit Card 10 284 307 548 890
------- ------- ------- ------- -------
28 2,575 1,435 829 986
------- ------- ------- ------- -------
Recoveries of Loans Previously Charged Off -
Real Estate - Construction - - - - -
Real Estate - Mortgage - - - 11 -
Commercial, Financial and Agricultural 40 75 599 458 10
Installment and Credit Card 13 95 96 54 55
------- ------- ------- ------- -------
53 170 695 523 65
------- ------- ------- ------- -------
Net Charge-Offs (Recoveries) (25) 2,405 740 306 921
------- ------- ------- ------- -------
Addition to Allowance Charged to Expense 60 4,180 975 790 420
------- ------- ------- ------- -------
Balance of Allowance at Period-End $ 3,910 $ 3,825 $ 2,050 $ 1,815 $ 1,331
======= ======= ======= ======= =======
Ratio of Net Charge-Offs to Avg. Loans Outstanding -0.02% 1.79% 0.51% 0.18% 0.55%
Ratio of Allowance for Credit Losses to Total Loans 3.11% 2.97% 1.46% 1.15% 0.79%
11
COMBANC, INC. AND SUBSIDIARY
March 31, 2004 FORM 10-Q
Total deposits increased $3,149,000 or 1.8% from December 31, 2003 to March 31,
2004. Table 4 below shows a breakdown of deposits by type at both March 31, 2004
and December 31, 2003. Management attributes the increase in total deposits to
competitive interest rates being offered on money market savings accounts and
certificates of deposit.
Table 4: Deposit Balances by Type
DEPOSIT TYPE
3/31/2004 12/31/2003 DIFFERENCE %
Non-interest Bearing DDA 15,834 15,758 76 0.48%
NOW Accounts 25,792 25,017 775 3.10%
MMKT Savings 13,292 12,139 1,153 9.50%
Savings 33,579 33,093 486 1.47%
Time Deposits 86,884 86,225 659 0.76%
-----------------------------------------------------------------
Total Deposits 175,381 172,232 3,149 1.83%
-----------------------------------------------------------------
Short-term borrowings, which are repurchase agreements, increased $281,000 from
December 31, 2003 to March 31, 2004. This increase can be attributed to local
businesses seeking interest-bearing transaction accounts that maintain an added
benefit of collateralization, backed by the Bank's investment securities, 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 $260,000 or 5.6% from December 31, 2003 to March 31, 2004. This
decrease is due to the prepayment of an advance with a prepayment option and
regular amortization. Due to the excessive amount of liquidity, management chose
not to borrow additional funds from FHLB at that time.
Total shareholders equity increased $516,000 from December 31, 2003 to March 31,
2004. Included in the overall increase was an increase in retained earnings of
$308,000, which was solely comprised of net income, and an increase of $208,000
in Accumulated Other Comprehensive Income, which is the unrealized gain on the
available-for-sale securities portfolio net of federal income tax. Interest
rates dropped at the end of the quarter, causing the value of the investment
portfolio to appreciate. No Treasury Stock was repurchased in the first quarter
of 2004.
RESULTS OF OPERATIONS
Net interest income, the difference between interest earned on interest-earning
assets and interest expense incurred on interest-bearing liabilities, is the
most significant component of The Commercial Bank's earnings. Net interest
income is affected by changes in the volume and rates of interest-earning assets
and interest-bearing liabilities and the volume of interest-earning assets
funded with low cost deposits, noninterest-bearing deposits and shareholders'
equity. Net interest income decreased $61,000 for the quarter ended March 31,
2004 from a year ago.
Net income for the first quarter of 2004 was $308,000 or $0.14 per share. This
represents an increase of $0.40 per share compared to the first quarter of 2003.
Annualized Return on average assets was 0.59% for the first quarter of 2004, up
from -1.11% for the first quarter of 2003. Annualized return on average equity
increased to 5.4% for the first quarter of 2004 from -2.4% for the first quarter
of 2003.
12
COMBANC, INC. AND SUBSIDIARY
March 31, 2004 FORM 10-Q
The most significant income statement changes between the three months ended
March 31, 2004 and the three months ended March 31, 2003 were as follows:
- The provision for loan losses has decreased $1,670,000 in the first
quarter of 2004. At year end 2003, management chose to have a
complete loan review of the portfolio by an external consultant. At
that time, all classified assets were allocated for in the
allowance for loan losses charged to 2003 earnings. At March 31,
2004, management believes the allowance for loan losses is
sufficient to cover all potential losses. As a result, only $60,000
was charged to provision for loan losses in the first quarter of
2004.
- Total noninterest income decreased $134,000 in the first quarter of
2004 compared to 2003. The decrease is due to the $70,000 decrease
in gain on sale of loans to FHLMC and the $78,000 decrease in other
income. The decrease in other income is due to the decrease in
mortgage service right revenue in the amount of $68,000, which is
the result of the decreased volume of loans sold to FHLMC.
- Total noninterest expense increased $133,000 in the first quarter
of 2004 compared to the first quarter of 2003. This increase is the
result of a $64,000 increase in legal and professional fees due to
the Written Agreement and related matters and an increase of
$100,000 in other expense. Other expense increased as a result of
$87,000 in first quarter mortgage service right impairments. Near
quarter end, interest rates dropped causing the value of mortgage
service rights to decrease.
- Net interest income decreased $61,000 or 3.2%. Included in the
decrease is a decrease in interest and fees on loans which is the
direct result of a decrease in loan balances of $9,412,000 over the
past year as well as a decrease in interest rates. The decrease in
loan balances is due to the large volume of 1 to 4 family
residential loans sold to the secondary market in 2003 and
management pricing higher risk commercial loans above the
competition and allowing those loans to leave the institution.
Although net interest income has decreased, net interest margin for
the first quarter remains strong at 3.91%.
PROSPECTS FOR THE REMAINDER OF 2004
Management believes earnings prospects for the remainder of 2004 will improve.
In the second and third quarter of 2004, management plans to purchase
participation loans to increase loan volume, thus increasing loan interest
revenue. These loans will be funded with the excess liquidity that the Bank
currently maintains.
Another major variable that could affect 2004 earnings is the gain on sale of
loans. If interest rates drop or remain level, additional 1 to 4 family sales
volume could occur which will create additional non-interest income. Also, if
interest rates on the long end of the yield curve rise, mortgage service right
impairment will be recaptured. Current impairments available for recapture
amount to $102,000.
REGULATORY CAPITAL
The Federal Reserve Board's risk-based capital guidelines addressing the capital
adequacy of bank holding companies and banks (collectively, "banking
organizations") include a definition of capital and a framework for calculating
risk-weighted assets and off-balance sheet items to broad risk categories, as
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COMBANC, INC. AND SUBSIDIARY
March 31, 2004 FORM 10-Q
well as minimum ratios to be maintained by banking organizations. A banking
organization's risk-based capital ratios are calculated by dividing its
qualifying capital by its risk-weighted assets.
Under the risk-based capital guidelines, there are two categories of capital:
core capital ("Tier 1") and supplemental capital ("Tier 2"), collectively
referred to as Total Capital. Tier 1 Capital includes common stockholders'
equity, qualifying perpetual preferred stock and minority interest in equity
accounts of consolidated subsidiaries. Tier 2 capital includes perpetual
preferred stock (to the extent ineligible for Tier 1), hybrid capital
instruments (i.e., perpetual debt and mandatory convertible securities) and
limited amounts of subordinated debt, intermediate-term preferred stock and the
allowance for credit losses.
The Federal Reserve Board's leverage constraint guidelines establish a minimum
ratio of Tier 1 Capital to quarterly average total assets ("Leverage Ratio").
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
established five capital tiers for banks. Pursuant to that statute the federal
bank regulatory agencies have defined the five capital tiers for banks. Under
these regulations, a bank is defined to be well capitalized, the highest tier,
if it maintains a Tier 1 Capital ratio of at least 6 percent, a Total Capital
ratio of at least 10 percent and a Leverage Ratio of at least 5 percent. At
March 31, 2004 ComBanc, Inc. maintained a Tier I capital ratio of 17.72%, a
total capital ratio of 19.00% and a Tier I leverage ratio of 10.77%.
Based on the respective regulatory capital ratios at March 31, 2004, and based
on the definitions in the regulations issued by the Federal Reserve Board and
the other federal bank regulatory agencies setting forth the general capital
requirements mandated by FDICIA, the Bank is well capitalized.
LIQUIDITY
The liquidity of a banking institution reflects its ability to provide funds to
meet loan requests, to accommodate possible outflows in deposits and to take
advantage of interest rate market opportunities. Funding of loan requests,
providing for liability outflows, and management of interest rate fluctuations
require continuous analysis in order to match the maturities of specific
categories of short-term loans and investments with specific types of deposits
and borrowings. Bank liquidity is thus normally considered in terms of the
nature and mix of the banking institution's sources and uses of funds. Liquid
assets consist of cash and due from banks, federal funds sold, and securities
available for sale. At March 31, 2004 the Bank's liquid assets amounted to
$79,801,000 or 37.7% of total assets compared with 35.2% at December 31, 2003.
Management considers its liquidity to be adequate to meet its normal funding
requirements.
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COMBANC, INC. AND SUBSIDIARY
March 31, 2004 FORM 10-Q
Item 3 -- Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes in the Company's quantitative and
qualitative market risks since December 31, 2003. The following table compares
rate sensitive assets and liabilities as of March 31, 2004 to December 31, 2003.
Principal Amount Maturing or Repricing in:
(Dollars in Thousands)
First Years
Year 1 to 5 Thereafter Total
----- ------ ---------- -----
Comparison of 03/31/04 to 12/31/03
Total rate sensitive assets:
At December 31, 2003 $ 65,164 $ 87,231 $ 41,295 $ 193,690
At March 31, 2004 71,953 81,235 43,700 196,888
Increase (Decrease) 6,789 (5,996) 2,405 3,198
Total rate sensitive liabilities:
At December 31, 2003 $ 61,706 $ 82,171 $ 24,786 $ 168,663
At March 31, 2004 69,736 76,448 25,574 171,758
Increase (Decrease) 8,030 (5,723) 788 3,095
Item 4 -- Controls and Procedures
Under the supervision and with the participation of our management, including
the Chief Executive Officer and principal financial officer, we have evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-15(e) and Exchange Act Rule
15d-15(e) as of the end of the period covered by this report. Based on that
evaluation, our Chief Executive Officer and principal financial officer have
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed in reports the Company files or
submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms. There were no
changes in our internal control over financial reporting during the period
covered by this report that have materially affected, or that are reasonably
likely to materially affect, our internal controls over financial reporting.
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COMBANC, INC. AND SUBSIDIARY
March 31, 2004 FORM 10-Q
PART II -- OTHER INFORMATION
Item 1 -- 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 March 31, 2004, the Bank was involved in a number of such cases as a
party-plaintiff, and occasionally, as a party-defendant due to its joinder as a
lien holder, either by mortgage or by judgment lien. In the ordinary case, the
Bank's security and value of its lien is not threatened, except through
bankruptcy or loss of value of the collateral should sale result in insufficient
proceeds to satisfy the judgment.
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 6 -- Exhibits and Reports on Form 8-K
(a) Exhibit 11. Statement regarding computation of
earnings per share is contained in Part
I, Item 2.
Exhibits 31.1 and 31.2 Rule 13a-14(a)/15d-14(a) certifications
Exhibits 32.1 and 32.2 Section 1350 certifications
(b)
I. A report on Form 8-K, reported under Items 5 and 7 was filed on
January 30, 2004.
II. A second report on Form 8-K, reported under Items 7 and 9,
including Condensed Consolidated Balance
Sheets as of December 31, 2003 and 2002, Condensed
Consolidated Statements of Income for the Fourth and
Third Quarters Ended December 31, 2003, Condensed
Consolidated Statements of Income for the Three Months
Ended December 31, 2003 and September 30, 2003 and
Condensed Consolidated Statements of Income for the
Years Ended December 31, 2003 and 2002 was filed on
February 9, 2004 with the SEC.
III. A third report on Form 8-K, reported under Items 5 and 7 was
filed on March 9, 2004 with the SEC.
IV. A fourth report on Form 8-K, reported under Items 5 and 7 was
filed on March 18, 2004 with the SEC.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMBANC, INC.
Date: May 3, 2004 /s/ Paul G. Wreede
------------------
Paul G. Wreede
President, CEO, and Director
Date: May 3, 2004 /s/ Jason R. Thornell
---------------------
Jason R. Thornell
VP/Controller
17
EXHIBIT INDEX
Exhibit No. Description
a) Exhibit 11. Statement regarding computation of earnings
per share is contained in Part I, Item 2.
Exhibits 31.1 and 31.2 Rule 13a-14(a)/15d-14(a) certifications
Exhibits 32.1 and 32.2 Section 1350 certifications
18