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 June 30, 2004
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Transition period from to
------------------------- ----------------------
Commission File Number 000-24925
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 2,211,014 shares of the
ComBanc's common stock (no par value) were outstanding as of July 22, 2004.
Page 1 of 25
COMBANC, INC. AND SUBSIDIARY
June 30, 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 Operations 4
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 17
Item 4. Controls and Procedures 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 6. Exhibits and Reports on Form 8-K 18
Signatures 20
Exhibits 31.1 and 31.2 Rule 13a-14(a)/15d-14(a) certifications 22
Exhibits 32.1 and 32.2 Section 1350 certifications 24
2
COMBANC, INC. AND SUBSIDIARY
June 30, 2004 FORM 10-Q
COMBANC, INC. AND SUBSIDIARY
DELPHOS, OHIO
CONDENSED CONSOLIDATED BALANCE SHEETS
($ in thousands)
June 30, December 31,
2004 2003
----------- ------------
(unaudited)
ASSETS
Cash and Due from Banks $ 9,690 $ 8,297
Federal Funds Sold 8,250 9,708
--------- ---------
Cash and Cash Equivalents 17,940 18,005
Investment Securities -
Available for Sale 60,990 55,052
Loans Held for Resale 133 -
Loans 123,939 128,756
Allowance for Loan Losses (3,956) (3,825)
--------- ---------
Net Loans 119,983 124,931
Premises and Equipment 4,321 4,432
Federal Reserve and Federal Home Loan Bank Stock 2,047 2,012
Interest Receivable 822 760
Other Assets 2,577 2,541
--------- ---------
Total Assets $ 208,813 $ 207,733
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest Bearing $ 16,358 $ 15,758
Interest Bearing 158,797 156,474
--------- ---------
Total Deposits 175,155 172,232
Short Term Borrowings 6,618 7,540
Long Term Debt 3,673 4,649
Interest Payable 390 392
Other Liabilities 284 362
--------- ---------
Total Liabilities 186,120 185,175
--------- ---------
Commitments and Contingent Liabilities - -
Shareholders' Equity -
Common Stock - No Par Value
5,000,000 shares authorized, 2,376,000 issued
and 2,211,014 outstanding 1,237 1,237
Capital Surplus 1,513 1,513
Retained Earnings 22,743 22,034
Accumulated Other Comprehensive Income (83) 491
Treasury Stock - 164,986 shares at cost (2,717) (2,717)
--------- ---------
Total Shareholders' Equity 22,693 22,558
--------- ---------
Total Liabilities and Shareholders' Equity $ 208,813 $ 207,733
========= =========
The accompanying notes are an integral part of the condensed consolidated
financial statements
3
COMBANC, INC. AND SUBSIDIARY
June 30, 2004 FORM 10-Q
COMBANC, INC. AND SUBSIDIARY
DELPHOS, OHIO
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share data)
For the Three Months Ended
June 30,
--------------------------
(unaudited)
2004 2003
------ ------
Interest Income:
Loans Receivable $1,986 $2,218
Investments Securities
Taxable 412 409
Tax-Exempt 113 146
Federal Funds Sold 24 28
------ ------
Total Interest Income 2,535 2,801
------ ------
Interest Expense:
Deposits 611 778
Short-Term Borrowings 25 16
Long-Term Debt 53 94
------ ------
Total Interest Expense 689 888
------ ------
Net Interest Income 1,846 1,913
Provision for Loan Losses - 180
------ ------
Net Interest Income after Provision for Loan Losses 1,846 1,733
Other Income:
Service Charges on Deposit Accounts 142 141
Gain on Sale of Loans 41 174
Other Income 218 147
------ ------
Total Other Income 401 462
------ ------
Other Expenses:
Salaries and Employee Benefits 924 839
Net Occupancy 89 94
Equipment Expenses 82 81
Data Processing Fees 101 86
Advertising 39 51
Printing and Office Supplies 39 37
Legal and Professional Fees 116 64
Dues and Memberships 64 57
State Taxes 73 59
Other Expense 177 223
------ ------
Total Other Expenses 1,704 1,591
------ ------
Income - before Income Tax 543 604
Income Tax Expense 142 133
------ ------
Net Income $ 401 $ 471
====== ======
Earnings Per Share $ 0.18 $ 0.21
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
June 30, 2004 FORM 10-Q
COMBANC, INC. AND SUBSIDIARY
DELPHOS, OHIO
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
($ in thousands, except per share data)
For the Six Months Ended
June 30,
------------------------
(unaudited)
2004 2003
------ -------
Interest Income:
Loans Receivable $3,936 $ 4,451
Investments Securities
Taxable 836 854
Tax-Exempt 234 293
Federal Funds Sold 48 48
------ -------
Total Interest Income 5,054 5,646
------ -------
Interest Expense:
Deposits 1,225 1,613
Short-Term Borrowings 48 30
Long-Term Debt 114 208
------ -------
Total Interest Expense 1,387 1,851
------ -------
Net Interest Income 3,667 3,795
Provision for Loan Losses 60 1,910
------ -------
Net Interest Income after Provision for Loan Losses 3,607 1,885
Other Income:
Service Charges on Deposit Accounts 269 269
Net Realized Gains on Sales of Available-for-
sale Securities 15 -
Gain on Sale of Loans 82 285
Other Income 311 318
------ -------
Total Other Income 677 872
------ -------
Other Expenses:
Salaries and Employee Benefits 1,721 1,654
Net Occupancy 195 193
Equipment Expenses 169 171
Data Processing Fees 200 179
Advertising 70 103
Printing and Office Supplies 67 72
Legal and Professional Fees 236 120
Dues and Memberships 136 124
State Taxes 133 119
Other Expense 425 371
------ -------
Total Other Expenses 3,352 3,106
------ -------
Income/Loss - before Income Tax (Credit)/Expense 932 (349)
Income Tax (Credit)/Expense 223 (238)
------ -------
Net Income/(Loss) $ 709 $ (111)
====== =======
Earnings/(Loss) Per Share $ 0.32 $ (0.05)
Cash Dividends Per Share $ 0.00 $ 0.24
The accompanying notes are an integral part of the condensed consolidated
financial statements
5
COMBANC, INC. AND SUBSIDIARY
June 30, 2004 FORM 10-Q
COMBANC, INC. AND SUBSIDIARY
DELPHOS, OHIO
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands)
For the Six Months
June 30,
---------------------
2004 2003
-------- --------
(unaudited)
Cash Flows from Operating Activities:
Net Income/(Loss) $ 709 $ (111)
Adjustments to Reconcile Net Income to
Net Cash Provided/(Used) by Operating Activities -
Depreciation and amortization 197 204
Provision for Loan Loss 60 1,910
Investment Securities Gains (15) -
Federal Home Loan Bank stock Dividends (35) (34)
Investment securities amortization (accretion), Net 227 189
Proceeds From Sale of Loans Held For Sale 7,183 25,866
Originations of Loans Held For Sale (7,233) (27,667)
Gain From Sale of Loans (82) (285)
Net Change in
Interest receivable (62) (55)
Interest payable (2) (93)
Other assets (37) (290)
Other liabilities 218 (218)
-------- --------
Net Cash Provided/(Used) by Operating Activities 1,128 (584)
-------- --------
Cash Flows from Investing Activities:
Purchases of Securities Available for Sale/FHLB Stock (19,104) (17,877)
Proceeds from Maturities of Securities
Available for Sale 9,480 15,446
Proceeds from Sales of Securities
Available for Sale 2,604 -
Net Change in Loans 4,888 6,521
Purchases of Premises and Equipment (86) (68)
-------- --------
Net Cash (Used)/Provided by Investing Activities (2,218) 4,022
-------- --------
Cash Flows from Financing Activities:
Net change in
Noninterest-bearing, Interest-bearing Demand and
Savings Deposits 1,852 (1,025)
Certificates and Other Time Deposits 1,070 (3,477)
Short-term Borrowings (922) 122
Repayment of Long-term Debt (975) (2,509)
Dividends Paid - (531)
-------- --------
Net Cash Provided/(Used) by Financing Activities 1,025 (7,420)
-------- --------
Net Change in Cash and Cash Equivalents (65) (3,982)
Cash and Cash Equivalents -
Beginning of Year 18,005 16,925
-------- --------
End of Period $ 17,940 $ 12,943
======== ========
The accompanying notes are an integral part of the condensed consolidated
financial statements
6
COMBANC, INC. AND SUBSIDIARY
June 30, 2004 FORM 10-Q
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2004
Note 1, Basis of Presentation
Certain information and note disclosures normally included in the Company's
annual financial statements prepared in accordance with accounting principles
generally accepted in the United States of America have been condensed or
omitted. These condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and notes thereto
included in the Company's Form 10-K annual report for 2003 filed with the
Securities and Exchange Commission.
The significant accounting policies followed by ComBanc, Inc. (Company) and its
wholly-owned subsidiary, The Commercial Bank (Bank), for interim financial
reporting are consistent with the accounting policies followed for annual
financial reporting. All adjustments which are, in the opinion of management,
necessary for a fair presentation of the results for the periods reported,
consisting only of normal recurring adjustments, have been included in the
accompanying unaudited condensed consolidated financial statements. The results
of operations for the six months ended June 30, 2004 and for the three months
ended June 30, 2004 are not necessarily indicative of those expected for the
remainder of the year.
The Condensed Consolidated Balance Sheet at December 31, 2003 has been taken
from audited consolidated financial statements at that date.
Note 2, Earnings Per Share
Earnings per share on the income statement has been computed on the basis of
weighted-average number of shares of common stock outstanding. The
weighted-average shares outstanding for the six months ending June 30, 2004 and
June 30, 2003 were 2,211,014.
Note 3, Commitments and Contingent Liabilities
Outstanding commitments to originate loans were $17,344,000 and $20,770,000 at
June 30, 2004 and December 31, 2003, respectively.
Note 4, Allowance for Loan Losses
Credit risk is the risk of loss from a customer default on a loan. The Bank has
in place a process to identify and manage its credit risk. The process includes
initial credit review and approval, periodic monitoring to measure compliance
with credit agreements and internal credit policies, monitoring changes in the
risk ratings of loans and leases, identification of problem loans and special
procedures for the collection of problem loans. The risk of loss is difficult to
quantify and is subject to fluctuations in values and general economic
conditions and other factors. THE DETERMINATION OF THE ALLOWANCE FOR LOAN LOSSES
IS A CRITICAL ACCOUNTING POLICY WHICH INVOLVES ESTIMATES AND MANAGEMENT'S
JUDGMENT ON A NUMBER OF FACTORS SUCH AS NET CHARGE-OFFS, DELINQUENCIES IN THE
LOAN PORTFOLIO AND GENERAL ECONOMIC
7
COMBANC, INC. AND SUBSIDIARY
June 30, 2004 FORM 10-Q
CONDITIONS. The Bank considers the allowance for loan losses of $3,956,000
adequate to cover losses inherent in the loan portfolios as of June 30, 2004.
However, no assurance can be given that the Bank will not, in any particular
period, sustain loan losses that are sizeable in relation to the amount
reserved, or that subsequent evaluations of the loan portfolio, in light of
factors then prevailing, 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, Subsequent Events
The Company and the Bank entered into an Agreement and Plan of Merger dated as
of August 4, 2004 by and among First Defiance Financial Corp., First Federal
Bank of the Midwest, the Company and the Bank (the "Agreement and Plan of
Merger"). A copy of the Agreement and Plan of Merger was attached as an exhibit
to the Company's Current Report on Form 8-K, which was filed with the SEC on
August 5, 2004. The agreement and plan have been filed with the Securities and
Exchange Commission and may be viewed on the website maintained by the SEC at
http://www.sec.gov.
8
COMBANC, INC. AND SUBSIDIARY
June 30, 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),
9
COMBANC, INC. AND SUBSIDIARY
June 30, 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 June 30, 2004 stood at $4,022,000 as compared to $6,948,000 as of
December 31, 2003. This decrease represents a 42.1% improvement since
10
COMBANC, INC. AND SUBSIDIARY
June 30, 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
Dollars in Thousands
6/30/2004 12/31/2003 12/31/2002 12/31/2001 12/31/2000
Past due 30 to 89 days and still accruing $ 1,667 $ 2,758 $ 6,672 $ 9,863 $ 4,502
Past due 90 days or more and still accruing 185 680 798 2,810 2,587
Nonaccrual 2,170 3,510 8,456 3,455 542
------- ------- ------- ------- -------
Total delinquencies $ 4,022 $ 6,948 $15,926 $16,128 $ 7,631
======= ======= ======= ======= =======
Total Delinquencies as a percentage of total loans 3.25% 5.40% 11.37% 10.31% 4.50%
Total assets increased $1,080,000 or .5% from $207,733,000 at December 31, 2003
to $208,813,000 at June 30, 2004. This is the result of a $6 million increase in
the investment portfolio less a $5 million decrease in the loan portfolio. This
increase was funded through an increase of $3 million in total deposits less a
decrease of $1 million in short term borrowings and a decrease of $1 million in
long term debt during the first six months of 2004.
Investment securities increased $5,938,000 from $55,052,000 at December 31, 2003
to $60,990,000 at June 30, 2004. This increase is the result of $19,104,000 in
purchases less the pay downs from Mortgage-backed securities and the maturity of
a U.S. Agency Bond totaling $9,480,000, the sale of $2,590,000 of municipal and
mortgage-backed securities, premium amortization of $227,000, and a decrease in
the market value of the available-for-sale portfolio of $869,000.
Total gross loans decreased 3.7% or $4,817,000 from December 31, 2003 to
$124,072,000 at June 30, 2004. The breakdown of the loan portfolio is detailed
in table 2 below. A significant change in the portfolio includes a decrease in
construction and land development loans. This decrease is the result of the
completion of a large construction loan and being converted to an amortized real
estate secured by nonfarm, nonresidential loan. Another significant change
includes 1-4 family secured by first lien mortgages. These loans decreased by
$1,544,000 due to additional refinancing and the Bank selling the loans to the
secondary market. As can be seen in Table 2, secondary market lending to FHLMC
has dropped off significantly to net growth of $1,136,000 in the first two
quarters of 2004. The decrease in sales to FHLMC is due to the increase of
interest rates on the long end of the yield curve by approximately 50 basis
points. These loans will continue to generate service fee income at .25% per
year over the life of the loan, which currently amounts to approximately
$159,000 annually. Another significant change in the portfolio includes a
$1,174,000 decrease in consumer loans. This decrease is due to management's
continued desire to decrease consumer loans due to the amount of risk that they
carry.
11
COMBANC, INC. AND SUBSIDIARY
June 30, 2004 FORM 10-Q
TABLE 2: Analysis of Loan Portfolio Composition
Dollars in Thousands
LOAN TYPE
6/30/2004 12/31/2003 DIFFERENCE %
Construction/Land Development $ 6,405 $ 7,305 $ (900) -12.32%
R/E Secured by Farmland 4,558 4,598 (40) -0.87%
Revol Open-end 1-4 Family LOC 5,115 5,294 (179) -3.38%
1-4 Secured by First 33,568 35,112 (1,544) -4.40%
1-4 Secured by Junior 585 550 35 6.36%
R/E Secured by Multi Family R/E 3,105 3,179 (74) -2.33%
R/E Secured by Nonfarm, Nonres 47,067 46,977 90 0.19%
Ag Loans 2,076 2,449 (373) -15.23%
Commercial Loans 12,171 12,607 (436) -3.46%
Municipal Loans 1,026 1,100 (74) -6.73%
Master Card Loans 545 566 (21) -3.71%
Other Consumer 11 7 4 57.14%
Consumer Loans 7,819 8,993 (1,174) -13.05%
Overdrafts 21 19 2 10.53%
-------- -------- -------- ------
Total Loans 124,072 128,756 (4,684) -3.64%
Loan Loss Reserve 3,956 3,825 131 3.42%
-------- -------- -------- ------
Total Net Loans $120,116 $124,931 $ (4,815) -3.85%
======== ======== ======== ======
Serviced FHLMC Mortgages 64,596 63,460 1,136 1.79%
-------- -------- -------- ------
Total Loans Serviced $184,712 $188,391 $ (3,679) -1.95%
======== ======== ======== ======
The Allowance for Loan Losses at June 30, 2004 was 3.1% of total loans compared
to 3.0% at December 31, 2003. This $131,000 increase from December 31, 2003 is
the result of a $60,000 provision and net recoveries of $71,000, increasing the
Allowance for Loan Loss from $3,825,000 at December 31, 2003 to $3,956,000 at
June 30, 2004. Table 3 below illustrates an analysis of the Allowance for Loan
and Lease Losses over the past five years.
12
COMBANC, INC. AND SUBSIDIARY
June 30, 2004 FORM 10-Q
TABLE 3: Analysis of Changes in Allowance for Loan and Lease Losses
Dollars in Thousands
For the
Six
Months
Ended For the Years Ended
--------- -------------------------------------------
6/30/2004 12/31/2003 12/31/2002 12/31/2001 12/31/2000
--------- ---------- ---------- ---------- ----------
Balance of Allowance at Beginning of Year $ 3,825 $ 2,050 $ 1,815 $ 1,331 $ 1,832
------- ------- ------- ------- -------
Loans Actually Charged Off -
Real Estate - Construction -- 141 -- -- --
Real Estate - Mortgage 135 444 317 -- --
Commercial, Financial and Agricultural -- 1,706 811 281 96
Installment and Credit Card 39 284 307 548 890
------- ------- ------- ------- -------
174 2,575 1,435 829 986
------- ------- ------- ------- -------
Recoveries of Loans Previously Charged Off -
Real Estate - Construction 34 -- -- -- --
Real Estate - Mortgage 29 -- -- 11 --
Commercial, Financial and Agricultural 155 75 599 458 10
Installment and Credit Card 27 95 96 54 55
------- ------- ------- ------- -------
245 170 695 523 65
------- ------- ------- ------- -------
Net Charge-Offs (Recoveries) (71) 2,405 740 306 921
------- ------- ------- ------- -------
Addition to Allowance Charged to Expense 60 4,180 975 790 420
------- ------- ------- ------- -------
Balance of Allowance at Period-End $ 3,956 $ 3,825 $ 2,050 $ 1,815 $ 1,331
======= ======= ======= ======= =======
Ratio of Net Charge-Offs to Avg. Loans Outstanding -0.06% 1.79% 0.51% 0.18% 0.55%
Ratio of Allowance for Credit Losses to Total Loans 3.19% 2.97% 1.46% 1.15% 0.79%
Total deposits increased $2,923,000 or 1.7% from December 31, 2003 to June 30,
2004. Table 4 below shows a breakdown of deposits by type at both June 30, 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
(Dollars in Thousands)
DEPOSIT TYPE
6/30/2004 12/31/2003 DIFFERENCE %
Non-interest Bearing DDA $ 16,358 $ 15,758 $ 600 3.81%
NOW Accounts 24,967 25,017 (50) -0.20%
MMKT Savings 12,742 12,139 603 4.97%
Savings 33,792 33,093 699 2.11%
Time Deposits 87,296 86,225 1,071 1.24%
-------- -------- -------- -------
Total Deposits $175,155 $172,232 $ 2,923 1.70%
======== ======== ======== =======
Short-term borrowings, which are repurchase agreements, decreased $922,000 from
December 31, 2003 to June 30, 2004. Long-term debt or borrowings with an
original maturity of greater than one year from the Federal Home Loan Bank
decreased $976,000 or 21.0% from December 31, 2003 to June 30, 2004. This
decrease is due to a maturing advance, 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.
13
COMBANC, INC. AND SUBSIDIARY
June 30, 2004 FORM 10-Q
Total shareholders equity increased $135,000 from December 31, 2003 to June 30,
2004. Included in the overall increase was an increase in retained earnings of
$709,000, which was solely comprised of net income, while there was a decrease
of $574,000 in Accumulated Other Comprehensive Income, which is the unrealized
gain/loss on the available-for-sale securities portfolio net of federal income
tax. Interest rates have increased throughout the quarter, causing the value of
the investment portfolio to depreciate. No Treasury Stock was repurchased in the
first two quarters of 2004.
RESULTS OF OPERATIONS
Six Months Ended June 30, 2004 compared to Six Months Ended June 30, 2003
Net income for the first two quarters of 2004 was $709,000 or $0.32 per share.
This represents an increase of $0.37 per share compared to the first two
quarters of 2003. Annualized Return on average assets was 0.67% for the first
two quarters of 2004, up from -.11% for the first quarter of 2003. Annualized
return on average equity increased to 6.22% for the first two quarters of 2004
from -.94% for the first two quarters of 2003.
The most significant income statement changes between the six months ended June
30, 2004 and the six months ended June 30, 2003 were as follows:
- The provision for loan losses has decreased $1,850,000 in the first
two quarters of 2004. At year end 2003, management chose to have a
complete loan review of the portfolio by an external consultant. At
that time, all classified assets were allocated for in the allowance
for loan losses charged to 2003 earnings. At June 30, 2004,
management believes the allowance for loan losses is sufficient to
cover all known losses. As a result, only $60,000 was charged to
provision for loan losses in the first two quarters of 2004.
- Total noninterest income decreased $195,000 in the first two
quarters of 2004 compared to 2003. This decrease is the result of a
$203,000 decrease in gain on sale of loans sold to FHLMC. As
interest rates continue to rise, sales of loans to FHLMC will
continue to decrease.
- Total noninterest expense increased $246,000 in the first two
quarters of 2004 compared to the first two quarters of 2003. This is
the result of an $116,000 increase in legal and professional fees
which is due to additional expense incurred to address the Written
Agreement, shareholder litigation and related matters. There was
also an increase in Salaries and Employee Benefits in the amount of
$67,000, which is the result of a $45,000 increase in employee
retirement benefits.
- Other expense increased $54,000 in the first two quarters of 2004 as
compared to the first two quarters of 2003. This increase is the
result of a $17,000 increase in insurance premiums, a $13,000
increase in repossession expense and a $70,000 increase in loss on
sale of other real estate owned, while there was a $39,000 decrease
in mortgage servicing rights.
- Net interest income decreased $128,000 or 3.4% in the first two
quarters of 2004 compared to the first two quarters of 2003.
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
$8,847,000 since June 30, 2003. The decrease in loan balances is due
to the large volume of 1 to 4 family residential loans sold to the
secondary market in 2003 and management pricing higher risk
commercial and consumer loans above the competition and allowing
those loans to leave the institution. Although net interest income
has decreased, net interest margin for the first two quarters
remains strong at 3.90%.
14
COMBANC, INC. AND SUBSIDIARY
June 30, 2004 FORM 10-Q
Three Months Ended June 30, 2004 compared to Three Months Ended June 30, 2003
Net income for the second quarter of 2004 was $401,000 or $0.18 per share. This
represents a decrease of $0.03 per share compared to the second quarter of 2003.
Annualized Return on average assets was 0.76% for the second quarter of 2004,
down from .90% for the second quarter of 2003. Annualized return on average
equity decreased to 7.03% for the second quarter of 2004 from 7.96% for the
second quarter of 2003.
The most significant income statement changes between the three months ended
June 30, 2004 and the three months ended June 30, 2003 were as follows:
- The provision for loan losses has decreased $180,000 in the second
quarter of 2004. There was no provision recorded in the second
quarter of 2004. The lower provision was due in part to the
Company's experience in the first two quarters of 2004, which showed
net recoveries of $71,000. Provisions for loan losses are charged to
earnings to bring the total allowance for loan losses to the level
deemed appropriate by management based on the following factors:
historical experience; the volume and type of lending conducted by
ComBanc, Inc.; the amount of non-performing assets, including loans
which meet the FASB Statement No. 114 definition of impaired; the
amount of assets graded by management as substandard, doubtful, or
loss; industry standards; general economic conditions, particularly
as they relate to ComBanc, Inc's market area; and other factors
related to the collectibility of ComBanc, Inc's loan portfolio. As
of June 30, 2004, management believes the balance of the allowance
for loan losses is appropriate.
- In the second quarter of 2004, net interest income decreased $67,000
compared to the second quarter of 2003. The decrease in the cost of
funds did not fully offset the decrease in interest on interest
earning assets. The decrease is also due to a decrease in loan
balances of $8,847,000 from $132,786,000 at June 30, 2003 to
$123,939,000 at June 30, 2004. As loan balances decreased, the
proceeds were invested in short-term, lower rate investment
securities. Management chooses to invest in shorter term securities
to allow for additional liquidity as interest rates begin to rise.
- Total noninterest income decreased $61,000 in the second quarter of
2004 as compared to the second quarter of 2003. Included in the
decrease is a $133,000 decrease in gain on sale of loans to FHLMC.
Since June 30, 2003, 15 year secondary market mortgage rates have
gone up 100 basis points from 4.50% at June 30, 2003 to 5.50% at
June 30, 2004. As a result of this 100 basis point increase,
mortgage refinances and purchases have slowed drastically causing a
drastic decrease in gain on sale of loans. While there was a
$133,000 decrease in gain on sale of loans, there was a $71,000
increase in other income. In June of 2004, mortgage servicing right
impairments in the amount of $102,000 were recaptured. With the
approximately 50 basis point rise in interest rates in the second
quarter, prepayment speeds on mortgages slowed significantly causing
the value of mortgage servicing rights to increase.
- Total noninterest expense increased $113,000 in the second quarter
of 2004 versus the second quarter of 2003. Included in the increase
is an increase of $52,000 in legal and professional fees which are
the result of additional expense incurred to address the Written
Agreement, shareholder litigation and related matters. Also included
in the increase is an $85,000 increase in salaries and employee
benefits, of which, $75,000 is an increase in employee retirement
benefits.
15
COMBANC, INC. AND SUBSIDIARY
June 30, 2004 FORM 10-Q
REGULATORY CAPITAL
The Federal Reserve Board's risk-based capital guidelines addressing the capital
adequacy of bank holding companies and banks (collectively, "banking
organizations") include a definition of capital and a framework for calculating
risk-weighted assets and off-balance sheet items to broad risk categories, as
well as minimum ratios to be maintained by banking organizations. A banking
organization's risk-based capital ratios are calculated by dividing its
qualifying capital by its risk-weighted assets.
Under the risk-based capital guidelines, there are two categories of capital:
core capital ("Tier 1") and supplemental capital ("Tier 2"), collectively
referred to as Total Capital. Tier 1 Capital includes common stockholders'
equity, qualifying perpetual preferred stock and minority interest in equity
accounts of consolidated subsidiaries. Tier 2 capital includes perpetual
preferred stock (to the extent ineligible for Tier 1), hybrid capital
instruments (i.e., perpetual debt and mandatory convertible securities) and
limited amounts of subordinated debt, intermediate-term preferred stock and the
allowance for credit losses.
The Federal Reserve Board's leverage constraint guidelines establish a minimum
ratio of Tier 1 Capital to quarterly average total assets ("Leverage Ratio").
The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA")
established five capital tiers for banks. Pursuant to that statute the federal
bank regulatory agencies have defined the five capital tiers for banks. Under
these regulations, a bank is defined to be well capitalized, the highest tier,
if it maintains a Tier 1 Capital ratio of at least 6 percent, a Total Capital
ratio of at least 10 percent and a Leverage Ratio of at least 5 percent. At June
30, 2004 ComBanc, Inc. maintained a Tier I capital ratio of 18.21%, a total
capital ratio of 19.48% and a Tier I leverage ratio of 10.78%.
Based on the respective regulatory capital ratios at June 30, 2004, and based on
the definitions in the regulations issued by the Federal Reserve Board and the
other federal bank regulatory agencies setting forth the general capital
requirements mandated by FDICIA, the Bank is well capitalized.
LIQUIDITY
The liquidity of a banking institution reflects its ability to provide funds to
meet loan requests, to accommodate possible outflows in deposits and to take
advantage of interest rate market opportunities. Funding of loan requests,
providing for liability outflows, and management of interest rate fluctuations
require continuous analysis in order to match the maturities of specific
categories of short-term loans and investments with specific types of deposits
and borrowings. Bank liquidity is thus normally considered in terms of the
nature and mix of the banking institution's sources and uses of funds. Liquid
assets consist of cash and due from banks, federal funds sold, and securities
available for sale. At June 30, 2004 the Bank's liquid assets amounted to
$78,930,000 or 37.8% of total assets compared with 35.2% at December 31, 2003.
Management considers its liquidity to be adequate to meet its normal funding
requirements.
16
COMBANC, INC. AND SUBSIDIARY
June 30, 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. As discussed in the 2003
Annual Report on Form 10-K, ComBanc, Inc's ability to maximize net income is
dependent on management's ability to plan and control net interest income
through management of the pricing and mix of assets and liabilities. Because a
large portion of assets and liabilities of ComBanc, Inc. are monetary in nature,
changes in interest rates and monetary or fiscal policy affect its financial
condition and can have a significant impact on the net income of the Company.
ComBanc, Inc does not use off balance sheet derivatives to enhance its risk
management, nor does it engage in trading activities beyond the sale of mortgage
loans.
ComBanc, Inc. monitors its exposure to interest rate risk on a monthly basis
through simulation analysis which measures the impact changes in interest rates
can have on net income. The simulation technique analyzes the effect of a
presumed 200 basis point shift in interest rates and takes into account
prepayment speeds on amortizing financial instruments, loan and deposit volumes
and rates, nonmaturity deposit assumptions and capital requirements. The results
of the simulation indicate that in an environment where interest rates rise or
fall 200 basis points over a 12 month period, using June 2004 amounts as a base
case, ComBanc, Inc's net interest income would be impacted by less than the
board mandated guidelines of 15%.
Item 4 - Controls and Procedures
Under the supervision and with the participation of our management, including
the Chief Executive Officer and principal financial officer, we have evaluated
the effectiveness of the design and operation of our disclosure controls and
procedures as defined in Exchange Act Rule 13a-15(e) and Exchange Act Rule 15d -
15(e) as of the end of the period covered by this report. Based on that
evaluation, our Chief Executive Officer and principal financial officer have
concluded that the Company's disclosure controls and procedures are effective to
ensure that information required to be disclosed in reports the Company files or
submits under the Exchange Act is recorded, processed, summarized and reported,
within the time periods specified in the SEC's rules and forms. There were no
changes in our internal control over financial reporting during the period
covered by this report that have materially affected, or that are reasonably
likely to materially affect, our internal control over financial reporting.
17
COMBANC, INC. AND SUBSIDIARY
June 30, 2004 FORM 10-Q
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
On June 2, 2004, Paul D. Harter, a shareholder of ComBanc, Inc., filed an action
in the Court of Common Pleas for Allen County, Ohio (the "Court") against the
Board of Directors of ComBanc, Inc. (Paul D. Harter V. Board of Directors,
ComBanc, Inc. et al. Case No. CV20040531). On May 28, 2004, Mr. Harter submitted
written consents of shareholders requesting the Company to call a special
shareholders meeting "to determine by shareholder vote whether current members
of the Board should be removed and replaced." The Company's Board of Directors
declined to call the requested shareholders meeting because it believed the
requests had been solicited by Mr. Harter in violation of Section 14(a) of the
Securities Exchange Act of 1934 and Regulation 14A promulgated thereunder and
were therefore invalid. Mr. Harter filed the action seeking to compel the
Company to call a special meeting. The Company believes the action is without
merit and intends to vigorously defend its position.
Additionally, the Bank, at any given time, is involved in a number of lawsuits
initiated by the Bank as a plaintiff, intending to collect upon delinquent
accounts, to foreclose upon real property, or to seize and sell personal
property pledged as security for any such account. At June 30, 2004, the Bank
was involved in a number of such cases as a party-plaintiff, and occasionally,
as a party-defendant due to its joinder as a lien holder, either by mortgage or
by judgment lien. In the ordinary case, the Bank's security and value of its
lien is not threatened, except through bankruptcy or loss of value of the
collateral should sale result in insufficient proceeds to satisfy the judgment.
Paul D. Harter v. Board of Directors, ComBanc, Inc. et al. Case No. CV2004-0531.
Item 4 - Submission of Matters to a Vote of Security Holders
The annual meeting of stockholders of ComBanc, Inc. was held on April 12, 2004.
Based upon the report of the Inspector of Elections on the matters voted upon at
this meeting the number of Directors for the ensuing year was fixed at six (6).
The following were elected as Directors until the 2005 Annual Meeting of
Shareholders and until their successors are elected and qualified:
Director For Against Abstain
----------------------- --------- ------- -------
Mr. Gary A. DeWyer 1,251,504 517,357 442,153
Mr. Richard R. Thompson 1,231,454 537,407 442,153
Mr. Dwain I. Metzger 1,224,362 544,499 442,153
Mr. C. Stanley Strayer 1,224,768 544,093 442,153
Mr. Paul G. Wreede 1,202,357 566,504 442,153
Mr. Ronald R. Elwer 1,221,956 546,905 442,153
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
18
COMBANC, INC. AND SUBSIDIARY
June 30, 2004 FORM 10-Q
(b)
I. A report on Form 8-K, reported under Items 12 and 7, was filed
with the SEC on April 9, 2004, which included Condensed
Consolidated Balance Sheets as of March 31, 2004 and December
31, 2003, Condensed Consolidated Statements of Income For the
Three Months Ended March 31, 2004 and March 31, 2003 and
Condensed Consolidated Statements of Cash Flows For the Three
Months March 31, 2004 and March 31, 2003.
II. A second report on Form 8-K, reported under Items 5 and 7, was
filed with the SEC on May 18, 2004, which included Condensed
Consolidated Balance Sheets as of March 31, 2004 and December
31, 2003 and Condensed Consolidated Statements of Income For
the Three Months Ended March 31, 2004 and March 31, 2003.
III. A third report on Form 8-K, reported under Items 5 and 7, was
filed on June 1, 2004 with the SEC.
IV. A fourth report on Form 8-K, reported under Items 7 and 12,
was filed with the SEC on July 16, 2004, which included
Condensed Consolidated Balance Sheets as of June 30, 2004 and
December 31, 2003, Condensed Consolidated Statements of
Operations For the Three Months Ended June 30, 2004 and June
30, 2003, Condensed Consolidated Statements of Operations For
the Six Months Ended June 30, 2004 and June 30, 2003 and
Condensed Consolidated Statements of Cash Flows For the Six
Months June 30, 2004 and June 30, 2003.
V. A Fifth report on Form 8-K, reported under Items 5 and 7, was
filed with the SEC on August 5, 2004, which included as
exhibits, a News Release dated August 4, 2004 and an Agreement
and Plan of Merger dated as of August 4, 2004 by and among
First Defiance Financial Corp., First Federal Bank of the
Midwest, ComBanc, Inc. and The Commercial Bank.
19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMBANC, INC.
Date: August 13, 2004 /s/ Paul G. Wreede
------------------
Paul G. Wreede
President, CEO, and Director
Date: August 13, 2004 /s/ Jason R. Thornell
---------------------
Jason R. Thornell
VP/Controller
20
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
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