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, 2002 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. ------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 34-1853493 ------------------------------------------------------------------------------- (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 ------------------------------------------------------------------------------- (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 ------------------------------------------------------------------------------- (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] Based on the actual trade price of the Common Shares of the Registrant on February 1, 2003, the aggregate market value of the Common Shares of the Registrant held by non-affiliates on that date was $35,928,978. 2,211,014 shares of the registrant's common shares were outstanding on February 1, 2003. Documents Incorporated by Reference: Portions of the definitive Proxy Statement for the 2003 Annual Meeting of Shareholders for the fiscal year ended December 31, 2002, which is to be filed within 120 days of the end of the Company's fiscal year, are incorporated by reference into Part III of this Form 10-K. The incorporation by reference of portions of the Proxy Statement shall not be deemed to incorporate by reference the information referred to in Item 402 (a) (8) of Regulation S-K. Page 1 of 70 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, 2003, the Company had 85 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 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. The Bank competes for deposits with other commercial banks, savings banks, saving and loan 2 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 conditions, including holding companies and state member banks based on their particular circumstances and risk profiles and those experiencing or anticipating significant growth. 3 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. 4 LOAN PORTFOLIO The amount of loans outstanding and the percent of the total represented by each type on the dates indicated were as follows: 2002 2001 2000 ------------------------------- ---------------------------------- -------------------- (Dollars in Thousands) Real Estate Loans: Construction $ 7,542 5.4% $ 9,827 6.3% $ 7,734 Mortgage 99,890 71.3% 107,006 68.4% 118,488 Commercial, Financial and Agricultural Loans 18,890 13.5% 22,026 14.1% 22,400 Installment and Credit Card Loans 12,418 8.8% 16,192 10.4% 19,298 Other Loans 11 0.0% 67 0.0% 46 Municipal Loans 1,340 1.0% 1,272 0.8% 1,564 ------------ ------------ -------------- ------------ -------------- Total 140,091 100.0% 156,390 100.0% 169,530 ============ ============ Less: Allowance for Credit Losses 2,050 1,815 1,331 ------------ -------------- -------------- Total Net Loans $ 138,041 $ 154,575 $ 168,199 ============ ============== ============== 2000 1999 1998 ------------------ --------------------------------- -------------------------------- (Dollars in Thousands) Real Estate Loans: Construction 4.6% $ 8,701 5.4% $ 6,727 4.7% Mortgage 69.9% 109,086 67.3% 91,442 64.3% Commercial, Financial and Agricultural Loans 13.2% 21,966 13.6% 17,937 12.6% Installment and Credit Card Loans 11.4% 21,192 13.1% 25,192 17.7% Other Loans 0.0% 35 0.0% 51 0.0% Municipal Loans 0.9% 978 0.6% 1,061 0.7% ----------- -------------- ------------ -------------- ------------ Total 100.0% 161,958 100.0% 142,410 100.0% =========== ============ ============ Less: Allowance for Credit Losses 1,832 1,800 -------------- -------------- Total Net Loans $ 160,126 $ 140,610 ============== ============== 5 The following table shows the maturity and repricing schedule of loans outstanding as of December 31, 2002. The amounts are also classified according to their sensitivity to changes in interest rates: After 1 Within But Within After 1 Year Five Years Five Years Total FIXED RATE LOANS: Real Estate - Construction $ 4,223 $ 2,860 $ 459 $ 7,542 Commercial 5,063 3,811 1,411 10,285 ADJUSTABLE RATE LOANS: Real Estate - Construction - - - - Commercial 8,187 418 - 8,605 TOTAL FIXED AND ADJUSTABLE RATE: Real Estate - Construction $ 4,223 $ 2,860 $ 459 $ 7,542 Commercial 13,250 4,229 1,411 18,890 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 $40,667,000 as of December 31, 2002. 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 6 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 76.8% of the Bank's portfolio with a balance of $108,160,000 at December 31, 2002. Real estate construction loans represent 7.0% or $7,542,000 of the real estate loan portfolio at December 31, 2002. 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 13.4% or $18,890,000 of the Bank's loan portfolio at December 31, 2002. Municipal loans totaled $1,340,000 or 1.0% 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 $12,418,000 or 8.8% of total loans at December 31, 2002. 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 7 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, ------------------------------------------------------------------------ 2002 2001 2000 1999 1998 ---------- ---------- -------- -------- -------- Non-Accrual $ 8,456 $ 3,455 $ 542 $ 712 $ 805 Contractually Past Due 90 Days or More as to Principal or Interest 798 2,810 2,587 2,413 621 ---------- ---------- -------- -------- -------- $ 9,254 $ 6,265 $ 3,129 $ 3,125 $ 1,426 ========== ========== ======== ======== ======== Non-Performing Loans to Total Loans 6.57% 3.96% 1.85% 1.93% 1.00% As of December 31, 2002, 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, 2002, the Bank's percentage of non-performing loans to total loans was 6.57% as compared to 3.96% of total loans at December 31, 2001. 8 SUMMARY OF CREDIT LOSS EXPERIENCE (Dollars in Thousands) Year Ended December 31, 2002 2001 2000 1999 1998 ------ ------ ------ ------ ------ Balance of Allowance at Beginning of Year $1,815 $1,331 $1,832 $1,800 $1,639 ------ ------ ------ ------ ------ Loans Actually Charged Off - Real Estate - Construction - - - - - Real Estate - Mortgage 317 - - - 15 Commercial, Financial and Agricultural 811 281 96 106 26 Installment and Credit Card 307 548 890 258 182 ------ ------ ------ ------ ------ 1,435 829 986 364 223 ------ ------ ------ ------ ------ Recoveries of Loans Previously Charged Off - Real Estate - Construction - - - - - Real Estate - Mortgage - 11 - - - Commercial, Financial and Agricultural 599 458 10 - 3 Installment and Credit Card 96 54 55 36 21 ------ ------ ------ ------ ------ 695 523 65 36 24 ------ ------ ------ ------ ------ Net Charge-Offs (Recoveries) 740 306 921 328 199 ------ ------ ------ ------ ------ Addition to Allowance Charged to Expense 975 790 420 360 360 ------ ------ ------ ------ ------ Balance of Allowance at Year-End $2,050 $1,815 $1,331 $1,832 $1,800 ====== ====== ====== ====== ====== Ratio of Net Charge-Offs to Avg. Loans Outstanding 0.51% 0.18% 0.55% 0.21% 0.15% Ratio of Allowance for Credit Losses to Total Loans 1.46% 1.15% 0.79% 1.14% 1.26% Allowance and Provision for Loan Losses. 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. 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 2002, the allowance had a balance of $2,050,000, or 1.46% of total loans, compared to $1,815,000, or 1.15% of total loans, at year end 2001. The provision for loan losses was $975,000 for the year ended December 31, 2002 compared to $790,000 for the year ended December 31, 2001. The increase in the reserve is the result of the addition to the allowance charged to expense which is the result of growing delinquencies occurring from a downturn in the economy. Additional 9 recoveries anticipated in the first and second quarters of 2003 will continue to fund the allowance. The weak economy will continue to affect delinquencies at least through the first half of 2003. 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, 2002 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. 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 $1,435,000 in 2002, $829,000 in 2001 and $986,000 in 2000. These totals represent a large loss in the commercial area in 2002 and in the installment area in 2001 and 2000. 10 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 three years. (Dollars in Thousands) 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 ================== ============== ============== =================== December 31, 2001 -------------------------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------ -------------- -------------- ------------------- Securities Available for Sale - Agency Securities $ 9,752 $ 198 $ 15 $ 9,935 Mortgaged Backed Securities 14,589 223 5 14,807 State and Municipal Securities 12,613 290 61 12,842 ------------------ -------------- -------------- ------------------- Total $ 36,954 $ 711 $ 81 $ 37,584 ================== ============== ============== =================== December 31, 2000 -------------------------------------------------------------------------------- Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------ -------------- -------------- ------------------- Securities Available for Sale - Agency Securities $ 18,958 $ 50 $ 130 $ 18,878 Mortgaged Backed Securities 10,762 102 47 10,817 State and Municipal Securities 10,339 241 15 10,565 ------------------ -------------- -------------- ------------------- Total $ 40,059 $ 393 $ 192 $ 40,260 ================== ============== ============== =================== 11 There are no investment securities of any single issuer where the aggregate carrying value of such securities exceeded 10% of shareholders' equity, except those of U. S. Treasury and U. S. Government agencies. The following table shows the maturities and weighted average yields of the Bank's investment securities as of December 31, 2002. The maturities of Mortgage-Backed Securities represent the actual maturity date of the security, and do not reflect 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 1 Year Within But Within 1 Year 5 Years ---------------------------- --------------------------- Amt Yield Amt Yield -------------- ---------- ------------- ---------- (Dollars in Thousands) U. S. Government Agencies $ 989 6.28% $ 3,004 5.33% Mortgage-Backed Securities 1,958 3.30% 7,031 5.76% Obligations of States and Political Subdivisions 932 7.60% 3,640 7.36% -------------- ------------- Total $ 3,879 $ 13,675 ============== ============= After 5 Years But Within After 10 Years 10 Years ------------------------------ ------------------------------- Amt Yield Amt Yield -------------- ------------ --------------- ------------ (Dollars in Thousands) U. S. Government Agencies $ 1,500 2.43% $ - Mortgage-Backed Securities 1,809 4.67% 24,777 4.65% Obligations of States and Political Subdivisions 4,864 7.06% 2,459 7.04% -------------- --------------- Total $ 8,173 $ 27,236 ============== =============== 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, ----------------------------------------------------------------------------------------- 2002 2001 2000 ----------------------------- --------------------------- ---------------------------- Average Average Average Average Average Average Balance Rate Balance Rate Balance Rate -------------- ------------ ----------- ------------- -------------- ----------- Noninterest-Bearing $ 14,690 0.00% $ 14,791 0.00% $ 14,680 0.00% Savings 30,186 1.09% 27,697 1.93% 27,201 2.32% NOW, Super NOW and Plus 33,188 1.01% 28,360 1.64% 27,685 1.96% Time 100,797 3.93% 108,079 5.68% 101,040 5.68% -------------- ----------- -------------- Total $ 178,861 $ 178,927 $ 170,606 ============== =========== ============== The maturity distribution of time deposits as of December 31, 2002 was: Less than $100,000 $100,000 and Over -------------- --------------- (Dollars In Thousands) --------------------------------- Three Months or Less $ 16,429 $ 5,298 Over Three Months Through Six Months 9,270 1,851 Over Six Months Through Twelve Months 23,284 6,398 Over Twelve Months 27,011 7,241 -------------- --------------- Total $ 75,994 $ 20,788 ============== =============== 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. 2002 2001 2000 --------- --------- --------- FEDERAL HOME LOAN BANK SHORT-TERM BORROWINGS Average Balance Outstanding $ 176 $ 6,748 $ 13,866 Maximum Amount Outstanding at any Month-End During the Period 600 6,925 19,368 Balance Outstanding at End of Period 0 925 6,000 Weighted Average Interest Rate During the Period 4.83% 4.43% 5.91% Weighted Average Interest Rate at End of Period n/a 5.06% 6.96% REPURCHASE AGREEMENTS Average Balance Outstanding $ 4,311 $ 3,505 $ 2,705 Maximum Amount Outstanding at any Month-End During the Period 6,318 4,481 3,299 Balance Outstanding at End of Period 5,946 3,052 3,259 Weighted Average Interest Rate During the Period 1.46% 3.22% 5.92% Weighted Average Interest Rate at End of Period 1.04% 1.51% 5.48% 14 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, 2002 vs. 2001 2001 vs. 2000 --------------------------------- ---------------------- -------------------- 2002 2001 2000 Amount Percent Amount Percent ------- ------ ------ ------- ------- ------ ------- (Dollar amounts in thousands) Interest Income $13,023 16,436 17,007 $(3,413) -20.77% $(571) -3.36% Interest Expense 5,219 8,432 8,587 (3,213) -38.10% (155) -1.81% ------- ------ ------ ------- ----- Net Interest Income $ 7,804 8,004 8,420 $ (200) -2.50% $(416) -4.94% ======= ====== ====== ======= ===== 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, ------------------------------------------------------------------------------------------------ 2002 2001 2000 ---------------------------- ---------------------------- ------------------------------ 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 $ 28,916 $ 1,619 5.60% $ 28,895 $ 1,729 5.98% $ 33,345 $ 2,135 6.40% Tax Exempt 13,153 996 7.57% 11,715 895 7.64% 11,546 904 7.83% Federal Funds Sold 17,125 277 1.62% 12,112 357 2.95% 599 38 6.34% Interest on Deposits with Bank: 86 1 1.16% 79 1 1.27% 28 1 3.57% Loans 146,200 10,506 7.19% 166,941 13,794 8.26% 167,095 14,236 8.52% --------- -------- --------- ------- --------- ------- Total Interest-Earning Assets 205,480 13,399 6.52% 219,742 16,776 7.63% 212,613 17,314 8.14% --------- -------- --------- ------- --------- ------- Noninterest-Earning Assets: Cash and Due from Bank: 4,965 4,706 4,427 Premises and Equipment 4,835 4,036 2,437 Other Assets 4,329 1,988 2,542 Allowance for Credit Losses (1,938) (1,367) (1,431) --------- --------- -------- Total Noninterest-Earning Assets 12,191 9,363 7,975 --------- --------- -------- Total Assets $ 217,671 $ 229,105 $ 220,588 ========= ========= ========= 16 Years Ended December 31, ----------------------------------------------------------------------------------------------- 2002 2001 2000 ------------------------------ ----------------------------- ------------------------------ 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 $ 30,186 $ 328 1.09% $ 27,697 $ 535 1.93% $ 27,201 $ 632 2.32% NOW, Super NOW, Plus 33,188 335 1.01% 28,360 465 1.64% 27,685 543 1.96% Time Deposits 100,797 3,957 3.93% 108,496 6,159 5.68% 101,040 5,744 5.68% -------- -------- --------- -------- --------- -------- Total Interest-Bearing Deposits 164,171 4,620 2.81% 164,553 7,159 4.35% 155,926 6,919 4.44% Other Borrowed 13,314 599 4.50% 22,472 1,273 5.66% 25,419 1,666 6.55% Fed Funds Purchased - - 0.00% - - 0.00% 10 2 20.00% -------- -------- --------- -------- --------- -------- Total Interest-Bearing Liabilities 177,485 5,219 2.94% 187,025 8,432 4.51% 181,355 8,587 4.73% -------- -------- --------- -------- --------- -------- Noninterest-Bearing Liabilities: Demand Deposits 14,690 14,791 14,680 Other Liabilities 1,012 2,904 1,415 -------- --------- --------- Total Noninterest- Bearing Liabilities 15,702 17,695 16,095 -------- --------- --------- Shareholders' Equity 24,484 24,385 23,138 -------- --------- --------- Total Liabilities and Shareholders' Equity $217,671 $ 229,105 $ 220,588 ======== ========= ========= Net Interest Income (Tax Equivalent Basis) $ 8,180 $ 8,344 $ 8,727 Reversal of Tax Equivalent Adjustment (376) (340) (307) -------- -------- -------- Net Interest Income $ 7,804 $ 8,004 $ 8,420 ======== ======== ======== Net Interest Spread (Tax Equivalent Basis) 3.58% 3.12% 3.41% ==== ==== ==== Net Interest Margin (Net Interest Income as a % of Interest- Earning Assets, Tax Equivalent Basis) 3.98% 3.80% 4.10% ==== ==== ==== Net Interest Margin (Net Interest Income as a % of Interest-Earning Assets) 3.80% 3.64% 3.96% ==== ==== ==== 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. 2002 vs 2001 2001 vs 2000 ----------------------------------------- ----------------------------------------- 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 $ 1 $ (111) $ (110) $ (272) $ (134) $ (406) Tax Exempt 109 (8) 101 13 (22) (9) Federal Funds Sold 911 (991) (80) 328 (9) 319 Interest on Deposits with Banks - - - - - - Interest and Fees on Loans (1,605) (1,683) (3,288) (13) (429) (442) ---------- ---------- ------------ --------- ---------- ------------ Total Interest Income (584) (2,793) (3,377) 56 (594) (538) ---------- ---------- ------------ --------- ---------- ------------ Interest Expense: Interest-Bearing Deposits: Savings 53 (260) (207) 12 (109) (97) NOW, Super NOW, and Plus 103 (233) (130) 13 (91) (78) Time (412) (1,790) (2,202) 401 14 415 Other Borrowed (448) (226) (674) (181) (212) (393) Federal Funds Purchased - - - (1) (1) (2) ---------- ---------- ------------ --------- ---------- ------------ Total Interest Expense (704) (2,509) (3,213) 244 (399) (155) ---------- ---------- ------------ --------- ---------- ------------ Change in Net Interest Income $ 120 $ (284) $ (164) $ (188) $ (195) $ (383) ========== ========== ============ ========= ========== ============ 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 Branch 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, 2002, 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 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 2002 and 2001, 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. 2002 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 2001 Low Bid High Bid Low Ask High Ask Dividend Per Share First Qtr 14.500 14.750 15.500 16.000 .120 Second Qtr 14.750 15.000 15.500 15.500 .120 Third Qtr 15.000 15.250 15.150 16.000 .120 Fourth Qtr 15.250 15.490 16.000 24.000 .140 As of February 1, 2003, the Company's common stock was held by 1,048 shareholders of record. As of February 1, 2003, 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, --------------------------------------------------------------------- 2002 2001 2000 1999 1998 ---------- ----------- ---------- ---------- ---------- STATEMENT OF OPERATIONS (Dollars in Thousands) Interest Income $ 13,023 $ 16,436 $ 17,007 $ 15,318 $ 14,538 Interest Expense 5,219 8,432 8,587 6,921 6,693 ---------- ----------- ---------- ---------- ---------- Net Interest Income 7,804 8,004 8,420 8,397 7,845 Provision for Loan Losses 975 790 420 360 360 ---------- ----------- ---------- ---------- ---------- Net Interest Income after Provision for Loan Losses 6,829 7,214 8,000 8,037 7,485 Other Income 1,172 1,106 600 639 447 Operating Expenses 5,823 5,662 5,251 5,140 4,618 ---------- ----------- ---------- ---------- ---------- Income before Income Taxes 2,178 2,658 3,349 3,536 3,314 Applicable Income Taxes 553 725 1,000 1,017 930 ---------- ----------- ---------- ---------- ---------- Net Income $ 1,625 $ 1,933 $ 2,349 $ 2,519 $ 2,384 ========== =========== ========== ========== ========== STATEMENT OF CONDITION (YEAR END DATA) Total Assets $ 218,030 $ 218,977 $ 223,062 $ 218,548 $ 194,661 Investment Securities 54,396 37,584 40,260 44,796 41,267 Loans Receivable 140,819 158,174 169,530 161,958 142,410 Allowance for Loan Losses 2,050 1,815 1,331 1,832 1,800 Deposits 178,890 179,657 178,082 169,720 166,021 Shareholders' Equity 24,350 23,940 23,764 22,473 22,566 SELECTED FINANCIAL RATIOS Return on Average Assets 0.75% 0.84% 1.06% 1.23% 1.25% Return on Average Equity 6.64% 7.93% 10.15% 11.04% 10.90% Tier One Risk-Based Capital 16.88% 15.74% 15.47% 15.43% 16.89% Total Risk-Based Capital 18.13% 16.96% 16.34% 16.66% 18.14% Tier One Leverage Ratio 10.77% 10.16% 10.61% 10.73% 11.42% Dividend Payout Ratio 68.47% 58.92% 47.52% 42.45% 40.00% PER SHARE DATA (1) Net Income $ 0.73 $ 0.85 $ 1.01 $ 1.06 $ 1.00 Book Value 11.01 10.63 10.28 9.57 9.50 Cash Dividends Declared 0.50 0.50 0.48 0.45 0.40 21 (1) Adjusted to reflect the August, 1998 ComBanc, Inc. formation resulting in a two for one stock exchange leaving 2,376,000 issued and 2,226,505 outstanding shares in 2002, 2,376,000 issued and 2,280,283 outstanding shares in 2001, 2,376,000 issued and 2,330,415 outstanding shares in 2000, 2,376,000 issued and 2,370,408 outstanding shares in 1999 and 2,376,000 issued and outstanding shares in 1998. ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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, 2002. 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), 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. 22 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. OFF-BALANCE SHEET ARRANGEMENTS At December 31, 2002, 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 an investment security on a when-issued basis on November 26, 2002 in the amount of $1,500,000. The trade settled on January 28, 2003. The Company and the bank 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. 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) CONTRACTUAL OBLIGATIONS PAYMENTS DUE BY PERIOD ------------------------------------------------------ LESS MORE THAN 1 THAN 5 TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS ----- ----- ----- --- ----- Long-Term Debt Obligations 7,719 3,028 2,345 470 1,876 ----- ----- ----- --- ----- TOTAL 7,719 3,028 2,345 470 1,876 ===== ===== ===== === ===== 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 23 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, 2002, such securities amounted to $54.4 million, at December 31, 2001 such securities amounted to $37.6 million, and at December 31, 2000 such securities amounted to $40.3 million. At December 31, 2002, 2001 and 2000, Federal Funds Sold amounted to $4.6 million, $9.7 million, and $2.8 million, respectively. 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 135% of the first mortgage loan portfolio as collateral. The approximate available line of credit from the Federal Home Loan Bank at December 31, 2002 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 2003 from additional sources such as investment security maturities and mortgage-backed securities repayments and deposit accounts. CAPITAL RESOURCES As of December 31, 2002, 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, 2002 that the Bank meets all the capital adequacy requirements to which it is subject. As of December 31, 2002, 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, 17.82%, 11.52%, and 7.35%, respectively at December 31, 2002. 24 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. 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, 2002, 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, 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 include 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 include 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 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, 25 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 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 26 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 has 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 is 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 is 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. COMPARISON OF OPERATING RESULTS FOR THE YEARS ENDED DECEMBER 31, 2001 AND DECEMBER 31, 2000. The Bank reported net income for the fiscal year 2001 of $1,933,000, compared to $2,349,000 in fiscal year 2000. The most significant changes from 2000 to 2001 were the decrease in interest income of $571,000, a decrease in interest expense of $154,000, an increase in the provision for loan losses of $370,000, an increase in other income of $506,000 and an increase in other expenses of $411,000. Net interest income decreased $416,000 in the fiscal year 2001 compared to fiscal year 2000. Interest income decreased 3.4% or $571,000 to $16,436,000 in fiscal year 2001 compared to $17,007,000 in fiscal year 2000. The major component of this decrease was interest on loans which decreased $477,000 to $13,759,000 in 2001 compared to $14,236,000 in 2000. This decrease was a result of an $11.8 million decrease in total net loans, and more specifically, an 8.2% or $9,698,000 decrease in real estate mortgage loans, and an overall decrease in average rates for the fiscal year 2001. Interest expense decreased $154,000 or 1.8% to $8,433,000 in fiscal year 2001 compared to $8,587,000 in fiscal year 2000. The majority of this decrease can be attributed to a $439,000 decrease in long-term debt expense, due to a decrease in both balance and rate on long term advances from the Federal Home Loan Bank. Interest on deposit accounts increased $240,000 or 3.5% to $7,159,000 in fiscal year 2001 from $6,919,000 in fiscal year 2000 due mainly to a $1.6 million increase in total deposit balances from the prior year. The provision for loan losses was $790,000 in fiscal year 2001, an increase of $370,000 from the 2000 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 2001. 27 Noninterest income increased $507,000 from $600,000 in fiscal 2000 to $1,107,000 in fiscal 2001. Service charges on deposit accounts increased $62,000 or 14.7%. The major components in this category include ATM fees, penalty charges on deposit accounts, and collections, commissions and fees. Gain on sale of loans increased from $0 in 2000 to $368,000 in 2001. This increase includes a Mortgage Servicing Right of $240,000 and a Gain on Sale of Mortgage Loans of $128,000, the result of the $9,698,000 decrease in real estate mortgage loans that were sold to the Federal Home Loan Mortgage Corporation with servicing retained. Other income increased $75,000 or 41.9% from $179,000 in 2000 to $254,000 in 2001. There were no sales of securities in fiscal year 2001, and therefore no gains or losses on sales of available for sale securities were recorded. Noninterest expense increased 7.8% or $411,000 in fiscal year 2001 compared to the same time frame a year ago. The major account increases include an increase of $64,000 in state taxes, a $62,000 increase in legal and professional fees incurred in the case of Bennett Funding, an increase in data processing expense of $54,000 as a result of additional electronic products offered to customers, an increase in net occupancy expense of $45,000 as a result of additional depreciation with the completion of the Corporate Center, and an increase in salaries and employee benefits of $42,000. 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 2003 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. 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 most 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. 28 EFFECT OF ACCOUNTING CHANGES In July 2001, the FASB (Financial Accounting Standards Board) issued Statements (SFAS) No. 141, "Accounting for Business Combinations" and No. 142, "Accounting for Goodwill and Intangible Assets". These Statements will have no material effect on the Company at this time since it has not been involved in a "business combination" subject to SFAS No. 141 and does not have goodwill or other intangible assets subject to SFAS No. 142. 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. 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, 2002 of the Bank's interest-earning assets and interest-bearing liabilities, its interest rate sensitivity gap, cumulative interest rate sensitivity gap for such assets and liabilities, and cumulative interest rate sensitivity gap as a percentage of total interest-earning assets. This table indicates the time periods in which certain interest-earning assets and certain interest-bearing liabilities will mature or may reprice in accordance with their contractual terms. 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 2003. 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 prepayment speeds which have an impact on gap. Management's Asset/Liability Management Committee monitors the Bank's interest rate sensitivity position. 29 3 months 3 - 12 1 - 3 3 - 5 over 5 or less months years years years Total -------- -------- -------- ------- ------- -------- Interest-Earning Assets: Loans $36,492 $ 15,842 $ 32,331 $24,880 $31,274 $140,819 Investment Securities 2,813 6,541 8,849 19,229 16,964 54,396 Federal Funds Sold 4,624 - - - - 4,624 Interest-Bearing Balances - in Other Depository Institutions 206 - - - - 206 ------- -------- -------- ------- ------- -------- Total $44,135 $ 22,383 $ 41,180 $44,109 $48,238 $200,045 ======= ======== ======== ======= ======= ======== Interest-Bearing Liabilities: Savings Deposits $ 3,257 $ 3,257 $ 10,073 $10,073 $13,431 $ 40,092 Checking Deposits 2,107 2,107 6,514 6,514 8,686 25,927 Time Deposits 23,050 40,449 25,300 7,983 - 96,782 Short Term Borrowings 483 483 1,494 1,494 1,992 5,946 Long Term Debt - 2,015 1,243 2,129 2,332 7,719 ------- -------- -------- ------- ------- -------- Total $28,897 $ 48,311 $ 44,624 $28,193 $26,440 $176,466 ======= ======== ======== ======= ======= ======== Interest Rate Sensitivity Gap $15,238 $(25,928) $ (3,444) $15,916 $21,798 $ 23,579 Cumulative Interest Rate Sensitivity Gap 15,238 (10,690) (14,135) 1,781 23,579 Cumulative Interest Rate Sensitivity Gap as a Percentage of Total Interest-Earning Assets 7.62% -5.34% -7.07% 0.89% 11.79% 30 ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA 31 COMBANC, INC. Accountants' Report and Consolidated Financial Statements December 31, 2002 and 2001 32 COMBANC, INC. AND SUBSIDIARY DECEMBER 31, 2002 AND 2001 CONTENTS INDEPENDENT ACCOUNTANTS' REPORT.........................................34 CONSOLIDATED FINANCIAL STATEMENTS Balance Sheets......................................................35 Statements of Income................................................36 Statements of Shareholders' Equity..................................37 Statements of Cash Flows............................................38 Notes to Financial Statements.......................................39 33 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, 2002 and 2001, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated 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 described above present fairly, in all material respects, the consolidated financial position of ComBanc, Inc. as of December 31, 2002 and 2001, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. BKD, LLP Cincinnati, Ohio January 30, 2003 34 COMBANC, INC. CONSOLIDATED BALANCE SHEETS DECEMBER 31, 2002 AND 2001 2002 2001 ------------- ------------- ASSETS Cash and due from banks $ 12,095,880 $ 6,509,530 Federal funds sold 4,624,000 9,677,000 Interest-bearing demand deposits 205,261 201,892 ------------- ------------- Cash and cash equivalents 16,925,141 16,388,422 Investment securities, available for sale 54,396,182 37,583,984 Loans held for sale 728,483 1,783,675 Loans, net of allowance for loan losses of $2,049,855 and $1,814,681 138,040,877 154,574,912 Premises and equipment 4,688,849 4,893,468 Federal Reserve and Federal Home Loan Bank stock 1,790,800 1,693,700 Interest receivable 949,640 1,350,893 Other assets 510,505 708,395 ------------- ------------- Total assets $ 218,030,477 $ 218,977,449 ============= ============= LIABILITIES Deposits Noninterest bearing $ 16,089,113 $ 17,282,498 Interest bearing 162,801,348 162,374,170 ------------- ------------- Total deposits 178,890,461 179,656,668 Short-term borrowings 5,946,334 3,976,944 Long-term debt 7,719,384 9,791,256 Interest payable 571,707 983,676 Other liabilities 552,119 629,159 ------------- ------------- Total liabilities 193,680,005 195,037,703 ------------- ------------- COMMITMENTS AND CONTINGENCIES SHAREHOLDERS' EQUITY Common stock, no par value Authorized -- 5,000,000 shares Issued -- 2,376,000 shares Outstanding -- 2,211,014 and 2,251,391 shares 1,237,500 1,237,500 Paid-in capital 1,512,500 1,512,500 Retained earnings 23,371,495 22,858,846 Accumulated other comprehensive income 945,817 415,780 Treasury stock, at cost -- 164,986 and 124,609 shares (2,716,840) (2,084,880) ------------- ------------- Total shareholders' equity 24,350,472 23,939,746 ------------- ------------- $ 218,030,477 $ 218,977,449 ============= ============= Total liabilities and shareholders' equity See Notes to Consolidated Financial Statements 35 COMBANC, INC. CONSOLIDATED STATEMENTS OF INCOME YEARS ENDED DECEMBER 31, 2002 AND 2001 2002 2001 2000 --------------------------------------------------------- INTEREST INCOME Loans receivable $10,469,007 $13,759,074 $14,236,390 Investment securities Taxable 1,619,031 1,728,750 2,134,628 Tax exempt 656,975 591,066 596,770 Federal funds sold 276,839 356,546 38,281 Deposits with financial institutions 815 1,063 995 ----------- ----------- ----------- Total interest income 13,022,667 16,436,499 17,007,064 ----------- ----------- ----------- INTEREST EXPENSE Deposits 4,619,285 7,159,348 6,919,127 Short-term borrowings 63,006 412,174 368,194 Long-term debt 536,078 861,200 1,299,748 ----------- ----------- ----------- Total interest expense 5,218,369 8,432,722 8,587,069 ----------- ----------- ----------- NET INTEREST INCOME 7,804,298 8,003,777 8,419,995 Provision for loan losses 975,000 790,200 420,000 ----------- ----------- ----------- NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 6,829,298 7,213,577 7,999,995 ----------- ----------- ----------- OTHER INCOME Service charges on deposit accounts 483,774 484,356 421,538 Net realized gains on sales of available-for-sale securities 8,416 -- -- Gain on sale of loans 242,091 368,049 -- Other income 437,876 254,151 178,754 ----------- ----------- ----------- Total other income 1,172,157 1,106,556 600,292 ----------- ----------- ----------- OTHER EXPENSES Salaries and employee benefits 3,049,302 2,879,048 2,837,166 Net occupancy expenses 384,888 306,709 261,661 Equipment expenses 313,845 235,700 197,448 Data processing fees 369,340 317,226 263,110 Advertising 137,426 168,942 168,019 Printing and office supplies 177,978 174,837 155,607 Legal and professional fees 244,770 393,692 332,262 Dues and memberships 245,064 245,033 215,431 State taxes 231,881 245,622 182,176 Other expenses 669,022 694,979 637,927 ----------- ----------- ----------- Total other expenses 5,823,516 5,661,788 5,250,807 ----------- ----------- ----------- INCOME BEFORE INCOME TAX 2,177,939 2,658,345 3,349,480 Income tax expense 552,611 725,155 1,000,462 ----------- ----------- ----------- NET INCOME $ 1,625,328 $ 1,933,190 $ 2,349,018 =========== =========== =========== EARNINGS PER SHARE $ .73 $ .85 $ 1.01 WEIGHTED-AVERAGE SHARES OUTSTANDING 2,226,505 2,280,383 2,330,415 See Notes to Consolidated Financial Statements 36 COMBANC, INC. CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY YEARS ENDED DECEMBER 31, 2002 AND 2001 ACCUMULATED OTHER COMMON PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE TREASURY STOCK CAPITAL INCOME EARNINGS INCOME STOCK TOTAL ----- ------- ------ -------- ------ ----- ----- BALANCES, JANUARY 1, 2000 $ 1,237,500 $1,512,500 $ 20,833,236 $(532,818) $ (577,566) $22,472,852 Comprehensive income Net income $2,349,018 2,349,018 2,349,018 Other comprehensive income, net of tax Unrealized gains on securities 665,246 665,246 665,246 ---------- Comprehensive income $3,014,264 ========== Cash dividends ($.48 per share) (1,117,603) (1,117,603) Purchase of treasury stock (605,373) (605,373) ----------- ---------- ------------ --------- ----------- ----------- BALANCES, DECEMBER 31, 2000 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 share) (1,138,995) (1,138,995) 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 =========== ========== ============ ========= =========== =========== See Notes to Consolidated Financial Statements 37 COMBANC, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS YEARS ENDED DECEMBER 31, 2002 AND 2001 2002 2001 2000 ---------------------------------------------------------- OPERATING ACTIVITIES Net income $ 1,625,328 $ 1,933,190 $ 2,349,018 Items not requiring (providing) cash Provision for loan losses 975,000 790,200 420,000 Depreciation and amortization 408,487 270,804 224,638 Deferred income tax 38,000 (24,000) 246,000 Investment securities amortization (accretion), net 95,003 23,472 (11,529) Investment securities gains (8,416) -- -- (Gain) loss on sale of equipment 23,698 -- (2,970) FHLB stock dividends (97,100) (84,300) (101,600) Loans held for sale 1,055,192 (1,783,675) -- Net change in Interest receivable 401,253 482,178 (253,621) Interest payable (411,969) (116,693) 236,294 Other assets 197,890 (297,073) 125,169 Other liabilities (388,090) 157,102 (264,830) ------------ ------------ ------------ Net cash provided by operating 3,914,276 1,351,205 2,966,569 activities ------------ ------------ ------------ INVESTING ACTIVITIES Purchases of securities available for sale (32,775,427) (17,160,699) (207,342) Proceeds from maturities of securities available for sale 16,061,194 20,242,332 5,762,760 Proceeds from sales of securities available for sale 618,535 -- -- Net change in loans 15,559,035 12,833,442 (8,492,544) Proceeds from sale of equipment 35,058 -- 6,000 Purchases of premises and equipment (262,624) (2,493,010) (567,963) Purchases of FHLB stock -- -- (236,200) ------------ ------------ ------------ Net cash provided (used) by investing activities (764,229) 13,422,065 (3,735,289) ------------ ------------ ------------ FINANCING ACTIVITIES Net change in Noninterest-bearing, interest-bearing demand and savings deposits 7,683,519 2,499,501 1,972,496 Certificates and other time deposits (8,449,726) (925,143) 6,389,724 Short-term borrowings 1,969,390 (5,281,663) (8,294,874) Proceeds of long-term debt 2,894,390 3,500,000 3,670,000 Repayment of long-term debt (4,966,262) (4,093,419) (829,072) Cash dividends (1,112,679) (1,138,995) (1,117,603) Purchase of stock (631,960) (901,941) (605,373) ------------ ------------ ------------ Net cash provided (used) by financing activities (2,613,328) (6,341,660) 1,185,298 ------------ ------------ ------------ NET CHANGE IN CASH AND CASH EQUIVALENTS 536,719 8,431,610 416,578 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 16,388,422 7,956,812 7,540,234 ------------ ------------ ------------ CASH AND CASH EQUIVALENTS, END OF YEAR $ 16,925,141 $ 16,388,422 $ 7,956,812 ============ ============ ============ ADDITIONAL CASH FLOWS INFORMATION Interest paid $ 5,630,338 $ 8,549,415 $ 8,350,775 Income tax paid 445,000 946,000 1,000,325 See Notes to Consolidated Financial Statements 38 COMBANC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 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. 39 COMBANC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 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 are carried at the principal amount outstanding. Interest income is accrued on the principal balances of loans. The accrual of interest on impaired loans is discontinued when, in management's opinion, the borrower may be unable to meet payments as they become due. When interest accrual is discontinued, all unpaid accrued interest is reversed when considered uncollectible. Interest income is subsequently recognized only to the extent cash payments are received. Certain loan fees and direct costs are being deferred and amortized as an adjustment of yield on the loans. 40 COMBANC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (Table Dollar Amounts in Thousands) 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. 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. 41 COMBANC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (Table Dollar Amounts in Thousands) 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. 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 income 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. 42 COMBANC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (Table Dollar Amounts in Thousands) 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, 2002 was $1,069,000. NOTE 3: INVESTMENT SECURITIES 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 ============== ============== ============== ============== 2001 GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------------------------------------------------------------- Available for sale Federal agencies $ 9,752 $ 198 $ (15) $ 9,935 State and municipal 12,613 290 (61) 12,842 Mortgage-backed securities 14,589 223 (5) 14,807 -------------- -------------- -------------- -------------- Total investment securities $ 36,954 $ 711 $ (81) $ 37,584 ============== ============== ============== ============== 43 COMBANC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (Table Dollar Amounts in Thousands) The amortized cost and fair value of securities available for sale at December 31, 2002, 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. AVAILABLE FOR SALE AMORTIZED COST FAIR VALUE ----------------------------------- Within one year $ 1,624 $ 1,680 One to five years 4,808 4,987 Five to ten years 7,168 7,502 After ten years 3,788 3,981 ---------------- ---------------- 17,388 18,150 Mortgage-backed securities 35,575 36,246 ---------------- ---------------- Totals $ 52,963 $ 54,396 ================ ================ Securities with a carrying value of $23,925,000 and $22,515,000, and fair value of $24,770,000 and $22,932,000, were pledged at December 31, 2002 and 2001 to secure certain deposits and for other purposes as permitted or required by law. Proceeds from sales of securities available for sale during 2002 were $618,535. Gross gains of $8,416 were realized on those sales. The tax expense for net gains on security transactions for 2002 was $2,861. 44 COMBANC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (Table Dollar Amounts in Thousands) NOTE 4: LOANS AND ALLOWANCE 2002 2001 --------- --------- Commercial and industrial loans $ 16,588 $ 19,473 Real estate loans (includes $4,627,000 and $4,600,000 secured by farmland) 99,890 107,006 Construction loans 7,542 9,827 Agricultural production financing and other loans to farmers 2,302 2,553 Individuals' loans for household and other personal expenditures 12,418 16,192 Tax-exempt loans 1,340 1,272 Other loans 11 67 --------- --------- 140,091 156,390 Allowance for loan losses (2,050) (1,815) --------- --------- Total loans $ 138,041 $ 154,575 ========= ========= 2002 2001 2000 ------- ------- ------- Allowance for loan losses Balances, January 1 $ 1,815 $ 1,331 $ 1,832 Provision for losses 975 790 420 Recoveries on loans 695 523 65 Loans charged off (1,435) (829) (986) ------- ------- ------- Balances, December 31 $ 2,050 $ 1,815 $ 1,331 ======= ======= ======= 45 COMBANC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (Table Dollar Amounts in Thousands) Information on impaired loans is summarized below. 2002 2001 2000 --------------- --------------- --------------- Impaired loans with an allowance $ 2,062 $ 2,046 $ 847 Impaired loans for which the discounted cash flows or collateral value exceeds the carrying value of the loan 7,496 2,238 488 --------------- --------------- --------------- Total impaired loans $ 9,558 $ 4,284 $ 1,335 =============== =============== =============== Allowance for impaired loans (included in the Company's allowance for loan losses) $ 377 $ 651 $ 510 =============== =============== =============== 2002 2001 2000 --------------- --------------- --------------- Average balance of impaired loans $ 9,689 $ 4,352 $ 1,366 Interest income recognized on impaired loans 209 102 59 Cash-basis interest included above 219 90 5 At December 31, 2002 and 2001, accruing loans delinquent 90 days or more totaled $766,000 and $2,810,000, respectively. Non-accruing loans at December 31, 2002 and 2001 were $9,065,000 and $3,455,000, respectively. NOTE 5: PREMISES AND EQUIPMENT 2002 2001 ------------- ------------ Land and improvements $ 481 $ 481 Buildings 4,769 4,664 Equipment 2,661 2,516 ------------- ------------ Total cost 7,911 7,661 Accumulated depreciation (3,222) (2,858) Construction in process -- 90 ------------- ------------ Net $ 4,689 $ 4,893 ============= ============ 46 COMBANC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (Table Dollar Amounts in Thousands) 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 $45,691,497 and $21,572,228 at December 31, 2002 and 2001, respectively. The aggregate fair value of capitalized mortgage servicing rights at December 31, 2002 and 2001 totaled $302,657 and $242,625. 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. 2002 2001 ---------- --------- Mortgage Servicing Rights Balances, beginning of year $ 239,877 $ -- Servicing rights capitalized 256,428 239,877 Amortization of servicing rights (71,576) -- ---------- --------- 424,729 239,877 Valuation allowance (122,072) -- ---------- --------- Balances, end of year $ 302,657 $ 239,877 ========== ========= Activity in the valuation allowance for mortgage servicing rights was as follows: 2002 2001 ---------- --------- Balance, beginning of year $ -- $ -- Additions 122,072 -- Reductions -- -- Direct write downs -- -- ---------- --------- Balance, end of year $ 122,072 $ 0 ========== ========= 47 COMBANC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (Table Dollar Amounts in Thousands) NOTE 7: DEPOSITS 2002 2001 --------- --------- Demand deposits $ 42,017 $ 40,071 Savings deposits 40,091 34,353 Certificates and other time deposits of $100,000 or more 20,788 23,619 Other certificates and time deposits 75,994 81,614 --------- --------- Total deposits $ 178,890 $ 179,657 ========= ========= Certificates and other time deposits maturing in years ending December 31 2003 $ 62,531 2004 17,354 2005 8,914 2006 6,835 2007 1,148 --------- $ 96,782 ========= NOTE 8: SHORT-TERM BORROWINGS 2002 2001 --------- --------- Federal Home Loan Bank advances $ -- $ 925 Securities sold under repurchase agreements 5,946 3,052 --------- --------- Total short-term borrowings $ 5,946 $ 3,977 ========= ========= 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 2002 and 2001 totaled $6,317,564 and $4,481,000 and the daily average of such agreements totaled $4,311,401 and $3,504,903. The agreements at December 31, 2002, mature daily. 48 COMBANC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (Table Dollar Amounts in Thousands) NOTE 9: LONG-TERM DEBT 2002 2001 --------- --------- Federal Home Loan Bank advances, variable rates ranging from 4.56% to 7.08%, due at various dates through July, 2020 $ -- $ 1,900 Federal Home Loan Bank advances, fixed rates ranging from 4.56% to 7.55%, due at various dates through July, 2014 7,719 7,891 --------- --------- Total long-term debt $ 7,719 $ 9,791 ========= ========= 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 150 percent of FHLB advances. Advances are subject to restrictions or penalties in the event of repayment. Maturities in years ending December 31 2003 $ 3,028 2004 1,504 2005 841 2006 367 2007 103 Thereafter 1,876 --------- $ 7,719 ========= 49 COMBANC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (Table Dollar Amounts in Thousands) NOTE 10: INCOME TAX 2002 2001 2000 ------- ------- -------- Income tax expense Currently payable Federal $ 492 $ 724 $ 736 State 23 25 18 Deferred 38 (24) 246 ------- ------- -------- Total income tax expense $ 553 $ 725 $ 1,000 ======= ======= ======== Reconciliation of federal statutory to actual tax expense Federal statutory income tax at 34% $ 740 $ 904 $ 1,139 Tax exempt interest (222) (190) (186) Nondeductible expenses 7 3 3 Effect of state income taxes 15 16 12 Other 13 (8) 32 ------- ------- -------- Actual tax expense $ 553 $ 725 $ 1,000 ======= ======= ======== A cumulative net deferred tax liability is included in other liabilities. The components of the liability are as follows: 2002 2001 ASSETS Allowance for loan losses $ 435 $ 369 Deferred compensation 37 32 -------- -------- Total assets 472 401 -------- -------- LIABILITIES Depreciation (135) (78) Mortgage servicing rights (103) (82) Accretion of investment discounts (20) (15) FHLB stock dividend basis difference (140) (114) Unrealized gain on securities (487) (214) -------- -------- Total liabilities (885) (503) -------- -------- $ (413) $ (102) ======== ======== 50 COMBANC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (Table Dollar Amounts in Thousands) NOTE 11: OTHER COMPREHENSIVE INCOME Other comprehensive income components and related taxes were as follows: 2002 2001 2000 -------- ------- -------- Unrealized gains on securities available for sale $ 811 $ 429 $ 1,008 Reclassification for realized amount included in income 8 -- -- -------- ------- -------- Other comprehensive income, before tax effect 803 429 1,008 Tax benefit (273) (146) (343) -------- ------- -------- Other comprehensive income $ 530 $ 283 $ 665 ======== ======= ======== 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: 2002 2001 -------- -------- Commitments to extend credit $ 21,278 $ 15,447 Standby letters of credit 665 829 51 COMBANC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 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 had federal funds sold to Great Lakes Bankers Bank in the amount of $8,973,000 and $9,677,000 at December 31, 2002 and 2001. The Bank committed to purchase an investment security on a when-issued basis on November 26, 2002 in the amount of $1,500,000. The trade settled on January 28, 2003. 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 Without prior approval, current regulations allow the Bank to pay dividends to the Company not exceeding net income (as defined) for the current year plus retained net income for the previous two years. The Bank normally restricts dividends to a lesser amount because of the need to maintain an adequate capital structure. At December 31, 2002, total shareholder's equity of the Bank was $16,920,799, of which approximately $355,000 was potentially available for distribution to the Company. 52 COMBANC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 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, 2002 and 2001, the Bank was categorized as well capitalized and met all subject capital adequacy requirements. There are no conditions or events since December 31, 2002 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 TO BE WELL ACTUAL ADEQUATE CAPITAL(1) CAPITALIZED(1) AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO ------ ----- ------ ----- ------ ----- 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 AS OF DECEMBER 31, 2001 Total capital(1)(to risk-weighted assets) $ 25,292 16.9% $ 11,985 8.0% $ 14,981 10.0% Tier I capital(1)(to risk-weighted assets) 15,620 10.5 5,977 4.0 8,965 6.0 Tier I capital(1)(to average assets) 15,620 6.7 9,361 4.0 11,702 5.0 (1) As defined by regulatory agencies 53 COMBANC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 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's expense for the plan was $231,203, $267,732 and $270,026 for 2002, 2001, and 2000, 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, 2002 $ 1,037 Changes in composition of related parties 878 New loans, including renewals 78 Payments, etc., including renewals (218) -------- Balances, December 31, 2002 $ 1,775 ======== 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. 54 COMBANC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 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, 2002 and 2001, approximate market rates, thus the fair value approximates carrying value. 55 COMBANC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 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: 2002 2001 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ------ ----- ------ ----- ASSETS Cash and cash equivalents $ 16,925 $ 16,925 $ 16,388 $ 16,388 Investment securities available for sale 54,396 54,396 37,584 37,584 Loans including loans held for sale, net 138,769 144,131 156,359 159,626 Interest receivable 950 950 1,351 1,351 Stock in FRB and FHLB 1,791 1,791 1,694 1,694 LIABILITIES Deposits 178,890 180,426 179,657 181,460 Short-term borrowings 5,946 5,946 3,977 3,977 Long-term debt 7,719 7,916 9,791 9,841 Interest payable 572 572 984 984 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: 2002 2001 --------- -------- ASSETS Cash and due from banks $ 467 $ 5 Investment in common stock of subsidiary 16,921 16,067 Receivable from subsidiary 7,000 8,000 -------- -------- Total assets $ 24,388 $ 24,072 ======== ======== LIABILITIES Other liabilities $ 38 $ 132 SHAREHOLDERS' EQUITY 24,350 23,940 -------- -------- Total liabilities and shareholders' equity $ 24,388 $ 24,072 ======== ======== 56 COMBANC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (Table Dollar Amounts in Thousands) CONDENSED STATEMENTS OF INCOME 2002 2001 2000 ------------ ----------- ----------- INCOME Dividends from subsidiary $ 1,113 $ 1,701 $ 1,513 Interest income 385 400 400 ------------ ----------- ----------- Total income 1,498 2,101 1,913 ------------ ----------- ----------- EXPENSES Other expenses 75 72 112 ------------ ----------- ----------- INCOME BEFORE INCOME TAX AND EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 1,423 2,029 1,801 INCOME TAX EXPENSE 121 128 110 ------------ ----------- ----------- INCOME BEFORE EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 1,302 1,901 1,691 EQUITY IN UNDISTRIBUTED INCOME OF SUBSIDIARY 323 32 658 ------------ ----------- ----------- NET INCOME $ 1,625 $ 1,933 $ 2,349 ============ =========== =========== 57 COMBANC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (Table Dollar Amounts in Thousands) CONDENSED STATEMENTS OF CASH FLOWS 2002 2001 2000 ----------- ----------- ----------- OPERATING ACTIVITIES Net income $ 1,625 $ 1,933 $ 2,349 Adjustments to reconcile net income to net cash provided by operating activities (418) 80 (621) ----------- ----------- ----------- Net cash provided by operating activities 1,207 2,013 1,728 ----------- ----------- ----------- INVESTING ACTIVITIES--proceeds from subsidiary for receivable 1,000 -- -- ----------- ----------- ----------- FINANCING ACTIVITIES Purchase of treasury stock (632) (902) (605) Cash dividends (1,113) (1,139) (1,117) ----------- ----------- ----------- Net cash used by financing activities (1,745) (2,041) (1,722) ----------- ----------- ----------- NET CHANGE IN CASH AND CASH EQUIVALENTS 462 (28) 6 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 5 33 27 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 467 $ 5 $ 33 =========== =========== =========== 58 COMBANC, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 2002 AND 2001 (Table Dollar Amounts in Thousands) NOTE 19: QUARTERLY FINANCIAL DATA (UNAUDITED) PROVISION SECURITY INTEREST INTEREST FOR LOAN GAINS NET EARNINGS INCOME EXPENSE LOSSES (LOSSES) INCOME PER SHARE ----------- ----------- ----------- --------- ----------- --------- 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 2001 First Quarter $ 4,311 $ 2,285 $ 135 $ -- $ 539 $ .23 Second Quarter 4,326 2,189 135 -- 583 .26 Third Quarter 4,203 2,124 370 -- 337 .15 Fourth Quarter 3,596 1,835 150 -- 474 .21 59 ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURES None PART III ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The following table lists the non-director, executive officers of the Company and the Bank. The information required by this item with respect to directors is incorporated herein by reference to the information under the heading "Election of Directors" in the definitive proxy statement of the Company. Name (Age) Principal Occupation Rebecca L. Minnig (46) 1989 - V.P., Cashier, and Security Officer 1992 - Senior V.P. Operations 1998 -- Senior V.P. Operations and Corporate Secretary Kathleen A. Miller (42) 1990 - Controller 1997 - Vice President, CFO and Systems Manager 1999 -- Senior Vice President, CFO and Systems Manager 2002 -- Senior Vice President, CIO and Systems Manager 60 EXECUTIVE OFFICERS OF REGISTRANT Name Age Position and Office Held with ComBanc, Inc. Officer Since ---- --- ------------------------------------------- ------------- Paul G. Wreede 52 Chairman of the Board 1975 President and Chief Executive Officer Ronald R. Elwer 49 Executive Vice President 1976 Rebecca L. Minnig 46 Senior Vice President Operations and 1979 Corporate Secretary Kathleen A. Miller 42 Senior Vice President, Chief Information Officer, and 1990 Systems Manager 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. 61 ITEM 11 - EXECUTIVE COMPENSATION Pursuant to Instruction G, the information required by this Item is incorporated herein by reference from the caption entitled "Executive Compensation and Other Information" in the Company's definitive Proxy Statement, provided that the subsections entitled "Personnel Committee Report on Executive Compensation" and "ComBanc Performance" shall not be deemed to be incorporated herein by reference. ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Pursuant to Instruction G, the information required by this item is incorporated by reference herein from the caption "Voting Securities and Ownership Thereof by Certain Beneficial Owners and Management" contained in the Company's definitive Proxy Statement. ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Pursuant to Instruction G, the information required by this item is incorporated by reference from the caption entitled "Additional Information on Management" contained in the Company's definitive Proxy Statement. 62 PART IV ITEM 14 -- EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. Within 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and principal financial officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Rule 13a-14(c) and 15d-14(c) of the Securities Exchange Act of 1934. Based upon that evaluation, the Chief Executive Officer and principal financial officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in the Company's periodic SEC filings. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. There were no significant deficiencies or material weaknesses, and therefore there were no corrective actions taken. 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 31. (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 67. (b) Reports on Form 8-K. There were no reports on Form 8-K filed during the quarter ended December 31, 2002. (c) Exhibits. Exhibits filed with this Annual Report on Form 10-K are attached hereto. See "Exhibit Index" at page 67. (d) Financial Statement Schedules. None 63 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 21, 2003 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 21, 2003 Chairman, President and CEO and Director /s/ Ronald R. Elwer --------------------------- Ronald R. Elwer February 21, 2003 Executive Vice President and Director /s/ Richard R. Thompson --------------------------- Richard R. Thompson February 21, 2003 Director /s/ Dwain I. Metzger --------------------------- Dwain I. Metzger February 21. 2003 Director /s/ C. Stanley Strayer --------------------------- C. Stanley Strayer February 21, 2003 Director /s/ Jason R. Thornell --------------------------- Jason R. Thornell February 21, 2003 Principal Financial Officer - Controller 64 CERTIFICATIONS I, Jason R. Thornell, Controller of the Company, certify that: 1. I have reviewed this annual report on Form 10-K of ComBanc, Inc. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a -- 14 and 15d -- 14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 21, 2003 /s/ Jason R. Thornell ---------------------- Jason R. Thornell Controller 65 CERTIFICATIONS I, Paul G. Wreede, President and CEO of the Company, certify that: 1. I have reviewed this annual report on Form 10-K of ComBanc, Inc. 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a -- 14 and 15d -- 14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: February 21, 2003 /s/ Paul G. Wreede --------------------- Paul G. Wreede President and CEO 66 ANNUAL REPORT ON FORM 10-K For the Year Ended December 31, 2002 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 Incorporated herein by of the Company reference to Registrant's 1998 Form 10-K dated February 26, 1999, filed March 1999 (Exhibit 3.1) 3.2 Bylaws of the Company Incorporated herein by reference to Registrant's 1998 Form 10-K dated February 26, 1999, filed March 1999 (Exhibit 3.2) 10.1 Merger Agreement by and between ComBanc, Inc. Incorporated herein by and The Commercial Bank Dated reference to Registrant's April 13, 1998 Form 8-K Dated September 28, 1998 (Exhibit 10.1) 21.1 Subsidiaries of the Company 68 99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted 69 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted 70 pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 67