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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
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
229 E. Second St., P. O. Box 429 Delphos, Ohio 45833
- -------------------------------------------------------------------------------
(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