10-Q 1 k80621e10vq.txt QUARTERLY REPORT FOR PERIOD ENDED 09/30/03 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from _______________________to _______________________ Commission File Number 000-24925 COMBANC, INC. -------------------------------------------------------------------------------- (Exact name of registrant as specified in its charter) Delaware 34-1853493 -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 229 E. Second St., P. O. Box 429, Delphos, Ohio 45833 -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (419) 695-1055 -------------------------------------------------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X] Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the last practicable date: 2,211,014 shares of the ComBanc's common stock (no par value) were outstanding as of November 1, 2003. Page 1 of 25 COMBANC, INC. AND SUBSIDIARY September 30, 2003 FORM 10-Q TABLE OF CONTENTS

2 COMBANC, INC. AND SUBSIDIARY September 30, 2003 FORM 10-Q COMBANC, INC. AND SUBSIDIARY DELPHOS, OHIO CONDENSED CONSOLIDATED BALANCE SHEETS ($ in thousands)

The accompanying notes are an integral part of the condensed consolidated financial statements 3 COMBANC, INC. AND SUBSIDIARY September 30, 2003 FORM 10-Q COMBANC, INC. AND SUBSIDIARY DELPHOS, OHIO CONDENSED CONSOLIDATED STATEMENTS OF INCOME ($ in thousands, except per share data)

The accompanying notes are an integral part of the condensed consolidated financial statements 4 COMBANC, INC. AND SUBSIDIARY September 30, 2003 FORM 10-Q COMBANC, INC. AND SUBSIDIARY DELPHOS, OHIO CONDENSED CONSOLIDATED STATEMENTS OF INCOME ($ in thousands, except per share data)

The accompanying notes are an integral part of the condensed consolidated financial statements 5 COMBANC, INC. AND SUBSIDIARY September 30, 2003 FORM 10-Q COMBANC, INC. AND SUBSIDIARY DELPHOS, OHIO CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in thousands)

The accompanying notes are an integral part of the condensed consolidated financial statements 6 COMBANC, INC. AND SUBSIDIARY September 30, 2003 FORM 10-Q NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS September 30, 2003 Note 1, Basis of Presentation Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K annual report for 2002 filed with the Securities and Exchange Commission. The significant accounting policies followed by ComBanc, Inc. (Company) and its wholly-owned subsidiary, The Commercial Bank (Bank), for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported, consisting only of normal recurring adjustments, have been included in the accompanying unaudited condensed consolidated financial statements. The results of operations for the nine months ended September 30, 2003, are not necessarily indicative of those expected for the remainder of the year. The Condensed Consolidated Balance Sheet at December 31, 2002 has been taken from audited consolidated financial statements at that date. Note 2, Earnings Per Share Earnings per share on the income statement has been computed on the basis of weighted-average number of shares of common stock outstanding. The weighted-average shares outstanding for the nine months ending September 30, 2003 and September 30, 2002 were 2,211,014 and 2,231,726 respectively. Note 3, Commitments Outstanding commitments to originate loans were $20,692,000 and $21,943,000 at September 30, 2003 and December 31, 2002, respectively. Note 4, Allowance for Loan Losses Credit risk is the risk of loss from a customer default on a loan. The Bank has in place a process to identify and manage its credit risk. The process includes initial credit review and approval, periodic monitoring to measure compliance with credit agreements and internal credit policies, monitoring changes in the risk ratings of loans and leases, identification of problem loans and special procedures for the collection of problem loans. The risk of loss is difficult to quantify and is subject to fluctuations in values and general economic conditions and other factors. The determination of the allowance for loan losses is a critical accounting policy which involves estimates and management's judgment on a number of factors such as net charge-offs, delinquencies in the loan portfolio and general economic conditions. The Bank considers the allowance for loan losses of $3,357,000 adequate to cover losses inherent in the loan portfolio as of September 30, 2003. However, no assurance can be given that the Bank will not, in any particular period, sustain loan losses that are sizeable in relation to the amount reserved, or that 7 COMBANC, INC. AND SUBSIDIARY September 30, 2003 FORM 10-Q subsequent evaluations of the loan portfolio, in light of factors then prevailing, including economic conditions and the Bank's on-going credit review process, will not require significant increases in the allowance for loan losses. Among other factors, a protracted economic slowdown and/or a decline in commercial or residential real estate values in the Bank's markets may have an adverse impact on the adequacy of the allowance for loan losses by increasing credit risk and the risk of potential loss. Note 5, Effect of Accounting Changes On November 25, 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. 45, Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN No. 45) which expands on the accounting guidance of Statements No. 5, 57 and 107 and incorporates without change the provisions of FASB Interpretation No. 34, which is being superseded. FIN No. 45, which is applicable to public and non-public entities, will significantly change current practice in the accounting for, and disclosure of, guarantees. Each guarantee meeting the characteristics described in FIN No. 45 is to be recognized and initially measured at fair value, which will be a change from current practice for most entities. In addition, guarantors will be required to make significant new disclosures, even if the likelihood of the guarantor making payments under the guarantee is remote, which represents another change from current general practice. FIN No. 45's disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002, while the initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company has changed its method of accounting and financial reporting for standby letters of credit by adopting the provisions of FIN No. 45 effective January 1, 2003. FIN 45 is not expected to have a material effect on the Company's consolidated financial statements. In January 2003, the FASB issued FIN 46, "Consolidation of Variable Interest Entities". FIN 46 requires a variable interest entity to be consolidated by a company if that company is subject to a majority for the risk of loss from the variable interest entity's activities or entitled to receive majority of the entity's residual returns, or both. FIN 46 also requires disclosures about variable interest entities that a company is not required to consolidate, but in which it has a significant variable interest. The consolidation requirements of FIN 46 apply immediately to variable interest entities created after January 31, 2003. The consolidation requirements apply to existing entities in the first fiscal year or interim period beginning after June 15, 2003. Certain of the disclosure requirements apply in all financial statements issued after January 31, 2003, regardless of when the variable interest entity was established. FIN 46 is not expected to have a material effect on the Company's consolidated financial statements. In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities". This Statement amends and clarifies financial accounting and reporting for derivative instruments, including certain embedded derivative, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". This Statement amends SFAS No. 133 to reflect the decisions made as part of the Derivatives Implementation Group (DIG) and in other FASB projects or deliberations. SFAS No. 149 is effective for contracts entered into 8 COMBANC, INC. AND SUBSIDIARY September 30, 2003 FORM 10-Q or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. Adoption of this standard is not expected to have a material effect on the Company's consolidated financial statements. In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity". This Statement establishes standards for how an entity classifies and measures certain financial instruments with characteristics of both liabilities and equity. This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. Adoption of this standard did not have a material effect on the Company's consolidated financial statements. 9 COMBANC, INC. AND SUBSIDIARY September 30, 2003 FORM 10-Q PART I - FINANCIAL INFORMATION Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operation 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. The Company cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, and that statements for periods subsequent to 2003 are subject to greater uncertainty because of the increased likelihood of changes in underlying factors and assumptions. Actual results could differ materially from forward-looking statements. In addition to those factors previously disclosed by the Company and those factors identified elsewhere herein, the following factors could cause actual results to differ materially from such forward looking statements: the extent and timing of actions of the Federal Reserve, changes in economic conditions, continued pricing pressures on loan and deposit products, actions of competitors, customer's acceptance of the Company's products and services, the extent and timing of legislative and regulatory actions and reforms, changes in accounting principals, technological changes and increased technology costs, downturn in demand for loan and deposit products, and changes in the interest rate environment that reduce interest margins. The Company's forward-looking statements speak only as the date on which such statements are made. By making any forward-looking statements, the Company assumes no duty to update them to reflect new, changing or unanticipated events or circumstances. ENTITY STATUS On April 13, 1998, The Commercial Bank became a wholly-owned subsidiary of the newly formed ComBanc, Inc., a one-bank holding company. Since ComBanc's only significant asset is the investment in The Commercial Bank, the following discussion will focus on the operations of The Commercial Bank. CRITICAL ACCOUNTING POLICIES The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The Company's significant accounting policies are described in detail in the notes to the Company's consolidated financial statements for the year ended December 31, 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), 10 COMBANC, INC. AND SUBSIDIARY September 30, 2003 FORM 10-Q trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management's estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs. The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for credit losses relating to impaired loans is based on the loan's observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan's effective interest rate. Regardless of the extent of the Company's analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors including inherent delays in obtaining information regarding a customer's financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger nonhomogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are among other factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company's evaluation of imprecision risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment. Mortgage Servicing Rights- Mortgage servicing rights ("MSRs") associated with loans originated and sold, where servicing is retained, are capitalized and included in other intangible assets in the consolidated balance sheet. The value of the capitalized servicing rights represents the present value of the future servicing fees arising from the right to service loans in the portfolio. Critical accounting policies for MSRs relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of MSRs requires the development and use of a number of estimates, including anticipated principal amortization and prepayments of that principal balance. Events that may significantly affect the estimates used are changes in interest rates, mortgage loan prepayment speeds and the payment performance of the underlying loans. The carrying value of the MSRs is periodically reviewed for impairment based on a determination of fair value. For purposes of measuring impairment, the servicing rights are compared to a valuation prepared based on a discounted cash flow methodology, utilizing current prepayment speeds and discount rates. Impairment, if any, is recognized through a valuation allowance and is recorded as amortization of intangible assets. FINANCIAL CONDITION As an overview of the financial condition and results of operation for the third quarter of 2003, improvements have been made. Nonaccrual loans, as can be seen in Table 1, have decreased by 27.2% since December 31, 2002 and total delinquencies have decreased by 39.6% from December 31, 2002 to September 30, 2003. The reduction in nonaccrual loans can be attributed to $1,162,000 in charge-offs, 11 COMBANC, INC. AND SUBSIDIARY September 30, 2003 FORM 10-Q $682,000 in principal reduction, and $453,000 moved to Other Real Estate Owned. Total delinquency reduction can be credited to the reduction in nonaccrual loans and loans being brought current through workout plans. TABLE 1: Analysis of Delinquencies

Total assets decreased $11,109,000 or 5.1% from $218,030,000 at December 31, 2002 to $206,921,000 at September 30, 2003. This is the result of an $8,892,000 decrease in net loans, a $1,556,000 decrease in investment securities, a $9,094,000 decrease in total deposits and a $2,762,000 decrease in long-term debt. Investment securities decreased $1,556,000 from $54,396,000 at December 31, 2002 to $52,840,000 at September 30, 2003. This decrease is the result of $23,452,000 in purchases less the pay downs from Mortgage-backed securities and a U.S. Agency Bond being called totaling $23,980,000, premium amortization of $334,000, and a decrease in the market value of the available-for-sale portfolio of $694,000. As interest rates begin to rebound from over 40 year lows, the market value of the portfolio will continue to decrease, but due to the short average life of 3.38 years and the volatility of -6.74% (in a +300 basis point rate shock), the portfolio will cash flow quickly. Total gross loans decreased 5.41% or $7,585,000 from December 31, 2002 to $132,506,000 at September 30, 2003. The breakdown of the loan portfolio is detailed in table 2 below. Significant changes in the portfolio include the decrease in the 1-4 Family residential loans secured by first liens which is the result of selling these mortgages to FHLMC. As can be seen in Table 2, secondary market lending to FHLMC continues to grow at a rapid rate. The Bank chose to sell these loans to maintain a competitive low interest rate and to offer a long-term product to consumers. Although these loans are no longer an interest earning asset to the institution, these loans were sold at a gain and will continue to generate service fee income at .25% per month over the life of the loan. Another significant change in the portfolio includes a $1,742,000 increase in the real estate secured by nonfarm, nonresidential properties. This increase is due to management's desire to increase loans secured by real estate which tend to be less risky in nature. The commercial loan decrease is primarily due to the higher risk that these loans carry in a sluggish economy. As these loans were refinanced, they were priced above the competition to encourage a controlled amount of runoff. The consumer installment loan decrease is primarily due to the desire to reduce indirect auto loans which also tend to be riskier in nature. TABLE 2: Analysis of Loan Portfolio Composition 12 COMBANC, INC. AND SUBSIDIARY September 30, 2003 FORM 10-Q

The Allowance for Loan Losses, at September 30, 2003 was 2.53% of total loans compared to 1.46% at December 31, 2002. This $1,307,000 increase from December 31, 2002 is the result of a $2,340,000 provision and net charge offs of $1,083,000, increasing the Allowance for Loan Loss from $2,050,000 at December 31, 2002 to $3,357,000 at September 30, 2003. In light of a low coverage ratio of Allowance for Loan and Lease Losses (ALLL) to nonaccrual loans, management increased the provision by $2,340,000 improving the ratio to 54.51% from 24.24% at December 31, 2002. The addition of the $2,340,000 was also due to the continued high volume of $6,159,000 in nonaccrual loans that management continues to pursue legally. Although the nonaccrual loan balances remain at high levels, these balances have been reduced by $2,297,000 in the first three quarters of 2003. Management attributes this significant decrease to an improvement in the local economy and an increased emphasis on work-out programs. The economy has begun to show signs of improvement through a slight decrease in unemployment and increased capacity at some local manufacturers. Table 3 below illustrates an analysis of the Allowance for Loan and Lease Losses over the past five years. TABLE 3: Analysis of Changes in Allowance for Loan and Lease Losses 13 COMBANC, INC. AND SUBSIDIARY September 30, 2003 FORM 10-Q

Total deposits decreased $9,094,000 or 5.08% from December 31, 2002 to September 30, 2003. Table 4 below shows a breakdown of deposits by type at both December 31, 2002 and September 30, 2003. The reduction in total deposits is the result of an extremely competitive local market for Time Deposits and the internal movement of deposit accounts into Repurchase Agreements which offer additional security for balances over the FDIC insurance limit and a higher rate of interest. Table 4: Deposit Balances by Type

Short-term borrowings, which include Federal Home Loan Bank borrowings with original maturities of less than one year and repurchase agreements, increased $2,029,000 from December 31, 2002 to September 30, 2003. Of the $2,029,000 increase, Federal Home Loan Bank borrowings were unchanged while repurchase agreements increased $2,029,000. This increase can be attributed to local businesses seeking interest-bearing transaction accounts that maintain an added benefit of collateralization on 14 14 COMBANC, INC. AND SUBSIDIARY September 30, 2003 FORM 10-Q seeking interest-bearing transaction accounts that maintain an added benefit of collateralization on balances over the FDIC insurance limit of $100,000. Long-term debt or borrowings with an original maturity of greater than one year from the Federal Home Loan Bank decreased $2,762,000 or 35.78% from December 31, 2002 to September 30, 2003. This decrease is due to the maturity of two advances totaling $1,993,000 with a weighted average rate of 7.44%. Due to the excessive amount of liquidity, management chose not to borrow additional funds from FHLB at that time. Total shareholders equity decreased $1,012,000 from December 31, 2002 to September 30, 2003. Included in the overall decrease was a decrease in retained earnings of $553,000, which was the result of $198,000 in net income for the first three quarters of 2003, less $752,000 in dividends, and a decrease of $459,000 in Accumulated Other Comprehensive Income, which is the unrealized gain on the available-for-sale securities portfolio net of federal income tax. No Treasury Stock was repurchased in the first three quarters of 2003. RESULTS OF OPERATIONS Net interest income, the difference between interest earned on interest-earning assets and interest expense incurred on interest-bearing liabilities, is the most significant component of The Commercial Bank's earnings. Net interest income is affected by changes in the volume and rates of interest-earning assets and interest-bearing liabilities and the volume of interest-earning assets funded with low cost deposits, noninterest-bearing deposits and shareholders' equity. Net interest income decreased $296,000 for the nine months ended September 30, 2003 from a year ago. Net income for the first three quarters of 2003 was $198,000 or $0.09 per share. This represents a decrease of 85.25% in net income per share compared to the nine months ended September 30, 2002. Annualized Return on average assets was 0.13% through the first nine months of 2003, down from 0.83% through the first nine months of 2002. Annualized return on average equity decreased to 1.11% for the first nine months of 2003 from 7.37% for the first nine months of 2002. The most significant income statement changes between the nine months ended September 30, 2003 and the nine months ended September 30, 2002 were as follows: - Net interest income decreased $296,000 or 5.04%. Included in the decrease is a decrease in interest and fees on loans which is the direct result of a decrease in average loan balances of $10,801,000 over the past year as well as a decrease in interest rates. The decrease in loan balances is due to the continued high volume of 1 to 4 family residential loans being sold to the secondary market and management pricing higher risk commercial loans above the competition and allowing those loans to leave the institution. Although interest on taxable investment securities has increased by 5.74%, the yield on investment securities has decreased to 3.38% for the nine months ended September 30, 2003 from 5.54% for the nine months ended September 30, 2002. The most significant decrease in yield on taxable securities is attributable to the increase in premium amortization, which is a direct result of the increase in prepayment speeds on mortgage-backed securities. - In light of the low coverage ratio of the ALLL to nonaccrual loans, there was a significant increase in the provision for loan losses and increased reserves on specified credits as discussed in prior paragraphs. 15 COMBANC, INC. AND SUBSIDIARY September 30, 2003 FORM 10-Q - Total other income increased $542,000 in 2003 over the same period in 2002. This increase is the result of the increased volume of real estate loans that have been sold to the Federal Home Loan Mortgage Corporation due to a continued high demand for low interest rate, long-term 1 to 4 family residential mortgages. The increase in serviced FHLMC loan balances from yearend can be noted in Table 2 above. The most significant income statement changes between the three months ended September 30, 2003 and the three months ended September 30, 2002 were as follows: - Net interest income has decreased 6.75% or $129,000. This decrease is also due to the decrease of over $10 million in average loan balances, which is described above, as well as a decrease in interest rates. Premium amortization on mortgage-backed securities has increased by $135,000 in comparison of the two quarters which is the result of increased prepayment speeds. As interest rates rise, prepayment speeds will decrease, thus causing premium amortization expense to decrease. - In light of the low coverage ratio of the ALLL to nonaccrual loans, there was a significant increase in the provision for loan losses and increased reserves on specified credits as discussed in prior paragraphs. - Total other income increased by 57.23% due to an increase in the gain on sale of loans to FHLMC of $103,000. Other operating income increased $70,000, which is also the result of the sale of l to 4 family residential loans to FHLMC through an increase in service fee income, mortgage service rights, and an increase in closing costs. PROSPECTS FOR THE REMAINDER OF 2003 Management believes earnings prospects for the remainder of 2003 will improve. Management believes the ALLL to be sufficient to cover any losses that the loan portfolio may incur. A key element of the Corporation's earnings over the last quarter of 2003 is the Provision for Loan Losses. As it can be seen in the income statement, the Provision for Loan Losses has increased $280,000 in the third quarter of 2003 over the third quarter of 2002. Although the Provision for Loan Losses has increased significantly, net interest margin remains strong at a 4.00%. Another major variable that could affect 2003 earnings is the gain on sale of loans. If interest rates drop or remain level, additional 1 to 4 family sales volume could occur which will create additional non-interest income. REGULATORY CAPITAL The Federal Reserve Board's risk-based capital guidelines addressing the capital adequacy of bank holding companies and banks (collectively, "banking organizations") include a definition of capital and a framework for calculating risk-weighted assets and off-balance sheet items to broad risk categories, as well as minimum ratios to be maintained by banking organizations. A banking organization's risk-based capital ratios are calculated by dividing its qualifying capital by its risk-weighted assets. Under the risk-based capital guidelines, there are two categories of capital: core capital ("Tier 1") and supplemental capital ("Tier 2"), collectively referred to as Total Capital. Tier 1 Capital includes 16 COMBANC, INC. AND SUBSIDIARY September 30, 2003 FORM 10-Q common stockholders' equity, qualifying perpetual preferred stock and minority interest in equity accounts of consolidated subsidiaries. Tier 2 capital includes perpetual preferred stock (to the extent ineligible for Tier 1), hybrid capital instruments (i.e. perpetual debt and mandatory convertible securities) and limited amounts of subordinated debt, intermediate-term preferred stock and the allowance for credit losses. The Federal Reserve Board's leverage constraint guidelines establish a minimum ratio of Tier 1 Capital to quarterly average total assets ("Leverage Ratio"). The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") established five capital tiers for banks. Pursuant to that statute the federal bank regulatory agencies have defined the five capital tiers for banks. Under these regulations, a bank is defined to be well capitalized, the highest tier, if it maintains a Tier 1 Capital ratio of at least 6 percent, a Total Capital ratio of at least 10 percent and a Leverage ratio of at least 5 percent. At September 30, 2003 ComBanc, Inc. maintained a Tier I Capital ratio of 17.42%, a Total Capital ratio of 18.68% and a Tier I Leverage ratio of 10.83%. Based on the respective regulatory capital ratios at September 30, 2003, and based on the definitions in the regulations issued by the Federal Reserve Board and the other federal bank regulatory agencies setting forth the general capital requirements mandated by FDICIA, the Bank is well capitalized. LIQUIDITY The liquidity of a banking institution reflects its ability to provide funds to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. Funding of loan requests, providing for liability outflows, and management of interest rate fluctuations require continuous analysis in order to match the maturities of specific categories of short-term loans and investments with specific types of deposits and borrowings. Bank liquidity is thus normally considered in terms of the nature and mix of the banking institution's sources and uses of funds. Liquid assets consist of Cash and Due from Banks, Federal Funds Sold, and Securities Available for Sale. At September 30, 2003 the Bank's liquid assets amounted to $68,508,000 or 33.11% of total assets compared with 32.71% at December 31, 2002. The Bank's residential first mortgage portfolio has been used to collateralize borrowings from the Federal Home Loan Bank as an additional source of liquidity. The Federal Home Loan Bank requires the Bank to pledge 165% of the first mortgage loan portfolio as collateral. The approximate available line of credit from the Federal Home Loan Bank at September 30, 2003 was $35.0 million with a balance of $4,958,000 leaving $30,042,000 to advance. At September 30, 2003, management considers its liquidity to be adequate to meet its normal funding requirements. 17 COMBANC, INC. AND SUBSIDIARY September 30, 2003 FORM 10-Q Item 3 - Quantitative and Qualitative Disclosures about Market Risk There have been no material changes in the Company's quantitative and qualitative market risks since December 31, 2002. The following table compares rate sensitive assets and liabilities as of September 30, 2003 to December 31, 2002. Principal Amount Maturing or Repricing in: (Dollars in Thousands)

Item 4 - Controls and Procedures An evaluation was carried out under the supervision and with the participation of the Company's management, including our Chief Executive Officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a - 15 (e) and 15d - 15 (e) of the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on their evaluation, our Chief Executive Officer and principal financial officer have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms. There has been no significant change in the Company's internal controls over financial reporting that occurred during the period covered by this report that has materially affected, or that is reasonably likely to materially affect, our internal control over financial reporting. 18 COMBANC, INC. AND SUBSIDIARY September 30, 2003 FORM 10-Q PART II - OTHER INFORMATION Item 1 - Legal Proceedings The Commercial Bank, at any given time, is involved in a number of lawsuits initiated by The Commercial 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. Combanc, Inc. is involved in no legal proceedings. At September 30, 2003, The Commercial 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 Commercial 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. Management and the Board are not aware of any additional potential claims against The Commercial Bank, which have not been disclosed herein. Item 6 - Exhibits and Reports on Form 8-K (a) Exhibit 11. Statement regarding computation of earnings per share is contained in Part I, Item 2. Exhibit 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - principal financial officer Exhibit 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 - Principal Executive Officer Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - principal financial officer Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Principal Executive Officer (b) There were no reports on 8-K filed during the quarter ended September 30, 2003. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMBANC, INC. Date: November 12, 2003 /s/ Paul G. Wreede ------------------ Paul G. Wreede President, CEO, and Director Date: November 12, 2003 /s/ Jason R. Thornell --------------------- Jason R. Thornell AVP/Controller 20 EXHIBIT INDEX Exhibit No. Description Exhibit 11. Statement regarding computation of earnings per share is contained in Part I, Item 2. Exhibit 31.1. Certification pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 - principal financial officer Exhibit 31.2 Certification pursuant to Section 302 of the Sarbanes- Oxley Act of 2002 - Principal Executive Officer Exhibit 32.1 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - principal financial officer Exhibit 32.2 Certification pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 - Principal Executive Officer 21

COMBANC INC 10-Q