10-Q 1 k86703e10vq.txt FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Transition period from to ------------------------- ---------------------- Commission File Number 000-24925 COMBANC, INC. -------------------------------------------------------------------------------- (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 latest practicable date: 2,211,014 shares of the ComBanc's common stock (no par value) were outstanding as of July 22, 2004. Page 1 of 25 COMBANC, INC. AND SUBSIDIARY June 30, 2004 FORM 10-Q TABLE OF CONTENTS

2 COMBANC, INC. AND SUBSIDIARY June 30, 2004 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 June 30, 2004 FORM 10-Q COMBANC, INC. AND SUBSIDIARY DELPHOS, OHIO CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ($ in thousands, except per share data)

The accompanying notes are an integral part of the condensed consolidated financial statements 4 COMBANC, INC. AND SUBSIDIARY June 30, 2004 FORM 10-Q COMBANC, INC. AND SUBSIDIARY DELPHOS, OHIO CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS ($ in thousands, except per share data)

The accompanying notes are an integral part of the condensed consolidated financial statements 5 COMBANC, INC. AND SUBSIDIARY June 30, 2004 FORM 10-Q COMBANC, INC. AND SUBSIDIARY DELPHOS, OHIO CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS ($ in thousands)

The accompanying notes are an integral part of the condensed consolidated financial statements 6 COMBANC, INC. AND SUBSIDIARY June 30, 2004 FORM 10-Q NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS June 30, 2004 Note 1, Basis of Presentation Certain information and note disclosures normally included in the Company's annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted. These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Form 10-K annual report for 2003 filed with the Securities and Exchange Commission. The significant accounting policies followed by ComBanc, Inc. (Company) and its wholly-owned subsidiary, The Commercial Bank (Bank), for interim financial reporting are consistent with the accounting policies followed for annual financial reporting. All adjustments which are, in the opinion of management, necessary for a fair presentation of the results for the periods reported, consisting only of normal recurring adjustments, have been included in the accompanying unaudited condensed consolidated financial statements. The results of operations for the six months ended June 30, 2004 and for the three months ended June 30, 2004 are not necessarily indicative of those expected for the remainder of the year. The Condensed Consolidated Balance Sheet at December 31, 2003 has been taken from audited consolidated financial statements at that date. Note 2, Earnings Per Share Earnings per share on the income statement has been computed on the basis of weighted-average number of shares of common stock outstanding. The weighted-average shares outstanding for the six months ending June 30, 2004 and June 30, 2003 were 2,211,014. Note 3, Commitments and Contingent Liabilities Outstanding commitments to originate loans were $17,344,000 and $20,770,000 at June 30, 2004 and December 31, 2003, respectively. Note 4, Allowance for Loan Losses Credit risk is the risk of loss from a customer default on a loan. The Bank has in place a process to identify and manage its credit risk. The process includes initial credit review and approval, periodic monitoring to measure compliance with credit agreements and internal credit policies, monitoring changes in the risk ratings of loans and leases, identification of problem loans and special procedures for the collection of problem loans. The risk of loss is difficult to quantify and is subject to fluctuations in values and general economic conditions and other factors. THE DETERMINATION OF THE ALLOWANCE FOR LOAN LOSSES IS A CRITICAL ACCOUNTING POLICY WHICH INVOLVES ESTIMATES AND MANAGEMENT'S JUDGMENT ON A NUMBER OF FACTORS SUCH AS NET CHARGE-OFFS, DELINQUENCIES IN THE LOAN PORTFOLIO AND GENERAL ECONOMIC 7 COMBANC, INC. AND SUBSIDIARY June 30, 2004 FORM 10-Q CONDITIONS. The Bank considers the allowance for loan losses of $3,956,000 adequate to cover losses inherent in the loan portfolios as of June 30, 2004. However, no assurance can be given that the Bank will not, in any particular period, sustain loan losses that are sizeable in relation to the amount reserved, or that subsequent evaluations of the loan portfolio, in light of factors then prevailing, including economic conditions and the Bank's on-going credit review process, will not require significant increases in the allowance for loan losses. Among other factors, a protracted economic slowdown and/or a decline in commercial or residential real estate values in the Bank's markets may have an adverse impact on the adequacy of the allowance for loan losses by increasing credit risk and the risk of potential loss. Note 5, Subsequent Events The Company and the Bank entered into an Agreement and Plan of Merger dated as of August 4, 2004 by and among First Defiance Financial Corp., First Federal Bank of the Midwest, the Company and the Bank (the "Agreement and Plan of Merger"). A copy of the Agreement and Plan of Merger was attached as an exhibit to the Company's Current Report on Form 8-K, which was filed with the SEC on August 5, 2004. The agreement and plan have been filed with the Securities and Exchange Commission and may be viewed on the website maintained by the SEC at http://www.sec.gov. 8 COMBANC, INC. AND SUBSIDIARY June 30, 2004 FORM 10-Q PART I - FINANCIAL INFORMATION Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations FORWARD-LOOKING STATEMENTS The Company has made, and may continue to make, various forward-looking statements with respect to interest rate sensitivity analysis, credit quality and other financial and business matters for 2004 and, in certain instances, subsequent periods. The Company cautions that these forward-looking statements are subject to numerous assumptions, risks and uncertainties, and that statements for periods subsequent to 2003 are subject to greater uncertainty because of the increased likelihood of changes in underlying factors and assumptions. Actual results could differ materially from forward-looking statements. In addition to those factors previously disclosed by the Company and those factors identified elsewhere herein, the following factors could cause actual results to differ materially from such forward looking statements: the extent and timing of actions of the Federal Reserve, changes in economic conditions, continued pricing pressures on loan and deposit products, actions of competitors, customer's acceptance of the Company's products and services, the extent and timing of legislative and regulatory actions and reforms, changes in accounting principals, technological changes and increased technology costs, downturn in demand for loan and deposit products, and changes in the interest rate environment that reduce interest margins. The Company's forward-looking statements speak only as the date on which such statements are made. By making any forward-looking statements, the Company assumes no duty to update them to reflect new, changing or unanticipated events or circumstances. ENTITY STATUS On April 13, 1998, The Commercial Bank became a wholly-owned subsidiary of the newly formed ComBanc, Inc., a one-bank holding company. Since ComBanc's only significant asset is the investment in The Commercial Bank, the following discussion will focus on the operations of The Commercial Bank. CRITICAL ACCOUNTING POLICIES The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States and conform to general practices within the banking industry. The Company's significant accounting policies are described in detail in the notes to the Company's consolidated financial statements for the year ended December 31, 2003. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. The financial position and results of operations can be affected by these estimates and assumptions and are integral to the understanding of reported results. Critical accounting policies are those policies that management believes are the most important to the portrayal of the Company's financial condition and results, and they require management to make estimates that are difficult, subjective, or complex. Allowance for Credit Losses- The allowance for credit losses provides coverage for probable losses inherent in the Company's loan portfolio. Management evaluates the adequacy of the allowance for credit losses each quarter based on changes, if any, in underwriting activities, the loan portfolio composition (including product mix and geographic, industry or customer-specific concentrations), 9 COMBANC, INC. AND SUBSIDIARY June 30, 2004 FORM 10-Q trends in loan performance, regulatory guidance and economic factors. This evaluation is inherently subjective, as it requires the use of significant management estimates. Many factors can affect management's estimates of specific and expected losses, including volatility of default probabilities, rating migrations, loss severity and economic and political conditions. The allowance is increased through provisions charged to operating earnings and reduced by net charge-offs. The Company determines the amount of the allowance based on relative risk characteristics of the loan portfolio. The allowance recorded for commercial loans is based on reviews of individual credit relationships and an analysis of the migration of commercial loans and actual loss experience. The allowance recorded for homogeneous consumer loans is based on an analysis of loan mix, risk characteristics of the portfolio, fraud loss and bankruptcy experiences, and historical losses, adjusted for current trends, for each homogeneous category or group of loans. The allowance for credit losses relating to impaired loans is based on the loan's observable market price, the collateral for certain collateral-dependent loans, or the discounted cash flows using the loan's effective interest rate. Regardless of the extent of the Company's analysis of customer performance, portfolio trends or risk management processes, certain inherent but undetected losses are probable within the loan portfolio. This is due to several factors including inherent delays in obtaining information regarding a customer's financial condition or changes in their unique business conditions, the judgmental nature of individual loan evaluations, collateral assessments and the interpretation of economic trends. Volatility of economic or customer-specific conditions affecting the identification and estimation of losses for larger non-homogeneous credits and the sensitivity of assumptions utilized to establish allowances for homogenous groups of loans are among other factors. The Company estimates a range of inherent losses related to the existence of these exposures. The estimates are based upon the Company's evaluation of imprecision risk associated with the commercial and consumer allowance levels and the estimated impact of the current economic environment. Mortgage Servicing Rights- Mortgage servicing rights ("MSRs") associated with loans originated and sold, where servicing is retained, are capitalized and included in other intangible assets in the consolidated balance sheet. The value of the capitalized servicing rights represents the present value of the future servicing fees arising from the right to service loans in the portfolio. Critical accounting policies for MSRs relate to the initial valuation and subsequent impairment tests. The methodology used to determine the valuation of MSRs requires the development and use of a number of estimates, including anticipated principal amortization and prepayments of that principal balance. Events that may significantly affect the estimates used are changes in interest rates, mortgage loan prepayment speeds and the payment performance of the underlying loans. The carrying value of the MSRs is periodically reviewed for impairment based on a determination of fair value. For purposes of measuring impairment, the servicing rights are compared to a valuation prepared based on a discounted cash flow methodology, utilizing current prepayment speeds and discount rates. Impairment, if any, is recognized through a valuation allowance and is recorded as amortization of intangible assets. FINANCIAL CONDITION We are currently subject to the terms of the Written Agreement, dated December 18, 2003, among the Company, the Bank, the Federal Reserve Bank of Cleveland and the Ohio Division of Financial Institutions. Total Delinquent and Nonaccrual Loans as of June 30, 2004 stood at $4,022,000 as compared to $6,948,000 as of December 31, 2003. This decrease represents a 42.1% improvement since 10 COMBANC, INC. AND SUBSIDIARY June 30, 2004 FORM 10-Q December 31, 2003. Total delinquency reduction can be credited to the continued emphasis on workout programs and a steady improvement in the local economy. TABLE 1: Analysis of Delinquencies Dollars in Thousands

Total assets increased $1,080,000 or .5% from $207,733,000 at December 31, 2003 to $208,813,000 at June 30, 2004. This is the result of a $6 million increase in the investment portfolio less a $5 million decrease in the loan portfolio. This increase was funded through an increase of $3 million in total deposits less a decrease of $1 million in short term borrowings and a decrease of $1 million in long term debt during the first six months of 2004. Investment securities increased $5,938,000 from $55,052,000 at December 31, 2003 to $60,990,000 at June 30, 2004. This increase is the result of $19,104,000 in purchases less the pay downs from Mortgage-backed securities and the maturity of a U.S. Agency Bond totaling $9,480,000, the sale of $2,590,000 of municipal and mortgage-backed securities, premium amortization of $227,000, and a decrease in the market value of the available-for-sale portfolio of $869,000. Total gross loans decreased 3.7% or $4,817,000 from December 31, 2003 to $124,072,000 at June 30, 2004. The breakdown of the loan portfolio is detailed in table 2 below. A significant change in the portfolio includes a decrease in construction and land development loans. This decrease is the result of the completion of a large construction loan and being converted to an amortized real estate secured by nonfarm, nonresidential loan. Another significant change includes 1-4 family secured by first lien mortgages. These loans decreased by $1,544,000 due to additional refinancing and the Bank selling the loans to the secondary market. As can be seen in Table 2, secondary market lending to FHLMC has dropped off significantly to net growth of $1,136,000 in the first two quarters of 2004. The decrease in sales to FHLMC is due to the increase of interest rates on the long end of the yield curve by approximately 50 basis points. These loans will continue to generate service fee income at .25% per year over the life of the loan, which currently amounts to approximately $159,000 annually. Another significant change in the portfolio includes a $1,174,000 decrease in consumer loans. This decrease is due to management's continued desire to decrease consumer loans due to the amount of risk that they carry. 11 COMBANC, INC. AND SUBSIDIARY June 30, 2004 FORM 10-Q TABLE 2: Analysis of Loan Portfolio Composition Dollars in Thousands LOAN TYPE

The Allowance for Loan Losses at June 30, 2004 was 3.1% of total loans compared to 3.0% at December 31, 2003. This $131,000 increase from December 31, 2003 is the result of a $60,000 provision and net recoveries of $71,000, increasing the Allowance for Loan Loss from $3,825,000 at December 31, 2003 to $3,956,000 at June 30, 2004. Table 3 below illustrates an analysis of the Allowance for Loan and Lease Losses over the past five years. 12 COMBANC, INC. AND SUBSIDIARY June 30, 2004 FORM 10-Q TABLE 3: Analysis of Changes in Allowance for Loan and Lease Losses Dollars in Thousands

Total deposits increased $2,923,000 or 1.7% from December 31, 2003 to June 30, 2004. Table 4 below shows a breakdown of deposits by type at both June 30, 2004 and December 31, 2003. Management attributes the increase in total deposits to competitive interest rates being offered on money market savings accounts and certificates of deposit. Table 4: Deposit Balances by Type (Dollars in Thousands) DEPOSIT TYPE

Short-term borrowings, which are repurchase agreements, decreased $922,000 from December 31, 2003 to June 30, 2004. Long-term debt or borrowings with an original maturity of greater than one year from the Federal Home Loan Bank decreased $976,000 or 21.0% from December 31, 2003 to June 30, 2004. This decrease is due to a maturing advance, the prepayment of an advance with a prepayment option and regular amortization. Due to the excessive amount of liquidity, management chose not to borrow additional funds from FHLB at that time. 13 COMBANC, INC. AND SUBSIDIARY June 30, 2004 FORM 10-Q Total shareholders equity increased $135,000 from December 31, 2003 to June 30, 2004. Included in the overall increase was an increase in retained earnings of $709,000, which was solely comprised of net income, while there was a decrease of $574,000 in Accumulated Other Comprehensive Income, which is the unrealized gain/loss on the available-for-sale securities portfolio net of federal income tax. Interest rates have increased throughout the quarter, causing the value of the investment portfolio to depreciate. No Treasury Stock was repurchased in the first two quarters of 2004. RESULTS OF OPERATIONS Six Months Ended June 30, 2004 compared to Six Months Ended June 30, 2003 Net income for the first two quarters of 2004 was $709,000 or $0.32 per share. This represents an increase of $0.37 per share compared to the first two quarters of 2003. Annualized Return on average assets was 0.67% for the first two quarters of 2004, up from -.11% for the first quarter of 2003. Annualized return on average equity increased to 6.22% for the first two quarters of 2004 from -.94% for the first two quarters of 2003. The most significant income statement changes between the six months ended June 30, 2004 and the six months ended June 30, 2003 were as follows: - The provision for loan losses has decreased $1,850,000 in the first two quarters of 2004. At year end 2003, management chose to have a complete loan review of the portfolio by an external consultant. At that time, all classified assets were allocated for in the allowance for loan losses charged to 2003 earnings. At June 30, 2004, management believes the allowance for loan losses is sufficient to cover all known losses. As a result, only $60,000 was charged to provision for loan losses in the first two quarters of 2004. - Total noninterest income decreased $195,000 in the first two quarters of 2004 compared to 2003. This decrease is the result of a $203,000 decrease in gain on sale of loans sold to FHLMC. As interest rates continue to rise, sales of loans to FHLMC will continue to decrease. - Total noninterest expense increased $246,000 in the first two quarters of 2004 compared to the first two quarters of 2003. This is the result of an $116,000 increase in legal and professional fees which is due to additional expense incurred to address the Written Agreement, shareholder litigation and related matters. There was also an increase in Salaries and Employee Benefits in the amount of $67,000, which is the result of a $45,000 increase in employee retirement benefits. - Other expense increased $54,000 in the first two quarters of 2004 as compared to the first two quarters of 2003. This increase is the result of a $17,000 increase in insurance premiums, a $13,000 increase in repossession expense and a $70,000 increase in loss on sale of other real estate owned, while there was a $39,000 decrease in mortgage servicing rights. - Net interest income decreased $128,000 or 3.4% in the first two quarters of 2004 compared to the first two quarters of 2003. Included in the decrease is a decrease in interest and fees on loans which is the direct result of a decrease in loan balances of $8,847,000 since June 30, 2003. The decrease in loan balances is due to the large volume of 1 to 4 family residential loans sold to the secondary market in 2003 and management pricing higher risk commercial and consumer loans above the competition and allowing those loans to leave the institution. Although net interest income has decreased, net interest margin for the first two quarters remains strong at 3.90%. 14 COMBANC, INC. AND SUBSIDIARY June 30, 2004 FORM 10-Q Three Months Ended June 30, 2004 compared to Three Months Ended June 30, 2003 Net income for the second quarter of 2004 was $401,000 or $0.18 per share. This represents a decrease of $0.03 per share compared to the second quarter of 2003. Annualized Return on average assets was 0.76% for the second quarter of 2004, down from .90% for the second quarter of 2003. Annualized return on average equity decreased to 7.03% for the second quarter of 2004 from 7.96% for the second quarter of 2003. The most significant income statement changes between the three months ended June 30, 2004 and the three months ended June 30, 2003 were as follows: - The provision for loan losses has decreased $180,000 in the second quarter of 2004. There was no provision recorded in the second quarter of 2004. The lower provision was due in part to the Company's experience in the first two quarters of 2004, which showed net recoveries of $71,000. Provisions for loan losses are charged to earnings to bring the total allowance for loan losses to the level deemed appropriate by management based on the following factors: historical experience; the volume and type of lending conducted by ComBanc, Inc.; the amount of non-performing assets, including loans which meet the FASB Statement No. 114 definition of impaired; the amount of assets graded by management as substandard, doubtful, or loss; industry standards; general economic conditions, particularly as they relate to ComBanc, Inc's market area; and other factors related to the collectibility of ComBanc, Inc's loan portfolio. As of June 30, 2004, management believes the balance of the allowance for loan losses is appropriate. - In the second quarter of 2004, net interest income decreased $67,000 compared to the second quarter of 2003. The decrease in the cost of funds did not fully offset the decrease in interest on interest earning assets. The decrease is also due to a decrease in loan balances of $8,847,000 from $132,786,000 at June 30, 2003 to $123,939,000 at June 30, 2004. As loan balances decreased, the proceeds were invested in short-term, lower rate investment securities. Management chooses to invest in shorter term securities to allow for additional liquidity as interest rates begin to rise. - Total noninterest income decreased $61,000 in the second quarter of 2004 as compared to the second quarter of 2003. Included in the decrease is a $133,000 decrease in gain on sale of loans to FHLMC. Since June 30, 2003, 15 year secondary market mortgage rates have gone up 100 basis points from 4.50% at June 30, 2003 to 5.50% at June 30, 2004. As a result of this 100 basis point increase, mortgage refinances and purchases have slowed drastically causing a drastic decrease in gain on sale of loans. While there was a $133,000 decrease in gain on sale of loans, there was a $71,000 increase in other income. In June of 2004, mortgage servicing right impairments in the amount of $102,000 were recaptured. With the approximately 50 basis point rise in interest rates in the second quarter, prepayment speeds on mortgages slowed significantly causing the value of mortgage servicing rights to increase. - Total noninterest expense increased $113,000 in the second quarter of 2004 versus the second quarter of 2003. Included in the increase is an increase of $52,000 in legal and professional fees which are the result of additional expense incurred to address the Written Agreement, shareholder litigation and related matters. Also included in the increase is an $85,000 increase in salaries and employee benefits, of which, $75,000 is an increase in employee retirement benefits. 15 COMBANC, INC. AND SUBSIDIARY June 30, 2004 FORM 10-Q REGULATORY CAPITAL The Federal Reserve Board's risk-based capital guidelines addressing the capital adequacy of bank holding companies and banks (collectively, "banking organizations") include a definition of capital and a framework for calculating risk-weighted assets and off-balance sheet items to broad risk categories, as well as minimum ratios to be maintained by banking organizations. A banking organization's risk-based capital ratios are calculated by dividing its qualifying capital by its risk-weighted assets. Under the risk-based capital guidelines, there are two categories of capital: core capital ("Tier 1") and supplemental capital ("Tier 2"), collectively referred to as Total Capital. Tier 1 Capital includes common stockholders' equity, qualifying perpetual preferred stock and minority interest in equity accounts of consolidated subsidiaries. Tier 2 capital includes perpetual preferred stock (to the extent ineligible for Tier 1), hybrid capital instruments (i.e., perpetual debt and mandatory convertible securities) and limited amounts of subordinated debt, intermediate-term preferred stock and the allowance for credit losses. The Federal Reserve Board's leverage constraint guidelines establish a minimum ratio of Tier 1 Capital to quarterly average total assets ("Leverage Ratio"). The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") established five capital tiers for banks. Pursuant to that statute the federal bank regulatory agencies have defined the five capital tiers for banks. Under these regulations, a bank is defined to be well capitalized, the highest tier, if it maintains a Tier 1 Capital ratio of at least 6 percent, a Total Capital ratio of at least 10 percent and a Leverage Ratio of at least 5 percent. At June 30, 2004 ComBanc, Inc. maintained a Tier I capital ratio of 18.21%, a total capital ratio of 19.48% and a Tier I leverage ratio of 10.78%. Based on the respective regulatory capital ratios at June 30, 2004, and based on the definitions in the regulations issued by the Federal Reserve Board and the other federal bank regulatory agencies setting forth the general capital requirements mandated by FDICIA, the Bank is well capitalized. LIQUIDITY The liquidity of a banking institution reflects its ability to provide funds to meet loan requests, to accommodate possible outflows in deposits and to take advantage of interest rate market opportunities. Funding of loan requests, providing for liability outflows, and management of interest rate fluctuations require continuous analysis in order to match the maturities of specific categories of short-term loans and investments with specific types of deposits and borrowings. Bank liquidity is thus normally considered in terms of the nature and mix of the banking institution's sources and uses of funds. Liquid assets consist of cash and due from banks, federal funds sold, and securities available for sale. At June 30, 2004 the Bank's liquid assets amounted to $78,930,000 or 37.8% of total assets compared with 35.2% at December 31, 2003. Management considers its liquidity to be adequate to meet its normal funding requirements. 16 COMBANC, INC. AND SUBSIDIARY June 30, 2004 FORM 10-Q Item 3 - Quantitative and Qualitative Disclosures about Market Risk There have been no material changes in the Company's quantitative and qualitative market risks since December 31, 2003. As discussed in the 2003 Annual Report on Form 10-K, ComBanc, Inc's ability to maximize net income is dependent on management's ability to plan and control net interest income through management of the pricing and mix of assets and liabilities. Because a large portion of assets and liabilities of ComBanc, Inc. are monetary in nature, changes in interest rates and monetary or fiscal policy affect its financial condition and can have a significant impact on the net income of the Company. ComBanc, Inc does not use off balance sheet derivatives to enhance its risk management, nor does it engage in trading activities beyond the sale of mortgage loans. ComBanc, Inc. monitors its exposure to interest rate risk on a monthly basis through simulation analysis which measures the impact changes in interest rates can have on net income. The simulation technique analyzes the effect of a presumed 200 basis point shift in interest rates and takes into account prepayment speeds on amortizing financial instruments, loan and deposit volumes and rates, nonmaturity deposit assumptions and capital requirements. The results of the simulation indicate that in an environment where interest rates rise or fall 200 basis points over a 12 month period, using June 2004 amounts as a base case, ComBanc, Inc's net interest income would be impacted by less than the board mandated guidelines of 15%. Item 4 - Controls and Procedures Under the supervision and with the participation of our management, including the Chief Executive Officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e) and Exchange Act Rule 15d - 15(e) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and principal financial officer have concluded that the Company's disclosure controls and procedures are effective to ensure that information required to be disclosed in reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. There were no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or that are reasonably likely to materially affect, our internal control over financial reporting. 17 COMBANC, INC. AND SUBSIDIARY June 30, 2004 FORM 10-Q PART II - OTHER INFORMATION Item 1 - Legal Proceedings On June 2, 2004, Paul D. Harter, a shareholder of ComBanc, Inc., filed an action in the Court of Common Pleas for Allen County, Ohio (the "Court") against the Board of Directors of ComBanc, Inc. (Paul D. Harter V. Board of Directors, ComBanc, Inc. et al. Case No. CV20040531). On May 28, 2004, Mr. Harter submitted written consents of shareholders requesting the Company to call a special shareholders meeting "to determine by shareholder vote whether current members of the Board should be removed and replaced." The Company's Board of Directors declined to call the requested shareholders meeting because it believed the requests had been solicited by Mr. Harter in violation of Section 14(a) of the Securities Exchange Act of 1934 and Regulation 14A promulgated thereunder and were therefore invalid. Mr. Harter filed the action seeking to compel the Company to call a special meeting. The Company believes the action is without merit and intends to vigorously defend its position. Additionally, the Bank, at any given time, is involved in a number of lawsuits initiated by the Bank as a plaintiff, intending to collect upon delinquent accounts, to foreclose upon real property, or to seize and sell personal property pledged as security for any such account. At June 30, 2004, the Bank was involved in a number of such cases as a party-plaintiff, and occasionally, as a party-defendant due to its joinder as a lien holder, either by mortgage or by judgment lien. In the ordinary case, the Bank's security and value of its lien is not threatened, except through bankruptcy or loss of value of the collateral should sale result in insufficient proceeds to satisfy the judgment. Paul D. Harter v. Board of Directors, ComBanc, Inc. et al. Case No. CV2004-0531. Item 4 - Submission of Matters to a Vote of Security Holders The annual meeting of stockholders of ComBanc, Inc. was held on April 12, 2004. Based upon the report of the Inspector of Elections on the matters voted upon at this meeting the number of Directors for the ensuing year was fixed at six (6). The following were elected as Directors until the 2005 Annual Meeting of Shareholders and until their successors are elected and qualified:

Item 6 - Exhibits and Reports on Form 8-K (a) Exhibit 11. Statement regarding computation of earnings per share is contained in Part I, Item 2. Exhibits 31.1 and 31.2 Rule 13a-14(a)/15d-14(a) Certifications Exhibits 32.1 and 32.2 Section 1350 Certifications 18 COMBANC, INC. AND SUBSIDIARY June 30, 2004 FORM 10-Q (b) I. A report on Form 8-K, reported under Items 12 and 7, was filed with the SEC on April 9, 2004, which included Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003, Condensed Consolidated Statements of Income For the Three Months Ended March 31, 2004 and March 31, 2003 and Condensed Consolidated Statements of Cash Flows For the Three Months March 31, 2004 and March 31, 2003. II. A second report on Form 8-K, reported under Items 5 and 7, was filed with the SEC on May 18, 2004, which included Condensed Consolidated Balance Sheets as of March 31, 2004 and December 31, 2003 and Condensed Consolidated Statements of Income For the Three Months Ended March 31, 2004 and March 31, 2003. III. A third report on Form 8-K, reported under Items 5 and 7, was filed on June 1, 2004 with the SEC. IV. A fourth report on Form 8-K, reported under Items 7 and 12, was filed with the SEC on July 16, 2004, which included Condensed Consolidated Balance Sheets as of June 30, 2004 and December 31, 2003, Condensed Consolidated Statements of Operations For the Three Months Ended June 30, 2004 and June 30, 2003, Condensed Consolidated Statements of Operations For the Six Months Ended June 30, 2004 and June 30, 2003 and Condensed Consolidated Statements of Cash Flows For the Six Months June 30, 2004 and June 30, 2003. V. A Fifth report on Form 8-K, reported under Items 5 and 7, was filed with the SEC on August 5, 2004, which included as exhibits, a News Release dated August 4, 2004 and an Agreement and Plan of Merger dated as of August 4, 2004 by and among First Defiance Financial Corp., First Federal Bank of the Midwest, ComBanc, Inc. and The Commercial Bank. 19 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMBANC, INC. Date: August 13, 2004 /s/ Paul G. Wreede ------------------ Paul G. Wreede President, CEO, and Director Date: August 13, 2004 /s/ Jason R. Thornell --------------------- Jason R. Thornell VP/Controller 20 EXHIBIT INDEX

COMBANC INC 10-Q