As filed with the Securities and Exchange Commission on November 10, 2004.
Registration No. 333-119821
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
-------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------
FIRST DEFIANCE FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
OHIO 6035 34-1803915
---------------------------------- ---------------------------- --------------------
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
601 Clinton Street
Defiance, Ohio 43512
(419) 782-5015
---------------------------------------------------
(Address, including ZIP Code, and telephone number,
including area code, of agent for service)
Copies to:
MR. WILLIAM J. SMALL KIMBERLY J. SCHAEFER, ESQ.
First Defiance Financial Corp. Vorys, Sater, Seymour and Pease LLP
601 Clinton Street 221 E. Fourth Street
Defiance, Ohio 43512 Suite 2000, Atrium Two
(419) 782-5015 Cincinnati, Ohio 45202
(513) 723-4068
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable after this Registration Statement has become
effective and all other conditions to the consummation of the transactions have
been satisfied or waived.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
CALCULATION OF REGISTRATION FEE
-------------------------------
Title of each
class of securities Amount to be Proposed maximum Proposed maximum Amount of
to be registered registered (1) offering price per unit aggregate price (2) registration fee (3)
---------------- -------------- ----------------------- ------------------- --------------------
Common Shares, $0.01 881,852 shares of N/A $4,156,706 $526.65
par value per share Common Stock
-------------------------------
(1) Based upon the maximum number of shares of common stock that the Registrant
may be required to issue in the transaction, calculated as the product of
(i) 1,105,507 (half of the aggregate number of shares of ComBanc, Inc.
expected to be outstanding when the transaction is consummated) and (ii) an
exchange ratio of .79769 shares of the Registrant's common stock for each
share of ComBanc, which such ratio represents the highest exchange ratio
that may be used pursuant to the Merger Agreement.
(footnotes continued on next page)
(2) Estimated solely for the purpose of calculating the registration fee
required by Section 6(b) of the Securities Act of 1933 and computed
pursuant to Rule 457(f)(2) thereunder on the basis of the book value of the
Registrant's common stock to be exchanged in the transaction, computed, in
accordance with Rule 457(f), as the product of (i) $10.48 (the book value
of a ComBanc share on September 30, 2004) and (ii) 2,211,014, the aggregate
number of shares of ComBanc expected to be outstanding when the transaction
is consummated, less $19,014,720, the amount of cash to be paid by the
Registrant to shareholders of ComBanc.
(3) Previously paid.
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
COMBANC, INC.
230 East Second Street
Delphos, Ohio 45833
(419) 692-8408
-----------------------------------------
Notice of Special Meeting of Shareholders
To Be Held on December 21, 2004
A special meeting of shareholders of ComBanc, Inc. will be held on
December 21, 2004 at 1:00 p.m., Eastern Time, at the Fraternal Order of Eagles,
1600 E. 5th Street, Delphos, Ohio. The special meeting will be held for the
purpose of considering and voting upon the following matters:
1. To approve and adopt the 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,
which provides for the merger of ComBanc into First Defiance, the
merger of Commercial Bank into First Federal, and the exchange of
each outstanding share of ComBanc, no par value per share, into the
right to receive either: (1) $17.20 in cash, (2) a number of shares
of First Defiance common stock equal to $17.20 divided by the
average of the closing price of a First Defiance share during the
five trading days ending one trading day before the merger, or (3)
$8.60 in cash and the number of shares of First Defiance stock equal
to $8.60 divided by the average closing price of a First Defiance
share for the five consecutive trading days ending one trading day
prior to the effective time of the merger. Elections will be limited
by the requirement that one-half of all of the outstanding ComBanc
shares be exchanged for cash, therefore, you may not receive the
form of payment that you request; and
2. To transact such other business that may properly come before the
special meeting, including, if necessary, the adjournment of the
special meeting to allow for additional solicitation of shareholder
votes to obtain the required vote to approve and adopt the merger
agreement.
The board of directors of ComBanc has established November 1, 2004, as the
record date. Only record holders of ComBanc common shares as of the close of
business on that date will be entitled to receive notice of and vote at the
special meeting.
A joint prospectus/proxy statement and proxy card for the special meeting
are enclosed.
You vote is important. Even if you plan to attend the special meeting,
please complete, sign and return the proxy card in the enclosed postage-paid
envelope as soon as possible.
The ComBanc board of directors recommends that you vote FOR the approval
and adoption of the Agreement and Plan of Merger.
By Order of the Board of Directors,
/s/ Paul G. Wreede
Paul G. Wreede, President and CEO
November 10, 2004
PROSPECTUS PROXY STATEMENT
FIRST DEFIANCE FINANCIAL CORP. COMBANC, INC.
for the issuance of up to for the Special Meeting of Shareholders
881,852 Shares of Common Stock
On August 4, 2004, First Defiance Financial Corp., First Federal Bank of
the Midwest, ComBanc, Inc. and The Commercial Bank executed an Agreement and
Plan of Merger that provides for the merger of ComBanc into First Defiance and
the merger of Commercial Bank into First Federal. For tax purposes, the
acquisition of ComBanc by First Defiance is intended to qualify as a
"reorganization" under the provisions of Section 368(a) of the Internal Revenue
Code of 1986, as amended.
We cannot complete the merger unless the holders of at least 1,105,508
ComBanc shares, which is a majority of the issued and outstanding ComBanc
shares, adopt the merger agreement. The ComBanc board of directors has scheduled
a special meeting for ComBanc shareholders to vote on the merger agreement. The
date, time and place of the special meeting are as follows:
December 21, 2004
1:00 p.m.
Fraternal Order of Eagles
1600 E. 5th Street
Delphos, Ohio
If we complete the merger, each ComBanc shareholder will have the option
to receive in exchange for each ComBanc share you own either: (1) $17.20 in
cash, (2) the number of shares of First Defiance stock equal to $17.20 divided
by the average closing price of a First Defiance share for the five consecutive
trading days ending one trading day prior to the effective time of the merger,
or (3) $8.60 in cash and the number of shares of First Defiance stock equal to
$8.60 divided by the average closing price of a First Defiance share for the
five consecutive trading days ending one trading day prior to the effective time
of the merger. Elections will be limited by the requirement that one-half of all
of the outstanding ComBanc shares be exchanged for cash, therefore, you may not
receive the form of payment that you request.
First Defiance shares are listed on The Nasdaq National Market under the
symbol "FDEF." On November 9, 2004, the last trading date before we printed this
prospectus/proxy statement, First Defiance shares closed at $26.99.
This prospectus/proxy statement provides detailed information about the
merger. We encourage you to read this entire document carefully.
An investment in the common stock of First Defiance involves certain
risks. For a discussion of these risks, see "Risk factors" beginning on page 7
of this document.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved the First Defiance stock to be issued in
the merger or determined if this prospectus/proxy statement is truthful or
complete. Any representation to the contrary is a criminal offense. First
Defiance stock is not insured by the Federal Deposit Insurance Corporation or
any other government agency.
This prospectus/proxy statement is dated November 10, 2004, and is first
being mailed to ComBanc shareholders on or about November 12, 2004.
Additional information
This document incorporates important business and financial information
about First Defiance and ComBanc from documents that they have filed with the
Securities and Exchange Commission but have not included in or delivered with
this document. If you write or call First Defiance or ComBanc, we will send you
these documents, excluding exhibits, without charge. You can contact First
Defiance or ComBanc at:
First Defiance Financial Corp. ComBanc, Inc.
601 Clinton Street 230 East Second Street
Defiance, Ohio 43512-3272 Delphos, Ohio 45833
Attention: John C. Wahl Attention: Paul G. Wreede
(419) 782-5015 (419) 692-8408
If you would like to request documents, please be sure we receive your
request by December 14, 2004. For additional information about ComBanc, please
refer to ComBanc's Form 10-K for the year ended December 31, 2003 and its Form
10-Q for the quarter ended September 30, 2004 which are attached as Annex D and
Annex E to this prospectus/proxy statement. See "Where you can find more
information" on page 51 for more information about the documents referred to in
this prospectus/proxy statement.
TABLE OF CONTENTS
Summary ............................................................................................................. 1
Risk factors ........................................................................................................ 7
Fluctuation in the market price of First Defiance stock will affect the value of the consideration you receive ... 7
You may receive a form of consideration different from the form of consideration you elect ....................... 7
First Defiance may fail to realize the anticipated benefits of the merger ........................................ 8
Changes in interest rates could reduce First Defiance's income 8
Comparative stock prices ............................................................................................ 8
Selected consolidated financial data of First Defiance .............................................................. 9
Recent developments related to First Defiance ....................................................................... 11
Selected consolidated financial data of ComBanc ..................................................................... 12
Comparative per share data .......................................................................................... 13
Pro forma financials ................................................................................................ 14
Forward looking statements .......................................................................................... 22
Regulatory approval required ........................................................................................ 23
The special meeting of ComBanc shareholders ......................................................................... 23
Purpose, time and place .......................................................................................... 23
Shares outstanding and entitled to vote; record date ............................................................. 23
Votes required ................................................................................................... 23
Voting, solicitation and revocation of proxies ................................................................... 24
Dissenters' rights .................................................................................................. 25
The parties to the merger agreement ................................................................................. 27
The merger .......................................................................................................... 27
Background and reasons for the merger ............................................................................ 27
First Defiance ................................................................................................ 27
ComBanc ....................................................................................................... 28
Opinion of ComBanc's financial advisor ........................................................................... 30
Analysis of recent comparable acquisitions ....................................................................... 32
Merger consideration ............................................................................................. 34
Allocation of First Defiance shares and cash among ComBanc shareholders .......................................... 36
Election procedure and exchange of certificates evidencing ComBanc shares ........................................ 37
Employee matters ................................................................................................. 37
Representations and warranties ................................................................................... 38
Covenants ........................................................................................................ 39
Conduct of business pending the merger ........................................................................... 39
Conditions ....................................................................................................... 41
Effective time ................................................................................................... 42
Termination and amendment ........................................................................................ 42
Interests of directors and officers .............................................................................. 43
Resale of First Defiance common shares ........................................................................... 44
Material federal income tax consequences ......................................................................... 44
Accounting treatment ............................................................................................. 46
Comparison of rights of holders of First Defiance shares and holders of ComBanc shares ........................... 47
Authorized stock ................................................................................................. 47
Director nominations ............................................................................................. 47
Anti-takeover provisions ......................................................................................... 47
Anti-takeover statutes ........................................................................................... 48
Legal matters ....................................................................................................... 50
Experts ............................................................................................................. 50
Where you can find more information ................................................................................. 51
Annex A Agreement and Plan of Merger dated August 4, 2004, by and among
------- First Defiance Financial Corp., First Federal Bank of the Midwest,
ComBanc, Inc. and The Commercial Bank.
Annex B Opinion of Keefe, Bruyette & Woods, Inc. dated as of November 10,
------- 2004.
Annex C Delaware General Corporation Law Section 262.
-------
Annex D ComBanc's Form 10-K for the year ended December 31, 2003.
-------
Annex E ComBanc's Form 10-Q for the quarter ended September 30, 2004.
-------
Summary
This summary highlights selected information from this prospectus/proxy
statement. It does not contain all of the information that may be important to
you. To fully understand the merger, you should read carefully this entire
document and the other documents to which we refer. To obtain more information,
see "Where you can find more information" on page 51. Page references are
included in this summary to direct you to a more complete description of topics
discussed in this document.
The parties (page 27)
First Defiance Financial Corp./First Federal Bank of the Midwest
601 Clinton Street
Defiance, Ohio 43512-3272
(419) 782-5015
First Defiance is a unitary thrift holding company organized under Ohio
law. Through its wholly-owned subsidiaries, First Federal and First Insurance &
Investments, First Defiance focuses on traditional banking and the sale, as
agent, of property and casualty, life and group health insurance products.
First Federal is a federally chartered savings bank. First Federal
conducts operations through its main office in Defiance and 19 branch offices in
several counties in northwest Ohio.
ComBanc, Inc./The Commercial Bank
230 East Second Street
Delphos, Ohio 45833
(419) 692-8408
ComBanc, Inc. is a bank holding company organized under Delaware law.
Through its wholly-owned subsidiary, Commercial Bank, ComBanc operates a single
line of business. Commercial 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.
The merger (page 27)
The merger agreement provides for the merger of ComBanc into First
Defiance and the subsequent merger of Commercial Bank into First Federal. The
mergers cannot be completed unless at least 1,105,508 ComBanc shares, which is a
majority of the issued and outstanding ComBanc shares, approve the merger. The
merger agreement is attached to this document as Annex A and is incorporated in
this prospectus/proxy statement by reference. We encourage you to read the
merger agreement carefully, as it is the legal document that governs the merger.
What you will receive in the merger (page 34)
If the merger is completed, each ComBanc shareholder, other than any
person who has properly exercised dissenters' rights, will elect to receive in
exchange for each ComBanc share owned, either:
o $17.20 in cash, or
o a number of shares of First Defiance common stock equal to
$17.20 divided by the average of the closing price of a First
Defiance share for the five consecutive trading days ending
one trading day prior to the effective time of the merger,
subject to possible adjustment discussed below, or
o $8.60 in cash and the number of shares of First Defiance stock
equal to $8.60 divided by the average closing price of a First
Defiance share for the five consecutive trading days ending
one trading day prior to the effective time of the merger.
Elections will be limited by the requirement that one-half of
all of the outstanding ComBanc shares be exchanged for cash,
therefore, you may not receive the form of payment that you
request.
Under the merger agreement, one-half of the total number of ComBanc shares
outstanding immediately prior to the effective time of the merger must be
exchanged for cash. If the aggregate number of shares for which cash elections
are made is not equal to one-half of the outstanding ComBanc shares, then the
form of payment you receive may be different than what you requested.
The total value of the merger consideration will depend upon the value of
a share of First Defiance stock during the five consecutive trading days ending
one trading day before the merger. The number of First Defiance shares that that
you may receive in exchange for each ComBanc share that you own will not be less
than 0.65266 shares or greater than 0.79769 shares, subject to the following
adjustments:
o if the average market value of a share of First Defiance stock
during the measuring period is between $21.56 and $26.35, then the
number of shares of First Defiance stock that you will receive in
exchange for each ComBanc share will equal $17.20 divided by the
average closing price during the measuring period;
o if the average closing price of a First Defiance share during the
measuring period is below $21.56, you will receive 0.79769 First
Defiance shares for each ComBanc share that you own; and
o if the average closing price is above $26.35, you will receive
0.65266 First Defiance shares for each ComBanc share that you own.
The merger agreement permits First Defiance to reduce the per share merger
consideration to be received by ComBanc shareholders if ComBanc's shareholders'
equity on the
-2-
closing date is less than $22,500,000. The merger agreement also permits First
Defiance to increase the number of shares to be received in exchange for each
ComBanc share if necessary to preserve the status of the merger as a tax-free
reorganization.
Allocation of First Defiance shares and cash among ComBanc shareholders (page
36)
Under the merger agreement, one-half of the total number of ComBanc shares
outstanding at the effective time of the merger will be exchanged for cash. If
the number of ComBanc shares electing to receive cash consideration, which
includes all dissenting shares, is less than one-half, then each ComBanc
shareholder electing cash will receive cash. The ComBanc shares of those ComBanc
shareholders who did not make an election and, if necessary, those ComBanc
shareholders electing to receive First Defiance shares as consideration, will
then be exchanged for cash, on a pro rata basis, so that one-half of the
outstanding ComBanc shares are exchanged for cash. The remainder of the ComBanc
shares will be exchanged for First Defiance shares.
If the number of ComBanc shares electing to receive cash consideration,
which includes all dissenting shares, is greater than one-half, then the cash
consideration will be allocated among those ComBanc shareholders electing to
receive cash on a pro rata basis so that the total number of ComBanc shares
exchanged for cash equals one-half of the number of outstanding ComBanc shares
immediately prior to the effective time of the merger. The remainder of the
ComBanc shares will be exchanged for First Defiance shares.
Election procedure (page 37)
Approximately seven business days after the effective time of the merger,
the exchange agent will mail an election form to you. The election form will
permit you to elect the type of consideration you would prefer to receive in
exchange for each ComBanc share that you own. Your options are to:
o elect to receive all cash,
o elect to receive all First Defiance shares,
o elect to receive 50% cash and 50% First Defiance shares, or
o make no election.
All election forms, along with your ComBanc stock certificates, must be
properly completed and actually received by the exchange agent by 5:00 p.m.,
Eastern Time, on the day set forth on the election form, which will be
approximately the 20th day following the date the election form was mailed to
you.
Special meeting of ComBanc shareholders (page 23)
The ComBanc special meeting of shareholders will take place at the
Fraternal Order of Eagles, 1600 E. 5th Street, Delphos, Ohio, on December 21,
2004 at 1:00 p.m. If you owned ComBanc common shares on November 1, 2004, you
are entitled to vote at the special meeting.
-3-
The holders of at least 1,105,508 shares, which is a majority of the issued and
outstanding ComBanc shares, must vote in favor of the resolution to adopt the
merger agreement.
Background and reasons for the merger (page 27)
The ComBanc board of directors believes that the terms of the merger
agreement are fair, and in the best interests of, ComBanc and its shareholders.
In reaching this decision, ComBanc considered several factors, including the
expense related to complying with the formal written agreement with its
regulators and the increased competition in the financial institutions industry.
The ComBanc board unanimously recommends that you vote FOR the approval and
adoption of the merger agreement.
Vote of management owned shares (page 23)
As of the record date, directors and executive officers of ComBanc and
their affiliates collectively owned approximately 6% of the outstanding ComBanc
shares. A majority of the outstanding shares of ComBanc is required to approve
the merger agreement. All of the directors and two non-director executive
officers of ComBanc entered into voting agreements with First Defiance pursuant
to which they agreed to vote all of their shares in favor of the adoption and
approval of the merger agreement.
Recommendation to shareholders (page 30)
The ComBanc board of directors believes that the merger is in the best
interests of ComBanc and its shareholders and unanimously recommends that you
vote "For" the proposal to approve and adopt the merger agreement.
Opinion of financial advisors (page 30)
In deciding to approve the merger, the ComBanc board of directors
considered the opinion of its financial advisor, Keefe, Bruyette & Woods, Inc.,
dated August 4, 2004, that the per share merger consideration was fair to
ComBanc shareholders from a financial point of view. The opinion, updated as of
November 10, 2004, is attached as Annex B to this prospectus/proxy statement. We
encourage you to read the opinion.
Material federal income tax consequences of the merger (page 44)
ComBanc shareholders may recognize a gain or a loss upon the receipt of
cash and/or First Defiance shares to be received in the merger. The actual
income tax consequences for each ComBanc shareholder may be different, and you
should contact your tax advisor.
Interests of directors and officers (page 43)
Some of the directors and executive officers of ComBanc have interests in
the merger that are different from, or in addition to, their interests as
shareholders of ComBanc. These interests include the following:
-4-
o Paul G. Wreede, the President of ComBanc and Commercial, signed a
three-year employment agreement with First Federal that will become
effective upon consummation of the merger. The agreement provides
that Mr. Wreede will receive an annual salary of $95,000, be
eligible for a bonus, and receive group health, life and disability
benefits.
o Ronald Elwer and Rebecca Minnig, executive officers of Commercial
Bank, have signed one-year employment agreements with First Federal
that will become effective upon consummation of the merger.
o For three years after the merger is completed, First Defiance will
indemnify and provide liability insurance for the directors and
executive officers of ComBanc for acts occurring prior to completion
of the merger.
o First Defiance will select one director of Commercial Bank to serve
on the Board of Directors of First Defiance and First Federal.
o Each of the directors of ComBanc who does not otherwise become an
employee or director of First Defiance or First Federal will be
appointed to an advisory board of First Federal and will receive
$500 for each monthly advisory board meeting attended.
o Current employees of ComBanc or Commercial Bank who are employed by
First Defiance or First Federal after the merger will be covered by
First Federal's employee benefit plans.
Termination and amendment of the merger agreement (page 42)
First Defiance and ComBanc may agree to terminate the merger agreement and
abandon the merger at any time before the effective time of the merger:
o by the mutual written consent of First Defiance and ComBanc;
o by either First Defiance or ComBanc if the merger is not completed
on or before March 31, 2005;
o by either First Defiance or ComBanc if any event occurs which would
prevent the satisfaction of certain conditions set forth in the
merger agreement;
o by either First Defiance or ComBanc if ComBanc executes a definitive
agreement with any person or entity other than First Defiance that
provides for the acquisition of all, or a material amount, of the
assets or shares of ComBanc, including by merger, consolidation or
business combination; or
-5-
o by ComBanc if First Defiance does not increase the number of shares
to be exchanged for ComBanc shares if necessary to preserve the
status of the merger as a tax-free reorganization.
If within 12 months after the merger agreement is terminated ComBanc
enters into or closes an acquisition transaction with a company other than First
Defiance, ComBanc must pay First Defiance a termination fee of $2,000,000.
We may amend the merger agreement in writing at any time before or after
the ComBanc shareholders adopt the merger agreement. If the ComBanc shareholders
have already adopted the merger agreement, however, we will not amend it without
shareholder approval if the amendment would have a material adverse effect on
the shareholders.
Dissenters' rights (page 25)
Delaware law provides ComBanc shareholders with dissenters' rights in the
merger. This means that if you strictly comply with the procedures under
Delaware law, you have the right to demand the fair value of your ComBanc
shares, as that value is determined under Delaware law. In addition to the
summary of dissenters' rights on page 25, a copy of the provisions of Delaware
law regarding dissenters' rights is attached to this prospectus/proxy statement
as Annex C.
-6-
Risk factors
In deciding how to vote on the merger agreement, you should consider
carefully all of the information contained in this document, especially the
following factors.
Fluctuation in the market price of First Defiance stock will affect the value of
the consideration you receive.
The number of shares of First Defiance stock that a ComBanc shareholder
may receive as a result of the merger depends upon the average closing price of
a share of First Defiance stock during the five consecutive trading days ending
one trading day immediately preceding the closing date. If the average market
value of a share of First Defiance stock during the measuring period is between
$21.56 and $26.35, then the number of shares of First Defiance stock that you
will receive in exchange for each ComBanc share you own will equal $17.20
divided by the average closing price during the measuring period. If the average
closing price of a First Defiance share during the measuring period is below
$21.56, you will receive 0.79769 First Defiance shares for each ComBanc share
that you own, and if the average closing price is above $26.35, you will receive
0.65266 First Defiance shares for each ComBanc share that you own.
On November 9, 2004, the last trading date before we printed this
prospectus/proxy statement, First Defiance stock closed at $26.99 per share on
Nasdaq. If First Defiance's stock price were to remain at $26.99 per share until
the closing, 0.65266 shares of First Defiance stock, with a value of
approximately $17.62, would be issued in exchange for each ComBanc share
exchanged solely for First Defiance stock and no cash.
Further, you will not receive your merger consideration until several
weeks after the closing of the merger and, in fact, you will not know during
that time whether you are receiving cash, stock or some combination of both.
During the post-closing period when ComBanc shareholders are given an
opportunity to elect the form of consideration they would like to receive and
while allocations are determined by First Defiance, the market price of First
Defiance stock may fall. You will not be able to sell your First Defiance stock
to avoid losses resulting from any decline in the trading prices of First
Defiance stock during this period.
On the day the merger closes, the market price of a share of First
Defiance stock may be higher or lower than the market price on the date the
merger agreement was signed, on the date this document was mailed to you, or on
the date of the special meeting of shareholders of ComBanc. Therefore, you
cannot be assured of receiving any specific market value of First Defiance
stock.
You may receive a form of consideration different from the form of consideration
you elect.
The consideration you receive in the merger is subject to the requirement
that one half of the total number of ComBanc shares outstanding immediately
prior to the closing of the merger must be exchanged for cash. The merger
agreement contains proration and allocation methods to achieve this result. If
you elect to receive all cash and the available cash is oversubscribed, then you
may receive a portion of the merger consideration in the form of First Defiance
stock. If you
-7-
elect all stock and the available stock is oversubscribed, then you may receive
a portion of the merger consideration in cash. If you elect a combination of
cash and First Defiance stock, you may not receive a 50%/50% allocation.
First Defiance may fail to realize the anticipated benefits of the merger.
First Defiance and ComBanc may not be able to integrate their operations
without encountering difficulties, including the loss of key employees and
customers, the disruption of ongoing business or possible inconsistencies in
standards, controls, procedures and policies. Additionally, in determining that
the merger is in the best interests of First Defiance and ComBanc, each of the
First Defiance and the ComBanc boards of directors considered enhanced earnings
opportunities. There can be no assurance, however, that any enhanced earnings
will result from the merger.
Changes in interest rates could reduce First Defiance's income.
First Defiance's net income depends to a great extent on the difference
between the interest rates earned on interest-earning assets, such as loans and
investment securities, and the interest rates paid on interest-bearing
liabilities, such as deposits and borrowings. These rates are highly sensitive
to many factors that are beyond First Defiance's control, including general
economic conditions and the policies of various governmental and regulatory
agencies. Changes in interest rates influence the volume of loan originations,
the generation of deposits, the yield on loans and investment securities and the
cost of deposits and borrowings. Fluctuations in these areas may adversely
affect First Defiance.
Comparative stock prices
First Defiance common stock is listed on The Nasdaq National Market System
under the symbol "FDEF." ComBanc common stock is not listed on an exchange or
The Nasdaq Stock Market.
As of November 9, 2004, there were 6,292,763 shares of First Defiance
common stock outstanding and held by approximately 1,600 holders of record. As
of November 1, 2004, there were 2,211,014 shares of ComBanc common stock
outstanding and held by approximately 1,000 holders of record.
-8-
The following table sets forth the closing sales prices per share of First
Defiance and ComBanc common stock on the last full trading day prior to the
announcement of the merger and on the last practicable trading day prior to
printing this prospectus/proxy statement. The table also presents the equivalent
price per share of ComBanc, giving effect to the merger as of such dates.
ComBanc equivalent
First Defiance ComBanc per share price
-------------- ------- ------------------
August 3, 2004 $23.91 $12.85 $17.20
November 9, 2004 $26.99 $17.20 $17.67
Selected consolidated financial data of First Defiance
The tables below contain information regarding the financial condition and
earnings of First Defiance for the five years ended December 31, 2003, and the
nine months ended September 30, 2003 and 2004. This information is based on
information contained in First Defiance's quarterly report on Form 10-Q and
annual reports on Form 10-K filed with the Securities and Exchange Commission.
First Defiance consolidated At September 30 At December 31,
statement of financial data: ----------------------- ----------------------------------------------------------
2004 2003 2003 2002 2001 2000 1999
---------- ---------- ---------- -------- ---------- ---------- --------
(Unaudited) (In thousands)
Total assets $1,102,370 $1,032,942 $1,040,599 $884,245 $1,132,648 $1,072,194 $987,994
Assets of continuing operations 1,102,370 1,032,942 1,040,599 884,245 644,194 664,468 580,649
Loans held-to maturity, net 844,546 710,300 735,255 561,041 499,141 529,963 449,784
Loans held-for-sale 6,812 11,594 5,872 15,336 672 -- --
Allowance for loan losses 9,712 8,577 8,844 7,496 6,548 6,330 6,504
Non-performing assets 2,006 3,299 2,949 2,731 2,526 1,490 1,258
Securities available-for-sale 141,655 175,018 168,259 209,604 48,453 52,850 53,712
Securities held-to maturity 2,427 2,953 2,776 3,921 5,818 7,697 9,895
Mortgage servicing rights 3,516 3,014 3,431 2,090 1,821 1,131 996
Deposits and borrowers' escrow
balances 780,676 735,560 729,227 599,889 615,238 529,067 493,560
FHLB advances 173,670 153,967 164,522 149,096 196,302 223,258 265,410
Stockholders' equity 125,423 123,179 124,269 120,110 111,021 99,473 89,416
-9-
First Defiance Nine months ended Year ended December 31,
consolidated September 30, -----------------------------------------------------
operating results: -------------------
2004 2003 2003 2002 2001 2000 1999
-------- -------- -------- -------- -------- -------- --------
(Unaudited) (In thousands, except per share data)
Interest income from $ 39,674 $ 36,981 $ 49,936 $ 46,141 $ 46,545 $ 46,941 $ 40,882
continuing operations
Interest expense from 14,946 15,875 20,855 22,044 25,602 27,202 21,292
continuing operations
Net interest income from 24,728 21,106 29,081 24,097 20,943 19,739 19,590
continuing operations
Provision for loan losses 1,244 1,185 1,719 1,451 994 635 155
Non-interest income 11,103 14,952 18,788 12,921 10,220 6,676 4,881
Settlement of contingent liability 1,927 -- -- -- -- -- --
Other non-interest expense 22,140 21,492 28,378 26,161 22,948 20,178 17,965
Income before income taxes 10,520 13,381 17,772 9,406 7,221 5,602 6,351
Income taxes 3,203 4,118 5,690 2,986 2,423 1,734 2,072
Income from continuing 7,317 9,263 12,082 6,420 4,798 3,868 4,279
operations
Discontinued operations, -- -- -- 8,853 8,818 7,094 4,344
net of tax
Cumulative effect of -- -- -- (194) -- -- --
change in method of
accounting for goodwill
Net income 7,317 9,263 12,082 15,079 13,616 10,962 8,623
Basic earnings per share 1.20 1.54 2.00 1.01 0.74 0.61 0.66
from continuing
operations
Basic earnings per share 1.20 1.54 2.00 2.37 2.11 1.74 1.33
Diluted earnings per share 1.15 1.47 1.91 0.97 0.72 0.60 0.64
from continuing
operations
Diluted earnings per share 1.15 1.47 1.91 2.28 2.05 1.71 1.29
At or for the nine
months ended
September 30, Year ended December 31,
------------------ -------------------------------------
Other data: 2004 2003 2003 2002 2001 2000 1999
---- ---- ---- ---- ---- ---- ----
Return on average assets 0.92% 1.29% 1.24% 0.77% 0.69% 0.60% 0.73%
Return on average equity 7.75% 10.24% 9.97% 5.39% 4.61% 4.13% 4.72%
Interest rate spread 3.35% 3.09% 3.13% 2.92% 3.25% 3.11% 3.56%
Net interest margin 3.57% 3.40% 3.42% 3.38% 3.68% 3.57% 3.92%
Ratio of operating expense 3.03% 2.71% 2.91% 3.16% 3.31% 3.11% 3.06%
to average total assets
-10-
Recent developments related to First Defiance
On October 13, 2004, First Defiance announced that it had executed a
definitive agreement to acquire The Genoa Savings and Loan Company, Genoa, OH in
a cash transaction valued at $11.0 million. Genoa has four locations in the
metropolitan Toledo, Ohio area with $84 million in deposits and $72 million in
loans at June 30, 2004. First Defiance management expects the transaction to be
accretive to earnings by $.01 to $.03 per share in 2005 with no revenue
enhancements assumed. Management also estimates that annual pre-tax expense
reductions will be approximately $1.7 million with approximately 75% of those to
be realized in the first 12 months. First Defiance expects one-time costs,
including acquisition-related and restructuring charges, will not exceed $2.35
million on a pre-tax basis over the integration period. Upon completion of the
Genoa acquisition as well as the ComBanc acquisition contemplated in this
document, on a pro forma basis using June 30, 2004 data, First Defiance will
have $1.37 billion in total assets and $1.01 billion in total deposits. The
acquisition of Genoa, which is subject to regulatory approvals and the approval
of shareholders of Genoa, is expected to close late in the first quarter of
2005.
On October 14, 2004, First Defiance announced that it had resolved the
contingent liability related to the 2002 sale of its subsidiary, The Leader
Mortgage Company, which was described in more detail in its previously filed
Form 10-Q for the quarter ended June 30, 2004. After considering contingency
reserves already recorded by First Defiance, the settlement will result in a
pretax charge of $1.9 million which was recorded in the third quarter of 2004.
After tax, the charge amounted to $1.25 million or $0.20 per share. When First
Defiance sold Leader Mortgage in 2002, it recognized an after-tax gain of $7.7
million or $1.16 per share.
-11-
Selected consolidated financial data of ComBanc
The tables below contain information regarding the financial condition and
earnings of ComBanc for the five years ended December 31, 2003, and the nine
months ended September 30, 2003 and 2004. This information is based on
information contained in ComBanc's quarterly report on Form 10-Q and annual
reports on Form 10-K filed with the Securities and Exchange Commission.
ComBanc consolidated At September 30 At December 31,
statement of financial data: ----------------------- ----------------------------------------------------------
2004 2003 2003 2002 2001 2000 1999
---------- ---------- ---------- -------- ---------- ---------- --------
(Unaudited) (In thousands)
Total assets $204,621 $206,921 $207,733 $218,030 $218,977 $223,062 $218,548
Investment securities 55,238 52,840 55,052 54,396 37,584 40,260 44,796
Loans receivable 123,078 132,841 128,756 140,819 158,174 169,530 161,958
Allowance for loan losses 3,834 3,357 3,825 2,050 1,815 1,331 1,832
Deposits 169,959 169,797 172,232 178,890 179,657 178,082 169,720
Shareholders' equity 23,181 23,338 22,558 24,350 23,940 23,764 22,473
ComBanc consolidated Nine months ended Year ended December 31,
statement of operations: September 30, ----------------------------------------------------
------------------
2004 2003 2003 2002 2001 2000 1999
------ ------- -------- ------- ------- ------- -------
(Unaudited) (In thousands, except per share data)
Interest income $7,445 $ 8,176 $ 10,830 $13,023 $16,436 $17,007 $15,318
Interest expense 2,075 2,649 3,378 5,219 8,432 8,587 6,921
Net interest income 5,370 5,527 7,452 7,804 8,004 8,420 8,397
Provision for loan losses 60 2,340 4,180 975 790 420 360
Net interest income after
provision for loan losses 5,310 3,187 3,272 6,829 7,214 8,000 8,037
Other income 1,027 1,465 1,686 1,172 1,106 600 639
Operating expenses 5,574 4,579 6,139 5,823 5,662 5,251 5,140
Income (loss) before 763 73 (1,181) 2,178 2,658 3,349 3,536
income taxes
Income taxes 142 (125) (595) 553 725 1,000 1,017
------ ------- -------- ------- ------- ------- -------
Net income (loss) $ 621 $ 198 $ (586) $ 1,625 $ 1,933 $ 2,349 $ 2,519
Net income (loss) per share $ 0.28 $ 0.09 $ (0.26) $ 0.73 $ 0.85 $ 1.01 $ 1.06
At or for the nine
months ended
September 30, Year ended December 31,
------------------ --------------------------------------
Other data: 2004 2003 2003 2002 2001 2000 1999
------ ------ ------ ------ ------ ------ ------
Return on average assets 0.40% 0.13% -0.28% 0.75% 0.84% 1.06% 1.23%
Return on average equity 3.61% 1.11% -2.47% 6.64% 7.93% 10.15% 11.04%
Tier one risk-based capital 18.37% 17.42% 17.24% 16.88% 15.74% 15.47% 15.43%
Total risk-based capital 19.64% 18.68% 18.52% 18.13% 16.96% 16.34% 16.66%
Tier one leverage ratio 11.00% 10.83% 10.49% 10.77% 10.16% 10.61% 10.73%
-12-
Comparative per share data
Presented below are the book value per share and net earnings per share of
(a) First Defiance on a historical basis, (b) ComBanc on a historical basis, (c)
First Defiance on a pro forma basis and (d) ComBanc on an equivalent pro forma
basis, adjusted to reflect the completion of the merger as of the beginning of
each of the periods indicated. The information in the following table is not
necessarily indicative of the results which actually would have been obtained if
we had completed the merger before the periods indicated.
Nine months ended Year ended
September 30, 2004 December 31, 2003
------------------ -----------------
First Defiance historical
Earnings per share:
Basic $ 1.20 $ 2.00
Diluted $ 1.15 $ 1.91
Book value per share $19.94 $ 9.64
Cash dividends paid per share $ 0.60 $ 0.65
ComBanc historical
Earnings per share:
Basic $ 0.28 $(0.26)
Diluted $ 0.28 $(0.26)
Book value per share $10.48 $10.20
Cash dividends paid per share -0- $ 0.34
First Defiance pro forma
Earnings per share:
Basic $ 1.09 $ 1.59
Diluted $ 1.05 $ 1.52
Book value per share $20.40 $20.09
Cash dividends paid per share $ 0.60 $ 0.65
ComBanc pro forma equivalent
Earnings per share:
Basic $ 0.72 $ 1.06
Diluted $ 0.69 $ 1.01
Book value per share $13.99 $13.34
Cash dividends paid per share $ 0.40 $ 0.43
-13-
Pro forma financials
The following unaudited pro forma condensed combined consolidated balance
sheet and statement of income are based on the historical consolidated financial
statements of First Defiance and ComBanc, giving effect to the merger to be
accounted for under the purchase method of accounting.
Under the purchase method of accounting, the tangible and identifiable
assets and liabilities of ComBanc will be recorded at estimated fair values at
the time the merger is consummated. The excess of the purchase price over the
fair value of the net tangible and identifiable intangible assets will be
recorded as goodwill. The adjustments necessary to record tangible and
identifiable intangible assets and liabilities at fair value will be amortized
to income and expense over the estimated remaining lives of the related assets
and liabilities. Goodwill will be subject to an annual test for impairment and
the amount impaired, if any, will be charged to expense at the time of
impairment.
The following unaudited pro forma combined consolidated balance sheet as
of September 30, 2004 and the unaudited pro forma condensed combined statement
of income for the year ended December 31, 2003 and the nine months ended
September 30, 2004 have been prepared to reflect First Defiance's acquisition of
ComBanc as if the acquisition had occurred on September 30, 2004 with respect to
the balance sheet, as of January 1, 2003 with respect to the statement of income
for the year ended December 31, 2003, and as of January 1, 2004 with respect to
the statement of income for the nine months ended September 30, 2004, in each
case giving effect to the pro forma adjustments described in the accompanying
notes.
The pro forma adjustments are based on estimates made for the purpose of
preparing these pro forma financial statements. The actual adjustments to the
accounts of First Defiance will be made based on the underlying historical
financial data and fair value of ComBanc's assets and liabilities at the time of
the transaction. First Defiance's management believes that the estimates used in
these pro forma financial statements are reasonable under the circumstances.
The pro forma condensed combined consolidated balance sheet and statements
of income have been prepared based on the purchase method of accounting assuming
793,602 First Defiance common shares will be issued. For a discussion of the
number of shares that may be issued in the merger, see "The Merger - Merger
consideration." For a discussion of the purchase method of accounting, see "The
Merger - Accounting treatment."
The unaudited pro forma condensed combined consolidated balance sheet as
of September 30, 2004 is not necessarily indicative of the combined financial
position had the merger been effective at that date. The unaudited pro forma
condensed combined consolidated statements of income are not necessarily
indicative of the results of operations that would have occurred had the merger
been effective at the beginning of the periods indicated, or of the future
results of First Defiance. These pro forma financial statements should be read
in conjunction with the historical financial statements and the related notes
incorporated elsewhere in this document.
These pro forma financial statements do not include the effects of any
potential cost savings that management believes will result from operating the
ComBanc banking offices as branches of First Federal and combining certain
operating systems.
-14-
First Defiance
ComBanc
Unaudited Pro Forma Condensed Combined Consolidated Balance Sheet
September 30, 2004
Combined First
First Defiance ComBanc Defiance and Pro Forma Combined pro
historical historical ComBanc adjustments forma
-------------- ----------- -------------- ----------- ------------
(In thousands)
Assets
Cash and due from banks $ 20,544 $ 7,856 $ 28,400 -- $ 28,400
Interest-earning deposits with
financial institutions 627 220 847 -- 847
Federal funds sold -- 12,573 12,573 -- 12,573
Securities --
Available-for-sale 141,655 55,238 196,893 (19,415)D 177,478
Held-to-maturity 2,427 -- 2,427 -- 2,427
Loans held for sale 6,812 262 7,074 -- 7,074
Loans receivable 854,258 122,816 977,074 1,554 D 978,628
Less allowance for credit losses 9,712 3,834 13,546 -- 13,546
----------- ----------- ----------- ----------- -----------
Net loans receivable 844,546 118,982 963,528 1,554 965,082
Mortgage servicing rights 3,516 508 4,024 -- 4,024
Accrued interest receivable 5,155 844 5,999 -- 5,999
Federal Home Loan Bank stock and
other interest-earning assets 13,235 2,067 15,302 -- 15,302
Bank Owned Life Insurance 18,532 -- 18,532 -- 18,532
Premises and equipment 24,056 4,259 28,315 -- 28,315
Real estate and other assets held for sale 61 600 661 -- 661
Goodwill 18,341 -- 18,341 13,725 D 32,066
Core deposit intangibles 620 -- 620 3,000 D 3,620
Other assets 2,243 1,212 3.455 -- 3,455
----------- ----------- ----------- ----------- -----------
Total assets $ 1,102,370 $ 204,621 $ 1,306,991 $ (1,136) $ 1,305,855
=========== =========== =========== =========== ===========
Liabilities
Deposits
Non-interest-bearing $ 55,321 $ 16,462 $ 71,783 $ -- $ 71,783
Interest-bearing 723,935 153,497 877.432 1,268 D 878,700
----------- ----------- ----------- ----------- -----------
Total deposits 779,256 169,959 949,215 1,268 950,483
Securities sold under repurchase
agreements 12,052 7,124 19,176 -- 19,176
Federal Home Loan Bank advances
and other debt 173,670 3,411 177,081 136 D 177,217
Accrued interest payable and
other liabilities 11,969 946 12,915 1,641 B, D 14,556
----------- ----------- ----------- ----------- -----------
Total liabilities 976,947 181,440 1,158,387 3,045 1,161,432
Stockholders' Equity
Common stock and paid in capital 51,656 2,750 54,406 16,250 D, E 70,656
Stock acquired by ESOP (1,478) -- (1,478) -- (1,478)
Deferred compensation (6) -- (6) -- (6)
Retained earnings 72,288 22,655 94,943 (22,655) E 72,288
Treasury stock -- (2,717) (2,717) 2,717 E --
Accumulated other comprehensive income 2,963 493 3,456 (493) E 2,963
----------- ----------- ----------- ----------- -----------
Total stockholders' equity 125,423 23,181 148,604 (4,181) 144,423
----------- ----------- ----------- ----------- -----------
Total liabilities and stockholders' equity $ 1,102,370 $ 204,621 $ 1,306,991 $ (1,136) $ 1,305,855
----------- ----------- ----------- ----------- -----------
-15-
First Defiance
ComBanc
Unaudited Pro Forma Condensed Combined Consolidated Statement of Income
For the Year Ended December 31, 2003
First Combined First
Defiance ComBanc Defiance and Pro forma Pro forma
historical historical ComBanc adjustments-G combined
---------- ---------- -------------- ------------- ---------
(In Thousands, except per share data)
Interest Income
Loans $ 41,165 $ 8,519 $ 49,684 $ (751) $ 48,933
Securities 8,491 2,147 10,638 (582) 10,056
Federal Funds sold and other 280 95 375 -- 375
-------- -------- -------- -------- --------
Total interest income 49,936 10,761 60,697 (1,333) 59,364
Interest Expense
Deposits 13,435 2,952 16,387 (976) 15,411
Advances and other borrowed funds 7,420 426 7,846 (39) 7,807
-------- -------- -------- -------- --------
Total interest expense 20,855 3,378 24,233 (1,015) 23,218
-------- -------- -------- -------- --------
Net interest income 29,081 7,383 36,464 (318) 36,146
Provision for credit losses 1,719 4,180 5,899 -- 5,899
-------- -------- -------- -------- --------
Net interest income after provision
for credit losses 27,362 3,203 30,565 (318) 30,247
Non-interest income
Service fees and other charges 4,480 675 5,155 -- 5,155
Insurance commissions 3,712 79 3,791 -- 3,791
Dividends on FHLB stock 695 69 764 -- 764
Gain on sale of loans 7,173 794 7,967 -- 7,967
Gain on sale of securities 1,575 8 1,583 -- 1,583
Trust income 161 -- 161 -- 161
Income from bank owned life insurance 809 -- 809 -- 809
Other non-interest income 183 215 398 -- 398
-------- -------- -------- -------- --------
Total non-interest income 18,788 1,840 20,628 -- 20,628
Non-interest expense
Compensation and benefits 16,120 3,150 19,270 -- 19,270
Occupancy 3,040 731 3,771 -- 3,771
Deposit insurance premiums 183 80 263 -- 263
State Franchise tax 1,118 234 1,352 -- 1,352
Data processing 1,841 375 2,216 -- 2,216
Amortization of mortgage servicing rights 1,252 71 1,323 -- 1,323
Other non-interest expense 4,824 1,582 6,406 700 7,106
-------- -------- -------- -------- --------
Total non-interest expense 28,378 6,223 34,601 700 35,301
-------- -------- -------- -------- --------
Income before income taxes 17,772 (1,180) 16,592 (1,018) 15,574
Income tax expense 5,690 (594) 5,096 (356) 4,740
-------- -------- -------- -------- --------
Net income $ 12,082 $ (586) $ 11,496 $ (662) $ 10,834
======== ======== ======== ======== ========
Earnings per share:
Basic $ 2.00 $ 1.59
Diluted $ 1.91 $ 1.52
Average shares outstanding
Basic 6,036 6,036 794 6,830
Diluted 6,319 6,319 794 7,113
-16-
First Defiance
ComBanc
Unaudited Pro Forma Condensed Combined Consolidated Statement of Income
For the Nine Months Ended September 30, 2004
Combined First
First Defiance ComBanc Defiance and Pro forma Pro forma
historical historical Combanc adjustments-G combined
-------------- ---------- -------------- ------------- ---------
(In thousands, except per share data)
Interest Income
Loans $34,412 $ 5,827 $40,239 $ (522) $39,717
Securities 5,225 1,529 6,754 (437) 6,317
Federal Funds sold and other 37 89 126 -- 126
------- ------- ------- ------- -------
Total interest income 39,674 7,445 47,119 (959) 46,160
Interest Expense
Deposits 9,453 1,834 11,287 (824) 10,463
Advances and other borrowed funds 5,493 241 5,734 (29) 5,705
------- ------- ------- ------- -------
Total interest expense 14,946 2,075 17,021 (853) 16,168
------- ------- ------- ------- -------
Net interest income 24,728 5,370 30,098 (106) 29,992
Provision for credit losses 1,244 60 1,304 -- 1,304
------- ------- ------- ------- -------
Net interest income after provision
for credit losses 23,484 5,310 28,794 (106) 28,688
Non-interest income
Service fees and other charges 3,950 533 4,483 -- 4,483
Insurance and investment sales commissions 3,192 72 3,264 -- 3,264
Dividends on FHLB stock 471 55 526 -- 526
Gain on sale of loans 1,910 188 2,098 -- 2,098
Gain on sale of securities 694 12 706 -- 706
Trust income 167 -- 167 -- 167
Income from bank owned life insurance 579 -- 579 -- 579
Other non-interest income 140 167 307 -- 307
------- ------- ------- ------- -------
Total non-interest income 11,103 1,027 12,130 -- 12,130
Non-interest expense
Compensation and benefits 13,062 2,834 15,896 -- 15,896
Occupancy 2,452 556 3,008 -- 3,008
Deposit insurance premiums 12 117 129 -- 129
State Franchise tax 467 207 674 -- 674
Data processing 1,717 300 2,017 -- 2,017
Amortization of mortgage servicing rights 581 101 682 -- 682
Settlement of contingent liabilities 1,927 -- 1,927 -- 1,927
Other non-interest expense 3,849 1,459 5,308 534 5,842
------- ------- ------- ------- -------
Total non-interest expense 24,067 5,574 29,641 534 30,175
------- ------- ------- ------- -------
Income before income taxes 10,520 763 11,283 (640) 10,643
Income tax expense 3,203 142 3,345 (224) 3,121
------- ------- ------- ------- -------
Net income $ 7,317 $ 621 $ 7,938 $ (416) $ 7,522
======= ======= ======= ======= =======
Earnings per share:
Basic $ 1.20 $ 1.09
Diluted $ 1.15 $ 1.05
Average shares outstanding
Basic 6,103 6,103 794 6,897
Diluted 6,380 6,380 794 7,174
-17-
Notes to Unaudited Pro Forma Condensed Combined Financial Data
Note A - Basis of presentation
The unaudited pro forma condensed combined consolidated financial data has
been prepared assuming that the merger of First Defiance and ComBanc will be
accounted for under the purchase method of accounting and is based on the
historical consolidated financial statements of First Defiance and ComBanc,
which have been adjusted to reflect the historical cost of ComBanc's assets and
liabilities at their estimated fair value. In addition, pro forma adjustments
have been included to give effect to events that are directly attributable to
the transaction, factually supportable and expected to have a continuing impact
on the combined company. Pro forma adjustments in the pro forma condensed
combined consolidated statements of income include amortization of core deposit
intangibles and other adjustments based on the allocated purchase price of net
assets acquired.
Note B - Merger related charges
In connection with the merger of First Defiance and ComBanc, pre-tax
merger related charges of approximately $631,000 are expected to be incurred.
These charges are expected to include $265,000 in severance and other employee
related payments and $366,000 in investment banking, legal and accounting fees.
An accrual for the merger related charges and related tax effect of $92,750 has
been reflected in the pro forma adjustments to the unaudited pro forma condensed
combined consolidated balance sheet as of September 30, 2004. Since these
charges are not expected to have a continuing effect on the operations of the
combined company, they are not included in the unaudited pro forma condensed
combined consolidated statement of income.
Note C - First Defiance related charges
The pro forma condensed combined consolidated statements of income exclude
estimated merger expense of approximately $750,000 expected to be incurred
during fiscal 2005 in connection with the merger of ComBanc as follows:
Compensation, bonuses and other benefits $350,000
Data processing conversion and other costs $400,000
Note D - Pro forma condensed combined consolidated balance sheet adjustments
Under purchase accounting, ComBanc's assets and liabilities and any
identifiable assets are required to be adjusted to their estimated fair values.
The estimated fair value adjustments have been determined by First Defiance
based upon available information. First Defiance cannot be sure that such
estimated values represent the fair value that ultimately would be determined as
of the acquisition date.
The following are the pro forma adjustments made to record the transaction
and to adjust ComBanc's assets and liabilities to their estimated fair values at
September 30, 2004:
-18-
(In thousands)
Purchase price of ComBanc:
Market value (as of market close on August 4, 2004) of
793,602 First Defiance shares to be
issued (net of issuance costs) $ 19,000
Cash to be paid 19,015
Direct acquisition costs (investment banking, legal, etc.) 400
--------
$ 38,415
========
Historical net assets of ComBanc at September 30, 2004 $ 23,181
Accrual of ComBanc merger related charges (631)
Fair market value adjustments as of September 30, 2004:
Loans 1,554
Deposits (1,268)
Federal Home Loan Bank advances (136)
Core deposit intangible 3,000
Goodwill 13,725
Deferred tax on purchase accounting adjustments (1,010)
--------
$ 38,415
========
First Defiance is in the process of completing the allocation of the
purchase price, which includes obtaining additional appraisals. Additional fair
market value adjustments may be identified and recorded in the future, as
appropriate, based upon the information available at that time.
The pro forma adjustment available-for-sale investment securities includes
cash paid in exchange for ComBanc shares of $19,015,000 and cash paid for direct
acquisition costs of $400,000.
Note E - Shareholders' equity
Under the terms of the merger agreement, ComBanc shareholders will be
entitled to receive, in exchange for each ComBanc common share owned, either
$17.20 in cash or a certain number of shares of First Defiance common stock. The
exchange ratio for ComBanc shareholders who elect to receive First Defiance
common shares will be determined by dividing $17.20 by the average closing price
of First Defiance stock for the five consecutive trading days ending one trading
day before the closing date of the merger, subject to certain limitations if the
average price is less than $21.56 or greater than $26.35 per share. Further, the
merger agreement provides that in the aggregate, 50% of the consideration will
be paid in shares of First Defiance stock. It is estimated that ComBanc
shareholders will receive 793,602 shares of First Defiance common stock based on
the August 4, 2004 closing price of a First Defiance share. The shares of First
Defiance common stock used in this transaction will be newly issued.
Approximately 7,079,000 First Defiance common shares will be outstanding for the
combined company after the merger. The Pro Forma adjustments to equity reflect
the issuance of these shares and the elimination of ComBanc's historical equity
balances.
-19-
Note F - Average shares outstanding
The pro forma weighted average shares outstanding is based on the
historical First Defiance weighted average shares outstanding, plus 793,602
First Defiance common shares to be issued to ComBanc shareholders.
Note G - Pro forma condensed consolidated combined statement of income
adjustments
For purposes of determining the pro forma effect of the ComBanc
acquisition on the statements of income, the following pro forma adjustments
have been made as if the acquisition had occurred as of January 1, 2003 for the
December 31, 2003 pro forma condensed consolidated combined statement of income
and as of January 1, 2004 for the September 30, 2004 pro forma condensed
consolidated combined statement of income.
Nine months ended
September 30, Year ended
2004 December 31, 2003
----------------- -----------------
Cost of financing cash portion of purchase $ (437) $ (582)
Yield adjustment for interest income on loans (522) (751)
Yield adjustment for interest expense on deposits 824 976
Yield adjustment for interest expense on advances 29 39
Amortization of core deposit intangible (534) (700)
------- -------
(640) (1,018)
Tax impact of pro forma adjustments 224 356
------- -------
$ (416) $ (662)
======= =======
Amortization or accretion of the yield adjustments for loans, deposits and
FHLB advances were determined based on the estimated life of the related loan or
deposit using the interest method. The amortization of the core deposit
intangible was computed using the sum of years digits method with an assumed
life of eight years. The cost of financing the cash portion of the transaction
was assumed to be 3%.
Note H - Sensitivity to interest rate changes
On the effective date of the merger, the interest rates used in the
valuation of ComBanc's assets and liabilities may be different than those at
September 30, 2004. This may change the purchase accounting adjustments and
their estimated effects on future pre-tax net income. The following table shows
the estimated effects on the purchase accounting adjustments and the pro forma
pre -tax net income of a 100 basis point decrease and 100 basis point and 200
basis point increases in interest rates used to determine the estimated fair
value of the indicated assets and liabilities. The income effect has been
determined by changing the relevant interest rate.
-20-
Purchase Accounting Adjustments
-----------------------------------------------------------------------
Pro Forma 100 Basis Point 100 Basis Point 200 Basis Point
Decrease in Rates Increase in Rates Increase in Rates
-----------------------------------------------------------------------
(Unaudited, dollars in thousands)
Loans $ 1,554 $ 4,867 $(1,568) $(4,507)
Deposits (1,268) (2,010) (514) 225
Borrowings (136) (254) (24) 83
Core Deposit Intangible 3,000 2,500 3,500 4,000
------- ------- ------- -------
Total adjustment $ 3,150 $ 5,103 $ 1,394 $ (199)
======= ======= ======= =======
Impact on Pro Forma Pre-Tax Net Income for the
Year Ended December 31, 2003
-----------------------------------------------------------------------
Pro Forma 100 Basis Point 100 Basis Point 200 Basis Point
Decrease in Rates Increase in Rates Increase in Rates
-----------------------------------------------------------------------
Yield adjustment for interest
income on loans $ (751) $(1,498) $ (146) 938
Yield adjustment for interest
expense on deposits 976 1,510 427 (110)
Yield adjustment for interest
expense on advances 39 69 11 (16)
Amortization of core deposit
intangible (700) (583) (816) (933)
------- ------- ------- -------
Total $ (436) $ (502) $ (524) $ (121)
======= ======= ======= =======
Impact on Pro Forma Pre-Tax Net Income for the
Nine Month Period Ended September 30, 2004
-----------------------------------------------------------------------
Pro Forma 100 Basis Point 100 Basis Point 200 Basis Point
Decrease in Rates Increase in Rates Increase in Rates
-----------------------------------------------------------------------
Yield adjustment for interest
income on loans $ (522) $(1,418) $ 51 1,239
Yield adjustment for interest
expense on deposits 824 1,268 325 (76)
Yield adjustment for interest
expense on advances 29 51 8 (11)
Amortization of core deposit
intangible (534) (445) (622) (711)
------- ------- ------- -------
Total $ (203) $ (544) $ (238) $ 441
======= ======= ======= =======
-21-
Sources of information
First Defiance and First Federal provided all information in this
prospectus/proxy statement relating to them, and ComBanc and Commercial Bank
provided all information in this prospectus/proxy statement relating to them.
Each party is responsible for the accuracy of its information.
You should rely only on the information which is contained in this
document or to which we have referred in this document. We have not authorized
anyone to provide you with information that is different.
Forward looking statements
The Private Securities Litigation Reform Act of 1995 provides a safe
harbor from civil litigation for forward-looking statements. Forward-looking
statements include the information concerning future results of operations, cost
savings and synergies of First Defiance and ComBanc after the merger and those
statements proceeded by, followed by or that otherwise include the terms
"should," "believe," "expect," "anticipate," "intend," "may," "will,"
"continue," "estimate" and other expressions that indicate future events and
trends. Although First Defiance and ComBanc believe, in making such statements,
that their expectations are based on reasonable assumptions, these statements
may be influenced by risks and uncertainties which could cause actual results
and trends to be substantially different from historical results or those
anticipated, depending on a variety of factors. These risks and uncertainties
include, without limitation:
o expected cost savings from the merger may not be fully realized or
realized within the expected time frame;
o revenues following the merger may be lower than expected or deposit
withdrawals, operating costs or customer loss and business
disruption following the merger may be greater than expected;
o competition among depository and other financial services companies
increases significantly;
o costs or difficulties related to the integration of First Defiance
and ComBanc may be greater than expected;
o general economic or business conditions, such as interest rates, may
be less favorable than expected;
o adverse changes may occur in the securities market; and
o legislation or changes in regulatory requirements may adversely
affect the businesses in which First Defiance is engaged.
-22-
You should understand that these factors, in addition to those discussed
elsewhere in this document and in documents that have been incorporated by
reference, could affect the future results of First Defiance and ComBanc, and
could cause those results to be substantially different from those expressed in
any forward-looking statements. First Defiance and ComBanc do not undertake any
obligation to update any forward-looking statement to reflect events or
circumstances arising after the date of this document.
Regulatory approval required
First Defiance has submitted an application to the Office of Thrift
Supervision seeking approval of the merger. We anticipate that the OTS will
approve the merger. However, there can be no assurance that the OTS will approve
the merger, that the approval will be received on a timely basis or that the
approval will not impose conditions or requirements that would so materially
reduce the economic or business benefits of the merger that, had such condition
or requirement been known, neither First Defiance nor ComBanc would have entered
into the merger agreement.
The special meeting of ComBanc shareholders
Purpose, time and place
This prospectus/proxy statement is being sent to you in connection with
the solicitation of proxies by the ComBanc board of directors for use at the
special meeting to be held at 1:00 p.m., on December 21, 2004, at the Fraternal
Order of Eagles, 1600 E. 5th Street, Delphos, Ohio. At the special meeting,
shareholders will be asked to consider and vote upon a proposal to adopt and
approve the merger agreement.
Shares outstanding and entitled to vote; record date
Only shareholders of record on November 1, 2004, will be entitled to
notice of and to vote at the special meeting of shareholders. At the close of
business on the record date, November 1, 2004, there were 2,211,014 ComBanc
shares issued and outstanding and entitled to vote. The ComBanc shares were held
of record by approximately 1,000 shareholders. Each ComBanc share entitles the
holder to one vote on all matters properly presented at the special meeting of
shareholders.
Votes required
Approval of the merger agreement requires the holders of a majority of the
outstanding ComBanc shares, or 1,105,508 shares, to vote in favor of the merger
agreement. As of November 1, 2004, the directors and executive officers of
ComBanc and Commercial Bank and the affiliates of such directors and executive
officers had sole or shared voting power with respect to 132,826 ComBanc shares,
or 6% of the outstanding ComBanc shares. The directors and two non-director
executive officers of ComBanc and Commercial Bank have agreed to vote 132,826
ComBanc shares for the adoption and approval of the merger agreement.
-23-
Each share of ComBanc is entitled to one vote on the proposal. A quorum,
consisting of the holders of a majority of the outstanding ComBanc shares, must
be present in person or by proxy at the special meeting before any action can be
taken. Under Delaware law, only votes cast in favor of a proposal count as being
voted for the proposal. Therefore, abstentions and broker non-votes will have
the effect of a vote against the adoption and approval of the merger agreement.
Voting, solicitation and revocation of proxies
A proxy card for use at the special meeting of shareholders accompanies
each copy of this prospectus/proxy statement mailed to ComBanc shareholders.
This proxy is solicited by the ComBanc board of directors. Whether or not you
attend the special meeting, the ComBanc board of directors urges you to return
the enclosed proxy card. If you have executed a proxy, you may revoke it at any
time before a vote is taken at the special meeting by:
o filing a written notice of revocation with the Secretary of ComBanc,
at 230 East Second Street, Delphos, Ohio 45833;
o executing and returning a later-dated proxy received by ComBanc
prior to a vote being taken at the special meeting; or
o attending the special meeting and giving notice of revocation in
person.
Your attendance at the special meeting will not, by itself, revoke your proxy.
If you are a ComBanc shareholder whose shares are not registered in your
own name, you will need additional documentation from your record holder in
order to vote your shares in person at the special meeting.
We do not expect any matter other than the merger agreement to be brought
before the ComBanc special meeting of shareholders. If any other matters are
properly brought before the special meeting for consideration, including a
motion to adjourn the special meeting for the purpose of soliciting additional
proxies, shares represented by properly executed proxies will be voted in the
discretion of the persons named in the proxy card in accordance with their best
judgment.
ComBanc and First Defiance will each pay half of all expenses incurred in
connection with printing and mailing this prospectus/proxy statement, the
accompanying proxy and any other related materials. ComBanc will pay all other
costs incurred in connection with the solicitation of proxies on behalf of the
ComBanc board of directors. Proxies will be solicited by mail and may also be
solicited, for no additional compensation, by officers, directors or employees
of ComBanc. ComBanc will also pay the standard charges and expenses of brokerage
houses, voting trustees, banks, associations and other custodians, nominees and
fiduciaries, who are record holders of ComBanc shares not beneficially owned by
them, for forwarding the proxy materials to, and obtaining proxies from, the
beneficial owners of ComBanc shares entitled to vote at the special meeting of
shareholders.
-24-
Dissenters' rights
ComBanc shareholders are entitled to dissenters' rights under Section 262
of the Delaware General Corporation Law. Under Delaware law, record holders of
ComBanc shares who continuously hold such shares through the effective time of
the merger, who follow the procedures set forth in Section 262 and who do not
vote in favor of the merger agreement will be entitled to have their shares of
ComBanc appraised by the Delaware Court of Chancery and to receive payment of
the "fair value" of such shares as determined by the court.
This discussion is not a complete statement of the law pertaining to
appraisal rights under Delaware law and is qualified in its entirety by the full
text of Section 262 of the Delaware General Corporation Law, which is attached
in its entirety as Annex C to this Prospectus/Proxy Statement.
Any shareholder who wishes to exercise these appraisal rights should
review the following discussion and Annex C carefully because failure to timely
and properly comply with the procedures specified will result in the loss of
appraisal rights.
A holder of shares of ComBanc wishing to exercise his or her appraisal
rights must:
o deliver to the Secretary of ComBanc a written and properly executed
demand that reasonably informs ComBanc of the identity of the record
holder of the ComBanc shares and of the holder's intention to demand
appraisal for those shares;
o deliver the demand before the vote on the merger agreement at the
special meeting to ComBanc at 230 East Second Street, Delphos, Ohio
45833, Attention: Secretary;
o not vote in favor of the merger agreement; and
o hold his or her shares of record on the date the written demand for
appraisal is made and continue to hold the shares through the
effective time of the merger.
Simply voting against the merger agreement does not constitute a demand
for appraisal rights. Only a record holder of ComBanc shares is entitled to
assert appraisal rights for the shares. Shareholders who hold their ComBanc
shares in brokerage accounts or other nominee forms and who wish to exercise
appraisal rights are urged to consult with their brokers to determine the
appropriate procedures for making a demand for appraisal.
A record holder such as a broker who holds shares of ComBanc as nominee
for several beneficial owners may exercise appraisal rights with respect to the
shares of ComBanc held for one or more beneficial owners without exercising such
rights with respect to the shares of ComBanc held for other beneficial owners.
In such case, the written demand should set forth the number of shares of
ComBanc as to which appraisal is sought. When no number of shares of
-25-
ComBanc is expressly mentioned, the demand will be presumed to cover all shares
of ComBanc held in the name of the record owner.
Within ten days after the effective time of the merger, First Defiance
will send a notice to each person who has properly asserted appraisal rights.
Within 120 days after the effective time, First Defiance or any shareholder
entitled to appraisal rights under Section 262, may file a petition in the
Delaware Court of Chancery demanding a determination of the value of the ComBanc
shares of all such shareholders. First Defiance is not under any obligation to
file a petition seeking the appraisal of the shares. Rather, it is the
obligation of the dissenting shareholder to initiate all necessary action to
perfect his or her appraisal rights in accordance with Section 262.
If a petition for an appraisal is timely filed, after a hearing on the
petition, the Delaware Court of Chancery will determine the shareholders
entitled to appraisal rights and will appraise the "fair value" of their ComBanc
shares, exclusive of any value arising from the completion or expectation of the
merger, together with a fair rate of interest, if any, to be paid upon the
amount determined to be the fair value. Shareholders considering seeking
appraisal should be aware that the fair value of their ComBanc shares as
determined under Section 262 could be more than, the same as or less than the
value of the merger consideration they would receive pursuant to the merger
agreement if they did not seek appraisal of their shares. The Delaware Supreme
Court has stated that "proof of value by any techniques or methods which are
generally considered acceptable in the financial community and otherwise
admissible in court" should be considered in appraisal proceedings. Investment
banking opinions as to fairness from a financial point of view are not
necessarily opinions as to fair value under Section 262.
If any ComBanc shareholder who demands appraisal of his or her shares
under Section 262 fails to perfect, or effectively withdraws or loses, his or
her right to appraisal, such shareholder will be deemed to have made a cash
election in accordance with the merger agreement. See "The merger - Election
procedure and exchange of certificates evidencing ComBanc shares." A shareholder
may withdraw his or her demand for appraisal by delivering to First Defiance a
written withdrawal, except that any such attempt to withdraw made more than 60
days after the effective time will require the written approval of First
Defiance. Failure to follow the steps required by Section 262 for perfecting
appraisal rights may result in the loss of such rights (in which event a
shareholder will be treated as a shareholder who has made a cash election in
accordance with the merger agreement).
Any ComBanc shareholder who has demanded an appraisal in compliance with
Section 262 will not, after the effective time, be entitled to the payment of
dividends or other distributions on those shares (except dividends or other
distributions, if any, payable to holders of record of shares of ComBanc as of a
date prior to the effective time of the merger).
First Defiance will not be required to complete the merger if the holders
of more than 12% of the outstanding ComBanc shares exercise appraisal rights.
-26-
If you vote in favor of the merger agreement, you will lose your appraisal
rights. If you sign a proxy and return it but do not indicate a voting
preference on the proxy, the proxy will be voted "FOR" the adoption of the
merger agreement and will constitute a waiver of appraisal rights.
The parties to the merger agreement
First Defiance
First Defiance is a unitary thrift holding company that is organized under
Ohio law. Through its wholly-owned subsidiaries, First Federal and First
Insurance & Investments, First Defiance focuses on traditional banking and
sales, as agent, of property and casualty, life and group health insurance
products. First Defiance's traditional banking activities include originating
and servicing residential real estate, nonresidential real estate, commercial,
and consumer loans and providing a broad range of depository services. First
Defiance's insurance activities consist primarily of commissions relating to the
sale of property and casualty, life and group health insurance and investment
products.
First Federal is a full-service provider of financial products with a main
office and 19 branches located throughout northwest Ohio. First Federal's
primary lending activities include the origination of conventional fixed-rate
and variable-rate mortgage loans for the acquisition, construction or
refinancing of single-family homes located in First Federal's primary market
areas. First Federal also originates mortgage loans on multifamily properties
and nonresidential properties, and originates a variety of consumer loans and
commercial loans.
ComBanc
ComBanc is a Delaware corporation that was formed in 1998. The only
business of ComBanc is holding the shares of its subsidiary, Commercial Bank.
Commercial Bank makes first mortgage loans, commercial loans and consumer loans
and accepts deposits from its branches in Delphos, Elida and Lima Ohio.
The merger
If the holders of at least a majority of the ComBanc shares adopt the
merger agreement, if the necessary regulatory approval is received and if all
conditions to the completion of the merger are satisfied or waived, the
acquisition of ComBanc and Commercial Bank will be accomplished through a
two-step process. First, ComBanc will merge into First Defiance, with First
Defiance being the surviving company. Second, Commercial Bank will merge into
First Federal, which will continue after the merger as a federal savings bank.
Background and reasons for the merger
First Defiance. In order to improve profitability and shareholder value,
management believes First Defiance needs to grow both organically, by selling
more products and services
-27-
through its existing banking offices, and through acquisitions. First Defiance
implemented this strategy in 2002 when the sale of its Leader Mortgage
subsidiary resulted in First Defiance having a significant amount of capital.
In pursuing its acquisition strategy, First Defiance is focusing its
attention on opportunities in geographic areas that are contiguous to its
existing markets and in communities that management believes would be receptive
to its traditional community banking approach, such as First Federal's June 2003
acquisition of banking offices in Findlay, Ottawa and McComb, Ohio from RFC
Banking Company. The ComBanc merger provides First Defiance with the opportunity
to extend its market into Allen County, Ohio, which includes the City of Lima.
ComBanc has two banking offices in Lima and a third in Elida, Ohio which is
adjacent to Lima. Management believes this is a logical extension of First
Defiance's existing markets, which include Putnam and Hancock Counties, adjacent
to Allen County. Upon completion of the merger, First Defiance will have 23
banking offices in 11 counties in northwest Ohio.
First Defiance has achieved substantial growth over the last five years,
particularly in the commercial lending area. Management believes it can
accelerate that growth further with the expansion into the Allen County market
area. First Defiance also believes it can enhance the relationships already
established by ComBanc by offering products and services not presently offered
by ComBanc, including trust and insurance services. The larger equity base and
larger lending capacity that First Defiance will derive from the merger provide
further opportunities for growth and profitability.
ComBanc. Commercial Bank was organized in 1877. Throughout its long
history, Commercial Bank has served the citizens of Delphos and the adjoining
counties of Van Wert, Allen and Putnam in a supportive and profitable manner.
During the past few years, however, Commercial Bank has encountered some
regulatory difficulties, as previously reported to you. As a result of these
regulatory difficulties, ComBanc and Commercial Bank entered into a formal
written agreement with the Federal Reserve Bank of Cleveland and the Ohio
Division of Financial Institutions in December 2003.
ComBanc's board and management have worked diligently to address the
weaknesses and deficiencies identified in the formal written agreement. In view
of the existing regulatory issues and the expenses associated with remedying the
deficiencies addressed by the regulators, as well as local economic conditions
and increased competition in the financial institutions industry, the ComBanc
board questioned whether ComBanc could return to historical profitability and
dividend payout levels in the near future. The ComBanc board considered whether
the continuation of the independence of ComBanc would provide to shareholders a
return on their investment that eventually would equal or exceed that of
comparable investments in other financial institutions.
In April 2004, representatives of First Defiance initiated preliminary,
informal discussions with the officers of ComBanc about the possibility of a
future merger or acquisition. Although the ComBanc board did not take any
immediate action with respect to First Federal's expression of interest, the
ComBanc board decided to seek the advice of a financial advisor regarding
potential strategic alternatives. On May 12, 2004, the ComBanc board invited
-28-
representatives from Keefe, Bruyette & Woods, Inc. to make a presentation on
developments and trends in the financial institutions industry, as well as
possible strategic alternatives.
While the directors focused on the future prospects of ComBanc as an
independent entity, they also considered the potential value that shareholders
could expect to receive in a merger with another bank holding company. The
ComBanc directors determined that both alternatives required further
consideration. Representatives of Keefe discussed additional information
regarding the financial institutions market and recent acquisitions of financial
institutions. Discussion among the ComBanc directors and the representatives of
Keefe focused on whether the continuation of the independence of ComBanc would
provide to shareholders a return on their investment that eventually would equal
or exceed that which could be provided as a result of a merger with another bank
holding company. The ComBanc board considered, among other factors:
o the projected short-term and long-term financial performance of
ComBanc;
o the expense associated with complying with the requirements imposed
by the regulators under the formal written agreement, and the impact
of such expense on the future profitability of ComBanc;
o the increased competition among providers of financial products and
services and the trend toward consolidation of financial
institutions in general;
o local economic conditions and trends; and
o the relatively small size of ComBanc in an increasingly competitive
market.
At the conclusion of the May 2004 meeting, the ComBanc board decided to
explore further the possibility of a merger transaction. The initial indication
of interest submitted by First Defiance proposed an all cash transaction,
representing a cash price of $18.09 per share of common stock. The directors
discussed the proposal at length and analyzed the available alternatives,
including the possibility of accepting the proposal, submitting a counteroffer
to First Defiance, terminating negotiations with First Defiance and remaining
independent, and soliciting additional bids from other potential candidates.
Following discussions, the directors decided to reject First Defiance's initial
proposal. The ComBanc board then engaged Keefe as its financial advisor to
assist with the process.
First Defiance submitted a revised proposal which changed the form of
consideration from all cash to 50% stock and 50% cash that resulted in a blended
price of $16.28 per share considering the stock and cash mix. On May 19, 2004,
the ComBanc board met to review the revised proposal submitted by First
Defiance. Following extensive discussion of the proposal from First Defiance,
the directors decided to reject First Defiance's revised proposal and instructed
Keefe to proceed with further negotiations with First Defiance.
On June 2, 2004, the ComBanc board convened to consider the response
submitted by First Defiance. Following the board's rejection of the proposal of
$16.28 per share representing a 50% stock and 50% cash transaction, the cash
price and the indicated stock value based upon
-29-
First Defiance's stock price was increased by First Defiance from $16.28 to
$17.20 per share. After an extensive discussion regarding the revised proposal
and consideration of the available alternatives, the directors unanimously
agreed to accept the $17.20 value. The ComBanc board instructed management to
begin negotiating a definitive agreement on the terms outlined in the First
Defiance proposal.
On July 28, 2004, the ComBanc board met to consider the final merger
agreement and other relevant documents. The directors reviewed the terms and
conditions of the First Defiance merger agreement, all other relevant documents
and the contemplated transaction. Following such review, Keefe analyzed the
financial terms of the transaction at length and concluded that, in its opinion,
the merger consideration was fair as of such date, from a financial point of
view, to the holders of common shares of ComBanc. Based upon the foregoing, the
ComBanc board determined that the terms and conditions of the merger agreement
were fair to and in the best interest of ComBanc and its shareholders, voted
unanimously to approve the merger agreement and authorized the execution of the
merger agreement and related documents.
The foregoing discussion of the information and factors is not intended to
be exhaustive, but includes all material factors considered by the ComBanc
board. The ComBanc board considered a number of factors that, taken in totality,
led to the determination by the ComBanc board that the merger is in the best
interests of ComBanc and its shareholders, customers and communities served. In
reaching its determinations to approve and recommend the merger agreement, the
ComBanc board did not assign relative or specific weights to the foregoing
factors, and individual directors may have given differing weights to different
factors. After considerable discussion, considering, among other things, the
matters discussed above and the opinion of Keefe described below, the ComBanc
board unanimously voted to approve the merger with First Defiance.
The ComBanc board unanimously recommends that the merger agreement be
adopted and approved by all shareholders of ComBanc.
Opinion of ComBanc's financial advisor
Keefe was retained by ComBanc to evaluate the First Defiance proposal.
Keefe, as part of its investment banking business, is regularly engaged in the
evaluation of businesses and securities in connection with mergers and
acquisitions, negotiated underwritings, and distributions of listed and unlisted
securities. Keefe is familiar with the market for common stocks of publicly
traded banks, savings institutions and bank and savings institution holding
companies. The ComBanc board of directors selected Keefe on the basis of the
firm's reputation and its experience and expertise in transactions similar to
the merger. Except as described herein, Keefe is not affiliated with ComBanc,
First Defiance or their respective affiliates.
As part of its engagement, Keefe was asked to render an opinion as to the
fairness, from a financial point of view, of the merger consideration to
ComBanc's shareholders. Keefe delivered a fairness opinion dated as of August 4,
2004, to the ComBanc board of directors that the merger consideration is fair to
the ComBanc shareholders from a financial point of view. No limitations were
imposed by ComBanc upon Keefe with respect to the investigations made or
procedures followed by Keefe in rendering its opinion.
-30-
Keefe updated its opinion as of the date of this prospectus/proxy
statement. The full text of the opinion, which sets forth certain assumptions
made, matters considered and limitations on the reviews undertaken, is attached
as Annex B to this prospectus/proxy statement and should be read in its
entirety. Keefe has consented to the following summary of its opinion and to the
entire opinion being attached to this prospectus/proxy statement as Annex B. The
summary of the opinion of Keefe set forth in this prospectus/proxy statement is
qualified in its entirety by reference to the opinion. Such opinion does not
constitute a recommendation by Keefe to any ComBanc shareholder as to how such
shareholder should vote with respect to the merger.
In rendering its opinion, Keefe did the following:
(1) reviewed the financial and business data which ComBanc supplied to it,
including annual reports for the years ended December 31, 2003, 2002 and 2001,
proxy statements for the years ended December 31, 2003 and 2001 and ComBanc's
unaudited financial information for the quarters ended March 31 and June 30,
2004;
(2) reviewed First Defiance's annual report and proxy statement for the
years ended December 31, 2003, 2002 and 2001 and unaudited financial statements
for the periods ended March 31 and June 30, 2003;
(3) discussed with senior management and ComBanc's board of directors the
current position and prospective outlook for ComBanc;
(4) considered historical quotations and the prices of recorded
transactions in ComBanc's common stock and reviewed the financial and stock
market data of other banking institutions, particularly Midwestern commercial
banks with assets between $150 - $300 million;
(5) considered historical quotations and the prices of recorded
transaction in First Defiance common stock and reviewed the financial and stock
market data of other thrift institutions, particularly Midwestern thrifts with
assets between $750 million and $2.5 billion;
(6) reviewed the financial and structural terms of several other recent
transactions involving mergers and acquisitions of commercial banking
institutions or proposed changes of control of comparably situated companies;
and
(7) reviewed certain other information which it deemed relevant.
In rendering its opinion, Keefe assumed and relied upon the accuracy and
completeness of the information provided to it by ComBanc and First Defiance and
obtained by it from public sources. In its review, with the consent of ComBanc's
board, Keefe did not undertake any independent verification of the information
provided to it, nor did it make any independent appraisal or evaluation of the
assets and liabilities of ComBanc or First Defiance, or of potential or
contingent liabilities of ComBanc or First Defiance. With respect to the
financial information, including forecasts received from ComBanc, Keefe assumed
(with ComBanc's consent) that such information had been reasonably prepared
reflecting the best currently available estimates
-31-
and judgment of ComBanc's management. Keefe also assumed that no restrictions or
conditions would be imposed by regulatory authorities that would have a material
adverse effect on the contemplated benefits of the merger to ComBanc or the
ability to consummate the merger.
Analysis of recent comparable acquisitions. In rendering its opinion,
Keefe analyzed pending acquisitions of banking institutions, including those
transactions deemed comparable to the merger. Keefe compared the acquisition
price relative to four industry-accepted ratios: deal price to book value, deal
price to tangible book value, deal price to last twelve months' earnings, and
premium to core deposits. The analysis included a comparison of the median, high
and low of the above ratios for pending and completed acquisitions, based on the
following comparable group: (1) all institutions in the comparable group were
banking institutions; (2) all transactions in the comparable group were either
announced or completed in 2003 or 2004; and (3) all transactions in the peer
group had an asset size between $100 - $500 million. As a result of these
transaction criteria, the following bank institutions were used in analyzing
comparable transactions:
Selling Institution Buying Institution
------------------- ------------------
Sun Country Bank America Bancshares Inc.
Upbancorp Inc. Bridgeview Bancorp, Inc.
AEA Bancshares Inc. Capitol Bancorp Ltd.
Metro Bancorp, Inc. Citizens First Bancorp Inc.
Sun Banc Corporation Happy Bancshares Inc.
Rocky Mountain Bancorp Inc. Heartland Financial USA Inc.
Citizens Bank Illinois NA Metropolitan Bank Group Inc.
Canaan National Bancorp Inc. Salisbury Bancorp Inc.
GLB Bancorp Inc. Sky Financial Group Inc.
Horizon Bank & Trust Co. South Shore Savings Bank
First Continental Bank UCBH Holdings Inc.
No company or transaction used as a comparison in this analysis is
identical to ComBanc, First Defiance or the merger. Accordingly, an analysis is
not simply mathematical; rather, it involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the companies and other factors that could affect the public trading value of
the companies to which they are being compared.
The information in the following table summarizes the material information
analyzed by Keefe with respect to the merger. The summary does not purport to be
a complete description of the analysis performed by Keefe in rendering its
opinion. Selecting portions of Keefe's analysis or isolating certain aspects of
the comparable transactions without considering all analyses and factors could
create an incomplete or potentially misleading view of the evaluation process.
-32-
-------------- -------------- ------------- -----------
Price to Price to last Core
Price to tangible 12 months deposit
book ratio (%) book ratio (%) earnings (x) premium (%)
-------------- -------------- ------------- -----------
----------------------------------------------------------------------------------------------------------------------
Low Value 132.6 133.2 12.4x 6.50
Median Value 176.9 179.2 19.2x 9.70
High Value 181.4 184.4 33.5x 14.30
----------------------------------------------------------------------------------------------------------------------
-------------- -------------- ------------- -----------
Price to Price to last Core
Price to tangible 12 months deposit
book ratio (%) book ratio (%) earnings (x) premium (%)
-------------- -------------- ------------- -----------
----------------------------------------------------------------------------------------------------------------------
Implied Value of FDEF offer 167.6 167.6 170.4x 9.8
----------------------------------------------------------------------------------------------------------------------
* Based on 8/4/04 closing price for FDEF
Discounted Cash Flow Analysis. Keefe performed a discounted cash flow analysis
to estimate a range of present values per share of ComBanc common stock. This
range was determined by adding (1) the present value, which is a representation
of the current value of a sum that is to be received some time in the future, of
the estimated future dividends that ComBanc could generate through year 5 of its
current business plan (as provided to Keefe) and (2) the present value of the
estimated terminal value, which is a valuation estimate based on a range of
price to earnings multiples applied to year 5 cash flow.
In calculating a terminal value of ComBanc common stock, Keefe applied a
range of multiples between 12.0x and 18.0x to year 5 forecasted earnings. In
performing this analysis, Keefe assumed that there were no restrictions imposed
upon ComBanc in its ability to pay dividends to shareholders and that
consolidated equity capital in excess of 9% of assets would be paid to ComBanc
shareholders in the form of a cash dividend. In addition, Keefe used the 2004
budget provided by ComBanc and relied on ComBanc management guidance for years 2
through 5 as an estimate of future ComBanc earnings. The combined dividend
stream and terminal value were then discounted back to June 30, 2004 (the date
of most recent financial information when the analysis was performed). Keefe
estimated a range of discount rates of 10.5% to 12.5% as the appropriate rate to
discount estimated future cash flows for purposes of this analysis. The results
of Keefe's analysis are set forth in the following table:
12.0x 13.5x 15.0x 16.5x 18.0x
--------------------------------------------------
Discount 12.5% $11.71 $12.54 $13.36 $14.18 $15.01
Rate 12.0% $11.95 $12.79 $13.64 $14.49 $15.33
11.5% $12.19 $13.06 $13.93 $14.80 $15.67
11.0% $12.44 $13.33 $14.23 $15.12 $16.01
10.5% $12.70 $13.62 $14.53 $15.45 $16.37
Based on the foregoing criteria and assumptions, Keefe estimated that the
theoretical present value of the ComBanc common stock ranged from $11.71 to
$16.37 per share. Given that the value of the consideration on a per share basis
to be paid in the merger, as of the date of the opinion, is above the implied
theoretical range of present values of estimated future earnings, Keefe believes
-33-
that this analysis supports the fairness, from a financial point of view, to
ComBanc and its shareholders of the consideration to be paid in the merger.
The discount dividend analyses of ComBanc do not necessarily indicate
actual values or actual future results and do not purport to reflect the prices
at which any securities may trade at the present or at any time in the future.
Dividend discount analysis is a widely used valuation methodology, but the
results of this methodology are highly dependent upon numerous assumptions that
must be made, including earnings growth rates, dividend payout rates, terminal
values, projected capital structure and discount rates.
The information contained herein provides a summary description of the
material analyses prepared by Keefe in connection with the rendering of its
opinion. The preparation of a fairness opinion is not necessarily susceptible to
partial analysis or summary description. Keefe believes that its analysis and
the summary set forth above must be considered as a whole and that selecting
portions of its analysis without considering all analyses, or selecting part of
the above summary, without considering all factors and analyses, would create an
incomplete view of the process underlying the analysis set forth in Keefe's
presentation and opinion. The ranges of valuations resulting from any particular
analysis described above should not be taken to be Keefe's view of the actual
value of ComBanc or First Defiance. The fact that any specific analysis has been
referred to in the summary above is not meant to indicate that such analysis was
given greater weight than any other analysis.
In preparing its analysis, Keefe made numerous assumptions with respect to
industry performance, business and economic conditions and other matters, many
of which are beyond the control of Keefe. The analyses performed by Keefe are
not necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses and do not
purport to be appraisals or reflect the prices at which a business may be sold
or the prices at which any securities may trade at the present time or at any
time in the future. In addition, as described above, Keefe's opinion, along with
its presentation to ComBanc's board of directors, was just one of the many
factors taken into consideration by ComBanc's board of directors in approving
the merger agreement.
Pursuant to its engagement letter with ComBanc, Keefe will receive a fee
equal to $260,000 plus reimbursement of expenses. As of the date of this
prospectus/proxy statement, Keefe has received $60,000. ComBanc has also agreed
to indemnify Keefe against certain liabilities, including liabilities under the
federal securities laws, and to reimburse Keefe for certain out-of-pocket
expenses.
Merger consideration
At the effective time of the merger, each ComBanc shareholder will elect
to receive one of the following in exchange for each ComBanc share: (1) $17.20
in cash, (2) a number of shares of First Defiance common stock equal to $17.20
divided by the average of the closing price of a First Defiance share for the
five consecutive trading days ending one trading day prior to the effective time
of the merger, subject to possible adjustment discussed below, or (3) $8.60 in
cash and the number of shares of First Defiance stock equal to $8.60 divided by
the average closing
-34-
price of a First Defiance share for the five consecutive trading days ending one
trading day prior to the effective time of the merger. Elections will be limited
by the requirement that one-half of all of the outstanding ComBanc shares be
exchanged for cash, therefore, you may not receive the form of payment that you
request.
Under the merger agreement, one-half of the total number of ComBanc shares
outstanding immediately prior to the effective time of the merger must be
exchanged for cash. If the aggregate number of shares for which cash elections
are made is not equal to one-half of the outstanding ComBanc shares, then the
form of payment you receive may be different than what you requested.
The total number of shares of First Defiance stock issued in the merger
and the total value of the merger consideration will depend upon the value of a
share of First Defiance stock during the five consecutive trading days ending
one trading day before the merger. The number of First Defiance shares that that
you may receive in exchange for each ComBanc share that is exchanged for First
Defiance stock will not be less than 0.65266 shares or greater than 0.79769
shares, subject to the following adjustments:
o if the average market value of a share of First Defiance stock
during the measuring period is between $21.56 and $26.35, then the
number of shares of First Defiance stock that you will receive in
exchange for each ComBanc share that is exchanged for First Defiance
stock will equal $17.20 divided by the average closing price during
the measuring period;
o if the average closing price of a First Defiance share during the
measuring period is below $21.56, you will receive 0.79769 First
Defiance shares for each ComBanc share that is exchanged for First
Defiance stock; and
o if the average closing price is above $26.35, you will receive
0.65266 First Defiance shares for each ComBanc share that is
exchanged for First Defiance stock.
On November 9, 2004, the last trading date before we printed this
prospectus/proxy statement, First Defiance shares closed at $26.99 on Nasdaq. If
First Defiance's stock price were to remain at $26.99 per share until the
closing, 0.65266 First Defiance shares, having a value of approximately $17.62,
would be issued in exchange for each ComBanc share exchanged solely for First
Defiance shares and no cash.
Based on the 2,211,014 ComBanc common shares issued and outstanding on
November 1, 2004, and the First Defiance stock price as of November 9, 2004, the
total number of First Defiance shares to be issued to ComBanc shareholders would
be approximately 721,520. Based on the 6,292,763 First Defiance shares issued
and outstanding on November 9, 2004, the total number of First Defiance shares
outstanding after the merger would be 7,014,283, of which approximately 10.29%
would be held by the former ComBanc shareholders.
-35-
The merger agreement provides that if the shareholders' equity of ComBanc
at the effective time of the merger is less than $22,500,000, excluding
unrealized accumulated other comprehensive income relating to ComBanc's
investment portfolio, the per share merger consideration to be paid to ComBanc
shareholders will be decreased. The per share reduction amount will equal (1)
the difference between $22,500,000 and the shareholders' equity of ComBanc at
the effective time of the merger, divided by (2) the number of ComBanc shares
outstanding at the effective time. As a result, each ComBanc share that is
exchanged for cash will receive an amount equal to $17.20 less the per share
reduction amount. Further, each ComBanc share that is exchanged for First
Defiance stock will receive a number of First Defiance shares that is equal to
(1) $17.20 less the per share reduction amount, divided by (2) the average of
the closing price of a First Defiance share during the measuring period. ComBanc
is not required to complete the merger if First Defiance reduces the per share
merger consideration because the shareholders' equity of ComBanc is less than
$22,500,000. However, ComBanc has the right to waive this condition.
The merger agreement further provides that in order to preserve the status
of the merger as a tax-free reorganization under the provisions of Section
368(a) of the Internal Revenue Code of 1986, as amended, the aggregate value of
First Defiance shares to be issued in connection with the merger, based upon the
market value of First Defiance shares at the end of trading on the business day
immediately before the effective time of the merger, may not be less than 45% of
the total consideration to be paid to ComBanc shareholders in the merger (the
sum of the aggregate cash consideration - which is equal to $17.20 per share
multiplied by one-half of the outstanding ComBanc shares - and the aggregate
value of First Defiance shares to be received by ComBanc shareholders as
consideration in the merger). If the aggregate value of First Defiance shares to
be issued in connection with the merger would be less than 45% of the total
consideration to be paid to ComBanc shareholders, then First Defiance may elect
to increase the number of First Defiance shares that ComBanc shareholders will
receive in exchange for each ComBanc share so that the aggregate value of First
Defiance shares to be issued in connection with the merger is equal to 45% of
the total consideration to be paid to ComBanc shareholders.
First Defiance will not issue fractional shares in the merger. Each
ComBanc shareholder who otherwise would be entitled to receive a fraction of a
share of First Defiance stock will receive cash in an amount equal to the
fractional First Defiance share interest multiplied by the average closing price
during the measuring period.
Allocation of First Defiance shares and cash among ComBanc shareholders
If the number of ComBanc shares to which the holder elected to receive
cash consideration, including all dissenting shares, is less than one-half of
the total number of ComBanc shares outstanding immediately prior to the merger,
then each ComBanc shareholder electing to receive cash will receive the cash
consideration. The ComBanc shares of those ComBanc shareholders who did not make
an election and, if necessary, those ComBanc shareholders electing to receive
First Defiance shares as consideration, will then be exchanged for cash, on a
pro rata basis, so that the total number of ComBanc shares exchanged for cash
-36-
equals one-half of the outstanding shares. The remainder of the ComBanc shares
will be exchanged for First Defiance shares.
If the number of ComBanc shares with respect to which the holder elected
to receive cash consideration, including all dissenting shares, is greater than
one-half of the total number of ComBanc shares outstanding immediately prior to
the merger, then each of the shares for which the shareholder elected to receive
First Defiance shares or for which no election was made shall receive First
Defiance shares. Then, the cash consideration will be allocated among those
ComBanc shareholders electing to receive cash consideration on a pro rata basis
such that the total shares exchanged for cash equals one-half of the outstanding
shares.
Election procedure and exchange of certificates evidencing ComBanc shares
Approximately seven business days after the effective time of the merger,
the exchange agent will mail to you an election form. Each election form will
permit you to:
o elect to receive cash in exchange for your ComBanc shares,
o elect to receive First Defiance shares in exchange for your
ComBanc shares,
o elect to receive 50% cash and 50% First Defiance shares in
exchange for your ComBanc shares, or
o indicate that you make no election.
Your election form, along with your stock certificates representing
ComBanc shares, must be properly completed and actually received by the exchange
agent by 5:00 p.m., Eastern Time, on the day designated on the election form,
which will be the 20th day following the mailing date of the election form.
Until you surrender your certificates, First Defiance will not pay you any
cash consideration or any dividends or other distributions and your rights as a
shareholder of First Defiance will be suspended. No interest will be paid or
accrued on any cash constituting merger consideration or unpaid dividends and
distributions, if any, payable to ComBanc shareholders.
If you have lost or misplaced your ComBanc stock certificate(s), you
should immediately call Paul G. Wreede at (419) 695-1055. Mr. Wreede will mail
to you instructions for replacing the lost certificate(s).
Employee matters
Each Commercial Bank employee whose employment is not terminated will
become an employee of First Federal and will be eligible to participate in First
Federal's employee plans, on the same basis as any newly-hired employee of First
Federal. Service with ComBanc or Commercial Bank will be treated as service with
First Federal to determine eligibility to participate and vesting, but not for
purposes of benefit accrual, under the employee plans. Generally, each employee
of Commercial Bank who does not have an employment agreement or severance
agreement with Commercial Bank and whom First Defiance or its subsidiaries elect
-37-
not to hire or elect to terminate without cause within 12 months of the merger
will be paid a severance payment equal to the product of one week of the
employee's base salary multiplied by the number of years of that employee's
service to Commercial Bank, with a maximum payment equal to 24 weeks' salary.
Former employees and directors of Commercial Bank who were receiving
benefits as of August 4, 2004 under ComBanc's health insurance as retirees will
be entitled to receive benefits under First Defiance's Retiree Medical Benefits
Plan.
Representations and warranties
First Defiance, First Federal, ComBanc and Commercial Bank have each made
representations and warranties in the merger agreement regarding:
o corporate organization,
o authority to enter into the merger agreement,
o conflicts,
o capitalization,
o regulatory reports and filings,
o financial statements,
o brokers,
o governmental proceedings,
o absence of undisclosed liabilities and changes in business
operations,
o legal proceedings,
o regulatory matters, and
o ownership of the other party's shares.
In addition, ComBanc and Commercial Bank have made representations and
warranties regarding:
o loans,
o allowance for loan losses,
o taxes,
o real estate,
o compliance with laws,
o employment agreements,
o employee benefit plans,
o material contracts,
-38-
o environmental matters,
o internal controls, and
o other matters.
Covenants
ComBanc may not solicit or initiate any proposals or offers from any
person regarding any acquisition or purchase of all or a material amount of the
assets of, any equity securities of, or any merger, consolidation or business
combination with, ComBanc or Commercial Bank, except as required by the good
faith exercise of the fiduciary duties of the ComBanc directors. ComBanc must
pay First Defiance a termination fee of $2,000,000 if ComBanc enters into or
closes an acquisition transaction with any person or entity other than First
Defiance at any time prior to the expiration of 12 months after the termination
of the merger agreement.
ComBanc and Commercial Bank have also agreed to do the following
immediately before completion of the merger to the extent such actions are
permitted by law and are consistent with generally accepted accounting
principles:
o terminate the ComBanc health insurance plan;
o terminate ComBanc's 401(k) plan or merge it with First Defiance's
plan;
o terminate all deferred compensation agreements of the directors of
ComBanc and Commercial Bank;
o take certain accounting actions to conform Commercial Bank's loan,
accrual and reserve policies to First Federal's policies; and
o recognize the expenses of the merger and any restructuring charges
related to or to be incurred in connection with the merger.
Conduct of business pending the merger
During the period between August 4, 2004, and the completion of the
merger, ComBanc and Commercial Bank have agreed to conduct their business only
in the ordinary and usual course, unless First Defiance agrees otherwise in
writing. In addition, ComBanc and Commercial Bank have agreed not to:
o sell, transfer, mortgage, pledge, or subject to any lien or
otherwise encumber any material amount of assets, except in the
ordinary course of business;
o make any capital expenditure that individually exceeds $10,000 or in
the aggregate exceeds $25,000;
o declare or pay any dividends on ComBanc shares;
-39-
o purchase, redeem, retire or otherwise acquire any ComBanc shares;
o issue any ComBanc shares or grant any option or right to acquire any
shares;
o amend their certificate of incorporation, bylaws, articles of
incorporation or code of regulations;
o acquire any stock or other interest in any other entity, with
certain exceptions in the ordinary course of business;
o adopt or amend any employee or director benefit plan, pension,
retirement, stock, profit sharing, or bonus plan or take any action
to accelerate the vesting of any benefits, except as required by
law;
o except as otherwise provided in the merger agreement, enter into or
amend any employment contract with any of their employees or
increase the compensation payable to any employee or director;
o borrow or agree to borrow any funds or directly guarantee or agree
to guarantee any obligations of others;
o originate or issue a commitment to originate any loan or note in an
amount of $100,000 or more or on an aggregate basis to one borrower
of $250,000 or more or modify, renew or release any collateral on an
existing loan the outstanding balance of which is $100,000 or more;
o establish any new lending programs or make any policy changes
concerning who may approve loans;
o enter into any securities transactions or purchase or otherwise
acquire any investment security other than U.S. Government and
agency obligations;
o increase or decrease the rate of interest paid on time deposits or
certificates of deposits except in a manner consistent with past
practices and prevailing rates in Commercial Bank's market;
o foreclose upon or otherwise take title or possession of any real
property without first obtaining a Phase I environmental report that
indicates that the property is free of pollutants, contaminants or
hazardous or toxic materials; provided, however, that Commercial
Bank will not be required to obtain such a report with respect to
single-family, non-agricultural residential property of one acre or
less unless it has reason to believe such property may contain
pollutants, contaminants or other waste materials;
o purchase or acquire any interest in a loan held by a third party; or
o agree to take any of the actions described above.
-40-
Conditions
First Defiance, First Federal, ComBanc and Commercial Bank may complete
the merger only if:
o the merger agreement is adopted by the holders of a majority of the
outstanding ComBanc shares;
o the parties receive regulatory approval from the Office of Thrift
Supervision;
o no governmental authority prohibits consummation of the merger;
o the First Defiance shares to be issued in the merger have been
registered with the Securities and Exchange Commission; and
o legal counsel has provided an opinion with respect to the federal
income tax consequences of the merger.
In addition, First Defiance and First Federal will not be required to
complete the merger unless the following conditions are satisfied:
o all of ComBanc's and Commercial Bank's representations and
warranties in the merger agreement are true in all material respects
as of the effective date of the merger;
o ComBanc and Commercial Bank have satisfied, in all material
respects, their obligations in the merger agreement; and
o the holders of not more than 12% of the outstanding ComBanc shares
have sought appraisal rights.
ComBanc and Commercial Bank will not be required to complete the merger
unless the following conditions are satisfied:
o all of First Defiance's and First Federal's representations and
warranties in the merger agreement are true in all material respects
as of the effective date of the merger;
o First Defiance and First Federal have satisfied, in all material
respects, their obligations in the merger agreement;
o ComBanc receives an opinion from its financial advisor reasonably
acceptable to ComBanc, dated as of the closing date, that the
consideration to be received by ComBanc shareholders in the merger
is fair from a financial point of view;
-41-
o First Defiance has purchased directors' and officers' liability
insurance for the present and former officers and directors of
ComBanc and Commercial Bank; and
o First Defiance has not reduced the consideration to be paid to
ComBanc shareholders because ComBanc's shareholders' equity was less
than $22,500,000.
First Defiance and ComBanc may waive any of these conditions unless the
waiver is prohibited by law.
Effective time
Following the satisfaction or waiver of all conditions in the merger
agreement, we will file certificates of merger as soon as practicable with the
Ohio Secretary of State and the Delaware Secretary of State in order to complete
the merger. We anticipate that we will complete the merger in January 2005.
Termination and amendment
First Defiance and ComBanc may agree to terminate the merger at any time
before it is completed, even if the ComBanc shareholders have voted to approve
the merger. The merger agreement may be terminated and the merger may be
abandoned at any time prior to the effective time of the merger:
o by the mutual written consent of First Defiance and ComBanc;
o by either First Defiance or ComBanc if the merger is not consummated
on or before March 31, 2005;
o by either First Defiance or ComBanc if any event occurs which would
preclude satisfaction of certain conditions set forth in the merger
agreement;
o by either First Defiance or ComBanc if ComBanc executes a definitive
agreement whereby some person or entity other than First Defiance
will acquire all or a material amount of the assets, or any equity
securities, of ComBanc, or ComBanc and such other person or entity
will enter into a merger, consolidation or business combination; or
o by ComBanc if First Defiance does not increase the stock
consideration to be received by ComBanc shareholders to preserve the
tax-free reorganization status of the merger.
ComBanc must pay to First Defiance a termination fee of $2,000,000 if
ComBanc enters into an acquisition transaction with a company other than First
Defiance at any time prior to the expiration of 12 months after the merger
agreement has been terminated.
-42-
If the merger agreement is terminated, the merger agreement will become
void and have no effect, except that the provisions of the merger agreement
relating to confidentiality of information and payment of expenses will survive
the termination and no party to the merger agreement will be released from any
liabilities or damages arising out of its breach of any provision of the merger
agreement.
The merger agreement may be amended in writing at any time before or after
the ComBanc shareholders adopt the merger agreement. If the ComBanc shareholders
have already adopted the merger agreement, however, we will not amend the merger
agreement without their approval if the amendment would materially adversely
affect the shareholders. If necessary, ComBanc will seek approval of any such
amendment at a subsequent meeting of shareholders.
Interests of directors and officers
Directors and officers of ComBanc have interests in the merger in addition
to their interests solely as ComBanc shareholders.
Employee benefit plans. All employees of ComBanc and Commercial Bank who
are employed by First Federal immediately after the merger will be covered by
First Federal's employee benefit plans.
Employment agreements. Paul G. Wreede, the President and Chief Executive
Officer of ComBanc and Commercial Bank, has executed a three-year employment
agreement with First Federal that will become effective upon consummation of the
merger. The agreement provides for an annual salary of $95,000, eligibility for
a bonus and group health, life and disability benefits.
Each of Ronald R. Elwer and Rebecca L. Minnig has entered into a one-year
employment agreement with First Federal that will become effective upon
consummation of the merger. Each agreement provides for a minimum annual salary
and participation in employee benefit plans.
Severance payments. Three of Commercial Bank's senior executive officers
will be entitled to a severance payment that is different than the severance
payment that other Commercial Bank employees will receive. If one of these
officers is not hired by First Federal or if his or her employment is terminated
without cause within 12 months of the merger, the officer will be entitled to a
severance payment equal to the product of two weeks' salary multiplied by the
number of total years of that officer's service to Commercial Bank, with a
minimum payment equal to 13 weeks' salary and a maximum of 26 weeks' salary.
Indemnification and insurance. For a period of three years after the
merger is completed, First Defiance will indemnify the current and former
officers and directors of ComBanc and Commercial Bank for their acts and
omissions occurring prior to the completion of the merger to the extent
permitted by First Defiance's articles of incorporation and code of regulations.
There will be no indemnification for claims against the officers and directors
arising out of or in connection with the merger. First Defiance has also agreed
to provide directors' and
-43-
officers' liability insurance to cover the directors and officers of ComBanc and
Commercial Bank for three years following the completion of the merger.
Board appointment. First Defiance will select one director of Commercial
Bank to serve on the Board of Directors of First Defiance and First Federal
beginning immediately after the effective time of the merger.
Advisory board. Each of the directors of ComBanc who does not become an
employee or director of First Defiance or First Federal will be appointed to an
advisory board of First Federal for a one-year term. As compensation for such
service, each advisory board member will receive $500 for each monthly advisory
board meeting attended. Each such ComBanc director will execute a non-compete
agreement with a one-year term.
Resale of First Defiance common shares
First Defiance has registered the First Defiance stock to be issued in the
merger with the Securities and Exchange Commission under the Securities Act of
1933, as amended. The First Defiance shares will be freely transferable, except
for First Defiance stock received by persons who may be deemed to be affiliates
of ComBanc. The term "affiliate" is defined in Rule 144 under the Securities Act
and generally includes executive officers, directors, and shareholders
beneficially owning 10% or more of the outstanding ComBanc stocks. ComBanc
affiliates may not sell their First Defiance stock, except (a) in compliance
with Rule 145 or another applicable exemption from the registration requirements
of the Securities Act or (b) pursuant to an effective registration statement
under the Securities Act covering their First Defiance stock.
Material federal income tax consequences
First Defiance and ComBanc have not sought, and do not intend to seek, a
ruling from the Internal Revenue Service as to the federal income tax
consequences of the merger. The opinion of Vorys, Sater, Seymour and Pease LLP,
counsel to First Defiance, as to some of the expected federal income tax
consequences of the merger is set forth as an exhibit to the registration
statement of which this prospectus/proxy statement is a part. The opinion is
based in part upon certain factual assumptions and upon certain representations
made by First Defiance and ComBanc, which representations Vorys, Sater, Seymour
and Pease LLP has relied upon and has assumed to be true, correct and complete.
If such representations are inaccurate, the opinion could be adversely affected.
In addition, the opinion assumes that the amount of cash that will be paid to
holders of ComBanc shares who perfect appraisal rights will not materially
exceed $17.20 per share. Opinions of tax counsel are not binding on the Internal
Revenue Service or the courts, either of which could take a contrary position.
That tax opinion supports the following discussion of the anticipated
federal income tax consequences of the merger to ComBanc shareholders. This
discussion is based on current federal law. Future legislative, judicial or
administrative interpretations, which may be retroactive, could alter or modify
the statements set forth in this discussion.
-44-
Assuming that the merger is consummated in accordance with the merger
agreement, it is anticipated that the following federal income tax consequences
will occur:
o The merger will be a reorganization within the meaning of Section
368(a)(1)(A) of the Internal Revenue Code. First Defiance and
ComBanc each will be a "party to the reorganization" within the
meaning of Section 368(b) of the Internal Revenue Code.
o No gain or loss will be recognized by First Defiance or ComBanc as a
result of the merger.
o The tax basis of the assets of ComBanc in the hands of First
Defiance will be the same as the tax basis of such assets in the
hands of ComBanc immediately prior to the merger.
o The holding period of the assets of ComBanc to be received by First
Defiance will include the period during which such assets were held
by ComBanc.
o A ComBanc shareholder receiving solely First Defiance shares in
exchange for such shareholder's ComBanc shares (not including any
cash received in lieu of fractional First Defiance shares) will
recognize no gain or loss upon the receipt of such First Defiance
shares.
o A ComBanc shareholder receiving solely cash in exchange for such
shareholder's ComBanc shares (as a result of such shareholder's
dissent to the merger or election to receive the cash consideration
for all of such shareholder's ComBanc shares), will recognize gain
or loss as if such shareholder had received such cash as a
distribution in redemption of such shareholder's ComBanc shares,
subject to the provisions and limitations of Section 302 of the
Internal Revenue Code.
o A ComBanc shareholder receiving both cash and First Defiance shares
in exchange for such shareholder's ComBanc shares (not including any
cash received in lieu of fractional First Defiance shares) will
recognize gain, but not loss, in an amount not to exceed the amount
of cash received (excluding cash received in lieu of fractional
First Defiance shares). For purposes of determining the character of
this gain, such ComBanc shareholder will be treated as having
received only First Defiance shares in exchange for such
shareholder's ComBanc shares, and as having immediately redeemed a
portion of such First Defiance shares for the cash received
(excluding cash received in lieu of fractional First Defiance
shares). Unless the redemption is treated as a dividend under the
principles of Section 302(d) of the Internal Revenue Code (to the
extent of ComBanc's current or accumulated earnings and profits),
the gain will be capital gain if the ComBanc shares are held by such
shareholder as a capital asset at the time of the merger.
o A ComBanc shareholder receiving cash in lieu of fractional First
Defiance shares will recognize gain or loss as if such fractional
First Defiance shares were
-45-
distributed as part of the merger and then redeemed by First
Defiance, subject to the provisions and limitations of Section 302
of the Internal Revenue Code.
o The tax basis of the First Defiance shares received by a ComBanc
shareholder pursuant to the merger will be the same as the tax basis
of the ComBanc shares surrendered in exchange therefor, decreased by
the amount of cash received and increased by the amount of gain, if
any, recognized on the exchange.
o The holding period of the First Defiance shares received by a
ComBanc shareholder will include the period during which the ComBanc
shares surrendered in exchange therefor were held, provided the
ComBanc shares are a capital asset in the hands of the ComBanc
shareholder at the time of the merger.
This discussion does not address, among other matters:
o state, local, or foreign tax consequences of the merger;
o the tax consequences to ComBanc shareholders who hold their shares
of ComBanc other than as a capital asset, who hold their shares in a
hedging transaction or as part of a straddle or conversion
transaction or who are subject to special rules under the Internal
Revenue Code, such as foreign persons, tax-exempt organizations,
insurance companies, financial institutions, and dealers in stocks
and securities;
o the tax consequences to ComBanc shareholders who received their
shares upon the exercise of stock options, stock purchase plan
rights, or otherwise as compensation; and
o the tax consequences to the holders of options to acquire shares of
ComBanc.
The foregoing discussion is intended only as a summary and is not a
complete analysis or listing of all potential federal income tax consequences of
the merger. ComBanc shareholders are urged to consult their tax advisors
concerning the United States federal, state, local and foreign tax consequences
of the merger to them.
Accounting treatment
The merger will be treated as a purchase for accounting purposes.
Accordingly, First Defiance will record the assets and liabilities of ComBanc on
its books at estimated fair value. The excess, if any, of the fair value of the
liabilities assumed and consideration paid over the fair value of the assets
received will be assigned to specific and unidentified intangible assets. The
resulting unidentified intangible asset will not be amortized, but will be
tested for impairment as prescribed under SFAS No. 142, "Goodwill and Intangible
Assets."
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Comparison of rights of holders of First Defiance shares and holders of ComBanc
shares
The shareholders of ComBanc who receive First Defiance shares as
consideration in the merger will become shareholders of First Defiance at the
effective time of the merger. There are certain differences between the rights
of First Defiance shareholders and the rights of ComBanc shareholders arising
from the distinctions between the First Defiance articles of incorporation and
code of regulations and the ComBanc certificate of incorporation and bylaws and
the differences between Ohio and Delaware law. However, the rights of the
holders of First Defiance shares and those of holders of ComBanc shares are
similar in most material aspects. The differences are described below.
Authorized stock
The First Defiance articles of incorporation authorize 25,000,000 shares
of common stock and 5,000,000 shares of preferred stock. The ComBanc certificate
of incorporation authorizes 5,000,000 common shares and no preferred shares.
Director nominations
First Defiance shareholders generally must submit director nominations at
least 60 days prior to the anniversary of the last annual shareholders' meeting.
ComBanc shareholders generally must submit director nominations no less than 14
days before the annual meeting.
Anti-takeover provisions
The following is a discussion of provisions of the First Defiance articles
of incorporation and code of regulations that could deter or prohibit changes in
majority control of the board of directors or non-negotiated acquisitions of
control of First Defiance.
Board of directors. The board of directors of First Defiance is to be
divided into three classes, as nearly equal in number as possible, which shall
be elected for staggered three-year terms.
First Defiance's articles provide that a director may be removed without
cause by the affirmative vote of 75% of the shares that would be entitled to
elect a director in place of the director being removed.
Limitations on call of meetings of shareholders. First Defiance's
regulations provide that meetings of shareholders may only be called by First
Defiance's chairman of the board; president or, in the case of the President's
absence, death or disability, the vice president authorized to exercise the
authority of the president; the directors; or the holders of 50% of all
outstanding shares.
Shareholder vote required to approve business combinations with principal
shareholders. First Defiance's articles require the approval of the holders of
(i) at least 80% of First Defiance's outstanding shares of voting stock, and
(ii) at least a majority of First Defiance's
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outstanding shares of voting stock, not including shares held by a "Related
Person," to approve certain "Business Combinations" as defined therein, and
related transactions. The term "Related Person" is defined to include any
individual, corporation, partnership or other entity which owns beneficially or
controls, directly or indirectly, 10% or more of the outstanding shares of
common stock of First Defiance. A "Business Combination" is defined to include:
o any merger or consolidation of First Defiance with or into any
Related Person;
o any sale, lease, exchange, mortgage, transfer, or other disposition
of all or more than 25% of the assets of First Defiance or its
subsidiaries to any Related Person;
o any merger or consolidation of a Related Person with First Defiance
or its subsidiaries;
o any sale, lease, exchange, transfer or other disposition of all or
more than 25% of the assets of a Related Person to First Defiance or
its subsidiaries;
o the issuance of any securities of First Defiance or its subsidiaries
to a Related Person;
o the acquisition by First Defiance or its subsidiaries of any
securities of the Related Person;
o any reclassification of the First Defiance common stock, or any
recapitalization involving the common stock of First Defiance; and
o any agreement, contract or other arrangement providing for any of
the above transactions.
The following is a discussion of provisions of the ComBanc certificate of
incorporation and bylaws that could deter or prohibit changes in majority
control of the board of directors or non-negotiated acquisitions of control of
ComBanc.
Board of directors. ComBanc's bylaws provide that a director may be
removed with or without cause by the affirmative vote of a majority of the
shares entitled to vote upon the election of directors.
Limitations on call of meetings of shareholders. ComBanc's bylaws provide
that special meetings of shareholders may only be called by the directors or
three or more holders of 25% or more of all outstanding shares.
Anti-takeover statutes
Certain state laws make a change in control of First Defiance and ComBanc
more difficult, even if desired by the holders of the majority of the First
Defiance or ComBanc shares. The Ohio anti-takeover statutes that govern First
Defiance differ substantially from the Delaware statutes that govern ComBanc.
-48-
Ohio control share acquisition statute. The Ohio Revised Code provides in
Section 1701.831 that specified notice and informational filings and special
shareholder meetings and voting procedures must occur before consummation of a
proposed "control share acquisition." A control share acquisition is defined as
any acquisition of an issuer's shares that would entitle the acquirer to
exercise or direct the voting power of the issuer in the election of directors
within any of the following ranges:
o one-fifth or more, but less than one-third, of the voting power;
o one-third or more, but less than a majority, of the voting power; or
o a majority or more of the voting power.
Assuming compliance with the notice and information filing requirements,
the proposed control share acquisition may take place only if, at a duly
convened special meeting of shareholders, the acquisition is approved by both a
majority of the voting power of the issuer represented at the meeting and a
majority of the voting power remaining after excluding the combined voting power
of the intended acquirer and the directors and officers of the issuer. The
control share acquisition statute does not apply to a corporation whose articles
of incorporation or regulations so provide. First Defiance has not opted out of
the application of the control share acquisition statute.
Ohio merger moratorium statute. Chapter 1704 of the Ohio Revised Code
prohibits specified business combinations and transactions between an "issuing
public corporation" and an "interested shareholder" for at least three years
after the interested shareholder attains 10% ownership, unless the board of
directors of the issuing public corporation approves the transaction before the
interested shareholder attains 10% ownership. An interested shareholder is a
person who owns 10% or more of the shares of the corporation. An issuing public
corporation is defined as an Ohio corporation with 50 or more shareholders that
has its principal place of business, principal executive offices, or substantial
assets within the State of Ohio, and as to which no close corporation agreement
exists. Examples of transactions regulated by the merger moratorium provisions
include mergers, consolidations, voluntary dissolutions, the disposition of
assets and the transfer of shares. After the three-year period, a moratorium
transaction may take place provided that certain conditions are satisfied,
including that:
o the board of directors approves the transaction;
o the transaction is approved by the holders of shares with at least
two-thirds of the voting power of the corporation (or a different
proportion set forth in the articles of incorporation), including at
least a majority of the outstanding shares after excluding shares
controlled by the interested shareholder; or
o the business combination results in shareholders, other than the
interested shareholder, receiving a fair price plus interest for
their shares, as determined in accordance with the statute.
Although the merger moratorium provisions may apply, a corporation may
elect not to be covered by the merger moratorium provisions, or subsequently
elect to be covered, with an
-49-
appropriate amendment to its articles of incorporation. First Defiance has not
opted out of the Ohio merger moratorium statute.
Delaware anti-takeover statute. The Delaware General Corporation Law
imposes limits on the ability of persons who acquire more than 15% of the
outstanding stock of a Delaware corporation, such as ComBanc, to effect a merger
with or acquisition of such corporation for three years after the person's
acquisition of stock of the corporation. Such a transaction may be effected,
generally, if:
o the buyer, while acquiring the 15% interest, acquires at least 85%
of the corporation's outstanding stock (the 85% requirement excludes
shares held by directors who are also officers and certain shares
held under employee stock plans);
o the Board of Directors of the corporation pre-approves the
transaction; or
o the transaction is subsequently approved by the corporation's Board
of Directors and two-thirds of the shares of outstanding stock of
the corporation (excluding shares held by the interested
stockholder).
Legal matters
Vorys, Sater, Seymour and Pease LLP has rendered an opinion that the
shares of First Defiance common stock to be issued to the ComBanc shareholders
in connection with the merger have been duly authorized and, if issued pursuant
to the merger agreement, will be validly issued, fully paid and non-assessable
under the laws of the State of Ohio. Vorys, Sater, Seymour and Pease LLP also
has delivered an opinion regarding the federal income tax consequences of the
merger to First Defiance, ComBanc and the ComBanc shareholders.
Experts
The consolidated financial statements of First Defiance included in First
Defiance's Annual Report on Form 10-K for the year ended December 31, 2003, have
been audited by Ernst & Young LLP, independent registered public accounting
firm, as set forth in their report thereon included in such Annual Report and
incorporated into this document by reference. Such consolidated financial
statements are incorporated herein by reference in reliance upon such report
given on the authority of such firm as experts in accounting and auditing.
The consolidated financial statements of ComBanc included in ComBanc's
Annual Report on Form 10-K for the year ended December 31, 2003, have been
audited by BKD, LLP, an independent registered public accounting firm, as set
forth in their report included in such Annual Report. Such consolidated
financial statements are incorporated herein by reference in reliance upon such
report given on the authority of such firm as experts in accounting and
auditing.
-50-
Where you can find more information
First Defiance has filed with the Securities and Exchange Commission a
Registration Statement on Form S-4 under the Securities Act for the First
Defiance shares to be issued to ComBanc shareholders in the merger. This
prospectus/proxy statement is a part of the Registration Statement on Form S-4.
The rules and regulations of the Securities and Exchange Commission permit us to
omit from this document information, exhibits and undertakings that are
contained in the Registration Statement on Form S-4.
In addition, First Defiance files reports, proxy statements and other
information with the Securities and Exchange Commission under the Exchange Act.
You can read and copy the Registration Statement and its exhibits, as well as
the reports, proxy statements and other information filed with the Securities
and Exchange Commission by First Defiance, at the following location:
Securities and Exchange Commission's Public Reference Room
450 Fifth Street, N.W.
Washington, D.C. 20549
Please call the Securities and Exchange Commission for more information on
the operation of the Public Reference Room at 1-800-SEC-0330. First Defiance and
ComBanc are electronic filers, and the Securities and Exchange Commission
maintains a Web site that contains reports, proxy and information statements and
other information regarding registrants that file electronically with the
Securities and Exchange Commission at the following Web address:
(http://www.sec.gov). Reports of First Defiance can also be found on First
Defiance's website (http://www.fdef.com)
The Securities and Exchange Commission allows us to "incorporate by
reference" into this prospectus/proxy statement, which means that the companies
can disclose important information to you by referring you to another document
filed separately with the Securities and Exchange Commission. The information
incorporated by reference is considered to be part of this prospectus/proxy
statement, except for any information superseded by information contained in
later-filed documents incorporated by reference in this prospectus/proxy
statement. You should read the information relating to the companies contained
in this prospectus/proxy statement and the information in the documents
incorporated by reference.
This document incorporates by reference the description of First Defiance
common stock contained in First Defiance's registration statement on Form 8-A
filed by First Defiance on September 25, 1995, including any amendment or
reports filed for the purpose of updating such description, the documents listed
below that First Defiance has previously filed with the Securities and Exchange
Commission and any future filings made by it with the Securities and Exchange
Commission before the special meeting of shareholders under Sections 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended.
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Commission Filings (File No. 0-25196) Period/Date
------------------------------------- -----------
Annual Report on Form 10-K Year ended December 31, 2003
Quarterly Reports on Form 10-Q Quarters ended March 31, June 30, and
September 30, 2004
Current Reports on Form 8-K Filed on January 21, April 21, July 20,
August 6, August 9, October 15 and
October 20, 2004
This document incorporates by reference the documents listed below that
ComBanc has previously filed with the Securities and Exchange Commission and any
future filings made by it with the Securities and Exchange Commission before the
special meeting of shareholders under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended.
Commission Filings (File No. 0-25196) Period/Date
------------------------------------- -----------
Annual Report on Form 10-K Year ended December 31, 2003 (a copy of
which is attached as Annex D to this
document)
Quarterly Report on Form 10-Q Quarters ended March 31, June 30, and
September 30, 2004 (a copy of which is
attached as Annex E to this document)
Current Reports on Form 8-K Filed on January 30, February 9, March
9, March 18, April 9, May 18, June 1,
July 16 and August 5, 2004
You can receive the documents incorporated by reference (without exhibits,
unless the exhibits are specifically incorporated by reference into this
prospectus/proxy statement) without charge by calling or writing one of the
following persons:
First Defiance Financial Corp. ComBanc, Inc.
601 Clinton Street 230 East Second Street
Defiance, Ohio 43512-3272 Delphos, Ohio 45833
Attention: John C. Wahl Attention: Paul G. Wreede
(419) 782-5015 (419) 695-1055
Please request documents by December 14, 2004. You may also obtain copies
of the documents from the Securities and Exchange Commission through its website
at the address provided above.
Following the merger, First Defiance will continue to be regulated by the
information, reporting and proxy statement requirements of the Securities
Exchange Act of 1934, as amended.
-52-
ANNEX A
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
TABLE OF CONTENTS
Page
----
ARTICAL ONE -- THE MERGER ................................................... 1
1.01. Corporate Merger................................................... 1
1.02. Effective Time..................................................... 2
1.03. Governing Documents of the Surviving Corporation................... 2
1.04. Bank Merger........................................................ 2
1.05. Structure of Combination........................................... 2
ARTICLE TWO -- CONVERSION OF SHARES; SURRENDER OF CERTIFICATES............... 2
2.01. Conversion of ComBanc Shares....................................... 2
2.02. Exchange of ComBanc Certificates................................... 2
2.03. Dissenting ComBanc Shares.......................................... 4
2.04. Anti-Dilution Provisions........................................... 7
2.05. FDEF Shares........................................................ 7
2.06. Tax Consequences................................................... 7
ARTICLE THREE -- REPRESENTATIONS AND WARRANTIES OF COMBANC AND
COMMERCIAL BANK ............................................................. 7
3.01. Corporate Status................................................... 8
3.02. Capitalization of ComBanc.......................................... 9
3.03. Capitalization of Commercial Bank.................................. 9
3.04. Corporate Proceedings.............................................. 10
3.05. Authorization...................................................... 10
3.06. Financial Statements of ComBanc.................................... 10
3.07. SEC Filings........................................................ 11
3.08. Absence of Undisclosed Liabilities................................. 11
3.09. Absence of Changes................................................. 11
3.10. Loans.............................................................. 11
3.11. Allowance for Loan Losses.......................................... 12
3.12. Reports and Records................................................ 12
3.13. Taxes.............................................................. 12
3.14. Property and Title................................................. 13
3.15. Legal Proceedings.................................................. 14
3.16. Compliance with Laws and Regulations............................... 14
3.17. No Conflict........................................................ 15
3.18. Brokers, Finders and Others........................................ 15
3.19. Employment Agreements.............................................. 15
3.20. Employee Benefit Plans............................................. 16
3.21. Insurance.......................................................... 17
3.22. Governmental and Third-Party Proceedings........................... 18
3.23. Contracts.......................................................... 18
3.24. Environmental Matters.............................................. 18
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3.25. ComBanc Information................................................ 19
3.26. CRA Compliance..................................................... 19
3.27. Ownership of FDEF Shares........................................... 19
3.28. Fairness Opinion................................................... 20
3.29. Real Property Interest............................................. 20
3.30. Internal Controls.................................................. 20
ARTICLE FOUR -- REPRESENTATIONS AND WARRANTIES OF FDEF AND FIRST
FEDERAL ..................................................................... 21
4.01. Corporate Status................................................... 21
4.02. Corporate Proceedings.............................................. 21
4.03. Capitalization of FDEF............................................. 21
4.04. Authorized and Effective Agreement................................. 22
4.05. No Conflict........................................................ 23
4.06. SEC Filings........................................................ 23
4.07. Financial Statements of FDEF and First Federal..................... 23
4.08. Brokers, Finders and Others........................................ 24
4.09. Governmental and Third-Party Proceedings........................... 24
4.10. Absence of Undisclosed Liabilities................................. 24
4.11. Absence of Changes................................................. 24
4.12. Legal Proceedings.................................................. 25
4.13. Regulatory Matters................................................. 25
4.14. Ownership of ComBanc Shares........................................ 25
ARTICLE FIVE -- FURTHER COVENANTS OF COMBANC AND COMMERCIAL BANK............. 25
5.01. Operation of Business.............................................. 25
5.02. Notification....................................................... 28
5.03. Acquisition Proposals.............................................. 29
5.04. Delivery of Information............................................ 29
5.05. Affiliates Compliance with the Securities Act...................... 29
5.06. Voting Agreement................................................... 29
5.07. No Control......................................................... 29
5.08. Accounting Policies................................................ 30
5.09. ComBanc Meeting.................................................... 30
5.10. Tax Matters........................................................ 30
5.11. Insurance Coverage................................................. 31
5.12. Supplemental Assurances............................................ 31
ARTICLE SIX -- FURTHER COVENANTS OF FDEF..................................... 31
6.01. Employees; Employee Benefits....................................... 31
6.02. Exchange Listing................................................... 32
6.03. Notification....................................................... 32
6.04. Indemnification.................................................... 32
6.05. Board of Directors................................................. 33
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6.06. Advisory Board..................................................... 33
ARTICLE SEVEN -- FURTHER OBLIGATIONS OF THE PARTIES.......................... 34
7.01. Cooperative Action................................................. 34
7.02. Press Releases..................................................... 34
7.03. Proxy/Prospectus; Registration Statement........................... 34
7.04. Regulatory Applications............................................ 35
7.05. Termination of Profit Sharing Plan................................. 35
7.06. Confidentiality.................................................... 36
ARTICLE EIGHT -- CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE
PARTIES ..................................................................... 36
8.01. Conditions to the Obligations of FDEF and First Federal............ 36
8.02. Conditions to the Obligations of ComBanc and Commercial Bank....... 37
8.03. Mutual Conditions.................................................. 38
ARTICLE NINE -- CLOSING...................................................... 38
9.01. Closing............................................................ 38
9.02. Closing Deliveries Required of FDEF and First Federal.............. 39
9.03. Closing Deliveries Required of ComBanc and Commercial Bank......... 39
ARTICLE TEN -- TERMINATION................................................... 39
10.01. Termination........................................................ 39
10.02. Effect of Termination.............................................. 40
10.03. Termination Fee.................................................... 40
10.04. Force Majeure...................................................... 40
ARTICLE ELEVEN -- MISCELLANEOUS.............................................. 41
11.01. Notices............................................................ 41
11.02. Counterparts....................................................... 42
11.03. Entire Agreement................................................... 42
11.04. Successors and Assigns............................................. 42
11.05. Captions........................................................... 42
11.06. Governing Law...................................................... 42
11.07. Payment of Fees and Expenses....................................... 42
11.08. Amendment.......................................................... 42
11.09. Waiver............................................................. 42
11.10. No Third-Party Rights.............................................. 42
11.11. Waiver of Jury Trial............................................... 43
11.12. Severability....................................................... 43
11.13. Non-Survival of Representations, Warranties and Covenants.......... 43
-iii-
GLOSSARY OF DEFINED TERMS
The following terms, when used in this Agreement, have the meanings
ascribed to them in the corresponding Sections of this Agreement listed below:
"Acquisition Transactions" -- Section 5.03
"Aggregated Cash Consideration" -- Section 2.01(c)
"Agreement" -- Preamble
"Average" -- Section 2.01(b)
"Bank Merger" -- Preamble
"Bank Merger Agreement" -- Preamble
"BHCA" -- Section 3.01(a)
"Cash Election Shares" -- Section 2.02(a)
"CERCLA" -- Section 3.24
"Closing" -- Section 9.01
"Closing Date" -- Section 9.01
"Code" -- Section 2.02(f)
"ComBanc" -- Preamble
"ComBanc Balance Sheet Date" -- Section 3.06
"ComBanc Certificates" -- Section 2.02(a)
"ComBanc Disclosure Schedule" -- Article Three
"ComBanc Dissenting Share" -- Section 2.03
"ComBanc Financial Statements" -- Section 3.06
"ComBanc Meeting" -- Section 3.04(b)
"ComBanc Real Properties" -- Section 3.14(a)
"ComBanc Shares" -- Section 1.01
"ComBanc's Counsel" -- Section 7.01
"ComBanc's Financial Advisor" -- Section 3.18
"Commercial Bank" -- Preamble
"Commercial Bank Real Estate Collateral" -- Section 3.24
"Compensation and Benefit Plans" -- Section 3.20(a)
"Consultants" -- Section 3.20(a)
"Continuing Employees" -- Section 6.01
"Corporate Merger" -- Preamble
"CRA" -- Section 3.26
"DGCL" -- Section 1.01
"Directors" -- Section 3.20(a)
"Effective Time" -- Section 1.02
"Election Deadline" -- Section 2.02(b)
"Election Form" -- Section 2.02(a)
"Employees" -- Section 3.20(a)
"Environmental Law" -- Section 3.24
"ERISA" -- Section 3.20(a)
"ERISA Affiliate" -- Section 3.20(c)
"Exchange Act" -- Section 3.07
"Exchange Agent" -- Section 2.02(a)
"Exchange Ratio" -- Section 2.01(a)
"FDEF" -- Preamble
-iv-
"FDEF Filed SEC Documents" -- Section 4.10
"FDEF Financial Statements" -- Section 4.07
"FDEF Shares" -- Section 2.01(a)
"FDEF Stock Option Plans" -- Section 4.03(a)
"FDEF Stock Options" -- Section 4.03(a)
"FDEF's Counsel" -- Section 7.01
"FDIC" -- Section 3.01(b)
"Federal Reserve" -- Section 3.01(b)
"First Federal" -- Preamble
"GAAP" -- Section 3.06
"Governmental Authority" -- Section 3.16(c)
"HOLA" -- Section 4.01(a)
"Hazardous Substances" -- Section 3.24
"IRS" -- Section 3.13
"Information" -- Section 7.06
"Loan Assets" -- Section 3.10
"Loan Documentation" -- Section 3.10
"material" -- Section 3.01(d)
"material adverse effect" -- Section 3.01(d)
"MRP" -- Section 4.03(a)
"Nasdaq" -- Section 4.09
"No-Election Shares" -- Section 2.02(a)
"ODFI" -- Section 3.01(b)
"OGCL" -- Section 1.01
"OTS" -- Section 4.01(b)
"Officers" -- Section 3.19(a)
"Outstanding ComBanc Shares" -- Section 2.01(c)
"PCBs" -- Section 3.24
"Pension Plan" -- Section 3.20(b)
"Per Share Cash Consideration" -- Section 2.01(a)
"Per Share Reduction" -- Section 2.01(d)
"Per Share Stock Consideration" -- Section 2.01(a)
"Proxy/Prospectus" -- Section 7.03(a)
"Reallocated Cash Shares" -- Section 2.02(c)
"Reallocated Stock Shares" -- Section 2.02(c)
"Registration Statement" -- Section 7.03(a)
"Regulatory Authorities" -- Section 3.16(a)
"Rule 145 Affiliates" -- Section 5.05
"SEC" -- Section 3.01(c)
"Securities Act" -- Section 3.20(b)
"Stock Election Shares" -- Section 2.02(a)
"Subsidiary" -- Section 3.01(c)
"Surviving Corporation" -- Section 1.01
"Tax" -- Section 3.13
"Tax Returns" -- Section 3.13
"Updated ComBanc Disclosure Schedule" -- Section 5.02
-v-
AGREEMENT AND PLAN OF MERGER
----------------------------
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), dated as of August
4, 2004, is made and entered into by and among First Defiance Financial Corp.,
an Ohio corporation ("FDEF"); First Federal Bank of the Midwest, a federal
savings bank ("First Federal"); ComBanc, Inc., a Delaware corporation
("ComBanc"); and The Commercial Bank, an Ohio commercial bank ("Commercial
Bank").
W I T N E S S E T H:
WHEREAS, the Boards of Directors of ComBanc, Commercial Bank, FDEF and
First Federal have each determined that it is in the best interests of their
respective corporations and shareholders for ComBanc to merge with and into
FDEF (the "Corporate Merger") followed by the merger of Commercial Bank with
and into First Federal (the "Bank Merger"), upon the terms and subject to the
conditions set forth in and pursuant to the terms of this Agreement and the
Bank Merger Agreement to be entered into by and between First Federal and
Commercial Bank, the form of which is attached hereto as Exhibit A (the "Bank
Merger Agreement"); and
WHEREAS, the Boards of Directors of ComBanc, Commercial Bank, FDEF and
First Federal have each approved this Agreement and the consummation of the
transactions contemplated hereby;
NOW, THEREFORE, in consideration of the premises and the respective
representations, warranties, covenants, agreements and conditions hereinafter
set forth, FDEF, First Federal, ComBanc and Commercial Bank, intending to be
legally bound hereby, agree as follows:
ARTICLE ONE
THE MERGER
1.01. Corporate Merger. Upon the terms and subject to the conditions of
this Agreement, at the Effective Time (as defined in Section 1.02), ComBanc
shall merge with and into FDEF in accordance with the Ohio General Corporation
Law (the "OGCL") and the Delaware General Corporation Law (the "DGCL"). FDEF
shall be the continuing and surviving corporation in the Corporate Merger,
shall continue to exist under the laws of the State of Ohio, and shall be the
only one of FDEF and ComBanc to continue its separate corporate existence after
the Effective Time. As used in this Agreement, the term "Surviving Corporation"
refers to FDEF immediately after the Effective Time. As a result of the
Corporate Merger, the outstanding common stock, without par value, of ComBanc
(the "ComBanc Shares") and ComBanc's treasury shares shall be converted or
cancelled in the manner provided in Article Two.
-1-
1.02. Effective Time. The Effective Time of the Corporate Merger shall
be the date and time upon which the last of the following occurs: (a) the
filing of the appropriate certificate of merger with the Ohio Secretary of
State, (b) the filing of the appropriate certificate of merger with the
Delaware Secretary of State or (c) such time thereafter as is agreed to in
writing by FDEF and ComBanc and provided in the certificates of merger filed
as set forth above.
1.03. Governing Documents of the Surviving Corporation. At the Effective
Time, the articles of incorporation and code of regulations of FDEF as in
effect immediately prior to the Effective Time shall be the articles of
incorporation and code of regulations of the Surviving Corporation.
1.04. Bank Merger. Following the Corporate Merger, FDEF shall cause the
Bank Merger to be completed in accordance with the Bank Merger Agreement.
1.05. Structure of Combination. With the consent of ComBanc, which consent
shall not be unreasonably withheld, FDEF and First Federal may at any time
change the method of effecting the mergers (including, without limitation, the
provisions of this Article One) if and to the extent FDEF deems such change to
be desirable; provided, however, that no such change shall (i) alter or change
the amount or composition of the per share merger consideration described in
Section 2.01 of this Agreement; (ii) be likely to materially delay or
jeopardize receipt of any required regulatory approvals or materially delay
the satisfaction of any conditions to the closing of the Corporate Merger; or
(iii) adversely affect the tax treatment of ComBanc or ComBanc stockholders as
a result of receiving the per share merger consideration. ComBanc and
Commercial Bank shall, if requested by FDEF, enter into one or more amendments
to this Agreement in order to effect any such change.
ARTICLE TWO
CONVERSION OF SHARES; SURRENDER OF CERTIFICATES
2.01. Conversion of ComBanc Shares. At the Effective Time, by virtue of
the Corporate Merger and without any action on the part of the holder thereof:
(a) Subject to Sections 2.02, 2.03 and 2.04, each ComBanc Share issued
and outstanding immediately prior to the Effective Time (other than ComBanc
Shares to be canceled in accordance with Section 2.01(d) and ComBanc
Dissenting Shares, as defined in Section 2.03) shall be converted into the
right to receive, at the election of the holder thereof pursuant to Section
2.02(a):
(i) the number of common shares, $.01 par value per share, of FDEF
("FDEF Shares") that is equal to the Exchange Ratio as defined in Section
2.01(b) (the "Per Share Stock Consideration"), or
(ii) a cash amount equal to $17.20 (the "Per Share Cash
Consideration").
(b) Subject to adjustments, if any, pursuant to Section 2.01(c), the
Exchange Ratio shall be a fraction the numerator of which shall be $17.20 and
the denominator of which shall be the average closing price of an FDEF Share
for the five consecutive trading days ending one trading day prior to the
Effective Time (the "Average"); provided, however, that in the event the
Average is less than $21.56, then the Exchange Ratio shall equal 0.79769;
provided further, however, that in the event the Average is greater than
$26.35, the Exchange Ratio shall equal 0.65266.
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(c) Notwithstanding anything in this Agreement to the contrary, to
preserve the status of the Corporate Merger as a tax-free reorganization
within the meaning of Section 368(a)(1)(A) of the Code, if the aggregate value
of the FDEF Shares to be issued in connection with the Corporate Merger, based
upon the closing price of the FDEF Shares as reported on The Nasdaq Stock
Market ("Nasdaq") on the business day immediately preceding the Effective
Time, would be less than 45% of the sum of the Aggregate Cash Consideration
(as defined below), plus the value of the FDEF Shares to be received by the
holders of the ComBanc Shares as consideration in connection with the
Corporate Merger, then FDEF may, in its sole discretion, increase the Per
Share Stock Consideration so that the aggregate value of the FDEF Shares to be
issued to the holders of the ComBanc Shares in connection with the Corporate
Merger, as determined based upon the closing price of the FDEF Shares on
Nasdaq on the business day immediately preceding the Effective Time, is equal
to 45% of the sum of the Aggregate Cash Consideration, plus the value of the
FDEF Shares to be received by the holders of the ComBanc Shares as
consideration in connection with the Corporate Merger. For purposes of this
Agreement, the "Aggregate Cash Consideration" shall be an amount equal to the
Per Share Cash Consideration multiplied by 50% of the number of ComBanc Shares
outstanding at the Effective Time (the "Outstanding ComBanc Shares") (i.e.
excluding any of ComBanc's treasury shares).
(d) If the shareholders' equity of ComBanc on the Closing Date is less
than $22,500,000, excluding unrealized accumulated other comprehensive income
related to ComBanc's investment portfolio, the Per Share Stock Consideration
and the Per Share Cash Consideration to be paid for the ComBanc Shares shall
be decreased by an amount equal to (i) the difference between $22,500,000 and
the shareholders' equity of ComBanc on the Closing Date, divided by (ii) the
number of ComBanc Shares outstanding on the Closing Date (the "Per Share
Reduction"), and each ComBanc shareholder shall be entitled to receive from
FDEF either (a) an amount equal to $17.20 less the Per Share Reduction or (b)
a number of FDEF Shares equal to the Exchange Ratio, where the numerator of
the Exchange Ratio shall be $17.20 less the Per Share Reduction, subject to
the adjustment set forth in Section 2.01(b).
(e) No certificates or scrip representing fractional FDEF Shares shall be
issued. Each holder of ComBanc Shares who would otherwise be entitled to
receive a fractional FDEF Share shall receive an amount of cash equal to the
product obtained by multiplying (i) the fractional FDEF Share interest to
which such holder (after taking into account all ComBanc Shares held at the
Effective Time by such holder) would otherwise be entitled by (ii) the
Average.
(f) Any treasury shares held by ComBanc and any ComBanc Shares owned by
FDEF for its own account shall be cancelled and retired at the Effective Time
and no consideration shall be issued in exchange therefor.
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2.02. Exchange of ComBanc Certificates.
(a) Seven business days after the Effective Time, or as soon as
practicable thereafter, FDEF, or an exchange agent designated by FDEF to
discharge its duties pursuant to this Section 2.02 (the "Exchange Agent"),
shall mail to each holder of record of ComBanc Shares (i) a form letter of
transmittal and instructions for use in surrendering for exchange the
certificates evidencing the ComBanc Shares ("ComBanc Certificates") that will
have been cancelled and extinguished as a result of the Corporate Merger and
(ii) an election form ("Election Form"). The letter of transmittal shall
specify that the risk of loss and title to the ComBanc Certificates shall pass
only upon delivery of such certificates as specified in the letter of
transmittal. Each Election Form shall permit the holder (or in the case of
nominee record holders, the beneficial owner through proper instructions and
documentation) (i) to elect to receive FDEF Shares with respect to all such
holder's ComBanc Shares, (ii) to elect to receive cash with respect to all
such holder's ComBanc Shares, (iii) to elect to receive 50% cash and 50% FDEF
Shares with respect to such holder's ComBanc Shares, or (iv) to indicate that
such holder makes no such election with respect to such holder's ComBanc
Shares ("No-Election Shares"). Any ComBanc Shares with respect to which the
holder has elected to receive cash are hereinafter referred to as "Cash
Election Shares," and any ComBanc Shares with respect to which the holder has
elected to receive FDEF Shares are hereinafter referred to as "Stock Election
Shares." Any ComBanc Shares with respect to which the holder thereof shall
not, as of the Election Deadline (as defined below), have made an election by
submission to the Exchange Agent of an effective, properly completed Election
Form shall be deemed to be No-Election Shares. Any ComBanc Dissenting Shares
shall be deemed to be Cash Election Shares for purposes of the allocation
provisions of subsection (c) below, but in no event shall such shares be
classified as Reallocated Stock Shares (as defined in Section 2.02 (c)(ii)(B)
below).
(b) For purposes of this Agreement, the term "Election Deadline" shall
mean 5:00 p.m., Eastern Time, on the 20th day following but not including the
date of mailing of the Election Form, or such other date upon which FDEF and
ComBanc shall mutually agree prior to the Effective Time. Any election to
receive cash, FDEF Shares or a combination of cash and FDEF Shares shall have
been properly made only if the Exchange Agent shall have actually received a
properly completed Election Form by the Election Deadline. The Exchange Agent
shall be required to make all determinations as to when any election,
modification or revocation has been received and whether any such election,
modification or revocation has been properly made.
(c) The Exchange Agent shall effect the allocation among holders of
ComBanc Shares of rights to receive cash, FDEF Shares, or a combination of
cash and FDEF Shares in accordance with the Election Forms as follows:
(i) If the number of Cash Election Shares is less than one-half of
the Outstanding ComBanc Shares, then:
(A) each of the Cash Election Shares (other than ComBanc
Dissenting Shares) shall be converted into the right to receive the Per Share
Cash Consideration,
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(B) the Exchange Agent will allocate first among the No-Election
Shares (by the method of allocation described in Section 2.02 (d)(i) below)
and then, if necessary, will allocate among the Stock Election Shares (by the
method of allocation described in Section 2.02 (d)(ii) below), a sufficient
number of non-Cash Election Shares ("Reallocated Cash Shares") such that the
sum of the number of Cash Election Shares plus the number of Reallocated Cash
Shares equals one-half of the Outstanding ComBanc Shares, and each of the
Reallocated Cash Shares shall be converted into the right to receive the Per
Share Cash Consideration, and
(C) each of the No-Election Shares (if any) and Stock Election
Shares which are not Reallocated Cash Shares shall be converted into the right
to receive the Per Share Stock Consideration.
(ii) If the number of Cash Election Shares is greater than one-half
of the Outstanding ComBanc Shares, then:
(A) each of the Stock Election Shares and No-Election Shares
shall be converted into the right to receive the Per Share Stock
Consideration,
(B) the Exchange Agent will allocate among the Cash Election
Shares (other than ComBanc Dissenting Shares) (by the method of allocation
described in Section 2.02(d) below), a sufficient number of Cash Election
Shares ("Reallocated Stock Shares") such that the sum of the number of
remaining Cash Election Shares (including all of the ComBanc Dissenting
Shares) equals one-half of the Outstanding ComBanc Shares, and each of the
Reallocated Stock Shares shall be converted into the right to receive the Per
Share Stock Consideration, and
(C) each of the Cash Election Shares (other than ComBanc
Dissenting Shares) which are not Reallocated Stock Shares shall be converted
into the right to receive the Per Share Cash Consideration.
(iii) If the number of Cash Election Shares (including the ComBanc
Dissenting Shares) is equal to one-half of the Outstanding ComBanc Shares,
then subparagraphs (c)(i) and (ii) above shall not apply and all No-Election
Shares and all Stock Election Shares shall be converted into the right to
receive the Per Share Stock Consideration.
(d) Any pro rata allocation shall be performed by the Exchange Agent as
follows:
(i) If the Exchange Agent is required pursuant to Section
2.02 (c)(i)(B) to designate from among all No-Election Shares the Reallocated
Cash Shares to receive the Per Share Cash Consideration, each holder of
No-Election Shares shall be allocated a pro rata portion (based on such
holder's No-Election Shares relative to all No-Election Shares) of the total
Reallocated Cash Shares.
(ii) If the Exchange Agent is required pursuant to Section
2.02(c)(i)(B) to designate from among all Stock Election Shares the
Reallocated Cash Shares to receive the Per Share Cash Consideration, each
holder of Stock Election Shares shall be allocated a pro rata portion (based
on such holder's Stock Election Shares relative to all Stock Election Shares)
of the remainder of the total Reallocated Cash Shares less the number of
No-Election Shares which are Reallocated Cash Shares.
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(iii) If the Exchange Agent is required pursuant to Section
2.02(c)(ii)(B) to designate from among all holders of Cash Election Shares the
Reallocated Stock Shares to receive the Per Share Stock Consideration, each
holder of Cash Election Shares shall be allocated a pro rata portion (based on
such holder's Cash Election Shares relative to all Cash Election Shares) of
the remainder of the total Reallocated Stock Shares less the number of
No-Election Shares which are Reallocated Stock Shares. For purposes of this
Section 2.02(d)(iii), ComBanc Dissenting Shares shall not be considered to be
Cash Election Shares.
(e) Upon surrender of a ComBanc Certificate for cancellation, together
with a letter of transmittal, duly executed, the holder of such ComBanc
Certificate shall be entitled to receive in exchange therefor a certificate
representing the full number of FDEF Shares and/or the amount of cash into
which the aggregate number of ComBanc Shares previously represented by such
surrendered ComBanc Certificate shall have been converted pursuant to this
Agreement., and the ComBanc Certificate so surrendered shall thereafter be
cancelled. All payments made upon the surrender of ComBanc Certificates
pursuant to this Article Two shall be deemed to have been made in full
satisfaction of all rights pertaining to the shares evidenced by such ComBanc
Certificates.
(f) If any ComBanc Certificate shall have been lost, stolen or destroyed,
upon the making of an affidavit of that fact by the person claiming such
ComBanc Certificate to be lost, stolen or destroyed and, if required by FDEF
in its sole discretion, the posting by such person of a bond in such amount as
FDEF may determine is reasonably necessary as indemnity against any claim that
may be made against it with respect to such ComBanc Certificate, the Exchange
Agent shall issue in exchange for such lost, stolen or destroyed ComBanc
Certificate the cash and/or FDEF Shares (and cash in lieu of fractional FDEF
Share interests, if any) deliverable in respect thereof.
(g) None of FDEF, ComBanc, the Exchange Agent or the Surviving
Corporation shall be liable to any former holder of ComBanc Shares for any
payment of the Per Share Stock Consideration, the Per Share Cash
Consideration, any cash in lieu of a fractional FDEF Share interest or any
dividends or distributions with respect to FDEF Shares delivered to a public
official if required by any applicable abandoned property, escheat or similar
law.
(h) No dividends or other distributions declared after the Effective Time
with respect to FDEF Shares and payable to the holders of record thereof after
the Effective Time shall be paid to the holder of any unsurrendered ComBanc
Certificate until it is surrendered by the holder thereof. Subject to the
effect, if any, of applicable law, after the subsequent surrender and exchange
of a ComBanc Certificate, the record holder thereof shall be entitled to
receive any dividends or other distributions, without any interest thereon,
which became payable with respect to the FDEF Shares represented by such
ComBanc Certificate.
(i) After the Effective Time, there shall be no further registration or
transfer of ComBanc Shares on the stock transfer books of ComBanc. In the
event that, after the Effective Time, ComBanc Certificates are presented for
transfer, they shall be cancelled and exchanged as provided in this Article
Two.
-6-
(j) FDEF or the Exchange Agent shall be entitled to deduct and withhold
from the Per Share Stock Consideration or the Per Share Cash Consideration
such amounts as FDEF or the Exchange Agent is required to deduct and withhold
with respect to the making of such payment under the Internal Revenue Code of
1986, as amended (the "Code"), or any other provision of domestic or foreign
tax law (whether national, federal, state, provincial, local or otherwise). To
the extent that amounts are so withheld and paid over to the appropriate
taxing authority by FDEF or the Exchange Agent, such withheld amounts shall be
treated for all purposes of this Agreement as having been paid to the holder
of the ComBanc Certificates.
(k) The Surviving Corporation may from time to time waive one or more of
the rights provided to it in this Article Two to withhold certain payments,
deliveries and distributions; and no such waiver shall constitute a waiver of
its rights thereafter to withhold any such payment, delivery or distribution
in the case of any person.
2.03. Dissenting ComBanc Shares. Anything contained in this Agreement or
elsewhere to the contrary notwithstanding, if any holder of an outstanding
ComBanc Share dissents from the Corporate Merger pursuant to Section 262 of
the DGCL and is thereby entitled to appraisal rights thereunder (a "ComBanc
Dissenting Share"), then such ComBanc Dissenting Share shall be extinguished
but shall not be converted into the right to receive the Per Share Stock
Consideration or the Per Share Cash Consideration. Instead, such ComBanc
Dissenting Share shall be entitled only to such rights (and shall have such
obligations) as are provided in Section 262 of the DGCL.
2.04. Anti-Dilution Provisions. The Exchange Ratio shall be adjusted to
reflect any occurrence subsequent to the date of this Agreement but prior to
the Effective Time, pursuant to which the outstanding FDEF Shares shall have
been or will be increased, decreased, changed into or exchanged for a
different number or kind of shares or securities through reorganization,
recapitalization, reclassification, stock dividend, stock split, reverse stock
split or other like changes in FDEF's capitalization.
2.05. FDEF Shares. Each FDEF Share issued and outstanding immediately
prior to the Effective Time shall continue to be issued and outstanding and
unaffected by the Corporate Merger.
2.06. Tax Consequences. For federal income tax purposes, the Corporate
Merger is intended to constitute a reorganization within the meaning of
Section 368(a) of the Code. The parties hereto hereby adopt this Agreement as
a "plan of reorganization" within the meaning of Treasury Department
regulation sections 1.368-2(g) and 1.368-3(a).
ARTICLE THREE
REPRESENTATIONS AND WARRANTIES OF
COMBANC AND COMMERCIAL BANK
Except as set forth on a disclosure schedule prepared by ComBanc and
Commercial Bank (the "ComBanc Disclosure Schedule"), ComBanc and Commercial
Bank represent and warrant to FDEF and First Federal that each of the
following statements is true and accurate:
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3.01. Corporate Status.
(a) ComBanc is a Delaware corporation and a bank holding company
registered under the Bank Holding Company Act of 1956, as amended ("BHCA").
ComBanc is duly organized, validly existing and in good standing under the
laws of the State of Delaware and has the full corporate power and authority
to own its property, to carry on its business as presently conducted, and to
enter into and, subject to the required adoption of this Agreement by the
ComBanc stockholders and the obtaining of appropriate approvals of
Governmental and Regulatory Authorities (as defined below), perform its
obligations under this Agreement and consummate the transactions contemplated
by this Agreement. ComBanc is not qualified to do business in any other
jurisdiction or required to be so qualified to do business in any other
jurisdiction except where the failure to be so qualified individually or in
the aggregate would not reasonably be expected to have a material adverse
effect on ComBanc. ComBanc has provided to FDEF and First Federal true and
complete copies of the certificate of incorporation and bylaws of ComBanc, in
each case as amended to the date of this Agreement.
(b) Commercial Bank is an Ohio commercial bank and a Federal Reserve
member bank, and is regulated by the Ohio Division of Financial Institutions
(the "ODFI"), the Board of Governors of the Federal Reserve System (the
"Federal Reserve"), and the Federal Deposit Insurance Corporation (the
"FDIC"). Commercial Bank is duly organized, validly existing and in good
standing under the laws of the State of Ohio and has full power and authority,
corporate or otherwise, to own its property and to carry on its business as
presently conducted. Commercial Bank is not qualified to do business in any
other jurisdiction or required to be qualified to do business in any other
jurisdiction, except where the failure to be so qualified individually or in
the aggregate would not reasonably be expected to have a material adverse
effect on Commercial Bank. Commercial Bank has provided to FDEF and First
Federal true and complete copies of the articles of incorporation and other
governing instruments of Commercial Bank, in each case as amended to the date
of this Agreement.
(c) Commercial Bank is the only Subsidiary (as defined below) of ComBanc.
For purposes of this Agreement, "Subsidiary" has the meaning ascribed to such
term in Rule 1-02 of Regulation S-X promulgated by the Securities and Exchange
Commission (the "SEC").
(d) As used in this Agreement, (i) any reference to any event, change,
effect, development, circumstance or occurrence being "material" with respect
to any entity means an event, change, effect, development, circumstance or
occurrence that is or is reasonably likely to be material in relation to the
financial condition, properties, assets, liabilities, businesses or results of
operations of such entity and its subsidiaries taken as a whole, and (ii) the
term "material adverse effect" means, with respect to any entity, an event,
change, effect, development, circumstance or occurrence that, individually or
together with any other event, change, effect, development, circumstance or
occurrence, (A) has or would be reasonably likely to have a material adverse
effect on the business, condition (financial or otherwise), capitalization,
assets (tangible or intangible), liabilities (accrued, contingent or
otherwise), operations, regulatory affairs, financial performance or prospects
of such entity and its Subsidiaries, taken as a whole, or (B) materially
impairs the ability of such entity to perform its obligations under this
Agreement or to consummate the Corporate Merger and the other transactions
contemplated by this Agreement.
-8-
3.02. Capitalization of ComBanc.
(a) The authorized capital of ComBanc consists solely of 5,000,000
ComBanc Shares, of which 2,211,014 are issued and outstanding and 164,986 are
held in treasury. All outstanding ComBanc Shares have been duly authorized and
are validly issued, fully paid and non-assessable, and were not issued in
violation of the preemptive rights of any person. All ComBanc Shares issued
have been issued in compliance in all material respects with all applicable
federal and state securities laws.
(b) As of the date of this Agreement, there are no options, warrants,
calls, rights, commitments or agreements of any character to which ComBanc is
a party or by which it is bound, obligating ComBanc to issue, deliver or sell,
or cause to be issued, delivered or sold, any additional ComBanc Shares or
obligating ComBanc to grant, extend or enter into any such option, warrant,
call, right, commitment or agreement. As of the date of this Agreement, there
are no outstanding contractual obligations of ComBanc to repurchase, redeem or
otherwise acquire any ComBanc Shares.
(c) Except as disclosed in Section 3.02(c) of the ComBanc Disclosure
Schedule, since December 31, 2003, ComBanc has not (A) issued or permitted to
be issued any ComBanc Shares, or securities exercisable for or convertible
into ComBanc Shares; (B) repurchased, redeemed or otherwise acquired, directly
or indirectly through any ComBanc Subsidiary or otherwise, any ComBanc Shares;
or (C) declared, set aside, made or paid to the stockholders of ComBanc
dividends or other distributions on the outstanding ComBanc Shares.
(d) No bonds, debentures, notes or other indebtedness of ComBanc having
the right to vote on any matters on which ComBanc stockholders may vote are
issued or outstanding.
3.03. Capitalization of Commercial Bank.
(a) The authorized capital of Commercial Bank consists solely of
1,188,000 shares of common stock, of which 1,188,000 are issued and
outstanding. All outstanding shares of Commercial Bank are owned beneficially
and of record by ComBanc. Such shares have been duly authorized and are
validly issued, fully paid and non-assessable, were not issued in violation of
the preemptive rights of any person, and have been issued in compliance in all
material respects with all applicable federal and state securities laws.
(b) As of the date of this Agreement, there are no options,
warrants, calls, rights, commitments or agreements of any character to which
Commercial Bank is a party or by which it is bound, obligating Commercial Bank
to issue, deliver or sell, or cause to be issued, delivered or sold, any
additional shares of Commercial Bank or obligating Commercial Bank to grant,
extend or enter into any such option, warrant, call, right, commitment or
agreement. As of the date of this Agreement, there are no outstanding
contractual obligations of Commercial Bank to repurchase, redeem or otherwise
acquire any shares of Commercial Bank.
-9-
(c) Commercial Bank has not (A) issued or permitted to be issued any
shares of Commercial Bank, or securities exercisable for or convertible into
shares of Commercial Bank; (B) repurchased, redeemed or otherwise acquired,
directly or indirectly any shares of Commercial Bank; or (C) declared, set
aside, made or paid to the shareholders of Commercial Bank dividends or other
distributions on the outstanding shares of Commercial Bank.
(d) No bonds, debentures, notes or other indebtedness of Commercial Bank
having the right to vote on any matters on which Commercial Bank shareholders
may vote are issued or outstanding.
3.04. Corporate Proceedings.
(a) This Agreement has been (i) duly executed and delivered by ComBanc
and Commercial Bank, (ii) approved by the boards of directors of ComBanc and
Commercial Bank and (iii) adopted by ComBanc as the sole shareholder of
Commercial Bank.
(b) Subject to the adoption of this Agreement by a majority of the issued
and outstanding ComBanc Shares at a meeting of the ComBanc stockholders (the
"ComBanc Meeting") and to the filing of all requisite applications with
Regulatory Authorities and the receipt of all requisite regulatory approvals,
ComBanc and Commercial Bank have all requisite corporate power and authority
to enter into this Agreement and to perform all of their obligations
hereunder.
3.05. Authorization. This Agreement has been duly executed and delivered
by each of ComBanc and Commercial Bank, and assuming the due authorization,
execution and delivery by FDEF and First Federal, constitutes a valid and
binding obligation of each of ComBanc and Commercial Bank, enforceable against
each of them in accordance with its terms, except as such enforceability may
be limited by bankruptcy, insolvency, reorganization, moratorium, fraudulent
conveyance and other similar laws relating to or affecting the enforcement of
creditors' rights generally, by general equitable principles (regardless of
whether enforceability is considered in a proceeding in equity or at law) and
by an implied covenant of good faith and fair dealing and except to the extent
such enforceability may be limited by laws relating to safety and soundness of
insured depository institutions as set forth in 12 U.S.C. {section} 1818(b) or
by appointment of a conservator by the FDIC. Each of ComBanc and Commercial
Bank has the right, power, authority and capacity to execute and deliver this
Agreement and, subject to the required adoption of this Agreement by the
ComBanc stockholders, the obtaining of appropriate approvals by Regulatory
Authorities and Governmental Authorities and the expiration of applicable
regulatory waiting periods, to perform its obligations under this Agreement.
3.06. Financial Statements of ComBanc. Except as set forth in Section 3.06
of the ComBanc Disclosure Schedule, the audited consolidated financial
statements of ComBanc, consisting of consolidated statements of financial
condition as of December 31, 2003, 2002 and 2001, and the related consolidated
statements of earnings, shareholders' equity and cash flows for the three
years then ended, including the related notes and the reports thereon of BKD,
LLP, and the unaudited interim consolidated statements of ComBanc, consisting
of consolidated statements of financial condition as of June 30, 2004 (the
"ComBanc Balance Sheet Date"), the related unaudited consolidated statements
of earnings, cash flows, including the related notes thereto, for the six
months ended June 30, 2004, of ComBanc (collectively, all of such audited and
unaudited consolidated financial statements are referred to as the "ComBanc
Financial Statements"), copies of which have recently been provided to FDEF
and First Federal, have been prepared in accordance with United States
generally accepted accounting principles ("GAAP") applied on a consistent
basis during the periods involved (except as may be indicated in the notes
thereto) and present fairly, in all material respects, the consolidated
financial condition, earnings and cash flows of ComBanc and Commercial Bank
for the periods then ended.
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3.07. SEC Filings. ComBanc has filed all reports and proxy materials
required to be filed by it with the SEC pursuant to the Securities Exchange
Act of 1934 (the "Exchange Act"). All such filings, at the time of filing,
complied in all material respects as to form and included all exhibits
required to be filed under the applicable rules of the SEC. None of such
documents, when filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
3.08. Absence of Undisclosed Liabilities. Except as set forth in the
ComBanc Financial Statements or in Section 3.08 of the ComBanc Disclosure
Schedule, ComBanc and Commercial Bank have no liabilities or obligations
(whether accrued, absolute, contingent or otherwise) as of the date hereof,
other than liabilities and obligations that individually or in the aggregate
could not reasonably be expected to have a material adverse effect on ComBanc
or Commercial Bank. Except as set forth in Section 3.08 of the ComBanc
Disclosure Schedule, all debts, liabilities, guarantees and obligations of
ComBanc and Commercial Bank incurred since the ComBanc Balance Sheet Date have
been incurred in the ordinary course of business and are usual and normal in
amount both individually and in the aggregate. Except as disclosed in Section
3.08 of the ComBanc Disclosure Schedule, neither ComBanc nor Commercial Bank
is in default or breach of any material agreement to which ComBanc or
Commercial Bank is a party other than any such breaches or defaults that
individually or in the aggregate would not reasonably be expected to have a
material adverse effect on ComBanc or Commercial Bank. To the knowledge of
ComBanc and Commercial Bank, no other party to any material agreement to which
ComBanc or Commercial Bank is a party is in default or breach of such
agreement, which breach or default would reasonably be expected to have a
material adverse effect on ComBanc or Commercial Bank.
3.09. Absence of Changes. Except as set forth in Section 3.09 of the
ComBanc Disclosure Schedule, since the ComBanc Balance Sheet Date there has
not been any material adverse change in the business, operations, assets or
financial condition of ComBanc and Commercial Bank taken as a whole.
3.10. Loans. Except for such insufficiencies as would not reasonably be
expected to have a material adverse effect on ComBanc or Commercial Bank, the
documentation ("Loan Documentation") governing or relating to the loan and
credit-related assets ("Loan Assets") included in the loan portfolio of
Commercial Bank is legally sufficient for the purposes intended thereby and
creates enforceable rights of Commercial Bank in accordance with the terms of
such Loan Documentation, subject to applicable bankruptcy, insolvency,
reorganization, moratorium, fraudulent conveyance and other similar laws
relating to or affecting the enforcement of creditors' rights generally. All
loans and extensions of credit that have been made by Commercial Bank comply
in all material respects with applicable regulatory limitations and
procedures. Except as set forth in Section 3.10 of the ComBanc Disclosure
Schedule, no debtor under any of the Loan Documentation has asserted any claim
or defense with respect to the subject matter thereof. Except as set forth in
Section 3.10 of the ComBanc Disclosure Schedule, neither ComBanc nor
Commercial Bank is a party to a loan, including any loan guaranty, with any
director, executive officer or 5% shareholder of ComBanc or Commercial Bank,
or any person, corporation or enterprise controlling, controlled by or under
common control with either ComBanc or Commercial Bank.
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3.11. Allowance for Loan Losses. Except as set forth in Section 3.11 of
the ComBanc Disclosure Schedule, there is no loan which is reflected as an
asset in the ComBanc Financial Statements that (a) is 90 days or more
delinquent, (b) has been classified as "substandard," "doubtful" or "loss," or
(c) has been designated as "special mention." ComBanc's allowance for loan
losses has been determined in accordance with GAAP and in accordance with all
rules and regulations applicable to ComBanc and Commercial Bank and is
adequate to provide for reasonably anticipated losses on outstanding loans.
3.12. Reports and Records. ComBanc and Commercial Bank have filed all
reports and maintained all records required to be filed or maintained by them
under the rules and regulations of the Federal Reserve, the ODFI and the FDIC.
All such documents and reports complied in all material respects with
applicable requirements of law and rules and regulations in effect at the time
such documents and reports were filed and contained in all material respects
the information required to be stated therein. None of such documents or
reports, when filed, contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under
which they were made, not misleading.
3.13. Taxes.
(a) Except as set forth in Section 3.13(a) of the ComBanc Disclosure
Schedule, ComBanc and Commercial Bank have timely filed all returns,
statements, reports and forms (including, without limitation, elections,
declarations, disclosures, schedules, estimates and information returns)
(collectively, the "Tax Returns") with respect to all federal, state, local
and foreign income, gross income, gross receipts, gains, premium, sales, use,
ad valorem, transfer, franchise, profits, withholding, payroll, employment,
excise, severance, stamp, occupancy, license, lease, environmental, customs,
duties, property, windfall profits and all other taxes (including, without
limitation, any interest, penalties or additions to tax with respect thereto,
individually a "Tax," and collectively, "Taxes") required to be filed with the
appropriate tax authority. Such Tax Returns were true, correct and complete in
all material respects. ComBanc and Commercial Bank have paid and discharged
all Taxes due (whether reflected on such Tax Returns or otherwise), other than
such Taxes that are adequately accrued as shown on the ComBanc Financial
Statements or have arisen in the ordinary course of business since the ComBanc
Balance Sheet Date.
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(b) Except as set forth in Section 3.13(b) of the ComBanc Disclosure
Schedule, neither the Internal Revenue Service (the "IRS") nor any other
taxing agency or authority, domestic or foreign, has asserted, is now
asserting or, to the knowledge of ComBanc or Commercial Bank, is threatening
to assert against ComBanc or Commercial Bank any deficiency or claim for
additional Taxes. There are no unexpired waivers by ComBanc or Commercial Bank
of any statute of limitations with respect to Taxes. The accruals and reserves
for Taxes reflected in the ComBanc Financial Statements are adequate in all
material respects for the periods covered. ComBanc and Commercial Bank have
withheld or collected and paid over to the appropriate Governmental
Authorities or are properly holding for such payment all Taxes required by law
to be withheld or collected. There are no liens for Taxes upon the assets of
ComBanc or Commercial Bank, other than liens for current Taxes not yet due and
payable. Neither ComBanc nor Commercial Bank has agreed to make, or is
required to make, any adjustment under Section 481(a) of the Code.
(c) Except as set forth in Section 3.13(c) of the ComBanc Disclosure
Schedule, neither ComBanc nor Commercial Bank is a party to any agreement,
contract, arrangement or plan that has resulted, or could result, individually
or in the aggregate, in the payment of "excess parachute payments" within the
meaning of Section 280G of the Code.
(d) Neither ComBanc nor Commercial Bank (i) has ever been a member of an
affiliated group of corporations, within the meaning of Section 1504 of the
Code, other than an affiliated group of which ComBanc is or was the common
parent corporation, or (ii) has any liability for the Taxes of any other
person or entity under Treasury Department Regulation Section 1.1502-6 (or any
similar provision of state, local or foreign law), as a transferee or
successor, by contract or otherwise.
(e) No Tax is required to be withheld pursuant to Section 1445 of the
Code as a result of the transactions contemplated by this Agreement.
3.14. Property and Title.
(a) Section 3.14(a) of the ComBanc Disclosure Schedule lists and
describes all real property, and any leasehold interest in real property,
owned or held by ComBanc or Commercial Bank (collectively, the "ComBanc Real
Properties"). Copies of all leases of ComBanc Real Properties to which ComBanc
or Commercial Bank is a party have been provided to FDEF. Such leasehold
interests have not been assigned or subleased. All ComBanc Real Properties
which are owned by ComBanc or Commercial Bank are free and clear of all
mortgages, liens, security interests, defects, encumbrances, easements,
restrictions, reservations, conditions, covenants, agreements, encroachments,
rights of way and zoning laws, except (i) those set forth in Section 3.14(a)
of the ComBanc Disclosure Schedule; (ii) easements, restrictions,
reservations, conditions, covenants, rights of way, zoning laws and other
defects and irregularities in title and encumbrances which do not materially
impair the use thereof for the purposes for which they are held; and (iii)
liens for current Taxes not yet due and payable.
(b) ComBanc and Commercial Bank own, and are in rightful possession of,
and have good title to, all of the other assets indicated in the ComBanc
Financial Statements as being owned by ComBanc or Commercial Bank, free and
clear of any charge, mortgage, pledge, security interest, hypothecation,
restriction, claim, option, lien, encumbrance or interest of any persons
whatsoever except (a) those described in Section 3.14(b) of the ComBanc
Disclosure Schedule and (ii) those assets disposed of in the ordinary course
of business consistent with past practices.
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(c) The assets of ComBanc and Commercial Bank, taken as a whole, are
adequate to continue to conduct the businesses of ComBanc and Commercial Bank
as such businesses are presently being conducted.
3.15. Legal Proceedings. Except as set forth in Section 3.15 of the
ComBanc Disclosure Schedule and other than routine foreclosure and collection
matters where ComBanc or Commercial Bank are only plaintiffs, there are no
actions, suits, proceedings, claims or investigations pending or, to the
knowledge of ComBanc or Commercial Bank, threatened in any court, before any
governmental agency or instrumentality or in any arbitration proceeding
against or by ComBanc or Commercial Bank.
3.16. Compliance with Laws and Regulations.
(a) Except as set forth in Section 3.16(a) of the ComBanc Disclosure
Schedule, neither ComBanc, Commercial Bank nor their respective properties is
a party to or subject to any order, judgment, decree, agreement, memorandum of
understanding or similar arrangement with, or a commitment letter or similar
submission to, or extraordinary supervisory letter from, any court or federal
or state governmental agency or authority, including any such agency or
authority charged with the supervision or regulation of financial institutions
(or their holding companies) or issuers of securities (including, without
limitation, the Federal Reserve, the ODFI, the FDIC, and the SEC) or the
supervision or regulation of ComBanc or Commercial Bank (collectively, the
"Regulatory Authorities"). Neither ComBanc nor Commercial Bank has been
advised by any Regulatory Authority that such Regulatory Authority is
contemplating issuing or requesting (or is considering the appropriateness of
issuing or requesting) any new or additional order, judgment, decree,
agreement, memorandum of understanding, commitment letter, supervisory letter
or similar submission.
(b) Each of ComBanc and Commercial Bank has been in compliance with all
applicable federal, state, local and foreign statutes, laws, regulations,
ordinances, rules, judgments, orders or decrees applicable thereto or to the
employees conducting such business, including, without limitation, the Equal
Credit Opportunity Act, as amended, the Fair Housing Act, as amended, the
Federal Community Reinvestment Act, as amended, the Home Mortgage Disclosure
Act, as amended, and all other applicable fair lending laws and other laws
relating to discriminatory business practices, except for failures to be in
compliance which, individually or in the aggregate, have not had or would not
reasonably be expected to have a material adverse effect on ComBanc or
Commercial Bank.
(c) Each of ComBanc and Commercial Bank has all permits, licenses,
authorizations, orders and approvals of, and has made all filings,
applications and registrations with, each Regulatory Authority and
administrative agency or commission or other federal, state or local
government authority or instrumentality (each, a "Governmental Authority")
that is required in order to permit it to own or lease its properties and to
conduct its business as presently conducted, except where the failure to
obtain any of the foregoing or to make any such filing, application or
registration has not had or would not reasonably be expected to have a
material adverse effect on ComBanc or Commercial Bank; and all such permits,
licenses, certificates of authority, orders and approvals are in full force
and effect and no suspension or cancellation of any of them has been
threatened in writing.
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(d) The savings accounts and deposits of Commercial Bank are insured up
to applicable limits by the FDIC in accordance with the Federal Deposit
Insurance Act, and Commercial Bank has paid all assessments and filed all
reports required by the Federal Deposit Insurance Act.
3.17. No Conflict. Except as set forth in the ComBanc Disclosure
Schedule, subject to the required adoption of this Agreement by the
stockholders of ComBanc, receipt of the required approvals of Governmental and
Regulatory Authorities, expiration of applicable regulatory waiting periods,
and required filings under federal and state securities laws, the execution,
delivery and performance of this Agreement, and the consummation of the
transactions contemplated hereby, by ComBanc and Commercial Bank does not and
will not (a) conflict with, or result in a violation of, or result in the
breach of or a default (or which with notice or lapse of time would result in
a default) under, any provision of: (i) any federal, state or local law,
regulation, ordinance, order, rule or administrative ruling of any
Governmental Authority applicable to ComBanc or Commercial Bank or any of
their respective properties; (ii) the certificate of incorporation or bylaws
of ComBanc, or the articles of incorporation, code of regulations or other
governing instruments of Commercial Bank; (iii) any material agreement,
indenture or instrument to which ComBanc or Commercial Bank is a party or by
which either of their properties or assets may be bound; or (iv) any order,
judgment, writ, injunction or decree of any court, arbitration panel or any
Governmental Authority applicable to ComBanc or Commercial Bank; (b) result in
the creation or acceleration of any security interest, mortgage, option,
claim, lien, charge or encumbrance upon or interest in any property of ComBanc
or Commercial Bank; or (c) violate the terms or conditions of, or result in
the cancellation, modification, revocation or suspension of, any material
license, approval, certificate, permit or authorization held by ComBanc or
Commercial Bank.
3.18. Brokers, Finders and Others. Except for $266,000 in aggregate fees
and expenses that are payable to Keefe, Bruyette and Woods, Inc. ("ComBanc's
Financial Advisor") and the ordinary and customary legal and accounting fees,
there are no fees or commissions of any sort whatsoever claimed by, or payable
by ComBanc or Commercial Bank to, any broker, finder, intermediary, attorney,
accountant or any other similar person in connection with effecting this
Agreement or the transactions contemplated hereby.
3.19. Employment Agreements. Neither ComBanc nor Commercial Bank is a
party to any employment, change in control, severance or consulting agreement.
Neither ComBanc nor Commercial Bank is a party to, bound by or negotiating,
any collective bargaining agreement, nor are any of their respective employees
represented by any labor union or similar organization. Each of ComBanc and
Commercial Bank is in compliance with all applicable laws respecting
employment and employment practices, terms and conditions of employment and
wages and hours other than with respect to any noncompliance that individually
or in the aggregate would not reasonably be expected to have a material
adverse effect on ComBanc or Commercial Bank. Neither ComBanc nor Commercial
Bank has engaged in any unfair labor practice, other than practices that
individually or in the aggregate would not reasonably be expected to have a
material adverse effect on ComBanc or Commercial Bank.
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3.20. Employee Benefit Plans.
(a) Section 3.20(a) of the ComBanc Disclosure Schedule contains a
complete and accurate list of all bonus, incentive, deferred compensation,
pension (including, without limitation, Pension Plans defined below),
retirement, profit-sharing, thrift, savings, employee stock ownership, stock
bonus, stock purchase, restricted stock, stock option, severance, welfare
(including, without limitation, "welfare plans" within the meaning of Section
3(1) of the Employee Retirement Income Security Act of 1974, as amended
("ERISA")), fringe benefit plans, employment or severance agreements and all
similar practices, policies and arrangements maintained or contributed to
(currently or within the last six years) by (i) ComBanc or Commercial Bank and
in which any employee or former employee (the "Employees"), consultant or
former consultant (the "Consultants"), officer or former officer (the
"Officers"), or director or former director (the "Directors") of ComBanc or
Commercial Bank participates or to which any such Employees, Consultants,
Officers or Directors are parties or (ii) any ERISA Affiliate (as defined
below) (collectively, the "Compensation and Benefit Plans"). Neither ComBanc
nor Commercial Bank has any commitment to create any additional Compensation
and Benefit Plan or to modify or change any existing Compensation and Benefit
Plan, except to the extent required by law.
(b) Each Compensation and Benefit Plan has been operated and administered
substantially in accordance with its terms and with applicable law, including,
but not limited to, ERISA, the Code, the Securities Act of 1933, as amended
(the "Securities Act"), the Exchange Act, the Age Discrimination in Employment
Act, or any regulations or rules promulgated thereunder, and all filings,
disclosures and notices required by ERISA, the Code, the Securities Act, the
Exchange Act, the Age Discrimination in Employment Act and any other
applicable law have been timely made. The prototype plan sponsor of the
Compensation and Benefit Plan which is an "employee pension benefit plan"
within the meaning of Section 3(2) of ERISA (a "Pension Plan") and which is
intended to be qualified under Section 401(a) of the Code has received a
favorable opinion letter from the IRS and neither ComBanc nor Commercial Bank
(i) has obtained a determination letter from the IRS or (ii) is aware of any
circumstances likely to result in revocation of such prototype plan sponsor's
favorable opinion letter. There is no material pending or, to the knowledge of
ComBanc or Commercial Bank, threatened, legal action, suit or claim relating
to the Compensation and Benefit Plans other than routine claims for benefits
thereunder. Neither ComBanc nor Commercial Bank has engaged in a transaction,
or omitted to take any action, with respect to any Compensation and Benefit
Plan that would reasonably be expected to subject ComBanc or Commercial Bank
to a tax or penalty imposed by either Section 4975 of the Code or Section 502
of ERISA, assuming for purposes of Section 4975 of the Code that the taxable
period of any such transaction expired as of the date hereof.
(c) Except as set forth in Section 3.20(c) of the ComBanc Disclosure
Schedule, (i) none of ComBanc or Commercial Bank, or any entity which is
considered one employer with ComBanc or Commercial Bank under Section
4001(a)(14) of ERISA or Section 414(b), (c) or (m) of the Code (an "ERISA
Affiliate"), has ever sponsored, maintained or been obligated to contribute to
any Pension Plan subject to either Title IV of ERISA or the funding
requirements of Section 412 of the Code; (ii) none of ComBanc or Commercial
Bank, or any ERISA Affiliate, has contributed, or has been obligated to
contribute, to a multiemployer plan under Subtitle E of Title IV of ERISA (as
defined in ERISA Sections 3(37)(A) and 4001(a)(3)) at any time since September
26, 1980; and (iii) there is no pending investigation or enforcement action by
the PBGC, the Department of Labor, the IRS or any other Governmental Authority
with respect to any Compensation and Benefit Plan.
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(d) Except as set forth in Section 3.20(d) of the ComBanc Disclosure
Schedule, all contributions required to be made under the terms of any
Compensation and Benefit Plan or ERISA Affiliate plan or any employee benefit
arrangements under any collective bargaining agreement to which ComBanc or
Commercial Bank is a party have been timely made or have been reflected on the
ComBanc Financial Statements.
(e) Except as disclosed in Section 3.20(e) of the ComBanc Disclosure
Schedule, neither ComBanc nor Commercial Bank has any obligations to provide
retiree health and retiree life insurance or other retiree death benefits
under any Compensation and Benefit Plan, other than benefits mandated by
Section 4980B of the Code.
(f) ComBanc and Commercial Bank do not maintain any foreign Compensation
and Benefit Plans.
(g) With respect to each Compensation and Benefit Plan, if applicable,
ComBanc or Commercial Bank has provided to FDEF, true and complete copies of:
(i) Compensation and Benefit Plan documents and all subsequent amendments
thereto; (ii) trust instruments and insurance contracts and all subsequent
amendments thereto; (iii) the most recent annual returns (Forms 5500) and
financial statements; (iv) the most recent summary plan descriptions and all
subsequent summaries of material modifications; (v) the most recent
determination letter issued by the IRS with respect to each Compensation and
Benefit Plan that is intended to comply with Code {section} 401(a); and (vi)
any Form 5310, Form 5310A, Form 5300 or Form 5330 filed with the IRS within
the twelve months ending immediately before the date hereof.
(h) Except as disclosed in Section 3.20(h) of the ComBanc Disclosure
Schedule, the consummation of the transactions contemplated by this Agreement
would not, directly or indirectly (including, without limitation, as a result
of any termination of employment prior to or following the Effective Time),
reasonably be expected to (i) entitle any Employee, Officer, Consultant or
Director to any payment (including severance pay or similar compensation) or
any increase in compensation, (ii) result in the vesting or acceleration of
any benefits under any Compensation and Benefit Plan or (iii) result in any
material increase in benefits payable under any Compensation and Benefit Plan.
3.21. Insurance. ComBanc and Commercial Bank are insured with reputable
insurers against such risks and in such amounts as the management of ComBanc
and Commercial Bank reasonably have determined to be prudent in accordance
with industry practices. Section 3.21 of the ComBanc Disclosure Schedule lists
all of the insurance policies, binders or bonds maintained by ComBanc or
Commercial Bank and a description of all claims filed by ComBanc or Commercial
Bank against the insurers of ComBanc and Commercial Bank since January 1,
2001. All such insurance policies are in full force and effect, neither
ComBanc nor Commercial Bank is in material default thereunder and all claims
thereunder have been filed in due and timely fashion.
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3.22. Governmental and Third-Party Proceedings. Except as set forth in
Section 3.22 of the ComBanc Disclosure Schedule, no consent, approval,
authorization of, or registration, declaration or filing with, any court,
Governmental Authority, Regulatory Authority or any other third party is
required to be made or obtained by ComBanc or Commercial Bank in connection
with the execution, delivery or performance by ComBanc of this Agreement or
the consummation by ComBanc of the transactions contemplated hereby, except
for (a) filings of applications and notices, as applicable, with and the
approval of certain federal and state banking authorities, (b) the filing of
the appropriate certificates of merger with the Secretaries of State of Ohio
and Delaware pursuant to the OGCL and DGCL, (c) the adoption of this Agreement
by the ComBanc stockholders, and (d) the filing with the SEC of the
Proxy/Prospectus (as defined in Section 7.03(a)).
3.23. Contracts. Section 3.23 of the ComBanc Disclosure Schedule
describes all contracts, whether written or oral, in existence as of the date
of this Agreement (other than those which have been performed completely or
which may be terminated without penalty and upon no more than 30 days' prior
notice) which involve the payment by or to ComBanc or Commercial Bank of more
than $10,000 in connection with the purchase of property or goods or the
performance of services. True, complete and correct copies of all such
contracts have been delivered to FDEF. Neither ComBanc nor Commercial Bank,
nor, to the knowledge of ComBanc or Commercial Bank, any other party thereto,
is in default under any such contract, agreement, commitment, arrangement or
other instrument to which it is a party, by which its respective assets,
business or operations may be bound or affected in any way, or under which it
or its respective assets, business or operations receive benefits, and there
has not occurred any event that, with the lapse of time or the giving of
notice or both, would constitute such a default.
3.24. Environmental Matters. Except as otherwise disclosed in Section
3.24 of the ComBanc Disclosure Schedule: neither the conduct nor operation of
ComBanc or Commercial Bank nor any condition of any property presently or
previously owned, leased or operated by any of them (including, without
limitation, in a fiduciary or agency capacity), or on which any of them holds
a lien, violates or violated Environmental Laws and to ComBanc's knowledge, no
condition has existed or event has occurred with respect to any of them or any
such property that, with notice or the passage of time, or both, is reasonably
likely to result in liability under Environmental Laws. Except as otherwise
disclosed in Section 3.24 of the ComBanc Disclosure Schedule, to ComBanc's
knowledge, neither ComBanc nor Commercial Bank has received any notice from
any person or entity that ComBanc or Commercial Bank or the operation or
condition of any property ever owned, leased, operated, or held as collateral
or in a fiduciary capacity by any of them are or were in violation of or
otherwise alleged to have liability under any Environmental Law, including,
but not limited to, responsibility (or potential responsibility) for the
cleanup or other remediation of any pollutants, contaminants, or hazardous or
toxics wastes, substances or materials at, on, beneath, or originating from
any such property. Neither ComBanc nor Commercial Bank has knowledge that (i)
any of the ComBanc Real Properties or improvements thereon or any of the real
properties in respect of which Commercial Bank has foreclosed or holds a
mortgage or mortgages (hereinafter referred to as the "Commercial Bank Real
Estate Collateral") or improvements thereon has been used for the treatment,
storage or disposal of Hazardous Substances or has been contaminated by
Hazardous Substances, (ii) any of the business operations of ComBanc or
Commercial Bank have contaminated lands, waters or other property of others
with Hazardous Substances, except routine, office-generated solid waste, or
(iii) any of the ComBanc Real Properties or improvements thereon, or the
Commercial Bank Real Estate Collateral or improvements thereon have in the
past or presently contain underground storage tanks, friable asbestos
materials or PCB-containing equipment.
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For purposes of this Agreement, (a) "Environmental Law" means all
applicable local, state and federal environmental, health and safety laws and
regulations, including, without limitation, the Resource Conservation and
Recovery Act, the Comprehensive Environmental Response, Compensation, and
Liability Act of 1980, as amended ("CERCLA"), the Clean Water Act, the Federal
Clean Air Act, and the Occupational Safety and Health Act, each as amended,
regulations promulgated thereunder, and state counterparts, and (b) "Hazardous
Substances" means, at any time: (i) any "hazardous substance" as defined in
{section}101(14) of CERCLA or regulations promulgated thereunder; (ii) any
"solid waste," "hazardous waste," or "infectious waste," as such terms are
defined in any other Environmental Law as of the date of this Agreement; and
(iii) friable asbestos, urea-formaldehyde, polychlorinated biphenyls ("PCBs"),
nuclear fuel or material, chemical waste, radioactive material, explosives,
known carcinogens, petroleum products and by-products, and other dangerous,
toxic or hazardous pollutants, contaminants, chemicals, materials or
substances listed or identified in, or regulated by, any Environmental Law.
3.25. ComBanc Information. True and complete copies of all documents
listed in the ComBanc Disclosure Schedule have been made available or provided
to FDEF. The books of account, stock record books and other financial and
corporate records of ComBanc and Commercial Bank, all of which have been made
available to FDEF, are complete and correct in all material respects,
including the maintenance of a system of internal accounting controls
sufficient to provide reasonable assurance that transactions are executed with
its management's authorizations and such books and records are accurately
reflected in all material respects in the ComBanc Financial Statements, except
for portions of records of various meetings that relate specifically to the
consideration of the transactions contemplated by this Agreement.
3.26. CRA Compliance. Neither ComBanc nor Commercial Bank has received
any notice of non-compliance with the applicable provisions of the Community
Reinvestment Act ("CRA") and the regulations promulgated thereunder, and
Commercial Bank received a CRA rating of "satisfactory" or better on each of
its last three examinations. Neither ComBanc nor Commercial Bank knows of any
fact or circumstance or set of facts or circumstances which would be
reasonably likely to cause ComBanc or Commercial Bank to receive any notice of
non-compliance with such provisions or cause the CRA rating of ComBanc or
Commercial Bank to fall below satisfactory.
3.27. Ownership of FDEF Shares. As of the date hereof, except as
otherwise disclosed in Section 3.27 of the ComBanc Disclosure Schedule,
neither ComBanc nor Commercial Bank nor, to the knowledge of ComBanc and
Commercial Bank, any of their affiliates (as such term is defined under the
Exchange Act), (a) beneficially owns, directly or indirectly, or (b) is a
party to any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting or disposing of, any FDEF Shares.
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3.28. Fairness Opinion. The Board of Directors of ComBanc has received
the opinion of the ComBanc's Financial Advisor dated the date of this
Agreement to the effect that the consideration to be received by the ComBanc
stockholders in the Corporate Merger is fair, from a financial point of view,
to the ComBanc stockholders.
3.29. Real Property Interest. ComBanc Shares are not a U.S. real property
interest within the meaning of Treasury Department Regulation Sections
1.897-2(b)(1) and (h).
3.30. Internal Controls.
(a) The Chief Executive Officer and Vice President-Controller of ComBanc
have evaluated the effectiveness of ComBanc's disclosure controls and
procedures as of the end of the periods covered by the ComBanc Financial
Statements and as of the date of this Agreement. Section 3.30(a) of the
ComBanc Disclosure Schedule presents the conclusions of the Chief Executive
Officer and Vice President-Controller of ComBanc about the effectiveness of
such disclosure controls and procedures as of the end of the periods covered
by the ComBanc Financial Statements. The Chief Executive Officer and Vice
President-Controller of ComBanc have disclosed to ComBanc's auditors and the
audit committee of ComBanc's board of directors and to FDEF: (i) all
significant deficiencies and material weaknesses in the design or operation of
the disclosure controls and procedures which are reasonably likely to
adversely affect ComBanc's ability to record, process, summarize and report
financial information and (ii) any fraud, whether or not material, that
involves management or other employees who have a significant role in
ComBanc's disclosure controls and procedures.
(b) The Chief Executive Officer and Vice President-Controller of ComBanc
have evaluated the effectiveness of ComBanc's internal control over financial
reporting as of the end of the periods covered by the ComBanc Financial
Statements and as of the date of this Agreement. Section 3.30(b) of the
ComBanc Disclosure Schedule presents the conclusions of the Chief Executive
Officer and Vice President-Controller of ComBanc about the effectiveness of
such internal control as of the end of the periods covered by the ComBanc
Financial Statements. The Chief Executive Officer and Vice President-
Controller of ComBanc have disclosed to ComBanc's auditors and the audit
committee of ComBanc's board of directors and to FDEF: (i) all significant
deficiencies and material weaknesses in the design or operation of internal
control over financial reporting which are reasonably likely to adversely
affect ComBanc's ability to record, process, summarize and report financial
information and (ii) any fraud, whether or not material, that involves
management or other employees who have a significant role in ComBanc's
internal control over financial reporting. ComBanc has provided to FDEF all
documentation related to ComBanc's internal control over financial reporting.
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ARTICLE FOUR
REPRESENTATIONS AND WARRANTIES OF FDEF AND FIRST FEDERAL
FDEF and First Federal hereby represent and warrant to ComBanc and
Commercial Bank that:
4.01. Corporate Status.
(a) FDEF is an Ohio corporation and a unitary savings and loan holding
company registered under the Home Owners' Loan Act, as amended (the "HOLA").
FDEF is duly organized, validly existing and in good standing under the laws
of the State of Ohio and has the full corporate power and authority to own its
property, to carry on its business as presently conducted and to enter into
and, subject to the required obtaining of appropriate approvals of
Governmental and Regulatory Authorities, perform its obligations under this
Agreement and consummate the transactions contemplated by this Agreement, and
is duly qualified or licensed to do business and is in good standing in each
jurisdiction in which the nature of its business or the ownership, leasing or
operation of its properties makes such qualification or licensing necessary,
other than where the failure to be so organized, existing, qualified or
licensed or in good standing individually or in the aggregate could not
reasonably be expected to have a material adverse effect on FDEF. FDEF has
made available to ComBanc true and complete copies of its articles of
incorporation and code of regulations as amended to the date of this
Agreement.
(b) First Federal is a federal savings bank and is regulated by the
Office of Thrift Supervision ("OTS") and the FDIC. First Federal is duly
organized, validly existing and in good standing under the laws of the United
States and has the full corporate power and authority to own its property and
to carry on its business as presently conducted. First Federal is not
qualified to do business in any other jurisdiction or required to be qualified
to do business in any other jurisdiction except where the failure to be so
organized, existing, qualified or licensed or in good standing individually or
in the aggregate could not reasonably be expected to have a material adverse
effect on First Federal. First Federal has made available to ComBanc true and
complete copies of its charter and bylaws as amended to the date of this
Agreement.
4.02. Corporate Proceedings. All corporate proceedings of FDEF and First
Federal necessary to authorize the execution, delivery and performance of this
Agreement, and the consummation of the transactions contemplated by this
Agreement, have been duly and validly taken. This Agreement has been duly
executed and delivered by each of FDEF and First Federal. No vote of FDEF's
shareholders is required to be obtained in connection with the consummation of
the transactions contemplated hereby unless the number of FDEF Shares to be
issued pursuant to the consummation of the Corporate Merger will entitle the
former ComBanc stockholders to exercise one-sixth or more of the voting power
of FDEF immediately after the Corporate Merger.
4.03. Capitalization of FDEF.
(a) As of the date of this Agreement, the authorized capital stock of
FDEF consists only of (i) 25,000,000 shares of common stock, par value $.01
per share, of which 6,317,885 shares are issued and outstanding, and 4,663,217
shares are held in treasury, and (ii) 5,000,000 preferred shares, par value
$.01 per share, none of which are outstanding. The outstanding FDEF Shares
have been duly authorized and are validly issued, fully paid and
non-assessable, and were not issued in violation of the preemptive rights of
any person. As of the date of this Agreement, 662,932 FDEF Shares are
reserved for issuance upon the exercise of outstanding stock options (the
"FDEF Stock Options") granted under FDEF's stock option plans (the "FDEF Stock
Option Plans") and 13,253 FDEF Shares are available for future grants of stock
options under the FDEF Stock Option Plans. As of the date of this Agreement,
except for the FDEF Stock Options, unvested FDEF Shares that have been awarded
under the 1996 Management Recognition Plan and Trust ("MRP"), and the shares
issuable to ComBanc's stockholders pursuant to this Agreement, FDEF has no
other commitment or obligation to issue, deliver or sell any FDEF Shares. As
of the date of this Agreement, there are no bonds, debentures, notes or other
indebtedness of FDEF, and no securities or other instruments or obligations of
FDEF, the value of which is in any way based upon or derived from any capital
or voting stock of FDEF, having the right to vote (or convertible into, or
exchangeable for, securities having the right to vote) on any matters on which
shareholders of FDEF may vote. Except as set forth above, as of the date of
this Agreement, there are no material contracts of any kind to which FDEF is a
party or by which FDEF is bound obligating FDEF to issue, deliver or sell, or
cause to be issued, delivered or sold, additional shares of capital stock of,
or other equity or voting interests in, or securities convertible into, or
exchangeable or exercisable for, shares of capital stock of, or other equity
or voting interests in, FDEF or obligating FDEF to issue, grant, extend or
enter into any such security, option, warrant, call, right or contract. As of
the date of this Agreement, there are no outstanding material contractual
obligations of FDEF to repurchase, redeem or otherwise acquire any shares of
capital stock of, or other equity or voting interests in, FDEF.
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(b) The FDEF Shares to be issued in exchange for ComBanc Shares in the
Corporate Merger, when issued in accordance with the terms of this Agree-
ment, will be duly authorized, validly issued, fully paid and non-assessable,
will not be subject to any preemptive or other statutory right of stockholders
and will be issued in compliance with applicable United States federal and
state securities laws.
4.04. Authorized and Effective Agreement. This Agreement has been duly
executed and delivered by each of FDEF and First Federal, and assuming the due
authorization, execution and delivery by each of ComBanc and Commercial Bank,
constitutes the legal, valid and binding obligation of each of FDEF and First
Federal, enforceable against them in accordance with its terms, except as the
same may be limited by bankruptcy, insolvency, reorganization, moratorium,
fraudulent conveyance and other similar laws relating to or affecting the
enforcement of creditors' rights generally, by general equitable principles
(regardless of whether enforceability is considered in a proceeding in equity
or at law) and by an implied covenant of good faith and fair dealing. Each of
FDEF and First Federal has the right, power, authority and capacity to execute
and deliver this Agreement and, subject to the obtaining of appropriate
approvals by Governmental and Regulatory Authorities and the expiration of
applicable regulatory waiting periods, and required filings under federal and
state securities laws, to perform its obligations under this Agreement.
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4.05. No Conflict. Subject to the receipt of the required approvals of
Governmental and Regulatory Authorities, the expiration of applicable
regulatory waiting periods and required filings under federal and state
securities laws, the execution, delivery and performance of this Agreement,
and the consummation of the transactions contemplated hereby, by FDEF and
First Federal do not and will not (a) conflict with, or result in a violation
of, or result in the breach of or a default (or which with notice or lapse of
time would result in a default) under, any provision of: (i) any federal,
state or local law, regulation, ordinance, order, rule or administrative
ruling of any Governmental Authority applicable to FDEF or any of its
properties; (ii) the articles of incorporation or code of regulations of FDEF
or the charter or bylaws of First Federal; (iii) any material agreement,
indenture or instrument to which FDEF or First Federal is a party or by which
it or its properties or assets may be bound; or (iv) any order, judgment,
writ, injunction or decree of any court, arbitration panel or any Governmental
Authority applicable to FDEF or First Federal other than, in the case of
clauses (i), (iii) and (iv) any such conflicts, violations, breaches or
defaults that individually or in the aggregate would not reasonably be
expected to have a material effect on FDEF on a consolidated basis; (b) result
in the creation or acceleration of any security interest, mortgage, option,
claim, lien, charge or encumbrance upon or interest in any property of FDEF or
First Federal, other than such security interests, mortgage, options, claims,
liens, charges or encumbrances that individually or in the aggregate would not
reasonably be expected to have a material adverse effect on FDEF on a
consolidated basis; or (c) violate the terms or conditions of, or result in
the cancellation, modification, revocation or suspension of, any material
license, approval, certificate, permit or authorization held by FDEF other
than such violations, cancellations, modifications, revocations or suspensions
that individually or in the aggregate would not reasonably be expected to have
a material effect on FDEF on a consolidated basis.
4.06. SEC Filings. FDEF has filed all reports and proxy materials
required to be filed by it with the SEC pursuant to the Exchange Act. All such
filings, at the time of filing, complied in all material respects as to form
and included all exhibits required to be filed under the applicable rules of
the SEC. None of such documents, when filed, contained any untrue statement of
a material fact or omitted to state a material fact required to be stated
therein or necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
4.07. Financial Statements of FDEF and First Federal. FDEF and First
Federal have furnished to ComBanc and Commercial Bank (a) the audited
consolidated financial statements of FDEF consisting of consolidated balance
sheets as of December 31, 2003, 2002 and 2001, and the related consolidated
statements of income, changes in shareholders' equity and cash flows for the
three years ended December 31, 2003, including accompanying notes and the
report thereon of Ernst and Young LLP, and (b) the unaudited interim
consolidated statements of FDEF, consisting of consolidated statements of
financial condition as of June 30, 2004, the related unaudited consolidated
statements of earnings, shareholders' equity, and cash flows including the
related notes thereto for the six months ended June 30, 2004, of FDEF
(collectively, all of such audited and unaudited consolidated financial
statements are referred to as the "FDEF Financial Statements"). The FDEF
Financial Statements were prepared in conformity with GAAP applied on a
consistent basis and present fairly, in all material respects, the
consolidated financial condition of FDEF at the dates, and the consolidated
results of operations and cash flows for the periods, stated therein.
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4.08. Brokers, Finders and Others. Except for fees paid to Austin
Associates, LLC, there are no fees or commissions of any sort whatsoever
claimed by, or payable by FDEF to, any broker, finder, intermediary attorney,
accountant or any other similar person in connection with effecting this
Agreement or the transactions contemplated hereby, except for ordinary and
customary legal and accounting fees.
4.09. Governmental and Third-Party Proceedings. No consent, approval,
authorization of, or registration, declaration or filing with, any court,
Governmental or Regulatory Authority or any other third party is required to
be made or obtained by FDEF or First Federal in connection with the execution,
delivery or performance by FDEF or First Federal of this Agreement or the
consummation by FDEF of the transactions contemplated hereby, except for (a)
filings of applications or notices, as applicable, with and the approval of
certain federal and state banking authorities, (b) the filing of the
appropriate certificate of merger with the Secretaries of State of Ohio and
Delaware pursuant to the OGCL and DGCL, (c) the filing with the SEC of the
Registration Statement (as defined in Section 7.03 below) and such reports
under the Exchange Act as may be required in connection with this Agreement,
the Corporate Merger and the other transactions contemplated hereby, (d) any
filings required under the rules and regulations of The Nasdaq Stock Market,
Inc. ("Nasdaq"), and (e) such other consents, approvals, orders,
authorizations, registrations, declarations and filings, except for such
consents, approvals orders, authorizations, registrations, declarations and
filings, the failure of which to be obtained or made individually or in the
aggregate would not reasonably be expected to have a material effect on FDEF
on a consolidated basis.
4.10. Absence of Undisclosed Liabilities. Except as set forth in publicly
available documents filed by FDEF with the SEC prior to the date of this
Agreement (the "FDEF Filed SEC Documents") and in the FDEF Financial
Statements, and except as arising hereunder, FDEF has no liabilities or
obligations (whether accrued, absolute, contingent or otherwise) as of June
30, 2004, other than liabilities and obligations that individually or in the
aggregate would not reasonably be expected to have a material adverse effect
on FDEF. Except as set forth in the FDEF Filed SEC Documents, all debts,
liabilities, guarantees and obligations of FDEF and First Federal incurred
since June 30, 2004, have been incurred in the ordinary course of business and
are usual and normal in amount both individually and in the aggregate. Neither
FDEF nor First Federal is in default or breach of any material agreement to
which FDEF or First Federal is a party other than any such breaches or
defaults that individually or in the aggregate would not reasonably be
expected to have a material adverse effect on FDEF on a consolidated basis. To
the best knowledge of FDEF and First Federal, no other party to any material
agreement to which FDEF or First Federal is a party is in default or breach of
such agreement, which breach or default would reasonably be expected to have a
material adverse effect on FDEF on a consolidated basis.
4.11. Absence of Changes. Except (a) as set forth in the FDEF Filed SEC
Documents, (b) as otherwise publicly disclosed in press releases issued by
FDEF, or (c) in the ordinary course of business consistent with past practice,
since December 31, 2003, there has not been any material adverse change in the
business, operations, assets or financial condition of FDEF and First Federal
taken as a whole, and, to the knowledge of FDEF and First Federal, no fact or
condition exists that FDEF or First Federal believes will cause such a
material adverse change in the future.
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4.12. Legal Proceedings. Except as set forth in the FDEF Filed SEC
Documents, there are no actions, suits, proceedings, claims or investigations
pending or, to the knowledge of FDEF and First Federal, threatened in any
court, before any Governmental Authority or instrumentality or in any
arbitration proceeding (a) against FDEF or First Federal which, if adversely
determined against FDEF or First Federal, would have a material adverse effect
on FDEF on a consolidated basis; or (b) against or by FDEF or First Federal
which, if adversely determined against FDEF or First Federal, would prevent
the consummation of this Agreement or any of the transactions contemplated
hereby or declare the same to be unlawful or cause the rescission thereof.
4.13. Regulatory Matters. None of FDEF, First Federal or the respective
properties of FDEF and First Federal is a party to or subject to any order,
judgment, decree, agreement, memorandum of understanding or similar
arrangement with, or a commitment letter or similar submission to, or
supervisory letter from, any Regulatory Authorities. Neither FDEF nor First
Federal has been advised by any Regulatory Authority that such Regulatory
Authority is contemplating issuing or requesting (or is considering the
appropriateness of issuing or requesting) any such order, judgment, decree,
agreement, memorandum of understanding, commitment letter, supervisory letter
or similar submission.
4.14. Ownership of ComBanc Shares. Neither FDEF nor First Federal, nor to
the knowledge of FDEF, any of its affiliates or associates (as such terms are
defined under the Exchange Act), (a) beneficially owns, directly or indirectly
or (b) is a party to any agreement, arrangement or understanding for the
purpose of acquiring, holding, voting or disposing of, any ComBanc Shares.
ARTICLE FIVE
FURTHER COVENANTS OF COMBANC AND COMMERCIAL BANK
5.01. Operation of Business. ComBanc and Commercial Bank each covenant to
FDEF that, throughout the period from the date of this Agreement to and
including the Closing (as defined in Section 9.01), except as expressly
contemplated or permitted by this Agreement or to the extent that FDEF shall
otherwise consent in writing which consent shall not be unreasonably withheld
or delayed:
(a) ComBanc and Commercial Bank will conduct their respective businesses
only in the ordinary and usual course consistent with past practice, and
neither ComBanc nor Commercial Bank shall take any action that would be
inconsistent with any representation or warranty of ComBanc or Commercial Bank
set forth in this Agreement or which would cause a breach of any such
representation or warranty if made at or immediately following such action,
except as may be required by applicable law or regulation.
(b) Except as provided for by this Agreement or as otherwise approved
expressly in writing by FDEF, neither ComBanc nor Commercial Bank will:
(i) sell, transfer, mortgage, pledge or subject to any lien or
otherwise encumber any of the assets of ComBanc or Commercial Bank, tangible
or intangible, which are material, individually or in the aggregate, to
ComBanc or Commercial Bank except for securitization activities in the
ordinary course of business;
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(ii) make any capital expenditure or capital additions or
improvements which individually exceed $10,000 or in the aggregate exceed
$25,000;
(iii) become bound by, enter into, or perform any material contract,
commitment or transaction that would be reasonably likely to (A) have a
material adverse effect on ComBanc or Commercial Bank, (B) impair in any
material respect the ability of ComBanc or Commercial Bank to perform its
obligations under this Agreement or (C) prevent or materially delay the
consummation of the transactions contemplated by this Agreement or the Bank
Merger Agreement;
(iv) declare, pay or set aside for payment any dividends or make any
distributions on ComBanc shares;
(v) purchase, redeem, retire or otherwise acquire any ComBanc Shares;
(vi) issue any ComBanc Shares or grant any option or right to acquire
any of its capital shares;
(vii) amend or propose to amend any of the governing documents of
ComBanc or Commercial Bank;
(viii) reorganize or acquire all or any portion of the assets,
business, deposits or properties of any other entity other than in the
ordinary and usual course of business consistent with past practice (A) by way
of foreclosures or (B) by acquisitions of control in a bona fide fiduciary
capacity or in satisfaction of debts previously contracted in good faith;
(ix) enter into, establish, adopt or amend any pension, retirement,
stock option, stock purchase, savings, profit-sharing, deferred compensation,
consulting, bonus, group insurance or other employee benefit, incentive or
welfare contract, plan or arrangement, or any trust agreement (or similar
arrangement) related thereto, in respect of any Director, Officer or Employee
of ComBanc or Commercial Bank, or take any action to accelerate the vesting or
exercisability of stock options, restricted stock or other compensation or
benefits payable thereunder; provided, however, that ComBanc or Commercial
Bank may take such actions in order to satisfy either applicable law or
contractual obligations, including those arising under its benefit plans,
existing as of the date hereof and disclosed in the ComBanc Disclosure
Schedule, or regular annual renewals of insurance contracts;
(x) announce or pay any general wage or salary increase or bonus, or
enter into or amend or renew any employment, consulting, severance or similar
agreements or arrangements with any Officer, Director or Employee of ComBanc
or Commercial Bank, except, in each case, (i) as set forth in Section 5.01(x)
of the ComBanc Disclosure Schedule, (ii) for changes that are required by
applicable law or (iii) to satisfy contractual obligations existing as of the
date hereof that are disclosed in the ComBanc Disclosure Schedule;
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(xi) borrow or agree to borrow any funds, including but not limited
to repurchase transactions, or indirectly guarantee or agree to guarantee any
obligations of others;
(xii) implement or adopt any change in its accounting principles,
practices or methods, other than as may be required by GAAP;
(xiii) make or change any Tax election or Tax accounting method, file
any amended Tax Return, settle any Tax claim or assessment or consent to the
extension or waiver of any statute of limitations with respect to Taxes;
(xiv) originate or issue a commitment to originate any loan or note
in a principal amount of $100,000 or more or on an aggregate basis to one
borrower of $250,000 or more, or modify, renew, or release any collateral on
any existing loan the outstanding balance of which, including principal,
interest and fees, is $100,000 or more;
(xv) establish any new lending programs or make any changes in its
policies concerning which persons may approve loans;
(xvi) enter into any securities transactions or purchase or otherwise
acquire any investment security other than U.S. Government and U.S. agency
obligations;
(xvii) increase or decrease the rate of interest paid on time
deposits or certificates of deposits, except in a manner and pursuant to
policies consistent with past practices in relation to rates prevailing in
Commercial Bank's market;
(xviii) foreclose upon or otherwise take title to or
possession or control of any real property without first obtaining a Phase I
Environmental Report thereon which indicates that the property is free of
pollutants, contaminants or hazardous or toxic waste materials including
asbestos and petroleum products; provided, however, that Commercial Bank shall
not be required to obtain such a report with respect to single-family,
non-agriculture residential property of one acre or less to be foreclosed upon
unless it has reason to believe such property may contain any such pollutants,
contaminants, waste materials including asbestos or petroleum products;
(xx) purchase or otherwise acquire any interest in a loan held by a
third party; or
(xxi) enter into any agreement to do any of the foregoing.
(c) ComBanc and Commercial Bank shall use their commercially
reasonable efforts to maintain and keep their respective properties and
facilities in their present condition and working order, ordinary wear and
tear excepted.
(d) ComBanc and Commercial Bank shall perform all of their
obligations under all agreements relating to or affecting their respective
properties, rights and businesses.
(e) ComBanc and Commercial Bank shall use their commercially reasonable
efforts to maintain and preserve their respective business organizations
intact, to retain present key Employees and to maintain the respective
relationships of customers, suppliers and others having business relationships
with them.
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(f) ComBanc or Commercial Bank shall maintain insurance coverage with
reputable insurers, which in respect of amounts, premiums, types and risks
insured, were maintained by them at the ComBanc Balance Sheet Date, and upon
the renewal or termination of such insurance, ComBanc and Commercial Bank will
use their commercially reasonable efforts to renew or replace such insurance
coverage with reputable insurers, in respect of the amounts, premiums, types
and risks insured or maintained by them at the ComBanc Balance Sheet Date.
(g) ComBanc and Commercial Bank shall afford to FDEF and First Federal
and to their officers, employees, investment bankers, attorneys, accountants
and other advisors and representatives reasonable and prompt access during
normal business hours during the period prior to the Effective Time or the
termination of this Agreement to all their respective properties, assets,
books, contracts, commitments, directors, officers, employees, attorneys,
accountants, auditors, other advisors and representatives and records and,
during such period, ComBanc and Commercial Bank shall make available to FDEF
or First Federal on a prompt basis (i) a copy of each report, schedule, form,
statement and other document filed or received by it during such period
pursuant to the requirements of domestic or foreign (whether national,
federal, state, provincial, local or otherwise) laws and (ii) all other
information concerning its business, properties and personnel as FDEF or First
Federal may reasonably request (including the financial and Tax work papers of
independent auditors and financial consultants), provided that neither FDEF or
First Federal shall unreasonably interfere with the business operations of
ComBanc or Commercial Bank and either ComBanc or Commercial Bank may, in its
discretion, limit the access of FDEF or First Federal to the employees of
ComBanc or Commercial Bank whose work product ComBanc or Commercial Bank
reasonably wishes to keep confidential.
5.02. Notification. Between the date of this Agreement and the Closing
Date, ComBanc promptly shall notify FDEF in writing if ComBanc or Commercial
Bank becomes aware of any fact or condition that (a) causes or constitutes a
breach of any of the representations and warranties of ComBanc or Commercial
Bank, or (b) would (except as expressly contemplated by this Agreement) cause
or constitute a breach of any such representation or warranty had such
representation or warranty been made as of the time of occurrence or discovery
of such fact or condition. Should any such fact or condition require any
change in the ComBanc Disclosure Schedule, ComBanc will promptly deliver to
FDEF a supplement to the ComBanc Disclosure Schedule specifying such change
("Updated ComBanc Disclosure Schedule"); provided, however, that the
disclosure of such change in the Updated ComBanc Disclosure Schedule shall not
be deemed to constitute a cure of any breach of any representation or warranty
made pursuant to this Agreement unless consented to in writing by FDEF. During
the same period, ComBanc will promptly notify FDEF of (i) the occurrence of
any breach of any of the covenants of ComBanc or Commercial Bank contained in
this Agreement, (ii) the occurrence of any event that may make the
satisfaction of the conditions in this Agreement impossible or unlikely or
(iii) the occurrence of any event that is reasonably likely, individually or
taken with all other facts, events or circumstances known to ComBanc or
Commercial Bank, to result in a material adverse effect with respect to
ComBanc or Commercial Bank.
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5.03. Acquisition Transactions. ComBanc and Commercial Bank shall (a)
not, directly or indirectly, solicit or initiate any proposals or offers from
any person or entity, or discuss or negotiate with any such person or entity,
regarding any acquisition or purchase of all or a material amount of the
assets of, any equity securities of, or any merger, consolidation or business
combination with, ComBanc or Commercial Bank (collectively, "Acquisition
Transactions"), (b) not disclose to any person any information not customarily
disclosed publicly or provide access to its properties, books or records or
otherwise assist or encourage any person in connection with any of the
foregoing in connection with an Acquisition Transaction, and (c) give FDEF
prompt notice of any such inquiries, offers or proposals. The foregoing
sentence shall not apply however to the consideration, negotiation and
consummation of an Acquisition Transaction not solicited by ComBanc or
Commercial Bank or any of their respective officers, directors, agents or
affiliates if, and to the extent that, the Board of Directors of ComBanc (as
constituted as of the date of this Agreement) reasonably determines in good
faith after consultation with ComBanc's Financial Advisors and upon written
advice of counsel to ComBanc that failure to consider such Acquisition
Transaction could reasonably be expected to constitute a breach of its
fiduciary duties to the shareholders of ComBanc; provided, however, that
ComBanc shall give FDEF prompt notice of any such proposal of an Acquisition
Transaction and keep FDEF promptly informed regarding the substance thereof
and the response of the Board of Directors of ComBanc thereto.
5.04. Delivery of Information. ComBanc and Commercial Bank shall furnish
to FDEF promptly after such documents are available: (a) all reports, proxy
statements or other communications by ComBanc to its stockholders, (b) all
press releases relating to any transactions, (c) all filings made with the
SEC, and (d) all status reports submitted to a Regulatory Authority pursuant
to the Written Agreement among ComBanc, Commercial Bank, the Federal Reserve
and the ODFI, dated December 19, 2003.
5.05. Affiliates Compliance with the Securities Act. No later than the
15th day prior to the mailing of the Proxy/Prospectus (as defined in Section
7.03 below), ComBanc shall deliver to FDEF a schedule of all persons whom
ComBanc reasonably believes are, or are likely to be, as of the date of the
ComBanc Meeting, deemed to be "affiliates" of ComBanc as that term is used in
Rule 145 under the Securities Act (the "Rule 145 Affiliates"). Thereafter and
until the Effective Time, ComBanc shall identify to FDEF each additional
person whom ComBanc reasonably believes to have thereafter become a Rule 145
Affiliate.
5.06. Voting Agreement. Concurrently with the execution and delivery of
this Agreement, and as a condition and material inducement to FDEF's
willingness to enter into this Agreement, each of the directors and executive
officers of ComBanc and Commercial Bank shall enter into a Voting Agreement in
the form attached hereto as Exhibit B. If any person shall become a director
or executive officer of ComBanc or Commercial Bank after the date of this
Agreement and until the Effective Time, ComBanc and Commercial Bank shall
cause each such person to execute a Voting Agreement.
5.07 No Control. Nothing contained in this Agreement shall give FDEF or
First Federal, directly or indirectly, the right to control or direct the
operations of ComBanc or Commercial Bank prior to the Effective Time. Prior to
the Effective Time, each of ComBanc and FDEF shall exercise, consistent with
the terms of this Agreement, complete control and supervision over its and its
subsidiaries respective operations.
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5.08 Accounting Policies. Before the Effective Time and at the request of
FDEF, ComBanc or Commercial Bank shall promptly (a) establish and take such
accruals to conform Commercial Bank' loan and accrual policies to FDEF's
policies; (b) establish and take such accruals and charges in order to
implement such policies in respect of excess facilities and equipment
capacity, severance costs, litigation matters, write-off or write-down of
various assets and other appropriate accounting adjustments; and (c) recognize
for financial accounting purposes such expenses of the Corporate Merger, the
Bank Merger and restructuring charges related to or to be incurred in
connection with such mergers, to the extent permitted by law, consistent with
GAAP and on a basis mutually satisfactory to it and FDEF; provided, however,
that neither ComBanc nor Commercial Bank shall be obligated to make any such
changes or adjustments until the satisfaction of all unwaived conditions set
forth in Sections 8.01, 8.02 and 8.03, and further provided that no basis for
termination of this Agreement by any party pursuant to Article Ten is then
extant. ComBanc and Commercial Bank's representations, warranties and
covenants contained in this Agreement shall not be deemed to be untrue or
breached in any respect for any purpose as a consequence of any modifications
or changes undertaken solely on account of this Section 5.08.
5.09 ComBanc Meeting. ComBanc shall, as promptly as practicable following
the effective date of the Registration Statement, establish a record date for,
duly call, give notice of, convene and hold the ComBanc Meeting no later than
45 days after the effectiveness of the Registration Statement, unless
otherwise agreed to by FDEF and ComBanc. The ComBanc Board of Directors shall
recommend to its stockholders that they adopt this Agreement, and shall
include such recommendation in the Proxy/Prospectus.
5.10 Tax Matters.
(a) Without the prior written consent of FDEF, neither ComBanc nor any of
its Subsidiaries shall make or change any election, change an annual
accounting period, adopt or change any accounting method, file any amended Tax
Return, enter into any closing agreement, settle any Tax claim or assessment
relating to ComBanc or any of its Subsidiaries, surrender any right to claim a
refund of Taxes, consent to any extension or waiver of the limitation period
applicable to any tax claim or assessment relating to ComBanc or any of its
Subsidiaries, or take any other similar action relating to the filing of any
Tax Return or the payment of any Tax, if such election, adoption, change,
amendment, agreement, settlement, surrender, consent or other action would
have the effect of increasing the Tax liability of ComBanc or any of its
Subsidiaries for any period ending after the Effective Date or decreasing any
Tax attribute of ComBanc or any of its Subsidiaries existing on the Effective
Date.
(b) Except as otherwise set forth herein, each of FDEF and ComBanc agrees
not to take any actions subsequent to the date of this Agreement that would
adversely affect the ability of ComBanc and its shareholders to characterize
the Merger as a tax-free reorganization under Section 368(a) of the Code, and
each of FDEF and ComBanc agrees to take such action as may be reasonably
required, if such action may be reasonably taken, to reverse the impact of
past actions which would adversely impact the ability of the Corporate Merger
to be characterized as a tax-free reorganization under Section 368(a) of the
Code.
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5.11 Insurance Coverage. ComBanc shall cause the policies of insurance
listed in the ComBanc Disclosure Schedule to remain in effect between the date
of this Agreement and the Effective Time.
5.12 Supplemental Assurances.
(a) On the date the Registration Statement becomes effective and on the
Effective Time, ComBanc shall deliver to FDEF a certificate signed by its
principal executive officer and its principal financial officer to the effect,
to such officers' knowledge, that the information contained in the
Registration Statement relating to the business and financial condition and
affairs of ComBanc, does not contain any untrue statement of a material fact
or omit to state any material fact required to be stated therein or necessary
to make the statements therein not misleading.
(b) On the date the Registration Statement becomes effective and on the
Effective Time, FDEF shall deliver to ComBanc a certificate signed by its
chief executive officer and its chief financial officer to the effect, to such
officers' knowledge, that the Registration Statement (other than the
information contained therein relating to the business and financial condition
and affairs of ComBanc) does not contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein not misleading.
ARTICLE SIX
FURTHER COVENANTS OF FDEF
6.01. Employees; Employee Benefits.
(a) All employees of Commercial Bank as of the date of this Agreement who
are actively employed by ComBanc as of the Effective Time and who are not
currently covered by a written employment or severance agreement with
Commercial Bank shall be at will employees of First Federal ("Continuing
Employees"). Continuing Employees will be eligible to participate in First
Federal's benefit plans on the earliest date permitted by such plan, with
credit for years of service with ComBanc or Commercial Bank for the purpose of
eligibility and vesting (but not for the purpose of accrual of benefits or
allocation of employer contributions). FDEF shall cause any and all pre-
existing condition limitations (to the extent such limitations did not apply
to a pre-existing condition under ComBanc's equivalent plan) and eligibility
waiting periods under group health plans to be waived with respect to such
participants and their eligible dependents.
(b) Any Continuing Employee, excluding those six employees listed in
Section 6.01(b) of the ComBanc Disclosure Schedule, who is not covered by a
written employment or severance agreement and who is terminated by FDEF or
First Federal without cause within 12 months of the Effective Time shall
receive a severance payment equal to the product of one week of his or her
then current base salary multiplied by the number of total years of service as
a Commercial Bank employee; provided, however, that the maximum severance
payment shall equal twenty-six weeks of his or her base salary.
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(c) Any Continuing Employee listed in Section 6.01(b) of the ComBanc
Disclosure Schedule who is not covered by a written employment or severance
agreement and who is terminated by FDEF or First Federal without cause within
12 months of the Effective Time shall receive a severance payment equal to the
product of two weeks of his or her then current base salary multiplied by the
number of total years of service as a Commercial Bank employee; provided,
however, that the minimum severance payment shall equal thirteen weeks of his
or her base salary and that the maximum severance payment shall equal
twenty-six weeks of his or her base salary.
(d) Each person who is listed in Section 6.01(d) of the ComBanc
Disclosure Schedule and is receiving benefits as of the date of this Agreement
under ComBanc's health insurance plan as a retiree will be entitled to receive
benefits under FDEF's Retiree Medical Benefits Plan and will pay premiums for
coverage under such plan based upon the sum of the retiree's age and years of
service at the time of retirement in accordance with the FDEF Retiree Medical
Benefits Plan.
(e) The covenants of this Section 6.01 shall survive the Corporate
Merger.
6.02. Exchange Listing. FDEF shall file a listing application with Nasdaq
for the FDEF Shares to be issued to the former holders of ComBanc Shares in
the Corporate Merger at the time prescribed by applicable rules and
regulations of Nasdaq, and shall use all commercially reasonable efforts to
cause the FDEF Shares to be issued in connection with the Corporate Merger to
be approved for listing on Nasdaq, subject to official notice of issuance,
prior to the Closing Date.
6.03. Notification. Between the date of this Agreement and the Closing
Date, FDEF will promptly notify ComBanc in writing if FDEF or First Federal
becomes aware of any fact or condition that (a) causes or constitutes a breach
of any of the representations and warranties of FDEF or First Federal or (b)
would (except as expressly contemplated by this Agreement) cause or constitute
a breach of any such representation or warranty had such representation or
warranty been made as of the time of occurrence or discovery of such fact or
condition. During the same period, FDEF will promptly notify ComBanc of (i)
the occurrence of any breach of any of the covenants of FDEF or First Federal
contained in this Agreement, (ii) the occurrence of any event that may make
the satisfaction of the conditions in this Agreement impossible or unlikely or
(iii) the occurrence of any event that is reasonably likely, individually or
taken with all other facts, events or circumstances known to FDEF or First
Federal, to result in a material adverse effect with respect to FDEF or First
Federal.
6.04 Indemnification.
(a) Nothing in this Agreement is intended to affect any rights to
indemnification to which any officer or director of ComBanc or Commercial Bank
may be entitled pursuant to the Certificate of Incorporation, Bylaws, Articles
of Incorporation, or Code of Regulations of ComBanc or Commercial Bank in
effect prior to the Effective Time. From the Effective Time and continuing for
a period of three years thereafter, the current and former officers and
directors of ComBanc and Commercial Bank shall be indemnified by FDEF from
their acts and omissions occurring prior to the Effective Time to the maximum
extent permitted by the Articles of Incorporation and Code of Regulations of
FDEF but subject to any applicable limitations of Ohio law. As a condition to
receiving such indemnification, the party claiming indemnification shall
assign to FDEF, by separate writing, all right, title and interest in and to
the proceeds of the claiming party's applicable insurance coverage, if any,
including insurance maintained or provided by FDEF or ComBanc or Commercial
Bank to the extent of such indemnity. No person shall be entitled to such
indemnification with respect to a claim (i) if such person fails to cooperate
in the defense and investigation of such claim as to which indemnification may
be made, (ii) made by such person against FDEF, its subsidiaries, ComBanc or
Commercial Bank arising out of or in connection with this Agreement, the
transactions contemplated hereby or the conduct of the business of FDEF, its
subsidiaries, ComBanc or Commercial Bank, or (iii) if such person fails to
deliver such notices as may be required under any applicable directors and
officers liability insurance policy to preserve any possible claims of which
the claiming party is aware, to the extent such failure results in the denial
of payment under such policy.
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(b) For a period of three years from the Effective Time, FDEF shall use
its reasonable best efforts to provide that portion of directors' and
officers' liability insurance that serves to reimburse the present and former
Officers and Directors of ComBanc or Commercial Bank with respect to claims
against such Directors and Officers arising from facts or events that occurred
before the Effective Time; provided, however, that in no event shall FDEF be
required to expend more than 125% of the current amount expended by ComBanc or
Commercial Bank to maintain or procure such directors' and officers'
insurance.
6.05 Board of Directors. FDEF will select one individual from the Board
of Directors of Commercial Bank in existence on the date of this Agreement to
serve on the Board of Directors of FDEF and First Federal beginning
immediately after the Effective Time. FDEF and First Federal will take all
necessary action prior to the Effective Time to increase the number of
directors on their respective Boards of Directors to permit the addition of
this individual. At the Effective Time, the director selected and nominated
pursuant to this Section 6.05 shall be elected or appointed to fill a vacancy
on the respective Boards.
6.06 Advisory Board. First Federal agrees to take all action necessary to
appoint all of the directors of Commercial Bank in existence on the date of
this Agreement who are not serving on the Board of Directors of FDEF or First
Federal and who are not employees of FDEF or First Federal, effective as of
the Effective Time, to an advisory board of First Federal for a term of one
year. First Federal shall pay the members of the advisory board a fee of
$500.00 per meeting attended and the advisory board shall meet monthly during
the year following the Corporate Merger. Each member of the advisory board
shall execute a non-compete agreement that extends for a period of twelve
months in the form attached hereto as Exhibit C.
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ARTICLE SEVEN
FURTHER OBLIGATIONS OF THE PARTIES
7.01. Cooperative Action. Subject to the terms and conditions of this
Agreement, each of ComBanc, Commercial Bank, FDEF and First Federal agrees to
use its best efforts to satisfy all of the conditions to this Agreement and to
cause the consummation of the transactions described in this Agreement, and to
take, or cause to be taken, all further actions and execute all additional
documents, agreements and instruments which may be reasonably required, in the
opinion of counsel for ComBanc ("ComBanc's Counsel") and counsel for FDEF
("FDEF's Counsel"), to satisfy all legal requirements of the States of Ohio
and Delaware and of the United States, so that this Agreement and the
transactions contemplated hereby will become effective as promptly as
practicable.
7.02. Press Releases. Neither FDEF nor ComBanc shall make any press
release or other public announcement concerning the transactions contemplated
by this Agreement without the consent of the other party hereto as to the form
and contents of such press release or public announcement, except to the
extent that such press release or public announcement may be required by law
or Nasdaq rules to be made before such consent can be obtained.
7.03. Proxy/Prospectus; Registration Statement.
(a) As promptly as reasonably practical following the date hereof,
ComBanc and FDEF shall prepare mutually acceptable proxy and prospectus
material that will constitute the proxy statement/prospectus (including all
amendments or supplements thereto, the "Proxy/Prospectus") relating to the
matters to be submitted to the ComBanc stockholders for the ComBanc Meeting,
and FDEF shall file with the SEC a registration statement with respect to the
issuance of FDEF Shares in the Corporate Merger (such registration statement,
which shall include the Proxy/Prospectus and all amendments or supplements
thereto, the "Registration Statement"). Each of ComBanc and FDEF agrees to use
all commercially reasonable efforts to cause the Registration Statement to be
declared effective under the Securities Act as promptly as reasonably
practicable after the filing thereof. FDEF also agrees to use all reasonable
efforts to obtain, prior to the effective date of the Registration Statement,
all necessary state securities law or "Blue Sky" permits and approvals
required to carry out the transactions contemplated by this Agreement. ComBanc
agrees to promptly furnish to FDEF all information concerning ComBanc,
Commercial Bank and the Officers, Directors and stockholders of ComBanc as
FDEF reasonably may request in connection with the foregoing. Each of ComBanc
and FDEF shall promptly notify the other upon the receipt of any comments from
the SEC or its staff or any request from the SEC or its staff for amendments
or supplements to the Registration Statement and shall promptly provide the
other with copies of all correspondence between it and its representatives, on
the one hand, and the SEC and its staff, on the other hand. Notwithstanding
the foregoing, prior to filing the Registration Statement (or any amendment or
supplement thereto), mailing the Proxy/Prospectus (or any amendment or
supplement thereto), or responding to any comments of the SEC with respect
thereto, each of ComBanc and FDEF, as the case may be, (i) shall provide the
other party with a reasonable opportunity to review and comment on such
document or response, (ii) shall include in such document or response all
comments reasonably proposed by such other party, and (iii) shall not file or
mail such document or respond to the SEC prior to receiving such other's
approval, which approval shall not be unreasonably withheld or delayed.
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(b) Each of ComBanc and FDEF agrees, as to itself and its Subsidiaries,
that none of the information to be supplied by it for inclusion or
incorporation by reference in (i) the Registration Statement will, at the time
the Registration Statement and each amendment or supplement thereto, if any,
is filed with the SEC and at the time the Registration Statement becomes
effective under the Securities Act, contain any untrue statement of a material
fact or omit to state any material fact required to be stated therein or
necessary to make the statements therein in light of the circumstances under
which they were made, not misleading, and (ii) the Proxy/Prospectus and any
amendment or supplement thereto will, as of the date such Proxy/Prospectus is
mailed to stockholders of ComBanc and up to and including the date of the
meeting of ComBanc's stockholders to which such Proxy/Prospectus relates,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein
in light of the circumstances under which they were made not misleading.
(c) Each of ComBanc and FDEF agrees, if it shall become aware prior to
the Effective Time of any information furnished by it that would cause any of
the statements in the Registration Statement to be false or misleading with
respect to any material fact, or to omit to state any material fact necessary
to make the statements therein not false or misleading, to promptly inform the
other party thereof and to take the necessary steps to correct the
Registration Statement.
(d) FDEF agrees to advise ComBanc, promptly after FDEF receives notice
thereof, of the time when the Registration Statement has become effective or
any supplement or amendment has been filed, of the issuance of any stop order
or the suspension of the qualification of FDEF Shares for offering or sale in
any jurisdiction, of the initiation or threat of any proceeding for any such
purpose, or of any request by the SEC for the amendment or supplement of the
Registration Statement or for additional information.
7.04. Regulatory Applications. FDEF will prepare and cause to be filed at
its expense such applications and other documents with the OTS, the FDIC, the
ODFI, and any other Regulatory or Governmental Authorities as are required to
secure the requisite approval to the consummation of the transactions provided
for in this Agreement. ComBanc and Commercial Bank agree that they will, as
promptly as practicable after request and at their own expense, provide FDEF
with all information and documents concerning ComBanc and Commercial Bank as
shall be required in connection with preparing any applications, registration
statements and other documents that are to be prepared and filed by FDEF and
in connection with regulatory approvals required to be obtained by FDEF
hereunder.
7.05. Termination of Plans. As of the Effective Time, ComBanc's health
insurance plan will be terminated and, in FDEF's discretion, ComBanc's 401(k)
Profit Sharing Plan (Plan #001) will either be terminated or merged into
FDEF's 401(k) Employee Savings Plan. Prior to the Effective Time, ComBanc will
terminate the retiree health insurance benefits for those people who may
retire after the date of this Agreement.
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7.06. Confidentiality. The parties to this Agreement acknowledge the
confidential and proprietary nature of the information as hereinafter
described which has heretofore been exchanged and which will be received from
each other hereunder (the "Information") and agree to hold and keep the same
confidential. Such Information will include any and all financial, technical,
commercial, marketing, customer or other information concerning the business,
operations and affairs of a party that may be provided to the other,
irrespective of the form of the communications, by such party's employees or
agents. Such Information shall not include information that is or becomes
generally available to the public other than as a result of a disclosure by a
party or its representatives in violation of this Agreement, or Information
which is required to be furnished or used in connection with legal
proceedings. The parties agree that the Information will be used solely for
the purposes contemplated by this Agreement and that such Information will not
be disclosed to any person other than employees and agents of a party who are
directly involved in evaluating the transaction. The Information shall not be
used in any way detrimental to a party, including use directly or indirectly
in the conduct of the other party's business or enterprise in which such party
may have an interest, now or in the future, and whether or not now in
competition with such other party. Upon the written request of the disclosing
party, upon termination of this Agreement, the other parties will promptly
return or destroy Information in their possession and certify to the
disclosing party that the party has done so.
ARTICLE EIGHT
CONDITIONS PRECEDENT TO THE OBLIGATIONS OF THE PARTIES
8.01. Conditions to the Obligations of FDEF and First Federal. The
obligations of FDEF and First Federal under this Agreement shall be subject to
the satisfaction, or written waiver by FDEF and First Federal prior to the
Closing Date, of each of the following conditions precedent:
(a) The representations and warranties of ComBanc and Commercial Bank set
forth in this Agreement shall be true and correct in all material respects as
of the date of this Agreement and as of the Closing Date as though such
representations and warranties were also made as of the Closing Date, except
that those representations and warranties which by their terms speak as of a
specific date shall be true and correct as of such date; and FDEF shall have
received a certificate, dated the Closing Date, signed by the chief executive
officer and the chief financial officer of each of ComBanc and Commercial Bank
to such effect.
(b) Each of ComBanc and Commercial Bank shall have performed in all
material respects all of its covenants and obligations under this Agreement to
be performed by it on or prior to the Closing Date, including those relating
to the Closing and the closing deliveries required by Section 9.03 of this
Agreement, and FDEF shall have received a certificate, dated the Closing Date,
signed by the chief executive officer and the chief financial officer of each
of ComBanc and Commercial Bank to such effect.
(c) The holders of not more than 12% of the outstanding ComBanc Shares
shall have perfected their appraisal rights under Section 262 of the DGCL, if
applicable, in connection with the transactions contemplated by this
Agreement.
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(d) ComBanc and Commercial Bank shall have obtained the consent or
approval of each person (other than Governmental and Regulatory Authorities)
whose consent or approval shall be required in connection with the
transactions contemplated hereby under any loan or credit agreement, note,
mortgage, indenture, lease, license or other agreement or instrument, except
those for which failure to obtain such consents and approvals would not,
individually or in the aggregate, have a material adverse effect, after the
Effective Time, on the Surviving Corporation.
(e) All of the Deferred Compensation Agreements with members of ComBanc
or Commercial Bank's Board of Directors shall be terminated.
8.02. Conditions to the Obligations of ComBanc and Commercial Bank. The
obligations of ComBanc and Commercial Bank under this Agreement shall be
subject to satisfaction, or written waiver by ComBanc and Commercial Bank
prior to the Closing Date, of each of the following conditions precedent:
(a) The representations and warranties of FDEF and First Federal set
forth in this Agreement shall be true and correct in all material respects as
of the date of this Agreement and as of the Closing Date as though such
representations and warranties were also made as of the Closing Date, except
that representations and warranties which by their terms speak as of a
specific date shall be true and correct as of such date; and ComBanc shall
have received a certificate, dated the Closing Date, signed by the chief
executive officer and the chief financial officer of each of FDEF and First
Federal to such effect.
(b) Each of FDEF and First Federal shall have performed in all
material respects all of its covenants and obligations under this Agreement to
be performed by it on or prior to the Closing Date, including those related to
the Closing and the closing deliveries required by Section 9.02 of this
Agreement, and ComBanc shall have received a certificate, dated the Closing
Date, signed by the chief executive officer and the chief financial officer of
each of FDEF and First Federal to such effect.
(c) FDEF and First Federal shall have obtained the consent or approval of
each person (other than Governmental and Regulatory Authorities) whose consent
or approval shall be required in connection with the transactions contemplated
hereby under any loan or credit agreement, note, mortgage, indenture, lease,
license or other agreement or instrument, except those for which failure to
obtain such consents and approvals would not, individually or in the
aggregate, have a material adverse effect, after the Effective Time, on the
Surviving Corporation.
(d) ComBanc shall have received from ComBanc's Financial Advisor an
opinion reasonably acceptable to ComBanc, dated as of the Closing Date, to the
effect that the consideration to be received by the holders of ComBanc Shares
in the Corporate Merger is fair, from a financial point of view, to the
holders of ComBanc's Shares.
(e) FDEF shall have purchased the directors' and officers' liability
insurance required by Section 6.04(b) of this Agreement.
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(f) There shall not have been an adjustment to the consideration
to be paid to ComBanc stockholders pursuant to Section 2.01(d).
8.03. Mutual Conditions. The obligations of ComBanc, Commercial Bank,
FDEF and First Federal under this Agreement shall be subject to the
satisfaction, or written waiver by the parties prior to the Closing Date, of
each of the following conditions precedent:
(a) The stockholders of ComBanc shall have duly adopted this Agreement by
the required vote.
(b) All approvals of Governmental and Regulatory Authorities required to
consummate the transactions contemplated by this Agreement shall have been
obtained and shall remain in full force and effect and all statutory waiting
periods in respect thereof shall have expired and no such approvals or
statute, rule or order shall contain, other than divestitures or dispositions
required to satisfy antitrust requirements, any conditions, restrictions or
requirements that would reasonably be expected to have a material adverse
effect after the Effective Time on the present or prospective consolidated
financial condition, business or operating results of the Surviving
Corporation.
(c) No temporary restraining order, preliminary or permanent injunction
or other order issued by a court of competent jurisdiction or other legal
restraint or prohibition preventing the consummation of the Corporate Merger
shall be in effect. No Governmental or Regulatory Authority of competent
jurisdiction shall have enacted, issued, promulgated, enforced, deemed
applicable or entered any statute, rule, regulation, judgment, decree,
injunction or other order prohibiting consummation of the transactions
contemplated by this Agreement or making the Corporate Merger illegal.
(d) The Registration Statement shall have become effective under the
Securities Act and no stop-order or similar restraining order suspending the
effectiveness of the Registration Statement shall have been issued and no
proceeding for that purpose shall have been initiated by the SEC.
(e) FDEF and ComBanc shall have received the written opinion of FDEF's
Counsel, dated the Closing Date, to the effect that, on the basis of facts,
representations and assumptions set forth in such opinion, the Corporate
Merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a)(1)(A) of the Code. In rendering its
opinion, FDEF's Counsel will require and rely upon customary representations
contained in letters from FDEF and ComBanc that FDEF's Counsel reasonably
deems relevant.
ARTICLE NINE
CLOSING
9.01. Closing. The closing of the Corporate Merger pursuant to this
Agreement (the "Closing") shall take place at a date and time agreed upon by
FDEF and ComBanc within a reasonable time after the satisfaction or waiver of
the last of the conditions to the Corporate Merger set forth in Article Eight
of this Agreement to be satisfied. Notwithstanding any of the foregoing to the
contrary, the Closing shall not occur on a date after that specified in
Section 10.01(b)(i) of this Agreement or after the date or dates on which any
Governmental or Regulatory Authority approval or any extension thereof
expires. The date of the Closing is sometimes herein called the "Closing
Date."
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9.02. Closing Deliveries Required of FDEF and First Federal. At the
Closing, FDEF and First Federal shall cause all of the following to be
delivered to ComBanc:
(a) The certificates of FDEF and First Federal contemplated by Section
8.02(a) and (b) of this Agreement.
(b) Copies of all resolutions adopted by the directors of FDEF and First
Federal, approving and adopting this Agreement and authorizing the
consummation of the transactions described herein, accompanied by a
certificate of the secretary or assistant secretary of FDEF and First Federal,
as applicable, dated as of the Closing Date, and certifying (i) the date and
manner of adoption of each such resolution; and (ii) that each such resolution
is in full force and effect, without amendment or repeal, as of the Closing
Date.
9.03. Closing Deliveries Required of ComBanc and Commercial Bank. At the
Closing, ComBanc and Commercial Bank shall cause all of the following to be
delivered to FDEF:
(a) The certificates of ComBanc and Commercial Bank contemplated by
Sections 8.01(a) and (b) of this Agreement.
(b) Copies of all resolutions adopted by the directors and the
shareholders of ComBanc and Commercial Bank approving and adopting this
Agreement and authorizing the consummation of the transactions described
herein, accompanied by a certificate of the secretary or the assistant
secretary of ComBanc and Commercial Bank, as applicable, dated as of the
Closing Date, and certifying (i) the date and manner of the adoption of each
such resolution; and (ii) that each such resolution is in full force and
effect, without amendment or repeal, as of the Closing Date.
(c) A written agreement from each Rule 145 Affiliate identified by
ComBanc pursuant to Section 5.05 in which such Rule 145 Affiliate confirms
that the FDEF Shares received by such Rule 145 Affiliate pursuant to the
Corporate Merger will be transferable only in accordance with Rule 145 of the
Securities Act.
ARTICLE TEN
TERMINATION
10.01. Termination. This Agreement may be terminated, and the Corporate
Merger may be abandoned, at any time prior to the Effective Time, whether
prior to or after this Agreement has been adopted by the shareholders of
ComBanc:
(a) By mutual written agreement of ComBanc and FDEF duly authorized by
action taken by or on behalf of their respective Boards of Directors;
(b) By either ComBanc or FDEF upon written notification to the
non-terminating party:
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(i) at any time after March 31, 2005, if the Corporate Merger shall
not have been consummated on or prior to such date and such failure to
consummate the Corporate Merger is not caused by a breach of this Agreement by
the terminating party;
(ii) if any event occurs which, in the reasonable opinion of either
FDEF or ComBanc, would preclude satisfaction of any of the conditions set
forth in Section 8.03 of this Agreement; or
(iii) if, in compliance with the provisions of Section 5.03 of this
Agreement, ComBanc executes a definitive agreement in connection with, or
closes, an Acquisition Transaction;
(c) By ComBanc upon written notice to FDEF if any event occurs which, in
the reasonable opinion of ComBanc, would preclude satisfaction of any of the
conditions set forth in Section 8.02 of this Agreement;
(d) By ComBanc upon written notice to FDEF if, pursuant to Section
2.01(c), FDEF, in its sole discretion, does not increase the Per Share Stock
Consideration to preserve the status of the Corporate Merger as a tax- free
reorganization.
(e) By FDEF upon written notice to ComBanc if any event occurs which, in
the reasonable opinion of FDEF, would preclude satisfaction of any of the
conditions set forth in Section 8.01 of this Agreement.
10.02. Effect of Termination. If this Agreement is validly terminated by
either ComBanc or FDEF pursuant to Section 10.01, this Agreement will
forthwith become null and void and there will be no liability or obligation on
the part of ComBanc, Commercial Bank, FDEF or First Federal except that (i)
the provisions of Sections 5.03, 7.06 and 11.07 and this Article Ten will
continue to apply following any such termination, and (ii) except as set forth
in Section 10.04, nothing contained herein shall relieve any party hereto from
liability for breach of its representations, warranties, covenants or
agreements contained in this Agreement.
10.03. Termination Fee. In the event ComBanc executes a definitive
agreement in connection with, or closes, an Acquisition Transaction at any
time after the date of this Agreement until the expiration of twelve months
from the date of termination of this Agreement, ComBanc shall pay to FDEF in
immediately available funds the sum of $2,000,000 within ten days after the
earlier of such execution or closing.
10.04. Force Majeure. Notwithstanding anything to the contrary in this
Agreement, in the event this Agreement is terminated as a result of a failure
of a condition, which failure is due to a natural disaster or other act of
God, or an act of war or terrorism, and provided no party has failed to
observe the material obligations of such party under this Agreement, no party
shall be obligated to pay to the other party to this Agreement any fees or
expenses or otherwise be liable hereunder.
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ARTICLE ELEVEN
MISCELLANEOUS
11.01. Notices. All notices, requests, demands and other communications
required or permitted to be given under this Agreement shall be given in
writing and shall be deemed to have been duly given (a) on the date of
delivery if delivered by hand or by telecopy, upon confirmation of receipt,
(b) on the first business day following the date of dispatch if delivered by a
recognized next-day courier service, or (c) on the third business day
following the date of mailing if sent by certified mail, postage prepaid,
return receipt requested. All notices thereunder shall be delivered to the
following addresses:
If to ComBanc or Commercial Bank, to:
ComBanc, Inc.
230 East Second Street
Delphos, Ohio 45833
Attn: Paul G. Wreede, President
Facsimile Number: (419) 692-8408
With a copy to:
Squire, Sanders & Dempsey L.L.P.
4900 Key Tower
127 Public Square
Cleveland, Ohio 44114
Attn: Shawn R. Russell, Esq.
Facsimile Number: (216) 479-8776
If to FDEF or First Federal, to:
First Defiance Financial Corp.
601 Clinton Street
Defiance, Ohio 43512
Attn: William J. Small, Chairman, President and Chief
Executive Officer
Facsimile Number: (419) 782-5145
With a copy to:
Vorys, Sater, Seymour and Pease LLP
Suite 2000, Atrium Two
221 East Fourth Street
Cincinnati, Ohio 45202
Attn: Terri Reyering Abare, Esq.
Facsimile Number: (513) 852-7810
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Any party to this Agreement may, by notice given in accordance with this
Section 11.01, designate a new address for notices, requests, demands and
other communications to such party.
11.02. Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed to be a duplicate original, but
all of which taken together shall be deemed to constitute a single instrument.
11.03. Entire Agreement. This Agreement (including the exhibits,
documents and instruments referred to herein) constitutes the entire
agreement, and supersedes all prior agreements and understandings, both
written and oral, among the parties with respect to the subject matter of this
Agreement.
11.04. Successors and Assigns. This Agreement shall inure to the benefit
of and be binding upon the respective successors and assigns (including
successive, as well as immediate, successors and assigns) of the parties
hereto. This Agreement may not be assigned by either party hereto without the
prior written consent of the other party.
11.05. Captions. The captions contained in this Agreement are included
only for convenience of reference and do not define, limit, explain or modify
this Agreement or its interpretation, construction or meaning and are in no
way to be construed as part of this Agreement.
11.06. Governing Law. This Agreement shall be governed by, and construed
in accordance with, the laws of the State of Ohio without giving effect to
principles of conflicts or choice of laws (except to the extent that mandatory
provisions of federal law are applicable).
11.07. Payment of Fees and Expenses. Except as otherwise agreed in
writing, each party hereto shall pay all of its own costs and expenses,
including legal and accounting fees, and all expenses relating to its
performance of, and compliance with, its undertakings herein, except that
printing and mailing expenses shall be shared equally between ComBanc and
FDEF. All fees to be paid to Governmental and Regulatory Authorities in
connection with the transactions contemplated by this Agreement shall be borne
by FDEF.
11.08. Amendment. From time to time and at any time prior to the
Effective Time, this Agreement may be amended only by an agreement in writing
executed in the same manner as this Agreement, except that after the ComBanc
Meeting, this Agreement may not be amended if it would violate the DGCL.
11.09. Waiver. The rights and remedies of the parties to this Agreement
are cumulative and not alternative. Neither the failure nor any delay by any
party in exercising any right, power or privilege under this Agreement or the
documents referred to in this Agreement will operate as a waiver of such
right, power or privilege, and no single or partial exercise of any such
right, power or privilege will preclude any other or further exercise of such
right, power or privilege or the exercise of any other right, power or
privilege.
11.10. No Third-Party Rights. Except as specifically set forth herein,
nothing expressed or referred to in this Agreement will be construed to give
any person other than the parties to this Agreement any legal or equitable
right, remedy or claim under or with respect to this Agreement or any
provision of this Agreement. This Agreement and all of its provisions and
conditions are for the sole and exclusive benefit of the parties to this
Agreement and their successors and assigns.
-42-
11.11. Waiver of Jury Trial. Each of the parties hereto irrevocably
waives any and all right to trial by jury in any legal proceeding arising out
of or related to this Agreement or the transactions contemplated hereby.
11.12. Severability. If any provision of this Agreement is held invalid
or unenforceable by any court of competent jurisdiction, the other provisions
of this Agreement will remain in full force and effect. Any provision of this
Agreement held invalid or unenforceable only in part or degree will remain in
full force and effect to the extent not held invalid or unenforceable.
11.13. Non-Survival of Representations, Warranties and Covenants. The
representations, warranties and covenants of FDEF, First Federal, ComBanc and
Commercial Bank set forth in this Agreement, or in any document delivered
pursuant to the terms hereof or in connection with the transactions
contemplated hereby, shall not survive the Closing and the consummation of the
transactions referred to herein, other than covenants which by their terms are
to survive or be performed after the Effective Time (including, without
limitation, those set forth in Article Six and this Article Eleven); except
that the Surviving Corporation and any director, officer or controlling person
thereof may rely on such representations, warranties or covenants in any
defense in law or equity which otherwise would be available against the claims
of any person, including, without limitation, any shareholder or former
shareholder of either ComBanc or FDEF.
[REMAINDER OF THE PAGE INTENTIONALLY BLANK]
-43-
IN WITNESS WHEREOF, this Agreement and Plan of Merger has been executed on
behalf of FDEF, First Federal, ComBanc and Commercial Bank to be effective as
of the date set forth in the first paragraph above.
ATTEST: FIRST DEFIANCE FINANCIAL CORP.
/s/ Rebecca L. Minning By: /s/ William J. Small
---------------------- -----------------------------------------------
William J. Small, Chairman, President and
Chief Executive Officer
ATTEST: FIRST FEDERAL BANK OF THE MIDWEST
/s/ Rebecca L. Minning By: /s/ William J. Small
---------------------- -----------------------------------------------
William J. Small, Chairman and
Chief Executive Officer
ATTEST: COMBANC, INC.
/s/ Rebecca L. Minning By: /s/ Paul G. Wreede
---------------------- -----------------------------------------------
Paul G. Wreede, Chairman, President and CEO
ATTEST: THE COMMERCIAL BANK
/s/ Rebecca L. Minning By: /s/ Paul G. Wreede
---------------------- -----------------------------------------------
Paul G. Wreede, President and CEO
-44-
EXHIBIT A
Agreement of Merger
THIS AGREEMENT OF MERGER (this "Agreement") is entered into as of the ___
day of ___________, 2004, by and between First Federal Bank of the Midwest
("First Federal"), a federal savings bank, and The Commercial Bank
("Commercial Bank"), an Ohio commercial bank.
R E C I T A L S :
WHEREAS, First Federal is a wholly owned subsidiary of First Defiance
Financial Corp. ("FDEF"), an Ohio corporation, and Commercial Bank is a wholly
owned subsidiary of ComBanc, Inc. ("ComBanc"), a Delaware corporation;
WHEREAS, FDEF, First Federal, ComBanc and Commercial Bank have entered
into an Agreement and Plan of Merger dated ___________________, 2004 (the
"Merger Agreement"), which provides for the merger of ComBanc with and into
FDEF and the subsequent merger of Commercial Bank with and into First Federal;
and
WHEREAS, the Boards of Directors of each of the parties hereto have
approved this Agreement;
NOW, THEREFORE, in consideration of the mutual premises and mutual
agreements contained herein, the parties hereto have agreed as follows:
ARTICLE I
THE MERGER
Section 1.01. At the Effective Time (as defined in Article IV below),
Commercial Bank shall merge with and into First Federal (the "Merger")
pursuant to Ohio Rev. Code {section}{section} 1115.11 and 1701.79, and the
applicable regulations of the Division of Financial Institutions of the Ohio
Department of Commerce (the "Division") and the Office of Thrift Supervision
("OTS"). Upon consummation of the Merger, the separate corporate existence of
Commercial Bank shall cease and First Federal shall continue as the surviving
institution (the "Surviving Institution").
Section 1.02. The name of the Surviving Institution shall be First Federal
Bank of the Midwest.
ARTICLE II
CONVERSION OF SECURITIES
Section 2.01. First Federal Stock. The shares of common stock of First
Federal issued and outstanding immediately prior to the Effective Time shall
be unaffected by the Merger and shall constitute the only outstanding shares
of capital stock of the Surviving Institution at and after the Effective Time.
Section 2.02. Commercial Bank Stock. At the Effective Time, by virtue of
the Merger and without any action on the part of First Federal or Commercial
Bank, all of the shares of common stock of Commercial Bank, $6.25 par value
per share, that are issued and outstanding immediately prior thereto shall
thereupon be canceled.
ARTICLE III
EFFECTIVE TIME
Section 3.01. The Merger shall become effective immediately following and
contingent upon the occurrence of the Closing (as defined in Article Nine of
the Merger Agreement) at the date and time specified in the articles of
combination to be filed with the Office of Thrift Supervision (the "Effective
Time"); provided, however, that such filing shall not occur and the Merger
shall not be effective until all of the following events have taken place:
(a) ComBanc shall have been merged with and into FDEF; (b) the sole
shareholders of First Federal and Commercial Bank shall have adopted this
Agreement; (c) the Merger shall have been approved by all regulatory
authorities; and (d) all applicable regulatory waiting periods shall have
expired.
ARTICLE IV
CHARTER AND BYLAWS
OF SURVIVING INSTITUTION
Section 4.01. The charter and bylaws of First Federal as in effect at the
Effective Time shall be the charter and bylaws of the Surviving Institution at
and after the Effective Time.
ARTICLE V
EXECUTIVE OFFICERS OF SURVIVING INSTITUTION
Section 5.01. The executive officers of First Federal immediately before
the Effective Time shall serve in the same capacities as executive officers of
the Surviving Institution at and after the Effective Time.
ARTICLE V
DIRECTORS OF RESULTING INSTITUTION
6.1 At and after the Effective Time and until changed in accordance
with law, the number of directors of the Resulting Institution shall be five.
The directors of Foundation immediately prior to the Effective Time shall be
the directors of the Resulting Institution at and after the Effective Time,
whose names, terms and residence addresses are as follows:
-2-
Director Term to Expire Residence Address
William J. Small
Don C. Van Brackel
Stephen L. Boomer
Douglas A. Burgei
Peter A. Diehl
John U. Fauster
Gerald M. Monnin
James L. Rohrs
Thomas A. Voigt
ARTICLE VII
EFFECTS OF MERGER
Section 7.01. At the Effective Time, Commercial Bank shall merge with and
into First Federal, with First Federal as the Surviving Institution. The
business of the Surviving Institution shall be that of a federal savings bank,
as provided for in its charter. All assets, rights, interests, privileges,
powers, franchises and property (real, personal and mixed) of First Federal
and Commercial Bank shall be automatically transferred to and vested in the
Surviving Institution by virtue of the Merger without any deed or other
document of transfer.
Section 7.02. The Surviving Institution, without any order or action on
the part of any court or otherwise and without any documents of assumption or
assignment, shall hold and enjoy all of the assets, rights, privileges,
powers, properties, franchises and interests, including, without limitation,
appointments, powers, designations, nominations and all other rights,
interests and powers as agent or fiduciary, in the same manner and to the same
extent as such rights, interests and powers were held or enjoyed by First
Federal and Commercial Bank, respectively.
Section 7.03. The Surviving Institution shall be responsible for all of
the liabilities, restrictions and duties of every kind and description of both
First Federal and Commercial Bank, immediately prior to the Merger, including,
without limitation, liabilities for all savings accounts, deposits, debts,
obligations and contracts of First Federal and Commercial Bank, respectively,
matured or unmatured, whether accrued, absolute, contingent and otherwise and
whether or not reflected or reserved against on balance sheets, books of
accounts or records of either First Federal or Commercial Bank. Deposit
accounts shall be deemed issued in the name of the Surviving Institution in
accordance with applicable regulations. All rights of creditors and other
obligees and all liens on property of either First Federal or Commercial Bank
shall be preserved, shall be assumed by the Surviving Institution and shall not
be released or impaired.
-3-
ARTICLE VIII
OFFICES OF SURVIVING INSTITUTION
Section 8.01. After the Effective Time, the locations of the offices of
the Resulting Institution shall be as follows:
Home Office: 601 Clinton Street
Defiance, Ohio 43512
Branch Offices: 1050 East Main Street 204 East High Street
Montpelier, Ohio 43543 Bryan, Ohio 43506
926 East High Street 211 South Fulton Street
Bryan, Ohio 43506 Wauseon, Ohio 43567
417 West Dussel Drive 201 East High Street
Maumee, Ohio 43537 Hicksville, Ohio 43526
825 N. Clinton Street 190 Stadium Drive
Defiance, Ohio 43512 Defiance, Ohio 43512
625 Scott Street 1333 Woodlawn Avenue
Napoleon, Ohio 43545 Napoleon, Ohio 43545
1226 W. Wooster Street 1694 N. Countyline
Street
Bowling Green, Ohio 43402 Fostoria, Ohio 44830
405 E. Main Street 905 N. Williams Street
Ottawa, Ohio 45875 Paulding, Ohio 45879
124 E. Main Street 3900 N. Main Street
McComb, Ohio 45858 Findlay, Ohio 45840
7591 Patriot Drive 301 S. Main Street
Findlay, Ohio 45840 Findlay, Ohio 45840
230 E. Second Street 2600 Allentown Road
Delphos, Ohio 45833 Lima, Ohio 45805
2285 N. Cole Street 105 S. Greenlawn Avenue
Lima, Ohio 45801 Elida, Ohio 45807
-4-
ARTICLE IX
LIQUIDATION ACCOUNT
Section 9.01. At the Effective Time, the Surviving Institution shall
assume Commercial Bank's liquidation account established upon Commercial Bank's
conversion to the stock form of ownership.
ARTICLE X
OTHER TERMS
Section 10.01. All terms used in this Agreement shall, unless defined
herein, have the meanings set forth in the Merger Agreement.
Section 10.02. Subject to applicable law, at any time prior to the
consummation of the Merger, this Agreement may be amended by an instrument in
writing signed on behalf of each of the parties hereto.
Section 10.03. This Agreement shall terminate and become null and void,
and the transactions contemplated herein shall thereupon be abandoned, upon
any occurrence of a termination of the Merger Agreement pursuant to Article
Ten thereof.
Section 10.04. This Agreement may be executed in any number of
counterparts, each of which shall be deemed an original and all of such
counterparts shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have caused this Agreement to be executed
as of the date first above written.
ATTEST: First Federal Bank of the Midwest
---------------------------------- By:------------------------------
-------------------
ATTEST: The Commercial Bank
---------------------------------- By:------------------------------
-------------------
-5-
EXHIBIT B
Voting Agreement
THIS VOTING AGREEMENT (this "Agreement") is entered into this _____ day
of ________, 2004, between the undersigned Stockholder (the "Stockholder") of
ComBanc, Inc., a Delaware corporation ("ComBanc"), and First Defiance
Financial Corp., an Ohio corporation ("FDEF").
RECITALS
A. The Stockholder owns or has the power to vote, other than in a
fiduciary capacity, _______ common shares, without par value, of ComBanc
(together with all other shares of ComBanc that the Stockholder may
subsequently acquire or obtain the power to vote, other than in a fiduciary
capacity, the "Shares").
B. ComBanc has entered into an Agreement and Plan of Merger by and
among FDEF, First Federal Bank of the Midwest, ComBanc and The Commercial Bank
of even date herewith (the "Merger Agreement").
C. Under the terms of the Merger Agreement, ComBanc has agreed to call
a meeting of its stockholders for the purpose of voting upon the adoption of
the Merger Agreement (together with any adjournments thereof, the "ComBanc
Meeting").
D. The parties to the Merger Agreement have made it a condition to
their entering into the Merger Agreement that certain stockholders of ComBanc,
including the Stockholder, agree to vote their shares of ComBanc in favor of
the adoption of the Merger Agreement.
AGREEMENT
Accordingly, the parties hereto agree as follows:
1. Agreement to Vote. The Stockholder agrees, subject to Section 2
below, to vote the Shares as follows:
(a) in favor of the adoption of the Merger Agreement;
(b) against the approval of any proposal relating to a competing
merger or business combination involving an acquisition of ComBanc or the
purchase of all or a substantial portion of the assets of ComBanc by any
person or entity other than FDEF or an affiliate of FDEF; and
(c) against any other transaction which is inconsistent with the
obligations of ComBanc under the Merger Agreement.
2. Limitation on Voting Power. It is expressly understood and
acknowledged that nothing contained herein is intended to restrict the
Stockholder from voting on any matter, or otherwise from acting, in the
Stockholder's capacity as a director or officer of ComBanc with respect to any
matter, including but not limited to, the management or operation of ComBanc.
3. Termination. This Agreement shall terminate on the earlier of (a)
the date on which the Merger Agreement is terminated in accordance with
Article Ten of the Merger Agreement, (b) the date on which the merger
contemplated by the Merger Agreement is consummated, or (c) the death of the
Stockholder.
4. Representations, Warranties, and Additional Covenants of the
Stockholder. The Stockholder hereby represents and warrants to FDEF that (a)
the Stockholder has the capacity and all necessary power and authority to vote
the Shares, and (b) this Agreement constitutes a legal, valid, and binding
obligation of the Stockholder, enforceable in accordance with its terms,
except as may be limited by bankruptcy, insolvency, or similar laws affecting
enforcement of creditors rights generally. The Stockholder further agrees
that, during the term of this Agreement, the Stockholder will not, without the
prior written consent of FDEF, which consent shall not be unreasonably
withheld, sell, pledge, or otherwise voluntarily dispose of any of the Shares
which are owned by the Stockholder or take any other voluntary action which
would have the effect of removing the Stockholder's power to vote the Shares
or which would be inconsistent with this Agreement. Notwithstanding the
foregoing, the Stockholder may transfer all or a portion of the Shares to an
immediate family member, but only if the transferee executes an identical
Voting Agreement.
5. Specific Performance. The undersigned hereby acknowledges that
damages would be an inadequate remedy for any breach of the provisions of this
Agreement and agrees that the obligations of the Stockholder shall be
specifically enforceable and that FDEF shall be entitled to injunctive or
other equitable relief upon such a breach by the Stockholder. The Stockholder
further agrees to waive any bond in connection with obtaining any such
injunctive or equitable relief. This provision is without prejudice to any
other rights that FDEF may have against the Stockholder for any failure to
perform his obligations under this Agreement.
6. Governing Law. This Agreement shall be construed and enforced in
accordance with the laws of the State of Ohio without regard to any of its
conflict of laws principles.
7. Capitalized Terms. Capitalized terms used herein without definition
shall have the meanings attributed to such terms in the Merger Agreement.
IN WITNESS WHEREOF, the undersigned have executed or caused to be
executed this Agreement as of the day and year first above written.
STOCKHOLDER FIRST DEFIANCE FINANCIAL CORP.
_____________________________________ By:___________________________
Name:_________________________
Print Name:__________________________ Title:________________________
2
EXHIBIT C
Non-Compete Agreement
This Non-Disclosure and Non-Competition Agreement (this
"Agreement") is made and entered into this ____ day of _______________, 200_ by
and between First Federal Bank of the Midwest, a federal savings bank ("First
Federal"), and the undersigned ("Member") for the benefit of First Federal.
RECITALS
A. First Defiance Financial Corp. and First Federal have spent
and continue to spend considerable time, money and effort developing their
business (the "Business").
B. Member desires to serve as a member of the Advisory Board of
First Federal and First Federal desires to have Member serve as such.
C. As a member of the Advisory Board, Member may discover the
names of First Federal's customers, its method of doing business, and other
valuable knowledge in connection with the Business.
D. For the proper protection of the Business it is essential
that all matters connected with, arising out of, or pertaining to the Business
and its method of operation, and the names of its customers, be kept secret;
and that the good will, customer contacts and customer relations developed in
the Business, together with the benefits of the advertising and promotion of
the Business and products be preserved.
NOW, THEREFORE, in consideration of the covenants and agreements
set forth in this Agreement, First Federal and Member hereby covenant and agree
as follows:
1. Secret and Confidential Information. Member agrees to treat
as confidential all information whether of a technical or business nature,
belonging to the Business which is possessed by Member, which may be disclosed
to Member or which Member may develop in the course of Member's service on the
Advisory Board ("Service"), including, without limitation, financial data and
statements, pricing and pricing strategies and plans, business plans, marketing
plans, customer lists, and account lists ("Confidential Information"). For
purposes of this Agreement, Confidential Information does not include
information which (i) becomes generally available to the public other than as a
result of a disclosure by Member, (ii) is developed by Member independent of
any confidential information received from First Federal, or (iii) is lawfully
obtained by Member from a third party outside of this Agreement. Member shall
not disclose, publish or otherwise use, either during Member's Service or after
termination of Member's Service, any such Confidential Information, trade
secrets or secret information without the prior written consent of First
Federal.
2. Return of Business Property. Member agrees that following
Member's termination of Service for any reason, Member will promptly return to
First Federal all financial and business documents, operations manuals,
business plans, information pertaining to pricing of products and services,
customers, profit margins and the design of saving and lending products, and
other materials of a confidential nature in any way relating to the Business
which are in Member's possession and/or made available to Member during
Member's Service, together with all existing copies, however reproduced
including paper documents and computer data or other media however stored.
1
3. Non-Solicitation. Member recognizes that First Federal's
workforce constitutes an important and vital aspect of its Business operations.
Therefore, Member will not hire or solicit, or assist anyone in the hiring or
soliciting of, any of First Defiance Financial Corp.'s, First Federal's or any
of their affiliates employees, independent contractors, or subcontractors,
without the express prior written consent of First Federal, for the duration of
Member's Service.
4. Non-Competition. Member shall not for a period of twelve months
following the date of this Agreement do any of the following:
(i) Directly or indirectly engage in business with or on behalf of, or
(ii) Assist or have an active interest in (whether as proprietor,
partner, investor, greater than 5% shareholder, officer,
director or any type of principal whatsoever); or
(iii) Enter the employment of or act as agent for, or advisor or
consultant to,
any person, firm, partnership, association, corporation or business
organization, entity or enterprise, including without limitation,
enterprises involving persons related by blood or marriage to
Member, and whether or not pursued for gain, profit, or other
pecuniary advantage, which is, or to Member's knowledge is planning
to, or to Member's knowledge is about to become, directly or
indirectly, engaged in the business of providing financial products
and services including but not limited to any of the following:
consumer and business financial products, mortgage brokerage
services, mortgage loans, checking accounts, savings accounts,
individual retirement accounts, loan accounts, safe deposit boxes,
certificates of deposit and related products and services, to any
person, firm, partnership, association, corporation or business
organization, entity or enterprise within a circle extending 50
miles from any office of First Federal or its affiliates.
Member herewith recognizes and expresses that the obligations and
restrictions imposed by the foregoing paragraphs are reasonable and proper in
order to protect First Federal from the loss of valuable assets, business
methods, and other trade secrets.
5. Payments to Member. In consideration and exchange for the
covenants and agreements set forth in this Agreement, First Federal shall pay
to Member the sum of $500 per Advisory Board meeting that is attended by
Member.
2
6. Legal Covenants. Member agrees that any future claim or
cause of action Member has against First Federal or its affiliates, whether
based on this Agreement or otherwise, does not constitute a defense to the
enforcement by First Federal of the covenants within this Agreement. Both
Member and First Federal expressly agree that it is the intent of this
Agreement to comply with any and all policy, statutory and common law. If any
of the contents of this Agreement are determined to be unlawful, such sentence,
paragraph, clause or combination of same, shall be void; yet the remainder of
the Agreement shall remain binding on the signing parties. In the event a
portion of this Agreement is determined to be unlawful, it is agreed by both
parties that the court shall substitute a reasonable, judicially enforceable
limitation in its place.
Member understands, acknowledges and agrees that any violation of
Member's covenants and agreements set forth in this Agreement will cause
irreparable injury to First Federal, and therefore, First Federal may enforce
this Agreement if necessary by means of injunction as well as institution of a
civil action for damages or by any other appropriate legal remedy.
Member agrees to indemnify and hold First Federal harmless from and
against any and all loss, cost, damage, or expense, including without
limitation, attorneys' fees that arises out of any breach by Member of this
Agreement.
7. Relationship of Parties. Member is not an employee of
First Federal and, as a result, shall not be entitled to any of the employee
benefits provided to First Federal employees.
8. Governing Law; Jurisdiction. This Agreement shall be
governed by and construed and enforced in accordance with the laws of the State
of Ohio. Any action, suit or proceeding in respect of or arising out of this
Agreement or the transactions contemplated hereby may be prosecuted as to any
one or more of the parties hereto in the courts of the State of Ohio. EACH
PARTY HERETO CONSENTS AND SUBMITS TO THE EXERCISE OF JURISDICTION OVER HIS
PERSON BY ANY COURT SITUATED IN OHIO AND HAVING JURISDICTION OVER THE SUBJECT
MATTER OF ANY ACTION, SUIT OR PROCEEDING ARISING OUT OF OR IN RESPECT OF THIS
AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY.
9. Entire Agreement. This Agreement constitutes the entire
agreement concerning the subject matters set forth herein and supersedes any
and all prior agreements or understandings between First Federal and Member
with regard to non-disclosure and non-competition.
10. Successors and Assigns. The privileges and benefits of this
Agreement shall be extended to the successors and assigns of First Federal.
3
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed and delivered as of the date first above written.
Attest: FIRST FEDERAL BANK OF THE MIDWEST
______________________________ By:___________________________
___________________________
its________________________
MEMBER
______________________________ ______________________________
______________________________
4
ANNEX B
-------
KEEFE, BRUYETTE & WOODS, INC.
SPECIALISTS IN FINANCIAL SERVICES
211 BRADENTON AVE. DUBLIN, OH 43017
PHONE FAX
614-766-8400 614-766-8406
November 10, 2004
Board of Directors
Combanc Inc.
229 East Second Street
Delphos, OH 45833
Dear Board Members:
You have requested our opinion as an independent investment banking firm
regarding the fairness, from a financial point of view, to the stockholders of
Combanc Inc. ("Combanc"), of the consideration to be paid to Combanc
shareholders in the merger (the "Merger") between Combanc and First Defiance
Financial Corp., an Ohio corporation ("First Defiance"). We have not been
requested to opine as to, and our opinion does not in any manner address,
Combanc's underlying business decision to proceed with or effect the Merger.
Pursuant to the Agreement and Plan of Merger, dated August 4, 2004, by and among
Combanc and First Defiance (the "Agreement"), at the effective time of the
Merger, First Defiance will acquire all of Combanc's issued and outstanding
shares of common stock. Combanc shareholders will receive the right to elect
either $17.20 per share in cash ("Per Share Cash Consideration") or common stock
of First Defiance based on an exchange ratio between .65266 and .79769 (the
"Exchange Ratio"), subject to certain adjustments (collectively, the
"Consideration").
Keefe, Bruyette & Woods, Inc., as part of its investment banking business, is
regularly engaged in the evaluation of businesses and securities in connection
with mergers and acquisitions, negotiated underwritings, and distributions of
listed and unlisted securities. We are familiar with the market for common
stocks of publicly traded banks, savings institutions and bank and savings
institution holding companies.
In connection with this opinion we reviewed certain financial and other business
data supplied to us by Combanc, including (i) the Agreement (ii) Annual Reports
for the years ended December 31, 2001, 2002 and 2003 (iii) Proxy Statements for
the years ended December 31, 2001, 2002 and 2003 (iv) unaudited financial
statements for the quarters ended March 31, 2004, June 30, 2004 and September
30, 2004 (v) and other information we deemed relevant. We also discussed with
senior management and directors of Combanc, the current position and prospective
outlook for Combanc. We reviewed financial and stock market data of other
banking institutions and the financial and structural terms of several other
recent transactions involving mergers and acquisitions of banking institutions
or proposed changes of control of comparably situated companies.
B-1
For First Defiance, we reviewed (i) Annual Reports for the years ended December
31, 2001, 2002 and 2003, (ii) unaudited financial statements for the quarters
ended March 31, 2004, June 30, 2004 and September 30, 2004 (iii) and other
information we deemed relevant. We also discussed with members of the senior
management team of First Defiance, the current position and prospective outlook
for First Defiance.
For purposes of this opinion we have relied, without independent verification,
on the accuracy and completeness of the material furnished to us by Combanc and
the material otherwise made available to us, including information from
published sources, and we have not made any independent effort to verify such
data. With respect to the financial information, including forecasts and asset
valuations we received from Combanc, we assumed (with your consent) that they
had been reasonably prepared reflecting the best currently available estimates
and judgment of Combanc's management. In addition, we have not made or obtained
any independent appraisals or evaluations of the assets or liabilities, and
potential and/or contingent liabilities of Combanc. We have further relied on
the assurances of management of Combanc that they are not aware of any facts
that would make such information inaccurate or misleading. We express no opinion
on matters of a legal, regulatory, tax or accounting nature or the ability of
the Merger, as set forth in the Agreement, to be consummated.
In rendering our opinion, we have assumed that in the course of obtaining the
necessary approvals for the Merger, no restrictions or conditions will be
imposed that would have a material adverse effect on the contemplated benefits
of the Merger to First Defiance or the ability to consummate the Merger. Our
opinion is based on the market, economic and other relevant considerations as
they exist and can be evaluated on the date hereof.
Consistent with the engagement letter with you, we have acted as financial
advisor to Combanc in connection with the Merger and will receive a fee for such
services. In addition, Combanc has agreed to indemnify us for certain
liabilities arising out of our engagement by Combanc in connection with the
Merger.
Based upon and subject to the foregoing, as outlined in the foregoing paragraphs
and based on such other matters as we considered relevant, it is our opinion
that as of the date hereof, the Consideration to be paid by First Defiance in
the Merger is fair, from a financial point of view, to the stockholders of
Combanc.
This opinion may not, however, be summarized, excerpted from or otherwise
publicly referred to without our prior written consent, although this opinion
may be included in its entirety in the proxy statement of Combanc used to
solicit stockholder approval of the Merger. It is understood that this letter is
directed to the Board of Directors of Combanc in its consideration of the
Agreement, and is not intended to be and does not constitute a recommendation to
any stockholder as to how such stockholder should vote with respect to the
Merger.
Very truly yours,
/s/ Keefe, Bruyette, & Woods, Inc.
Keefe, Bruyette, & Woods, Inc.
B-2
ANNEX C
-------
SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW
Section 262 Appraisal rights.
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d) of this
section with respect to such shares, who continuously holds such shares through
the effective date of the merger or consolidation, who has otherwise complied
with subsection (d) of this section and who has neither voted in favor of the
merger or consolidation nor consented thereto in writing pursuant to ss. 228 of
this title shall be entitled to an appraisal by the Court of Chancery of the
fair value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this section,
the word "stockholder" means a holder of record of stock in a stock corporation
and also a member of record of a nonstock corporation; the words "stock" and
"share" mean and include what is ordinarily meant by those words and also
membership or membership interest of a member of a nonstock corporation; and the
words "depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions thereof,
solely of stock of a corporation, which stock is deposited with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or consolidation to be
effected pursuant to ss. 251 (other than a merger effected pursuant to ss.
251(g) of this title), ss. 252, ss. 254, ss. 257, ss. 258, ss. 263 or ss. 264 of
this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of stock, which stock,
or depository receipts in respect thereof, at the record date fixed to determine
the stockholders entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or consolidation, were either
(i) listed on a national securities exchange or designated as a national market
system security on an interdealer quotation system by the National Association
of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders;
and further provided that no appraisal rights shall be available for any shares
of stock of the constituent corporation surviving a merger if the merger did not
require for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of ss. 251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of any class or
series of stock of a constituent corporation if the holders thereof are required
by the terms of an agreement of merger or consolidation pursuant to ss.ss. 251,
252, 254, 257, 258, 263 and 264 of this title to accept for such stock anything
except:
a. Shares of stock of the corporation surviving or resulting
from such merger or consolidation, or depository receipts in respect thereof;
b. Shares of stock of any other corporation, or depository
receipts in respect thereof, which shares of stock (or depository receipts in
receipt thereof) or depository receipts at the effective date of the merger or
consolidation will be either listed on a national securities exchange or
designated as a national market system security on an interdealer quotation
system by the National Association of Securities Dealers, Inc. or held of record
by more than 2,000 holders;
c. Cash in lieu of fractional shares or fractional depository
receipts described in the foregoing subparagraphs a. and b. of this paragraph;
or
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d. Any combination of the shares of stock, depository receipts
and cash in lieu of fractional shares or fractional depository receipts
described in the foregoing subparagraphs a., b. and c. of this paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under ss. 253 of this title is not owned
by the parent corporation immediately prior to the merger, appraisal rights
shall be available for the shares of the subsidiary Delaware corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares of any
class or series of its stock as a result of an amendment to its certificate of
incorporation, any merger or consolidation in which the corporation is a
constituent corporation or the sale of all or substantially all of the assets of
the corporation. If the certificate of incorporation contains such a provision,
the procedures of this section, including those set forth in subsections (d) and
(e) of this section, shall apply as nearly as is practicable.
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal rights are
provided under this section is to be submitted for approval at a meeting of
stockholders, the corporation, not less than 20 days prior to the meeting, shall
notify each of its stockholders who was such on the record date for such meeting
with respect to shares for which appraisal rights are available pursuant to
subsections (b) or (c) hereof that appraisal rights are available for any or all
of the shares of the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand the appraisal of
such stockholder's shares shall deliver to the corporation, before the taking of
the vote on the merger or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it reasonably informs
the corporation of the identity of the stockholder and that the stockholder
intends thereby to demand the appraisal of such stockholder's shares. A proxy or
vote against the merger or consolidation shall not constitute such a demand. A
stockholder electing to take such action must do so by a separate written demand
as herein provided. Within 10 days after the effective date of such merger or
consolidation, the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied with this
subsection and has not voted in favor of or consented to the merger or
consolidation of the date that the merger or consolidation has become effective;
or
(2) If the merger or consolidation was approved pursuant to ss. 228 or ss.
253 of this title, then, either a constituent corporation before the effective
date of the merger or consolidation, or the surviving or resulting corporation
within ten days thereafter, shall notify each of the holders of any class or
series of stock of such constituent corporation who are entitled to appraisal
rights of the approval of the merger or consolidation and that appraisal rights
are available for any or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a copy of this
section. Such notice may, and, if given on or after the effective date of the
merger or consolidation, shall, also notify such stockholders of the effective
date of the merger or consolidation. Any stockholder entitled to appraisal
rights may, within 20 days after the date of mailing of such notice, demand in
writing from the surviving or resulting corporation the appraisal of such
holder's shares. Such demand will be sufficient if it reasonably informs the
corporation of the identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holder's shares. If such notice did not
notify stockholders of the effective date of the merger or consolidation, either
(i) each such constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each of the holders of
any class or series of stock of such constituent corporation that are entitled
to appraisal rights of the effective date of the merger or consolidation or (ii)
the surviving or resulting corporation shall send such a second notice to all
such holders on or within 10 days after such effective date; provided, however,
that if such second notice is sent more than 20 days following the sending of
the first notice, such second notice need only be sent to
C-2
each stockholder who is entitled to appraisal rights and who has demanded
appraisal of such holder's shares in accordance with this subsection. An
affidavit of the secretary or assistant secretary or of the transfer agent of
the corporation that is required to give either notice that such notice has been
given shall, in the absence of fraud, be prima facie evidence of the facts
stated therein. For purposes of determining the stockholders entitled to receive
either notice, each constituent corporation may fix, in advance, a record date
that shall be not more than 10 days prior to the date the notice is given,
provided, that if the notice is given on or after the effective date of the
merger or consolidation, the record date shall be such effective date. If no
record date is fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next preceding the day on
which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any stockholder who has
complied with subsections (a) and (d) hereof and who is otherwise entitled to
appraisal rights, may file a petition in the Court of Chancery demanding a
determination of the value of the stock of all such stockholders.
Notwithstanding the foregoing, at any time within 60 days after the effective
date of the merger or consolidation, any stockholder shall have the right to
withdraw such stockholder's demand for appraisal and to accept the terms offered
upon the merger or consolidation. Within 120 days after the effective date of
the merger or consolidation, any stockholder who has complied with the
requirements of subsections (a) and (d) hereof, upon written request, shall be
entitled to receive from the corporation surviving the merger or resulting from
the consolidation a statement setting forth the aggregate number of shares not
voted in favor of the merger or consolidation and with respect to which demands
for appraisal have been received and the aggregate number of holders of such
shares. Such written statement shall be mailed to the stockholder within 10 days
after such stockholder's written request for such a statement is received by the
surviving or resulting corporation or within 10 days after expiration of the
period for delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation, which
shall within 20 days after such service file in the office of the Register in
Chancery in which the petition was filed a duly verified list containing the
names and addresses of all stockholders who have demanded payment for their
shares and with whom agreements as to the value of their shares have not been
reached by the surviving or resulting corporation. If the petition shall be
filed by the surviving or resulting corporation, the petition shall be
accompanied by such a duly verified list. The Register in Chancery, if so
ordered by the Court, shall give notice of the time and place fixed for the
hearing of such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the addresses
therein stated. Such notice shall also be given by 1 or more publications at
least 1 week before the day of the hearing, in a newspaper of general
circulation published in the City of Wilmington, Delaware or such publication as
the Court deems advisable. The forms of the notices by mail and by publication
shall be approved by the Court, and the costs thereof shall be borne by the
surviving or resulting corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become entitled to
appraisal rights. The Court may require the stockholders who have demanded an
appraisal for their shares and who hold stock represented by certificates to
submit their certificates of stock to the Register in Chancery for notation
thereon of the pendency of the appraisal proceedings; and if any stockholder
fails to comply with such direction, the Court may dismiss the proceedings as to
such stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of any element
of value arising from the accomplishment or expectation of the merger or
consolidation, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. In determining such fair value, the
Court shall take into account
C-3
all relevant factors. In determining the fair rate of interest, the Court may
consider all relevant factors, including the rate of interest which the
surviving or resulting corporation would have had to pay to borrow money during
the pendency of the proceeding. Upon application by the surviving or resulting
corporation or by any stockholder entitled to participate in the appraisal
proceeding, the Court may, in its discretion, permit discovery or other pretrial
proceedings and may proceed to trial upon the appraisal prior to the final
determination of the stockholder entitled to an appraisal. Any stockholder whose
name appears on the list filed by the surviving or resulting corporation
pursuant to subsection (f) of this section and who has submitted such
stockholder's certificates of stock to the Register in Chancery, if such is
required, may participate fully in all proceedings until it is finally
determined that such stockholder is not entitled to appraisal rights under this
section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting corporation to the
stockholders entitled thereto. Interest may be simple or compound, as the Court
may direct. Payment shall be so made to each such stockholder, in the case of
holders of uncertificated stock forthwith, and the case of holders of shares
represented by certificates upon the surrender to the corporation of the
certificates representing such stock. The Court's decree may be enforced as
other decrees in the Court of Chancery may be enforced, whether such surviving
or resulting corporation be a corporation of this State or of any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances. Upon
application of a stockholder, the Court may order all or a portion of the
expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorney's fees and the
fees and expenses of experts, to be charged pro rata against the value of all
the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection (d) of
this section shall be entitled to vote such stock for any purpose or to receive
payment of dividends or other distributions on the stock (except dividends or
other distributions payable to stockholders of record at a date which is prior
to the effective date of the merger or consolidation); provided, however, that
if no petition for an appraisal shall be filed within the time provided in
subsection (e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such stockholder's
demand for an appraisal and an acceptance of the merger or consolidation, either
within 60 days after the effective date of the merger or consolidation as
provided in subsection (e) of this section or thereafter with the written
approval of the corporation, then the right of such stockholder to an appraisal
shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court
of Chancery shall be dismissed as to any stockholder without the approval of the
Court, and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had they
assented to the merger or consolidation shall have the status of authorized and
unissued shares of the surviving or resulting corporation.
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ANNEX D
-------
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, 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 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]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Based on the actual trade price of the Common Shares of the Registrant on
February 1, 2004, the aggregate market value of the Common Shares of the
Registrant held by non-affiliates on that date was $26,532,168.
2,211,014 shares of the registrant's common shares were outstanding on February
1, 2004.
Documents Incorporated by Reference:
1
Portions of the definitive Proxy Statement for the 2004 Annual Meeting of
Shareholders for the fiscal year ended December 31, 2003, 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.
2
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, 2004, the Company had 88 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 corporate center and 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.
3
The Bank competes for deposits with other commercial banks, savings banks,
saving and loan 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
4
conditions, including holding companies and state member banks based on their
particular circumstances and risk profiles and those experiencing or
anticipating significant growth.
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.
LENDING ACTIVITIES
5
LOAN PORTFOLIO
The amount of loans outstanding and the percent of the total represented by each
type on the dates indicated were as follows:
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(Dollars in Thousands)
Real Estate Loans:
Construction $ 7,305 5.7% $ 7,542 5.4% $ 9,827 6.3% $ 7,734 4.6% $ 8,701 5.4%
Mortgage 95,710 74.3% 99,890 71.3% 107,006 68.4% 118,488 69.9% 109,086 67.3%
Commercial, Financial and
Agricultural Loans 15,056 11.7% 18,890 13.5% 22,026 14.1% 22,400 13.2% 21,966 13.6%
Installment and
Credit Card Loans 9,566 7.4% 12,418 8.9% 16,192 10.4% 19,298 11.4% 21,192 13.1%
Other Loans 19 0.0% 11 0.0% 67 0.0% 46 0.0% 35 0.0%
Municipal Loans 1,100 0.9% 1,340 1.0% 1,272 0.8% 1,564 0.9% 978 0.6%
-------- ----- -------- ------ -------- ----- -------- ----- -------- -----
Total 128,756 100.0% 140,091 100.0% 156,390 100.0% 169,530 100.0% 161,958 100.0%
===== ====== ===== ===== =====
Less:
Allowance for Credit Losses 3,825 2,050 1,815 1,331 1,832
-------- -------- -------- -------- --------
Total Net Loans $124,931 $138,041 $154,575 $168,199 $160,126
======== ======== ======== ======== ========
6
The following table shows the maturity and repricing schedule of loans
outstanding as of December 31, 2003. The amounts are also classified according
to their sensitivity to changes in interest rates:
(Dollars in Thousands)
After 1
Within But Within After
1 Year Five Years Five Years Total
FIXED RATE LOANS:
Real Estate - Construction $ 4,168 $ 2,675 $ 393 $ 7,236
Commercial 2,273 4,131 504 6,908
ADJUSTABLE RATE LOANS:
Real Estate - Construction 37 32 - 69
Commercial 7,382 766 - 8,148
TOTAL FIXED AND ADJUSTABLE RATE:
Real Estate - Construction $ 4,205 $ 2,707 $ 393 $ 7,305
Commercial 9,655 4,897 504 15,056
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 $35,112,000
as of December 31, 2003.
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
7
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 80.0% of the Bank's portfolio with a
balance of $103,015,000 at December 31, 2003. Real estate construction loans
represent 5.7% or $7,305,000 of the real estate loan portfolio at December 31,
2003.
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 11.7% or
$15,056,000 of the Bank's loan portfolio at December 31, 2003. Municipal loans
totaled $1,100,000 or 0.9% 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 $9,566,000
or 7.4% of total loans at December 31, 2003.
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
8
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,
-----------------------------------------------------------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Non-Accrual $ 3,510 $ 8,446 $ 3,455 $ 542 $ 712
Contractually Past Due 90 Days or More
as to Principal or Interest 680 798 2,810 2,587 2,413
-------- -------- -------- -------- --------
$ 4,190 $ 9,244 $ 6,265 $ 3,129 $ 3,125
======== ======== ======== ======== ========
Non-Performing Loans to Total Loans 3.25% 6.60% 3.96% 1.85% 1.93%
Under its written agreement with its banking regulators ("the
agreement") with its states that the Bank must develop an acceptable written
plan designed to improve the Bank's position on each loan or other asset in
excess of $200,000 that was past due 90 days or that was adversely classified in
the Report of Inspection and Examination. Asset improvement plans have been
prepared for all relationships meeting the above criteria. The plans were
prepared with the assistance of an external consulting firm. The Bank's loan
committee and the board of directors review the asset improvement plans at
inception and monthly thereafter. The Bank also retained an external consultant
to review the Bank's loan portfolio. The review was intended to accomplish the
following six objectives: 1) Evaluate the overall credit quality of the
portfolio, including the borrower's financial strengths, repayment ability and
collateral position; 2) evaluate underwriting standards and loan documentation
with a summary of all exceptions noted; 3) review compliance to the Board
approved loan policies, including lending authority; 4) evaluate the loan
grading system and the actual assignment of loan grades; 5) review the adequacy
of the Watch List procedures; and 6) evaluate the methodology of the ALLL
process for determining adequacy. This review has been completed and the
December 31, 2003 financial statements reflect the credit quality findings of
this review.
As of December 31, 2003, 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, 2003, the Bank's percentage of non-performing loans to
total loans was 3.25% as compared to 6.60% of total loans at December 31, 2002.
9
SUMMARY OF CREDIT LOSS EXPERIENCE
(Dollars in Thousands)
Year Ended December 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
Balance of Allowance at Beginning of Year $2,050 $1,815 $1,331 $1,832 $1,800
------ ------ ------ ------ ------
Loans Actually Charged Off -
Real Estate - Construction 141 - - - -
Real Estate - Mortgage 444 317 - - -
Commercial, Financial and Agricultural 1,707 811 281 96 106
Installment and Credit Card 284 307 548 890 258
------ ------ ------ ------ ------
2,576 1,435 829 986 364
------ ------ ------ ------ ------
Recoveries of Loans Previously Charged Off -
Real Estate - Construction - - - - -
Real Estate - Mortgage - - 11 - -
Commercial, Financial and Agricultural 75 599 458 10 -
Installment and Credit Card 96 96 54 55 36
------ ------ ------ ------ ------
171 695 523 65 36
------ ------ ------ ------ ------
Net Charge-Offs (Recoveries) 2,405 740 306 921 328
------ ------ ------ ------ ------
Addition to Allowance Charged to Expense 4,180 975 790 420 360
------ ------ ------ ------ ------
Balance of Allowance at Year-End $3,825 $2,050 $1,815 $1,331 $1,832
====== ====== ====== ====== ======
Ratio of Net Charge-Offs to Avg. Loans Outstanding 1.79% 0.51% 0.18% 0.55% 0.21%
Ratio of Allowance for Credit Losses to Total Loans 2.97% 1.46% 1.15% 0.79% 1.14%
Allowance and Provision for Loan Losses. As noted in the Agreement, the
Bank is required to maintain, through charges to current operating income, an
adequate reserve for loan losses, and it shall be determined in light of the
volume of criticized loans, the current level of past due and nonperforming
loans, past loan loss experience, evaluation of the probable losses in the
Bank's loan portfolio, including the potential for existence of unidentified
losses in loans adversely classified, the imprecision of loss estimates, the
requirements of the Interagency Policy Statements on the Allowance for Loan and
Lease Losses, dated December 21, 1993 and July 2, 2001, and examiners'
criticisms noted in the Report of Inspection and Examination. The Bank's board
of directors hired an outside consultant, to evaluate the allowance for loan
losses adequacy. This review has been completed and the December 31, 2003
financial statements, in particular, the allowance for loan losses, reflect the
credit quality findings of this review.
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.
10
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 2003, the allowance had a balance of $3,825,000, or 2.97%
of total loans, compared to $2,050,000, or 1.46% of total loans, at year end
2002. The provision for loan losses was $4,180,000 for the year ended December
31, 2003 compared to $975,000 for the year ended December 31, 2002. The increase
in the reserve is the result of the addition to the allowance charged to expense
which is the result of the continued high volume of delinquencies in a sluggish
economy. The weak economy will continue to affect delinquencies at least through
the first half of 2004. 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, 2003 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. The Bank's Delinquent and
Nonaccrual Loans showed substantial improvement for the year 2003. Total
Delinquent and Nonaccrual Loans as of December 31, 2002 stood at $15,916,000,
while as of December 31, 2003 they stood at $6,948,000. These represented a
56.35% improvement. 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 $2,575,000 in 2003, $1,435,000 in 2002 and
$829,000 in 2001. These totals represent a large loss in the commercial area in
2003 and 2002 and in the installment area in 2001.
11
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 two years.
(Dollars in Thousands)
December 31, 2003
-----------------------------------------------
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
Securities Available for Sale -
Agency Securities $ 4,046 $ 39 $ - $ 4,085
Mortgaged Backed Securities 39,837 237 228 39,846
State and Municipal Securities 10,424 700 3 11,121
--------- ---------- ---------- ---------
Total $ 54,307 $ 976 $ 231 $ 55,052
========= ========== ========== =========
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
========= ========== ========== =========
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. Government agencies.
The following table shows the maturities and weighted average yields of
the Bank's investment securities as of December 31, 2003. Mortgage-Backed
Securities totaling $39,837,000 with a yield of 3.60% are excluded from the
chart due to the uncertainty of 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 After
1 Year 5 Years
Within But Within But Within After
1 Year 5 Years 10 Years 10 Years
------ ------- -------- --------
Amt Yield Amt Yield Amt Yield Amt Yield
--- ----- --- ----- --- ----- --- -----
(Dollars in Thousands)
U. S. Government
Agencies $ 1,000 6.30% $ 1,000 3.65% $ 2,046 5.80% $ -
Obligations of
States and Political
Subdivisions 1,181 7.69% 2,441 6.86% 4,856 7.01% 1,947 7.00%
-------- -------- -------- -------
Total $ 2,181 $ 3,441 $ 6,902 $ 1,947
======== ======== ======== =======
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,
-------------------------------------------------------------------------------
2003 2002 2001
---- ---- ----
Average Average Average Average Average Average
Balance Rate Balance Rate Balance Rate
------- ---- ------- ---- ------- ----
Noninterest-Bearing $ 14,603 0.00% $ 14,690 0.00% $ 14,791 0.00%
Savings 32,687 0.47% 30,186 1.09% 27,697 1.93%
NOW, Super NOW and Plus 34,356 0.49% 33,188 1.01% 28,360 1.64%
Time 91,485 2.88% 100,797 3.93% 108,079 5.68%
---------- ---------- ----------
Total $ 173,131 $ 178,861 $ 178,927
========== ========== ==========
The maturity distribution of time deposits as of December 31, 2003 was:
Less than $100,000
$100,000 and Over
-------- --------
(Dollars In Thousands)
Three Months or Less $ 11,056 $ 4,363
Over Three Months Through Twelve Months 24,796 3,952
Over One Year Through Three Years 28,522 9,200
Over Three Years 3,523 813
---------- ----------
Total $ 67,897 $ 18,328
========== ==========
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.
(Dollars in Thousands)
2003 2002 2001
---- ---- ----
FEDERAL HOME LOAN BANK SHORT-TERM BORROWINGS
Average Balance Outstanding $ 0 $ 176 $ 6,748
Maximum Amount Outstanding
at any Month-End During the Period 0 600 6,925
Balance Outstanding at End of Period 0 0 925
Weighted Average Interest Rate
During the Period n/a 4.83% 4.43%
Weighted Average Interest Rate at
End of Period n/a n/a 5.06%
REPURCHASE AGREEMENTS
Average Balance Outstanding $ 7,097 $4,311 $ 3,505
Maximum Amount Outstanding
at any Month-End During the Period 9,647 6,318 4,481
Balance Outstanding at End of Period 7,540 5,946 3,052
Weighted Average Interest Rate
During the Period 1.16% 1.46% 3.22%
Weighted Average Interest Rate at
End of Period 1.22% 1.04% 1.51%
14
LONG-TERM DEBT
The following table sets forth certain information regarding the Bank's
long-term debt at or for the periods ended on the dates indicated.
(Dollars in Thousands)
2003 2002 2001
---- ---- ----
FEDERAL HOME LOAN BANK LONG-TERM DEBT
Average Balance Outstanding $ 5,962 $ 8,827 $ 12,219
Maximum Amount Outstanding
at any Month-End During the Period 7,633 9,710 16,676
Balance Outstanding at End of Period 4,648 7,719 9,791
Weighted Average Interest Rate
During the Period 5.77% 6.94% 7.05%
Weighted Average Interest Rate at
End of Period 5.48% 6.03% 5.94%
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, 2003 vs. 2002 2002 vs. 2001
------------ ------------- -------------
2003 2002 2001 Amount Percent Amount Percent
---- ---- ---- ------ ------- ------ -------
(Dollar amounts in thousands)
Interest Income $ 10,830 13,023 16,436 $(2,193) -16.84% $(3,413) -20.77%
Interest Expense 3,378 5,219 8,432 (1,841) -35.27% (3,213) -38.10%
--------- ------ ------ ------- -------
Net Interest Income $ 7,452 7,804 8,004 $ (352) -4.51% $ (200) -2.50%
========= ====== ====== ======= =======
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,
------------------------------ --------------------------- ----------------------------
2003 2002 2001
------------------------------ --------------------------- ----------------------------
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 $ 44,801 $ 1,635 3.65% $ 28,916 $ 1,619 5.60% $ 28,895 $ 1,729 5.98%
Tax Exempt 11,404 881 7.73% 13,153 996 7.57% 11,715 895 7.64%
Federal Funds Sold 8,944 94 1.05% 17,125 277 1.62% 12,112 357 2.95%
Interest on Deposits
with Banks 165 1 0.61% 86 1 1.16% 79 1 1.27%
Loans 134,731 8,548 6.34% 146,200 10,506 7.19% 166,941 13,794 8.26%
--------- ------- -------- ------- -------- --------
Total Interest-Earning
Assets 200,045 11,159 5.58% 205,480 13,399 6.52% 219,742 16,776 7.63%
--------- ------- -------- ------- -------- --------
Noninterest-Earning Assets:
Cash and Due from Banks 7,111 4,965 4,706
Premises and Equipment 4,569 4,835 4,036
Other Assets 1,634 4,329 1,988
Allowance for
Credit Losses (2,898) (1,938) (1,367)
--------- -------- --------
Total Noninterest-Earning
Assets 10,416 12,191 9,363
--------- -------- --------
Total Assets $ 210,461 $217,671 $229,105
========= ======== ========
16
Years Ended December 31,
------------------------------ --------------------------- ----------------------------
2003 2002 2001
------------------------------ --------------------------- ----------------------------
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 $ 32,687 $ 153 0.47% $ 30,186 $ 328 1.09% $ 27,697 $ 535 1.93%
NOW, Super NOW, Plus 34,356 167 0.49% 33,188 335 1.01% 28,360 465 1.64%
Time Deposits 91,485 2,632 2.88% 100,797 3,957 3.93% 108,496 6,159 5.68%
-------- -------- -------- ------- -------- -------
Total Interest-Bearing
Deposits 158,528 2,952 1.86% 164,171 4,620 2.81% 164,553 7,159 4.35%
Other Borrowed 13,059 426 3.26% 13,314 599 4.50% 22,472 1,273 5.66%
-------- -------- -------- ------- -------- -------
Total Interest-Bearing
Liabilities 171,587 3,378 1.97% 177,485 5,219 2.94% 187,025 8,432 4.51%
-------- -------- -------- ------- -------- -------
Noninterest-Bearing
Liabilities:
Demand Deposits 14,603 14,690 14,791
Other Liabilities 580 1,012 2,904
-------- -------- --------
Total Noninterest-
Bearing Liabilities 15,183 15,702 17,695
-------- -------- --------
Shareholders ' Equity 23,691 24,484 24,385
-------- -------- --------
Total Liabilities and
Shareholders' Equity $210,461 $217,671 $229,105
======== ======== ========
Net Interest Income
(Tax Equivalent Basis) $ 7,781 $ 8,180 $ 8,344
Reversal of Tax
Equivalent Adjustment (329) (376) (340)
-------- ------- -------
Net Interest Income $ 7,452 $ 7,804 $ 8,004
======== ======= =======
Net Interest Spread (Tax
Equivalent Basis) 3.61% 3.58% 3.12%
==== ==== ====
Net Interest Margin
(Net Interest Income as a %
of Interest-Earning Assets,
Tax Equivalent Basis) 3.89% 3.98% 3.80%
==== ==== ====
Net Interest Margin
(Net Interest Income as a %
of Interest-Earning Assets) 3.73% 3.80% 3.64%
==== ==== ====
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.
2003 vs 2002 2002 vs 2001
------------ ------------
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 $ 41 $ (26) $ 15 $ 1 $ (111) $ (110)
Tax Exempt (136) 21 (115) 109 (8) 101
Federal Funds
Sold (106) (78) (184) 911 (991) (80)
Interest on Deposits
with Banks 1 - 1 - - -
Interest and Fees
on Loans (785) (1,172) (1,957) (1,605) (1,683) (3,288)
------ ------- -------- ------- -------- --------
Total Interest Income (985) (1,255) (2,240) (584) (2,793) (3,377)
------ ------- -------- ------- -------- --------
Interest Expense:
Interest-Bearing Deposits:
Savings 30 (205) (175) 53 (260) (207)
NOW, Super NOW,
and Plus 12 (180) (168) 103 (233) (130)
Time (341) (984) (1,325) (412) (1,790) (2,202)
Other Borrowed (11) (162) (173) (448) (226) (674)
Federal Funds Purchased - - - - - -
------ ------- -------- ------- -------- --------
Total Interest Expense (310) (1,531) (1,841) (704) (2,509) (3,213)
------ ------- -------- ------- -------- --------
Change in Net
Interest Income $ (675) $ 276 $ (399) $ 120 $ (284) $ (164)
====== ======= ======== ======= ======== ========
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 Main
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, 2003, 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 the 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 2003 and 2002, 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.
2003 Low Bid High Bid Low Ask High Ask Dividend Per Share
First Qtr 16.000 16.250 16.500 17.000 .120
Second Qtr 15.375 16.250 15.500 17.000 .120
Third Qtr 14.250 14.250 14.750 16.250 .100
Fourth Qtr 14.250 14.250 15.250 15.250 .000
2003 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
As of February 23, 2004, the Company's common stock was held by 1,089
shareholders of record.
As of February 23, 2004, 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,
-----------------------------------------------------------------------
2003 2002 2001 2000 1999
---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
STATEMENT OF OPERATIONS
Interest Income $ 10,830 $ 13,023 $ 16,436 $ 17,007 $ 15,318
Interest Expense 3,378 5,219 8,432 8,587 6,921
---------- ---------- ---------- ---------- ----------
Net Interest Income 7,452 7,804 8,004 8,420 8,397
Provision for Loan Losses 4,180 975 790 420 360
---------- ---------- ---------- ---------- ----------
Net Interest Income after
Provision for Loan Losses 3,272 6,829 7,214 8,000 8,037
Other Income 1,686 1,172 1,106 600 639
Operating Expenses 6,139 5,823 5,662 5,251 5,140
---------- ---------- ---------- ---------- ----------
Income/(Loss) before Income Taxes (1,181) 2,178 2,658 3,349 3,536
Applicable Income Taxes (595) 553 725 1,000 1,017
---------- ---------- ---------- ---------- ----------
Net Income/(Loss) $ (586) $ 1,625 $ 1,933 $ 2,349 $ 2,519
========== ========== ========== ========== ==========
STATEMENT OF CONDITION (YEAR END DATA)
Total Assets $ 207,733 $ 218,030 $ 218,977 $ 223,062 $ 218,548
Investment Securities 55,052 54,396 37,584 40,260 44,796
Loans Receivable 128,756 140,819 158,174 169,530 161,958
Allowance for Loan Losses 3,825 2,050 1,815 1,331 1,832
Deposits 172,232 178,890 179,657 178,082 169,720
Shareholders' Equity 22,558 24,350 23,940 23,764 22,473
SELECTED FINANCIAL RATIOS
Return on Average Assets -0.28% 0.75% 0.84% 1.06% 1.23%
Return on Average Equity -2.47% 6.64% 7.93% 10.15% 11.04%
Tier One Risk-Based Capital 17.24% 16.88% 15.74% 15.47% 15.43%
Total Risk-Based Capital 18.52% 18.13% 16.96% 16.34% 16.66%
Tier One Leverage Ratio 10.49% 10.77% 10.16% 10.61% 10.73%
Dividend Payout Ratio -128.33% 68.47% 58.92% 47.52% 42.45%
PER SHARE DATA (1)
Net Income/(Loss) $ (0.26) $ 0.73 $ 0.85 $ 1.01 $ 1.06
Book Value 10.20 11.01 10.63 10.28 9.57
Cash Dividends Declared 0.34 0.50 0.50 0.48 0.45
21
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
EXECUTIVE SUMMARY
The following are financial highlights for the year 2003 which are
discussed in more detail in the following sections of this MD&A:
- Total delinquencies have decreased by 56.35% from $15,916,000 at
December 31, 2002 to $6,948,000 at December 31, 2003. Total
delinquency reduction can be credited to the reduction in
nonaccrual loans and loans being brought current through workout
plans.
- Total provision expense increased $3,205,000 or 328.72% in 2003
compared to 2002. This increase is the result of net charge-offs
in the amount of $2,405,000 and the continued high volume of
delinquencies, although the volume of total delinquencies has
decreased by $8,968,000 since yearend 2002. The significant
increase in the provision for loan losses is also due to the low
coverage ratio of the ALLL to nonaccrual loans in prior years,
and the increased reserves required on specified credits.
- Total shareholders equity decreased $1,792,000 from December 31,
2002 to December 31, 2003. This decrease is the result of the net
operating loss of $586,000 or $(0.26) per common share for the
Year Ended December 31, 2003 and total 2003 cash dividends in the
amount of $752,000 or $0.34 per common share.
REGULATORY MATTERS
Following a regulatory examination in September, 2003, the Company and
the Bank entered into The Agreement with the Federal Reserve Bank of Cleveland
and the Ohio Division of Financial Institutions on December 19, 2003. Under the
Agreement, the Bank must adopt and implement certain plans, policies and
strategies, including loan policies and procedures that monitor risk
concentrations and problem credits, a loan review program to assess the Bank's
loan portfolio and monitor and address loan deficiencies, an asset improvement
plan focusing on loans or other assets in excess of $200,000 or that are past
due 90 days or more or adversely qualified, a written plan to monitor and manage
the Bank's market risk exposure and a written compliance program. In addition,
the Company and the Bank are required to have a capital plan and the directors
must submit a written plan to strengthen board oversight. In addition, the Bank
is required to maintain adequate valuation reserves for its loans and leases. As
described more fully in Note 13 to the 2003 Consolidated Financial Statements
included in this Report, the Agreement also prohibits the payment of any
dividends without prior regulatory approval.
In response to the Agreement, the Bank has put an asset improvement
plan in place and has prepared and implemented a revised compliance plan. In
addition, outside consultants have completed a review of the Bank's loan
portfolio, verified the validity of the Bank's market risk models and reviewed
and validated the Bank's valuation reserve methodology. The Bank has also
retained a consulting firm to search for a new Head of Credit Administration and
to assist with the restructuring of the existing loan department. Management is
currently in the process of preparing a capital plan and revisions to certain
loan policies for submission to the Bank's regulators.
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
22
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 of operations, 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.
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.
23
OFF-BALANCE SHEET ARRANGEMENTS
At December 31, 2003, 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 two investment securities on a
when-issued basis on October 6, 2003 in the amount of $1,000,000 and on November
20, 2003 in the amount of $500,000. Both trades settled on January 26, 2004.
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)
PAYMENTS DUE BY PERIOD
----------------------------------------------------------------
LESS MORE
THAN 1 THAN 5
CONTRACTUAL OBLIGATIONS TOTAL YEAR 1-3 YEARS 3-5 YEARS YEARS
- ----------------------------------------------------------------------------------------------------
Long-Term Debt Obligations 4,649 1,506 1,164 1,214 765
- ---------------------------------------------------------------------------------------------------
TOTAL 4,649 1,506 1,164 1,214 765
- ---------------------------------------------------------------------------------------------------
Excluded from the table above is $1,500,000 in investment securities
that were purchased on a when-issued basis. Due to the uncertainty of prepayment
speeds of these types of investment securities, they are intentionally excluded
from the chart totals.
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.
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, 2003 such securities amounted to $55.1 million, at
December 31, 2002 such securities amounted to $54.4 million, and at December 31,
2001 such securities amounted to $37.6 million. At December 31, 2003, 2002 and
2001, Federal Funds Sold amounted to $9.7 million, $4.6 million, and $9.7
million, respectively.
24
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 December 31, 2003 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 2004 from additional sources such as investment security maturities
and mortgage-backed securities repayments and deposit accounts.
CAPITAL RESOURCES
As of December 31, 2003, 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, 2003 that the Bank meets all the capital
adequacy requirements to which it is subject.
As of December 31, 2003, 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, 18.52%, 15.68%, and 9.54%, respectively at December 31, 2003.
As part of the The Agreement, the Bank and the Company were to submit
to the Reserve bank and the Division an acceptable joint written plan to achieve
and maintain sufficient capital at the holding company and subsidiary. To comply
with the Agreement, management of the Bank and the Company has revised the
capital plan and it is currently under review by an external consultant and will
thereafter be submitted to the regulators.
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.
25
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, 2003, 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, 2003 AND DECEMBER 31, 2002.
As an overview of the financial condition and results of operation for
the Year Ended December 31, 2003, improvements have been made. Nonaccrual loans,
as can be seen in Table 1, have decreased by 58.44% since December 31, 2002 and
total delinquencies have decreased by 56.35% from December 31, 2002 to December
31, 2003. The reduction in nonaccrual loans can be attributed to $1,760,000 in
charge-offs, $2,214,000 in principal reduction, and $953,000 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
(Dollars in Thousands)
12/31/2003 12/31/2002 12/31/2001 12/31/2000 12/31/1999
Past due 30 to 89 days and still accruing $ 2,758 $ 6,672 $ 9,863 $ 4,502 $ 2,004
Past due 90 days or more and still accruing 680 798 2,810 2,587 2,413
Nonaccrual 3,510 8,446 3,455 542 712
----------------------------------------------------------------------
Total delinquencies $ 6,948 $ 15,916 $ 16,128 $ 7,631 $ 5,129
======================================================================
Total Delinquencies as a percentage of total loans 5.40% 11.36% 10.31% 4.50% 3.17%
Total assets decreased $10,298,000 or 4.72% from $218,030,000 at
December 31, 2002 to $207,733,000 at December 31, 2003. This is the result of a
$13,110,000 decrease in net loans, a $6,658,000 decrease in total deposits and a
$3,071,000 decrease in long-term debt, and a $1,792,000 decrease in total
shareholders' equity. The decrease in net loans is due to the amount of 1-4
family residential mortgages sold to the secondary mortgage market and the
intentional runoff of higher risk commercial and consumer loans. Due to this
decrease in loans and the decreased need for liquidity, deposits were priced to
allow runoff as well.
Investment securities increased $656,000 from $54,396,000 at December
31, 2002 to $55,052,000 at December 31, 2003. This increase is the result of
$34,261,000 in purchases less the pay downs from Mortgage-backed securities, a
U.S. Agency Bond being called totaling $31,279,000, proceeds from the sale of
securities totaling $1,218,000 (gross of gain on sale), net premium amortization
of $427,000, and a decrease in the market value of the available-for-sale
portfolio of $690,000. 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 3.64 years and a volatility of -6.00% (in a +300 basis
point rate shock), the portfolio will cash flow quickly. The current strategy in
the investment portfolio is to keep the duration of the portfolio as short as
possible without sacrificing a significant
26
amount of yield. This strategy will be employed until interest rates rebound and
the asset quality of the loan portfolio begins to improve.
Total gross loans decreased 8.09% or $11,335,000 from $140,091,000 at
December 31, 2002 to $128,756,000 at December 31, 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
$1,217,000 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 of less risk in nature. The commercial
loan decrease of $3,981,000 or 24.00% is primarily due to the higher risk that
these loans carry in a sluggish economy. As these loans were refinanced, they
were priced 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 of greater risk in nature.
TABLE 2: Analysis of Loan Portfolio Composition
(Dollars in Thousands)
LOAN TYPE 12/31/2003 12/31/2002 CHANGE %
Construction/Land Development $ 7,305 $ 7,542 $ (237) -3.14%
R/E Secured by Farmland 4,598 4,627 (29) -0.63%
Revol Open-end 1-4 Family LOC 5,294 5,476 (182) -3.32%
1-4 Secured by first 35,112 39,939 (4,827) -12.09%
1-4 Secured by Junior 550 869 (319) -36.71%
R/E Secured by Multi Family R/E 3,179 3,219 (40) -1.24%
R/E Secured by Nonfarm, Nonres 46,977 45,760 1,217 2.66%
Ag Loans 2,449 2,302 147 6.39%
Commercial Loans 12,607 16,588 (3,981) -24.00%
Municipal Loans 1,100 1,340 (240) -17.91%
Master Card Loans 566 622 (56) -9.00%
Other Consumer 7 1 6 600.00%
Consumer Loans 8,993 11,795 (2,802) -23.76%
Overdrafts 19 11 8 72.73%
----------------------------------------------------
Total Loans 128,756 140,091 (11,335) -8.09%
Loan Loss Reserve 3,825 2,050 1,775 86.59%
----------------------------------------------------
Total Net Loans $ 124,931 $ 138,041 $ (13,110) -9.50%
====================================================
Serviced FHLMC Mortgages 63,460 45,589 17,871 39.20%
----------------------------------------------------
Total Loans Serviced $ 188,391 $ 183,630 $ 4,761 2.59%
----------------------------------------------------
The Allowance for Loan Losses, at December 31 2003 was 2.97% of total
loans compared to 1.46% at December 31, 2002. This $1,775,000 increase from
December 31, 2002 is the result of a $4,180,000 provision and net charge offs of
$2,405,000, increasing the Allowance for Loan Loss from $2,050,000 at December
31, 2002 to $3,825,000 at December 31, 2003. In light of a low coverage ratio of
Allowance for Loan and Lease Losses (ALLL) to nonaccrual loans, management
increased the provision by $3,205,000 improving the ratio to 108.97% at December
31, 2003 from 24.27% at December 31, 2002. The addition was also due to the
continued high volume of $4,190,000 in nonperforming loans that management
continues to pursue legally. Although the nonperforming loan balances remain at
high levels, these balances have been reduced by $5,054,000 or 54.67% from
$9,244,000 at December 31, 2002 to $4,190,000 at December 31, 2003. Management
attributes this significant decrease to not only charge-offs of $2,575,000, but
an improvement in the local economy
27
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
(Dollars in Thousands)
Year Ended December 31,
2003 2002 2001 2000 1999
------ ------ ------ ------ ------
Balance of Allowance at Beginning of Year $2,050 $1,815 $1,331 $1,832 $1,800
------ ------ ------ ------ ------
Loans Actually Charged Off -
Real Estate - Construction 141 - - - -
Real Estate - Mortgage 444 317 - - -
Commercial, Financial and Agricultural 1,707 811 281 96 106
Installment and Credit Card 284 307 548 890 258
------ ------ ------ ------ ------
2,576 1,435 829 986 364
------ ------ ------ ------ ------
Recoveries of Loans Previously Charged Off -
Real Estate - Construction - - - - -
Real Estate - Mortgage - - 11 - -
Commercial, Financial and Agricultural 75 599 458 10 -
Installment and Credit Card 96 96 54 55 36
------ ------ ------ ------ ------
171 695 523 65 36
------ ------ ------ ------ ------
Net Charge-Offs (Recoveries) 2,405 740 306 921 328
------ ------ ------ ------ ------
Addition to Allowance Charged to Expense 4,180 975 790 420 360
------ ------ ------ ------ ------
Balance of Allowance at Year-End $3,825 $2,050 $1,815 $1,331 $1,832
====== ====== ====== ====== ======
Ratio of Net Charge-Offs to Avg. Loans Outstanding 1.79% 0.51% 0.18% 0.55% 0.21%
Ratio of Allowance for Credit Losses to Total Loans 2.97% 1.46% 1.15% 0.79% 1.14%
Total deposits decreased $6,658,000 or 3.72% from December 31, 2002 to
December 31, 2003. Table 4 below shows a breakdown of deposits by type at both
December 31, 2002 and December 31, 2003. The reduction in total deposits is the
result of an extremely competitive local market for Time Deposits, 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, and the decreased need for liquidity.
TABLE 4: Deposit Balances by Type
(Dollars in Thousands)
DEPOSIT TYPE 12/31/2003 12/31/2002 DIFFERENCE %
Non-interest Bearing DDA $ 15,758 $ 16,089 $ (331) -2.06%
NOW Accounts 25,016 25,927 (911) -3.51%
MMKT Savings 12,139 9,546 2,593 27.16%
Savings 33,094 30,546 2,548 8.34%
Time Deposits 86,225 96,782 (10,557) -10.91%
-----------------------------------------------------
Total Deposits $ 172,232 $ 178,890 $ (6,658) -3.72%
=====================================================
28
Short-term borrowings, which include Federal Home Loan Bank borrowings
with original maturities of less than one year and retail repurchase agreements,
increased $1,594,000 from December 31, 2002 to December 31, 2003. Of the
$1,594,000 increase, Federal Home Loan Bank borrowings were unchanged while
repurchase agreements increased $1,594,000. This increase can be attributed to
local businesses 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 $3,071,000 or 39.78% from
December 31, 2002 to December 31, 2003. This decrease is due to the maturity of
two advances totaling $1,993,000 with a weighted average rate of 7.44% and the
prepayment and principal amortization of other advances. Due to the excessive
amount of liquidity, management chose not to borrow additional funds from FHLB
at that time.
Total shareholders equity decreased $1,792,000 from December 31, 2002
to December 31, 2003. Included in the overall decrease was a decrease in
retained earnings of $1,338,000, which was the result of a net loss of $586,000
for the Year Ended December 31, 2003, the payment of $752,000 in dividends, and
a decrease of $454,000 in Accumulated Other Comprehensive Income, which is the
unrealized gain on the available-for-sale securities portfolio net of tax. No
Treasury Stock was repurchased in 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 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 $352,000 for
the Year Ended December 31, 2003 from a year ago.
There was a net loss for the Year Ended December 31, 2003 in the amount
of $586,000 or $(0.26) per share. This represents a decrease of 136.06% in net
income per share compared to the Year Ended December 31, 2002. Return on average
assets was -0.28% for the Year Ended December 31, 2003, down from 0.75% for the
Year Ended December 31, 2002. Return on average equity decreased to -2.47% in
2003 from 6.64% in 2002.
The most significant income statement changes between the Year Ended
December 31, 2003 and the Year Ended December 31, 2002 were as follows:
- The Provision for loan losses increased $3,205,000 or 328.72% from
$975,000 for the Year Ended December 31, 2002 to $4,180,000 for the
Year Ended December 31, 2003. This increase is the result of net
charge-offs in the amount of $2,405,000 and the continued high
volume of delinquencies, although the volume of total delinquencies
has decreased by $8,968,000 since year end 2002. The significant
increase in the provision for loan losses is also due to the low
coverage ratio of the ALLL to nonaccrual loans in prior years, and
the increased reserves required on specified credits.
- Net interest income decreased $352,000 or 4.51%. This decline was
largely due to a decrease in the yield on earning assets, which was
not fully offset by the decrease in the Company's cost of funds.
Included in the decrease is a reduction in interest and fees on
loans which is the direct result of a decrease in average loan
balances of $11,469,000 over the past year as well as a drop 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 to encourage a controlled amount of runoff.
Although interest on taxable investment securities has increased by
$16,000, the yield on investment securities has decreased to 3.65%
for the Year Ended December 31,
29
2003 from 5.60% for the Year Ended December 31, 2002. The most
significant decrease in yield on taxable securities is attributable
to the low interest rate environment and the increase in premium
amortization, which is a direct result of the increase in prepayment
speeds on mortgage-backed securities.
- Total non-interest income increased $514,000 for the Year Ended
December 31, 2003 versus the same period in 2002. Of the $514,000
increase, gain on sale of loans increased $248,000. 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 year end noted in Table 2 above. Mortgage service rights, net
of impairments also increased $232,000 from 2002 to 2003 as a direct
result of the high volume of mortgage sales to the Federal Home Loan
Mortgage Corporation. Service charges on deposit accounts increased
$51,000 in 2003 as a result of an increase in fees.
- Total non-interest expense increased $315,000 or 5.41% from
$5,824,000 for the Year Ended December 31, 2002 to $6,139,000 for
the Year Ended December 31, 2003. This increase is due to a $101,000
increase in salaries and employee benefits, of which, health
insurance costs increased by $142,000 or 29.89%. The increase is
also due to a $59,000 increase in legal and professional fees, which
is due in part to the additional consultations as required by the
Agreement among the Federal Reserve, the Bank and Company. Other
expense increased by $91,000 or 13.60%. This increase is due to the
loss on sale of other real estate owned in the amount of $34,000, an
increase of $20,000 in repossession expense, an increase of $23,000
in FDIC assessments, and an increase of $14,000 in postage and
freight.
- Income tax expense decreased $1,147,000 for the year ended December
31, 2003. This is a direct result of the decrease in net income
before tax.
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 included 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 included 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
30
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, 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
31
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 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 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 was 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 was 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.
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. 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.
32
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 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.
EFFECT OF ACCOUNTING CHANGES
In January 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities". 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". 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".
Adoption of this standard did not have a material effect on the Company's
consolidated financial statements.
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. There are several
the institution can manage interest rate risk including: 1) matching repricing
periods for new assets and liabilities, for example, by shortening terms of new
loans or investments; 2) selling existing assets or repaying certain
liabilities; and 3) hedging existing assets, liabilities, or anticipated
transactions. An institution might also invest in more complex financial
instruments intended to hedge or otherwise change interest rate risk. Interest
rate swaps, futures contacts, options on futures contracts, and other such
derivative financial instruments can be used for this purpose. Because these
instruments are sensitive to interest rate changes, they require management's
expertise to be effective. The Company has not purchased derivative financial
instruments in the past and does not presently intend to purchase such
instruments.
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, 2003 of the Bank's interest-earning assets and interest-bearing
liabilities, its interest rate sensitivity gap, cumulative
33
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 2004. 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 and investment
security prepayment speeds which have an impact on gap.
As part of the Agreement, the Bank was to devise an acceptable written
program to effectively identify, measure, monitor, and manage the Bank's market
risk exposure (satisfying the requirements of the Joint Policy Statement on
Interest Rate Risk, dated May 23, 1996). In response, the Bank contracted with
an external consultant to validate the Bank's interest rate risk program. In
December 2003, the consultant validated the Bank's interest rate risk models and
all necessary adjustments were made.
Management's Asset/Liability Management Committee monitors the Bank's
interest rate sensitivity position. Asset and liability management seeks to
control the volatility of the Company's performance due to changes in interest
rates. The Company attempts to achieve an appropriate relationship between rate
sensitive assets and rate sensitive liabilities.
34
(Dollars in Thousands)
3 months 3 - 12 1 - 3 3 - 5 over 5
or less months years years years Total
-------- -------- -------- -------- -------- --------
Interest-Earning Assets:
Loans $ 28,490 $ 15,093 $ 36,897 $ 22,383 $ 25,893 $128,756
Investment Securities 2,650 9,049 11,764 16,187 15,402 55,052
Federal Funds Sold 9,708 - - - - 9,708
Interest-Bearing Balances -
in Other Depository Institutions 174 - - - - 174
-------- -------- -------- -------- -------- --------
Total $ 41,022 $ 24,142 $ 48,661 $ 38,570 $ 41,295 $193,690
======== ======== ======== ======== ======== ========
Interest-Bearing Liabilities:
Savings Deposits $ 3,619 $ 11,308 $ 15,153 $ 15,153 $ - $ 45,233
Checking Deposits 4,253 12,508 4,128 4,128 - 25,016
Time Deposits 16,906 27,871 37,112 4,336 - 86,225
Short Term Borrowings 1,282 3,770 1,244 1,244 - 7,540
Long Term Debt - 461 1,935 1,000 1,253 4,649
-------- -------- -------- -------- -------- --------
Total $ 26,059 $ 55,918 $ 59,572 $ 25,861 $ 1,253 $168,663
======== ======== ======== ======== ======== ========
Interest Rate
Sensitivity Gap $ 14,963 $(31,776) $(10,911) $ 12,709 $ 40,042 $ 25,027
Cumulative Interest Rate
Sensitivity Gap 14,963 (16,813) (27,724) (15,015) 25,027
Cumulative Interest Rate
Sensitivity Gap as a
Percentage of Total
Interest-Earning Assets 7.73% -8.68% -14.31% -7.75% 12.92%
35
ITEM 8 - CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
36
COMBANC, INC.
Accountants' Report and Consolidated Financial Statements
December 31, 2003 and 2002
37
COMBANC, INC.
DECEMBER 31, 2003 AND 2002
CONTENTS
INDEPENDENT ACCOUNTANTS' REPORT........................................... 39
CONSOLIDATED FINANCIAL STATEMENTS
Balance Sheets........................................................ 40
Statements of Operations.............................................. 41
Statements of Shareholders' Equity.................................... 42
Statements of Cash Flows.............................................. 43
Notes to Financial Statements......................................... 44
38
[BKD LLP LOGO]
312 Walnut Street, Suite 3000
Cincinnati, Oh 45202
513 621-8300 Fax 513 621-8345
BKD.COM
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, 2003 and 2002, and the related consolidated statements of
operations, shareholders' equity and cash flows for each of the three years in
the period ended December 31, 2003. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these 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 referred to above present
fairly, in all material respects, the consolidated financial position of
ComBanc, Inc. as of December 31, 2003 and 2002, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2003 in conformity with accounting principles generally accepted in
the United States of America.
BKD.LLP
SOLUTIONS
FOR
SUCCESS
Cincinnati, Ohio
January 30, 2004
[A MEMBER OF MOORES ROWLAND LOGO]
39
COMBANC, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 2003 AND 2002
2003 2002
-------------------------------------
ASSETS
Cash and due from banks $ 8,123,029 $ 12,095,880
Federal funds sold 9,708,000 4,624,000
Interest-bearing demand deposits 173,501 205,261
------------- -------------
Cash and cash equivalents 18,004,530 16,925,141
Investment securities, available for sale 55,052,117 54,396,182
Loans held for sale -- 728,483
Loans, net of allowance for loan losses of $3,824,749 and
$2,049,855 124,931,288 138,040,877
Premises and equipment 4,432,070 4,688,849
Federal Reserve and Federal Home Loan Bank stock 2,011,800 1,790,800
Interest receivable 759,996 949,640
Other assets 2,540,950 510,505
------------- -------------
Total assets $ 207,732,751 $ 218,030,477
============= =============
LIABILITIES
Deposits
Noninterest bearing $ 15,758,386 $ 16,089,113
Interest bearing 156,473,983 162,801,348
------------- -------------
Total deposits 172,232,369 178,890,461
Short-term borrowings 7,539,653 5,946,334
Long-term debt 4,648,873 7,719,384
Interest payable 392,174 571,707
Other liabilities 361,424 552,119
------------- -------------
Total liabilities 185,174,493 193,680,005
------------- -------------
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY
Common stock, no par value
Authorized -- 5,000,000 shares
Issued - 2,376,000 shares
Outstanding -- 2,211,014 shares 1,237,500 1,237,500
Paid-in capital 1,512,500 1,512,500
Retained earnings 22,033,905 23,371,495
Accumulated other comprehensive income 491,193 945,817
Treasury stock, at cost - 164,986 shares (2,716,840) (2,716,840)
------------- -------------
Total shareholders' equity 22,558,258 24,350,472
------------- -------------
Total liabilities and shareholders' equity $ 207,732,751 $ 218,030,477
============= =============
See Notes to Consolidated Financial Statements
40
COMBANC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
---------------------------------------------------------
INTEREST INCOME
Loans receivable $ 8,518,698 $ 10,469,007 $ 13,759,074
Investment securities
Taxable 1,635,328 1,619,031 1,728,750
Tax exempt 581,183 656,975 591,066
Federal funds sold 94,101 276,839 356,546
Deposits with financial institutions 1,041 815 1,063
------------ ------------ ------------
Total interest income 10,830,351 13,022,667 16,436,499
------------ ------------ ------------
INTEREST EXPENSE
Deposits 2,952,357 4,619,285 7,159,348
Short-term borrowings 82,393 63,006 412,174
Long-term debt 343,563 536,078 861,200
------------ ------------ ------------
Total interest expense 3,378,313 5,218,369 8,432,722
------------ ------------ ------------
NET INTEREST INCOME 7,452,038 7,804,298 8,003,777
Provision for loan losses 4,180,000 975,000 790,200
------------ ------------ ------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN
LOSSES 3,272,038 6,829,298 7,213,577
------------ ------------ ------------
OTHER INCOME
Service charges on deposit accounts 535,367 483,774 484,356
Net realized gains on sales of available-for-
sale securities 7,726 8,416 --
Gain on sale of loans 490,438 242,091 368,049
Other income 652,720 437,876 254,151
------------ ------------ ------------
Total other income 1,686,251 1,172,157 1,106,556
------------ ------------ ------------
OTHER EXPENSES
Salaries and employee benefits 3,149,950 3,049,302 2,879,048
Net occupancy expenses 383,903 384,888 306,709
Equipment expenses 346,837 313,845 235,700
Data processing fees 374,912 369,340 317,226
Advertising 168,766 137,426 168,942
Printing and office supplies 153,711 177,978 174,837
Legal and professional fees 304,267 244,770 393,692
Dues and memberships 263,134 245,064 245,033
State taxes 233,638 231,881 245,622
Other expenses 759,543 669,022 694,979
------------ ------------ ------------
Total other expenses 6,138,661 5,823,516 5,661,788
------------ ------------ ------------
INCOME BEFORE INCOME TAX (1,180,372) 2,177,939 2,658,345
Income tax expense (benefit) (594,527) 552,611 725,155
------------ ------------ ------------
NET INCOME (LOSS) $ (585,845) $ 1,625,328 $ 1,933,190
============ ============ ============
EARNINGS (LOSS) PER SHARE $ (.26) $ .73 $ .85
WEIGHTED-AVERAGE SHARES OUTSTANDING $ 2,211,014 $ 2,226,505 $ 2,280,383
See Notes to Consolidated Financial Statements
41
COMBANC, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
ACCUMULATED
OTHER
COMMON PAID-IN COMPREHENSIVE RETAINED COMPREHENSIVE TREASURY
STOCK CAPITAL INCOME EARNINGS INCOME STOCK TOTAL
------------------------------------------------------------------------------------------------
BALANCES, JANUARY 1, 2001 $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 (1,138,995) (1,138,995)
share)
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
Comprehensive loss
Net loss $ (585,845) (585,845) (585,845)
Other comprehensive
income, net of tax
Unrealized
losses on (454,624) (454,624) (454,624)
-----------
securities
Comprehensive loss $(1,040,469)
===========
Cash dividends ($.34 per share) (751,745) (751,745)
---------- ---------- ----------- ------------ ----------- ------------
BALANCES, DECEMBER 31, 2003 $1,237,500 $1,512,500 $22,033,905 $ 491,193 $(2,716,840) $ 22,558,258
========== ========== =========== ============ =========== ============
See Notes to Consolidated Financial Statements
42
COMBANC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2003, 2002 AND 2001
2003 2002 2001
----------------------------------------------------------
OPERATING ACTIVITIES
Net income (loss) $ (585,845) $ 1,625,328 $ 1,933,190
Items not requiring (providing) cash
Provision for loan losses 4,180,000 975,000 790,200
Depreciation and amortization 392,856 408,487 270,804
Deferred income tax (535,265) 38,000 (24,000)
Investment securities amortization (accretion), net 426,946 95,003 23,472
Investment securities gains (7,726) (8,416) --
Loss on sale of equipment -- 23,698 --
FHLB stock dividends (69,200) (97,100) (84,300)
Proceeds from sale of loans held for sale 42,352,520 33,123,405 22,260,795
Originations of loans held for sale (41,133,599) (31,826,122) (23,676,421)
Gain from sale of loans (490,438) (242,091) (368,049)
Interest receivable 189,644 401,253 482,178
Interest payable (179,533) (411,969) (116,693)
Other assets (1,495,183) 197,890 (297,073)
Other liabilities 43,505 (388,090) 157,102
------------ ------------ ------------
Net cash provided by operating activities 3,088,682 3,914,276 1,351,205
------------ ------------ ------------
INVESTING ACTIVITIES
Purchases of securities available for sale (34,260,581) (32,775,427) (17,160,699)
Proceeds from maturities of securities available for
sale 31,278,852 16,061,194 20,242,332
Proceeds from sales of securities available for sale 1,217,751 618,535 --
Net change in loans 8,929,589 15,559,035 12,833,442
Proceeds from sale of equipment -- 35,058 --
Purchases of premises and equipment (136,076) (262,624) (2,493,010)
Purchases of Federal Reserve stock (151,800) -- --
------------ ------------ ------------
Net cash provided by (used in) investing
activities 6,877,735 (764,229) 13,422,065
------------ ------------ ------------
FINANCING ACTIVITIES
Net change in
Noninterest-bearing, interest-bearing demand and
savings deposits 3,898,909 7,683,519 2,499,501
Certificates and other time deposits (10,557,001) (8,449,726) (925,143)
Short-term borrowings 1,593,320 1,969,390 (5,281,663)
Proceeds of long-term debt -- 2,894,390 3,500,000
Repayment of long-term debt (3,070,511) (4,966,262) (4,093,419)
Cash dividends (751,745) (1,112,679) (1,138,995)
Purchase of stock -- (631,960) (901,941)
------------ ------------ ------------
Net cash used in financing activities (8,887,028) (2,613,328) (6,341,660)
------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS 1,079,389 536,719 8,431,610
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 16,925,141 16,388,422 7,956,812
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, END OF YEAR $ 18,004,530 $ 16,925,141 $ 16,388,422
============ ============ ============
ADDITIONAL CASH FLOWS INFORMATION
Interest paid $ 3,557,846 $ 5,630,338 $ 8,549,415
Income tax paid $ -- $ 445,000 $ 946,000
See Notes to Consolidated Financial Statements
43
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 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.
44
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 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 that management has the intent and ability to hold for the
foreseeable future or until maturity or payoffs are reported at their
outstanding principal balances adjusted for any charge-offs, the
allowance for loan losses, any deferred fees or costs on originated
loans. Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term.
Generally, loans are placed on non-accrual status at ninety days past
due and interest is considered a loss, unless the loan is well-secured
and in the process of collection.
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.
45
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002, AND 2001
(Table Dollar Amounts in Thousands)
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.
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.
46
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
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 operations 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. The Company has no common
stock equivalents.
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, 2003 was $1,043,000.
47
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
NOTE 3: INVESTMENT SECURITIES
2003
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
-----------------------------------------------
Available for sale
Federal agencies $ 4,046 $ 39 $ -- $ 4,085
State and municipal 10,424 700 (3) 11,121
Mortgage-backed
securities 39,837 237 (228) 39,846
------- ------- ------- -------
Total investment
securities $54,307 $ 976 $ (231) $55,052
======= ======= ======= =======
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
======== ======== ======== ========
48
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
The amortized cost and fair value of securities available for sale at
December 31, 2003, 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.
AMORTIZED
COST FAIR VALUE
-------------------------------
Within one year $ 2,181 $ 2,200
One to five years 3,441 3,619
Five to ten years 6,902 7,296
After ten years 1,946 2,091
----------- -----------
14,470 15,206
Mortgage-backed securities 39,837 39,846
----------- -----------
Totals $ 54,307 $ 55,052
=========== ===========
Securities with a carrying value of $27,522,000 and $23,925,000, and
fair value of $28,052,000 and $24,770,000, were pledged at December 31,
2003 and 2002 to secure certain deposits and for other purposes as
permitted or required by law.
Gross gains of $22,000 and $8,000 and gross losses of $14,000 and $0
resulting from sales of available-for-sale securities were realized for
2003 and 2002, respectively.
Certain investments in debt securities are reported in the financial
statements at an amount less than their historical cost. Total fair
value of these investments at December 31, 2003, was $25,743,000, which
is approximately 47% of the Company's available-for-sale investment
portfolio. These declines primarily resulted from recent increases in
market interest rates.
Based on evaluation of available evidence, including recent changes in
market interest rates, credit rating information and information
obtained from regulatory filings, management believes the declines in
fair value for these securities are temporary.
Should the impairment of any of these securities become other than
temporary, the cost basis of the investment will be reduced and the
resulting loss recognized in net income in the period the
other-than-temporary impairment is identified.
49
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
Securities with unrealized losses at December 31, 2003 were as follows:
LESS THAN 12 MONTHS 12 MONTHS OR LONGER TOTAL
---------------------------------------------------------------------------------
UNREALIZED UNREALIZED UNREALIZED
FAIR VALUE LOSSES FAIR VALUE LOSSES FAIR VALUE LOSSES
---------------------------------------------------------------------------------
AVAILABLE FOR SALE
SECURITIES:
State and
municipal $ 625 $ (3) $ -- $ -- $ 625 $ (3)
Mortgage-backed
securities 24,245 (216) 873 (12) 25,118 (228)
----------- ---------- ----------- ----------- ----------- -----------
$ 24,870 $ (219) $ 873 $ (12) $ 25,743 $ (231)
=========== ========== =========== =========== =========== ===========
NOTE 4: LOANS AND ALLOWANCE
2003 2002
--------------------------
Commercial and industrial loans $ 12,607 $ 16,588
Real estate loans (includes $4,598,000 and $4,627,000
secured by farmland) 95,710 99,890
Construction loans 7,305 7,542
Agricultural production financing and other loans to farmers 2,449 2,302
Individuals' loans for household and other personal
expenditures 9,566 12,418
Tax-exempt loans 1,100 1,340
Other loans 19 11
--------- ---------
128,756 140,091
Allowance for loan losses (3,825) (2,050)
--------- ---------
Total loans $ 124,931 $ 138,041
========= =========
50
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
2003 2002 2001
-----------------------------------
Allowance for loan losses
Balances, January 1 $ 2,050 $ 1,815 $ 1,331
Provision for losses 4,180 975 790
Recoveries on loans 171 695 523
Loans charged off (2,576) (1,435) (829)
------- ------- -------
Balances, December 31 $ 3,825 $ 2,050 $ 1,815
======= ======= =======
Information on impaired loans is summarized below.
2003 2002 2001
-----------------------------------
Impaired loans with an allowance $ 3,044 $ 2,062 $ 2,046
Impaired loans for which the discounted
cash flows or collateral value exceeds
the carrying value of the loan 1,121 7,496 2,238
------- ------- -------
Total impaired loans $ 4,165 $ 9,558 $ 4,284
======= ======= =======
Allowance for impaired loans (included in
the Company's allowance for loan
losses) $ 871 $ 377 $ 651
======= ======= =======
2003 2002 2001
-----------------------------------
Average balance of impaired loans $ 5,317 $ 9,689 $ 4,352
Interest income recognized on impaired
loans 105 209 102
Cash-basis interest included above 110 219 90
At December 31, 2003 and 2002, accruing loans delinquent 90 days or more totaled
$680,000 and $798,000, respectively. Non-accruing loans at December 31, 2003 and
2002 were $3,510,000 and $8,446,000, respectively.
51
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
NOTE 5: PREMISES AND EQUIPMENT
2003 2002
---------------------
Land and improvements $ 481 $ 481
Buildings 4,782 4,769
Equipment 2,525 2,661
------- -------
Total cost 7,788 7,911
Accumulated depreciation (3,356) (3,222)
------- -------
Net $ 4,432 $ 4,689
======= =======
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 $63,460,000 and $45,589,000 at December
31, 2003 and 2002, respectively.
The aggregate fair value of capitalized mortgage servicing rights at
December 31, 2003 and 2002 totaled $535,096 and $302,657. 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.
2003 2002
-----------------
Mortgage Servicing Rights
Balances, beginning of year $ 303 $ 240
Servicing rights capitalized 425 257
Amortization of servicing rights (84) (72)
----- -----
644 425
Valuation allowance (109) (122)
----- -----
Balances, end of year $ 535 $ 303
===== =====
52
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
Activity in the valuation allowance for mortgage servicing rights was as
follows:
2003 2002
-------------------------
Balance, beginning of year $ 122,072 $ --
Additions 53,228 122,072
Reductions (65,980) --
Direct write downs -- --
--------- ---------
Balance, end of year $ 109,320 $ 122,072
========= =========
NOTE 7: DEPOSITS
2003 2002
----------------------
Demand deposits $ 40,774 $ 42,017
Savings deposits 45,233 40,091
Certificates and other time deposits of $100,000 or more 18,327 20,788
Other certificates and time deposits 67,898 75,994
-------- --------
Total deposits $172,232 $178,890
======== ========
Certificates and other time deposits maturing in years
ending December 31
2004 $44,167
2005 28,696
2006 9,026
2007 1,142
2008 3,194
-------
$86,225
=======
53
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
NOTE 8: SHORT-TERM BORROWINGS
2003 2002
-----------------
Securities sold under repurchase agreements $7,540 $5,946
====== ======
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
2003 and 2002 totaled $9,647,000 and $6,318,000 and the daily average
of such agreements totaled $7,097,000 and $4,311,401. The agreements at
December 31, 2003, mature daily.
NOTE 9: LONG-TERM DEBT
2003 2002
------------------------------
Federal Home Loan Bank advances, fixed rates ranging from 4.56% to
6.90%, due at various dates through July, 2014 $ 4,649 $ 7,719
========= ========
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 165 percent of FHLB advances. Advances are subject to restrictions
or penalties in the event of repayment.
Maturities in years ending December 31
2004 $ 1,506
2005 788
2006 376
2007 103
2008 1,110
Thereafter 766
--------
$ 4,649
========
54
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
NOTE 10: INCOME TAX
2003 2002 2001
------------------------------
Income tax expense (benefit)
Currently payable
Federal $ (66) $ 492 $ 724
State 6 23 25
Deferred (535) 38 (24)
----- ----- -----
Total income tax expense
(benefit) $(595) $ 553 $ 725
===== ===== =====
Reconciliation of federal statutory to
actual tax expense
Federal statutory income tax at 34% $(401) $ 740 $ 904
Tax exempt interest (202) (222) (190)
Nondeductible expenses 2 7 3
Effect of state income taxes 4 15 16
Other 2 13 (8)
----- ----- -----
Actual tax expense (benefit) $(595) $ 553 $ 725
===== ===== =====
A cumulative net deferred tax asset (liability) is included in the balance
sheets. The components of the asset are as follows:
2003 2002
---------------------
ASSETS
Allowance for loan losses $ 1,057 $ 435
Alternative minimum tax credit 26 --
Deferred compensation 43 37
------- -------
Total assets 1,126 472
------- -------
LIABILITIES
Depreciation (166) (135)
Mortgage servicing rights (182) (103)
Accretion of investment discounts (5) (20)
FHLB stock dividend basis difference (164) (140)
Unrealized gain on securities (253) (487)
------- -------
Total liabilities (770) (885)
------- -------
$ 356 $ (413)
======= =======
55
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
NOTE 11: OTHER COMPREHENSIVE INCOME
Other comprehensive income (loss) components and related taxes were as
follows:
2003 2002 2001
-----------------------------
Unrealized gains (losses) on securities
available for sale $(681) $ 811 $ 429
Reclassification for realized amount
included in income 8 8 --
----- ----- -----
Other comprehensive income (loss),
before tax effect (689) 803 429
Tax expense (benefit) 234 (273) (146)
----- ----- -----
Other comprehensive income (loss) $(455) $ 530 $ 283
===== ===== =====
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:
2003 2002
--------------------
Commitments to extend credit $20,252 $21,278
Standby letters of credit 518 665
56
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 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 committed to purchase an investment security on a when-issued
basis on November 20, 2003 in the amount of $1,500,000. The settle date
occurred on January 26, 2004.
The Bank had federal funds sold to Great Lakes Bankers Bank in the
amount of $9,708,000 and $8,973,000 at December 31, 2003 and 2002.
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
On December 24, 2003, the Company and the Bank announced they entered
into a Written Agreement (Agreement) with the Federal Reserve Bank of
Cleveland and the Ohio Division of Financial Institutions on December
18, 2003. The Agreement was the result of an examination of the Bank
conducted in September 2003.
As part of the Written Agreement between the Company, the Bank, the
Ohio Division of Financial Institutions, and the Federal Reserve Bank
of Cleveland, the Bank is prohibited from paying dividends to the
Company without prior regulatory approval. Also, the Company is
prohibited from paying common stock dividends without prior regulatory
approval.
57
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 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, 2003 and 2002, the Bank was categorized as
well capitalized and met all subject capital adequacy requirements.
There are no conditions or events since December 31, 2003 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 ADEQUATE TO BE WELL
ACTUAL CAPITAL(1) CAPITALIZED (1)
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
-------------------------------------------------------------------
AS OF DECEMBER 31, 2003
Total capital(1)(to
risk-weighted assets) $ 23,609 18.5% $ 10,213 8.0% $ 12,766 10.0%
Tier I capital(1)(to
risk-weighted assets) 20,014 15.7 5,107 4.0 7,660 6.0
Tier I capital(1)(to
average assets) 20,014 9.5 8,393 4.0 10,491 5.0
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
(1)As defined by regulatory
agencies
58
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 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 also has a
401k retirement plan covering substantially all employees. The Company
matches 100% of each employee's contributions made to the plan up to
4.0% of each employee's gross salary. The Company's expense for the
plans were $70,000, $231,203 and $267,732 for 2003, 2002, and 2001,
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, 2003 $ 1,775
New loans, including renewals 2,617
Payments, etc., including renewals (940)
----------
Balances, December 31, 2003 $ 3,452
==========
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.
59
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 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, 2003 and 2002, approximate
market rates, thus the fair value approximates carrying value.
60
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 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:
2003 2002
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
--------------------------------------------------------------
ASSETS
Cash and cash equivalents $ 18,005 $ 18,005 $ 16,925 $ 16,925
Investment securities available
for sale 55,052 55,052 54,396 54,396
Loans including loans held for
sale, net 124,931 130,185 138,769 144,131
Interest receivable 760 760 950 950
Stock in FRB and FHLB 2,012 2,012 1,791 1,791
LIABILITIES
Deposits 172,232 173,176 178,890 180,426
Short-term borrowings 7,540 7,540 5,946 5,946
Long-term debt 4,649 4,862 7,719 7,916
Interest payable 392 392 572 572
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:
2003 2002
---------- ----------
ASSETS
Cash and due from banks $ 9 $ 467
Investment in common stock of Bank 20,558 16,921
Receivable from Bank 2,000 7,000
--------- ---------
Total assets $ 22,567 $ 24,388
========= =========
LIABILITIES
Other liabilities $ 9 $ 38
SHAREHOLDERS' EQUITY 22,558 24,350
--------- ---------
Total liabilities and shareholders' equity $ 22,567 $ 24,388
========= =========
61
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
CONDENSED STATEMENTS OF OPERATIONS
2003 2002 2001
--------------------------------
INCOME
Dividends from Bank $ 265 $ 1,113 $ 1,701
Interest income 162 385 400
-------- --------- ---------
Total income 427 1,498 2,101
-------- --------- ---------
EXPENSES
Other expenses 69 75 72
-------- --------- ---------
INCOME BEFORE INCOME TAX AND EQUITY IN
UNDISTRIBUTED INCOME (LOSS) OF BANK 358 1,423 2,029
INCOME TAX EXPENSE 36 121 128
-------- --------- ---------
INCOME BEFORE EQUITY IN UNDISTRIBUTED
INCOME (LOSS) OF BANK 322 1,302 1,901
EQUITY IN UNDISTRIBUTED INCOME (LOSS) OF
BANK (908) 323 32
-------- --------- ---------
NET INCOME (LOSS) $ (586) $ 1,625 $ 1,933
======== ========= =========
62
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
CONDENSED STATEMENTS OF CASH FLOWS
2003 2002 2001
-----------------------------
OPERATING ACTIVITIES
Net income (loss) $ (586) $ 1,625 $ 1,933
Adjustments to reconcile net income
to net cash provided by operating
activities 880 (418) 80
------- ------- -------
Net cash provided by operating
activities 294 1,207 2,013
------- ------- -------
INVESTING ACTIVITIES
Investment in Bank (5,000) -- --
Proceeds from Bank for receivable 5,000 1,000 --
------- ------- -------
Net cash provided by investing
activities -- 1,000 --
------- ------- -------
FINANCING ACTIVITIES
Purchase of treasury stock -- (632) (902)
Cash dividends (752) (1,113) (1,139)
------- ------- -------
Net cash used in financing
activities (752) (1,745) (2,041)
------- ------- -------
NET CHANGE IN CASH AND CASH EQUIVALENTS (458) 462 (28)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
YEAR 467 5 33
------- ------- -------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 9 $ 467 $ 5
======= ======= =======
63
COMBANC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2003, 2002 AND 2001
(Table Dollar Amounts in Thousands)
NOTE 19: QUARTERLY FINANCIAL DATA (UNAUDITED)
PROVISION EARNINGS
INTEREST INTEREST FOR LOAN SECURITY NET INCOME (LOSS) PER
INCOME EXPENSE LOSSES GAINS (LOSS) SHARE
----------- ----------- ----------- ---------- ---------- ----------
2003
First Quarter $ 2,846 $ 963 $ 1,730 $ -- $ (582) $ (0.26)
Second Quarter 2,801 888 180 -- 471 0.21
Third Quarter 2,581 798 430 -- 308 0.14
Fourth Quarter 2,602 729 1,840 8 (783) (0.35)
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
During the fourth quarter of 2003, additional provision for loan losses were
recorded due to identification of increased levels of classified loans.
64
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURES
None
ITEM 9A - 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, the Chief Executive Officer and Chief Financial Officer have
concluded that these 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 year ended
December 31, 2003 that have materially affected, or are reasonably likely to
materially affect, our internal controls over financial reporting.
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," "Committees of the Board," "Section 16(a)
Beneficial Ownership Reporting Compliance" and "Shareholder Proposals and
Director Nominations" in the definitive Proxy Statement of the Company for the
2004 annual meeting of the shareholders.
The Company's Board of Directors has adopted a Code of Ethics,
available on the Company's website at
HTTP://WWW.COMMERCIALBANK.COM/ABOUTUS/CODEOFETHICS.ASP for the Company's
employees, officers and directors. (The provisions of the Code of Ethics will be
included in the Company's employee handbook, which is issued to all new
employees and officers at the time of employment and reissued to existing
employees and officers from time to time.)
65
EXECUTIVE OFFICERS OF REGISTRANT
Name Age Position and Office Held with ComBanc, Inc. Officer Since
---- --- ------------------------------------------- -------------
Paul G. Wreede 53 Chairman of the Board 1975
President and Chief Executive Officer
Ronald R. Elwer 50 Executive Vice President 1976
Rebecca L. Minnig 47 Senior Vice President Operations and 1979
Corporate Secretary
Kathleen A. Miller 43 Senior Vice President, Chief Information Officer, and 1990
Systems Manager
Jason R. Thornell 29 Vice President and Controller 2001
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.
Jason R. Thornell has been Vice President and Controller since 2004 and
has been controller of the Company since 2001.
66
ITEM 11 - EXECUTIVE COMPENSATION
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 for the 2004 annual
meeting of shareholders, 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 AND
RELATED STOCKHOLDER MATTERS
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
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 for the 2004 annual meeting of
shareholders.
67
PART IV
ITEM 14 - PRINCIPAL ACCOUNTING FEES AND SERVICES.
Information concerning principal accountant fees and services, and
audit committee pre-approval policies and procedures for audit and non-audit
services required by this item is incorporated by reference from the caption
entitled ("Audit Committee Report") in the Company's definitive Proxy Statement
for the 2004 annual meeting.
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 37.
(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 70.
(b) Reports on Form 8-K.
There was a report on Form 8-K reported under Item 5 filed
during the quarter ended December 31, 2003, filed on December
24, 2003 with the SEC.
(c) Exhibits.
Exhibits filed with this Annual Report on Form 10-K are
attached hereto.
See "Exhibit Index" at page 70.
(d) Financial Statement Schedules.
None
68
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 24, 2004 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 24, 2004 Chairman, President and CEO and Director
/s/ Ronald R. Elwer
- ----------------------------
Ronald R. Elwer February 24, 2004 Executive Vice President and Director
/s/ Richard R. Thompson
- ----------------------------
Richard R. Thompson February 24, 2004 Director
/s/ Dwain I. Metzger
- ----------------------------
Dwain I. Metzger February 24. 2004 Director
/s/ C. Stanley Strayer
- ----------------------------
C. Stanley Strayer February 24, 2004 Director
/s/ Jason R. Thornell
- ----------------------------
Jason R. Thornell February 24, 2004 Principal Financial Officer -
Vice President/Controller
69
ANNUAL REPORT ON FORM 10-K
For the Year Ended December 31, 2003
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
of the Company 71
3.2 Bylaws of the Company 72
10.1 Merger Agreement by and between ComBanc, Inc. 80
and The Commercial Bank Dated
April 13, 1998
14 Code of Ethics The Code of Ethics is available
through the Company's website
at http://www.commercialbank.com/aboutUs
/codeOfEthics.asp.
21.1 Subsidiaries of the Company 81
31 Rule 13a - 14(B)/15d - 14(a) certifications 82
32 Section 1350 certifications 84
70
EXHIBIT 3.1
Amended and Restated
Certificate of Incorporation
of ComBanc, Inc.
Pursuant to the provisions of Section 241 and 245 of the General
Corporation Law of the State of Delaware, the undersigned sole incorporator of
ComBanc, Inc., a Delaware corporation organized on November 25, 1997, does
hereby amend and restate the Certificate of Incorporation as follows:
The Amended and Restated Certificate of Incorporation set forth herein
was duly adopted prior to the receipt of any payment for any of the
Corporation's stock.
FIRST: The name of this corporation is: ComBanc, Inc.
SECOND: Its registered office in the State of Delaware is to be
located 15 Loockerman Street, in the city of Dover, County of Kent, 19903-0841.
The registered agent in charge thereof is AGENTS FOR DELAWARE CORPORATIONS, INC.
THIRD: The purpose of the Corporation is to engage in any lawful act
or activity for which corporations may be organized under the General
Corporation Law of Delaware.
FOURTH: Total number of shares which the Corporation is authorized to
have shall be five million (5,000,000) shares of common stock, no par value.
FIFTH: The Corporation shall eliminate the personal liability of a
director to the Corporation or its Stockholders for monetary damages for breach
of his fiduciary duty as a director. This Article Fifth shall not apply and
shall not eliminate personal liability of a director: (i) for any breach of the
director's duty of loyalty to the Corporation or its stockholders; (ii) for acts
or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) for illegal distribution of dividends; (iv) for
any transaction from which the director derived an improper personal benefit.
SIXTH: The Corporation shall indemnify its present and past
Directors, officers, employees and agents, and such other persons as it shall
have powers to indemnify, to the full extent permitted under the provisions of
Delaware law.
SEVENTH: The business and affairs of the Corporation shall be managed
by the Board of Directors, the directors being elected and appointed as required
by the Bylaws of the Corporation.
EIGHTH: The Corporation reserves the right to amend and repeal all
provisions contained in this Certificate of Incorporation by a majority vote of
stockholders.
I, the undersigned sole incorporator do hereby make this Amended and
Restated Certificate of Incorporation this 24th day of August, 1998.
/s/ Martin D. Werner
-------------------------------------
Martin D. Werner, Incorporator
71
EXHIBIT 3.2
COMBANC, INC.
BYLAWS
ARTICLE I
MEETING OF SHAREHOLDERS
SECTION 1.1. ANNUAL MEETING. An annual meeting of the stockholders, for
the election of Directors to succeed those whose terms expire and for the
transaction of such other business as may properly come before the meeting,
shall be held at such place, on such date and at such time as the Board of
Directors shall fix each year.
SECTION 1.2. SPECIAL MEETING. Special meetings of the stockholders, for
any purpose or purposes prescribed in the notice of the meeting, may be called
by the Board of Directors or by any three (3) or more stockholders owning, in
the aggregate, not less than twenty-five percent (25%) of the stock of the
Corporation, and shall be on such date and at such time as the Board of
Directors or other individual(s) shall fix. A special meeting shall be held at
such place as shall be determined by the Board of Directors if called by the
Board of Directors or at the main office of the Corporation if called by other
persons.
SECTION 1.3. NOTICE OF MEETINGS. Written notice of the place, date, and
time of all meetings of the stockholders shall be given, not less than ten (10)
nor more than sixty (60) days before the date on which the meeting is to be
held, to each stockholder entitled to vote at such meeting, and shall be mailed,
postage prepaid, to the address of the stockholder appearing on the books of the
Corporation. Written waiver of such notice by stockholders is not permitted
except through resolution by the Board.
When a meeting is adjourned to another place, date or time, notice need
not be given of the adjourned meeting if the place, date, and time thereof are
announced at the meeting at which the adjournment is taken; provided, however,
that if the date of any adjourned meeting is more than thirty (30) days after
the date for which the meeting was originally called and notice given; or if a
new record date is fixed for the adjourned meeting, written notice of the place,
date, and time of the adjourned meeting shall be given in conformity herewith.
At any adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
SECTION 1.4. QUORUM. At any meeting of the stockholders, the holders of
a majority of all the shares of stock entitled to vote at the meeting, present
in person or by proxy, shall constitute a quorum for all purposes, unless or
except to the extent that the presence of a larger number may be required by
law.
If a quorum shall fail to attend any meeting, the Chairman of the
meeting or the holders of a majority of the shares of stock entitled to vote who
are present, in person or by proxy, may adjourn the meeting to another place,
date or time. A majority of the votes cast at a stockholders' meeting shall
72
decide every question or matter submitted to the stockholder at any meeting
unless otherwise provided by law, by the Certificate of Incorporation, or by
these Bylaws.
SECTION 1.5. ORGANIZATION. Such person as the Board of Directors may
have designated or in absence of such person, the highest ranking officer of the
Corporation who is present shall call to order any meeting of the stockholders
and act as Chairman of the meeting. In the absence of the Secretary of the
Corporation, the Secretary of the meeting shall be such person as the Chairman
appoints.
SECTION 1.6. CONDUCT OF BUSINESS. The Chairman of any meeting of
stockholders shall determine the order of business and the procedure at the
meeting, including such regulation of the manner of voting and the conduct of
discussion.
SECTION 1.7. PROXIES AND VOTING. At any meeting of the stockholders,
every stockholder entitled to vote may vote in person or by proxy authorized by
an instrument in writing, filed in accordance with the procedure established for
the meeting.
Each stockholder shall have one vote for every share of stock entitled
to vote which is registered in his/her name on the record date for the meeting,
except as otherwise provided herein or required by law. Unless otherwise
specified a proxy shall be valid for only one (1) meeting, to be specified
therein, and any adjournments of such meeting. Proxy shall be dated and filed
with the records of the meeting.
SECTION 1.8. STOCK LIST. A complete list of stockholders entitled to
vote at any meeting of stockholders for each class of stock and showing the
address of each such stockholder and the number of shares registered in his/her
name, shall be open to the examination of any such stockholder, for any purpose
germane to the meeting, during ordinary business hours for a period of at least
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or if not so specified, the place where the meeting is to be held.
The stock list shall also be kept at the place of the meeting during
the whole time thereof and shall be open to the examination of any such
stockholder who is present. This list shall presumptively determine the identity
of the stockholders entitled to vote at the meeting and the number of shares
held by each of them.
ARTICLE II
BOARD OF DIRECTORS
SECTION 2.1. The Board of Directors (hereinafter referred to as the
"Board"), shall have power to manage and administer the business and affairs of
the Corporation. Except as expressly limited by law, all corporate powers of the
Corporation shall be vested in, and may be exercised by said Board.
SECTION 2.2. NOMINATIONS FOR AND QUALIFICATIONS OF DIRECTORS.
Nominations for election to the Board of Directors may be made by the Board of
Directors, or by any stockholder of any outstanding class of capital stock of
the Corporation entitled to vote for the election of Directors.
73
Nominations, other than those made by or on behalf of the existing management of
the Corporation, shall be made in writing and shall be delivered or mailed to
the President of the Corporation not less than fourteen (14) days nor more than
fifty (50) days prior to any meeting of the stockholders called for the election
of Directors; provided, however, that if less than twenty-one (21) days notice
of the meeting is given to stockholders, such notification must be mailed or
delivered to the President of the Corporation not later than the close of
business on the seventh (7) day following the day on which the notice of meeting
was mailed. Such notification shall contain the following information to the
extent known to the notifying stockholder: (a) the name and address of each
proposed nominee; (b) the principal occupation of each proposed nominee; (c) the
name and residence address of the notifying stockholder; and (e) the number of
shares of capital stock of the Corporation owned by the notifying stockholder.
Notifications not made in accordance herewith may, in his/her discretion, be
disregarded by the Chairman of the meeting, and upon his/her instructions, the
vote tellers may disregard all votes cast for each such nominee.
SECTION 2.3. NUMBER AND TERMS OF DIRECTORS. The number of Directors
which shall constitute the whole board shall be not less than one (1) nor more
than twenty-five (25). The number of Directors which shall constitute the Board
of Directors for each year shall be determined by the Board of Directors and
unless otherwise specified shall consist of the same number of Directors as were
elected for the preceding year. A Director shall hold office until his successor
is elected and qualified, or until his resignation or removal.
SECTION 2.4. REMOVAL OF DIRECTORS. Any or all of the Directors may be
removed, with or without cause, by the holders of a majority of the shares then
entitled to vote at an election of Directors.
SECTION 2.5. ORGANIZATION MEETING. The Secretary of the Corporation,
upon receiving the certificate of the judges of the result of any election,
shall notify the "Directors elect" of their election and of the time at which
they are required to meet for the purpose of organizing the new Board and
electing and appointing officers of the Corporation for the succeeding year.
Such meeting shall be appointed to be held on the day of the election, or as
soon thereafter as practicable, and, in any event, within thirty (30) days
thereof. If, at the time fixed for such meeting, there shall not be a quorum
present, the Directors present may adjourn the meeting, from time to time, until
a quorum is obtained.
SECTION 2.6. REGULAR MEETING. The regular meetings of the Board of
Directors shall be held, without notice, as may be determined from time to time
by the Board. When any regular meeting of the Board falls upon a holiday, the
meeting shall be held on the next business day, unless the Board shall designate
some other day.
SECTION 2.7. SPECIAL MEETINGS. Special meetings of the Board of
Directors may be called by the Chairman, Vice Chairman, and/or President of the
Corporation, or at the request of three (3) or more Directors. Each member of
the Board of Directors shall be given notice, stating the time and place, by
letter, telegram or in person of each said special meeting. Such notice of the
special meeting can be waived by a Director at the special meeting, but if a
Director does not waive such a
74
notice, said notice shall be received by each Director who has not waived notice
not less than three (3) days prior to the special meeting.
SECTION 2.8. VACANCIES. If the office of any Director becomes vacant by
reason of death, resignation, disqualification, removal or other cause, the
majority of the Directors remaining in office, although less than a quorum, may
elect a successor for the unexpired term and until his/her successor is elected
and qualified.
SECTION 2.9. QUORUM. A majority of the Directors shall constitute a
quorum at any meeting, except when otherwise provided by law; but a lesser
number may adjourn any meeting, from time to time and the meeting may be held,
as adjourned, without further notice.
SECTION 2.10. PARTICIPATION IN MEETINGS BY CONFERENCE TELEPHONE.
Members of the Board of Directors, or of any committee thereof, may participate
in a meeting of such Board or committee by means of conference telephone or
similar communications equipment that enables all persons participating in the
meeting to hear each other. Such participation shall constitute presence in
person at such meeting.
SECTION 2.11 RETIREMENT. A Director shall retire not later than
December 31 of the year in which such director shall attain age 70.
ARTICLE III
COMMITTEES
SECTION 3.1. COMMITTEES OF THE BOARD OF DIRECTORS. The Board of
Directors, by vote of a majority of the whole Board, may from time to time
designate committees of the Board, with such lawfully delegatable powers and
duties as it thereby confers, to serve at the pleasure of the Board and shall,
for those committees and any others provided for herein, elect a Director or
Directors to serve as the member or members, designating, if it desires, other
Directors as alternative members who may replace any absent or disqualified
member at any meeting of the committee.
ARTICLE IV
OFFICERS AND EMPLOYEES
SECTION 4.1. CHAIRMAN OF THE BOARD. The Board of Directors may appoint
one of its members to be Chairman of the Board to serve at the pleasure of the
Board. He/She shall preside at all meetings of the Board of Directors. He/She
shall have general executive powers, as well as the specific powers conferred by
these Bylaws. He/She shall also have and may exercise such further powers and
duties as, from time to time, may be conferred upon or assigned to him/her by
the Board of Directors.
SECTION 4.2. VICE CHAIRMAN OF THE BOARD. The Board of Directors may
appoint one of its members to be Vice Chairman of the Board to serve at the
pleasure of the Board. He/She shall preside at all meetings of the Board of
Directors in the absence of the Chairman. He/She shall have general executive
powers, as well as the specific powers conferred by these Bylaws. He/She shall
also
75
have and may exercise such further powers and duties as, from time to time, may
be conferred upon or assigned to him/her by the Board of Directors.
SECTION 4.3. PRESIDENT. The Board of Directors shall appoint a
President of the Corporation. In the absence of the Chairman or Vice Chairman,
he/she shall preside at any meeting of the Board. The President shall have
general executive powers, and shall have and may exercise any and all other
powers and duties pertaining by law, regulation or practice, to the office of
President, or imposed by these Bylaws. He/She shall also have and may exercise
such further powers and duties as, from time to time, may be conferred upon or
assigned to him/her by the Board of Directors.
SECTION 4.4. VICE PRESIDENT. The Board of Directors may appoint one or
more Vice Presidents. Each Vice President shall have such powers and duties as
may be assigned to him/her by the Board of Directors. Any one or more of such
Vice President(s) may be designated as "Executive Vice President" or "Senior
Vice President."
SECTION 4.5. SECRETARY. The Board of Directors shall appoint a
Secretary, or other designated officer who shall be Secretary of the Board and
of the Corporation, and shall keep accurate minutes of all meetings. He/She
shall attend to the giving of all notices required by these Bylaws to be given.
He/She shall be custodian of the corporate seal, records, documents and papers
of the Corporation. He/She shall provide for the keeping of proper records of
all transactions of the Corporation. He/She shall have and may exercise any and
all other powers and duties pertaining by law, regulation or practice, to the
office of Secretary, or imposed by these Bylaws. He/She shall also perform such
other duties as may be assigned to him/her from time to time by the Board of
Directors.
SECTION 4.6. OTHER OFFICERS. The Board of Directors may appoint one or
more Assistant Vice Presidents, one or more Assistant Secretaries, and one or
more Managers and Assistant Managers and such other officers and attorneys in
fact as from time to time may appear to the Board to be required or desirable to
transact the business of the Corporation. Such officers shall respectively
exercise such powers and perform all such duties as pertain to their several
offices, or as may be conferred upon, or assigned to by the Board of Directors,
Chairman of the Board, Vice Chairman of the Board, or the President.
SECTION 4.7. TENURE OF OFFICE. The President and all other officers
shall hold office for the current year for which the Board was elected, unless
they shall resign, become disqualified, or be removed; any vacancy occurring in
the office of the President shall be filled promptly by the Board of Directors.
ARTICLE V
RIGHT OF INDEMNIFICATION OF DIRECTORS, OFFICERS AND OTHERS
SECTION 5.1. RIGHT TO INDEMNIFICATION. Each person who was or is made a
party or is threatened to be made a party to or is involved in any action, suit
or proceeding, whether civil, criminal, administrative or investigative
("proceeding"), by reason of the fact that he or she or a person for whom he or
she is the legal representative is or was a Director or officer, employee or
agent of the
76
Corporation or is or was serving at the request of the Corporation as a Director
or officer, employee or agent of another corporation, or of a partnership, joint
venture, trust or other enterprise, including service with respect to employee
benefit plans, whether the basis of such proceeding is alleged action in an
official capacity as a Director, officer, employee or agent or in any other
capacity while serving as a Director, officer, employee or agent, shall be
indemnified and held harmless by the Corporation to the fullest extent
authorized by the Delaware General Corporation Law, as the same exists or may
hereafter be amended (but, in the case of any such amendment, only to the extent
such amendment permits the Corporation to provide broader indemnification rights
than said law permitted the Corporation to provide prior to such amendment)
against all expenses, liability and loss (including attorney's fees, judgments,
fines, ERISA excise taxes or penalties and amounts paid or to be paid in
settlement) reasonably incurred or suffered by such person in connection
therewith. Such right shall be a contract right and shall include the right to
be paid by the Corporation expenses incurred in defending any such proceeding in
advance of its final disposition; provided, however, that the payment of such
expenses incurred by a Director or officer of the Corporation in his or her
capacity while a Director or officer (and not in any other capacity in which
service was or is rendered by such person while a Director or officer,
including, without limitation, service to an employee benefit plan) in advance
of the final disposition of such proceeding, shall be made only upon delivery to
the Corporation of an undertaking, by or on behalf of such Director or officer,
to repay all amounts so advanced if it should be determined ultimately that such
Director or officer is not entitled to be indemnified under this section or
otherwise.
SECTION 5.2. INSURANCE. The Corporation may maintain insurance, at its
expense, to protect itself and any such Director, officer, employee or agent of
the Corporation or another corporation, partnership, joint venture, trust or
other enterprise against any such expense, liability or loss, whether or not the
Corporation would have the power to indemnify such person against such expense,
liability or loss under the Delaware General Corporation Law.
ARTICLE VI
STOCK
SECTION 6.1. CERTIFICATES OF STOCK. Each stockholder shall be entitled
to a certificate signed by, or in the name of the Corporation by, the President
or Vice President and by the Secretary or an Assistant Secretary, certifying the
number of shares owned by him/her. Any of or all the signatures on the
certificate may be facsimile.
SECTION 6.2. TRANSFERS OF STOCK. Transfers of the stock shall be made
only upon the transfer of the books of the Corporation kept at an office of the
Corporation or by transfer agents designated to transfer shares of the stock of
the Corporation. Except where a certificate is issued in accordance with Section
6.4 of Article VI of these Bylaws, an outstanding certificate for the number of
shares involved shall be surrendered for cancellation before a new certificate
is issued therefor.
SECTION 6.3. RECORD DATE. The Board of Directors may fix a record date,
which shall not be more than sixty (60) nor less than ten (10) days before the
date of any meeting of stockholders, nor
77
more than sixty (60) days prior to the time for the other action hereinafter
described, at which time there shall be determined the stockholders who are
entitled: to notice of or to vote at any meeting of stockholders or any
adjournment thereof; to express consent to corporate action in writing without a
meeting; to receive payment of any dividend or other distribution or allotment
of any rights; or to exercise any rights with respect to any change, conversion
or exchange of stock or with respect to any other lawful action.
SECTION 6.4. LOST, STOLEN OR DESTROYED CERTIFICATE. In the event of the
loss, theft or destruction of any certificate of stock, another may be issued in
its place pursuant to such regulations as the Board of Directors may establish
concerning proof of such loss, theft or destruction and concerning the giving of
a satisfactory bond or bonds or indemnity.
SECTION 6.5. REGULATION. The issue, transfer, conversion and
registration of certificates of stock shall be governed by such other
regulations as the Board of Directors may establish.
ARTICLE VII
NOTICES
SECTION 7.1. NOTICES. Whichever notice is required to be given to any
stockholder, Director, officer, or agent, such requirement shall not be
construed to mean personal notice. Such notice may in every instance be
effectively given by depositing a writing in a post office or letter box in a
postpaid, sealed wrapper, or by dispatching a prepaid telegram, addressed to
such stockholder, Director, officer or agent at his or her address as the same
appears on the books of the Corporation. The time when such notice is dispatched
shall be the time of the giving of the notice.
SECTION 7.2. WAIVERS. A written waiver of any notice, signed by a
stockholder, Director, officer or agent whether before or after the time of the
event for which notice is to be given, shall be deemed equivalent to the notice
required to be given to such stockholder, Director, officer or agent. Neither
the business nor the purpose of any meeting need be specified in such a waiver.
ARTICLE VIII
MISCELLANEOUS
SECTION 8.1. CONVEYANCE OF REAL ESTATE. All transfers and conveyances
of real estate, title to which is vested in the Corporation, shall be by written
instrument, under the seal of this Corporation, made pursuant to the order of
the Board of Directors, and signed by either the Chairman, Vice Chairman,
President, a Vice President, or Secretary.
SECTION 8.2. CONTRACTS. All contracts, checks, drafts, and other
instruments shall be signed by the Chairman, Vice Chairman, President, or a Vice
President or Secretary or such other officers as may be designated by the Board
of Directors by resolution.
SECTION 8.3. CORPORATE SEAL. The Board of Directors may provide a
suitable seal, containing the name of the Corporation, which seal shall be in
the charge of the Secretary. If and when so directed by the Board of Directors
or a committee thereof, duplicates of the seal may be kept and used by the
Secretary or Assistant Secretary.
78
SECTION 8.4. RELIANCE UPON BOOKS, REPORTS, AND RECORDS. Each Director,
each member of any committee designated by the Board of Directors, and each
officer of the Corporation shall, in the performance of his/her duties, be fully
protected in relying on good faith upon the books of account or other records of
the Corporation, including reports made to the Corporation by any of its
officers, by an independent certified public accountant, or by an appraiser with
reasonable care.
SECTION 8.5. FISCAL YEAR. The fiscal year of this Corporation shall be
the calendar year.
ARTICLE IX
AMENDMENTS
SECTION 9.1. AMENDMENTS. These Bylaws may be amended or repealed in
whole or in part by majority of the whole Board of Directors at any meeting of
the Board.
Stockholders may amend or repeal these Bylaws in whole or in part by
approving such amendment or repeal thereof at a meeting of stockholders called
for such purpose with a simple majority of the stockholders entitled to vote.
79
EXHIBIT 10.1
MERGER AGREEMENT BY AND BETWEEN
COMBANC, INC. AND
THE COMMERCIAL BANK
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 number and 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 the transaction described above, 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 Bank is subject to the
informational requirements of the Exchange Act and in accordance with Section
12(I) thereof has timely filed reports and other information with the Board of
Governors of the Federal Reserve System ("FRS"). Such reports and other
information filed by the Bank with the FRS may be examined without charge at, or
copies obtained upon payment of prescribed fees from, the Securities Disclosure
Division, Board of Governors of the Federal Reserve System, Stop 153A,
Washington, D.C. 20551.
80
COMBANC, INC.
SUBSIDIARIES OF THE REGISTRANT
DECEMBER 31, 2003
EXHIBIT 21.1
Subsidiary (1) State of Incorporation
- -------------- ----------------------
The Commercial Bank Ohio
(1) Subsidiary's name listed hereon is name under which such subsidiary does
business.
81
EXHIBIT 31.1
CERTIFICATIONS
I, Jason R. Thornell, Vice President/Controller of ComBanc, Inc., 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 functions):
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 24, 2004
By: /s/ Jason R. Thornell
---------------------------------
Jason R. Thornell, Vice President/Controller
82
EXHIBIT 31.2
CERTIFICATIONS
I, Paul G. Wreede, President and CEO of ComBanc, Inc., 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 functions):
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 24, 2004
By: /s/ Paul G. Wreede
----------------------------
Paul G. Wreede, President and CEO
83
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
In connection with the filing with the Securities and Exchange Commission of the
Annual Report of ComBanc, Inc. (the "Company") on Form 10-K for the period
ending December 31, 2003 (the "Report"), I, Jason R. Thornell, Controller of the
Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended; and
(2) The information contained in the Report fairly
presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ Jason R. Thornell
- ---------------------
Jason R. Thornell, Vice President/Controller
February 20, 2004
84
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
In connection with the filing with the Securities and Exchange Commission of the
Annual Report of ComBanc, Inc. (the "Company") on Form 10-K for the period
ending December 31, 2003 (the "Report"), I, Paul G. Wreede, President and Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to
the best of my knowledge:
(1) The Report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange Act
of 1934, as amended; and
(2) The information contained in the Report fairly
presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ Paul G. Wreede
- ------------------
Paul G. Wreede, President and Chief Executive Officer
February 20, 2004
85
STOCK TRANSFER AGENT AND REGISTRAR
The Commercial Bank
229 E. Second Bank
Delphos, Ohio 45833
(419)695-1055
ANNUAL MEETING OF SHAREHOLDERS
The Annual Meeting of Shareholders of
ComBanc, Inc. will be held 1:00 p.m.
April 12, 2004 at:
Fraternal Order of Eagles
1600 E. Fifth Street
Delphos, Ohio 45833
86
ANNEX E
-------
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 September 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 October 11, 2004.
TABLE OF CONTENTS
Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 6
Notes to Condensed Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial Condition 9
and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 16
Item 4. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 17
Item 6. Exhibits and Reports on Form 8-K 17
Signatures 18
Exhibits 31.1 and 31.2 Rule 13a-14(a)/15d-14(a) certifications 20
Exhibits 32.1 and 32.2 Section 1350 certifications 22
2
COMBANC, INC. AND SUBSIDIARY
DELPHOS, OHIO
-------------
CONDENSED CONSOLIDATED BALANCE SHEETS
-------------------------------------
($ in thousands)
September 30, December 31,
ASSETS 2004 2003
------
----------------- ----------------
(unaudited)
Cash and Due from Banks $ 8,076 $ 8,297
Federal Funds Sold 12,573 9,708
----------------- ----------------
Cash and Cash Equivalents 20,649 18,005
Investment Securities -
Available for Sale 55,238 55,052
Loans Held for Resale 262 -
Loans 122,816 128,756
Allowance for Loan Losses (3,834) (3,825)
----------------- ----------------
Net Loans 118,982 124,931
Premises and Equipment 4,259 4,432
Federal Reserve and Federal Home Loan Bank Stock 2,067 2,012
Interest Receivable 844 760
Other Assets 2,320 2,541
----------------- ----------------
Total Assets $ 204,621 $ 207,733
================= ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Noninterest Bearing $ 16,462 $ 15,758
Interest Bearing 153,497 156,474
----------------- ----------------
Total Deposits 169,959 172,232
Short Term Borrowings 7,124 7,540
Long Term Debt 3,411 4,649
Interest Payable 440 392
Other Liabilities 506 362
----------------- ----------------
Total Liabilities 181,440 185,175
----------------- ----------------
Commitments and Contingent Liabilities - -
Shareholders' Equity -
Common Stock - No Par Value
5,000,000 shares authorized, 2,376,000 issued
and 2,211,014 outstanding 1,237 1,237
Capital Surplus 1,513 1,513
Retained Earnings 22,655 22,034
Accumulated Other Comprehensive Income 493 491
Treasury Stock - 164,986 shares at cost (2,717) (2,717)
----------------- ----------------
Total Shareholders' Equity 23,181 22,558
----------------- ----------------
Total Liabilities and Shareholders' Equity $ 204,621 $ 207,733
================= ================
The accompanying notes are an integral part of the condensed
consolidated financial statements
3
COMBANC, INC. AND SUBSIDIARY
DELPHOS, OHIO
-------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
($ in thousands, except per share data)
For the Three Months Ended
September 30,
-----------------------------------
(unaudited)
2004 2003
---------------- ----------------
Interest Income:
------------------
Loans Receivable $ 1,891 $ 2,058
Investments Securities
Taxable 398 362
Tax-Exempt 116 139
Federal Funds Sold 40 22
---------------- ----------------
Total Interest Income 2,446 2,582
---------------- ----------------
Interest Expense:
-------------------
Deposits 609 701
Short-Term Borrowings 31 27
Long-Term Debt 48 70
---------------- ----------------
Total Interest Expense 688 798
---------------- ----------------
Net Interest Income 1,758 1,784
Provision for Loan Losses - 430
---------------- ----------------
Net Interest Income after Provision for Loan Losses 1,758 1,354
Other Income:
---------------
Service Charges on Deposit Accounts 143 138
Net Realized Gains on Sales of Available-for-
sale Securities (3) -
Gain on Sale of Loans 33 173
Other Income 79 200
---------------- ----------------
Total Other Income 252 511
---------------- ----------------
Other Expenses:
-----------------
Salaries and Employee Benefits 1,113 710
Net Occupancy 102 98
Equipment Expenses 90 85
Data Processing Fees 101 97
Advertising 22 28
Printing and Office Supplies 20 25
Legal and Professional Fees 300 79
Dues and Memberships 57 69
State Taxes 74 58
Other Expense 300 194
---------------- ----------------
Total Other Expenses 2,179 1,443
---------------- ----------------
Income/(Loss) - before Income Tax (169) 422
---------------
Income Tax Expense/(Credit) (81) 113
---------------- ----------------
Net Income/(Loss) $ (88) $ 309
-------------------
================ ================
Earnings/(Loss) Per Share $ (0.04) $ 0.14
Cash Dividends Per Share $ 0.00 $ 0.10
The accompanying notes are an integral part of the condensed
consolidated financial statements
4
COMBANC, INC. AND SUBSIDIARY
DELPHOS, OHIO
-------------
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
-----------------------------------------------
($ in thousands, except per share data)
For the Nine Months Ended
September 30,
------------------------------------
(unaudited)
2004 2003
---------------- ----------------
Interest Income:
------------------
Loans Receivable $ 5,827 $ 6,509
Investments Securities
Taxable 1,234 1,216
Tax-Exempt 350 432
Federal Funds Sold 88 70
Deposits with Financial Institutions 1 1
---------------- ----------------
Total Interest Income 7,500 8,228
---------------- ----------------
Interest Expense:
-------------------
Deposits 1,834 2,314
Short-Term Borrowings 79 57
Long-Term Debt 162 278
---------------- ----------------
Total Interest Expense 2,075 2,649
---------------- ----------------
Net Interest Income 5,425 5,579
Provision for Loan Losses 60 2,340
---------------- ----------------
Net Interest Income after Provision for Loan Losses 5,365 3,239
Other Income:
---------------
Service Charges on Deposit Accounts 412 407
Net Realized Gains on Sales of Available-for-
sale Securities 12 -
Gain on Sale of Loans 115 458
Other Income 390 518
---------------- ----------------
Total Other Income 929 1,383
---------------- ----------------
Other Expenses:
-----------------
Salaries and Employee Benefits 2,834 2,364
Net Occupancy 297 291
Equipment Expenses 259 256
Data Processing Fees 301 276
Advertising 92 131
Printing and Office Supplies 87 97
Legal and Professional Fees 536 199
Dues and Memberships 193 193
State Taxes 207 177
Other Expense 725 565
---------------- ----------------
Total Other Expenses 5,531 4,549
---------------- ----------------
Income - before Income Tax Expense 763 73
--------
Income Tax Expense/(Credit) 142 (125)
---------------- ----------------
Net Income $ 621 $ 198
------------
================ ================
Earnings Per Share $ 0.28 $ 0.09
Cash Dividends Per Share $ 0.00 $ 0.34
The accompanying notes are an integral part of the condensed
consolidated financial statements
5
COMBANC, INC. AND SUBSIDIARY
DELPHOS, OHIO
-------------
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
-----------------------------------------------
($ in thousands)
For the Nine Months
September 30,
-----------------------------------
2004 2003
--------------- ----------------
(unaudited)
Cash Flows from Operating Activities:
Net Income $ 621 $ 198
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities -
Depreciation and amortization 298 297
Provision for Loan Loss 60 2,340
Investment Securities Gains (12) -
Federal Home Loan Bank stock Dividends (55) (52)
Investment securities amortization (accretion), Net 334 334
Proceeds From Sale of Loans Held For Sale 10,403 38,902
Originations of Loans Held For Sale (10,550) (38,051)
Gain From Sale of Loans (115) (458)
Net Change in
Interest receivable (84) 55
Interest payable 48 (68)
Other assets 220 (1,175)
Other liabilities 143 33
--------------- ----------------
Net Cash Provided by Operating Activities 1,311 2,355
--------------- ----------------
Cash Flows from Investing Activities:
Purchases of Securities Available for Sale/FHLB Stock (20,104) (23,452)
Proceeds from Maturities of Securities
Available for Sale 16,848 23,980
Proceeds from Sales of Securities
Available for Sale 2,752 -
Net Change in Loans 5,889 6,552
Purchases of Premises and Equipment (125) (114)
--------------- ----------------
Net Cash Provided by Investing Activities 5,260 6,966
--------------- ----------------
Cash Flows from Financing Activities:
Net change in
Noninterest-bearing, Interest-bearing Demand and
Savings Deposits (304) (702)
Certificates and Other Time Deposits (1,969) (8,392)
Short-term Borrowings (416) 2,029
Repayment of Long-term Debt (1,238) (2,761)
Dividends Paid - (752)
--------------- ----------------
Net Cash Used in Financing Activities (3,927) (10,578)
--------------- ----------------
Net Change in Cash and Cash Equivalents 2,644 (1,257)
Cash and Cash Equivalents -
Beginning of Year 18,005 16,925
--------------- ----------------
End of Period $ 20,649 $ 15,668
=============== ================
The accompanying notes are an integral part of the condensed
consolidated financial statements
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 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 nine months ended September 30, 2004 and for the three
months ended September 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 nine months ending September 30,
2004 and September 30, 2003 were 2,211,014.
Note 3, Commitments and Contingent Liabilities
Outstanding commitments to originate loans were $20,549,000 and $20,770,000 at
September 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 CONDITIONS. The Bank considers the allowance
for loan losses of $3,834,000 adequate to cover losses inherent in the loan
portfolios as of September 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,
7
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, Merger Agreement
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
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), 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,
9
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. We are also currently subject to
the terms of the 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.
Total Delinquent and Nonaccrual Loans as of September 30, 2004 stood at
$3,615,000 as compared to $6,948,000 as of December 31, 2003. This decrease
represents a 48.0% improvement since December 31, 2003. Total delinquency
reduction can be credited to the continued emphasis on workout programs and a
steady improvement in the local economy.
10
TABLE 1: Analysis of Delinquencies
Dollars in Thousands
9/30/2004 12/31/2003 12/31/2002 12/31/2001 12/31/2000
Past due 30 to 89 days and still accruing $ 2,002 $ 2,758 $ 6,672 $ 9,863 $ 4,502
Past due 90 days or more and still accruing 17 680 798 2,810 2,587
Nonaccrual 1,596 3,510 8,456 3,455 542
----------------------------------------------------------------------------
Total delinquencies $ 3,615 $ 6,948 $ 15,926 $ 16,128 $ 7,631
============================================================================
Total Delinquencies as a percentage of total loans 2.94% 5.40% 11.37% 10.31% 4.50%
Total assets decreased $3,112,000 or 1.5% from $207,733,000 at December 31, 2003
to $204,621,000 at September 30, 2004. This change is the result of a $5.9
million decrease in the loan portfolio while there was a $2.6 million increase
in cash and cash equivalents. This reduction was offset through a decrease of
$2.3 million in total deposits, a decrease of $1.2 million in long term debt,
and a $0.4 million decrease in short term borrowings, while there was a $0.6
million increase in total shareholders' equity during the first nine months of
2004.
Total gross loans decreased 4.4% or $5,678,000 from December 31, 2003 to
$123,078,000 at September 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 commercial real estate loan. Another significant change includes 1-4
family secured by first lien mortgages. These loans decreased by $2,002,000 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 $136,000 in the first three 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 $161,000 annually. Another
significant change in the portfolio includes a $1,702,000 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. Commercial loans have
decreased $1,032,000 or 8.2% from December 31, 2003 to September 30, 2004 due to
the management's continued desire to decrease commercial loans not secured by
real estate due to the amount of risk that they carry.
TABLE 2: Analysis of Loan Portfolio Composition
Dollars in Thousands
11
Loan Type
9/30/2004 12/31/2003 Difference %
--------- ---------- ---------- --------
Construction/Land Development $ 6,161 $ 7,305 $ (1,144) -15.66%
R/E Secured by Farmland 5,029 4,598 431 9.37%
Revol Open-end 1-4 Family LOC 4,965 5,294 (329) -6.21%
1-4 Secured by first 33,110 35,112 (2,002) -5.70%
1-4 Secured by Junior 567 550 17 3.09%
R/E Secured by Multi Family R/E 3,068 3,179 (111) -3.49%
R/E Secured by Nonfarm, Nonres 47,903 46,977 926 1.97%
Ag Loans 2,075 2,449 (374) -15.27%
Commercial Loans 11,575 12,607 (1,032) -8.19%
Municipal Loans 746 1,100 (354) -32.18%
Master Card Loans 525 566 (41) -7.24%
Other Consumer 12 7 5 71.43%
Consumer Loans 7,291 8,993 (1,702) -18.93%
Overdrafts 51 19 32 168.42%
-------- -------- -------- ------
Total Loans 123,078 128,756 (5,678) -4.41%
Loan Loss Reserve 3,834 3,825 9 0.24%
-------- -------- -------- ------
Total Net Loans $119,244 $124,931 $ (5,687) -4.55%
======== ======== ======== ======
Serviced FHLMC Mortgages 63,596 63,460 136 0.21%
-------- -------- -------- ------
Total Loans Serviced $182,840 $188,391 $ (5,551) -2.95%
======== ======== ======== ======
The Allowance for Loan Losses at September 30, 2004 was 3.1% of total loans
compared to 3.0% at December 31, 2003. This $9,000 increase from December 31,
2003 is the result of a $60,000 provision and net charge-offs of $51,000,
increasing the Allowance for Loan Loss from $3,825,000 at December 31, 2003 to
$3,834,000 at September 30, 2004. 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
Dollars in Thousands
For the
Nine
Months
Ended For the Years Ended
--------- ---------------------------------------------------------
9/30/2004 12/31/2003 12/31/2002 12/31/2001 12/31/2000
--------- ---------- ---------- ---------- ----------
Balance of Allowance at Beginning of Year $3,825 $2,050 $1,815 $1,331 $1,832
------ ------ ------ ------ ------
Loans Actually Charged Off -
Real Estate - Construction -- 141 -- -- --
Real Estate - Mortgage 218 444 317 -- --
Commercial, Financial and Agricultural 13 1,706 811 281 96
Installment and Credit Card 81 284 307 548 890
------ ------ ------ ------ ------
312 2,575 1,435 829 986
------ ------ ------ ------ ------
Recoveries of Loans Previously Charged Off -
Real Estate - Construction 34 -- -- -- --
Real Estate - Mortgage 34 -- -- 11 --
Commercial, Financial and Agricultural 156 75 599 458 10
Installment and Credit Card 37 95 96 54 55
------ ------ ------ ------ ------
261 170 695 523 65
------ ------ ------ ------ ------
Net Charge-Offs (Recoveries) 51 2,405 740 306 921
------ ------ ------ ------ ------
Addition to Allowance Charged to Expense 60 4,180 975 790 420
------ ------ ------ ------ ------
Balance of Allowance at Period-End $3,834 $3,825 $2,050 $1,815 $1,331
====== ====== ====== ====== ======
Ratio of Net Charge-Offs to Avg. Loans Outstanding 0.04% 1.79% 0.51% 0.18% 0.55%
Ratio of Allowance for Credit Losses to Total Loans 3.12% 2.97% 1.46% 1.15% 0.79%
Total deposits decreased $2,273,000 or 1.3% from December 31, 2003 to September
30, 2004. Table 4 below shows a breakdown of deposits by type at both September
30, 2004 and December 31, 2003.
12
Management attributes the decrease in total deposits to the Bank's slightly less
competitive interest rates being offered on certificates of deposit. Less
competitive interest rates are being offered due to the abundance of liquidity
that the Bank currently maintains.
TABLE 4: Deposit Balances by Type
(Dollars in Thousands)
Deposit Type
9/30/2004 12/31/2003 Difference %
Non-interest Bearing DDA $ 16,462 $ 15,758 $ 704 4.47%
NOW Accounts 25,109 25,017 92 0.37%
MMKT Savings 11,917 12,139 (222) -1.83%
Savings 32,216 33,093 (877) -2.65%
Time Deposits 84,255 86,225 (1,970) -2.28%
--------- --------- -------- -------
Total Deposits $ 169,959 $ 172,232 $ (2,273) -1.32%
========= ========= ======== =======
Short-term borrowings, which are repurchase agreements, decreased $416,000 from
December 31, 2003 to September 30, 2004. Long-term debt or borrowings with an
original maturity of greater than one year from the Federal Home Loan Bank
decreased $1,238,000 or 26.7% from December 31, 2003 to September 30, 2004. This
decrease is due to a maturing advance, the prepayment of an advance with a
prepayment option and regular principal amortization. Due to the excessive
amount of liquidity, management chose not to borrow additional funds from FHLB.
Total shareholders equity increased $623,000 from December 31, 2003 to September
30, 2004. Included in the overall increase was an increase in retained earnings
of $621,000, which was solely comprised of net income and an increase of $2,000
in Accumulated Other Comprehensive Income, which is the unrealized gain/loss on
the available-for-sale securities portfolio net of federal income tax. No
Treasury Stock was repurchased in the first three quarters of 2004.
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2004 compared to Nine Months Ended September 30,
2003
Net income for the first three quarters of 2004 was $621,000 or $0.28 per share.
This represents an increase of $0.19 per share compared to the first three
quarters of 2003. Annualized Return on average assets was 0.40% for the first
three quarters of 2004, up from 0.13% for the first three quarters of 2003.
Annualized return on average equity increased to 3.61% for the first three
quarters of 2004 from 1.11% for the first three quarters of 2003.
The most significant income statement changes between the nine months ended
September 30, 2004 and the nine months ended September 30, 2003 were as follows:
- The provision for loan losses has decreased $2,280,000 in the first
three quarters of 2004, from $2,340,000 in the first three quarters
of 2003 to $60,000 in the first three 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 September 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 three quarters of 2004.
- Total noninterest income decreased $454,000 in the first three
quarters of 2004 compared to 2003. This decrease is the result of a
$343,000 decrease in gain on sale of loans sold to
13
FHLMCand a $174,000 decrease in the capitalization of mortgage
service rights, while there was a $21,000 increase in service fee
income on FHLMC loans and an $18,000 increase in investment center
revenue. As interest rates rise, sales of loans to FHLMC will
continue to decrease.
- Total noninterest expense increased $982,000 in the first three
quarters of 2004 compared to the first three quarters of 2003. This
is the result of a $337,000 increase in legal and professional fees
which is due to additional expense incurred to address the Written
Agreement, the Definitive Agreement with First Defiance,
shareholder litigation and related matters. There was also an
increase in Salaries and Employee Benefits in the amount of
$470,000, which is the result of a $155,000 increase in employee
health insurance, an increase of $103,000 in post-retirement
benefits, a $95,000 increase in employee salaries and a $98,000
increase in retirement expense. Other expense increased $160,000
due to a $57,000 increase in FDIC assessments, which is a direct
result of the Written Agreement, a $64,000 increase in other
expense, due to the loss on the sale of other real estate owned in
the amount of $70,000, and an $18,000 increase in mortgage service
right impairments.
- Net interest income decreased $154,000 or 2.8% in the first three
quarters of 2004 compared to the first three quarters of 2003.
Included in the decrease is a decrease in loan interest and fees
which is the direct result of a decrease in loan balances of
$9,690,000 since September 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.
Three Months Ended September 30, 2004 compared to Three Months Ended September
30, 2003
There was a net operating loss in the amount of $88,000 for the third quarter of
2004 or $(0.04) per share. This represents a decrease of $0.18 per share
compared to the third quarter of 2003. Annualized Return on average assets was
(0.17%) for the third quarter of 2004, down from .58% for the third quarter of
2003. Annualized return on average equity decreased to (1.54%) for the third
quarter of 2004 from 5.21% for the third quarter of 2003.
The most significant income statement changes between the three months ended
September 30, 2004 and the three months ended September 30, 2003 were as
follows:
- The provision for loan losses has decreased $430,000 in the third
quarter of 2004. There was no provision recorded in the third
quarter of 2004. The lower provision was due in part to the
Company's experience in the first three quarters of 2004, which
showed net charge-offs of $51,000. 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 September 30, 2004, management believes the
balance of the allowance for loan losses is appropriate.
- Total noninterest income decreased $259,000 in the third quarter of
2004 as compared to the third quarter of 2003. Included in the
decrease is a $140,000 decrease in gain on sale of loans to FHLMC.
There was also a $121,000 decrease in other income. This decrease
is solely comprised of a $121,000 decrease in the capitalization of
mortgage service rights. 15, 20, and 30 year interest rates
decreased in the third quarter causing prepayment speeds to
increase, therefore, causing the value of mortgage service rights
to decrease.
14
- Total noninterest expense increased $736,000 in the third quarter
of 2004 versus the third quarter of 2003. Included in the increase
is an increase of $403,000 in salaries and employee benefits. Of
the $403,000 increase, there was an $187,000 increase in group
insurance, a $103,000 increase in post-retirement benefits, a
$60,000 increase in employee salaries and a $53,000 increase in
employee retirement benefits. There was a $221,000 increase in
legal and professional fees which is the result of additional
expense incurred to address the Written Agreement, the Definitive
Agreement with First Defiance, shareholder litigation and related
matters. Also included in the$736,000 increase is a $106,000
increase in other expense. Of the $106,000 increase, $60,000 is
attributable to an increase in FDIC assessments, as the result of
the Written Agreement, and $57,000 is the result of the third
quarter 2004 mortgage service right impairment, which is the direct
result of the decrease in long-term interest rates. Management
believes that the $57,000 impairment will be recaptured by December
31, 2004.
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
September 30, 2004 ComBanc, Inc. maintained a Tier I capital ratio of 18.37%, a
total capital ratio of 19.64% and a Tier I leverage ratio of 11.00%.
Based on the respective regulatory capital ratios at September 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
15
consist of cash and due from banks, federal funds sold, and securities available
for sale. At September 30, 2004 the Bank's liquid assets amounted to $75,887,000
or 37.1% of total assets compared with 35.2% at December 31, 2003. Management
considers its liquidity to be adequate to meet its normal funding requirements.
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 September 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.
16
PART II - OTHER INFORMATION
Item 1 - Legal Proceedings
As described in the Company's Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 2004, 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." Mr. Harter
filed the action seeking to compel the Company to call a special meeting. On
September 1, 2004, ComBanc and Harter entered into a Settlement Agreement and
Release which resolved the dispute, and on September 8, 2004, Harter dismissed
the lawsuit with prejudice.
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 September 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.
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
(b)
I. A report on Form 8-K, reported under Items 12 and 7,
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 Income For the Three 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.
II. A second 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.
17
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: October 27, 2004 /s/ Paul G. Wreede
------------------
Paul G. Wreede
President, CEO, and Director
Date: October 27, 2004 /s/ Jason R. Thornell
---------------------
Jason R. Thornell
VP/Controller
18
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
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
EXHIBIT 31.1
CERTIFICATION
I, Jason R. Thornell, VP/Controller of ComBanc, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of ComBanc, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a -- 15 (e) and 15d -- 15 (e)) for the
registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 this report is being prepared;
b) paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
a. any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: October 27, 2004
/s/ Jason R. Thornell
---------------------
Jason R. Thornell
VP/Controller
EXHIBIT 31.2
CERTIFICATION
I, Paul G. Wreede, President and CEO of ComBanc, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of ComBanc, Inc.;
2. Based on my knowledge, this quarterly 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 quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly 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 quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a -- 15 (e) and 15d -- 15 (e)) for the
registrant and we have:
a) designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 this report is being prepared;
b) paragraph omitted pursuant to SEC Release Nos. 33-8238 and 34-47986;
c) evaluated the effectiveness of the registrant's disclosure controls and
procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation of internal control over financial
reporting, to the registrant's auditors and the audit committee of the
registrant's board of directors (or persons performing the equivalent
functions):
a) all significant deficiencies and material weaknesses in the design or
operation of internal control over financial reporting which are
reasonably likely to adversely affect the registrant's ability to
record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: October 27, 2004 /s/ Paul G. Wreede
------------------
Paul G. Wreede
President and CEO
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
In connection with the filing with the Securities and Exchange Commission of the
Quarterly Report of ComBanc, Inc. (the "Company") on Form 10-Q for the period
ending September 30, 2004 (the "Report"), I, Jason R. Thornell, VP/Controller of
the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge:
(1) The Report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended; and
(2) The information contained in the Report fairly
presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ Jason R. Thornell
----------------------------------
Jason R. Thornell, VP/Controller
October 27, 2004
This certification accompanies this Report on Form 10-Q pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required
by such Act, be deemed filed by the Company for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
certification will not be deemed to be incorporated by reference into any filing
under the Securities Act of 1933, as amended, or the Exchange Act, except to the
extent that the Company specifically incorporates it by reference.
A signed original of the written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
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
In connection with the filing with the Securities and Exchange Commission of the
Quarterly Report of ComBanc, Inc. (the "Company") on Form 10-Q for the period
ending September 30, 2004 (the "Report"), I, Paul G. Wreede, President and Chief
Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to
the best of my knowledge:
(1) The Report fully complies with the requirements of
section 13(a) or 15(d) of the Securities Exchange
Act of 1934, as amended; and
(2) The information contained in the Report fairly
presents, in all material respects, the financial
condition and results of operations of the Company.
/s/ Paul G. Wreede
- -----------------------------
Paul G. Wreede, President and Chief Executive Officer
October 27, 2004
This certification accompanies this Report on Form 10-Q pursuant to Section 906
of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required
by such Act, be deemed filed by the Company for purposes of Section 18 of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). Such
certification will not be deemed to be incorporated by reference into any filing
under the Securities Act of 1933, as amended, or the Exchange Act, except to the
extent that the Company specifically incorporates it by reference.
A signed original of the written statement required by Section 906 has been
provided to the Company and will be retained by the Company and furnished to the
Securities and Exchange Commission or its staff upon request.
PART II
Item 20. Indemnification of Directors and Officers.
------- ------------------------------------------
(a) Ohio General Corporation Law
Division (E) of Section 1701.13 of the Ohio Revised Code addresses
indemnification by an Ohio corporation and provides as follows:
(1) A corporation may indemnify or agree to indemnify any person who was or
is a party, or is threatened to be made a party, to any threatened, pending, or
completed action, suit, or proceeding, whether civil, criminal, administrative,
or investigative, other than an action by or in the right of the corporation, by
reason of the fact that he is or was a director, officer, employee, or agent of
the corporation, or is or was serving at the request of the corporation as a
director, trustee, officer, employee, member, manager, or agent of another
corporation, domestic or foreign, nonprofit or for profit, a limited liability
company, or a partnership, joint venture, trust, or other enterprise, against
expenses, including attorney's fees, judgments, fines, and amounts paid in
settlement actually and reasonably incurred by him in connection with such
action, suit, or proceeding, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, if he had
no reasonable cause to believe his conduct was unlawful. The termination of any
action, suit, or proceeding by judgment, order, settlement, or conviction, or
upon a plea of nolo contendere or its equivalent, shall not, of itself, create a
presumption that the person did not act in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the
corporation, and, with respect to any criminal action or proceeding, he had
reasonable cause to believe that his conduct was unlawful.
(2) A corporation may indemnify or agree to indemnify any person who was or
is a party, or is threatened to be made a party, to any threatened, pending, or
completed action or suit by or in the right of the corporation to procure a
judgment in its favor, by reason of the fact that he is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee, member,
manager, or agent of another corporation, domestic or foreign, nonprofit or for
profit, a limited liability company, or a partnership, joint venture, trust, or
other enterprise, against expenses, including attorney's fees, actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit, if he acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interests of the corporation, except that no
indemnification shall be made in respect of any of the following:
(a) Any claim, issue, or matter as to which such person is adjudged to be
liable for negligence or misconduct in the performance of his duty to the
corporation unless, and only to the extent that, the court of common pleas
or the court in which such action or suit was brought determines, upon
application, that, despite the adjudication of liability, but in view of
all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses as the court of common pleas or
such other court shall deem proper;
(b) Any action or suit in which the only liability asserted against a
director is pursuant to section 1701.95 of the Revised Code.
(3) To the extent that a director, trustee, officer, employee, member,
manager, or agent has been successful on the merits or otherwise in defense of
any action, suit, or proceeding referred to in division (E)(1) or (2) of this
section, or in defense of any claim, issue, or matter therein, he shall be
indemnified against expenses, including attorney's fees, actually and reasonably
incurred by him in connection with the action, suit, or proceeding.
(4) Any indemnification under division (E)(1) or (2) of this section,
unless ordered by a court, shall be made by the corporation only as authorized
in the specific case, upon a determination that indemnification of the director,
trustee, officer, employee, member, manager, or agent is proper in the
circumstances because he has met the applicable standard of conduct set forth in
division (E)(1) or (2) of this section. Such determination shall be made as
follows:
(a) By a majority vote of a quorum consisting of directors of the
indemnifying corporation who were not and are not parties to or threatened
with the action, suit, or proceeding referred to in division (E)(1) or (2)
of this section;
(b) If the quorum described in division (E)(4)(a) of this section is not
obtainable or if a majority vote of a quorum of disinterested directors so
directs, in a written opinion by independent legal counsel other than an
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attorney, or a firm having associated with it an attorney, who has been
retained by or who has performed services for the corporation or any person
to be indemnified within the past five years;
(c) By the shareholders;
(d) By the court of common pleas or the court in which the action, suit, or
proceeding referred to in division (E)(1) or (2) of this section was
brought.
Any determination made by the disinterested directors under division (E)(4)(a)
or by independent legal counsel under division (E)(4)(b) of this section shall
be promptly communicated to the person who threatened or brought the action or
suit by or in the right of the corporation under division (E)(2) of this
section, and, within ten days after receipt of such notification, such person
shall have the right to petition the court of common pleas or the court in which
such action or suit was brought to review the reasonableness of such
determination.
(5) (a) Unless at the time of a director's act or omission that is the
subject of an action, suit, or proceeding referred to in division (E)(1) or (2)
of this section, the articles or the regulations of a corporation state, by
specific reference to this division, that the provisions of this division do not
apply to the corporation and unless the only liability asserted against a
director in an action, suit, or proceeding referred to in division (E)(1) or (2)
of this section is pursuant to section 1701.95 of the Revised Code, expenses,
including attorney's fees, incurred by a director in defending the action, suit,
or proceeding shall be paid by the corporation as they are incurred, in advance
of the final disposition of the action, suit, or proceeding, upon receipt of an
undertaking by or on behalf of the director in which he agrees to do both of the
following:
(i) Repay such amount if it is proved by clear and convincing evidence in a
court of competent jurisdiction that his action or failure to act involved
an act or omission undertaken with deliberate intent to cause injury to the
corporation or undertaken with reckless disregard for the best interests of
the corporation;
(ii) Reasonably cooperate with the corporation concerning the action, suit,
or proceeding.
(b) Expenses, including attorney's fees, incurred by a director, trustee,
officer, employee, member, manager, or agent in defending any action, suit, or
proceeding referred to in division (E)(1) or (2) of this section, may be paid by
the corporation as they are incurred, in advance of the final disposition of the
action, suit, or proceeding, as authorized by the directors in the specific
case, upon receipt of an undertaking by or on behalf of the director, trustee,
officer, employee, member, manager, or agent to repay such amount, if it
ultimately is determined that he is not entitled to be indemnified by the
corporation.
(6) The indemnification authorized by this section shall not be exclusive
of, and shall be in addition to, any other rights granted to those seeking
indemnification under the articles, the regulations, any agreement, a vote of
shareholders or disinterested directors, or otherwise, both as to action in
their official capacities and as to action in another capacity while holding
their offices or positions, and shall continue as to a person who has ceased to
be a director, trustee, officer, employee, member, manager, or agent and shall
inure to the benefit of the heirs, executors, and administrators of such a
person.
(7) A corporation may purchase and maintain insurance or furnish similar
protection, including, but not limited to, trust funds, letters of credit, or
self-insurance, on behalf of or for any person who is or was a director,
officer, employee, or agent of the corporation, or is or was serving at the
request of the corporation as a director, trustee, officer, employee, member,
manager, or agent of another corporation, domestic or foreign, nonprofit or for
profit, a limited liability company, or a partnership, joint venture, trust, or
other enterprise, against any liability asserted against him and incurred by him
in any such capacity, or arising out of his status as such, whether or not the
corporation would have the power to indemnify him against such liability under
this section. Insurance may be purchased from or maintained with a person in
which the corporation has a financial interest.
(8) The authority of a corporation to indemnify persons pursuant to
division (E)(1) or (2) of this section does not limit the payment of expenses as
they are incurred, indemnification, insurance, or other protection that may be
provided pursuant to divisions (E)(5), (6), and (7) of this section. Divisions
(E)(1) and (2) of this section do not create any obligation to repay or return
payments made by the corporation pursuant to division (E)(5), (6), or (7).
(9) As used in division (E) of this section, "corporation" includes all
constituent entities in a consolidation or merger and the new or surviving
corporation, so that any person who is or was a director, officer, employee,
trustee, member, manager, or agent of such a constituent entity, or is or was
serving at the request of such constituent entity as a director, trustee,
officer, employee, member, manager, or agent of another corporation, domestic or
foreign, nonprofit or for profit, a
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limited liability company, or a partnership, joint venture, trust, or other
enterprise, shall stand in the same position under this section with respect to
the new or surviving corporation as he would if he had served the new or
surviving corporation in the same capacity.
(b) Articles of Incorporation of First Defiance
The Articles of Incorporation of First Defiance contains the following
provisions with respect to the indemnification of directors and officers:
ARTICLE VII
Indemnification
The Corporation shall indemnify any person who was or is a party or is
threatened to be made a party, to any threatened, pending, or completed
action, suit, or proceeding, whether civil, criminal, administrative, or
investigative, including actions by or in the right of the Corporation, by
reason of the fact that such person is or was a director, officer,
employee, or agent of the Corporation, or is or was serving at the request
of the Corporation as a director, trustee, officer, employee, member,
manager, or agent of another corporation, a limited liability company, or a
partnership, joint venture, trust, or other enterprise, against expenses,
including attorney's fees, judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such
action, suit, or proceeding to the full extent permissible under Ohio law.
ARTICLE XIII
Duties of Directors; Limitation of Liability
A director shall perform his duties as a director, including his
duties as a member of any committee of the directors upon which he may
serve, in good faith, in a manner he reasonably believes to be in or not
opposed to the best interests of the Corporation, and with the care that an
ordinarily prudent person in a like position would use under similar
circumstances. In performing his duties, a director is entitled to rely on,
among other things, information, opinions, reports, or statements,
including financial statements and other financial data, that are prepared
or presented by one or more directors, officers, or employees of the
Corporation, counsel, public accountants, or other persons as to matters
that the director reasonably believes are within the person's professional
or expert competence, or a committee of the directors upon which he does
not serve.
A director of the Corporation shall not be personally liable for
monetary damages for any action taken, or for any failure to take any
action, as a director except to the extent that by law a director's
liability for monetary damages may not be limited.
(c) Insurance
First Defiance has purchased insurance coverage under policies that insure
directors and officers against certain liabilities that might be incurred by
them in their capacities as directors and officers.
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Item 21. Exhibits and Financial Statements Schedules
-------- -------------------------------------------
(a) Exhibits The following exhibits are filed herewith unless
-------- otherwise noted:
Exhibit No. Description
----------- -----------
2 Agreement and Plan of Merger dated as of August 2, 2004, by and
among First Defiance Financial Corp., First Federal Bank of the
Midwest, ComBanc, Inc. and, The Commercial Bank*
3.1 Articles of Incorporation*
3.2 Code of Regulations*
3.3 Bylaws*
4 Articles of Incorporation and Code of Regulations, defining the
rights of shareholders*
5 Opinion of Vorys, Sater, Seymour and Pease LLP regarding the
legality of the First Defiance stock being registered*
8 Opinion of Vorys, Sater, Seymour and Pease LLP regarding the tax
consequences of the merger*
10.1 1996 Stock Option Plan*
10.2 1996 Management Recognition Plan and Trust*
10.3 2001 Stock Option and Incentive Plan*
10.4 1993 Stock Incentive Plan*
10.5 1993 Directors' Stock Option Plan*
10.6 Employment Agreement with William J. Small*
10.7 Employment Agreement with James L. Rohrs*
10.8 Employment Agreement with John C. Wahl*
10.9 Employment Agreement with Gregory R. Allen*
13.1 ComBanc's Form 10-K for the year ended December 31, 2003*
13.2 ComBanc's Form 10-Q for the quarter ended September 30, 2004
(included as Annex E to the prospectus/proxy statement)
20 Notice of Special Meeting of Shareholders of ComBanc
21 Subsidiaries of First Defiance*
23.1 Consent of Ernst & Young LLP
23.2 Consent of BKD, LLP
23.3 Consent of Vorys, Sater, Seymour and Pease LLP*
23.4 Consent of Keefe, Bruyette & Woods, Inc.
99 Form of Proxy for ComBanc
* Previously provided.
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(b) Financial Statement Schedules
-----------------------------
All schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under related instructions or are
inapplicable and, therefore, have been omitted.
Item 22. Undertakings
-------- ------------
(a) 1. The undersigned registrant hereby undertakes:
(a) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933, as amended (the "Act");
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the registration
statement. Notwithstanding the foregoing, any increase or decrease in volume of
securities offered (if the total dollar value of securities offered would not
exceed that which was registered) and any deviation from the low or high end of
the estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the maximum
aggregate offering price set forth in the "Calculation of Registration Fee"
table in the effective registration statement; and
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement.
(b) That, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof.
(c) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
2. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Act, each filing of the registrant's annual
report pursuant to section 13(a) or section 15(d) of the Securities Exchange Act
of 1934 (and, where applicable, each filing of an employee benefit plan's annual
report pursuant to section 15(d) of the Securities Exchange Act of 1934) that is
incorporated by reference in the registration statement shall be deemed to be a
new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
3. The undersigned registrant hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X are not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
4. The undersigned registrant hereby undertakes as follows: that prior to
any public reoffering of the securities registered hereunder through use of a
prospectus which is part of this registration statement, by any person or party
who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer
undertakes that such reoffering prospectus will contain the information called
for by the applicable registration form with respect to reofferings by persons
who may be deemed underwriters, in addition to the information called for by the
other Items of the applicable form.
5. The registrant undertakes that every prospectus (i) that is filed
pursuant to paragraph 4 immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until
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such amendment is effective, and that, for purposes of determining any liability
under the Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
6. Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(b) The undersigned registrant herby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(c) The undersigned registrant herby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
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SIGNATURES
----------
Pursuant to the requirements of the Securities Act, the Registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Defiance, State of Ohio,
on November 10, 2004.
First Defiance Financial Corp.
By /s/ William J. Small
----------------------------
William J. Small,
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on November 10, 2004.
By /s/ John C. Wahl By /s/ James L. Rohrs
----------------------------- -------------------
John C. Wahl, James L. Rohrs,
Executive Vice President and Director, Executive Vice President
Chief Financial Officer
By By /s/ Stephen L. Boomer
------------------------------ ---------------------
Don C. Van Brackel, Stephen L. Boomer,
Director, Vice Chairman Director
By /s/ Douglas A. Burgei By
----------------------------- ------------------
Dr. Douglas A. Burgei, Peter A. Diehl,
Director Director
By By /s/ Gerald W. Monnin
----------------------------- --------------------
Dr. John U. Fauster, III, Gerald W. Monnin,
Director Director
By /s/ Thomas A. Voigt
Thomas A. Voigt,
Director
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